-----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, VOcGFB9U1cu4zoqT85ySYu8H/D6S8zXwKyWydXtM+nj7HEQQojBJ8w7naYg+lw0A VR5iOm8uSkKsIDTv2FGfnQ== 0000898430-00-000959.txt : 20000329 0000898430-00-000959.hdr.sgml : 20000329 ACCESSION NUMBER: 0000898430-00-000959 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIERRA PACIFIC POWER CO CENTRAL INDEX KEY: 0000090144 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 880044418 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-00508 FILM NUMBER: 581132 BUSINESS ADDRESS: STREET 1: 6100 NEIL RD STREET 2: P O BOX 10100 CITY: RENO STATE: NV ZIP: 89520-0400 BUSINESS PHONE: 7026895408 MAIL ADDRESS: STREET 1: 6100 NEIL ROAD STREET 2: P.O. BOX 10100 CITY: RENO STATE: NV ZIP: 89520 10-K405 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File Number 0-508 SIERRA PACIFIC POWER COMPANY (Exact name of registrant as specified in its charter) NEVADA 88-0044418 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 10100 (6100 Neil Road) Reno, Nevada 89520-0400 (89511) (Address of principal executive office) (Zip Code) (775) 834-4011 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: none. Securities registered pursuant to Section 12(g) of the Act: Preferred Stock: --------------- (Title of Class) Class A, Series 1, $1.95 Dividend, $25 stated value Preferred Securities: --------------------- (Title of Class) Sierra Pacific Power Capital Trust I, $2.15 Dividend, $25 stated value Indicate by check mark whether 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 ---- State the aggregate market value of the voting stock held by non-affiliates. As of March 22, 2000: None Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at March 22, 2000: 1,000 shares Common Stock, $3.75 par value
Proof of March 20, 2000 SIERRA PACIFIC POWER COMPANY 1999 ANNUAL REPORT FORM 10-K CONTENTS PART I............................................................................................................. 3 ITEM 1. BUSINESS (1)...................................................................................... 3 SIERRA PACIFIC POWER COMPANY..................................................................................... 3 BUSINESS OUTLOOK AND OVERVIEW.................................................................................... 4 ITEM 2. PROPERTIES......................................................................................... 29 ITEM 3. LEGAL PROCEEDINGS.................................................................................. 29 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 29 PART II............................................................................................................ 30 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................................................................................................ 30 ITEM 6. SELECTED FINANCIAL DATA............................................................................ 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................................................................. 31 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................... 50 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................ 51 SIERRA PACIFIC POWER COMPANY..................................................................................... 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................................................................... 58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.............................................................................................. 80 PART III........................................................................................................... 80 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS................................................................... 80 ITEM 11. EXECUTIVE COMPENSATION............................................................................. 86 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................... 91 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................... 92 PART IV............................................................................................................ 96 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................... 96 SIGNATURES....................................................................................................... 97
2 PART I ITEM 1. BUSINESS The information in this Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to anticipated financial performance, management's plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions and other matters. Words such as "anticipate," "believe," "estimate," "expect," "intend," "plan" and "objective" and other similar expressions identify those statements that are forward-looking. These statements are based on management's beliefs and assumptions and on information currently available to management. Actual results could differ materially from those contemplated by the forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such statements, factors that could cause Sierra Pacific Power Company's (SPPC's) actual results to differ materially from those contemplated in any forward-looking statement include, among others, the following: (1) the pace and extent of the ongoing restructuring of the electric and gas industries in Nevada and California; (2) the outcome of regulatory and legislative proceedings and operational changes related to industry restructuring; (3) the amount SPPC is allowed to recover from customers for certain costs that prove to be uneconomic in the new competitive market; (4) the outcome of ongoing and future regulatory proceedings; (5) management's ability to integrate the operations of Nevada Power Company (NVP) and SPPC, and to implement and realize anticipated cost savings from the merger of SPR and NVP; (6) industrial, commercial and residential growth in the service territory of SPPC; (7) fluctuations in electric, gas and other commodity prices and the ability to manage such fluctuations successfully; (8) changes in the capital markets and interest rates affecting the ability to finance capital requirements; (9) the loss of any significant customers; (10) the weather and other natural phenomena; and (11) changes in the business of major customers that may result in changes in the demand for services of SPPC. Other factors and assumptions not identified above may also have been involved in deriving these forward-looking statements, and the failure of those other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. SPPC assumes no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. SIERRA PACIFIC POWER COMPANY Sierra Pacific Power Company, hereinafter known as the Company or SPPC, is a Nevada corporation organized in 1965 as a successor to a Maine corporation organized in 1912. The Company became a wholly owned subsidiary of Sierra Pacific Resources (SPR) on May 31, 1984. Its mailing address is Post Office Box 10100 (6100 Neil Road), Reno, Nevada 89520-0400. The Company has four primary, wholly owned subsidiaries: Pinon Pine Corp. (PPC), Pinon Pine Investment Co. (PPIC), GPSF-B, and Sierra Pacific Power Capital I (the Trust). PPC and PPIC own 25% and 75% of a 38% interest in Pinon Pine Company, L.L.C. GPSF-B, a Delaware corporation formerly owned by General Electric Capital Corporation and now owned by the Company, owns the remaining 62%. The LLC was formed to take advantage of federal income tax credits associated with the alternative fuel (syngas) produced by the coal gasifier available under (S) 29 of the Internal Revenue Code. The Trust was created to issue trust securities in order to purchase the Company's junior subordinated debentures . 3 The Company is a public utility primarily engaged in the distribution, transmission, generation, purchase and sale of electric energy. It provides electricity to approximately 302,000 customers in a 50,000 square mile service area including western, central and northeastern Nevada, including the cities of Reno, Sparks, Carson City, Elko, and a portion of eastern California, including the Lake Tahoe area. In 1999, electric revenue was 79.8% of total revenue. The Company also provides natural gas service in Nevada to approximately 110,000 customers in an area of about 600 square miles in Reno/Sparks and environs. It supplies water service in Nevada to about 70,600 customers in the Reno/Sparks metropolitan area. In 1999, natural gas revenues were 13.1% and water revenues were 7.1% of total revenues. The Company used diverse resources to meet its 1999 electric energy requirements, including gas and oil generation (28.4%), coal generation (17.4%), and purchased power (53.8%). The Company has no ownership interest in, nor does it operate, any nuclear generating units. In 1999, the Company's average electric customer count grew by 2.8%; its average natural gas customer count increased by 4.3%; and its average water customer count increased by 4.8%. Many factors account for this growth including population growth in the Company's service areas. The Company had 1,430 regular employees as of December 31, 1999; this is a 1.1% decrease from 1998. The Company's current contract with the International Brotherhood of Electrical Workers, which represents 58.0% of the workforce, was renegotiated in 1997 and is in effect until December 31, 2000. The three-year contract provides for a 2.75% general wage increase for most bargaining unit employees beginning January 1, 1998, with 2.75% increases in both 1999 and 2000. In addition, the contract provides for bargaining unit employees to participate in the incentive compensation program. Nevada is a "right-to-work" state. For a discussion of results of operations refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Business Outlook And Overview ELECTRIC INDUSTRY TRENDS - ------------------------ On July 28, 1999, SPR completed its merger with NVP. More than 30 other mergers of electric and/or gas companies were pending, announced, or completed in 1999. Merger and acquisition activity is expected to continue into the next decade, as companies position themselves for continued electric restructuring throughout the United States. The Company announced its plan to divest its generation assets in June 1998. A stipulation on the Divestiture Plan was approved by the PUCN in February 2000. This stipulation will clear the way for the Divestiture process to begin. See Generation Divestiture for further information. Federal and state legislation is moving the electric utility industry toward competition. Federal and state regulators play critical roles in establishing a competitive marketplace. Currently, 21 states have passed restructuring bills, and 19 more states are considering legislation to restructure their electric markets. In addition, the U.S. Congress is considering national legislation that would implement electric restructuring across the nation. Passage of a comprehensive federal bill is expected within the next several years. Regulatory changes generally focus on the unbundling of utility functions into separate products and services. The major product being opened to competition is energy (e.g., kilowatt hours). Other services such as meter reading and billing are also being opened to competition in some states, including California and Nevada.. The delivery of energy (e.g., transmission and distribution) to businesses and homes remains a utility product regulated by the Federal Energy Regulatory Commission and state regulators. On December 15, the FERC issued Order No. 2000, a long awaited rule on Regional Transmission Organizations (RTO's). The implementation of Order No. 2000 is expected to have major long-term effects on the electric power markets by promoting regionalization of the transmission grid. 4 The Company is subject to California, Nevada and the FERC regulatory jurisdiction. Federal and state regulation will continue to play an active role in the Company's utility business. The Company's electric system demand exceeds the import capabilities of its transmission system. Accordingly, some of the Company's generation capacity has been identified as "must run" in order to meet load. Tariffs governing the availability and pricing of "must run" facilities after the divestiture of generation have been filed with the FERC. See Generation Divestiture. The FERC will also regulate the Company's electric transmission system. The states will continue to regulate those retail distribution services determined to be non-competitive. Approximately 67% of SPPC's operating revenues is related to electric sales in Nevada. Nevada passed Assembly Bill 366 (AB366) in July 1997, as enabling legislation to implement electric industry restructuring in Nevada. This legislation was modified in June 1999 by Senate Bill 438 (SB438). SB438 provides for competition to be implemented in the Nevada electric utility industry. See Electric Restructuring Activities. On February 28, 2000, the governor of Nevada postponed the expected March 1, 2000 opening date. No new date has been set, but competition could begin later in 2000 or possibly in 2001. SB438 allows the PUCN to authorize full recovery of costs that it determines to be stranded as a result of restructuring, and provides criteria for recovery of costs associated with purchase power obligations. In addition SB438 provides the electric distribution utility will be the provider of last resort (PLR) until alternate methods go into effect, no sooner than July 1, 2001; under rates which will be capped until March 1, 2003. In August 1997, the PUCN opened an investigatory docket of the issues to be considered as a result of restructuring the electric industry under AB366 and SB438. The Company is a participant in this docket in which new regulations for the restructured marketplace have been developed. These regulations include standards of conduct, consumer protection, stranded costs and licensing provisions for alternative sellers. Implementation of some of the regulations, including unbundling of services, stranded costs and provider of last resort, has already posed or is expected to pose financial risks to the Company. The Company is working to mitigate these risks by changing its business strategies, actively pursuing regulatory remedies and, if necessary, pursuing legal remedies. See further discussion regarding restructuring activities and potential risks in Item 7, Nevada Matters. California accounts for approximately 6% of the Company's electric revenue. California opened retail access in 1998. California customers may choose to continue to take service from their incumbent utility at tariff rates, purchase energy from marketers or contract directly with a generator. Any customers choosing to purchase energy from marketers or generators will pay a distribution fee for their use of the Company's transmission and distribution systems. To date no California customers have opted for retail open access. Operating results should not be materially impacted by these regulatory changes because of the continued use of the Company's transmission /distribution facilities and the Company's limited exposure in California. For more information regarding regulatory changes affecting SPPC, see Item 7, Nevada Matters, California Matters, FERC Matters and Note 2 of the Company's consolidated financial statements. SIERRA PACIFIC RESOURCES AND NEVADA POWER COMPANY MERGER - -------------------------------------------------------- As previously mentioned, the merger between SPR and NVP was finalized on July 28, 1999 following receipt of all regulatory approvals. The PUCN gave unanimous approval of a stipulation among the merging companies, the PUCN staff and the Utility Consumer Advocate, regarding the merger. 5 As part of the stipulation approved by the PUCN, the companies were required to re-file the plan to divest their generating assets, and file a final Independent System Administrator (ISA) proposal with the PUCN and the FERC. In January 2000, the FERC approved the ISA proposal; the PUCN's decision is still pending. See Generation Divestiture and Item 7, Nevada Matters for more information. 6 As part of the conditions for the merger SPPC was required to file a general rate case and unbundle costs. In April 1999, Phase I of the revenue requirement and unbundling study was filed with the PUCN. In September 1999, the PUCN issued an interim order on revenue requirements. In October 1999, Phase II regarding rate design was filed. Hearings were conducted in November 1999. Phase III will be filed 15 days following the PUCN decision on Phases I and II and will include full proposed tariffs for distribution service and all other noncompetitive services. SPPC is also required to file a general rate case three years after the start of retail competition in the state of Nevada. The filing would give the Company the opportunity to recover certain costs of the merger, provided it can be demonstrated that merger savings exceed certain merger costs. Merger costs are to be split among non-competitive and potentially competitive services or businesses. An opportunity to recover the non-competitive portion of the merger costs will be addressed in the rate case that follows the start of competition in Nevada. The burden is to prove that merger savings exceed merger costs. GENERATION DIVESTITURE - ---------------------- In June 1998, SPR announced a plan to divest the generation assets of its NVP and SPPC subsidiaries. This business strategy was described in the SPR/NVP merger applications filed with the PUCN and the FERC in July 1998. The FERC, Department of Justice, and SEC approved the merger. The PUCN conditionally approved the merger in December 1998, and one of the conditions was the filing of the divestiture plan with the PUCN. The plan was filed in April 1999, and included details about the auction process, market power mitigation, sale of the assets in described bundles, description of the proposed generation tariffs, description of the proposed independent system administrator, and the description of the proposed power purchase contracts. In June 1999, the PUCN approved a stipulation in the Merger docket with several conditions. Some of those conditions were: re-file the divestiture plan with the PUCN; file the generation aggregation tariffs (GAT) at the FERC; file the proposal for the ISA at the FERC; file proposals for the buyback or purchase power contracts; and file proposals for mitigation of the qualifying facilities and purchase power contracts. A revised Divestiture Plan was filed with the PUCN in October 1999. The PUCN held a hearing on December 28, 1999 and a stipulation was offered to the Commission for approval. Approval of the stipulation was received in February 2000. In accordance with the approved stipulation, SPR will be offering for sale generation assets with peak capacity of approximately 2,985 megawatts (MW) with approximately 1,045 MW owned by SPPC and approximately 1,940 MW owned by NVP. Potential buyers will be allowed to offer bids for different combinations of assets or for a consolidated asset. The plants utilize either coal, natural gas, or oil as fuel and are a mix of base load or peaking units consisting of conventional steam turbines, combined-cycle, or combustion turbines. SPR anticipates closing the sales of the generation assets during a period beginning in the fourth quarter 2000 and ending in 2003. 7 ELECTRIC BUSINESS - ----------------- Business and Competitive Environment - ------------------------------------ Transmission The FERC issued Order 2000 in December 1999. The order requires all investor-owned utilities in the United States who own interstate transmission to file their plans regarding Regional Transmission Organizations (RTOs) by October 15, 2000. Utilities must file by that date, either by joining an RTO or stating why they are not joining one. The RTOs must be operational by December 15, 2001 with congestion management in place one year later. The FERC has required that RTOs be operated by independent entities that are not participants in the energy market. The RTO must accommodate broad participation by both private and public utilities, provide customer efficient price signals and be independent of market participants (i.e., sellers of energy to end use customers). In addition, RTO rates must eliminate pancaking (multiple rates on a transmission path), manage congestion and internal parallel flows, deal effectively with non-RTO transmission owning entities (not under the FERC jurisdiction) and provide correct investment incentives. The FERC has offered the possibility of incentive ratemaking to RTOs that meet all the criteria for a large-scale regional entity. The Company will explore strategic transmission options, using the guidelines included in Order 2000. The Company's response will be filed before the October 15, 2000 deadline. The FERC filings for the start of Nevada restructuring and the PGE acquisition will anticipate this October 2000 RTO filing. Distribution The Company's electric business contributed $609 million (78.8%) of 1999 operating revenues. Electric system peaks typically occur in the summer, while winter peaks run nearly as high. The system has an annual load factor of approximately 70.9%, which is higher than the industry norm of 50-55%. Winter peak loads are due to shorter daylight hours, colder temperatures (which affect space heating requirements) and ski resort demands (snowmaking, hotels, lifts, etc.). Summer peak loads result from air-conditioning, cooling equipment and irrigation pumping. The Company's peak load increased an average of 5% annually over the past five years, reaching 1,470 MW on July 12, 1999. The Company's total electric megawatt-hour (MWh) sales have increased an average of 7.65% annually over the past five years. A significant part of the growth in the Company's electric sales has resulted from growth in the residential area, mining and manufacturing industry in northern Nevada. SPPC's electric customers by class contributed the following toward 1999 and 1998 megawatt-hour sales:
MWh Sales 1999 1998 Residential 1,998,174 19.6% 1,987,562 20.4% Commercial and Industrial: Mining 2,716,579 26.6% 2,648,957 27.1% Offices/Schools/Govt. 1,128,189 11.1% 1,048,553 10.7% Resorts & Recreation 768,750 7.5% 760,848 7.8% Manufacturing/Warehouse 586,963 5.8% 738,972 7.6% Wholesale 1,695,420 16.6% 1,443,652 14.6% All Other 1,308,861 12.8% 1,134,675 11.8% -------------- --------- ------------ -------- Total 10,202,936 100.0% 9,763,219 100.0%
According to the Nevada Mining Association statistics, Nevada leads the nation in gold production, accounting for approximately 74% of all U.S. production and 10% of world production, ranking it the third largest gold producer in the world behind South Africa and Australia. It is estimated that Nevada gold production for 1999 was approximately 8.2 million ounces. A majority of Nevada's gold mines are customers of the Company. Currently, known gold reserves at existing mines in Nevada total approximately 87 million ounces, the majority of the nation's known gold reserves. These reserves are sufficient to continue production at current rates for the next decade. During 1999, world gold prices ranged from about $253 per ounce to $326 per ounce. Production costs continue to vary greatly at Nevada mines, along with profitability. Industry reports indicate many Nevada gold mines have a production cost of less than $300 per ounce, with some of the larger mines producing within the $192 to $240 per ounce range. When compared to world production costs, Nevada remains below the worldwide average. While Nevada's gold mines have the lowest costs in the world, investments in exploration and development have fallen, and may continue to fall. In addition, low gold prices may shorten the expected mine lives of certain Nevada properties as lower grade ore becomes uneconomic to mine. The Company's territory also has a variety of other mineral producing mines. Approximately 19.5 million ounces of silver were produced in 1999, worth approximately $102 million, with over 123 million ounces of silver resources identified in the State. Silver demand has been exceeding new supply for most of the decade, drawing down inventories built up in the 1980's. As this situation continues, we will see continued upward pressure on silver prices. Other minerals produced in Nevada include copper, lithium, mercury, barite, diatomite, gypsum, and lime, valued at over $108 million. 8 The Company has seven long-term power sales agreements with major mining customers with terms of at least five years. The final contract expires in 2005. One of these customers has provided SPPC with two years' notice of termination. Five of these agreements have been reviewed and approved by the PUCN as part of the Company's new tariff structure designed for major customers. These mining agreements secure over 223 megawatts of present and future mining load, or approximately $74 million in annual revenues, which is 12.2% of the 1999 electric operating revenues. The agreements require that customers maintain minimum demand and load factor levels, and include termination charge provisions to recover all of the Company's customer-specific facilities investment. Sales to the mining sector grew at approximately the same percentage as overall system sales (3.8%). The resorts and recreation group is comprised of hotels, casinos, and ski resorts. This major customer segment comprises 7.5% of the total electric system retail MWh sales. Tourism and gaming continue to be key contributors to the local economy. Several of the largest gaming customers are expanding their properties to differentiate the Reno/Tahoe market by creating a more desirable resort location. These same large gaming customers increased their 1999 electric load by 7,902 MWh (1.0%) over 1998. Gaming has substantial potential for growth with the recent purchases and reopening of several smaller casinos. In addition, several closed properties have been razed and have plans for new properties to be built in their place. The advent of increased competition in 1999, particularly "Indian gaming" in key feeder markets and the continuing expansion in Las Vegas, has not had a negative impact on the Northern Nevada market share and ultimately energy sales. The passing of Proposition 5 in California, which liberalizes Indian reservation gaming operations, had been predicted to cause a decline in Reno's gaming revenues once implemented. Northern Nevada casinos are evaluating and implementing competitive strategies to expand their entertainment portfolio. The key to this strategy is packaging entertainment value, customer comfort, and reasonable pricing, with the natural attraction of the Sierra Nevada geographic location. The Company's industrial and large commercial customers continue their interest in the electric supply source options potentially available to them under regulatory reforms currently being considered in Nevada and in place in California. The Company continues to prepare for a more competitive environment and has actively participated in regulatory reform deliberations in Nevada. Upon opening the market to retail access, one of the most significant regulations that will impact the distribution business is the requirement to be the provider of last resort for customers who do not choose a competitive supplier or who are unable to secure a new supplier. Due to the SB438 requirement that the provider of last resort be placed into a separate affiliate, recent PUCN decisions regarding recovery of fuel expenses, and the stringent proposed regulations, significant detrimental financial impacts are expected to occur. As a result, the Company is determined to exit the provider of last resort requirement as quickly as possible. First the Company would seek to exit the energy supply portion of the provider of last resort. Then, if current legislation and regulation do not change, the Company would plan to exit other services, including metering, billing and customer service functions. See Item 7, Nevada Matters, California Matters, and FERC Matters for further discussion. Over the past five years, MWh sales to wholesale customers have increased at a rate of 39.4%. During 1999, firm and non-firm sales to wholesale customers comprised about 14.8% of total energy sales. The wholesale market is very competitive and sales into this market are typically made at very low margins. This market is maturing and will become even more competitive in the future. The Company utilizes wholesale sales to better manage fuel and purchase power costs. 9
PERCENT MWh OF TOTAL ------------ --------- Firm Sales 507,640 29.9% Non-firm Sales 123,567 7.3% Firm Off-System Sales 1,064,213 62.8% ------------- ---------- Total 1,695,420 100.0% ============= ==========
While the wholesale sales in 1999 represented 14.8% of sales they represent only 8.6% of electric revenues. MAJOR PROJECTS - --------------- The following major projects have been approved in previous resource plans and may have been financed utilizing internally generated cash and/or the proceeds from various forms of debt and preferred securities: Pinon Pine Project The Pinon Pine Project is a cooperative agreement with the U.S. Department of Energy (DOE) for the construction of a coal-gasification power plant. Total project costs incurred by the Company through December 31, 1999, were $170.0 million. Actual costs incurred by the Company in 1999 were $.4 million. Alturas Intertie Project The Alturas Intertie Project, which went into service in December 1998, is a 345 kilovolt (kV) transmission line from Northern California to Reno. Total project costs incurred through December 31, 1999 were $153.2 million. Actual costs incurred in 1999 were $9.1 million. Estimated costs for 2000 are $1.0 million. Falcon Transmission Project The Falcon Transmission Project is a 345kV transmission line within Northern Nevada. Total project costs incurred through December 31, 1999 were $2.4 million. Actual costs incurred in 1999 were $2.1 million. Estimated costs for 2000 are $4.0 million. The Company's construction program and estimated expenditures are subject to continuing review, and are revised from time to time due to various factors, including the rate of load growth, escalation of construction costs, availability of fuel types, changes in environmental regulations, adequacy of rate relief, and the Company's ability to raise necessary capital. 10 FINANCING PROGRAMS - ------------------ Current estimated cash construction expenditures for 2000 are $137.7 million. The Company may utilize internally generated cash and the proceeds from the issuance of securities to meet capital expenditure requirements through 2000. Internally generated funds provided 35% of all construction expenditures in 1999. On July 28, 1999, the Company put into place a $150 million 364-day unsecured revolving credit facility that is convertible at the Company's election into a one-year term loan. This facility replaced the Company's previous credit facility and may be used for working capital and general corporate purposes, including commercial paper backup. On April 9, 1999, The Company sold the Transition Property (See California Matters in Rate Proceedings, later) to SPPC Funding LLC, a Delaware special purpose limited liability company whose sole member is the Company, in exchange for the proceeds of the SPPC Funding LLC Notes, Series 1999-1 (the "Underlying Notes"). SPPC Funding LLC then issued and sold the Underlying Notes to the California Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1 (the "Trust") in exchange for the proceeds of the sale of the Trust's $24.0 million 6.4% Rate Reduction Certificates, Series 1999-1 (the "Certificates"). The Trust, which had been established by the California Infrastructure and Economic Development Bank, issued and sold the Certificates in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended. The Certificates are one of a series of rate reduction certificates that may be issued from time to time by the Trust and sold to investors upon terms determined at the time of sale. On July 12, 1999, $10 million of the Company's 6.86% medium-term notes matured. On July 6, 1999, $20 million of the Company's 6.83% medium-term notes matured. On September 17, 1999, the Company issued $100 million of floating rate notes ("Notes") due October 13, 2000. Interest on the Notes, payable quarterly, commenced on December 15, 1999. The interest rate on the Notes for each interest period to maturity is a floating rate, subject to adjustment every three months. The quarterly rate is equal to the London Interbank Offered Rate (LIBOR) for three-month U.S. dollar deposits plus a spread of 0.75%. The Notes will not be entitled to any sinking fund and will be redeemable, in whole, at the option of the Company beginning on March 15, 2000 and on the 15th day of each month thereafter. On November 1, 1999 the Company redeemed Preferred Stock, Series A, $2.44 Dividend (4.88%), Series B, $2.36 Dividend (4.72%) and Series C, $3.90 Dividend (7.80%). FACILITIES AND OPERATIONS - ------------------------- Total System As of December 31, 1999, the Company's electric transmission facilities consisted of approximately 4,000 overhead pole line miles and 81 substations. Its distribution facilities consisted of approximately 9,000 overhead pole line miles, 4,500 underground cable miles and 178 substations. 11 The Company continues to maintain a wide variety of resources in its generation system. During 1999, the Company generated 46.2% of its total electric energy requirements in its own plants, purchasing the remaining 53.8% as shown below:
Megawatt- Percent Hours of Total --------- -------- Company Generation - ------------------ Gas/Oil 3,071,537 28.4% Coal 1,879,326 17.4% Hydro 47,277 0.4% ---------- ----- Total Generated 4,998,140 46.2% ---------- ----- Purchased Power - --------------- Utility Purchases: Long-Term Firm 1,322,088 12.2% Short-Term Firm 3,337,174 30.8% Spot Market 297,333 2.8% Non-Utility Purchases: Geothermal 712,976 6.6% Other 128,332 1.2% Transmission & Balancing 23,939 0.2% ---------- ----- Total Purchased 5,821,842 53.8% ---------- ----- Total 10,819,982 100.0% ========== =====
The Company's decision to purchase spot market energy is based on the economics of purchasing "as-available" energy when it is less expensive than the Company's own generation. At the time of the 1999 system peak, the Company had purchased firm capacity under long-term contracts with other utilities and qualifying facilities (QFs) equal to 17% of total peak hour capacity. In 1999, most of the Company's non-utility generation came from QFs, except for 14,951 megawatt hours, which came from two small power producers. Risk Management Over the past several years, SPPC recognized that the management of energy commodity (electricity, natural gas, coal, and oil) price risk was an essential component of SPPC's efforts to manage revenues and expenses. In 1998, SPPC's board of Directors approved a Risk Management Policy & Procedure Manual that governed price risk management activities. With the merger of SPR and NVP, the Board of Directors requested that management review and consolidate the Risk Management Programs of the two utilities. SPPC and NVP engaged the services of a leading energy risk management consulting company to review existing policies and procedures, make any recommendations to the existing Program, and implement the revised Program. That project led the companies to adapt revised policies and procedures, implement new IT systems to track any commodity price exposures, as well as focus on potential "Earnings-at-Risk" which measures the amount of exposure that the companies have to energy prices at any point. 12 Load and Resources Forecast The electric customer growth rate was 2.8%, 2.8%, and 3.1% in 1999, 1998 and 1997, respectively. Annual electricity retail sales reached 8,412,853 megawatt-hours in 1999. Peak electric demand rose from 1,423 megawatts in 1998 to 1,470 megawatts in 1999. The Nevada Legislature mandated retail access to alternative electric suppliers. While the opening date of competition is not yet known, once access begins, the Company will continue to be required to supply electricity to customers as the "provider of the last resort". It is expected that some customers will elect to receive their electric supply from other suppliers, however, reasonable estimates of the number and timing of customers switching are not yet available. The proposed "provider of last resort" regulations have highlighted the Company's exposure to fuel price risks. Consequently, if the proposed regulations are adopted, the Company will exit the provider of last resort function as quickly as possible, beginning with energy supply. The projections shown below are forecasts of the load to be provided to all of the Company's current customers, and therefore, include demand that may actually be met by other electric suppliers. As part of the merger agreement with the PUCN, the Company has committed to divest its generation facilities to enhance competition in a deregulated environment. Current plans call for the divestiture to occur in the year 2000. Until such time, the Company will continue to provide energy through generation and purchase power to meet both summer and winter peak loads. The Company's actual total system capability and peak loads for 1999, and as estimated for summer peak demand through 2001 (assuming no curtailment of supply or load and normal weather conditions), are indicated below:
Capacity at 1999 Peak Forecast Summer Peak ----------------------------------------------------- MW % 2000 2001 ----------------------------------------------------- Company Generation: Existing (1) 1,045 63% 1,052 0 --------------------------------------------------- Purchases: Long/Short-Term Firm (2) (3) 492 29% 498 1,541 Interruptible Customers 2 0% 2 2 Non-Utility Generators 70 4% 70 70 --------------------------------------------------- Subtotal 564 33% 570 1,613 --------------------------------------------------- Additional Required 60 4% 82 177 Total System Capacity 1,669 100% 1,704 1,790 --------------------------------------------------- Net System Peak (4) 1,470 88% 1,499 1,581 Planning Reserve 199 12% 205 209 --------------------------------------------------- Total 1,669 100% 1,704 1,790 =================================================== Growth over previous year 2.1% 5.1%
(1) Assumes divestiture is complete by peak season 2001. (2) Value net of losses. (3) Includes potential short-term firm purchases that are not under contract. Values shown represent purchases within existing transmission system limits. 13 (4) The system peak shown for 1999 is the actual system peak of 1,470 MW, which occurred on July 12, 1999. The Company plans its system consistent with the Western System Coordinating Council guidelines, which recommends planning reserves in excess of required operating reserves. The "Additional Required" represents the difference between the planning reserves and the operating reserves needed for the system. These additional reserves will be met, if needed, by short-term purchases through 2001. Generation The following is a list of the Company's generation plants including their megawatt (MW) summer peak capacity, the type/fuel that they use to generate, and the year(s) that the unit(s) was (were) installed:
Number of MW Year(s) Name Type/Fuel Units Capacity Installed - ---- --------- ------ -------- --------- Valmy (1) Steam/Coal 2 266 1981 and 1985 Tracy Steam/Natural Gas, Residual Oil 3 244 1963, 1965, 1974 Pinon (2) Combined Cycle/Coal, Natural Gas 1 89 1996 - 1998 Clark Mtn. CT's Combustion Turbine/Natural Gas, Diesel Oil 2 138 1994 Ft. Churchill Steam/Natural Gas, Residual Oil 2 226 1968 and 1971 Other (3) Gas Turbine/Natural Gas, Diesel Oil, Propane, Hydro 33 82 1899 1970 ----- 1,045 =====
(1) SPPC is the operator and owns an undivided 50 percent interest in the Valmy plant. Idaho Power Company (Idaho Power) owns the remainder. The capacities shown above for the Valmy plant represent the Company's share only. The Company owns 100 percent of all of its remaining electric generation plants. (2) Includes the generation capacity of the 100% SPPC-owned power island portion of the Pinon Pine Power Project. Pinon's current summer peak capacity is 89 MW when operating on natural gas. (3) Four of the Company's hydro generation units are located on the Truckee River, which runs approximately 100 miles from Lake Tahoe, through Reno/Sparks, to Pyramid Lake. A 2 MW facility located on the Truckee River at Farad was damaged by the January 1997 flood and was not available for generation during the 1999 summer peak. Purchased Power The Company continues to manage a diverse portfolio of contracted and spot market supplies, as well as its own generation, to minimize its net average system operating costs. During 1999, the Company witnessed a leveling of off- system energy prices compared to the previous year, but energy forecasts indicate steadily increasing prices as load appears to outpace additional supply. 14 The Company is a member of the Northwest Power Pool and Western Systems Power Pool. These pools have provided the Company further access to spot market power in the Pacific Northwest and the Southwest. In turn, the Company's generation facilities provide a backup source for other pool members who rely heavily on hydroelectric systems. The Company has an agreement with PacifiCorp's Utah division and Idaho Power in which a portion of the energy purchased by the Company from PacifiCorp is transmitted through the Idaho Power system. The agreement also provides added access to spot market power. The Company purchases hydro- and thermally-produced spot market energy, by the hour, based upon economics and system import limits. Also purchased during peak load periods is firm energy as required to supply load and maintain adequate operating reserve margins. As off-system energy costs increase, the Company supplies a higher percentage of its native load utilizing its fossil fuel generation but is still required to buy peaking energy from the market. Also, market conditions throughout the West are in flux with regions approaching deregulation using different methods. Each change results in different market pricing characteristics. Currently, the Company has contracted for a total of 165 MW of long-term firm purchased power from the utility suppliers listed below. Several of the Company's firm purchase power contracts contain minimum purchase obligations. Meeting these minimums has not been a problem for the Company in the past, and is not expected to be a problem in the future.
Contract Party Contract Operation Termination Minimum Capacity Date Date Capacity % ---------------------------------------------------------------------------------------------- Idaho Power (for Elko) 15 MW March 1994 May 31, 2000 40% PacifiCorp 75 MW June 1989 Feb 28, 2009 70% PacifiCorp/Utah Power (1) 75 MW May 1991 April 30, 2000 78%
(1) The Company has provided notice to terminate the PacifiCorp/Utah contract effective April 30, 2000. According to the Public Utility Regulatory Policies Act, the Company is obligated, under certain conditions, to purchase the generation produced by small power producers and co-generation facilities at costs determined by the appropriate state utility commission. Generation facilities that meet the specifications of the regulations are known as qualifying facilities (QFs). As of December 31, 1999, the Company had a total of 109 MW of maximum contractual firm capacity under 15 contracts with QFs. The Company also had contracts with three projects at fluctuating short-term avoided cost rates. All QF contracts currently delivering power to the Company at long-term rates have been approved by either the PUCN or the California Public Utility Commission (CPUC), and have QF status as approved by the FERC. One long-term QF contract terminates in 2006, one terminates in 2039, and the remainder terminate between 2014 and 2022. Energy purchased by the Company from QFs constituted 10% of the net system requirements during 1999. These contracts continue to provide useful diversity for the Company in meeting its peak load. All the QFs from which the Company makes firm purchases are either geothermal (87%), hydroelectric or biomass. 15 The actual QF firm capacity output under contract was 64 MW during the summer of 1999. The actual QF output for all non-utility generator deliveries during the summer 1999 peak was 83 MW. The table on page 13 reflects actual performance during the 1999 summer peak period. A difference exists between the non-utility generator figures and the table on page 13 because the 1999 figure is actual and the remaining years are forecasts. Any capacity shortfall created by under-performance was included in the Company's 1999 amended resource plan. Transmission In planning its transmission capacity, the Company considers generation and purchased power options, as well as the requirements for providing retail and wholesale transmission services. The Company's existing transmission lines extend some 300 miles from the crest of the Sierra Nevada in eastern California, northeast to the Nevada-Idaho border at Jackpot, Nevada, and 250 miles from the Reno area south to Tonopah, Nevada. A 230 kV transmission line connects the Company to facilities near the Utah-Nevada state line, which in turn interconnects the Company to Utah Power facilities. A 345 kV transmission line connects the Company to Idaho Power facilities at the Idaho-Nevada state line. The Company also has two 120 kV lines and one 60 kV line which interconnect with Pacific Gas and Electric (PG&E) on the west side of the Company's system at Donner Summit, California. Two 60 kV transmission ties allow wheeling of up to 14 MW of power from the Beowawe Geothermal Project, which is located within the Company's service area, to Southern California Edison. These two minor interties are available for use during emergency conditions affecting either party. The Company's transmission intertie system provides access to regional energy sources. The Falcon Project is a 185-mile 345kV line connecting the Company's Falcon Substation to the Company's Gonder Substation. The Project improves system import and export capabilities and enables the Company to provide transmission service between Idaho, Utah, and the Northwest. A Right-of-Way application was submitted to the Bureau of Land Management (BLM) on December 17, 1998, and Electric Resource Plan approval was received from the PUCN on April 8, 1999. On October 5, 1999, the Company received a letter from the BLM requiring the preparation of an Environmental Impact Statement (EIS). Current activities include completion of environmental field surveys, hiring a consultant to prepare the EIS, and WSCC rating studies. The EIS process should continue until July 2001, which should translate to a project in-service date in June 2003. Annual costs for 1999 are $2.25 million, total costs as of December 31, 1999 are $2.28 million, and the estimated net cash total cost is $98.2 million. The Company completed construction of the Alturas Intertie transmission line in December 1998. The Alturas Intertie was built to enhance service to existing load, to expand service to new customers and to increase significantly the Company's access to lower cost resources in the Pacific Northwest. This 345 kV line originates west of Alturas, California and extends 165 miles south to Reno. 16 Certain Northern California public power groups have challenged the Company's filing with the FERC of the interconnection and operating agreements related to the Alturas Intertie in December 1998 and January 1999. The California groups alleged that the potential reduction in imports into California constitutes an impairment of reliability and therefore seek to force reductions in use of the Alturas Intertie during peak periods. These allegations have already been rejected by the Western Systems Coordinating Council, which determined the capacity rating of the Alturas Intertie. The Company (supported by Bonneville Power Administration and PacifiCorp) has filed testimony before the FERC that the Alturas Intertie does not adversely affect reliability and that, under the FERC's Order No. 888, customers in Nevada are entitled to compete with customers in California for transmission capacity in the Pacific Northwest on a first-come, first-served basis. The FERC staff has agreed with the Company's position on this matter. One of the California groups, the Transmission Agency of Northern California ("TANC"), also initiated proceedings in the United States District Court for the Eastern District of California and the United States Court of Appeals for the Ninth Circuit, in each case alleging that Bonneville's construction of a small portion of the Alturas Intertie violated the Northwest Power Preference Act and requesting an injunction prohibiting operation of the Alturas Intertie. The case before the Eastern District was dismissed for lack of jurisdiction. The case before the Ninth Circuit was dismissed for TANC's failure to prosecute. In December 1999, TANC filed suit in the Superior Court of the State of California, Sacramento County, seeking an injunction against operation of the Alturas Intertie based on numerous allegations under state law, including inverse condemnation, trespass, private nuisance, and conversion. Fuel Availability The Company's 1999 fuel requirements for electric generation were provided by natural gas, coal, and oil. During 1999 natural gas remained the fuel of choice, over oil, for generation plants other than Valmy, which is a coal-fired plant. The average costs of coal, gas and oil for energy generation per million British thermal units (MMBtu) for the years 1995-1999, along with the percentage contribution to total fuel requirements were as follows:
______________________________________________________________________________ Average Consumption Cost & Percentage Contribution to Total Fuel Requirements Gas Coal Oil --- ---- --- $/MMBtu Percent $/MMBtu Percent $/MMBtu Percent ------- ------- ------- ------- ------- ------- 1999 $2.71 62.3 $1.46 37.3 $3.41 0.4 1998 2.12 60.7 1.56 39.0 3.96 0.3 1997 2.03 62.0 1.80 37.0 3.35 1.0 1996 2.10 61.0 1.88 37.0 3.48 2.0 1995 1.65 55.0 2.19 44.0 3.80 1.0 ______________________________________________________________________________
For a discussion of the change in fuel costs, see Item 7, Management Discussion and Analysis. The Company's long-term contract with Black Butte Coal Company (Black Butte) for coal shipments to Valmy from the mine near Rock Springs, Wyoming, remains in effect until June 30, 2007, or until all volume requirements under the contract are delivered and/or canceled. Due to previous accelerated purchases and cancellations and continuing cancellations of minimum monthly volume obligations (described below), the Company projects it will fully satisfy all volume requirements and that termination of the contract will occur sometime in early to mid-2002. 17 Beginning in June 1996, the Company, along with its joint-ownership partner (Idaho Power Company), implemented an economic cancellation strategy that essentially buys down minimum tonnage requirements under the Black Butte contract rather than taking physical delivery of the coal. Canceling the Black Butte tonnage creates various economic and operating benefits, primarily the opportunity to buy lower-cost spot market coal and reduce overall fuel costs. In June 1996, the Company and Idaho Power expended $5 million ($2.5 million each) to cancel all minimum volume requirements for the 1996-97 contract year. The Company agreed with Idaho Power to satisfy even more volume requirements in the fall of 1996 and in June 1997 by matching the dollar cost of Black Butte tonnage purchased by Idaho Power for delivery to Idaho's coal-fired Jim Bridger plant. The Company expended $3.8 million for these matching cancellations. Since July 1997, the Company and Idaho Power have canceled (or delivered to the Bridger plant) minimum Black Butte volume requirements on a monthly basis. During the third quarter 1998 and in September through November 1999, minimum contract quantities were delivered to Idaho Power's Bridger plant, with these deliveries credited to Valmy requirements under the Black Butte contract. The Company's long-term coal contract with Canyon Fuel Company, LLC (Canyon), which provides coal for Valmy from Canyon's SUFCO mine in Central Utah, expires on June 30, 2003. This contract also contains minimum volume requirements that the Company expects to meet each year until termination. The current owner of the SUFCO mine is Arch Coal, Inc., which acquired ARCO Coal (the previous owner of the Canyon Fuel properties, including SUFCO) on June 1, 1998. During 1999, several short-term agreements for the purchase of spot market coal were executed, with two of these agreements extending into 2001. The source of this coal is the Uinta Basin of Utah. These spot market purchases supplement base volume requirements under the Company's long-term coal contracts at a cost approximately one-half that of contract coal. The total amount of coal burned at the Valmy Power Plant during 1999 was 1.55 million tons. As of December 31, 1999, the coal inventory level was 383,053 tons, or approximately 67.0 days of consumption at 100% capacity. The Company normally targets an average annual coal stockpile sufficient to provide 30 days' supply at full load. For 1999, however, the Company made the decision to increase storage to approximately 60 days' supply by December 31 as part of its Y2K contingency plans. The Company has adjusted its operations toward reaching the normal 30 days' supply by the end of 2000. During 1999, transportation of coal to Valmy was provided by the Union Pacific Railroad (UP) under a 3-year agreement effective June 1, 1998. This agreement was negotiated as a resolution to the Company's previously filed complaint with the Surface Transportation Board alleging unreasonable rate levels being charged by the UP. During 1999, the Company operated the Pinon Pine facility exclusively on natural gas. Although no coal was purchased in 1998 for synthetic gas production in the plant's coal gasification facility, approximately 19,000 tons were purchased in 1997 and 450 tons in 1999. This inventory has been more than sufficient to fuel the gasifier during its limited operation during the last two years. Total coal burned in the gasifier during 1999 was 679 tons. Petroleum coke (used for gasifier startup) purchased in 1999 was 220 tons, with 169 tons being burned. Due to operational problems caused by high levels of fine particles inherent in the coal used at Pinon, about 450 tons of stoker coal, which is a sized and harder product, was purchased in November 1999 as an attempt to reduce the effects of filter clogging in the gasifier. 18 The Company meets its needs for residual oil for generation through purchases on the spot market. With no other mitigating factors, the Company's residual oil inventory policy is to maintain 50,000 to 75,000 barrels at each of its Tracy and Ft. Churchill generating plants. Based on Y2K contingency plans, the Company increased storage at its Ft. Churchill plant to full capacity this past summer and also increased Tracy storage to over 100,000 barrels which, in total, will provide over 10 days' supply at full load operation. The Company has adjusted its operations toward reaching normal inventory levels in 2000. Storage levels were not increased to full capacity at Tracy because of favorable natural gas availability estimates from the gas supply industry. The actual residual oil inventory level at these two sites was 232,134 barrels as of December 31, 1999, which is equal to 10.5 days' supply at full load operation. Total residual oil consumption in 1999 was 37,425 barrels. No residual oil was burned in the month of December, with natural gas supply being sufficient to fuel both the Tracy and Ft. Churchill steam units. NATURAL GAS BUSINESS - -------------------- The Company's natural gas business is a local distribution company (LDC) in the Reno/Sparks area that accounted for $100.2 million in 1999 operating revenues or 13.1% of total Company operating revenues. Growth in the Company's service territory continues to be strong. Residential customer growth during 1999 was 4.3%. The overall natural gas customer growth rate was 4.3% for the year. The Company's total customer count increased 5,131 customers to 111,843 customers at the end of 1999. Natural gas offers significant economic and environmental advantages over other energy sources for space heating, water heating and other uses in residential, commercial and industrial applications. Growth in all sectors is expected to continue as new developments in the Company's distribution service area are planned. Contracts established during the last three years under the Company's Value Based Service Tariff (VBST) are being successfully renewed as the old contracts expire. During 1999, two contracts were renewed under the VBST tariff, which is designed to enable the Company to compete with competitive service options for its largest customers. As of December 31, 1999, the Company had seven VBST contracts in place with customers. The Company's natural gas LDC business is subject to competition from other suppliers and other forms of energy available to its customers. Large customers with fuel switching capability compare natural gas prices on an interruptible basis to alternative energy source prices. Seven customers now secure their own gas supplies, with the Company providing transportation service on its distribution system. The Company has contracted for firm winter-only and annual gas supplies with 13 Canadian and domestic suppliers to meet the firm requirements of its LDC and electric operations. The contracts total 157,500 decatherms per day through March 2000 and 95,000 decatherms per day for April through October 2000. The Company's firm natural gas supply is supplemented with natural gas storage services and supplies from a Northwest Pipeline Co. facility located at Jackson Prairie in southern Washington and a liquefied natural gas (LNG) storage from a facility located near Lovelock, Nevada. The LNG facility is operated by Paiute Pipeline Company and is used for meeting peak demand. The Jackson Prairie and LNG facilities can contribute a total of approximately 48,000 decatherms per day of peaking supplies. 19 Starting November 1, 1996, the Company entered an agreement to sell winter seasonal peaking capacity supplies to another company over a seven-year period. The contract provides for the payment to the Company of a monthly reservation charge, reimbursement of pipeline capacity charges during the winter, and a volumetric commodity charge based on the market price for natural gas. The Company was able to enter into this agreement due to the ability of its power plants to utilize alternative fuels and its power importation option. Following is a summary of the transportation and approximate storage capacity of the Company's current gas supply program. Firm transportation capacity on the Northwest/Paiute system exists to serve primarily the LDC. Firm transportation capacity on the PGT/Tuscarora system exists primarily to serve the Company's electric generating plants. Storage capacity is generally used for the peaking requirements of the LDC.
Transportation Capacity Northwest: 68,696 decatherms per day firm 90,000 decatherms per day interruptible Paiute: 103,774 decatherms per day firm from November through March 61,044 decatherms per day firm from April through October 90,000 decatherms per day interruptible NOVA: 30,000 decatherms per day firm ANG: 30,000 decatherms per day firm PGT: 30,000 decatherms per day firm 40,270 decatherms per day firm (winter only) 90,000 decatherms per day interruptible Tuscarora: 106,250 decatherms per day firm 50,000 decatherms per day interruptible Storage Capacity Williams: 281,242 decatherms from Jackson Prairie 12,687 decatherms per day from Jackson Prairie Paiute: 463,034 decatherms from Lovelock LNG 35,078 decatherms per day from Lovelock LNG facility
The Company plans to sell its gas fired generation by the end of 2000. As part of this sale the Company will be transferring portions of its firm pipeline and the winter peaking supply agreement, described above, to the buyers of the Ft. Churchill and Tracy generation bundles. The final allocation of capacity to the buyers is still being determined but will meet the divestiture stipulation requirement that Sierra maintain the availability and reliability of natural gas to its local gas distribution company. Total LDC decatherm supply requirements in 1999 and 1998 were 13.4 million decatherms and 14.9 million decatherms, respectively. Electric generating fuel requirements for 1999 and 1998 were 31.6 million decatherms and 35.0 million decatherms, respectively. As of December 31, 1999, the Company owned and operated 1,439 miles of three-inch equivalent natural gas distribution piping. 20 WATER BUSINESS - -------------- The water distribution business contributed $54.3 million (7.1%) to the Company's 1999 operating revenues. Water production in 1999 totaled 24.97 billion gallons. 3.99 billion gallons were produced from the Company's groundwater wells. The remaining 20.98 billion gallons were treated through the Company's two water treatment facilities, the Chalk Bluff Water Treatment Plant and the Glendale Water Treatment Plant. The Company's peak day send-out of water during 1999 was 133.1 million gallons (135.2 including the Silver Lake acquisition described below), a 0.5% decrease over the 133.8 million gallon peak set in 1998. The stability in peak day demand was due to mild summer temperatures which offset additional new customer demands. Overall weather conditions during the year produced an above average snow pack with a warm lingering fall; thus annual production was up 11.5%. The Company's water supplies are from both surface and groundwater sources, with the addition of drought storage and refill provisions sufficient to withstand prolonged drought conditions. The surface water source is the Truckee River, which originates in Lake Tahoe and flows north and east through the cities of Reno and Sparks to Pyramid Lake, located northeast of Reno. The Company's groundwater comes from 25 supply wells located around the Reno/Sparks area. Man-made contaminants, perchloroethylene, from local business operations have been found at levels exceeding the drinking water standards in five of these wells. All five of these wells have now been fit with treatment equipment that allows them to be returned to operation and deliver water to the system that meets federal standards. The Washoe County remediation district is expected to reimburse the Company for the cleanup of this groundwater contaminant in these five wells beginning in 2000. Additionally, the Company has four wells which currently exceed the federal drinking water standard for naturally occurring arsenic concentrations. Production from three of these wells continues by blending water treated at the Glendale Water Treatment Plant. The fourth well is out of service pending treatment. The Company's water laboratory research staff is developing options to assure that the Company is prepared to meet new arsenic standards. The new Arsenic regulations will be promulgated in 2000 and the proposed regulation is expected to require action on 17 of the 25 wells serving the Company's system. Depending upon final rules from the EPA, the Company may incur between $70 million and $98 million by 2004 to meet the new standards. A favorable piece of legislation, AB380, was passed in the 1999 State legislature that resolved more than a decade of litigation over water rights and addressed the issues of forfeiture and abandonment. The legislation creates a special fund for the acquisition of water rights in question and clears the future for conversion of agricultural rights to urban uses without the cloud of forfeiture or abandonment protests. The Company continues to pursue the Negotiated Settlement that has been under development for several years. The Company is currently operating under a Preliminary Settlement Agreement (PSA) and interim storage contract until negotiations are completed and the final Truckee River Operating Agreement (TROA) is completed. Based on comments received from the initial release, the environmental impact statement (EIS) will be redone and resubmitted for comments following the final TROA drafting. This is expected to occur during 2000. The Negotiated Settlement is a complex set of agreements on Truckee River issues involving the United States, California and Nevada governments, the Pyramid Lake Paiute Tribe and the Company. It is expected the agreement will be finalized this year. During 1999, many details of the TROA and language of the draft have been solidified. Once in effect, the new agreement will allow the Company use of federal reservoirs for drought reserve storage. 21 The Company plans to rebuild the Farad dam and put the Farad Hydro plant back into service in 2001. The Company is designing and obtaining the appropriate permits to construct the replacement project. The dam was destroyed during a flood in 1997. The water rights associated with the hydro facilities are part of the Negotiated Settlement and provide for river flows to the water division, and therefore the four Truckee River hydro plants will stay with the Company's water business even after generation divestiture. See Merger/Generation Divestiture discussion. As a condition of the Negotiated Settlement, the Company's unmetered residential water customers must be converted to metered service. A meter retrofit program was approved by the PUCN and began in 1995. Funding for the program is provided by business developers and administered by the Company. Meter installation costs are significantly lower if a meter box is already in place. Accordingly, meter boxes without meters are installed when roads and sidewalks are replaced. Since the program's inception, 5,533 meters (14% of 1995 unmetered customers) and 10,911 boxes without meters (41% of 1995 customers without facilities for meter installation) have been installed. During 1999, 671 meters and 3,611 boxes were installed with contributed funds. At this time, only customers who volunteer for the program may have meters installed. Water meters have been required in all new construction since 1986. The Company has made application to the PUCN to transfer retail water customers in the Double Diamond area to Washoe County and serve these and other customers in the South Truckee Meadows as wholesale customers through the County. This option minimizes the need for duplicate and costly facilities. In addition, the Company was successful in acquiring the assets of the Silver Lake Water Company and received approval by the PUCN. The Company began operation of the two Silver Lake wells, metering, billing, and customer services in October 1999. As a result of this acquisition, the Company increased its customer base by approximately 1600 customers, and more importantly, avoided costly capital expenditures. CONSTRUCTION PROGRAM - -------------------- Gross construction expenditures for 1999, including allowance for funds used during construction (AFUDC) and contributions in aid of construction, were $142.3 million and for the period 1995 through 1999 were $820.8 million. Estimated construction expenditures for 2000 and the period 2001-2004 are as follows (dollars in thousands):
Total 2000 2001-2004 5-Year --------------------------------------- Electric facilities $ 98,563 $407,785 $506,348 Water facilities 24,112 131,410 155,522 Gas facilities 19,550 39,390 58,940 Common facilities 8,047 17,410 25,457 -------------------------------------- Total construction expenditures $150,272 $595,995 $746,267 ====================================== AFUDC (2,220) (12,875) (15,095) Net salvage, including cost of removal (120) (400) (520) Net customer advances and contributions in aid of construction (10,242) (40,620) (50,862) -------------------------------------- Total cash requirements $137,690 $542,100 $679,790 ======================================
22 Total construction expenditures estimated for 2000 and the 2001-2004 period, for each segment of the Company's business, consist of the following (dollars in thousands):
Total 2000 2001-2004 5-Year ---------------------------------------- Electric Facilities: Distribution $ 63,490 $221,055 $284,545 Generation 4,695 4,530 9,225 Transmission 12,329 154,720 167,049 Other 18,049 27,480 45,529 -------------------------------------- $ 98,563 $407,785 $506,348 -------------------------------------- Water Facilities: Treatment and Supply $ 6,024 $ 57,200 $ 63,224 Distribution 17,720 72,910 90,630 Other 368 1,300 1,668 -------------------------------------- $ 24,112 $131,410 $155,522 -------------------------------------- Gas Facilities: Distribution $ 18,944 $ 36,660 $ 55,604 Other 606 2,730 3,336 -------------------------------------- $ 19,550 $ 39,390 $ 58,940 -------------------------------------- Common Facilities $ 8,047 $ 17,410 $ 25,457 -------------------------------------- TOTAL $150,272 $595,995 $746,267 ======================================
GENERAL REGULATION - ------------------ The Company is subject to the jurisdiction of the PUCN and the CPUC with respect to rates, standards of service, siting of, and necessity for, generation and certain transmission facilities, accounting, issuance of securities and other matters with respect to electric operations. The Company submits integrated resource plans regarding its electric, gas, and water business operations to the PUCN for approval. Under federal law, the Company is subject to certain jurisdictional regulation, primarily by the FERC. The FERC has jurisdiction under the Federal Power Act with respect to rates, service, interconnection, accounting, and other matters in connection with the Company's sale of electricity for resale and the transmission of energy for others. The FERC also has jurisdiction over the natural gas pipeline companies from which the Company takes service. As a result of regulation, many of the fundamental business decisions of the Company, as well as the rate of return it is permitted to earn on its utility assets, are subject to the approval of governmental agencies. The Company is also subject to regulation by environmental authorities. See Environment. 23 Rate Proceedings - ---------------- During 1999, 85% of the Company's revenues were from retail sales of electricity, natural gas and water in Nevada, 5% from retail sales of electricity in California and 10% from sales of electricity and gas for resale. Nevada Matters - -------------- Electric Industry Restructuring During the 1997 session, the Nevada Legislature passed Assembly Bill 366 (AB 366). AB 366 was a comprehensive bill that introduced competition for electric and gas retail services. Since the fall of 1997, the PUCN has been developing regulations to implement AB 366. In the 1999 session, the legislature passed Senate Bill 438 (SB 438) that significantly modified many provisions of AB 366. These two pieces of legislation substantially alter the way the Company is regulated and how it will serve its customers. Non-price Terms and Conditions for Distribution Service On February 2, 1999, the Company filed its non-price terms and conditions for unbundled distribution service pursuant to the PUCN regulations. A stipulation resolving most issues and agreeing to further filings on unresolved issues was filed with the PUCN on April 9, 1999, and subsequently approved by the PUCN on April 22, 1999. Settlements regarding the unresolved issues were subsequently filed and approved by the PUCN. Unbundling of Utility Services On April 1, 1999, in accordance with the merger order and the implementation of AB 366, the Company filed a revenue requirements and unbundling study with the PUCN (the "Compliance Filing"). The Compliance Filing included the development of an electric revenue requirement for the test period 1998. The Compliance Filing regulation requires the revenue requirement development to be in the form used for rate cases. In the unbundling study, the revenue requirement was assigned and allocated to a number of service components including generation, aggregation, transmission, distribution, metering, billing, and customer services. On September 23, 1999, the PUCN issued an interim order on the Company's April 1, 1999 Compliance Filing. The Order contained the PUCN's decision on revenue requirements, return on equity, depreciation, and the unbundling study. The Company did not utilize the order's revenue requirement, return on equity or depreciation rates in Phase II of this case because SP438 legally mandated that the Company use its July 1, 1999 revenue requirement in Phase II. Pricing of Distribution Service On October 8, 1999, the Company filed final versions of the approved non- price terms and conditions and rates reflecting a revenue requirement in accordance with SB 438. Hearings were held in early November. A decision is expected in 2000. 24 Earnings Sharing On April 30, 1999 the Company filed an earnings sharing refund request, based on 1999 earnings of $7.0 million for electric customers and $1.9 million for gas customers. On August 19, 1999, the PUCN approved a stipulation between the Company, Staff, and the Utilities Consumer Advocate, which resulted in a $7.4 million and a $2.0 million refund to electric and gas customers, respectively. Based on 1999 operating results, the Company anticipates it may make refunds to customers. Appropriate reserves have been recorded to reflect any anticipated refunds. Generation Divestiture In October 1999, the Company filed with the PUCN its request for approval to sell its generation plants. Hearings were held in November 1999 and a stipulation was approved in February 2000. California Matters - ------------------ Rate Reduction Bonds California's electricity restructuring statute (Assembly Bill 1890, Chapter 854, California Statutes of 1996, as amended) permits California investor-owned utilities, including the Company, to finance the recovery of a reduction in electricity rates for residential and small commercial customers through the issuance of rate reduction certificates. Transition costs consist of the costs of generation-related assets and obligations that may become uneconomic as a result of a competitive generation market, together with certain other costs associated therewith. In order for the Company to recover transition and associated costs, the CPUC authorized the establishment of non-bypassable, usage-based, per kilowatt- hour charges ("FTA Charges") to be included in the regular utility bills of residential and small commercial consumers located in the historical service territory of the Company in California. The right to receive payments made in respect of the FTA Charges is referred to as Transition Property. On April 9, 1999, the Company sold the Transition Property to SPPC Funding LLC, a Delaware special purpose limited liability company whose sole member is the Company, in exchange for the proceeds of the SPPC Funding LLC Notes, Series 1999-1 (the "Underlying Notes"). SPPC Funding LLC then issued and sold the Underlying Notes to the California Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1 (the "Trust") in exchange for the proceeds of the sale of the Trust's $24.0 million 6.4% Rate Reduction Certificates, Series 1999- 1 (the "Certificates"). The Trust, which had been established by the California Infrastructure and Economic Development Bank, issued and sold the Certificates in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended. The Certificates are one of a series of rate reduction certificates that may be issued from time to time by the Trust and sold to investors upon terms determined at the time of sale. On January 10, 2000, the Commission approved the Company's annual true-up of the FTA charges effective January 1, 2000. 25 Revenue Cycle Unbundling On February 18, 1999, the CPUC approved the Company's proposed Revenue Cycle Services Credits (RCSC) application filed February 2, 1998. The RCSC addresses meter ownership, meter services, meter reading, and billing and applies to customers who select their own provider of a revenue cycle service. On April 9, 1999, the Company made a compliance tariff filing which reflects the approved credits. Direct Access Tariffs On April 5, 1999, the CPUC approved the Company's compliance filing, effective back to March 18, 1998, which proposed tariff changes to implement direct access. Rate Unbundling On April 5, 1999, the CPUC approved the Company's proposed unbundled rates effective back to June 1, 1998. Distribution Competition The CPUC has opened a docket item to solicit comments and proposals on distributed generation and competition in electric distribution service. The Company is actively participating in the on-going workshops. It is too early to determine how this proceeding may affect the Company. Generation Divestiture The Company has filed with the CPUC its request for approval to sell its generation plants. The Company filed a revised application requesting an exemption. A decision is expected in the first half of 2000. Distribution Performance-Based Rate-making (PBR) On January 3, 2000, the Company filed a distribution PBR proposal to become effective January 1, 2001 through 2003. The proposal includes rate indexing and earnings sharing mechanisms as well as performance indicators for employee safety, customer satisfaction and system reliability. The Company will submit a 2001 Cost of Capital filing in May 2000 and a Distribution PBR 2001 Cost of Service filing in June 2000. FERC Matters - ------------ On March 30, 1999, the Company filed an application with the FERC to increase its Open Access Transmission rates. On October 12, 1999, the Company filed an Offer of Partial Settlement which resolved all issues but pricing to the Mines and to the City of Fallon. A status report on the two remaining issues was filed on January 11, 2000. On January 31, 2000, the FERC approved the Partial Settlement. 26 On March 31, 1999, the Company filed with the FERC for approval of generation tariffs that contain the rates, terms and conditions under which the new owners of the Company's generation would operate after divestiture. The FERC dismissed the tariffs on November 1, 1999, apparently misinterpreting the agreement reached with the PUCN on the tariffs. The Company filed a request for rehearing of the FERC's November 1, 1999 order dismissing the tariff. The rehearing request explains how the FERC erred in dismissing the tariff. On December 17, 1999, the Commission issued an Order Granting Rehearing for Further Consideration. A decision is expected in 2000. On July 23, 1999, the Company and Nevada Power Company submitted a filing to create the Mountain West Independent Scheduling Administrator. The filing is made to request approval of certain of the tariffs and agreements with respect to the transmission services of the Company and Nevada Power Company. On January 27, 2000, the FERC issued an order approving with modifications the Mountain West ISA proposal. The PUCN is continuing to review aspects of the filing, including funding for the Mountain West ISA. ENVIRONMENT - ----------- General As with other utilities, the Company is subject to federal, state, and local regulations governing air and water quality, hazardous and solid waste, land use, and other environmental considerations. These considerations affect the construction and operation of electric, gas, and water utility facilities. Nevada's Utility Environmental Protection Act requires approval of the PUCN prior to the construction of major utility generation and transmission facilities. The United States Environmental Protection Agency (EPA) and Nevada's Division of Environmental Protection (NDEP) administer regulations involving air quality; water pollution; and solid, hazardous, and toxic waste. The Company's board of directors has a comprehensive environmental policy, and a separate board committee on environmental compliance that oversees corporate performance and achievements related to the environment. The Company's corporate environmental policy emphasizes environmental stewardship. 1999 Activities - --------------- As part of the Generation Divestiture process, the Company conducted Phase I and Phase II Environmental Assessments for its Ft. Churchill, Tracy and Valmy Power Plants. The Anticipated remediation cost is $150,000. In 1995, the Company identified one site formerly used for manufacturing gas from oil. This site was sold in 1997 with full disclosure to the buyer. Shortly after the sale, the buyer notified the Company of its intent to file legal action. In July 1998, the Company entered into an agreement with the buyer to mitigate the contamination on site to an acceptable level. In 1999, soil contamination was remediated in full compliance with the settlement agreement and the site case was closed by the local regulatory agency. No further action is required at this site. 27 In September 1994, Region VII of EPA notified the Company that the Company was being named as a potentially responsible party (PRP) regarding the past improper handling of Polychlorinated Biphenyls (PCBs) by PCB Treatment, Inc., located in Kansas City, Kansas, and Kansas City, Missouri (the Sites). The EPA is requesting that the Company voluntarily pay an undefined (pro rata) share of the ultimate clean-up costs at the Sites. A number of the largest PRP's formed a steering committee, which is chaired by the Company. The responsibility of the Committee is to direct clean-up activities, determine appropriate cost allocation, and pursue actions against recalcitrant parties, if necessary. The EPA issued an administrative order on consent requiring signatories to perform certain investigative work at the Sites. The steering committee retained a consultant to prepare an analysis regarding the Sites. The site evaluations have been completed. EPA is developing an allocation formula to allocate the remediation costs. The Company has recorded preliminary liability for the Sites of $650,000, of which approximately $150,000 has been spent through December 31, 1999. Once evaluations are completed, the Company will be in a better position to estimate and record the ultimate liabilities for the Sites. The Company continued and initiated several actions in accordance with its policy to be an environmental leader in principle and practice. These actions have (1) Resulted in reduced pollutant and greenhouse gas emission rates at power plants; (2) Demonstrated stewardship of wildlife and waterfowl habitat on and adjacent to Company property; (3) Improved water quality conditions; and (4) Lowered the cost of compliance with environmental regulations. During 1999, the Company was awarded bonus sulfur dioxide emission allowances by the EPA for its use of geothermal energy, a renewable resource. Under the Acid Rain Rule of the Clean Air Act, bonus emission allowances are generated to utilities that have avoided sulfur dioxide emissions by using renewable energy to generate electricity. In 1999 the Company received 4,907 bonus allowances. GENERAL - FRANCHISES - -------------------- The Company has nonexclusive local franchises or revocable permits to carry on its business in the localities in which its respective operations are conducted in Nevada and California. The franchise and other governmental requirements of some of the cities and counties in which the Company operates provide for payments based on gross revenues. During 1999, the Company collected $8.8 million in franchise or other fees based on gross revenues. It also paid and recorded as expense $1.0 million of fees based on net profits.
Franchise Type of Service Expiration Date - -------------------------------------------------------------------------- Reno Electric, Gas and Water January 2006 Sparks Electric May 2006 Sparks Gas May 2007 Sparks Water April 2004 Carson City Electric February 2012 City of Elko Electric April 2017 City of South Lake Tahoe Electric April 2018 Washoe County Gas and Water May 2015 Washoe County Electric September 2015 Eureka County Electric July 2018
The Company applies for renewal of franchises in a timely manner prior to their respective expiration dates. 28 GENERAL - RESEARCH AND DEVELOPMENT - ---------------------------------- The Company participates in several utility associations, including the Electric Power Research Institute and Gas Research Institute. ITEM 2. PROPERTIES The general character of the Company's principle facilities is discussed in Item 1, Business. Substantially all utility plant is subject to the lien of the Indenture of Mortgage, dated December 1, 1940, and supplemental indentures thereto between the Company and State Street Bank and Trust, as trustee, securing the Company's outstanding first mortgage bonds. ITEM 3. LEGAL PROCEEDINGS The Company, through the course of its normal business operations, is currently involved in a number of legal actions, none of which has had or, in the opinion of management, is expected to have a significant impact on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 29 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company is a wholly-owned subsidiary of Sierra Pacific Resources and, as such, its common stock is not publicly traded and no market exists for it. Cash dividends declared by SPPC on its common stock were as follows (dollars in thousands):
1999 1998 ------------------------ First Quarter $19,000 $19,000 Second Quarter 19,000 19,000 Third Quarter 19,000 19,000 Fourth Quarter 19,000 19,000 ------- ------- Total $76,000 $76,000 ======= =======
After provisions for payment of dividends on all outstanding shares of preferred stock, and subject to limitations in the Company's restated articles of incorporation and its indentures, dividends may be paid on the common stock out of any funds legally available for that purpose when declared by the board of directors. As of December 31, 1999, approximately $76.0 million of retained earnings were available for the payment of dividends on common stock under the most restrictive of these limitations. ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31, (dollars in thousands) 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Operating Revenues $ 763,722 $ 734,332 $ 657,540 $ 619,724 $ 597,784 ========== ========== ========== ========== ========== Operating Income $ 129,836 $ 126,194 $ 120,172 $ 107,008 $ 101,811 ========== ========== ========== ========== ========== Income Before Preferred Dividends $ 71,726 $ 86,020 $ 83,127 $ 73,651 $ 65,983 ========== ========== ========== ========== ========== Income Applicable To Common Stock $ 66,241 $ 80,561 $ 77,668 $ 67,351 $ 58,609 ========== ========== ========== ========== ========== Total Assets $2,096,476 $2,011,820 $1,912,242 $1,842,628 $1,729,818 ========== ========== ========== ========== ========== Long-Term Debt and Redeemable Preferred Securities $ 673,930 $ 654,950 $ 655,389 $ 655,787 $ 547,124 ========== ========== ========== ========== ========== Cash Dividends Paid Per Common Share $ 76,000 $ 75,000 $ 70,000 $ 63,000 $ 54,000 ========== ========== ========== ========== ==========
30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- Net income before preferred dividends in 1999 was $71.7 million, a decrease of $14.3 million compared to 1998. The Company was authorized to earn a return on equity of 12% in its Nevada electric operations and 12% and 11.25%, respectively, in its Nevada gas and water operations. The Company may have earned in excess of its allowed regulated returns for its electric and gas operations and therefore, under its currently effective rate settlement, the Company anticipates it may make refunds to customers reflecting one half of the excess earnings. Appropriate reserves have been recorded to reflect any anticipated refunds. California operations were authorized to earn a return on common equity of 11.6% in 1999. See Regulatory Matters for more discussion of these issues. Nevada, the Company's primary jurisdiction, uses a marginal cost method for setting electric and gas rates by customer class. As a result, changes in sales mix can result in variations in revenues, regardless of changes in total consumption. The components of gross margin are set forth (dollars in thousands):
1999 1998 1997 ---------- ---------- ---------- Operating Revenues Electric $609,197 $585,657 $540,346 Gas 100,177 99,532 70,675 Water 54,348 49,143 46,519 -------- -------- -------- Total Revenues 763,722 734,332 657,540 -------- -------- -------- Energy Costs: Electric $294,822 $271,773 $231,473 Gas 68,125 65,430 38,135 -------- -------- -------- Total Energy Costs 362,947 337,203 269,608 -------- -------- -------- Gross Margin $400,775 $397,129 $387,932 ======== ======== ======== Gross Margin by Segment Electric $314,375 $313,884 $308,873 Gas 32,052 34,102 32,540 Water 54,348 49,143 46,519 -------- -------- -------- Total $400,775 $397,129 $387,932 ======== ======== ========
31 The causes for significant changes in specific lines comprising the results of operations for the years ended are provided (dollars thousands):
1999 1998 1997 -------------------------------------------------------------------------- Change from Change from Amount Prior year Amount Prior year Amount ---------- ----------- ---------- ------------ ----------- Electric Operating Revenues: Residential $ 117,533 1.4% $ 169,109 3.7% $ 163,003 Commercial 188,348 5.4% 178,752 1.9% 175,386 Industrial 185,771 0.5% 184,820 4.7% 176,463 ----------- ---- ----------- ----- ----------- Retail revenues 545,652 2.4% 532,681 3.5% 514,852 Other 63,545 20.0% 52,976 107.8% 25,494 ----------- ---- ----------- ------ ----------- Total Revenues $ 609,197 4.0% $ 585,657 8.4% $ 540,346 =========== ===== ============ ======= ========== Retail sales in megawatt-hours (MWH) 8,412,853 4.5% 8,047,650 3.9% 7,743,799 ---------- ---- ----------- ------ ----------- Average retail revenue per MWH $ 64.86 -2.0% $ 66.19 -0.4% $ 66.49
In 1999, residential, commercial and industrial electric revenues increased due to a 3% increase in both residential and commercial customers and a 7.8% increase in industrial customers. The increase in residential and industrial revenues was partially offset by lower use per customer. Residential use per customer was lower due to milder weather in 1999. Industrial use per customer was lower primarily because of reduced production by several of the Company's gold mining customers as a result of lower gold prices in 1999. The average retail revenue per MWh was lower for 1999 because of higher revenues from customers that are charged lower rates per MWh. Other electric revenues were higher due to a $19.4 million increase in wholesale electric sales. This increase was partially offset by a $4.3 million reclassification from operating expense to a contra-revenue in order to reflect a refund resulting from the 1997 earnings sharing decision by the Public Utilities Commission of Nevada. Also, the increase in 1999 revenues was partially offset by a higher provision for customer refunds and also losses from the Company's Pinon Pine subsidiaries. In 1998, residential and commercial revenues increased due to 2% and 3% increases in customers, respectively. Industrial revenues were higher in 1998 because of higher use per customer, primarily in the mining industry where several of the Company's customers expanded operations during 1998. The increases in revenues for residential, commercial and industrial were all partially offset by a rate reduction that went into effect March 1997. The increase in other revenues primarily resulted from higher wholesale electric sales and a smaller charge for customer refunds. Higher wholesale sales in 1998, $33.1 million compared to $13.3 in 1997, reflect an increased focus on this business opportunity. 32
1999 1998 1997 -------------------------- --------------------------- ---------- Change from Change from Amount Prior year Amount Prior year Amount ---------- ------------ ---------- ------------ ---------- Gas Operating Revenues: Residential $ 42,888 -2.2% $ 43,833 14.1% $ 38,410 Commercial 21,259 -3.5% 22,022 12.3% 19,606 Industrial 11,252 -9.0% 12,368 6.8% 11,580 Miscellaneous 1,305 281.3% (720) -6.2% (678) ----------- ----- ----------- ------ ----------- Total retail revenue 76,704 -1.0% $ 77,503 12.5% $ 68,918 Wholesale revenue 23,473 6.6% 22,029 1153.8% 1,757 ----------- ----- ----------- ------ ----------- Total Revenues $ 100,177 0.6% $ 99,532 40.8% $ 70,675 =========== ===== =========== ====== =========== Sale (Decatherms): Retail 13,387,819 -5.3% 14,142,782 13.3% 12,487,087 Wholesale 10,424,212 -11.2% 11,738,372 1278.6% 851,459 ---------- ----- ----------- ------ ----------- Total 23,812,031 -8.0% 25,881,154 94.0% 13,338,546 =========== ====== =========== ====== =========== Average revenues per decatherm Retail $ 5.73 4.6% $ 5.48 -0.7% $ 5.52 Wholesale $ 2.25 19.8% $ 1.88 -8.7% $ 2.06
Residential, commercial and industrial gas revenues were lower in 1999 because of lower per customer use resulting from milder weather in 1999. Lower gas revenues in 1999 were partially offset by additional customers in all categories. Wholesale gas revenues were higher due to several large gas sales contracts in the first quarter of 1999. Residential, commercial and industrial gas revenues increased in 1998 because of a 4% increase in customers and colder than normal weather during the year. The increase in wholesale revenues reflected the Company's increased focus on this business opportunity.
1999 1998 1997 ---------------------------- ---------------------------- ---------- Change from Change from Amount Prior year Amount Prior year Amount ---------- ------------ ---------- ------------ ---------- Water Operating Revenues $54,348 10.6% $49,143 5.6% $46,519 ======= ==== ======= === =======
Water revenues increased during 1999 due to a 5% increase in total customers and higher use per customer as a result of less precipitation in 1999. Water revenues were higher in 1998 because of a 3% increase in customers and an April 1998 price increase. 33
1999 1998 1997 --------------------------- --------------------------- ---------- Change from Change from Amount Prior year Amount Prior year Amount ---------- ------------ ---------- ------------ ---------- Purchased Power $ 179,781 14.5% $ 156,970 20.2% $ 130,612 Purchased Power MWH 5,797,903 25.4% 4,623,959 20.5% 3,836,975 Average cost per MWH of Purchased Power $ 31.01 -8.7% $ 33.95 -0.3% $ 34.04
Purchased power costs were higher in 1999 primarily because the Company fulfilled more of its total energy requirements with less expensive purchased power and reduced its own generation. Purchased power costs were also higher during 1999 due to increased wholesale sales. The higher costs were partially offset by lower average unit prices for purchased power. Purchased power costs were significantly higher in 1998 due mostly to the costs associated with higher wholesale electric sales as discussed previously. To a lesser extent system load growth also contributed to higher purchased power costs.
1999 1998 1997 --------------------------- --------------------------- ---------- Change from Change from Amount Prior year Amount Prior year Amount ---------- ------------ ---------- ------------ ---------- Fuel for Power Generation $ 115,065 0.2% $ 114,803 13.8% $ 100,861 MWHs generated 4,998,140 -9.5% 5,524,262 13.7% 4,859,203 Average fuel cost per MWH of Generated Power $ 23.02 10.8% $ 20.78 0.1% $ 20.76
Fuel for generation costs were comparable with the prior year despite a 9.5% reduction in the volume of electric generation. Higher gas prices and the absence of Department of Energy co-funding of fuel costs at the Pinon Pine project contributed to the higher average cost per MWh of generated power. As, previously discussed, the Company was able to replace electricity from generation with less expensive purchased power. 34 The costs of fuel for generation increased in 1998 because of higher generation requirements needed to meet continued customer growth and greater use per customer.
1999 1998 1997 --------------------------- --------------------------- ---------- Change from Change from Amount Prior year Amount Prior year Amount ---------- ------------ ---------- ------------ ---------- Gas Purchased for Resale Retail $ 47,696 7.2% $ 44,473 21.2% $ 36,703 Wholesale 20,429 -2.5% 20,957 1371.7% 1,424 ----------- ----- ----------- ------ ----------- Total $ 68,125 4.1% $ 65,430 71.6% $ 38,127 =========== ===== =========== ====== =========== Gas Purchased for Resale (decatherms) Retail 13,501,728 -6.6% 14,462,505 13.6% 12,727,950 Wholesale 10,424,212 -11.2% 11,738,372 1278.6% 851,459 ----------- ----- ----------- ------ ----------- Total 23,925,940 -8.7% 26,200,877 92.9% 13,579,409 =========== ===== =========== ====== =========== Average cost per decatherm Retail $ 3.53 14.6% $ 3.08 6.9% $ 2.88 Wholesale $ 1.96 9.5% $ 1.79 7.2% $ 1.67
The cost of gas purchased for retail sales increased in 1999 because of higher unit prices. The increase in gas unti prices is attributable to increased demand for gas in the Pacific Northwest and additional transportation fees. Consistent with the increase in retail gas revenues from customer growth and colder weather in 1998, retail gas purchases (decatherms) were higher in 1998. The average cost per decatherm for all purchases was also higher because of an increase in the unit cost of firm and spot purchases.
1999 1998 1997 --------------------------- --------------------------- ---------- Change from Change from Amount Prior year Amount Prior year Amount ---------- ------------ ---------- ------------ ---------- Allowance for other funds used during construction $(1,341) -135.3% $ 3,797 -33.7% $ 5,723 Allowance for borrowed funds used during construction 308 -95.2% 6,414 34.0% 4,785 ------- ------ ------- ----- ------- $(1,033) -110.1% $10,211 -2.8% $10,508 -------- ------ ------- ----- -------
The total allowance for funds used during construction (AFUDC) was lower in 1999 because of construction completed in June and December 1998 for the Pinon and Alturas projects, respectively. Also, the 1999 amounts reflect an adjustment to reverse amounts previously charged to AFUDC of $2.3 million. This adjustment resulted from a refinement of amounts assigned to specific components of facilities that were completed at various times and that used differing AFUDC rates. AFUDC was slightly lower in 1998 than 1997. The 1998 amount was lower due to the completion of the Pinon Pine power project in June 1998. 35
1999 1998 1997 -------------------------- --------------------------- ---------- Change from Change from Amount Prior year Amount Prior year Amount ---------- ----------- ---------- ------------ ---------- Other operating expense $115,453 -0.5% $116,076 -3.8% $120,600 Maintenance expense 22,520 1.1% 22,266 -4.8% 23,387 Depreciation and amortization 77,373 11.4% 69,435 8.3% 64,117 Income taxes 36,042 -17.2% 43,550 7.8% 40,387 Interest charges on long-term debt 40,263 3.5% 38,890 -1.8% 39,609 Interest charges-other 11,615 51.7% 7,659 67.1% 4,583
Other operating expense for 1999 includes a $4.5 million adjustment, which increased expense and reduced revenue related to a rate reserve established in 1998. This was offset by other reductions. Other operating expense was lower in 1998 due to lower costs for stock compensation, post-retirement benefits, fuel buyouts, lower accruals for delays in the construction of Pinon, and no flood damage costs. Maintenance expense for 1999 was comparable to the prior year. Maintenance expense was lower in 1998 because of additional electric plant maintenance performed during the previous year. Depreciation and amortization expense increased for 1999 due to the completion of the Alturas intertie in December 1998 and the Pinon post- gasification facilities in June 1998. Depreciation expense increased in 1998 because of the Pinon Pine facilities completed in 1998. Also, 1998 depreciation was higher due to water division additions and other customer improvements added to plant in service late in 1997. Operating income taxes were less in 1999 due to lower operating income before income taxes and a lower effective tax rate for the year. Operating income taxes increased in 1998 due to increases in pre-tax income and the effective tax rate. See Note 5 for more information. Interest on long term debt was slightly higher in 1999 due to higher average long-term debt balances over the prior year. Interest on long-term debt was lower in 1998 because of the redemption of $5 million of 8.65% medium-term notes on June 18, 1998. See Note 6 to the consolidated financial statements for more information related to long-term debt. Interest charges-other were higher for 1999 because of a Public Utilities Commission of Nevada's decision to assess partial interest on amounts payable in the 1997 earnings sharing case and higher average short-term borrowing in 1999. Interest charges-other increased in 1998 because of higher short-term debt balances utilized to partially finance the Alturas transmission project. Liquidity and Capital Resources Overall net cash flows decreased during 1999, as compared to 1998, due to lower net cash flows from operating activities and to a lesser extent greater cash used in investing activities. The decrease in cash flows from operating and investing activities was partially offset by cash provided from financing activities. The decrease in cash provided from operating activities was primarily due to cash utilized for customer refunds and merger related cash requirements. The increase in cash used for investing activities was due to the Company's acquisition of General Electric Capital Corporation's interest in 36 Pinon Pine Company L.L.C., GPSF-B. Net cash provided by financing activities resulted from the issuance of $24 million of California rate reduction bonds in April 1999, and $100 million floating rate notes issued on September 17, 1999. See "Regulatory Matters" for more details regarding the California bonds. Overall net cash flows increased slightly during 1998, as compared to 1997, due to higher net cash flows from operating and financing activities which were mostly offset by more cash used in investing activities. The increase in cash flows from operating activities was mainly due to higher operating income as a result of increased revenues from customer growth. The increase in cash used in investing activities was primarily due to increased construction expenditures. The increase in net cash provided by financing activities was mainly due to increased long-term and short-term borrowings. 37 CONSTRUCTION EXPENDITURES AND FINANCING - --------------------------------------- The table below provides cash construction expenditures and net internally generated cash for 1997 through 1999 (dollars in thousands):
1999 1998 1997 Total ---------- ---------- ---------- ---------- Cash Construction Expenditures $ 116,131 $ 39,098 $ 110,878 $ 366,107 ========== ========== ========== ========== Net cash flow from operating activities 122,329 153,191 145,455 420,975 Less common & preferred cash dividends 81,746 80,459 75,459 237,664 ---------- ---------- ---------- ---------- Internally generated cash 40,583 72,732 69,996 183,311 Add equity contribution from parent 22,000 17,250 27,000 66,250 ---------- ---------- ---------- ---------- Total cash available $ 62,583 $ 89,982 $ 96,996 $ 249,561 ========== ========== ========== ========== Internally generated cash as a percentage of cash construction expenditures 35% 52% 63% 50% Total cash available as a percentage of cash construction expenditures 54% 64% 87% 68%
SPPC's estimated cash construction expenditures for 2000 through 2004 are $680 million. SPPC estimates that 63% of its 2000 cash expenditures of approximately $125 million will be provided by internally generated funds, with the remainder being provided by the issuance of long-term debt, short-term debt, and parent contributions. SPPC's estimated level of internally generated cash utilized for construction of 63% anticipates that SPPC will pay all of its net income in dividends to SPR. SPPC anticipates receiving $28 million of capital contribution from SPR in 2000. CAPITAL STRUCTURE - ----------------- As of December 31, 1999 SPPC had $110 million commercial paper issued and outstanding. SPPC's commercial paper is rated A2 and P2 by Standard and Poor's and Moody's, respectively. SPPC's actual capital structure at December 31, 1999, 1998, and 1997 was as follows (dollars in thousands):
1999 1998 1997 --------------------- --------------------- ---------------------- Short-Term Debt (1) $ 212,339 13% $ 135,473 9% $ 75,454 6% Long-Term Debt 625,430 39% 606,450 40% 606,889 42% Preferred Stock 50,000 3% 73,115 5% 73,115 5% Preferred Securities 48,500 3% 48,500 3% 48,500 3% Common Equity 673,738 42% 661,367 43% 639,556 44% ------------------ ------------------ ------------------ TOTAL $1,610,007 100% $1,524,905 100% $1,443,514 100% ================== ================== ==================
(1) Including current maturities of long-term debt and preferred stock. 38 The indenture under which the SPPC's first mortgage bonds are issued, prescribes certain coverage ratios that must be met before additional bonds may be issued. At December 31, 1999, these coverage provisions would allow for the issuance of approximately $511 million in additional first mortgage bonds at an assumed interest rate of 8.0%. The indenture also limits the amount of first mortgage bonds that SPPC may issue to 60 percent of unfunded property plus the amount of any previously issued bonds that have since been retired. Based on certifications to the trustee as of December 31, 1999, these indenture provisions would have allowed for the issuance of approximately $845 million in additional first mortgage bonds. SPPC's secured long-term debt is rated A-, A3 by Standard & Poor's and Moody's, respectively. SPPC's pre-tax interest coverages for 1999, 1998 and 1997 were 3.15%, 3.87% and 3.86%, respectively. REGULATORY - ----------- Restructuring - ------------- Electric Restructuring Activities In 1997, the Governor of Nevada signed into law Assembly Bill 366 (AB366) that provided for competition to be implemented in the electric utility industry. In 1999 the Governor signed into law Senate Bill 438 (SB438) that amended AB 366. SB 438 contains the following major provisions: . In addition to generation, metering and billing are declared to be potentially competitive services. . The start date for competition is March 1, 2000 or such other start date determined to be in the public interest by the Governor. . The electric distribution utility is the provider of last resort (PLR) until alternate methods go into effect, no sooner than July 1, 2001. PLR rates are capped until March 1, 2003 at the rates in effect as of July 1, 1999, as adjusted for any deferred energy cases filed with the PUCN prior to October 1, 1999. . Allows the use of the net proceeds of generation divestiture to pay for certain reductions in PLR revenues until March 1, 2003, arising from the departure of customers who select new suppliers. . Repeals deferred energy for electric utilities on October 1, 1999. . Permits alternative sellers to submit bids to provide PLR service after July 1, 2001, subject to a PUCN public interest finding and a PUCN-held auction. . Provides for the recovery of Past Costs, often referred to as stranded costs, including specific criteria for recovery of purchase power costs. The PUCN has conducted a number of hearings associated with AB366 and SB438. In February 2000 the Governor of Nevada delayed the start date of competition indefinitely. Electric competition may begin later in 2000 or 2001. Generally, restructuring regulations have proceeded slowly. Currently, many important regulations, including the affiliate regulations and the PLR, are not complete. In their present form several of the proposed regulations could have potentially significant negative financial ramifications. These regulations and the potential risks are described below. The Company's management is actively working to modify these regulations. Several key Nevada restructuring issues have also arisen in other states, been litigated, and resolved in favor of the utility. If final regulations are not modified to remove the financial risk exposures, The Company will likely pursue legal action to resolve these issues. As a final option, the Company will seek an injunction to the start of competition or to overturn portions of SB438. 39 Affiliate Transaction Regulation While SB438 allows for the use of name and logo, the affiliate regulation has not yet been modified to reflect this change. In addition, the Company has requested that the PUCN modify the rule related to sharing services, sharing officers and directors, and transfer pricing. To date the PUCN has not acted on this request. On March 30, 1999, SPPC and the Company filed with the District Court a "Complaint and Petition for Declaratory and Injunctive Relief and for Judicial Review" relating to the Affiliate Transaction Rules. SPPC and the Company asked that the court find that the rules "violate plaintiff's federal and state constitutional guarantees, are unlawful and invalid because they were enacted in violation of the procedural and substantive provisions of the Administrative Procedures Act, and are unlawful and invalid because they exceed the authority of the PUCN and are unsupported by the evidence." SPPC and NVP asked that the court order the PUCN "to cease and desist from enforcing the regulations." Past Costs Past costs, commonly referred to as stranded costs in other jurisdictions, were the subject of several hearings in 1999. AB366/ SB438 permit the recovery of costs associated with potentially competitive services such as generation and purchased power pursuant to specified legal criteria. In the hearings, various topics were discussed including the characteristics that define recoverable past costs, criteria for evaluating the effectiveness of mitigation efforts, options for cost recovery mechanisms, and applicable tax and accounting issues. On December 29, 1999 the PUCN adopted the past cost regulation. This regulation requires the utility to file for past costs 45 days after the adoption of the regulation or issuance of the final order in the compliance plan filing. The regulation requires estimates of book values and market values as of the opening date of competition. In addition, the Company must provide documentation relative to criteria in the law such as mitigation efforts, conduct relative to other states, and efforts to minimize taxes. The PUCN will take these criteria into consideration in determining allowable past costs. During comments related to this rule, the Company raised a number of legal issues including treatment of purchase power agreements, ability to true up initial estimates of past costs to actual results, and ability to recover costs to implement restructuring. The Company has not completed an estimate of its past costs, since such a calculation is dependent on a variety of issues related to restructuring which are not resolved at this time. However based upon the current regulation and the positions taken by other parties to the rulemaking, several risk areas have been identified including: . SB438 criteria provide latitude for the PUCN to reduce the Company's stranded cost claim. . Purchase power agreements are the largest category of past costs. Federal and state laws provide protection to federally mandated power purchase contracts. The Company believes that the PUCN regulation provides less security to recover purchase power costs than provided by federal and state laws. . Because the regulation does not provide a guaranteed true up to actual results, it is possible that stranded cost recovery could be set too low to recover all stranded costs. 40 . The stranded cost proceeding will establish the gain or loss on the divestiture sale of generation assets; the regulation provides that any gain on divestiture would be utilized to reduce stranded costs. Some elements of the calculation may be controversial. In addition the regulation does not address other claims to generation gain, such as recovery of certain revenue shortfalls as allowed by SB438, which may arise as customers leave the PLR. The Company is currently evaluating challenges to the regulation and will actively pursue changes in the regulatory process or, if necessary, pursue legal challenges in the federal and or state courts. The Company believes that based upon the content of the regulation and the applicable law, legal challenge relative to purchase power agreements has a strong possibility of being successful. Provider of Last Resort The provider of last resort (PLR) will provide electric service to customers who do not select an electricity provider and to customers who are not able to obtain service from an alternative seller after the date competition begins. SB 438 provides for the electric distribution utility (EDU) to provide PLR services until July 1, 2001. The PUCN has conducted several workshops and hearings on the PLR regulations. This rule is not expected to be finalized until mid-2000. The current draft proposed regulation includes standards of conduct relative to distribution and provider of last resort functions, which require segregation of operating functions and constraints on sharing of common services. As part of their comments during development of the proposed regulation, the Company raised concerns regarding the financial impacts of the proposed regulations that place into question the financial viability of the PLR. For instance the current regulations restrict the PLR from relying on distribution assets or revenues to obtain credit. Second, the current regulations provide no financial reward potential for the significant fuel price risks that the PLR may face during the PLR rate cap period which ends March 1, 2003. Third, the proposed standards of conduct for the EDU and PLR will increase costs as a result of the loss of economies of scale and scope. In addition to these impacts, the proposed regulation does not address two important areas associated with the PLR. Regulations have yet to be developed that fairly compensates the utility for recovery of revenue shortfalls allowed under SB438 which arise as customers leave the PLR for new suppliers. Regulations also do not address how the Company will be able to collect the costs, allowed by SB438, which will be incurred to serve customers who leave the PLR and later return. In the ongoing rulemaking process the Company is working to address these serious concerns and modify the PLR regulation. If the proposed regulations are adopted in their current form, the Company will seek to transition out of the PLR function. In addition, if necessary, the Company is prepared to pursue legal remedies to mitigate any significant financial exposures associated with the final PLR regulation. 41 Independent Scheduling Administrator The Company has participated in interim Independent Scheduling Administrator (iISA) working groups which are developing iISA standards, protocols and procedures. The PUCN has held hearings regarding entities interested in performing the iISA function, the timeline, the functions to be performed, the costs and how these entities will adhere to the PUCN iISA principles. To date the Company has not agreed to provide funding for the iISA because the PUCN has not provided a mechanism for the Company to recover costs associated with iISA. However in February 2000 the PUCN opened an investigatory docket to consider the funding and other transmission access issues. See FERC Matters for further discussion. Gas Restructuring To comply with Nevada AB 366 for natural gas deregulation, the PUCN has developed some new natural gas rules. In 1999, little gas restructuring activity occurred. Two new regulations, gas licensing and gas licensing fees were adopted by the PUCN in 1999. Nevada Matters - -------------- Non-price Terms and Conditions for Distribution Service On February 1, 1999, the Company filed its non-price terms and conditions for unbundled distribution service pursuant to the PUCN regulations. A stipulation resolving most issues and agreeing to further filings on unresolved issues was filed with the PUCN on April 9, 1999, and subsequently approved by the PUCN on April 22, 1999. Settlements regarding the unresolved issues were subsequently filed and approved by the PUCN. Unbundling of Utility Services On April 1, 1999, the Company filed the revenue requirements and unbundling study portions of the Compliance Filing with the PUCN. The filing included the development of an electric revenue requirement for the test period 1998. The compliance filing regulation requires the revenue requirement development to be in the form used for rate cases. In the unbundling study, the revenue requirement was assigned and allocated to a number of service components including generation, aggregation, transmission, distribution, metering, billing, and customer services. On September 23, 1999, The PUCN issued an interim order on the Company's April 1 compliance filing. The order contained the PUCN's decision on revenue requirements, return on equity, depreciation, and the unbundling study. The Company did not utilize the order's revenue requirement, return on equity or depreciation rates from Phase II of the case because SB438 legally mandated that the Company use its July 1, 1999 revenue requirement. Pricing of Distribution Service On October 8, 1999, the Company filed final versions of the approved non- price terms and conditions and rates reflecting a revenue requirement thought by the Company to be correct and in accordance with SB 438. Hearings were held in early November. A decision is expected in 2000. 42 Merger of SPR and Nevada Power Company On April 8, 1999, SPR and NVP filed a joint application with the PUCN for approval of their proposed merger. On January 4, 1999, the PUCN issued the final order in the merger case. On December 31, 1998, the PUCN voted 3-0 to approve the merger, with conditions. The conditions include, among others, requirements to divest generation, file the divestiture plan with the PUCN for approval, file an ISA proposal at the FERC, file a generation tariff at the FERC, file a rate case and unbundle costs in 1999, file a subsequent rate case three years after retail competition, and submit an application to recover stranded costs. Earnings Sharing On April 30, 1999, the Company filed its second compliance filings related to the 1997 rate stipulation The filings provide a calculation of Sierra's electric and gas earnings in excess of a 12% return on equity (ROE). Any earnings in excess of 12% ROE are shared 50/50 between shareholders and customers. On August 19, 1999, the PUCN approved a stipulation between SPPC, Staff, and the UCA that rebated $7.37 million and $1.98 million to electric and gas customers, respectively in 1999. Based on 1999 operating results, SPPC anticipates it may make refunds to customers. Appropriate reserves have been recorded to reflect any anticipated refunds. Generation Divestiture The Company has filed with the PUCN its request for approval to sell its generation plants on October 12, 1999. On February 18, 2000, the PUCN approved an application to sell the generation plants of both SPPC and NVP. The revised divestiture plan was approved unanimously by the PUCN. Under the terms of the approved plan, both utilities will sell all of their power plants through an auction process. CALIFORNIA MATTERS - ------------------ Rate Reduction Bonds California's electricity restructuring statute (Assembly Bill 1890, Chapter 854, California Statutes of 1996, as amended), permits California investor-owned utilities, including the Company, to finance the recovery of a reduction in electricity rates for residential and small commercial customers through the issuance of rate reduction certificates. Transition costs consist of the costs of generation-related assets and obligations that may become uneconomic as a result of a competitive generation market, together with certain other costs associated therewith. In order for the Company to recover transition and associated costs, the California Public Utilities Commission (CPUC) authorized the establishment of non-bypassable, usage-based, per kilowatt hour charges ("FTA Charges"), to be included in the regular utility bills of residential and small commercial consumers located in the historical service territory of the Company in California. The right to receive payments made in respect of the FTA Charges is referred to as Transition Property. 43 On April 9, 1999, the Company sold the Transition Property to SPPC Funding LLC, a Delaware special purpose limited liability company whose sole member is the Company, in exchange for the proceeds of the SPPC Funding LLC Notes, Series 1999-1 (the "Underlying Notes"). SPPC Funding LLC then issued and sold the Underlying Notes to the California Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1 (the "Trust") in exchange for the proceeds of the sale of the Trust's $24.0 million 6.4% Rate Reduction Certificates, Series 1999- 1 (the "Certificates"). The Trust, which had been established by the California Infrastructure and Economic Development Bank, issued and sold the Certificates in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended. The Certificates are one of a series of rate reduction certificates that may be issued from time to time by the Trust and sold to investors upon terms determined at the time of sale. On January 10, 2000, the CPUC approved the Company's annual true-up of the FTA charges effective January 1, 2000. Revenue Cycle Unbundling On February 18, 1999, the CPUC approved the Company's proposed Revenue Cycle Services Credits (RCSC) application filed February 2, 1998. The RCSC addresses meter ownership, meter services, meter reading, and billing and applies to customers who select their own provider of a revenue cycle service. On April 9, 1999, the Company made a compliance tariff filing which reflects the approved credits. Direct Access Tariffs On April 5, 1999, the CPUC approved the Company's compliance filing, effective back to March 18, 1998, which proposed tariff changes to implement direct access. Rate Unbundling On April 5, 1999, the CPUC approved the Company's proposed unbundled rates effective back to June 1, 1998. Distribution Competition The CPUC has opened a docket item to solicit comments and proposals on distributed generation and competition in electric distribution service. The Company is actively participating in the on-going workshops. It is too early to determine how this proceeding may affect the Company. Generation Divestiture The Company has filed with the CPUC its request for approval to sell its generation plants. The Company plans to file a revised application during the first half of 2000. 44 Distribution Performance-Based Rate-making (PBR) On January 3, 2000, the Company filed a distribution PBR proposal to become effective January 1, 2001 through 2003. The proposal includes rate indexing and earnings sharing mechanisms as well as performance indicators for employee safety, customer satisfaction and system reliability. The Company will submit a 2001 Cost of Capital filing in May 2000 and a Distribution PBR 2001 Cost of Service filing in June 2000. FERC Matters - ------------ Regional Transmission Organizations On May 13, 1999, the FERC issued a Notice of Proposed Rulemaking on Regional Transmission Organizations (RTOs). the FERC proposed characteristics of an RTO and also the requirement for utilities to form or join RTOs. On August 23, 1999, the Company filed comments on the proposed rule along with numerous other parties. On December 15, 1999, the FERC approved the final rule on RTOs. Merger On April 14, 1999, the FERC voted to approve the merger of SPR and NVP, as proposed. In approving the merger the FERC required the companies to divest of their generation facilities (as proposed by the companies) and required Nevada Power to file an update of its transmission rates (also proposed by the companies). On May 17th, TDPUD filed a Petition for Rehearing of the FERC's order approving the merger. TDPUD claims the FERC violated its own policy by allowing the merger to be consummated prior to divestiture of generation assets. The Company and Nevada Power filed an answer to TDPUD's Petition for Rehearing in May. On July 14, 1999, the FERC denied all aspects of TDPUD's petition. Transmission Rate Case On March 30, 1999, the Company filed with the FERC to increase its open access transmission rates. The Company requested an increase of $16 million in the annual revenue requirement for network service. The point-to-point rate would increase from $2.80 /kW-mo. to $3.21 /kW-mo. This filing incorporates the Alturas intertie, completed in December 1998, and the reclassification of transmission and distribution facilities approved by the PUCN last summer. On May 28, 1999, as expected, the FERC issued an order setting the rate case for hearing. The proposed rates are accepted subject to refund and suspended until November 1, 1999. On June 14, 1999, as required by the May 28 order, the Company filed additional information on the proposed transmission and distribution (T&D) reclassification. The Company also requested that the FERC accept the filing and approve the T&D split. On July 29, 1999 the FERC accepted the Company's proposed T&D reclassification. On October 12, 1999, the Company filed an Offer of Partial Settlement which resolved all issues but pricing to the Mines and to the City of Fallon. On November 3, the Partial Settlement was certified to the FERC. A status report on the two remaining issues was filed on January 11, 2000. On January 31, 2000, the FERC approved the Partial Settlement. 45 Generation Tariffs On March 31, 1999, the Company filed Docket No. ER99-2332 with the FERC for approval of generation tariffs that contain the rates, terms and conditions under which the new owners of the Company's generation would operate after divestiture. The tariffs permit market-based rates after the offering of capacity under a cost-based recourse approach. Motions to intervene and protest in the Company's generation tariffs rate case were due on April 20, 1999. Newmont, City of Fallon, and TDPUD filed motions to intervene and protest. Barrick (a mining company) filed a motion to intervene with comments. Several other parties also filed interventions. The PUCN filed motion to intervene and protest one day after the date established by the FERC. The PUCN requested the FERC to hold the proceedings in abeyance to allow the PUCN more time to review SPPC's divestiture plan filing. The Company filed an Answer to the protests filed on the tariff on May 5, 1999. In response to the PUCN request, the Company requested that the FERC rule on the Company's tariff by November 30, 1999 (rather than September 30, 1999) to allow the PUCN more time. The Company also provided clarification in response to other protests. On July 20, 1999, the Company filed a motion to expedite the FERC's consideration of the tariff. The motion requested that the FERC approve the tariff by September 30, 1999 since the PUCN issues were resolved. On November 1, the FERC dismissed the tariffs, apparently misinterpreting the agreement reached with the PUCN on the tariffs. On November 22, 1999 the Company filed a request for rehearing of the FERC's November 1 order dismissing the tariffs. The rehearing request explains how the FERC erred in dismissing the tariff. On December 17, 1999, the FERC issued an Order Granting Rehearing for Further Consideration. A decision is expected in 2000. Independent Scheduling Administrator (ISA) On July 23, 1999, the Company and Nevada Power submitted a filing to establish the Mountain West ISA (Docket ER97-3719). The proposal centers on the formation of an interim ISA called Mountain West ISA, which will ensure the non- discriminatory treatment of transmission customer in two wholesale electricity markets; one in northern Nevada and one in southern Nevada. The formation of the ISA is viewed as an interim step in the move to broader regional restructuring of the electric service industry in the western United States. Fifteen parties filed to intervene in the ISA filing. On September 17, 1999, the Company, Nevada Power and the Mountain West ISA filed answers to the protests filed on the ISA filing. The California ISO filed an answer to the Company's and Nevada Power's response to their protest on September 28, 1999. On January 27, 2000, the FERC issued an order approving with modifications the Mountain West ISA proposal. The PUCN is continuing to review aspects of the filing, including funding for the Mountain West ISA. YEAR 2000 ISSUES - ---------------- 46 The Company uses business application software programs and relies on computing infrastructure that includes embedded systems that have a Year 2000 (Y2K) affect on the Company. In many cases, the Company's software programs and embedded systems used two-digit years that recognized a date using `00' as the year 1900 rather than the year 2000. This could have resulted in the computer or device shutting down, performing incorrect computations, or performing in an inconsistent manner. In 1996, the Company established its Y2K project to address Y2K issues. The project's scope included: (1) business application systems (including, but not limited to, customer information and billing) and financial systems (including time reporting, payroll, general ledger, accounts payable and purchasing, and end-user developed systems); (2) embedded systems (including equipment that operates or controls operating facilities such as power plants, electric transmission and distribution, water, gas, telecommunications, and information technology systems); (3) customer, vendor, and supplier relationships; and (4) testing and contingency planning. Business Application Systems The initial focus for the Y2K project team was on the business application systems. In the fall of 1996 the Company purchased software assessment tools and completed its inventory and code assessment for its mainframe business systems. The Company developed and strictly adhered to a Y2K methodology that included unit, system wide and Y2K date specific testing. As of November 1999 the Company had completed the assessment and modification of 100% of its business systems. The Company experienced few business systems errors due to Y2K in the first week of 2000. The Company utilized quick action response teams and corrected all known problems without any material impact to its customers. Embedded Systems The Company hired an outside engineering consultant, Network Systems Engineering Corporation (NSEC), to assist the Company's staff in conducting a thorough and comprehensive inventory of its embedded systems at the component level. All systems were inventoried and assessed for Y2K date impacts. This inventory identified over 2,500 potentially date sensitive items. The Company and NSEC contacted all manufacturers of those components that they have identified as critical to operations and continues to contact other manufacturers of embedded system components to determine if their components were Y2K ready. As of June 30, 1999, 100% of the Company's mission critical embedded systems were Y2K ready. Vendors and Suppliers The Company contacted, in writing, all vendors and suppliers of products and services that it considered critical to its operations. These contacts included, but were not limited to, suppliers of interstate transportation capacity for coal supplies, natural gas producers, financial institutions, and telephone service providers. The Company met one on one with several of its critical vendors and suppliers to assess their Y2K readiness. From these meetings, the Company felt that these vendors and suppliers had a viable Y2K program. There were no major vendor or supplier problems related to Y2K. During the first week of 2000, there were two vendor software licensing date problems and were corrected the same day they occurred. 47 Major Customers The Company met face to face with many of its major customers to share its progress on Y2K. Also discussed at these meetings was the customer's Y2K readiness. There were no major customer issues related to the Y2K date rollover. Contingency Planning The Company's Y2K strategies included contingency planning for both business and embedded systems. The planning effort included critical Company areas such as electric generation, water, gas, telecommunications, building facilities, information technology, networks, vendors, suppliers, and operations personnel. Quick action response teams and additional Company personnel were available for the century rollover. Additionally, the Company's Emergency Operations Center (EOC) was activated for the century rollover. All Company contingency plans were completed as of September 30, 1999. As the result of a non-eventful year 2000 rollover, it was not necessary to invoke Company contingency plans. As part of its normal business practice, the Company maintains plans to follow during emergency circumstances. Potential Risks With respect to its internal operations, those over which the Company has direct control, the Company believed the most significant potential risks from Y2K problems were: (1) its ability to use electronic devices to control and operate its generation, gas, water, telecommunication, transmission and distribution systems, (2) its ability to render timely bills to its customers, and (3) the ability to maintain continuous operations of its computer systems. Based upon the smooth transition to year 2000, the Company believes the continued probability of such failures is low. The Company is monitoring the progress of these critical entities and contingency plans will remain in place to address the potential failure of an external party. Effect on Operations The Company had no significant impacts on fourth quarter 1999 operations as a result of Y2K problems. The Company experienced no significant interruptions to operations or business systems related to Y2K problems during the actual date rollover period. The Company feels that there will be minimal risks during the year 2000 and that any Y2K related problems will be minor and corrected immediately without effect on operations. Financial Implications With 100% of mission critical components tested, the Company anticipated and proved that the transition through critical Y2K dates had minimal impact on the Company's Electric, Gas, and Water 48 operations during year 2000 rollover period and during year 2000 and beyond. These results are reflected in reduced costs discussed below. The Company had estimated that its total incremental expenditures for the Y2K effort, since it began identification of Y2K cost, would be approximately $5.9 million. This estimate has been reduced from amounts previously reported based on updated assessments of the project costs. Y2K costs include assessment, remediation, testing, and contingency planning activities. Of the total project costs $5.4 million was incurred through December 31, 1999. Approximately $4.0 million of the expenditures are operating and maintenance expenses, and $1.4 million are capital expenditures. The Company anticipates that the remaining Y2K expenditures will be approximately $100,000 for the 2000 business year. Final archiving of hard copy and electronic documentation, project review, and project shutdown will be completed in the first quarter of 2000. 49 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has evaluated its risk related to financial instruments whose values are subject to market sensitivity. The only such instruments are Company issued fixed-rate and variable-rate debt, and preferred securities obligations which were as follows as of December 31, 1998 and 1999. Long-term debt (Dollars in Thousands):
Expected Expected Maturity Weighted Average Maturity Date Amounts Interest Rates Fair Value - ------------------------------------------------------------------------------------------------------------------------ December 31 December 31 December 31 Fixed Rate 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- 1999 - $ 30,500 - 6.88% 2000 2,755 300 6.24% 9.00% 2001 19,620 17,500 5.56% 5.51% 2002 2,626 200 6.11% 9.00% 2003 20,632 18,200 5.63% 5.60% 2004 2,621 - 6.12% - Thereafter 499,931 490,500 6.62% 6.83% ====================== =================== ====================== Total Fixed Rate $548,185 $556,900 $529,875 $592,373 Variable Rate Due 2000 $100,000 - 6.87% - Due 2020 80,000 80,000 *3.81% 3.55% ======================= =================== ====================== $180,000 $ 80,000 $180,000 $ 80,000 Preferred securities (fixed rate) Due 2036 $ 48,500 $ 48,500 8.60% - $ 48,500 $ 48,500 ======================= =================== ====================== Total $776,685 $686,900 $758,375 $720,873
* Weighted daily average rate for month ended December 31, 1998 and 1999 Commodity Price Risk SPPC is exposed to commodity price risk primarily related to changes in the market price of electricity as well as changes in fuel costs incurred to generate electricity. Although the potential exists for market risk within these contracts, the future costs are expected to be covered in the rate making process. SPPC's gas local distribution company is also protected by deferred energy accounting procedures (See Note 1 to the Financial Statements). These risks are not expected to expose SPPC to significant market risks related to commodity price fluctuations. As a result of the merger of SPR and NVP, the Board of Directors of the combined company requested that management review and consolidate the Risk Management Programs of the two utilities. SPPC and NVP engaged the services of a leading energy risk management consulting company to review existing policies and procedures, make any recommendations to the existing Program, and implement the revised Program. That project led SPPC to adopt revised policies and procedures, implement new IT systems to track any commodity price exposures, as well as focus on potential "Earnings-at-Risk" which measures the amount of exposure that SPPC have to energy prices at any point in time. 50 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ----- Independent Auditors' Report................................................................52 Financial Statements: Consolidated Balance Sheets as of December 31, 1999 and 1998......................53 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997.............................................................54 Consolidated Statements of Common Shareholder's Equity for the Years Ended December 31, 1999, 1998 and 1997....................................55 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997................................................56 Consolidated Statements of Capitalization as of December 31, 1999 and 1998.....57-58 Notes to Consolidated Financial Statements...............................................59-81
51 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholder of Sierra Pacific Power Company Reno, Nevada We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Sierra Pacific Power Company and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, common shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Reno, Nevada February 29, 2000 52 SIERRA PACIFIC POWER COMPANY CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
December 31, ASSETS: 1999 1998 - ------- ---- ---- Utility Plant, at Original Cost: Plant in service $2,420,728 $2,348,996 Less accumulated provision for depreciation 799,099 727,624 --------- --------- 1,621,629 1,621,372 Construction work in progress 97,561 55,670 --------- --------- 1,719,190 1,677,042 --------- --------- Other Investments 62,704 34,022 --------- --------- Current Assets: Cash and cash equivalents 3,011 15,197 Accounts receivable less provision for Uncollectible accounts: 1999 - $3,649; 1998 - $3,461 113,695 114,380 Materials, supplies and fuel, at average cost 30,070 25,776 Other 3,103 2,692 ------- ------- 149,879 158,045 Deferred Charges: Regulatory tax asset 65,531 65,619 Other regulatory assets 73,660 61,675 Other 25,512 15,417 ------- ------- 164,703 142,711 ------- ------- $2,096,476 $2,011,820 ========== ========== CAPITALIZATION AND LIABILITIES: - ------------------------------- Capitalization: Common shareholder's equity $ 673,738 $ 661,367 Preferred stock 50,000 73,115 Preferred securities subject to mandatory redemption 48,500 48,500 Long-term debt 625,430 606,450 --------- --------- 1,397,668 1,389,432 --------- --------- Current Liabilities: Short-term borrowings 109,584 105,000 Current maturities of long-term debt 102,755 30,473 Accounts payable 78,491 66,032 Accrued interest 5,110 7,535 Dividends declared 19,974 20,365 Accrued salaries and benefits 8,385 12,131 Other current liabilities 10,673 27,759 ------- ------- 334,972 269,295 ------- ------- Commitments & Contingencies (Note 13) Deferred Credits: Deferred federal income taxes 170,261 161,697 Deferred investment tax credits 35,980 37,944 Regulatory tax liability 37,846 38,939 Accrued retirement benefits 49,052 42,560 Customer advances for construction 40,081 34,961 Other 30,616 36,992 ------- ------- 363,836 353,093 ------- ------- $2,096,476 $2,011,820 ========== ==========
The accompanying notes are an integral part of the financial statements. 53 SIERRA PACIFIC POWER COMPANY CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands)
Year Ended December 31, 1999 1998 1997 ---- ---- ---- Operating Revenues: Electric $609,197 $585,657 $540,346 Gas 100,177 99,532 70,675 Water 54,348 49,143 46,519 -------- -------- -------- 763,722 734,332 657,540 -------- -------- -------- Operating Expenses: Operation: Purchased power 179,781 156,970 130,612 Fuel for power generation 115,065 114,803 100,861 Gas purchased for resale 68,125 65,430 38,127 Deferral of energy costs-net - - 8 Other 115,453 116,076 120,600 Maintenance 22,520 22,266 23,387 Depreciation and amortization 77,373 69,435 64,117 Taxes: Income taxes 36,042 43,550 40,387 Other than income 19,527 19,608 19,269 -------- -------- -------- 633,886 608,138 537,368 -------- -------- -------- Operating Income 129,836 126,194 120,172 -------- -------- -------- Other Income: Allowance for other funds used during construction (1,341) 3,797 5,723 Other (expense)/income-net (1,028) 335 810 -------- ------- ------- (2,369) 4,132 6,533 -------- ------- ------- Total Income Before Interest Charges 127,467 130,326 126,705 -------- ------- ------- Interest Charges: Long-term debt 40,263 38,890 39,609 Other 11,615 7,659 4,583 Allowance for borrowed funds used during construction and capitalized interest (308) (6,414) (4,785) ------- ------- ------- 51,570 40,135 39,407 ------- ------- ------- Income Before Dividends on Mandatorily Redeemable Preferred Securities 75,897 90,191 87,298 Preferred dividend requirements of company-obligated mandatorily redeemable preferred securities (4,171) (4,171) (4,171) ------- ------- ------- Income Before Preferred Dividend requirements 71,726 86,020 83,127 Preferred dividend requirements and premium paid on redemption (5,485) (5,459) (5,459) ------- ------- ------- Income Applicable to Common Stock $ 66,241 $ 80,561 $ 77,668 ========= ========= =========
The accompanying notes are an integral part of the financial statements. 54 SIERRA PACIFIC POWER COMPANY CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY (Dollars in Thousands)
Year ended December 31, 1999 1998 1997 ---- ---- ---- Common Stock - ------------ Balance at Beginning of Year and End of Year $ 4 $ 4 $ 4 Other Paid-In Capital - --------------------- Balance at Beginning of Year 562,684 545,434 518,434 Additional investment by parent company 22,000 17,250 27,000 ------- ------- ------- Balance at End of Year 584,684 562,684 545,434 ------- ------- ------- Retained Earnings - ----------------- Balance at Beginning of Year 98,679 94,118 88,458 Income before preferred dividends 71,726 86,020 83,127 Preferred stock dividends declared & premium on redemption (5,355) (5,459) (5,459) Common stock dividends declared (76,000) (76,000) (72,000) Cost of issuing common stock (reimbursement to parent company) - - (8) -------- -------- -------- Balance at End of Year 89,050 98,679 94,118 -------- -------- -------- Total Common Shareholder's Equity at End of Year $673,738 $661,367 $639,556 ========= ======== ========
The accompanying notes are an integral part of the financial statements. 55 SIERRA PACIFIC POWER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
Year Ended December 31, 1999 1998 1997 ---- ---- ---- Cash Flows From Operating Activities: - ------------------------------------ Income before preferred dividends $71,726 $86,020 $83,127 Non-Cash items included in income: Depreciation and amortization 77,373 69,435 64,117 Deferred taxes and investment tax credits 5,595 (3,743) (2,772) AFUDC and capitalized interest 1,033 (10,211) (10,508) Deferred energy costs, merger costs and other non-cash 8,644 2,400 (2,151) Early Retirement and severance amortization 4,194 4,177 4,551 Changes in certain assets and liabilities: Accounts receivable 685 (13,836) (10,144) Materials, supplies and fuel (4,294) (521) 2,331 Other current assets (411) (120) 1,376 Accounts payable 12,459 2,944 9,090 Other current liabilities (23,257) 6,844 1,543 Other - net (31,418) 9,802 4,895 -------- ------- ------- Net Cash Flows From Operating Activities 122,329 153,191 145,455 -------- ------- ------- Cash Flows From Investing Activities: - ------------------------------------ Additions to utility plant (142,306) (183,384) (147,801) Non-cash charges to utility plant (768) 10,587 11,553 Customer refunds for construction 5,120 (3,517) (951) Contributions in aid of construction 21,823 37,216 26,321 --------- --------- --------- Net cash used for utility plant (116,131) (139,098) (110,878) Investment in subsidiaries and other non-utility property-net (28,720) (2,788) (5,254) --------- --------- --------- Net Cash Used in Investing Activities (144,851) (141,886) (116,132) --------- --------- --------- Cash Flows From Financing Activities: - ------------------------------------ Increase in short-term borrowings 1,972 30,637 40,583 Proceeds from issuance of long-term debt 124,495 35,000 - Retirement of long-term debt (33,270) (5,456) (15,417) Retirement of preferred stock (23,115) - - Additional investment by parent company 22,000 17,250 27,000 Dividends paid and premiums on preferred redemption (81,746) (80,459) (75,459) -------- -------- -------- Net Cash Provided (Used) By Financing Activities 10,336 (3,028) (23,293) -------- -------- -------- Net (Decrease) Increase in Cash and Cash Equivalents (12,186) 8,277 6,030 Beginning Balance in Cash and Cash Equivalents 15,197 6,920 890 -------- ------- ------- Ending Balance in Cash and Cash Equivalents $ 3,011 $ 15,197 $ 6,920 ======= ======= =========== Supplemental Disclosures of Cash Flow Information: - ------------------------------------------------- Cash Paid During Year For: Interest $54,303 $48,250 $46,824 Income taxes 28,604 45,963 41,656
The accompanying notes are an integral part of the financial statements. 56 SIERRA PACIFIC POWER COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Dollars in Thousands)
December 31, Common Shareholder's Equity: 1999 1998 - --------------------------- Common Stock, $3.75 par value, 1,000 shares authorized, issued and outstanding $ 4 $ 4 Other paid-in capital 584,684 562,684 Retained earnings 89,050 98,679 --------- --------- Total Common Shareholder's Equity 673,738 661,367 Cumulative Preferred Stock: Not subject to mandatory redemption: $50 par value: Series A; $2.44 dividend - 4,025 Series B; $2.36 dividend - 4,100 Series C; $3.90 dividend - 14,990 $25 stated value: Class A Series 1; $1.95 dividend 50,000 50,000 -------- --------- Total Preferred Stock 50,000 73,115 Company-obligated mandatorily redeemable preferred securities of the Company's subsidiary trust, Sierra Pacific Power Capital I, holding solely $50 million principal amount of 8.60% junior subordinated debentures of the Company, due 2036 48,500 48,500 -------- --------- Total cumulative preferred securities 98,500 121,615 -------- --------- Long-Term Debt: First Mortgage Bonds: Unamortized bond premium and discount, net (795) (831) Debt Secured by First Mortgage Bonds: 2.00%Series Z due 2004 72 93 2.00% Series O due 2011 1,374 1,497 6.35% Series FF due 2012 1,000 1,000 6.55% Series AA due 2013 39,500 39,500 6.30% Series DD due 2014 45,000 45,000 6.65% Series HH due 2017 75,000 75,000 6.65% Series BB due 2017 17,500 17,500 6.55% Series GG due 2020 20,000 20,000 6.30% Series EE due 2022 10,250 10,250 6.95% to 8.61% Series A MTN due 2022 110,000 110,000 7.10% and 7.14% Series B MTN due 2023 58,000 58,000 6.62% to 6.83% Series C MTN due 2006 50,000 50,000 5.90% Series JJ due 2023 9,800 9,800 5.90% Series KK due 2023 30,000 30,000 5.00% Series Y due 2024 3,138 3,207 6.70% Series II due 2032 21,200 21,200 5.47% Series D MTN due 2001 17,000 17,000 5.50% Series D MTN due 2003 5,000 5,000 5.59% Series D MTN due 2003 13,000 13,000 ------- ------- Subtotal, excluding current portion 526,039 526,216 Variable Rate Note: Water Facilities Note: maturing 2020 80,000 80,000 Other, excluding current portion 19,391 234 ------- ------- Total Long-Term Debt 625,430 606,450 ------- ------- TOTAL CAPITALIZATION $1,397,668 $1,389,432 ========== ==========
The accompanying notes are an integral part of the financial statements. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies for both utility and non-utility operations are as follows: General Sierra Pacific Power Company (SPPC or the Company), a wholly-owned subsidiary of Sierra Pacific Resources (SPR), is a regulated public utility engaged principally in the generation, purchase, transmission, distribution, and sale of electric energy. It provides electricity to approximately 302,000 customers in a 50,000 square mile territory including western, central, and northeastern Nevada, including the cities of Reno, Sparks, Carson City and Elko, and a portion of eastern California, including the Lake Tahoe area. SPPC also provides water and gas service in the cities of Reno and Sparks, Nevada, and environs. In 1995, SPPC formed two subsidiaries for the specific purpose of forming a partnership to operate the Pinon Pine gasifier facility. These subsidiaries are Pinon Pine Corporation and Pinon Pine Investment Company. In February 1999, SPPC purchased GPSF-B, which owned the portion of the gasifier facility that was not already owned by SPPC. On July 29, 1996, SPPC formed a wholly-owned subsidiary, Sierra Pacific Power Capital I (Trust), for the purpose of completing a public offering of trust originated preferred securities. These subsidiaries are consolidated into the financial statements of SPPC, with all significant intercompany transactions eliminated. Refer to Note 4 of SPPC's consolidated financial statements for the stock issuance and Note 3 for the Pinon Pine Power Project. SPPC maintains its accounts for electric and gas operations in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission, and for water operations, in accordance with the Uniform System of Accounts prescribed by the National Association of Regulatory Utility Commissioners. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities. These estimates and assumptions also affect the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain reclassifications have been made for comparative purposes but have not affected previously reported net income or common shareholder's equity. Utility Plant In addition to direct labor and material costs, the Company also charges the following to the cost of constructing utility plants: the cost of time spent by administrative employees in planning and directing construction work, property taxes, employee benefits (including such costs as pensions, postretirement and post-employment benefits, vacations and payroll taxes), and an allowance for funds used during construction (AFUDC). The original cost of plant retired or otherwise disposed of and the cost of removal less salvage is generally charged to the accumulated provision for depreciation. The cost of current repairs and minor replacements is charged to operating expenses when incurred. The cost of renewals and betterments is capitalized. 58 Allowance For Funds Used During Construction and Capitalized Interest As part of the cost of constructing utility plant, the Company capitalizes AFUDC. AFUDC represents the cost of borrowed funds and, where appropriate, the cost of equity funds used for construction purposes in accordance with rules prescribed by the FERC and the Public Utilities Commission of Nevada . AFUDC is capitalized in the same manner as construction labor and material costs, with an offsetting credit to "other income" for the portion representing the cost of equity funds and as a reduction of interest charges for the portion representing borrowed funds. Recognition of this item as a cost of utility plant is in accordance with established regulatory rate-making practices. Such practices permit the utility to earn a fair return on, and recover in rates charged for utility services, all capital costs. This is accomplished by including such costs in the rate base and in the provision for depreciation. The AFUDC rates used during 1999, 1998, and 1997 were 6.09%, 7.69% and 8.30%, respectively. As specified by the PUCN, certain projects were assigned a lower AFUDC rate due to specific low-interest-rate financings directly associated with those projects. Depreciation Depreciation is calculated using the straight-line composite method over the estimated remaining service lives of the related properties. The depreciation provision for 1999, 1998 and 1997, as authorized by the PUCN and stated as a percentage of the original cost of depreciable property, was approximately 3.14%, 3.31%, and 3.16%, respectively. Cash and Cash Equivalents Cash is comprised of cash on hand and working funds. Cash equivalents consist of high quality investments in money market funds. SPPC had no short- term investments in money market funds at December 31, 1999 and $12.4 million of short-term investments in money market funds at December 31, 1998. Regulatory Accounting and Other Regulatory Assets The Company's rates are currently subject to the approval of the PUCN and are designed to recover the cost of providing generation, transmission and distribution services. As a result, the Company qualifies for the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation", issued by the Financial Accounting Standards Board (FASB). This statement recognizes that the rate actions of a regulator can provide reasonable assurance of the existence of an asset and requires the capitalization of incurred costs that would otherwise be charged to expense where it is probable that future revenue will be provided to recover these costs. SFAS No. 71 prescribes the method to be used to record the financial transactions of a regulated entity. The criteria for applying SFAS No. 71 include the following: (i) rates are set by an independent third party regulator, (ii) approved rates are intended to recover the specific costs of the regulated products or services, and (iii) rates that are set at levels that will recover costs can be charged to and collected from customers. SFAS No. 101, "Regulated Enterprises-Accounting for the Discontinuation of Application of FASB Statement No. 71," requires that an enterprise whose operations cease to meet the qualifying criteria of SFAS No. 71, discontinue the application of that statement by eliminating the effects of any actions of regulators that had been previously recognized. 59 In 1997, the Emerging Issues Task Force (EITF) released Issue 97-4. In doing so, it reached a consensus that a utility subject to a deregulation plan for its generation business should stop applying SFAS No. 71 to the generating portion of its business no later than the date when a deregulation plan with sufficient detail is known. EITF 97-4 also reached a consensus that regulatory assets and liabilities that originated in a portion of the business that is discontinuing its application of SFAS No. 71, should be evaluated on the basis of where (that is, the portion of the business in which) the regulated cash flows to realize and settle them will be derived. The result of the consensus is that there is no elimination of regulatory assets which the deregulatory legislation or rate order specifies collection of, if the regulatory assets are recoverable through a portion of the business which remains subject to SFAS No. 71. In conformity with SFAS No. 71, the accounting for the Company conforms to generally accepted accounting principles as applied to regulated public utilities and as prescribed by the agencies and commissions of the jurisdictions in which they operate. In accordance with these principles, certain costs that would otherwise be charged to expense or capitalized as plant costs are deferred as regulatory assets based on expected recovery from customers in future rates. Management's expected recovery of deferred costs is based upon specific rate- making decisions or precedent for each item. The following other regulatory assets were included in the consolidated balance sheets as of December 31 (dollars in thousands):
DESCRIPTION 1999 1998 AMORTIZATION PERIODS ----------- ---- ---- -------------------- Early retirement and severance offers $16,274 $20,468 Various through 2004 Loss on reacquired debt 17,140 17,918 Various through 2023 Plant assets 7,104 7,978 Various through 2031 Conservation and demand side programs 5,551 3,787 Various through 2007 Merger transition costs 4,703 0 To be determined* Merger severance/relocation 11,432 0 To be determined* Other costs 11,456 11,524 Various ------- ------- Total $73,660 $61,675 ======= =======
* Under the terms of the merger stipulation with the PUCN, three years after the start of retail competition in the State of Nevada, the Company is required to file a general rate case that would give the Company the opportunity to recover the costs of the merger. The amortization period for these costs will be determined at the time of the general rate case filing. Currently, the electric utility industry is predominantly regulated on a basis designed to recover the cost of providing electric power to its retail and wholesale customers. If cost-based regulation were to be discontinued in the industry for any reason, including competitive pressure on the cost-based prices of electricity, profits could be reduced, and utilities might be required to reduce their asset balances to reflect a market basis less than cost. Discontinuance of cost-based regulation would also require affected utilities to write off their associated regulatory assets. Management cannot predict the potential impact, if any, of these competitive forces on the Company's future financial position and results of operations. 60 Deferral of Energy Costs Nevada and California statutes permit regulated utilities to, from time-to- time, adopt deferred energy accounting procedures, which record as deferred energy costs the difference between actual fuel expense and fuel revenues. Under regulations adopted by the PUCN, deferred energy rates are revised at least every 12 months to recapture the accumulated deferred balance over a future period. The intent of these procedures is to ease the effect of fluctuations in the cost of purchased gas, fuel and purchased power. During 1999 SPPC did not employ deferred energy accounting procedures, but has resumed those procedures for natural gas operations as of January 1, 2000. Federal Income Taxes and Investment Tax Credits SPR and its subsidiaries file a consolidated federal income tax return. Current income taxes are allocated based on SPR's and each subsidiary's respective taxable income or loss and investment tax credits as if each subsidiary filed a separate return. Deferred taxes are provided on temporary differences at the statutory income tax rate in effect as of the most recent balance sheet date. SPPC accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and assets for the future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. For regulatory purposes, SPPC is authorized to provide for deferred taxes on the difference between straight-line and accelerated tax depreciation on post-1969 utility plant expansion property, deferred energy, and certain other differences between financial reporting and taxable income, including those added by the Tax Reform Act of 1986 (TRA). In 1981, SPPC began providing for deferred taxes on the benefits of using the Accelerated Cost Recovery System for all post-1980 property. In 1987, the TRA required SPPC to begin providing deferred taxes on the benefits derived from using the Modified Accelerated Cost Recovery System. Investment tax credits are no longer available to SPPC. The deferred investment tax credits are being amortized over the estimated service lives of the related properties. Revenues Operating revenues include unbilled utility revenues earned (service has been delivered, but not yet billed by the end of the accounting period). These amounts are also included in accounts receivable. 61 Recent Pronouncements of the FASB In June 1998, the FASB issued SFAS No. 133, entitled "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position, and measure those instruments at fair value. In May 1999, members of the FASB agreed to delay the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000, and accordingly, the Company is required to adopt the statement effective January 1, 2001. The Company is still assessing the impact of SFAS No. 133 on its financial condition and results of operations. NOTE 2. REGULATORY ACTIONS Nevada Matters On April 30, 1999, the Company filed its second compliance filings related to the 1997 rate stipulation The filings provide a calculation of the Company electric and gas earnings in excess of a 12 % return on equity (ROE). Any earnings in excess of 12 % ROE are shared 50/50 between shareholders and customers. On August 19, 1999, the Commission approved a stipulation between the Company, Staff, and the UCA, which rebated in 1999 $7.34 million and $2.0 million to electric and gas customers, respectively. Based on 1999 operating results, the Company anticipates it may make refunds to customers. Appropriate reserves have been recorded to reflect any anticipated refunds. California Matters On February 18, 1999, the California Public Utility Commission (CPUC) approved the Company's proposed Revenue Cycle Services Credits (RCSC) application filed February 2, 1998. The RCSC addresses meter ownership, meter services, meter reading, and billing and applies to customers who select their provider of a revenue cycle service. On April 9, 1999, the Company made a compliance tariff filing which reflects the approved credits. On April 5, 1999, the CPUC approved the Company's proposed unbundled rates effective back to June 1, 1998. FERC Matters On March 30, 1999, the Company filed an application with the FERC to increase its Open Access Transmission rates. On October 12, 1999, the Company filed an Offer of Partial Settlement which resolved all issues with the exception of pricing to the Mines and to the City of Fallon. On November 3, the Partial Settlement was certified to the FERC. A status report on the two remaining issues was filed on January 11, 2000. On January 31, 2000, the FERC approved the Partial Settlement. 62 On March 31, 1999, the Company filed an application with the FERC for approval of generation rates, terms and conditions under which the new owners of the Company's generation would operate after divestiture. The FERC dismissed the application on November 1, 1999, apparently misinterpreting the agreement reached between the Company and the PUCN. The Company filed a request for rehearing and on December 17, 1999, the FERC issued an Order Granting Rehearing for Further Consideration. A decision is expected in 2000. NOTE 3. JOINTLY OWNED FACILITIES Valmy SPPC and Idaho Power Company each own an undivided 50% interest in the Valmy generating station, with each company being responsible for financing its share of capital and operating costs. SPPC is the operator of the plant for both parties. SPPC's share of direct operation and maintenance expenses for Valmy is included in the accompanying consolidated statements of income. The following schedule reflects SPPC's 50% ownership interest in jointly owned electric utility plant at December 31, 1999 (dollars in thousands):
Electric Accumulated Construction MW Plant Provision For Work In Plant Capacity In Service Depreciation Progress -------- -------- ---------- ------------ -------- Valmy #1 129 $127,022 $55,625 $ 63 Valmy #2 137 $153,902 $56,431 $554
Pinon Pine Pinon Pine Corp. and Pinon Pine Investment Co., subsidiaries of SPPC, own 25% and 75% of a 38% interest in Pinon Pine Company, L.L.C. GPSF-B, a Delaware corporation formerly owned by General Electric Capital Corporation (GECC) and now owned by SPPC, owns the remaining 62% as of February 1999. The LLC was formed to take advantage of federal income tax credits associated with the alternative fuel (syngas) produced by the coal gasifier available under (S) 29 of the Internal Revenue Code. The entire project, which includes an LLC-owned gasifier and an SPPC-owned power island and post-gasification facility to partially cool and clean the syngas, is referred to collectively as the Pinon Pine Power Project. SPPC has a funding arrangement with the Department of Energy (DOE). Under the agreement, the DOE will provide funding towards the construction of the project, and towards the operating and maintenance costs of the facility. The DOE has committed $168 million of funding for Pinon construction and operation costs. The DOE provided funding for approximately 53% of the estimated construction cost and half of the operating and fuel expenses through December 31, 1999. Additional funding will be provided until the commitment is expended. A dispute has arisen with the DOE regarding the historical and future funding of natural gas costs. In February 1999, the DOE informed SPPC it will not fund the remaining $14 million under the cooperative agreement until the dispute is resolved. On November 2, 1999, SPPC reached final agreement with the DOE regarding the allowability of previously incurred natural gas costs. The agreement also redefines the cooperative agreement performance period and the responsibilities of both parties through the remainder of the 63 agreement. The period of performance is extended until January 1, 2001 or until the facility is sold or operational control is transferred. The DOE agrees to share past fuel costs and future natural gas costs used to fuel the gas combustion turbine during periods when air extraction from the process is directed to the gasifier island. Estimated construction start-up and commissioning costs for Pinon, including the DOE's portion are approximately $301.5 million, which includes permitting taxes, start-up commissioning, operator training and Allowance for Funds Used During Construction. DOE funding for construction through December 1999 is $161.4 million. Construction began on the project in February 1995, following resource plan approval and the receipt of all permits and other approvals. The natural gas portion (combined cycle combustion turbine) was satisfactorily completed and placed in service December 1, 1996. The balance of the plant was completed in June 1998. The construction of the gasifier portion of the project overran the fixed contract price by approximately 12% or $12.6 million. The overrun is primarily due to redesign issues, resolving technical issues relative to start up and other costs due to a later than anticipated completion date. To date, SPPC has not been successful in obtaining sustained operation of the gasifier but work continues to identify problem areas and redesign solutions which will likely require additional capital expenditures. Due to the problems noted above, SPPC and Foster Wheeler settled on a portion of the cost overrun and have entered into an alternative dispute resolution. SPPC had to satisfy certain performance requirements as part of the construction agreement with the LLC. The initial performance warranty required that the gasifier attain an average capacity factor of 30% during 1997, regardless of delays in the in-service date. Since the gasifier was not in service in 1997, the certain performance warranties required by the contract were not met. Consequently, SPPC paid GECC $2.8 million as satisfaction of the performance obligation. NOTE 4. PREFERRED STOCK AND PREFERRED SECURITIES All issues of preferred stock are superior to SPR common stock with respect to dividend payments (which are cumulative) and liquidation rights. SPPC's Restated Articles of Incorporation, as amended on August 19, 1992, authorize an aggregate total of 11,780,500 shares of preferred stock at any given time. On July 29, 1996, the Trust, a wholly-owned subsidiary of SPPC, issued $48.5 million (1,940,000 shares) of 8.60% Trust Originated Preferred Securities (the Preferred Securities). SPPC owns all the common securities of the Trust; 60,000 shares totaling $1.5 million (Common Securities). The Preferred Securities and the Common Securities (the Trust Securities) represent undivided beneficial ownership interests in the assets of the Trust. The existence of the Trust is for the sole purpose of issuing the Trust Securities and using the proceeds thereof to purchase from SPPC its 8.60% Junior Subordinated Debentures due July 30, 2036, in a principal amount of $50 million. The sole asset of the Trust is SPPC's junior subordinated debentures. SPPC's obligations provide a full and unconditional guarantee of the Trust's obligations under the Preferred Securities. The Preferred Securities of Sierra Pacific Power Capital I are redeemable only in conjunction with the redemption of the related 8.60% junior subordinated debentures. The junior subordinated debentures will mature on July 30, 2036, and may be redeemed, in whole or in part, at any time on or after July 30, 2001, or at any time in certain circumstances upon the occurrence of a tax event. A tax event occurs if an opinion has been received from tax counsel that there is more than an insubstantial risk that: the Trust is, or will be subject to federal income tax with respect to interest accrued or received on the junior subordinated debentures; the Trust is, or will be subject to more than a de minimis amount of other taxes, duties or other governmental charges; interest payable by SPPC to the Trust on the junior subordinated debentures is not, or will not be, deductible, in whole or in part for federal income tax purposes. 64 Upon the redemption of the junior subordinated debentures, payment will simultaneously be applied to redeem preferred securities having an aggregate liquidation amount equal to the aggregate principal amount of the Junior Subordinated Debentures. The preferred securities are redeemable at $25 per preferred security plus accrued dividends. On November 1, 1999, SPPC paid $23.5 million, par value and premium, to redeem Series A, $2.44 Dividend (4.88%), Series B, $2.36 Dividend (4.72%) and Series C, $3.90 Dividend (7.8%). The following table indicates the number of shares outstanding at December 31 of each year and the dollar amount thereof. The difference between total shares authorized and the amount outstanding represents undesignated shares authorized but not issued.
Shares Issued Amount -------------------------------------- -------------------------------------- (Dollars in thousands) 1999 1998 1997 1999 1998 1997 ------------- ------------- ------------- ------------- -------------- ------------- Preferred Stock Not subject to mandatory redemption: Series A 80,500 80,500 $ 4,025 $ 4,025 Series B 82,000 82,000 4,100 4,100 Series C 299,800 299,800 14,990 14,990 Class A Series I 2,000,000 2,000,000 2,000,000 $50,000 50,000 50,000 ------------- ------------- ------------- ------------- -------------- ------------- Subtotal 2,000,000 2,462,300 2,462,300 $50,000 $ 73,115 $ 73,115 Preferred Securities Subject to mandatory redemption: Preferred securities of Sierra Pacific Power Capital I 1,940,000 1,940,000 1,940,000 48,500 48,500 48,500 ---------------------------------------------- ------------------------------------------------ Total 3,940,000 4,402,300 4,202,300 $98,500 $121,615 $121,615 ============================================== ================================================
65 NOTE 5. TAXES
The following reflects the composition of taxes on income (in thousands of dollars): 1999 1998 1997 --------------------------------------------------------------- Federal: Taxes estimated to be currently payable $ 29,101 $ 46,176 $ 40,574 Deferred taxes related to: Excess of tax depreciation over book depreciation 3,574 4,100 3,997 Contributions in aid of construction and customer advances (2,701) (2,963) (3,966) Avoided interest capitalized 69 (875) (1,578) Repairs and maintenance 1,504 - - Severance programs 3,774 Other-net, deferral of energy costs & costs of abandoned 1,384 (2,075) 1,010 merger Net amortization of investment tax credit (1,981) (1,930) (1,962) State (California) 888 925 801 ---------------------------------------------------------------- Total $ 35,661 $ 43,358 $ 38,876 ================================================================ As Reflected in Statement of Income: Federal income taxes $ 35,154 $ 42,625 $ 39,586 State income taxes 888 925 801 --------------------------------------------------------------- Operating Income 36,042 43,550 40,387 Other income-net (381) (192) (1,511) --------------------------- ----------------- -------------- Total $ 35,661 $ 43,358 $ 38,876 =============================================================== The total income tax provisions differ from amounts computed by applying the federal statutory tax rate to income before income taxes for the following reasons (in thousands of dollars): 1999 1998 1997 --------------------------------------------------------------- Income before preferred dividend requirements $ 71,726 $ 86,020 $ 83,127 Total income tax expense 35,661 43,358 38,876 --------------------------------------------------------------- 107,387 129,378 122,003 Statutory tax rate 35% 35% 35% --------------------------------------------------------------- Expected income tax expense 37,585 45,282 42,701 Depreciation related to difference in cost basis for tax purposes 1,408 1,383 1,591 Allowance for funds used during construction - equity 386 (1,334) (1,912) Tax benefit from the disposition of assets (442) 63 (569) ITC amortization (1,981) (1,930) (1,962) California franchise taxes (net of federal benefit) 577 601 521 Other-net (1,872) (707) (1,494) ---------------------------------------------------------------- $ 35,661 $ 43,358 $ 38,876 =============================================================== Effective tax rate 33.2% 33.5% 31.9%
66 The net deferred federal income tax liability consists of deferred federal income tax liabilities less related deferred federal income tax assets, as shown (in thousands of dollars):
1999 1998 ------------------- -------------------- Deferred Federal Income Tax Liabilities: AFUDC $ 8,894 $ 8,378 Bond redemptions 6,099 6,466 Excess of tax depreciation over book depreciation 161,903 157,906 Severance Programs 6,380 2,606 Repairs and maintenance 7,684 6,180 Tax benefits flowed through to customers 65,531 65,618 Other (510) (45) ------------------- -------------------- Total $255,981 247,109 ------------------- -------------------- Deferred Federal Income Tax Assets: Avoided interest capitalized 14,624 14,694 Employee benefit plans 3,944 3,049 Contributions in aid of construction and customer advances 36,626 33,925 Gross-ups received on contributions in aid of construction and customer advances 5,163 4,512 Unamortized investment tax credit 19,991 20,432 Other 5,372 8,800 ------------------- -------------------- Total 85,720 85,412 ------------------- -------------------- Deferred Federal Income Taxes $170,261 $161,697 =================== ====================
The Company's balance sheets contain a net regulatory tax asset of $27.7 million at December 31, 1999 and $26.7 million at December 31, 1998. The net regulatory asset consists of future revenue to be received from customers (a regulatory tax asset) of $65.5 million at December 31, 1999 and $65.6 million at December 31, 1998, due to flow through of the tax benefits of temporary differences. Offset against these amounts are future revenues to be refunded to customers (a regulatory tax liability), consisting of $17.9 million at December 31, 1999 and $18.5 million at December 31, 1998, due to temporary differences for liberalized depreciation at rates in excess of current tax rates, and $20.0 million at December 31, 1999 and $20.4 million at December 31, 1998 due to temporary differences caused by the investment tax credit. The regulatory tax liability for temporary differences related to liberalized depreciation will continue to be amortized using the average rate assumption method required by the Tax Reform Act of 1986. The regulatory tax liability for temporary differences caused by the investment tax credit will be amortized ratably in the same fashion as the deferred investment credit. NOTE 6. LONG-TERM DEBT Substantially all utility plant is subject to the lien of the SPPC indenture under which the first mortgage bonds are issued. On June 17, 1998, SPPC redeemed $5 million of 8.65% First Mortgage Bonds before the 2002 due date. In December 1998, SPPC issued $35 million principal amount of collateralized Medium-Term Notes, Series D, consisting of a three year non- callable note, due in 2001, with an interest rate of 5.47% and five year non- callable notes, due in 2003, with interest rate ranging from 5.50% to 5.59%. For all notes, interest is payable in semi-annual payments. The proceeds to SPPC from the sale of the notes was used for general corporate purposes including but not limited to: the acquisition of property; the construction, completion, extension or improvement of facilities; or discharge or refunding of obligations, including short-term borrowings. 67 On April 9, 1999, the Company sold the right to receive payments made in respect of Transition Property as defined by the Offering Circular dated March 30, 1999, to SPPC Funding LLC, a Delaware special purpose limited liability company whose sole member is the Company, in exchange for the proceeds of the SPPC Funding LLC Notes, Series 1999-1 (the Underlying Notes). SPPC Funding LLC then issued and sold the Underlying Notes to the California Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1 (the Trust) in exchange for the proceeds of the sale of the Trust's $24.0 million 6.4% Rate Reduction Certificates, Series 1999-1 (the Certificates). The Trust, which had been established by the California Infrastructure and Economic Development Bank, issued and sold the Certificates in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended. The Certificates are one of a series of rate reduction certificates that may be issued from time to time by the Trust and sold to investors upon terms determined at the time of sale. On July 12, and July 16, 1999, respectively, $10 million of the 6.86% and $20 million of the 6.83% of the Series C, collateralized Medium-Term Notes matured. On September 17, 1999, the Company issued $100,000,000 Floating Rate Notes, due October 13, 2000. Interest on the Notes is payable quarterly commencing on December 15, 1999. The interest rate on the Notes for each interest period to maturity is a floating rate, subject to adjustment every three months. The quarterly rate is equal to the London InterBank Offered Rate for three-month U.S. dollar deposits (LIBOR) plus a spread of 0.75%. These Notes will not be entitled to any sinking fund and will be redeemable in whole, without premium at the option of the Company, beginning on March 15, 2000 and on the 15th day of each month thereafter. The proceeds of this financing were used to pay down commercial paper. SPPC's annual amount of maturities for long-term debt is as follows (dollars in thousands): 2000 $102,755 2001 19,620 2002 2,626 2003 20,632 2004 2,621 ---------- 2000-2004 148,254 Thereafter 579,931 ----------- Total $728,185 NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The December 31, 1999 carrying amount for cash and cash equivalents, current assets, accounts receivable, accounts payable and current liabilities approximates fair value due to the short-term nature of these instruments. The total fair value of SPPC's long-term debt at December 31, 1999, is estimated to be $607.1 million (excluding current portion) based on quoted market prices for the same or similar issues or on the current rates offered to SPPC for debt of the same remaining maturities. The total fair value (excluding current portion) was estimated to be $641.9 million as of December 31, 1998. NOTE 8. SHORT-TERM BORROWINGS 68 In January of 1999 the Company revised its credit facilities resulting in a $150 million 364-day bank facility, and a $50 million revolving credit facility to support commercial paper activity. On July 28, 1999 the Company revised its credit facilities resulting in a $150 million 364-day credit facility to support commercial paper activity. This facility may be used for working capital and general corporate purposes, including commercial paper backup. This credit facility will expire on July 28, 2000. At December 31, 1999, SPPC's short-term debt was $109.6 million comprised entirely of commercial paper at an average interest rate of 6.54%. The other subsidiaries of SPPC have no outstanding short-term borrowings at this time. NOTE 9. DIVIDENDS The Restated Articles of Incorporation of SPPC and the indentures relating to the various series of its First Mortgage Bonds contain restrictions as to the payment of dividends on its common stock. Under the most restrictive of these limitations, approximately $76 million of retained earnings were available at December 31, 1999 for the payment of common stock cash dividends. NOTE 10. STOCK COMPENSATION PLANS At December 31, 1999, Sierra Pacific Resources (SPR), SPPC's parent company, had several stock-based compensation plans, which are described below. The Company applies Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to Employees in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for nonqualified stock options and the employee stock purchase plan. The total compensation cost that has been charged against income for the performance shares, dividend equivalents and the non-employee director stock plans was $0.7 million, $0.5 million, and $1.4 million for 1999, 1998 and 1997, respectively. The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock Based Compensation. Had compensation cost for SPR's nonqualified stock options and the employee stock purchase plan been determined based on the fair value at the grant dates for awards under those plans consistent with the provisions of SFAS No. 123, SPPC's income applicable to common stock would have been decreased to the pro forma amounts indicated below:
Income Applicable to Common Stock 1999 1998 1997 - ---------------------------------------------------------------------------------------- As Reported $66,241 $80,561 $77,668 Pro Forma $65,408 $80,217 $77,500
SPR's executive long-term incentive plan for key management employees, which was approved by shareholders on May 16, 1994, provides for the issuance of up to 750,000 of SPR's common shares to key employees through December 31, 2003. The plan permits the following types of grants, separately or in combination: nonqualified and qualified stock options, stock appreciation rights, restricted stock, performance units, performance shares, and bonus stock. During 1999, 1998 and 1997, the Company issued only nonqualified stock options and performance shares under the long-term incentive plan. 69 Nonqualified stock options granted during 1999, 1998 and 1997 were granted at an option price not less than market value at the date of the grant (August 1, and January 1, 1999, January 1, 1998 and January 1, 1997, respectively). The January 1 options for 1999, 1998 and 1997 vest to the participants 33 1/3% per year over a three year period from the grant date, and may be exercised for a period not exceeding ten years from the date of the grant. The August 1, 1999 options vest to the participants 33 1/3% per year over a three year period beginning January 1, 2000, and may be exercised for a period not exceeding ten years from the date of the grant. The options may be exercised using either cash or previously acquired shares valued at the current market price, or a combination of both. As a result of the merger with NVP on August 1, 1999, all shares outstanding as of that date, for January 1, 1999 grants and prior, were converted at a 1.44:1 ratio. The subsequent change in the exercise prices and the outstanding shares is reflected in all numbers shown for the applicable grants. The fair value of each nonqualified option has been estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants issued in 1999, 1998, and 1997:
- ---------------------------------------------------------------------------------------------------- Dividend Expected Risk-Free Yield Volatility Rate of Return Expected Life - ---------------------------------------------------------------------------------------------------- January 1, 1999 4.40% 18.60% 5.08% 10 years August 1, 1999 4.25% 17.41% 6.31% 10 years January 1, 1998 4.71% 13.16% 5.81% 10 years January 1, 1997 5.30% 11.42% 6.68% 10 years
A summary of the status of SPR's nonqualified stock option plan as of December 31, 1999, 1998 and 1997, and changes during those years is presented below:
---------------------------------------------------------------------------------- 1999 1998 1997 ---------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Nonqualified Stock Options Shares (1) Price Shares (1) Price Shares (1) Price - ------------------------------------------------------------------------------------------------------------------------------ Outstanding at beginning of year 285,931 $22.00 187,669 $17.70 101,520 $14.40 Granted 583,016 $25.36 173,460 $24.93 114,472 $19.97 Exercised 1,286 $14.39 31,014 $16.84 14,836 $14.09 Forfeited 34,678 $22.48 44,184 $18.83 13,487 $16.09 Outstanding at end of year 832,983 $24.34 285,931 $22.00 187,669 $17.70 Options exercisable at year-end 126,844 $20.54 50,930 $16.95 29,827 $14.11 Weighted-average grant date fair value of options: January 1 $4.05 $4.79 $3.51 August 1 $5.11
1. As a result of the merger, all options outstanding prior to August 1, 1999 were converted at a 1.44:1 ratio. The historical information has been adjusted to account for the related increase in shares. The following table summarizes information about nonqualified stock options outstanding at December 31, 1999: 70
Options Outstanding Options Exercisable Number Remaining Number Outstanding at Contractual Life Exercisable at Grant Date Exercise Price 12/31/99 Exercise Price 12/31/99 01/01/1994 $14.24 11,976 4 years $14.24 11,976 01/01/1995 $13.02 15,841 5 years $13.02 12,673 01/01/1996 $16.23 13,718 6 years $16.23 8,231 01/01/1997 $19.97 62,472 7 years $19.97 41,649 01/01/1998 $24.93 156,960 8 years $24.93 52,315 01/01/1999 $24.22 198,576 9 years $24.22 - 08/01/1999 $26.00 373,440 9.6 years $26.00 - Weighted Average Remaining 8.7 years Contractual Life
During 1999, 1998 and 1997, SPR granted performance shares in the following numbers and initial values, respectively: 27,765, 23,778 and 17,726 shares; and $26.00, $24.22 and $24.93 per share. These numbers reflect a 1.44:1 conversion as a result of the August 1, 1999 merger with Nevada Power Company. The actual number of shares earned by each participant is dependent upon SPR achieving certain financial goals over three-year performance periods. The value of performance shares, if earned, will be equal to the market value of SPR's common shares as of the end of the performance periods. SPR, at its sole discretion, may pay earned performance shares in the form of cash or in shares, or a combination thereof. Simultaneous with the grant of both the nonqualified options and performance shares above, each participant was granted dividend equivalents for all performance share grants, and for 1996 and prior nonqualified option grants. Each dividend equivalent entitles the participant to receive a contingent right to be paid an amount equal to dividends declared on shares originally granted from the date of grant through the exercise date, or, in the case of performance shares, throughout the performance period. Additionally, in order for dividend equivalents to be paid on the performance shares, certain financial targets must be met. Dividend equivalents will be forfeited if options expire unexercised. Under SPR's employee stock purchase plan, SPR is authorized to issue up to 400,162 shares of common stock to all of its employees with minimum service requirements. Under the terms of the plan, employees can choose twice each year to have up to 15% of their base earnings withheld to purchase SPR's common stock. The purchase price of the stock is 90% of the market value on the offering commencement date. Employees can withdraw from the plan at any time prior to the exercise date. Under the plan, SPR sold 21,888, 15,282 and 17,822 shares to employees in 1999, 1998 and 1997, respectively. Proforma compensation cost has been estimated for the employees' purchase rights on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for 1999, 1998 and 1997, respectively. 71
Average Dividend Average Expected Average Risk-Free Weighted Average Yield Volatility Interest Rate Fair Value 1999 4.31% 18.85% 5.08% $2.85 1998 4.17% 14.16% 4.96% $4.94 1997 4.87% 11.57% 5.59% $4.14
SPPC and SPR share the same directors and, as a result, the directors are compensated according to the SPR non-employee director stock plan. The plan provides that a portion of the outside directors' annual retainer be paid in SPR stock. Under the current plan the annual retainer for non-employee directors is $30,000, and the minimum amount to be paid in stock is $20,000 per director. During 1999, 1998 and 1997, SPR granted the following total shares and related compensation to directors in SPR stock, respectively: 4,741, 6,391 and 8,208 shares; and $150,000, $233,250, and $230,833. Nevada Power directors, who were appointed to the SPR Board of Directors after the merger, were not issued any stock options for 1999. Stock options were granted only to the remaining SPR directors. In 2000, all directors will be eligible for stock option grants. The Company also paid out phantom stock shares to retiring directors in the amount of $1,222,110. NOTE 11. RETIREMENT PLAN AND POST RETIREMENT BENEFITS Pension and other postretirement benefit plans SPR has pension plans covering substantially all employees. Benefits are based on years of service and the employee's highest compensation prior to retirement. SPR also has a postretirement plan, which provides medical and life insurance benefits for certain retired employees. The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the plans. The non-qualified Supplemental Executive Retirement Plan (SERP) is included as part of pension benefits. This reconciliation is based on a September 30 measurement date and reflects the merger of SPR and NVP during 1999 under purchase accounting. SPPC is a member of the controlled group in the multi-employer plans. 72
Other Postretirement Pension Benefits Benefits --------------------------------------- -------------------------------------- 1999 1998 1999 1998 ----------------------------------- -------------------------------------- Change in benefit obligations Benefit obligation, beginning of year $149,031 $119,533 $ 16,381 $ 15,496 Service cost 8,481 5,386 996 432 Interest cost 12,823 9,285 1,982 1,155 Participant contributions 0 0 255 252 Plan amendment&special termination 5,865 2,240 1,312 0 Actuarial (gains) losses 4,663 18,001 (1,694) 47 Merger of SPPC Plans 192,140 0 60,386 0 Curtailment loss (gain) (5,373) 0 386 0 Benefits paid (19,160) (5,414) (2,017) (1,001) ----------- ----------- ----------- ----------- Benefit obligation, end of year $348,470 $149,031 $ 77,987 $ 16,381 =========== =========== =========== =========== Change in plan assets Fair value of plan assets, beginning of year $111,160 $100,898 $ 11,139 $ 8,665 Actual return on plan assets 15,510 9,546 4,649 1,464 Company contributions 10,432 6,130 2,069 1,759 Participant contributions 0 0 255 252 Merger of SPPC Plans 208,766 0 50,593 $ - Benefits paid (19,160) (5,414) (2,017) (1,001) ----------- ----------- ----------- ----------- Fair value of plan assets, end of year $326,708 $111,160 $ 66,688 $ 11,139 =========== =========== =========== =========== Funded Status, end of year $(21,762) $(37,870) $(11,299) $ (5,243) Unrecognized net actuarial (gains) losses 26,550 19,320 (8,746) (11,507) Unrecognized prior service cost 6,375 7,784 0 0 Contributions made in 4th quarter 288 3,609 1,096 1,908 Unrecognized net transition obligation 0 0 12,217 13,561 ----------- ----------- ------------ ----------- Accrued pension and postretirement benefit obligations $ 11,451 $ (7,157) $ (6,732) $ (1,281) =========== =========== =========== ===========
The following amounts pertain to the non-qualified SERP plan covering certain current and former employees. The projected benefit obligation and accumulated benefit obligation for pension plans with accumulated benefit obligations in excess of the plan assets were $18.5 million and $15.7 million, respectively, at the end of the year and $9.7 million and $8.3 million, respectively, at the beginning of the year. 73 Amounts for pension and postretirement benefits recognized in the consolidated balance sheets consist of the following:
Other Postretirement Pension Benefits Benefits ----------------------------------- ------------------------------- 1999 1998 1999 1998 ----------------------------------- ------------------------------- Prepaid pension asset $ 26,166 $ - N/A N/A Accrued benefit liability (14,716) (7,157) $(6,732) $(1,281) Intangible asset 346 577 N/A N/A Accumulated other comprehensive income 606 (2,722) N/A N/A Additional minimum liability (952) 2,145 N/A N/A ----------- ----------- ----------- ----------- Net amount recognized 11,450 (7,157) (6,732) (1,281) =========== =========== =========== ===========
The weighted-average actuarial assumptions as of December 31 were as follows:
Other Postretirement Pension Benefits Benefits ----------------------------- ------------------------ 1999 1998 1997 1999 1998 1997 ----------------------------- ------------------------ Discount rate 7.50% 6.75% 7.50% 7.50% 6.50% 7.50% Expected return on plan assets 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% Rate of compensation increase 4.50% 4.50% 4.50% NA NA NA
The Company has assumed a health care cost trend rate of 6% for 1999 and all future years. Net periodic pension and other postretirement benefit costs include the following components: 74
Pension Benefits --------------------------------------------------------- 1999 1998 1997 --------------------------------------------------------- Service cost $ 8,481 $ 5,386 $ 4,406 Interest cost 12,823 9,285 8,437 Expected return on assets (11,712) (7,697) (7,015) Amortization of: Transition asset Prior service costs 841 780 675 Actuarial (gains) losses 976 187 86 ----------- ----------- ----------- Net periodic benefit cost 11,409 7,941 6,589 Additional charges (credits): Special termination charges 5,865 Curtailment credits (3,920) ----------- ----------- ----------- Total net benefit cost $ 13,354 $ 7,941 $ 6,589 =========== =========== ===========
Other Postretirement Benefits -------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------- Service cost $ 996 $ 433 $ 370 Interest cost 1,982 1,155 1,270 Expected return on assets (1,741) (770) (626) Amortization of: Prior service costs 0 0 0 Transition obligation 1,344 967 967 Actuarial (gains) losses (596) (505) (399) ----------- ----------- ----------- Net periodic benefit cost 1,985 1,280 1,582 Additional charges (credits): Special termination charges 1,312 0 Curtailment loss 1,283 0 ----------- ----------- ----------- Total net benefit cost $ 4,580 $ 1,280 $ 1,582 =========== =========== ===========
A regulatory asset was booked to offset the net effect of special termination benefits and curtailment costs incurred in connection with the merger of the two companies. The portion of the net periodic benefit cost recognized for pension benefits by SPPC during 1999 was $.9 million. The portion for other postretirement benefits recognized by SPPC was $.9 million. 75 The assumed health care cost trend rate has a significant effect on the amounts reported. A one percentage point change in the assumed health care cost trend rate would have had the following effects on 1999 service and interest costs and the accumulated postretirement benefit obligation at year end:
Increase Decrease -------- -------- Effect on service and interest components of net periodic cost $ 554 $ (512) Effect on accumulated postretirement benefit obligation $6,239 $(5,776)
NOTE 12. POSTEMPLOYMENT BENEFITS During 1999, SPPC offered a severance program to non-bargaining-unit employees which provided for severance pay and medical benefits continuation totaling $6.4 million and $0.2 million respectively. As of December 31, 1999, as approved by the PUCN, this cost was deferred as a regulatory asset. The order approving the merger of SPR and NVP, by the PUCN, directed SPR to defer merger costs (including severance and related benefits) for a three year period. The deferral of these costs is intended to allow adequate time for the anticipated savings from the merger to develop. At the end of the three year period, the order instructs the Company to propose an amortization period for these costs, and allows the Company to recover the costs to the extent that they are offset by merger savings. At December 31, 1999, the remaining liability for unpaid severance was $3.0 million. NOTE 13: COMMITMENTS AND CONTINGENCIES The Company's estimated cash construction expenditures for the year 2000 and the five-year period 2000-2004 are $137.7 million and $679.8 million, respectively. The Company has several long-term contracts for the purchase of electric energy and/or capacity. These contracts expire in years ranging from 2000 to 2009. Estimated future commitments under non-cancelable agreements with initial terms of one year or more at December 31, 1999 were as follows (dollars in thousands):
Accounted for as Long-Term Executory Contracts 2000 $ 28,114 2001 22,787 2002 23,488 2003 24,308 2004 25,182 2005 to 2009 114,840
76 The Company has several long-term contracts for the purchase and transportation of coal and gas. These contracts expire in years ranging from 2000 to 2015. Estimated future commitments under non-cancelable agreements with initial terms of one year or more at December 31, 1999 were as follows (dollars in thousands):
Coal and Gas Transportation 2000 $113,011 $ 46,091 2001 38,971 45,914 2002 17,648 44,926 2003 8,098 35,962 2004 0 32,049 2005 to 2015 0 289,619
The Company has an operating lease for its corporate headquarters building. The primary term of the lease is 25 years, ending in 2010. The current annual rental is $5.4 million, which amount remains constant until the end of the primary term. The lease has renewal options for an additional 50 years. The total rental expense under all operating leases, excluding fuel transportation contracts, was approximately $10.0 million in 1999, $7.0 million in 1998 and $6.9 million in 1997. Estimated future minimum cash payments, including the Company's headquarters building, under non-cancelable operating leases with initial terms of one year or more at December 31, 1999 were as follows (dollars in thousands): 2000 $10,007 2001 8,650 2002 7,399 2003 7,220 2004 7,157 2005 to 2014 75,087
In September 1994, Region VII of the United States Environmental Protection Agency (EPA) notified the Company that the Company was being named as a potentially responsible party (PRP) regarding the past improper handling of Polychlorinated Biphenyls (PCBs) by PCB Treatment, Inc., located in Kansas City, Kansas, and Kansas City, Missouri (the Sites). The EPA is requesting that the Company voluntarily pay an undefined (pro rata) share of the ultimate clean-up costs at the Sites. A number of the largest PRP's formed a steering committee, which is chaired by the Company. The responsibility of the Committee is to direct clean-up activities, determine appropriate cost allocation, and pursue actions against recalcitrant parties, if necessary. The EPA issued an administrative order on consent requiring signatories to perform certain investigative work at the Sites. The steering committee retained a consultant to prepare an analysis regarding the Sites. The site evaluations have been completed. The EPA is developing an allocation formula to allocate the remediation costs. The Company has recorded preliminary liability for the Sites of $650,000, of which approximately $150,000 has been spent through December 31, 1999. Once evaluations are completed, the Company will be in a better position to estimate and record the ultimate liabilities for the Sites. 77 Additionally, the Company has four wells which currently exceed the federal drinking water standard for naturally occurring arsenic concentrations. Production from three of these wells continues by blending water treated at the Glendale Water Treatment Plant. The fourth well is out of service pending treatment. The Company's water laboratory research staff is developing options to assure that the Company is prepared to meet new arsenic standards. The new Arsenic regulations will be promulgated in 2000 and the proposed regulation is expected to require action on 17 of the 25 wells serving the Company's system. Depending upon final rules from the EPA, the Company may incur between $70 million and $98 million by 2004 to meet the new standards. As part of the Generation Divestiture process, SPPC conducted Phase I and Phase II Environmental Assessments for its Ft. Churchill, Tracy and Valmy Power Plants. Anticipated remediation cost is $150,000. See Notes 1, 3, 4, 6, 8, 11, and 12 of SPPC's consolidated financial statements for additional commitments and contingencies. SPPC, through the course of its normal business operations, is currently involved in a number of other legal actions, none of which has had or, in the opinion of management, is expected to have a significant impact on its financial position or results of operations. NOTE 14. SEGMENT INFORMATION The Company adopted FASB statement No. 131, Disclosure about Segments of an Enterprise and Related Information for its annual reports as of December 31, 1998. The Company operates three business segments providing regulated electric, natural gas and water service. Electric service is provided to northern Nevada and the Lake Tahoe area of California. Natural gas and water services are provided in the Reno-Sparks area of Nevada. Other segment information includes segments below the quantitative threshold for separate disclosure. Information as to the operations of the different business segments is set forth below based on the nature of products and services offered. The Company evaluates performance based on several factors, of which the primary financial measure is business segment operating income. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies (Note 1). Intersegment revenues are not material. Financial data for business segments is as follows (in thousands):
Electric Gas Water Reconciling December 31, 1999 Eliminations Consolidated Operating revenues $ 609,197 $100,177 $ 54,348 763,722 Operating income 102,460 10,243 17,133 129,836 Operating income taxes 30,986 2,884 2,172 36,042 Depreciation 64,647 5,115 7,611 77,373 Interest expense on long term debt 27,803 3,348 9,112 40,263 Assets 1,620,720 152,016 280,057 43,683 2,096,476 Capital expenditures 102,249 12,041 28,016 142,306
78
Reconciling Consolidated December 31, 1998 Electric Gas Water Eliminations Operating revenues $ 585,657 $ 99,532 $ 49,143 $ 734,332 Operating income 103,728 10,534 11,932 126,194 Operating income taxes 34,611 5,142 3,797 43,550 Depreciation 57,180 4,810 7,445 69,435 Interest expense on long term debt 25,497 3,601 9,792 38,890 Assets 1,558,322 139,398 274,124 39,976 2,011,820 Capital expenditures 144,080 11,124 28,180 183,384
Consolidated December 31, 1997 Electric Gas Water Reconciling Eliminations Operating Revenues $540,346 $70,675 $46,519 $657,540 Operating income 99,671 10,057 10,444 120,172 Operating income taxes 33,742 4,223 2,422 40,387 Depreciation 52,239 4,531 7,347 64,117 Interest expense on long 28,095 3,312 8,202 39,609 term debt Capital expenditures 105,531 12,191 30,079 147,801
The reconciliation of segment assets to the consolidated total includes the following unallocated amounts:
1999 1998 ------------- -------------- Other property $ 2,661 $ 1,342 Cash 3,011 15,197 Current assets- other 3,103 2,692 Other regulatory assets 34,571 21,031 Deferred charges- other 337 (286) -------------- -------------- $43,683 $39,976 ============== ==============
NOTE 15. QUARTERLY FINANCIAL DATA (unaudited) (Dollars in thousands):
Quarter Ended ------------------------------------------------------------ March 31, June 30, Sept. 30, Dec. 31, 1999 1999 1999 1999 --------------------------------------------------------------- Operating Revenues $192,611 $179,818 $194,802 $196,491 Operating Income 35,773 29,837 32,527 31,699 Income Before Preferred Dividend Requirements 22,471 16,892 13,815 18,548 Income Applicable to Common Stock 21,106 15,527 12,450 17,158
79
Quarter Ended ------------------------------------------------------------ March 31, June 30, Sept. 30, Dec. 31, 1998 1998 1998 1998 ------------------------------------------------------------ Operating Revenues $182,722 169,143 187,446 $195,021 Operating Income 33,138 27,308 33,626 $ 32,122 Income Before Preferred Dividend Requirement 23,194 17,705 23,751 $ 21,370 Income Applicable to Common Stock 21,829 16,340 22,386 $ 20,006
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS (a) Directors The following is a listing of all the current directors of SPPC and their ages as of December 31, 1999. There are no family relationships among them. Directors serve three-year terms with four (or five) terms of office expiring at each Annual Meeting, or until their successors have been elected and qualified. Directors whose terms expire in 2000: Edward P. Bliss, 67 Consultant to Scudder Kemper Investments Co; retired partner, Loomis, Sayles & Company, Inc., an investment counsel firm in Boston, Massachusetts. He is also a Director of Seaboard Petroleum, Midland, Texas. Mr. Bliss has served as a Director of SPR since 1991, of SPPC since 1991, and was elected a Director of NVP in July 1999. Mary Kaye Cashman, 48 Chief Executive Officer and Vice Chairman of the Board since 1995 of Cashman Equipment Company, one of the oldest and largest Caterpillar dealers in North America. She serves on the boards of the Nevada Test Site Development Corporation; Mackay School of Mines Advisory Board at the University of Nevada, Reno; Bishop Gorman High School Endowment Foundation; and McCaw Elementary School of Mines Foundation. Ms. Cashman has served as a Director of NVP since 1997, and was elected a Director of SPR and SPPC in July 1999. Ms. Cashman tendered her resignation as a Director on March 8, 2000. 80 Mary Lee Coleman, 62 President of Coleman Enterprises, a developer of shopping centers and industrial parks. She is also a director of First Dental Health. Ms. Coleman has served as a Director of NVP since 1980, and was elected a Director of SPR and SPPC in July 1999. Jerry E. Herbst, 61 Chief Executive Officer of Terrible Herbst, Inc., a gas station, car wash, convenience store chain; and Herbst Supply Co., Inc., a wholesale fuel distributor; family-owned businesses for which he has worked since 1959. He is also a partner of the Coast Resorts (hotel and casino industry). Mr. Herbst has served as a Director of NVP since 1990, and was elected a Director of SPR and SPPC in July 1999. Directors whose terms expire in 2001: Theodore J. Day, 50 Senior Partner, Hale, Day, Gallagher Company, a real estate brokerage and investment firm. Mr. Day has served as a Director of SPPC since 1986, of SPR since 1987, and was elected a Director of NVP in July 1999. He is also a Director of the W.M. Keck Foundation. James R. Donnelley, 64 Vice Chairman of the Board, R.R. Donnelley & Sons Company, since July 1990, and a Director of that company since 1976. Mr. Donnelley was R.R. Donnelley and Sons' Group President, Corporate Development from June 1987 to July 1990, and Group President, Financial Printing Services Group from January 1985 to January 1988. He is also a Director of Pacific Magazines & Printing Limited, and Chairman of National Merit Scholarship Corporation. Mr. Donnelley has served as a Director of SPR since 1987, of SPPC since 1992, and was elected a Director of NVP in July 1999. John L. Goolsby, 57 Retired President and Chief Executive Officer of The Howard Hughes Corporation, a real estate investment and land development company. Mr. Goolsby became affiliated with The Howard Hughes Corporation in 1980 and served as President from 1988-1998. He is also a director of America West ---------------------------------- Holdings Corporation and Tejon Ranch Company. Mr. Goolsby has served as a ----------------------- Director of NVP since 1991, and was elected a Director of SPR and SPPC in July 1999. 81 Malyn K. Malquist, 47, President and Chief Executive Officer Mr. Malquist was elected President, Chief Operating Officer, and a Director of SPR, and President, Chief Executive Officer, and a Director of NVP and SPPC upon the close of SPR's merger with NVP in July 1999. He was previously elected President and Chief Executive Officer of SPR and SPPC in January 1998. In February 1998, Mr. Malquist was elected to the additional position of Chairman. Mr. Malquist continued to hold the positions of Chairman and Chief Executive Officer until SPR's merger with NVP in July 1999. He was Senior Vice President - Distribution Services Business Group and Principal Operations Officer from August 1996 to January 1998. He served as Senior Vice President and Chief Financial Officer of SPR and SPPC from April 1994, when he joined SPR, until August 1996. Prior to joining SPR, Mr. Malquist was with San Diego Gas and Electric, where from 1978 he held various financial positions, including Treasurer and Vice President. John F. O'Reilly, 54 Chairman and Chief Executive Officer of the law firm of Keefer, O'Reilly, Ferrario and Lubbers. Mr. O'Reilly is also Chairman and Chief Executive Officer of the O'Reilly Gaming Group and is Chairman of the Nevada Test Site Development Corporation. Mr. O'Reilly has served as a Director of NVP since 1995, and was elected a Director of SPR and SPPC in July 1999. Directors whose terms expire in 2002: Krestine M. Corbin, 62 President and Chief Executive Officer of Sierra Machinery, Incorporated since 1984 and a director of that company since 1980. She also serves on the Federal Reserve Bank Twelfth District Head Board. Ms. Corbin has served as a Director of SPR since 1991, of SPR since 1989, and was elected a Director of NVP in July 1999. Fred D. Gibson, Jr., 72 Retired Chairman, President and Chief Executive Officer, but remains as a director, of American Pacific Corporation, a manufacturer of chemicals and pollution abatement equipment and a real estate developer. Mr. Gibson has been affiliated with American Pacific Corporation and its predecessor, Pacific Engineering & Production Co., since 1956. He is also a director of Cashman Equipment Company. Mr. Gibson has served as a Director of NVP since 1978, and was elected a Director of SPR and SPPC in July 1999. James L. Murphy, 70 Certified Public Accountant and retired partner of and consultant to Grant Thornton L.L.P., an international accounting and management consulting firm. Mr. Murphy is the owner, independent trustee and general partner of several real estate development projects and numerous rental properties. He is also a retired Colonel in the United States Air Force Reserve. Mr. Murphy has served as a Director of SPPC since 1990, of SPR since 1992, and was elected a Director of NVP in July 1999. 82 Michael R. Niggli, 50, Chairman and Chief Executive Officer Mr. Niggli was elected Chairman and Chief Executive Officer of SPR, and Chairman of NVP and SPPC, upon the close of SPR's merger with NVP in July 1999. He joined NVP as President and Chief Operating Officer in February 1998. He was appointed by NVP's Board of Directors as Chief Executive Officer effective February 23, 1999 and as Chairman on June 10, 1999. Prior to joining NVP, Mr. Niggli was Senior Vice President of the Custom Accounts Market Unit for Entergy, a New Orleans-based global energy company. Beginning in 1988, he also served at Entergy as Senior Vice President of Marketing and in Vice President positions for areas including fuels, strategic planning and customer service. Dennis E. Wheeler, 57 Chairman, President and Chief Executive Officer of Coeur d'Alene Mines Corporation since 1986. Mr. Wheeler has served as a Director of SPR since 1990, of SPPC since 1992, and was elected a Director of NVP in July 1999. All of the present Directors are Directors of SPR. Messrs. Malquist and Murphy are Directors of Lands of Sierra, Inc.; Messrs. Day and Malquist are Directors of Tuscarora Gas Pipeline Co.; Mr. Niggli is a Director of Sierra Pacific Communications; Mr. Malquist is a Director of Sierra Water Development Company, Sierra Gas Holdings Co., Pinon Pine Corp., and Pinon Pine Investment Co. All of the above listed companies are affiliates of SPPC with the exception of GPSF-B, Pinon Pine Corp., and Pinon Pine Investment Co, which are subsidiaries. (b) Executive Officers The following are current executive officers of the companies indicated and their ages as of December 31, 1999. There are no family relationships among them. Officers serve a term which extends to and expires at the annual meeting of the Board of Directors or until a successor has been elected and qualified: Michael R. Niggli, 50, Chairman, Board of Directors See description under Item 10(a), "Directors," page 83 Malyn K. Malquist, 47, President and Chief Executive Officer See description under Item 10(a), "Directors," page 82. Steven W. Rigazio, 45, Senior Vice President, Energy Delivery Mr. Rigazio was elected Senior Vice President, Energy Delivery, in July 1999, and holds the same position with NVP. Previously he was Vice President, Finance and Planning, Treasurer, and Chief Financial Officer for NVP effective October 1993. Other NVP management positions include Vice President and Treasurer, Chief Financial Officer; Vice President, Planning; Director of System Planning; Manager of Rates and Regulatory Affairs; and Supervisor of Rates and Regulations. Mr. Rigazio has been with NVP since 1984. 83 William E. Peterson, 52, Senior Vice President, General Counsel and Corporate Secretary Mr. Peterson was elected to his present position in January 1994, and holds the same positions with the Company's parent, SPR, and with NVP. He was previously Senior Vice President, Corporate Counsel for SPPC from July 1993 to January 1994. Prior to joining the Company in 1993, he served as General Counsel and Resident Agent for SPR since 1992, while a partner in the Woodburn and Wedge law firm. He was a partner in the Woodburn and Wedge law firm since 1982. Mark A. Ruelle, 38, Senior Vice President, Chief Financial Officer and Treasurer Mr. Ruelle was elected to his present position March 1, 1997, and holds the same positions with SPR and NVP. Prior to joining the Company, Mr. Ruelle was President of Westar Energy, a subsidiary of Western Resources in 1996, and before that, served as Vice President, Corporate Development for Western Resources in 1995. Mr. Ruelle was with Western Resources since 1987 and served in numerous positions in regulatory affairs, treasury, finance, corporate development, and strategy planning. David G. Barneby, 54, Vice President, Generation Mr. Barneby was elected Vice President, Generation, in July 1999, and holds the same position with NVP. Previously he was elected Vice President, Power Delivery for NVP effective October 1993. Mr. Barneby has been with NVP since 1965, and other management positions include Vice President, Generation; Manager, Generation Engineering and Construction; and Superintendent and Project Manager, Reid Gardner Unit 4. Jeffrey L. Ceccarelli, 45, Vice President, Distribution Services, New Business Mr. Ceccarelli was elected Vice President, Distribution Services, New Business, in July 1999, and holds the same position with NVP. He was elected Vice President, Distribution Services in February 1998. Prior to this, he served as Executive Director, Distribution Services. From January 1996 through January 1998, Mr. Ceccarelli was Director, Customer Operations. A civil engineer, Mr. Ceccarelli has been with the Company since 1972 and has held numerous management positions in operations, customer service, design and engineering. Gloria T. Banks Weddle, 50, Vice President, Corporate Services Ms. Weddle was elected Vice President, Corporate Services of the Company in July 1999, and was elected to the same position with NVP in January 1996. Previously she was Vice President, Human Resources and Corporate Services for NVP effective October 1993. Other NVP management positions include Vice President, Human Resources; Director of Human Resources; and Manager of Compensation and Benefits. Ms. Weddle has been with NVP since 1973. Matt H. Davis, 44, Vice President, Distribution Services, Operations and Maintenance Mr. Davis was elected Vice President, Distribution Services, Operations and Maintenance in July 1999, and holds the same position with NVP. Previously he was Director, System Planning and Division Director, System Planning and Operations for NVP. Mr. Davis has been with NVP since 1978 and has held various positions in the distribution, transmission, power contracts, and land services departments. 84 Mary O. Simmons, 44, Controller Ms. Simmons was elected to her current position in June 1997, and holds the same position with SPR and NVP. Her previous positions include: Director, Water Policy and Planning; Director, Budgets and Financial Services; and Assistant Treasurer, Shareholder Relations for SPR. Ms. Simmons, a certified public accountant, has been with the Company since 1985. Douglas R. Ponn, 52, Vice President, Governmental and Regulatory Affairs Mr. Ponn was elected Vice President, Governmental and Regulatory Affairs in July 1999, and holds the same position with NVP. Previously he was Executive Director, Governmental and Regulatory Affairs. Mr. Ponn has been with the Company since 1986. Mary Jane Reed, 53, Vice President, Human Resources Ms. Reed was elected Vice President, Human Resources of the Company in January 1997, and was named to the same position with NVP in July 1999. She was previously Vice President, Human Resources Network Group for Bell Atlantic Corporation. Ms. Reed was with Bell Atlantic from 1968 - 1996 and in addition to the Vice President's position, served as Director of Human Resources, Assistant to the President for Consumer Affairs, and several other managerial positions. Although all outstanding shares of the Company's common stock are held by SPR and it is SPR's common stock which is traded on the New York Stock Exchange, SPPC has four series of non-voting preferred stock still outstanding and registered under the Securities Exchange Act of 1934 ("the Act"). As a technical matter, the Company is thus deemed an "issuer" for purposes of the Act whose officers are required to make filings with respect to beneficial ownership, if any, of those non-voting preferred securities. The Company's officers, all of whom are currently reporting pursuant to Section 16(a) of the Act with respect to SPR's common stock, have now filed reports with respect to the Company's preferred stock, which reports show no past or current beneficial ownership of such preferred stock. 85 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth information about the compensation of each Chief Executive Officer that served in that position during 1999, and each of the four most highly compensated officers for services in all capacities to SPR and its subsidiaries.
Annual Compensation Long-Term Compensation ------------------------------------------------------------------------------------------------------ Awards Payout ----------------------------------------------------------- Securities Restricted Underlying Name and Principal Other Annual Stock Options/ LTIP All Other Position Year Salary ($) Bonus ($) Compensation ($) Awards ($) SARs (#) Payouts ($) Compensation ($) (a) (b) (c) (d) (2) (e) (3) (f) (g) (4) (h) (5) (i) (6) - ---------------------------------------------------------------------------------------------------------------------------------- Michael R. Niggli (1) 1999 $400,000 $255,130 $ 1,183 - 123,000 $410,306 $ 8,934 Chairman and Chief 1998 $353,846 $216,000 $11,161 - - $115,399 $79,743 Executive Officer Malyn K. Malquist (1) 1999 $352,692 $199,875 $14,337 - 298,792 - $22,021 President and Chief 1998 $292,960 $180,900 $16,486 - 61,000 $ 85,184 $15,805 Operating Officer 1997 $212,803 $ 92,198 $ 2,052 - 14,000 $101,192 $15,279 Steven W. Rigazio 1999 $262,075 $ 81,700 $60,654 - 36,260 $127,712 $ 6,811 Senior Vice President, 1998 $219,462 $ 30,750 $13,712 - - $ 29,304 $ 4,800 Energy Delivery 1997 $202,269 $ 48,750 $11,736 - - $ 36,594 $ 4,800 Mark A. Ruelle 1999 $196,654 $ 86,658 $ 7,389 - 61,292 - $ 8,565 Senior Vice President, 1998 $192,116 $ 72,843 $12,342 - 9,000 $ 50,108 $ 8,974 Chief Financial Officer 1997 $143,308 $ 65,269 $ 3,808 - 8,384 - $77,329 and Treasurer William E. Peterson 1999 $200,000 $ 83,053 $20,727 - 80,168 - $11,974 Senior Vice President, 1998 $199,385 $ 71,503 $18,918 - 9,000 $ 85,184 $29,939 General Counsel and 1997 $207,757 $ 78,184 $17,142 - 10,000 $101,192 $29,488 Corporate Secretary Gloria T. Banks-Weddle 1999 $185,769 $ 57,564 $41,358 - 18,220 $101,582 $ 7,371 Vice President, 1998 $177,222 $ 54,000 - - - $ 29,960 $ 4,514 Corporate Services 1997 $164,539 $ 25,500 - - - - $ 3,067 - ----------------------------------------------------------------------------------------------------------------------------------
1. Mr. Malquist was Chairman, President and Chief Executive Officer of Sierra Pacific Resources until the August 1, 1999 merger, at which time Mr. Malquist was named President and Chief Executive Officer of SPPC, and President and Chief Operating Officer of the parent, SPR; and Mr. Niggli was appointed Chairman of the Board of Directors and Chief Executive Officer of the parent, SPR, and Chairman of the Board of Directors of SPPC. 2. The amounts presented for 1999, and those for SPR executives in 1998 and 1997, represent incentive pay received pursuant to SPR's "pay for performance" team incentive plan approved by stockholders in May, 1994. The 1998 and 1997 amounts for the NVP executives represent pay received according to the NVP Short-Term Incentive Plan. 3. For the executives listed, with the exceptions noted below, these amounts represent Personal Time Off payouts. For Mr. Rigazio and Ms. Banks-Weddle, the Personal Time Off payouts were $17,881 and $5,596 respectively. Also included for these executives is the amount of those perquisites, which in the aggregate, exceeded the lesser of $50,000 or 10% of their salary and bonus. Due to a change in policies after the merger, the NVP executives were either given their company vehicle, or allowed to purchase it at a bargain price. The fair market value and the related tax gross-up, less any amount paid by the executive, if applicable, was included as compensation for the executives. Mr. 86 Rigazio and Ms. Banks-Weddle received, as compensation for their automobiles, $42,774 and $35,762 respectively. 4. As a result of the August 1, 1999 merger with Nevada Power Company, all SPR nonqualifying stock options outstanding as of that date were converted at a ratio of 1.44:1. For the pre-merger SPR executives, the 1999 option amounts include the number of new shares issued during the year, as well as the total number of shares that were converted for that employee. For 1998 and 1997, the amounts are the same as those presented in prior years and do not reflect the conversion. 5. The Long-term incentive payouts for the SPR executives, for the three-year period January 1, 1997 to December 31, 1999, was not approved for payment by the SPR Board of Directors; therefore, zero amounts are shown in 1999 for the pre-merger SPR executives. Nevada Power executives received a lump sum payout of all their performance shares as a result of the August 1, 1999 merger. 6. Amounts for All Other Compensation include the following for 1999:
- ------------------------------------------------------------------------------------------------------------------------- Michael R. Malyn K. Steven W. Mark A. William E. Gloria T. Description Niggli Malquist Rigazio Ruelle Peterson Banks-Weddle - ------------------------------------------------------------------------------------------------------------------------- Company contributions to $6,639 $ 6,000 $6,659 $6,000 $6,000 $7,204 the 401k deferred compensation plan Company contributions to $14,225 $2,000 $4,126 the nonqualified deferred compensation plan Imputed income on group $ 528 $ 152 $ 176 $ 643 $ 166 term life insurance premiums paid by the Company Insurance premiums paid for $2,294 $ 1,268 $ 389 $1,205 executive term life policies - -------------------------------------------------------------------------------------------------------------------------
Options/SAR Grants in Last Fiscal Year The following table shows all grants of options to the named executive officers of SPR in 1999. Pursuant to Securities and Exchange Commission (SEC) rules, the table also shows the present value of the grant at the date of grant.
- ------------------------------------------------------------------------------------------------------------------------------------ Percent of Total Number of Securities Options/SAR's Granted Underlying to Employees in Exercise of Base Grant Date Name Options/SAR's Granted Fiscal Year Price ($/share) Expiration Date Present Value (a) (1) (b) (2) (c) (3) (d) (e) (f) (4) - ------------------------------------------------------------------------------------------------------------------------------------ Michael R. Niggli 08/01/1999 Grant 123,000 14.77% $26.00 08/01/2009 $ 628,530 Employee Total 123,000 14.77% $ 628,530 Malyn K. Malquist 08/01/1999 Grant 87,840 10.55% $26.00 08/01/2009 $ 448,862 01/01/1999 Grant 87,840 10.55% $24.22 01/01/2009 $ 355,752 01/01/1998 Grant 87,840 10.55% $24.93 01/01/2008 $ 275,110 01/01/1997 Grant 20,160 2.42% $19.97 01/01/2007 $ 49,157 01/01/1996 Grant 5,045 0.61% $16.23 01/01/2006 $ 7,459 01/01/1995 Grant 6,092 0.73% $13.02 01/01/2005 01/01/1994 Grant 3,975 0.48% $14.24 01/01/2004 Employee Total 298,792 35.89% $1,136,340
87 Steven W. Rigazio 08/01/1999 Grant 23,300 2.80% $26.00 08/01/2009 $119,063 01/01/1999 Grant 12,960 1.56% $24.22 01/01/2009 $ 52,488 Employee Total 36,260 4.36% $171,551 Mark A. Ruelle 08/01/1999 Grant 23,300 2.80% $26.00 08/01/2009 $119,063 01/01/1999 Grant 12,960 1.56% $24.22 01/01/2009 $ 52,488 01/01/1998 Grant 12,960 1.56% $24.93 01/01/2008 $ 40,590 01/01/1997 Grant 12,072 1.45% $19.97 01/01/2007 $ 29,436 Employee Total 61,292 7.37% $241,577 William E. Peterson 08/01/1999 Grant 23,300 2.80% $26.00 08/01/2009 $119,063 01/01/1999 Grant 12,960 1.56% $24.22 01/01/2009 $ 52,488 01/01/1998 Grant 12,960 1.56% $24.93 01/01/2008 $ 40,590 01/01/1997 Grant 14,400 1.73% $19.97 01/01/2007 $ 35,112 01/01/1996 Grant 5,045 0.61% $16.23 01/01/2006 $ 7,459 01/01/1995 Grant 6,092 0.73% $13.02 01/01/2005 01/01/1994 Grant 5,411 0.65% $14.24 01/01/2004 Employee Total 80,168 9.64% $254,712 Gloria T. Banks-Weddle 08/01/1999 Grant 10,300 1.24% $26.00 08/01/2009 $ 52,633 01/01/1999 Grant 7,920 0.95% $24.22 01/01/2009 $ 32,076 Employee Total 18,220 2.19% $ 84,709 - --------------------------------------------------------------------------------
1. Under the SPR executive long-term incentive plan, the 1999 grants of nonqualifying stock options were made on January 1. One third of these grants vest annually commencing one year after the date of the grant. An additional grant of nonqualifying stock options was made on August 1, 1999, following the merger with Nevada Power Company. One third of these grants vest annually commencing January 1, 2001. 2. As a result of the August 1, 1999 merger with Nevada Power Company, all SPR nonqualifying stock options outstanding as of that date were converted at a ratio of 1.44:1. This resulted in the repricing of each grant and a change in the number of outstanding shares for each employee. According to SEC regulations, these repriced options are listed above as grants issued during the year. The vesting periods and expiration dates of the grants were not changed. 3. The total number of nonqualifying stock options granted to all employees in 1999 was 832,983. 4. The hypothetical grant date present values are calculated under the Black- Scholes Model. The Black-Scholes Model is a mathematical formula used to value options traded on stock exchanges. The assumptions used in determining the option grant date present value listed above include the stock's average expected volatility (17.77%), average risk free rate of return (5.94%), average projected dividend yield (4.30%), the stock option term (10 years), and an adjustment for risk of forfeiture during the vesting period (3 years at 3%). No adjustment was made for non- transferability. 88 Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values The following table provides information as to the value of the options held by the named executive officers at year end measured in terms of the closing price of Sierra Pacific Resources common stock on December 31, 1999.
- ------------------------------------------------------------------------------------------------------------------------------------ Shares Number of Securities Underlying Acquired on Value Unexercised Options/SARs at Value of Unexercised in-the-money Name Exercise Realized Fiscal Year-End Options/SARs at Fiscal Year-End (a) (b) (c) (d) (e) ------------------------------------------------------------------------- Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------------------------------------------------------------------------------------------------ Michael R. Niggli - - - 123,000 - - Malyn K. Malquist - - 54,593 244,199 $36,384 $7,400 Steven W. Rigazio - - - 36,260 - - Mark A. Ruelle - - 12,368 48,924 - - William E. Peterson - - 27,232 52,936 $40,798 $7,400 Gloria T. Banks-Weddle - - - 18,220 - - - ------------------------------------------------------------------------------------------------------------------------------------
(e) Pre-tax gain. Value of in-the-money options based on December 31, 1999 closing trading price of $17.31 less the option exercise price. Long-Term Incentive Plans-Awards in Last Five Years The executive long-term incentive plan (LTIP) provides for the granting of stock options (both nonqualified and qualified), stock appreciation rights (SARs), restricted stock performance units, performance shares and bonus stock to participating employees as an incentive for outstanding performance. Incentive compensation is based on the achievement of pre-established financial goals for SPR. Goals are established for total shareholder return (TSR) compared against the Dow Jones Utility Index and annual growth in earnings per share (EPS). The following table provides information as to the performance shares granted to the named executive officers of Sierra Pacific Power Company in 1999. Nonqualifying stock options granted to the named executives as part of the LTIP are shown in the table "Option/SAR Grants in Last Fiscal Year."
- ----------------------------------------------------------------------------------------------------------------------------- Estimated Future Payouts Under Non-Stock Price- Based Plans --------------------------------------------------- Performance or Number of Shares, Other Period Until Units or Other Maturation or Name Rights Payout Threshold ($) Target ($) Maximum ($) (a) (b) (c) (d)(1) (e)(2) (f)(3) - ----------------------------------------------------------------------------------------------------------------------------- Michael R. Niggli 6,480 3 years $78,473 $156,946 $274,655 Malyn K. Malquist 6,480 3 years $78,473 $156,946 $274,655 Steven W. Rigazio 1,872 3 years $22,670 $ 45,340 $ 79,345 Mark A. Ruelle 1,872 3 years $22,670 $ 45,340 $ 79,345 William E. Peterson 1,872 3 years $22,670 $ 45,340 $ 79,345 Gloria T. Banks-Weddle 1,152 3 years $13,951 $ 27,901 $ 48,828 - ------------------------------------------------------------------------------------------------------------------------------------
1. The threshold represents the level of TSR and EPS achieved during the cycle which represents minimum acceptable performance and which, if attained, results in payment of 50% of the target award. Performance below the minimum acceptable level results in no award earned. 89 2. The target represents the level of TSR and EPS achieved during the cycle which indicates outstanding performance and which, if attained, results in payment of 100% of the target award. 3. The maximum represents the maximum payout possible under the plan and a level of TSR and EPS indicative of exceptional performance which, if attained, results in a payment of 175% of the target award. All levels of awards are made with reference to the price of each performance share at the time of the grant. Pension Plans The following table shows annual benefits payable on retirement at normal retirement age 65 to elected officers under the Company's defined benefit plans based on various levels of remuneration and years of service which may exist at the time of retirement.
- ---------------------------------------------------------------------------------------- Highest Average Annual Benefits for Years of Service Indicated Five-Years Remuneration 15 Years 20 Years 25 Years 30 Years 35 Years - ---------------------------------------------------------------------------------------- $ 60,000 $ 27,000 $ 31,500 $ 36,000 $ 36,000 $ 36,000 $120,000 $ 54,000 $ 63,000 $ 72,000 $ 72,000 $ 72,000 $180,000 $ 81,000 $ 94,500 $108,000 $108,000 $108,000 $240,000 $108,000 $126,000 $144,000 $144,000 $144,000 $300,000 $135,000 $157,500 $180,000 $180,000 $180,000 $360,000 $162,000 $189,000 $216,000 $216,000 $216,000 $420,000 $189,000 $220,500 $252,000 $252,000 $252,000 $480,000 $216,000 $252,000 $288,000 $288,000 $288,000 $540,000 $243,000 $283,500 $324,000 $324,000 $324,000 $600,000 $270,000 $315,000 $360,000 $360,000 $360,000 $660,000 $297,000 $346,500 $396,000 $396,000 $396,000 $720,000 $324,000 $378,000 $432,000 $432,000 $432,000 - ----------------------------------------------------------------------------------------
The Company's noncontributory retirement plan provides retirement benefits to eligible employees upon retirement at a specified age. Annual benefits payable are determined by a formula based on years of service and final average earnings consisting of base salary and incentive compensation. Remuneration for the named executives is the amount shown under "Salary" and "Incentive Pay" in the "Summary Compensation Table. Pension costs of the retirement plan to which the Company contributes 100% of the funding are not and cannot be readily allocated to individual employees and are not subject to Social Security or other offsets. Years of credited service for the named executives are as follows: Mr. Niggli, 0.9; Mr. Malquist, 4.6; Mr. Rigazio, 14.5; Mr. Ruelle, 1.8; Mr. Peterson, 12.5; and Ms. Banks-Weddle, 19.8. A supplemental executive retirement plan (SERP) and an excess plan are also offered to the named executive officers. The SERP is intended to ensure the payment of a competitive level of retirement income to attract, retain and motivate selected executives. The excess plan is intended to provide benefits to executive officers whose pension benefits under the Company's retirement plan are limited by law to certain maximum amounts. 90 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Voting Stock SPR owns 100% of the voting stock of SPPC. The table below sets forth the shares of Sierra Pacific Resources Common Stock beneficially owned by each director, nominee for director, the Chief Executive Officer, and the four other most highly compensated executive officers. No director, nominee for director or executive officer owns, nor do the directors and executive officers as a group own, in excess of one percent of the outstanding Common Stock of SPR. Unless otherwise indicated, all persons named in the table have sole voting and investment power with respect to the shares shown.
Common Shares Beneficially Percent of Total Common Owned as of Shares Outstanding as of Name of Director or Nominee March 1, 2000 March 1, 2000 --------------------------- ----------------- ------------------------ Edward P. Bliss 22,988 Mary K. Cashman 9,054 Mary L. Coleman 262,656 Krestine M. Corbin 16,454 Theodore J. Day 31,429 No director or nominee James R. Donnelley 30,129 for director owns in excess Fred D. Gibson Jr. 7,708 of one percent John L. Goolsby 7,965 Jerry E. Herbst 5,100 Malyn K. Malquist 158,479 James L. Murphy 18,285 Michael R. Niggli 43,867 John F. O'Reilly 4,000 Dennis E. Wheeler 13,635 ------- 631,749 ======= Common Shares Beneficially Percent of Total Common Owned as of Shares Outstanding as of Executive Officers March 1, 2000 March 1, 2000 ------------------ ----------------- ------------------------ Charles A. Lenzie (1) 9,475 Michael R. Niggli (1) 43,867 Malyn K. Malquist (1) 158,479 No executive officer owns Steven W. Rigazio 20,553 in excess of one percent Mark A. Ruelle 35,444 William E. Peterson 55,993 Gloria T. Banks-Weddle 6,839 ------- 330,650 ======= All directors and executive officers as a group (a) (b) (c) 876,275 =======
(1) Mr. Malquist was Chairman, President and Chief Executive Officer of Sierra Pacific Resources until the August 1, 1999 merger, at which time Mr. Malquist was named President and Chief Executive Officer of SPPC, and President and Chief Operating Officer of the parent, SPR, and Mr. 91 Niggli was appointed Chairman of the Board of Directors and Chief Executive Officer of the parent, SPR, and Chairman of the Board of Directors of SPPC. (a) Includes shares acquired through participation in the Employee Stock Purchase Plan and/or the 401(k) plan. (b) The number of shares beneficially owned includes shares which the Executive Officers currently have the right to acquire pursuant to stock options granted, and performance shares earned under the Executive Long-Term Incentive Plan. Share beneficially owned pursuant to stock options granted to Messrs. Niggli, Malquist, Rigazio, Peterson, Ruelle, Banks-Weddle, and directors and executive officers as a group are 34,797, 151,365, 7,766, 50,668, 32,799 3,433, and 369,503 shares, respectively. (c) Included in the shares beneficially owned by the Directors are 45,913 shares of "phantom stock" representing the actuarial value of the Director's vested benefits in the terminated Retirement Plan for Outside Directors. The "phantom stock" is held in an account to be paid at the time of the Director's departure from the Board. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS SPR entered into an agreement with Hale Day Gallagher Co., a real estate brokerage and investment company, to act as broker for the sale of a property owned by Lands of Sierra, Inc., a subsidiary of SPR. The sale of the property resulted in Hale Day Gallagher Co. receiving a standard brokerage commission of 5% of the selling price. Mr. T.J. Day, a senior partner of Hale Day Gallagher Co. and a Director of the Company, did not participate in any discussions or voting to retain the firm, had no relationship with, or interest in, the transaction, will receive no part of the commission, and no direct or indirect benefit from the transaction. Mr. Peterson, formerly a partner with the law firm of Woodburn and Wedge, became Senior Vice President and General Counsel for Sierra Pacific Resources in 1993. Woodburn and Wedge, which has performed legal services for Sierra Pacific Power Company since 1920 and for Sierra Pacific Resources and all of its subsidiaries from their inception, continues to perform legal work for the Company. Mr. Peterson's spouse, an equity partner in the firm since 1982, has performed work for the Company since 1976 and continues to do so from time to time. Susan Oldham, a former employee of SPPC specializing in water resources law, planning and policy accepted the Company's voluntary severance offering in December 1995. Ms. Oldham is the spouse of Steven C. Oldham, Vice President Transmission Business Group and Strategic Development for Sierra Pacific Power Company. Ms. Oldham, a licensed attorney in Nevada and California, has continued to perform specialized legal services in the water resources area for the Company on a contract basis. In 1999, SPPC purchased all of the plant assets of the Silver Lake Water Company. The stock is owned 50% by the Lear Family Trust and 50% by Moya Olsen Lear. Mr. Murphy, a Director of SPPC, and Mr. Dayton, a former director of SPPC and a director at the time of purchase, are trustees of the Lear Family Trust. Neither Mr. Murphy nor Mr. Dayton participated in any of the Company's discussions or deliberations to purchase the Silver Lake Water Company and neither received any benefit, either directly or indirectly, from the transaction. 92 Change in Control Agreement Employment Agreements - --------------------- Sierra Pacific Resources has entered into Employment Agreements with Messrs. Niggli and Malquist. Messrs. Niggli and Malquist are sometimes hereinafter individually referred to as the "Executive." The Employment Agreements became effective on July 28, 1999, and have an initial term of three years, which term would automatically be extended in the event of a Change in Control (as defined in the Agreements) to the third anniversary of the Change in Control (or the consummation of the Change in Control, if later). The extended term is subject to further extension on the occurrence of an additional Change in Control event. Pursuant to the Employment Agreements, Mr. Niggli will serve as Chairman and Chief Executive Officer of Sierra Pacific Resources, and Mr. Malquist will serve as President and Chief Operating Officer of Sierra Pacific Resources and Chief Executive Officer of Nevada Power Company and SPPC. Each Executive's Employment Agreement provides that he will receive annual base salary commensurate with his position and level of responsibility, as determined by the Sierra Pacific Board (or compensation committee thereof), but not less than the Executive's annual base salary as in effect immediately prior to the Merger. Base salary may not be decreased. Each Employment Agreement also provides that the Executive will be eligible to participate in any annual incentive and long-term cash incentive plans applicable to executive and management employees that are authorized by the Sierra Pacific Board (or compensation committee thereof), with such participation, subject to achievement of applicable performance measures, to be at annual target payout or grant levels, respectively, of not less than a percentage of the Executive's annual base salary equal to the corresponding target percentage of annual base salary in effect for the Executive under the Nevada Power or Sierra Pacific plans in which the Executive participated immediately prior to the Merger; provided, however, that the target percentages for one Executive shall in no event be less than the target percentages for the other Executive. The Executives also are entitled to participate in all employee benefit plans in which senior executives of Sierra pacific are entitled to participate, in certain fringe benefits and in the supplemental retirement plans in which they participated immediately prior to the Merger. If during the term of the Employment Agreement Sierra Pacific terminates the employment of the Executive for reasons other than cause (as defined in each Employment Agreement), death or disability or the Executive terminates his employment for good reason (as defined in each Employment Agreement), the Executive will receive, in addition to all compensation earned through the date of termination and coverage and benefits under all benefit and incentive compensation plans to which he is entitled pursuant to the terms thereof, a severance payment equal to three times the sum of his annual base salary and target annual bonus. In addition, the Executive will continue to receive health benefits (i.e., medical insurance, etc.) and life benefits on the same terms and conditions as prior to his termination for 36 months following his termination (the "Continuation Period"). The Executive has no duty to mitigate, but the health and life benefits listed above will be offset by any benefits payable to the Executive during the Continuation Period from another employer. Under the Employment Agreements, Sierra Pacific will pay any additional amounts sufficient to hold the Executive harmless for any excise tax that might be imposed as a result of the Executive being subject to the federal excise tax on "excess parachute payments" or similar taxes imposed by state or local law in connection with receiving any compensation or benefits pursuant to his Employment Agreement or otherwise that is considered contingent on a change in control. If the Executive dies, is terminated due 93 to permanent disability, is terminated for cause, or terminates for other than good reason, in each case during the term of the Employment Agreement, Sierra Pacific will pay to the Executive or the Executive's beneficiaries or estate, as the case may be, all compensation earned through the date of termination and benefits payable under applicable benefit and incentive compensation plans. A Change in Control for purposes of the Employment Agreements occurs (i) if Sierra Pacific merges or consolidates, or sells all or substantially all of its assets, and less than 65% of the voting power of the surviving corporation is owned by those stockholders who were stockholders of Sierra Pacific immediately prior to such merger or sale; (ii) any person acquires 20% or more of Sierra Pacific's voting stock; (iii) Sierra Pacific enters into an agreement or Sierra Pacific or any person announces an intent to take action, the consummation of which would otherwise result in a Change in Control, or the Board of Directors of Sierra Pacific adopts a resolution to the effect that a Change in Control has occurred; (iv) within a two-year period, a majority of the directors of Sierra Pacific at the beginning of such period cease to be directors; or (v) the stockholders of Sierra Pacific approve a complete liquidation or dissolution of Sierra Pacific. Severance Agreements - -------------------- Nevada Power Company On March 13, 1998, Gloria Banks Weddle, David G. Barneby, and Steven W. Rigazio entered into employment agreements with Nevada Power Company for a three-year term which would automatically be extended in the event of a Change in Control to the third anniversary of the Change in Control (or the consummation of the Change in Control, if later). The extended term is subject to further extension on the occurrence of a further Change in Control event. The announcement of the execution of the Merger Agreement constituted a Change in Control under the employment agreements, and the consummation of the Mergers constituted an additional change in control event. If during the term of the employment agreement Nevada Power terminates the employment of an executive officer for reasons other than cause (as defined in each employment agreement), death or disability, or the executive officer terminates his or her employment for good reason (as defined in each employment agreement), the executive officer will receive, in addition to all compensation earned through the date of termination and coverage and benefits under all benefit and incentive compensation plans to which the executive officer is entitled pursuant to the terms thereof, a severance payment equal to two times the sum of his or her annual base salary and target annual bonus. In addition, the executive officer will continue to receive health benefits (i.e., medical insurance, etc.) and life benefits which will be offset by any benefits payable to the executive officer during the applicable benefit continuation period from another employer. Under the employment agreements, the executive officer will receive additional amounts sufficient to hold the executive harmless for any excise tax that might be imposed by state or local law in connection with receiving any compensation or benefits pursuant to the employment agreement or otherwise that is considered contingent on a Change in Control. The annual incentive plans, 1993 Long-Term Incentive Plan and the Supplemental Executive Retirement Plan of Nevada Power, contained provisions relating to Change in Control. Under the annual incentive plans, after a Change in Control, eligible participants, whether or not the participants are terminated, including executive officers and participants who terminated prior to the Change in Control by reason of normal or early retirement or death, will have a right to an immediate cash payment of their annual awards, on a pro-rated basis, based on annual base salary and on the assumption that established targets at 100% achievement level for the year had been met. Under the 1993 Long-Term Incentive Plan, after a Change in Control, incentive compensation unit awards for outstanding performance periods will be immediately paid to participating executive officers in the 94 amount of one share of Nevada Power Common Stock for each incentive compensation unit. Under the Supplemental Executive Retirement Plan, the accrued benefit of each executive officer participating therein will become fully vested on the occurrence of a Change in Control. The consummation of the Mergers constituted a "Change in Control" under all the plans described above. Sierra Pacific Power Company In February 1997, SPR entered into severance agreements with Jeffrey L. Ceccarellli, Steven C. Oldham, William E. Peterson, Douglas R. Ponn, Mark A. Ruelle, Mary O. Simmons, and Mary Jane Reed. These agreements provide that, upon termination of the executive's employment within twenty-four months following a change in control of SPR (as defined in the agreements) either (a) by SPR for reasons other than cause (as defined in the agreements), death or disability, or (b) by the executive for good reason (as defined by the agreement, including a diminution of responsibilities, compensation, or benefits (unless, with respect to reduction in salary or benefits, such reduction is applicable to all senior executives of SPR and the acquirer)), the executive will receive certain payments and benefits. These severance payments and benefits include (i) a lump sum payment equal to three times the sum of the executive's base salary and target bonus, (ii) a lump sum payment equal to the present value of the benefits the executive would have received had be continued to participate in SPR's retirement plans for an additional 3 years (or, in the case of SPR's Supplemental Executive Retirement Plan only, the greater of three years or the period from the date of termination until the executive's early retirement date, as defined in such plan), and (iii) continuation of life, disability, accident and health insurance benefits for a period of thirty-six (36) months immediately following termination of employment. The agreements also provide that if any compensation paid, or benefit provided, to the executive, whether or not pursuant to the change-in-control agreements, would be subject to the federal excise tax on "excess parachute payments," payments and benefits provided pursuant to the agreement will be cut back to the largest amount that would not be subject to such excise tax, if such cutback results in a higher after-tax payment to the executive. The Board of Directors entered into these agreements in order to attract and retain excellent management and to encourage and reinforce continued attention to the executives' assigned duties without distraction under circumstances arising from the possibility of a change in control of SPR. In entering into these agreements, the Board was advised by Towers Perrin, the national compensation and benefits consulting firm described above, and Skadden, Arps, Slate, Meager & Flom, an independent outside law firm, to insure that the agreements entered into were in line with existing industry standards and provided benefits to management consistent with those standards. 95 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedules and Exhibits
Page ---- 1. Financial Statements: Independent Auditors' Report................................... 52 Consolidated Balance Sheets as of December 31, 1999 and 1998................................... 53 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997....................... 54 Consolidated Statements of Common Shareholder's Equity for the Years Ended December 31, 1999, 1998 and 1997......... 55 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998and 1997.................. 56 Consolidated Statements of Capitalization as of December 31, 1999 and 1998................................... 57 Notes to Consolidated Financial Statements..................... 58-80 2. Financial Statement Schedules: Independent Auditors' Report................................... 98 Schedule II - Consolidated Valuation and Qualifying Accounts... 99
All other schedules have been omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. Columns omitted from schedules have been omitted because the information is not applicable. 3. Exhibits: Exhibits are listed in the Exhibit Index on pages 100-107 (b) Reports on Form 8-K None. 96 SIGNATURES Pursuant to the requirements of Section 13 and 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. SIERRA PACIFIC POWER COMPANY By /S/ Malyn K. Malquist ---------------------- Malyn K. Malquist President, Chief Operating Officer and Director March 22, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 22nd day of March 2000. /S/ Mark A. Ruelle /S/ Mary O. Simmons -------------------------------------- -------------------------------------- Mark A. Ruelle Mary O. Simmons Senior Vice President, Controller Chief Financial Officer and Treasurer (Principal Accounting Officer) (Principal Financial Officer) /S/ Edward P. Bliss /S/ Mary Kaye Cashman -------------------------------------- -------------------------------------- Edward P. Bliss Mary Kaye Cashman Director Director /S/ Mary Lee Coleman /S/ Jerry E. Herbst -------------------------------------- -------------------------------------- Mary Lee Coleman Jerry E. Herbst Director Director /S/ Theodore J. Day /S/ James R. Donnelley -------------------------------------- -------------------------------------- Theodore J. Day James R. Donnelley Director Director /S/ John L. Goolsby /S/ Michael R. Niggli -------------------------------------- -------------------------------------- John L. Goolsby Michael R. Niggli Director Chairman, Chief Executive Officer Director /S/ John F. O'Reilly /S/ Krestine M. Corbin -------------------------------------- -------------------------------------- John F. O'Reilly Krestine M. Corbin Director Director /S/ Fred D. Gibson, Jr. /S/ James L. Murphy -------------------------------------- -------------------------------------- Fred D. Gibson, Jr. James L. Murphy Director Director /S/ Dennis E. Wheeler -------------------------------------- Dennis E. Wheeler Director
97 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholder of Sierra Pacific Power Company Reno, Nevada We have audited the consolidated financial statements of Sierra Pacific Power Company and subsidiaries (the Company") as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated February 29, 2000; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedule listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such 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. DELOITTE & TOUCHE LLC Reno, Nevada February 29, 2000 98 Schedule II - Consolidated Valuation and Qualifying Accounts For The Years Ended December 31, 1999, 1998 and 1997 (Dollars in Thousands)
Provision for Uncollectible Accounts ----------------- Balance at January 1, 1997 $ 2,196 Provision charged to income 1,411 Amounts written off, less recoveries (1,903) --------------- Balance at December 31, 1997 1,704 Balance at January 1, 1998 1,704 Provision charged to income 3,686 Amounts written off, less recoveries (1,929) --------------- Balance at December 31, 1998 3,461 Balance at January 1, 1999 3,461 Provision charged to income 2,005 Amounts written off, less recoveries (1,817) --------------- Balance at December 31, 1999 $ 3,649 ===============
99 SIERRA PACIFIC POWER COMPANY 1999 FORM 10-K EXHIBIT INDEX Exhibits filed with this Form 10-K are denoted with an asterisk (*). The other listed exhibits have been previously filed with the Securities and Exchange Commission and are incorporated herein by reference. (3) . Restated Articles of Incorporation of the Company dated May 19, 1987 (Exhibit (3)(A) to the 1993 Form 10-K) . Certificate of Amendments dated August 26, 1992 to Restated Articles of Incorporation of the Company dated May 19, 1987, in connection with the Company's preferred stock (Exhibit 3.1 to Form 8-K dated August 26, 1992) . Certificate of Designation, Preferences and Rights dated August 31, 1992 to Restated Articles of Incorporation of the Company dated May 19, 1987, in connection with the Company's Class A Series 1 Preferred Stock (Exhibit 4.3 to Form 8-K dated August 26, 1992) . By-laws of the Company, as amended through November 13, 1996 (Exhibit (3)(A) to Form 10-K for the year ended December 31, 1996) . Articles of Incorporation of Pinon Pine Corp., dated December 11, 1995 (Exhibit (3)(A) to Form 10-K for the year ended December 31, 1995) . Articles of Incorporation of Pinon Pine Investment Co., dated December 11, 1995 (Exhibit (3)(B) to Form 10-K for the year ended December 31, 1995) . Agreement of Limited Liability Company of Pinon Pine Company, L.L.C., dated December 15, 1995, between Pinon Pine Corp., Pinon Pine Investment Co. and GPSF-B INC 1995 (Exhibit (3)(C) to Form 10-K for the year ended December 31, 1995) . *(A) Amended and Restated Limited Liability Company Agreement of SPPC Funding LLC dated as of April 9, 1999, in connection with the issuance of California rate reduction bonds (4) . Mortgage Indentures of the Company defining the rights of the holders of the Company's First Mortgage Bonds: Original Indenture (Exhibit 7-A to Registration No. 2-7475); Ninth Supplemental Indenture (Exhibit 2-M to Registration No. 2-59509); Tenth Supplemental Indenture (Exhibit 4-K to Registration No. 2-23932); Eleventh Supplemental Indenture (Exhibit 4-L to Registration No. 2-26552); Twelfth Supplemental Indenture (Exhibit 4-L 100 to Registration No. 2-36982); Sixteenth Supplemental Indenture (Exhibit 2-Y to Registration No. 2-53404); Nineteenth Supplemental Indenture (Exhibit (4)(A) to the 1991 Form 10-K); Twentieth Supplemental Indenture (Exhibit (4)(B) to the 1991 Form 10-K); Twenty-Seventh Supplemental Indenture (Exhibit (4)(A) to the 1989 Form 10-K); Twenty-Eighth Supplemental Indenture (Exhibit (4)(A) to the 1992 Form 10-K); Twenty-Ninth Supplemental Indenture (Exhibit D to Form 8-K dated July 15, 1992); Thirtieth Supplemental Indenture (Exhibit (4)(B) to the 1992 Form 10-K); Thirty-First Supplemental Indenture (Exhibit (4)(C) to the 1992 Form 10-K); Thirty-Second Supplemental Indenture (Exhibit 4.6 to Registration No.33-69550); Thirty-Third Supplemental Indenture (Exhibit C to Form 8-K dated October 20, 1993); Thirty-Fourth Supplemental Indenture (Exhibit C to Form 8-K dated March 11, 1996) Thirty-Fifth Supplemental Indenture (Exhibit C to Form 8-K dated March 10, 1997). . Collateral Trust Indenture dated June 1, 1992 between the Company and Bankers Trust Company, as Trustee, relating to the Company's medium-term note program (Exhibit B to Form 8-K dated July 15, 1992 in connection with the Company's medium-term note program); First Supplemental Indenture dated June 1, 1992 (Exhibit C to Form 8-K dated July 15, 1992); Second Supplemental Indenture dated October 1, 1993 (Exhibit B to Form 8-K dated October 20, 1993); Third Supplemental Indenture dated as of February 1, 1996 (Exhibit B to Form 8-K dated March 11, 1996); and Fourth Supplemental Indenture dated as of February 1, 1997 (Exhibit B to Form 8-K dated March 10, 1997). . Form of Medium-Term Global Fixed Rate Note, Series A (Exhibit E to Form 8-K dated July 15, 1992 in connection with the Company's medium-term note program) . Form of Medium-Term Global Fixed Rate Note, Series B (Exhibit D to Form 8-K dated October 25, 1993 in connection with the Company's medium-term note program) . Form of Medium-Term Global Fixed-Rate Note, Series C (Exhibit D to Form 8-K dated March 11, 1996 in connection with the Company's medium-term note program) . Form of Medium-Term Global Fixed-Rate Note, Series D (Exhibit D to Form 8-K dated March 10, 1997 in connection with the Company's medium-term note program) . *(A) Fiscal and Paying Agency Agreement dated as of September 14, 1999 between the Company and Bankers Trust Company, relating to the Company's money market note program 101 . *(B) Form of Global Floating Rate Note due October 13, 2000 . *(C) Indenture dated as of April 9, 1999 between SPPC Funding LLC and Bankers Trust Company of California, N.A. in connection with the issuance of California rate reduction bonds . *(D) First Series Supplement dated as of April 9, 1999 to Indenture between SPPC Funding LLC and Bankers Trust Company of California, N.A. in connection with the issuance of California rate reduction bonds . *(E) Form of SPPC Funding LLC Notes, Series 1999-1, in connection with the issuance of California rate reduction bonds . Amended and Restated Declaration of Trust of Sierra Pacific Power Capital I (the Trust) dated July 24, 1996 in connection with the offering of the Preferred Securities of the Trust. (Exhibit 4.1 to Form 8-K dated August 2, 1996) . Indenture between the Company and IBJ Schroder Bank and Trust Company as Trustee dated July 1, 1996 in connection with the offering of the Preferred Securities of the Trust. (Exhibit 4.2 to Form 8-K dated August 2, 1996) . First Supplemental Indenture to the Indenture used in connection with the issuance of Junior Subordinated Debentures dated July 24, 1996 in connection with the offering of the Preferred Securities of the Trust. (Exhibit 4.3 to Form 8-K dated August 2, 1996). . Guarantee with respect to Preferred Securities dated July 29, 1996 in connection with the offering of the Preferred Securities of the Trust. (Exhibit 4.4 to Form 8-K dated August 2, 1996). . Guarantee with respect to Common Securities dated July 29, 1996 in connection with the offering of the Preferred Securities of the Trust. (Exhibit 4.5 to Form 8-K dated August 2, 1996). (10) . Coal Sales Agreement dated May 16, 1978 between the Company and Coastal States Energy Company (confidential portions omitted and filed separately with the Securities and Exchange Commission) (Exhibit 5-GG to Registration No. 2-62476) . Amendment No. 1 dated November 8, 1983 to Coal Sales Agreement dated May 16, 1978 between the Company and Coastal States Energy Company (Exhibit (10)(B) to Form 10-K for the year ended December 31, 1991) 102 . Amendment No. 2 dated February 25, 1987 to Coal Sales Agreement dated May 16, 1978 between the Company and Coastal States Energy Company (Exhibit (10)(A) to Form 10-K for the year ended December 31, 1993) . Amendment No. 3 dated May 8, 1992 to Coal Sales Agreement dated May 16, 1978 between the Company and Coastal States Energy Company (Exhibit (10)(B) to Form 10-K for the year ended December 31, 1992; confidential portions omitted and filed separately with the Securities and Exchange Commission) . Coal Purchase Contract dated June 19, 1986 between the Company, Black Butte Coal Company and Idaho Power Company (Exhibit (10)(C) to the Form 10-K for the year ended December 31, 1992) . Settlement Agreement and Mutual Release dated May 8, 1992 between the Company and Coastal States Energy Company (Exhibit (10)(D) to Form 10-K for the year ended December 31, 1992; confidential portions omitted and filed separately with the Securities and Exchange Commission) . Interconnection Agreement dated May 29, 1981 between the Company and Idaho Power Company (Exhibit (10)(C) to Form 10-K for the year ended December 31, 1991) . Amendatory Agreement dated February 14, 1992 to Interconnection Agreement dated May 29, 1981 between the Company and Idaho Power Company (Exhibit (10)(D) to Form 10-K for the year ended December 31, 1991) . Agreement dated February 23, 1989 between the Company and Idaho Power Company for the supply of power and energy (Exhibit (10)(A) to Form 10-K for the year ended December 31, 1988) . Cooperative Agreement dated July 31, 1992 between the Company and the United States Department of Energy in connection with the Pinon Pine Integrated Coal Gasification Combined Cycle Project (Exhibit (10)(H) to Form 10-K for the year ended December 31, 1992) . Revised Intercompany Pool Agreement dated July 19, 1982 pertaining to the Company's membership (Exhibit (10)(E) to Form 10-K for the year ended December 31, 1991) . Agreement dated November 7, 1986 between the Company and Western Systems Power Pool (Exhibit (10)(C) to Form 10-K for the year ended December 31, 1988) 103 . Memorandum dated October 1, 1988 to Agreement dated November 7, 1986 between the Company and Western Systems Power Pool (Exhibit (10)(D) to Form 10-K for the year ended December 31, 1988) . General Transfer Agreement dated February 25, 1988 between the Company and the United States of America Department of Energy acting by and through the Bonneville Power Administration (Exhibit (10)(E) to Form 10-K for the year ended December 31, 1988) . Rail Transportation Contract dated June 30, 1986 between the Company and Idaho Power Company as shippers and Union Pacific and Western Pacific Railroad Companies as carriers (Exhibit (10)(C) to Form 10-K for the year ended December 31, 1993) . Addendum dated October 9, 1993 to Rail Transportation Contract dated June 30, 1986 between the Company and Idaho Power Company as shippers and Union Pacific Railroad Companies as carriers (Exhibit (10)(D) to Form 10-K for the year ended December 31, 1993) . Financing Agreement dated March 1, 1987 between the Company and Humboldt County, Nevada relating to the Humboldt County, Nevada Variable Rate Demand Pollution Control Refunding Revenue Bonds (Sierra Pacific Power Company Project) Series 1987 (Exhibit (10)(E) to Form 10-K for the year ended December 31, 1993) . Financing Agreement dated March 1, 1987 between the Company and Washoe County, Nevada relating to the Washoe County, Nevada Variable Rate Demand Gas and Water Facilities Refunding Revenue Bonds (Sierra Pacific Power Company Project) Series 1987 (Exhibit (10)(F) to Form 10-K for the year ended December 31, 1993) . Financing Agreement dated June 1, 1987 between the Company and Washoe County, Nevada relating to the Washoe County, Nevada Variable Rate Demand Water Facilities Revenue Bonds (Sierra Pacific Power Company Project) Series 1987 (Exhibit (10)(G) to Form 10-K for the year ended December 31, 1993) . Financing Agreement dated December 1, 1987 between the Company and Washoe County, Nevada relating to the Washoe County, Nevada Variable Rate Demand Gas Facilities Revenue Bonds (Sierra Pacific Power Company Project) Series 1987 (Exhibit (10)(H) to Form 10-K for the year ended December 31, 1993) . Financing Agreement dated September 1, 1990 between the Company and Washoe County, Nevada relating to the Washoe County, Nevada Gas 104 Facilities Revenue Bonds (Sierra Pacific Power Company Project) Series 1990 (Exhibit (10)(C) to Form 10-K for the year ended December 31, 1990) Financing Agreement dated December 1, 1990 between the Company and Washoe County, Nevada relating to the Washoe County, Nevada Water Facilities Revenue Bonds (Sierra Pacific Power Company Project) Series 1990 (Exhibit (10)(E) to Form 10-K for the year ended December 31, 1990) . First Amendment dated August 12, 1991 to Financing Agreement dated December 1, 1990 between the Company and Washoe County, Nevada relating to the Washoe County, Nevada Water Facilities Revenue Bonds (Sierra Pacific Power Company Project) Series 1990 (Exhibit (10)(J) to Form 10-K for the year ended December 31, 1991) . Letter of Credit, Reimbursement and Security Agreement dated December 12, 1990 between the Company and Union Bank of Switzerland relating to the Washoe County, Nevada Water Facilities Revenue Bonds (Sierra Pacific Power Company Project) Series 1990 (Exhibit (10)(F) to Form 10-K for the year ended December 31, 1990) . Financing Agreement dated June 1, 1993 between the Company and Washoe County, Nevada relating to the Washoe County, Nevada Water Facilities Refunding Revenue Bonds (Sierra Pacific Power Company Project) Series 1993A (Exhibit (10) (I) to Form 10-K for the year ended December 31, 1993) . Financing Agreement dated June 1, 1993 between the Company and Washoe County, Nevada relating to the Washoe County, Nevada Gas and Water Facilities Refunding Revenue Bonds (Sierra Pacific Power Company Project) Series 1993B (Exhibit (10) (J) to Form 10- K for the year ended December 31, 1993) . *(A) Credit Agreement dated as of June 24, 1999 among the Company, Mellon Bank, N.A., First Union Bank and Wells Fargo Bank, N.A. relating to $150,000,000 credit facility . *(B) Transition Property Purchase and Sale Agreement dated as of April 9, 1999 between Sierra Pacific Power Company and SPPC Funding LLC in connection with the issuance of California rate reduction bonds . *(C) Transition Property Servicing Agreement dated as of April 9, 1999 between Sierra Pacific Power Company and SPPC Funding LLC in connection with the issuance of California rate reduction bonds 105 . *(D) Administrative Services Agreement dated as of April 9, 1999 between Sierra Pacific Power Company and SPPC Funding LLC in connection with the issuance of California rate reduction bonds . Agreement dated May 1, 1991 between the Company and the Inter- national Brotherhood of Electrical Workers (Exhibit (10)(K) to Form 10-K for the year ended December 31, 1991) . Ratified changes to the Agreement between the Company and the International Brotherhood of Electrical Workers dated October 31, 1994 (Exhibit (10)(B) to Form 10-K for the year ended December 31, 1994) . Agreement dated January 1, 1998 between the Company and the International Brotherhood of Electrical Workers. (Filed as Exhibit 10(B) to Form 10-K for the year ended December 31, 1997) . Lease dated January 30, 1986 between the Company and Silliman Associates Limited Partnership relating to the Company's corporate headquarters building (Exhibit (10)(I) to Form 10-K for the year ended December 31, 1992) . Letter of Amendment dated May 18, 1987 to Lease dated January 30, 1986 between the Company and Silliman Associates Limited Partnership relating to the Company's corporate headquarters building (Exhibit (10) (K) to Form 10-K for the year ended December 31, 1993) . Natural gas Transportation Service Agreement, dated January 11, 1995 between the Company and Tuscarora Gas Transmission Company (Filed with Form 10-K for the year ended December 31, 1995) . Fixed-Price Turn-Key Construction Agreement, dated December 15, 1995 between the Company and Pinon Pine Company, L.L.C (Filed with Form 10-K for the year ended December 31, 1995) . Operation and Maintenance Agreement, dated December 15, 1995 between the Company and Pinon Pine Company, L.L.C. (Filed with Form 10-K for the year ended December 31, 1995) . Syngas Purchase Agreement, dated December 15, 1995 between the Company and Pinon Pine Company, L.L.C. (Filed with Form 10-K for the year ended December 31, 1995) . The Amended and Restated Nonqualified Deferred Compensation Plan in which any director or any executive officer of the Company may participate. The Plan was amended and restated January 1, 1996 (Filed as Exhibit 10(B) with Form 10-K for the year ended December 31, 1996) 106 . Change in Control Agreement dated February 18, 1997 by and among Sierra Pacific Resources and the following officers (individually): Gerald W. Canning, Jeffrey L. Ceccarelli, Randy G. Harris, Malyn K. Malquist, Steven C. Oldham, Victor H. Pena, William E. Peterson, Mark A. Ruelle, Mary O. Simmons, Doug Ponn, and Mary Jane Willier (filed as Exhibit 10(A) to Form 10-K for the year ended December 31, 1997) . Notice of Termination of Power Purchase from PacifiCorp under the Interconnection Agreement of May 19, 1971 (filed as Exhibit 10(C) to Form 10-K for the year ended December 31, 1997) (11) . The Company is a wholly owned subsidiary and, in accordance with Paragraph 6 of SFAS No. 128 (Earnings Per Share), earnings per share data have been omitted. (12) . *(A) Calculation of Pre-Tax Interest Coverages for the Periods 1999, 1998 and 1997. (21) . Subsidiaries of the Registrant: Pinon Pine Company, a Nevada Corporation Pinon Pine Investment Company, a Nevada Corporation GPSF-B, a Delaware Corporation SPPC Funding LLC, a Delaware Limited Liability Company Sierra Pacific Power Capital Trust I (The Trust) (27) . *(A) The Financial Data Schedule containing summary financial information extracted from the consolidated financial statements filed on Form 10-K for the year ended December 31, 1999. 107 EX-3.A 2 AMENDED AND RESTATED LIMITED LIABILITY AGREEMENT EXHIBIT (3) (A) AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF SPPC FUNDING LLC This AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT, dated as of April 9, 1999 (together with the schedules attached hereto, this "Agreement"), --------- of SPPC FUNDING LLC (the "Company"), is entered into by SIERRA PACIFIC POWER ------- COMPANY, a Nevada corporation, as the sole member (the "Initial Member"). -------------- Capitalized terms used herein and not otherwise defined have the meanings set forth on Schedule A hereto. The Initial Member, by execution of this Agreement, (i) hereby continues the Company as a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act (6 Del.C. (S) 18-101, et seq.), as amended from time to time (the "Act"), and this Agreement, (ii) hereby amends --- and restates in its entirety the initial Limited Liability Company Agreement of the Company, dated as of March 24, 1999 (the "Initial LLC Agreement"), and (iii) --------------------- hereby agrees as follows: 1. Name. ---- The name of the limited liability company heretofore previously formed and continued hereby is SPPC Funding LLC. 2. Principal Business Office. ------------------------- The principal business office of the Company shall be located at such location as may hereafter be determined by the Member. 3. Registered Office. ----------------- The address of the registered office of the Company in the State of Delaware is c/o The Prentice Hall Corporation System, Inc., 1013 Centre Road, City of Wilmington, County of New Castle, 19805. 1 4. Registered Agent. ---------------- The name and address of the registered agent of the Company for service of process on the Company in the State of Delaware is The Prentice Hall Corporation System, Inc., 1013 Centre Road, City of Wilmington, County of New Castle, 19805. 5. Members. ------- a. The name and the mailing address of the Initial Member are set forth on Schedule B attached hereto. b. Subject to Section 9j, the Member may act by written consent. 6. Certificates. ------------ Ellen M. Collins, as an "authorized person" within the meaning of the Act, has executed, delivered, and filed the Certificate of Formation with the Secretary of State of the State of Delaware. Upon the filing of the Certificate of Formation with the Secretary of State of the State of Delaware, her powers as an "authorized person" ceased, and the Member thereupon became the designated "authorized person" and shall continue as the designated "authorized person" within the meaning of the Act. The Member or an Officer shall execute, deliver, and file any other certificates (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in California and in any other jurisdiction in which the Company may wish to conduct business. 7. Purposes. -------- Subject to Section 9j, the purposes of the Company are to engage in the following activities: a. (i) To acquire, own, hold, administer, service, or enter into agreements for the servicing, financing, managing, sale, assignment, pledge, collection of amounts due on, and otherwise dealing with the Transition Property and other assets to be acquired pursuant to the Basic Documents and any proceeds or rights associated therewith; (ii) To issue, sell, authorize, and deliver the Notes and other evidences of the Indebtedness and to enter into any agreement or document providing for the authorization, issuance, sale, and delivery of the Notes; (iii) To sell, exchange, pledge, encumber, or otherwise dispose of all or any part of the Transition Property and its other assets and property and, in connection therewith, to accept, collect, hold, sell, exchange, or otherwise dispose of evidences of indebtedness or other property received pursuant thereto, including the encumbrance of all of the Transition Property and its other assets and property as collateral security for the Indebtedness; 2 (iv) To execute, deliver, and perform under the Basic Documents; (v) To invest proceeds from the Transition Property and its other assets and any capital and income of the Company in accordance with the Basic Documents or as otherwise determined by the Board and not inconsistent with this Section or the Basic Documents; and (vi) To do such other things and carry on any other activities which the Board determines to be necessary, convenient, or incidental to any of the foregoing purposes and to have and exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Act. b. The Company, by or through any Officer on behalf of the Company, may enter into and perform the Basic Documents, including the Note Issuance Documents, the Notes, the Sale Documents, the Servicing Agreement, and all documents, agreements, certificates, or financing statements contemplated thereby or related thereto, all without any further act, vote, or approval of the Member or any Director or Officer notwithstanding any other provision of this Agreement, the Act, or applicable law, rule, or regulation. The foregoing authorization shall not be deemed a restriction on the powers of any Officer to enter into other agreements on behalf of the Company. 8. Powers. ------ Subject to Section 9j, the Company (i) shall have and exercise all powers necessary, convenient, or incidental to accomplish its purposes as set forth in Section 7 and (ii) shall have and exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Act. 9. Management. ---------- a. Board of Directors. Subject to Section 9j, the business and affairs ------------------ of the Company shall be managed by or under the direction of a Board of one or more Directors appointed by the Member. Subject to Section 10, the Member may determine at any time in its sole and absolute discretion the number of Directors to constitute the Board. The authorized number of Directors may be increased or decreased by the Member at any time in its sole and absolute discretion, upon notice to all Directors, and subject in all cases to Section 10. The initial number of Directors shall be five, two of which shall be Independent Directors pursuant to Section 10. Each Director elected, designated, or appointed shall hold office until a successor is elected and qualified or until such Director's earlier death, resignation, or removal. Each Director shall execute and deliver the Management Agreement. Directors need not be a Member. b. Powers. Subject to Section 9j, the Board of Directors shall have the ------ power to do any and all acts necessary, convenient, or incidental to or for the furtherance of the purposes described herein, including all powers, statutory or otherwise. Subject to Section 9j, the Board of 3 Directors has the authority to bind the Company. The names of the initial Directors appointed by the Member are set forth on Schedule D. c. Meeting of the Board of Directors. The Board of Directors of the --------------------------------- Company may hold meetings, both regular and special, within or outside the State of Delaware. Regular meetings of the Board may be held without notice at such time and at such place as shall from time to time be determined by the Board. Special meetings of the Board may be called by the President on not less than one day's notice to each Director by telephone, facsimile, mail, telegram, or any other means of communication, and special meetings shall be called by the President or Secretary in like manner and with like notice upon the written request of any one or more of the Directors. d. Quorum; Acts of the Board. At all meetings of the Board, a majority ------------------------- of the Directors shall constitute a quorum for the transaction of business and, except as otherwise provided in any other provision of this Agreement, the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board. If a quorum shall not be present at any meeting of the Board, the Directors present at such meeting may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. e. Electronic Communications. Members of the Board, or any committee ------------------------- designated by the Board, may participate in meetings of the Board, or any committee, by means of telephone conference or similar communications equipment that allows all persons participating in the meeting to hear each other, and such participation in a meeting shall constitute presence in person at the meeting. If all the participants are participating by telephone conference or similar communications equipment, the meeting shall be deemed to be held at the principal place of business of the Company. f. Committees of Directors. ----------------------- (i) The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the Directors of the Company. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. (ii) In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. 4 (iii) Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Company. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board. Each committee shall keep regular minutes of its meetings and report the same to the Board when required. g. Compensation of Directors; Expenses. The Board shall have the ----------------------------------- authority to fix the compensation of Directors. The Directors may be paid their expenses, if any, of attendance at meetings of the Board, which may be a fixed sum for attendance at each meeting of the Board or a stated salary as Director. No such payment shall preclude any Director from serving the Company in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. h. Removal of Directors. Unless otherwise restricted by law, any -------------------- Director or the entire Board of Directors may be removed, with or without cause, at any time by the Member, and, subject to Section 10, any vacancy caused by any such removal may be filled by action of the Member. i. Directors as Agents. To the extent of their powers set forth in this ------------------- Agreement, and subject to Section 9j, the Directors are agents of the Company for the purpose of the Company's business, and the actions of the Directors taken in accordance with such powers set forth in this Agreement shall bind the Company. j. Limitations on the Company's Activities. --------------------------------------- (i) This Section 9j is being adopted in order to comply with certain provisions required in order to qualify the Company as a "special purpose entity" for the purpose of the Indebtedness. (ii) The Member shall not, for so long as any Indebtedness is outstanding, amend, alter, change, or repeal the definition of "Independent Director" or Sections 7, 8, 9, 10, 20, 21, 22, 23, 24, 26, or 31 or Schedule A of this Agreement without the unanimous written consent of the Board (including the Independent Directors). Subject to this Section 9j, the Member reserves the right to amend, alter, change, or repeal any provisions contained in this Agreement in accordance with Section 31. (iii) Notwithstanding any other provision of this Agreement and any provision of law that otherwise so empowers the Company, the Member, the Board, any Officer or any other Person neither the Member nor the Board nor any Officer nor any other Person shall be authorized or empowered, nor shall they permit the Company, without the prior unanimous written consent of the Member and the Board (including the Independent Directors), to take any Material Action; provided, however, that the foregoing is subject in all cases to Section 843(e) of the Statute. 5 (iv) Unless otherwise provided in the Note Issuance Documents, for so long as any Indebtedness is outstanding, the Board and the Member shall cause the Company to do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory), and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if: (A) the Board shall determine that the preservation thereof is no longer desirable for the conduct of its business and that the loss thereof is not disadvantageous in any material respect to the holders of the Indebtedness, and the Company shall deliver to the Note Trustee an Officer's Certificate to that effect, and (B) the Rating Agency Condition is satisfied with regard to such decision not to preserve such right or franchise. The Board also shall cause the Company to: (1) Maintain its own correct and complete separate books and records and bank accounts and maintain the resolutions, agreements, and other instruments underlying the transactions engaged in by the Company as official records of the Company; (2) At all times hold itself out to the public as a legal entity separate from the Member and any other Person; (3) Have a Board composed differently from that of the Member and any other Person, with the business affairs of the Company managed by or subject to the direction of such Board, free of any undue or excessive control exercised by any other Person, whether or not an Affiliate; (4) File its own tax returns, if any, as may be required under applicable law, to the extent (a) not part of a consolidated group filing a consolidated return or returns or (b) not treated as a division for tax purposes of another taxpayer, and pay any taxes so required to be paid under applicable law; (5) Not commingle its assets with assets of any other Person (except as contemplated by the Basic Documents), to maintain the identifiability of the funds and other assets of the Company, and to ensure that the assets and liabilities of the Company are readily distinguishable from those of any other Person; (6) Conduct its business in its own name and not conduct its business in a manner which would give any Person reasonable grounds to believe it is dealing with the Member, any of its other Affiliates, or any other Person other than the Company; (7) Maintain separate financial statements; (8) Pay its own liabilities only out of its own funds; 6 (9) Maintain an arm's length relationship with its Affiliates and its Member and engage in transactions with its Affiliates (i) only on terms and conditions which are commercially reasonable and comparable to transactions on an arms-length basis with unaffiliated Persons, and (ii) only with the prior approval of the Board (including the Independent Directors); (10) Pay the salaries of its own employees, if any; (11) Not hold out its credit as being available to satisfy the obligations of others and not seek or obtain credit based on, or induce any third party to reasonably rely on, the assets or creditworthiness of any other Person, whether or not an Affiliate of the Company; (12) Allocate fairly and reasonably any overhead for shared office space and conduct its business from an office or designated area separate from that of its Member and any other Affiliate; (13) Use separate stationery, invoices, and checks; (14) Not pledge its assets for the benefit of any other Person (except as contemplated by the Basic Documents); (15) Correct any known misunderstanding regarding its separate identity; (16) Maintain adequate capital in light of its contemplated business purposes; (17) Cause its Board of Directors to meet at least annually or act pursuant to written consent and keep minutes of such meetings and actions and observe all other Delaware limited liability company formalities; and (18) Not acquire any obligations or securities of a Member or make loans or advances to a Member. Failure of the Company to comply with any of the foregoing covenants shall not affect the status of the Company as a separate legal entity or the limited liability of the Member. (v) For so long as any Indebtedness is outstanding, the Board shall not cause or permit the Company to: (1) Guarantee any obligation of any Person, including any Affiliate; (2) Engage, directly or indirectly, in any business other than that arising out of the issuance of the Indebtedness or the actions required or permitted to be performed under Section 7, the Note Issuance Documents, or this Section 9j; 7 (3) Incur, create, or assume any indebtedness other than the Indebtedness or as otherwise expressly permitted under the Note Issuance Documents; (4) Make or permit to remain outstanding any loan or advance to, or own or acquire any stock or securities of, any Person other than the instruments constituting part of the Collateral, except that the Company may invest in those investments permitted under the Note Issuance Documents and may make any advance required or expressly permitted to be made pursuant to any provisions of the Note Issuance Documents and permit the same to remain outstanding in accordance with such provisions; (5) To the fullest extent permitted by law, engage in any dissolution, liquidation, consolidation, merger, asset sale, or transfer of ownership interests other than such activities as are expressly permitted pursuant to any provision of the Note Issuance Documents; or (6) Form, acquire, or hold any subsidiary (whether corporate, partnership, limited liability company, or other). 10. Independent Directors. --------------------- For so long as any Indebtedness is outstanding, the Member shall cause the Company at all times to have at least two Independent Directors who will be appointed by the Member. To the fullest extent permitted by Section 18-1101(c) of the Act, the Independent Directors shall consider only the interests of the Company, including its respective creditors, in acting or otherwise voting on the matters referred to in Section 9j(iii). No resignation or removal of an Independent Director, and no appointment of a successor Independent Director, shall be effective until the successor Independent Director shall have accepted his or her appointment by a written instrument, which may be a counterpart signature page to the Management Agreement. All right, power, and authority of the Independent Directors shall be limited to the extent necessary to exercise those rights and perform those duties specifically set forth in this Agreement. Except as provided in the second sentence of this Section 10, in exercising their rights and performing their duties under this Agreement, the Independent Directors shall have a fiduciary duty of loyalty and care similar to that of a director of a business corporation organized under the General Corporation Law of the State of Delaware. 11. Officers. -------- a. Officers. The names of the initial President, Treasurer, Controller, -------- Secretary and Assistant Treasurer of the Company are set forth on Schedule D. All subsequent Officers of the Company shall be chosen by the Board and shall consist of at least a President, a Secretary, and a Treasurer. The Board of Directors may also choose one or more Vice Presidents, Assistant Secretaries, and Assistant Treasurers. Any number of offices may be held by the same person. The Board may appoint such other Officers and agents as it shall deem necessary or advisable 8 who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. The salaries of all Officers and agents of the Company shall be fixed by or in the manner prescribed by the Board. The Officers of the Company shall hold office until their successors are chosen and qualified. Any Officer elected or appointed by the Board may be removed at any time, with or without cause, by the affirmative vote of a majority of the Board. Any vacancy occurring in any office of the Company shall be filled by the Board. b. President. The President shall be the chief executive officer of the --------- Company, shall preside at all meetings of the Members, if any, and the Board, shall be responsible for the general and active management of the business of the Company and shall see that all orders and resolutions of the Board are carried into effect. The President shall execute all bonds, mortgages, and other contracts, except: (i) where required or permitted by law or this Agreement to be otherwise signed and executed, including Section 7b; (ii) where signing and execution thereof shall be expressly delegated by the Board to some other Officer or agent of the Company; and (iii) as otherwise permitted in Section 11c. c. Vice President. In the absence of the President or in the event of -------------- the President's inability to act, the Vice President, if any (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the Directors, or in the absence of any designation, then in the order of their election), shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents, if any, shall perform such other duties and have such other powers as the Board may from time to time prescribe. d. Secretary and Assistant Secretary. The Secretary shall be responsible --------------------------------- for filing legal documents and maintaining records for the Company. The Secretary shall attend all meetings of the Board and all meetings of the Members, if any, and record all the proceedings of the meetings of the Company and of the Board in a book to be kept for that purpose and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the Members, if any, and special meetings of the Board, and shall perform such other duties as may be prescribed by the Board or the President, under whose supervision the Secretary shall serve. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board (or if there be no such determination, then in order of their election), shall, in the absence of the Secretary or in the event of the Secretary's inability to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board may from time to time prescribe. e. Treasurer and Assistant Treasurer. The Treasurer shall have the --------------------------------- custody of the Company funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositories as may be designated by the Board. The Treasurer shall disburse the funds of the Company as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the 9 President and to the Board, at its regular meetings or when the Board so requires, an account of all of the Treasurer's transactions and of the financial condition of the Company. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of the Treasurer's inability to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board may from time to time prescribe. f. Officers as Agents. The Officers, to the extent of their powers set ------------------ forth in this Agreement or otherwise vested in them by action of the Board not inconsistent with this Agreement, are agents of the Company for the purpose of the Company's business, and, subject to Section 9j, the actions of the Officers taken in accordance with such powers shall bind the Company. g. Duties of Board and Officers. Except to the extent otherwise provided ---------------------------- herein, each Director and Officer shall have a fiduciary duty of loyalty and care similar to that of directors and officers of business corporations organized under the General Corporation Law of the State of Delaware. 12. Limited Liability. ----------------- Except as otherwise expressly provided by the Act, the debts, obligations, and liabilities of the Company, whether arising in contract, tort, or otherwise, shall be the debts, obligations, and liabilities solely of the Company, and neither any Member nor any Director shall be obligated personally for any such debt, obligation, or liability of the Company solely by reason of being a Member or Director of the Company. 13. Capital Contributions. --------------------- The Initial Member was deemed admitted as the Member of the Company upon the execution and delivery of the Initial LLC Agreement. The Initial Member has contributed the amount of cash to the Company listed on Schedule B attached hereto. 14. Additional Contributions. ------------------------ The Initial Member is not required to make any additional capital contribution to the Company. However, a Member may make additional capital contributions to the Company at any time upon the written consent of such Member. To the extent that the Member makes an additional capital contribution to the Company, the Member shall revise Schedule B of this Agreement. The provisions of this Agreement, including this Section 14, are intended solely to benefit the Member and, to the fullest extent permitted by law, shall not be construed as conferring any benefit upon any creditor of the Company (and no such creditor of the Company shall be a third-party beneficiary of this Agreement), and no Member shall have any duty or obligation to any creditor of the Company to make any contribution to the Company or to issue any call for capital pursuant to this Agreement. 10 15. Allocation of Profits and Losses. -------------------------------- The Company's profits and losses shall be allocated to the Member. 16. Distributions. ------------- Distributions shall be made to the Member at the times and in the aggregate amounts determined by the Board. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not be required to make a distribution to any Member on account of its interest in the Company if such distribution would violate Section 18-607 of the Act or any other applicable law or the Basic Documents. 17. Books and Records. ----------------- The Board shall keep or cause to be kept complete and accurate books of account and records with respect to the Company's business. The books of the Company shall at all times be maintained by the Board. Each Member and its duly authorized representatives shall have the right to examine the Company books, records, and documents during normal business hours. The Company, and the Board on behalf of the Company, shall not have the right to keep confidential from the Member any information that the Board would otherwise be permitted to keep confidential from the Member pursuant to Section 18-305(c) of the Act. The Company's books of account shall be kept using the method of accounting determined by the Member. The Company's independent auditor shall be an independent public accounting firm selected by the Member. 18. Reports. ------- a. Within 60 days after the end of each fiscal quarter, the Board shall cause to be prepared an unaudited report setting forth as of the end of such fiscal quarter: (i) Unless such quarter is the last fiscal quarter, a balance sheet of the Company; and (ii) Unless such quarter is the last fiscal quarter, an income statement of the Company for such fiscal quarter. b. The Board shall use diligent efforts to cause to be prepared and mailed to the Initial Member and any other Members, within 90 days after the end of each fiscal year, an audited or unaudited report setting forth as of the end of such fiscal year: (i) A balance sheet of the Company; (ii) An income statement of the Company for such fiscal year; and 11 (iii) A statement of such Member's capital account. c. The Board shall, after the end of each fiscal year, use reasonable efforts to cause the Company's independent accountants to prepare and transmit to each Member as promptly as practicable, such tax information as may be reasonably necessary to enable such Member to prepare its federal, state, and local income tax returns relating to such fiscal year. 19. Other Business. -------------- The Member and any Affiliate of the Member may engage in or possess an interest in other business ventures (unconnected with the Company) of every kind and description, independently or with others. The Company shall not have any rights in or to such independent ventures or the income or profits therefrom by virtue of this Agreement. 20. Exculpation and Indemnification. ------------------------------- a. No Member, Officer, Director, employee, or agent of the Company and no employee, representative, agent, or Affiliate of the Member (collectively, the "Covered Persons") shall be liable to the Company or any other Person who has an - ---------------- interest in or claim against the Company for any loss, damage, or claim incurred by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of the authority conferred on such Covered Person by this Agreement, except that a Covered Person shall be liable for any such loss, damage, or claim incurred by reason of such Covered Person's gross negligence or willful misconduct. b. To the fullest extent permitted by applicable law, a Covered Person shall be entitled to indemnification from the Company for any loss, damage, or claim incurred by such Covered Person by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of the authority conferred on such Covered Person by this Agreement, except that no Covered Person shall be entitled to be indemnified in respect of any loss, damage, or claim incurred by such Covered Person by reason of such Covered Person's gross negligence or willful misconduct with respect to such acts or omissions; provided, however, that any indemnity under this Section 20 shall be provided out of and to the extent of Company assets only, and no Member shall have personal liability on account thereof; and provided further, that for so long as any Indebtedness is outstanding no indemnity payment from funds of the Company (as distinct from funds from other sources, such as insurance) of any indemnity under this Section 20 shall be payable except out of funds available for payment of Company expenses as provided in the Indenture. c. To the fullest extent permitted by applicable law, expenses (including legal fees) incurred by a Covered Person defending any claim, demand, action, suit, or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit, or proceeding upon receipt by the Company of an undertaking by or on 12 behalf of the Covered Person to repay such amount if it shall be determined that the Covered Person is not entitled to be indemnified as authorized in this Section 20. d. A Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports, or statements presented to the Company by any Person as to matters the Covered Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports, or statements as to the value and amount of the assets, liabilities, or any other facts pertinent to the existence and amount of assets from which distributions to the Member might properly be paid. e. To the extent that, at law or in equity, a Covered Person has duties (including fiduciary duties) and liabilities relating thereto to the Company or to any other Covered Person, a Covered Person acting under this Agreement shall not be liable to the Company or to any other Covered Person for its good faith reliance on the provisions of this Agreement or any approval or authorization granted by the Company or any other Covered Person. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of a Covered Person otherwise existing at law or in equity, are agreed by the Member to replace such other duties and liabilities of such Covered Person. f. The foregoing provisions of this Section 20 shall survive any termination of this Agreement. 21. Assignments. ----------- Subject to Section 23, a Member may assign in whole or in part its limited liability company interest in the Company. If a Member transfers all of its limited liability company interest in the Company pursuant to this Section 21, the transferee shall be admitted to the Company as a member of the Company upon its execution of an instrument signifying its agreement to be bound by the terms and conditions of this Agreement, which instrument may be a counterpart signature page to this Agreement. Such admission shall be deemed effective immediately prior to the transfer, and, immediately following such admission, the transferor Member shall cease to be a member of the Company. Notwithstanding anything in this Agreement to the contrary, any successor to a Member by merger or consolidation in compliance with the Basic Documents shall, without further act, be a Member hereunder and the Company shall continue without dissolution, and such merger or consolidation shall not constitute an assignment for purposes of this Agreement. 22. Resignation. ----------- For so long as any Indebtedness is outstanding, the Initial Member may not resign unless the Rating Agency Condition is satisfied with regard to such resignation. A Member (other than the Initial Member) may resign from the Company with the written consent of the Initial Member. If a Member is permitted to resign pursuant to this Section 22, an additional member of the Company shall be admitted to the Company, subject to Section 21, upon its execution of an instrument signifying its agreement to be bound by the terms and conditions of this Agreement, 13 which instrument may be a counterpart signature page to this Agreement. Such admission shall be deemed effective immediately prior to the resignation, and, immediately following such admission, the resigning Member shall cease to be a member of the Company. 23. Admission of Additional Members. ------------------------------- One or more additional members of the Company may be admitted to the Company with the written consent of the Members; provided that, notwithstanding the foregoing, for so long as any Indebtedness remains outstanding, no additional members may be admitted to the Company unless the Initial Member retains a majority interest in the Company and the Rating Agency Condition is satisfied with regard to the admission of such additional members. 24. Dissolution. ----------- a. Subject to Section 9j, the Company shall be dissolved, and its affairs shall be wound up upon the first to occur of the following: (i) the retirement, resignation, or dissolution of the Member or the occurrence of any other event which terminates the continued membership of the Member in the Company unless the business of the Company is continued in a manner permitted by this Agreement or the Act or (ii) the entry of a decree of judicial dissolution under Section 18-802 of the Act. b. The Bankruptcy of the Member shall not cause the Member to cease to be a member of the Company and upon the occurrence of such an event, the business of the Company shall continue without dissolution. Notwithstanding any other provision of this Agreement, the Member waives any right that it night have under Section 18-801(b) of the Act to agree in writing to dissolve the Company upon the Bankruptcy of the Member or the occurrence of any event that causes the Member to cease to be a member of the Company. c. In the event of dissolution, the Company shall conduct only such activities as are necessary to wind up its affairs (including the sale of the assets of the Company in an orderly manner), and the assets of the Company shall be applied in the manner, and in the order of priority, set forth in Section 18- 804 of the Act. 14 25. Waiver of Partition; Nature of Interest. --------------------------------------- Except as otherwise expressly provided in this Agreement, to the fullest extent permitted by law, each Member hereby irrevocably waives any right or power that such Member might have to cause the Company or any of its assets to be partitioned, to cause the appointment of a receiver for all or any portion of the assets of the Company, to compel any sale of all or any portion of the assets of the Company pursuant to any applicable law, or to file a complaint or to institute any proceeding at law or in equity to cause the dissolution, liquidation, winding up, or termination of the Company. No Member shall have any interest in any specific assets of the Company, and no Member shall have the status of a creditor with respect to any distribution pursuant to Section 16 hereof. The interest of the Members in the Company is personal property. 26. Benefits of Agreement; No Third-Party Rights. -------------------------------------------- None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditor of the Company or by any creditor of any Member. Nothing in this Agreement shall be deemed to create any right in any Person (other than Covered Persons pursuant to Section 20) not a party hereto, and this Agreement shall not be construed in any respect to be a contract in whole or in part for the benefit of any third Person. 27. Severability of Provisions. -------------------------- Each provision of this Agreement shall be considered severable and if for any reason any provision or provisions herein are determined to be invalid, unenforceable, or illegal under any existing or future law, such invalidity, unenforceability, or illegality shall not impair the operation of or affect those portions of this Agreement which are valid, enforceable, and legal. 28. Entire Agreement. ---------------- This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof. 29. Binding Agreement. ----------------- Notwithstanding any other provision of this Agreement, the Member agrees that this Agreement, including, without limitation, Sections 7, 8, 9, 10, 20, 21, 22, 23, 24, 26, and 31, constitutes a legal, valid, and binding agreement of the Member, and is enforceable against the Member by the Independent Directors, in accordance with its terms. In addition, each Independent Director is an intended beneficiary of this Agreement. 30. Governing Law. ------------- This Agreement shall be governed by and construed under the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by said laws. 15 31. Amendments. ---------- Subject to Section 9j, this Agreement may not be modified, altered, supplemented, or amended except pursuant to a written agreement executed and delivered by the Member. Notwithstanding anything to the contrary in this Agreement, for so long as any Indebtedness is outstanding, this Agreement may not be modified, altered, supplemented, or amended unless the Rating Agency Condition is satisfied with regard to such modification, alteration, supplement, or amendment, except: (i) to cure any ambiguity or (ii) to correct or supplement any provision in a manner consistent with the intent of this Agreement. 32. Counterparts. ------------ This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement and all of which together shall constitute one and the same instrument. 33. Notices. ------- Any notices required to be delivered hereunder shall be in writing and personally delivered, mailed, or sent by telecopy or other similar form of rapid transmission, and shall be deemed to have been duly given upon receipt (a) in the case of the Company, to the Company at its address in Section 2, (b) in the case of a Member, to such Member at its address as listed on Schedule B attached hereto, and (c) in the case of either of the foregoing, at such other address as may be designated by written notice to the other party. 16 IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, has duly executed this Agreement as of the date first above written. MEMBER: SIERRA PACIFIC POWER COMPANY By: RICHARD K. ATKINSON ------------------------------------- Name: Richard K. Atkinson Title: Assistant Treasurer 17 Schedule A DEFINITIONS A. Definitions ----------- When used in this Agreement, the following terms not otherwise defined herein have the following meanings: "Act" has the meaning set forth in the preamble to this Agreement. --- "Administrative Services Agreement" means the Administrative Services --------------------------------- Agreement to be entered into between the Company and the Initial Member, as administrator. "Affiliate" means, with respect to any Person, any other Person directly or --------- indirectly Controlling or Controlled by or under direct or indirect common Control with such Person. "Agreement" means this Amended and Restated Limited Liability Company --------- Agreement, together with the schedules attached hereto, as amended, restated, or supplemented from time to time. "Bankruptcy" means, with respect to any Person, if such Person (i) makes an ---------- assignment for the benefit of creditors, (ii) files a voluntary petition in bankruptcy, (iii) is adjudged bankrupt or insolvent, or has entered against it an order for relief, in any bankruptcy or insolvency proceeding, (iv) files a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, or similar relief under any statute, law or regulation, (v) files an answer or other pleading admitting or failing to contest the material allegations of any petition filed against it in any proceeding of this nature, (vi) seeks, consents to or acquiesces in the appointment of a Trustee, receiver or liquidator of the Person or of all or any substantial part of its properties, or (vii) 120 days after the commencement of any proceeding against the Person seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, if the proceeding has not been dismissed, or if within 90 days after the appointment without such Person's consent or acquiescence of a trustee, receiver or liquidator of such Person or of all or any substantial part of its properties, the appointment is not vacated or stayed, or within 90 days after the expiration of any such stay, the appointment is not vacated. With respect to the Member, the foregoing definition of "Bankruptcy" is intended to replace and shall supersede and replace the definition of "Bankruptcy" set forth in Sections 18-101(1) and 18-304 of the Act. "Basic Documents" means the Indenture, the Trust Agreement, the Sale --------------- Agreement, any Subsequent Sale Agreement, the Servicing Agreement, the Purchase Agreement, the 18 Administrative Services Agreement, the Note Purchase Agreement, the Letter of Credit, the DTC Agreement, the Fee and Indemnity Agreement, and all other documents and certificates delivered in connection therewith. "Board" or "Board of Directors" means the Board of Directors of the ----- ------------------ Company. "Certificate of Formation" means the Certificate of Formation of the ------------------------ Company filed with the Secretary of State of the State of Delaware on March 24, 1999, as amended or amended and restated from time to time. "Certificates" means the rate reduction certificates to be issued by ------------ California Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1. "Certificate Trustee" means the institution serving as certificate trustee ------------------- under the Trust Agreement. "Collateral" means all of the Company's right, title, and interest in and ---------- to (a) the Transition Property transferred by the Initial Member to the Company pursuant to the Sale Agreement and all proceeds thereof, (b) any Subsequent Transition Property transferred by the Initial Member to the Company pursuant to each Subsequent Sale Agreement and all proceeds thereof, (c) the Sale Agreement and each Subsequent Sale Agreement, (d) the Servicing Agreement, (e) the Collection Account (including all subaccounts thereof) and all amounts or investment property on deposit therein or credited thereto from time to time, (f) all other property of whatever kind owned from time to time by the Company, (g) all present and future claims, demands, causes and choses in action in respect of any or all of the foregoing, and all payments on or under and all proceeds of every kind and nature whatsoever in respect of any or all of the foregoing, including all proceeds of the conversion, voluntary or involuntary, into cash or other liquid property, all cash proceeds, accounts, accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts, insurance proceeds, condemnation awards, rights to payment of any and every kind, and other forms of obligations and receivables, instruments, and other property which at any time constitute all or part of or are included in proceeds of any of the foregoing, and (h) all proceeds of the foregoing. "Collection Account" means the segregated trust account to be established ------------------ in the name of the Note Trustee into which will be deposited the payments received in respect of the non-bypassable, usage-based, per-kilowatt-hour FTA charges permitted to be levied on customers pursuant to the Financing Order. "Company" means SPPC Funding LLC, a Delaware limited liability company. ------- "Control" means the possession, directly or indirectly, of the power to ------- direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities or general partnership or managing member interests, by contract, or otherwise. "Controlling" and "Controlled" shall have correlative meanings. Without limiting the generality 19 of the foregoing, a Person shall be deemed to Control any other Person in which it owns, directly or indirectly, a majority of the ownership interests. "Covered Persons" has the meaning set forth in Section 20a. --------------- "CPUC" means the California Public Utilities Commission or any successor ---- governmental agency that has regulatory authority over the True-Up Adjustments contemplated by the Statute. "Delaware Trustee" means the institution serving as Delaware trustee under ---------------- the Trust Agreement. "Directors" means the directors elected to the Board of Directors from time --------- to time by the Member, including the Independent Directors. A Director is hereby designated as a "manager" of the Company within the meaning of Section ------- 18-101(10) of the Act. "DTC Agreement" means the agreement to be entered into between California ------------- Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1, the Certificate Trustee, and The Depository Trust Company, relating to the Certificates, as the same may be amended and supplemented from time to time. "Fee and Indemnity Agreement" means the Fee and Indemnity Agreement to be --------------------------- entered into among the Company, the Note Trustee, the Certificate Trustee, the Delaware Trustee, and the California Infrastructure and Economic Development Bank, as originator. "Financing Order" means the order of the CPUC, Decision No. 98-10-021, --------------- issued as of October 8, 1998 which became effective on November 12, 1998. "Indebtedness" means the obligations of the Company arising under all ------------ Series of Notes. "Indenture" means the Indenture to be entered into between the Company, as --------- issuer, and the Note Trustee, as trustee, including the Series supplements thereto relating to the Notes, as the same may be amended, supplemented, or otherwise modified from time to time. "Independent Director" means a natural person who, for the five-year period -------------------- prior to his or her appointment as Independent Director has not been, and during the continuation of his or her service as Independent Director is not any of: (i) an employee, director, stockholder, partner, or officer of the Company or any of its Affiliates (other than through his or her service as an Independent Director of the Company); (ii) an employee, director, stockholder, partner, or officer of a customer or supplier that derives more than ten percent of its revenues from the Company or any of its Affiliates; or (iii) any member of the immediate family of a person described in (i) or (ii). "Initial LLC Agreement" has the meaning set forth in the preamble to this --------------------- Agreement. 20 "Initial Member" means Sierra Pacific Power Company, a Nevada corporation, -------------- as the sole member of the Company. "Letter of Credit" means the letter of credit dated as of April 9, 1999 ---------------- from Wells Fargo Bank, N.A. for the benefit of the Note Issuer or the Note Trustee, as the same may be amended and supplemented from time to time. "Management Agreement" means the agreement of the Directors in the form -------------------- attached hereto as Schedule C. "Material Action" means to consolidate or merge the Company with or into --------------- any Person, or sell all or substantially all of the assets of the Company, or to institute proceedings to have the Company be adjudicated bankrupt or insolvent, or consent to the institution of bankruptcy or insolvency proceedings against the Company, or file a petition seeking, or consent to, reorganization or relief with respect to the Company under any applicable federal or state law relating to bankruptcy, or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, or other similar official of or for the Company or a substantial part of its property, or make any assignment for the benefit of creditors of the Company, or admit in writing the Company's inability to pay its debts generally as they become due, or, to the fullest extent permitted by law, take action in furtherance of any such action, or dissolve or liquidate the Company. "Member" means the Initial Member and includes any Person admitted as an ------ additional member of the Company or a substitute member of the Company pursuant to the provisions of this Agreement. "Moody's" means Moody's Investors Service Inc. or its successor or such ------- nationally recognized statistical rating organization designated by the Company with notice to the Note Trustee, the Certificate Trustee, the California Infrastructure and Economic Development Bank and the Initial Member in its role as servicer under the Servicing Agreement. "Note Issuance Documents" means the collective reference to the Indenture ----------------------- and the other governing documents relating to the Indebtedness, as the same may be amended, supplemented, or otherwise modified from time to time. "Note Purchase Agreement" means the Note Purchase Agreement to be entered ----------------------- into between the Company and the California Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1. "Notes" means the SPPC Funding LLC Notes at any time issued pursuant to the ----- Indenture or any indenture supplemental thereto. "Note Trustee" means the institution serving as note trustee under the ------------ Indenture. "Officer" means an officer of the Company described in Section 11. ------- 21 "Officer's Certificate" means a certificate signed by any Officer of the --------------------- Company who is authorized to act for the Company in matters relating to the Company. "Person" means any individual, corporation, partnership, joint venture, ------ limited liability company, limited liability partnership, association, joint- stock company, trust, unincorporated organization, or other organization, whether or not a legal entity, and any governmental authority. "Purchase Agreement" means the purchase agreements to be entered into among ------------------ the Member, the Company, the California Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1, and the purchasers named therein. "PU Code" means the California Public Utilities Code, as amended from time ------- to time. "Rating Agency Condition" means, with respect to any action, that Moody's ----------------------- shall have been given ten days prior notice thereof and that Moody's shall have notified the Company in writing that such action will not result in a reduction or withdrawal of its then current rating of any Series of the Notes. "Sale Agreement" means the Transition Property Purchase and Sale Agreement -------------- to be entered into between the Company and the Initial Member, as seller. "Sale Documents" means the collective reference to the Sale Agreement, any -------------- Subsequent Sale Agreements and the agreements, instruments, and documents contemplated thereby, as the same may be amended, supplemented, or otherwise modified from time to time. "Series" means each series of Notes issued and authenticated pursuant to ------ the Indenture. "Servicing Agreement" means the Transition Property Servicing Agreement to ------------------- be entered into between the Company and the Initial Member, as servicer, as the same may be amended, supplemented, or otherwise modified from time to time. "Statute" means Assembly Bill 1890, Chapter 854, California Statutes of ------- 1996, as amended by Senate Bill 477, Chapter 275, California Statutes of 1997, and as further amended from time to time. "Subsequent Sale Agreement" means any sale agreement substantially similar ------------------------- to the Sale Agreement, entered into subsequently thereto, pursuant to which the Initial Member will sell Subsequent Transition Property to the Company. "Subsequent Transition Property" means any transition property as defined ------------------------------ in Section 840 of the PU Code, created by the PU Code and the Financing Order and specifically described in an issuance advice letter filed with the CPUC pursuant to the Financing Order, and sold to the Company by the Initial Member pursuant to a Subsequent Sale Agreement. 22 "Transition Property" means the "Transition Property" contemplated by the ------------------- Financing Order and to be specifically described in the issuance advice letter filed with the CPUC pursuant to the Financing Order. "Trust Agreement" means the Amended and Restated Declaration and Agreement --------------- of Trust to be entered into among the California Infrastructure and Economic Development Bank, the Certificate Trustee, and the Delaware Trustee, including the Series supplements thereto relating to the Certificates, as the same may be further amended and supplemented from time to time. B. Rules of Construction --------------------- Definitions in this Agreement apply equally to both the singular and plural forms of the defined terms. The words "include" and "including" shall be deemed to be followed by the phrase "without limitation." The terms "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section, paragraph, or subdivision. The Section titles appear as a matter of convenience only and shall not affect the interpretation of this Agreement. All Section, paragraph, clause, Exhibit, or Schedule references not attributed to a particular document shall be references to such parts of this Agreement. 23 Schedule B MEMBERS Agreed Value of Percentage Name Mailing Address Capital Contribution Interest - ---- --------------- -------------------- -------- Sierra Pacific 6100 Neil Road $122,000 100% Power P.O. Box 30150 Company Reno, Nevada 89520 24 Schedule C MANAGEMENT AGREEMENT April 9, 1999 SPPC Funding LLC 6100 Neil Road P.O. Box 30150 Reno, Nevada 89520 Re: Management Agreement SPPC Funding LLC Ladies and Gentlemen: For good and valuable consideration, each of the undersigned persons who have been designated as managers of SPPC Funding LLC, a Delaware limited liability company (the "Company"), in accordance with the Amended and Restated Limited Liability Company Agreement of the Company, dated as of April 9, 1999, as it may be amended or restated from time to time (the "LLC Agreement"), hereby agree as follows: 1. Each of the undersigned accepts such person's rights and authority as a Director (as defined in the LLC Agreement) under the LLC Agreement and agrees to perform and discharge such person's duties and obligations as a Director under the LLC Agreement, and further agrees that such rights, authorities, duties, and obligations under the LLC Agreement shall continue until such person's successor as a Director is designated or until such person's resignation or removal as a Director is effective in accordance with the LLC Agreement. Each of the undersigned agrees and acknowledges that it has been designated as a "manager" of the Company within the meaning of the Delaware Limited Liability Company Act. 2. For so long as any Indebtedness (as defined in the LLC Agreement) is outstanding, each of the undersigned agrees, solely in its capacity as a creditor of the Company on account of any indemnification or other payment owing to the undersigned by the Company, not to acquiesce, petition, or otherwise invoke or cause the Company to invoke the process of any court or governmental authority for the purpose of commencing or sustaining a case against the Company under any federal or state bankruptcy, insolvency, or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator, or other similar official of or for the Company or any substantial part of the property of the Company, or ordering the winding up or liquidation of the affairs of the Company. 25 3. THIS MANAGEMENT AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, AND ALL RIGHTS AND REMEDIES SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. IN WITNESS WHEREOF, the undersigned have executed this Management Agreement as of the day and year first above written. __________________________________ Name: __________________________________ Name: __________________________________ Name: __________________________________ Name: __________________________________ Name: 26 SCHEDULE D SPPC Funding LLC ---------------- Initial Directors ----------------- Director Malyn K. Malquist Director Mark A. Ruelle Director William E. Peterson Independent Director Mark A. Ferrucci Independent Director Kim E. Lutthans SPPC Funding LLC ---------------- Initial Officers ---------------- President Malyn K. Malquist Treasurer Mark A. Ruelle Controller Mary O. Simmons Secretary William E. Peterson Assistant Treasurer Richard K. Atkinson 27 EX-4.A 3 FISCAL AND PAYING AGENCY AGREEMENT EXHIBIT (4)(A) FISCAL AND PAYING AGENCY AGREEMENT ---------------------------------- THIS AGREEMENT dated as of September 14, 1999 between Sierra Pacific Power Company, a corporation organized under the laws of the State of Nevada (the "Company"), and Bankers Trust Company, a New York banking corporation as fiscal and paying agent (the "Agent"). Section 1. Appointment of Agent. The Company proposes to issue from -------------------- time to time its unsecured, unsubordinated Notes (the "Notes"). The Company hereby appoints the Agent to act, on the terms and conditions specified herein, as fiscal and paying agent for the Notes. Section 2. Amount Unlimited; Execution. --------------------------- (a) The Notes shall be issuable in series. The aggregate principal amount of Notes which may be issued hereunder is unlimited. (b) Each Note shall be executed on behalf of the Company by the manual or facsimile signature of an Authorized Representative (as defined in Section 3 hereof) of the Company. Section 3. Authorized Representatives. From time to time the Company -------------------------- will furnish the Agent with a certificate or similar form of evidence of the Company demonstrating the incumbency of officers authorized to execute Notes and Authentication Orders (as defined in Section 4 hereof) on behalf of the Company (an "Authorized Representative"). Until the Agent receives a subsequent incumbency certificate or similar form of evidence of the Company, the Agent shall be entitled to rely on the last such certificate or similar form of evidence delivered to it for purposes of determining the Authorized Representatives. Any Note bearing the manual or facsimile signature of a person who is an Authorized Representative on the date such signature is affixed shall bind the Company after the completion and registration thereof by the Agent, notwithstanding that such person shall have ceased to hold office on the date such Note is authenticated and delivered by the Agent. Section 4. Authentication Orders; Completion, Authentication and ----------------------------------------------------- Delivery of Notes. ----------------- (a) The Notes shall be issued only upon receipt from the Company of an order (an "Authentication Order") with respect to a series of Notes, which shall be accompanied by the proposed form of the Notes of such series and, to the extent not set forth in such proposed form of Note, shall include: 1 (i) the designation of the Notes of the series (which may be part of a series of Notes previously issued); (ii) any limit on the aggregate principal amount of the Notes of the series that may be authenticated and delivered hereunder (except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes of the series); (iii) any date or dates on which the principal of the Notes of the series is payable; (iv) the method by which the rate or rates at which the Notes shall bear interest shall be determined; the date or dates from which such interest shall be payable (each an "Interest Payment Date") and the record dates for the determination of holders to whom interest is payable; and the basis on which interest is to be calculated; (v) the place or places where the principal of and any interest on the Notes shall be payable; (vi) the price or prices at which, the period or periods within which and the terms and conditions upon which Notes of the series may be redeemed, in whole or in part; (vii) the obligation, if any, of the Company to redeem, purchase or repay Notes of the series pursuant to any mandatory redemption, sinking fund or analogous provisions or at the option of a holder thereof and the price or prices at which and the period or periods within which and the terms and conditions upon which Notes shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; (viii) the denominations in which Notes shall be issuable; (ix) if other than the principal amount thereof, the portion of the principal amount of Notes which shall be payable upon declaration of acceleration of the maturity thereof; (x) any restrictions on sale, resale, pledge or any other transfer of the Notes; and (xi) whether the Notes will be in the form of a global security. (b) Upon receipt of such Authentication Order with respect to the Notes, the Agent shall prepare or cause to be prepared, the necessary Notes in the form attached hereto as Exhibit A and, in accordance with the Authentication --------- Order, shall: 2 (i) complete each Note as to its Registered Holder and principal amount; (ii) record each Note in a Note Register to be maintained by the Agent hereunder; (iii) cause each Note to be manually authenticated by any one of the officers or employees of the Agent duly authorized and designated by it for such purpose; and (iv) deliver each Note. Section 5. Reliance on an Authentication Order. The Agent shall ----------------------------------- incur no liability to the Company in acting hereunder on instructions which the recipient believed in good faith to have been given by an Authorized Representative. Section 6. Company's Representations and Warranties. The ---------------------------------------- Authentication Order given to the Agent in accordance with Section 4 hereof shall constitute a continuing representation and warranty to the Agent by the Company that the issuance and delivery of the Notes which are the subject thereof have been duly and validly authorized by the Company and that the Notes, when completed, authenticated and delivered pursuant hereto, will constitute the legal, valid and binding obligations of the Company. Section 7. Payment of Note Interest; Interest Payment Dates; Record -------------------------------------------------------- Dates. All interest payments in respect of the Notes will be made to the - ----- Registered Holders in whose names Notes are registered at the close of business on the record date specified in the Notes of such series (whether or not a New York City Business Day) next preceding each Interest Payment Date (each a "Record Date"). Notwithstanding the foregoing, if so specified in the Notes of such series, if the original issue date or date of transfer of any Note occurs either on an Interest Payment Date or between a Record Date and the next succeeding Interest Payment Date, the first payment of interest on any such Note will be made on the Interest Payment Date following the next succeeding Record Date. Unless otherwise specified in an Authentication Order with respect to a particular series of Notes or in the proposed form of Notes of that series, all interest payments on the Notes will be made at the office of the Agent located at Four Albany Street, New York, New York 10006-1515, or, at the option of the Agent may be made by check of the Agent mailed to the Registered Holders, as such Registered Holders appear on the Record Date in the Note Register referred to in Section 12 hereof, or to such other address in the United States as any Registered Holder shall designate to the Agent in writing not later than the relevant Record Date; provided, however, that in the case of Notes held by a -------- ------- depository or its nominee, payments of principal and interest shall be made by wire transfer of immediately available funds to an account designated by such depository. Section 8. Payment of Note Principal. The Agent will pay the ------------------------- principal amount of each Note at maturity, together with accrued interest due at maturity (unless the maturity date is an Interest Payment Date), if any, only upon presentation and surrender of such Note on or 3 after the maturity date thereof. The Agent will forthwith cancel and destroy each such Note. If the maturity date is an Interest Payment Date, interest will be paid in the usual manner. Section 9. Information Regarding Amounts Due. Promptly following --------------------------------- each Record Date, the Agent will advise the Company of the amount of interest due on the following Interest Payment Date. The Agent will advise the Company by the fifteenth day prior to each payment date of the principal of and accrued interest to be paid on Notes maturing on the next succeeding payment date. Section 10. Availability of Funds. The Company shall assure that --------------------- funds are available to the Agent not later than 10:00 a.m. New York City time on each Interest Payment Date and on each maturity date of any Note, in immediately available funds sufficient to pay all accrued interest on, and/or the principal of any such Note, as the case may be. Section 11. Amendments and Waivers. This Agreement and the provisions ---------------------- of Notes of one or more series issued pursuant hereto may be amended or waived in the manner and with the effect as may be specified in the terms of Notes of such series. Section 12. Registration, Transfer, Exchange, Persons Deemed Owners. ------------------------------------------------------- (a) The terms "Note Register" shall mean the definitive record in which shall be recorded the names, addresses and taxpayer identifying numbers of Registered Holders of the Notes, the Note numbers and original issue dates thereof and details with respect to the transfers and exchange of Notes. (b) The Agent shall register the transfer of any Note and/or effect the exchange of any Note or Notes for Notes of other authorized denominations only in accordance with the terms and conditions of such Note. Section 13. Application of Funds; Return of Unclaimed Funds. Until ----------------------------------------------- used or applied as herein provided and except as otherwise provided in the terms of the Notes, all funds made available to the Agent hereunder shall be held for the purposes for which they were received but need not be segregated from other funds except to the extent required by law. Section 14. Liability. Neither the Agent nor its officers or --------- employees shall be liable for any act or omission hereunder except in the case of gross negligence or willful misconduct. The duties and obligations of the Agent, its officers and employees shall be determined by the express provisions of this Agreement and they shall not be liable except for the performance of such duties and obligations as are specifically set forth herein and no implied covenants shall be read into this Agreement against them. The Agent may consult with counsel and shall be fully protected in any action taken in good faith in accordance with the advice of counsel. Neither the Agent nor its officers or employees shall be required to ascertain whether any issuance or sale of Notes (or any amendment or termination of this Agreement) has been duly authorized or is in compliance with any other agreement to which the Company is a party (whether or not the Agent is also a party of such other agreement). In acting under this Agreement or in connection with the Notes, the Fiscal Agent is acting solely as agent of the 4 Company and shall not assume any relationship of agency of trust for or with any Noteholder, except that all funds held by the Agent for payment of principal of or interest on the Notes shall be held in trust by it and applied to payments or the Notes subject to the limitations set forth herein and in the terms of the Note. Section 15. Indemnification. The Company agrees to indemnify and --------------- hold harmless the Agent, its directors, officers, employees and agents from and against any and all liabilities (including liability for penalties), losses, claims, damages, actions, suits, judgments, demands, costs and expenses (including reasonable legal fees and expenses) relating to or arising out of or in connection with its or their performance under this Agreement, except to the extent that they are caused by the gross negligence or willful misconduct of the Agent. The foregoing indemnity includes, but is not limited to, any action taken or omitted in good faith within the scope of this Agreement upon telephone, telecopier or other electronically transmitted instructions, if authorized herein, received from or believed by the Agent in good faith to have been given by, an Authorized Representative. This indemnity shall survive the resignation of removal of the Agent and the satisfaction or termination of this Agreement. Section 16. Compensation of the Agent. The Company agrees to pay the ------------------------- compensation of the Agent at such rates as shall be agreed upon from time to time and to reimburse the Agent for its out-of-pocket expenses (including costs of preparation of the Notes and reasonable legal fees and expenses), disbursements and advances incurred or made in accordance with any provisions of this Agreement. The obligations of the Company to the Agent pursuant to this Section shall survive the resignation or removal of the Agent and the satisfaction or termination of the Agreement. Section 17. Notices. ------- (a) All communications by or on behalf of the Company relating to the issuance, transfer, exchange or payment of Notes or interest thereon shall be directed to the Agent at its address set forth in subsection (b)(ii) hereof (or such other address as the Agent shall specify in writing to the Company). (b) Notices and other communications hereunder shall except to the extent otherwise expressly provided, be in writing and shall be addressed as follows, or to such other addresses as the parties hereto shall specify from time to time: 5 (i) if to the Company: Sierra Pacific Power Company 6100 Neil Road P.O. Box 10100 Reno, Nevada 89520-0400 Attention: Treasurer (ii) if to the Agent in connection with the issuance, transfer, exchange or payment of Notes or interest thereon: Bankers Trust Company Corporate Trust and Agency Group Four Albany Street New York, New York 10006-1515 Section 18. Resignation or Removal of Agent. The Agent may at any ------------------------------- time resign as such agent by giving written notice to the Company of such intention on its part, specifying the date on which its desired resignation shall become effectively; provided, however, that such date shall be not less -------- ------- than three months after the giving of such notice by the Agent to the Company. The Agent may be removed at any time by the filing with it of any instrument in writing signed by a duly authorized officer of the Company and specifying such removal and the date upon which it is intended to become effective. Such resignation or removal shall take effect on the date of the appointment by the Company of a successor agent and the acceptance of such appointment by such successor Agent. In the event of resignation by the Agent, if a successor Agent has not been appointed by the Company within three months after the giving of notice by the Agent of its intention to resign, the Agent may, at the expense of the Company, petition any court of competent jurisdiction for appointment of a successor Agent. Section 19. Benefit of Agreement. This Agreement is solely for the -------------------- benefit of the parties hereto, their successors and assigns, and no other person shall acquire or have any right under or by virtue hereof. Section 20. Notes Held by the Agent. The Agent, in its individual or ----------------------- other capacity, may become the owner or pledgee of the Notes with the same rights it would have if it were not acting as fiscal and paying agent hereunder. Section 21. Governing Law. This Agreement is to be delivered and ------------- performed in, and shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York. Section 22. Counterparts. This Agreement may be executed by the ------------ parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts, each 6 such counterpart, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf by their officers thereunto duly authorized, all as of the date and year first above written. SIERRA PACIFIC POWER COMPANY By:______________________________________ BANKERS TRUST COMPANY By:______________________________________ 7 EX-4.B 4 FORM OF GLOBAL FLOATING RATE NOTE EXHIBIT (4)(B) NOTE NO. R-1 CUSIP N0. 826418 AT 2 UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO SIERRA PACIFIC POWER COMPANY (THE "COMPANY") OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS NOTE IS A BOOK-ENTRY SECURITY AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY. THIS NOTE IS EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED HEREIN, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN SUCH LIMITED CIRCUMSTANCES. THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED 1 OR OTHERWISE TRANSFERRED ONLY (1) INSIDE THE U.S. TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE U.S. IN A TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE. SIERRA PACIFIC POWER COMPANY FLOATING RATE NOTES DUE OCTOBER 13, 2000 (THE "NOTES") Sierra Pacific Power Company, a corporation duly organized and existing under the laws of the State of Nevada (the "Company"), for value received, hereby promises to pay to Cede & Co., as the nominee of The Depository Trust Company, or registered assigns, the principal amount of $100,000,000 on October 13, 2000 (the "Maturity Date"), and to pay interest as set forth below on the outstanding principal amount hereof from time to time from September 17, 1999 or from the most recent Interest Payment Date (as defined below) to which interest has been paid or duly provided for, quarterly in arrears on December 15, 1999, March 15, June 15 and September 15, 2000 and on the Maturity Date (each, an "Interest Payment Date"), commencing December 15, 1999, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date shall, as provided herein, be paid to the person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on the fifteenth calendar day preceding each Interest Payment Date (each, a "Regular Record Date"); provided, however, that interest payable on the Maturity Date shall be -------- ------- payable to the person to whom the principal amount of this Note is payable. Any interest payable on any Interest Payment Date other than the Maturity Date and not so punctually paid or duly provided for shall forthwith cease to be payable to the person in whose name this Note is registered at the close of business on such Regular Record Date and shall instead be payable to the Person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on a special record date for the payment of such interest to be fixed by the Company, notice whereof shall be given to the registered holder of this Note (or one or more predecessor Notes) not less than 10 days prior to such special record date. Principal of this Note shall be payable against surrender hereof at the corporate trust office of the Fiscal Agent or at such other office 2 or agency of the Company as may be designated by it for such purpose in the Borough of Manhattan, The City of New York. Payment of the principal of and interest on this Note shall be made at the corporate trust office of the Fiscal Agent or at such other office or agency of the Company as may be designated by it for such purpose in the Borough of Manhattan, The City of New York, 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; provided, however, that, at the option of the Company, -------- ------- payments of interest may be made by check mailed to the address of the person entitled thereto as such address shall appear in the Note Register (as defined in Section 3 hereof); and provided further, however, that in the case of Notes -------- ------- ------- held by a depository (as defined in Section 3 hereof) or its nominee, payments of principal and interest shall be made by wire transfer of immediately available funds to an account designated by such depository. If any Interest Payment Date for this Note (other than an Interest Payment Date at the Maturity Date) would otherwise be a day that is not a Business Day (as defined in Section 1 hereof), such Interest Payment Date shall be postponed until the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Payment Date shall be the next preceding Business Day. If the Maturity Date of this Note falls on a day that is not a Business Day, the payment of principal and interest will be made on the next succeeding Business Day, and no interest on such payment shall accrue for the period from and after such Maturity Date, except as otherwise expressly provided for herein. This Note is one of a duly authorized series of securities of the Company, limited in aggregate principal amount of $100,000,000, issued under a Fiscal and Paying Agency Agreement, dated as of September 14, 1999, (the "Fiscal Agency Agreement"), duly executed and delivered by the Company to Bankers Trust Company, as Fiscal and Paying Agent (the "Fiscal Agent"). All terms that are used but not defined in this Note and that are defined in the Fiscal Agency Agreement shall have the meanings set forth therein. This Note may be redeemed at the option of the Company, in whole, beginning on March 15, 2000, and on the 15th day of each month thereafter, at a redemption price equal to 100% of the unpaid principal amount plus accrued and unpaid interest on this Note to the date of redemption. Any such redemption may be made by the Company upon not less than 15 Business Days prior notice mailed to the holder of this Note at its registered address by first-class mail. On and after the redemption date, interest shall cease to accrue on this Note unless the Company defaults in the payment of any principal then due and payable. 1. Calculation of Interest. The period beginning on, and including, September 17, 1999 and ending on, but excluding, the first Interest Payment Date and each successive period beginning on, and including, an Interest Payment Date and ending on, but excluding, the next succeeding Interest Payment Date is herein called an "Interest Period". "Business 3 Day" shall mean any day on which commercial banks and foreign exchange markets are open for business, including dealings in deposits in U.S. dollars in New York and London. The rate of interest payable from time to time in respect of this Note (the "Rate of Interest") will be a floating rate determined by reference to LIBOR, determined as described below, plus a margin of 0.75% per annum. All percentages resulting from any calculation on this Note will be rounded to the nearest one hundredth-thousandth of a percentage point, with five one millionths of a percentage point rounded upwards (e.g., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation on the Notes will be rounded to the nearest cent (with one-half cent being rounded upward). (a) At approximately 11:00 a.m. (London time) on the second day on which commercial banks are open for business (including dealings in U.S. Dollar deposits) in London (or, for purposes of paragraph (c) (ii) below, New York) prior to the commencement of the Interest Period for which such rate will apply (each such day an "Interest Determination Date"), Bankers Trust Company, London Branch, or its successor in this capacity (the "Calculation Agent"), will calculate the rate of interest (the "Rate of Interest") for such Interest Period as, subject to the provisions described below, the rate per annum equal to 0.75% above the rate appearing on the Dow Jones Telerate Page 3750 (or such other page as may replace that page on the Dow Jones Telerate Service) for three-month U.S. dollar deposits in the London inter-bank market on such Interest Determination Date. (b) If on any Interest Determination Date an appropriate rate cannot be determined from the Dow Jones Telerate Service, the Rate of Interest for the next Interest Period shall, subject to the provisions described below, be the rate per annum that the Calculation Agent certifies to be 0.75% per annum above the arithmetic mean of the offered quotations, as communicated to and at the request of the Calculation Agent by not less than two major banks in London selected by the Calculation Agent (the "Reference Banks," which expression shall include any successors nominated by the Calculation Agent), to leading banks in London by the principal London offices of the Reference Banks for three-month U.S. dollar deposits in the London inter- bank market as at 11:00 a.m. (London time) on such Interest Determination Date. (c) If on any Interest Determination Date fewer than two of such offered rates are available, the Rate of Interest for the next Interest Period shall be whichever is the higher of: (i) the Rate of interest in effect for the last preceding Interest Period to which (a) or (b) above shall have applied; and 4 (ii) the Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate per annum which the Calculation Agent determines to be 0.75% per annum above either (1) the arithmetic mean of the U.S. dollar offered rates which New York City banks selected by the Calculation Agent are or were quoting, on the relevant Interest Determination Date, for three-month deposits to the Reference Banks or those of them (being at least two in number) to which such quotations are or were, in the opinion of the Calculation Agent, being so made, or (2) in the event that the Calculation Agent can determine no such arithmetic mean, the arithmetic mean of the U.S. dollar offered rates which at least two New York City banks selected by the Calculation Agent are or were quoting on such Interest Determination Date to leading European banks for a period of three months; provided, however, that if the banks selected as aforesaid by the Calculation Agent are not quoting as mentioned above, the Rate of Interest shall be the Rate of Interest specified in (i) above. The Calculation Agent shall, as soon as practicable after 11:00 a.m. (London time) on each Interest Determination Date, determine the Rate of Interest and calculate the amount of interest payable in respect of the following Interest Period (the "Interest Amount"). The Interest Amount shall be calculated by applying the Rate of Interest to the principal amount of each Note outstanding at the commencement of the Interest Period, multiplying each such amount by the actual number of days in the Interest Period concerned (which actual number of days shall include the first day but exclude the last day of such Interest Period) divided by 360 and rounding the resultant figure upwards to the nearest cent (half a cent being rounded upwards). The determination of the Rate of Interest and the Interest Amount by the Calculation Agent shall (in the absence of willful default, bad faith or manifest error) be final and binding on all parties. Notwithstanding anything herein to the contrary, the interest rate on the Notes shall in no event be higher than the maximum rate permitted by New York law, as the same may be modified by United States law of general application. Interest shall cease to accrue on this Note on the Maturity Date unless, upon presentation of this Note, payment of principal is improperly withheld or refused, in which case, interest shall continue to accrue. 2. Calculation Agent. So long as any of this Note remains outstanding, the Company shall maintain under appointment a Calculation Agent, which shall initially be the Fiscal Agent, to calculate the Rate of Interest payable on this Note in respect of each Interest Period. If the Calculation Agent shall fail to establish the Rate of Interest for any Interest Period, or if the Company shall remove the Calculation Agent, the Company shall appoint another commercial or investment bank to act as the Calculation Agent. The Company may change the Calculation Agent without notice. 5 All certificates, communications, opinions, determinations, calculations, quotations and decisions given, expressed, made or obtained for the purposes of the provisions hereof relating to the payment and calculation of interest on this Note by the Calculation Agent shall (in the absence of willful default, bad faith or manifest error) be binding on the Company, the Calculation Agent and all of the holders and owners of beneficial interests in this Note, and no liability shall (in the absence of willful default, bad faith or manifest error) attach to the Calculation Agent in connection with the exercise or non-exercise by it of its powers, duties and discretions. 3. Registration; Registration of Transfer and Exchange. The Company shall cause to be kept at an office or agency to be maintained by the Company a register (the register maintained in such office being herein referred to as the "Note Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. The Fiscal Agent is hereby appointed "Note Registrar" for the purpose of registering Notes and transfers of Notes as herein provided. The Company may appoint co-registrars and may change any Note Registrar or co- registrar without notice. Notes shall be exchangeable pursuant to this Section 3 for Notes registered in the name of, and a transfer of a Note may be registered to, any person other than DTC or its successor depository (DTC or such successor being referred to as a "depository") for such Note or its nominee only if (i) such depository notifies the Company that it is unwilling or unable to continue as depository for such Note or if at any time such depository ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and a successor depository is not appointed by the Company within 90 days, (ii) there shall have occurred and be continuing an Event of Default (as defined below) with respect to the Notes or (iii) the Company, in its sole discretion, elects to terminate the book-entry system. Upon the occurrence of any one or more of the conditions specified in clauses (i), (ii) or (iii) of the preceding sentence, such Note shall be exchanged for Notes registered in the names of, and the transfer of such Note shall be registered to, such persons (including persons other than the depository with respect to such Notes and its nominee) as such depository shall direct, in each case subject to Section 5 hereof. Subject to the restrictions on transfer and delivery set forth in this Note, Notes may be presented for exchange or for registration of transfer (duly endorsed or with the form of transfer endorsed thereon duly executed) at the office of the Fiscal Agent or at the office of any other transfer agent designated by the Company for such purpose. Such transfer or exchange shall be effected upon the Fiscal Agent's or such other transfer agent's, as the case may be, being satisfied with the documents of title and identity of the person making the request. The Company may at any time designate additional transfer agents or rescind the designation of any transfer agent or approve a change in the office through which any transfer agent acts; provided, however, that there -------- ------- shall at all times be a transfer agent in the Borough of Manhattan, The City of New York. 6 The Notes and any certificates for Notes issued in exchange for Notes or a beneficial interest therein will bear the third legend set forth in this Note. The holder of a certificated Note may transfer such Note, subject to compliance with the provisions of such legend, as provided in the preceding paragraph. Upon the transfer, exchange or replacement of Notes bearing such legend, or upon specific request for removal of such legend on a Note, the Company will deliver only Notes bearing such legend, or will refuse to remove such legend, as the case may be, unless there is delivered to the Company such satisfactory evidence, which may include an opinion of counsel, as may reasonably be required by the Company that neither such legend nor the restrictions on transfer set forth therein are required to ensure compliance with the provisions of the Securities Act. 4. Acts by Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by the Notes or the Fiscal Agency Agreement to be given or taken by holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such holders in person or by an agent duly appointed in writing; and, except as otherwise expressly provided in the Notes or the Fiscal Agency Agreement, such action shall become effective when such instrument or instruments are delivered to the Fiscal Agent and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of the Notes and the Fiscal Agency Agreement and conclusive in favor of the Fiscal Agent and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his or her individual capacity, such certificate or affidavit shall also constitute sufficient proof of his or her authority. The fact and date of the execution of any such instrument or writing, or the authority of the person executing the same, may also be proved in any other manner which the Fiscal Agent deems sufficient. (c) The Company may set any day as the record date for the purpose of determining the holders of outstanding Notes entitled to make any request or demand or give any authorization, direction, notice, consent or waiver or take other action, provided or permitted by the Notes and the Fiscal Agency Agreement to be made, given or taken by holders of the Notes. 7 With regard to any record date set pursuant to the immediately preceding paragraph, the holders of outstanding Notes on such record date (or their duly appointed agents), and only such persons, shall be entitled to take relevant action, whether or not such holders remain holders after such record date. With regard to any action that may be taken hereunder only by holders of a requisite principal amount of outstanding Notes (or their duly appointed agents) and for which a record date is set pursuant to the immediately preceding paragraph, the Company, may at its option, set an expiration date after which no such action purported to be taken by any holder shall be effective unless taken on or prior to such expiration date by holders of the requisite principal amount of outstanding Notes on such record date (or their duly appointed agents). On or prior to any expiration date set pursuant to this paragraph, the Company may, on one or more occasions at its option, extend such expiration date to any later date. Nothing in this paragraph shall prevent any holder (or any duly appointed agent thereof) from taking, at any time, any action contrary to or different from, any action previously taken, or purported to have been taken hereunder by such holder, in which event the Company may set a record date in respect thereof pursuant to this paragraph. Notwithstanding the foregoing, the Company shall not set a record date for, and the provisions to this paragraph shall not apply with respect to, any action to be taken by holders pursuant to Section 8 hereof. Upon receipt by the Fiscal Agent of notice of any default, any declaration of acceleration, or any rescission and annulment of any such declaration, or of any direction in accordance with Section 8 hereof, a record date shall automatically and without any other action by any person be set for the purpose of determining the holders of outstanding Notes entitled to join in such notice, declaration, or rescission and annulment, or direction, as the case may be, which record date shall be the close of business on the date the Fiscal Agent receives such notice, declaration, rescission and annulment or direction, as the case may be. The holders of outstanding Notes on such record date (or their duly appointed agent), and only such persons, shall be entitled to join in such notice, declaration, rescission and annulment, or direction, as the case may be, whether or not such holders remain holders after such record date; provided that, unless -------- such notice, declaration, rescission and annulment, or direction, as the case may be, shall have become effective by virtue of holders of the requisite principal amount of outstanding Notes on such record date (or their duly appointed agents) having joined therein on or prior to the 90th day after such record date, such notice of default, declaration, or rescission and annulment or direction given or made by the holders, as the case may be, shall automatically and without any action by any person be canceled and of no further effect. Nothing in this paragraph shall prevent a holder (or a duly appointed agent thereof) from giving, before or after the expiration of such 90-day period, a notice of default, a declaration of acceleration, a rescission and annulment of a declaration of acceleration or a direction, contrary to or different from, or, after the expiration of such period, identical to, a previously given notice, declaration, rescission and annulment, or direction, as the case may be, that has been canceled pursuant to the 8 proviso to the preceding sentence, in which event a new record date in respect thereof shall be set pursuant to this paragraph. (d) The ownership of the Notes shall be proved by the Note Register. (e) Any request, demand, authorization, direction, notice, consent, waiver, or other Act of the holder of any Note shall bind every future holder of the same Note and the holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Fiscal Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Note. 5. Denominations. The Notes are issuable only in registered form without coupons in denominations of $100,000 and integral multiples of $1,000 in excess thereof. 6. Persons Deemed Owners. The Company, the Fiscal Agent and any agent of the Company or the Fiscal Agent may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes whatsoever, whether or not this Note shall be overdue, and neither the Company, the Fiscal Agent nor any such agent shall be affected by notice to the contrary. 7. Amendments and Waivers. Without the consent of any holders of the Notes, the Company, when authorized by a resolution duly adopted by the Board of Directors of the Company, and the Fiscal Agent, at any time and from time to time, may amend the terms of the Notes and enter into one or more agreements supplemental to the Fiscal Agency Agreement, in form satisfactory to the Fiscal Agent, for any of the following purposes: (a) to evidence the succession of another person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Fiscal Agency Agreement; or (b) to add to the covenants of the Company for the benefit of the holders of the Notes; or (c) to add any additional Events of Default; or (d) to secure the Notes; or (e) to evidence and provide for the acceptance of appointment by a successor Fiscal Agent with respect to the Notes; or (f) to amend the restrictions on transfer applicable to the Notes as set forth on this Note; or 9 (g) to cure any ambiguity or to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to correct or supplement any defective provision contained herein or in the Fiscal Agency Agreement, provided that such action pursuant to this clause -------- (g) shall not adversely affect the interests of the holders of the Notes. With the consent of the holders of not less than 66-2/3% in principal amount of the outstanding Notes, by act of said holders delivered to the Company and the Fiscal Agent, the Company, when authorized by a resolution duly adopted by the Board of Directors of the Company, and the Fiscal Agent, at any time and from time to time, may amend the terms of the Notes and enter into an agreement supplemental to the Fiscal Agency Agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Notes, or the Fiscal Agency Agreement as the same pertains to the Notes, or of modifying in any manner the rights of the holders of the Notes: provided, -------- however, that no such amendment or supplemental agreement shall, without the - ------- consent of the holder of each outstanding Note affected thereby, (1) change the stated maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon, or change any place of payment where, or the coin or currency in which, any Note or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the stated maturity thereof, or (2) reduce the percentage in principal amount of the outstanding Notes, the consent of whose holders is required for any such amendment or supplemental agreement or the consent of whose holders is required for any waiver provided for herein or in the Fiscal Agency Agreement, or (3) modify any of the provisions of this Section or Section 9, except to increase any such percentage or to provide that certain other provisions of the Notes cannot be modified or waived without the consent of the holder of each outstanding Note affected thereby. It shall not be necessary for any act of holders under this Section 7 to approve the particular form of any proposed amendment or supplemental agreement, but it shall be sufficient if such act shall approve the substance thereof. Upon the execution of any agreement supplement to the Fiscal Agency Agreement as permitted by this Section 7, the Notes and the Fiscal Agency Agreement shall be modified in accordance therewith, and such supplemental agreement shall form a part of the Notes and the Fiscal Agency Agreement, as the same pertains to the Notes, for all purposes; and every 10 holder of the Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. 8. Defaults and Remedies. The occurrence of any of the following events shall constitute an Event of Default with respect to the Notes: (a) default in the payment of the principal of any of the Notes when the same becomes due and payable; or (b) default in the payment of any installment of interest upon any of the Notes when the same becomes due and payable, and continuance of such default for a period of 30 days; or (c) failure on the part of the Company duly to observe or perform any other of the covenants or agreements on the part of the Company in the Notes for a period of 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 Fiscal Agent by registered or certified mail or to the Company and the Fiscal Agent by the holders of at least 25% in aggregate principal amount of the Notes, or (d) a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of the Company under the Federal Bankruptcy Code or any other similar applicable Federal or State law, and such decree or order shall have continued undischarged and unstayed for a period of 60 days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee in the bankruptcy or insolvency of the Company or of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of 60 days; or (e) the Company shall institute proceedings to be adjudicated bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Federal Bankruptcy Code or any other similar Federal or State law, or shall consent to the filing of any such petition or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or of its property, or shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts generally as they become due. If an Event of Default occurs and is continuing, the holders of at least 25% in principal amount of the Notes then outstanding may declare all the Notes to be due and payable immediately. Holders of a majority in principal amount of the Notes may waive an Event of 11 Default and rescind any related declaration except as provided in Section 9(a) hereof. The Fiscal Agent may withhold from holders of Notes notice of any continuing Event of Default, except in respect of a default in the payment of principal of or interest on the Notes, if it determines that withholding such notice is in their interest. 9. Waivers. (a) The holders of not less than a majority in principal amount of the outstanding Notes may on behalf of the holders of the Notes waive any past default hereunder with respect to the Notes and its consequences, except a default (1) in the payment of the principal of or interest on any Note, or (2) In respect of a covenant or provision hereof which under Section 7 cannot be modified or amended without the consent of the holder of each outstanding Note affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of the Notes; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. (b) The Company may omit in any particular instance to comply with any term, provision or condition set forth in the Notes or the Fiscal Agency Agreement with respect to the Notes if before the time for such compliance the holders of at least 66-2/3% in principal amount of the outstanding Notes shall, by act of such holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but (i) without the consent of the holder of each Note affected thereby, no such waiver shall extend to or affect any term, provision or condition which under Section 7 cannot be modified or amended without the consent of the holder of each outstanding Note affected, and (ii) no such waiver shall extend to or affect any term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and any duties of the Fiscal Agent in respect of any such term, provision or condition shall remain in full force and effect. 10. Company May Consolidate Etc., Only on Certain Terms. The Company covenants that it will not merge or consolidate with any other corporation or sell or convey all or substantially all of its assets to any person, firm or corporation, except that the Company may merge or consolidate with, or sell or convey all or substantially all of its assets to, any other corporation, provided that (i) either the Company shall be the continuing corporation, or the - -------- successor corporation (if other than the Company) shall be a corporation organized and existing under the laws of the United States of America or a State thereof and such corporation shall expressly assume the due and punctual payment of the principal of and interest on all the 12 Notes, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Note and the Fiscal Agency Agreement to be performed by the Company, by supplemental agreement in form satisfactory to the Fiscal Agent, executed and delivered to the Fiscal Agent by such corporation, and (ii) the Company or such successor corporation, as the case may be, shall not, immediately after such merger, consolidation, sale or conveyance, be in default in the performance of any such covenant or condition. Upon any consolidation of the Company with, or merger of the Company into, any other person or any sale or conveyance of all or substantially all of the assets of the Company in accordance with this Section 10, the successor person formed by such consolidation or into which the Company is merged or to which such sale or conveyance is made shall succeed to, and be substituted for, and may exercise every right and power of the Company under this Note and the Fiscal Agency Agreement with the same effect as if such successor person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor person shall be relieved of all obligations and covenants under the Notes and the Fiscal Agency Agreement. 11. Unclaimed Amounts. Any money deposited with the Fiscal Agent in trust for the payment of the principal of or interest on any Note and remaining unclaimed for twelve months after such principal or interest has become due and payable shall be paid to the Company upon its request; and the holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Fiscal Agent with respect to such money shall thereupon cease. 12. Mutilated, Destroyed, Lost and Stolen Notes. If any Note becomes mutilated or defaced or is apparently destroyed, lost or stolen, the Fiscal Agent shall, subject to the provisions of this Section 12, authenticate and deliver a new Note in exchange and substitution for the mutilated or defaced Note or in lieu of or in substitution for the apparently destroyed, lost or stolen Note. Application for the authentication and delivery of a substitute Note pursuant to this Section 12 may be made at the office of the Fiscal Agent. If the applicant for any substitute Note shall furnish to the Company and the Fiscal Agent (i) in the case of any such request in case of loss or theft, such security or indemnity as may be required by the Company and the Fiscal Agent in their sole discretion to indemnify and defend and to save each of them and any agent of either of them harmless, and (ii) in the case of any request for a substitute Note in case of destruction, loss or theft, evidence to the satisfaction of the Company and the Fiscal Agent of the apparent destruction, loss or theft of such Note and of the ownership thereof, then, in the absence of notice to the Company or the Fiscal Agent that such Note has been acquired by a bona fide purchaser, the Company shall execute and the Fiscal Agent shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Note, a new Note of like tenor and principal amount and bearing a number not contemporaneously outstanding. 13 In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Note, pay such Note. Upon the issuance of any substitute Note under this Section 12, the Company may require the payment of a sum sufficient to cover any tax assessment or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Fiscal Agent) connected therewith. Every new Note issued pursuant to this Section in lieu of any destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all the benefits of the Fiscal Agency Agreement equally and proportionately with any and all other Notes. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. 14 13. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Fiscal Agency Agreement, or for any claim based on, in respect of or by reason of such obligations or their creation. Each holder (and each beneficial owner) of a Note by accepting such Note (or acquisition of a beneficial interest therein) waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Notes. THIS NOTE SHALL FOR ALL PURPOSES BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. This Note shall not be valid or obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Fiscal Agent under the Fiscal Agency Agreement. [The remainder of this page is left blank intentionally.] 15 IN WITNESS WHEREOF, the Company has caused this instrument to be signed in its corporate name, manually or by facsimile, by an Authorized Representative and a facsimile of its corporate seal to be affixed hereunto or imprinted hereon, attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. SIERRA PACIFIC POWER COMPANY Attest: _________________________ By: ___________________________ Name: Title: Dated: September 17, 1999 FISCAL AGENT'S CERTIFICATE OF AUTHENTICATION This is one of the Notes referred to in the within-mentioned Fiscal Agency Agreement. BANKERS TRUST COMPANY, as Fiscal Agent By: __________________________ Authorized Signer 16 EX-4.C 5 INDENTURE DATED APRIL 9, 1999 EXHIBIT (4)(C) SPPC FUNDING LLC, Note Issuer and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., Note Trustee INDENTURE Dated as of April 9, 1999 Issuable in Series 1 TABLE OF CONTENTS -----------------
Page ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE........................................... 2 SECTION 1.01. Definitions................................................................. 2 SECTION 1.02. Rules of Construction....................................................... 12 ARTICLE II THE NOTES........................................................................... 13 SECTION 2.01. Form........................................................................ 13 SECTION 2.02. Denominations; Notes Issuable in Series..................................... 13 SECTION 2.03. Execution, Authentication and Delivery...................................... 15 SECTION 2.04. Temporary Notes............................................................. 15 SECTION 2.05. Registration; Registration of Transfer and Exchange......................... 15 SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Notes.................................. 17 SECTION 2.07. Persons Deemed Owner........................................................ 18 SECTION 2.08. Payment of Principal, Premium, if any, and Interest; Interest on Overdue Principal; Principal, Premium, if any, and Interest Rights Preserved.... 18 SECTION 2.09. Cancellation................................................................ 19 SECTION 2.10. Amount Unlimited; Authentication and Delivery of Notes...................... 20 SECTION 2.11. Release of Collateral....................................................... 26 ARTICLE III COVENANTS.......................................................................... 26 SECTION 3.01. Payment of Principal, Premium, if any, and Interest......................... 26 SECTION 3.02. Maintenance of Office or Agency............................................. 26 SECTION 3.03. Money for Payments To Be Held in Trust...................................... 26 SECTION 3.04. Existence................................................................... 28 SECTION 3.05. Protection of Collateral.................................................... 28 SECTION 3.06. Opinions as to Collateral................................................... 29 SECTION 3.07. Performance of Obligations; Servicing....................................... 29 SECTION 3.08. Negative Covenants.......................................................... 31 SECTION 3.09. Annual Statement as to Compliance........................................... 32 SECTION 3.10. Note Issuer May Consolidate, etc., Only on Certain Terms.................... 32 SECTION 3.11. Successor or Transferee..................................................... 34 SECTION 3.12. No Other Business........................................................... 35 SECTION 3.13. No Borrowing................................................................ 35 SECTION 3.14. Servicer's Obligations...................................................... 35 SECTION 3.15. Guarantees, Loans, Advances and Other Liabilities........................... 35
2 SECTION 3.16. Capital Expenditures........................................................ 35 SECTION 3.17. Non-Routine True-Up Adjustment.............................................. 35 SECTION 3.18. Restricted Payments......................................................... 35 SECTION 3.19. Notice of Events of Default................................................. 36 SECTION 3.20. Further Instruments and Acts................................................ 36 SECTION 3.21. Purchase of Subsequent Transition Property.................................. 36 ARTICLE IV SATISFACTION AND DISCHARGE; DEFEASANCE.............................................. 37 SECTION 4.01. Satisfaction and Discharge of Indenture; Defeasance......................... 37 SECTION 4.02. Conditions to Defeasance.................................................... 39 SECTION 4.03. Application of Trust Money.................................................. 40 SECTION 4.04. Repayment of Moneys Held by Paying Agent.................................... 40 ARTICLE V REMEDIES............................................................................. 41 SECTION 5.01. Events of Default........................................................... 41 SECTION 5.02. Acceleration of Maturity; Rescission and Annulment.......................... 42 SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Note Trustee........ 43 SECTION 5.04. Remedies; Priorities........................................................ 45 SECTION 5.05. Optional Preservation of the Collateral..................................... 46 SECTION 5.06. Limitation of Suits......................................................... 46 SECTION 5.07. Unconditional Rights of Noteholders To Receive Principal, Premium, if any, and Interest.................................................... 47 SECTION 5.08. Restoration of Rights and Remedies.......................................... 47 SECTION 5.09. Rights and Remedies Cumulative.............................................. 47 SECTION 5.10. Delay or Omission Not a Waiver.............................................. 47 SECTION 5.11. Control by Noteholders...................................................... 48 SECTION 5.12. Waiver of Past Defaults..................................................... 48 SECTION 5.13. Undertaking for Costs....................................................... 49 SECTION 5.14. Waiver of Stay or Extension Laws............................................ 49 SECTION 5.15. Action on Notes............................................................. 49 SECTION 5.16. Performance and Enforcement of Certain Obligations.......................... 49 ARTICLE VI THE NOTE TRUSTEE..................................................................... 50 SECTION 6.01. Duties of Note Trustee...................................................... 50 SECTION 6.02. Rights of Note Trustee...................................................... 51 SECTION 6.03. Individual Rights of Note Trustee........................................... 52 SECTION 6.04. Note Trustee's Disclaimer................................................... 52 SECTION 6.05. Notice of Defaults.......................................................... 52 SECTION 6.06. Reports by Note Trustee to Holders.......................................... 53
3 SECTION 6.07. Compensation and Indemnity.................................................. 53 SECTION 6.08. Replacement of Note Trustee................................................. 54 SECTION 6.09. Successor Note Trustee by Merger............................................ 55 SECTION 6.10. Appointment of Co-Trustee or Separate Trustee............................... 55 SECTION 6.11. Eligibility; Disqualification............................................... 56 SECTION 6.12. Representations and Warranties of Note Trustee.............................. 56 ARTICLE VII NOTEHOLDERS' LISTS AND REPORTS..................................................... 57 SECTION 7.01. Note Issuer To Furnish Note Trustee Names and Addresses of Noteholders...... 57 SECTION 7.02. Preservation of Information; Communications to Noteholders.................. 57 ARTICLE VIII ACCOUNTS, DISBURSEMENTS AND RELEASES.............................................. 57 SECTION 8.01. Collection of Money......................................................... 57 SECTION 8.02. Collection Account.......................................................... 58 SECTION 8.03. General Provisions Regarding the Collection Account......................... 61 SECTION 8.04. Release of Collateral....................................................... 62 SECTION 8.05. Opinion of Counsel.......................................................... 62 SECTION 8.06. Reports by Independent Accountants.......................................... 62 SECTION 8.07. Letter of Credit............................................................ 63 ARTICLE IX SUPPLEMENTAL INDENTURES............................................................. 63 SECTION 9.01. Supplemental Indentures Without Consent of Noteholders...................... 63 SECTION 9.02. Supplemental Indentures with Consent of Noteholders......................... 64 SECTION 9.03. Execution of Supplemental Indentures........................................ 66 SECTION 9.04. Effect of Supplemental Indenture............................................ 66 SECTION 9.05. Reference in Notes to Supplemental Indentures............................... 66 ARTICLE X REDEMPTION OF NOTES.................................................................. 67 SECTION 10.01. Optional Redemption by Note Issuer......................................... 67 SECTION 10.02. Form of Optional Redemption Notice......................................... 67 SECTION 10.03. Notes Payable on Optional Redemption Date or Payment Date.................. 68 SECTION 10.04. Mandatory Redemption by Note Issuer........................................ 68 SECTION 10.05. Form of Mandatory Redemption Notice........................................ 68 SECTION 10.06. Notes Payable on Mandatory Redemption Date or Date......................... 69 ARTICLE XI MISCELLANEOUS....................................................................... 69 SECTION 11.01. Compliance Certificates and Opinions, etc.................................. 69
4 SECTION 11.02. Form of Documents Delivered to Note Trustee................................ 71 SECTION 11.03. Acts of Noteholders........................................................ 72 SECTION 11.04. Notices, etc., to Note Trustee, Note Issuer, Infrastructure Bank and Moody's............................................................. 72 SECTION 11.05. Notices to Noteholders; Waiver............................................. 73 SECTION 11.06. Effect of Headings and Table of Contents................................... 73 SECTION 11.07. Successors and Assigns..................................................... 73 SECTION 11.08. Separability............................................................... 74 SECTION 11.09. Benefits of Indenture...................................................... 74 SECTION 11.10. Legal Holidays............................................................. 74 SECTION 11.11. Governing Law.............................................................. 74 SECTION 11.12. Counterparts............................................................... 74 SECTION 11.13. Recording of Indenture..................................................... 74 SECTION 11.14. Trust Obligation........................................................... 74 SECTION 11.15. No Recourse to Note Issuer................................................. 75 SECTION 11.16. Inspection................................................................. 75
5 Exhibits -------- Exhibit A-1 Form of Sale Agreement Exhibit A-2 Form of Servicing Agreement Exhibit B Form of Note Exhibit C Form of Series Supplement 6 INDENTURE INDENTURE dated as of April 9, 1999, between SPPC FUNDING LLC, a Delaware limited liability company (the "Note Issuer"), and BANKERS TRUST COMPANY OF ----------- CALIFORNIA, N.A., a national banking association, as trustee (the "Note ---- Trustee"). - ------- The Note Issuer has duly authorized the execution and delivery of this Indenture to provide for one or more Series of Notes, issuable as provided in this Indenture. Each such Series of Notes will be issued only under a separate Series Supplement to this Indenture duly executed and delivered by the Note Issuer and the Note Trustee. The Note Issuer is entering into this Indenture, and the Note Trustee is accepting the trusts created hereby, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. GRANTING CLAUSE The Note Issuer hereby Grants to the Note Trustee at the Closing Date, as Note Trustee for the benefit of the Holders of the Notes from time to time issued and outstanding, all of the Note Issuer's right, title and interest in and to (a) the Transition Property transferred by the Seller to the Note Issuer pursuant to the Sale Agreement and all proceeds thereof, (b) any Subsequent Transition Property transferred by the Seller to the Note Issuer pursuant to each Subsequent Sale Agreement and all proceeds thereof, (c) the Sale Agreement and each Subsequent Sale Agreement, (d) the Servicing Agreement, (e) the Collection Account (including all subaccounts thereof) and all amounts or investment property on deposit therein or credited thereto from time to time, (f) all other property of whatever kind owned from time to time by the Note Issuer, (g) all present and future claims, demands, causes and choses in action in respect of any or all of the foregoing and all payments on or under and all proceeds of every kind and nature whatsoever in respect of any or all of the foregoing, including all proceeds of the conversion, voluntary or involuntary, into cash or other liquid property, all cash proceeds, accounts, accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts, insurance proceeds, condemnation awards, rights to payment of any and every kind, and other forms of obligations and receivables, instruments and other property that at any time constitute all or part of or are included in the proceeds of any of the foregoing and (h) all proceeds of the foregoing (collectively, the "Collateral"; it being understood that the following do not constitute Collateral: (i) the cash contributed to the Note Issuer by the Seller that is not held in the Capital Subaccount, including cash that has been released to the Note Issuer pursuant to Section 8.02(d) following retirement of a Series of Notes, (ii) net investment earnings that have been released to the Note Issuer pursuant to Section 8.02(d), (iii) the Overcollateralization Amount with respect to a Series of Notes that has been released to the Note Issuer pursuant to Section 8.02(d) following retirement of such Series of Notes) and (iv) amounts deposited with the Note Issuer on the Closing Date for payment of costs of issuance with respect to the Notes or the Certificates as set forth on the flow of funds memorandum delivered on the Closing Date (together with any interest earnings thereon), 7 it being understood that such amounts described in this clause (iv) shall not be subject to Section 3.15. The foregoing Grant is made in trust to secure the payment of principal of and premium, if any, interest on, and any other amounts owing in respect of, the Notes equally and ratably without prejudice, priority or distinction, except as expressly provided in this Indenture, and to secure compliance with the provisions of this Indenture with respect to the Notes, all as provided in this Indenture. The Note Trustee, as trustee on behalf of the Holders of the Notes, acknowledges such grant, accepts the trusts hereunder in accordance with the provisions hereof and agrees to perform its duties herein required. ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE ------------------------------------------ SECTION 1.01. Definitions. ----------- (a) Except as otherwise specified herein or as the context may otherwise require, the following terms have the respective meanings set forth below for all purposes of this Indenture. "Act" has the meaning specified in Section 11.03(a). --- "Actual FTA Collections" means, with respect to any Collection Period, FTA ---------------------- Collections actually received with respect to such Collection Period. "Administrative Services Agreement" means the Administrative Services --------------------------------- Agreement dated as of April 9, 1999, as the same may be amended and supplemented from time to time, between the Administrator and the Note Issuer. "Administrator" means Sierra Pacific Power Company, or any successor ------------- Administrator under the Administrative Services Agreement. "Affiliate" means, with respect to any specified Person, any other Person --------- controlling or controlled by or under common control with such specified Person. For the 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. "Authorized Officer" means, with respect to the Note Issuer, any officer of ------------------ the Note Issuer who is authorized to act for the Note Issuer in matters relating to the Note Issuer and who is identified on the list of Authorized Officers delivered by the Note Issuer to the 8 Note Trustee on the Closing Date (as such list may be modified or supplemented from time to time thereafter). "Basic Documents" means this Indenture, the Trust Agreement, the Sale --------------- Agreement, the Servicing Agreement, the Administrative Services Agreement, the Note Purchase Agreement, the DTC Agreement, the Fee and Indemnity Agreement, the Purchase Agreement and all other documents and certificates delivered in connection therewith and, with respect to any subsequent Series of Notes and Certificates, the comparable documents for each of the foregoing. "Business Day" means any day other than a Saturday, a Sunday or a day on ------------ which banking institutions or trust companies in New York, New York or San Francisco, California are authorized or obligated by law, regulation or executive order to remain closed. "Capital Subaccount" has the meaning set forth in Section 8.02(a). ------------------ "Certificate Trustee" means the Person acting as certificate trustee under ------------------- the Trust Agreement. "Certificates" has the meaning set forth in the Trust Agreement. ------------ "Closing Date" means April 9, 1999. ------------ "Code" means the Internal Revenue Code of 1986, as amended from time to ---- time, and Treasury Regulations promulgated thereunder. "Collateral" has the meaning specified in the Granting Clause of this ---------- Indenture. "Collection Account" has the meaning specified in Section 8.02(a). ------------------ "Collection Period" means each calendar month immediately preceding the ----------------- respective Remittance Date. "Corporate Trust Office" means the principal office of the Note Trustee at ---------------------- which at any particular time its corporate trust business shall be administered, which office at the date of the execution of this Indenture is located at Four Albany Street, New York, NY 10006, Attention: Structured Finance Group, or at such other address as the Note Trustee may designate from time to time by notice to the Noteholders and the Note Issuer, or the principal corporate trust office of any successor Note Trustee (the address of which the successor Note Trustee will notify the Noteholders and the Note Issuer). "Covenant Defeasance Option" has the meaning specified in Section 4.01(b). -------------------------- 9 "Default" means any occurrence that is, or with notice or the lapse of time ------- or both would become, an Event of Default. "Delaware Trustee" means the Person acting as Delaware trustee under the ---------------- Trust Agreement. "DTC Agreement" has the meaning set forth in the Trust Agreement. ------------- "Eligible Deposit Account" means either (a) a segregated account with an ------------------------ Eligible Institution or (b) a segregated trust account with the corporate trust department of a depository institution organized under the laws of the United States of America or any one of the states thereof or the District of Columbia (or any domestic branch of a foreign bank), having corporate trust powers and acting as trustee for funds deposited in such account, so long as any of the securities of such depository institution shall have a credit rating from Moody's in one of its generic rating categories that signifies investment grade. "Eligible Institution" means (a) the corporate trust department of the Note -------------------- Trustee, provided that an account with the Note Trustee will only be an Eligible -------- Deposit Account if it is a segregated trust account, or (b) a depository institution organized under the laws of the United States of America or any State (or any domestic branch of a foreign bank), that (i) has either (A) a long-term unsecured debt rating of A2 by Moody's or (B) a certificate of deposit rating of P-1 by Moody's, or any other long-term, short-term or certificate of deposit rating acceptable to Moody's and (ii) whose deposits are insured by the FDIC. If so qualified under clause (b) above, the Note Trustee may be considered an Eligible Institution for the purposes of clause (a) of this definition. "Eligible Investments" mean instruments or investment property that -------------------- evidence: (a) direct obligations of, and obligations fully and unconditionally guaranteed as to timely payment by, the United States of America; (b) demand deposits, time deposits, certificates of deposit or bankers' acceptances of depository institutions meeting the requirements of clause (b) of the definition of Eligible Institutions; (c) commercial paper (other than commercial paper of the Seller) having, at the time of the investment or contractual commitment to invest therein, a rating from Moody's in the highest investment category granted thereby; (d) investments in money market funds having a rating from Moody's in the highest investment category granted thereby (including funds for which the Note Trustee or any of its Affiliates is investment manager or advisor); (e) repurchase obligations with respect to any security that is a direct obligation of, or fully guaranteed by, the United States of America or any agency or instrumentality thereof the obligations of which are backed by the full faith and credit of the United States 10 of America, in either case entered into with depository institutions meeting the requirements of clause (b) of the definition of Eligible Institutions; and (f) any other investment permitted by Moody's. "Estimated FTA Collections" means the amount of FTA Payments the Servicer ------------------------- is required to remit to the Collection Account on or before the eighteenth day of each calendar month (or, if such eighteenth day is not a Business Day, the Business Day immediately following such eighteenth day) pursuant to Section 6(e) of Annex I to the Servicing Agreement. "Event of Default" has the meaning specified in Section 5.01. ---------------- "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "FDIC" means the Federal Deposit Insurance Corporation or any successor. ---- "Fee and Indemnity Agreement" has the meaning set forth in the Trust --------------------------- Agreement. "Final Maturity Date" means, with respect to any Series of Notes, the Final ------------------- Maturity Date therefor as specified in the Series Supplement relating to such Series of Notes. "FTA Collections" means FTA Payments received by the Servicer that are --------------- remitted to the Collection Account. "FTA Payments" means the payments made by the California Customers based on ------------ the FTA Charges. "General Subaccount" has the meaning set forth in Section 8.02(a). ------------------ "Grant" means mortgage, pledge, bargain, sell, warrant, alienate, remise, ----- release, convey, assign, transfer, create, and grant a lien upon and a security interest in and right of set-off against, deposit, set over and confirm pursuant to this Indenture. A Grant of the Collateral or of any other agreement or instrument shall include all rights, powers and options (but none of the obligations) of the Granting party thereunder, including the immediate and continuing right to claim for, collect, receive and give receipt for payments in respect of the Collateral and all other moneys payable thereunder, to give and receive notices and other communications, to make waivers or other agreements, to exercise all rights and options, to bring Proceedings in the name of the Granting party or otherwise and generally to do and receive anything that the Granting party is or may be entitled to do or receive thereunder or with respect thereto. "Holder" or "Noteholder" means the Person in whose name a Note is ------ ---------- registered on the Note Register. 11 "Indenture" or "this Indenture" means this instrument as originally --------- -------------- executed and, as from time to time supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, as so supplemented or amended, or both, and shall include the forms and terms of the Notes established hereunder. "Independent" means, when used with respect to any specified Person, that ----------- the Person (a) is in fact independent of the Note Issuer, any other obligor upon the Notes, the Seller, the Servicer and any Affiliate of any of the foregoing Persons, (b) does not have any direct financial interest or any material indirect financial interest in the Note Issuer, any such other obligor, the Seller, the Servicer or any Affiliate of any of the foregoing Persons and (c) is not connected with the Note Issuer, any such other obligor, the Seller, the Servicer or any Affiliate of any of the foregoing Persons as an officer, employee, promoter, underwriter, trustee, partner, director or person performing similar functions. "Independent Certificate" means a certificate or opinion to be delivered to ----------------------- the Note Trustee under the circumstances described in, and otherwise complying with, the applicable requirements of Section 11.01, made by an Independent appraiser or other expert appointed by an Issuer Order and consented to by the Note Trustee, and such opinion or certificate shall state that the signer has read the definition of "Independent" in this Indenture and that the signer is Independent within the meaning thereof. "Infrastructure Bank" means the California Infrastructure and Economic ------------------- Development Bank or any successor in interest. "Issuer Order" and "Issuer Request" means a written order or request signed ------------ -------------- in the name of the Note Issuer by any one of its Authorized Officers and delivered to the Note Trustee. "Legal Defeasance Option" has the meaning specified in Section 4.01(b). ----------------------- "Letter of Credit" means the letter of credit, dated as of April 9, 1999, ---------------- from the Letter of Credit Bank for the benefit of the Note Issuer and the Note Trustee, as the same may be amended and supplemented from time to time. "Letter of Credit Bank" means Wells Fargo Bank, N. A. or another financial --------------------- institution with a short-term debt rating of at least "P-1." "Mandatory Redemption Date" has the meaning specified in Section 10.04. ------------------------- "Mandatory Redemption Price" has the meaning specified in Section 10.04. -------------------------- "Minimum Denomination" means, with respect to any Series of Notes, the -------------------- minimum denomination therefor specified in the Series Supplement relating to such Series 12 of Notes, which minimum denomination shall be not less than $1,000 and, except as otherwise provided in such Series Supplement, integral multiples thereof. "Moody's" means Moody's Investors Service Inc. or its successor or, if no ------- such organization or successor is any longer in existence, "Moody's" shall mean a nationally recognized statistical rating organization or other comparable Person designated by the Note Issuer, written notice of which designation shall be given to the Note Trustee, the Certificate Trustee and the Servicer. "Note Interest Rate" means, with respect to any Series of Notes, the rate ------------------ at which interest accrues on the Notes of such Series, as specified in the Series Supplement relating to the Notes of such Series. "Note Issuer" means the party named as such in this Indenture until a ----------- successor replaces it and, thereafter, means the successor. "Note Purchase Agreement" has the meaning set forth in the Trust Agreement. ----------------------- "Note Register" and "Note Registrar" have the respective meanings specified ------------- -------------- in Section 2.05. "Note Trustee" means Bankers Trust Company of California, N.A., a national ------------ banking association, as Note Trustee under this Indenture, or any successor Note Trustee under this Indenture. "Notes" has the meaning specified in Section 2.02. ----- "Officer's Certificate" means a certificate signed by any Authorized --------------------- Officer of the Note Issuer, under the circumstances described in, and otherwise complying with, the applicable requirements of Section 11.01, and delivered to the Note Trustee. Unless otherwise specified, any reference in this Indenture to an Officer's Certificate shall be to an Officer's Certificate of any Authorized Officer of the Note Issuer. "Operating Expenses" means all fees, costs and expenses of the Note Issuer, ------------------ including all amounts owed by the Note Issuer to the Note Trustee, the Certificate Trustee, the Delaware Trustee and the Infrastructure Bank, the Servicing Fee, the Quarterly Administration Fee, any fees, costs and expenses payable or reimbursable by the Note Issuer to the Administrator and legal and accounting fees, costs and expenses of the Note Issuer and the Trust. "Opinion of Counsel" means one or more written opinions of counsel who may, ------------------ except as otherwise expressly provided in this Indenture, be employees of or counsel to the Note Issuer and who shall be satisfactory to the Note Trustee, and which opinion or opinions shall be addressed to the Note Trustee as trustee, shall comply with any applicable 13 requirements of Section 11.01, and shall be in form and substance satisfactory to the Note Trustee. "Optional Redemption Date" means, with respect to any Series, the Payment ------------------------ Date specified by the Note Issuer for the redemption of the Notes of such Series pursuant to Section 10.01. "Optional Redemption Price" has the meaning specified in Section 10.01. ------------------------- "Outstanding" means, as of the date of determination, all Notes theretofore ----------- authenticated and delivered under this Indenture except: (i) Notes theretofore canceled by the Note Registrar or delivered to the Note Registrar for cancellation; (ii) Notes or portions thereof the payment for which money in the necessary amount has been theretofore deposited with the Note Trustee or any Paying Agent in trust for the Holders of such Notes, provided, however, that if -------- ------- such Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor, satisfactory to the Note Trustee, has been made; and (iii) Notes in exchange for or in lieu of other Notes which have been authenticated and delivered pursuant to this Indenture unless proof satisfactory to the Note Trustee is presented that any such Notes are held by a bona fide purchaser; provided that in determining whether the Holders of the requisite Outstanding - -------- Amount of the Notes or any Series thereof have given any request, demand, authorization, direction, notice, consent or waiver hereunder or under any Basic Document, Notes owned by the Note Issuer, any other obligor upon the Notes, the Seller or any Affiliate of any of the foregoing Persons shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Note Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes that the Note Trustee actually knows to be so owned shall be so disregarded. Notes so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Note Trustee that the pledgee has the right so to act with respect to such Notes and that the pledgee is not the Note Issuer, any other obligor upon the Notes, the Seller or any Affiliate of any of the foregoing Persons. "Outstanding Amount" means the aggregate principal amount of all Notes or, ------------------ if the context requires, all Notes of a Series, Outstanding at the date of determination. "Overcollateralization Subaccount" has the meaning specified in Section -------------------------------- 8.02(a). "Paying Agent" means the Note Trustee or any other Person that meets the ------------ eligibility standards for the Note Trustee specified in Section 6.11 and is authorized by the 14 Note Issuer to make payment of principal of or premium, if any, or interest on the Notes on behalf of the Note Issuer. "Payment Date" means, with respect to any Series of Notes, the Payment ------------ Dates therefor specified in the Series Supplement relating to such Series of Notes, provided that if any such date is not a Business Day, the Payment Date -------- shall be the Business Day immediately succeeding such date. "Person" means any individual, corporation, limited liability company, ------ estate, partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Note" means, with respect to any particular Note, every ---------------- previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note, and, for the purpose of this definition, any Note authenticated and delivered under Section 2.06 in lieu of a mutilated, lost, destroyed or stolen Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note. "Proceeding" means any suit in equity, action at law or other judicial or ---------- administrative proceeding. "Purchase Agreement" means the Purchase Agreement, dated as of April 9, ------------------ 1999, among the Seller, the Note Issuer, the Trust, the Infrastructure Bank, the California State Treasurer's Office and the initial purchasers named therein. "Quarterly Administration Fee" shall mean $1,250.00 per calendar quarter. ---------------------------- "Quarterly Interest" means, with respect to any Payment Date and any Series ------------------ of Notes, the quarterly interest for such Payment Date and Series of Notes as specified in the Series Supplement relating to such Series of Notes. "Quarterly Principal" means, with respect to any Payment Date and any ------------------- Series of Notes, the excess, if any, of the Outstanding Amount of such Series of Notes over the outstanding principal balance specified for such Payment Date on the applicable Expected Amortization Schedule. "Rating Agency Condition" means, with respect to any action, that Moody's ----------------------- shall have been given ten days prior notice thereof and that Moody's shall have notified the Servicer, the Note Issuer and the Note Trustee in writing that such action will not result in a reduction or withdrawal of Moody's then current rating of either any Series of the Notes or any Series of the Certificates. "Record Date" means, with respect to a Payment Date, Optional Redemption ----------- Date or Mandatory Redemption Date, the close of business on the last day of the calendar month preceding the calendar month 15 preceding the calendar month in which such Payment Date, Optional Redemption Date or Mandatory Redemption Date occurs. "Registered Holder" means the Person in whose name a Note is registered on ----------------- the Note Register on the applicable Record Date. "Remittance Date" means the eighteenth day of each calendar month or, if --------------- such day is not a Business Day, the next succeeding Business Day. "Repurchase Date" has the meaning specified in the Sale Agreement. --------------- "Required Capital Level" means, as of any Payment Date, the sum of 0.5% of ---------------------- the initial principal amount of each then-outstanding Series of Notes issued pursuant to this Indenture prior to that Payment Date. "Required Overcollateralization Level" means, as of any Payment Date with ------------------------------------ respect to a Series of Notes, the amount required to be on deposit in the Overcollateralization Subaccount as specified in the Series Supplement relating to such Series of Notes. "Reserve Subaccount" has the meaning specified in Section 8.02(a). ------------------ "Responsible Officer" means any officer within the Corporate Trust Office, ------------------- including any Managing Director, Vice President, Assistant Vice President, Secretary, Assistant Secretary or Assistant Treasurer or any other officer of the Note Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge and familiarity with the particular subject. "Sale Agreement" means the Transition Property Purchase and Sale Agreement, -------------- dated as of April 9, 1999, between the Note Issuer and the Seller, in the form of Exhibit A-1, as amended and supplemented from time to time. "Scheduled Maturity Date" means, with respect to any Series of Notes, the ----------------------- Scheduled Maturity Date therefor, as specified in the Series Supplement relating to such Series of Notes. "SEC" or "Commission" means the Securities and Exchange Commission. --- ---------- "Securities Act" means the Securities Act of 1933, as amended. -------------- "Series" means each series of Notes issued and authenticated pursuant to ------ this Indenture and a related Series Supplement. 16 "Series Issuance Date" means, with respect to any Series of Notes, the date -------------------- on which the Notes of such Series are to be originally issued in accordance with Section 2.10 and the Series Supplement relating to such Series of Notes. "Series Supplement" means an indenture supplemental to this Indenture that ----------------- authorizes a particular Series of Notes. "Servicing Agreement" means the Transition Property Servicing Agreement, ------------------- dated as of April 9, 1999, between the Note Issuer and the Servicer, in the form of Exhibit A-2, as amended and supplemented from time to time. "State" means any one of the 50 states of the United States of America or ----- the District of Columbia. "Successor Servicer" has the meaning specified in Section 3.07(e). ------------------ "Trust" has the meaning set forth in the Trust Agreement. ----- "Trust Agreement" means the Amended and Restated Declaration and Agreement --------------- of Trust, dated as of April 9, 1999, among the Infrastructure Bank, the Delaware Trustee and the Certificate Trustee, as the same may be further amended and supplemented from time to time. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in ------------------- --- force on the date hereof, unless otherwise specifically provided. "UCC" means, unless the context otherwise requires, the Uniform Commercial --- Code, as in effect in the relevant jurisdiction, as amended from time to time. "U.S. Government Obligations" means direct obligations (or certificates --------------------------- representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable at the Note Issuer's option. (b) Except as otherwise specified herein or as the context may otherwise require, the following terms have the respective meanings set forth in Section 1.01 of the Servicing Agreement as in effect on the Closing Date for all purposes of this Indenture, and the definitions of such terms are equally applicable both to the singular and plural forms of such terms: (i) Advice Letters, (ii) Annual Adjustment Filing Date, 17 (iii) California Customers, (iv) CPUC, (v) CPUC Regulations, (vi) Excess Remittance, (vii) Expected Amortization Schedule, (viii) Financing Order, (ix) FTA Charges, (x) Non-Routine True-Up Adjustment, (xi) Overcollateralization Amount, (xii) Principal Balance, (xiii) Projected Principal Balance, (xiv) PU Code, (xv) Remittance Shortfall, (xvi) Seller, (xvii) Seller Mortgage, (xviii) Servicer, (xix) Servicer Default, (xx) Servicing Fee, (xxi) Subsequent Sale Agreement, (xxii) Subsequent Sale Date, (xxiii) Subsequent Transition Property, and (xiv) Transition Property. SECTION 1.02. Rules of Construction. Unless the context otherwise --------------------- requires: 18 (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles as in effect from time to time; (iii) "or" is not exclusive; (iv) "including" means including without limitation; (v) words in the singular include the plural, and words in the plural include the singular; and (vi) the words "herein," "hereof," "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. ARTICLE II THE NOTES SECTION 2.01. Form. The Notes and the Note Trustee's certificate of ---- authentication shall be in substantially the forms set forth in Exhibit B, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture or by a related Series Supplement and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may, consistently herewith, be determined by the officers executing such Notes, as evidenced by their execution of such Notes. Any portion of the text of any Note may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Note. The Notes shall be typewritten, printed, lithographed or engraved or produced by any combination of these methods (with or without steel engraved borders), all as determined by the officers executing such Notes, as evidenced by their execution of such Notes. Each Note shall be dated the date of its authentication. The terms of the Notes set forth in Exhibit B are part of the terms of this Indenture. SECTION 2.02. Denominations; Notes Issuable in Series. The Notes shall be --------------------------------------- issuable as registered definitive Notes in the Minimum Denomination specified in the applicable Series Supplement and, except as otherwise provided in such Series Supplement, in integral multiples thereof. 19 The Notes may, at the election of and as authorized by an Authorized Officer of the Note Issuer, be issued in one or more Series, and shall be designated generally as the "Notes" of the Note Issuer, with such further ----- particular designations added or incorporated in such title for the Notes of any particular Series as an Authorized Officer of the Note Issuer may determine. Each Note shall bear upon its face the designation so selected for the Series to which it belongs. All Notes of the same Series shall be identical in all respects except for the denominations thereof. All Notes of a particular Series issued under this Indenture, shall be in all respects equally and ratably entitled to the benefits hereof without preference, priority, or distinction on account of the actual time or times of authentication and delivery, all in accordance with the terms and provisions of this Indenture. Each Series of Notes shall be created by a Series Supplement authorized by an Authorized Officer of the Note Issuer and establishing the terms and provisions of such Series. The several Series thereof may differ as between Series, in respect of any of the following matters: (1) designation of the Series; (2) the principal amount; (3) the Note Interest Rate; (4) the Payment Dates; (5) the Scheduled Maturity Date; (6) the Final Maturity Date; (7) the Series Issuance Date; (8) the place or places for the payment of interest, principal and premium, if any; (9) the Minimum Denominations; (10) the provisions for optional redemption by the Note Issuer; (11) the Expected Amortization Schedule; (12) the Required Overcollateralization Level for each Payment Date; (13) provisions with respect to the definitions set forth in Article One hereof; and 20 (14) any other provisions expressing or referring to the terms and conditions upon which the Notes of the applicable Series are to be issued under this Indenture that are not in conflict with the provisions of this Indenture and as to which the Rating Agency Condition is satisfied. 21 SECTION 2.03. Execution, Authentication and Delivery. The Notes shall be -------------------------------------- executed on behalf of the Note Issuer by any of its Authorized Officers. The signature of any such Authorized Officer on the Notes may be manual or facsimile. Notes bearing the manual or facsimile signature of individuals who were at any time Authorized Officers of the Note Issuer shall bind the Note Issuer, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time and from time to time after the execution and delivery of this Indenture, the Note Issuer may deliver Notes executed by the Note Issuer to the Note Trustee pursuant to an Issuer Order for authentication, and the Note Trustee shall authenticate and deliver such Notes as in this Indenture provided and not otherwise. Each Note shall be dated the date of its authentication. No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Note a certificate of authentication substantially in the form provided for herein executed by the Note Trustee by the manual signature of one of its authorized signatories, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder. SECTION 2.04. Temporary Notes. Pending the preparation of definitive --------------- Notes, the Note Issuer may execute, and upon receipt of an Issuer Order the Note Trustee shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, of the tenor of the definitive Notes in lieu of which they are issued and with such variations not inconsistent with the terms of this Indenture as the officers executing such Notes may determine, as evidenced by their execution of such Notes. If temporary Notes are issued, the Note Issuer will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Note Issuer to be maintained as provided in Section 3.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes, the Note Issuer shall execute and the Note Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of Minimum Denominations. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. SECTION 2.05. Registration; Registration of Transfer and Exchange. The --------------------------------------------------- Note Issuer shall cause to be kept a register (the "Note Register") in which, ------------- subject to such reasonable regulations as it may prescribe, the Note Issuer shall provide for the registration of Notes and the registration of transfers of Notes. The Note Trustee shall be 22 "Note Registrar" for the purpose of registering Notes and transfers of Notes as -------------- herein provided. Upon any resignation of any Note Registrar, the Note Issuer shall promptly appoint a successor or, if it elects not to make such an appointment, assume the duties of Note Registrar. If a Person other than the Note Trustee is appointed by the Note Issuer as Note Registrar, the Note Issuer will give the Note Trustee prompt written notice of the appointment of such Note Registrar and of the location, and any change in the location, of the Note Register, and the Note Trustee shall have the right to inspect the Note Register at all reasonable times and to obtain copies thereof, and the Note Trustee shall have the right to rely upon a certificate executed on behalf of the Note Registrar by a Responsible Officer thereof as to the names and addresses of the Holders of the Notes and the principal amounts and number of such Notes. Subject to this Section 2.05, upon surrender for registration of transfer of any Note at the office or agency of the Note Issuer to be maintained as provided in Section 3.02, the Note Issuer shall execute, and the Note Trustee shall authenticate and the Noteholder shall obtain from the Note Trustee, in the name of the designated transferee or transferees, one or more new Notes in any Minimum Denominations, of a like Series and aggregate principal amount. No resale or transfer of a Note shall be made unless the registration requirements of the Securities Act and any applicable state securities laws are complied with, or such registration of transfer is exempt from the registration requirements under the Securities Act and such state securities laws. In the event that a transfer is to be made in reliance upon an exemption from the Securities Act and such state securities laws in connection with such registration of such transfer, such resale, pledge or transfer may only be made to a person whom the transferor reasonably believes is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act that purchases for its own account or for the account of a qualified institutional buyer who is aware that the resale or other transfer is being made in reliance on Rule 144A. The transferor will, and each subsequent transferor is required to, notify any purchaser from it of the resale restrictions set forth above. The Holder of a Note desiring to effect such registration of transfer shall, and does hereby agree to, indemnify the Note Trustee, the Note Issuer and the Servicer and their respective officers, directors, agents and employees against any liability that may result if the transfer is not so exempt from, or is not made in accordance with, the Securities Act and such state laws. The preceding sentence shall survive the termination of this Indenture and the earlier removal or resignation of the Note Trustee. None of the Note Issuer, the Note Trustee or the Servicer is under any obligation to register the Notes under the Securities Act or any state securities laws. At the option of the Holder, Notes may be exchanged for other Notes in any Minimum Denominations, of a like Series and aggregate principal amount, upon surrender of the Notes to be exchanged at such office or agency. Whenever any Notes are so surrendered for exchange, the Note Issuer shall execute, and the Note Trustee shall 23 authenticate and the Noteholder shall obtain from the Note Trustee, the Notes which the Noteholder making the exchange is entitled to receive. All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Note Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange. Every Note presented or surrendered for registration of transfer or exchange shall be duly endorsed by, or be accompanied by (a) a written instrument of transfer in form satisfactory to the Note Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing, with such signature guaranteed by an institution which is a member of one of the following recognized Signature Guaranty Programs: (i) The Securities Transfer Agent Medallion Program (STAMP); (ii) The New York Stock Exchange Medallion Program (MSP); (iii) The Stock Exchange Medallion Program (SEMP); or (iv) in such other guarantee program acceptable to the Note Trustee, and (b) such other documents as the Note Trustee may require. No service charge shall be made to a Holder for any registration of transfer or exchange of Notes, but the Note Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes, other than exchanges pursuant to Section 2.04 or 9.05 not involving any transfer. The preceding provisions of this Section notwithstanding, the Note Issuer shall not be required to make and the Note Registrar need not register transfers or exchanges of Notes selected for redemption or of any Note for a period of 15 days preceding the due date for any payment with respect to the Note. SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Notes. If (i) any ------------------------------------------ mutilated Note is surrendered to the Note Trustee, or the Note Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Note, and (ii) there is delivered to the Note Trustee such security or indemnity as may be required by it to hold the Note Issuer and the Note Trustee harmless, then, in the absence of notice to the Note Issuer, the Note Registrar or the Note Trustee that such Note has been acquired by a protected purchaser, the Note Issuer shall execute and, upon its request, the Note Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Note, a replacement Note of like Series, tenor and principal amount, bearing a number not contemporaneously outstanding; provided, however, that if any such destroyed, lost or stolen Note, but not a mutilated Note, shall have become or within seven days shall be due and payable, or shall have been called for redemption, instead of issuing a replacement Note, the Note Issuer may pay such destroyed, lost or stolen Note when so due or payable or upon the Optional Redemption Date or Mandatory Redemption Date, as applicable, without surrender thereof. If, after the delivery of such replacement Note or payment of a destroyed, lost or stolen Note pursuant to the proviso to the preceding sentence, a protected 24 purchaser of the original Note in lieu of which such replacement Note was issued presents for payment such original Note, the Note Issuer and the Note Trustee shall be entitled to recover such replacement Note (or such payment) from the Person to whom it was delivered or any Person taking such replacement Note from such Person to whom such replacement Note was delivered or any assignee of such Person, except a protected purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the Note Issuer or the Note Trustee in connection therewith. Upon the issuance of any replacement Note under this Section, the Note Issuer may require the payment by the Holder of such Note of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other reasonable expenses (including the fees and expenses of the Note Trustee) connected therewith. Every replacement Note issued pursuant to this Section in replacement of any mutilated, destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Note Issuer, whether or not the mutilated, destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. SECTION 2.07. Persons Deemed Owner. Prior to due presentment for -------------------- registration of transfer of any Note, the Note Issuer, the Note Trustee and any agent of the Note Issuer or the Note Trustee may treat the Person in whose name any Note is registered (as of the day of determination) as the owner of such Note for the purpose of receiving payments of principal of and premium, if any, and interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and neither the Note Issuer, the Note Trustee nor any agent of the Note Issuer or the Note Trustee shall be affected by notice to the contrary. SECTION 2.08. Payment of Principal, Premium, if any, and Interest; ---------------------------------------------------- Interest on Overdue Principal; Principal, Premium, if any, and Interest Rights - ------------------------------------------------------------------------------ Preserved. - --------- (a) The Notes shall accrue interest as provided in the related Series Supplement which shall be substantially in the form set forth in Exhibit C hereto, at the applicable Note Interest Rate specified therein, and such interest shall be payable on each Payment Date as specified therein. Any installment of interest, principal or premium, if any, payable on any Note which is punctually paid or duly provided for by the Note Issuer on the applicable Payment Date shall be paid to the Person in whose name such Note (or one or more Predecessor Notes) is registered on the Record Date for such Payment Date, by check mailed first-class, postage prepaid to such Person's address as it appears on the Note 25 Register on such Record Date or in such other manner as may be provided in the related Series Supplement, except that, with respect to Notes registered on the Record Date in the name of the Certificate Trustee, payments will be made by wire transfer in immediately available funds to the account designated by the Certificate Trustee and except that the final installment of principal and premium, if any, payable with respect to such Note on a Payment Date will be payable as provided below. The funds represented by any such checks returned undelivered shall be held in accordance with Section 3.03 hereof. (b) The principal of each Note of each Series shall be paid, to the extent funds are available therefor in the Collection Account, in installments on each Payment Date specified in the related Series Supplement. Notwithstanding the foregoing, the entire unpaid principal amount of the Notes of a Series shall be due and payable, if not previously paid, on the date on which an Event of Default shall have occurred and be continuing with respect to such Series, if the Note Trustee or the Holders of the Notes representing not less than a majority of the Outstanding Amount of the Notes of all Series have declared the Notes to be immediately due and payable in the manner provided in Section 5.02. All payments of principal and premium, if any, on the Notes of any Series shall be made pro rata to the Noteholders entitled thereto. The Note Trustee shall notify the Person in whose name a Note is registered at the close of business on the Record Date preceding the Payment Date on which the Note Issuer expects that the final installment of principal of and premium, if any, and interest on such Note will be paid. Such notice shall be mailed no later than five days prior to such final Payment Date and shall specify that such final installment will be payable only upon presentation and surrender of such Note and shall specify the place where such Note may be presented and surrendered for payment of such installment. Notices in connection with redemptions of Notes shall be mailed to Noteholders as provided in Section 10.02. (c) If the Note Issuer defaults in a payment of interest on the Notes of any Series when due, the Note Issuer shall pay such defaulted interest (plus interest on such defaulted interest at the applicable Note Interest Rate to the extent lawful). The Note Issuer may pay such defaulted interest (plus interest on such defaulted interest) to the Persons who are Noteholders on a subsequent special record date, which date shall be at least five Business Days prior to the payment date. The Note Issuer shall fix or cause to be fixed any such special record date and payment date, and, at least 20 days before any such special record date, the Note Issuer shall mail to each affected Noteholder a notice that states the special record date, the payment date and the amount of defaulted interest (plus interest on such defaulted interest) to be paid. SECTION 2.09. Cancellation. All Notes surrendered for payment, ------------ registration of transfer, exchange or redemption shall, if surrendered to any Person other than the Note Trustee, be delivered to the Note Trustee and shall be promptly canceled by the Note Trustee. The Note Issuer may at any time deliver to the Note Trustee for cancellation any Notes previously authenticated and delivered hereunder that the Note Issuer may have acquired in any manner whatsoever, and all Notes so delivered shall be promptly canceled by the Note Trustee. No Notes shall be authenticated in lieu of or in exchange for any 26 Notes canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Notes may be held or disposed of by the Note Trustee in accordance with its standard retention or disposal policy as in effect at the time. SECTION 2.10. Amount Unlimited; Authentication and Delivery of Notes. The ------------------------------------------------------ aggregate principal amount of Notes that may be authenticated and delivered under this Indenture is unlimited. Notes of a new Series may from time to time be executed by the Note Issuer and delivered to the Note Trustee for authentication, and thereupon the same shall be authenticated and delivered by the Note Trustee upon Issuer Request and upon delivery by the Note Issuer to the Note Trustee, and receipt by the Note Trustee, or the causing to occur by the Note Issuer, of the following; provided, however, that compliance with such conditions and delivery of such documents shall only be required in connection with the original issuance of a Note or Notes of such Series: (1) Note Issuer Action. An Issuer Order authorizing and directing the execution, authentication and delivery of the Notes by the Note Trustee and specifying the principal amount of Notes to be authenticated. (2) Authorizations. (a) An Opinion of Counsel that no authorization, approval or consent of any governmental body or bodies at the time having jurisdiction in the premises is required for the valid issuance, authentication and delivery of such Notes, except for such registrations as are required under the Blue Sky and securities laws of any State or such authorizations, approvals or consents of governmental bodies that have been obtained and copies of which have been delivered with such Opinion of Counsel. (b) An Opinion of Counsel that no authorization, approval or consent of any governmental body or bodies at the time having jurisdiction in the premises is required for the valid execution and delivery by the Note Issuer of each of the Basic Documents to which the Note Issuer is a party, except for such authorizations, approvals or consents of governmental bodies that have been obtained and copies of which have been delivered with such Opinion of Counsel. (3) Authorizing Certificate. A certificate of an Authorized Officer of the Note Issuer certifying (i) that the Note Issuer has duly authorized the execution and delivery of this Indenture and the related Series Supplement and the execution, authentication and delivery of the Notes of such Series and (ii) that the Series Supplement for such Series of Notes shall be in the form attached thereto, which Series Supplement shall comply with the requirements of Section 2.02 hereof. 27 (4) The Collateral. The Note Issuer shall have caused all Collateral to have been Granted to the Note Trustee or, if requested by the Note Trustee, its nominee and will have caused all related filings with the CPUC pursuant to the PU Code and other filings in connection with such Grant to have been duly made. (5) Certificates of the Note Issuer and the Seller. (a) An Officer's Certificate from the Note Issuer, dated as of the Series Issuance Date: (i) to the effect that the Note Issuer is not in Default under this Indenture and that, after giving effect to the release of the lien of the Seller Mortgage, the issuance of the Notes applied for will not result in any Default or in any breach of any of the terms, conditions or provisions of or constitute a default under any indenture, mortgage, deed of trust or other agreement or instrument to which the Note Issuer is a party or by which it or its property is bound or any order of any court or administrative agency entered in any Proceeding to which the Note Issuer is a party or by which it or its property may be bound or to which it or its property may be subject; and that all conditions precedent provided in this Indenture relating to the authentication and delivery of the Notes applied for have been complied with; (ii) to the effect that, after giving effect to the release of the lien of the Seller Mortgage: (A) the Note Issuer has not assigned any interest or participation in the Collateral except for the lien of this Indenture; (B)the Note Issuer has the power and right to Grant the Collateral to the Note Trustee as security hereunder, and (C) the Note Issuer, subject to the terms of this Indenture, has Granted to the Note Trustee all of its right, title and interest in and to such Collateral free and clear of any lien, mortgage, pledge, charge, security interest, adverse claim or other encumbrance arising as a result of actions of the Note Issuer or through the Note Issuer, except the lien of this Indenture; (iii) to the effect that the Note Issuer has appointed the firm of Independent certified public accountants as contemplated in Section 8.06 hereof; (iv) to the effect that attached thereto are duly executed, true and complete copies of the Sale Agreement or Subsequent Sale Agreement, as applicable, and the Servicing Agreement; and (v) stating that all filings with the CPUC pursuant to the PU Code and all UCC financing statements with respect to the 28 Collateral that are required to be filed by the terms of the Sale Agreement or Subsequent Sale Agreement, as applicable, the Servicing Agreement or this Indenture have been filed as required. (b) An Officer's Certificate (as defined in the Sale Agreement) from the Seller, dated as of the Series Issuance Date, to the effect that, in the case of the Transition Property immediately prior to the conveyance thereof to the Note Issuer pursuant to the Sale Agreement: (i) after giving effect to the release of the lien of the Seller Mortgage: (A) the Seller was the owner of such Transition Property, free and clear of any lien, mortgage, pledge, charge, security interest, adverse claim or other encumbrance (subject to any statutory lien in favor of the holders of the rate reduction bonds issued pursuant to the Financing Order and the trustee or the representative for such holders pursuant to Section 843(g) of the PU Code), (B) the Seller had not assigned any interest or participation in such Transition Property and the proceeds thereof other than to the Note Issuer pursuant to the Sale Agreement (or, if assigned, it has been released), (C) the Seller has the power and right to convey such Transition Property and the proceeds thereof to the Note Issuer, and (D) the Seller, subject to the terms of the Sale Agreement, has validly conveyed to the Note Issuer all of its right, title and interest in and to such Transition Property and the proceeds thereof, free and clear of any lien, mortgage, pledge, charge, security interest, adverse claim or other encumbrance; and (ii) the attached copies of the Financing Order and Issuance Advice Letter creating such Transition Property are true and correct. (6) Opinion of Counsel. Unless otherwise specified in a Series Supplement, an Opinion of Counsel, portions of which may be delivered by counsel for the Note Issuer, portions of which may be delivered by counsel for the Seller and the Servicer, and portions of which may be delivered by counsel for the Trust, dated the Series Issuance Date, in each case subject to the customary exceptions, qualifications and assumptions contained therein, to the collective effect that: (a) it is not necessary in connection with the offer, sale and delivery of (i) the Certificates by the Trust or (ii) the Notes by the Note Issuer to the Trust pursuant to the Note Purchase Agreement to register the Certificates or Notes under the Securities Act or to qualify an indenture in respect thereof under the Trust Indenture Act; 29 (b) all instruments furnished to the Note Trustee pursuant to this Indenture conform to the requirements set forth in this Indenture and constitute all of the documents required to be delivered hereunder for the Note Trustee to authenticate and deliver the Notes applied for, and all conditions precedent provided for in this Indenture relating to the authentication and delivery of the Notes have been complied with; (c) the Note Issuer has the power and authority to execute and deliver the Series Supplement and this Indenture and to issue the Notes, and each of the Series Supplement and this Indenture, and the Notes have been duly authorized and the Note Issuer is duly formed and is validly existing in good standing under the laws of the jurisdiction of its organization; (d) the Series Supplement and the Indenture have been duly authorized, executed and delivered by the Note Issuer; (e) the Notes applied for have been duly authorized and executed and, when authenticated in accordance with the provisions of the Indenture and delivered against payment of the purchase price therefor, will constitute valid and binding obligations of the Note Issuer, entitled to the benefits of the Indenture and the related Series Supplement; (f) this Indenture, the Sale Agreement or the Subsequent Sale Agreement, as applicable, the Servicing Agreement and the related Series Supplement are valid and binding agreements of the Note Issuer, enforceable in accordance with their respective terms, except as such enforceability may be subject to bankruptcy, insolvency, reorganization and other similar laws affecting the rights of creditors generally and general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); (g) (I) to the extent that the provisions of Section 843 of the PU Code apply to the grant of a security interest by the Note Issuer in the Collateral pursuant to this Indenture, then after giving effect to the release of the lien of the Seller Mortgage and upon the giving of value by the Note Trustee to the Note Issuer with respect to the Collateral, (A) this Indenture creates in favor of the Note Trustee a security interest in the rights of the Note Issuer in the Collateral, (B) such security interest is valid and enforceable against the Note Issuer and third parties (subject to the rights of any third parties holding security interests in such Collateral perfected in the manner described 30 in Section 843 of the PU Code), and has attached, (C) such security interest is perfected, and (D) such perfected security interest is of first priority (subject to any statutory lien in favor of the holders of the rate reduction bonds issued pursuant to the Financing Order and the trustee or the representative for such holders pursuant to Section 843(g) of the PU Code). (II) To the extent that the provisions of Section 843 of the PU Code do not apply to the grant of a security interest by the Note Issuer in the Collateral pursuant to this Indenture, then after giving effect to the release of the lien of the Seller Mortgage and upon the giving of value by the Note Trustee to the Note Issuer with respect to the Collateral, (A) this Indenture creates in favor of the Note Trustee a security interest in the rights of the Note Issuer in the Collateral, and such security interest is enforceable against the Note Issuer with respect to such Collateral, (B) such security interest is perfected, and (C) such perfected security interest is of first priority (subject to any statutory lien in favor of the holders of the rate reduction bonds issued pursuant to the Financing Order and the trustee or the representative for such holders pursuant to Section 843(g) of the PU Code); (h) the Notes and the Certificates are exempt from the registration requirements under the Securities Act; (i) the Note Issuer is not now and, assuming that the Note Issuer uses the proceeds of the sale of the Notes for the purpose of acquiring Transition Property in accordance with the terms of the Sale Agreement, following the sale of the Notes to the Trust and the Certificates to the underwriter(s), initial purchaser(s), placement agent(s) or similar Person(s), neither the Note Issuer nor the Trust will be required to be registered under the Investment Company Act of 1940, as amended; (j) the Sale Agreement is a valid and binding agreement of the Seller enforceable against the Seller in accordance with its terms except as such enforceability may be subject to bankruptcy, insolvency, reorganization and other similar laws affecting the rights of creditors generally and general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law); (k) the Servicing Agreement is a valid and binding agreement of the Servicer enforceable against the Servicer in accordance with its terms except as such enforceability may be subject to bankruptcy, insolvency, reorganization and other similar laws affecting the rights of creditors generally and general principles of 31 equity (regardless of whether such enforcement is considered in a proceeding in equity or at law); (l) after giving effect to the release of the Seller Mortgage and upon the delivery of the fully executed Sale Agreement to the Note Issuer and the payment of the purchase price of the Transition Property by the Note Issuer to the Seller pursuant to the Sale Agreement, then (I) the transfer of the Transition Property by the Seller to the Note Issuer pursuant to the Sale Agreement conveys the Seller's right, title and interest in the Transition Property to the Note Issuer and will be treated under state law as an absolute transfer of all of the Seller's right, title, and interest in the Transition Property, other than for federal and state income and franchise tax purposes, (II) such transfer of the Transition Property is perfected, (III) such transfer has priority over any other assignment of the Transition Property and (IV) the Transition Property is free and clear of all liens created prior to its transfer to the Note Issuer pursuant to the Sale Agreement; and (m) such other matters as the Note Trustee may reasonably require. (7) Accountant's Certificate or Opinion. Unless otherwise specified in a Series Supplement, a certificate or opinion, addressed to the Note Issuer and the Note Trustee complying with the requirements of Section 11.01(a) hereof, of a firm of Independent certified public accountants of recognized national reputation to the effect that (a) such accountants are Independent with respect to the Note Issuer within the meaning of the Indenture, and are independent public accountants within the meaning of the standards of The American Institute of Certified Public Accountants and (b) with respect to the Collateral, they have made such calculations as they deemed necessary for the purpose and determined that, based on the assumptions used in calculating the initial FTA Charges or, if applicable, the most recent revised FTA Charges, as of the Series Issuance Date for such Series (after giving effect to the issuance of such Series and the application of the proceeds therefrom) such FTA Charges are sufficient to pay (a) Operating Expenses when incurred, plus (b) the Overcollateralization Amount, plus (c) interest on each Series of Notes at their respective Note Interest Rates when due, plus (d) principal of each Series of Notes in accordance with the Expected Amortization Schedule. (8) Rating Agency Condition. The Note Trustee shall receive evidence reasonably satisfactory to it that the Rating Agency Condition will be satisfied with respect to the issuance of such new Series. 32 (9) Requirements of Series Supplement. Such other funds, accounts, documents certificates, agreements, instruments or opinions as may be required by the terms of the Series Supplement creating such Series. (10) Other Requirements. Such other documents, certificates, agreements, instruments or opinions as the Note Trustee may reasonably require. SECTION 2.11. Release of Collateral. Subject to Section 11.01, the Note --------------------- Trustee shall release property from the lien of this Indenture only as specified in Section 8.02(d) or upon receipt of an Issuer Request accompanied by an Officer's Certificate, an Opinion of Counsel. ARTICLE III COVENANTS SECTION 3.01. Payment of Principal, Premium, if any, and Interest. The --------------------------------------------------- Note Issuer will duly and punctually pay the principal of and premium, if any, and interest on the Notes in accordance with the terms of the Notes and this Indenture. Amounts properly withheld under the Code by any Person from a payment to any Noteholder of interest or principal or premium, if any, shall be considered as having been paid by the Note Issuer to such Noteholder for all purposes of this Indenture. SECTION 3.02. Maintenance of Office or Agency. The Note Issuer will ------------------------------- maintain in the Borough of Manhattan, The City of New York, an office or agency where Notes may be surrendered for registration of transfer or exchange. The Note Issuer hereby initially appoints the Note Trustee to serve as its agent for the foregoing purposes. The Note Issuer will give prompt written notice to the Note Trustee of the location, and of any change in the location, of any such office or agency. If at any time the Note Issuer shall fail to maintain any such office or agency or shall fail to furnish the Note Trustee with the address thereof, such surrenders may be made at the Corporate Trust Office, and the Note Issuer hereby appoints the Note Trustee as its agent to receive all such surrenders. SECTION 3.03. Money for Payments To Be Held in Trust. As provided in -------------------------------------- Section 8.02(a), all payments of amounts due and payable with respect to any Notes that are to be made from amounts withdrawn from the Collection Account pursuant to Section 8.02(d) shall be made on behalf of the Note Issuer by the Note Trustee or by another Paying Agent, and no amounts so withdrawn from the Collection Account for payments of Notes shall be paid over to the Note Issuer except as provided in this Section and Section 8.02. The Note Issuer will cause each Paying Agent other than the Note Trustee to execute and deliver to the Note Trustee an instrument in which such Paying Agent shall agree with 33 the Note Trustee (and if the Note Trustee acts as Paying Agent, it hereby so agrees), subject to the provisions of this Section, that such Paying Agent will: (i) hold all sums held by it for the payment of amounts due with respect to the Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided and pay such sums to such Persons as herein provided; (ii) give the Note Trustee notice of any default by the Note Issuer (or by any other obligor upon the Notes) of which such Paying Agent has actual knowledge in the making of any payment required to be made with respect to the Notes; (iii) at any time during the continuance of any such default, upon the written request of the Note Trustee, forthwith pay to the Note Trustee all sums so held in trust by such Paying Agent; (iv) immediately resign as a Paying Agent and forthwith pay to the Note Trustee all sums held by it in trust for the payment of Notes if at any time it ceases to meet the standards required to be met by a Paying Agent at the time of its appointment; and (v) comply with all requirements of the Code with respect to the withholding from any payments made by it on any Notes of any applicable withholding taxes imposed thereon and with respect to any applicable reporting requirements in connection therewith. The Note Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, by Issuer Order direct any Paying Agent to pay to the Note Trustee all sums held in trust by such Paying Agent, such sums to be held by the Note Trustee upon the same trusts as those upon which the sums were held by such Paying Agent; and upon such payment by any Paying Agent to the Note Trustee, such Paying Agent shall be released from all further liability with respect to such money. Subject to applicable laws with respect to escheat of funds, any money held by the Note Trustee or any Paying Agent in trust for the payment of any amount due with respect to any Note and remaining unclaimed for two years after such amount has become due and payable shall be discharged from such trust and be paid to the Note Issuer on Issuer Request; and, subject to Section 11.18, the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Note Issuer for payment thereof (but only to the extent of the amounts so paid to the Note Issuer), and all liability of the Note Trustee or such Paying Agent with respect to such trust money shall thereupon cease; provided, however, that the Note Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Note Issuer cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in The City of New York, notice that such money remains 34 unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Note Issuer. The Note Trustee may also adopt and employ, at the expense of the Note Issuer, any other reasonable means of notification of such repayment (including mailing notice of such repayment to Holders whose Notes have been called but have not been surrendered for redemption or whose right to or interest in moneys due and payable but not claimed is determinable from the records of the Note Trustee or of any Paying Agent, at the last address of record for each such Holder). SECTION 3.04. Existence. The Note Issuer will keep in full its existence, --------- rights and franchises as a limited liability company under the laws of the State of Delaware (unless it becomes, or any successor Note Issuer hereunder is or becomes, organized under the laws of any other State or of the United States of America, in which case the Note Issuer will keep in full effect its existence, rights and franchises under the laws of such other jurisdiction) and will obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Indenture, the Notes, the Collateral and each other instrument or agreement included in the Collateral. SECTION 3.05. Protection of Collateral. The Note Issuer will from time to ------------------------ time execute and deliver all such supplements and amendments hereto and all such filings with the CPUC pursuant to the PU Code, financing statements, continuation statements, instruments of further assurance and other instruments, and will take such other action necessary or advisable to: (i) maintain or preserve the lien and security interest (and the priority thereof) of this Indenture or carry out more effectively the purposes hereof; (ii) perfect, publish notice of or protect the validity of any Grant made or to be made by this Indenture; (iii) enforce any of the Collateral; (iv) preserve and defend title to the Collateral and the rights of the Note Trustee and the Noteholders in such Collateral against the claims of all Persons and parties, including the challenge by any party to the validity or enforceability of the Financing Order, any Advice Letter or the Transition Property or any proceeding relating thereto and institute any action or proceeding necessary to compel performance by the CPUC or the State of California of any of its obligations or duties under the PU Code, the Financing Order or any Advice Letter; or (v) pay any and all taxes levied or assessed upon all or any part of the Collateral. 35 The Note Issuer hereby designates the Note Trustee its agent and attorney- in-fact to execute any filings with the CPUC, financing statement, continuation statement or other instrument required by the Note Trustee pursuant to this Section, it being understood that the Note Trustee shall have no such obligation. SECTION 3.06. Opinions as to Collateral. ------------------------- (a) On the Series Issuance Date for each Series, the Note Issuer shall furnish to the Note Trustee an Opinion of Counsel either stating that, in the opinion of such counsel, such action has been taken with respect to the recording and filing of this Indenture, any indentures supplemental hereto, and any other requisite documents, and with respect to the execution and filing of any filings with the CPUC pursuant to the PU Code, financing statements and continuation statements, as are necessary to perfect and make effective the lien and security interest of this Indenture and reciting the details of such action, or stating that, in the opinion of such counsel, no such action is necessary to make such lien and security interest effective. (b) On or before September 30 in each calendar year, while any Series is outstanding, beginning at least three months after the issuance of the first Series of the Notes, the Note Issuer shall furnish to the Note Trustee an Opinion of Counsel either stating that, in the opinion of such counsel, such action has been taken with respect to the recording, filing, re-recording and refiling of this Indenture, any indentures supplemental hereto and any other requisite documents and with respect to the execution and filing of any filings with the CPUC pursuant to the PU Code, financing statements and continuation statements as is necessary to maintain the lien and security interest created by this Indenture and reciting the details of such action or stating that in the opinion of such counsel no such action is necessary to maintain such lien and security interest. Such Opinion of Counsel shall also describe the recording, filing, re-recording and refiling of this Indenture, any indentures supplemental hereto and any other requisite documents and the execution and filing of any filings with the CPUC, financing statements and continuation statements that will, in the opinion of such counsel, be required to maintain the lien and security interest of this Indenture until September 30 in the following calendar year. (c) Prior to the effectiveness of any Subsequent Sale Agreement or any amendment to the Sale Agreement, the Note Issuer shall furnish to the Note Trustee an Opinion of Counsel either (A) stating that, in the opinion of such counsel, all filings, including filings with the CPUC pursuant to the PU Code, have been executed and filed that are necessary fully to preserve and protect the interest of the Note Issuer and the Note Trustee in the Transition Property and the proceeds thereof, and reciting the details of such filings or referring to prior Opinions of Counsel in which such details are given, or (B) stating that, in the opinion of such counsel, no such action shall be necessary to preserve and protect such interest. SECTION 3.07. Performance of Obligations; Servicing. ------------------------------------- 36 (a) The Note Issuer (i) will diligently pursue any and all actions to enforce its rights under each instrument or agreement included in the Collateral and (ii) will not take any action and will use its best efforts not to permit any action to be taken by others that would release any Person from any of such Person's covenants or obligations under any such instrument or agreement or that would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, any such instrument or agreement, except, in each case, as expressly provided in this Indenture, the Sale Agreement, the Servicing Agreement or such other instrument or agreement. (b) The Note Issuer may contract with other Persons to assist it in performing its duties under this Indenture, and any performance of such duties by a Person identified to the Note Trustee in an Officer's Certificate of the Note Issuer shall be deemed to be action taken by the Note Issuer. Initially, the Note Issuer has contracted with the Servicer to assist the Note Issuer in performing its duties under this Indenture. (c) The Note Issuer will punctually perform and observe all of its obligations and agreements contained in this Indenture, the Basic Documents and in the instruments and agreements included in the Collateral, including filing or causing to be filed all filings with the CPUC pursuant to the PU Code, UCC financing statements and continuation statements required to be filed by it by the terms of this Indenture, the Sale Agreement and the Servicing Agreement in accordance with and within the time periods provided for herein and therein. Except as otherwise expressly permitted therein, the Note Issuer shall not waive, amend, modify, supplement or terminate any Basic Document or any provision thereof without the written consent of the Note Trustee (which consent shall not be withheld if (i) the Note Trustee shall have received an Officer's Certificate stating that such waiver, amendment, modification, supplement or termination shall not adversely affect in any material respect the interests of the Noteholders or the holders of Certificates and (ii) the Rating Agency Condition shall have been satisfied with respect thereto) or the Holders of at least a majority of the Outstanding Amount of Notes of all Series. (d) If the Note Issuer shall have knowledge of the occurrence of a Servicer Default under the Servicing Agreement, the Note Issuer shall promptly give written notice thereof to the Note Trustee, the Infrastructure Bank and Moody's, and shall specify in such notice the action, if any, the Note Issuer is taking with respect of such default. If a Servicer Default shall arise from the failure of the Servicer to perform any of its duties or obligations under the Servicing Agreement with respect to the Transition Property or the FTA Charges, the Note Issuer shall take all reasonable steps available to it to remedy such failure. (e) As promptly as possible after the giving of notice of termination to the Servicer and Moody's, the Servicer's rights and powers pursuant to Section 7.01 of the Servicing Agreement, the Note Issuer shall appoint a successor Servicer (the "Successor Servicer") with the Note Trustee's prior written ------------------ consent thereto (which consent shall not be unreasonably withheld), and such Successor Servicer shall accept its appointment by a written assumption in a form acceptable to the Note Issuer and the Note Trustee. A Person 37 shall qualify as a Successor Servicer only if such Person satisfies the requirements of the Servicing Agreement. If within 30 days after the delivery of the notice referred to above, the Note Issuer shall not have obtained such a new Servicer, the Note Trustee may petition the CPUC or a court of competent jurisdiction to appoint a Successor Servicer. In connection with any such appointment, the Note Issuer may make such arrangements for the compensation of such successor as it and such successor shall agree, subject to the limitations set forth below and in the Servicing Agreement, and in accordance with Section 7.02 of the Servicing Agreement, the Note Issuer shall enter into an agreement with such successor for the servicing of the Transition Property (such agreement to be in form and substance satisfactory to the Note Trustee). (f) Upon any termination of the Servicer's rights and powers pursuant to the Servicing Agreement, the Note Trustee shall promptly notify the Note Issuer, the Noteholders, the Infrastructure Bank and Moody's. As soon as a Successor Servicer is appointed, the Note Issuer shall notify the Note Trustee, the Noteholders and Moody's of such appointment, specifying in such notice the name and address of such Successor Servicer. (g) Without derogating from the absolute nature of the assignment granted to the Note Trustee under this Indenture or the rights of the Note Trustee hereunder, the Note Issuer agrees that it will not, without the prior written consent of the Note Trustee or the Holders of at least a majority in Outstanding Amount of the Notes of all Series, amend, modify, waive, supplement, terminate or surrender, or agree to any amendment, modification, supplement, termination, waiver or surrender of, the terms of any Collateral or the Basic Documents, or waive timely performance or observance by the Seller or the Servicer under the Sale Agreement or the Servicing Agreement, respectively. If any such amendment, modification, supplement or waiver shall be so consented to by the Note Trustee or such Holders, the Note Issuer agrees to execute and deliver, in its own name and at its own expense, such agreements, instruments, consents and other documents as shall be necessary or appropriate in the circumstances. The Note Issuer agrees that no such amendment, modification, supplement or waiver shall adversely affect the rights of the Holders of the Notes outstanding at the time of any such amendment, modification, supplement or waiver. (h) The Note Issuer shall furnish to the Noteholders and to prospective investors, upon the request of such Noteholders and prospective investors, any information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act for so long as the Notes are not freely transferable under the Securities Act, and, in any event, such information shall include all information that the Note Issuer would be required to file with the SEC if the Notes were not exempt from registration. (i) The Note Issuer shall make all filings required under the Statute relating to the transfer of the ownership or security interest in the Transition Property other than those required to be made by the Seller pursuant to the Basic Documents. 38 SECTION 3.08. Negative Covenants. For so long as any Notes are ------------------ Outstanding, the Note Issuer shall not: (i) except as expressly permitted by this Indenture, sell, transfer, exchange or otherwise dispose of any of the properties or assets of the Note Issuer, including those included in the Collateral, unless directed to do so by the Note Trustee in accordance with Article V; (ii) claim any credit on, or make any deduction from the principal or premium, if any, or interest payable in respect of, the Notes (other than amounts properly withheld from such payments under the Code) or assert any claim against any present or former Noteholder by reason of the payment of the taxes levied or assessed upon any part of the Collateral; (iii) terminate its existence or dissolve or liquidate in whole or in part; or (iv) (A) permit the validity or effectiveness of this Indenture to be impaired, or permit the lien of this Indenture to be amended, hypothecated, subordinated, terminated or discharged, or permit any Person to be released from any covenants or obligations with respect to the Notes under this Indenture except as may be expressly permitted hereby, (B) permit any lien, charge, excise, claim, security interest, mortgage or other encumbrance (other than the lien of this Indenture and any statutory lien under Section 843(g) of the PU Code) to be created on or extend to or otherwise arise upon or burden the Collateral or any part thereof or any interest therein or the proceeds thereof or (C) subject to any statutory lien under Section 843(g) of the PU Code, permit the lien of this Indenture not to constitute a valid first priority security interest in the Collateral. SECTION 3.09. Annual Statement as to Compliance. The Note Issuer will --------------------------------- deliver to the Note Trustee, the Certificate Trustee and Moody's not later than September 30 of each year (commencing with September 30, 1999), an Officer's Certificate stating, as to the Authorized Officer signing such Officer's Certificate, that (i) a review of the activities of the Note Issuer during the preceding twelve months ended June 30 and of performance under this Indenture has been made under such Authorized Officer's supervision; and (ii) to the best of such Authorized Officer's knowledge, based on such review, the Note Issuer has complied with all conditions and covenants under this Indenture throughout such twelve month period, or, if there has been a default in the compliance of the Note Issuer with any such condition or covenant, specifying each such default known to such Authorized Officer and the nature and status thereof. SECTION 3.10. Note Issuer May Consolidate, etc., Only on Certain Terms. -------------------------------------------------------- 39 (a) The Note Issuer shall not consolidate or merge with or into any other Person, unless (i) the Person (if other than the Note Issuer) formed by or surviving such consolidation or merger shall be a Person organized and existing under the laws of the United States of America or any State and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Note Trustee, in form and substance satisfactory to the Note Trustee, the due and punctual payment of the principal of and premium, if any, and interest on all Notes and the performance or observance of every agreement and covenant of this Indenture on the part of the Note Issuer to be performed or observed, all as provided herein and in the applicable Series Supplement or Series Supplements; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) the Rating Agency Condition shall have been satisfied with respect to such transaction; (iv) the Note Issuer shall have received an Opinion of Counsel (and shall have delivered copies thereof to the Note Trustee) to the effect that such transaction will not have any material adverse tax consequence to the Note Issuer, the Trust, any Noteholder or any Certificateholder; (v) any action as is necessary to maintain the lien and security interest created by this Indenture shall have been taken; and (vi) the Note Issuer shall have delivered to the Note Trustee an Officer's Certificate and an Opinion of Counsel each stating that such consolidation or merger and such supplemental indenture comply with this Section 3.10 and that all conditions precedent herein provided for relating to such transaction have been complied with (including any filing required by the Exchange Act). (b) Except as specifically provided herein, the Note Issuer shall not convey or transfer any of its properties or assets, including those included in the Collateral, to any Person, unless (i) the Person that acquires by conveyance or transfer the properties and assets of the Note Issuer the conveyance or transfer of which is hereby restricted shall (A) be a United States citizen or a Person organized and existing under the laws of the United States of America or any State, (B) expressly assumes, by an indenture supplemental hereto, executed and delivered to the Note Trustee, in form and substance satisfactory to the Note Trustee, the due and punctual payment of the principal of and premium, if any, and interest on all Notes and the performance or 40 observance of every agreement and covenant of this Indenture on the part of the Note Issuer to be performed or observed, all as provided herein and in the applicable Series Supplement or Series Supplements, (C) expressly agrees by means of such supplemental indenture that all right, title and interest so conveyed or transferred shall be subject and subordinate to the rights of Holders of the Notes, (D) unless otherwise provided in the supplemental indenture referred to in clause (B) above, expressly agrees to indemnify, defend and hold harmless the Note Issuer against and from any loss, liability or expense arising under or related to this Indenture and the Notes and (E) expressly agrees by means of such supplemental indenture that such Person (or if a group of Persons, then one specified Person) shall deliver any information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) the Rating Agency Condition shall have been satisfied with respect to such transaction; (iv) the Note Issuer shall have received an Opinion of Counsel (and shall have delivered copies thereof to the Note Trustee) to the effect that such transaction will not have any material adverse tax consequence to the Note Issuer, the Trust, any Noteholder or any Certificateholder; (v) any action as is necessary to maintain the lien and security interest created by this Indenture shall have been taken; and (vi) the Note Issuer shall have delivered to the Note Trustee an Officer's Certificate and an Opinion of Counsel each stating that such conveyance or transfer and such supplemental indenture comply with this Section 3.10 and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 3.11. Successor or Transferee. ----------------------- (a) Upon any consolidation or merger of the Note Issuer in accordance with Section 3.10(a), the Person formed by or surviving such consolidation or merger (if other than the Note Issuer) shall succeed to, and be substituted for, and may exercise every right and power of, the Note Issuer under this Indenture with the same effect as if such Person had been named as the Note Issuer herein. (b) Except as set forth in Section 6.07, upon a conveyance or transfer of all the assets and properties of the Note Issuer pursuant to Section 3.10(b), SPPC Funding LLC will be released from every covenant and agreement of this Indenture to be observed or performed on the part of the Note Issuer with respect to the Notes immediately upon the 41 delivery of written notice to the Note Trustee stating that SPPC Funding LLC is to be so released. SECTION 3.12. No Other Business. The Note Issuer shall not engage any ----------------- business other than financing, purchasing, owning and managing the Transition Property in the manner contemplated by this Indenture and the Basic Documents and activities incidental thereto. SECTION 3.13. No Borrowing. The Note Issuer shall not issue, incur, ------------ assume, guarantee or otherwise become liable, directly or indirectly, for any indebtedness except for the Notes. SECTION 3.14. Servicer's Obligations. The Note Issuer shall enforce the ---------------------- Servicer's compliance with all of the Servicer's material obligations under the Servicing Agreement. SECTION 3.15. Guarantees, Loans, Advances and Other Liabilities. Except ------------------------------------------------- as otherwise contemplated by the Sale Agreement, the Servicing Agreement or this Indenture, the Note Issuer shall not make any loan or advance or credit to, or guarantee (directly or indirectly or by an instrument having the effect of assuring another's payment or performance on any obligation or capability of so doing or otherwise), endorse or otherwise become contingently liable, directly or indirectly, in connection with the obligations, stocks or dividends of, or own, purchase, repurchase or acquire (or agree contingently to do so) any stock, obligations, assets or securities of, or any other interest in, or make any capital contribution to, any other Person. SECTION 3.16. Capital Expenditures. Other than expenditures in an -------------------- aggregate amount not to exceed $25,000 in any calendar year, the Note Issuer shall not make any expenditure (by long-term or operating lease or otherwise) for capital assets (either realty or personalty). SECTION 3.17. Non-Routine True-Up Adjustment. The Note Issuer agrees that ------------------------------ it shall not consent to a Non-Routine True-Up Adjustment pursuant to Section 4.01(c) of the Servicing Agreement unless the Rating Agency Condition shall have been satisfied. SECTION 3.18. Restricted Payments. The Note Issuer shall not, directly or ------------------- indirectly, (i) pay any dividend or make any distribution (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof, to any owner of a beneficial interest in the Note Issuer or otherwise with respect to any ownership or equity interest or security in or of the Note Issuer, (ii) redeem, purchase, retire or otherwise acquire for value any such ownership or equity interest or security or (iii) set aside or otherwise segregate any amounts for any such purpose; provided, however, that, if no Event of Default shall have occurred and be continuing, the Note Issuer may make, or cause to be made, any such distributions to any owner of a beneficial interest in the Note Issuer or otherwise with respect to any ownership or equity interest or security in or of the Note Issuer using funds distributed to the Note Issuer pursuant to Section 8.02(d) to the 42 extent that such distributions would not cause the book value of the remaining equity in the Note Issuer to decline below 0.5 percent of the original principal amount of all Series of Notes which remain outstanding. The Note Issuer will not, directly or indirectly, make payments to or distributions from the Collection Account except in accordance with this Indenture and the Basic Documents. SECTION 3.19. Notice of Events of Default. The Note Issuer agrees give --------------------------- the Note Trustee and Moody's prompt written notice of each Event of Default hereunder and each default on the part of the Seller or the Servicer of its obligations under the Sale Agreement or the Servicing Agreement, respectively. SECTION 3.20. Further Instruments and Acts. Upon request of the Note ---------------------------- Trustee, the Note Issuer will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. SECTION 3.21. Purchase of Subsequent Transition Property. ------------------------------------------ (a) The Note Issuer may from time to time purchase Subsequent Transition Property from the Seller pursuant to a Subsequent Sale Agreement, subject to the conditions specified in paragraph (b) below. (b) The Note Issuer shall be permitted to purchase from the Seller Subsequent Transition Property and the proceeds thereof only upon the satisfaction of each of the following conditions on or prior to the related Subsequent Sale Date: (i) the Seller shall have provided the Note Issuer, the Note Trustee and Moody's with written notice, which shall be given not later than 10 days prior to the related Subsequent Sale Date, specifying the Subsequent Sale Date for such Subsequent Transition Property and the aggregate amount of the FTA Charges related to such Subsequent Transition Property, and shall have provided any information reasonably requested by any of the foregoing Persons with respect to the Subsequent Transition Property then being conveyed to the Note Issuer; (ii) the Seller and the Note Issuer shall have delivered to the Note Trustee a duly executed Subsequent Sale Agreement in substantially the form of the Sale Agreement; (iii) as of such Subsequent Sale Date, the Seller was not insolvent and will not have been made insolvent by such transfer and the Seller is not aware of any pending insolvency with respect to itself; (iv) the Rating Agency Condition shall have been satisfied with respect to such conveyance; 43 (v) such conveyance will not result in an adverse tax consequence to the Note Issuer, the Trust, the Noteholders or the Certificateholders; (vi) as of such Subsequent Sale Date, no breach by the Seller of its representations, warranties or covenants in the Sale Agreement and no Servicer Default shall exist; (vii) as of such Subsequent Sale Date, the Note Issuer shall have sufficient funds available to pay the purchase price for the Subsequent Transition Property to be conveyed on such date and all conditions to the issuance of one or more Series of Notes intended to provide such funds set forth in Section 2.10 of this Indenture shall have been satisfied; (viii) the Note Issuer shall have delivered to the Note Trustee an Officer's Certificate confirming the satisfaction of each condition precedent specified in this paragraph (b); (ix) (A) the Note Issuer shall have delivered to Moody's any Opinions of Counsel requested by Moody's and (B) the Note Issuer shall have delivered to the Note Trustee the Opinion of Counsel required by Section 3.06(c) of this Indenture; and (x) subject to any statutory lien under Section 843(g) of the PU Code, the Seller and the Note Issuer shall have taken any action required to maintain the first perfected ownership interest of the Note Issuer in the Transition Property and the proceeds thereof, and the Note Issuer shall have taken any action required to maintain first perfected security interest of the Note Trustee in the Transition Property and the proceeds thereof. ARTICLE IV SATISFACTION AND DISCHARGE; DEFEASANCE -------------------------------------- SECTION 4.01. (a) Satisfaction and Discharge of Indenture; Defeasance. This Indenture --------------------------------------------------- shall cease to be of further effect with respect to the Notes of any Series, and the Note Trustee, on reasonable demand of and at the expense of the Note Issuer, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture with respect to the Notes of such Series, when (A) either (1) all Notes of such Series theretofore authenticated and delivered (other than (i) Notes that have been destroyed, lost or stolen and that have 44 been replaced or paid as provided in Section 2.06 and (ii) Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Note Issuer and thereafter repaid to the Note Issuer or discharged from such trust, as provided in Section 3.03) have been delivered to the Note Trustee for cancellation; or (2) the Scheduled Maturity Date has occurred with respect to all Notes of such Series not theretofore delivered to the Note Trustee for cancellation, and the Note Issuer has irrevocably deposited or caused to be irrevocably deposited with the Note Trustee cash, in trust for such purpose, in an amount sufficient to pay and discharge the entire indebtedness on such Notes not theretofore delivered to the Note Trustee for cancellation on the Scheduled Maturity Date therefor; (B) the Note Issuer has paid or caused to be paid all other sums payable hereunder by the Note Issuer with respect to such Series; and (C) the Note Issuer has delivered to the Note Trustee an Officer's Certificate, an Opinion of Counsel and (if required by the Note Trustee) an Independent Certificate from a firm of certified public accountants, each meeting the applicable requirements of Section 11.01(a) and each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture with respect to Notes of such Series have been complied with. (b) Subject to Sections 4.01(c) and 4.02, the Note Issuer at any time may terminate (i) all its obligations under this Indenture with respect to the Notes of any Series ("Legal Defeasance Option") or (ii) its obligations under Sections ----------------------- 3.04, 3.05, 3.06, 3.07, 3.08, 3.09, 3.10, 3.12, 3.13, 3.14, 3.15, 3.16, 3.17 and 3.18 and the operation of Section 5.01(iv) ("Covenant Defeasance Option") with -------------------------- respect to any Series of Notes. The Note Issuer may exercise the Legal Defeasance Option with respect to any Series of Notes notwithstanding its prior exercise of the Covenant Defeasance Option with respect to such Series. If the Note Issuer exercises the Legal Defeasance Option with respect to any Series, the maturity of the Notes of such Series may not be accelerated because of an Event of Default. If the Note Issuer exercises the Covenant Defeasance Option with respect to any Series, the maturity of the Notes of such Series may not be accelerated because of an Event of Default specified in Section 5.01(iv). Upon satisfaction of the conditions set forth herein to the exercise of the Legal Defeasance Option or the Covenant Defeasance Option with respect to any Series of Notes the Note Trustee, on reasonable demand of and at the expense of the Note Issuer, shall execute proper instruments acknowledging satisfaction and discharge of the obligations that are terminated pursuant to such exercise. 45 (c) Notwithstanding Sections 4.01(a) and 4.01(b) above, (i) rights of registration of transfer and exchange, (ii) substitution of mutilated, destroyed, lost or stolen Notes, (iii) rights of Noteholders to receive payments of principal, premium, if any, and interest, (iv) Sections 4.03 and 4.04, (v) the rights, obligations and immunities of the Note Trustee hereunder (including the rights of the Note Trustee under Section 6.07 and the obligations of the Note Trustee under Section 4.03) and (vi) the rights of Noteholders as beneficiaries hereof with respect to the property deposited with the Note Trustee payable to all or any of them, shall survive until the Notes of the Series as to which this Indenture or certain obligations hereunder have been satisfied and discharged pursuant to Section 4.01(a) or 4.01(b) have been paid in full. Thereafter, the obligations in Sections 6.07 and 4.04 with respect to such Series shall survive. SECTION 4.02. Conditions to Defeasance. The Note Issuer may exercise the ------------------------ Legal Defeasance Option or the Covenant Defeasance Option with respect to any Series of Notes only if: (a) the Note Issuer irrevocably deposits or causes to be deposited in trust with the Note Trustee cash or U.S. Government Obligations for the payment of principal of and premium, if any, and interest on such Notes to the Scheduled Maturity Dates, Optional Redemption Date or Mandatory Redemption Date therefor, as applicable; (b) the Note Issuer delivers to the Note Trustee a certificate from a nationally recognized firm of Independent accountants expressing its opinion that the payments of principal and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited cash without investment will provide cash at such times and in such amounts (but, in the case of the Legal Defeasance Option only, not more than such amounts) as will be sufficient to pay in respect of the Notes of such Series (i) subject to clause (ii), principal in accordance with the Expected Amortization Schedule therefor, (ii) if such Series is to be redeemed, the Optional Redemption Price or Mandatory Redemption Price, as applicable, therefor on the Optional Redemption Date or Mandatory Redemption Date, as applicable, therefor and (iii) interest when due; (c) in the case of the Legal Defeasance Option, 91 days pass after the deposit is made and during the 91-day period no Default specified in Section 5.01(v) or (vi) occurs which is continuing at the end of the period; (d) no Default has occurred and is continuing on the day of such deposit and after giving effect thereto; (e) in the case of an exercise of the Legal Defeasance Option, the Note Issuer shall have delivered to the Note Trustee an Opinion of Counsel stating that (i) the Note Issuer has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of execution of this Indenture, there 46 has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Notes of such Series will not recognize income, gain or loss for Federal income tax purposes as a result of such legal defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred; (f) in the case of an exercise of the Covenant Defeasance Option, the Note Issuer shall have delivered to the Note Trustee an Opinion of Counsel to the effect that the Holders of the Notes of such Series will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (g) the Note Issuer delivers to the Note Trustee an Officer's Certificate and an Opinion of Counsel, each stating that all conditions precedent to the satisfaction and discharge of the Notes of such Series to the extent contemplated by this Article IV have been complied with. Before or after a deposit pursuant to this Section 4.02 with respect to any Series of Notes, the Note Issuer may make arrangements satisfactory to the Note Trustee for the redemption of such Notes at a future date in accordance with Article X. SECTION 4.03. Application of Trust Money. All moneys or U.S. Government -------------------------- Obligations deposited with the Note Trustee pursuant to Section 4.01 or 4.02 hereof shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent, as the Note Trustee may determine, to the Holders of the particular Notes for the payment or redemption of which such moneys have been deposited with the Note Trustee, of all sums due and to become due thereon for principal, premium, if any, and interest; but such moneys need not be segregated from other funds except to the extent required herein or in the Servicing Agreement or required by law. SECTION 4.04. Repayment of Moneys Held by Paying Agent. In connection ---------------------------------------- with the satisfaction and discharge of this Indenture or the Covenant Defeasance Option or Legal Defeasance Option with respect to the Notes of any Series, all moneys then held by any Paying Agent other than the Note Trustee under the provisions of this Indenture with respect to such Notes shall, upon demand of the Note Issuer, be paid to the Note Trustee to be held and applied according to Section 3.03 and thereupon such Paying Agent shall be released from all further liability with respect to such moneys. ARTICLE V REMEDIES 47 SECTION 5.01. Events of Default. "Event of Default" with respect to any ----------------- ---------------- Series, wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (i) default in the payment of any interest on any Note when the same becomes due and payable, and such default shall continue for a period of five days; or (ii) default in the payment of the then unpaid principal of any Note of any Series on the Final Maturity Date for such Series; or (iii) default in the payment of the Optional Redemption Price for any Note on the Optional Redemption Date therefor, or a default in the payment of the Mandatory Redemption Price for the Notes on the Mandatory Redemption Date; (iv) default in the observance or performance of any covenant or agreement of the Note Issuer made in this Indenture (other than a covenant or agreement, a default in the observance or performance of which is elsewhere in this Section specifically dealt with), or any representation or warranty of the Note Issuer made in this Indenture or in any certificate or other writing delivered pursuant hereto or in connection herewith proving to have been incorrect in any material respect as of the time when the same shall have been made, and such default shall continue or not be cured, or the circumstance or condition in respect of which such misrepresentation or warranty was incorrect shall not have been eliminated or otherwise cured, for a period of 30 days after there shall have been given, by registered or certified mail, to the Note Issuer by the Note Trustee or to the Note Issuer and the Note Trustee by the Holders of at least 25 percent of the Outstanding Amount of the Notes of such Series, a written notice specifying such default or incorrect representation or warranty and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or ----------------- (v) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of the Note Issuer or any substantial part of the Collateral in an involuntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Note Issuer or for any substantial part of the Collateral, or ordering the winding-up or liquidation of the Note Issuer's affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (vi) the commencement by the Note Issuer of a voluntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or 48 hereafter in effect, or the consent by the Note Issuer to the entry of an order for relief in an involuntary case under any such law, or the consent by the Note Issuer to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Note Issuer or for any substantial part of the Collateral, or the making by the Note Issuer of any general assignment for the benefit of creditors, or the failure by the Note Issuer generally to pay its debts as such debts become due, or the taking of action by the Note Issuer in furtherance of any of the foregoing. The Note Issuer shall deliver to a Responsible Officer of the Note Trustee and Moody's, within five days after an Authorized Officer has knowledge of the occurrence thereof, written notice in the form of an Officer's Certificate of any event which with the giving of notice and the lapse of time would become an Event of Default under clause (iv), its status and what action the Note Issuer is taking or proposes to take with respect thereto. SECTION 5.02. Acceleration of Maturity; Rescission and Annulment. If an -------------------------------------------------- Event of Default should occur and be continuing with respect to any Series, then and in every such case the Note Trustee or the Holders of Notes representing not less than a majority of the Outstanding Amount of the Notes of all Series may declare all the Notes to be immediately due and payable, by a notice in writing to the Note Issuer (and to the Note Trustee if given by Note holders), and upon any such declaration the unpaid principal amount of the Notes of all Series, together with accrued and unpaid interest thereon through the date of acceleration, shall become immediately due and payable. At any time after such declaration of acceleration of maturity has been made and before a judgment or decree for payment of the money due has been obtained by the Note Trustee as hereinafter in this Article V provided, the Holders of Notes representing a majority of the Outstanding Amount of the Notes of all Series, by written notice to the Note Issuer and the Note Trustee, may rescind and annul such declaration and its consequences if: (i) the Note Issuer has paid or deposited with the Note Trustee a sum sufficient to pay (A) all payments of principal of and premium, if any, and interest on all Notes of all Series and all other amounts that would then be due hereunder or upon such Notes if the Event of Default giving rise to such acceleration had not occurred; and (B) all sums paid or advanced by the Note Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Note Trustee and its agents and counsel; and 49 (ii) all Events of Default with respect to all Series, other than the nonpayment of the principal of the Notes of all Series that has become due solely by such acceleration, have been cured or waived as provided in Section 5.12. No such rescission shall affect any subsequent default or impair any right consequent thereto. SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Note ------------------------------------------------------------ Trustee. - ------- (a) The Note Issuer covenants that if (i) default is made in the payment of any interest on any Note of a Series when the same becomes due and payable, and such default continues for a period of five days, (ii) default is made in the payment of the then unpaid principal of any Note of any Series on the Final Maturity Date for such Note or (iii) default is made in the payment of the Optional Redemption Price or Mandatory Redemption Price, as applicable, for any Note on the Optional Redemption Date or Mandatory Redemption Date, as applicable, therefor, the Note Issuer will, upon demand of the Note Trustee, pay to it, for the benefit of the Holders of the Notes of such Series, the whole amount then due and payable on such Notes for principal, premium, if any, and interest, with interest upon the overdue principal and premium, if any, and, to the extent payment at such rate of interest shall be legally enforceable, upon overdue installments of interest, at the respective rate borne by the Notes of such Series and in addition thereto such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Note Trustee and its agents and counsel. (b) Subject to Section 11.18, in case the Note Issuer shall fail forthwith to pay such amounts upon such demand, the Note Trustee, in its own name and as trustee of an express trust, may institute a Proceeding for the collection of the sums so due and unpaid, and may prosecute such Proceeding to judgment or final decree, and may enforce the same against the Note Issuer or other obligor upon such Notes and collect in the manner provided by law out of the property of the Note Issuer or other obligor upon such Notes, wherever situated, the moneys adjudged or decreed to be payable. (c) If an Event of Default occurs and is continuing with respect to any Series, the Note Trustee may, as more particularly provided in Section 5.04, in its discretion, proceed to protect and enforce its rights and the rights of the Noteholders of such Series, by such appropriate Proceedings as the Note Trustee shall deem most effective to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy or legal or equitable right vested in the Note Trustee by this Indenture or by law. (d) In case there shall be pending, relative to the Note Issuer or any other obligor upon the Notes or any Person having or claiming an ownership interest in the Collateral, 50 Proceedings under Title 11 of the United States Code or any other applicable Federal or state bankruptcy, insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Note Issuer or its property or such other obligor or Person, or in case of any other comparable judicial Proceedings relative to the Note Issuer or other obligor upon the Notes of any Series, or to the creditors or property of the Note Issuer or such other obligor, the Note Trustee, irrespective of whether the principal of any Notes of any Series shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Note Trustee shall have made any demand pursuant to the provisions of this Section, shall be entitled and empowered, by intervention in such Proceedings or otherwise: (i) to file and prove a claim or claims for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Note Trustee (including any claim for reasonable compensation to the Note Trustee and each predecessor Note Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Note Trustee and each predecessor Note Trustee, except as a result of negligence or bad faith) and of the Noteholders allowed in such Proceedings; (ii) unless prohibited by applicable law and regulations, to vote on behalf of the Holders of Notes in any election of a trustee, a standby trustee or Person performing similar functions in any such Proceedings; and (iii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute all amounts received with respect to the claims of the Noteholders and of the Note Trustee on their behalf; and any trustee, receiver, liquidator, custodian or other similar official in any such Proceeding is hereby authorized by each of such Noteholders to make payments to the Note Trustee, and, in the event that the Note Trustee shall consent to the making of payments directly to such Noteholders, to pay to the Note Trustee such amounts as shall be sufficient to cover reasonable compensation to the Note Trustee, each predecessor Note Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Note Trustee and each predecessor Note Trustee except as a result of negligence or bad faith. (e) Nothing herein contained shall be deemed to authorize the Note Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Noteholder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof or to authorize the Note Trustee to vote in respect of the claim of any Noteholder in any such proceeding except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar Person. 51 (f) All rights of action and of asserting claims under this Indenture, or under any of the Notes of any Series, may be enforced by the Note Trustee without the possession of any of the Notes of such Series or the production thereof in any trial or other Proceedings relative thereto, and any such action or proceedings instituted by the Note Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements and compensation of the Note Trustee, each predecessor Note Trustee and their respective agents and attorneys, shall be for the ratable benefit of the Holders of the Notes of such Series. (g) In any Proceedings brought by the Note Trustee (and also any Proceedings involving the interpretation of any provision of this Indenture to which the Note Trustee shall be a party), the Note Trustee shall be held to represent all the Holders of the Notes, and it shall not be necessary to make any Noteholder a party to any such Proceedings. SECTION 5.04. Remedies; Priorities. -------------------- (a) If an Event of Default shall have occurred and be continuing with respect to a Series, the Note Trustee may do one or more of the following (subject to Section 5.05): (i) institute Proceedings in its own name and as trustee of an express trust for the collection of all amounts then payable on the Notes of such Series or under this Indenture with respect thereto, whether by declaration or otherwise, enforce any judgment obtained, and collect from the Note Issuer and any other obligor upon such Notes moneys adjudged due; (ii) institute Proceedings from time to time for the complete or partial foreclosure of this Indenture with respect to the Collateral; (iii) exercise any remedies of a secured party under the UCC or the PU Code and take any other appropriate action to protect and enforce the rights and remedies of the Note Trustee and the Holders of the Notes of such Series; and (iv) sell the Collateral or any portion thereof or rights or interest therein, at one or more public or private sales called and conducted in any manner permitted by law; provided, however, that the Note -------- ------- Trustee may not sell or otherwise liquidate any portion of the Collateral following an Event of Default, other than an Event of Default described in Section 5.01(i), (ii) or (iii), with respect to any Series unless (A) the Holders of 100 percent of the Outstanding Amount of the Notes of all Series consent thereto, (B) the proceeds of such sale or liquidation distributable to the Noteholders of all Series are sufficient to discharge in full all amounts then due and unpaid upon such Notes for principal, premium, if any, and interest after taking into account payment of all amounts due prior thereto pursuant to the priorities set forth in Section 8.02(d) or (C) the Note Trustee determines that the Collateral will not continue to provide sufficient funds for all payments on the Notes of all Series as they would have become due if the Notes had not been declared 52 due and payable, and the Note Trustee obtains the consent of Holders of 66- 2/3 percent of the Outstanding Amount of the Notes of all Series. In determining such sufficiency or insufficiency with respect to clause (B) and (C), the Note Trustee may, but need not, obtain and conclusively rely upon an opinion of an Independent investment banking or accounting firm of national reputation as to the feasibility of such proposed action and as to the sufficiency of the Collateral for such purpose. (b) If the Note Trustee collects any money pursuant to this Article V, it shall pay out such money in accordance with the priorities set forth in Section 8.02(d). SECTION 5.05. Optional Preservation of the Collateral. If the Notes of --------------------------------------- all Series have been declared to be due and payable under Section 5.02 following an Event of Default and such declaration and its consequences have not been rescinded and annulled, the Note Trustee may, but need not, elect to maintain possession of the Collateral. It is the desire of the parties hereto and the Noteholders that there be at all times sufficient funds for the payment of principal of and premium, if any, and interest on the Notes, and the Note Trustee shall take such desire into account when determining whether or not to maintain possession of the Collateral. In determining whether to maintain possession of the Collateral, the Note Trustee may, but need not, obtain and conclusively rely upon an opinion of an Independent investment banking or accounting firm of national reputation as to the feasibility of such proposed action and as to the sufficiency of the Collateral for such purpose. SECTION 5.06. Limitation of Suits. No Holder of any Note of any Series ------------------- shall have any right to institute any Proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (i) such Holder previously has given written notice to the Note Trustee of a continuing Event of Default with respect to such Series; (ii) the Holders of not less than 25 percent of the Outstanding Amount of the Notes of all Series have made written request to the Note Trustee to institute such Proceeding in respect of such Event of Default in its own name as Note Trustee hereunder; (iii) such Holder or Holders have offered to the Note Trustee indemnity satisfactory to it against the costs, expenses and liabilities to be incurred in complying with such request; (iv) the Note Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute such Proceedings; and (v) no direction inconsistent with such written request has been given to the Note Trustee during such 60-day period by the Holders of a majority of the Outstanding Amount of the Notes of all Series; it being understood and intended that no one or more Holders of Notes shall have any right in any manner whatever 53 by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Notes or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided. In the event the Note Trustee shall receive conflicting or inconsistent requests and indemnity from two or more groups of Holders of Notes, each representing less than a majority of the Outstanding Amount of the Notes of all Series, the Note Trustee in its sole discretion may determine what action, if any, shall be taken, notwithstanding any other provisions of this Indenture. SECTION 5.07. Unconditional Rights of Noteholders To Receive Principal, --------------------------------------------------------- Premium, if any, and Interest. Notwithstanding any other provisions in this - ----------------------------- Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, (a) to receive payment of (i) the interest, if any, on such Note on or after the due dates thereof expressed in such Note or in this Indenture, (ii) the unpaid principal, if any, of such Notes on or after the Final Maturity Date therefor or (iii) in the case of redemption, receive payment of the unpaid principal and premium, if any, and interest, if any, on such Note on or after the Optional Redemption Date or Mandatory Redemption Date, as applicable, therefor and (b) to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. SECTION 5.08. Restoration of Rights and Remedies. If the Note Trustee or ---------------------------------- any Noteholder has instituted any Proceeding to enforce any right or remedy under this Indenture and such Proceeding has been discontinued or abandoned for any reason or has been determined adversely to the Note Trustee or to such Noteholder, then and in every such case the Note Issuer, the Note Trustee and the Noteholders shall, subject to any determination in such Proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Note Trustee and the Noteholders shall continue as though no such Proceeding had been instituted. SECTION 5.09. Rights and Remedies Cumulative. No right or remedy herein ------------------------------ conferred upon or reserved to the Note Trustee or to the Noteholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.10. Delay or Omission Not a Waiver. No delay or omission of the ------------------------------ Note Trustee or any Noteholder to exercise any right or remedy accruing upon any Default or Event of Default shall impair any such right or remedy or constitute a waiver of any such Default or Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Note Trustee or to the Noteholders may be exercised from 54 time to time, and as often as may be deemed expedient, by the Note Trustee or by the Noteholders, as the case may be. SECTION 5.11. Control by Noteholders. The Holders of a majority of the ---------------------- Outstanding Amount of the Notes of all Series (or, if less than all Series are affected, the affected Series) shall have the right to direct the time, method and place of conducting any Proceeding for any remedy available to the Note Trustee with respect to the Notes of such Series or exercising any trust or power conferred on the Note Trustee with respect to such Series; provided that -------- (i) such direction shall not be in conflict with any rule of law or with this Indenture; (ii) subject to the express terms of Section 5.04, any direction to the Note Trustee to sell or liquidate the Collateral shall be by the Holders of Notes representing not less than 100 percent of the Outstanding Amount of the Notes of all Series; (iii) if the conditions set forth in Section 5.05 have been satisfied and the Note Trustee elects to retain the Collateral pursuant to such Section, then any direction to the Note Trustee by Holders of Notes representing less than 100 percent of the Outstanding Amount of the Notes of all Series to sell or liquidate the Collateral shall be of no force and effect; and (iv) the Note Trustee may take any other action deemed proper by the Note Trustee that is not inconsistent with such direction; provided, -------- however, that, subject to Section 6.01, the Note Trustee need not take any ------- action that it determines might involve it in liability or might materially adversely affect the rights of any Noteholders not consenting to such action. SECTION 5.12. Waiver of Past Defaults. Prior to the declaration of the ----------------------- acceleration of the maturity of the Notes of all Series as provided in Section 5.02, the Holders of Notes of not less than a majority of the Outstanding Amount of the Notes of all Series may waive any past Default or Event of Default and its consequences except a Default (a) in payment of principal of or premium, if any, or interest on any of the Notes or (b) in respect of a covenant or provision hereof which cannot be modified or amended without the consent of the Holder of each Note of all Series affected. In the case of any such waiver, the Note Issuer, the Note Trustee and the Holders of the Notes shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereto. Upon any such waiver, such Default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of Default arising therefrom shall be deemed to have been cured and not to have occurred, for every purpose of this Indenture; 55 but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereto. SECTION 5.13. Undertaking for Costs. All parties to this Indenture agree, --------------------- and each Holder of any Note by such Holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Note Trustee for any action taken, suffered or omitted by it as Note Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to (a) any suit instituted by the Note Trustee, (b) any suit instituted by any Noteholder, or group of Noteholders, in each case holding in the aggregate more than 10 percent of the Outstanding Amount of the Notes of a Series or (c) any suit instituted by any Noteholder for the enforcement of the payment of (i) interest on any Note on or after the due dates expressed in such Note and in this Indenture, (ii) the unpaid principal, if any, of any Note on or after the Final Maturity Date therefor or (iii) in the case of redemption, the unpaid principal of and premium, if any, and interest on any Note on or after the Optional Redemption Date or Mandatory Redemption Date, as applicable, therefor. SECTION 5.14. Waiver of Stay or Extension Laws. The Note Issuer covenants -------------------------------- (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead or in any manner whatsoever, claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Note Issuer (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Note Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 5.15. Action on Notes. The Note Trustee's right to seek and --------------- recover judgment on the Notes or under this Indenture shall not be affected by the seeking, obtaining or application of any other relief under or with respect to this Indenture. Neither the lien of this Indenture nor any rights or remedies of the Note Trustee or the Noteholders shall be impaired by the recovery of any judgment by the Note Trustee against the Note Issuer or by the levy of any execution under such judgment upon any portion of the Collateral or upon any of the assets of the Note Issuer. SECTION 5.16. Performance and Enforcement of Certain Obligations. -------------------------------------------------- (a) Promptly following a request from the Note Trustee to do so and at the Note Issuer's expense, the Note Issuer agrees to take all such lawful action as the Note Trustee may request to compel or secure the performance and observance by the Seller and the Servicer, as applicable, of each of their obligations to the Note Issuer under or in 56 connection with the Sale Agreement and the Servicing Agreement, respectively, in accordance with the terms thereof, and to exercise any and all rights, remedies, powers and privileges lawfully available to the Note Issuer under or in connection with the Sale Agreement and the Servicing Agreement, respectively, to the extent and in the manner directed by the Note Trustee, including the transmission of notices of default on the part of the Seller or the Servicer thereunder and the institution of legal or administrative actions or proceedings to compel or secure performance by the Seller or the Servicer of each of their obligations under the Sale Agreement and the Servicing Agreement, respectively. (b) If an Event of Default has occurred, the Note Trustee may, and, at the direction (which direction shall be in writing or by telephone (confirmed in writing promptly thereafter)) of the Holders of 66-2/3 percent of the Outstanding Amount of the Notes of all Series shall, subject to Article VI, exercise all rights, remedies, powers, privileges and claims of the Note Issuer against the Seller or the Servicer under or in connection with the Sale Agreement and the Servicing Agreement, respectively, including the right or power to take any action to compel or secure performance or observance by the Seller or the Servicer of each of their obligations to the Note Issuer thereunder and to give any consent, request, notice, direction, approval, extension or waiver under the Sale Agreement or the Servicing Agreement, respectively, and any right of the Note Issuer to take such action shall be suspended. ARTICLE VI THE NOTE TRUSTEE SECTION 6.01. Duties of Note Trustee. ---------------------- (a) If an Event of Default has occurred and is continuing, the Note Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Note Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Note Trustee; and (ii) in the absence of bad faith on its part, the Note Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Note Trustee and conforming to the requirements of this Indenture; however, the Note Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. 57 (c) The Note Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Note Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer unless it is proved that the Note Trustee was negligent in ascertaining the pertinent facts; and (iii) the Note Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 5.11. (d) Every provision of this Indenture that in any way relates to the Note Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Note Trustee shall not be liable for interest on any money received by it except as the Note Trustee may agree in writing with the Note Issuer. (f) Money held in trust by the Note Trustee need not be segregated from other funds except to the extent required by law or the terms of this Indenture, the Sale Agreement and the Servicing Agreement. (g) No provision of this Indenture shall require the Note Trustee to expend or risk its own funds or otherwise incur 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 to believe that repayments of such funds or indemnity satisfactory to it against such risk or liability is not reasonably assured to it. (h) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Note Trustee shall be subject to the provisions of this Section. (i) In the event that the Trustee is also acting as Paying Agent or Note Registrar hereunder, this Article VI shall also be afforded to such Paying Agent or Note Registrar. SECTION 6.02. Rights of Note Trustee. ---------------------- (a) The Note Trustee may conclusively rely and shall be fully protected in relying on any document believed by it to be genuine and to have been signed or presented by the proper person. The Note Trustee need not investigate any fact or matter stated in the document. 58 (b) Before the Note Trustee acts or refrains from acting, it may require an Officer's Certificate or an Opinion of Counsel. The Note Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officer's Certificate or Opinion of Counsel. (c) The Note Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys or a custodian or nominee, and the Note Trustee shall not be responsible for any misconduct or negligence on the part of, or for the supervision of, any such agent, attorney, custodian or nominee appointed with due care by it hereunder. (d) The Note Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; provided, however, that the Note Trustee's conduct does not constitute -------- ------- wilful misconduct, negligence or bad faith. (e) The Note Trustee may consult with counsel, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Notes shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. SECTION 6.03. Individual Rights of Note Trustee. The Note Trustee in its --------------------------------- individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Note Issuer or its affiliates with the same rights it would have if it were not Note Trustee. Any Paying Agent, Note Registrar, co-registrar or co-paying agent may do the same with like rights. However, the Note Trustee must comply with Sections 6.11. SECTION 6.04. Note Trustee's Disclaimer. The Note Trustee shall not be ------------------------- responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Note Issuer's use of the proceeds from the Notes, and it shall not be responsible for any statement of the Note Issuer in the Indenture or in any document issued in connection with the sale of the Notes or in the Notes other than the Note Trustee's certificate of authentication. SECTION 6.05. Notice of Defaults. If a Default occurs and is continuing ------------------ with respect to any Series and if it is actually known to a Responsible Officer of the Note Trustee, the Note Trustee shall mail to each Holder of Notes of all Series notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of and premium, if any, or interest on any Note, the Note Trustee may withhold the notice if and for so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of Noteholders. SECTION 6.06. Reports by Note Trustee to Holders. ---------------------------------- 59 (a) For so long as the Note Trustee is the Note Registrar and Paying Agent, it shall deliver to each Noteholder such information in its possession as may be required to enable such holder to prepare its Federal and state income tax returns. (b) With respect to each Series of Notes, on or prior to each Payment Date therefor, the Note Trustee will deliver to each Holder of Notes on such Payment Date a statement as provided and prepared by the Servicer which will include (to the extent applicable) the following information (and any other information so specified in the applicable Series Supplement) as to the Notes of such Series with respect to such Payment Date or the period since the previous Payment Date, as applicable: (i) the amount of the distribution to Noteholders allocable to principal; (ii) the amount of the distribution to Noteholders allocable to interest; (iii) the aggregate outstanding Principal Balance of the Notes, after giving effect to payments allocated to principal reported under (i) above; and (iv) the Principal Balance and the Projected Principal Balance as of such Payment Date, after giving effect to distributions to be made on such Payment Date. (c) The Note Issuer shall send a copy of each of the Certificate of Compliance delivered to it pursuant to Section 3.03 of the Servicing Agreement and the Annual Accountant's Report delivered to it pursuant to Section 3.04 of the Servicing Agreement to Moody's. A copy of such certificate and report may be obtained by any Noteholder by a request in writing to the Note Trustee. SECTION 6.07. Compensation and Indemnity. The Note Issuer shall pay to -------------------------- the Note Trustee from time to time reasonable compensation for its services. The Note Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Note Issuer shall reimburse the Note Trustee for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Note Trustee's agents, counsel, accountants and experts. The Note Issuer shall indemnify the Note Trustee and its officers, directors, employees and agents against any and all loss, liability or expense (including attorneys' fees and expenses) incurred by it in connection with the administration of this trust and the performance of its duties hereunder. Note Trustee shall notify the Note Issuer as soon as is reasonably practicable of any claim for which it may seek indemnity. Failure by the Note Trustee to so notify the Note Issuer shall not relieve the Note Issuer of its obligations hereunder. The Note Issuer shall defend the claim and the Note Trustee may have separate counsel and the Note Issuer shall pay the fees and expenses of such counsel. The Note Issuer need not reimburse any expense 60 or indemnify against any loss, liability or expense incurred by the Note Trustee through the Note Trustee's own wilful misconduct, negligence or bad faith. The Note Issuer's payment obligations to the Note Trustee pursuant to this Section shall survive the discharge of this Indenture or the earlier resignation or removal of the Note Trustee. When the Note Trustee incurs expenses after the occurrence of a Default specified in Section 5.01(v) or (vi) with respect to the Note Issuer, the expenses are intended to constitute expenses of administration under Title 11 of the United States Code or any other applicable Federal or state bankruptcy, insolvency or similar law. SECTION 6.08. Replacement of Note Trustee. The Note Trustee may resign at --------------------------- any time by so notifying the Note Issuer, provided that no such resignation shall be effective until either (a) the Collateral has been completely liquidated and the proceeds of the liquidation distributed to the Noteholders or (b) a successor trustee having the qualifications set forth in Section 6.11 has been designated and has accepted such trusteeship. The Holders of a majority in Outstanding Amount of the Notes of all Series may remove the Note Trustee by so notifying the Note Trustee and may appoint a successor Note Trustee. The Note Issuer shall remove the Note Trustee if: (i) the Note Trustee fails to comply with Section 6.11; (ii) the Note Trustee is adjudged a bankrupt or insolvent; (iii) a receiver or other public officer takes charge of the Note Trustee or its property; or (iv) the Note Trustee otherwise becomes incapable of acting. If the Note Trustee resigns or is removed or if a vacancy exists in the office of Note Trustee for any reason (the Note Trustee in such event being referred to herein as the retiring Note Trustee), the Note Issuer shall promptly appoint a successor Note Trustee. A successor Note Trustee shall deliver a written acceptance of its appointment to the retiring Note Trustee and to the Note Issuer. Thereupon the resignation or removal of the retiring Note Trustee shall become effective, and the successor Note Trustee shall have all the rights, powers and duties of the Note Trustee under this Indenture. The successor Note Trustee shall mail a notice of its succession to Noteholders. The retiring Note Trustee shall promptly transfer all property held by it as Note Trustee to the successor Note Trustee. If a successor Note Trustee does not take office within 60 days after the retiring Note Trustee resigns or is removed, the retiring Note Trustee, the Note Issuer or the Holders of a majority in Outstanding Amount of the Notes of all Series may petition any court of competent jurisdiction for the appointment of a successor Note Trustee. 61 If the Note Trustee fails to comply with Section 6.11, any Noteholder may petition any court of competent jurisdiction for the removal of the Note Trustee and the appointment of a successor Note Trustee. Notwithstanding the replacement of the Note Trustee pursuant to this Section, the Note Issuer's obligations under Section 6.07 shall continue for the benefit of the retiring Note Trustee. SECTION 6.09. Successor Note Trustee by Merger. If the Note Trustee -------------------------------- consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Note Trustee. In case at the time such successor or successors by merger, conversion or consolidation to the Note Trustee shall succeed to the trusts created by this Indenture any of the Notes shall have been authenticated but not delivered, any such successor to the Note Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Note Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor to the Note Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Note Trustee shall have. SECTION 6.10. Appointment of Co-Trustee or Separate Trustee. --------------------------------------------- (a) Notwithstanding any other provisions of this Indenture, at any time, for the purpose of meeting any legal requirement of any jurisdiction in which any part of the Trust may at the time be located, the Note Trustee shall have the power and may execute and deliver all instruments to appoint one or more Persons to act as a co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust, and to vest in such Person or Persons, in such capacity and for the benefit of the Noteholders, such title to the Trust, or any part hereof, and, subject to the other provisions of this Section, such powers, duties, obligations, rights and trusts as the Note Trustee may consider necessary or desirable. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as a successor trustee under Section 6.11 and no notice to Noteholders of the appointment of any co-trustee or separate trustee shall be required under Section 6.08 hereof. (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: 62 (i) all rights, powers, duties and obligations conferred or imposed upon the Note Trustee shall be conferred or imposed upon and exercised or performed by the Note Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Note Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed the Note Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Collateral or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Note Trustee; (ii) no trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder; and (iii) the Note Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Note Trustee shall be deemed to have been given to each of the then separate trustees and co- trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Indenture and the conditions of this Article VI. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Note Trustee or separately, as may be provided therein, subject to all the provisions of this Indenture, specifically including every provision of this Indenture relating to the conduct of, affecting the liability of, or affording protection to, the Note Trustee. Every such instrument shall be filed with the Note Trustee. (d) Any separate trustee or co-trustee may at any time constitute the Note Trustee, its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Indenture on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Note Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. SECTION 6.11. Eligibility; Disqualification. The Note Trustee shall at ----------------------------- all times satisfy the requirements of Section 26(a)(i) of the Investment Company Act of 1940. The Note Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition and it shall have a long term debt rating of A2 (or the equivalent thereof) or better by Moody's. SECTION 6.12. Representations and Warranties of Note Trustee. The Note ---------------------------------------------- Trustee hereby represents and warrants that: 63 (a) The Note Trustee is a national banking association, validly existing and in good standing under the laws of the United States; and (b) The Note Trustee has full power, authority and legal rights to execute, deliver and perform this Indenture and the Basic Documents to which the Note Trustee is a party and has taken all necessary action to authorize the execution, delivery, and performance by it of this Indenture and such Basic Documents. ARTICLE VII NOTEHOLDERS' LISTS AND REPORTS SECTION 7.01. Note Issuer To Furnish Note Trustee Names and Addresses of ---------------------------------------------------------- Noteholders. The Note Issuer will furnish or cause to be furnished to the Note - ----------- Trustee (a) not more than five days after the earlier of (i) each Record Date with respect to each Series and (ii) three months after the last Record Date with respect to each Series, a list, in such form as the Note Trustee may reasonably require, of the names and addresses of the Holders of Notes of such Series as of such Record Date, (b) at such other times as the Note Trustee may request in writing, within 30 days after receipt by the Note Issuer of any such request, a list of similar form and content as of a date not more than 10 days prior to the time such list is furnished; provided, however, that so long as the -------- ------- Note Trustee is the Note Registrar, no such list shall be required to be furnished. SECTION 7.02. Preservation of Information; Communications to Noteholders. ---------------------------------------------------------- The Note Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of the Holders of Notes contained in the most recent list furnished to the Note Trustee as provided in Section 7.01 and the names and addresses of Holders of Notes received by the Note Trustee in its capacity as Note Registrar. The Note Trustee may destroy any list furnished to it as provided in such Section 7.01 upon receipt of a new list so furnished. ARTICLE VIII ACCOUNTS, DISBURSEMENTS AND RELEASES SECTION 8.01. Collection of Money. Except as otherwise expressly provided ------------------- herein, the Note Trustee may demand payment or delivery of, and shall receive and collect, directly and without intervention or assistance of any fiscal agent or other intermediary, all money and other property payable to or receivable by the Note Trustee pursuant to this Indenture. The Note Trustee shall apply all such money received by it as provided in this Indenture. Except as otherwise expressly provided in this Indenture, if any default occurs in the making of any payment or performance under any agreement or instrument that is part of the Collateral, the Note Trustee may take such action as may be appropriate to 64 enforce such payment or performance, subject to Article VI, including the institution and prosecution of appropriate Proceedings. Any such action shall be without prejudice to any right to claim a Default or Event of Default under this Indenture and any right to proceed thereafter as provided in Article V. SECTION 8.02. Collection Account. ------------------ (a) Prior to the Series Issuance Date for the first Series issued hereunder, the Note Issuer shall open, at the Note Trustee's Corporate Trust Office, or at another Eligible Institution, one or more segregated trust accounts in the Note Trustee's name for the deposit of Estimated FTA Collections (collectively, the "Collection Account"). The Collection Account will consist ------------------ of four subaccounts: a general subaccount (the "General Subaccount"), a reserve ------------------ subaccount (the "Reserve Subaccount"), a subaccount for the ------------------ Overcollateralization Amount (the "Overcollateralization Subaccount") and a -------------------------------- capital subaccount (the "Capital Subaccount"). All amounts in the Collection ------------------ Account not allocated to any other subaccount shall be allocated to the General Subaccount. Prior to the initial Payment Date, all amounts in the Collection Account (other than funds deposited into the Capital Subaccount, up to the Required Capital Level) shall be allocated to the General Subaccount. All references to the Collection Account shall be deemed to include reference to all subaccounts contained therein. Withdrawals from and deposits to each of the foregoing subaccounts of the Collection Account shall be made as set forth in Section 8.02(d) and (e). The Collection Account shall at all times be maintained in an Eligible Deposit Account and only the Note Trustee shall have access to the Collection Account for the purpose of making deposits in and withdrawals from the Collection Account in accordance with this Indenture. Funds in the Collection Account shall not be commingled with any other moneys. All moneys deposited from time to time in the Collection Account, all deposits therein pursuant to this Indenture, and all investments made in Eligible Investments with such moneys, including all income or other gain from such investments, shall be held by the Note Trustee in the Collection Account as part of the Collateral as herein provided. (b) The Note Trustee shall have sole dominion and exclusive control over all moneys in the Collection Account and shall apply such amounts therein as provided in this Section 8.02. The Note Trustee shall also pay from the Collection Account any amounts requested to be paid by the Servicer pursuant to Section 6.11(d)(ii) of the Servicing Agreement. (c) FTA Collections shall be deposited in the General Subaccount as provided in Section 6.11 of the Servicing Agreement. All deposits to and withdrawals from the Collection Account and all allocations to the subaccounts of the Collection Account shall be made by the Note Trustee in accordance with the written instructions provided by the Servicer in the Monthly Servicer's Certificate and the Quarterly Servicer's Certificate, as applicable. 65 (d) On each Payment Date for any Series of Notes, the Note Trustee shall apply all amounts on deposit in the Collection Account, including all net earnings thereon, to pay the following amounts, in accordance with the Quarterly Servicer's Certificate, in the following priority: (i) all amounts owed by the Note Issuer to the Note Trustee (including legal fees and expenses) shall be paid to the Note Trustee (subject to Section 6.07) and all amounts owed to the Certificate Trustee and the Delaware Trustee under the Trust Agreement shall be paid to the Certificate Trustee and Delaware Trustee, as appropriate; (ii) the Servicing Fee for such Payment Date and all unpaid Servicing Fees for prior Payment Dates shall be paid to the Servicer; (iii) the Quarterly Administration Fee and all unpaid Quarterly Administration Fees from prior Payment Dates shall be paid to the Administrator; (iv) for so long as no Default or Event of Default shall have occurred and be continuing or would result from such payment, all other Operating Expenses shall be paid to the Persons entitled thereto or, if such have been previously paid by the Note Issuer, to the Note Issuer in reimbursement thereof; provided that the amount paid on each Payment Date -------- pursuant to this clause (iv) shall not exceed $100,000; (v) any overdue Quarterly Interest (together with, to the extent lawful, interest on such overdue Quarterly Interest at the applicable Note Interest Rate) and then Quarterly Interest for such Payment Date with respect to each Series of Notes shall be paid to the Noteholders of such Series of Notes; (vi) principal due and payable on the Notes of any Series as a result of an Event of Default or on the Final Maturity Date of the Notes of such Series, shall be paid to the Noteholders of such Series of Notes; (vii) Quarterly Principal for such Payment Date with respect to each Series of Notes shall be paid to the Noteholders of such Series of Notes; (viii) unpaid Operating Expenses shall be paid to the Persons entitled thereto or, if such have been previously paid by the Note Issuer, to the Note Issuer in reimbursement thereof; (ix) the amount, if any, by which the Required Overcollateralization Level exceeds the amount in the Overcollateralization Subaccount as of such Payment Date shall be allocated to the Overcollateralization Subaccount; 66 (x) the amount, if any, by which the Required Capital Level with respect to all Outstanding Series of Notes exceeds the amount in the Capital Subaccount as of such Payment Date shall be allocated to the Capital Subaccount; 67 (xi) funds up to the amount of net earnings on amounts in the Collection Account for the prior quarter without cumulation shall be paid to the Note Issuer, free from the lien of this Indenture; (xii) if any Series of Notes has been paid in full as of such Payment Date, the amount by which the amount in the Overcollateralization Subaccount exceeds the aggregate Required Overcollateralization Level with respect to all Series of Notes remaining outstanding shall be paid to the Note Issuer, free from the lien of this Indenture; (xiii) if any Series of Notes has been paid in full as of such Payment Date, the amount by which the amount in the Capital Subaccount exceeds the aggregate Required Capital Level with respect to all Series of Notes remaining outstanding shall be paid to the Note Issuer, free from the lien of this Indenture; (xiv) the balance, if any, shall be allocated to the Reserve Subaccount for distribution on subsequent Payment Dates; and (xv) after principal of and premium, if any, and interest on all Notes of all Series, and all of the other foregoing amounts, have been paid in full, the balance, if any, shall be paid to the Note Issuer, free from the lien of this Indenture. All payments to the Noteholders of a Series pursuant to clauses (v), (vi) and (vii) above or, in the case of clause (vi), if there is more than one Series of Notes outstanding all payments to the Noteholders of all Series, shall be made to such holders pro rata based on the respective principal amounts of Notes of such Series held by such Holders. (e) If on any Payment Date funds on deposit in the General Subaccount are insufficient to make the payments contemplated by clauses (i) through (vii) of Section 8.02(d) above, the Note Trustee shall (i) first, draw from amounts on ----- deposit in the Reserve Subaccount, (ii) second, draw from amounts on deposit in ------ the Overcollateralization Subaccount and (iii) third, draw from amounts on ----- deposit in the Capital Subaccount, in each case, up to the amount of such shortfall in order to make the payments contemplated by clauses (i) through (vii) of Section 8.02(d). In addition, if on any Payment Date funds on deposit in the General Subaccount are insufficient to make the allocations contemplated by clauses (ix) and (x) above, the Note Trustee shall draw from amounts on deposit in the Reserve Subaccount to make such allocations notwithstanding the fact that on such Payment Date the allocation contemplated by clause (viii) above may not have been fully satisfied. (f) On any Mandatory Redemption Date, the Note Trustee shall pay to the Noteholders the Mandatory Redemption Price. SECTION 8.03. General Provisions Regarding the Collection Account. --------------------------------------------------- 68 (a) For so long as no Default or Event of Default shall have occurred and be continuing, all or a portion of the funds in the Collection Account shall be invested in Eligible Investments and reinvested by the Note Trustee upon Issuer Order; provided, however, that (i) such Eligible Investments shall not mature later than the Business Day prior to the next Payment Date for the related Series of Notes, (ii) such Eligible Investments shall not be sold, liquidated or otherwise disposed of at a loss prior to the maturity thereof and (iii) if such Eligible Investments have a maturity of one month or less, such Eligible Investments (or the provider thereof) must have a long-term unsecured debt rating of at least A2 by Moody's or a certificate of deposit rating of at least P-1 by Moody's, and if such Eligible Investments have a maturity of greater than one month, such Eligible Investments (or the provider thereof) must have a long- term unsecured debt rating of at least A1 by Moody's and a certificate of deposit rating of at least P-1 by Moody's. All income or other gain from investments of moneys deposited in the Collection Account shall be deposited by the Note Trustee in the Collection Account, and any loss resulting from such investments shall be charged to the Collection Account. The Note Issuer will not direct the Note Trustee to make any investment of any funds or to sell any investment held in the Collection Account unless the security interest Granted and perfected in such account will continue to be perfected in such investment or the proceeds of such sale, in either case without any further action by any Person, and, in connection with any direction to the Note Trustee to make any such investment or sale, if requested by the Note Trustee, the Note Issuer shall deliver to the Note Trustee an Opinion of Counsel, acceptable to the Note Trustee, to such effect. In no event shall the Note Trustee be liable for the selection of Eligible Investments or for investment losses incurred thereon. The Note Trustee shall haveno liability in respect of losses incurred as a result of the liquidation of any Eligible Investment prior to its stated maturity or the failure of the Note Issuer to provide timely written investment direction. The Note Trustee shall have no obligation to invest or reinvest any amounts held hereunder in the absence of written investment direction pursuant to an Issuer Order. (b) Subject to Section 6.01(c), the Note Trustee shall not in any way be held liable by reason of any insufficiency in the Collection Account resulting from any loss on any Eligible Investment included therein except for losses attributable to the Note Trustee's failure to make payments on such Eligible Investments issued by the Note Trustee, in its commercial capacity as principal obligor and not as trustee, in accordance with their terms. (c) If (i) the Note Issuer shall have failed to give written investment directions for any funds on deposit in the Collection Account to the Note Trustee by 11:00 a.m. Eastern Time (or such other time as may be agreed by the Note Issuer and Note Trustee) on any Business Day; or (ii) a Default or Event of Default shall have occurred and be continuing with respect to the Notes of any Series but the Notes of such Series shall not have been declared due and payable pursuant to Section 5.02; then the Note Trustee shall, to the fullest extent practicable, invest and reinvest funds in the Collection Account in one or more investments which qualify as investments in money market funds described under paragraph (d) of the definition of Eligible Investments. 69 SECTION 8.04. Release of Collateral. --------------------- (a) The Note Trustee may, and when required by the provisions of this Indenture shall, execute instruments to release property from the lien of this Indenture, or convey the Note Trustee's interest in the same, in a manner and under circumstances that are not inconsistent with the provisions of this Indenture. No party relying upon an instrument executed by the Note Trustee as provided in this Article VIII shall be bound to ascertain the Note Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any moneys. (b) The Note Trustee shall, at such time as there are no Notes Outstanding, release any remaining portion of the Collateral that secured the Notes from the lien of this Indenture and release to the Note Issuer or any other Person entitled thereto any funds then on deposit in the Collection Account. The Note Trustee shall release property from the lien of this Indenture pursuant to this Section 8.04(b) only upon receipt of an Issuer Request accompanied by an Officer's Certificate, an Opinion of Counsel meeting the applicable requirements of Section 11.01. SECTION 8.05. Opinion of Counsel. The Note Trustee shall receive at least ------------------ seven days' notice when requested by the Note Issuer to take any action pursuant to Section 8.04(a), accompanied by copies of any instruments involved, and the Note Trustee shall also require, as a condition to such action, an Opinion of Counsel, in form and substance satisfactory to the Note Trustee, stating the legal effect of any such action, outlining the steps required to complete the same, and concluding that all conditions precedent to the taking of such action have been complied with and such action will not materially and adversely impair the security for the Notes or the rights of the Noteholders in contravention of the provisions of this Indenture; provided, however, that such Opinion of Counsel shall not be required to express an opinion as to the fair value of the Collateral. Counsel rendering any such opinion may rely, without independent investigation, on the accuracy and validity of any certificate or other instrument delivered to the Note Trustee in connection with any such action. SECTION 8.06. Reports by Independent Accountants. As of the initial ---------------------------------- Series Issuance Date, the Note Issuer shall appoint a firm of Independent certified public accountants of recognized national reputation for purposes of preparing and delivering the reports or certificates of such accountants required by this Indenture and the related Series Supplements. In the event such firm requires the Note Trustee to agree to the procedures performed by such firm, the Note Issuer shall direct the Note Trustee in writing to so agree; it being understood and agreed that the Note Trustee will deliver such letter of agreement in conclusive reliance upon the direction of the Note Issuer, and the Note Trustee makes no independent inquiry or investigation to, and shall have no obligation or liability in respect of, the sufficiency, validity or correctness of such procedures. Upon any resignation by such firm the Note Issuer shall provide written notice thereof to the Note Trustee and shall promptly appoint a successor thereto that shall also be a firm of 70 Independent certified public accountants of recognized national reputation. If the Note Issuer shall fail to appoint a successor to a firm of Independent certified public accountants that has resigned within 15 days after such resignation, the Note Trustee shall promptly notify the Note Issuer of such failure in writing. If the Note Issuer shall not have appointed a successor within 10 days thereafter the Note Trustee shall promptly appoint a successor firm of Independent certified public accountants of recognized national reputation; provided that the Note Trustee shall have no liability with respect to such appointment if the Note Trustee acted with due care with respect thereto. The fees of such Independent certified public accountants and its successor shall be payable by the Note Issuer. SECTION 8.07. Letter of Credit. The Note Issuer shall establish and, for ---------------- so long as may be required to satisfy the Rating Agency Condition, maintain an irrevocable Letter of Credit in an initial amount of $500,000 for the benefit of the Note Issuer and the Note Trustee. The Note Issuer and the Note Trustee shall have the right to draw under the Letter of Credit solely in the event and to the extent that the Aggregate Remittance Amount is not remitted pursuant to Section 6.11 of the Servicing Agreement. If by 6:00 p.m. Eastern Time on such Remittance Date the Note Trustee shall not have received the Aggregate Remittance Amount, the Note Trustee shall draw on the Letter of Credit as set forth in Section 6.11(f) of the Servicing Agreement. Amounts drawn under the Letter of Credit by the Note Issuer or the Note Trustee shall be deposited in the Collection Account and shall be applied as set forth in Section 8.02 hereof. The Letter of Credit may be increased at any time in order to satisfy the requirement of Section 6.11(d) of the Servicing Agreement. ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. Supplemental Indentures Without Consent of Noteholders. ------------------------------------------------------ (a) Without the consent of the Holders of any Notes but with prior notice to Moody's, the Note Issuer and the Note Trustee, when authorized by an Issuer Order, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Note Trustee, for any of the following purposes: (i) to correct or amplify the description of any property at any time subject to the lien of this Indenture, or better to assure, convey and confirm unto the Note Trustee any property subject or required to be subjected to the lien of this Indenture, or to subject to the lien of this Indenture additional property; (ii) to evidence the succession, in compliance with the applicable provisions hereof, of another person to the Note Issuer, and the assumption by any such successor of the covenants of the Note Issuer herein and in the Notes contained; 71 (iii) to add to the covenants of the Note Issuer, for the benefit of the Holders of the Notes, or to surrender any right or power herein conferred upon the Note Issuer; (iv) to convey, transfer, assign, mortgage or pledge any property to or with the Note Trustee; (v) to cure any ambiguity, to correct or supplement any provision herein or in any supplemental indenture which may be inconsistent with any other provision herein or in any supplemental indenture or to make any other provisions with respect to matters or questions arising under this Indenture or in any supplemental indenture; provided that such action shall not adversely affect the interests of the Holders of the Notes or holders of the Certificates; (vi) to evidence and provide for the acceptance of the appointment hereunder by a successor trustee with respect to the Notes and to add to or change any of the provisions of this Indenture as shall be necessary to facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Article VI; (vii) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualification of this Indenture under the TIA or under any similar Federal statute hereafter enacted and to add to this Indenture such other provisions as may be expressly required by the TIA; or (viii) to set forth the terms of any Series that has not theretofore been authorized by a Series Supplement. The Note Trustee is hereby authorized to join in the execution of any such supplemental indenture and to make any further appropriate agreements and stipulations that may be therein contained. (b) The Note Issuer and the Note Trustee, when authorized by an Issuer Order, may, also without the consent of any of the Holders of the Notes, enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Indenture or of modifying in any manner the rights of the Holders of the Notes under this Indenture; provided, however, that (i) such action shall not, as evidenced by an Opinion of Counsel, adversely affect in any material respect the interests of the Noteholders or the holders of Certificates and (ii) the Rating Agency Condition shall have been satisfied with respect thereto. SECTION 9.02. Supplemental Indentures with Consent of Noteholders. The --------------------------------------------------- Note Issuer and the Note Trustee, when authorized by an Issuer Order, also may, with prior notice to Moody's and with the consent of the Holders of not less than a majority of the Outstanding Amount of the Notes of each Series to be affected, by Act of such Holders 72 delivered to the Note Issuer and the Note Trustee, enter into an indenture or indentures supple- mental hereto for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Indenture or of modifying in any manner the rights of the Holders of the Notes under this Indenture; provided, however, that no such supplemental indenture shall, without -------- ------- the consent of the Holder of each Outstanding Note of each Series affected thereby: (i) change the date of payment of any installment of principal of or premium, if any, or interest on any Note, or reduce the principal amount thereof, the interest rate thereon or premium, if any, with respect thereto, change the provisions of this Indenture and the related applicable Series Supplement relating to the application of collections on, or the proceeds of the sale of, the Collateral to payment of principal of or premium, if any, or interest on the Notes, or change any place of payment where, or the coin or currency in which, any Note or the interest thereon is payable, or impair the right to institute suit for the enforcement of the provisions of this Indenture requiring the application of funds available therefor, as provided in Article V, to the payment of any such amount due on the Notes on or after the respective due dates thereof (or, in the case of optional or mandatory redemption, on or after the Optional Redemption Date or Mandatory Redemption Date, as applicable); (ii) reduce the percentage of the Outstanding Amount of the Notes or of a Series thereof, the consent of the Holders of which is required for any such supplemental indenture, or the consent of the Holders of which is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture; (iii) modify or alter the provisions of the proviso to the definition of the term "Outstanding"; (iv) reduce the percentage of the Outstanding Amount of the Notes required to direct the Note Trustee to direct the Note Issuer to sell or liquidate the Collateral pursuant to Section 5.04; (v) modify any provision of this Section except to increase any percentage specified herein or to provide that certain additional provisions of this Indenture or the Basic Documents cannot be modified or waived without the consent of the Holder of each Outstanding Note affected thereby; (vi) modify any of the provisions of this Indenture in such manner as to affect the calculation of the amount of any payment of interest, principal or premium, if any, due on any Note on any Payment Date (including the calculation of any of the individual components of such calculation) or to affect the rights of the Holders of Notes to the benefit of any provisions for the mandatory redemption of the Notes contained herein; or 73 (vii) permit the creation of any lien ranking prior to or on a parity with the lien of this Indenture with respect to any part of the Collateral or, except as otherwise permitted or contemplated herein, terminate the lien of this Indenture on any property at any time subject hereto or deprive the Holder of any Note of the security provided by the lien of this Indenture. The Note Trustee may in its discretion determine whether or not any Notes or Certificates of a Series would be affected by any supplemental indenture and any such determination shall be conclusive upon the Holders of all Notes and holders of all Certificates of such Series, whether theretofore or thereafter authenticated and delivered hereunder. The Note Trustee shall not be liable for any such determination made in good faith. It shall not be necessary for any Act of Noteholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. Promptly after the execution by the Note Issuer and the Note Trustee of any supplemental indenture pursuant to this Section, the Note Issuer shall mail to Moody's and the Holders of the Notes to which such amendment or supplemental indenture relates a notice setting forth in general terms the substance of such supplemental indenture. Any failure of the Note Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 9.03. Execution of Supplemental Indentures. In executing, or ------------------------------------ permitting the additional trusts created by, any supplemental indenture permitted by this Article IX or the modifications thereby of the trusts created by this Indenture, the Note Trustee shall be entitled to receive, and subject to Sections 6.01 and 6.02, shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Note Trustee may, but shall not be obligated to, enter into any such supplemental indenture that affects the Note Trustee's own rights, duties, liabilities or immunities under this Indenture or otherwise. SECTION 9.04. Effect of Supplemental Indenture. Upon the execution of any -------------------------------- supplemental indenture pursuant to the provisions hereof, this Indenture shall be and be deemed to be modified and amended in accordance therewith with respect to each Series of Notes affected thereby, and the respective rights, limitations of rights, obligations, duties, liabilities and immunities under this Indenture of the Note Trustee, the Note Issuer and the Holders of the Notes shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.05. Reference in Notes to Supplemental Indentures. Notes --------------------------------------------- authenticated and delivered after the execution of any supplemental indenture pursuant to 74 this Article IX may, and if required by the Note Trustee shall, bear a notation in form approved by the Note Trustee as to any matter provided for in such supplemental indenture. If the Note Issuer or the Note Trustee shall so determine, new Notes so modified as to conform, in the opinion of the Note Trustee and the Note Issuer, to any such supplemental indenture may be prepared and executed by the Note Issuer and authenticated and delivered by the Note Trustee in exchange for Outstanding Notes. ARTICLE X REDEMPTION OF NOTES SECTION 10.01. Optional Redemption by Note Issuer. The Note Issuer may, ---------------------------------- at its option, redeem all, but not less than all, of the Notes of a Series on any Payment Date if, after giving effect to payments that would otherwise be made on such Payment Date, the Outstanding Amount of any such Series of Notes has been reduced to less than five percent of the initial principal balance thereof on any Optional Redemption Date at a price equal to the outstanding principal amount of the Notes to be redeemed plus accrued and unpaid interest thereon at the Note Interest Rate to the Optional Redemption Date (such price being called the "Optional Redemption Price"). If the Note Issuer shall elect ------------------------- to redeem the Notes of a Series pursuant to this Section 10.01, it shall furnish written notice (which notice shall state all items listed in Section 10.02) of such election to the Note Trustee and Moody's not later than 25 days prior to the Optional Redemption Date and shall deposit with the Note Trustee not later than one Business Day prior to the Optional Redemption Date the Optional Redemption Price of the Notes to be redeemed whereupon all such Notes shall be due and payable on the Optional Redemption Date upon the furnishing of a notice complying with Section 10.02 hereof to each Holder of the Notes of such Series pursuant to this Section 10.01. SECTION 10.02. Form of Optional Redemption Notice. Unless otherwise ---------------------------------- specified in the Series Supplement relating to a Series of Notes, notice of redemption under Section 10.01 hereof shall be given by the Note Trustee by first-class mail, postage prepaid, mailed not less than five days nor more than 25 days prior to the applicable Optional Redemption Date to each Holder of Notes to be redeemed, as of the close of business on the Record Date preceding the applicable Optional Redemption Date at such Holder's address appearing in the Note Register. All notices of redemption shall state: (1) the Optional Redemption Date; (2) the Optional Redemption Price; and 75 (3) the place where such Notes are to be surrendered for payment of the Optional Redemption Price (which shall be the office or agency of the Note Issuer to be maintained as provided in Section 3.02 hereof). Notice of redemption of the Notes to be redeemed shall be given by the Note Trustee in the name and at the expense of the Note Issuer. Failure to give notice of redemption, or any defect therein, to any Holder of any Note selected for redemption shall not impair or affect the validity of the redemption of any other Note. SECTION 10.03. Notes Payable on Optional Redemption Date or Payment Date. --------------------------------------------------------- Notice of redemption having been given as provided in Section 10.02 hereof, the Notes to be redeemed shall on the Optional Redemption Date become due and payable at the Optional Redemption Price and (unless the Note Issuer shall default in the payment of the Optional Redemption Price) no interest shall accrue on the Optional Redemption Price for any period after the date to which accrued interest is calculated for purposes of calculating the Optional Redemption Price. SECTION 10.04. Mandatory Redemption by Note Issuer. If the Seller is ----------------------------------- required to repurchase the Transition Property pursuant to Section 5.01(b) of the Sale Agreement, the Note Issuer shall be required to redeem all outstanding Series of Notes on or before the fifth Business Day following the Repurchase Date (such date of mandatory redemption, the "Mandatory Redemption Date") for a ------------------------- purchase price equal to the then outstanding principal amount of the Notes plus accrued and unpaid interest thereon at the Note Interest Rate to the Mandatory Redemption Date (such price being called the "Mandatory Redemption Price"). If -------------------------- the Note Issuer is required to redeem the Notes pursuant to this Section 10.04, it shall furnish written notice (which notice shall state all items listed in Section 10.05) of such redemption to the Note Trustee and Moody's not later than one Business Day before such Repurchase Date and shall deposit with the Note Trustee, not later than one Business Day prior to the Mandatory Redemption Date, the Mandatory Redemption Price of the Notes to be redeemed whereupon all such Notes shall be due and payable on the Mandatory Redemption Date upon the furnishing of a notice complying with Section 10.05 hereof to each Holder of the Notes of all such Series pursuant to this Section 10.04. SECTION 10.05. Form of Mandatory Redemption Notice. Notice of redemption ----------------------------------- under Section 10.04 hereof shall be given by the Note Trustee by first-class mail, postage prepaid, mailed not less than five days prior to the Mandatory Redemption Date to each Holder of Notes to be redeemed, as of the close of business on the Record Date preceding the Mandatory Redemption Date at such Holder's address appearing in the Note Register. All notices of redemption shall state: (1) the Mandatory Redemption Date; (2) the Mandatory Redemption Price; and 76 (3) the place where such Notes are to be surrendered for payment of the Mandatory Redemption Price (which shall be the office or agency of the Note Issuer to be maintained as provided in Section 3.02 hereof). Notice of redemption of the Notes to be redeemed shall be given by the Note Trustee in the name and at the expense of the Note Issuer. Failure to give notice of redemption, or any defect therein, to any Holder of any Note selected for redemption shall not impair or affect the validity of the redemption of any other Note. SECTION 10.06. Notes Payable on Mandatory Redemption Date or Date. Notice -------------------------------------------------- of redemption having been given as provided in Section 10.05 hereof, the Notes to be redeemed shall on the Mandatory Redemption Date become due and payable at the Mandatory Redemption Price and (unless the Note Issuer shall default in the payment of the Mandatory Redemption Price) no interest shall accrue on the Mandatory Redemption price for any period after the date to which accrued interest is calculated for purposes of calculating the Mandatory Redemption Price. ARTICLE XI MISCELLANEOUS SECTION 11.01. Compliance Certificates and Opinions, etc. ----------------------------------------- (a) Upon any application or request by the Note Issuer to the Note Trustee to take any action under any provision of this Indenture, the Note Issuer shall furnish to the Note Trustee (i) an Officer's Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, (ii) an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (i) a statement that each signatory of such certificate or opinion has read or has caused to be read such covenant or condition and the definitions herein relating thereto; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; 77 (iii) a statement that, in the opinion of each such signatory, such signatory has made such examination or investigation as is necessary to enable such signatory to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether, in the opinion of each such signatory, such condition or covenant has been complied with. (b) (i) Prior to the deposit of any Collateral or other property or securities with the Note Trustee that is to be made the basis for the release of any property or securities subject to the lien of this Indenture, the Note Issuer shall, in addition to any obligation imposed in Section 11.01(a) or elsewhere in this Indenture, furnish to the Note Trustee an Officer's Certificate certifying or stating the opinion of each person signing such certificate as to the fair value (within 90 days of such deposit) to the Note Issuer of the Collateral or other property or securities to be so deposited. (ii) Whenever the Note Issuer is required to furnish to the Note Trustee an Officer's Certificate certifying or stating the opinion of any signer thereof as to the matters described in clause (i) above, the Note Issuer shall also deliver to the Note Trustee an Independent Certificate as to the same matters, if the fair value to the Note Issuer of the securities to be so deposited and of all other such securities made the basis of any such withdrawal or release since the commencement of the then-current fiscal year of the Note Issuer, as set forth in the certificates delivered pursuant to clause (i) above and this clause (ii), is ten percent or more of the Outstanding Amount of the Notes of all Series, but such a certificate need not be furnished with respect to any securities so deposited, if the fair value thereof to the Note Issuer as set forth in the related Officer's Certificate is less than $25,000 or less than one percent of the Outstanding Amount of the Notes of all Series. (iii) Whenever any property or securities are to be released from the lien of this Indenture other than pursuant to Section 8.02(d), the Note Issuer shall also furnish to the Note Trustee an Officer's Certificate certifying or stating the opinion of each person signing such certificate as to the fair value (within 90 days of such release) of the property or securities proposed to be released and stating that in the opinion of such person the proposed release will not impair the security under this Indenture in contravention of the provisions hereof. (iv) Whenever the Note Issuer is required to furnish to the Note Trustee an Officer's Certificate certifying or stating the opinion of any signer thereof as to the matters described in clause (iii) above, the Note Issuer shall also furnish to the Note Trustee an Independent Certificate as to the same matters if the fair value of the property or securities and of all other property with respect to such Series, or securities released from the lien of this Indenture (other than pursuant to Section 8.02(d) hereof) since the commencement of the then-current calendar year, as set forth in the certificates required by clause (iii) above and this clause (iv), equals 10 percent or more of the Outstanding Amount of the Notes of all Series, but such 78 certificate need not be furnished in the case of any release of property or securities if the fair value thereof as set forth in the related Officer's Certificate is less than $25,000 or less than one percent of the then Outstanding Amount of the Notes of all Series. 79 (v) Notwithstanding Section 2.11 or any other provision of this Section, the Note Issuer may (A) collect, liquidate, sell or otherwise dispose of the Transition Property and the FTA Charges as and to the extent permitted or required by the Basic Documents and (B) make cash payments out of the Collection Account as and to the extent permitted or required by the Basic Documents. SECTION 11.02. Form of Documents Delivered to Note Trustee. In any case ------------------------------------------- where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an Authorized Officer of the Note Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his or her certificate or opinion is based are erroneous. Any such certificate of an Authorized Officer or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Servicer, the Seller, the Note Issuer or the Administrator, stating that the information with respect to such factual matters is in the possession of the Servicer, the Seller, the Note Issuer or the Administrator, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Whenever in this Indenture, in connection with any application or certificate or report to the Note Trustee, it is provided that the Note Issuer shall deliver any document as a condition of the granting of such application, or as evidence of the Note Issuer's compliance with any term hereof, it is intended that the truth and accuracy, at the time of the granting of such application or at the effective date of such certificate or report (as the case may be), of the facts and opinions stated in such document shall in such case be conditions precedent to the right of the Note Issuer to have such application granted or to the sufficiency of such certificate or report. The foregoing shall not, however, be construed to affect the Note Trustee's right to rely upon the truth and accuracy of any statement or opinion contained in any such document as provided in Article VI. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 11.03. Acts of Noteholders. ------------------- 80 (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Noteholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Noteholders in person or by agents duly appointed in writing; and except as herein otherwise expressly provided such action shall become effective when such instrument or instruments are delivered to the Note Trustee, and, where it is hereby expressly required, to the Note Issuer. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Noteholders --- signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Note Trustee and the Note Issuer, if made in the manner provided in this Section. (b) The fact and date of the execution by any person of any such instrument or writing may be proved in any manner that the Note Trustee deems sufficient. (c) The ownership of Notes shall be proved by the Note Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Notes shall bind the Holder of every Note issued upon the registration thereof or in exchange therefor or in lieu thereof, in respect of anything done, omitted or suffered to be done by the Note Trustee or the Note Issuer in reliance thereon, whether or not notation of such action is made upon such Note. SECTION 11.04. Notices, etc., to Note Trustee, Note Issuer, Infrastructure ----------------------------------------------------------- Bank and Moody's. - ---------------- (a) Any request, demand, authorization, direction, notice, consent, waiver or Act of Noteholders or other documents provided or permitted by this Indenture to be made upon, given or furnished to or filed with: (i) the Note Trustee by any Noteholder or by the Note Issuer shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing by facsimile transmission, first-class mail or overnight delivery service to or with the Note Trustee at its Corporate Trust Office, or (ii) the Note Issuer by the Note Trustee or by any Noteholder shall be sufficient for every purpose here under if in writing and mailed, first- class, postage prepaid, to the Note Issuer addressed to: SPPC Funding LLC, 6100 Neil Road, P.O. Box 30150, Attention: President, or at any other address previously furnished in writing to the Note Trustee by the Note Issuer. The Note Issuer shall promptly transmit any notice received by it from the Noteholders to the Note Trustee. (b) Notices required to be given to Moody's or the Infrastructure Bank by the Note Issuer or the Note Trustee shall be in writing, personally delivered or mailed by certified mail, return receipt requested (i) in the case of Moody's, to Moody's Investors 81 Service, Inc., ABS Monitoring Department, 99 Church Street, New York, New York 10007 and (ii) in the case of the Infrastructure Bank, to California Infrastructure and Economic Development Bank, c/o California Trade and Commerce Agency, 801 K Street, Suite 1700, Sacramento, CA 95814, Attention: Executive Director. SECTION 11.05. Notices to Noteholders; Waiver. Where this Indenture ------------------------------ provides for notice to Noteholders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class, postage prepaid to each Noteholder affected by such event, at such Noteholder's address as it appears on the Note Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Noteholders is given by mail, neither the failure to mail such notice nor any defect in any notice so mailed to any particular Noteholder shall affect the sufficiency of such notice with respect to other Noteholders, and any notice that is mailed in the manner herein provided shall conclusively be presumed to have been duly given. Where this Indenture provides for notice in any manner, such notice may be waived in writing by any Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Noteholders shall be filed with the Note Trustee but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such a waiver. In case, by reason of the suspension of regular mail service as a result of a strike, work stoppage or similar activity, it shall be impractical to mail notice of any event of Noteholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Note Trustee shall be deemed to be a sufficient giving of such notice. Where this Indenture provides for notice to Moody's, failure to give such notice shall not affect any other rights or obligations created hereunder, and shall not under any circumstance constitute a Default or Event of Default. SECTION 11.06. Effect of Headings and Table of Contents. The Article and ---------------------------------------- Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 11.07. Successors and Assigns. All covenants and agreements in ---------------------- this Indenture and the Notes by the Note Issuer shall bind its successors and assigns, whether so expressed or not. All agreements of the Note Trustee in this Indenture shall bind its successors. SECTION 11.08. Separability. In case any provision in this Indenture or ------------ in the Notes shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 82 SECTION 11.09. Benefits of Indenture. Nothing in this Indenture or in the --------------------- Notes, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, and the Noteholders, and any other party secured hereunder, and any other Person with an ownership interest in any part of the Collateral, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 11.10. Legal Holidays. In any case where the date on which any -------------- payment is due shall not be a Business Day, then (notwithstanding any other provision of the Notes or this Indenture) payment need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date on which nominally due, and no interest shall accrue for the period from and after any such nominal date. SECTION 11.11. Governing Law. THIS INDENTURE SHALL BE CONSTRUED IN ------------- ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. SECTION 11.12. Counterparts. This Indenture may be executed in a number ------------ of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 11.13. Recording of Indenture. If this Indenture is subject to ---------------------- recording in any appropriate public recording offices, such recording is to be effected by the Note Issuer and at its expense accompanied by an Opinion of Counsel (which may be counsel to the Note Trustee or any other counsel reasonably acceptable to the Note Trustee) to the effect that such recording is necessary either for the protection of the Noteholders or any other Person secured hereunder or for the enforcement of any right or remedy granted to the Note Trustee under this Indenture. SECTION 11.14. Trust Obligation. No recourse may be taken, or indirectly, ---------------- with respect to the obligations of the Note Issuer or the Note Trustee on the Notes or under this Indenture or any certificate or other writing delivered in connection herewith or therewith, against (i) the Note Trustee in its individual capacity, (ii) any owner of a beneficial interest in the Note Issuer or (iii) any partner, owner, beneficiary, agent, officer, director or employee of the Note Trustee in its individual capacity, any holder of a beneficial interest in the Note Issuer or the Note Trustee or of any successor or assign of the Note Trustee in its individual capacity, except as any such Person may have expressly agreed (it being understood that the Note Trustee has no such obligations in its individual capacity). SECTION 11.15. No Recourse to Note Issuer. Notwithstanding any provision -------------------------- of this Indenture or any Series Supplement to the contrary, Noteholders shall have no recourse against the Note Issuer, but shall look only to the Collateral, with respect to any amounts due to the Noteholders hereunder. 83 SECTION 11.16. Inspection. The Note Issuer agrees that, on reasonable ---------- prior notice, it will permit any representative of the Note Trustee, during the Note Issuer's normal business hours, to examine all the books of account, records, reports, and other papers of the Note Issuer, to make copies and extracts therefrom, to cause such books to be audited by Independent certified public accountants, and to discuss the Note Issuer's affairs, finances and accounts with the Note Issuer's officers, employees, and Independent certified public accountants, all at such reasonable times and as often as may be reasonably requested. The Note Trustee shall and shall cause its representatives to hold in confidence all such information except to the extent disclosure may be required by law (and all reasonable applications for confidential treatment are unavailing) and except to the extent that the Note Trustee may reasonably determine that such disclosure is consistent with its obligations hereunder. Notwithstanding anything herein to the contrary, the foregoing shall not be construed to prohibit (i) disclosure of any and all information that is or becomes publicly known, or information obtained by the Note Trustee from sources other than the Note Issuer, provided such parties are rightfully in possession of such information, (ii) disclosure of any and all information (A) if required to do so by any applicable statute, law, rule or regulation, (B) pursuant to any subpoena, civil investigative demand or similar demand or request of any court or regulatory authority exercising its proper jurisdiction, (C) in any preliminary or final offering circular, registration statement or contract or other document pertaining to the transactions contemplated by this Indenture or the Basic Documents approved in advance by the Note Issuer or (D) to any affiliate, independent or internal auditor, agent, employee or attorney of the Note Trustee having a need to know the same, provided that such parties agree to be bound by the confidentiality provisions contained in this Secton 11.19, or (iii) any other disclosure authorized by the Note Issuer. 84 IN WITNESS WHEREOF, the Note Issuer and the Note Trustee have caused this Indenture to be duly executed by their respective officers, thereunto duly authorized and duly attested, all as of the day and year first above written. SPPC FUNDING LLC, By: Name: Title: BANKERS TRUST COMPANY OF CALIFORNIA, N.A., not in its individual capacity but solely as Note Trustee, By: Name: Title: 85 STATE OF NEVADA, ) ) ss.: COUNTY OF WASHOE ) On the ____ day of April, 1999, before me, Jill Nichol, a Notary Public in and for said county and state, personally appeared Mark A. Ruelle, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person and officer whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument SPPC Funding LLC, a Delaware limited liability company and the entity upon which the person acted, executed this instrument. WITNESS my hand and official seal. By Notary Public My commission expires: STATE OF ______________, ) ) ss.: COUNTY OF ___________, ) On the ____ day of April, 1999, before me, __________ a Notary Public in and for said county and state, personally appeared _____________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person and officer whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument _________________, a national banking association and the entity upon which the person acted, executed this instrument. WITNESS my hand and official seal. Notary Public My commission expires: 86 Exhibit A-1 [FORM OF SALE AGREEMENT] 87 Exhibit A-2 [FORM OF SERVICING AGREEMENT] 88 Exhibit B [FORM OF NOTE] 89 Exhibit C [FORM OF SERIES SUPPLEMENT] 90 EX-4.D 6 FIRST SERIES SUPPLEMENT DATED APRIL 9, 1999 EXHIBIT (4)(D) FIRST SERIES SUPPLEMENT between SPPC FUNDING LLC, as Note Issuer, and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Note Trustee Dated as of April 9, 1999 Supplemental to the Indenture Dated as of April 9, 1999 1 TABLE OF CONTENTS Section 1. Designation............................................................... 1 Section 2. Initial Principal Amount; Note Interest Rate; Scheduled Maturity Date; Final Maturity Date.............................. 1 Section 3. Authentication Date; Payment Dates; Expected Amortization Schedule for Principal; Quarterly Interest; Required Amortization Level; No Premium......................... 2 Section 4. Minimum Denominations..................................................... 3 Section 5. Certain Defined Terms..................................................... 3 Section 6. Delivery of the Series 1999-1 Notes; Form of the Series 1999-1 Notes........................................... 3 Section 7. Ratification of Indenture................................................. 3 Section 8. Counterparts.............................................................. 3 Section 9. Governing Law............................................................. 3 Section 10. Trust Obligation.......................................................... 3
Schedules and Exhibits ---------------------- Schedule A Expected Amortization Schedule Schedule B Required Overcollateralization Level Exhibit A Form of Note 2 FIRST SERIES SUPPLEMENT Authorizing the Issuance of $24,000,000 Aggregate Principal Amount of 6.40% Notes, Series 1999-1 FIRST SERIES SUPPLEMENT, dated as of April 9, 1999 (this "Supplement"), by ---------- and between SPPC FUNDING LLC, a Delaware limited liability company (the "Note ---- Issuer"), and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., a national banking - ------ association (the "Note Trustee"), as Note Trustee under the Indenture, dated as ------------ of April 9, 1999, between the Note Issuer and the Note Trustee (the "Indenture"). --------- PRELIMINARY STATEMENT Section 9.01 of the Indenture provides, among other things, that the Note Issuer and the Note Trustee may at any time and from time to time enter into one or more indentures supplemental to the Indenture for the purposes of authorizing the issuance by the Note Issuer of a Series of Notes and specifying the terms thereof. The Note Issuer has duly authorized the creation of a Series of Notes with an initial aggregate principal amount of $24,000,000 to be known as the Note Issuer's Notes, Series 1999-1 (the "Series 1999-1 Notes"), and the Note ------------------- Issuer and the Note Trustee are executing and delivering this Supplement in order to provide for the Series 1999-1 Notes. All terms used in this Supplement that are defined in the Indenture, either directly or by reference therein, have the meanings assigned to them therein, except to the extent such terms are defined or modified in this Supplement or the context clearly requires otherwise. In the event that any term or provision contained herein shall conflict with or be inconsistent with any term or provision contained in the Indenture, the terms and provisions of this Supplement shall govern. SECTION 1. Designation. The Series 1999-1 Notes shall be designated ----------- generally as the Note Issuer's Notes, Series 1999-1. SECTION 2. Initial Principal Amount; Note Interest Rate; Scheduled ------------------------------------------------------- Maturity Date; Final Maturity Date. The Series 1999-1 Notes shall have the - ---------------------------------- initial principal amount, bear interest at the rates per annum and shall have Scheduled Maturity Dates and Final Maturity Dates as set forth below: 3
Initial Principal Note Interest Scheduled Maturity Final Maturity ----------------- ------------- ------------------ -------------- Amount Rate Date Date ------ ---- ---- ---- $24,000,000 6.40% March 25, 2009 March 25, 2011
The Note Interest Rate shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 3. Authentication Date; Payment Dates; Expected Amortization --------------------------------------------------------- Schedule for Principal; Quarterly Interest; Required Overcollateralization - -------------------------------------------------------------------------- Level; No Premium. - ----------------- (a) Authentication Date. The Series 1999-1 Notes that are authenticated ------------------- and delivered by the Note Trustee to or upon the order of the Note Issuer on April 9, 1999 (the "Series Issuance Date") shall have as their date of -------------------- authentication April 9, 1999. (b) Payment Dates. The Payment Dates for the Series 1999-1 Notes are the ------------- March 25, June 25, September 25 and December 25 of each year, or if any such date is not a Business Day, the next succeeding Business Day, commencing on June 25, 1999 and continuing until the earlier of repayment of the Series 1999-1 Notes in full and the Final Maturity Date for the Series 1999-1 Notes. (c) Expected Amortization Schedule for Principal. Unless an Event of --------------------------------------------- Default shall have occurred and be continuing, on each Payment Date, the Note Trustee shall distribute to the Noteholders of record as of the related Record Date amounts payable pursuant to Section 8.02(d)(vii) of the Indenture as principal; provided, however, that in no event shall a principal payment pursuant to this Section 3(c) on any Series of Notes on a Payment Date be greater than the amount necessary to reduce the Outstanding Amount of such Series of Notes to the amount specified in the Expected Amortization Schedule, which is attached as Schedule A hereto for such Series and Payment Date. (d) Quarterly Interest. Quarterly Interest will be payable on the Series ------------------ 1999-1 Notes on each Payment Date in an amount equal to one-fourth of the product of (i) the applicable Note Interest Rate and (ii) the Outstanding Amount of the Series 1999-1 Notes as of the close of business on the preceding Payment Date after giving effect to all payments of principal made to the holders of the Series 1999-1 Notes on such preceding Payment Date; provided, however, that with respect to the initial Payment Date or, if no payment has yet been made, interest on the outstanding principal balance will accrue from and including the Series Issuance Date to, but excluding, the following Payment Date. (e) Required Overcollateralization Level. The Required ------------------------------------ Overcollateralization Level for any Payment Date shall be as set forth in Schedule B hereto. (f) No Premium. No premium will be payable in connection with the early ---------- redemption of the Series 1999-1 Notes. 4 SECTION 4. Minimum Denominations. The Series 1999-1 Notes shall be --------------------- issuable in the Minimum Denomination and integral multiples thereof. SECTION 5. Certain Defined Terms. Article One of the Indenture provides --------------------- that the meanings of certain defined terms used in the Indenture shall, when applied to the Notes of a particular Series, be as defined in Article One but with such additional provisions as are specified in the related Supplement. Additionally, Article Two of the Indenture provides that with respect to a particular Series of Notes, certain terms will have the meanings specified in the related Supplement. With respect to the Series 1999-1 Notes, the following definitions shall apply: "Minimum Denomination" shall mean $100,000 and integral multiples of -------------------- $1,000. "Note Interest Rate" has the meaning set forth in Section 2 of this ------------------ Supplement. "Payment Date" has the meaning set forth in Section 3(b) of this ------------ Supplement. "Quarterly Interest" has the meaning set forth in Section 3(d) of this ------------------ Supplement. "Series Issuance Date" has the meaning set forth in Section 3(a) of this -------------------- Supplement. SECTION 6. Delivery and Payment for the Series 1999-1 Notes; Form of the ------------------------------------------------------------- Series 1999-1 Notes. The Note Trustee shall deliver the Series 1999-1 Notes to - ------------------- the Note Issuer when authenticated in accordance with Section 2.03 of the Indenture. The Series 1999-1 Notes shall be in the form of Exhibit A hereto. SECTION 7. Ratification of Agreement. As supplemented by this Supplement, ------------------------- the Indenture is in all respects ratified and confirmed, and the Indenture, as so supplemented by this Supplement, shall be read, taken, and construed as one and the same instrument. SECTION 8. Counterparts. This Supplement may be executed in any number of ------------ counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. SECTION 9. Governing Law. THIS SUPPLEMENT SHALL BE CONSTRUED IN ------------- ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO ITS CONFLICT OF LAWS PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. SECTION 10. Trust Obligation. No recourse may be taken, directly or ---------------- indirectly, with respect to the obligations of the Note Issuer or the Note Trustee on the Notes or under this Supplement or any certificate or other writing delivered in connection herewith or therewith, against (i) the Note Trustee in its individual capacity, (ii) any owner of a beneficial interest in the Note Issuer or (iii) any partner, owner, beneficiary, agent, officer, director, employee or agent of the Note Trustee in its individual capacity, any holder of a beneficial interest in the Note Issuer or the Note Trustee or of any successor or assign of the Note Trustee in its 5 individual capacity, except as any such Person may have expressly agreed (it being understood that the Note Trustee has no such obligations in its individual capacity). 6 IN WITNESS WHEREOF, the Note Issuer and the Note Trustee have caused this Supplement to be duly executed by their respective officers thereunto duly authorized as of the day of the month and year first above written. SPPC FUNDING LLC, as Note Issuer, By: MARK A. RUELLE ------------------------------------ Name: Mark A. Ruelle Title: Treasurer BANKERS TRUST COMPANY OF CALIFORNIA, N.A., not in its individual capacity but solely as Note Trustee, By: RICHARD K. ATKINSON ------------------------------ Name: Richard K. Atkinson Title: Assistant Treasurer 7 Schedule A SPPC FUNDING LLC NOTES, SERIES 1999-1 Expected Amortization Schedule ------------------------------ Principal Date Balance ---- ------- Series Issuance Date $24,000,000 June 1999 23,835,891 September 1999 23,041,136 December 1999 22,200,000 March 2000 21,299,918 June 2000 20,684,942 September 2000 20,250,699 December 2000 19,800,000 March 2001 19,096,231 June 2001 18,414,470 September 2001 17,916,149 December 2001 17,400,000 March 2002 16,672,262 June 2002 16,004,913 September 2002 15,511,075 December 2002 15,000,000 March 2003 14,282,359 June 2003 13,616,856 September 2003 13,116,903 December 2003 12,600,000 March 2004 11,887,191 June 2004 11,225,485 September 2004 10,721,050 December 2004 10,200,000 March 2005 9,492,845 June 2005 8,834,639 September 2005 8,325,463 December 2005 7,800,000 March 2006 7,098,379 June 2006 6,443,724 September 2006 5,929,841 December 2006 5,400,000 March 2007 4,703,935 June 2007 4,052,829 September 2007 3,534,229 December 2007 3,000,000 8 March 2008 2,309,493 June 2008 1,661,939 September 2008 1,138,619 December 2008 600,000 March 2009 0 9 Schedule B SPPC FUNDING LLC NOTES, SERIES 1999-1 Required Overcollateralization Level ------------------------------------ Date Series 1999-1 ---- ------------- Series Issuance Date $ 0 June 1999 3,000 September 1999 6,000 December 1999 9,000 March 2000 12,000 June 2000 15,000 September 2000 18,000 December 2000 21,000 March 2001 24,000 June 2001 27,000 September 2001 30,000 December 2001 33,000 March 2002 36,000 June 2002 39,000 September 2002 42,000 December 2002 45,000 March 2003 48,000 June 2003 51,000 September 2003 54,000 December 2003 57,000 March 2004 60,000 June 2004 63,000 September 2004 66,000 December 2004 69,000 March 2005 72,000 June 2005 75,000 September 2005 78,000 December 2005 81,000 March 2006 84,000 June 2006 87,000 September 2006 90,000 December 2006 93,000 March 2007 96,000 June 2007 99,000 September 2007 102,000 10 December 2007 105,000 March 2008 108,000 June 2008 111,000 September 2008 114,000 December 2008 117,000 March 2009 120,000 11 Exhibit A [FORM OF NOTE] 12 EX-4.E 7 FORM OF SPPC FUNDING LLC NOTES EXHIBIT (4)(E) THIS NOTE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER -------------- ANY STATE SECURITIES LAWS IN RELIANCE ON EXEMPTIONS PROVIDED BY THE SECURITIES ACT AND SUCH STATE SECURITIES LAWS. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES FOR THE BENEFIT OF SPPC FUNDING LLC (THE "NOTE ISSUER") THAT SUCH NOTE IS ----------- BEING ACQUIRED FOR ITS OWN ACCOUNT AND NOT WITH A VIEW TO DISTRIBUTION AND THAT SUCH NOTE MAY BE RESOLD, PLEDGED OR TRANSFERRED ONLY IF SUCH RESALE, PLEDGE OR TRANSFER (A) IS MADE IN ACCORDANCE WITH SECTION 2.05 OF THE INDENTURE REFERRED TO HEREIN AND (B) IS MADE (I) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (II) TO A PERSON WHOM THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER WHO IS AWARE THAT THE RESALE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A. THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE RESALE RESTRICTIONS SET FORTH ABOVE. REGISTERED No. 01. $24,000,000 SEE REVERSE FOR CERTAIN DEFINITIONS THE PRINCIPAL OF THIS SERIES 1999-1 NOTE WILL BE PAID IN INSTALLMENTS AS SET FORTH HEREIN. ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS SERIES 1999-1 NOTE AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. SPPC FUNDING LLC NOTES, SERIES 1999-1
Note Interest Original Principal Scheduled Final Final Maturity ------------- ------------------ --------------- -------------- Rate Amount Maturity Date Date ---- ------ ------------- ---- 6.40% $24,000,000 March 25, 2009 March 25, 2011
SPPC Funding LLC, a limited liability company organized and existing under the laws of the State of Delaware (herein referred to as the "Note Issuer"), for ----------- value received, hereby promises to pay to California Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1, or registered assigns, the Original Principal Amount shown above in quarterly installments on the Payment Dates and in the amounts specified on the reverse hereof or, if less, the amounts determined pursuant to Section 8.02 of the Indenture, in each year, commencing on the date determined as provided on the reverse hereof and ending on or before the Final Maturity Date shown above and to pay interest, at the Note Interest Rate 1 shown above, on each March 25, June 25, September 25 and December 25 or, if any such day is not a Business Day, the next succeeding Business Day, commencing on June 25, 1999 and continuing until the earlier of the payment of the principal hereof and the Final Maturity Date (each a "Payment Date"), on the principal ------------ amount of this Series 1999-1 Note (this "Series 1999-1 Note"). Interest on this ------------------ Series 1999-1 Note will accrue for each Payment Date from the most recent Payment Date on which interest has been paid to but excluding such Payment Date or, if no interest has yet been paid, from April 9, 1999. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Such principal of and interest on this Series 1999-1 Note shall be paid in the manner specified on the reverse hereof. The principal of and interest on this Series 1999-1 Note are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. All payments made by the Note Issuer with respect to this Series 1999-1 Note shall be applied first to interest due and payable on this Series 1999-1 Note as provided above and then to the unpaid principal of and premium, if any, on this Series 1999-1 Note, all in the manner set forth in Section 8.02 of the Indenture. Reference is made to the further provisions of this Series 1999-1 Note set forth on the reverse hereof, which shall have the same effect as though fully set forth on the face of this Series 1999-1 Note. Unless the certificate of authentication hereon has been executed by the Note Trustee whose name appears below by manual signature, this Series 1999-1 Note shall not be entitled to any benefit under the Indenture referred to on the reverse hereof, or be valid or obligatory for any purpose. 2 IN WITNESS WHEREOF, the Note Issuer has caused this instrument to be signed, manually or in facsimile, by its Authorized Officer. Date: April 9, 1999 SPPC FUNDING LLC, By: RICHARD K. ATKINSON --------------------------- Name: Richard K. Atkinson Title: Assistant Treasurer NOTE TRUSTEE'S CERTIFICATE OF AUTHENTICATION Dated: April 9, 1999 This is one of the Series 1999-1 Notes designated above and referred to in the within-mentioned Indenture. BANKERS TRUST COMPANY OF CALIFORNIA, N.A., not in its individual capacity but solely As Note Trustee, By: PETER BECKER ------------------------------ Authorized Signatory 3 [REVERSE OF NOTE] This Series 1999-1 Note (this "Series 1999-1 Note") is one of a duly ------------------ authorized issue of Notes of the Note Issuer, designated as its Notes (herein called the "Notes"), issued and to be issued in one or more Series, under an ----- Indenture dated as of April 9, 1999 and a Series Supplement thereto (such Indenture and Series Supplement, each as supplemented or amended, are herein referred to collectively as the "Indenture"), each between the Note Issuer and --------- Bankers Trust Company of California, N.A., as Note Trustee (the "Note Trustee", ------------ which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights and obligations thereunder of the Note Issuer, the Note Trustee and the Holders of the Notes. All terms used in this Series 1999-1 Note that are defined in the Indenture, as supplemented or amended, shall have the meanings assigned to them in the Indenture. The Series 1999-1 Notes and any other Series of Notes issued by the Note Issuer are and will be equally and ratably secured by the collateral pledged as security therefor as provided in the Indenture. The principal of this Series 1999-1 Note shall be payable on each Payment Date only to the extent that amounts in the Collection Account are available therefor, and only until the outstanding principal balance thereof on such Payment Date (after giving effect to all payments of principal, if any, made on such Payment Date) has been reduced to the principal balance specified in the Expected Amortization Schedule, which is attached to the related Series Supplement as Schedule A, unless payable earlier either because (x) an Event of Default shall have occurred and be continuing and the Note Trustee or the Holders of Notes representing not less than a majority of the Outstanding Amount of the Notes of all Series have declared the Notes of all Series to be immediately due and payable in accordance with Section 5.02 of the Indenture, (y) the Note Issuer, at its option, shall have called for the redemption of the Series 1999-1 Notes pursuant to Section 10.01 of the Indenture or (z) the Note Issuer shall have called for the redemption of the Series 1999-1 Notes pursuant to Section 10.04 of the Indenture if the Seller is required to repurchase the Transition Property pursuant to Section 5.01(b) of the Sale Agreement. However, actual principal payments may be made in lesser than expected amounts and at later than expected times as determined pursuant to Section 8.02 of the Indenture. The entire unpaid principal amount of this Series 1999-1 Note shall be due and payable on the earlier of the Final Maturity Date hereof, the Optional Redemption Date, if any, and the Mandatory Redemption Date, if any, hereof. Notwithstanding the foregoing, the entire unpaid principal amount of the Notes shall be due and payable, if not then previously paid, on the date on which an Event of Default shall have occurred and be continuing, and the Note Trustee or the Holders of the Notes representing not less than a majority of the Outstanding Amount of the Notes of all Series have declared the Notes of all Series to be immediately due and payable in the manner provided in Section 5.02 of the Indenture. All principal payments on the Series 1999-1 Notes shall be made pro rata to the Holders of the Series 1999-1 Notes entitled thereto based on the respective principal amounts of the Series 1999-1 Notes held by them. Payments of interest on this Series 1999-1 Note due and payable on each Payment Date, together with the installment of principal or premium, if any, shall be made by check mailed first-class, postage prepaid, to the Person whose name appears as the Registered Holder of this Series 1999-1 Note (or one or more Predecessor Notes) on the Note Register as of the close of business on the Record Date or in such other manner as may be provided in the related Series Supplement, except that with respect to Notes registered on the Record Date in the name of the Certificate Trustee, payments will be made by wire transfer in immediately available funds to the account designated by the Certificate Trustee and except that the final installment of principal and premium, if any, payable with respect to this Series 1999-1 Note on a Payment Date shall be payable as provided below. Such checks shall be mailed to the Person entitled thereto at the address of such Person as it appears on the Note Register as of the applicable Record Date without requiring 4 that this Series 1999-1 Note be submitted for notation of payment. Any reduction in the principal amount of this Series 1999-1 Note (or any one or more Predecessor Notes) effected by any payments made on any Payment Date shall be binding upon all future Holders of this Series 1999-1 Note and of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not noted hereon. If funds are expected to be available, as provided in the Indenture, for payment in full of the then remaining unpaid principal amount of this Series 1999-1 Note on a Payment Date, then the Note Trustee, in the name of and on behalf of the Note Issuer, will notify the Person who was the Registered Holder hereof as of the Record Date preceding such Payment Date by notice mailed no later than five days prior to such final Payment Date and shall specify that such final installment will be payable only upon presentation and surrender of this Series 1999-1 Note and shall specify the place where this Series 1999-1 Note may be presented and surrendered for payment of such installment. The Note Issuer shall pay interest on overdue installments of interest at the Note Interest Rate to the extent lawful. As provided in the Indenture, the Series 1999-1 Notes may be redeemed, in whole but not in part, at the option of the Note Issuer on any Payment Date at the Optional Redemption Price if, after giving effect to payments that would otherwise be made on such Payment Date, the Outstanding Amount of the Series 1999-1 Notes has been reduced to less than five percent of the initial principal balance thereof. In addition, as provided in the Indenture, if the Seller is required to repurchase the Transition Property pursuant to Section 5.01(b) of the Sale Agreement, the Note Issuer will be required to redeem all outstanding Series of Notes, including the Series 1999-1 Notes, on or before the fifth Business Day following the Repurchase Date (as defined in the Sale Agreement). As provided in the Indenture and subject to certain limitations set forth therein, the transfer of this Series 1999-1 Note may be registered on the Note Register upon surrender of this Series 1999-1 Note for registration of transfer at the office or agency designated by the Note Issuer pursuant to the Indenture, duly endorsed by, or accompanied by (a) a written instrument of transfer in form satisfactory to the Note Trustee duly executed by the Holder hereof or his attorney duly authorized in writing, with such signature guaranteed by an institution that is a member of one of the following recognized Signature Guaranty Programs: (i) The Securities Transfer Agent Medallion Program (STAMP); (ii) The New York Stock Exchange Medallion Program (MSP); (iii) The Stock Exchange Medallion Program (SEMP); or (iv) in such other guarantee program acceptable to the Note Trustee, and (b) such other documents as the Note Trustee may require, and thereupon one or more new Series 1999-1 Notes of Minimum Denominations and in the same aggregate principal amount will be issued to the designated transferee or transferees. No service charge will be charged for any registration of transfer or exchange of this Series 1999-1 Note, but the transferor may be required to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any such registration of transfer or exchange, other than exchanges pursuant to Section 2.04 or 9.06 of the Indenture not involving any transfer. Each Noteholder, by acceptance of a Note, covenants and agrees that no recourse may be taken, directly or indirectly, with respect to the obligations of the Note Issuer or the Note Trustee on the Notes or under the Indenture or any certificate or other writing delivered in connection therewith, against (i) the Note Trustee in its individual capacity, (ii) any owner of a beneficial interest in the Note Issuer or (iii) any partner, owner, beneficiary, agent, officer, director or employee of the Note Trustee in its individual capacity, any holder of a beneficial interest in the Note Issuer or the Note Trustee or of any successor or assign of the Note Trustee in its individual capacity, except as any such Person may have expressly agreed (it being understood that the Note Trustee has no such obligations in its individual capacity). Prior to the due presentment for registration of transfer of this Series 1999-1 Note, the Note Issuer, the Note Trustee and any agent of the Note Issuer or the Note Trustee may treat the Person in whose name 5 this Series 1999-1 Note is registered (as of the day of determination) as the owner hereof for the purpose of receiving payments of principal of and premium, if any, and interest on this Series 1999-1 Note and for all other purposes whatsoever, whether or not this Series 1999-1 Note be overdue, and neither the Note Issuer, the Note Trustee nor any such agent shall be affected by notice to the contrary. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Note Issuer and the rights of the Holders of the Notes under the Indenture at any time by the Note Issuer with the consent of the Holders of Notes representing a majority of the Outstanding Amount of all Notes at the time Outstanding of each Series to be affected. The Indenture also contains provisions permitting the Holders of Notes representing specified percentages of the Outstanding Amount of the Notes of all Series, on behalf of the Holders of all the Notes, to waive compliance by the Note Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Series 1999-1 Note (or any one of more Predecessor Notes) shall be conclusive and binding upon such Holder and upon all future Holders of this Series 1999-1 Note and of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof whether or not notation of such consent or waiver is made upon this Series 1999-1 Note. The Indenture also permits the Note Trustee to amend or waive certain terms and conditions set forth in the Indenture without the consent of Holders of the Notes issued thereunder. The term "Note Issuer" as used in this Series 1999-1 Note includes any ----------- successor to the Note Issuer under the Indenture. The Note Issuer is permitted by the Indenture, under certain circumstances, to merge or consolidate, subject to the rights of the Note Trustee and the Holders of Notes under the Indenture. The Series 1999-1 Notes are issuable only in registered form in denominations as provided in the Indenture and the related Series Supplement, subject to certain limitations therein set forth. THIS SERIES 1999-1 NOTE, THE INDENTURE AND THE RELATED SERIES SUPPLEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO ITS CONFLICT OF LAWS PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. No reference herein to the Indenture and no provision of this Series 1999-1 Note or of the Indenture shall alter or impair the obligation of the Note Issuer, which is absolute and unconditional, to pay the principal of and interest on this Series 1999-1 Note at the times, place, and rate, and in the coin or currency herein prescribed. The Holder of this Series 1999-1 Note by the acceptance hereof agrees that, notwithstanding any provision of the Indenture or the related Series Supplement to the contrary, the Holder shall have no recourse against the Note Issuer, but shall look only to the Collateral, with respect to any amounts due to the Holder under this Series 1999-1 Note. 6 ASSIGNMENT Social Security or Taxpayer I.D. or Other Identifying Number of Assignee FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________________________________________________________ (name and address of assignee) the within Series 1999-1 Note and all rights thereunder, and hereby irrevocably constitutes and appoints______________, attorney, to transfer said Series 1999-1 Note on the books kept for registration thereof, with full power of substitution in the premises. Dated:__________________ _______________ 7 EX-10.A 8 CREDIT AGREEMENT DATED JUNE 24, 1999 EXHIBIT (10)(A) =============================================================================== $150,000,000 CREDIT AGREEMENT dated as of June 24, 1999 among SIERRA PACIFIC POWER COMPANY, MELLON BANK, N.A., as Administrative Agent, FIRST UNION NATIONAL BANK and WELLS FARGO BANK, N.A., as Syndication Agents, and the LENDERS party hereto from time to time Arranged By MELLON BANK, N.A. =============================================================================== 1 CREDIT AGREEMENT, dated as of June 24, 1999, among SIERRA PACIFIC POWER COMPANY, a Nevada corporation, MELLON BANK, N.A., as Administrative Agent, FIRST UNION NATIONAL BANK and WELLS FARGO BANK, N.A., as Syndication Agents, the LENDERS party hereto from time to time and MELLON BANK, N.A., as Arranger. W I T N E S S E T H: ------------------- WHEREAS, the Borrower (as defined below) has requested, and Lenders (as defined below) have agreed to make available, the credit facilities described below upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I DEFINITIONS; CONSTRUCTION SECTION 1.01 Defined Terms. ------------- As used in this Agreement, the following terms have the following meanings: "ABR", when used in reference to any Loan or Borrowing, refers to --- whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "Acquisition" means any transaction, or any series of related ----------- transactions, consummated after the Effective Date, by which the Borrower and/or any of its Subsidiaries directly or indirectly (a) acquires any ongoing business or all or substantially all of the assets of any Person engaged in any ongoing business, whether through purchase of assets, merger or otherwise, (b) acquires control of securities of a Person engaged in an ongoing business representing more than 50% of the ordinary voting power for the election of directors or other governing position if the business affairs of such Person are managed by a board of directors or other governing body or (c) acquires control of more than 50% of the ownership interest in any partnership, joint venture, limited liability company, business trust or other Person engaged in an ongoing business that is not managed by a board of directors or other governing body. "Adjusted LIBO Rate" means, with respect to any Eurodollar Revolving ------------------ Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Administrative Agent" means Mellon Bank, N.A., in its capacity as -------------------- administrative agent for the Lenders hereunder and any successor appointed pursuant to Section 8.10. 2 "Affiliate" means, any Person that directly or indirectly Controls, or --------- is under common Control with, or is Controlled by, another Person, provided that, in any event, any Person that owns directly or indirectly securities having 20% or more of the voting power for the election of directors or other governing body of a corporation or 20% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to Control such corporation or other Person. "AFUDC-Debt" means, for any period, the allowance for borrowed funds ---------- used during construction for such period as calculated in accordance with the rules of the Public Utilities Commission of Nevada. "AFUDC-Equity" means, for any period, the allowance for funds other ------------ than borrowed funds used during construction for such period as calculated in accordance with the rules of the Public Utilities Commission of Nevada. "Agents" means, collectively, the Administrative Agent, the Arranger ------ and the Syndication Agents. "Alternate Base Rate" means, for any day, a rate per annum equal to ------------------- the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Applicable Percentage" means, with respect to any Lender as of any --------------------- date of determination, the percentage of the total Commitments as of such date represented by such Lender's Commitment as of such date. If the Commitments have terminated or expired, the Applicable Percentages shall be determined, as of any date of determination, based upon the percentage of the total Loans outstanding as of such date represented by such Lender's Loans outstanding as of such date. "Applicable Rate" means, for any day, with respect to the facility --------------- fees payable hereunder, with respect to any Eurodollar Revolving Loan or with respect to any usage fees payable hereunder, as the case may be, the applicable rate per annum set forth below under the caption "Facility Fee", "Eurodollar Spread" or "Usage Fee", as the case may be, based on the ratings by S&P and Moody's, respectively, applicable on such day to the Index Debt: Facility Eurodollar Usage Fee Index Debt rating: S&P/Moody's Fee Spread (*33%/*66%) - ------------------------------- --- ------ ----------- Ratings greater than A-/A3 .1500% .3500% .0250/.0750% Ratings equal to A-/A3 .1500% .4000% .0250/.0750% Ratings equal to BBB+/Baa1 .2000% .4250% .0250/.0750% Ratings equal to BBB/Baa2 .2250% .5250% .0500/.1250% * Greater than 3 Ratings equal to BBB-/Baa3 .2500% .7500% .0500/.1250% Ratings less than BBB-/Baa3 .3750% .8750% .1250/.2500% For purposes of the foregoing, (i) if either Moody's or S&P shall not have in effect a rating for the Index Debt (other than by reason of the circumstances referred to in the last sentence of this definition), then such rating agency shall be deemed to have established a rating in its lowest rating category, (ii) if the ratings established or deemed to have been established by Moody's and S&P for the Index Debt shall be changed (other than as a result of a change in the rating system of Moody's or S&P), such change shall be effective as of two Business Days after it is first announced by the applicable rating agency and (iii) if the rating assigned by Moody's and the rating assigned by S&P shall differ (a) by one level (e.g., Moody's rating of A3 and S&P rating of BBB+), then the higher rating level shall apply (i.e., A3) and (b) by more than one level (e.g., Moody's rating of A3 and S&P rating of BBB-), then the rating level above the lower rating level shall apply (i.e., BBB/Baa2). Each change in the Applicable Rate shall apply during the period commencing two Business Days after the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody's or S&P shall change, or if either such rating agency shall cease to be in the business of rating corporate debt obligations, the Borrower and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Rate shall be determined by reference to the rating most recently in effect prior to such change or cessation. "Arranger" means Mellon Bank, N.A. in its capacity as arranger -------- hereunder. "Assignment and Acceptance" means an assignment and acceptance entered ------------------------- into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.12), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "Availability Period" means the period from and including the ------------------- Effective Date to but excluding the earlier of the Revolving Termination Date and the date on which the Commitments terminate. "Bankruptcy Code" means Title 11 of the United States Code entitled --------------- "Bankruptcy," as now or hereafter in effect, or any successor thereto. "Board" means the Board of Governors of the Federal Reserve System of ----- the United States of America. "Borrower" means Sierra Pacific Power Company, a Nevada corporation. -------- "Borrowing" means Loans of the same Type, made, converted or continued --------- on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect. "Borrowing Request" means a request by the Borrower for a Borrowing ----------------- made in accordance with Section 2.03. 4 "Business Day" means any day that is not a Saturday, Sunday or other ------------ day on which commercial banks in Pittsburgh, Pennsylvania are authorized or required by Law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease Obligations" of any Person means all obligations of ------------------------- such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board), and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including such Statement No. 13). "Change in Control" means (a) the failure of Sierra Pacific Resources ----------------- to own, legally and beneficially, 100% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; (b) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof) of shares representing more than 20% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Sierra Pacific Resources; or (c) for any period of 12 consecutive calendar months, a majority of the Board of Directors of Sierra Pacific Resources shall no longer be composed of individuals (i) who were members of said Board on the first day of such period, (ii) whose election or nomination to said Board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of said Board or (iii) whose election or nomination to said Board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of said Board. "Change in Law" means (a) the adoption of any Law after the date of ------------- this Agreement, (b) any change in any Law or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.13(b), by any lending office of such Lender or by such Lender's Parent, if any) with any request, guideline or directive (whether or not having the force of Law) of any Governmental Authority made or issued after the date of this Agreement. "Class", when used in reference to any Loan or Borrowing, refers to ----- whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans or Term Loans. "Code" means the Internal Revenue Code of 1986 and the regulations ---- promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Commitment" means, with respect to each Lender, the commitment of ---------- such Lender to make Revolving Loans hereunder, expressed as an amount representing the maximum aggregate amount of such Lender's Revolving Credit Exposure hereunder, as such commitment 5 may be (a) reduced from time to time pursuant to Section 2.06 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.12. The initial amount of each Lender's Commitment is set forth on Schedule I or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders' Commitments is $150,000,000. "Consolidated Earnings Available For Fixed Charges" means, for any ------------------------------------------------- period, Consolidated Net Income Available to Common less AFUDC-Debt less AFUDC- Equity plus Consolidated Fixed Charges, in each case for the Borrower for such period. "Consolidated Fixed Charges" means, for any period, the sum of (i) the -------------------------- total consolidated cash interest paid by the Borrower and its consolidated Subsidiaries for such period, (ii) lease payments made or accrued by the Borrower and its consolidated Subsidiaries, on a consolidated basis, for such period and (iii) preferred dividends paid by the Borrower and its consolidated Subsidiaries for such period. "Consolidated Net Income Available to Common" means, for any period, ------------------------------------------- the consolidated net income of the Borrower and its consolidated Subsidiaries less consolidated preferred dividends accrued by the Borrower and its consolidated Subsidiaries, in each case for such period. "Control" of a Person (including, with its correlative meanings, ------- "Controlled by" and "under common Control with") means possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise) of such Person. "Default" means any event, act or condition which upon notice, lapse ------- of time or both would, unless cured or waived, become an Event of Default. "Default Interest" has the meaning assigned to such term in Section ---------------- 2.11(c). "Dollars" or "$" refers to freely transferable lawful money of the ------- - United States of America. "Effective Date" means the date on which the conditions specified in -------------- Section 4.01 are satisfied (or waived in accordance with Section 9.01). "Environmental Claims" means any and all administrative, regulatory or -------------------- judicial actions, suits, demands, demand letters, directives, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law or any permit issued, or any approval given, under any such Environmental Law (hereafter, "Claims"), including, without ------ limitation, (a) any and all Claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief in connection with alleged injury or threat of injury to health, safety or the environment due to the presence of Hazardous Materials. 6 "Environmental Law" means any Federal, state, foreign or local ----------------- statute, Law, rule, regulation, ordinance, code, guideline, written policy and rule of common law now or hereafter in effect and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, employee health and safety or Hazardous Materials, including, without limitation, CERCLA; RCRA; the Federal Water Pollution Control Act, 33 U.S.C. (S) 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. (S) 2601 et seq.; the -- ---- -- ---- Clean Air Act, 42 U.S.C. (S) 7401 et seq.; the Safe Drinking Water Act, 42 -- ---- U.S.C. (S) 3803 et seq.; the Oil Pollution Act of 1990, 33 U.S.C. (S) 2701 et -- ---- -- seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 - ---- U.S.C. (S) 11001 et seq.; the Hazardous Material Transportation Act, 49 U.S.C. -- ---- (S) 1801 et seq. and the Occupational Safety and Health Act, 29 U.S.C. (S) 651 -- ---- et seq.; and any state and local or foreign counterparts or equivalents, in each - -- ---- case as amended from time to time. "ERISA" means the Employee Retirement Income Security Act of 1974 and ----- the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement, and to any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" means any corporation or trade or business that is a --------------- member of any group of organizations described in Section 414(b) or (c) of the Code of which the Borrower is a member. "Eurodollar", when used in reference to any Loan or Borrowing, refers ---------- to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate. "Event of Default" has the meaning assigned to such term in Section ---------------- 7.01. "Excluded Taxes" means, with respect to the Administrative Agent, any -------------- Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the Laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.17(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement or is attributable to such Foreign Lender's failure or inability to comply with Section 2.15(e), except to the extent that such Foreign Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.15(a). "Existing Indebtedness" has the meaning assigned to such term in --------------------- Section 3.23. "Extension Request" has the meaning assigned to such term in Section ----------------- 2.06(e). 7 "Extension Request Notice" has the meaning assigned to such term in ------------------------ Section 2.06(e). "Extension Request Period" has the meaning assigned to such term in ------------------------ Section 2.06(e). "Federal Funds Effective Rate" means, for any day, the weighted ---------------------------- average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Final Repayment Date" means the earliest to occur of (a) the date -------------------- that is one year after the Term Loan Conversion Date and (b) the date on which the Obligations under this Agreement terminate, whether by prepayment, cancellation, acceleration or otherwise. "First Mortgage Bonds" means obligations issued from time to time -------------------- under, and secured by, the First Mortgage Indenture. "First Mortgage Indenture" means the Indenture of Mortgage, dated as ------------------------ of December 1, 1940, from the Borrower to State Street Bank and Trust Company (successor to The New England Trust Company), as trustee, and Gerald R. Wheeler (successor to Leo W. Huegle), as co-Trustee, as modified, amended or supplemented at any time or from time to time by supplemental indentures. "Fixed Charge Coverage Ratio" means, as of the last day of a fiscal --------------------------- quarter, the ratio of Consolidated Earnings Available For Fixed Charges to Consolidated Fixed Charges, in each case, for the four consecutive fiscal quarter period of the Borrower ended on such last day. "Foreign Lender" means any Lender that is organized under the Laws of -------------- a jurisdiction other than the United States of America, each State thereof and the District of Columbia. "Foreign Pension Plan" means any plan, fund (including, without -------------------- limitation, any superannuation fund) or other similar program established or maintained outside the United States of America by the Borrower or any one or more of its Subsidiaries primarily for the benefit of employees of the Borrower or such Subsidiaries residing outside the United States of America, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code. "GAAP" means generally accepted accounting principles in the United ---- States of America applied in a consistent manner. 8 "Governmental Action" means any authorization, approval, order, ------------------- decree, ruling or other action by, or notice to or filing with, any Governmental Authority. "Governmental Authority" means the government of the United States of ---------------------- America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, bureau, instrumentality, regulatory body, court, tribunal, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Hazardous Materials" means (a) any petroleum or petroleum products, ------------------- radioactive materials, asbestos in any form that is friable, urea formaldehyde foam insulation, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous waste," "hazardous materials," "extremely hazardous substances," "restricted hazardous waste," "toxic substances," "toxic pollutants," "contaminants," or "pollutants," or words of similar import, under any applicable Environmental Law; and (c) any other chemical, material or substance, the Release of which is prohibited, limited or regulated by any governmental authority. "Indebtedness" of any Person means, (a) obligations created, issued or ------------ incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (d) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; and (f) any guarantee or other arrangement by which such Person guarantees or is otherwise liable for the Indebtedness of others; provided, however, that "Indebtedness" shall not include Secured Nonrecourse Obligations. "Indebtedness to be Refinanced" means all Indebtedness that is listed ----------------------------- on Schedule VII. "Indemnified Parties" means each Agent, the Lenders, their respective ------------------- Affiliates, and the directors, officers, employees, attorneys and agents of each of the foregoing. "Indemnified Taxes" means all Taxes other than Excluded Taxes. ----------------- "Index Debt" means the senior, unsecured, long-term indebtedness for ---------- borrowed money of the Borrower that is not guaranteed by any other Person or subject to any credit enhancement. "Interest Election Request" means a request by the Borrower to convert ------------------------- or continue a Borrowing in accordance with Section 2.05. 9 "Interest Payment Date" means (a) with respect to any ABR Loan, each --------------------- Quarterly Date, and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration after the first day of such Interest Period. "Interest Period" means, with respect to any Eurodollar Borrowing, the --------------- period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect; provided, that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "Investment" means, when used in connection with any Person, any ---------- investment by or of that Person, whether by means of purchase or other acquisition of stock or other securities of any other Person or by means of a loan, advance creating a debt, capital contribution, guaranty or other debt or equity participation or interest in any other Person, including any partnership --------- and joint venture interests of such Person but excluding any Wholly-Owned --------- Subsidiary of such Person. The amount of any Investment shall be the amount actually invested (minus any return of capital with respect to such Investment ----- which has actually been received in cash or has been converted into cash), without adjustment for subsequent increases or decreases in the value of such Investment. "Law" shall mean any law (including common law), constitution, --- statute, treaty, convention, regulation, rule, ordinance, order, injunction, writ, decree or award of any Governmental Authority. "Lenders" means the Persons listed on Schedule I and any other Person ------- that shall have become a party hereto pursuant to an Assignment and Acceptance. "LIBO Rate" means, with respect to any Eurodollar Borrowing for any --------- Interest Period, the average of the offered rates for Dollar deposits for the applicable Interest Period which appear on the Telerate Page 3750, British Bankers Association Interest Settlement Rates, with maturities comparable to the Interest Period to be applicable to such Eurodollar Loan, determined as of 10:00 A.M. (Pittsburgh, Pennsylvania time) on the date which is two Business Days prior to the commencement of such Interest Period. "Lien" means, with respect to any Property, any mortgage, lien, ---- pledge, charge, security interest or encumbrance of any kind in respect of such Property. For purposes of this Agreement, a Person shall be deemed to own subject to a Lien any Property that it has acquired 10 or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement (other than an operating lease) relating to such Property. "Loan Documents" means this Agreement, each Borrowing Request, each -------------- Interest Election Request, each Note and the Notice of Term Loan Conversion. "Loans" means (a) Revolving Loans, (b) Term Loans or (c) Revolving ----- Loans and Term Loans, as the context may require. "Material Adverse Effect" means a material adverse effect on (a) the ----------------------- Property, business, operations, financial condition, prospects, liabilities or capitalization of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower to perform its obligations hereunder, (c) the validity or enforceability of this Agreement, (d) the rights and remedies of the Lenders and the Administrative Agent hereunder or (e) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith. "Mergers" means the merger of (a) LAKE Merger Sub, Inc., a wholly- ------- owned Subsidiary of Sierra Pacific Resources, with and into Sierra Pacific Resources and (b) NPC with and into DESERT Merger Sub, Inc., a wholly-owned Subsidiary of Sierra Pacific Resources, in each case pursuant to the Agreement and Plan of Merger, dated as of April 29, 1998, among NPC, Sierra Pacific Resources, DESERT Merger Sub, Inc. and LAKE Merger Sub, Inc. "Moody's" means Moody's Investors Service, Inc.; provided that if such ------- corporation (or its successors and assigns) shall for any reason 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 approved for purposes hereof by the Required Lenders and the Borrower. "Multiemployer Plan" means a multiemployer plan defined as such in ------------------ Section 3(37) of ERISA to which contributions have been made by the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA. "NPC" means Nevada Power Co., a Nevada corporation. --- "Note" has the meaning assigned to such term in Section 2.08(f). ---- "Notice of Term Loan Conversion" has the meaning assigned to such term ------------------------------ in Section 2.07(a). "Obligations" means all Indebtedness, obligations and liabilities of ----------- the Borrower to any Lender or any Agent from time to time arising under or in connection with or related to or evidenced by or secured by this Agreement or any other Loan Document, and all extensions, renewals or refinancings thereof, whether such Indebtedness, obligations or liabilities are direct or indirect, otherwise secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising. Without limitation of the foregoing, such Indebtedness, obligations and liabilities shall include the principal amount of all Loans, all interest, fees, indemnities or expenses under or in connection with this Agreement or any other Loan Document, and all extensions, renewals and refinancings thereof, whether or not 11 such Loans were made in compliance with the terms and conditions of this Agreement or in excess of the obligation of the Lenders to lend. Obligations shall remain obligations notwithstanding any assignment or transfer or any subsequent assignment or transfer of any of the Obligations or any interest therein. "Other Taxes" means any and all present or future stamp or documentary ----------- taxes or any other excise or Property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "Parent" means any Person that Controls a Lender. ------ "Participant" has the meaning assigned to Section 9.12(b). ----------- "PBGC" means the Pension Benefit Guaranty Corporation or any entity ---- succeeding to any or all of its functions under ERISA. "Permitted Liens" has the meaning assigned to such term in Section --------------- 6.02. "Person" means any natural person, corporation, limited liability ------ company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means an employee benefit or other plan established or ---- maintained by the Borrower or any ERISA Affiliate and that is covered by Title IV of ERISA, other than a Multiemployer Plan. "Prime Rate" means the rate of interest per annum publicly announced ---------- from time to time by Mellon Bank, N.A. as its prime rate, the Prime Rate to change when and as such prime rate changes. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Mellon Bank, N.A. may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "Principal Office" means the principal office of Mellon Bank, N.A., ---------------- located on the date hereof at One Mellon Bank Center, Pittsburgh, Pennsylvania 15258. "Property" means any right or interest in or to property of any kind -------- whatsoever, whether real, personal or mixed and whether tangible or intangible. "Purchasing Lender" has the meaning assigned to Section 9.12(c). ----------------- "Quarterly Dates" means the last day of March, June, September and --------------- December in each year, the first of which shall be the first such day after the date hereof; provided that if any such day is not a Business Day, then such Quarterly Date shall be the next succeeding Business Day (unless such succeeding Business Day falls in a subsequent calendar month, in which event such Quarterly Date shall be the next preceding Business Day). "Register" has the meaning assigned to Section 9.12(d). -------- 12 "Related Parties" means, with respect to any specified Person, such --------------- Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Release" means the disposing, discharging, injecting, spilling, ------- pumping, leaking, leaching, dumping, emitting, escaping, emptying, pouring or migrating, into or upon any land or water or air, or otherwise entering into the environment. "Reportable Event" means an event described in Section 4043(c) of ---------------- ERISA with respect to a Plan that is subject to Title IV of ERISA other than those events as to which the 30-day notice period is waived under subsection .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043 (provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA, including, without limitation, the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code). "Required Lenders" means (a) so long as the Commitments remain in ---------------- effect, Lenders having Commitments representing 51% or more of the sum of the total Commitments at such time, or (b) if the Commitments have terminated, Lenders holding 51% or more of the aggregate principal amount of the Loans outstanding at such time. "Responsible Officer" means the Treasurer, the Assistant Treasurer, ------------------- the Chief Financial Officer or the Controller. "Revolving Credit Exposure" means, with respect to any Lender at any ------------------------- time, the aggregate outstanding principal amount of such Lender's Revolving Loans at such time. "Revolving Loan" has the meaning assigned to such term in Section -------------- 2.01(a). "Revolving Termination Date" means December 29, 1999, provided, -------------------------- however, that if, on or before such date, the Borrower shall have obtained all regulatory approvals necessary to permit the Revolving Termination Date to be extended to the date which is 364 days after the Effective Date, as such termination date may be extended from time to time in accordance with Section 2.06(e), and shall have furnished to the Administrative Agent copies of such approvals and a legal opinion, in form and substance satisfactory to the Administrative Agent, that such approvals have been obtained and are in full force and effect, then the Revolving Termination Date shall be automatically extended to the date which is 364 days after the Effective Date, as such termination date may be extended from time to time in accordance with Section 2.06(e). "Secured Nonrecourse Obligations" means and includes (a) secured ------------------------------- obligations of the Borrower taken on a consolidated basis where recourse of the payee of such obligations is expressly limited to an assigned lease or loan receivable and the Property related thereto and (b) liabilities of the Borrower taken on a consolidated basis to manufacturers of leased equipment where such liabilities are payable solely out of revenues derived from the leasing or sale of such equipment. 13 "Shareholders' Equity" means, as of any date of determination, the -------------------- amount which is shown as "shareholders' equity" (which shall include both common and preferred equity) in the consolidated balance sheet of the Borrower at such date. "S&P" means Standard & Poor's Ratings Group, a division of The McGraw --- Hill Companies, Inc., and its successor and assigns; provided that if such corporation (or its successors and assigns) shall for any reason 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 approved for purposes hereof by the Required Lenders and the Borrower. "Statutory Reserve Rate" means a fraction (expressed as a decimal), ---------------------- the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject for eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such statutory reserve rates without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Subsidiary" shall mean, as to any Person, (i) any corporation more ---------- than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (ii) any partnership, limited liability company, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has more than a 50% equity interest at the time. "Substitute Lender" has the meaning assigned to such term in Section ----------------- 2.06(f). "Syndication Agents" means First Union National Bank and Wells Fargo ------------------ Bank, N.A. "Taxes" means any and all present or future taxes, levies, imposts, ----- duties, deductions, charges or withholdings imposed by any Governmental Authority. "Term Loan" has the meaning assigned to such term in Section 2.01(b). --------- "Term Loan Conversion Date" means the date set forth in the Notice of ------------------------- Term Loan Conversion; provided however, that the Term Loan Conversion Date shall not be a date that occurs later than the Revolving Termination Date. "Total Indebtedness" means, as of any date of determination, the sum ------------------ of all Indebtedness of the Borrower and its consolidated Subsidiaries as of such date. 14 "Type", when used in reference to any Loan or Borrowing, refers to ---- whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate. "Unfunded Current Liability" of any Plan means the amount, if any, by -------------------------- which the value of the accumulated plan benefits under the Plan determined on a plan termination basis in accordance with actuarial assumptions at such time consistent with those prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds the fair market value of all plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions). "Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any ----------------------- corporation 100% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (ii) any partnership, limited liability company, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has a 100% equity interest at the time. "Year 2000 Compliant" has the meaning assigned to such term in Section ------------------- 3.21. "Year 2000 Plan" has the meaning assigned to such term in Section -------------- 3.21. SECTION 1.02. Classification of Loans and Borrowings. --------------------------------------- For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a Revolving Loan or a Term Loan) or by Type (e.g., a Eurodollar Loan or an ABR Loan) or by Class and Type (e.g., a Eurodollar Revolving Loan). Borrowings also may be classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a "Eurodollar Borrowing") or by Class and Type (e.g., a "Eurodollar Revolving Borrowing"). SECTION 1.03 Terms Generally. --------------- The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof and (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement. 15 SECTION 1.04 Accounting Terms; GAAP. ---------------------- Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time. ARTICLE II THE CREDITS SECTION 2.01 The Commitments. --------------- (a) Subject to the terms and conditions set forth herein, each Lender agrees to make loans (each such loan, a "Revolving Loan") to the Borrower from -------------- time to time on any Business Day during the Availability Period in an aggregate principal amount that will not result in (i) such Lender's Revolving Credit Exposure (after giving effect to such Revolving Loans) exceeding such Lender's Commitment or (ii) the sum of the Revolving Credit Exposures of all Lenders exceeding the total Commitments. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans. (b) Subject to the terms and conditions set forth herein, each Lender agrees, so long as no Default or Event of Default has occurred and is continuing, to consolidate on the Term Loan Conversion Date all of such Lender's Revolving Loans that are outstanding on the Term Loan Conversion Date (after giving effect to any payment or prepayment of such Loans made by the Borrower on such date) into a single loan (each such loan, a "Term Loan") in an amount not --------- to exceed the aggregate principal amount of such Revolving Loans. Revolving Loans that are consolidated into a Term Loan shall be deemed paid. Term Loans which are repaid or prepaid may not be reborrowed. SECTION 2.02 Loans and Borrowings. -------------------- (a) Obligations of Lenders. Each Revolving Loan shall be made as part ---------------------- of a Borrowing consisting of Loans of the same Type made by the Lenders ratably in accordance with their respective Commitments. Each Term Loan shall be made in accordance with the procedures set forth in Section 2.07. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder. The Commitments of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Type of Loans. Subject to Section 2.12, each Borrowing shall be ------------- comprised entirely of ABR Loans or Eurodollar Loans. Each Lender may, at its option, make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (c) Minimum Amounts; Limitation on Number of Borrowings. Each --------------------------------------------------- Revolving Borrowing (whether an ABR Borrowing or a Eurodollar Borrowing) shall be in an aggregate amount equal to $5,000,000 or a multiple of $1,000,000 in excess thereof, provided that an ABR Borrowing may be made in an aggregate amount that is equal to the entire unused 16 balance of the total Commitments. The Borrower may thereafter, upon irrevocable notice to the Administrative Agent in accordance with Section 2.05(b), (i) elect, as of any Business Day, in the case of ABR Loans, to convert any such ABR Loans or any part thereof, in an aggregate amount equal to $5,000,000 or a multiple of $1,000,000 in excess thereof, into Eurodollar Loans, and (ii) elect, as of the last day of the applicable Interest Period, to continue any Eurodollar Loans having Interest Periods expiring on such day or any part thereof in an aggregate amount of $5,000,000 or a multiple of $1,000,000 in excess thereof; provided that, if at any time the aggregate amount of Eurodollar Loans in respect of any Borrowing is reduced by payment, prepayment or conversion of part thereof to be less than $5,000,000, such Eurodollar Loans shall automatically convert into ABR Loans. Borrowings of more than one Type may be outstanding at the same time; provided that there shall not at any time be more than a total of five Eurodollar Borrowings outstanding. (d) Maximum Duration of Interest Periods. Notwithstanding any other ------------------------------------ provision of this Agreement, until the Term Loan Conversion Date shall have occurred, the Borrower shall not be entitled to request, or to elect to convert or continue, any Eurodollar Borrowing if the Interest Period requested with respect thereto would end after the Revolving Termination Date. From and after the Term Loan Conversion Date (if any), the Borrower shall not be entitled to elect to convert or continue any Borrowing if the Interest Period requested with respect thereto would end after the Final Repayment Date. SECTION 2.03 Requests for Revolving Borrowings. --------------------------------- To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Revolving Borrowing, not later than 12:00 noon., Pittsburgh, Pennsylvania time, three Business Days before the date of the proposed Borrowing, or (b) in the case of an ABR Borrowing, not later than 12:00 noon, Pittsburgh, Pennsylvania time, one Business Day before the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in the form attached hereto as Exhibit B and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.04. 17 If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. SECTION 2.04 Funding of Borrowings. --------------------- (a) Funding by Lenders. No later than 12:00 noon, Pittsburgh, ------------------ Pennsylvania time, on the date specified in each Borrowing Request, each Lender will make available its Applicable Percentage of each Revolving Borrowing requested to be made on such date, in Dollars and in immediately available funds at the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with Mellon Bank, N.A. at the Principal Office and designated by the Borrower in the applicable Borrowing Request. (b) Presumption by the Administrative Agent. Unless the --------------------------------------- Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the Federal Funds Effective Rate or (ii) in the case of the Borrower, the interest rate applicable to the Loans of such Borrowing. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. SECTION 2.05 Interest Elections. ------------------ (a) Elections by the Borrower for Borrowings. Each Borrowing ---------------------------------------- initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section but subject to Section 2.02. Once Loans have been made pursuant to a Borrowing, the Borrower may elect to convert or continue different portions of such Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. 18 (b) Notice of Elections. To make an election pursuant to this ------------------- Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. (c) Information in Interest Election Requests. Each telephonic and ----------------------------------------- written Interest Election Request shall specify the following information in compliance with Section 2.02: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) of this paragraph shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing, or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Notice by the Administrative Agent to Lenders. Promptly following --------------------------------------------- receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) Failure to Elect; Events of Default. If the Borrower fails to ----------------------------------- deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. 19 SECTION 2.06 Termination, Reduction and Extension of Commitments. --------------------------------------------------- (a) Scheduled Termination. Unless previously terminated, the --------------------- Commitments shall terminate on the Revolving Termination Date. (b) Voluntary Termination or Reduction. The Borrower may at any time ---------------------------------- prior to the Revolving Termination Date terminate, or from time to time reduce, the Commitments; provided that (i) each reduction of the Commitments shall be in an amount that is $10,000,000 or a multiple of $5,000,000 in excess thereof and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.09, the sum of the total Revolving Credit Exposures would exceed the total Commitments. (c) Notice of Voluntary Termination or Reduction. The Borrower shall -------------------------------------------- notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any such notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. (d) Effect of Termination or Reduction. Any termination or reduction ---------------------------------- of the Commitments shall be permanent. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their Applicable Percentages. (e) Extension of Commitments. ------------------------ (i) Not earlier than the date which is 60 days (but not later than 30 days) prior to the then existing Revolving Termination Date (the "Extension Request Notice Date"), the Borrower may deliver to the Administrative ----------------------------- Agent (which shall promptly transmit the same to each Lender) a notice (an "Extension Request") requesting that the Revolving Termination Date be extended ----------------- for an additional 364 days commencing on the then existing Revolving Termination Date. Not earlier than the date which is 30 days (but not later than 20 days) prior to the then existing Revolving Termination Date (the period from the Extension Request Notice Date to such date, the "Extension Request Period"), ------------------------ each Lender (in its sole and absolute discretion and after conducting an internal credit review of the Borrower) shall notify the Administrative Agent of such Lender's willingness or unwillingness to so extend the Revolving Termination Date. Any Lender which shall fail to so notify the Administrative Agent within such period shall be deemed to have declined to extend the Revolving Termination Date. If Lenders having Commitments totaling an amount equal to at least 51% of the aggregate amount of the Commitments then in effect agree to such extension by notice to the Administrative Agent, then (A) subject to clause (iii) below, the Revolving Termination Date shall be extended for an additional 364 days with respect to the Commitments of the Lenders so agreeing, and (B) subject to Section 2.06(f) hereof, the Commitment of each Lender not so 20 agreeing shall expire on the then expiring Revolving Termination Date and the Borrower shall pay or prepay on such day without premium or penalty all principal of such Lender's Loans together with accrued interest thereon and all accrued facility and usage fees and other amounts payable to such Lender hereunder (including, without limitation, amounts payable pursuant to Section 2.14 hereof as a result of such payment or prepayment); provided, however, that (x) if Lenders having Commitments totaling an amount equal to at least 51% of the aggregate amount of the Commitments then in effect do not agree as contemplated by Section 2.06(e)(i), then the Revolving Termination Date shall not be extended pursuant to this Section 2.06(e) and the Commitments of all of the Lenders shall remain in effect until the Revolving Termination Date except as otherwise provided in this Agreement; and (y) the Borrower may not request any extension of the Revolving Termination Date pursuant to this Section 2.06(e)(i) more frequently than once in any calendar year. (ii) Any Loan by any Lender the Commitment of which is to terminate pursuant to Section 2.06(e)(i) hereof that would otherwise be made or converted by such Lender as a Eurodollar Loan having an Interest Period ending after the date such Commitment is to terminate shall be made or continued as an ABR Loan and all ABR Loans of such Lender that would otherwise be converted into Eurodollar Loans having such Interest Periods shall remain as ABR Loans. (iii) It shall be a condition precedent to any extension of the Revolving Termination Date that: (a) on the date of such extension no Default or Event of Default shall have occurred and be continuing; (b) the representations and warranties made by the Borrower in Article III shall be true and complete on and as of the date of such extension (or if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and (c) except for the Mergers, on the date of such extension there shall have been no material adverse change in the consolidated financial condition, operations, business or prospects taken as a whole of the Borrower and its Subsidiaries from that set forth in its financial statements as of December 31, 1998 referred to in Section 3.06 hereof or, if the Borrower has delivered its financial statements for any fiscal year to the Lenders and the Administrative Agent pursuant to Section 5.01(a) hereof, as of the date of the most recent such financial statements. Each request for an extension of the Revolving Termination Date pursuant to Section 2.06(e) shall constitute a certification by the Borrower to the effect set forth in the preceding sentence (both as of the date of such request and, unless the Borrower notifies the Administrative Agent prior to the date of such extension, as of the date of such extension). (f) Substitute Lenders. In the event any Lender does not agree to any ------------------ extension by the date provided pursuant to Section 2.06(e) hereof, then, unless a Default or an Event of Default shall have occurred and be continuing, the Borrower may, not later than 10 days following the expiration of the Extension Request Period, designate one or more other banks (each such bank being herein called a "Substitute Lender"), which may include any of the Lenders, acceptable ----------------- to the Administrative Agent (which acceptance will not be unreasonably 21 withheld), to assume such non-consenting Lender's Commitment hereunder and to purchase, on or before the date such Lender's Loans would otherwise be required to be paid or prepaid hereunder, the Loans and Notes of such Lender and such Lender's rights hereunder in respect thereof, without recourse to or representation or warranty by, or expense to, such Lender. In such event, the purchase price shall be equal to the outstanding principal amount of the Loans and Notes payable to such Lender plus any accrued but unpaid interest on such Loans and Notes and accrued but unpaid facility and usage fees in respect of such Lender's Commitment. Upon such assumption and purchase and the receipt by such Lender of any other amounts payable to it by the Borrower under this Agreement, and subject to the execution and delivery to the Administrative Agent and such Lender by the Substitute Lender of documentation reasonably satisfactory to the Administrative Agent and such Lender pursuant to which such Substitute Lender shall assume the obligations of such original Lender under this Agreement in respect of its Loans, Notes and Commitment and agree to become a "Lender" hereunder (if not already a Lender) to the extent of the Commitments, Loans and Notes assumed and purchased, the Substitute Lender shall succeed to the rights, obligations and benefits of such Lender hereunder in such respect (except for such rights, obligations and benefits of the Lender as have accrued (other than principal, accrued interest or facility and usage fees ) or are required to be performed by it on or prior to the date of such assumption and purchase) (and such Lender shall be released from its Commitment except for any liability arising or relating to any event occurring prior to the date of such assumption and purchase) and the Substitute Lender shall be deemed to have agreed to the relevant extension of the Revolving Termination Date and, anything in Section 2.06(e) to the contrary notwithstanding, whether such extension is effective shall be determined accordingly; provided that following any such assumption and purchase the Commitments of each Substitute Lender (including any Commitments theretofore held by it) shall be not less than $10,000,000. SECTION 2.07 Term Loan Conversion Option. ---------------------------- (a) In the event the Borrower desires to have all of its Revolving Loans consolidated into Term Loans, the Borrower shall deliver written notice thereof (the "Notice of Term Loan Conversion") to the Administrative Agent at ------------------------------ least 10 days prior to the Term Loan Conversion Date. Once delivered, the Notice of Term Loan Conversion shall be irrevocable. (b) The Notice of Term Loan Conversion shall specify: (i) the Term Loan Conversion Date, which shall be a date (A) no sooner than 5 days after the date on which the Notice of Term Loan Conversion is delivered to the Administrative Agent, (B) no later than the Revolving Termination Date and (C) that is a Business Day; (ii) the principal amount of Revolving Loans that are to be consolidated into Term Loans on the Term Loan Conversion Date, which amount shall be the aggregate principal amount of all Revolving Loans that will be outstanding on the Term Loan Conversion Date after giving effect to all payments or prepayments to be made prior to such date; 22 (iii) whether the Term Loans are to be ABR Loans or Eurodollar Loans on the Term Loan Conversion Date; and (iv) if the Terms Loans are to be Eurodollar Loans on the Term Loan Conversion Date, the duration of the Interest Period applicable thereto, provided that if the Notice of Term Loan Conversion fails to specify the duration of the Interest Period for any Borrowing comprised of Eurodollar Loans, such Interest Period shall be three months. (c) The Administrative Agent will promptly notify each Lender of its receipt of the Notice of Term Loan Conversion from the Borrower and of the contents of such notice. (d) If the Borrower requests that Term Loans be made available on the Term Loan Conversion Date, each Lender shall, on the Term Loan Conversion Date, be deemed to have made available to the Borrower its Applicable Percentage of the Term Loans requested and the Borrower shall be deemed to have applied the full amount of such proceeds to the repayment of the Revolving Loans previously made by such Lender to such Borrower. (e) Unless all the Lenders otherwise consent, (i) the Borrower may not deliver any Notice of Term Loan Conversion so long as any Default or Event of Default has occurred and is continuing and (ii) no consolidation of Revolving Loans into Term Loans pursuant to any validly given Notice of Term Loan Conversion shall be permitted if on the Term Loan Conversion Date specified a Default or an Event of Default shall have occurred and is continuing. SECTION 2.08 Repayment of Loans; Evidence of Debt. ------------------------------------ (a) Repayment. The Borrower hereby unconditionally promises to pay to --------- the Administrative Agent for account of the Lenders (i) the outstanding principal amount of the Revolving Loans on the Revolving Termination Date, unless the Borrower elects to consolidate all of such Revolving Loans into Term Loans on or before such date; and (ii) the outstanding principal amount of all Term Loans made to the Borrower on the Final Repayment Date. (b) Manner of Payment. Prior to any repayment or prepayment of any ----------------- Borrowings hereunder, the Borrower shall select the Borrowing or Borrowings to be paid and shall notify the Administrative Agent by telephone (confirmed by telecopy) of such selection not later than 12:00 noon, Pittsburgh, Pennsylvania time, three Business Days before the scheduled date of such repayment or prepayment; provided that each repayment or prepayment of Borrowings shall be applied to repay or prepay any outstanding ABR Borrowings before any other Borrowings. If the Borrower fails to make a timely selection of the Borrowing or Borrowings to be repaid or prepaid, such payment shall be applied, first, to pay any outstanding ABR Borrowings and, second, to other Borrowings in the order of the remaining duration of their respective Interest Periods (the Borrowing with the shortest remaining Interest Period to be repaid first). Each payment of a Revolving Borrowing shall be applied ratably to the Loans included in such Borrowing. (c) Maintenance of Loan Accounts by Lenders. Each Lender shall --------------------------------------- maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the 23 Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (d) Maintenance of Loan Accounts by the Administrative Agent. The -------------------------------------------------------- Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. (e) Effect of Entries. The entries made in the accounts maintained ------------------ pursuant to paragraph (c) and (d) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (f) Notes. Any Lender may request that Loans made by it be evidenced ----- by a promissory note (each a "Note") in substantially the form of Exhibit C. In ---- such event, the Borrower shall prepare, execute and deliver to such Lender a Note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in the form of Exhibit C. Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after assignment pursuant to Section 9.12) be represented by one or more Notes in such form payable to the order of the payee named therein (or, if such Note is a registered note, to such payee and its registered assigns). SECTION 2.09 Prepayment of Loans. ------------------- (a) Optional Prepayments Right to Prepay Borrowings. The Borrower ----------------------------------------------- shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to the requirements of this Section. (b) Notices, Etc. The Borrower shall notify the Administrative Agent ------------- by telephone (confirmed by telecopy) of any optional prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 12:00 noon, Pittsburgh, Pennsylvania time, three Business Days before the date of prepayment, or (ii) in the case of prepayment of an ABR Borrowing, not later than 12:00 noon, Pittsburgh, Pennsylvania time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.06(c), then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.06(c). Promptly following receipt of any such notice relating to a Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an aggregate principal amount equal to $5,000,000 or a multiple of $1,000,000 in excess thereof, provided that if any prepayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Revolving Loans made pursuant to such Borrowing to an amount less than $5,000,000, such outstanding Loans shall immediately be converted into ABR Loans. Each 24 prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.11 and shall be made in the manner specified in this Section 2.09(b). SECTION 2.10 Fees. ---- (a) Facility Fee. The Borrower shall pay the Administrative Agent for ------------ the account of each Lender a facility fee for the period from and including the Effective Date to but excluding the Revolving Termination Date (or such earlier date on which the total Commitments shall have been terminated) computed at a rate per annum equal to the Applicable Rate on each Lender's daily average Commitment, such fee to be paid quarterly in arrears on each Quarterly Date and on the Revolving Termination Date (or such earlier date on which the total Commitments shall have been terminated). The facility fee shall be calculated on the basis of the actual number of days elapsed in a year of 360 days. (b) Usage Fee. The Borrower shall pay the Administrative Agent for --------- the account of each Lender a usage fee for each day during the period from and including the date hereof to but excluding the Revolving Termination Date (or such earlier date on which the total Commitments shall have been terminated) on which the aggregate principal amount of the then outstanding Revolving Loans exceeds 33% or 66%, as the case may be, of the total Commitments hereunder computed at a rate per annum equal to the Applicable Rate for such percentage of usage on the daily average aggregate principal amount of the Revolving Loans then outstanding, such fee to be paid quarterly in arrears on each Quarterly Date and on the Revolving Termination Date (or such earlier date on which the total Commitments shall have been terminated). The usage fee shall be calculated on the basis of the actual number of days elapsed in a year of 360 days. (c) Payment of Fees. All fees payable hereunder shall be paid on the --------------- dates due, in immediately available funds, to the Administrative Agent for distribution, in the case of facility and usage fees, to the Lenders entitled thereto. SECTION 2.11 Interest. -------- (a) ABR Loans. The Loans comprising each ABR Revolving Borrowing --------- shall bear interest at a rate per annum equal to the Alternate Base Rate. (b) Eurodollar Loans. The Loans comprising each Eurodollar Borrowing ---------------- shall bear interest at a rate per annum equal to the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate. (c) Default Interest. Notwithstanding the foregoing, if any principal ---------------- of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided above or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section. 25 (d) Payment of Interest. Accrued interest on each Loan shall be ------------------- payable in arrears on each Interest Payment Date for such Loan and (i) in the case of Revolving Loans, upon termination of the Commitments and (ii) in the case of Term Loans, on the Final Repayment Date; provided that (x) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (y) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the Revolving Termination Date), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (z) in the event of any conversion of any Eurodollar Borrowing prior to the end of the current Interest Period therefor, accrued interest on such Borrowing shall be payable on the effective date of such conversion. (e) Computation. All interest hereunder shall be computed on the ----------- basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive, absent manifest error. SECTION 2.12 Alternate Rate of Interest. If prior to the -------------------------- commencement of any Interest Period for a Eurodollar Borrowing: (a) the Administrative Agent determines (which determination shall be conclusive, absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or (b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective, and (ii) if any Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR Revolving Borrowing. SECTION 2.13 Increased Costs. --------------- (a) Increased Costs Generally. If any Change in Law shall: ------------------------- (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or its Parent (except any such reserve requirement reflected in the Adjusted LIBO Rate); or 26 (ii) impose on any Lender or its Parent or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender; and the result of any of the foregoing shall be to increase the cost to such Lender or its Parent of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or its Parent, as the case may be, for such additional costs incurred or reduction suffered. (b) Capital Requirements. If any Lender determines that any Change in -------------------- Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of its Parent as a consequence of this Agreement or the Loans made by such Lender to a level below that which such Lender or its Parent could have achieved but for such Change in Law (taking into consideration such Lender's policies and the policies of its Parent with respect to capital adequacy), then from time to time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or its Parent for any such reduction suffered. (c) Certificates from Lenders. A certificate of a Lender setting ------------------------- forth the amount or amounts necessary to compensate such Lender or its Parent, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive, absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Delay in Requests. Failure or delay on the part of any Lender to ----------------- demand compensation pursuant to this Section shall not constitute a waiver of such Lender's right to demand such compensation. SECTION 2.14 Break Funding Payments. In the event of (a) the payment ---------------------- of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Revolving Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice is permitted to be revocable under Section 2.09(b) and is revoked in accordance herewith), or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.17, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, the loss to any Lender attributable to any such event shall be deemed to include an amount determined by such Lender to be equal to the excess, if any, of (i) the amount of interest that such Lender would pay for a deposit equal to the principal amount of such Loan for the period from the date of such payment, conversion, failure or assignment to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the duration of the Interest Period that would have resulted from such borrowing, conversion or continuation) if the interest rate payable on such deposit were equal to the Adjusted LIBO Rate for such Interest Period, over (ii) the amount of interest that such Lender would earn on such principal amount for such period 27 if such Lender were to invest such principal amount for such period at the interest rate that would be bid by such Lender (or an Affiliate of such Lender) for dollar deposits from other banks in the eurodollar market at the commencement of such period. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive, absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.15 Taxes. ----- (a) Payments Free of Taxes. Any and all payments by or on account of ---------------------- any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, Arranger, Syndication Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable Law. (b) Payment of Other Taxes by the Borrower. In addition, the Borrower -------------------------------------- shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable Law. (c) Indemnification by the Borrower. The Borrower shall indemnify the ------------------------------- Administrative Agent, the Arranger, each Syndication Agent and each Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent, Arranger, such Syndication Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender, the Arranger, a Syndication Agent or by the Administrative Agent (on its own behalf or on behalf of a Lender, the Arranger or a Syndication Agent) shall be conclusive, absent manifest error. (d) Evidence of Payments. As soon as practicable after any payment of --------------------- Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Foreign Lenders. Any Foreign Lender that is entitled to an ---------------- exemption from or reduction of withholding tax under the Law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable Law or reasonably requested by the Borrower, such properly 28 completed and executed documentation prescribed by applicable Law as will permit such payments to be made without withholding or at a reduced rate. SECTION 2.16 Payments Generally; Pro Rata Treatment; Sharing of Set- ------------------------------------------------------ offs. - ---- (a) Payments by the Borrower. The Borrower shall make each payment ------------------------ required to be made by it hereunder (whether of principal, interest or fees, or under Section 2.13, 2.14 or 2.15, or otherwise) prior to 1:00 PM, Pittsburgh, Pennsylvania time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any such date shall be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its Principal Office and to such account at its Principal Office as the Administrative Agent shall specify to the Borrower, except that payments pursuant to Sections 2.13, 2.14, 2.15 and 9.04 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in Dollars. (b) Application of Insufficient Payments. If at any time insufficient ------------------------------------ funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, to pay interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, to pay principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties. (c) Pro Rata Treatment. Except to the extent otherwise provided ------------------ herein: (i) each Revolving Borrowing shall be made from the Lenders, each payment of facility and usage fees under Section 2.10 shall be made for account of the Lenders, and each termination or reduction of the amount of the Commitments under Section 2.06 shall be applied to the respective Commitments of the Lenders, pro rata according to the amounts of their respective Commitments; (ii) each Borrowing shall be allocated pro rata among the Lenders according to the amounts of their respective Commitments (in the case of the making of Revolving Loans) or their respective Loans (in the case of conversions and continuations of Loans); (iii) each payment or prepayment of principal of Loans by the Borrower shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Loans held by them; and (iv) each payment of interest on Loans by the Borrower shall be made for account of the Lenders pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Lenders. (d) Sharing of Payments by Lenders. If any Lender shall, by ------------------------------ exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Loans and accrued interest thereon then due than the proportion 29 received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable Law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. (e) Presumptions of Payment. Unless the Administrative Agent shall ----------------------- have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the Federal Funds Effective Rate. (f) Certain Deductions by the Administrative Agent. If any Lender ---------------------------------------------- shall fail to make any payment required to be made by it pursuant to Section 2.04(b) or 2.16(e), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.17 Mitigation Obligations; Replacement of Lenders. ---------------------------------------------- (a) Designation of a Different Lending Office. If any Lender requests ----------------------------------------- compensation under Section 2.13, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for account of any Lender pursuant to Section 2.15, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.13 or 2.15, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all 30 reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) Replacement of Lenders. If any Lender requests compensation under ---------------------- Section 2.13, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for account of any Lender pursuant to Section 2.15, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.12), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.13 or payments required to be made pursuant to Section 2.15, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. ARTICLE III REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants to the Administrative Agent and each Lender as follows: SECTION 3.01 Corporate Status. ---------------- The Borrower and each Subsidiary of the Borrower is a corporation, trust or limited liability company duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization. The Borrower and each Subsidiary of the Borrower has the corporate power and authority to own its Property and to transact the business in which it is engaged or presently proposes to engage. The Borrower and each Subsidiary of the Borrower is duly qualified to do business as a foreign corporation, trust or limited liability company and is in good standing in all jurisdictions in which the ownership of its properties or the nature of its activities or both makes such qualification necessary or advisable. Schedule II states as of the date hereof the jurisdiction of organization of the Borrower and each Subsidiary of the Borrower, and the jurisdictions in which the Borrower and each Subsidiary of the Borrower is qualified to do business as a foreign corporation, trust or limited liability company. SECTION 3.02 Corporate Power and Authorization. --------------------------------- The Borrower has the corporate power and authority to execute, deliver, perform, and take all actions contemplated by, each of the Loan Documents to which it is a party, and all 31 such action has been duly and validly authorized by all necessary corporate proceedings on its part. Without limiting the foregoing, the Borrower has the corporate power and authority to borrow pursuant to the Loan Documents to the fullest extent permitted hereby and thereby from time to time, and has taken all necessary corporate action to authorize such borrowings. SECTION 3.03 Execution and Binding Effect. ---------------------------- This Agreement and each of the other Loan Documents to which the Borrower is a party and which is required to be delivered on or before the Effective Date pursuant to Section 4.01 has been duly and validly executed and delivered by the Borrower. This Agreement and each such other Loan Document constitutes, and when executed and delivered by the Borrower will constitute, the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as the enforceability hereof or thereof may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. SECTION 3.04 Governmental Approvals and Filings. ---------------------------------- The Public Utilities Commission of Nevada and the California Public Utilities Commission have each duly and validly issued orders authorizing the Borrower to enter into this Agreement and the other Loan Documents to which it is a party and to take all actions contemplated hereby or thereby or in connection herewith or therewith, and such orders remain in full force and effect in the form issued. No other Governmental Action is required for the due execution, delivery and performance by the Borrower of this Agreement or any of the other Loan Documents to which it is a party. All Governmental Actions required to be taken in order the effect the Mergers have been taken. SECTION 3.05 Absence of Conflicts. -------------------- Neither the execution and delivery of any of the Loan Documents by the Borrower, nor the consummation of the transactions herein or therein contemplated by the Borrower, nor the performance of or the compliance with the terms and conditions hereof or thereof by the Borrower, nor the consummation of the Mergers, does or will: (a) violate or conflict with any Law; or (b) violate, conflict with or result in a breach of any term or condition of, or constitute a default under, or result in (or give rise to any -- -- right, contingent or otherwise, of any Person to cause) any termination, cancellation, prepayment or acceleration of performance of, or result in the -- creation or imposition of (or give rise to any obligation, contingent or otherwise, to create or impose) any Lien upon any of the Property of the Borrower or any Subsidiary of the Borrower pursuant to, or otherwise result in -- (or give rise to any right, contingent or otherwise, of any Person to cause) any change in any right, power, privilege, duty or obligation of the Borrower or any Subsidiary of the Borrower under or in connection with, (i) the articles of incorporation or by-laws (or other constituent documents) of the Borrower or any Subsidiary of the Borrower; 32 (ii) any agreement or instrument creating, evidencing or securing any Indebtedness to which the Borrower or any Subsidiary of the Borrower is a party or by which any of them or any of their respective properties (now owned or hereafter acquired) may be subject or bound; or (iii) any other material agreement or instrument to which the Borrower or any Subsidiary of the Borrower is a party or by which any of them or any of their respective properties (now owned or hereafter acquired) may be subject or bound. SECTION 3.06 Audited Financial Statements. ---------------------------- The Borrower has heretofore furnished to each of the Agents and each of the Lenders consolidated balance sheets of the Borrower and its consolidated Subsidiaries as of December 31, 1996, 1997 and 1998 and the related consolidated statements of income, retained earnings and changes in cash flows for the fiscal years then ended, as examined and reported on by independent certified public accountants for the Borrower, who delivered an unqualified opinion in respect thereof. Such financial statements (including the notes thereto) present fairly the financial condition of the Borrower and its consolidated Subsidiaries as of the end of each such fiscal year and the results of their operations and their retained earnings and changes in cash flows for the fiscal years then ended, all in conformity with GAAP. SECTION 3.07 Interim Financial Statements. ---------------------------- The Borrower has heretofore furnished to each of the Agents and each of the Lenders an interim consolidated balance sheet of the Borrower and its consolidated Subsidiaries as of the end of the first fiscal quarter of the fiscal year beginning January 1, 1999, together with the related consolidated statements of income, retained earnings and changes in cash flows for the applicable fiscal period ending on such date. Such financial statements (including the notes thereto) present fairly the financial condition of the Borrower and its consolidated Subsidiaries as of the end of such fiscal quarter and the results of their operations and their retained earnings and changes in cash flows for the fiscal periods then ended, all in conformity with GAAP, subject to normal and recurring year-end audit adjustments. SECTION 3.08 Absence of Undisclosed Liabilities. ---------------------------------- Neither the Borrower nor any Subsidiary of the Borrower has any liability or obligation of any nature whatever (whether absolute, accrued, contingent or otherwise, whether or not due), forward or long-term commitments or unrealized or anticipated losses from unfavorable commitments, except (a) as disclosed in the financial statements referred to in Sections 3.06 and 3.07, and (b) liabilities, obligations, commitments and losses incurred after March 31, 1999, in the ordinary course of business and consistent with past practices. SECTION 3.09 Absence of Material Adverse Change. ---------------------------------- Except for the Mergers, since December 31, 1998, there has been no material adverse change in the business, operations, condition (financial or otherwise), or prospects of the Borrower and its Subsidiaries taken as a whole. 33 SECTION 3.10 Accurate and Complete Disclosure. -------------------------------- All information heretofore, contemporaneously or hereafter provided by or on behalf of the Borrower to any Agent or any Lender pursuant to or in connection with any Loan Document or any transaction contemplated hereby or thereby is or will be (as the case may be) true and accurate in all material respects on the date as of which such information is dated (or, if not dated, when received by such Agent or such Lender) and does not or will not (as the case may be) omit to state any material fact necessary to make such information not misleading at such time in light of the circumstances in which it was provided. The Borrower has disclosed to each Agent and each Lender in writing every fact or circumstance which has, or which so far as the Borrower can reasonably foresee is reasonably likely and is reasonably likely to have, a Material Adverse Effect. SECTION 3.11 Margin Regulations. ------------------ No part of the proceeds of any Loan hereunder will be used for the purpose of buying or carrying any "margin stock", as such term is used in Regulation U of the Board of Governors of the Federal Reserve System, as amended from time to time, or to extend credit to others for the purpose of buying or carrying any "margin stock". Neither the Borrower nor any Subsidiary of the Borrower is engaged in the business of extending credit to others for the purpose of buying or carrying "margin stock". Neither the Borrower nor any Subsidiary of the Borrower owns any "margin stock". Neither the making of any Loan nor any use of proceeds of any such Loan will violate or conflict with the provisions of Regulation T, U or X of the Board, as amended from time to time. SECTION 3.12 Litigation. ---------- There is no pending or (to the Borrower's knowledge after due inquiry) threatened action, suit, proceeding or investigation (including any Environmental Claim) by or before any Governmental Authority against or affecting the Borrower or any Subsidiary of the Borrower which, if adversely decided, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect, except for (a) matters described in the financial statements referred to in Section 3.06 and (b) matters set forth in Schedule III. SECTION 3.13 Absence of Events of Default. ---------------------------- No event has occurred and is continuing and no condition exists which constitutes a Default or an Event of Default. SECTION 3.14 Absence of Other Conflicts. -------------------------- Neither the Borrower nor any Subsidiary of the Borrower is in violation of or conflict with, or is subject to any contingent liability on account of any violation of or conflict with: (a) any Law (including ERISA, the Code, any applicable occupational health, safety or welfare Law or any applicable Environmental Law); 34 (b) its articles of incorporation or by-laws (or other constituent documents); or (c) any agreement or instrument to which it is party or by which it or any of its properties (now owned or hereafter acquired) may be subject or bound; except for matters which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. SECTION 3.15 Insurance. --------- The Borrower and each Subsidiary of the Borrower maintains with financially sound and reputable insurers insurance with respect to its properties and business and against at least such liabilities, casualties and contingencies and in at least such types and amounts as is customary in the case of corporations engaged in the same or a similar business or having similar properties similarly situated. SECTION 3.16 Title to Property; No Liens. --------------------------- The Borrower and each Subsidiary of the Borrower has good and marketable title in fee simple to all real Property owned or purported to be owned by it and good title to all other Property of whatever nature owned or purported to be owned by it, including but not limited to all Property reflected in the most recent audited balance sheet referred to in Section 3.06 or submitted pursuant to Section 5.01(b), as the case may be (except as sold or otherwise disposed of in the ordinary course of business after the date of such balance sheet). Except for (i) Liens reflected in the most recent audited balance sheet referred to in Section 3.06 or submitted pursuant to Section 5.01(b), as the case may be, (ii) Liens consisting of zoning or planning restrictions, easements, permits and other restrictions or limitations on the use of real Property or irregularities in title thereto which do not materially detract from the value of, or impair the use of, such Property by the Borrower or any Subsidiary of the Borrower in the operation of its business, (iii) Liens for current Taxes not yet due and delinquent and (iv) Liens set forth on Schedule IV, no Property owned by the Borrower or any Subsidiary of the Borrower is subject to any Lien. SECTION 3.17 Taxes. ----- All tax and information returns required to be filed by or on behalf of the Borrower or any Subsidiary of the Borrower have been properly prepared, executed and filed. All Taxes upon the Borrower or any Subsidiary of the Borrower or upon any of their respective Properties, incomes, sales or franchises which are due and payable have been paid, other than those not yet delinquent and payable without premium or penalty, and except for those being diligently contested in good faith by appropriate proceedings, and in each case adequate reserves and provisions for Taxes have been made on the books of the Borrower and each Subsidiary of the Borrower. The reserves and provisions for Taxes on the books of the Borrower and each Subsidiary of the Borrower are adequate for all open years and for its current fiscal period. Neither the Borrower nor any Subsidiary of the Borrower knows of any proposed additional assessment or basis for any material assessment for additional Taxes (whether or not reserved against). 35 SECTION 3.18 Borrower Not An Investment Company. ---------------------------------- Neither the Borrower nor any Subsidiary of the Borrower is an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act of 1940. SECTION 3.19 Environmental Matters. --------------------- (a) The Borrower and each of its Subsidiaries have complied with and are in compliance with, all applicable Environmental Laws and the requirements of any permits issued under such Environmental Laws. Except as disclosed on Schedule V, there are no pending or threatened Environmental Claims against the Borrower or any of its Subsidiaries (including any such claim arising out of the ownership, lease or operation by the Borrower or any of its Subsidiaries of any real Property no longer owned, leased or operated by the Borrower or any of its Subsidiaries) or any real Property owned, leased or operated by the Borrower or any of its Subsidiaries. Except as disclosed on Schedule V, there are no facts, circumstances, conditions or occurrences with respect to the business or operations of the Borrower or any of its Subsidiaries, or any real Property owned, leased or operated by the Borrower or any of its Subsidiaries (including any real Property formerly owned, leased or operated by the Borrower or any of its Subsidiaries but no longer owned, leased or operated by the Borrower or any of its Subsidiaries) or any Property adjoining or adjacent to any such real Property that could be expected (i) to form the basis of an Environmental Claim against the Borrower or any of its Subsidiaries or any real Property owned, leased or operated by the Borrower or any of its Subsidiaries or (ii) to cause any real Property owned, leased or operated by the Borrower or any of its Subsidiaries to be subject to any restrictions on the ownership, occupancy or transferability of such real Property by the Borrower or any of its Subsidiaries under any applicable Environmental Law. (b) Hazardous Materials have not at any time been generated, used, treated or stored on, or transported to or from, any real Property owned, leased or operated by the Borrower or any of its Subsidiaries where such generation, use, treatment or storage has violated or could be expected to violate any Environmental Law. Hazardous Materials have not at any time been Released on or from any real Property owned, leased or operated by Borrower or any of its Subsidiaries where such Release has violated or would be expected to violate any applicable Environmental Law. (c) Notwithstanding anything to the contrary in this Section, the representations made in this Section shall not be untrue unless the effect of all violations, claims, restrictions, failures and noncompliances of the types described in this Section would reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect on the Borrower. SECTION 3.20 ERISA. ----- (a) Each Plan (and each related trust, insurance contract or fund) is in substantial compliance with its terms and with all applicable Laws, including without limitation ERISA and the Code; each Plan (and each related trust, if any) which is intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to the effect that it meets the requirements of Sections 401(a) and 501(a) of the Code; no 36 Reportable Event has occurred; no Multiemployer Plan is insolvent or in reorganization; no Plan has an Unfunded Current Liability; no Plan which is subject to Section 412 of the Code or Section 302 of ERISA has an accumulated funding deficiency within the meaning of such sections of the Code or ERISA or has applied for or received a waiver of an accumulated funding deficiency or an extension of any amortization period within the meaning of Section 412 of the Code or Section 303 or 304 of ERISA; all contributions required to be made with respect to a Plan have been timely made; neither the Borrower nor any Subsidiary of the Borrower nor any ERISA Affiliate has incurred any material liability (including any indirect, contingent or secondary liability) to or on account of a Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or expects to incur any such liability under any of the foregoing sections with respect to any Plan; no condition exists which presents a material risk to the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate of incurring a liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; no proceedings have been instituted to terminate or appoint a trustee to administer any Plan; no action, suit, proceeding, hearing, audit or investigation with respect to the administration, operation or the investment of assets of any Plan (other than routine claims for benefits) is pending, expected or threatened; using actuarial assumptions and computation methods consistent with Part 1 of subtitle E of Title IV of ERISA, the aggregate liabilities of the Borrower and its Subsidiaries and its ERISA Affiliates to all Multiemployer Plans in the event of a complete withdrawal therefrom, as of the close of the most recent fiscal year of each such Plan ended prior to the date of the most recent Borrowing, would not have a Material Adverse Effect; each group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) which covers or has covered employees or former employees of the Borrower, any Subsidiary of the Borrower, or any ERISA Affiliate has at all times been operated in compliance with the provisions of Part 6 of subtitle B of Title I of ERISA and Section 4980B of the Code; no Lien imposed under the Code or ERISA on the assets of the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate exists or is likely to arise on account of any Plan; and the Borrower and its Subsidiaries may cease contributions to or terminate any Plan maintained by any of them without incurring any material liability. (b) Each Foreign Pension Plan, if any, has been maintained in substantial compliance with its terms and with the requirements of any and all applicable Laws, statutes, rules, regulations and orders and has been maintained, where required, in good standing with applicable regulatory authorities. All contributions required to be made with respect to a Foreign Pension Plan have been timely made. Neither the Borrower nor any of its Subsidiaries has incurred any obligation in connection with the termination of or withdrawal from any Foreign Pension Plan. The present value of the accrued benefit liabilities (whether or not vested) under each Foreign Pension Plan, determined as of the end of the Borrower's most recently ended Fiscal Year on the basis of actuarial assumptions, each of which is reasonable, did not exceed the current value of the assets of such Foreign Pension Plan allocable to such benefit liabilities. SECTION 3.21 Year 2000 Issues. ---------------- The Borrower has (i) initiated a detailed review and assessment of all areas within its business and operations and the business and operations of its Subsidiaries, including those affected by suppliers and vendors, that could be adversely impacted by the "Year 2000 Problem", i.e., the risk that computer applications used by the Borrower, its Subsidiaries, or their 37 suppliers and vendors, may be unable to recognize and perform properly date- sensitive functions involving certain dates prior to and any date after December 31, 1999, (ii) developed a detailed plan and timetable for addressing the Year 2000 Problem on a timely basis (the "Year 2000 Plan"), and (iii) to date, implemented this plan in accordance with the timetable. The Borrower reasonably believes that all computer applications, including those of its suppliers and vendors, that are material to its business, operations or conditions (financial or otherwise) will, on a timely basis, be able to perform properly date- sensitive functions for all dates before and after January 1, 2000, that is, be "Year 2000 Compliant", except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. SECTION 3.22 Pari Passu Status. ----------------- The claims and rights of the Lenders against the Borrower hereunder are not subordinated to, and rank at least pari passu with, the claims and rights of other holders of its unsecured indebtedness except to the extent otherwise provided by Law (including without limitation the Bankruptcy Code and the provisions of 31 U.S.C. (S)3713). SECTION 3.23 Indebtedness. ------------ Schedule VI contains a true and complete list of all Indebtedness of the Borrower and its Subsidiaries that is, or will be, outstanding on the Effective Date ("Existing Indebtedness"). --------------------- ARTICLE IV CONDITIONS SECTION 4.01 Effective Date. -------------- This Agreement and the other Loan Documents shall become effective as against the Lenders and the Agents on the first date on which all of the following conditions shall be satisfied or waived: (a) Agreement; Notes. The Administrative Agent shall have received an ---------------- executed counterpart of this Agreement for each Lender, duly executed by the Borrower, and, to the extent any Lender has requested a Note pursuant to Section 2.08(f), a Note conforming to the requirements hereof, duly executed on behalf of the Borrower. (b) Governmental Approvals and Filings. The Administrative Agent ---------------------------------- shall have received, with copies and executed counterparts for each Lender, true and correct copies (in each case certified as to authenticity on such date on behalf of the Borrower) of the orders entered by the Public Utilities Commission of Nevada and the California Public Utilities Commission as referred to in Section 3.04, and such orders shall be satisfactory in form and substance to the Administrative Agent and shall be in full force and effect. (c) Corporate Proceedings. The Administrative Agent shall have --------------------- received, with a counterpart for each Lender, certificates by the Secretary or Assistant Secretary of the Borrower dated as of the Effective Date as to (i) true copies of the articles of incorporation and by-laws (or other constituent documents) of the Borrower as in effect on such date 38 (which, in the case of articles of incorporation or other constituent documents filed or required to be filed with the Secretary of State or other Governmental Authority in its jurisdiction of incorporation, shall be certified to be true, correct and complete by such Secretary of State or other Governmental Authority not more than 30 days before the date hereof), (ii) true copies of all corporate action taken by the Borrower relative to this Agreement and the other Loan Documents, and (iii) the incumbency and signatures of the respective officers of the Borrower executing this Agreement and the other Loan Documents to which the Borrower is a party, together with satisfactory evidence of the incumbency of such Secretary or Assistant Secretary. The Administrative Agent shall have received, with a copy for each Lender, certificates from the Secretary of State of Nevada (or other applicable Governmental Authority) dated not more than 30 days before the Effective Date showing the good standing of the Borrower in Nevada and in each state in which the Borrower does business. (d) Legal Opinion of Counsel to the Borrower. The Administrative ---------------------------------------- Agent shall have received, with an executed counterpart for each Lender, an opinion addressed to the Administrative Agent and each Lender, dated the Effective Date, of Choate, Hall & Stewart, counsel to the Borrower, as to such matters as may be requested by the Administrative Agent and in form and substance satisfactory to the Lenders. (e) Financial Statements. The Administrative Agent shall have -------------------- received for each Lender a true and correct copy of the (i) audited consolidated financial statements, including balance sheets, income statements and cash flow statements, for the Borrower and each of its consolidated Subsidiaries for the years ended December 31, 1998, 1997 and 1996 and (ii) unaudited interim consolidated financial statements, including a balance sheet, income statement and statement of cash flows, for the Borrower and its consolidated Subsidiaries for the three month period ended March 31, 1999. (f) No Material Adverse Effect. Nothing shall have occurred (and -------------------------- neither the Administrative Agent nor the Lenders shall have become aware of any facts or conditions not previously known) which the Lenders shall determine (i) has had, or could reasonably be expected to have, a Material Adverse Effect. The Administrative Agent shall have received a certificate of a senior financial officer of the Borrower, dated the Effective Date, to the effect that, as of the Effective Date, there has been no Material Adverse Effect since December 31, 1998. (g) Mergers. The Mergers shall have been consummated prior to ------- September 1, 1999, or such later date as the Lenders and the Administrative Agent shall agree upon in writing, on terms satisfactory to the Lenders and the Administrative Agent shall have received copies of all documentation related there, including, without limitation, the order(s) of the Federal Energy Regulatory Commission and the Securities and Exchange Commission approving the Mergers . (h) Governmental Approvals. All necessary and material Governmental ---------------------- Actions (domestic and foreign) and third party approvals and/or consents in connection with the Mergers and the transactions contemplated in this Agreement shall have been obtained and remain in effect and all applicable waiting periods with respect thereto shall 39 have expired without any action being taken by any competent authority which restrains, prevents or imposes materially adverse conditions upon, the consummation of the Mergers or the transactions contemplated hereby or otherwise referred to herein. The Administrative Agent shall have received documentation reasonably acceptable to it that (i) the Federal Energy Regulatory Commission and the Securities and Exchange Commission have each duly approved the Mergers and (ii) the Public Utilities Commission of Nevada and the California Public Utilities Commission have each duly approved the Borrowings hereunder. (i) No Injunctions. There shall not exist any judgment, order, -------------- injunction or other restraint issued or filed or a hearing seeking injunctive relief or other restraint pending or notified prohibiting or imposing materially adverse conditions upon the consummation of the Mergers or the other transactions contemplated hereby or otherwise referred to herein. (j) Litigation, Proceedings and Investigations. There shall be no ------------------------------------------ actions, arbitrations, suits, investigations or proceedings pending or threatened with respect to this Agreement or the Mergers or which the Administrative Agent shall determine could reasonably be expected to have a Material Adverse Effect. (k) No Violation of Existing Agreements. Neither the Borrower nor any ----------------------------------- Subsidiary of the Borrower is in violation of any material agreement or instrument to which it is party or by which it or any of its properties (now owned or hereafter acquired) may be subject or bound; (l) Refinancing. ----------- (i) The total commitments in respect of the Indebtedness to be Refinanced shall have been terminated, and all loans and notes with respect thereto shall have been repaid in full, together with interest thereon, all letters of credit issued thereunder shall have been terminated and all other amounts (including premiums) owing pursuant to the Indebtedness to be Refinanced shall have been repaid in full and all documents in respect of the Indebtedness to be Refinanced and all guarantees with respect thereto shall have been terminated (except as to indemnification provisions, which may survive to the extent provided therein) and be of no further force and effect. (ii) The creditors in respect of the Indebtedness to be Refinanced shall have terminated and released any and all security interests and Liens on the assets owned by Borrower and its Subsidiaries. The Administrative Agent shall have received such releases of security interests in and Liens on the assets owned by Borrower and its Subsidiaries as may have been requested by the Administrative Agent, which releases shall be in form and substance reasonably satisfactory to the Administrative Agent. Without limiting the foregoing, there shall have been delivered (i) proper termination statements (Form UCC-3 or the appropriate equivalent) for filing under the UCC of each jurisdiction where a financing statement (Form UCC-1 or the appropriate equivalent) was filed with respect to Borrower or any of its Subsidiaries in connection with the security interests created with respect to the Indebtedness to be Refinanced and the documentation 40 related thereto, (ii) termination or reassignment of any security interest in, or Lien on, any patents, trademarks, copyrights, or similar interests of Borrower or any of its Subsidiaries on which filings have been made, (iii) terminations of all mortgages, leasehold mortgages, deeds of trust and leasehold deeds of trust created with respect to Property of Borrower or any of its Subsidiaries, in each case to secure the obligations in respect of the Indebtedness to be Refinanced, all of which shall be in form and substance reasonably satisfactory to the Administrative Agent, and (iv) all collateral owned by Borrower and its Subsidiaries in the possession of any of the creditors in respect of the Indebtedness to be Refinanced or any collateral agent or trustee under any related security document shall have been returned to Borrower or its respective Subsidiary, as the case may be. (m) Ratings. The Administrative Agent shall have received a ------- certificate of a senior financial officer of the Borrower, dated the Effective Date, setting forth the then current ratings of the Index Debt. (n) Officers' Certificates. The Administrative Agent shall have ---------------------- received, with an executed counterpart for each Lender, certificates from such officers of the Borrower as to such matters as the Administrative Agent may request. (o) Fees, Expenses, etc. All fees and other items required to be paid -------------------- to the Agents and the Lenders on or before the Effective Date (including all fees referenced in fee letters and offer letters) shall have been paid or received. (p) Section 4.02 Conditions. ----------------------- (i) Each of the representations and warranties made by the Borrower herein and in each other Loan Document shall be true and correct in all material respects on and as of the Effective Date as if made on and as of such date, both before and after giving effect to the Loans requested to be made on such date. (ii) No Default or Event of Default shall have occurred and be continuing on the Effective Date. (q) Additional Matters. The Administrative Agent shall have received, ------------------ with copies or executed counterparts for each Lender, such other certificates, opinions, documents and instruments as the Administrative Agent may have requested. All corporate and other proceedings, and all documents, instruments and other matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be satisfactory in form and substance to the Administrative Agent. SECTION 4.02 Conditions to All Loans. ----------------------- The obligation of each Lender to make, convert or continue any Loan on the occasion of any Borrowing is subject to satisfaction of the conditions precedent set forth in Section 4.01 and satisfaction of the following further conditions precedent: 41 (a) Notice. The Borrower shall have executed and delivered to the ------ Administrative Agent a Borrowing Request or Interest Election Request for such Borrowing in accordance with Section 2.03 or 2.05, as the case may be. (b) Representations and Warranties. Each of the representations and ------------------------------ warranties made by the Borrower herein and in each other Loan Document shall be true and correct in all material respects on and as of such date as if made on and as of such date, both before and after giving effect to the making, conversion or continuation of Loans requested to be made, converted or continued on such date. (c) No Defaults. No Default or Event of Default shall have occurred ----------- and be continuing on such date or after giving effect to the making, conversion or continuation of Loans requested to be made, converted or continued on such date. (d) No Violations of Law, etc. Neither the making, conversion or ------------------------- continuation of nor use of the Loans shall cause any Lender to violate or be in conflict with any Law. (e) No Material Adverse Change. There shall not have occurred, or be -------------------------- threatened, any other event, act or condition which would reasonably be expected to have a Material Adverse Effect. Each request by the Borrower for any Loan or conversion or continuation thereof shall constitute a representation and warranty by the Borrower that the conditions set forth in this Section 4.02 have been satisfied as of the date of such request. Failure of the Administrative Agent to receive notice from the Borrower to the contrary before such Loan is made shall constitute a further representation and warranty by the Borrower that the conditions referred to in this Section 4.02 have been satisfied as of the date such Loan is made. ARTICLE V AFFIRMATIVE COVENANTS The Borrower hereby covenants to the Administrative Agent and each Lender: SECTION 5.01 Basic Reporting Requirements. ---------------------------- (a) Annual Audit Reports. As soon as practicable, and in any event -------------------- within 90 days after the close of each fiscal year of the Borrower, the Borrower shall furnish to the Administrative Agent, with a copy for each Lender, consolidated statements of income, retained earnings and cash flows of the Borrower and its consolidated Subsidiaries for such fiscal year and a consolidated balance sheet of the Borrower and its consolidated Subsidiaries as of the close of such fiscal year, and notes to each, all in reasonable detail, setting forth in comparative form the corresponding figures for the preceding fiscal year. Such financial statements shall be accompanied by an opinion of independent certified public accountants of recognized national standing selected by the Borrower, which opinion shall not be subject to any qualification as to scope of audit or as to any other matter which the Required Lenders determine is adverse. Such opinion in any event shall contain a written statement of such accountants substantially to the effect that (i) such accountants examined such financial statements in accordance with generally accepted auditing standards and accordingly made such tests of accounting records and such other 42 auditing procedures as such accountants considered necessary in the circumstances and (ii) in the opinion of such accountants such financial statements present fairly the financial position of the Borrower and its consolidated Subsidiaries as of the end of such fiscal year and the results of their operations and their retained earnings and cash flows for such fiscal year, in conformity with GAAP. (b) Quarterly Consolidated Reports. As soon as practicable, and in ------------------------------ any event within 45 days after the close of each of the first three fiscal quarters of each fiscal year of the Borrower, the Borrower shall furnish to the Administrative Agent, with a copy for each Lender, unaudited consolidated statements of income, retained earnings and cash flows of the Borrower and its consolidated Subsidiaries for the period from the beginning of such fiscal year to the end of such fiscal quarter and an unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as of the close of such fiscal quarter, and notes to each, all in reasonable detail, setting forth in comparative form the corresponding figures for the same periods or as of the same date during the preceding fiscal year (except for the consolidated balance sheet, which shall set forth in comparative form the corresponding balance sheet as of the prior fiscal year end). Such financial statements shall be certified by a Responsible Officer of the Borrower as presenting fairly the financial position of the Borrower and its consolidated Subsidiaries as of the end of such fiscal quarter and the results of their operations and their retained earnings and changes in cash flows for such fiscal year, in conformity with GAAP, subject to normal and recurring year-end audit adjustments. (c) Quarterly Compliance Certificates. The Borrower shall deliver to --------------------------------- the Administrative Agent, with a copy for each Lender, a Quarterly Compliance Certificate in substantially the form set forth as Exhibit D, duly completed and signed by a Responsible Officer of the Borrower concurrently with the delivery of the financial statements referred to in subsections (a) and (b) of this Section 5.01. (d) Certain Other Reports and Information. Promptly upon their ------------------------------------- becoming available to the Borrower, the Borrower shall deliver to the Administrative Agent, with a copy for each Lender, a copy of (i) all regular or special reports, registration statements and amendments to the foregoing which the Borrower or any Subsidiary of the Borrower shall file with the Securities and Exchange Commission (or any successor thereto) or any securities exchange, and (ii) all reports, proxy statements, financial statements and other information distributed by the Borrower to its stockbrokers, bondholders or the financial community generally. (e) Further Information. The Borrower shall promptly furnish to the ------------------- Administrative Agent, with a copy for each Lender, such other information and in such form as the Administrative Agent or any Lender may reasonably request from time to time. (f) Notice of Certain Events. Promptly (and, in the case of clause ------------------------ (i) below, no later than two Business Days) upon becoming aware of any of the following, the Borrower shall give the Administrative Agent notice thereof, together with a written statement of a Responsible Officer of the Borrower setting forth the details thereof and any action with respect thereto taken or proposed to be taken by the Borrower: (i) Any Default or Event of Default. 43 (ii) The occurrence or existence of any event or condition (including (A) the violation or alleged violation of any Environmental Law by the Borrower or any Subsidiary of the Borrower or the assertion of any Environmental Claim against the Borrower or any Subsidiary of the Borrower, (B) the commencement of any other action, suit, proceeding or investigation by or before any Governmental Authority against or affecting the Borrower or any Subsidiary of the Borrower, or (C) the violation, breach or default or alleged violation, breach or default by the Borrower or any Subsidiary of the Borrower or any other Person under any agreement or instrument material to the business, operations, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole) which event or condition, either individually or in the aggregate, has, or would reasonably be expected to have, a Material Adverse Effect. (iii) Any change in the Index Debt rating. (g) Visitation; Verification. The Borrower shall permit such ------------------------ Persons as the Administrative Agent or any Lender may designate from time to time to visit and inspect any of the properties of the Borrower and of any Subsidiary, to examine their respective books and records and take copies and extracts therefrom and to discuss their respective affairs with their respective officers, employees and independent accountants at such times and as often as the Administrative Agent or any Lender may reasonably request; provided, -------- however, that the Borrower reserves the right to restrict access to any of its generating facilities in accordance with reasonably adopted practices relating to safety and security. The Borrower hereby authorizes such officers, employees and independent accountants to discuss with the Administrative Agent or any Lender the affairs of the Borrower and its Subsidiaries. (h) ERISA. Within 30 days after the Borrower knows that any of the ----- events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a Responsible Officer of the Borrower setting forth details respecting such event or condition and the action, if any, that the Borrower or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Borrower or an ERISA Affiliate with respect to such event or condition): (i) any Reportable Event and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041 of ERISA of a notice of intent to terminate any Plan or any action taken by the Borrower or an ERISA Affiliate to terminate any Plan, in each case with respect to which there are insufficient assets to pay benefits as they become due; (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Borrower or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; 44 (iv) the complete or partial withdrawal from a Multiemployer Plan by the Borrower or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by the Borrower or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; and (v) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Borrower or an ERISA Affiliate fails to timely provide security to the Plan in accordance with the provisions of said Sections. (i) Satisfaction of Certain Reporting Requirements. Notwithstanding ---------------------------------------------- any other provision of this Section 5.01, the Borrower shall be deemed to have satisfied its obligations pursuant to Sections 5.01(a) and (b) if and to the extent that it shall have provided to the Administrative Agent and each Lender, pursuant to Section 5.01(d), copies of its periodic reports (on Form 10-K or 10- Q, as the case may be) as required to be filed with the Securities and Exchange Commission (or any successor thereto) pursuant to the Securities and Exchange Act of 1934, as amended (or any successor statute of similar import), for the annual and quarterly periods described in such Sections. (j) Delivery to Lenders. The Administrative Agent shall promptly ------------------- deliver to each Lender each of the reports, statements, certificates or other documents delivered to the Administrative Agent by the Borrower pursuant to this Section 5.01. SECTION 5.02 Insurance. --------- The Borrower shall, and shall cause each of its Subsidiaries to, maintain with financially sound and reputable insurers insurance with respect to its properties and business and against such liabilities, casualties and contingencies and of such types and in such amounts as is customary in the case of corporations engaged in the same or similar businesses or having similar properties similarly situated and as is satisfactory from time to time to the Required Lenders in their reasonable discretion. SECTION 5.03 Payment of Taxes and Other Potential Charges and ------------------------------------------------ Priority Claims. - --------------- The Borrower shall, and shall cause each of its Subsidiaries to, pay or discharge (a) on or prior to the date on which penalties or Liens attach thereto, all Taxes imposed upon it or any of its properties; (b) on or prior to the date when due, all lawful claims of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a Lien upon any such Property; and 45 (c) on or prior to the date when due, all other lawful claims which, if unpaid, might result in the creation of a Lien upon any such Property or which, if unpaid, might give rise to a claim entitled to priority over general creditors of the Borrower or such Subsidiary in a case under the Bankruptcy Code; provided, that, unless and until foreclosure, distraint, levy, sale or similar - -------- proceedings shall have been commenced, the Borrower or such Subsidiary need not pay or discharge any such Tax, assessment, charge or claim so long as (x) the validity thereof is contested in good faith and by appropriate proceedings diligently conducted, and (y) such reserves or other appropriate provisions as may be required by GAAP shall have been made therefor. SECTION 5.04 Preservation of Corporate Status and Franchises. ----------------------------------------------- The Borrower shall, and shall cause each of its Subsidiaries to, maintain its status as a corporation, trust or limited liability company duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization, and to be duly qualified to do business as a foreign corporation, trust or limited liability company and in good standing in all jurisdictions in which the ownership of its properties or the nature of its business or both make such qualification necessary or advisable; provided, -------- however, that nothing in this Section 5.04 shall prevent the withdrawal by the - ------- Borrower or any of its Subsidiaries of its qualification as a foreign corporation in any jurisdiction where such withdrawal could not have a Material Adverse Effect. The Borrower shall, and shall cause each of its Subsidiaries to, do or cause to be done, all things necessary to preserve and keep in full force and effect its material rights, franchises, licenses and patents. SECTION 5.05 Governmental Approvals and Filings. ---------------------------------- The Borrower shall keep and maintain in full force and effect all Governmental Actions necessary or advisable in connection with execution and delivery of any Loan Document, consummation of the transactions herein or therein contemplated, performance of or compliance with the terms and conditions hereof or thereof or to ensure the legality, validity, binding effect or enforceability hereof or thereof. SECTION 5.06 Maintenance of Properties. ------------------------- The Borrower shall, and shall cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition the properties now or hereafter owned, leased or otherwise possessed by it and shall make or cause to be made all needful and proper repairs, renewals, replacements and improvements thereto so that the business carried on in connection therewith may be properly and advantageously conducted at all times. SECTION 5.07 Avoidance of Other Conflicts. ---------------------------- The Borrower shall not, and shall not permit any of its Subsidiaries to, violate or conflict with, be in violation of or in conflict with, or be or remain subject to any liability (contingent or otherwise) on account of any violation or conflict with (a) any Law; 46 (b) its articles of incorporation or by-laws; or (c) any agreement or instrument to which it is party or by which any of them or any of their respective Subsidiaries is a party or by which any of them or any of their respective properties (now owned or hereafter acquired) may be subject or bound, except for matters which would not reasonably be expected, either individually or in the aggregate, to have a Material Adverse Effect. SECTION 5.08 Financial Accounting Practices. ------------------------------ The Borrower shall, and shall cause each of its Subsidiaries to, make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (a) transactions are executed in accordance with management's general or specific authorization, (b) transactions are recorded as necessary (i) to permit preparation of financial statements in conformity with GAAP and (ii) to maintain accountability for assets, (c) access to assets is permitted only in accordance with management's general or specific authorization and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. SECTION 5.09 Use of Proceeds. --------------- The Borrower shall apply the proceeds of all Loans hereunder only for working capital and general corporate purposes of the Borrower, including commercial paper backup. The Borrower shall not use the proceeds of any Loans hereunder directly or indirectly for any unlawful purpose, in any manner inconsistent with Section 3.11, or inconsistent with any other provision of any Loan Document. SECTION 5.10 End of Fiscal Periods. --------------------- The Borrower shall cause (a) each of its, and each of its Subsidiary's, fiscal years to end on December 31 and (b) each of its, and each of its Subsidiary's, fiscal quarters to end on March 31, June 30, September 30 and December 31. ARTICLE VI NEGATIVE COVENANTS The Borrower hereby covenants to the Administrative Agent and each Lender as follows: SECTION 6.01 Financial Covenants. ------------------- (a) Maximum Leverage. The Borrower shall not permit the ratio of (a) ---------------- Total Indebtedness to (b) the sum of Total Indebtedness and Shareholders' Equity, determined as of the last day of each fiscal quarter, to exceed 0.65 to 1. 47 (b) Fixed Charge Coverage Ratio. The Borrower shall not permit the --------------------------- Fixed Charge Coverage Ratio, determined as of the last day of each fiscal quarter for the period consisting of the four consecutive fiscal quarters ended on such last day, to be less than 1.5 to 1. SECTION 6.02 Liens. ----- The Borrower shall not, and shall not permit any of its Subsidiaries to, at any time create, incur, assume or suffer to exist any Lien on any of its Property (now owned or hereafter acquired), or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except for the following ("Permitted Liens"): --------------- (a) Liens existing on the date hereof and securing obligations existing on the date hereof other than Indebtedness to be Refinanced, as such Liens and obligations are listed on Schedule IV; (b) Liens securing obligations issued under and pursuant to the terms and conditions of the First Mortgage Indenture; (c) Liens on First Mortgage Bonds issued as collateral for pollution control or gas or water facility revenue bonds issued for the benefit of the Borrower or its Subsidiaries (and related rights and interests) to secure obligations of the Borrower or such Subsidiaries for the benefit of the holders of such bonds, provided that such bonds are not secured by any other assets or Properties of the Borrower or its Subsidiaries; (d) Liens on "transition property" arising pursuant to Section 843 of the California Public Utility Code for the benefit of holders of rate reduction bonds issued pursuant to a valid financing order of the California Public Utilities Commission; (e) Liens arising from taxes, assessments, charges or claims described in Section 5.03 that are not yet due or that remain payable without penalty or to the extent permitted to remain unpaid under the proviso to such Section 5.03; (f) Deposits or pledges of cash or securities in the ordinary course of business to secure (i) worker's compensation, unemployment insurance or other social security obligations, (ii) performance of bids, tenders, trade contracts (other than for payment of money) or leases, (iii) stay, surety or appeal bonds, or (iv) other obligations of a like nature incurred in the ordinary course of business; (g) Zoning restrictions, easements, minor restrictions on the use of real Property, minor irregularities in title thereto and other minor Liens that do not secure the payment of money or the performance of an obligation and that do not in the aggregate materially detract from the value of an asset to, or materially impair its use in the business of, the Borrower or such Subsidiary; and (h) Liens on Property securing all or part of the purchase price thereof and Liens (whether or not assumed) existing in Property at the time of purchase thereof, provided that: (i) such Lien is created before or substantially simultaneously with the purchase of such Property by the Borrower or such Subsidiary, (ii) such Lien is confined 48 solely to the Property so purchased, improvements thereto and proceeds thereof, (iii) the aggregate amount secured by such Liens on any particular Property at the time purchased by the Borrower or such Subsidiary, as the case may be, shall not exceed the lesser of the purchase price of such Property and the fair market value of such Property at the time of purchase thereof by the Borrower or such Subsidiary, and (iv) the aggregate amount secured by all Liens described in this Section 6.02(h) shall not at any time exceed $50,000,000. "Permitted Liens" shall in no event include any Lien imposed by, or required to be granted pursuant to, ERISA or any Environmental Law. SECTION 6.03 Mergers. ------- The Borrower shall not, and shall not permit any of its Subsidiaries to, (a) merge with or into or consolidate with any other Person, (b) liquidate, wind-up, dissolve or divide, or (c) agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (i) A Person may merge with or into or consolidate with any Subsidiary of the Borrower, provided that (x) the surviving Person shall be a Subsidiary of the Borrower, (y) no Default or Event of Default shall have occurred and be continuing or shall exist at such time or after giving effect to such transaction and (z) the Borrower shall deliver to the Administrative Agent (A) a certificate, in a form reasonably satisfactory to the Administrative Agent, certifying that no Default or Event of Default exists or will result from such merger and (B) pro forma financial statements in support of such certification; and (ii) A Person may merge with or into or consolidate with the Borrower, provided that (x) the Borrower shall be the surviving Person, (y) no Default or Event of Default shall have occurred and be continuing or shall exist at such time or after giving effect to such transaction and (z) the Borrower shall deliver to the Administrative Agent (A) a certificate, in a form reasonably satisfactory to the Administrative Agent, certifying that no Default or Event of Default exists or will result from such merger and (B) pro forma financial statements in support of such certification. SECTION 6.04 Dispositions of Properties. -------------------------- The Borrower shall not, and shall not permit any of its Subsidiaries to, sell, convey, assign, lease, sale-leaseback, transfer, abandon or otherwise dispose of, voluntarily or involuntarily (collectively, "Dispose"), any of its ------- Properties, or agree, become or remain liable contingently or otherwise to do any of the foregoing, except that, so long as no Default or Event of Default shall have occurred and be continuing or shall exist at such time or after giving effect to such transaction, the Borrower and its Subsidiaries may Dispose of Property (a) in transactions in the ordinary course of business, (b) that is obsolete, (c) comprising generating assets, provided that the aggregate book -------- value of all generating assets Disposed of pursuant to this Section 6.04(c) from and after the date hereof shall not exceed $500,000,000, and (d) in transactions other than as provided in Section 6.04 (a), (b) and (c), provided that the -------- aggregate book value of all Property Disposed of pursuant to this Section 6.04(d) from and after the date hereof shall not exceed $50,000,000. 49 SECTION 6.05 Investments and Acquisitions. ---------------------------- Prior to the making of any Investment or the consummation of any Acquisition by the Borrower or any of its Subsidiaries, the amount or purchase price of which, as the case may be, when aggregated with the amounts and purchase prices of other Investments and Acquisitions made by the Borrower and its Subsidiaries, would exceed $10,000,000 in the aggregate at any time, the Borrower shall deliver to the Administrative Agent (i) a certificate, in a form reasonably satisfactory to the Administrative Agent, certifying that no Default or Event of Default exists or will result from such Acquisition and (ii) pro forma financial statements in support of such certification. SECTION 6.06 Dividends and Stock Repurchases. ------------------------------- The Borrower shall not declare or pay any dividend on its capital stock (except for dividends in the form of capital stock), or redeem or repurchase any of its capital stock, if a Default or Event of Default shall have occurred and be continuing or shall exist at such time or after giving effect to such transaction. SECTION 6.07 Transactions with Affiliates. ---------------------------- The Borrower shall not enter into any transaction of any kind with any Person that Controls the Borrower or is controlled by the Borrower or is under common control with the Borrower other than (a) salary, bonus, employee stock option and other compensation arrangements with directors or officers in the ordinary course of business, (b) transactions that are fully disclosed to the board of directors (or executive committee thereof) of the Borrower and expressly authorized by a resolution of the board of directors (or executive committee) of the Borrower which is approved by a majority of the directors (or executive committee) not having an interest in the transaction, (c) transactions between or among the Borrower and its Wholly-Owned Subsidiaries, (d) transactions between the Borrower and its Subsidiaries, on the one hand, and NPC and its Subsidiaries, on the other hand, and (e) transactions on overall terms at least as favorable to the Borrower as would be the case in an arm's-length transaction between unrelated parties of equal bargaining power. SECTION 6.08 Change of Business. ------------------ The Borrower shall not engage in any business other than the businesses of (a) the generation or purchase of electrical power, (b) the purchase of natural gas and (c) the acquisition of water, and in each case the transmission and distribution thereof to industrial, commercial and residential customers. SECTION 6.09 Equal and Ratable Lien. ---------------------- If, notwithstanding the prohibition contained in Section 6.02, the Borrower or any of its Subsidiaries shall create, assume or permit to exist any Lien upon any of its Property, other than those permitted by the provisions of Section 6.02, it will make or cause to be made effective provision whereby the Borrowings will be secured equally and ratably with any and all other obligations thereby secured, such security to be pursuant to agreements reasonably satisfactory to the Administrative Agent and, in any such case, the Borrowings shall have the benefit, to the 50 fullest extent that, and with such priority as, the Lenders may be entitled under applicable law, of an equitable Lien on such Property. Such violation of Section 6.02 will constitute an Event of Default, whether or not provision is made for an equal and ratable Lien pursuant to this Section. SECTION 6.10 Restrictive Agreements. ----------------------- Except as otherwise permitted under Article VI hereunder, the Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its Property or assets, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Borrower or any other Subsidiary or to guarantee Indebtedness of the Borrower or any other Subsidiary. SECTION 6.11 Year 2000. --------- At the request of any Lender, the Borrower will make available to such Lender the Borrower's Year 2000 Plan, together with any updates or progress reports with respect thereto. The Borrower will promptly notify the Administrative Agent in the event the Borrower discovers or determines that any computer application, including those of its suppliers and vendors, that is material to its business, operations or conditions (financial or otherwise) will not be Year 2000 Compliant on a timely basis, except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. ARTICLE VII DEFAULTS SECTION 7.01 Events of Default. ----------------- An "Event of Default" shall mean the occurrence or existence of one or ---------------- more of the following events or conditions (for any reason, whether voluntary, involuntary or effected or required by Law): (a) The Borrower shall fail to pay when due principal of any Loan. (b) The Borrower shall fail to pay when due interest on any Loan, any fees, indemnity or expenses, or any other amount due hereunder or under any other Loan Document and such failure shall have continued for a period of three business days. (c) Any representation or warranty made or deemed made by the Borrower in or pursuant to or in connection with any Loan Document, or any statement made by the Borrower in any financial statement, certificate, report, exhibit or document furnished by the Borrower to the Administrative Agent or any Lender pursuant to or in connection with any Loan Document, shall prove to have been false or misleading in any material respect as of the time when made or deemed made (including by omission of material information necessary to make such representation, warranty or statement not misleading). 51 (d) The Borrower shall default in the performance or observance of any covenant contained in Article VI or any of the covenants contained in Sections 5.01(f)(i) or 5.09 or 5.10. (e) The Borrower shall default in the performance or observance of any other covenant, agreement or duty under this Agreement or any other Loan Document and (i) in the case of a default under Section 5.01 (other than as referred to in subsection (f)(i) thereof) such default shall have continued for a period of ten Business Days and (ii) in the case of any other default such default shall have continued for a period of 30 days after notice from the Administrative Agent to the Borrower. (f) The Borrower or any Subsidiary of the Borrower shall (i) fail to make any payment (x) on account of any Indebtedness aggregating $10,000,000 or more in principal amount or (y) aggregating $10,000,000 or more, on any Indebtedness, or any interest or premium thereon, in each case, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and, in each case, such failure shall have continued beyond any applicable grace period specified in any agreement or instrument relating to such Indebtedness, or (ii) fail to perform or observe any other term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any Indebtedness when required to be performed or observed, and such failure shall have continued beyond any applicable grace period specified in any agreement or instrument relating to such Indebtedness, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness, the unpaid principal amount of which then aggregates $10,000,000. (g) One or more final judgments or orders for the payment of money shall have been entered against the Borrower or any Subsidiary of the Borrower, which judgments or orders exceed $10,000,000 in the aggregate, and such judgments or orders shall have remained undischarged and unstayed for a period of thirty consecutive days. (h) One or more writs or warrants of attachment, garnishment, execution, distraint or similar process exceeding in value the aggregate amount of $10,000,000 shall have been issued against the Borrower or any Subsidiary of the Borrower or any of their respective properties and shall have remained undischarged and unstayed for a period of thirty consecutive days. (i) Any Governmental Action now or hereafter made by or with any Governmental Authority in connection with any Loan Document is not obtained or shall have ceased to be in full force and effect or shall have been modified or amended or shall have been held to be illegal or invalid, and the Required Lenders shall have determined (which determination shall be conclusive provided it is reached in good faith) that the consequence of any of the foregoing events would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (j) Any Loan Document or any material term or provision thereof shall have ceased to be in full force and effect, or the Borrower or any Governmental Authority with jurisdiction over the Borrower shall, or shall purport to, terminate, repudiate, declare 52 voidable or void or otherwise contest, any Loan Document or any material term or provision thereof or any obligation or liability of the Borrower thereunder. (k) An event or condition specified in Section 5.01(h) hereof shall occur or exist with respect to any Plan or Multiemployer Plan or any Lien arises pursuant to ERISA and, as a result of such event or condition or Liens, together with all other such events or conditions or Liens, the Borrower or any ERISA Affiliate shall incur or shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or PBGC or suffer an encumbrance to exist in favor of any thereof (or any combination of the foregoing) which would constitute a Material Adverse Effect. (l) The Borrower or any Subsidiary of the Borrower shall have violated any Environmental Law or become subject to any Environmental Claim and, in either case, the Required Lenders shall have determined (which determination shall be conclusive provided it is reached in good faith) that such event would reasonably be expected, either individually or in the aggregate, to have a Material Adverse Effect. (m) A proceeding shall have been instituted in respect of the Borrower or any Subsidiary of the Borrower: (i) seeking to have an order for relief entered in respect of such Person, or seeking a declaration or entailing a finding that such Person is insolvent or a similar declaration or finding, or seeking dissolution, winding-up, charter revocation or forfeiture, liquidation, reorganization, arrangement, adjustment, composition or other similar relief with respect to such Person, its assets or its debts under any Law relating to bankruptcy, insolvency, relief of debtors or protection of creditors, termination of legal entities or any other similar Law now or hereafter in effect, or (ii) seeking appointment of a receiver, trustee, liquidator, assignee, sequestrator or other custodian for such Person or for all or any substantial part of its Property, and such proceeding shall result in the entry, making or grant of any such order for relief, declaration, finding, relief or appointment, or such proceeding shall remain undismissed and unstayed for a period of thirty consecutive days. (n) The Borrower or any Subsidiary of the Borrower shall become insolvent; shall fail to pay, become unable to pay, or state that it is or will be unable to pay, its debts as they become due; shall voluntarily suspend transaction of its business; shall make a general assignment for the benefit of creditors; shall institute (or fail to controvert in a timely and appropriate manner) a proceeding described in Section 7.01(m)(i), or (whether or not any such proceeding has been instituted) shall consent to or acquiesce in any such order for relief, declaration, finding or relief described therein; shall institute (or fail to controvert in a timely and appropriate manner) a proceeding described in Section 7.01(m)(ii), or (whether or not any such proceeding has been instituted) shall consent to or acquiesce in any such appointment or to the taking of possession by any such 53 custodian of all or any substantial part of its Property; shall dissolve, wind-up, revoke or forfeit its charter (or other constituent documents) or liquidate itself or any substantial part of its Property; or shall take any action in furtherance of any of the foregoing. (o) A Change in Control shall occur. (p) The Borrower shall cease to maintain a first mortgage bond rating of at least Baa3 by Moody's and BBB- by S&P. SECTION 7.02 Consequences of an Event of Default. ----------------------------------- (a) If an Event of Default specified in subsections (a) through (l), (o), (p) or (q) of Section 7.01 shall occur and, be continuing or shall exist, then, in addition to all other rights and remedies which the Administrative Agent or any Lender may have hereunder or under any other Loan Document, at law, in equity or otherwise, the Lenders shall be under no further obligation to make Loans hereunder, and the Administrative Agent may, and, upon the written request of the Required Lenders shall, by notice to the Borrower, from time to time do any or all of the following: (i) Declare the Commitments terminated, whereupon the Commitments will terminate and any fees hereunder shall be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue. (ii) Declare the unpaid principal amount of the Loans, interest accrued thereon and all other obligations to be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue. (b) If an Event of Default specified in subsection (m) or (n) of Section 7.01 shall occur or exist, then, in addition to all other rights and remedies which the Administrative Agent or any Lender may have hereunder or under any other Loan Document, at law, in equity or otherwise, the Commitments shall automatically terminate and the Lenders shall be under no further obligation to make Loans, and the unpaid principal amount of the Loans, interest accrued thereon and all other obligations shall become immediately due and payable without presentment, demand, protest or notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue. ARTICLE VIII THE AGENTS SECTION 8.01 Appointment. ----------- Each Lender hereby irrevocably appoints Mellon Bank, N.A. to act as Administrative Agent for such Lender under this Agreement and the other Loan Documents. Each Lender hereby irrevocably authorizes the Administrative Agent to take such action on behalf of such Lender under the provisions of this Agreement and the other Loan Documents, and to exercise such powers and to perform such duties, as are expressly delegated to or required of the 54 Administrative Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. Mellon Bank, N.A. hereby agrees to act as Administrative Agent on behalf of the Lenders on the terms and conditions set forth in this Agreement and the other Loan Documents, subject to its right to resign as provided in Section 8.10. Each Lender hereby irrevocably authorizes the Administrative Agent to execute and deliver each of the Loan Documents executed after the date hereof and to accept delivery of such of the other Loan Documents delivered after the date hereof as may not require execution by the Administrative Agent (with such consents of the Lenders as required pursuant to Section 9.01). Each Lender agrees that the rights and remedies granted to the Administrative Agent under the Loan Documents shall be exercised exclusively by the Administrative Agent, and that no Lender shall have any right individually to exercise any such right or remedy, except to the extent expressly provided herein or therein. SECTION 8.02 General Nature of Administrative Agent's Duties. ----------------------------------------------- Notwithstanding anything to the contrary elsewhere in this Agreement or in any other Loan Document: (a) The Administrative Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents, and no implied duties or responsibilities on the part of the Administrative Agent shall be read into this Agreement or any other Loan Document or shall otherwise exist. (b) The duties and responsibilities of the Administrative Agent under this Agreement and the other Loan Documents shall be mechanical and administrative in nature, and the Administrative Agent shall not have a fiduciary relationship in respect of any Lender. (c) The Administrative Agent is and shall be solely the agent of the Lenders. The Administrative Agent does not assume, and shall not at any time be deemed to have, any relationship of agency or trust with or for, or any other duty or responsibility to, the Borrower or any other Person (except only for its relationship as agent for, and its express duties and responsibilities to, the Lenders as provided in this Agreement and the other Loan Documents). (d) The Administrative Agent shall be under no obligation to take any action hereunder or under any other Loan Document if the Administrative Agent believes in good faith that taking such action may conflict with any Law or any provision of this Agreement or any other Loan Document, or may require the Administrative Agent to qualify to do business in any jurisdiction where it is not then so qualified. SECTION 8.03 Exercise of Powers. ------------------ The Administrative Agent shall take any action of the type specified in this Agreement or any other Loan Document as being within the Administrative Agent's rights, powers or discretion in accordance with directions from the Required Lenders (or, to the extent this Agreement or such Loan Document expressly requires the direction or consent of some other Person or set of Persons, then instead in accordance with the directions of such other Person or set 55 of Persons). In the absence of such directions, the Administrative Agent shall have the authority (but under no circumstances shall be obligated), in its sole discretion, to take any such action, except to the extent that this Agreement or such Loan Document expressly requires the direction or consent of the Required Lenders (or some other Person or set of Persons), in which case the Administrative Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction, discretion or consent shall be binding on all the Lenders. The Administrative Agent shall not have any liability to any Person as a result of (a) the Administrative Agent acting or refraining from acting in accordance with the directions of the Required Lenders (or other applicable Person or set of Persons), (b) the Administrative Agent refraining from acting in the absence of instructions to act from the Required Lenders (or other applicable Person or set of Persons), whether or not the Administrative Agent has discretionary power to take such action, or (c) the Administrative Agent taking discretionary action it is authorized to take under this Section (subject, in the case of clauses (b) and (c), to the provisions of Section 8.04(a)). SECTION 8.04 General Exculpatory Provisions. ------------------------------ Notwithstanding anything to the contrary elsewhere in this Agreement or any other Loan Document: (a) The Administrative Agent shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Loan Document, unless caused by its own gross negligence or willful misconduct. (b) The Administrative Agent shall not be responsible for (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Loan Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, or received under or in connection with, this Agreement or any other Loan Document, (iii) any failure of the Borrower or any Lender to perform any of their respective obligations under this Agreement or any other Loan Document, or (iv) the existence, validity, enforceability, perfection, recordation, priority, adequacy or value, now or hereafter, of any Lien or other direct or indirect security afforded or purported to be afforded by any of the Loan Documents or otherwise from time to time. (c) The Administrative Agent shall not be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Loan Document on the part of the Borrower, (ii) the business, operations, condition (financial or otherwise) or prospects of the Borrower or any other Person, or (iii) except to the extent set forth in Section 8.05(f), the existence of any Default or Event of Default. (d) The Administrative Agent shall not be under any obligation, either initially or on a continuing basis, to provide any Lender with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement or any other Loan Document to be furnished by the Administrative Agent to such Lender. 56 SECTION 8.05 Administration by the Administrative Agent. ------------------------------------------ (a) The Administrative Agent may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any other Loan Document) purportedly made by or on behalf of the proper party or parties, and the Administrative Agent shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. (b) The Administrative Agent may consult with legal counsel (including, without limitation, in-house counsel for the Administrative Agent or in-house or other counsel for the Borrower), independent public accountants and any other experts selected by it from time to time, and the Administrative Agent shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) The Administrative Agent may conclusively rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to the Administrative Agent in accordance with the requirements of this Agreement or any other Loan Document. Whenever the Administrative Agent shall deem it necessary or desirable that a matter be proved or established with respect to the Borrower or any Lender, such matter may be established by a certificate of the Borrower or such Lender, as the case may be, and the Administrative Agent may conclusively rely upon such certificate (unless other evidence with respect to such matter is specifically prescribed in this Agreement or another Loan Document). (d) The Administrative Agent may fail or refuse to take any action unless it shall be indemnified to its satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature which may be imposed on, incurred by or asserted against the Administrative Agent by reason of taking or continuing to take any such action. (e) The Administrative Agent may perform any of its duties under this Agreement or any other Loan Document by or through agents or attorneys-in-fact. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. (f) The Administrative Agent shall not be deemed to have any knowledge or notice of the occurrence of any Default or Event of Default unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a "notice of default". If the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to each Lender. SECTION 8.06 Lenders Not Relying on Administrative Agent or Other ---------------------------------------------------- Lenders. - ------- Each Lender acknowledges as follows: (a) Neither the Administrative Agent nor any other Lender has made any representations or warranties to it, and no act taken hereafter by the Administrative Agent 57 or any other Lender shall be deemed to constitute any representation or warranty by the Administrative Agent or such other Lender to it. (b) It has, independently and without reliance upon the Administrative Agent or any other Lender, and based upon such documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the other Loan Documents. (c) It will, independently and without reliance upon the Administrative Agent or any other Lender, and based upon such documents and information as it shall deem appropriate at the time, make its own decisions to take or not take action under or in connection with this Agreement and the other Loan Documents. SECTION 8.07 Indemnification. --------------- Each Lender agrees to reimburse and indemnify the Administrative Agent and its directors, officers, employees and agents (to the extent not reimbursed by the Borrower and without limitation of the obligations of the Borrower to do so, in each case pursuant to the terms of this Agreement and the other Loan Documents), based on its Applicable Percentage, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the fees and disbursements of counsel for the Administrative Agent or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Administrative Agent or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Administrative Agent or such other Person as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Loan Document, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any Loan, provided that no Lender shall be liable for any portion of -------- such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements resulting solely from the gross negligence or willful misconduct of the Administrative Agent or such other Person, as finally determined by a court of competent jurisdiction. Payments under this Section 8.07 shall be due and payable on demand, and to the extent that any Lender fails to pay any such amount on demand, such amount shall bear interest for each day from the date of demand until paid (before and after judgment) at a rate per annum (calculated on the basis of a year of 360 days and actual days elapsed) which for each day shall be equal to the Federal Funds Effective Rate for such day. SECTION 8.08 Administrative Agent in its Individual Capacity. ----------------------------------------------- With respect to its Commitment and the Obligations owing to it, the Administrative Agent shall have the same rights and powers under this Agreement and each other Loan Document as any other Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lenders," "holders of Notes" and like terms shall include the Administrative Agent in its individual capacity as such. The Administrative Agent and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, and engage in any other business with, the Borrower and any 58 stockholder, subsidiary or affiliate of the Borrower, as though the Administrative Agent were not the Administrative Agent hereunder. SECTION 8.09 Holders of Notes. ---------------- The Administrative Agent may deem and treat the Lender which is payee of a Note as the owner and holder of such Note for all purposes hereof unless and until an Assignment and Acceptance with respect to the assignment or transfer thereof shall have been filed with the Administrative Agent in accordance with Section 9.12. Any authority, direction or consent of any Person who at the time of giving such authority, direction or consent is shown in the Register as being a Lender shall be conclusive and binding on each present and subsequent holder, transferee or assignee of any Note or Notes payable to such Lender or of any Note or Notes issued in exchange therefor. SECTION 8.10 Successor Administrative Agent. ------------------------------ The Administrative Agent may resign at any time by giving 10 days' prior written notice thereof to the Lenders and the Borrower. The Administrative Agent may be removed by the Required Lenders at any time with or without cause by giving 10 days, prior written notice thereof to the Administrative Agent, the other Lenders and the Borrower. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed and consented to, and shall have accepted such appointment, within 30 days after such notice of resignation or removal, then the retiring Administrative Agent, on behalf of the Lenders, may appoint a successor Administrative Agent. Each successor Administrative Agent shall be a commercial bank or trust company organized under the Laws of the United States of America or any State thereof and having a combined capital and surplus of at least $1,000,000,000. The appointment of any successor Administrative Agent at any time pursuant to this Section 8.10 shall be subject to the approval of the Borrower, provided that at such time there shall not have occurred and be continuing any Default or Event of Default, and provided further that the Borrower's consent to any such appointment shall not be unreasonably withheld. Upon the acceptance by a successor Administrative Agent of its appointment as Administrative Agent hereunder, such successor Administrative Agent shall thereupon succeed to and become vested with all the properties, rights, powers, privileges and duties of the former Administrative Agent without further act, deed or conveyance. Upon the effective date of resignation or removal of a retiring Administrative Agent, the Administrative Agent shall be discharged from its duties under this Agreement and the other Loan Documents, but the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted by it while it was Administrative Agent under this Agreement. If and for so long as no successor Administrative Agent shall have been appointed, then any notice or other communication required or permitted to be given by the Administrative Agent shall be sufficiently given if given by the Required Lenders, all notices or other communications required or permitted to be given to the Administrative Agent shall be given to each Lender, and all payments to be made to the Administrative Agent shall be made directly to the Borrower or Lender for whose account such payment is made. 59 SECTION 8.11 Additional Administrative Agents. -------------------------------- If the Administrative Agent shall from time to time deem it necessary or advisable, for its own protection in the performance of its duties hereunder or in the interest of the Lenders, the Administrative Agent and the Borrower shall execute and deliver a supplemental agreement and all other instruments and agreements necessary or advisable in the opinion of the Administrative Agent to constitute another commercial bank or trust company, or one or more other Persons approved by the Administrative Agent, to act as co-Administrative Agent, with such powers of the Administrative Agent as may be provided in such supplemental agreement, and to vest in such bank, trust company or Person, as such co-Administrative Agent, any properties, rights, powers, privileges and duties of the Administrative Agent under this Agreement or any other Loan Document. The appointment of any co-Administrative Agent at any time pursuant to this Section 8.11 shall be subject to the approval of the Borrower, provided that at such time there shall not have occurred and be continuing any Default or Event of Default, and provided further that the Borrower's consent to any such appointment shall not be unreasonably withheld. SECTION 8.12 Calculations. ------------ The Administrative Agent shall not be liable for any calculation, apportionment or distribution of payments made by it in good faith, in the absence of its own gross negligence or willful misconduct. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Lender to whom payment was due but not made (except as provided in the preceding sentence) shall be to recover from the other Lenders any payment in excess of the amount to which they are determined to be entitled or, if the amount due was not paid by the Borrower, to recover such amount from the Borrower. SECTION 8.13 Syndication Agents. ------------------ As Syndication Agents, neither First Union National Bank nor Wells Fargo Bank, N.A. shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, neither First Union National Bank nor Wells Fargo Bank, N.A. shall have any or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on First Union National Bank or Wells Fargo Bank, N.A. in deciding to enter into this Agreement or in not taking action hereunder or under the Loan Documents. ARTICLE IX MISCELLANEOUS SECTION 9.01 Amendments and Waivers. ---------------------- Neither this Agreement nor any other Loan Document may be amended, modified or supplemented except in accordance with the provisions of this Section 9.01. The Administrative Agent and the Borrower may from time to time amend, modify or supplement the provisions of this Agreement or any other Loan Document for the purpose of amending, adding to or waiving any provision, or changing in any manner the rights and duties of the Borrower, the Administrative Agent or any Lender. Any such amendment, modification or supplement made by the Borrower and the Administrative Agent in accordance with the provisions of this Section 9.01 shall be 60 binding upon the Borrower, each Lender and the Administrative Agent. The Administrative Agent shall enter into such amendments, modifications or supplements from time to time as directed by the Required Lenders, and only as so directed, provided, that no such amendment, modification or supplement may be -------- made which will: (a) Increase the Commitment of any Lender over the amount thereof then in effect, without the written consent of each Lender affected thereby; (b) Extend the Revolving Termination Date, without the written consent of all the Lenders; (c) Reduce the principal amount of or extend the time for any payment of principal of any Loan, or reduce the rate of interest or extend the time for payment of any interest borne by any Loan, or extend the time for payment of or reduce the amount of any fees, or reduce or postpone the date for payment of any other obligation, without the written consent of each Lender affected thereby; (d) Change the definition of "Required Lenders" or amend this Section 9.01 or Section 9.12(a) or any other provision of this Agreement that requires the consent of all Lenders to the taking or failure to take action hereunder, without the written consent of all the Lenders; or (e) Amend or waive any of the provisions of Article VIII, or impose additional duties upon the Administrative Agent or otherwise adversely affect the rights, interests or obligations of the Administrative Agent, without the written consent of the Administrative Agent; and provided, further, that Assignment and Acceptances may be entered into in -------- the manner provided in Section 9.12. Any such amendment, modification or supplement must be in writing and shall be effective only to the extent set forth in such writing. Any Default or Event of Default waived or consented to in any such amendment, modification or supplement shall be deemed to be cured and not continuing to the extent and for the period set forth in such waiver or consent, but no such waiver or consent shall extend to any other or subsequent Default or Event of Default or impair any right consequent thereto. SECTION 9.02 No Implied Waiver; Cumulative Remedies. -------------------------------------- No course of dealing and no delay or failure of the Administrative Agent or any Lender in exercising any right, power or privilege under this Agreement or any other Loan Document shall affect any other or future exercise thereof or the exercise of any other right, power or privilege; nor shall any single or partial exercise of any such right, power or privilege or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies of the Administrative Agent and the Lenders under this Agreement and any other Loan Document are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any Lender would otherwise have hereunder or thereunder, at law, in equity or otherwise. 61 SECTION 9.03 Notices. ------- (a) Except to the extent otherwise expressly permitted hereunder or thereunder, all notices, requests, demands, directions and other communications (collectively "notices") under this Agreement or any other Loan Document shall ------- be in writing (including telecopied communication) and shall be sent by first- class mail, or by nationally-recognized overnight courier, or by telecopier (with confirmation in writing mailed first-class or sent by such an overnight courier), or by personal delivery. All notices shall be sent to the applicable party at the address stated on the signature pages hereof or in accordance with the last unrevoked written direction from such party to the other parties hereto in all cases with postage or other charges prepaid. Any such properly given notice shall be effective on the earliest to occur of receipt, telephone confirmation of receipt of telecopy communication, one Business Day after delivery to a nationally-recognized overnight courier, or three Business Days after deposit in the mail. (b) Any Lender giving any notice to the Borrower or any other party to a Loan Document shall simultaneously send a copy thereof to the Administrative Agent, and the Administrative Agent shall promptly notify the other Lenders of the receipt by it of any such notice. (c) The Administrative Agent and each Lender may rely on any notice (whether or not such notice is made in a manner permitted or required by this Agreement or any other Loan Document) purportedly made by or on behalf of the Borrower, and neither the Administrative Agent nor any Lender shall have any duty to verify the identity or authority of any Person giving such notice. SECTION 9.04 Expenses; Taxes; Indemnity. -------------------------- (a) The Borrower agrees to pay or cause to be paid and to save the Administrative Agent and each of the Lenders harmless against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel) incurred by the Administrative Agent or any Lender from time to time arising from or relating to (i) in the case of the Administrative Agent, the negotiation, syndication, preparation, execution, delivery, administration and performance of this Agreement and the other Loan Documents, (ii) in the case of the Syndication Agents, the syndication of this Agreement and the other Loan Documents, (iii) in the case of the Administrative Agent, any amendments, modifications, supplements, waivers or consents to this Agreement or any other Loan Document (whether or not ultimately entered into or granted), and (iv) in the case of the Administrative Agent or any Lender, the enforcement or preservation of rights under this Agreement or any other Loan Document (including but not limited to any such costs or expenses arising from or relating to (A) collection or enforcement of an outstanding Loan or any other amount owing hereunder or thereunder by the Administrative Agent or such Lender, and (B) any litigation, proceeding, dispute, work-out, restructuring or rescheduling related in any way to this Agreement or the Loan Documents). (b) The Borrower hereby agrees to pay all stamp, document, transfer, recording, filing, registration, search, sales and excise fees and taxes and all similar impositions now or hereafter determined by the Administrative Agent or any Lender to be payable in connection with 62 this Agreement or any other Loan Documents or any other documents, instruments or transactions pursuant to or in connection herewith or therewith (which determination shall be conclusive provided it is reached in good faith), and the Borrower agrees to save the Administrative Agent and each Lender harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such fees, taxes or impositions. (c) The Borrower hereby agrees to reimburse and indemnify each of the Indemnified Parties from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for such Indemnified Party in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnified Party shall be designated a party thereto) that may at any time be imposed on, asserted against or incurred by such Indemnified Party as a result of, or arising out of, or in any way related to or by reason of, this Agreement or any other Loan Document, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any Loan (and without in any way limiting the generality of the foregoing, including any violation or breach of any Environmental Law or any other Law by the Borrower or any Subsidiary of the Borrower; any Environmental Claim arising out of the management, use, control, ownership or operation of Property by any of such Persons, including all onsite and off-site activities involving Hazardous Materials; or any exercise by the Administrative Agent or any Lender of any of its rights or remedies under this Agreement or any other Loan Document); but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements resulting solely from the gross negligence or willful misconduct of such Indemnified Party, as finally determined by a court of competent jurisdiction. If and to the extent that the foregoing obligations of the Borrower under this subsection (c), or any other indemnification obligation of the Borrower hereunder or under any other Loan Document, are unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable Law. SECTION 9.05 Severability. ------------ The provisions of this Agreement are intended to be severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. SECTION 9.06 Prior Understandings. -------------------- This Agreement, the other Loan Documents and that certain letter agreement regarding fees dated March 30, 1999 among Mellon Bank, N.A., Sierra Pacific Resources and the Borrower, as such agreements shall be amended from time to time, supersede all prior and contemporaneous understandings and agreements, whether written or oral, among the parties hereto relating to the transactions provided for herein and therein. 63 SECTION 9.07 Duration; Survival. ------------------ All representations and warranties of the Borrower contained herein or in any other Loan Document or made in connection herewith or therewith shall survive the making, and shall not be waived by the execution and delivery, of this Agreement or any other Loan Document, any investigation by or knowledge of the Administrative Agent or any Lender, the making of any Loan, or any other event or condition whatever. All covenants and agreements of the Borrower contained herein or in any other Loan Document shall continue in full force and effect from and after the date hereof so long as the Borrower may borrow hereunder and until payment in full of all Obligations. Without limitation, all obligations of the Borrower hereunder or under any other Loan Document to make payments to or indemnify the Administrative Agent or any Lender shall survive the payment in full of all other Obligations, termination of the Borrower's right to borrow hereunder, and all other events and conditions whatever. In addition, all obligations of each Lender to make payments to or indemnify the Administrative Agent shall survive the payment in full by the Borrower of all Obligations, termination of the Borrower's right to borrow hereunder, and all other events or conditions whatever. SECTION 9.08 Counterparts. ------------ This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. SECTION 9.09 Limitation on Payments. ---------------------- The parties hereto intend to conform to all applicable Laws in effect from time to time limiting the maximum rate of interest that may be charged or collected. Accordingly, notwithstanding any other provision hereof or of any other Loan Document, the Borrower shall not be required to make any payment to or for the account of any Lender, and each Lender shall refund any payment made by the Borrower, to the extent that such requirement or such failure to refund would violate or conflict with nonwaivable provisions of applicable Laws limiting the maximum amount of interest which may be charged or collected by such Lender. SECTION 9.10 Set-Off. ------- The Borrower hereby agrees that, to the fullest extent permitted by Law, if any Obligation of the Borrower shall be due and payable (by acceleration or otherwise), each Lender shall have the right, without notice to the Borrower, to set-off against and to appropriate and apply to such Obligation any indebtedness, liability or obligation of any nature owing to the Borrower by such Lender, including but not limited to all deposits (whether time or demand, general or special, provisionally credited or finally credited, whether or not evidenced by a certificate of deposit) now or hereafter maintained by the Borrower with such Lender. Such right shall be absolute and unconditional in all circumstances and, without limitation shall exist whether or not such Lender or any other Person shall have given notice or made a demand to the Borrower or any other Person, whether such indebtedness, obligation or liability owed to the Borrower is contingent, absolute, matured or unmatured (it being agreed that such Lender may deem such indebtedness, obligation or liability to be then due and payable at the time of such setoff), and regardless of the existence or 64 adequacy of any collateral, guaranty or any other security, right or remedy available to any Lender or any other Person. The Borrower hereby agrees that, to the fullest extent permitted by Law, any Participant and any branch, subsidiary or affiliate of any Lender or any Participant shall have the same rights of set- off as a Lender as provided in this Section (regardless of whether such Participant, branch, subsidiary or affiliate would otherwise be deemed in privity with or a direct creditor of the Borrower). The rights provided by this Section are in addition to all other rights of set-off and banker's lien and all other rights and remedies which any Lender (or any such Participant, branch, subsidiary or affiliate) may otherwise have under this Agreement, any other Loan Document, at law or in equity, or otherwise, and nothing in this Agreement or any other Loan Document shall be deemed a waiver or prohibition of or restriction on the rights of set-off or bankers' lien of any such Person. SECTION 9.11 Sharing of Collections. ---------------------- The Lenders hereby agree among themselves that if any Lender shall receive (by voluntary payment, realization upon security, set-off or from any other source) any amount on account of the Loans, interest thereon, or any other Obligation contemplated by this Agreement or the other Loan Documents to be made by the Borrower pro rata to all Lenders (or pro rata to holders of Notes) in greater proportion than any such amount received by any other applicable Lender, then the Lender receiving such proportionately greater payment shall notify each other Lender and the Administrative Agent of such receipt, and equitable adjustment will be made in the manner stated in this Section 9.11 so that, in effect, all such excess amounts will be shared ratably among all of the applicable Lenders. The Lender receiving such excess amount shall purchase (which it shall be deemed to have done simultaneously upon the receipt of such excess amount) for cash from the other applicable Lenders a participation in the applicable Obligations owed to such other Lenders in such amount as shall result in a ratable sharing by all applicable Lenders of such excess amount (and to such extent the receiving Lender shall be a Participant). If all or any portion of such excess amount is thereafter recovered from the Lender making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by Law to be paid by the Lender making such purchase. The Borrower hereby consents to and confirms the foregoing arrangements. Each Participant shall be bound by this Section as fully as if it were a Lender hereunder. SECTION 9.12 Successors and Assigns; Participations; Assignments. --------------------------------------------------- (a) Successors and Assigns. This Agreement shall be binding upon and ---------------------- inure to the benefit of the Borrower, the Lenders, all future holders of the Notes, the Agents and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights hereunder or interests herein without the prior written consent of all the Lenders and the Administrative Agent, and any purported assignment without such consent shall be void. (b) Participations. Any Lender may, in the ordinary course of its -------------- commercial banking business and in accordance with applicable Law, at any time sell participations to one or more commercial banks or other Persons (each a "Participant") in all or a portion of its rights and obligations under this ----------- Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitment and the Loans owing to it and any Note held by it); provided, that - -------- 65 (i) any such Lender's obligations under this Agreement and the other Loan Documents shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the parties hereto shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and each of the other Loan Documents, (iv) such Participant shall be bound by the provisions of Section 9.11, and (v) no Participant (unless such Participant is an Affiliate of such Lender, or is itself a Lender) shall be entitled to require such Lender to take or refrain from taking action under this Agreement or under any other Loan Document, except that such Lender may agree with such Participant that such Lender will not, without such Participant's consent, take any action, or consent to the taking of any action, of the type described in Section 9.01(a), (b) or (c). The Borrower agrees that any such Participant shall be entitled to the benefits of Sections 2.13, 2.14, 2.15 and 9.04 with respect to its participation in the Commitments and the Loans outstanding from time to time; provided, that no such -------- Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred to such Participant had no such transfer occurred. (c) Assignments. Any Lender may, in the ordinary course of its ----------- commercial banking business and in accordance with applicable Law, at any time assign all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or any portion of its Commitment and Loans owing to it and any Note held by it) to any Lender, any Affiliate of a Lender or to one or more additional commercial banks or other Persons (each a "Purchasing Lender"); provided, that ----------------- -------- (i) any such assignment to a Purchasing Lender which is not a Lender or an affiliate of a Lender shall be made only with the consent (which in each case shall not be unreasonably withheld) of the Borrower (so long as no Default or Event of Default shall have occurred and be continuing) and the Administrative Agent; (ii) if a Lender makes such an assignment of less than all of its then remaining rights and obligations under this Agreement and the other Loan Documents, such transferor Lender shall retain, after such assignment, a minimum principal amount of $10,000,000 of the Commitments and Loans then outstanding, and such assignment, unless made to an assignee who is a Lender hereunder prior to such assignment, shall be in a minimum principal amount of $10,000,000 of the Commitments and Loans then outstanding; (iii) each such assignment shall be of a constant, and not a varying, percentage of the Commitment of the transferor Lender and of all of the transferor Lender's rights and obligations under this Agreement and the other Loan Documents; and 66 (iv) each such assignment shall be made pursuant to an Assignment and Acceptance. In order to effect any such assignment, the transferor Lender and the Purchasing Lender shall execute and deliver to the Administrative Agent a duly completed Assignment and Acceptance (including the consents required by clause (i) of the preceding sentence) with respect to such assignment, together with any Note or Notes subject to such assignment and a processing and recording fee of $3,500; and, upon receipt thereof, the Administrative Agent shall accept such Assignment and Acceptance. Upon receipt of notice from the transferor Lender that it has received the consideration described in the Assignment and Acceptance, the Administrative Agent shall record such acceptance in the Register. Upon such execution, delivery, acceptance and recording, from and after the close of business at the Administrative Agent's Office on the settlement date specified in such Assignment and Acceptance: (x) the Purchasing Lender shall be a party hereto and, to the extent provided in such Assignment and Acceptance, shall have the rights and obligations of a Lender hereunder, and (y) the transferor Lender thereunder shall be released from its obligations under this Agreement to the extent so transferred (and, in the case of an Assignment and Acceptance covering all or the remaining portion of a transferor Lender's rights and obligations under this Agreement, such transferor Lender shall cease to be a party to this Agreement) from and after the settlement date. On or prior to the settlement date specified in an Assignment and Acceptance, the Borrower, at its expense, shall execute and deliver to the Administrative Agent (for delivery to the Purchasing Lender) new Notes evidencing such Purchasing Lender's assigned Commitment or Loans and (for delivery to the transferor Lender) replacement Notes in the principal amount of the Loans or Commitment retained by the transferor Lender (such Notes to be in exchange for, but not in payment of, those Notes then held by such transferor Lender). Each such Note shall be dated the date and be substantially in the form of the predecessor Note. The Administrative Agent shall mark the predecessor Notes "exchanged" and deliver them to the Borrower. Accrued interest and accrued fees shall be paid to the Purchasing Lender at the same time or times provided in the predecessor Notes and this Agreement. (d) Register. The Administrative Agent shall maintain at its office a -------- copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and -------- the Commitment of, and principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive absent manifest error and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of the Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Financial and Other Information. The Borrower authorizes the ------------------------------- Administrative Agent and each Lender to disclose to any Participant or Purchasing Lender (each, a "transferee") and any prospective transferee any and ---------- all financial and other information in such 67 Person's possession concerning the Borrower and its Subsidiaries and Affiliates which has been or may be delivered to such Person by or on behalf of the Borrower in connection with this Agreement or any other Loan Document or such Person's credit evaluation of the Borrower and its Subsidiaries and Affiliates. (f) Assignments to Federal Reserve Bank. Any Lender may at any time ----------------------------------- assign all or any portion of its rights under this Agreement, including without limitation any Loans owing to it, and any Note held by it, to a Federal Reserve Bank. No such assignment shall relieve the transferor Lender from its obligations hereunder. (g) Special Purpose Funding Vehicles. Notwithstanding anything to the -------------------------------- contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC") the option to fund all or any part of any Loan that such Granting Lender would otherwise be obligated to fund pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to fund any Loan, and (ii) if an SPC elects not to exercise such option or otherwise fails to fund all or any part of such Loan, the Granting Lender shall be obligated to fund such Loan pursuant to the terms hereof. The funding of a Loan by an SPC hereunder shall utilize the Revolving Credit Commitment of the Granting Lender to the same extent, and as if, such Loan were funded by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or payment under this Agreement for which a Lender would otherwise be liable for so long as, and to the extent, the Granting Lender provides such indemnity or makes such payment. Notwithstanding anything to the contrary contained in this Agreement, any SPC may disclose on a confidential basis any non-public information relating to its funding of Loans to any rating agency, commercial paper dealer or provider of any surety or guarantee to such SPC. This Section may not be amended without the prior written consent of each Granting Lender, all or any part of whose Loan is being funded by an SPC at the time of such amendment. SECTION 9.13 Governing Law; Submission to Jurisdiction Waiver of Jury -------------------------------------------------------- Trial; Limitation of Liability. - ------------------------------ (a) Governing Law. THIS AGREEMENT AND ALL OTHER LOAN DOCUMENTS ------------- (EXCEPT TO THE EXTENT, IF ANY, OTHERWISE EXPRESSLY STATED IN SUCH OTHER LOAN DOCUMENTS) SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CHOICE OF LAW PRINCIPLES. (b) Certain Waivers. EACH PARTY TO THIS AGREEMENT HEREBY IRREVOCABLY --------------- AND UNCONDITIONALLY: (i) AGREES THAT ANY ACTION, SUIT OR PROCEEDING BY ANY PERSON ARISING FROM OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY STATEMENT, COURSE OF CONDUCT, ACT, OMISSION, OR EVENT OCCURRING IN CONNECTION HEREWITH OR THEREWITH (COLLECTIVELY, "RELATED LITIGATION") MAY ------------------ BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION SITTING IN NEW YORK, NEW YORK AND SUBMITS TO THE JURISDICTION OF SUCH 68 COURTS (AND, TO THE FULLEST EXTENT PERMITTED BY LAW, THE BORROWER AGREES THAT IT WILL NOT BRING ANY RELATED LITIGATION IN ANY OTHER FORUM, BUT NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING ANY ACTION, SUIT OR PROCEEDING IN ANY OTHER FORUM IN WHICH THE BORROWER OR ANY OF ITS ASSETS MAY BE LOCATED OR IN WHICH THE BORROWER MAY BE DOING BUSINESS OR THE RIGHT OF THE BORROWER TO ASSERT ANY DEFENSE OR COUNTERCLAIM TO ANY ACTION BROUGHT BY THE ADMINISTRATIVE AGENT OR ANY LENDER IN ANY FORUM); (ii) WAIVES ANY OBJECTION WHICH IT MAY HAVE AT ANY TIME TO THE LAYING OF VENUE OF ANY RELATED LITIGATION BROUGHT IN ANY SUCH COURT, WAIVES ANY CLAIM THAT ANY SUCH RELATED LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM, AND WAIVES ANY RIGHT TO OBJECT, WITH RESPECT TO ANY RELATED LITIGATION BROUGHT IN ANY SUCH COURT, THAT SUCH COURT DOES NOT HAVE JURISDICTION OVER IT; (iii) CONSENTS AND AGREES TO SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER LEGAL PROCESS IN ANY RELATED LITIGATION BY REGISTERED OR CERTIFIED U.S. MAIL, POSTAGE PREPAID, TO IT AT THE ADDRESS FOR NOTICES DESCRIBED IN SECTION 9.03, AND CONSENTS AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE IN EVERY RESPECT VALID AND EFFECTIVE SERVICE (BUT NOTHING HEREIN SHALL AFFECT THE VALIDITY OR EFFECTIVENESS OF PROCESS SERVED IN ANY OTHER MANNER PERMITTED BY LAW); AND (iv) WAIVES THE RIGHT TO TRIAL BY JURY IN ANY RELATED LITIGATION. (c) Limitation of Liability. TO THE FULLEST EXTENT PERMITTED BY ----------------------- LAW, NO CLAIM MAY BE MADE BY ANY PARTY TO THIS AGREEMENT AGAINST ANY OTHER PARTY TO THIS AGREEMENT OR ANY AFFILIATE, DIRECTOR, OFFICER, EMPLOYEE, ATTORNEY OR AGENT OF ANY OF THEM FOR ANY SPECIAL, INCIDENTAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM ARISING FROM OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY STATEMENT, COURSE OF CONDUCT, ACT, OMISSION, OR EVENT OCCURRING IN CONNECTION HEREWITH OR THEREWITH (WHETHER FOR BREACH OF CONTRACT, TORT OR ANY OTHER THEORY OF LIABILITY). EACH PARTY TO THIS AGREEMENT HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR ANY SUCH DAMAGES, WHETHER SUCH CLAIM PRESENTLY EXISTS OR ARISES HEREAFTER AND WHETHER OR NOT SUCH CLAIM IS KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR. 69 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. Address SIERRA PACIFIC POWER COMPANY - ------- Sierra Pacific Resources 6100 Neil Road P.O. Box 30150 By____________________________ Reno, Nevada 89520 Name: Attn: Mark Ruelle Title: 70 Address MELLON BANK, N.A., as Administrative - ------- Agent, Arranger and as a Lender Mellon Bank One Mellon Bank Center Pittsburgh, Pennsylvania 15258 Attn: Richard A. Matthews By__________________________________ Name: Richard A. Matthews Title: Vice President 71 Address FIRST UNION NATIONAL BANK, as - ------- Syndication Agent and as a Lender First Union National Bank One First Union Center 301 South College Street Charlotte, North Carolina 28288-0735 By_________________________________ Attn: Dana Maloney Name: Title: 72 Address WELLS FARGO BANK, N.A., as - ------- Syndication Agent and as a Lender Wells Fargo Bank 201 Third Street 8/th/ Floor San Francisco, California 94103 By_________________________________ Attn: Maria Josefa Prosperi Name: Title: 73 Address BANK OF AMERICA NATIONAL TRUST AND - ------- SAVINGS ASSOCIATION Bank of America 300 South Fourth Street 2/nd/ Floor Las Vegas, Nevada 89101 By_________________________________ Attn: Dolores A. Rippo Name: Title: 74 Address THE BANK OF NEW YORK - ------- The Bank of New York One Wall Street New York, New York 10286 By_________________________________ Attn: Kathy D'Elena Name: Title: 75 Address THE FIRST NATIONAL BANK OF CHICAGO - ------- The First National Bank of Chicago One First National Plaza Suite 0573 Chicago, Illinois By_________________________________ Attn: Mari Albanese Name: Title: 76 Address CREDIT SUISSE FIRST BOSTON - ------- Credit Suisse First Boston 5 World Trade Center New York, New York 10048 By_________________________________ Attn: Genaro Sarasola Name: Title: 77 Address PARIBAS - ------- Paribas 787 7/th/ Avenue New York, New York 10019 By_________________________________ Attn: Telca Hurley Name: Title: By_________________________________ Name: Title: 78 Address UNION BANK OF CALIFORNIA, N.A. - ------- Union Bank of California Energy Capital Services - LA Office 445 South Figueroa Street By_________________________________ 15/th/ Floor Name: Los Angeles, CA 90071 Title: Attn Patricia A. Gonzales 79 Address BANK OF MONTREAL - ------- Bank of Montreal 700 Louisiana Street Suite 4400 By_________________________________ Houston, TX 77002 Name: Cahal B. Carmody Attn: Cahal B. Carmody Title: Director 80 Address BAYERISCHE LANDESBANK GIROZENTRALE - ------- Bayerische Landesbank Girozentrale 560 Lexington Avenue New York, New York 10022 Attn: Patricia Sanchez By_________________________________ Name: Peter Obermann Title: Senior Vice President By_________________________________ Name: Sean O'Sullivan Title: Senior Vice President 81 Address FLEET NATIONAL BANK - ------- Fleet National Bank One Federal Street Boston, Massachusetts 02110 By_________________________________ Attn: Francia Castillo, Loan Administrator Name: Title: 82 Address FIRST SECURITY BANK OF NEVADA - ------- First Security Bank of Nevada P.O. Box 19250 Las Vegas, Nevada 89132 By_________________________________ Attn: Cheryl Moss Name: Cheryl Moss Title: Senior Vice President & Manager Corporate Banking Department 83 Address KBC BANK, N.V. - ------- KBC Bank, N.V. 125 West 55/th/ Street 10/th/ Floor By_________________________________ New York, New York 10019 Name: Attn: Claire Kowalski/Charlene Cumberbatch Title: By_________________________________ Name: Title: 84 Address U.S. BANK NATIONAL ASSOCIATION - ------- U.S. Bank National Association Commercial Loan Servicing Department 555 S.W. Oak Street, PL-7 By_________________________________ Portland, Oregon 97204 Name: Attn: Jan Knox, Participation Specialist Title: 85 SCHEDULE I ---------- Commitments ----------- [See definitions of "Commitment" in Section 1.01] LENDER COMMITMENT AMOUNT ------ ----------------- Mellon Bank, N.A. $ 15,937,500 First Union National Bank $ 12,187,500 Wells Fargo Bank, N.A. $ 12,187,500 Bank of America National Trust and Savings Association $ 11,250,000 The Bank of New York $ 11,250,000 The First National Bank of Chicago $ 11,250,000 Credit Suisse First Boston $ 11,250,000 Paribas $ 11,250,000 Union Bank of California, N.A. $ 11,250,000 Bank of Montreal $ 9,375,000 Bayerische Landesbank Girozentrale $ 9,375,000 Fleet National Bank $ 9,375,000 First Security Bank of Nevada $ 4,687,500 KBC Bank, N.V. $ 4,687,500 U.S. Bank National Association $ 4,687,500 Total $150,000,000 ============ 86 TABLE OF CONTENTS -----------------
Page ---- ARTICLE I DEFINITIONS; CONSTRUCTION 1 SECTION 1.01 Defined Terms. 1 SECTION 1.02. Classification of Loans and Borrowings 14 SECTION 1.03 Terms Generally. 14 SECTION 1.04 Accounting Terms; GAAP. 15 ARTICLE II THE CREDITS 15 SECTION 2.01 The Commitments. 15 SECTION 2.02 Loans and Borrowings. 15 SECTION 2.03 Requests for Revolving Borrowings. 16 SECTION 2.04 Funding of Borrowings. 17 SECTION 2.05 Interest Elections. 18 SECTION 2.06 Termination, Reduction and Extension of Commitments. 19 SECTION 2.07 Term Loan Conversion Option 21 SECTION 2.08 Repayment of Loans; Evidence of Debt 22 SECTION 2.09 Prepayment of Loans. 23 SECTION 2.10 Fees. 24 SECTION 2.11 Interest. 25 SECTION 2.12 Alternate Rate of Interest. 25 SECTION 2.13 Increased Costs. 26 SECTION 2.14 Break Funding Payments. 27 SECTION 2.15 Taxes. 27 SECTION 2.16 Payments Generally; Pro Rata Treatment; Sharing of Set-offs. 28 SECTION 2.17 Mitigation Obligations; Replacement of Lenders. 30 ARTICLE III REPRESENTATIONS AND WARRANTIES 31 SECTION 3.01 Corporate Status. 31 SECTION 3.02 Corporate Power and Authorization. 31 SECTION 3.03 Execution and Binding Effect. 31 SECTION 3.04 Governmental Approvals and Filings. 31 SECTION 3.05 Absence of Conflicts. 32 SECTION 3.06 Audited Financial Statements. 32 SECTION 3.07 Interim Financial Statements. 33 SECTION 3.08 Absence of Undisclosed Liabilities. 33 SECTION 3.09 Absence of Material Adverse Effect 33 SECTION 3.10 Accurate and Complete Disclosure 33 SECTION 3.11 Margin Regulations 33 SECTION 3.12 Litigation 34 SECTION 3.13 Absence of Events of Default 34 SECTION 3.14 Absence of Other Conflicts 34 SECTION 3.15 Insurance 34 SECTION 3.16 Title to Property; No Liens 34 SECTION 3.17 Taxes 35 SECTION 3.18 Borrower Not An Investment Company 35 SECTION 3.19 Environmental Matters 35 SECTION 3.20 ERISA. 36
87 SECTION 3.21 Year 2000 Issues. 37 SECTION 3.22 Pari Passu Status. 37 SECTION 3.23 Indebtedness 38 ARTICLE IV CONDITIONS 38 SECTION 4.01 Effective Date. 38 SECTION 4.02 Conditions to All Loans 41 ARTICLE V AFFIRMATIVE COVENANTS 42 SECTION 5.01 Basic Reporting Requirements. 42 SECTION 5.02 Insurance 45 SECTION 5.03 Payment of Taxes and Other Potential Charges and Priority Claims 45 SECTION 5.04 Preservation of Corporate Status and Franchises 45 SECTION 5.05 Governmental Approvals and Filings 46 SECTION 5.06 Maintenance of Properties 46 SECTION 5.07 Avoidance of Other Conflicts 46 SECTION 5.08 Financial Accounting Practices 46 SECTION 5.09 Use of Proceeds 47 SECTION 5.10 End of Fiscal Periods 47 ARTICLE VI NEGATIVE COVENANTS 47 SECTION 6.01 Financial Covenants 47 SECTION 6.02 Liens 47 SECTION 6.03 Mergers 49 SECTION 6.04 Dispositions of Properties 49 SECTION 6.05 Investments and Acquisitions 49 SECTION 6.06 Dividends and Stock Repurchases 50 SECTION 6.07 Transactions with Affiliates 50 SECTION 6.08 Change of Business 50 SECTION 6.09 Equal and Ratable Lien. 50 SECTION 6.10 Restrictive Agreements. 50 SECTION 6.11 Year 2000 51 ARTICLE VII DEFAULTS 51 SECTION 7.01 Events of Default 51 SECTION 7.02 Consequences of an Event of Default 54 ARTICLE VIII THE AGENTS 54 SECTION 8.01 Appointment 54 SECTION 8.02 General Nature of Administrative Agent's Duties 55 SECTION 8.03 Exercise of Powers 55 SECTION 8.04 General Exculpatory Provisions 56 SECTION 8.05 Administration by the Administrative Agent 56 SECTION 8.06 Lenders Not Relying on Administrative Agent or Other Lenders 57 SECTION 8.07 Indemnification 58 SECTION 8.08 Administrative Agent in its Individual Capacity 58 SECTION 8.09 Holders of Notes 58 SECTION 8.10 Successor Administrative Agent 59 SECTION 8.11 Additional Administrative Agents 59 SECTION 8.12 Calculations 60 SECTION 8.13 Syndication Agents 60 ARTICLE IX MISCELLANEOUS 60 SECTION 9.01 Amendments and Waivers 60
88 SECTION 9.02 No Implied Waiver; Cumulative Remedies 61 SECTION 9.03 Notices 61 SECTION 9.04 Expenses; Taxes; Indemnity 62 SECTION 9.05 Severability 63 SECTION 9.06 Prior Understandings 63 SECTION 9.07 Duration; Survival 63 SECTION 9.08 Counterparts 64 SECTION 9.09 Limitation on Payments 64 SECTION 9.10 Set-Off 64 SECTION 9.11 Sharing of Collections 65 SECTION 9.12 Successors and Assigns; Participations; Assignments 65 SECTION 9.13 Governing Law; Submission to Jurisdiction Waiver of Jury Trial; Limitation of Liability 68
89 EX-10.B 9 TRANSITION PROPERTY PURCHASE AND SALE AGREEMENT EXHIBIT (10)(B) TRANSITION PROPERTY PURCHASE AND SALE AGREEMENT between SPPC FUNDING LLC Note Issuer and SIERRA PACIFIC POWER COMPANY Seller Dated as of April 9, 1999 1 TRANSITION PROPERTY PURCHASE AND SALE AGREEMENT TRANSITION PROPERTY PURCHASE AND SALE AGREEMENT, dated as of April 9, 1999, between SPPC FUNDING LLC, a Delaware limited liability company (the "Note ---- Issuer"), and SIERRA PACIFIC POWER COMPANY, a Nevada corporation, as Seller - ------ (the "Seller"). ------ WHEREAS, the Note Issuer desires to purchase the Transition Property created pursuant to the PU Code, the Financing Order and the Issuance Advice Letter; and WHEREAS, the Seller is willing to sell such Transition Property to the Note Issuer. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I Definitions ----------- SECTION 1.01. Definitions. Whenever used in this Agreement, the following ----------- words and phrases shall have the following meanings: "Agreement" means this Transition Property Purchase and Sale Agreement, as --------- the same may be amended and supplemented from time to time. "Basic Documents" has the meaning assigned to that term in the Indenture. --------------- "Business Day" has the meaning assigned to that term in the Indenture. ------------ "California Customers" means existing and future California Residential -------------------- Customers and California Small Commercial Customers. "California Residential Customers" means the existing and future -------------------------------- residential consumers of electricity, as identified in the Financing Order, located in the service territory in California in which the Seller provided electricity services as of December 20, 1995. "California Small Commercial Customers" means the existing and future small ------------------------------------- commercial consumers of electricity, as identified in the Financing Order, located in the service territory in California in which the Seller provided electricity services as of December 20, 1995. "Certificate Trustee" means the Person acting as certificate trustee under ------------------- the Trust Agreement. "Certificateholder" has the meaning assigned to that term in the Trust ----------------- Agreement. 2 "Certificates" means the Series of Certificates issued under the Trust ------------ Agreement whose Series Issuance Date is the date of this Agreement. "Closing Date" has the meaning assigned to that term in the Indenture. ------------ "Collection Account" has the meaning assigned to that term in the ------------------ Indenture. "Corporate Trust Office" has the meaning set forth in the Indenture. ---------------------- "CPUC" means the California Public Utilities Commission or any successor in ---- interest. "CPUC Regulations" has the meaning assigned to that term in the Servicing ---------------- Agreement. "Date of Breach" means, with respect to the repurchase obligation specified -------------- in Section 5.01(b), the date of breach of a representation and warranty that triggers such repurchase obligation. "Delaware Trustee" means the Person acting as Delaware trustee under the ---------------- Trust Agreement. "Expected Amortization Schedule" has the meaning assigned to that term in ------------------------------ the Servicing Agreement. "Financing Order" means the order of the CPUC, Decision 98-10-021, issued --------------- as of October 8, 1998, which became effective on November 12, 1998. "FTA Charges" means the charges permitted to be levied upon the California ----------- Customers pursuant to the Financing Order. "Indenture" means the Indenture dated as of April 9, 1999, between the Note --------- Issuer and the Note Trustee, as the same may be amended and supplemented from time to time. "Infrastructure Bank" means the California Infrastructure and Economic ------------------- Development Bank or any successor in interest. "Infrastructure Bank Issuance Resolution" means Resolution No. B99-27 --------------------------------------- adopted by the Infrastructure Bank on March 9, 1999. "Insolvency Event" means, with respect to a specified Person, (a) the ---------------- filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person's affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (b) the commencement by such Person of a voluntary case under any applicable Federal or 3 state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due, or the taking of action by such Person in furtherance of any of the foregoing. "Issuance Advice Letter" means Advice No. 206-E (U-903-E), dated March 31, ---------------------- 1999, filed with the CPUC by the Seller pursuant to the Financing Order. "Lien" means a security interest, lien, charge, pledge, equity or ---- encumbrance of any kind. "Losses" has the meaning assigned to that term in Section 5.01(e). ------ "Moody's" has the meaning assigned to that term in the Indenture. ------- "Note Issuer" has the meaning assigned to that term in the heading of this ----------- Agreement. "Note Trustee" means the Person acting as trustee under the Indenture. ------------ "Noteholders" has the meaning assigned to that term in the Indenture. ----------- "Notes" means the Series of Notes issued under the Indenture whose Series ----- Issuance Date is the date of this Agreement. "Officer's Certificate" means a certificate signed by the chairman of the --------------------- board, the president, the vice chairman of the board, any vice president, the treasurer, any assistant treasurer, the secretary or any assistant secretary of the Seller. "Opinion of Counsel" means one or more written opinions of counsel who may ------------------ be an employee of or counsel to the party providing such opinion of counsel, which counsel shall be acceptable to the party receiving such opinion of counsel. "Outstanding Amount" has the meaning assigned to that term in the ------------------ Indenture. "Overcollateralization Amount" has the meaning assigned to that term in the ---------------------------- Servicing Agreement. "Person" means any individual, corporation, limited liability company, ------ estate, partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof. "PU Code" means the California Public Utilities Code, as amended from time ------- to time. 4 "Repurchase Date" means the date that is five Business Days after the date --------------- that is (i) if the terms of Section 5.01(b)(i)(A) and Section 5.01(b)(i)(B)(ii) are applicable, two Business Days after the Date of Breach if the Seller fails to make the deposit required by such Section or 90 days after the Date of Breach if the Seller makes the deposit required by such Section, (ii) if the terms of Section 5.01(b)(ii) are applicable, 30 days after the Seller receives written notice from the Note Trustee or the Certificate Trustee or otherwise becomes aware of such breach and (iii) if the terms of Section 5.01(b)(i)(A) and Section 5.01(b)(i)(B)(i) are applicable, 90 days after the Date of Breach. "Repurchase Price" has the meaning assigned to that term in Section ---------------- 5.01(b)(i). "Seller" means Sierra Pacific Power Company and its successors in interest ------ to the extent permitted hereunder. "Seller Mortgage" means the Indenture of Mortgage, dated as of December 1, --------------- 1940, executed by Sierra Pacific Power Company, as supplemented and amended to the date hereof, in favor of The New England Trust Company and Leo W. Huegle (State Street Bank and Trust Company and Gerald R. Wheeler, by succession), as trustees, as the same may be further amended and supplemented from time to time. "Series" has the meaning set forth in the Trust Agreement. ------ "Series Issuance Date" has the meaning set forth in the Indenture. -------------------- "Servicer Default" means an event specified in Section 7.01 of the ---------------- Servicing Agreement. "Servicing Agreement" means that certain Transition Property Servicing ------------------- Agreement dated as of the date hereof between Sierra Pacific Power Company, as Servicer, and the Note Issuer, as amended and supplemented from time to time. "Statute" means Chapter 854, California Statutes of 1996 and Chapter 275, ------- California Statutes of 1997, as further amended from time to time. "STO" means the California State Treasurer's Office, as agent for sale for --- the Certificates. "Transition Costs" has the meaning assigned to that term in Section 840(f) ---------------- of the PU Code. "Transition Property" means the "Transition Property" contemplated by the ------------------- Financing Order and specifically described in the Issuance Advice Letter. "Trust" has the meaning assigned to that term in the Trust Agreement. ----- 5 "Trust Agreement" means the Amended and Restated Declaration and Agreement --------------- of Trust dated as of April 9, 1999, among the Infrastructure Bank, the Delaware Trustee and the Certificate Trustee, as the same may be further amended and supplemented from time to time. "Trust Property" has the meaning assigned to that term in the Trust -------------- Agreement. SECTION 1.02. Other Definitional Provisions. ----------------------------- (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Indenture. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) The words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Section, Schedule and Exhibit references contained in this Agreement are references to Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (d) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter forms of such terms. ARTICLE II Conveyance of Transition Property --------------------------------- SECTION 2.01. Conveyance of Transition Property. In consideration of the --------------------------------- Note Issuer's delivery to or upon the order of the Seller of $22,322,405, the Seller does hereby irrevocably sell, transfer, assign, set over and otherwise convey to the Note Issuer, without recourse (subject to the obligations herein), all right, title and interest of the Seller in and to the Transition Property (such sale, transfer, assignment, set over and conveyance of the Transition Property includes, to the fullest extent permitted by the Statute, the assignment of all revenues, collections, claims, rights, payments, money or proceeds of or arising from the FTA Charges pursuant to the Financing Order and the Issuance Advice Letter). Such sale, transfer, assignment, set over and conveyance is hereby expressly stated to be a sale and, pursuant to Section 844(a) of the PU Code, shall be treated as an absolute transfer of all of the Seller's right, title and interest (as in a true sale), and not as a pledge or other financing, of the Transition Property. This is the statement referred to in Section 844(a) of the PU Code. If such sale, transfer, assignment, set over and conveyance is held not to be a true sale as contemplated by Section 844(a) of the PU Code, then such sale, transfer, assignment, set over and conveyance shall be treated as a pledge of the Transition Property, and the Seller shall be deemed to have granted a security interest to the Note Issuer in the Transition Property. The Seller takes the position that it has no rights in the Transition Property to which such a security interest could attach because it has sold all rights in 6 the Transition Property to the Note Issuer pursuant to Section 844(a) of the PU Code. ARTICLE III Representations and Warranties of Seller ---------------------------------------- The Seller makes the following representations and warranties, as of the Closing Date, on which the Note Issuer has relied in acquiring the Transition Property. The representations and warranties shall survive the sale of the Transition Property to the Note Issuer and the pledge thereof to the Note Trustee pursuant to the Indenture. SECTION 3.01. Organization and Good Standing. The Seller is duly organized ------------------------------ and validly existing as a corporation in good standing under the laws of the State of Nevada, with the power and authority in all jurisdictions in which it operates to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted, and had at all relevant times, and has, the requisite power, authority and legal right to own the Transition Property. SECTION 3.02. Due Qualification. The Seller is duly qualified to do ----------------- business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business shall require such qualifications, licenses or approvals (except where the failure to so qualify would not be reasonably likely to have a material adverse effect on the Seller's business, operations, assets, revenues, properties or prospects). SECTION 3.03. Power and Authority. The Seller has the requisite power and ------------------- authority to execute and deliver this Agreement and to carry out its terms; the Seller has full power and authority to sell and assign the Transition Property to be sold and assigned to the Note Issuer and the Seller has duly authorized such sale and assignment to the Note Issuer by all necessary corporate action; and the execution, delivery and performance of this Agreement has been duly authorized by the Seller by all necessary corporate action. SECTION 3.04. Binding Obligation. This Agreement constitutes a legal, ------------------ valid and binding obligation of the Seller enforceable in accordance with its terms, subject to applicable insolvency, reorganization, moratorium, fraudulent transfer and other similar laws relating to or affecting creditors' rights generally from time to time in effect and to general principles of equity (including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law. SECTION 3.05. No Violation. After giving effect to the release of the ------------ lien of the Seller Mortgage on the Transition Property, the consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not conflict with, result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of incorporation or bylaws of the Seller, or any indenture, agreement or 7 other instrument to which the Seller is a party or by which it shall be bound; nor result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument; nor violate any law or any order, rule or regulation applicable to the Seller of any court or of any Federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties. SECTION 3.06. No Proceedings. There are no proceedings or investigations -------------- pending or, to the Seller's knowledge, threatened, before any court, Federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties involving or relating to the Seller or the Note Issuer or, to the Seller's knowledge, any other Person: (i) asserting the invalidity of this Agreement, the Indenture, the Trust Agreement or any of the other Basic Documents or the Notes or the Certificates, (ii) seeking to prevent the issuance of the Notes or the Certificates or the consummation of any of the transactions contemplated by this Agreement, the Indenture, the Trust Agreement or any of the other Basic Documents, (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Seller of its obligations under, or the validity or enforceability of, this Agreement, the Indenture, the Trust Agreement, any of the other Basic Documents or the Notes or the Certificates or (iv) which might adversely affect the Federal or state income tax attributes of the Notes or the Certificates. SECTION 3.07. Approvals. No approval, authorization, consent, order or --------- other action of, or filing with, any court, Federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the execution and delivery by the Seller of this Agreement, the performance by the Seller of the transactions contemplated hereby or the fulfillment by the Seller of the terms hereof, except those that have been obtained or made and those that the Seller, in its capacity as Servicer under the Servicing Agreement, is required to make in the future pursuant to Article IV of the Servicing Agreement. SECTION 3.08. The Transition Property. ----------------------- (a) Information. At the Closing Date, all information provided by the ----------- Seller to the Note Issuer with respect to the Transition Property (including the Expected Amortization Schedule, the Financing Order and the Issuance Advice Letter) is correct in all material respects. (b) Title. It is the intention of the parties hereto that the transfer ----- and assignment herein contemplated constitute a sale of the Transition Property from the Seller to the Note Issuer and that the beneficial interest in and title to the Transition Property not be part of the debtor's estate in the event of the filing of a bankruptcy petition by or against the Seller under any bankruptcy law. No portion of the Transition Property has been sold, transferred, assigned or pledged by the Seller to any Person other than the Note Issuer. At the Closing Date immediately prior to the sale hereunder and after giving effect to the release of the lien of the Seller Mortgage, the Seller owns the Transition Property, free and clear of all Liens and rights of others, no offsets, defenses or counterclaims exist or have been asserted with respect thereto, and Sierra Pacific Power 8 Company, in its capacity as Seller or Servicer, will not at any time assert any Lien against or with respect to any of the Transition Property. (c) Transfer Filings. At the Closing Date, the Transition Property has ---------------- been validly transferred and sold to the Note Issuer, the Note Issuer shall own all such Transition Property, free and clear of all Liens and rights of others, except for any statutory lien in favor of the holders of the rate reduction bonds issued pursuant to the Financing Order and the trustee or the representative for such holders pursuant to Section 843(g) of the PU Code; and all filings to be made by the Seller (including filings with the CPUC under the PU Code) necessary in any jurisdiction to give the Note Issuer a first priority perfected ownership or security interest in the Transition Property have been made (subject to any statutory lien in favor of the holders of the rate reduction bonds issued pursuant to the Financing Order and the trustee or the representative for such holders pursuant to Section 843(g) of the PU Code). No further action, other than any filings required by Sections 9-403(2)-(3), 9-306, 9-402(7) and 9-103 of the Uniform Commercial Code and Sections 843 and 844 of the PU Code, is required to maintain such first priority perfected ownership or security interest (subject to any statutory lien in favor of the holders of the rate reduction bonds issued pursuant to the Financing Order and the trustee or the representative for such holders pursuant to Section 843(g) of the PU Code). (d) Financing Order and Issuance Advice Letters; Other Approvals. At the ------------------------------------------------------------ Closing Date, under the laws of the State of California and the United States in effect on the Closing Date, (i) the Financing Order and the Issuance Advice Letter pursuant to which the Transition Property has been created have been duly authorized and adopted by the CPUC and are in full force and effect; (ii) as of the issuance of the Certificates, the Certificates are entitled to the protections provided in the first sentence and the penultimate sentence of Section 841(c) and the first sentence of Section 842(d) of the PU Code and, accordingly, the Financing Order and the Issuance Advice Letter are not revocable by the CPUC; (iii) none of the State of California, the CPUC or the Infrastructure Bank may revoke, limit, alter or modify the Transition Property, the Financing Order or the Advice Letters relating thereto, and all rights thereunder, in a manner adversely affecting the Noteholders or the Certificateholders, other than a temporary impairment described in the following sentence, until the Certificates, together with interest thereon, are fully discharged, unless adequate provision shall be made by law for the protection of the Note Issuer, the Trust and the Certificateholders; (iv) the process by which the Financing Order and the Infrastructure Bank Issuance Resolution were adopted and approved and the Issuance Advice Letter was filed, and the Financing Order, the Issuance Advice Letter and the Infrastructure Bank Issuance Resolution themselves, comply with all applicable laws, rules and regulations, and, prior to the discharge in full of the Certificates unless adequate provision shall be made by law for the protection of the Note Issuer, the Trust and the Certificateholders, no court or other administrative body can order the revocation, alteration, limitation or other impairment of the Financing Order, the Issuance Advice Letter, the Infrastructure Bank Issuance Resolution, the Transition Property or the FTA Charges or any rights arising under any of them or enjoin the performance of any obligations thereunder; and (v) no other approval, authorization, consent, order or other action of, or filing with, any court, Federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the creation of the 9 Transition Property, except those that have been obtained or made. For purposes of clause (d)(iii) above, a "temporary impairment" shall mean a breach by the -------------------- State of California of its pledge contained in Section 841(c) of the PU Code effecting a temporary impairment of the Certificateholders' rights, which under current law would be permitted if it can be shown to be necessary to advance an important public interest; such a public interest may arise in connection with a great public calamity, which might, for example, include economic upheaval or natural disasters. (e) Assumptions. At the Closing Date, the assumptions used in calculating ----------- the FTA Charges related to the Transition Property are reasonable and made in good faith. (f) Creation of Transition Property. Upon the effectiveness of the ------------------------------- Issuance Advice Letter: (i) all of the Transition Property constitutes a current property right; (ii) the Transition Property includes, without limitation, (A) the right, title and interest in and to the FTA Charges, as adjusted from time to time, (B) the right to be paid the total amounts set forth in the Issuance Advice Letter, (C) the right, title and interest in and to all revenues, collections, claims, payments, money, or proceeds of or arising from the FTA Charges set forth in the Issuance Advice Letter, and (D) all rights to obtain adjustments to the FTA Charges pursuant to the Financing Order; and (iii) the holders of the Transition Property are entitled to recover the Transition Costs described in the Financing Order or the Issuance Advice Letter in the aggregate amount equal to the principal amount of the Notes and the Certificates, all interest thereon, the Overcollateralization Amount relating to the Notes and all related fees, costs and expenses in respect of the Notes and the Certificates until they have been paid in full. SECTION 3.09. Outstanding Indenture. On or prior to the Closing Date, the --------------------- Lien of the Seller Mortgage on the Transition Property shall have been released. ARTICLE IV Covenants of the Seller ----------------------- SECTION 4.01. Corporate Existence. For so long as any of the Notes are ------------------- outstanding, the Seller (a) will keep in full force and effect its existence, rights and franchises as a corporation under the laws of the jurisdiction of its incorporation and (b) will obtain and preserve its qualification to do business, in each case, to the extent that in each such jurisdiction such existence or qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the Basic Documents to which the Seller is a party and each other instrument or agreement necessary or appropriate to the proper administration of this Agreement and the transactions contemplated hereby. SECTION 4.02. No Liens. Except for the conveyances hereunder or any -------- statutory lien under Section 843(g) of the PU Code, the Seller will not sell, pledge, assign or transfer to any other Person, or grant, create, incur, assume or suffer to exist any Lien on, any of the Transition Property, or any interest therein, and the Seller shall defend the right, title and interest of the 10 Note Issuer and the Note Trustee in, to and under the Transition Property, against all claims of third parties claiming through or under the Seller. SECTION 4.03. Delivery of Collections. If the Seller receives collections ----------------------- in respect of the FTA Charges or the proceeds thereof, the Seller agrees to pay the Servicer all payments received by the Seller in respect thereof as soon as practicable after receipt thereof by the Seller, but in no event later than two Business Days after such receipt. SECTION 4.04. Notice of Liens. The Seller shall notify the Note Issuer --------------- and the Note Trustee promptly after becoming aware of any Lien on any of the Transition Property other than the conveyances hereunder or under the Indenture or any statutory lien under Section 843(g) of the PU Code. SECTION 4.05. Compliance with Law. The Seller hereby agrees to comply ------------------- with its organizational or governing documents and all laws, treaties, rules, regulations and determinations of any governmental instrumentality applicable to the Seller, except to the extent that failure so to comply would not adversely affect the Note Issuer's or the Note Trustee's interests in the Transition Property or under any of the Basic Documents or the Seller's performance of its obligations hereunder or under any of the other Basic Documents to which it is party. SECTION 4.06. Covenants Related to Transition Property. ---------------------------------------- (a) For so long as any of the Notes are outstanding, the Seller shall treat the Notes as debt of the Note Issuer for all purposes, except for federal and state income and franchise tax purposes. (b) For so long as any of the Notes are outstanding, the Seller shall indicate in its data systems and financial statements that it is not the owner of the Transition Property. (c) For so long as any of the Notes are outstanding, the Seller shall not own or purchase any Notes or Certificates. (d) The Seller agrees that upon the sale by the Seller of the Transition Property to the Note Issuer pursuant to this Agreement, (i) to the fullest extent permitted by law, including applicable CPUC Regulations, the Note Issuer shall have all of the rights originally held by the Seller with respect to such Transition Property, including the right to exercise any and all rights and remedies to collect any amounts payable by any California Customer in respect of such Transition Property, notwithstanding any objection or direction to the contrary by the Seller and (ii) any payment by any California Customer to the Note Issuer shall discharge such California Customer's obligations in respect of such Transition Property to the extent of such payment, notwithstanding any objection or direction to the contrary by the Seller. 11 (e) For so long as any of the Notes are outstanding, (i) the Seller shall not make any statement or reference in respect of the Transition Property that is inconsistent with the ownership interest of the Note Issuer, and (ii) the Seller shall not take any action in respect of the Transition Property except solely in its capacity as the Servicer thereof pursuant to the Servicing Agreement or as otherwise contemplated by the Basic Documents. SECTION 4.07. Protection of Title. The Seller shall execute and file such ------------------- filings, including filings with the CPUC pursuant to the PU Code, and cause to be executed and filed such filings, all in such manner and in such places as may be required by law fully to preserve, maintain, and protect the interests of the Note Issuer in the Transition Property, including all filings required under the Statute relating to the transfer of the ownership or security interest in the Transition Property by the Seller to the Note Issuer. The Seller shall deliver (or cause to be delivered) to the Note Issuer file-stamped copies of, or filing receipts for, any document filed as provided above, as soon as available following such filing. The Seller shall institute any action or proceeding necessary to compel performance by the CPUC or the State of California of any of their obligations or duties under the PU Code, the Financing Order or the Issuance Advice Letter, and the Seller agrees to take such legal or administrative actions, including defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary to protect the Note Issuer and the Certificateholders from claims, state actions or other actions or proceedings of third parties which, if successfully pursued, would result in a breach of any representation set forth in Article III. The costs of any such actions or proceedings will be payable by the Seller. SECTION 4.08. Nonpetition Covenants. Notwithstanding any prior --------------------- termination of this Agreement or the Indenture, but subject to the CPUC's right to order the sequestration and payment of revenues arising with respect to the Transition Property notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to the debtor, pledgor or transferor of the Transition Property pursuant to Section 843(e) and (g) of the PU Code, the Seller shall not, prior to the date that is one year and one day after the termination of the Indenture, acquiesce, petition or otherwise invoke or cause the Note Issuer or the Trust to invoke the process of any court or government authority for the purpose of commencing or sustaining a case against the Note Issuer or the Trust under any Federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Note Issuer or the Trust or any substantial part of the property of the Note Issuer or the Trust, or ordering the winding up or liquidation of the affairs of the Note Issuer or the Trust. SECTION 4.09. Taxes. For so long as any of the Notes are outstanding, the ----- Seller shall, and shall cause each of its subsidiaries to, pay all material taxes, assessments and governmental charges imposed upon it or any of its properties or assets or with respect to any of its franchises, business, income or property before any penalty accrues thereon if the failure to pay any such taxes, assessments and governmental charges would, after any applicable grace periods, notices or other similar requirements, result in a lien on the Transition Property; provided that no such 12 tax need be paid if the Seller or one of its subsidiaries is contesting the same in good faith by appropriate proceedings promptly instituted and diligently conducted and if the Seller or such subsidiary has established appropriate reserves as shall be required in conformity with generally accepted accounting principles. ARTICLE V The Seller ---------- SECTION 5.01. Liability of Seller; Indemnities. -------------------------------- (a) The Seller shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Seller under the Agreement. (b) (i) In the event of a breach by the Seller of any representation and warranty specified in Sections 3.08(d) or 3.08(f) that has a material adverse effect on the Certificateholders, the Seller shall repurchase the Transition Property from the Note Issuer at a purchase price (the "Repurchase Price") equal to the then outstanding principal amount of ---------------- the Notes and all accrued and unpaid interest thereon as of the Repurchase Date; provided, however, that the Seller shall not be ------------ obligated to repurchase the Transition Property if (A) within 90 days after the date of the occurrence thereof such breach is cured or the Seller takes remedial action such that there is not and will not be a material adverse effect on the Certificateholders as a result of such breach and (B) either (i) if the Seller had, immediately prior to the breach, a long term debt rating of at least "A3" or the equivalent by Moody's (or such other long term debt rating as shall be approved by Moody's), the Seller enters into a binding agreement with the Note Issuer to pay any amounts necessary so that all interest payments due on the Notes during such 90-day period will be paid in full, or (ii) if the Seller does not have such a long term debt rating, the Seller deposits, within two Business Days after such breach, an amount in escrow with the Note Trustee sufficient, taking into account amounts on deposit in the Collection Account which will be available for such purpose, to pay all interest payments that will become due on the Notes during such 90-day period. The Seller will not be in breach of any representation and warranty as a result of a change in law by means of a legislative enactment, constitutional amendment or voter initiative. (ii) In the event of a breach by the Seller of any representation and warranty specified in Sections 3.01, 3.03, 3.04, 3.05, 3.08(b) or 3.08(c) that has a material and adverse effect on the Certificateholders, if within 30 days after the Seller receives written notice from the Note Trustee or the Certificate Trustee or otherwise becomes aware of such breach, such breach has not been cured and the Seller has not taken remedial action such that there is not and will not be a material adverse effect on the Certificateholders as a result of such breach, then the Seller 13 shall repurchase the Transition Property from the Note Issuer for the Repurchase Price on the Repurchase Date. (iii) Upon the payment by the Seller of the Repurchase Price pursuant to this Section 5.01(b), neither the Note Issuer nor any other Person shall have any other claims, rights or remedies against the Seller for a breach of the foregoing representations and warranties. (c) The Seller shall indemnify the Note Issuer, the Trust, the Note Trustee, the Certificate Trustee, the Delaware Trustee, the Infrastructure Bank, the STO, the Noteholders and the Certificateholders and each of their respective officers, directors, employees and agents for, and defend and hold harmless each such Person from and against, any and all taxes (other than any taxes imposed on Noteholders or Certificateholders solely as a result of their ownership of Notes or Certificates, respectively) that may at any time be imposed on or asserted against any such Person as a result of the sale of the Transition Property to the Note Issuer, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes. (d) The Seller shall indemnify the Note Issuer, the Trust, the Note Trustee, the Certificate Trustee, the Delaware Trustee, the Infrastructure Bank, the STO, the Noteholders and the Certificateholders and each of their respective officers, directors, employees and agents for, and defend and hold harmless each such Person from and against, any and all taxes (other than any taxes imposed on Noteholders or Certificateholders solely as a result of their ownership of Notes or Certificates, respectively) that may be imposed on or asserted against any such Person under existing law as of the Closing Date as a result of the issuance and sale by the Note Issuer of the Notes, the issuance and sale by the Trust of the Certificates or the other transactions contemplated herein, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes. (e) The Seller shall indemnify the Note Issuer, the Trust, the Note Trustee, the Certificate Trustee, the Delaware Trustee, the Infrastructure Bank, the STO, the Noteholders and the Certificateholders and each of their respective officers, directors, employees and agents for, and defend and hold harmless each such Person from and against, any and all liabilities, obligations, losses, claims, damages, payments, costs or expenses of any kind whatsoever (collectively, "Losses") that may be imposed on, incurred by or ------ asserted against any such Person as a result of (i) the Seller's willful misconduct, bad faith or gross negligence in the performance of its duties or observance of its covenants under this Agreement, or the Seller's reckless disregard of its obligations and duties under this Agreement or (ii) the Seller's breach of any of its representations or warranties contained in this Agreement (other than the representations and warranties specified in Sections 14 3.01, 3.03, 3.04, 3.05, 3.08(b), 3.08(c), 3.08(d) or 3.08(f) the breach of which are subject to the repurchase obligation set forth in Section 5.01(b)). (f) The Seller shall pay any and all taxes levied or assessed upon all or any part of the Trust Property based on existing law as of the Closing Date. (g) Indemnification under Sections 5.01(c) through 5.01(f) shall survive the resignation or removal of the Note Trustee, the Certificate Trustee or the Delaware Trustee and the termination of this Agreement and shall include reasonable fees and expenses of investigation and litigation (including attorneys fees and expenses). SECTION 5.02. Merger or Consolidation of, or Assumption of the Obligations ------------------------------------------------------------ of, Seller. Any Person (a) into which the Seller may be merged or consolidated, - ---------- (b) which may result from any merger or consolidation to which the Seller shall be a party or (c) which may succeed to the properties and assets of the Seller substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Seller hereunder, shall be the successor to the Seller under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (i) immediately after giving effect to such transaction, no representation or - ----------------- warranty made pursuant to Article III shall have been breached and (if the Seller is the Servicer) no Servicer Default, and no event which, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Seller shall have delivered to the Note Issuer and the Note Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with, (iii) the Seller shall have delivered to the Note Issuer and the Note Trustee an Opinion of Counsel either (A) stating that, in the opinion of such counsel, all filings to be made by the Seller, including filings with the CPUC pursuant to the PU Code, have been executed and filed that are necessary to fully preserve and protect the interest of the Note Issuer in the Transition Property and reciting the details of such filings or (B) stating that, in the opinion of such counsel, no such action shall be necessary to preserve and protect such interests, and (iv) Moody's shall have received prior written notice of such transaction. Notwithstanding anything herein to the contrary, the execution of the foregoing agreement of assumption and compliance with clauses (i), (ii), (iii) and (iv) above shall be conditions to the consummation of any transaction referred to in clauses (a), (b) or (c) above. SECTION 5.03. Limitation on Liability of Seller and Others. The Seller -------------------------------------------- and any director or officer or employee or agent of the Seller may rely in good faith on the advice of counsel or on any document of any kind, prima facie properly executed and submitted by any Person, respecting any matters arising hereunder. Subject to Section 4.07, the Seller shall not be under any obligation to appear in, prosecute or defend any legal action that shall not be incidental to its obligations under this Agreement, and that in its opinion may involve it in any expense or liability. 15 ARTICLE VI Miscellaneous Provisions ------------------------ SECTION 6.01. Amendment. This Agreement may be amended by the Seller and --------- the Note Issuer, with prior written notice given to Moody's and the prior written consent of the Note Trustee, but without the consent of any of the Noteholders or Certificateholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Noteholders or the Certificateholders; provided, however, that such action shall not, as ----------------- evidenced by an Officer's Certificate delivered to the Note Issuer and the Note Trustee, adversely affect in any material respect the interests of any Noteholder or Certificateholder. This Agreement may also be amended from time to time by the Seller and the Note Issuer, with prior written notice given to Moody's and the prior written consent of the Note Trustee and the prior written consent of the Noteholders of Notes evidencing not less than a majority of the Outstanding Amount of the Notes of all Series affected thereby, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Noteholders or the Certificateholders; provided, however, that no such amendment shall (a) increase -------- ------- or reduce in any manner the amount of, or accelerate or delay the timing of, FTA Collections or (b) reduce the aforesaid percentage of the Outstanding Amount of the Notes, the Noteholders of which are required to consent to any such amendment, without the consent of the Noteholders of all the outstanding Notes. Promptly after the execution of any such amendment or consent, the Note Issuer shall furnish written notification of the substance of such amendment or consent to the Note Trustee, the Infrastructure Bank, the STO and Moody's. Notwithstanding anything to the contrary contained herein, no such amendment may amend or in any way modify the rights of the Infrastructure Bank or the STO under this Agreement without their prior written consent. It shall not be necessary for the consent of Noteholders pursuant to this Section to approve the particular form of any proposed amendment or consent, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the execution of any amendment to this Agreement, the Note Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by this Agreement. The Note Trustee may, but shall not be obligated to, enter into any such amendment which affects the Note Trustee's own rights, duties or immunities under this Agreement or otherwise. 16 SECTION 6.02. Notices. All demands, notices and communications upon or to ------- the Seller, the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank, the STO or Moody's under this Agreement shall be in writing, personally delivered, mailed or sent by telecopy or other similar form of rapid transmission, and shall be deemed to have been duly given upon receipt (a) in the case of the Seller, to Sierra Pacific Power Company, at 6l00 Neil Road, P.O. Box 10100, Reno, Nevada 89520-3150, Attention of Treasurer, (b) in the case of the Note Issuer, to SPPC Funding LLC, 6l00 Neil Road, P.O. Box 30150, Reno, Nevada 89520-3150, Attention of President, (c) in the case of the Note Trustee, at the Corporate Trust Office, (d) in the case of the Certificate Trustee, to Bankers Trust Company of California, N.A., c/o Bankers Trust Company, Corporate Trust and Agency Services, Four Albany Street, New York, New York 10006, Attention: Structured Finance Group, (e) in the case of the Infrastructure Bank, to California Infrastructure and Economic Development Bank, c/o California Trade and Commerce Agency, 801 K Street, Suite 1700, Sacramento, CA 95814, Attention of Executive Director, (f) in the case of the STO, to the California State Treasurer's Office, 915 Capitol Mall, Room 110, Sacramento, CA 95814, Attention of Deputy Treasurer, (g) in the case of Moody's, to Moody's Investors Service, Inc., ABS Monitoring Department, 99 Church Street, New York, New York 10007, or (h) as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. SECTION 6.03. Assignment. Notwithstanding anything to the contrary ---------- contained herein, except as provided in Section 5.02, this Agreement may not be assigned by the Seller. SECTION 6.04. Limitations on Rights of Others. The provisions of this ------------------------------- Agreement are solely for the benefit of the Seller, the Note Issuer, the Note Trustee, the Trust, the Certificate Trustee, the Delaware Trustee, the Infrastructure Bank, the STO, the Noteholders and the Certificateholders and nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Transition Property or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. SECTION 6.05. Severability. Any provision of this Agreement that is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 6.06. Separate Counterparts. This Agreement may be executed by --------------------- the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 6.07. Headings. The headings of the various Articles and Sections -------- herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 17 SECTION 6.08. Governing Law. This Agreement shall be construed in ------------- accordance with the laws of the State of California, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. SECTION 6.09. Assignment to Note Trustee. The Seller hereby acknowledges -------------------------- and consents to any mortgage, pledge, assignment and grant of a security interest by the Note Issuer to the Note Trustee pursuant to the Indenture for the benefit of the Noteholders of all right, title and interest of the Note Issuer in, to and under the Transition Property and the proceeds thereof and the assignment of any or all of the Note Issuer's rights and obligations hereunder to the Note Trustee. SECTION 6.10. Limitation of Liability. It is expressly understood and ----------------------- agreed by the parties hereto that (a) this Agreement is executed and delivered by Bankers Trust Company of California, N.A., not individually or personally but solely as Note Trustee on behalf of the holders of the Notes, in the exercise of the powers and authority conferred and vested in it, (b) the representations, undertakings and agreements herein made by the Note Trustee on behalf of the holders of the Notes are made and intended not as personal representations, undertakings and agreements by Bankers Trust Company of California, N.A., but are made and intended for the purpose of binding only the holders of the Notes, (c) nothing herein contained shall be construed as creating any liability on Bankers Trust Company of California, N.A., individually or personally, to perform any covenant either expressed or implied contained herein, except in its capacity as Note Trustee, all such liability, if any, being expressly waived by the parties who are signatories to this Agreement and by any Person claiming by, through or under such parties and (d) under no circumstances shall Bankers Trust Company of California, N.A., be personally liable for the payment of any indebtedness or expenses of the holders of the Notes or be personally liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Note Trustee under this Agreement; provided, however, -------- ------- that this provision shall not protect Bankers Trust Company of California, N.A. against any liability that would otherwise be imposed by reason of willful misconduct, bad faith or gross negligence in the performance of duties or by reason of reckless disregard of obligations and duties under this Agreement. 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers as of the day and year first above written. SPPC FUNDING LLC, Note Issuer, By MARK A. RUELLE ---------------------------- Name: Mark A. Ruelle Title: Treasurer SIERRA PACIFIC POWER COMPANY, Seller, By RICHARD K. ATKINSON ----------------------------- Name: Richard K. Atkinson Title: Assistant Treasurer Acknowledged and Accepted: BANKERS TRUST COMPANY OF CALIFORNIA, N.A., not in its individual capacity but solely as Note Trustee, By PETER BECKER -------------- Name: Peter Becker Title: Assistant Vice President 19 EX-10.C 10 TRANSITION PROPERTY SERVICING AGREEMENT EXHIBIT (10)(C) ================================================================================ TRANSITION PROPERTY SERVICING AGREEMENT between SPPC FUNDING LLC Note Issuer and SIERRA PACIFIC POWER COMPANY Servicer Dated as of April 9, 1999 ================================================================================ 1 TABLE OF CONTENTS
Page ---- ARTICLE I Definitions SECTION 1.01. Definitions.................................................... 1 SECTION 1.02. Other Definitional Provisions.................................. 13 ARTICLE II Appointment and Authorization SECTION 2.01. Appointment of Servicer; Acceptance of Appointment............. 14 SECTION 2.02. Authorization.................................................. 14 SECTION 2.03. Dominion and Control Over the Transition Property.............. 15 ARTICLE III Billing Services SECTION 3.01. Duties of Servicer............................................. 16 SECTION 3.02. Servicing and Maintenance Standards............................ 18 SECTION 3.03. Certificate of Compliance...................................... 18 SECTION 3.04. Annual Report by Independent Public Accountants................ 19 ARTICLE IV Services Related to True-Up Adjustments SECTION 4.01. Periodic True-Up Adjustments................................... 20 SECTION 4.02. Limitation of Liability........................................ 26 ARTICLE V The Transition Property SECTION 5.01. Custody of Transition Property Records......................... 27 SECTION 5.02. Duties of Servicer as Custodian................................ 28 SECTION 5.03. Instructions; Authority to Act................................. 30 SECTION 5.04. Custodian's Indemnification.................................... 30 SECTION 5.05. Effective Period and Termination............................... 31 SECTION 5.06. General Indemnification of Note Trustee, Certificate Trustee and the Delaware Trustee.................................... 31 ARTICLE VI The Servicer SECTION 6.01. Representations and Warranties of Servicer..................... 32 SECTION 6.02. Indemnities of Servicer; Release of Claims..................... 36 SECTION 6.03. Merger or Consolidation of, or Assumption of the Obligations of, Servicer..................................... 37 SECTION 6.04. Limitation on Liability of Servicer and Others................. 38
2 SECTION 6.05. Sierra Pacific Power Company Not to Resign as Servicer......... 39 SECTION 6.06. Servicing Compensation......................................... 40 SECTION 6.07. Compliance with Applicable Law................................. 41 SECTION 6.08. Access to Certain Records and Information Regarding Transition Property............................................ 41 SECTION 6.09. Appointments................................................... 42 SECTION 6.10. No Servicer Advances........................................... 42 SECTION 6.11. Remittances.................................................... 42 ARTICLE VII Default SECTION 7.01. Servicer Default............................................... 45 SECTION 7.02. Appointment of Successor....................................... 48 SECTION 7.03. Waiver of Past Defaults........................................ 49 SECTION 7.04. Notice of Servicer Default..................................... 49 ARTICLE VIII Miscellaneous Provisions SECTION 8.01. Amendment...................................................... 50 SECTION 8.02. Protection of Title to Trust................................... 52 SECTION 8.03. Notices........................................................ 52 SECTION 8.04. Assignment..................................................... 53 SECTION 8.05. Limitations on Rights of Others................................ 53 SECTION 8.06. Severability................................................... 54 SECTION 8.07. Separate Counterparts.......................................... 54 SECTION 8.08. Headings....................................................... 54 SECTION 8.09. Governing Law.................................................. 54 SECTION 8.10. Assignment to Note Trustee..................................... 54 SECTION 8.11. Nonpetition Covenants.......................................... 54 SECTION 8.12. Limitation of Liability........................................ 55
Annexes ------- Annex I Servicing Procedures Schedule 6 to Annex I Calculation of Aggregate Remittance Amount Annex II Routine Quarterly True-Up Adjustments Exhibits and Schedules ---------------------- Exhibit A Form of Monthly Servicer's Certificate Exhibit B Form of Certificate of Compliance Exhibit C Form of Routine Annual True-Up Mechanism Advice Letter Exhibit D Form of Anniversary True-Up Mechanism Advice Letter Exhibit E Form of Quarterly Servicer's Certificate Schedule 4.01(a) Expected Amortization Schedule 3 TRANSITION PROPERTY SERVICING AGREEMENT TRANSITION PROPERTY SERVICING AGREEMENT, dated as of April 9, 1999, between SPPC FUNDING LLC, a Delaware limited liability company (the "Note Issuer"), and ----------- SIERRA PACIFIC POWER COMPANY, a Nevada corporation, as Servicer (the "Servicer"). -------- RECITALS A. Pursuant to the Statute and the Financing Order, the Seller and the Note Issuer are concurrently entering into the Sale Agreement pursuant to which the Seller is selling to the Note Issuer the Transition Property created pursuant to the PU Code, the Financing Order and the Issuance Advice Letter described in such agreement, and the Seller may sell other Transition Property to the Note Issuer pursuant to Subsequent Sale Agreements. B. In connection with its ownership of the Transition Property and in order to collect the associated FTA Charges, the Note Issuer desires to engage the Servicer to carry out the functions described herein. The Servicer currently performs similar functions for itself with respect to its own charges to its customers and may in the future perform for others. In addition, the Note Issuer desires to engage the Servicer to act on its behalf in obtaining True-Up Adjustments from the CPUC. The Servicer desires to perform all of these activities on behalf of the Note Issuer. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 4 ARTICLE I Definitions ----------- SECTION 1.01. Definitions. Whenever used in this Agreement, the following ------------ ----------- words and phrases shall have the following meanings: "Actual FTA Payments" means the actual FTA Payments received by the ------------------- Servicer attributable to a particular Billing Period. "Advice Letter" means any filing made to the CPUC by the Servicer on behalf ------------- of the Note Issuer with respect to the FTA Charges or any True-Up Adjustment in the form of an advice letter, including an Issuance Advice Letter, a Routine Annual True-Up Mechanism Advice Letter, an Anniversary True-Up Mechanism Advice Letter or a Non-Routine True-Up Mechanism Advice Letter. "Aggregate Remittance Amount" has the meaning set forth in Annex I hereto. --------------------------- "Agreement" means this Transition Property Servicing Agreement, together --------- with all Exhibits, Schedules, Annexes and Attachments hereto, as the same may be amended and supplemented from time to time. "Anniversary True-Up Mechanism Advice Letter" means an Advice Letter filed ------------------------------------------- with the CPUC at least fifteen days prior to the Financing Order Anniversary Date in respect of a True-Up Adjustment, substantially in the form of Exhibit D hereto. Any True-Up Adjustment required as a result of the Anniversary True-Up Mechanism Advice Letter will become effective on the date specified by the CPUC in accordance with the Financing Order. 5 "Annual Accountant's Report" has the meaning set forth in Section 3.04. -------------------------- "Annual Adjustment Filing Date" means each December 15, from and including ----------------------------- December 15, 1999 to and including the last December 15 preceding the Retirement of the Notes; provided, however, that if any such day is not a Servicer Business Day, "Annual Adjustment Filing Date" shall mean the Servicer Business Day immediately preceding such day. "Applicable ESP" means, with respect to each California Customer, the ESP, -------------- if any, providing "direct access" service to that California Customer. "Basic Documents" has the meaning set forth in the Indenture. --------------- "Billing Period" means a calendar month. -------------- "Bills" means each of the regular monthly bills, the summary bills, the ----- opening bills and the closing bills issued to California Customers or ESPs by Sierra Pacific Power Company on its own behalf and in its capacity as Servicer. "Business Day" has the meaning assigned to that term in the Indenture. ------------ "California Customers" means existing and future California Residential -------------------- Customers and California Small Commercial Customers. "California Residential Customers" means the existing and future -------------------------------- residential consumers of electricity, as identified in the Financing Order, located in the service territory in California in which the Seller provided electricity services as of December 20, 1995. "California Small Commercial Customers" means the existing and future small ------------------------------------- commercial consumers of electricity, as identified in the Financing Order, located in the 6 service territory in California in which the Seller provided electricity services as of December 20, 1995. "Capital Subaccount" has the meaning set forth in the Indenture. ------------------ "Certificate of Compliance" has the meaning set forth in Section 3.03. ------------------------- "Certificate Trustee" means the Person acting as certificate trustee under ------------------- the Trust Agreement. "Certificateholder" has the meaning set forth in the Trust Agreement. ----------------- "Certificates" has the meaning set forth in the Trust Agreement. ------------ "Closing Date" has the meaning set forth in the Indenture. ------------ "Collection Account" has the meaning set forth in the Indenture. ------------------ "Collection Period" means the calendar month immediately preceding the ----------------- respective Remittance Date. "Collections Curves" means the Daily Collections Curve together with the ------------------ Monthly Collections Curve. "Consolidated ESP Billing" has the meaning set forth in Annex I hereto. ------------------------ "Corporate Trust Office" has the meaning set forth in the Indenture. ---------------------- "CPUC" means the California Public Utilities Commission or any successor ---- governmental agency that has regulatory authority over the True-Up Adjustments contemplated by the Statute. "CPUC Regulations" means all regulations, rules, tariffs and laws ---------------- applicable to public utilities or ESPs, as the case may be, and promulgated by, enforced by or otherwise within the jurisdiction of the CPUC. 7 "Current Billing Period" has the meaning set forth in Annex I hereto. ---------------------- "Daily Collections Curve" has the meaning set forth in Annex I hereto. ----------------------- "Daily Remittance" has the meaning set forth in Section 6.11(b). ---------------- "Delaware Trustee" means the Person acting as Delaware trustee under the ---------------- Trust Agreement. "ESP" means an alternative energy service provider who has entered into an --- ESP Service Agreement with the Seller. "ESP Service Agreement" means an agreement between an ESP and the Seller --------------------- for the provision of "direct access" service to customers in accordance with CPUC decisions. "Estimated FTA Collection" has the meaning set forth in Annex I hereto. ------------------------ "Estimated FTA Payments" means the sum of the amounts remitted with respect ---------------------- to a Billing Period during the six months following such Billing Period based on the Collections Curves. "Excess Remittance" means the amount, if any, calculated for a particular ----------------- Remittance Date, by which (i) all Estimated FTA Payments remitted to the Collection Account on and prior to such Remittance Date with respect to the FTA Charges billed to California Customers during the sixth preceding Billing Period exceed (ii) Actual FTA Payments received by the Servicer attributable to such Billing Period. "Expected Amortization Schedule" means Schedule 4.01(a) hereto, as the same ------------------------------ may be amended from time to time pursuant to Section 4.01(a). "Final Maturity Date" has the meaning set forth in the Indenture. ------------------- 8 "Financing Order" means the order of the CPUC, Decision 98-10-021, issued --------------- as of October 8, 1998, the terms and conditions of which were consented to by Sierra Pacific Company on November 12, 1998. "Financing Order Anniversary Date" means October 8, 1998 of each year. -------------------------------- "FTA Charges" means the charges permitted to be levied upon the California ----------- Customers pursuant to the Financing Order. "FTA Collections" means FTA Payments received by the Servicer which are --------------- remitted to the Collection Account. "FTA Effective Date" means the date on which the initial FTA Charges go ------------------ into effect pursuant to the terms of the Financing Order and the first Issuance Advice Letter. "FTA End Date" means, depending on the context in which used, either (i) ------------ the date on which specific FTA Charges end because such FTA Charges have been replaced with revised FTA Charges or (ii) the FTA Termination Date. "FTA Payments" means the payments made by California Customers based on the ------------ FTA Charges. "FTA Start Date" means, depending on the context in which used, either (i) -------------- the FTA Effective Date or (ii) the date on which specific revised FTA Charges go into effect to replace previously existing FTA Charges. "FTA Termination Date" means the date on which the FTA Charges will cease -------------------- to be billed pursuant to the terms of the Financing Order, provided that the Notes and the Certificates shall have been paid in full. "General Subaccount" has the meaning set forth in the Indenture. ------------------ 9 "Infrastructure Bank" means the California Infrastructure and Economic ------------------- Development Bank or any successor in interest. "Indenture" means the Indenture dated as of April 9, 1999, between the Note --------- Issuer and the Note Trustee, as the same may be amended and supplemented from time to time. "Initial Transition Property" means the Transition Property described in --------------------------- the Sale Agreement. "Insolvency Event" means, with respect to a specified Person, (a) the ---------------- filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person's affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days or (b) the commencement by such Person of a voluntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due, or the taking of action by such Person in furtherance of any of the foregoing. 10 "Issuance Advice Letter" means an Advice Letter submitted to the CPUC in ---------------------- connection with and immediately prior to the issuance of a Series of Notes, which Advice Letter becomes effective five Business Days after filing pursuant to the terms of the Financing Order. The first Issuance Advice Letter will establish the initial FTA Charges, and subsequent Issuance Advice Letters will modify the FTA Charges to support the issuance of additional Series of Notes. "Lien" means a security interest, lien, charge, pledge, equity or ---- encumbrance of any kind. "Losses" has the meaning set forth in Section 5.04. ------ "Monthly Collections Curve" has the meaning set forth in Annex I hereto. ------------------------- "Monthly Servicer's Certificate" means a certificate, substantially in the ------------------------------ form of Exhibit A hereto, completed and executed by a Responsible Officer of the Servicer pursuant to Section 3.01(b)(i). "Moody's" has the meaning set forth in the Indenture. ------- "Non-Routine True-Up Adjustment" has the meaning set forth in Section ------------------------------ 4.01(c)(i). "Non-Routine True-Up Mechanism Advice Letter" means an Advice Letter filed ------------------------------------------- with the CPUC in accordance with the Financing Order with respect to any Non- Routine True-Up Adjustment, pursuant to which the related Non-Routine True-Up Adjustment generally will become effective at the beginning of the first Quarter that is at least 90 days after filing. "Note Issuer" means SPPC Funding LLC, a Delaware limited liability company. ----------- 11 "Note Trustee" means the Person acting as trustee under the Indenture, its ------------ successors in interest and any successor trustee under the Indenture. "Noteholder" has the meaning set forth in the Indenture. ---------- "Notes" has the meaning set forth in the Indenture. ----- "Officer's Certificate" means a certificate signed by a Responsible --------------------- Officer. "Operating Expense" shall have the meaning set forth in the Indenture. ----------------- "Opinion of Counsel" means one or more written opinions of counsel who may ------------------ be employees of or counsel to the party providing such opinion(s) of counsel, which counsel shall be acceptable to the party receiving such opinion(s) of counsel. "Outstanding Amount" has the meaning set forth in the Indenture. ------------------ "Overcollateralization Amount" means, with respect to any Series of Notes, ---------------------------- the additional amount specified in the Issuance Advice Letter relating to such Series of Notes that the owner of the Transition Property is entitled to collect pursuant to the Financing Order to enhance the likelihood that payments on the Notes will be made in accordance with the Expected Amortization Schedule. "Overcollateralization Subaccount" has the meaning set forth in the -------------------------------- Indenture. "Payment Date" has the meaning set forth in the Indenture. ------------ "Person" has the meaning set forth in the Indenture. ------ "Principal Balance" means, as of any Payment Date, the sum of the ----------------- outstanding principal amount of each Series of Notes. 12 "Projected Principal Balance" means, as of any Payment Date, the sum of the --------------------------- projected outstanding principal amount of each Series of Notes for such Payment Date set forth in the Expected Amortization Schedule. "PU Code" means the California Public Utilities Code, as amended from time ------- to time. "Quarter" means each calendar quarter, specifically: ------- January 1 to and including March 31; April 1 to and including June 30; July 1 to and including September 30; and October 1 to and including December 31. "Quarterly Servicer's Certificate" means a certificate, substantially in -------------------------------- the form of Exhibit E hereto, completed and executed by a Responsible Officer of the Servicer pursuant to Section 4.01(d)(ii). "Rating Agency Condition" has the meaning set forth in the Indenture. ----------------------- "Released Parties" has the meaning set forth in Section 6.02. ---------------- "Remittance Date" means the eighteenth day of each calendar month or, if --------------- such day is not a Business Day, the next succeeding Business Day, commencing on May 18, 1999. "Remittance Shortfall" means the amount, if any, calculated for a -------------------- particular Remittance Date, by which (i) Actual FTA Payments received by the Servicer attributable to FTA Charges billed to California Customers during the sixth preceding Billing Period exceed (ii) all Estimated FTA Payments remitted to the Collection Account on and prior to such Remittance Date with respect to such Billing Period. 13 "Required Capital Level" means, as of any Payment Date, the sum of 0.5 ---------------------- percent of the initial principal amount of each then-outstanding Series of Notes issued pursuant to the Indenture prior to that Payment Date. "Required Overcollateralization Level" means, as of any Payment Date, the ------------------------------------ amount required to be on deposit in the Overcollateralization Subaccount as specified in each Series Supplement. "Reserve Subaccount" has the meaning set forth in the Indenture. ------------------ "Responsible Officer" means the chairman of the board, the chief executive ------------------- officer, the president, the vice chairman of the board, any vice president, the treasurer, any assistant treasurer, the secretary, any assistant secretary or the controller of the Servicer. "Retirement of the Notes" means the day on which the final distribution is ----------------------- made to the Note Trustee in respect of the last outstanding Note. "Routine Annual True-Up Mechanism Advice Letter" means an Advice Letter ---------------------------------------------- filed with the CPUC at least fifteen days prior to the end of each calendar year in respect of an annual True-Up Adjustment, substantially in the form of Exhibit C hereto. The Routine Annual True-Up Mechanism Advice Letter will become effective on the first calendar day of the next calendar year. "Sale Agreement" means the Transition Property Purchase and Sale Agreement, -------------- dated as of the date hereof, between Sierra Pacific Power Company and the Note Issuer, as amended and supplemented from time to time. "Scheduled Maturity Date" has the meaning set forth in the Indenture. ----------------------- 14 "Seller" means Sierra Pacific Power Company and its successors in interest ------ to the extent permitted under the Sale Agreement. "Seller Mortgage" means the Indenture of Mortgage, dated as of December 1, --------------- 1940, executed by Sierra Pacific Power Company, as supplemented and amended to the date hereof, in favor of The New England Trust Company and Leo W. Huegle (State Street Bank and Trust Company and Gerald R. Wheeler, by succession), as trustees, as the same may be further amended and supplemented from time to time. "Series" has the meaning set forth in the Indenture. ------ "Series Issuance Date" has the meaning set forth in the Indenture. -------------------- "Series Supplement" has the meaning set forth in the Indenture. ----------------- "Servicer" means Sierra Pacific Power Company, as the servicer of the -------- Transition Property, and each successor to Sierra Pacific Power Company (in the same capacity) pursuant to Section 6.03 or 7.02. "Servicer Business Day" means any Business Day on which the Servicer's --------------------- offices in the State of Nevada are open for business. "Servicer Default" means an event specified in Section 7.01. ---------------- "Servicing Fee" means the fee payable on each Payment Date to the Servicer ------------- for services rendered during the period from, but not including, the preceding Payment Date to and including the current Payment Date, determined pursuant to Section 6.06. "Statute" means Chapter 854, California Statutes of 1996 and Chapter 275, ------- California Statutes of 1997, as further amended from time to time. 15 "STO" means the California State Treasurer's Office, as agent for sale of --- the Certificates. "Subsequent Sale Agreement" has the meaning assigned to that term in the ------------------------- definition of Subsequent Transition Property. "Subsequent Sale Date" means any date on which Subsequent Transition -------------------- Property is to be sold to the Note Issuer pursuant to a Subsequent Sale Agreement. "Subsequent Transition Property" means any transition property (as defined ------------------------------ in Section 840 of the PU Code) created under the PU Code and the Financing Order and specifically described in the related Issuance Advice Letter and sold to the Note Issuer by the Seller pursuant to an agreement substantially similar to the Sale Agreement (a "Subsequent Sale Agreement"). ------------------------- "Termination Notice" has the meaning assigned to that term in Section 7.01. ------------------ "Transition Costs" has the meaning assigned to that term in Section 840(f) ---------------- of the PU Code. "Transition Property" means the Initial Transition Property and, from and ------------------- after the applicable Subsequent Sale Date therefor, any Subsequent Transition Property. "Transition Property Records" has the meaning assigned to that term in --------------------------- Section 5.01. "True-Up Adjustment" means each adjustment to the FTA Charges made pursuant ------------------ to the terms of the Financing Order and in accordance with Section 4.01 hereof or in connection with the conveyance to the Note Issuer of Subsequent Transition Property. "Trust" has the meaning set forth in the Trust Agreement. ----- 16 "Trust Agreement" means the Amended and Restated Declaration and Agreement --------------- of Trust dated as of April 9, 1999, among the Infrastructure Bank, the Delaware Trustee and the Certificate Trustee, as the same may be further amended and supplemented from time to time. "Trust Officer" means any officer assigned to the Corporate Trust Office, ------------- including any managing director, vice president, assistant vice president, assistant treasurer, assistant secretary or any other officer of the Note Trustee customarily performing functions similar to those performed by any of the above designated officers and having direct responsibility for the administration of this Agreement, and also, with respect to a particular matter, any other officer, to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. SECTION 1.02. Other Definitional Provisions. ------------ ----------------------------- (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Indenture. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) The words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Section, Schedule, Exhibit, Annex and Attachment references contained in this Agreement are references to Sections, Schedules, Exhibits, 17 Annexes and Attachments in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation." (d) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter forms of such terms. ARTICLE II ---------- Appointment and Authorization ----------------------------- SECTION 2.01. Appointment of Servicer; Acceptance of Appointment. Subject ------------ -------------------------------------------------- to Section 6.05 and Article 7, the Note Issuer hereby appoints the Servicer, and the Servicer hereby accepts such appointment, to perform the Servicer's obligations pursuant to this Agreement on behalf of and for the benefit of the Note Issuer in accordance with the terms of this Agreement and applicable law. This appointment and the Servicer's acceptance thereof may not be revoked except in accordance with the express terms of this Agreement. SECTION 2.02. Authorization. With respect to all or any portion of the ------------ ------------- Transition Property, the Servicer shall be, and hereby is, authorized and empowered by the Note Issuer (a) to execute and deliver, on behalf of itself and/or the Note Issuer, as the case may be, any and all instruments, documents or notices, and (b) on behalf of itself and/or the Note Issuer, as the case may be, to make any filing and participate in proceedings of any kind with any governmental authorities, including with the CPUC. The Note Issuer shall furnish the Servicer with such documents as have been prepared by the Servicer for execution by the Note Issuer and with such other documents as may be in the Note Issuer's possession, in each case, as necessary or appropriate to enable the Servicer to carry out its 18 servicing and administrative duties hereunder. Upon the written request of the Servicer, the Note Issuer shall furnish the Servicer with any powers of attorney or other documents necessary or appropriate to enable the Servicer to carry out its duties hereunder. SECTION 2.03. Dominion and Control Over the Transition Property. ------------ ------------------------------------------------- Notwithstanding any other provision herein, the Servicer and the Note Issuer agree that the Note Issuer shall have dominion and control over the Transition Property, and the Servicer, in accordance with the terms hereof, is acting solely as the servicing agent and custodian for the Note Issuer with respect to the Transition Property and the Transition Property Records. The Servicer hereby agrees that it shall not take any action that is not authorized by this Agreement, that is not consistent with its customary procedures and practices, or that shall impair the rights of the Note Issuer in the Transition Property, in each case unless such action is required by law or court or regulatory order. ARTICLE III ----------- Billing Services ---------------- SECTION 3.01. Duties of Servicer. The Servicer, as agent for the Note ------------ ------------------ Issuer, shall have the following duties: (a) Duties of Servicer Generally. The Servicer's duties in general shall ---------------------------- include management, servicing and administration of the Transition Property; obtaining meter reads, calculating usage, billing, collections and posting of all payments in respect of the Transition Property; responding to inquiries by California Customers, the CPUC, or any federal, local or other state governmental authorities with respect to the Transition Property; delivering Bills to California Customers and ESPs, processing and depositing 19 collections and making periodic remittances; furnishing periodic reports to the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's; and taking action in connection with True-Up Adjustments as set forth herein. Certain of the duties set forth above may be performed by ESPs pursuant to ESP Service Agreements. Anything to the contrary notwithstanding, the duties of the Servicer set forth in this Agreement shall be qualified in their entirety by any CPUC Regulations as in effect at the time such duties are to be performed. Without limiting the generality of this Section 3.01(a), in furtherance of the foregoing, the Servicer hereby agrees that it shall also have, and shall comply with, the duties and responsibilities relating to data acquisition, usage and bill calculation, billing, customer service functions, collections, payment processing and remittance set forth in Annex I hereto. (b) Reporting Functions. ------------------- (i) Monthly Servicer's Certificate. On or before each Remittance ------------------------------ Date, the Servicer shall prepare and deliver to the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's a written report substantially in the form of Exhibit A hereto (a "Monthly Servicer's ------------------ Certificate") setting forth certain information relating to FTA Payments - ----------- received by the Servicer during the Collection Period preceding such Remittance Date. (ii) Notification of Laws and Regulations. The Servicer shall ------------------------------------ immediately notify the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's in writing of any laws or CPUC Regulations hereafter promulgated that have 20 a material adverse effect on the Servicer's ability to perform its duties under this Agreement. (iii) Other Information. Upon the reasonable request of the Note ----------------- Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank or Moody's, the Servicer shall provide to such Note Issuer, Note Trustee, Certificate Trustee, Infrastructure Bank or Moody's, as the case may be, any public financial information in respect of the Servicer, or any material information regarding the Transition Property to the extent it is reasonably available to the Servicer, as may be reasonably necessary and permitted by law for the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank or Moody's to monitor the performance by the Servicer hereunder. In addition, for so long as any of the Notes of any Series are outstanding, the Servicer shall provide the Note Issuer, the Note Trustee and the Certificate Trustee, within a reasonable time after written request therefor, any information available to the Servicer or reasonably obtainable by it that is necessary to calculate the FTA Charges applicable to each class of California Customer. (iv) Preparation of Reports of the Note Issuer. The Servicer shall ----------------------------------------- prepare any reports required to be filed by the Note Issuer as described in Section 3.07 of the Indenture. SECTION 3.02. Servicing and Maintenance Standards. On behalf of the Note ------------ ----------------------------------- Issuer, the Servicer shall (a) manage, service, administer and make collections in respect of the Transition Property with reasonable care and in accordance with applicable law, including all applicable CPUC Regulations and guidelines, using the same degree of care and diligence that the Servicer exercises with respect to similar assets for its own account 21 and, if applicable, for others; (b) follow customary standards, policies and procedures for the industry in performing its duties as Servicer; (c) use all reasonable efforts, consistent with its customary servicing procedures, to enforce, and maintain rights in respect of, the Transition Property; and (d) comply with all laws and regulations applicable to and binding on it relating to the Transition Property. The Servicer shall follow such customary and usual practices and procedures as it shall deem necessary or advisable in its servicing of all or any portion of the Transition Property, which, in the Servicer's judgment, may include the taking of legal action. SECTION 3.03. Certificate of Compliance. The Servicer shall deliver to ------------ ------------------------- the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's on or before September 30 of each year, commencing September 30, 1999 to and including the September 30 succeeding the Retirement of the Notes, an Officer's Certificate substantially in the form of Exhibit B hereto (a "Certificate of Compliance"), stating that (i) a review of the activities of the ------------------------- Servicer during the twelve months ended the preceding June 30 (or, in the case of the first Certificate of Compliance to be delivered on or before September 30, 1999, the period of time from the date of this Agreement until June 30, 1999) and of its performance under this Agreement has been made under such officer's supervision and (ii) to the best of such officer's knowledge, based on such review, the Servicer has fulfilled all of its obligations in all material respects under this Agreement throughout such twelve months (or, in the case of the Certificate of Compliance to be delivered on or before September 30, 1999, the period of time from the date of this Agreement until June 30, 1999), or, if there has been a default in the fulfillment of any such 22 material obligation, specifying each such material default known to such officer and the nature and status thereof. SECTION 3.04. Annual Report by Independent Public Accountants. (a) The ------------ ----------------------------------------------- Servicer shall cause a firm of independent certified public accountants (which may provide other services to the Servicer or the Seller) to prepare, and the Servicer shall deliver to the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's, a report addressed to the Servicer (the "Annual Accountant's Report"), which may be included as part of the -------------------------- Servicer's customary auditing activities, for the information and use of the Note Issuer, the Note Trustee, the Certificate Trustee and the Infrastructure Bank on or before September 30 of each year, beginning September 30, 1999 to and including the September 30 succeeding the Retirement of the Notes, to the effect that such firm has performed certain procedures in connection with the Servicer's compliance with its obligations under this Agreement during the preceding twelve months ended June 30 (or, in the case of the first Annual Accountant's Report to be delivered on or before September 30, 1999, the period of time from the date of this Agreement until June 30, 1999), identifying the results of such procedures and including any exceptions noted. In the event that such accounting firm requires the Note Trustee or the Certificate Trustee to agree or consent to the procedures performed by such firm, the Note Issuer shall direct the Note Trustee or the Certificate Trustee in writing to so agree; it being understood and agreed that the Note Trustee or the Certificate Trustee, as the case may be, will deliver such letter of agreement or consent in conclusive reliance upon the direction of the Note Issuer, and neither the Note Trustee nor the Certificate Trustee will make any independent 23 inquiry or investigation as to, and shall have no obligation or liability in respect of, the sufficiency, validity or correctness of such procedures. (b) The Annual Accountant's Report shall also indicate that the accounting firm providing such report is independent of the Servicer within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. ARTICLE IV ---------- Services Related to True-Up Adjustments --------------------------------------- SECTION 4.01. Periodic True-Up Adjustments. From time to time, until the ------------ ---------------------------- Retirement of the Notes, the Servicer shall identify the need for True-Up Adjustments and shall take all reasonable action to obtain and implement such True-Up Adjustments, all in accordance with the following: (a) Expected Amortization Schedule. The initial Expected Amortization ------------------------------ Schedule is attached hereto as Schedule 4.01(a). In connection with the issuance by the Note Issuer of any additional Series of Notes after the Closing Date, the Servicer, on or prior to the Series Issuance Date therefor, shall revise the Expected Amortization Schedule to add the requisite information for each new Series of Notes and set forth, as of each Payment Date through the scheduled Retirement of the Notes, the aggregate principal amounts of the Notes of all Series, including such additional Series, expected to be outstanding on such Payment Date. If the Expected Amortization Schedule is revised as set forth above, the Servicer shall send a copy of such revised Expected Amortization Schedule to the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's promptly thereafter. 24 (b) Routine True-Up Adjustments and Yearly Filings. ---------------------------------------------- (i) Routine Yearly True-Up Adjustments and Filings. ---------------------------------------------- (1) Each year on or immediately before the Annual Adjustment Filing Date, the Servicer shall: (A) estimate collections through the December 31 immediately following such Annual Adjustment Filing Date and through December 31 of the year following the year of such Annual Adjustment Filing Date; (B) update the assumptions underlying the FTA Charges, including energy usage volume, the rate of delinquencies and write-offs, estimated expenses and fees of the Note Issuer, the Trust and the Infrastructure Bank to the extent not fixed, and the Collections Curves; (C) determine the revised FTA Charges that, together with the funds on deposit in the Reserve Subaccount, would restore: (1) the Principal Balance to the Projected Principal Balance, (2) the balance in the Overcollateralization Subaccount to the Required Overcollateralization Level and (3) the balance in the Capital Subaccount to the Required Capital Level, in each case within twelve months after such revised FTA Charges go into effect (and with respect to any True-Up Adjustments occurring after the last Scheduled Maturity Date for any Series, determine the revised FTA Charges that would be sufficient to retire the unpaid Principal Balance within the earlier of (x) a date which is not more than twelve months after the Scheduled Maturity Date and (y) the last Final Maturity Date for such Series); (D) file a Routine Annual True-Up Mechanism Advice Letter with the CPUC, substantially in the form attached hereto as Exhibit C, to notify the CPUC of the FTA Charges for the coming year; and (E) take all reasonable actions and make all reasonable efforts to secure such True-Up Adjustment and to enforce the provisions of the 25 Statute that obligate the CPUC to approve rates at levels sufficient to recover the FTA Payments in accordance with the Expected Amortization Schedule. (2) Each year on or immediately before September 23, which is the date that is fifteen days before the Financing Order Anniversary Date (or if such date is not a Servicer Business Day, on the Servicer Business Day immediately preceding such date), the Servicer shall: (A) if required by the Servicer in its judgment or found to be necessary by the CPUC, estimate collections through the end of the Quarter in which the Financing Order Anniversary Date occurs; (B) if required by the Servicer in its judgment or found to be necessary by the CPUC, update the assumptions underlying the FTA Charges, including energy usage volume, the rate of delinquencies and write- offs, and estimated expenses and fees of the Note Issuer, the Trust and the Infrastructure Bank to the extent not fixed; (C) if required by the Servicer in its judgment or found to be necessary by the CPUC, determine the revised FTA Charges that, together with the funds on deposit in the Reserve Subaccount, would restore: (1) the Principal Balance to the Projected Principal Balance, (2) the balance in the Overcollateralization Subaccount to the Required Overcollateralization Level and (3) the balance in the Capital Subaccount to the Required Capital Level, in each case within twelve months after such revised FTA Charges go into effect (and with respect to any True-Up Adjustments occurring after the last Scheduled Maturity Date for any Series, determine the revised FTA Charges that would be sufficient to retire the unpaid Principal Balance within the earlier of (x) a date which is not more than twelve months after the Scheduled Maturity Date and (y) the last Final Maturity Date for such Series); (D) file an Anniversary True-Up Mechanism Advice Letter with the 26 CPUC, substantially in the form attached hereto as Exhibit D; and (E) take all reasonable actions and make all reasonable efforts to secure the resulting True- Up Adjustment (if such an adjustment is sought by the Servicer or found to be necessary by the CPUC) and to enforce the provisions of the Statute that obligate the CPUC to approve rates at levels sufficient to recover the FTA Payments in accordance with the Expected Amortization Schedule. (3) In the case of a True-Up Adjustment pursuant to a Routine Annual True-Up Mechanism Advice Letter, the Servicer shall implement the revised FTA Charges, if any, as of the first day of the following calendar year. (4) In the case of a True-Up Adjustment required by the Servicer in its judgment or found to be necessary by the CPUC pursuant to an Anniversary True-Up Mechanism Advice Letter, the Servicer shall implement the revised FTA Charges, if any, on the date specified by the CPUC in accordance with the Financing Order. (ii) Routine Quarterly True-Up Adjustments. If the Issuance Advice ------------------------------------- Letter with respect to a Series of Notes provides that the Servicer will file Routine Quarterly True-Up Mechanism Advice Letters, then the Servicer shall make such filings in accordance with the procedures set forth in Annex II hereto. On each Series Issuance Date, the Servicer and the Note Issuer shall amend Annex II to specify in detail the Servicer's obligations to perform routine quarterly True-Up Adjustments, if any, with respect to the new Series of Notes issued on such Series Issuance Date. (c) Non-Routine True-Up Adjustments. ------------------------------- 27 (i) Whenever the Servicer determines that the existing model for calculating the FTA Charges should be amended or revised, subject to the consent of the Note Issuer under the conditions set forth in Section 3.17 of the Indenture, the Servicer shall file a Non-Routine True-Up Mechanism Advice Letter with the CPUC designating the adjustments to the model and any corresponding adjustments to the FTA Charges (collectively, a "Non-Routine True-Up ------------------- Adjustment"). - ---------- (ii) The Servicer shall take all reasonable actions and make all reasonable efforts to secure any Non-Routine True-Up Adjustments. (iii) The Servicer shall implement any resulting adjustments to the model and any resulting revised FTA Charges as of the first day of the Quarter which begins at least 90 days after the Non-Routine True-Up Mechanism Advice Letter is filed. (d) Reports. ------- (i) Notification of Advice Letter Filings and True-Up Adjustments. ------------------------------------------------------------- Whenever the Servicer files an Advice Letter with the CPUC, the Servicer shall send a copy of such filing (together with a copy of all notices and documents that, in the Servicer's reasonable judgment, are material to the adjustments effected by such Advice Letter) to the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's concurrently therewith. If any True-Up Adjustment requested in any such Advice Letter filing does not become effective on the applicable date as provided by the Financing Order, the Servicer shall notify the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's by the end of the second Servicer Business Day after such applicable date. 28 (ii) Quarterly Servicer's Certificate. Not later than the Remittance -------------------------------- Date immediately prior to each Payment Date, the Servicer shall deliver a written report substantially in the form of Exhibit E hereto (the "Quarterly --------- Servicer's Certificate") to the Note Issuer, the Note Trustee, the Certificate - ---------------------- Trustee, the Infrastructure Bank and Moody's. (iii) Reports to California Customers. ------------------------------- (A) After each revised FTA Charge has gone into effect pursuant to a True-Up Adjustment, the Servicer shall, to the extent and in the manner and time frame required by applicable CPUC Regulations, if any, cause to be prepared and delivered to California Customers a notice announcing such revised FTA Charges. (B) In addition, at least once each year, to the extent permitted by CPUC Regulations, the Servicer shall cause to be prepared and delivered to California Customers a notice stating, in effect, that the Transition Property and the FTA Charges are owned by the Note Issuer and not the Seller. Such notice shall be included either as an insert to or in the text of the Bills delivered to such California Customers or shall be delivered to California Customers by electronic means or such other means as the Servicer or the Applicable ESP may from time to time use to communicate with their respective customers. (C) Except to the extent that applicable CPUC Regulations make the Applicable ESP responsible for such costs, the Servicer shall pay from its own funds all costs of preparation and delivery incurred in connection with clauses (A) and (B) above, 29 including but not limited to printing and postage costs as the same may increase or decrease from time to time. (iv) ESP Reports. The Servicer shall provide to Moody's any publicly ----------- available reports filed by the Servicer with the CPUC (or otherwise made publicly available by the Servicer) relating to ESPs and any other non- confidential and non-proprietary information relating to ESPs reasonably requested by Moody's. SECTION 4.02. Limitation of Liability. (a) The Note Issuer and the ------------ ----------------------- Servicer expressly agree and acknowledge that: (i) In connection with any True-Up Adjustment, the Servicer is acting solely in its capacity as the servicing agent hereunder. (ii) Neither the Servicer nor the Note Issuer is responsible in any manner for, and shall have no liability whatsoever as a result of any action, decision, ruling or other determination made or not made, or any delay (other than any delay resulting from the Servicer's failure to file the applications required by Section 4.01 in a timely and correct manner or other breach by the Servicer of its duties under this Agreement), by the CPUC in any way related to the Transition Property or in connection with any True-Up Adjustment, the subject of any filings under Section 4.01, any proposed True-Up Adjustment, or the approval of any revised FTA Charges and the scheduled adjustments thereto. (iii) The Servicer shall have no liability whatsoever relating to the calculation of any revised FTA Charges and the scheduled adjustments thereto, including as a result of any inaccuracy of any of the assumptions made in such calculation regarding 30 expected energy usage volume and the rate of delinquencies and write-offs, so long as the Servicer has acted in good faith and has not acted in a grossly negligent manner in connection therewith, and the Servicer have no liability whatsoever as a result of any Person's, including the Noteholders' or the Certificateholders', not receiving any payment, amount or return anticipated or expected or in respect of any Note or Certificate generally, except only to the extent that the same is caused by the Servicer's gross negligence, willful misconduct or bad faith. (b) Notwithstanding the foregoing, the Servicer hereby acknowledges that the terms of this Section 4.02 are not intended to, and shall not, relieve the Servicer of liability for any misrepresentation by the Servicer under Section 6.01 or for any breach by the Servicer of its other obligations under this Agreement. ARTICLE V --------- The Transition Property ----------------------- SECTION 5.01. Custody of Transition Property Records. To assure uniform ------------ -------------------------------------- quality in servicing the Transition Property and to reduce administrative costs, the Note Issuer hereby revocably appoints the Servicer, and the Servicer hereby accepts such appointment, to act, as the agent of the Note Issuer and the Note Trustee, as custodian of any and all documents and records that the Seller shall keep on file in accordance with its customary procedures and that relate to the Transition Property, including copies of the Financing Order and Advice Letters relating thereto and all documents filed with the CPUC in connection with any True-Up Adjustment (collectively, the "Transition Property Records"), which are --------------------------- hereby constructively delivered to the Note Trustee, as pledgee of the 31 Note Issuer (or, in the case of the Subsequent Transition Property, will as of the applicable Subsequent Sale Date be constructively delivered to the Note Trustee, as pledgee of the Note Issuer) with respect to all Transition Property. SECTION 5.02. Duties of Servicer as Custodian. ------------ ------------------------------- (a) Safekeeping. The Servicer shall hold the Transition Property Records ----------- on behalf of the Note Issuer and maintain such accurate and complete accounts, records and computer systems pertaining to the Transition Property Records as shall enable the Note Issuer to comply with this Agreement and the Indenture. In performing its duties as custodian, the Servicer shall act with reasonable care, using that degree of care and diligence that the Servicer exercises with respect to comparable assets that the Servicer services for itself or, if applicable, for others. The Servicer shall promptly report to the Note Issuer and the Note Trustee any failure on its part to hold the Transition Property Records and maintain its accounts, records and computer systems as herein provided and promptly take appropriate action to remedy any such failure. Nothing herein shall be deemed to require an initial review or any periodic review by the Note Issuer or the Note Trustee of the Transition Property Records. The Servicer's duties to hold the Transition Property Records on behalf of the Note Issuer set forth in this Section 5.02, to the extent such Transition Property Records have not been previously transferred to a successor Servicer pursuant to Article VII, shall terminate three years after the earlier of (i) the date on which the Servicer is succeeded by a successor Servicer in accordance with Article VII hereof and (ii) the date on which no Notes of any Series are outstanding. 32 (b) Maintenance of and Access to Records. The Servicer shall maintain the ------------------------------------ Transition Property Records at 6100 Neil Road, Reno, Nevada or at such other office as shall be specified to the Note Issuer and the Note Trustee by written notice at least 30 days prior to any change in location. The Servicer shall make available for inspection to the Note Issuer and the Note Trustee or their respective duly authorized representatives, attorneys or auditors the Transition Property Records at such times during normal business hours that the Note Issuer or the Note Trustee shall reasonably request and that do not unreasonably interfere with the Servicer's normal operations. Nothing in this Section 5.02(b) shall affect the obligation of the Servicer to observe any applicable law (including any CPUC Regulations) prohibiting disclosure of information regarding the California Customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section 5.02(b). (c) Release of Documents. Upon instruction from the Note Trustee, the -------------------- Servicer shall release any Transition Property Records to the Note Trustee, the Note Trustee's agent or the Note Trustee's designee, as the case may be, at such place or places as the Note Trustee may designate, as soon as practicable. (d) Defending Transition Property Against Claims. The Servicer shall -------------------------------------------- institute any action or proceeding necessary to compel performance by the CPUC or the State of California of any of their obligations or duties under the PU Code, the Financing Order or any Advice Letter, and the Servicer agrees to take such legal or administrative actions, including defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary to block or 33 overturn any attempts to cause a repeal of, modification of or supplement to the Statute or the Financing Order or the rights of holders of Transition Property by legislative enactment, voter initiative or constitutional amendment that would be adverse to Certificateholders. The costs of any such action shall be payable from FTA Collections as an Operating Expense in accordance with the priorities set forth in Section 8.02(d) of the Indenture. The Servicer's obligations pursuant to this Section 5.02 shall survive and continue notwithstanding the fact that the payment of Operating Expenses pursuant to Section 8.02(d) of the Indenture may be delayed (it being understood that the Servicer may be required to advance its own funds to satisfy its obligations hereunder). SECTION 5.03. Instructions; Authority to Act. For so long as any Notes ------------ ------------------------------ remain outstanding, the Servicer shall be deemed to have received proper instructions with respect to the Transition Property Records upon its receipt of written instructions signed by a Trust Officer of the Note Trustee. SECTION 5.04. Custodian's Indemnification. The Servicer as custodian ------------ --------------------------- shall indemnify the Note Issuer, the Trust, the Certificate Trustee, the Delaware Trustee, the Note Trustee, the Infrastructure Bank, the STO, the Noteholders and the Certificateholders and each of their respective officers, directors, employees and agents for, and defend and hold harmless each such Person from and against, any and all liabilities, obligations, losses, damages, payments, claims, costs or expenses of any kind whatsoever (collectively, "Losses") that may be imposed on, incurred by or asserted against any such ------ Person as the result of any improper act or omission in any way relating to the maintenance and custody by the Servicer, as custodian, of the Transition Property 34 Records; provided, however, that the Servicer shall not be liable for any -------- ------- portion of any such amount resulting from the willful misconduct, bad faith or gross negligence of the Note Issuer, the Trust, the Certificate Trustee, the Delaware Trustee, the Note Trustee, the Infrastructure Bank, the STO, the Noteholders or the Certificateholders, as the case may be. Indemnification under this Section shall survive resignation or removal of the Note Trustee, the Delaware Trustee or the Certificate Trustee and shall include reasonable fees and expenses of investigation and litigation. SECTION 5.05. Effective Period and Termination. The Servicer's ------------ -------------------------------- appointment as custodian shall become effective as of the Closing Date and shall continue in full force and effect until terminated pursuant to this Section. If any Servicer shall resign as Servicer in accordance with the provisions of this Agreement or if all of the rights and obligations of any Servicer shall have been terminated under Section 7.01, the appointment of such Servicer as custodian shall be terminated by the Note Trustee or by the Holders of Notes evidencing not less than 25 percent of the Outstanding Amount of the Notes of all Series in the same manner as the Note Trustee or such Holders may terminate the rights and obligations of the Servicer under Section 7.01. SECTION 5.06. General Indemnification of Note Trustee, Certificate Trustee ------------ ------------------------------------------------------------ and the Delaware Trustee. The Servicer hereby agrees to indemnify and hold - ------------------------ harmless the Note Trustee, the Certificate Trustee and the Delaware Trustee and their respective directors, officers, employees and agents from and against any and all Losses incurred by or asserted against any such Person as a result of or in connection with the transactions 35 contemplated by this Agreement or any Basic Document, other than any Loss incurred by reason or result of the gross negligence or willful misconduct of the Note Trustee, the Certificate Trustee or the Delaware Trustee, as the case may be; provided, however, that the foregoing indemnity is extended to the Note -------- ------- Trustee, the Certificate Trustee and the Delaware Trustee solely in their respective capacities as trustees and not for the benefit of the Noteholders or the Certificateholders. The obligations of the Servicer set forth herein shall survive the termination of this Agreement or the earlier resignation or removal of the Note Trustee under the Indenture or the Certificate Trustee or the Delaware Trustee under the Trust Agreement. ARTICLE VI ---------- The Servicer ------------ SECTION 6.01. Representations and Warranties of Servicer. The Servicer ------------ ------------------------------------------ makes the following representations and warranties, as of the Closing Date, as of each Subsequent Sale Date relating to the sale of Subsequent Transition Property pursuant to a Subsequent Sale Agreement, and as of such other dates as expressly provided in this Section 6.01, on which the Note Issuer and the Note Trustee are deemed to have relied in entering into this Agreement relating to the servicing of the Transition Property. The representations and warranties shall survive the execution and delivery of this Agreement and the pledge thereof to the Note Trustee pursuant to the Indenture. (a) Organization and Good Standing. The Servicer is duly organized and ------------------------------ validly existing as a corporation in good standing under the laws of the state of its incorporation, with the power and authority in all jurisdictions in which it operates to own its properties 36 and to conduct its business as such properties are currently owned and such business is currently conducted, and had at all relevant times, and has, the requisite power, authority and legal right to service the Transition Property and to hold the Transition Property Records as custodian. (b) Due Qualification. The Servicer is duly qualified to do business as a ----------------- foreign corporation in good standing, and has obtained all necessary licenses and approvals in, all jurisdictions in which the ownership or lease of property or the conduct of its business (including the servicing of the Transition Property as required by this Agreement) shall require such qualifications, licenses or approvals (except where the failure so to qualify would not be reasonably likely to have a material adverse effect on the Servicer's business, operations, assets, revenues, properties or prospects or adversely affect the servicing of the Transition Property). (c) Power and Authority. The Servicer has the requisite power and ------------------- authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by the Servicer by all necessary corporate action. (d) Binding Obligation. This Agreement constitutes a legal, valid and ------------------ binding obligation of the Servicer enforceable in accordance with its terms, subject to applicable insolvency, reorganization, moratorium, fraudulent transfer and other similar laws relating to or affecting creditors' rights generally from time to time in effect and to general principles of equity (including, without limitation, concepts of materiality, reasonableness, 37 good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law. (e) No Violation. After giving effect to the release of the lien of the ------------ Seller Mortgage, the consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof shall not conflict with, result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of incorporation or bylaws of the Servicer, or any indenture, agreement or other instrument to which the Servicer is a party or by which it shall be bound; nor result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument; nor violate any law or any order, rule or regulation applicable to the Servicer of any court or of any Federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties. (f) No Proceedings. Except as set forth on Schedule 6.01(f), there are no -------------- proceedings or investigations pending or, to the Servicer's best knowledge, threatened before any court, Federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties involving or relating to the Servicer or the Note Issuer or, to the Servicer's knowledge, any other Person (i) asserting (A) the invalidity of this Agreement, or (B) the invalidity of the Indenture, the Trust Agreement, any of the other Basic Documents or the Notes or the Certificates, (ii) seeking to prevent the issuance of the Notes or the Certificates or the consummation of any of the transactions contemplated by this Agreement, the Indenture, 38 the Trust Agreement or any of the other Basic Documents, (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, this Agreement, the Indenture, the Trust Agreement, any of the other Basic Documents or the Notes or the Certificates or (iv) relating to the Servicer and which might adversely affect the Federal or state income tax attributes of the Notes or the Certificates. (g) Approvals. No approval, authorization, consent, order or other action --------- of, or filing with, any court, Federal or state regulatory body, administrative agency or other governmental instrumentality is required in connection with the execution and delivery by the Servicer of this Agreement, the performance by the Servicer of the transactions contemplated hereby or the fulfillment by the Servicer of the terms hereof, except those that have been obtained or made and those that the Servicer is required to make in the future pursuant to Article IV hereof. (h) Collections Curves. Each Collections Curve used in connection with ------------------ Schedule 6 to Annex I hereto is accurate in all material respects, and the future delivery of each revised Collections Curve shall constitute a representation and warranty that each such revised Collections Curve is accurate in all material respects. (i) Premises. The premises set forth in Schedule 6 to Annex I hereto are -------- reasonable based upon historical performance and will be reasonable as they change from time to time. (j) Reports and Certificates. Each report and certificate delivered in ------------------------ connection with an Advice Letter will constitute a representation and warranty by the Servicer that 39 each such report or certificate, as the case may be, is true and correct; provided, however, that to the extent any such report or certificate is based in - -------- ------- part upon or contains assumptions, forecasts or other predictions of future events, the representation and warranty of the Servicer with respect thereto will be limited to the representation and warranty that such assumptions, forecasts or other predictions of future events are reasonable based upon historical performance. SECTION 6.02. Indemnities of Servicer; Release of Claims. (a) The ------------ ------------------------------------------ Servicer shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Servicer under this Agreement. (b) The Servicer shall indemnify the Note Issuer, the Trust, the Note Trustee, the Certificate Trustee, the Delaware Trustee, the Infrastructure Bank, the STO, the Seller, the Noteholders and the Certificateholders and each of their respective officers, directors, employees and agents for, and defend and hold harmless each such Person from and against, any and all Losses that may be imposed on, incurred by or asserted against any such Person as a result of (i) the Servicer's willful misconduct, bad faith or gross negligence in the performance of its duties or observance of its covenants under this Agreement or the Servicer's reckless disregard of its obligations and duties under this Agreement or (ii) the Servicer's breach of any of its representations or warranties in this Agreement. (c) For purposes of Section 6.02(b), in the event of the termination of the rights and obligations of Sierra Pacific Power Company (or any successor thereto pursuant to Section 6.03) as Servicer pursuant to Section 7.01, or a resignation by such Servicer 40 pursuant to this Agreement, such Servicer shall be deemed to be the Servicer pending appointment of a successor Servicer pursuant to Section 7.02. (d) Indemnification under Sections 6.02(b) and 6.02(c) shall survive the resignation or removal of the Note Trustee, the Delaware Trustee or the Certificate Trustee or the termination of this Agreement and shall include reasonable fees and expenses of investigation and litigation (including reasonable attorneys fees and expenses). (e) Except to the extent expressly provided for in this Agreement or the other Basic Documents (including, without limitation, the Servicer's claims with respect to the Servicing Fee, reimbursement for any Excess Remittance, reimbursement for costs incurred pursuant to Section 5.02(d) and the payment of the purchase price of Transition Property), the Servicer hereby releases and discharges the Note Issuer and the Trust and each of their respective officers, directors and agents (collectively, the "Released Parties") from any and all ---------------- actions, claims and demands whatsoever, whenever arising, that the Servicer, in its capacity as Servicer or Seller, shall or may have against any such Person relating to the Transition Property or the Servicer's activities with respect thereto other than any actions, claims and demands arising out of the willful misconduct, bad faith or gross negligence of the Released Parties. SECTION 6.03. Merger or Consolidation of, or Assumption of the Obligations ------------ ------------------------------------------------------------ of, Servicer. Any Person (a) into which the Servicer may be merged or - ------------ consolidated, (b) which may result from any merger or consolidation to which the Servicer shall be a party or (c) which may succeed to the properties and assets of the Servicer substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to 41 perform every obligation of the Servicer hereunder, shall be the successor to the Servicer under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (i) immediately after giving -------- ------- effect to such transaction, no Servicer Default and no event that, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Servicer shall have delivered to the Note Issuer, the Note Trustee and Moody's an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger or succession and such agreement of assumption complies with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with and (iii) the Servicer shall have delivered to the Note Issuer, the Note Trustee and Moody's an Opinion of Counsel either (A) stating that, in the opinion of such counsel, all filings to be made by the Servicer, including filings with the CPUC pursuant to the PU Code, have been executed and filed that are necessary to preserve and protect fully the interests of the Note Issuer in the Transition Property and reciting the details of such filings or (B) stating that, in the opinion of such counsel, no such action shall be necessary to preserve and protect such interests. Notwithstanding anything herein to the contrary, the execution of the foregoing agreement of assumption and compliance with clauses (i), (ii) and (iii) above shall be conditions to the consummation of the transactions referred to in clauses (a), (b) or (c) above. SECTION 6.04. Limitation on Liability of Servicer and Others. Neither the ------------ ---------------------------------------------- Servicer nor any of the directors or officers or employees or agents of the Servicer shall be liable to the Note Issuer, the Note Trustee, the Infrastructure Bank, the Noteholders, the 42 Trust, the Certificate Trustee, the Delaware Trustee, the Certificateholders or any other Person, except as provided under this Agreement, for any action taken or for refraining from the taking of any action pursuant to this Agreement or for errors in judgment; provided, however, that this provision shall not protect -------- ------- the Servicer or any such person against any liability that would otherwise be imposed by reason of willful misconduct, bad faith or gross negligence in the performance of duties or by reason of reckless disregard of obligations and duties under this Agreement. The Servicer and any director or officer or employee or agent of the Servicer may rely in good faith on the advice of counsel reasonably acceptable to the Note Trustee or on any document of any kind, prima facie properly executed and submitted by any Person, respecting any matters arising under this Agreement. Except as provided in this Agreement, the Servicer shall not be under any obligation to appear in, prosecute or defend any legal action that shall not be related to or incidental to its duties to service the Transition Property in accordance with this Agreement and that in its opinion may involve it in any expense or liability. SECTION 6.05. Sierra Pacific Power Company Not to Resign as Servicer. ------------ ------------------------------------------------------ Subject to the provisions of Section 6.03, Sierra Pacific Power Company shall not resign from the obligations and duties hereby imposed on it as Servicer under this Agreement, except upon either (a) a determination that the performance of its duties under this Agreement shall no longer be permissible under applicable law or (b) satisfaction of the following: (i) the Rating Agency Condition shall have been satisfied, (ii) the CPUC shall have approved such resignation and (iii) notice of such resignation shall have been given to 43 the Infrastructure Bank. Notice of any such determination permitting the resignation of Sierra Pacific Power Company shall be communicated to the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's at the earliest practicable time (and, if such communication is not in writing, shall be confirmed in writing at the earliest practicable time), and any such determination shall be evidenced by an Opinion of Counsel to such effect delivered to the Note Issuer, the Note Trustee and the Certificate Trustee concurrently with or promptly after such notice. No such resignation shall become effective until a successor Servicer shall have assumed the responsibilities and obligations of Sierra Pacific Power Company in accordance with Section 7.02. SECTION 6.06. Servicing Compensation. (a) In consideration for its ------------ ---------------------- services hereunder, until the Retirement of the Notes, the Servicer shall receive a fee (the "Servicing Fee") quarterly on each Payment Date in an amount ------------- equal to (i) one-fourth of 0.25 percent of the outstanding Principal Balance (before giving effect to payments made on such date) for so long as FTA Charges are included as a line item on Bills otherwise sent to California Customers or (ii) one-fourth of 1.50 percent of the outstanding Principal Balance (before giving effect to payments made on such date) if FTA Charges are not included as a line item on Bills otherwise sent to California Customers but, instead, are billed separately to California Customers. The Servicer also shall be entitled to retain as additional compensation (i) any interest earnings on FTA Payments received by the Servicer and invested by the Servicer pursuant to Section 6(d) of Annex I hereto during each Collection Period prior to remittance to the Collection Account and (ii) all late payment charges, if any, collected from California Customers or ESPs. 44 (b) The Servicing Fee set forth in Section 6.06(a) above shall be paid to the Servicer by the Note Trustee, on each Payment Date in accordance with the priorities set forth in Section 8.02(d) of the Indenture, by wire transfer of immediately available funds from the Collection Account to an account designated by the Servicer. Any portion of the Servicing Fee not paid on such date shall be added to the Servicing Fee payable on the subsequent Payment Date. (c) Except as provided in Section 5.02(d), the Servicer shall be required to pay from its own account all expenses incurred by it in connection with its activities hereunder (including any fees to and disbursements by accountants, counsel, or any other Person, any taxes imposed on the Servicer and any expenses incurred in connection with reports to Noteholders and Certificateholders) out of the compensation retained by or paid to it pursuant to this Section 6.06, and shall not be entitled to any extra payment or reimbursement therefor. SECTION 6.07. Compliance with Applicable Law. The Servicer covenants and ------------ ------------------------------ agrees, in servicing the Transition Property, to comply with all laws applicable to, and binding upon, the Servicer and relating to such Transition Property the noncompliance with which would have a material adverse effect on the value of the Transition Property; provided, however, that the foregoing is not intended -------- ------- to, and shall not, impose any liability on the Servicer for noncompliance with any law that the Servicer is contesting in good faith in accordance with its customary standards and procedures. SECTION 6.08. Access to Certain Records and Information Regarding ------------ --------------------------------------------------- Transition Property. The Servicer shall provide to the Noteholders, the Note - ------------------- Trustee, the 45 Certificate Trustee, the Infrastructure Bank and the STO access to the Transition Property Records in such cases where the Noteholders, the Note Trustee, the Certificate Trustee and the Infrastructure Bank shall be required by applicable law to be provided access to such records. Access shall be afforded without charge, but only upon reasonable request and during normal business hours at the respective offices of the Servicer. Nothing in this Section shall affect the obligation of the Servicer to observe any applicable law (including any CPUC Regulation) prohibiting disclosure of information regarding the California Customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section. SECTION 6.09. Appointments. The Servicer may at any time appoint any ------------ ------------ Person to perform all or any portion of its obligations as Servicer hereunder; provided, however, that the Rating Agency Condition shall have been satisfied in - -------- ------- connection therewith; provided further that the Servicer shall remain obligated ---------------- and be liable to the Note Issuer, the Note Trustee, the Certificate Trustee and the Noteholders for the servicing and administering of the Transition Property in accordance with the provisions hereof without diminution of such obligation and liability by virtue of the appointment of such Person and to the same extent and under the same terms and conditions as if the Servicer alone were servicing and administering the Transition Property; and provided further, however, that -------- ------- nothing herein shall preclude the execution by the Servicer of an ESP Service Agreement with ESPs. The fees and expenses of such Person shall be as agreed between the Servicer and such Person from time to time, and none of the Note Issuer, the Note Trustee, the Noteholders or any other Person shall have any responsibility therefor or 46 right or claim thereto. Any such appointment shall not constitute a Servicer resignation under Section 6.05. SECTION 6.10. No Servicer Advances. The Servicer shall not make any ------------ -------------------- advances of interest or principal on the Notes or the Certificates. SECTION 6.11. Remittances. (a) Subject to clause (b) below, on each ------------ ----------- Remittance Date, the Servicer shall cause to be made a wire transfer of immediately available funds equal to the Aggregate Remittance Amount for the applicable Collection Period to the General Subaccount of the Collection Account. Prior to each remittance to the General Subaccount of the Collection Account pursuant to this Section, the Servicer shall provide written notice to the Note Trustee of each such remittance (including the exact dollar amount to be remitted). (b) Notwithstanding the foregoing clause (a) and subject to the succeeding clause (c), during any period in which there exists the occurrence and continuance of a Servicer Default, the failure to satisfy the Rating Agency Condition, the failure of the Servicer to maintain a short-term rating of P-1 or a long-term rating of A-2 or better by Moody's, or if there shall exist no letter of credit in favor of the Note Trustee which shall have satisfied the Rating Agency Condition, the Servicer shall remit to the General Subaccount of the Collection Account the total FTA Payments estimated to have been received by the Servicer from or on behalf of California Customers on a given Servicer Business Day in respect of all previously Billed FTA Charges within two Servicer Business Days of receipt thereof by the Servicer (the "Daily Remittance"). On ---------------- or before each Remittance Date during any period described in this clause (b), the Servicer shall calculate the amount of 47 any Remittance Shortfall or Excess Remittance attributable to the prior Collection Period and (A) if a Remittance Shortfall exists, the Servicer shall make a supplemental remittance to the General Subaccount of the Collection Account on such Remittance Date in the amount of such Remittance Shortfall or (B) if an Excess Remittance exists, the Servicer shall reduce the amount of each Daily Remittance (beginning with the Daily Remittance occurring on the Remittance Date) by the outstanding amount of such Excess Remittance until the balance of the Excess Remittance has been reduced to zero. (c) Notwithstanding the foregoing clause (b), during a period in which the Servicer fails to maintain a short-term rating of P-1 or a long-term rating A-2 or better by Moody's, the Servicer shall have the option of remitting funds equal to the Aggregate Remittance Amount on the Remittance Date as provided in Section 6.11(a); provided that (i) the Note Issuer shall have established and -------- shall maintain the Letter of Credit for the benefit of the Note Issuer and the Note Trustee as provided in Section 8.07 of the Indenture and (ii) the Aggregate Remittance Amount for any Collection Period shall not exceed the amount available to be drawn under the Letter of Credit. In the event that the Aggregate Remittance Amount for any Collection Period exceeds the amount available to be drawn under the Letter of Credit the Servicer shall be subject to the Daily Remittance of estimated FTA Payments as provided in Section 6.11(b). (d) The Servicer agrees and acknowledges that it holds all FTA Payments collected by it for the benefit of the Note Issuer and that all such amounts will be remitted by the Servicer in accordance with this Section without any surcharge, fee, offset, charge or other deduction except (i) as set forth in clause (b) above or clause (e) below and (ii) for late 48 fees permitted by Section 6.06. The Servicer further agrees not to make any claim to reduce its obligation to remit all FTA Payments collected by it in accordance with this Agreement, except (i) as set forth in clause (b) above or clause (e) below and (ii) for late fees permitted by Section 6.06. (e) If there is an Excess Remittance, the Servicer shall be entitled either (i) to reduce the amount which the Servicer remits to the General Subaccount of the Collection Account on such Remittance Date by the amount of such Excess Remittance, the amount of such reduction becoming the property of the Servicer or (ii) to be paid immediately from the Collection Account or any subaccount therein the amount of such Excess Remittance, such payment becoming the property of the Servicer. If there is a Remittance Shortfall, the amount that the Servicer remits to the General Subaccount of the Collection Account on such Remittance Date will be increased by the amount of such Remittance Shortfall, such increase coming from the Servicer's own funds. (f) If the Note Trustee shall not have received either (i) the Aggregate Remittance Amount pursuant to clause (a) above by 6:00 P.M. Eastern Standard Time on such Remittance Date or (ii) notice from the Servicer that the Note Issuer has drawn on the Letter of Credit pursuant to clause (g), the Note Trustee on the following Business Day shall draw on the full amount of the Letter of Credit. (g) If the Servicer has not wire transferred the aggregate Remittance Amount pursuant to clause (a) by 1:00 p.m. (Eastern Standard Time) on any Remittance Date, the Note Issuer shall, not later than 6:00 p.m. (Eastern Standard Time) on such Remittance 49 Date, draw the entire amount of the Letter of Credit and simultaneously send, by facsimile transmission, notice of the draw to the Note Trustee and the Infrastructure Bank. ARTICLE VII ----------- Default ------- SECTION 7.01. Servicer Default. If any one of the following events (a ------------ ---------------- "Servicer Default") shall occur and be continuing: ---------------- (a) any failure by the Servicer to deposit in the Collection Account on behalf of the Note Issuer any required remittance that shall continue unremedied for a period of three Business Days after written notice of such failure is received by the Servicer from the Note Issuer or the Note Trustee or after discovery of such failure by an officer of the Servicer; provided, however, ------- that, if the Servicer fails to deposit an Aggregate Remittance Amount on any Remittance Date pursuant to Section 6.11, then such failure by the Note Issuer shall be deemed to be a default by the Servicer under this Agreement; or (b) any failure on the part of the Servicer or the Seller, as the case may be, duly to observe or to perform in any material respect any other covenants or agreements of the Servicer or the Seller (as the case may be) set forth in this Agreement (including Section 4.01) or any other Basic Document to which it is a party, which failure shall (i) materially and adversely affect the rights of Noteholders or Certificateholders and (ii) continue unremedied for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given (A) to the Servicer or the Seller (as the case may be) by the Note Issuer or (B) to the Servicer or the Seller (as the case may 50 be) by the Note Trustee or by the Noteholders of Notes evidencing not less than 25 percent of the Outstanding Amount of the Notes of all Series; or (c) any representation or warranty made by the Servicer in this Agreement shall prove to have been incorrect when made, which has a material adverse effect on the Note Issuer or the Certificateholders and which material adverse effect continues unremedied for a period of 60 days after the date on which written notice thereof, requiring the same to be remedied, shall have been delivered to the Servicer by the Note Issuer or the Note Trustee; or (d) an Insolvency Event occurs with respect to the Servicer or the Seller; then, and in each and every case, so long as the Servicer Default shall not have been remedied, either the Note Trustee, or the Holders of Notes evidencing not less than 25 percent of the Outstanding Amount of the Notes of all Series, by notice then given in writing to the Servicer (and to the Note Trustee if given by the Noteholders) (a "Termination Notice") may terminate all the rights ------------------ and obligations (other than the obligations set forth in Section 6.02 hereof) of the Servicer under this Agreement. In addition, upon a Servicer Default described in Section 7.01(a), each of the following shall be entitled to apply to the CPUC for sequestration and payment of revenues arising with respect to the Transition Property: (1) the Certificateholders and the Certificate Trustee as beneficiary of any statutory lien permitted by the PU Code; (2) the Note Issuer or its assignees; or (3) pledgees or transferees, including transferees under Section 844 of the PU Code, of the Transition Property. On or after the receipt by the Servicer of a Termination 51 Notice, all authority and power of the Servicer under this Agreement, whether with respect to the Notes, the Transition Property, the FTA Charges or otherwise, shall, without further action, pass to and be vested in such successor Servicer as may be appointed under Section 7.02; and, without limitation, the Note Trustee is hereby authorized and empowered to execute and deliver, on behalf of the predecessor Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such Termination Notice, whether to complete the transfer of the Transition Property Records and related documents, or otherwise. The predecessor Servicer shall cooperate with the successor Servicer, the Note Issuer and the Note Trustee in effecting the termination of the responsibilities and rights of the predecessor Servicer under this Agreement, including the transfer to the successor Servicer for administration by it of all cash amounts that shall at the time be held by the predecessor Servicer for remittance, or shall thereafter be received by it with respect to the Transition Property or the FTA Charges. All reasonable costs and expenses (including attorneys fees and expenses) incurred in connection with transferring the Transition Poperty Records to the successor Servicer and amending this Agreement to reflect such succession as Servicer pursuant to this Section shall be paid by the predecessor Servicer upon presentation of reasonable documentation of such costs and expenses. SECTION 7.02. Appointment of Successor. (a) Upon the Servicer's receipt ------------ ------------------------ of a Termination Notice pursuant to Section 7.01 or the Servicer's resignation or removal in accordance with the terms of this Agreement, the predecessor Servicer shall continue to perform its functions as Servicer under this Agreement, and shall be entitled to receive the 52 requisite portion of the Servicing Fee, until a successor Servicer shall have assumed in writing the obligations of the Servicer hereunder as described below. In the event of the Servicer's termination hereunder, the Note Issuer shall appoint a successor Servicer with the Note Trustee's prior written consent thereto (which consent shall not be unreasonably withheld), and the successor Servicer shall accept its appointment by a written assumption in form acceptable to the Note Issuer and the Note Trustee. If within 30 days after the delivery of the Termination Notice, the Note Issuer shall not have obtained such a new Servicer, the Note Trustee may petition the CPUC or a court of competent jurisdiction to appoint a successor Servicer under this Agreement. A Person shall qualify as a successor Servicer only if (i) such Person is permitted under CPUC Regulations to perform the duties of the Servicer, (ii) the Rating Agency Condition shall have been satisfied and (iii) such Person enters into a servicing agreement with the Note Issuer having substantially the same provisions as this Agreement. (b) Upon appointment, the successor Servicer shall be the successor in all respects to the predecessor Servicer and shall be subject to all the responsibilities, duties and liabilities arising thereafter relating thereto placed on the predecessor Servicer and shall be entitled to the Servicing Fee and all the rights granted to the predecessor Servicer by the terms and provisions of this Agreement. SECTION 7.03. Waiver of Past Defaults. The Noteholders of Notes ------------ ----------------------- evidencing not less than a majority of the Outstanding Amount of the Notes of all Series may, on behalf of all Noteholders, waive in writing any default by the Servicer in the performance of its obligations hereunder and its consequences, except a default in making any required 53 deposits to the Collection Account in accordance with this Agreement. Upon any such waiver of a past default, such default shall cease to exist, and any Servicer Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereto. SECTION 7.04. Notice of Servicer Default. The Servicer shall deliver to ------------ -------------------------- the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank, the STO and Moody's, promptly after having obtained knowledge thereof, but in no event later than five Business Days thereafter, written notice in an Officers' Certificate of any event which with the giving of notice or lapse of time, or both, would become a Servicer Default under Section 7.01(a) or (b). ARTICLE VIII ------------ Miscellaneous Provisions ------------------------ SECTION 8.01. Amendment. (a) This Agreement may be amended in writing by ------------ --------- the Servicer and the Note Issuer with five Business Days' prior written notice given to Moody's and the prior written consent of the Note Trustee, but without the consent of any of the Noteholders or Certificateholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Noteholders or the Certificateholders; provided, however, that such action -------- ------- shall not, as evidenced by an Officer's Certificate delivered to the 54 Note Issuer and the Note Trustee, adversely affect in any material respect the interests of any Noteholder or Certificateholder. This Agreement may also be amended in writing from time to time by the Servicer and the Note Issuer with prior written notice given to Moody's and the prior written consent of the Note Trustee and the prior written consent of the Holders of Notes evidencing not less than a majority of the Outstanding Amount of the Notes of all Series, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Noteholders or the Certificateholders; provided, however, that no such amendment shall (a) increase -------- ------- or reduce in any manner the amount of, or accelerate or delay the timing of, FTA Collections or (b) reduce the aforesaid percentage of the Outstanding Amount of the Notes, the Noteholders of which are required to consent to any such amendment, without the consent of the Noteholders of all the outstanding Notes. Promptly after the execution of any such amendment and the requisite consents, the Note Issuer shall furnish written notification of the substance of such amendment to the Note Trustee and Moody's. It shall not be necessary for the consent of Noteholders pursuant to this Section to approve the particular form of any proposed amendment or consent, but it shall be sufficient if such consent shall approve the substance thereof. Prior to its consent to any amendment to this Agreement, the Note Trustee shall be entitled to receive and conclusively rely upon an Opinion of Counsel stating that such amendment is authorized or permitted by this Agreement. The Note Trustee may, but shall 55 not be obligated to, enter into any such amendment which affects the Note Trustee's own rights, duties or immunities under this Agreement or otherwise. (b) Notwithstanding Section 8.01(a) or anything to the contrary in this Agreement, the Servicer and the Note Issuer may amend Annex I to this Agreement in writing with prior written notice given to the Note Trustee and Moody's, but without the consent of the Note Trustee, Moody's or any Noteholder or Certificateholder, solely to address changes to the Servicer's method of calculating FTA Payments received as a result of changes to the Servicer's current computerized customer information system, as contemplated by Section (e)(iii) of Annex I hereto; provided that any such amendment shall not have or -------- cause a material adverse effect on the Certificateholders. SECTION 8.02. Protection of Title to Trust. (a) The Servicer shall ------------ ---------------------------- maintain accounts and records as to the Transition Property accurately and in accordance with its standard accounting procedures and in sufficient detail to permit reconciliation between FTA Payments received by the Servicer and FTA Collections from time to time deposited in the Collection Account. (b) The Servicer shall permit the Note Trustee and its agents at any time during normal business hours, upon reasonable notice to the Servicer and to the extent it does not unreasonably interfere with the Servicer's normal operations, to inspect, audit and make copies of and abstracts from the Servicer's records regarding the Transition Property and the FTA Charges. Nothing in this Section 8.02(b) shall affect the obligation of the Servicer to observe any applicable law (including any CPUC Regulation) prohibiting disclosure of information regarding the California Customers, and the failure of the Servicer to provide 56 access to such information as a result of such obligation shall not constitute a breach of this Section 8.02(b). SECTION 8.03. Notices. All demands, notices and communications upon or to ------------ ------- the Servicer, the Note Issuer, the Note Trustee, the Infrastructure Bank, the STO, the Certificate Trustee or Moody's under this Agreement shall be in writing and personally delivered, sent by overnight mail or sent by telecopy or other similar form of rapid transmission, and shall be deemed to have been duly given upon receipt (a) in the case of the Servicer, to Sierra Pacific Power Company, at 6100 Neil Road, P.O. Box 10100, Reno, Nevada 89520-3150, Attention: Treasurer, (b) in the case of the Note Issuer, to SPPC Funding LLC, at 6100 Neil Road, P.O. Box 30150, Reno, Nevada 89520-3150, Attention: President, (c) in the case of the Note Trustee, at the Corporate Trust Office, (d) in the case of the Infrastructure Bank, to California Infrastructure and Economic Development Bank, c/o California Trade and Commerce Agency, at 801 K Street, Suite 1700, Sacramento, CA 95814, Attention: Executive Director, (e) in the case of the Certificate Trustee, to Bankers Trust Company of California, N.A., c/o Bankers Trust Company, Corporate Trust and Agency Services, Four Albany Street, New York, New York 10006, Attention: Structured Finance Group, (f) in the case of the STO, to the California State Treasurer's Office, 915 Capitol Mall, Room 110, Sacramento, CA 95814, Attention of Deputy Treasurer, (g) in the case of Moody's, to Moody's Investors Service, Inc., ABS Monitoring Department, 99 Church Street, New York, New York 10007 or (h) as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. 57 SECTION 8.04. Assignment. Notwithstanding anything to the contrary ------------ ---------- contained herein, except as provided in Section 6.03 and as provided in the provisions of this Agreement concerning the resignation of the Servicer, this Agreement may not be assigned by the Servicer. SECTION 8.05. Limitations on Rights of Others. The provisions of this ------------ ------------------------------- Agreement are solely for the benefit of the Servicer and the Note Issuer and, to the extent provided herein or in the Basic Documents, the Trust, the Note Trustee, the Certificate Trustee, the Noteholders, the Certificateholders, the Infrastructure Bank and the STO, and nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Transition Property or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. SECTION 8.06. Severability. Any provision of this Agreement that is ------------ ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 8.07. Separate Counterparts. This Agreement may be executed by ------------ --------------------- the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. 58 SECTION 8.08. Headings. The headings of the various Articles and Sections ------------ -------- herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 8.09. Governing Law. This Agreement shall be construed in ------------ ------------- accordance with the laws of the State of California, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. SECTION 8.10. Assignment to Note Trustee. The Servicer hereby ------------ -------------------------- acknowledges and consents to (i) the collateral assignment of any or all of the Note Issuer's rights and obligations hereunder to the Note Trustee and (ii) the further assignment of the Note Trustee's rights and obligations under the Indenture to the Certificate Trustee. SECTION 8.11. Nonpetition Covenants. Notwithstanding any prior ------------ --------------------- termination of this Agreement or the Indenture, but subject to the CPUC's right to order the sequestration and payment of revenues arising with respect to the Transition Property, notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to the debtor, pledgor or transferor of the Transition Property pursuant to Section 843(e) and (g) of the PU Code, the Servicer shall not, prior to the date that is one year and one day after the termination of the Indenture with respect to the Note Issuer, acquiesce, petition or otherwise invoke or cause the Note Issuer or the Trust to invoke the process of any court or governmental authority for the purpose of commencing or sustaining a case against the Note Issuer or the Trust under any Federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator 59 or other similar official of the Note Issuer or the Trust or any substantial part of the property of the Note Issuer or the Trust, or ordering the winding up or liquidation of the affairs of the Note Issuer or the Trust. SECTION 8.12. Limitation of Liability. It is expressly understood and ------------ ----------------------- agreed by the parties hereto that (a) this Agreement is executed and delivered by Bankers Trust Company of California, N.A., not individually or personally but solely as Note Trustee on behalf of the holders of the Notes, in the exercise of the powers and authority conferred and vested in it, (b) the representations, undertakings and agreements herein made by the Note Trustee on behalf of the holders of the Notes are made and intended not as personal representations, undertakings and agreements by Bankers Trust Company of California, N.A., but are made and intended for the purpose of binding only the holders of the Notes, (c) nothing herein contained shall be construed as creating any liability on Bankers Trust Company of California, N.A., individually or personally, to perform any covenant either expressed or implied contained herein, except in its capacity as Note Trustee, all such liability, if any, being expressly waived by the parties who are signatories to this Agreement and by any Person claiming by, through or under such parties and (d) under no circumstances shall Bankers Trust Company of California, N.A., be personally liable for the payment of any indebtedness or expenses of the holders of the Notes or be personally liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Note Trustee under this Agreement; provided, however, -------- ------- that this provision shall not protect Bankers Trust Company of California, N.A. against any liability that would otherwise be imposed by reason of willful misconduct, bad faith or 60 gross negligence in the performance of duties or by reason of reckless disregard of obligations and duties under this Agreement. 61 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers as of the day and year first above written. SPPC FUNDING LLC, By: ______________________________________ Name: Title: SIERRA PACIFIC POWER COMPANY, By: ______________________________________ Name: Title: Acknowledged and Accepted: BANKERS TRUST COMPANY OF CALIFORNIA, N.A., not in its individual capacity but solely as Note Trustee, By: ______________________________________ Name: Title: 62 Annex I to Servicing Agreement SERVICING PROCEDURES The Servicer agrees to comply with the following servicing procedures: SECTION 1. DEFINITIONS. (a) Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Agreement. (b) Whenever used in this Annex I, the following words and phrases shall have the following meanings: "Aggregate Remittance Amount" has the meaning set forth in Section 6(e)(i) --------------------------- of this Annex I. "Balanced Payment Plan" means a level payment plan offered by the Seller, --------------------- which, if elected by a California Residential Customer, provides for level monthly Bill charges. "Billed FTA Revenues" means the amounts billed to California Customers ------------------- pursuant to the FTA Charges, whether billed directly to such California Customers by the Servicer or indirectly through an ESP pursuant to Consolidated ESP Billing. "Closing Bill" means the final bill issued to a California Customer at the ------------ time service is terminated. "Consolidated ESP Billing" means the billing option available to California ------------------------ Customers served by an ESP pursuant to which the Applicable ESP will be responsible for billing and collecting all charges to California Customers electing such billing option, including the FTA Charges, and will become obligated to the Servicer for such Billed FTA Revenues, all in accordance with applicable CPUC Regulations. Unless the context 63 indicates otherwise, the term Consolidated ESP Billing includes the Full Consolidated ESP Billing option. "Current Billing Period" means the calendar month immediately preceding the ---------------------- respective Remittance Date. "Daily Collections Curve" means the tally for the number of customer ----------------------- accounts specified in Schedule 6 to this Annex I, resulting from counting the number of days between when a particular bill is generated and when payment is received, as described in Schedule 6 to this Annex I. "Estimated FTA Collections" has the meaning set forth in Schedule 6 to this ------------------------- Annex I. "Estimation Template" means the template shown on Schedule 6 to this Annex ------------------- I, which template is used to calculate the FTA Payments estimated to have been received by the Servicer during any Collection Period. "Full Consolidated ESP Billing" means the billing option available to ----------------------------- California Customers served by an ESP, if such option is approved by the utility with respect to such ESP, pursuant to which such ESP performs the same tasks it would perform under Consolidated ESP Billing and, in addition, calculates all utility charges to California Customers, including the FTA Charges, from billing factors provided by the utility and the Servicer. "Monthly Collections Curve" means the cumulative summation of the Daily ------------------------- Collections Curve to derive monthly percentages of revenue collected, as described in Schedule 6 to this Annex I. 64 "Net Write-Off Percent" means the number (expressed as a percent) allocable --------------------- to a particular Billing Period equal to (i) the amount by which Write-Offs in the Current Billing Period exceed Write-Off recoveries in the current Billing Period, divided by (ii) the total billed revenue in the Current Billing Period. "Servicer Policies and Practices" means, with respect to the Servicer's ------------------------------- duties under this Annex I, the policies and practices of the Servicer applicable to such duties that the Servicer follows with respect to comparable assets that it services for itself or others. "Variables" means the following variables underlying the Daily Collections --------- Curves: (i) sample sizes for California Residential Customers and California Small Commercial Customers; (ii) tallied number of days recorded between when bills are generated and when bill payments are received; and (iii) the actual Write-Off percentage, calculated in the same manner as Net Write-Off Percent except that it is calculated for the applicable calendar year, for California Residential Customers and California Small Commercial Customers for the most recent year. "Write-Offs" means net amounts written off (including amounts written off ---------- that are subsequently recovered) of Billed FTA Revenues that remain unpaid by California Customers and ESPs as of 180 days after the issuance of the Closing Bills containing such charges. SECTION 2. DATA ACQUISITION. (a) Installation and Maintenance of Meters. Except to the extent that an -------------------------------------- ESP is responsible for such services pursuant to an ESP Service Agreement, the Servicer shall 65 cause to be installed, replaced and maintained meters in such places and in such condition as will enable the Servicer to obtain usage measurements for each California Customer every 27 to 33 days. (b) Meter Reading. At least once each 27 to 33 days, the Servicer shall ------------- obtain usage measurements for each California Customer; provided, however, that -------- ------- the Servicer may determine any California Customer's usage on the basis of estimates in accordance with applicable CPUC Regulations; and provided further ---------------- that the Servicer may obtain usage measurements from the Applicable ESP for California Customers receiving meter reading services from such ESP if the respective ESP Service Agreement so provides. (c) Cost of Metering. The Note Issuer shall not be obligated to pay any ---------------- costs associated with the metering duties set forth in this Section 2, including, but not limited to, the costs of installing, replacing and maintaining meters, and the Note Issuer shall not be entitled to any credit against the Servicing Fee for any cost savings realized by the Servicer or any ESP as a result of new metering and/or billing technologies. SECTION 3. USAGE AND BILL CALCULATION. The Servicer shall obtain a calculation of each California Customer's usage (which may be based on data obtained from such California Customer's meter read or on usage estimates determined in accordance with applicable CPUC Regulations) once every 27 to 33 days and shall determine therefrom each California Customer's individual FTA Charge to be included on such California Customer's Bill; provided, however, that in the case of California Customers served by an -------- ------- ESP under the Full Consolidated ESP Billing option, the Applicable ESP, rather than the Servicer, shall determine such California Customers' 66 individual FTA Charges to be included on such California Customers' Bills based on billing factors provided by the Servicer, and the Servicer shall deliver to the Applicable ESPs such billing factors as are necessary for the Applicable ESPs to calculate such California Customers' respective FTA Charges as such charges may change from time to time pursuant to the True-Up Adjustments. SECTION 4. BILLING. ------- The Servicer shall implement the FTA Charges as of the FTA Effective Date and shall thereafter bill each California Customer or the Applicable ESP for the respective California Customer's outstanding current and past due FTA Charges accruing through the FTA Termination Date, all in accordance with the following: (a) Frequency of Bills; Billing Practices. In accordance with the ------------------------------------- Servicer's then-existing Servicer Policies and Practices for its own charges, as such Servicer Policies and Practices may be modified from time to time, the Servicer shall generate and issue a Bill to each California Customer, or, in the case of a California Customer who has elected Consolidated ESP Billing, to the Applicable ESP, with respect to such California Customer's respective FTA Charge once every 27 to 33 days, at the same time, with the same frequency and on the same Bill as that containing the Servicer's own charges to such California Customer or ESP, as the case may be. In the event that the Servicer makes any material modification to its Servicer Policies and Practices for its own charges, it shall notify the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's as soon as practicable, and in no event later than 60 Business Days after such 67 modification goes into effect; provided, however, that the Servicer may not make -------- ------- any modification that will materially adversely affect the Certificateholders. (b) Format. ------ (i) Each Bill to a California Customer shall contain the charge corresponding to the respective FTA Charge owed by such California Customer for the applicable Billing Period. Unless it is not practicable for the Servicer's billing system to do so, the FTA Charge shall appear as a separate line-item on each Bill. (ii) In the case of each California Customer that has elected Consolidated ESP Billing, the Servicer shall deliver to the Applicable ESP itemized charges for such California Customer setting forth such California Customer's FTA Charge as a separate line-item. (iii) The Servicer shall conform to such requirements in respect of the format, structure and text of Bills delivered to California Customers and ESPs as applicable CPUC Regulations shall from time to time prescribe. To the extent that Bill format, structure and text are not prescribed by the PU Code or by applicable CPUC Regulations, the Servicer shall, subject to clauses (i) and (ii) above, determine the format, structure and text of all Bills in accordance with its reasonable business judgment, its Servicer Policies and Practices with respect to its own charges and prevailing industry standards. (c) Delivery. The Servicer shall deliver all Bills to California Customers -------- (i) by United States Mail in such class or classes as are consistent with the Servicer Policies and Practices followed by the Servicer with respect to its own charges to its customers or (ii) by 68 any other means, whether electronic or otherwise, that the Servicer may from time to time use to present its own charges to its customers. In the case of California Customers that have elected Consolidated ESP Billing, the Servicer shall deliver all Bills or charges to the Applicable ESPs by such means as are mutually agreed upon by the Servicer and the Applicable ESP and are consistent with CPUC Regulations. The Servicer or an ESP, as applicable, shall pay from its own funds all costs of issuance and delivery of all Bills, including but not limited to printing and postage costs as the same may increase or decrease from time to time. SECTION 5. CUSTOMER SERVICE FUNCTIONS. The Servicer shall handle all California Customer inquiries and other California Customer service matters according to the same procedures it uses to service California Customers with respect to its own charges. SECTION 6. COLLECTIONS; PAYMENT PROCESSING; REMITTANCE. (a) Collection Efforts, Policies, Procedures. (i) The Servicer shall use reasonable efforts to collect all Billed Revenues from California Customers and ESPs as and when the same become due and shall follow such collection procedures as it follows with respect to comparable assets that it services for itself or others, including with respect to the following: (A) The Servicer shall prepare and deliver overdue notices to California Customers and ESPs in accordance with applicable CPUC Regulations and Servicer Policies and Practices. 69 (B) The Servicer shall apply late payment charges, if any, to outstanding ESP balances in accordance with applicable CPUC Regulations. All late payment charges and interest collected shall be payable to and retained by the Servicer as a component of its compensation under the Agreement, and the Note Issuer shall have no right to share in the same. (C) The Servicer shall deliver oral and written past-due and shut-off notices in accordance with applicable CPUC Regulations and Servicer Policies and Practices. (D) The Servicer shall adhere to and carry out disconnection policies and termination of Consolidated ESP Billing in accordance with PU Code (S) 779.2, CPUC Decision 97-10-087 and applicable CPUC Regulations and Servicer Policies and Practices. (E) The Servicer may employ the assistance of collection agents in accordance with applicable CPUC Regulations and Servicer Policies and Practices. (F) The Servicer shall apply California Customer and ESP deposits to the payment of delinquent accounts in accordance with applicable CPUC Regulations and Servicer Polices and Practices and according to the priorities set forth in Section 6(b)(ii), (iii) and (iv) of this Annex I. (ii) The Servicer shall not waive any late payment charge or any other fee or charge relating to delinquent payments, if any, or waive, vary or modify any terms of payment of any amounts payable by a California Customer, in each case unless such waiver or action (A) would be in accordance with the Servicer's customary practices or 70 those of any successor Servicer with respect to comparable assets that it services for itself and for others; (B) would not materially adversely affect the rights of the Certificateholders; and (C) would comply with applicable law; provided, however, that notwithstanding anything in the Agreement or this Annex I to the contrary, the Servicer is authorized to write off any Billed FTA Revenues, in accordance with its Servicer Policies and Practices, that remain outstanding for 180 days after issuance of a Closing Bill. (iii) The Servicer shall accept payment from California Customers in respect of Billed FTA Revenues in such forms and methods and at such times and places as it accepts for payment of its own charges. The Servicer shall accept payment from ESPs in respect of Billed FTA Revenues in such forms and methods and at such times and places as the Servicer and each ESP shall mutually agree in accordance with applicable CPUC Regulations. (b) Payment Processing; Allocation; Priority of Payments. (i) The Servicer shall post all payments received to California Customer or ESP accounts as promptly as practicable, and, in any event, substantially all payments shall be posted no later than two Servicer Business Days after receipt. (ii) Subject to clause (iii) below, the Servicer shall apply payments received to each California Customer's or ESP's account in proportion to the charges contained on the outstanding Bill to such California Customer or ESP. (iii) Any amounts collected by the Servicer that represent partial payments of the total Bill to a California Customer shall be allocated as follows (A) first to amounts owed to the Note Issuer, the Seller and the applicable ESP, regardless of age, in 71 proportion to their respective percentages of the total amount of their combined outstanding charges on such Bill, and then (B) to all other outstanding amounts owed to parties other than the Note Issuer, the Seller and the applicable ESP. (iv) The Servicer shall hold all over-payments for the benefit of the Note Issuer and the Seller and shall apply such funds to future Bill charges in accordance with clauses (ii) and (iii) above as such charges become due. (c) Accounts; Records. The Servicer shall maintain accounts and records as to the Transition Property accurately and in accordance with its standard accounting procedures and in sufficient detail to permit reconciliation between payments or recoveries with respect to the Transition Property and the amounts from time to time remitted to the Collection Account in respect of the Transition Property. (d) Investment of FTA Payments Received. Prior to remittance on the applicable Remittance Date, the Servicer may invest FTA Payments received at its own risk and for its own benefit, and such investments and funds shall not be required to be segregated from the other investments and funds of the Servicer. (e) Calculation of Collections; Determination of Aggregate Remittance Amount. (i) On or before each Remittance Date, the Servicer shall calculate, in accordance with Schedule 6, the total FTA Payments estimated to have been received by the Servicer from or on behalf of California Customers during the prior Collection Period in respect of all previously Billed FTA Revenues ("Estimated FTA Collections"), increased or decreased, as applicable, by (A) the amount of any Remittance Shortfall calculated for such Remittance Date or (B) the amount of any Excess Remittance calculated for such 72 Remittance Date and (C) Billed FTA Revenues not accounted for or erroneously accounted for in prior periods (collectively, the "Aggregate Remittance Amount"). (ii) At the end of each year, on or before the Annual Adjustment Date in accordance with Section 4.01(b)(i)(1) of the Agreement, the Servicer shall update the Variables underlying the Daily Collections Curve in Schedule 6 and shall revise such curve to reflect the updated Variables. The Servicer shall use the revised Daily Collections Curve to update the Monthly Collections Curve. (iii) The Servicer and the Note Issuer acknowledge that the Servicer has undertaken to make certain changes to its current computerized customer information system, which changes, when functional, would affect the Servicer's method of calculating the FTA Payments estimated to have been received by the Servicer during each Collection Period as set forth in Schedule 6 hereto. Should these changes to the computerized customer information system become functional during the term of the Agreement, the Servicer and the Note Issuer agree that they shall review the procedures used to calculate the FTA Payments estimated to have been received, as set forth on Schedule 6, in light of the capabilities of such new system and shall make such modifications and/or substitutions to such procedures and to clause (ii) above as may be appropriate in the interests of efficiency, accuracy, cost and/or system capabilities; provided, however, that the Servicer may not make any modification or substitution that will materially adversely affect the Certificateholders. As soon as practicable, and in no event later than 60 Business Days after the date on which all California Customer accounts have been converted for billing under such new system, the 73 Servicer shall notify the Note Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's of the same. (iv) All calculations of collections, each update of the Variables and any changes in procedures used to calculate the FTA Payments pursuant to this Section 6(e) shall be made in good faith and in the case of any update pursuant to clause (ii) or any change in procedures pursuant to clause (iii) in a manner reasonably intended to provide estimates and calculations that are at least as accurate as those that would be provided on the Closing Date utilizing the initial Variables and procedures. (f) Remittances. (i) The Note Issuer shall cause to be established the Collection Account in the name of the Note Trustee in accordance with the Indenture. (ii) The Servicer shall make or cause to be made remittances to the Collection Account in accordance with Section 6.11 of the Agreement. (iii) In the event of any change of account or change of institution affecting the Collection Account, the Note Issuer shall provide written notice thereof to the Servicer by the earlier of (A) five Business Days from the effective date of such change or (B) five Business Days prior to the next Remittance Date. 74 Schedule 6 to Annex I to Servicing Agreement CALCULATION OF AGGREGATE REMITTANCE AMOUNT Subject to the terms and conditions of this Agreement, the Servicer shall calculate the Aggregate Remittance Amount to be remitted to the Collection Account on a Remittance Date in accordance with this Schedule 6. I. Determination of Monthly Collections Curves ------------------------------------------- The following model shall be used to determine the Monthly Collections Curves for California Residential Customers and California Small Commercial Customers for each Collection Period. Such Monthly Collections Curves shall be used in the Estimation Template described in Section II of this Schedule 6. Assumptions ----------- 1. California Customer billing is conducted on a daily basis, and each month contains 30 days. 2. The Monthly Collections Curve has not varied materially over the course of the year. 3. The Monthly Collections Curve is composed of a summation of historical daily collections receipts curves ("Daily Collections Curves"). ------------------------ 4. The historical daily collections receipts curve was derived from California Customer accounts spanning from January 1997 to December 1998. 5. The California Customer accounts in 1998 include 38,087 residential accounts (representing approximately 95% of all California Residential Customer 75 accounts) and 4,532 small commercial accounts (representing approximately 100% of all California Small Commercial Customer accounts.) 6. The California Customer accounts in 1997 include 37,758 residential accounts (representing approximately 95% of all California Residential Customer accounts) and 4,633 small commercial accounts (representing approximately 100% of all California Small Commercial Customer accounts. 7. Each billing month has an estimated collection percentage as shown below: Estimated Collection Percentages -------------------------------- California Residential California Small ---------------------- ---------------- Billing Month Customers Commercial Customers ------------- --------- -------------------- 72% 28% Methodology - ----------- Daily Collections Curves. In order to determine the Monthly Collections ------------------------ Curves, the Servicer must first determine the Daily Collections Curves. To derive the Daily Collections Curves, the Servicer recorded the number of days between when a particular bill was generated and when full payment was received. A tally was developed to record each payment experience for the sample. California Residential Customer accounts and California Small Commercial Customer accounts were tallied separately. Once the tallies were complete, the Servicer expressed each day's tally sum as a percentage of the total number of bills generated in the sample (i.e., 72% for California Residential Customers and 28% for California Small Commercial Customers). 76 Monthly Collections Curves. To derive the Monthly Collections Curves, the -------------------------- Servicer assumed that the daily collection payment pattern was the same for bills sent on each day of the month and that the billed amounts for a given month are spread evenly over each day of the month. Thus, the daily payments received as a percent of the monthly billed can be determined for each day's billing. Each daily percentage shown in Attachments A and B, was multiplied by 1/30 to simulate one day's worth of collections. Then, the Servicer took the cumulative sum for each day (Day 1, Day 1 + Day 2, Day 1 + Day 2 + Day 3, etc.) to produce the Monthly Collections curves shown in Attachment A to this Schedule 6. II. Estimation Template for Calculation of Estimated FTA Collections ---------------------------------------------------------------- The Servicer shall use the Estimation Template described below to calculate the FTA Payments estimated to have been received during the Collection Period relating to each Remittance Date (prior to any adjustment for any Remittance Shortfall, any Excess Remittance or any FTA Revenues not accounted for in prior periods) (the "Estimated FTA Collections"). The Servicer shall calculate the ------------------------- Estimated FTA Collections separately for California Residential Customers and California Small Commercial Customers. In such calculations, the Servicer shall use the Monthly Collections Curves described in Section I of this Schedule 6 in the Estimation Template. Where: M = [a calendar month] n = [the calendar month immediately prior to the Remittance Date] M\\(n)\\ = the Collection Period [for which Estimated Collections are calculated and remitted on the Remittance Date, as well as the Current Billing Period with respect to such Remittance Date] A = percentage collected of the total Billed FTA Revenues billed during the Current Billing Period 77 B = percentage collected of the total Billed FTA Revenues billed during the Billing Period prior to the Current Billing Period C = percentage collected of the total Billed FTA Revenues billed during the Billing Period two periods prior to the Current Billing Period D = percentage collected of the total Billed FTA Revenues billed during the Billing Period three periods prior to the Current Billing Period E = percentage collected of the total Billed FTA Revenues billed during the Billing Period four periods prior to the Current Billing Period F = percentage collected of the total Billed FTA Revenues billed during the Billing Period five periods prior to the Current Billing Period R = Billed FTA Revenues for a Billing Period S = Estimated FTA Collections for the Collection Period Then: For the Collection Period, Estimated FTA Collections (prior to any adjustments) equal (S) as shown in the Estimation Template below. For each Collection Period, (S) is calculated separately for California Residential Customers and California Small Commercial Customers. - ------------------------------------------------------------------------------ Collection Percent Estimated FTA Billed FTA Revenues from Monthly Collections in Period for Billing Period/1/ Collection Curve/2/ Collection Period - ------------------------------------------------------------------------------- M\\(n-5)\\ R\\(n-5)\\ F (F)(R\\(n-5)\\) - ------------------------------------------------------------------------------- M\\(n-4)\\ R\\(n-4)\\ E (E)(R\\(n-4)\\) - ------------------------------------------------------------------------------- M\\(n-3)\\ R\\(n-3)\\ D (D)(R\\(n-3)\\) - ------------------------------------------------------------------------------- M\\(n-2)\\ R\\(n-2)\\ C (C)(R\\(n-2)\\) - ------------------------------------------------------------------------------- M\\(n-1)\\ R\\(n-1)\\ B (B)(R\\(n-1)\\) - ------------------------------------------------------------------------------- M\\(n) \\ R\\(n) \\ A (A)(R\\(n)\\) - ------------------------------------------------------------------------------- Total S - ------------------------------------------------------------------------------- Notes: /1/ The Billed FTA Revenues (R) for multiple prior Billing Periods will be zero during the phase-in of the FTA Charges following the FTA Effective Date. Similarly, the Billed FTA Revenues for multiple succeeding Billing Periods will be zero during the phase-out of the FTA Charges following the FTA Termination Date. /2/ The Collection Percent (A, B, C, D, E, or F) is the collection percent in effect at the time the FTA Charges were billed based on the Monthly Collections Curve then in effect. 78 III. Calculation of the Aggregate Remittance Amount ---------------------------------------------- The Servicer shall use the Estimated FTA Collections calculated for California Residential Customers and California Small Commercial Customers under Estimation Template described in Section II of this Schedule 6 to calculate the Aggregate Remittance Amount for the Collection Period. Subject to the terms and provisions of this Agreement, the Servicer shall determine the Aggregate Remittance Amount (Z) to be remitted on a Remittance Date as follows: Where: M\\(n+1)\\ = a calendar month containing a Remittance Date M\\(n)\\ = a Collection Period S\\(r)(n)\\ = Estimated FTA Collections for California Residential Customers during a Collection Period S\\(s)(n)\\ = Estimated FTA Collections for California Small Commercial Customers during a Collection Period X\\(r)\\ = Remittance Shortfall (Excess Remittance) for California Residential Customers for a Remittance Date, if any X\\(s)\\ = Remittance Shortfall (Excess Remittance) for California Small Commercial Customers for a Remittance Date, if any Y\\(n)\\ = Billed FTA Revenues not accounted for or erroneously accounted for in prior periods, if any Z\\(n+1)\\ = Aggregate Remittance Amount to be remitted on a Remittance Date Then: the Aggregate Remittance Amount to be remitted on the Remittance Date (Z\\(n+1)\\) shall be determined as follows: Z\\(n+1)\\ = S\\(r)(n)\\ + S\\(s)(n)\\ + X\\(r)\\ + X\\(s)\\ + Y\\(n)\\ 79 Attachment A Schedule 6 to Annex I to Servicing Agreement
Residential Eligible Customers Small Commercial Customers Percent of billed amounts collected in current month 56.60% 56.60% Percent of billed amounts collected in second month after billing 37.30% 37.30% Percent of billed amounts collected in third month after billing 5.00% 5.00% Percent of billed amounts collected in fourth month after billing 0.45% 0.45% Percent of billed amounts collected in fifth month after billing 0.45% 0.45% Percent of billed amounts collected in sixth month after billing -- --
80 Annex II to Servicing Agreement ROUTINE QUARTERLY TRUE-UP ADJUSTMENTS SECTION 1. Series 1999-1. (a) The Servicer shall not perform Routine ------------- Quarterly True-Up Adjustments for the SPPC Funding LLC Notes, Series 1999-1. 81 Exhibit A [FORM OF MONTHLY SERVICER'S CERTIFICATE] 82 Monthly Servicer's Certificate California Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1 $24,000,000 6.40% Rate Reduction Certificates, Series 1999-1 Pursuant to Section 3.01(b)(i) of the Transition Property Servicing Agreement dated as of April 9, 1999 (the "Agreement") between Sierra Pacific Power Company, as Servicer, and SPPC Funding LLC, as Note Issuer, the Servicer does hereby certify as follows: Capitalized terms used in the Monthly Servicer's Certificate (the "Monthly Certificate") have their respective meanings as set forth in the Agreement. References herein to certain sections and subsections are references to the respective sections of the Agreement. Collection Period: XXX Line No. BILLED REVENUE SUMMARY -------- ---------------------- 1 Current Monthly Billing Period 2 Residential KWh Billed (Pre-True Up) 3 Residential KWh Billed (Post-true Up) 4 Residential FTA Charge (Pre-True Up) 5 Residential FTA Charge (Post-True Up) 6 Small Commercial KWh Billed (Pre-True Up) 7 Small Commercial KWh Billed (Post-True Up) 8 Small Commercial FTA Charge (Pre-True Up) 9 Small Commercial FTA Charge (Post-True Up) Current Period Billed FTA Revenues 10 Residential 11 Small Commercial 12 Total 13 FTA Revenues Not Accounted For in Prior Periods 14 Residential G&E Net Write-Offs as % of G&E Billed Revenues 15 CIA G&E Net Write-Offs as % of G&E Billed Revenues 83 Exhibit A of Servicing Agreement SIERRA PACIFIC POWER COMPANY
FTA REVENUES REMITTED TO TRUSTEE - --------------------------------------------------------------------------------------------------------------------- Monthly Residential Remittance Percentages - -------------------------------------------------------------------------------------------------------------------- Line No. 30 Days 60 Days 90 Days 120 Days 150 Days 180 Days Total 1 Billed DTA Rev 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2 [Mo.] 3 [Mo.] 4 [Mo.] 5 [Mo.] 6 [Mo.] 7 [Mo.] 8 Total Write-off Reconciliation ------------------------ 9 xxx Period Billed FTA Revenues 10 xx FTA Residential Net Write-Offs 11 xx Net Billed FTA Revenues 12 Amount Previously Remitted to Trust 13 Write-Off Adjustment 14 Aggregate Residential Remittance Amount Monthly Small Commercial Remittance Percentages 30 Days 60 Days 90 Days 120 Days 150 Days 180 Days Total 15 Billed DTA Rev 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 16 [Mo.] 17 [Mo.] 18 [Mo.] 19 [Mo.] 20 [Mo.] 21 [Mo.] 22 Total Write-off Reconciliation ------------------------ 23 xx Period Billed FTA Revenues 24 xx FTA Small Commercial Net Write-Offs 25 xx Net Billed FTA Revenues 26 Amount Previously Remitted to Trust 27 Write-off Adjustment 28 Aggregate Small Commercial Remittance Amount AGGREGATE REMITTANCE AMOUNT --------------------------- 29 Residential Remittance Amount 30 Small Commercial Remittance Amount 31 Total 32 FTA Revenues Not Accounted For in Prior Period 33 Aggregate FTA Remittances for xxx Billing Period 34 Aggregate FTA Remittances for xxx Billing Period 35 Aggregate FTA Remittance for xxx Billing Period 36 Total FTA Remittances for xxx Payment Date
84 Exhibit A of Servicing Agreement SIERRA PACIFIC POWER COMPANY IN WITNESS HEREOF, the undersigned has duly executed and delivered this Monthly Servicer's Certificate ________________ day of _____, _____. SIERRA PACIFIC POWER COMPANY, as Servicer By: _______________________________ [SPPC Officer] [Title of Officer] 85 Exhibit B [FORM OF CERTIFICATE OF COMPLIANCE] The undersigned hereby certifies that he/she is the duly elected and acting ___________ of Sierra Pacific Power Company, as servicer (the "Servicer") under the Transition Property Servicing Agreement, dated as of April 9, 1999 (the Servicing Agreement"), between the Servicer and SPPC Funding LLC (the "Note Issuer") and further that: 1. A review of the activities of the Servicer and of its performance under the Servicing Agreement during the twelve months ended June 30, ___ has been made under the supervision of the undersigned pursuant to Section 3.03 of the Servicing Agreement; and 2. To the best of the undersigned's knowledge, based on such review, the Servicer has fulfilled all of its material obligations in all material respects under the Servicing Agreement throughout the twelve months ended June 30, ___, except for those material defaults in the fulfillment of material obligations listed on Annex A hereto. Executed as of this ___ day of ______________. SIERRA PACIFIC POWER COMPANY ______________________________________ By: Name: Title: 86 Annex A to Certificate of Compliance List of Servicer Defaults ------------------------- The following material defaults known to the undersigned occurred during the year ended June 30, ___: Nature of Default Status ----------------- ------ 87 Exhibit C [FORM OF ROUTINE ANNUAL TRUE-UP MECHANISM ADVICE LETTER] December ____, _____ ADVICE ______-E PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ENERGY DIVISION SUBJECT: Annual FTA Charge True-Up Mechanism Advice Filing Pursuant to California Public Utilities Commission (CPUC) Decision No. ____________ (Decision), Ordering Paragraph No. __, Sierra Pacific Power Company (SPPC) as servicer of the Rate Reduction Bonds and on behalf of SPPC Funding LLC is required to apply for adjustment to FTA charges at least [15] days before the end of each calendar year. PURPOSE - ------- This filing establishes revised FTA charges for rate schedules for residential and eligible small commercial customers. During the rate-freeze period, changes in the FTA charges will be offset by equal and offsetting changes in the residual Competition Transition Charge (CTC) component of customers' rates. 88 BACKGROUND - ---------- In Decision ____________, the Commission authorized SPPC to file routine True-Up Mechanism Advice Letters on an annual basis, at least [15] days before the end of the calendar year. Routine Advice Letter filings are those in which SPPC uses the methodology found reasonable by the Commission in Decision No. ____________ to revise existing FTA charges. Using the Methodology approved by the Commission in Decision No. ____________, this filing modifies the variables used in the FTA charge calculation and provides the resulting modified FTA charges. Table 1 shows the revised assumptions for each of the variables used in calculating the FTA charges for residential and small commercial customers. The assumptions underlying the current FTA charges were filed in Advice ____, as authorized by Decision No.____________. Attachment 1 shows the revised payment schedule. 89 Exhibit C of Servicing Agreement TABLE I Input Values For Revised FTA Charges
- ----------------------------------------------------------------------------------------------------------------- Eligible Small Residential Commercial Customers Customers - ----------------------------------------------------------------------------------------------------------------- Monthly kWH sales: - ----------------------------------------------------------------------------------------------------------------- January - ----------------------------------------------------------------------------------------------------------------- February - ----------------------------------------------------------------------------------------------------------------- March - ----------------------------------------------------------------------------------------------------------------- April - ----------------------------------------------------------------------------------------------------------------- May - ----------------------------------------------------------------------------------------------------------------- June - ----------------------------------------------------------------------------------------------------------------- July - ----------------------------------------------------------------------------------------------------------------- August - ----------------------------------------------------------------------------------------------------------------- September - ----------------------------------------------------------------------------------------------------------------- October - ----------------------------------------------------------------------------------------------------------------- November - ----------------------------------------------------------------------------------------------------------------- December - ----------------------------------------------------------------------------------------------------------------- Residential and eligible small commercial bill [month, year] - ----------------------------------------------------------------------------------------------------------------- Percent of residential customers' and elibible small commercial customers' billed amounts expected to be uncollected - ----------------------------------------------------------------------------------------------------------------- Percent of billed amounts collected in current month - ----------------------------------------------------------------------------------------------------------------- Percent of billed amounts collected in second month after billing - ----------------------------------------------------------------------------------------------------------------- Percent of billed amounts collected in third month after billing - ----------------------------------------------------------------------------------------------------------------- Percent of billed amounts collected in fourth month after billing - ----------------------------------------------------------------------------------------------------------------- Percent of billed amounts collected in fifth month after billing - ----------------------------------------------------------------------------------------------------------------- Percent of billed amounts collected in sixth month after billing - ----------------------------------------------------------------------------------------------------------------- For Series - ----------------------------------------------------------------------------------------------------------------- Quarterly Overcollateralization amount - ----------------------------------------------------------------------------------------------------------------- Quarterly Servicing Fee as percent of outstanding balance - -----------------------------------------------------------------------------------------------------------------
90 - ----------------------------------------------------------------------------------------------------------------- Quarterly ongoing transaction expenses - ----------------------------------------------------------------------------------------------------------------- Expected outstanding RRB principal balance as of 12/31/__ - ----------------------------------------------------------------------------------------------------------------- Undercollection of principal to be reflected in the new FTA charges - ----------------------------------------------------------------------------------------------------------------- Reserve Subaccount balance to be reflected in the new FTA charges - ----------------------------------------------------------------------------------------------------------------- Difference between Overcollateralization Subaccount balance and Required Overcollaterization Level to be reflected in the new FTA charges - ----------------------------------------------------------------------------------------------------------------- Difference between Capital Subaccount balance and Required Capital Level to be reflected in the new FTA charges - -----------------------------------------------------------------------------------------------------------------
Table II shows the revised FTA charges calculated for residential and eligible small commercial customers. The FTA calculations are shown in Attachment 2. Table II
- ----------------------------------------------------------------------------------------------------------------- Residential Customer FTA Charge c/kWh - ----------------------------------------------------------------------------------------------------------------- Eligible Small Commercial Customer FTA Charge c/kWH - -----------------------------------------------------------------------------------------------------------------
Attached are proposed changes to Part 1 of SPPC's Preliminary Statement to show FTA charges to be effective January 1, _____. EFFECTIVE DATE - -------------- In accordance with Decisions ____________, Routine True-Up Mechanism Advice Letters for required annual FTA charge adjustments shall be filed at least [15] days before the end of each calendar year and these adjustments to FTA charges shall be effective at the beginning of the next calendar year. No Commission resolution is required. Therefore, these FTA charges shall be effective January 1, ____ through December 31, ____. NOTICE - ------ Copies of this filing are being furnished to the parties on the attached service list and to parties to ______________. In accordance with Public Utilities Code (S)491, notice to the public is hereby given by filing and keeping this filing open for public inspection at the SPPC's corporate headquarters. Enclosures cc: CPUC, SF - Attn: Paul Clanon, Energy Division CPUC, SF - Attn: Elena Schmid, ORA CPUC, SF - Attn: Juanita Porter, Energy Division CPUC, SF - Attn: Wade McCartney, Energy Division 91 Exhibit D of Servicing Agreement [FORM OF ANNIVERSARY TRUE-UP MECHANISM ADVICE LETTER] August ___, ____ ADVICE ______-E (U39E) PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ENERGY DIVISION SUBJECT: Anniversary FTA Charge True-Up Mechanism Advice Filing Pursuant to California Public Utilities Commission (CPUC) Decision No. __________ (Financing Order), Ordering Paragraphs Nos. __ and __, Sierra Pacific Power Company (SPPC) as servicer of the Rate Reduction Bonds (RRBs) and on behalf of SPPC Funding LLC is required to file a True-Up Mechanism Advice Letter at least 15 days before each anniversary of the issuance of the Financing Order. PURPOSE - ------- This filing establishes that the FTA charges currently in effect are adequate to service the RRBs, that no event of default has occurred and is continuing on the RRBs, and that no adjustments to the FTA charges are required at this time. BACKGROUND - ---------- In the Financing Order, the Commission ordered SPPC to file a True-Up Mechanism Advice Letter at least 15 days before each anniversary of the issuance of the Financing Order, stating whether an adjustment to the FTA charges is necessary. Table 1 shows the RRB principal balance and the balances in the Collection Account subaccounts immediately following distributions made on ______, ___, _____. The assumptions underlying the current FTA charges were filed in Advice ______-E, as authorized by the Financing Order. 92 Exhibit D of Service Agreement
- ----------------------------------------------------------------------------------------------------------------- TABLE 1 RRB Principal Balance and Collection Account Subaccount Balances - ----------------------------------------------------------------------------------------------------------------- Scheduled RRB Principal Balance - ----------------------------------------------------------------------------------------------------------------- RRB Principal Balance - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Reserve Subaccount Balance - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Required Overcollateralization Level - ----------------------------------------------------------------------------------------------------------------- Overcollateralization Subaccount Balance - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Required Capital Level - ----------------------------------------------------------------------------------------------------------------- Capital Subaccount Balance - -----------------------------------------------------------------------------------------------------------------
EFFECTIVE DATE - -------------- In accordance with the Financing Order, the Commission shall determine on this Financing Order Issuance Anniversary, as required by PU Code Section 841(c), whether adjustments to the FTA charges are required, with the resulting adjustments to the FTA charges, if necessary, to be implemented within 90 days of this Financing Order Issuance Anniversary. NOTICE - ------ Copies of this filing are being furnished to the parties on the attached service list and to parties to ___________. In accordance with Public Utilities Code (S)491, notice to the public is hereby given by filing and keeping this filing open for public inspection at the SPPC's corporate headquarters. cc: CPUC, SF - Attn: Paul Clanon, Energy Division CPUC, SF - Attn: Elena Schmid, ORA CPUC, SF - Attn: Juanita Porter, Energy Division CPUC, SF - Attn: Wade McCartney, Energy Division 93 Exhibit E [FORM OF QUARTERLY SERVICER'S CERTIFICATE] Quarterly Servicer's Certificate California Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1 $24,000,000 6.40% Rate Reduction Certificates, Series 1999-1 Pursuant to Section 4.01(d)(ii) of the Transition Property Servicing Agreement dated as of April 9, 1999 (the "Agreement") between Sierra Pacific Power Company, as Servicer, and SPPC Funding LLC, as Note Issuer, the Servicer does hereby certify as follows: Capitalized terms used in the Quarterly Servicer's Certificate (the "Quarterly Certificate") have the respective meanings as set forth in the Agreement. References herein to certain sections and subsections are references to the respective sections of the Agreement. Collection Periods: Distribution Date: 1. Collections Allocable and Aggregate Amounts Available for the Current Distribution Date: i. Remittances for the xxx Collection Period ii. Remittances for the xxx Collection Period iii. Remittances for the xxx Collection Period iv. Net Earnings on Collection Account v. General Sub-Account Balance vi. Reserve Sub-Account Balance vii. Overcollateralization Sub-Account Balance viii. Capital Sub-Account Balance ix. Collection Account Balance 2. Outstanding Principal Balance and Collection Account Balance as of Prior Distribution Date: i. Rate Reduction Certificate Principal Balance ii. Reserve Sub-Account Balance iii. Overcollateralization Sub-Account Balance iv. Capital Sub-Account Balance 3. Required Funding/Payments as of Current Distribution Date: 94 i. Projected Certificate Balance ii. Required Overcollateralization Funding iii. Required Capital Sub-Account Funding 4. Allocation of Remittances as of Current Distribution Date Pursuant to 8.02(d) of Indenture: i. Note Trustee, Delaware Trustee, Certificate Trustee and Letter of Credit Bank Fees ii. Quarterly Servicing Fee iii. Quarterly Administration Fee iv. Operating Expenses (subject to $100,000 cap) v. Quarterly Interest vi. Quarterly Principal vii. Operating Expenses (in excess of $100,000) viii. Funding of Overcollateralization Sub-Account (to required level) ix. Funding of Capital Sub-Account (to required level) x. Net Earnings Released to Note Issuer xi. Deposits to Reserve Sub-Account 5. Outstanding Principal Balance and Collection Account Balance as of Current Distribution Date (after giving effect to payments to be made on such distribution date): i. Rate Reduction Certificate Principal Balance ii. Reserve Sub-Account Balance iii. Overcollateralization Sub-Account Balance iv. Capital Sub-Account Balance 6. Sub-Account Draws as of Current Distribution Date (if applicable, pursuant to Section 8.02(e) of Indenture): i. Reserve Sub-Account ii. Overcollateralization Sub-Account iii. Capital Sub-Account iv. Total Draws 95 7. Shortfalls in Interest and Principal Payments as of Current Distribution Date: i. Quarterly Interest ii. Quarterly Principal 8. Shortfalls in Required Sub-Account Levels as of Current Distribution Date: i. Overcollateralization Sub-Account ii. Capital Sub-Account IN WITNESS HEREOF, the undersigned has duly executed and delivered this Quarterly Servicer's Certificate this _____ day of ______, ____. SIERRA PACIFIC POWER COMPANY, as Servicer By:_____________________________________ [SPPC Officer] [Title of Officer] 96 Schedule 4.01(a) of Servicing Agreement Expected Amortization Schedule ------------------------------ Expected Outstanding Principal Balance -------------------------------------- Principal --------- Date Balance ---- ------- Series Issuance Date 24,000,000 June 1999 23,835,891 September 1999 23,041,136 December 1999 22,200,000 March 2000 21,299,918 June 2000 20,684,942 September 2000 20,250,699 December 2000 19,800,000 March 2001 19,096,231 June 2001 18,414,470 September 2001 17,916,149 December 2001 17,400,000 March 2002 16,672,262 June 2002 16,004,913 September 2002 15,511,075 December 2002 15,000,000 March 2003 14,282,359 June 2003 13,616,856 September 2003 13,116,903 December 2003 12,600,000 March 2004 11,887,191 June 2004 11,225,485 September 2004 10,721,050 December 2004 10,200,000 March 2005 9,492,845 June 2005 8,834,639 September 2005 8,325,463 December 2005 7,800,000 March 2006 7,098,379 June 2006 6,443,724 September 2006 5,929,841 December 2006 5,400,000 March 2007 4,703,935 June 2007 4,052,829 September 2007 3,534,229 December 2007 3,000,000 97 March 2008 2,309,493 June 2008 1,661,939 September 2008 1,138,619 December 2008 600,000 March 2009 0 Weighted Average 5.06 years 98 EX-10.D 11 ADMINISTRATIVE SERVICES AGREEMENT EXHIBIT (10)(D) ADMINISTRATIVE SERVICES AGREEMENT between SPPC FUNDING LLC and SIERRA PACIFIC POWER COMPANY Dated as of April 9, 1999 1 TABLE OF CONTENTS -----------------
Article Page - ------- ---- 1 Services 1 2 Compensation and Payment 1 3 Responsibilities of SPPC 2 4 Notice and Acceptance of Completion 3 5 Rights to Work Product 4 6 Confidentiality 4 7 Force Majeure 4 8 Assignment and Subcontracting 4 9 Termination 5 10 Notices 5 11 Transfer of Ownership 5 12 Conduct of Business 5 13 General 8 14 Conformity to Laws 8
Appendix - -------- A Form of Request for Administrative Services 2 ADMINISTRATIVE SERVICES AGREEMENT THIS AGREEMENT is made and entered into effective as of April 9, 1999, by and between SPPC FUNDING LLC, a Delaware limited liability company (the "Note Issuer"), and SIERRA PACIFIC POWER COMPANY, a Nevada corporation ("SPPC"). RECITALS The Note Issuer desires SPPC to perform certain administrative and technical services in support of the Note Issuer's operations, including without limitation, legal, financial and accounting services (the "Administrative Services"). SPPC desires to perform the Administrative Services in consideration of the compensation and other terms and conditions hereinafter set forth. It is the parties' intention that SPPC shall be compensated for all costs incurred in providing the Administrative Services, including without limitation, Administrative Services rendered from March 24, 1999 through the date of this Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. Services -------- 1.1 SPPC shall perform from time to time such Administrative Services as described in written Requests for Administrative Services (individually, a "Request") in substantially the form set forth in Appendix A to this Agreement, or by oral Request confirmed by written Request within three (3) working days thereafter, setting forth the particular Administrative Services to be performed and the authorized cost therefor. The terms and conditions of this Agreement shall apply to all Requests issued hereunder. 1.2 SPPC shall use its best efforts to complete the Administrative Services specified in each Request in each case in accordance with the agreed upon task schedules. 1.3 All procurement functions performed by SPPC under this Agreement shall be carried out as the Note Issuer's agent. 2. Compensation and Payment ------------------------ 2.1 Costs. As compensation for the performance of the Administrative ----- Services, the Note Issuer shall pay SPPC its costs, consisting of its direct and indirect costs on a fully loaded basis in accordance with the parties' established procedures, in the manner and at the times set forth below ("Costs"). 3 2.2 Payment. By the last day of each calendar month (or, if such last day ------- is not a "Business Day" as that term is defined in the Indenture, dated as of April 9, 1999, by and between the Note Issuer and Bankers Trust Company of California, N.A., a national banking association, as note trustee (the "Indenture"), the next succeeding Business Day) , SPPC shall prepare and submit to the Note Issuer an invoice for Costs incurred during the preceding month. Each invoice shall segregate Costs as agreed by the Note Issuer's and SPPC's authorized representatives. Such segregation of costs shall not be more detailed than a breakdown by task and SPPC's system of accounts. Upon receipt of the invoice, the Note Issuer shall record the billing and shall pay SPPC the total amount shown to be due on any such invoice by the next Payment Date (as such term is defined in the Indenture). Should the Note Issuer dispute any portion of an invoice, the Note Issuer shall advise SPPC in writing of the disputed portion and any proposed adjustments within thirty (30) days from the date of receipt. 2.3 Interest. Any balance owed to SPPC beyond the time for payment -------- provided in section 2.2 above shall accrue interest for each day until the outstanding balance is paid at the lesser of (a) a rate equal to 2 percent above the "Reference Rate" of the Bank of America N.T. & S.A., San Francisco, California on each day such interest accrues or (b) the maximum rate permitted by applicable law, provided, however, that interest shall not accrue on balances -------- ------- in excess of $25,000 per calendar quarter. Any adjustments in the Note Issuer's favor resulting from the resolution of any dispute or of any audit under section 2.4 below shall bear interest at the above-defined rate from the date payment was made by the Note Issuer to the date of payment or credit by SPPC. 2.4 Records. SPPC shall maintain books and accounts of the Costs in ------- accordance with SPPC's established procedures and generally accepted accounting principles and practices. During SPPC's normal business hours for a period of three (3) years after the date the Administrative Services to which the books and accounts relate are provided, the Note Issuer's authorized representatives shall have access to these books and accounts to the extent required to verify the Costs invoiced hereunder. SPPC shall include provisions substantially similar to this section in any reimbursable cost subcontract that it enters into in connection with this Agreement. 2.5 Funding Limitation. SPPC shall use its best efforts to notify the ------------------ Note Issuer in advance of incurring expenses in excess of the authorized cost for a particular Request. SPPC shall not be obligated to perform or complete any activities to the extent SPPC's Costs of doing so would exceed the applicable authorization. 3. Responsibilities of SPPC ------------------------- 3.1 Liability. SPPC shall perform the Administrative Services with the --------- degree of skill and judgment normally exercised by firms of similar stature and reputation. However, in consideration of the fact that SPPC is providing services at cost, the Note Issuer agrees that SPPC shall not be liable to the Note Issuer for, and that the Note Issuer shall, to the fullest extent permitted by law, indemnify, defend and hold harmless SPPC against, any loss, damage, cost or expense resulting from SPPC's acts or omissions, unless such acts or omissions constitute gross negligence, willful misconduct, fraud, or bad faith. 4 3.2 Consequential Losses. Neither SPPC nor its subcontractors or -------------------- suppliers, if any, shall be liable to the Note Issuer or its constituent partners for any consequential, special or incidental losses or damages that may be incurred in connection with any Administrative Services provided hereunder, such as loss of use, lost profits or revenues, cost of capital, loss of goodwill, or delay damages. 3.3 Availability. The waivers and disclaimers of liability, releases from ------------ liability, limitations and apportionments of liability, and exclusive remedy provisions of this Agreement shall apply even in the event of the fault, breach of contract, or otherwise of the party to the benefit of which such provisions operate, and shall extend to such party's affiliated companies other than the parties to this Agreement and its and their shareholders, directors, officers, employees and agents. 3.4 Insurance. SPPC hereby represents to the Note Issuer, and the Note --------- Issuer hereby acknowledges, that SPPC is insured under a major risk management program with large self-insured retentions. This program includes coverage for general liability insurance with limits of $200,000,000 as to person or persons for bodily injury, personal injury or property damage. In addition, SPPC and the Note Issuer may elect to procure insurance on behalf of the Note Issuer for specific projects as they deem appropriate, the cost of any such insurance to be a Cost to be paid by the Note Issuer. 3.5 Access to Work. SPPC shall, at all reasonable times during the course -------------- of the work, provide the Note Issuer with access to the work (complete or in progress) to such extent as may reasonably be required by the Note Issuer in order to determine the quantity and quality of the work and to assess the status of the work with respect to any applicable agreed-upon work plans and schedules. 3.6 Independent Contractor. SPPC shall act as an independent contractor ---------------------- in rendering any services under this Agreement. The parties also intend that no act done by either party pursuant to this Agreement will be deemed to create a partnership or joint venture, nor will the provisions of this Agreement be construed as creating a partnership or joint venture. 5 4. Notice and Acceptance of Completion ----------------------------------- Upon completion of any Administrative Services provided pursuant to a Request that requires SPPC to provide notice of completion of any Administrative Services described therein, SPPC shall notify the Note Issuer in writing of the date of said completion. Upon receipt of said notice, the Note Issuer shall promptly provide SPPC with a written listing of the Administrative Services, if any, that the Note Issuer determines have not been completed. With respect to Administrative Services listed by the Note Issuer as incomplete, SPPC shall complete such Administrative Services and the above acceptance procedure shall be repeated. 5. Rights to Work Product ---------------------- 5.1 All preliminary and final plans, specifications, and reports developed by SPPC as a part of the Administrative Services performed and paid for under this Agreement shall constitute the property of the Note Issuer. SPPC reserves all rights to information, such as computer software, that may be utilized in the performance of the Administrative Services but that is neither developed under this Agreement nor originally obtained from the Note Issuer. 5.2 The work product of SPPC's Administrative Services shall be for the use solely of the Note Issuer. The Note Issuer releases and agrees to hold SPPC harmless from any claim or liability arising as a result of any unauthorized use of such work product by any person other than the Note Issuer. The provisions of this Article 5 shall survive completion or termination of the Administrative Services. 6. Confidentiality --------------- Any information provided by either party to the other that is designated in writing by the disclosing party as confidential shall be held in confidence by the receiving party for a period of two (2) years following the date of disclosure. During such period, the receiving party shall not disclose such information to third parties, including affiliates other than the parties hereto, except with the prior permission of the disclosing party; provided that such restrictions shall not apply to information (a) previously known to the receiving party, (b) obtained by the receiving party from others, (c) that is in or becomes part of the public domain through no fault of the receiving party, or (d) that is ordered or required to be produced by a court or regulatory agency acting within its authority. The provisions of this Article 6 shall survive completion or termination of the Administrative Services and shall not supersede more stringent legal and regulatory non-disclosure requirements. 7. Force Majeure ------------- Neither party hereto shall be considered in default in the performance of any obligations hereunder, to the extent that the performance of such obligation is prevented or delayed by any cause, existing or future, that is beyond the reasonable control of such party, including changes in applicable law and action or delay by the other party or its contractors. 6 8. Assignment and Subcontracting ----------------------------- Any right or duty of this Agreement may only be assigned or subcontracted by either the Note Issuer or SPPC with the prior written approval of the other party and with prior notice to Moody's (as that term is defined in the Indenture); provided, however, that nothing contained in this Agreement shall prohibit the Note Issuer from obtaining Administrative Services from any third party on such terms as the Note Issuer shall negotiate with such third party. In obtaining any such Administrative Services from any such third party, the Note Issuer shall use its best efforts to obtain such Administrative Services at the lowest possible cost. 9. Termination ----------- 9.1 Either party may terminate SPPC's Administrative Services or any portion thereof at any time, for such party's convenience and without cause, effective upon the other party's receipt of written notice thereof from the terminating party. Upon termination, the Note Issuer hereby agrees to pay to SPPC all Costs incurred through the date of such termination, and SPPC shall deliver the intermediate work product developed prior to such termination. 9.2 Either the Note Issuer or SPPC may terminate this Agreement at any time upon thirty (30) days prior notice to the other party and to Moody's. Such termination shall not be effective as to uncompleted Administrative Services, and the provisions of this Agreement shall continue to be effective as to such Administrative Services until completed or terminated under Section 9.1 above. 10. Notices ------- Any notice required or allowed hereunder shall be deemed effective when received at the address set forth below, or at any successor address of which a party shall have duly notified the other: To the Note Issuer: SPPC Funding LLC 6100 Neil Road P.O. Box 30150 Reno, Nevada 89520-3150 Attention: President To SPPC: Sierra Pacific Power Company 6100 Neil Road P.O. Box 10100 Reno, Nevada 89520-3150 Attention: Treasurer 7 11. Transfer of Ownership --------------------- The Note Issuer agrees that its subsidiaries and partners and any future recipient of any interest in a project will be made bound by the releases and limitations of SPPC's liability set forth in this Agreement. 12. Conduct of Business ------------------- Notwithstanding any other provisions of this Agreement, each of SPPC and the Note Issuer agree that, until the Notes have been paid in full and notwithstanding any termination of this Agreement, it will at all times comply with the following covenants regarding the conduct of its business and the performance of the Administrative Services. Capitalized terms used in this Section and not otherwise defined shall have the meanings set forth in the Indenture. 12.1 Each of SPPC and the Note Issuer will observe, and comply fully with, all corporate procedures required by its articles of incorporation or certificate of formation, by its bylaws or limited liability company agreement, and by the laws of the state of its incorporation or formation, as the case may be. Each of SPPC and the Note Issuer, to the extent required by the laws of its state of incorporation or formation, will maintain its corporate existence and good standing under such laws. Each of SPPC and the Note Issuer will be qualified to do business in each state in which the conduct of its business so requires. 12.2 The Note Issuer will not commingle its assets or business functions with the assets or business functions of SPPC or any other affiliate, except for the commingling of collections in respect of the Transition Property permitted by the Basic Documents. The bank accounts and funds of the Note Issuer will be maintained separately from those of SPPC or any other affiliate and will be maintained in the name and tax identification number of the Note Issuer, except to the extent that SPPC is permitted by the Basic Documents to commingle collections in respect of the Transition Property. The board of directors of the Note Issuer will duly authorize all the corporate actions of that company, to the extent required by the laws of its state of formation, its certificate of formation, and its limited liability company agreement. The Note Issuer will maintain its own separate minutes of such actions. The Note Issuer will maintain separate and full corporate records and financial records for itself only. The Note Issuer will have at least two directors who are not shareholders, affiliates, directors, or employees of, or consultants to, SPPC or any other affiliate. The business affairs of the Note Issuer will be determined by the directors, officers, and employees of the Note Issuer acting in the interests of the Note Issuer, and will not be directed by SPPC (except acting properly in its role as member) or any other affiliate. 12.3 The financial records and accounts of each of SPPC and the Note Issuer will be prepared and maintained in accordance with generally accepted accounting principles and will be audited annually by an independent accountant. 12.4 Each of SPPC and the Note Issuer will conduct its business solely in its own name. In that regard, all written and oral communications, including, without limitation, letters, invoices, purchase orders, and contracts, of the Note Issuer will be made solely in 8 the name of the Note Issuer. The Note Issuer will have its own tax identification number, telephone number, stationery, and business forms, separate from those of SPPC or any other affiliate. The Note Issuer will have its own physically separate office, which will not be used by SPPC or any other affiliate, and which will have a mailing address that is not shared with SPPC or any other affiliate. Neither SPPC nor any other affiliate will use the stationery or business forms of the Note Issuer, and the Note Issuer will not use the stationery or business forms of SPPC or any other affiliate. Neither SPPC nor any other affiliate will conduct business in the name of the Note Issuer, and the Note Issuer will not conduct business in the name of SPPC or any other affiliate. 12.5 The Note Issuer will pay its own expenses and liabilities from its own funds, and neither SPPC nor any other affiliate will pay, or will be liable for, the expenses or liabilities of the Note Issuer, except as provided in the Basic Documents. 12.6 If invoices and other statements of account from creditors of the Note Issuer are received by SPPC or any other affiliate (other than the Note Issuer), SPPC will advise the sender that such invoices and statements should be sent directly to the Note Issuer. If invoices and other statements of account from creditors of SPPC are received by the Note Issuer, SPPC will advise the sender that such invoices and statements should be sent directly to SPPC. 12.7 The Note Issuer will not be liable for the payment of, nor will it pay, any liability of SPPC or any other affiliate, except as provided in the Basic Documents. 12.8 Neither the assets nor the creditworthiness of SPPC or any other affiliate will ever be held out as being available for the payment of any liability of the Note Issuer. Neither the assets nor the creditworthiness of the Note Issuer will ever be held out as being available for the payment of any liability of SPPC or any other affiliate. 12.9 Except with respect to tax reporting, SPPC, each other affiliate, and the Note Issuer will always describe the Note Issuer as a separate legal entity and not as a division or department of SPPC or any other affiliate. SPPC and each other affiliate will maintain an arm's-length relationship with the Note Issuer, and the Note Issuer will maintain an arm's-length relationship with SPPC and each other affiliate. No transaction between the Note Issuer and SPPC or any other affiliate will be on terms more favorable than in a similar transaction involving an unrelated third party. 12.10 The resolutions of each of the Note Issuer and SPPC regarding the transactions contemplated by the Basic Documents and the related documents will be continuously maintained as official records of such company. 12.11 Neither the Note Issuer nor SPPC will transfer any property with the intent to hinder, delay, or defraud any person or entity. Each of the Note Issuer and SPPC will receive reasonably equivalent value in exchange for its transfer of any property. 9 12.12 The financial statements of each of SPPC and the Note Issuer will disclose the effects of all transactions between SPPC and the Note Issuer in accordance with generally accepted accounting principles and will also disclose that the Transition Property is not an asset of SPPC or any Affiliate (other than the Note Issuer) and that the assets of the Note Issuer (including the Transition Property) are not available to pay creditors of SPPC or any other affiliate. 12.13 Notwithstanding any prior termination of this Agreement or the Indenture, but subject to the CPUC's right to order the sequestration and payment of revenues arising with respect to the Transition Property notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to the debtor, pledgor or transferor of the Transition Property pursuant to Section 843(e) and (g) of the PU Code, the Seller shall not, prior to the date that is one year and one day after the termination of the Indenture, acquiesce, petition or otherwise invoke or cause the Note Issuer to invoke the process of any court or government authority for the purpose of commencing or sustaining a case against the Note Issuer under any federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Note Issuer or any substantial part of the property of the Note Issuer, or ordering the winding up or liquidation of the affairs of the Note Issuer. 13. General ------- Any of the Administrative Services performed or caused to be performed by SPPC prior to the date of execution of this Agreement shall be deemed to have been performed under this Agreement. This Agreement constitutes the entire agreement between the parties relating to the subject matter hereof, and supersedes any previous or contemporaneous agreements or proposals (except as specifically incorporated herein). This Agreement may be amended only by an instrument in writing executed by authorized representatives of the Note Issuer and SPPC. If any part of this Agreement is held by a court to be unenforceable or invalid, the remaining provisions shall remain valid and enforceable. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 14. Conformity to Laws ------------------ All of the provisions of this Agreement will be subject to all applicable laws, orders, rules and regulations of any governmental body having jurisdiction in the premises, and any provision of this Agreement that is inconsistent with any such law, order, rule or regulation will be modified so as to conform with such law, order, rule or regulation, and this Agreement, as so modified, will continue in full force and effect. 10 IN WITNESS WHEREOF, the parties hereto have entered into this Administrative Services Agreement effective as of the day and year first hereinabove written. SIERRA PACIFIC POWER COMPANY By: RICHARD K. ATKINSON ------------------------------ Name: Richard K. Atkinson Title: Assistant Treasurer SPPC FUNDING LLC By: MARK A. RUELLE --------------------------------- Name: Mark A. Ruelle Title: Treasurer 11 Appendix A FORM OF REQUEST FOR ADMINISTRATIVE SERVICES [SPPC Funding LLC Letterhead] Sierra Pacific Power Company 6100 Neil Road Reno, NV 89520-3150 Attention: ______________________ Subject: Request For Services No. ________ SPPC Funding LLC Job No.__________ Dear Controller: This will confirm that Sierra Pacific Power Company (SPPC) is authorized to perform the services described in the attached Scope of Work dated ___________________. SPPC shall commence the performance of the Administrative Services on _______________________, and use its best efforts to complete the Administrative Services in this Request by _______________________. The amount authorized for this Request is: ______________________. This Request is governed by the Administrative Services Agreement between SPPC Funding LLC and SPPC dated April 9, 1999. 12 If this Request correctly states our agreement as to the subject matter hereof, please indicate your acceptance and agreement to this request where indicated below, assign a separate cost subaccount number for this work, and return a signed copy of this letter to me. The original of this letter is for your files. Very truly yours, SPPC FUNDING LLC By: _______________________________ Name: Title: ACCEPTED AND AGREED: SIERRA PACIFIC POWER COMPANY By: ____________________________________ Name: Title: 13 EX-12.A 12 CALCULATION OF PRE-TAX INTEREST COVERAGES Exhibit (12)(A) to the Sierra Pacific Power Company 1999 Form 10-K SIERRA PACIFIC POWER COMPANY CALCULATION OF PRE-TAX INTEREST COVERAGES
1999 1998 1997 -------------- -------------- -------------- Total Income Before Interest Charges $127,467 $130,326 $126,705 Add: Income Taxes: Included in operating expense 36,042 43,550 40,387 Included in other income - net (381) (192) (1,511) Allowance for Borrowed Funds Used During Construction 308 6,414 4,785 -------------- -------------- -------------- Total Numerator $163,436 $180,098 $170,366 ============== ============== ============== Interest Charges: Long-Term Debt $ 40,263 $ 38,890 $ 39,609 Other 11,615 7,659 4,583 -------------- -------------- -------------- Total Denominator $ 51,878 $ 46,549 $ 44,192 ============== ============== ============== Pre-Tax Interest Coverage 3.15 3.87 3.86 ============== ============== ==============
EX-27.A 13 FINANCIAL DATA SCHEDULE
OPUR1 The schedule contains summary financial information extracted from the Company's financial records and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1999 DEC-31-1999 PER-BOOK 1,719,190 62,704 149,879 164,703 0 2,096,476 4 584,684 89,050 673,738 0 50,000 625,430 0 0 109,584 102,755 0 0 0 534,969 2,096,476 763,722 36,042 597,844 633,886 129,836 (2,369) 127,467 51,570 75,897 9,656 66,241 76,000 40,263 122,329 0 0 Sierra Pacific Power Company is a wholly owned subsidiary of Sierra Pacific Resources and as such its common stock is not publicly traded. SPPC does not report EPS information.
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