-----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, H+uanLA8KEYs6r1pb6czvQW8W1EZQcHt0/RseNXvi0Xq1R3FyztqiHt6p0YONf84 mhkQmnx9Fmwg/0gmiY9AaA== 0000950135-03-002893.txt : 20030507 0000950135-03-002893.hdr.sgml : 20030507 20030506213508 ACCESSION NUMBER: 0000950135-03-002893 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIERRA PACIFIC RESOURCES /NV/ CENTRAL INDEX KEY: 0000741508 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 880198358 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08788 FILM NUMBER: 03685067 BUSINESS ADDRESS: STREET 1: PO BOX 30150 STREET 2: 6100 NEIL RD CITY: RENO STATE: NV ZIP: 89511 BUSINESS PHONE: 7758344011 MAIL ADDRESS: STREET 1: P O BOX 30150 STREET 2: 6100 NEIL ROAD CITY: RENO STATE: NV ZIP: 89511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEVADA POWER CO CENTRAL INDEX KEY: 0000071180 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 880045330 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-28348 FILM NUMBER: 03685068 BUSINESS ADDRESS: STREET 1: 6226 W SAHARA AVE CITY: LAS VEGAS STATE: NV ZIP: 89146 BUSINESS PHONE: 7023675000 MAIL ADDRESS: STREET 1: P O BOX 230 CITY: LAS VEGAS STATE: NV ZIP: 89151 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHERN NEVADA POWER CO DATE OF NAME CHANGE: 19701113 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00508 FILM NUMBER: 03685069 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-Q 1 b46521spe10vq.txt SIERRA PACIFIC POWER COMPANY ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Registrant, State of Incorporation, Address of Commission File Principal Executive Offices and Telephone I.R.S. employer Number Number Identification Number 1-08788 SIERRA PACIFIC RESOURCES 88-0198358 P.O. Box 10100 (6100 Neil Road) Reno, Nevada 89520-0400 (89511) (775) 834-4011 2-28348 NEVADA POWER COMPANY 88-0420104 6226 West Sahara Avenue Las Vegas, Nevada 89146 (702) 367-5000 0-00508 SIERRA PACIFIC POWER COMPANY 88-0044418 P.O. Box 10100 (6100 Neil Road) Reno, Nevada 89520-0400 (89511) (775) 834-4011
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 whether any registrant is an accelerated filer(as defined in Rule 12b-2 of the Act). Sierra Pacific Resources Yes [X] No [ ]; Nevada Power Company Yes [ ] No [X]; Sierra Pacific Power Company Yes [ ] No [X] 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 May 1, 2003 Common Stock, $1.00 par value 117,135,012 Shares of Sierra Pacific Resources Sierra Pacific Resources is the sole holder of the 1,000 shares of outstanding Common Stock, $1.00 stated value, of Nevada Power Company. Sierra Pacific Resources is the sole holder of the 1,000 shares of outstanding Common Stock, $3.75 stated value, of Sierra Pacific Power Company. This combined Quarterly Report on Form 10-Q is separately filed by Sierra Pacific Resources, Nevada Power Company and Sierra Pacific Power Company. Information contained in this document relating to Nevada Power Company is filed by Sierra Pacific Resources and separately by Nevada Power Company on its own behalf. Nevada Power Company makes no representation as to information relating to Sierra Pacific Resources or its subsidiaries, except as it may relate to Nevada Power Company. Information contained in this document relating to Sierra Pacific Power Company is filed by Sierra Pacific Resources and separately by Sierra Pacific Power Company on its own behalf. Sierra Pacific Power Company makes no representation as to information relating to Sierra Pacific Resources or its subsidiaries, except as it may relate to Sierra Pacific Power Company. ================================================================================ SIERRA PACIFIC RESOURCES NEVADA POWER COMPANY SIERRA PACIFIC POWER COMPANY QUARTERLY REPORTS ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003 CONTENTS PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Unaudited) SIERRA PACIFIC RESOURCES - Condensed Consolidated Balance Sheets - March 31, 2003 and December 31, 2002................................. 3 Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2003 and 2002................. 4 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2003 and 2002................. 5 NEVADA POWER COMPANY - Condensed Consolidated Balance Sheets - March 31, 2003 and December 31, 2002................................. 6 Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2003 and 2002................. 7 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2003 and 2002................. 8 SIERRA PACIFIC POWER COMPANY - Condensed Consolidated Balance Sheets - March 31, 2003 and December 31, 2002................................. 9 Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2003 and 2002................. 10 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2003 and 2002................. 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS......................................................... 12 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 28 Sierra Pacific Resources............................................................................... 38 Nevada Power Company................................................................................... 42 Sierra Pacific Power Company........................................................................... 48 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................................................... 59 ITEM 4. Controls and Procedures...................................................................................... 59 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings............................................................................................ 60 ITEM 4. Submission of Matters to a Vote of Security Holders.......................................................... 61 ITEM 5. Other Information............................................................................................ 61 ITEM 6. Exhibits and Reports on Form 8-K............................................................................. 61 Signature Page and Certifications........................................................................................... 63
2 SIERRA PACIFIC RESOURCES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 2003 2002 ---------- ----------- (UNAUDITED) ASSETS Utility Plant at Original Cost: Plant in service $6,095,682 $5,989,701 Less accumulated provision for depreciation 1,992,811 1,944,351 ---------- ---------- 4,102,871 4,045,350 Construction work-in-progress 259,602 263,346 ---------- ---------- 4,362,473 4,308,696 ---------- ---------- Investments and other property, net 136,606 134,068 ---------- ---------- Current Assets: Cash and cash equivalents 387,192 193,386 Restricted cash 67,113 13,705 Accounts receivable less provision for uncollectible accounts: 2003-$42,844 ; 2002-$44,184 315,564 359,083 Deferred energy costs - electric 288,407 268,979 Deferred energy costs - gas 6,431 17,045 Materials, supplies and fuel, at average cost 86,320 87,840 Risk management assets (Note 10) 23,963 29,570 Other 66,391 48,960 ---------- ---------- 1,241,381 1,018,568 ---------- ---------- Deferred Charges and Other Assets: Goodwill (Note 12) 309,971 310,441 Deferred energy costs - electric 589,707 685,875 Regulatory tax asset 162,427 163,889 Other regulatory assets 139,066 136,933 Risk management assets (Note 10) 29,910 368 Risk management regulatory assets - net (Note 10) 47,443 44,970 Other 88,657 92,436 ---------- ---------- 1,367,181 1,434,912 ---------- ---------- $7,107,641 $6,896,244 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization: Common shareholders' equity $1,426,469 $1,327,166 Preferred stock 50,000 50,000 NPC obligated mandatorily redeemable preferred trust securities 188,872 188,872 Long-term debt 3,013,127 3,062,883 ---------- ---------- 4,678,468 4,628,921 ---------- ---------- Current Liabilities: Current maturities of long-term debt 758,858 672,963 Accounts payable 194,892 233,099 Accrued interest 90,339 50,308 Dividends declared 1,052 1,045 Accrued salaries and benefits 19,362 20,828 Deferred taxes 117,202 123,507 Risk management liabilities (Note 10) 67,774 69,953 Other current liabilities 89,671 46,719 ---------- ---------- 1,339,150 1,218,422 ---------- ---------- Commitments & Contingencies (Note 11) Deferred Credits and Other Liabilities: Deferred federal income taxes 336,195 336,144 Deferred investment tax credit 47,629 48,492 Regulatory tax liability 41,722 42,718 Customer advances for construction 119,196 116,032 Accrued retirement benefits 114,205 107,580 Risk management liabilities (Note10) 3,329 3,917 Contract termination reserves (Note11) 312,594 312,594 Other 115,153 81,424 ---------- ---------- 1,090,023 1,048,901 ---------- ---------- $7,107,641 $6,896,244 ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 3 SIERRA PACIFIC RESOURCES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2003 2002 ------------- ------------- OPERATING REVENUES: Electric $ 537,106 $ 581,026 Gas 64,617 55,083 Other 1,239 2,755 ------------- ------------- 602,962 638,864 ------------- ------------- OPERATING EXPENSES: Operation: Purchased power 206,435 281,483 Fuel for power generation 80,213 130,773 Gas purchased for resale 42,334 38,594 Deferred energy costs disallowed - 434,123 Deferral of energy costs - electric - net 84,187 (14,241) Deferral of energy costs - gas - net 10,803 8,192 Other 73,602 72,045 Maintenance 18,724 16,907 Depreciation and amortization 45,950 48,641 Taxes: Income taxes (16,140) (158,617) Other than income 11,057 11,715 ------------- ------------- 557,165 869,615 ------------- ------------- OPERATING INCOME (LOSS) 45,797 (230,751) ------------- ------------- OTHER INCOME (EXPENSE): Allowance for other funds used during construction 1,760 657 Unrealized gain on derivative instrument ( Note 10) 15,925 - Interest accrued on deferred energy 7,635 (6,124) Other income 6,414 3,580 Other expense (3,731) (8,797) Income taxes (8,418) 4,214 ------------- ------------- 19,585 (6,470) ------------- ------------- Total Income (Loss) Before Interest Charges 65,382 (237,221) ------------- ------------- INTEREST CHARGES: Long-term debt 68,595 58,800 Other 10,273 4,630 Allowance for borrowed funds used during construction and capitalized interest (1,756) (1,503) ------------- ------------- 77,112 61,927 ------------- ------------- Dividend requirements of NPC obligated mandatorily redeemable preferred trust securities 3,793 3,793 ------------- ------------- NET LOSS (15,523) (302,941) ------------- ------------- Preferred stock dividend requirements of SPPC 975 975 ------------- ------------- LOSS APPLICABLE TO COMMON STOCK $ (16,498) $ (303,916) ============= ============= Basic and diluted loss per share of common stock $ (0.15) $ (2.98) Cumulative effect of change in accounting principle (net of tax) per share - - ------------- ------------- Per share loss applicable to common stock $ (0.15) $ (2.98) ============= ============= Weighted Average Shares of Common Stock Outstanding 111,499,881 102,110,536 ============= ============= Dividends Paid Per Share of Common Stock $ - $ 0.20 ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 4 SIERRA PACIFIC RESOURCES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 2003 2002 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (15,523) $(302,941) Non-cash items included in income: Depreciation and amortization 45,950 48,641 Deferred taxes and deferred investment tax credit (12,225) (4,713) AFUDC and capitalized interest (3,516) 537 Amortization of deferred energy costs - electric 44,490 - Amortization of deferred energy costs - gas 6,165 6,404 Deferred energy costs disallowed (net of taxes) - 282,181 Unrealized gain on derivative instrument (net of taxes) (10,351) - Early retirement and severance amortization 624 752 Other non-cash (3,742) (3,954) Changes in certain assets and liabilities: Accounts receivable 43,519 55,204 Deferral of energy costs - electric 32,251 (7,410) Deferral of energy costs - gas 4,448 1,437 Materials, supplies and fuel 1,520 (1,162) Other current assets (70,839) (2,257) Accounts payable (38,207) (56,359) Income tax receivable - 79,333 Derivative instrument associated with convertible debt 72,078 - Other current liabilities 25,364 31,112 Other assets (26,493) - Other liabilities 40,354 72 --------- --------- Net Cash from Operating Activities 135,867 126,877 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (99,467) (85,558) AFUDC and other charges to utility plant 3,516 (537) Customer advances (refunds) for construction 3,165 (575) Contributions in aid of construction 3,055 16,148 --------- --------- Net cash used for utility plant (89,731) (70,522) Investments and other property - net (1,350) (1,308) --------- --------- Net Cash from Investing Activities (91,081) (71,830) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term borrowings - 69,672 Proceeds from issuance of long-term debt 228,764 - Retirement of long-term debt (78,775) (3,463) Dividends paid (969) (21,542) --------- --------- Net Cash from Financing Activities 149,020 44,667 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 193,806 99,714 Beginning Balance in Cash and Cash Equivalents 193,386 99,109 --------- --------- Ending Balance in Cash and Cash Equivalents $ 387,192 $ 198,823 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during period for: Interest $ 38,837 $ 39,629 Income taxes $ - $ (79,333) NONCASH FINANCING ACTIVITIES (NOTE 4): Exchanged Floating Rate Notes for SPR common stock $ 8,750 Exchanged Premium Income Equity Securities for SPR common stock $ 104,782
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS 5 NEVADA POWER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 2003 2002 ---------- ------------ (Unaudited) ASSETS Utility Plant at Original Cost: Plant in service $3,631,806 $3,542,300 Less accumulated provision for depreciation 1,047,877 1,017,494 ---------- ---------- 2,583,929 2,524,806 Construction work-in-progress 163,299 173,189 ---------- ---------- 2,747,228 2,697,995 ---------- ---------- Investments and other property, net 19,589 20,295 ---------- ---------- Current Assets: Cash and cash equivalents 90,689 95,009 Restricted cash 3,850 3,850 Accounts receivable less provision for uncollectible accounts: 2003-$33,914; 2002-$33,841 167,366 202,590 Deferred energy costs - electric 230,232 213,193 Materials, supplies and fuel, at average cost 43,687 44,074 Risk management assets (Note 10) 20,206 28,173 Other 49,712 31,602 ---------- ---------- 605,742 618,491 ---------- ---------- Deferred Charges and Other Assets: Deferred energy costs - electric 440,232 524,345 Regulatory tax asset 105,124 106,071 Other regulatory assets 54,607 53,109 Risk management assets (Note 10) 21,846 368 Risk management regulatory assets - net (Note 10) 15,469 1,491 Other 45,247 46,357 ---------- ---------- 682,525 731,741 ---------- ---------- $4,055,084 $4,068,522 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization: Common shareholder's equity $1,134,377 $1,149,131 NPC obligated mandatorily redeemable preferred trust securities 188,872 188,872 Long-term debt 1,486,402 1,488,597 ---------- ---------- 2,809,651 2,826,600 ---------- ---------- Current Liabilities: Current maturities of long-term debt 354,664 354,677 Accounts payable 92,031 143,002 Accounts payable, affiliated companies 2,549 4,287 Accrued interest 47,368 29,892 Dividends declared 78 78 Accrued salaries and benefits 7,217 7,781 Deferred taxes 87,240 90,616 Risk management liabilities (Note 10) 35,662 29,908 Other current liabilities 23,554 22,115 ---------- ---------- 650,363 682,356 ---------- ---------- Commitments & Contingencies (Note 11) Deferred Credits and Other Liabilities: Deferred federal income taxes 124,814 129,687 Deferred investment tax credit 21,495 21,902 Regulatory tax liability 16,974 17,300 Customer advances for construction 68,779 66,434 Accrued retirement benefits 55,983 54,216 Contract termination reserves (Note 11) 225,816 225,816 Other 81,209 44,211 ---------- ---------- 595,070 559,566 ---------- ---------- $4,055,084 $4,068,522 ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 6 NEVADA POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 2003 2002 --------- --------- OPERATING REVENUES: Electric $ 331,652 $ 356,272 --------- --------- OPERATING EXPENSES: Operation: Purchased power 119,257 176,066 Fuel for power generation 46,537 83,722 Deferred energy costs disallowed - 434,123 Deferral of energy costs-net 72,785 (9,636) Other 40,540 39,986 Maintenance 13,537 11,650 Depreciation and amortization 25,907 30,809 Taxes: Income taxes (10,548) (156,423) Other than income 6,224 6,734 --------- --------- 314,239 617,031 --------- --------- OPERATING INCOME (LOSS) 17,413 (260,759) --------- --------- OTHER INCOME (EXPENSE): Allowance for other funds used during construction 1,158 421 Interest accrued on deferred energy 5,710 (11,151) Other income 3,338 146 Other expense (1,432) (5,997) Income taxes (2,514) 5,645 --------- --------- 6,260 (10,936) --------- --------- Total Income (Loss) Before Interest Charges 23,673 (271,695) --------- --------- INTEREST CHARGES: Long-term debt 30,102 24,078 Other 6,080 2,530 Allowance for borrowed funds used during construction and capitalized interest (1,056) (1,112) --------- --------- 35,126 25,496 --------- --------- Dividend requirements of obligated mandatorily redeemable preferred trust securities 3,793 3,793 --------- --------- NET LOSS $ (15,246) $(300,984) ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 7 NEVADA POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 2003 2002 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ (15,246) $(300,984) Non-cash items included in income: Depreciation and amortization 25,907 30,809 Deferred taxes and deferred investment tax credit (8,035) (4,586) AFUDC and capitalized interest (2,214) 692 Amortization of deferred energy costs 32,331 - Deferred energy costs disallowed (net of taxes) - 282,181 Other non-cash (4,702) (555) Changes in certain assets and liabilities: Accounts receivable 35,224 46,471 Deferral of energy costs 34,744 2,221 Materials, supplies and fuel 387 1,348 Other current assets (18,110) (2,187) Accounts payable (52,709) (51,497) Income tax receivable - 79,333 Other current liabilities 18,351 11,545 Other assets (19,943) - Other liabilities 38,765 540 --------- --------- Net Cash from Operating Activities 64,750 95,331 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (74,525) (65,685) AFUDC and other charges to utility plant 2,214 (692) Customer advances (refunds) for construction 2,345 (469) Contributions in aid of construction 2,363 13,592 --------- --------- Net cash used for utility plant (67,603) (53,254) Investments and other property - net 741 (950) --------- --------- Net Cash from Investing Activities (66,862) (54,204) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term borrowings - 68,429 Retirement of long-term debt (2,208) (2,663) Investment by parent company - 10,000 Dividends paid - (9,995) --------- --------- Net Cash from Financing Activities (2,208) 65,771 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,320) 106,898 Beginning Balance in Cash and Cash Equivalents 95,009 8,505 --------- --------- Ending Balance in Cash and Cash Equivalents $ 90,689 $ 115,403 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during period for: Interest $ 18,706 $ 14,104 Income taxes $ - $ (79,333)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS 8 SIERRA PACIFIC POWER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 2003 2002 ---------- ------------ (Unaudited) ASSETS Utility Plant at Original Cost: Plant in service $2,463,876 $2,447,401 Less accumulated provision for depreciation 944,934 926,857 ---------- ---------- 1,518,942 1,520,544 Construction work-in-progress 96,303 90,157 ---------- ---------- 1,615,245 1,610,701 ---------- ---------- Investments and other property, net 953 874 ---------- ---------- Current Assets: Cash and cash equivalents 127,801 88,910 Restricted cash 9,605 9,605 Accounts receivable less provision for uncollectible accounts: 2003 - $8,930; 2002 - $10,343 147,019 154,821 Accounts receivable, affiliated companies 58,598 58,680 Deferred energy costs - electric 58,175 55,786 Deferred energy costs - gas 6,431 17,045 Materials, supplies and fuel, at average cost 40,525 41,727 Risk management assets (Note 10) 3,757 1,397 Other 12,008 12,955 ---------- ---------- 463,919 440,926 ---------- ---------- Deferred Charges and Other Assets: Deferred energy costs - electric 149,475 161,530 Regulatory tax asset 57,303 57,818 Other regulatory assets 64,258 64,149 Risk management assets (Note 10) 8,064 - Risk management regulatory assets - net (Note 10) 31,974 43,479 Other 19,934 19,013 ---------- ---------- 331,008 345,989 ---------- ---------- $2,411,125 $2,398,490 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization: Common shareholder's equity $ 642,548 $ 639,295 Preferred stock 50,000 50,000 Long-term debt 914,425 914,788 ---------- ---------- 1,606,973 1,604,083 ---------- ---------- Current Liabilities: Current maturities of long-term debt 101,400 101,400 Accounts payable 70,540 71,247 Accrued interest 26,199 12,136 Dividends declared 974 968 Accrued salaries and benefits 9,726 10,812 Deferred taxes 29,962 32,891 Risk management liabilities (Note 10) 32,112 40,045 Other current liabilities 7,935 10,864 ---------- ---------- 278,848 280,363 ---------- ---------- Commitments & Contingencies (Note 11) Deferred Credits and Other Liabilities: Deferred federal income taxes 257,420 251,487 Deferred investment tax credit 26,134 26,590 Regulatory tax liability 24,748 25,418 Customer advances for construction 50,417 49,598 Accrued retirement benefits 49,734 44,856 Risk management liabilities (Note 10) 3,329 3,917 Contract termination reserves (Note 11) 86,778 86,778 Other 26,744 25,400 ---------- ---------- 525,304 514,044 ---------- ---------- $2,411,125 $2,398,490 ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 9 SIERRA PACIFIC POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 2003 2002 --------- --------- OPERATING REVENUES: Electric $ 205,454 $ 224,754 Gas 64,617 55,083 --------- --------- 270,071 279,837 --------- --------- OPERATING EXPENSES: Operation: Purchased power 87,178 105,417 Fuel for power generation 33,676 47,051 Gas purchased for resale 42,334 38,594 Deferral of energy costs - electric - net 11,402 (4,605) Deferral of energy costs - gas - net 10,803 8,192 Other 29,213 27,762 Maintenance 5,187 5,257 Depreciation and amortization 19,706 17,558 Taxes: Income taxes 2,090 4,901 Other than income 4,662 4,776 --------- --------- 246,251 254,903 --------- --------- OPERATING INCOME 23,820 24,934 --------- --------- OTHER INCOME (EXPENSE): Allowance for other funds used during construction 602 236 Interest accrued on deferred energy 1,925 5,027 Other income 1,065 1,837 Other expense (1,905) (2,462) Income taxes (303) (1,432) --------- --------- 1,384 3,206 --------- --------- Total Income Before Interest Charges 25,204 28,140 --------- --------- INTEREST CHARGES: Long-term debt 18,781 16,445 Other 3,125 1,142 Allowance for borrowed funds used during construction and capitalized interest (700) (391) --------- --------- 21,206 17,196 --------- --------- NET INCOME 3,998 10,944 --------- --------- Preferred Dividend Requirements 975 975 --------- --------- Earnings applicable to common stock $ 3,023 $ 9,969 ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 10 SIERRA PACIFIC POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 2003 2002 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,998 $ 10,944 Non-cash items included in income: Depreciation and amortization 19,706 17,558 Deferred taxes and deferred investment tax credit 2,393 6,918 AFUDC and capitalized interest (1,302) (155) Amortization of deferred energy costs - electric 12,159 - Amortization of deferred energy costs - gas 6,165 6,404 Early retirement and severance amortization 624 752 Other non-cash (2,313) (1,131) Changes in certain assets and liabilities: Accounts receivable 7,884 3,959 Deferral of energy costs - electric (2,493) (9,631) Deferral of energy costs - gas 4,448 1,437 Materials, supplies and fuel 1,202 (2,399) Other current assets 947 (272) Accounts payable (707) (11,428) Other current liabilities 10,048 10,208 Other assets (6,550) - Other liabilities 6,222 1,467 --------- --------- Net Cash from Operating Activities 62,431 34,631 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (24,942) (19,873) AFUDC and other charges to utility plant 1,302 155 Customer advances (refunds) for construction 819 (106) Contributions in aid of construction 692 2,556 --------- --------- Net cash used for utility plant (22,129) (17,268) Disposal of investments and other property - net (79) 577 --------- --------- Net Cash from Investing Activities (22,208) (16,691) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in short-term borrowings - 1,243 Retirement of long-term debt (363) (800) Investment by parent company - 10,000 Dividends paid (969) (10,969) --------- --------- Net Cash from Financing Activities (1,332) (526) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 38,891 17,414 Beginning Balance in Cash and Cash Equivalents 88,910 11,772 --------- --------- Ending Balance in Cash and Cash Equivalents $ 127,801 $ 29,186 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during period for: Interest $ 7,843 $ 3,019 Income taxes $ - $ -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. MANAGEMENT'S STATEMENT (SPR, NPC, SPPC) In the opinion of the management of Sierra Pacific Resources (SPR), Nevada Power Company (NPC), and Sierra Pacific Power Company (SPPC), the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the condensed consolidated financial position, results of operations and cash flows for the periods shown. These condensed consolidated financial statements do not contain the complete detail or footnote disclosure concerning accounting policies and other matters which are included in full year financial statements and therefore, they should be read in conjunction with the audited financial statements included in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002. The results of operations of SPR, NPC and SPPC for the three-month period ended March 31, 2003, are not necessarily indicative of the results to be expected for the full year. PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements of SPR include the accounts of SPR and its wholly-owned subsidiaries, NPC and SPPC (collectively, the "Utilities"), Tuscarora Gas Pipeline Company (TGPC), Sierra Gas Holding Company (SGHC), Sierra Energy Company dba eo three (eo three), Sierra Pacific Energy Company (SPE), Lands of Sierra (LOS), Sierra Pacific Communications (SPC), and Sierra Water Development Company (SWDC). All significant intercompany transactions and balances have been eliminated in consolidation. SIERRA PACIFIC RESOURCES SPR, on a stand-alone basis, had cash and cash equivalents of approximately $166.7 million at March 31, 2003. On April 21, 2003, SPR utilized approximately $133 million of its cash and cash equivalents to repay unsecured Floating Rate Notes due April 20, 2003. Currently, SPR has a substantial amount of debt and other obligations including, but not limited to: $300 million of its unsecured 8 3/4% Senior Notes due 2005; and $240 million of its unsecured 7.93% Senior Notes due 2007; and $300 million of its 7.25% Convertible Notes due 2010. SPR's future liquidity and its ability to pay the principal of and interest on its indebtedness depend on SPPC's ability to continue to pay dividends to SPR, on NPC's financial stability and a restoration of its ability to pay dividends to SPR, and on SPR's ability to access the capital markets or otherwise refinance maturing debt. Further adverse developments at NPC or SPPC, including a material disallowance of deferred energy costs in current and future rate cases or an adverse decision in the pending lawsuit by Enron, could make it difficult to continue to operate outside of bankruptcy. See Note 5, Dividend Restrictions for information regarding the dividend restrictions applicable to NPC and SPPC and Note 11, Commitments and Contingencies for additional information regarding uncertainties that could impact SPR's liquidity and financial condition. The provisions that currently restrict dividends payable by NPC or SPPC have adversely affected SPR's liquidity and will continue to negatively impact SPR's liquidity until those provisions are no longer in effect. Management intends to seek a modification of the financial covenant contained in NPC's first mortgage indenture in the near future. The regulatory limitation contained in the Public Utility Commission of Nevada's (PUCN) Compliance Order, Docket No. 02-4037, dated June 19, 2002, expires on December 31, 2003. Prior to the expiration date of the Compliance Order, management may seek PUCN approval for a payment of dividends by NPC or may seek a waiver from the PUCN of the dividend restriction. Financing Transactions. On February 14, 2003, SPR issued and sold $300 million of its 7.25% Convertible Notes due 2010. Approximately $53.4 million of the net proceeds from the sale of the notes were used to purchase U.S. government securities that were pledged to the trustee for the first five interest payments on the notes payable during the first two and one-half years. A portion of the remaining net proceeds of the notes have been used to repurchase approximately $58.5 million of SPR's Floating Rate Notes due April 20, 2003. Of the remaining net proceeds, approximately $133 million were used to repay the remainder of SPR's Floating Rate Notes due April 20, 2003, and the remaining proceeds will be available for general corporate purposes, including the payment of interest on SPR's other outstanding indebtedness. The Convertible Notes will not be convertible prior to August 14, 2003. At any time on or after August 14, 2003 through the close of business February 14, 2010, holders of the Convertible Notes may convert their notes into shares of SPR's common stock. Until SPR has obtained shareholder approval to fully convert the Convertible Notes into shares of common 12 stock, holders of the Convertible Notes will be entitled to receive 76.7073 shares of common stock and a remaining portion in cash, based on the average closing price of SPR's common stock over five consecutive trading days, for each $1,000 principal amount of notes surrendered for conversion. At an assumed five-day average closing price of $3.87 per share (based on the last reported sale price of SPR's common stock on April 30, 2003), the total amount of the cash payable on conversion of the Convertible Notes would be approximately $165.4 million. If SPR does not obtain shareholder approval, SPR will be required to pay the cash portion of any Convertible Notes as to which the holders request conversion on or after August 14, 2003. Although management does not believe it is likely that a significant amount of the Convertible Notes will be converted in the foreseeable future, in the event that SPR does not have available funds to pay the cash portion of the Convertible Notes upon the requested conversion, SPR may have to issue additional debt to raise the necessary funds. There can be no assurance that SPR will be able to access the capital markets to issue such additional debt. If SPR does obtain shareholder approval, it may elect to satisfy the cash payment component of the conversion price of the Convertible Notes solely with shares of common stock. SPR has agreed to use reasonable efforts to obtain shareholder approval, not later than 180 days after the date of issuance of the Convertible Notes, for approval to issue and deliver shares of SPR's common stock in lieu of the cash payment component of the conversion price of the Convertible Notes. For further information regarding the terms of the Convertible Notes, see Note 4, Long-Term Debt. Effect of Holding Company Structure. Due to its holding company structure, SPR's right as a common shareholder to receive assets of any of its direct or indirect subsidiaries upon a subsidiary's liquidation or reorganization is junior to the claims against the assets of such subsidiary by its creditors. Therefore, SPR's debt obligations are effectively subordinated to all existing and future claims of its subsidiaries' creditors, particularly those of NPC and SPPC, including trade creditors, debt holders, secured creditors, taxing authorities, guarantee holders and NPC's and SPPC's preferred security holders. As of March 31, 2003, NPC, SPPC and their subsidiaries had approximately $2.86 billion of debt and other obligations outstanding and approximately $238.9 million of outstanding preferred securities. Although the Utilities are parties to agreements that limit the amount of additional indebtedness they may incur, the Utilities retain the ability to incur substantial additional indebtedness and other liabilities. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainties discussed above. NEVADA POWER COMPANY NPC had cash and cash equivalents of approximately $91 million at March 31, 2003. In addition to anticipated capital requirements for construction, NPC has approximately $355 million of debt maturing in 2003. NPC expects to finance these requirements with internally generated funds, including the recovery of deferred energy, and the issuance of debt. NPC's liquidity would be significantly affected by an adverse decision in the lawsuit by Enron, or by unfavorable rulings by the PUCN in pending or future NPC or SPPC rate cases. Standard and Poors Rating Group, Inc. (S&P) and Moodys Investors Service, Inc. (Moodys) have NPC's credit ratings on "negative" and "stable", respectively. Future downgrades by either S&P or Moody's could preclude NPC's access to the capital markets. Furthermore, if NPC continues to experience financial difficulty or if its credit ratings are further downgraded, NPC may experience considerable difficulty entering into new power supply contracts, particularly under traditional payment terms. If suppliers will not sell power to NPC under traditional payment terms, NPC may have to pre-pay its power requirements. If it does not have sufficient funds or access to liquidity to pre-pay its power requirements, particularly at the onset of the summer months, and is unable to obtain power through other means, NPC's results of operations, financial position, and cash flows will be adversely affected. Adverse developments with respect to any one or a combination of the foregoing could make it difficult to continue to operate outside of bankruptcy. NPC's General and Refunding Mortgage Indenture creates a lien on substantially all of NPC's properties in Nevada that is junior to the lien of the first mortgage indenture. As of March 31, 2003, $870 million of NPC's General and Refunding Mortgage securities were outstanding. Additional securities may be issued under the General and Refunding Mortgage Indenture on the basis of (i) 70% of net utility property additions, (ii) the principal amount of retired General and Refunding Mortgage Bonds, and/or (iii) the principal amount of first mortgage bonds retired after delivery to the indenture trustee of the initial expert's certificate under the General and Refunding Mortgage Indenture. As of March 31, 2003, NPC had the capacity to issue approximately $1.13 billion of additional General and Refunding Mortgage securities. However, the financial covenants contained in NPC's Series E Notes limit NPC's ability to issue additional General and Refunding Mortgage Bonds or other debt. NPC has reserved $125 million of General and Refunding Mortgage bonds for issuance upon the initial funding of NPC's receivables facility. See Note 3, Short-Term Borrowings for information regarding NPC's accounts receivable facility. NPC intends to use its accounts receivable purchase 13 facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. NPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $125 million General and Refunding Mortgage Bond. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainties discussed above. SIERRA PACIFIC POWER COMPANY SPPC had cash and cash equivalents of approximately $128 million at March 31, 2003. In addition to anticipated capital requirements for construction, and not including $80 million of Bonds subject to remarketing (see Note 4), SPPC has approximately $21 million of debt maturing in 2003. SPPC expects to finance these requirements with internally generated funds, including the recovery of deferred energy. SPPC's future liquidity could be significantly affected by unfavorable rulings by the PUCN in pending or future SPPC or NPC rate cases. S&P and Moody's have SPPC's credit ratings on "negative outlook" and "stable", respectively. Future downgrades by either S&P or Moody's could preclude SPPC's access to the capital markets. Furthermore, if SPPC continues to experience financial difficulty or if its credit ratings are further downgraded, SPPC may experience considerable difficulty entering into new power supply contracts, particularly under traditional payment terms. If suppliers will not sell power to SPPC under traditional payment terms, SPPC may have to pre-pay its power requirements. If it does not have sufficient funds or access to liquidity to pre-pay its power requirements, and is unable to obtain power through other means, SPPC's results of operations, financial position and cash flows will be adversely affected. Adverse developments with respect to any one or a combination of the factors and contingencies set forth above could make it difficult to continue to operate outside of bankruptcy. SPPC's General and Refunding Mortgage Indenture creates a lien on substantially all of SPPC's properties in Nevada that is junior to the lien of the first mortgage indenture. As of March 31, 2003, approximately $419.8 million of SPPC's General and Refunding Mortgage bonds were outstanding. On May 1, 2003, SPPC issued its $80 million General and Refunding Mortgage Note, Series D, due 2004, to secure SPPC's payment obligations with respect to $80 million of Washoe County, Nevada, Water Facilities Refunding Revenue Bonds (Sierra Pacific Power Company Project), Series 2001, which were issued for SPPC's benefit. Additional securities may be issued under the General and Refunding Mortgage Indenture on the basis of (1) 70% of net utility property additions, (2) the principal amount of retired General and Refunding Mortgage bonds, and/or (3) the principal amount of first mortgage bonds retired after delivery to the indenture trustee of the initial expert's certificate under the General and Refunding Mortgage Indenture. At March 31, 2003, SPPC had the capacity to issue approximately $435.7 million of additional General and Refunding Mortgage securities, which amount does not include SPPC's $80 million General and Refunding Mortgage Note, Series D, due 2004. However, the financial covenants contained in SPPC's Term Loan Agreement and Receivable Purchase Facility Agreements limit SPPC's ability to issue additional General and Refunding Mortgage Securities or other debt. SPPC has reserved $75 million of General and Refunding Mortgage Bonds for issuance upon the initial funding of its receivables purchase facility. SPPC intends to use its accounts receivable purchase facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. SPPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $75 million General and Refunding Mortgage Bond. See Note 3, Short-Term Borrowings for information regarding SPPC's accounts receivable facility. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainties discussed above. RECLASSIFICATIONS Certain items previously reported have been reclassified to conform to the current year's presentation. Net income and shareholders' equity were not affected by these reclassifications. NEVADA POWER COMPANY FINANCIAL STATEMENTS The presentation of the condensed consolidated statements of operations and cash flows of NPC for the three months ended March 31, 2002 have been revised. Specifically, the effects of the revisions were to eliminate the line item " Equity in losses of Sierra Pacific Resources" of $(2,932) on NPC's Condensed Consolidated Statement of Operations and to eliminate the line item "Equity in losses of SPR" of $(2,932) on NPC's Condensed Consolidated Statement of Cash Flows. For additional information regarding this change in presentation, see Note 1, Summary of Significant Accounting Policies of Notes to Financial Statements in SPR's, NPC's and SPPC's Report on Form 10-K for the year ended December 31, 2002. 14 DEFERRAL OF ENERGY COSTS NPC and SPPC implemented deferred energy accounting procedures on March 1, 2001. See Note 1, Summary of Significant Accounting Policies, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, for additional information regarding the implementation of deferred energy accounting by the Utilities. The following deferred energy costs were included in the condensed consolidated balance sheets as of March 31, 2003 (dollars in thousands):
March 31, 2003 ----------------------------------------------- NPC SPPC SPPC SPR Description Electric Electric Gas Total --------- --------- --------- --------- Unamortized balances approved for collection in current rates $ 298,828 $ 108,025 $ 21,559 $ 428,412 Balances pending PUCN approval (1) (2) 191,143 15,380 - 206,523 Balances accrued since end of periods submitted for PUCN approval (3) (51,352) 2,344 (15,128) (64,136) Terminated suppliers (2) (4) 231,845 81,901 - 313,746 --------- --------- --------- --------- Total $ 670,464 $ 207,650 $ 6,431 $ 884,545 ========= ========= ========= =========
(1)See Note 9, Regulatory Actions, for additional discussion of balances pending PUCN approval. (2)Balances adjusted from amounts presented as of December 31, 2002, reflecting, primarily, a reclassification between amounts for terminated suppliers and balances pending PUCN approval. (3)Credits represent over-collections, that is, the extent to which gas or fuel and purchased power costs recovered through rates exceed actual gas or fuel and purchased power costs. (4)Amounts related to terminated suppliers are discussed in Note 17, Commitments and Contingencies, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002. STOCK COMPENSATION PLANS In December 2002, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," as an amendment to SFAS No. 123, "Accounting for Stock-Based Compensation." SPR has previously adopted the disclosure-only provisions of SFAS No. 123, and as of December 31, 2002 has adopted the updated disclosure requirements set forth in SFAS No. 148. At March 31, 2003, SPR had several stock-based compensation plans which are described more fully in Note 15 "Stock Compensation Plans," of Notes to Financial Statements in SPR's, NPC's, and SPPC's Combined Annual Report on Form 10-K for the year ended December 31, 2002. SPR applies Accounting Principles 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. 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, SPR's income applicable to common stock would have been decreased to the pro forma amounts indicated below (dollars in thousands, except earnings per share): 15
Three Months Ended March 31, 2003 2002 ----------------------- Stock Compensation Cost included in Net Income as Reported, net of related tax effects As Reported $ (100) $ 170 ======================= Loss applicable to Common Stock As Reported $ (16,498) $(303,916) Less: Additional Stock Compensation Cost, net of related tax effects Pro Forma 1,192 512 ----------------------- Loss applicable to Common Stock Pro Forma $ (17,690) $(304,428) ======================= Basic Loss Per Share As Reported $ (0.15) $ (2.98) Pro Forma $ (0.16) $ (2.98) Diluted Loss Per Share As Reported $ (0.15) $ (2.98) Pro Forma $ (0.16) $ (2.98)
RECENT PRONOUNCEMENTS In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees" (FIN 45), which elaborates on the disclosures to be made in interim and annual financial statements of a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing a guarantee. Initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. As of March 31, 2003, any guarantees of SPR and its subsidiaries were intercompany, whereby the parent issues the guarantees on behalf of its consolidated subsidiaries to a third party. Therefore there is no impact on the financial position, results of operation or cash flows of SPR, NPC or SPPC. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which elaborates on Accounting Research Bulletin No. 51, "Consolidated Financial Statements." Among other requirements, FIN 46 provides that a variable interest entity be consolidated by the enterprise that is the primary beneficiary of the variable interest entity. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Management does not expect the adoption of FIN 46 to have an effect on the financial position, results of operation or cash flows of SPR, NPC or SPPC. NOTE 2. ASSET RETIREMENT OBLIGATIONS (AROs) Effective January 1, 2003, the Utilities adopted the provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 generally applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. SFAS No. 143 requires NPC to recognize an estimated liability for the retirement of generation plant assets specified in land leases for NPC's jointly-owned Navajo generating station because the leases require the lessees to remove the facilities upon request of the Navajo Nation at the expiration of the leases. However, the retirement obligation and corresponding charges recognized were immaterial to the financial statements of NPC. NPC also redesignated amounts from Accumulated Depreciation to a regulatory liability in order to reflect the estimated costs of removal collected through rates. NPC amortizes the amount added to Electric Plant In Service and recognizes accretion expense in connection with the discounted liability over the estimated remaining life of the Navajo generating station assets. SPPC has no significant asset retirement obligations. NPC and SPPC also collect removal costs in rates for certain assets that do not have associated legal asset retirement obligations. As of March 31, 2003, NPC and SPPC estimate that they had approximately $126 million and $148 million related to removal costs recorded in Accumulated Depreciation, respectively. 16 NOTE 3. SHORT-TERM BORROWINGS NEVADA POWER COMPANY On October 29, 2002, NPC established an accounts receivable purchase facility of up to $125 million, which was arranged by Lehman Brothers. If NPC elects to activate the receivables purchase facility, NPC will sell all of its accounts receivable generated from the sale of electricity to customers to its newly created bankruptcy remote special purchase subsidiary. The receivables sales will be without recourse except for breaches of customary representations and warranties made at the time of sale. The subsidiary will, in turn, sell these receivables to a bankruptcy remote subsidiary of SPR. SPR's subsidiary will issue variable rate revolving notes backed by the purchased receivables. Lehman Brothers Holding, Inc. will be the sole initial committed purchaser of all of the variable rate revolving notes. The agreements relating to the receivables purchase facility contain various conditions to purchase, covenants and trigger events, termination events and other provisions customary in receivables transactions. In connection with NPC's receivables facility, SPR has agreed to guaranty NPC's performance of certain obligations as a seller and servicer under the facility. NPC has agreed to issue $125 million principal amount of its General and Refunding Mortgage Bonds upon activation of the accounts receivables purchase facility. The full principal amount of the Bond would secure certain of NPC's obligations as seller and servicer, plus certain interest, fees and expenses thereon to the extent not paid when due, regardless of the actual amounts owing with respect to the secured obligations. As a result, in the event of an NPC bankruptcy or liquidation, the holder of the Bond securing the receivables facility may recover more on a pro rata basis than the holders of other General and Refunding Mortgage securities, who could recover less on a pro rata basis, than they otherwise would recover. However, in no event will the holder of the Bond recover more than the amount of obligations secured by the Bond. NPC intends to use the accounts receivables purchase facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. NPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $125 million General and Refunding Mortgage Bond. As of March 31, 2003, this facility has not been activated. NPC does not expect to activate this facility in the foreseeable future. SIERRA PACIFIC POWER COMPANY On October 29, 2002, SPPC established an accounts receivable purchase facility of up to $75 million, which was arranged by Lehman Brothers. If SPPC elects to activate the receivables purchase facility, SPPC will sell all of its accounts receivable generated from the sale of electricity and gas to customers to its newly created bankruptcy-remote special purpose subsidiary. The receivables sales will be without recourse except for breaches of customary representations and warranties made at the time of sale. The subsidiary will, in turn, sell these receivables to a bankruptcy-remote subsidiary of SPR. SPR's subsidiary will issue variable rate revolving notes backed by the purchased receivables. Lehman Brothers Holdings, Inc. will be the sole initial committed purchaser of all of the variable rate revolving notes. The agreements relating to the receivables purchase facility contain various conditions to purchase, covenants and trigger events, termination events and other provisions customary in receivables transactions. In connection with SPPC's receivables facility, SPR has agreed to guaranty SPPC's performance of certain obligations as a seller and servicer under the facility. SPPC has agreed to issue $75 million principal amount of its General and Refunding Mortgage Bonds upon activation of the accounts receivables purchase facility. The full principal amount of the Bond would secure certain of SPPC's obligations as seller and servicer, plus certain interest, fees and expenses thereon to the extent not paid when due, regardless of the actual amounts owing with respect to the secured obligations. As a result, in the event of an SPPC bankruptcy or liquidation, the holder of the Bond securing the receivables facility may recover more on a pro rata basis than the holders of other General and Refunding Mortgage securities, who could recover less on a pro rata basis, than they otherwise would recover. However, in no event will the holder of the Bond recover more than the amount of obligations secured by the Bond. SPPC intends to use the accounts receivables purchase facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. SPPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $75 million General and Refunding Mortgage Bond. As of March 31, 2003, this facility has not been activated. SPPC does not expect to activate this facility in the foreseeable future. 17 NOTE 4. LONG-TERM DEBT Substantially all utility plant is subject to the liens of NPC's and SPPC's indentures under which their First Mortgage bonds and General and Refunding Mortgage bonds are issued. SIERRA PACIFIC RESOURCES In January 2003, SPR acquired $8.75 million aggregate principal amount of its Floating Rate Notes due April 20, 2003, in exchange for approximately 1.3 million shares of its common stock, in two privately negotiated transactions exempt from the registration requirements of the Securities Act. On February 5, 2003, SPR acquired 2.1 million of Premium Income Equity Securities (PIES) including approximately $104.8 million of 7.93% Senior Notes due 2007 that are a component of the PIES, in exchange for approximately 13.66 million shares of its common stock, in five privately negotiated transactions exempt from the registration requirements of the Securities Act. On February 14, 2003, SPR issued $300 million of its 7.25% Convertible Notes due 2010. Interest on the notes is payable semi-annually. At any time on or after August 14, 2003 through the close of business February 14, 2010, holders of the Convertible Notes may convert each $1,000 principal amount of their notes into 219.1637 shares of SPR's common stock, subject to adjustment upon the occurrence of certain dilution events. Until SPR has obtained shareholder approval to fully convert the Convertible Notes into shares of common stock, holders of the Convertible Notes will be entitled to receive 76.7073 shares of common stock and a remaining portion in cash based on the average closing price of SPR's common stock over five consecutive trading days for each $1,000 principal amount of notes surrendered for conversion. In the event SPR obtains shareholder approval, it may elect to satisfy the cash payment component of the conversion price of the Convertible Notes solely with shares of common stock. Because the Convertible Notes may be converted, at the holder's option, any time after six months from issuance, there is a possibility that SPR may be required to honor this obligation in less than one year. In addition, until SPR has obtained shareholder approval to fully convert the Convertible Notes into shares of common stock, SPR must satisfy part of this obligation in cash. Accordingly, the portion of the obligation relating to the amount to be settled upon conversion by issuing shares is classified as a long-term liability and the portion to be settled with working capital upon demand by the holder is classified as a current maturity. For further information regarding accounting for the conversion option, see Note 10, Derivatives and Hedging Activities. The Convertible Notes provide for the payment of dividends to the holders in an amount equal to any per share dividends on SPR common stock that would have been payable to the holders if the holders of the notes had converted their notes into shares of common stock at the applicable conversion rate on the record date for such dividend. SPR may redeem some or all of the notes at any time on or after February 14, 2008. SPR used approximately $53.4 million of the proceeds to acquire U.S. Government securities that are pledged to the trustee as security for the notes for the first two and one-half years and which SPR expects to use to pay the first five interest payments on the notes. A portion of the remaining net proceeds of the notes were used to repurchase approximately $58.5 million of SPR's Floating Rate Notes due April 20, 2003. Of the remaining net proceeds, approximately $133 million were used to repay the remainder of SPR's Floating Rate Notes due April 20, 2003, and the remaining proceeds will be available for general corporate purposes. The indenture under which the Convertible Notes were issued does not contain any financial covenants or any restrictions on the payment of dividends, the repurchase of SPR's securities or the incurrence of indebtedness. The indenture does allow the holders of the Convertible Notes to require SPR to repurchase all or a portion of the holders' Convertible Notes upon a change of control. The indenture also provides for an event of default if SPR or any of its significant subsidiaries, including NPC and SPPC, fails to pay any indebtedness in excess of $10 million or has any indebtedness of $10 million or more accelerated and declared due and payable. On April 21, 2003, SPR paid the remaining approximate $133 million unsecured Floating Rate Notes, due April 20, 2003, at maturity. SIERRA PACIFIC POWER COMPANY On May 1, 2003, SPPC's $80 million Washoe County, Nevada, Water Facilities Refunding Revenue Bonds, Series 2001, were successfully remarketed. The interest rate on the bonds was adjusted from their prior two-year 5.75% term rate to a 7.50 % term rate for the period of May 1, 2003 to and including May 3, 2004. The bonds will be subject to remarketing on May 3, 2004 and will continue to be included in current maturities of long-term debt. In the event that the bonds cannot be successfully remarketed on that date, SPPC will be required to purchase the outstanding bonds at a price of 100% of principal 18 amount, plus accrued interest. From May 1, 2003 to and including May 3, 2004, SPPC's payment and purchase obligations in respect of the bonds are secured by SPPC's $80 million General and Refunding Mortgage Note, Series D, due 2004. SIERRA PACIFIC COMMUNICATIONS Sierra Touch America LLC (STA), a partnership between SPC and Touch America, formerly Montana Power Company, was formed to construct a fiber optic line between Salt Lake City, Utah and Sacramento, CA. On September 9, 2002, SPC entered into an agreement to purchase and lease certain telecommunications and fiber optic assets from Touch America, subject to successful completion of the construction, in exchange for SPC's partnership units in Sierra Touch America and the execution of a $35 million promissory note for a total purchase price of $48.5 million. The promissory note accrues interest at 8% per annum. The outstanding balance of the promissory note as of March 31, 2003, was $21.3 million. As of March 31, 2003 NPC's, SPPC's and SPR's aggregate annual amount of maturities for long-term debt (including obligations related to capital leases) for the next five years is shown below (in thousands of dollars):
SPR Holding Co. SPR NPC SPPC and Other Subs. Consolidated ----------- ----------- --------------- ------------ 2003 $ 354,664 $ 101,400 $ 302,794 $ 758,858 2004 135,570 3,400 - 138,970 2005 6,091 100,150 300,000 406,241 2006 6,509 52,400 - 58,909 2007 5,949 2,400 240,218 248,567 ----------- ----------- --------- ------------ Thereafter 1,345,721 759,533 80,136 2,185,390 ----------- ----------- --------- ------------ 1,854,504 1,019,283 923,148 3,796,935 Unamortized (Disc.)/Prem. (13,438) (3,458) (8,054) (24,950) ----------- ----------- --------- ------------ Total $ 1,841,066 $ 1,015,825 $ 915,094 $ 3,771,985 =========== =========== ========= ============
NOTE 5. DIVIDEND RESTRICTIONS Since SPR is a holding company, substantially all of its cash flow is provided by dividends paid to SPR by NPC and SPPC on their common stock, all of which is owned by SPR. Since NPC and SPPC are public utilities, they are subject to regulation by state utility commissions which may impose limits on investment returns or otherwise impact the amount of dividends that the Utilities may declare and pay, and to federal statutory limitation on the payment of dividends. In addition, certain agreements entered into by the Utilities set restrictions on the amount of dividends they may declare and pay and restrict the circumstances under which such dividends may be declared and paid. The specific restrictions on dividends contained in agreements to which NPC and SPPC are party, as well as specific regulatory limitations on dividends, are summarized below. NEVADA POWER COMPANY First Mortgage Indenture. NPC's first mortgage indenture limits the cumulative amount of dividends and other distributions that NPC may pay on its capital stock to the cumulative net earnings of NPC since 1953, subject to adjustments for the net proceeds of sales of capital stock since 1953. At the present time, this restriction precludes NPC from making further payments of dividends on NPC's common stock and will continue to bar dividends until NPC, over time, generates sufficient earnings to eliminate the deficit under this provision (which was approximately $254 million as of March 31, 2003), unless the restriction is waived, amended, or removed by the consent of the first mortgage bondholders, or the first mortgage bonds are redeemed or defeased. Under this provision, NPC continues to have capacity to repurchase or redeem shares of its capital stock. Series E Notes. NPC's 10 7/8% General and Refunding Mortgage Notes, Series E, due 2009, which were issued on October 29, 2002, limit the amount of payments in respect of common stock that NPC may pay to SPR. However, that 19 limitation does not apply to payments by NPC to enable SPR to pay its reasonable fees and expenses (including, but not limited to, interest on SPR's indebtedness and payment obligations on account of SPR's PIES provided that: - those payments do not exceed $60 million for any one calendar year, - those payments comply with any regulatory restrictions then applicable to NPC, and - the ratio of consolidated cash flow to fixed charges for NPC's most recently ended four full fiscal quarters immediately preceding the date of payment is at least 1.75 to 1. The terms of the Series E Notes also permit NPC to make payments to SPR in an aggregate amount not to exceed $15 million from the date of the issuance of the Series E Notes. In addition, NPC may make dividend payments to SPR in excess of the amounts described above so long as, at the time of payment and after giving effect to the payment: - there are no defaults or events of default with respect to the Series E Notes, - NPC can meet a fixed charge coverage ratio test, and - the total amount of such dividends is less than: - the sum of 50% of NPC's consolidated net income measured on a quarterly basis cumulative of all quarters from the date of issuance of the Series E Notes, plus - 100% of NPC's aggregate net cash proceeds from the issuance or sale of certain equity or convertible debt securities of NPC, plus - the lesser of cash return of capital or the initial amount of certain restricted investments, plus - the fair market value of NPC's investment in certain subsidiaries. If NPC's Series E Notes are upgraded to investment grade by both Moodys and S&P, these dividend restrictions will be suspended and will no longer be in effect so long as the Series E Notes remain investment grade. Accounts Receivable Facility. On October 29, 2002, NPC established an accounts receivable purchase facility. The agreements relating to the receivables purchase facility contain various conditions, including a limitation on the payment of dividends by NPC to SPR that is identical to the limitation contained in NPC's General and Refunding Mortgage Notes, Series E, described above. Preferred Trust Securities. The terms of NPC's preferred trust securities provide that no dividends may be paid on NPC's common stock if NPC has elected to defer payments on the junior subordinated debentures issued in conjunction with the preferred trust securities. At this time, NPC has not elected to defer payments on the junior subordinated debentures. PUCN Order. The PUCN issued a Compliance Order, Docket No. 02-4037, on June 19, 2002, relating to NPC's request for authority to issue long-term debt. The PUCN order requires that, until such time as the order's authorization expires (December 31, 2003), NPC must either receive the prior approval of the PUCN or reach an equity ratio of 42% before paying any dividends to SPR. If NPC achieves a 42% equity ratio prior to December 31, 2003, the dividend restriction ceases to have effect. As of March 31, 2003, NPC's equity ratio was 36.0%. Federal Power Act. NPC is subject to the provisions of the Federal Power Act that state that dividends cannot be paid out of funds that are properly included in capital accounts. Although the meaning of this provision is unclear, it could be interpreted to impose an additional material limitation on a utility's ability to pay dividends in the absence of retained earnings. SIERRA PACIFIC POWER COMPANY Term Loan Agreement. SPPC's Term Loan Agreement dated October 30, 2002, which expires October 31, 2005, limits the amount of dividends that SPPC may pay to SPR. However, that limitation does not apply to payments by SPPC to enable SPR to pay its reasonable fees and expenses (including, but not limited to, interest on SPR's indebtedness and payment obligations on account of SPR's PIES) provided that those payments do not exceed $90 million, $80 million and $60 million in the aggregate for the twelve month periods ending on October 30, 2003, 2004 and 2005, respectively. The Term Loan Agreement also permits SPPC to make dividend payments to SPR in an aggregate amount not to exceed $10 million during the term of the Term Loan Agreement. In addition, SPPC may make dividend payments to SPR in excess of the amounts described above so long as, at the time of the payment and after giving effect to the payment, there are no defaults or events of default under the Term Loan Agreement, and such amounts, when aggregated with the amount of dividends paid to SPR by SPPC since the date of execution of the Term Loan Agreement, do not exceed the sum of: - (i) 50% of SPPC's Consolidated Net Income for the period commencing January 1, 2003 and ending with last day of fiscal quarter most recently completed prior to the date of the contemplated dividend payment, plus - (ii) the aggregate amount of cash received by SPPC from SPR as equity contributions on its common stock during such period. 20 Accounts Receivable Facility. On October 29, 2002, SPPC established an accounts receivable purchase facility. The agreements relating to the receivables purchase facility contain various conditions, including a limitation on the payment of dividends by SPPC to SPR that is identical to the limitation contained in SPPC's Term Loan Agreement, described above. Articles of Incorporation. SPPC's Articles of Incorporation contain restrictions on the payment of dividends on SPPC's common stock in the event of a default in the payment of dividends on SPPC's preferred stock. SPPC's Articles also prohibit SPPC from declaring or paying any dividends on any shares of common stock (other than dividends payable in shares of common stock), or making any other distribution on any shares of common stock or any expenditures for the purchase, redemption or other retirement for a consideration of shares of common stock (other than in exchange for or from the proceeds of the sale of common stock) except from the net income of SPPC, and its predecessor, available for dividends on common stock accumulated subsequent to December 31, 1955, less preferred stock dividends, plus the sum of $500,000. At the present time, SPPC believes that these restrictions do not materially limit its ability to pay dividends and/or to purchase or redeem shares of its common stock. Federal Power Act. SPPC is subject to the provisions of the Federal Power Act that state that dividends cannot be paid out of funds that are properly included in capital accounts. Although the meaning of this provision is unclear, it could be interpreted to impose an additional material limitation on a utility's ability to pay dividends in the absence of retained earnings. 21 NOTE 6. EARNINGS PER SHARE (SPR) The following table outlines the calculation for earnings per share (EPS). The difference, if any, between Basic EPS and Diluted EPS is due to common stock equivalent shares resulting from stock options, the employee stock purchase plan, performance and restricted stock plans and the non-employee director stock plan. However, due to net losses for the three-month periods ended March 31, 2003 and 2002, these items are anti-dilutive. Accordingly, Diluted EPS for these periods are computed using the weighted average shares outstanding before dilution. Common stock equivalents were determined using the treasury stock method.
Three Months Ended March 31, 2003 2002 ------------ ------------ BASIC EPS Numerator ($000) Loss applicable to common stock $ (16,498) $ (303,916) ============ ============ Denominator Weighted average number of shares outstanding 111,499,881 102,110,536 ============ ============ Per-Share Amount Loss applicable to common stock $ (0.15) $ (2.98) ============ ============ DILUTED EPS Numerator ($000) Loss applicable to common stock $ (16,498) $ (303,916) ============ ============ Denominator (1) Weighted average number of shares outstanding 111,499,881 102,110,536 before dilution Stock options - 31,612 Executive long term incentive plan - performance shares - 24,694 Executive long term incentive plan - restricted shares 26,440 - Non-Employee Director stock plan 14,183 9,355 Employee stock purchase plan - 2,660 ------------ ------------ 111,540,504 102,178,857 ============ ============ Per-Share Amount Loss applicable to common stock $ (0.15) $ (2.98) ============ ============
(1) The denominator does not include anti-dilutive stock equivalents for the Stock Option Plan, Employee Stock Purchase Plan, Corporate PIES and 7.25% Convertible Debt due to conversion prices being higher than market prices at March 31, 2003. NOTE 7. SEGMENT INFORMATION (SPR) SPR operates three business segments providing regulated electric and natural gas services. NPC has one business segment that provides electric service to Las Vegas and surrounding Clark County. SPPC has two business segments. One business segment provides electric service in northern Nevada and the Lake Tahoe area of California and the other segment provides natural gas service 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. SPR evaluates performance based on several factors, of which the primary financial measure is business segment operating income. Intersegment revenues are not material. Financial data for business segments is as follows (in thousands): 22
Three Months Ended NPC SPPC Total March 31, 2003 Electric Electric Electric Gas Other Consolidated - ------------------ ---------- --------- ---------- -------- ------- -------------- Operating Revenues $ 331,652 $ 205,454 $ 537,106 $ 64,617 $ 1,239 $ 602,962 ========== ========= ========== ======== ======= ============== Operating Income $ 17,413 $ 20,232 $ 37,645 $ 3,589 $ 4,563 $ 45,797 ========== ========= ========== ======== ======= ==============
Three Months Ended NPC SPPC Total March 31, 2002 Electric Electric Electric Gas Other Consolidated - ------------------ ---------- --------- ---------- -------- ------- -------------- Operating Revenues $ 356,272 $ 224,754 $ 581,026 $ 55,083 $ 2,755 $ 638,864 ========== ========= ========== ======== ======= ============== Operating Income (Loss) $ (260,759) $ 23,401 $ (237,358) $ 1,533 $ 5,074 $ (230,751) ========== ========= ========== ======== ======= ==============
NOTE 8. DISPOSAL OF LONG-LIVED ASSETS During 2002, the Utilities began pursuing the sale of several non-essential properties. As a result, on January 15, 2003, NPC sold a parcel of land located on Flamingo Road near the Barbary Coast Casino in Las Vegas, Nevada. NPC received cash proceeds of approximately $18 million for the property and retained an easement and other rights necessary to maintain aerial power lines that cross the property. Also, it was agreed that NPC will receive an additional $2.6 million from the sale if the power lines that cross the property are removed and the other rights are relinquished within a five-year period from the date of the sale. The property had been originally transferred to NPC at no cost. The transaction resulted in a gain of $17.7 million, which will be recognized into revenue over a period of three years consistent with the accounting treatment directed by the PUCN. NPC is pursuing the sale of land parcels located on Flamingo Road from Koval Lane to Maryland Parkway, commonly known as "the Flamingo Corridor." These properties are presently under long-term leases with restaurants, convenience stores, gas stations, etc. On April 21, 2003 NPC provided notice to the tenants of the Flamingo Corridor properties of its intent to sell the properties at a public auction. Currently the auction is scheduled for mid-July 2003. The carrying value of the properties is approximately $.9 million. On November 11, 2002, SPPC agreed to sell land located in Nevada County and Sierra County, California, commonly referred to as Independence Lake. The sale was subject to review by a third party who retained certain rights, including water rights, after the sale is completed. Also, the sales agreement included a due diligence review period of 180 days which allowed the buyer to review and accept a variety of matters agreed to by both parties. In April 2003, the buyer terminated the agreement during the review period as provided for in the agreement. The agreed upon sales price was $22 million and the carrying value of the property is approximately $108,000. SPPC plans to sell the property and is continuing to work with all potential buyers. NOTE 9. REGULATORY ACTIONS NEVADA POWER COMPANY 2002 DEFERRED ENERGY CASE On November 14, 2002, NPC filed an application with the PUCN seeking to clear deferred balances for purchased fuel and power costs accumulated between October 1, 2001, and September 30, 2002, as required by law. The application seeks to establish a rate to repay accumulated purchased fuel and power costs of $195.7 million, together with a carrying charge, over a period of not more than three years. The application also requests a reduction to the going-forward rate for energy, reflecting reduced wholesale energy costs. The combined effect of these two adjustments results in an overall rate reduction of 5.3%. Intervenors filed their direct testimony on March 7, 2003, and supplemental testimony was filed March 27, 2003, calling for disallowances between approximately $108 and $300 million of the total fuel and purchased power costs. The largest of the proposed disallowances are based on the same alleged imprudence as found in the PUCN order for NPC's 2001 Deferred Energy Case relating to NPC's failure to enter into power contracts in 1999. Certain Intervenors' testimony, in the current case, have argued in favor of disallowances based on the same alleged imprudence as cited in the last deferred order but have not quantified their proposals and in some cases have argued in favor of disallowances in excess of the ranges previously indicated. The PUCN Staff does not support this disallowance but calculated a range of $116 to $347 million in the event that the PUCN disallows deferred energy costs based upon the same alleged imprudence cited by the PUCN in its 2001 decision relative to this issue. 23 While all Intervenors have called for the PUCN to reduce NPC's requested energy rates for recovery of past energy costs, some have also proposed to increase customers' energy rates for purchases that will occur during the upcoming deferred accounting period, which would decrease the accumulation of deferred energy costs. NPC's rebuttal testimony was filed March 31, 2003. The hearing commenced on April 7, 2003, and was completed on April 17, 2003. A special agenda meeting is scheduled for May 9, 2003, at which time a ruling from the Commission is expected. SIERRA PACIFIC POWER COMPANY 2003 DEFERRED ENERGY CASE On January 14, 2003, SPPC filed an application with the PUCN, as required by law, seeking to clear deferred balances for purchased fuel and power costs accumulated between December 1, 2001 and November 30, 2002. The application seeks to establish a Deferred Energy Accounting Adjustment (DEAA) rate to repay accumulated purchased fuel and power costs of $15.4 million and spread the cost recovery over a period of not more than three years. It also seeks to recalculate the Base Tariff Energy Rate to reflect anticipated ongoing purchased fuel and power costs. The total rate increase resulting from the requested DEAA would amount to 0.01%. The intervenors' testimony was received April 25, 2003, and includes proposed disallowances from $34 million to $76 million. While all Intervenors call for the PUCN to reduce SPPC's requested energy rates for recovery of past energy costs, some also propose to increase customers' energy rates for purchases that will occur during the upcoming deferred accounting period, which would decrease the accumulation of deferred energy costs. A hearing is scheduled to begin on May 12, 2003, and a ruling is required before July 13, 2003. NOTE 10. DERIVATIVES AND HEDGING ACTIVITIES SPR, SPPC, and NPC apply (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. As amended, SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, measure those instruments at fair value, and recognize changes in the fair value of the derivative instruments in earnings in the period of change unless the derivative qualifies as an effective hedge. SPR's and the Utilities' objective in using derivatives is to reduce exposure to energy price risk and interest rate risk. Energy price risks result from activities that include the generation, procurement and marketing of power and the procurement and marketing of natural gas. Derivative instruments used to manage energy price risk include forwards, options, and swaps. These contracts allow the Utilities to reduce the risks associated with volatile electricity and natural gas markets. At March 31, 2003, the fair value of the derivatives resulted in the recording of $54 million, $42 million and $12 million in risk management assets and $71 million, $36 million and $35 million in risk management liabilities in the Consolidated Balance Sheets of SPR, NPC and SPPC, respectively. Due to deferred energy accounting under which the Utilities operate, regulatory assets and liabilities are established to the extent that electricity and natural gas derivative gains and losses are recoverable or payable through future rates. Accordingly, at March 31, 2003, $47 million, $15 million and $32 million in net risk management regulatory assets were recorded in the Consolidated Balance Sheets of SPR, NPC, and SPPC, respectively. In addition, for the three months ended March 31, 2003, the unrealized gains and losses resulting from the change in the fair value of derivatives designated and qualifying as cash flow hedges for SPR, NPC, and SPPC were recorded in Other Comprehensive Income. Such amounts are reclassified into earnings when the related transactions are settled or terminate. Accordingly, $1.1 million relating to SPR's terminated interest rate swap was reclassified into earnings during the three months ended March 31, 2003. The effects of SFAS No. 133 on comprehensive income and the components thereof at March 31, 2003, and 2002, are as follows (in thousands): 24
SPR NPC SPPC ------------- ------------- -------------- Net Income (Loss) for the three months ended March 31, 2003 $ (16,498) $ (15,246) $ 3,023 Change in market value of risk management assets and liabilities as of March 31, 2003, net of taxes of $1,051, $165, and $125 1,952 492 232 respectively ------------- ------------- -------------- Total Comprehensive Income (Loss) for the three months ended March 31, 2003 $ (14,546) $ (14,754) $ 3,255 ============= ============= ============== Net Income (Loss) for the three months ended March 31, 2002 $ (303,916) $ (300,984) $ 9,969 Change in market value of risk management assets and liabilities as of March 31, 2002, net of taxes of ($3,127), ($134), and ($64), respectively (5,807) 248 118 ------------- ------------- -------------- Total Comprehensive Income for the three months ended March 31, 2002 $ (309,723) $ (300,736) $ 10,087 ============= ============= ==============
In connection with SPR's issuance of its Convertible Notes (see Note 4, Long-Term Debt), the conversion option, which is treated as a cash-settled written call option, was separated from the debt and accounted for separately as a derivative instrument in accordance with FASB's Emerging Issues Task Force Issue 90-19, "Convertible Bonds with Issuer Option to Settle for Cash upon Conversion". Upon issuance, the fair value of the option was recorded as a current liability in Other Current Liabilities. The change in the fair value is recognized in earnings in the period of the change. NOTE 11. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL NEVADA POWER COMPANY The Grand Canyon Trust and Sierra Club filed a lawsuit in the U.S. District Court, District of Nevada in February 1998 against the owners (including NPC) of the Mohave Generation Station ("Mohave"), alleging violations of the Clean Air Act regarding emissions of sulfur dioxide and particulates. An additional plaintiff, National Parks and Conservation Association, later joined the suit. The plant owners and plaintiffs have had numerous settlement discussions and filed a proposed settlement with the court in October 1999. The consent decree, approved by the court in November 1999, established emission limits for sulfur dioxide and opacity and required installation of air pollution controls for sulfur dioxide, nitrogen oxides and particulate matter. The new emission limits must be met by January 1, 2006 and April 1, 2006 for the first and second units, respectively. The estimated cost of new controls is $1.1 billion. As a 14% owner in Mohave, NPC's cost could be $154 million. NPC's ownership interest in Mohave comprises approximately 10% of NPC's peak generation capacity. Southern California Edison (SCE) is the operating partner of Mohave. On May 17, 2002, SCE filed with the CPUC an application to address the future disposition of SCE's share of Mohave. Mohave obtains all of its coal supply from a mine in northeast Arizona on lands of the Navajo Nation and the Hopi Tribe (the Tribes). This coal is delivered from the mine to Mohave by means of a coal slurry pipeline which requires water that is obtained from groundwater wells located on lands of the Tribes in the mine vicinity. Due to the lack of progress in negotiations with the Tribes and other parties to resolve several coal and water supply issues, SCE's application states that it appears that it probably will not be possible for SCE to extend Mohave's operations beyond 2005. Due to the uncertainty over a post-2005 coal supply, SCE and the other Mohave co-owners have been prevented from commencing the installation of extensive pollution control equipment that must be put in place if Mohave's operations are extended past 2005. NPC is currently evaluating and analyzing all of its options with regard to the Mohave project. In May 1997, the Nevada Division of Environmental Protection (NDEP) ordered NPC to submit a plan to eliminate the discharge of Reid Gardner Station wastewater to groundwater. The NDEP order also required a hydrological assessment of groundwater impacts in the area. In June 1999, NDEP determined that wastewater ponds had degraded groundwater quality. In August 1999, NDEP issued a discharge permit to Reid Gardner Station and an order that requires all wastewater ponds to be closed or lined with impermeable liners over the next 10 years. This order also required NPC to submit a Site Characterization Plan to NDEP to ascertain impacts. This plan has been approved by NDEP. NDEP is expected to identify remediation requirements of 25 contaminated groundwater resulting from these evaporation ponds by July 2003. New pond construction and lining costs are estimated to cost approximately $25 million, of which, $17 million is expected to be spent by the end of 2003. At the Reid Gardner Station, the NDEP has determined that there is additional groundwater contamination that resulted from oil spills at the facility. NDEP has required NPC to submit a corrective action plan. The extent of contamination has been determined and remediation is occurring at a modest rate. A hydro-geologic evaluation of the current remediation was completed, and a dual phase extraction remediation system, which has been approved by NDEP, will be constructed beginning in May 2003 at an estimated cost of $150,000. In May 1999, NDEP issued an order to eliminate the discharge of NPC's Clark Station wastewater to groundwater. The order also required a hydrological assessment of groundwater impacts in the area. This assessment, submitted to NDEP in February 2001, warranted a Corrective Action Plan, which was approved in June 2002. Remediation costs are expected to be approximately $100,000. In addition to remediation, NPC spent $663,000 to line all existing treated water ponds. Lining of all existing treated water ponds was completed in February 2003. In July 2000, NPC received a request from the EPA for information to determine the compliance of certain generation facilities at the Clark Station with the applicable State Implementation Plan. In November 2000, NPC and the Clark County Health District entered into a Corrective Action Order requiring, among other steps, capital expenditures at the Clark Station totaling approximately $3 million. In March 2001, the EPA issued an additional request for information that could result in remediation beyond that specified in the November 2000 Corrective Action Order. If the EPA prevails, capital expenditures and temporary outages of four of Clark Station's generation units could be required. Additionally, depending on the time of year that the compliance activity and corresponding generation outage would occur, the incremental cost to purchase replacement energy could be substantial. To date, EPA has not issued additional requests for further information. NEICO, a wholly owned subsidiary of NPC, owns property in Wellington, Utah, which was the site of a coal washing and load out facility. The site now has a reclamation estimate supported by a bond of $4.8 million with the Utah Division of Oil and Gas Mining. The property was under contract for sale and the contract required the purchaser to provide $1.3 million in escrow towards reclamation. However, the sales contract was terminated and NEICO took title to the escrow funds. The property is currently leased with the intention to reclaim coal fines with subsequent revenues and reduction to the reclamation bond. SIERRA PACIFIC POWER COMPANY In September 1994 Region VII of the EPA notified SPPC that it was being named as a potentially responsible party (PRP) regarding the past improper handling of Polychlorinated Biphenyls (PCB's) by PCB Treatment, Inc., in two buildings, one located in Kansas City, Kansas and the other in Kansas City, Missouri (the Sites). Prior to 1994, SPPC sent PCB contaminated material to PCB Treatment, Inc. for disposal. Certificates of disposal were issued to SPPC by PCB Treatment, Inc. however; the contaminated material was not disposed of, but remained on-site. A number of the largest PRP's formed a steering committee, which is chaired by SPPC. The steering committee has completed its site investigations and the EPA has determined that the Sites should be remediated by removing the buildings to the appropriate landfills. The EPA has issued an administrative order on consent requiring the steering committee to oversee the performance of the work. SPPC has recorded a preliminary liability for the Sites of $650,000 of which approximately $136,000 has been spent through March 31, 2003. The steering committee is obtaining cost estimates for removal of the buildings. Once these costs have been determined, SPPC will be in a better position to estimate and record the ultimate liabilities for the Sites. LANDS OF SIERRA LOS, a wholly owned subsidiary of SPR, owns property in North Lake Tahoe, California, which is leased to independent condominium owners. The property has both soil and groundwater petroleum contamination resulting from an underground fuel tank that has been removed from the property. Additional contamination from a third party fuel tank on the property has also been identified and is undergoing remediation. On February 3, 2003, the Lahontan Regional Water Quality Control Board re-opened closure of this property. By October 1, 2003, SPR will complete the evaluation of alternative remediation technologies and their effectiveness in reducing contamination at this site. An application for closure will be re-submitted at that time. Additional remediation costs are expected to be approximately $100,000. LITIGATIONCONTINGENCIES NEVADA POWER COMPANY AND SIERRA PACIFIC POWER COMPANY Enron Power Marketing (Enron) filed a complaint with the United States Bankruptcy Court for the Southern District of New York seeking to recover approximately $216 million and $93 million against NPC and SPPC, respectively, for liquidated damages for power supply contracts terminated by Enron in May 2002 and for power previously delivered to the Utilities. The Utilities have denied liability on numerous grounds, including deceit and misrepresentation in the inducement 26 (including, but not limited to, misrepresentation as to Enron's ability to perform) and fraud, unfair trade practices and market manipulation. The Utilities filed motions to dismiss for lack of jurisdiction and/or for a stay of all proceedings pending the actions of the Utilities' proceedings under Section 206 of the Federal Power Act at the FERC. The Utilities have also filed proofs of claims and counterclaims against Enron, for the full amount of the approximately $300 million claimed to be owed and additional damages, as well as for unspecified damages to be determined during the case as a result of acts and omissions of Enron in manipulating the power markets, wrongful termination of its transactions with the Utilities, and fraudulent inducement to enter into transactions with Enron, among other issues. On December 19, 2002, the bankruptcy judge granted Enron's motion for partial summary judgment on Enron's claim for $17.7 million and $6.7 million, respectively, for energy delivered by Enron in April 2002, for which NPC and SPPC did not pay. The court ordered this money to be deposited into an escrow account not subject to claims of Enron's creditors and subject to refund depending on the outcome of the Utilities' FERC cases on the merits. The Utilities made the deposit as required. The bankruptcy court denied the Utilities' motion to stay the proceeding pending the outcome of the Utilities' Section 206 case at the FERC and denied the Utilities' motion to dismiss for lack of jurisdiction as to Enron's claims for power previously delivered to the Utilities. The court stated that it would rule in due course on Enron's motion for partial summary judgment to require NPC and SPPC to post $200 million and $87 million, respectively pending the outcome of the case on the merits, and for judgment on the merits on Enron's liquidated damage claim (contract price less market price on the date of termination) relating to power it did not deliver under contracts terminated by Enron in May 2002. The court took under advisement the Utilities' motion to stay or dismiss Enron's claim for liquidated damages relating to the undelivered power. On April 3, 2003, the court heard arguments regarding Enron's motion to dismiss the Utilities' counterclaims against Enron for unspecified damages to be determined during the case, but did not rule on this matter nor did it indicate when a decision on this matter can be expected. The Utilities are unable to predict the outcome of these motions. The Utilities continue to participate in non-binding court-ordered mediation proceedings along with all of Enron's other terminated purchased power counterparties. The United States District Court for the Southern District of New York has also denied the Utilities' motion to withdraw reference of the matter to the bankruptcy court without prejudice. The bankruptcy court currently has under submission (1) Enron's motion to dismiss the Utilities' counterclaims, (2) Enron's motion for partial summary judgment regarding the amounts alleged to be due for undelivered power and the posting of collateral for undelivered power, and (3) the Utilities' motion to dismiss or stay proceeding on Enron's claims relating to delivered power. A decision adverse to the Utilities on Enron's motion for partial summary judgment, or an adverse decision in the lawsuit with respect to liability as to Enron's claims on the merits for undelivered power, would have a material adverse effect on SPR's and the Utilities' financial condition and liquidity, and could make it difficult for one or more of SPR, NPC or SPPC to continue to operate outside of bankruptcy. NEVADA POWER COMPANY On September 5, 2002, Morgan Stanley Capital Group (MSCG) initiated an arbitration pursuant to the arbitration provisions in various power supply contracts terminated by MSCG in April 2002. In the arbitration, MSCG requested that the arbitrator compel NPC to pay MSCG $25 million pending the outcome of any dispute regarding the amount owed under the contracts. NPC claimed that nothing is owed under the contracts on various grounds, including breach by MSCG in terminating the contracts, and further, that the arbitrator does not have jurisdiction over NPC's contract claims and defenses. In March 2003, the arbitrator overseeing the arbitration proceedings dismissed MSCG's demand for arbitration and agreed that the issues raised by MSCG were not calculation issues subject to arbitration and that NPC's contract defenses were likewise not arbitrable. NPC has since filed a complaint for declaratory relief in the U.S. District Court for the District of Nevada asking the Court to declare that NPC is not liable for any damages as a result of MSCG's termination of its power supply contracts. MSCG has not yet answered or responded to the complaint; however, on April 17, 2003, MSCG filed a complaint against NPC at the FERC conceding that the issues raised by NPC were litigable in court but asking the FERC to declare that under the WSPP agreement NPC should post the $25 million in dispute as collateral pending the outcome of the litigation. NPC is unable to predict the outcome of these proceedings. NOTE 12. SUBSEQUENT EVENTS See Notes 1, 4, 8, 9 and 11 for discussion of events occurring after March 31, 2003. 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND RISK FACTORS THE INFORMATION IN THIS FORM 10-Q 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 THE ACTUAL RESULTS OF SIERRA PACIFIC RESOURCES (SPR), NEVADA POWER COMPANY (NPC), OR SIERRA PACIFIC POWER COMPANY (SPPC) TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN ANY FORWARD-LOOKING STATEMENT INCLUDE, AMONG OTHERS, THE FOLLOWING: (1) UNFAVORABLE RULINGS IN RATE CASES PREVIOUSLY FILED, CURRENTLY PENDING AND TO BE FILED BY NPC AND SPPC (THE UTILITIES) WITH THE PUBLIC UTILITIES COMMISSION OF NEVADA (PUCN), INCLUDING THE PERIODIC APPLICATIONS TO RECOVER COSTS FOR FUEL AND PURCHASED POWER THAT HAVE BEEN RECORDED BY THE UTILITIES IN THEIR DEFERRED ENERGY ACCOUNTS, AND DEFERRED NATURAL GAS RECORDED BY SPPC FOR ITS GAS DISTRIBUTION BUSINESS; (2) THE ABILITY OF SPR, NPC, AND SPPC TO ACCESS THE CAPITAL MARKETS TO SUPPORT THEIR REQUIREMENTS FOR WORKING CAPITAL, INCLUDING AMOUNTS NECESSARY TO FINANCE DEFERRED ENERGY COSTS, CONSTRUCTION COSTS, AND THE REPAYMENT OF MATURING DEBT, PARTICULARLY IN THE EVENT OF ADDITIONAL UNFAVORABLE RULINGS BY THE PUCN, A FURTHER DOWNGRADE OF THE CURRENT DEBT RATINGS OF SPR, NPC, OR SPPC, AND/OR ADVERSE DEVELOPMENTS WITH RESPECT TO NPC's OR SPPC'c POWER AND FUEL SUPPLIERS; (3) WHETHER NPC'S ABILITY TO PAY SPR DIVIDENDS WILL BE RESTORED IN THE NEAR FUTURE, AND WHETHER SPPC WILL BE ABLE TO CONTINUE TO PAY SPR DIVIDENDS UNDER THE TERMS OF SPPC's FINANCING AGREEMENTS AND/OR RESTATED ARTICLES OF INCORPORATION; (4) WHETHER THE PUCN WILL ISSUE FAVORABLE ORDERS IN A TIMELY MANNER TO PERMIT THE UTILITIES TO BORROW MONEY AND ISSUE ADDITIONAL SECURITIES TO FINANCE THE UTILITIES' OPERATIONS AND TO PURCHASE POWER AND FUEL NECESSARY TO SERVE THEIR RESPECTIVE CUSTOMERS AND TO REPAY MATURING DEBT; (5) WHETHER SUPPLIERS, SUCH AS ENRON, WHICH HAVE TERMINATED THEIR POWER SUPPLY CONTRACTS WITH NPC AND/OR SPPC WILL BE SUCCESSFUL IN PURSUING THEIR CLAIMS AGAINST THE UTILITIES FOR LIQUIDATED DAMAGES UNDER THEIR POWER SUPPLY CONTRACTS, AND WHETHER ENRON WILL BE SUCCESSFUL IN ITS LAWSUIT AGAINST NPC AND SPPC; (6) WHETHER SPR, NPC, AND SPPC WILL BE ABLE TO MAINTAIN SUFFICIENT STABILITY WITH RESPECT TO THEIR LIQUIDITY AND RELATIONSHIPS WITH SUPPLIERS TO BE ABLE TO CONTINUE TO OPERATE OUTSIDE OF BANKRUPTCY; (7) WHETHER CURRENT SUPPLIERS OF PURCHASED POWER, NATURAL GAS, OR FUEL TO NPC OR SPPC WILL CONTINUE TO DO BUSINESS WITH NPC OR SPPC OR WILL TERMINATE THEIR CONTRACTS AND SEEK LIQUIDATED DAMAGES FROM THE RESPECTIVE UTILITY; (8) WHETHER THE UTILITIES WILL NEED TO PURCHASE ADDITIONAL POWER ON THE SPOT MARKET TO MEET UNANTICIPATED POWER DEMANDS (FOR EXAMPLE, DUE TO UNSEASONABLY HOT WEATHER) AND WHETHER SUPPLIERS WILL BE WILLING TO SELL SUCH POWER TO THE UTILITIES IN LIGHT OF THEIR WEAKENED FINANCIAL CONDITION; (9) WHETHER SPPC WILL BE ABLE TO MAKE THE GASIFIER FACILITY AT THE PINON PINE POWER PROJECT OPERATIONAL AND, IN ANY EVENT, WHETHER SPPC WILL BE SUCCESSFUL IN OBTAINING PUCN APPROVAL TO RECOVER THE COSTS OF THE GASIFIER IN A FUTURE GENERAL RATE CASE; (10) WHETHER NPC AND SPPC WILL BE SUCCESSFUL IN OBTAINING PUCN APPROVAL TO RECOVER GOODWILL AND OTHER MERGER COSTS RECORDED IN CONNECTION WITH THE 1999 MERGER BETWEEN SPR AND NPC IN A FUTURE GENERAL RATE CASE; (11) WHOLESALE MARKET CONDITIONS, INCLUDING AVAILABILITY OF POWER ON THE SPOT MARKET, WHICH AFFECT THE PRICES THE UTILITIES HAVE TO PAY FOR POWER AS WELL AS THE PRICES AT WHICH THE UTILITIES CAN SELL ANY EXCESS POWER; 28 (12) THE FINAL OUTCOME OF THE UTILITIES' PENDING LAWSUITS IN NEVADA STATE COURT SEEKING TO REVERSE PORTIONS OF THE PUCN'S ORDERS DENYING THE RECOVERY OF DEFERRED ENERGY COSTS, INCLUDING THE OUTCOME OF PETITIONS FILED BY THE BUREAU OF CONSUMER PROTECTION OF THE NEVADA ATTORNEY GENERAL'S OFFICE SEEKING ADDITIONAL DISALLOWANCES; (13) WHETHER THE UTILITIES WILL BE ABLE, EITHER THROUGH FEDERAL ENERGY REGULATORY COMMISSION (FERC) PROCEEDINGS OR NEGOTIATION, TO OBTAIN LOWER PRICES ON THEIR LONGER-TERM PURCHASED POWER CONTRACTS ENTERED INTO DURING 2000 AND 2001 THAT ARE PRICED ABOVE CURRENT MARKET PRICES FOR ELECTRICITY; (14) THE EFFECT THAT ANY FUTURE TERRORIST ATTACKS, WARS, THREATS OF WAR, OR EPIDEMICS MAY HAVE ON THE TOURISM AND GAMING INDUSTRIES IN NEVADA, PARTICULARLY IN LAS VEGAS, AS WELL AS ON THE ECONOMY IN GENERAL; (15) UNSEASONABLE WEATHER AND OTHER NATURAL PHENOMENA, WHICH CAN HAVE POTENTIALLY SERIOUS IMPACTS ON THE UTILITIES' ABILITY TO PROCURE ADEQUATE SUPPLIES OF FUEL OR PURCHASED POWER TO SERVE THEIR RESPECTIVE CUSTOMERS AND ON THE COST OF PROCURING SUCH SUPPLIES; (16) INDUSTRIAL, COMMERCIAL, AND RESIDENTIAL GROWTH IN THE SERVICE TERRITORIES OF THE UTILITIES; (17) THE LOSS OF ANY SIGNIFICANT CUSTOMERS; (18) THE EFFECT OF EXISTING OR FUTURE NEVADA, CALIFORNIA, OR FEDERAL LEGISLATION OR REGULATIONS AFFECTING ELECTRIC INDUSTRY RESTRUCTURING, INCLUDING LAWS OR REGULATIONS WHICH COULD ALLOW ADDITIONAL CUSTOMERS TO CHOOSE NEW ELECTRICITY SUPPLIERS OR CHANGE THE CONDITIONS UNDER WHICH THEY MAY DO SO; (19) CHANGES IN THE BUSINESS OF MAJOR CUSTOMERS, INCLUDING THOSE ENGAGED IN GOLD MINING OR GAMING, WHICH MAY RESULT IN CHANGES IN THE DEMAND FOR SERVICES OF THE UTILITIES, INCLUDING THE EFFECT ON THE NEVADA GAMING INDUSTRY OF THE OPENING OF ADDITIONAL INDIAN GAMING ESTABLISHMENTS IN CALIFORNIA AND OTHER STATES; (20) CHANGES IN ENVIRONMENTAL REGULATIONS, TAX, OR ACCOUNTING MATTERS OR OTHER LAWS AND REGULATIONS TO WHICH THE UTILITIES ARE SUBJECT; (21) FUTURE ECONOMIC CONDITIONS, INCLUDING INFLATION OR DEFLATION RATES AND MONETARY POLICY; (22) FINANCIAL MARKET CONDITIONS, INCLUDING CHANGES IN AVAILABILITY OF CAPITAL OR INTEREST RATE FLUCTUATIONS; (23) UNUSUAL OR UNANTICIPATED CHANGES IN NORMAL BUSINESS OPERATIONS, INCLUDING UNUSUAL MAINTENANCE OR REPAIRS; AND (24) EMPLOYEE WORKFORCE FACTORS, INCLUDING CHANGES IN COLLECTIVE BARGAINING UNIT AGREEMENTS, STRIKES, OR WORK STOPPAGES. 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. SPR, NPC AND SPPC ASSUME NO OBLIGATION TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS OR CHANGES IN OTHER FACTORS AFFECTING FORWARD-LOOKING STATEMENTS. CRITICAL ACCOUNTING POLICIES The following items represent critical accounting policies that under different conditions or using different assumptions could have a material effect on the financial condition, liquidity and capital resources of SPR and the Utilities: REGULATORY ACCOUNTING The Utilities' rates are currently subject to the approval of the PUCN and, in the case of SPPC, they are also subject to the approval of California Public Utility Commission (CPUC) and are designed to recover the cost of providing generation, transmission and distribution services. As a result, the Utilities qualify 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 29 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. Regulatory assets represent incurred costs that have been deferred because it is probable they will be recovered through future rates collected from customers. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred. Management regularly assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory environment changes and the status of any pending or potential deregulation legislation. Although current rates do not include the recovery of all existing regulatory assets as discussed further below and in Note 1 in Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, management believes the existing regulatory assets are probable of recovery. This determination reflects the current political and regulatory climate in the state, and is subject to change in the future. If future recovery of costs ceases to be probable, the write-off of regulatory assets would be required to be recognized as a charge or expensed in current period earnings. Regulatory Accounting affects other Critical Accounting Policies, including Deferred Energy Accounting, Accounting for Goodwill and Merger Costs, Accounting for Generation Divestiture Costs, Impairment of Long-Lived Assets, and Accounting for Derivatives and Hedging Activities, all of which are discussed immediately below. DEFERRED ENERGY ACCOUNTING On April 18, 2001, the Governor of Nevada signed into law Assembly Bill 369 (AB 369). The provisions of AB 369 include, among others, a reinstatement of deferred energy accounting for fuel and purchased power costs incurred by electric utilities. In accordance with the provisions of SFAS No. 71, the Utilities implemented deferred energy accounting on March 1, 2001, for their respective electric operations. Under deferred energy accounting, to the extent actual fuel and purchased power costs exceed fuel and purchased power costs recoverable through current rates, that excess is not recorded as a current expense on the statement of operations but rather is deferred and recorded as an asset on the balance sheet. Conversely, a liability is recorded to the extent fuel and purchased power costs recoverable through current rates exceed actual fuel and purchased power costs. These excess amounts are reflected in adjustments to rates and recorded as revenue or expense in future time periods, subject to PUCN review. AB 369 provides that the PUCN may not allow the recovery of any costs for purchased fuel or purchased power "that were the result of any practice or transaction that was undertaken, managed or performed imprudently by the electric utility." In reference to deferred energy accounting, AB 369 specifies that fuel and purchased power costs include all costs incurred to purchase fuel, to purchase capacity, and to purchase energy. The Utilities also record, and are eligible under the statute to recover, a carrying charge on such deferred balances. The Utilities are 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. See Energy Supply in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, for a discussion of the Utilities' purchased power procurement strategies, and Commodity Price Risk in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, for a discussion of the Utilities' commodity risk management program. As discussed above, deferred energy accounting facilitates the recovery of costs incurred to procure fuel and purchased power for SPPC and NPC. As described in more detail under Regulation and Rate Proceedings, Nevada Matters, Nevada Power Company 2001 Deferred Energy Case, in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, on November 30, 2001, NPC filed an application with the PUCN seeking to establish a Deferred Energy Accounting Adjustment (DEAA) rate to clear deferred balances for purchased fuel and power costs accumulated between March 1, 2001 and September 30, 2001. The application sought to establish a rate to clear accumulated purchased fuel and power costs of $922 million and spread the cost recovery over a period of not more than three years. On March 29, 2002, the PUCN issued its decision on the deferred energy application, disallowing $434 million of deferred purchased fuel and power costs, and allowing NPC to collect the remaining $478 million over three years beginning April 1, 2002. As a result of this disallowance, NPC wrote off $465 million of deferred energy costs and related carrying charges, the two major national rating agencies immediately downgraded the credit rating on SPR's, NPC's and SPPC's debt securities (followed by further downgrades late in April 2002), and the market price of SPR's common stock fell substantially. As described in more detail under Regulation and Rate Proceedings, Nevada Matters, Sierra Pacific Power Company 2002 Deferred Energy Case, in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, SPPC filed an application with the PUCN seeking to establish a DEAA rate to clear its deferred balances for purchased fuel and power costs accumulated between March 1, 2001 and November 30, 2001. The application sought to establish a rate to clear accumulated purchased fuel and power costs of $205 million and spread the cost recovery over a period of not more than three years. On May 28, 2002, the PUCN issued its decision on SPPC's deferred energy application, disallowing $53 million of deferred purchased fuel and power costs, and allowing SPPC to collect the remaining $150 million 30 over three years beginning June 1, 2002. As a result of this decision, SPPC wrote off $58 million of disallowed deferred energy costs and related carrying charges in the second quarter of 2002. Both Utilities have continued to be entitled under AB 369 to utilize deferred energy accounting for their electric operations. Because of contracts entered into during the Western energy crisis in 2001 to assure adequate supplies of electricity for their customers, the Utilities incurred fuel and purchased power costs in excess of amounts they were permitted to recover in current rates. As a result, during 2002, both Utilities continued to record additional amounts in their deferral of energy costs accounts. On November 14, 2002, NPC filed an application with the PUCN seeking to clear deferred balances of $195.7 million for purchased fuel and power costs accumulated between October 1, 2001, and September 30, 2002, and to spread the recovery of the deferred costs, together with a carrying charge, over a period of not more than three years. Intervenors filed their direct testimony on March 7, 2003, and supplemental testimony was filed March 27, 2003, calling for disallowances between approximately $108 and $300 million of the total fuel and purchased power costs. The largest of the proposed disallowances are based on the same alleged imprudence as found in the PUCN order for NPC's 2001 Deferred Energy Case relating to NPC's failure to enter into power contracts in 1999. Certain Intervenors' testimony, in the current case, have argued in favor of disallowances based on the same alleged imprudence as cited in the last deferred order but have not quantified their proposals and in some cases have argued in favor of disallowances in excess of the ranges previously indicated. The PUCN Staff does not support this disallowance but calculated a range of $116 to $347 million in the event that the PUCN disallows deferred energy costs based upon the same alleged imprudence cited by the PUCN in its 2001 decision relative to this issue. While all Intervenors have called for the PUCN to reduce NPC's requested energy rates for recovery of past energy costs, some have also proposed to increase customers' energy rates for purchases that will occur during the upcoming deferred accounting period, which would decrease the accumulation of deferred energy costs. NPC's rebuttal testimony was filed on March 31, 2003, and hearings were completed on April 17, 2003. The PUCN's decision is scheduled for May 9, 2003. On January 14, 2003, SPPC filed an application with the PUCN seeking to clear deferred balances of $15.4 million for purchased fuel and power costs accumulated between December 1, 2001, and November 30, 2002 The application seeks to establish a DEAA rate to repay accumulated purchased fuel and power costs of $15.4 million and spread the cost recovery over a period of not more than three years. It also seeks to recalculate the Base Tariff Energy Rate to reflect anticipated ongoing purchased fuel and power costs. The total rate increase resulting from the requested DEAA would amount to 0.01%. The intervenors' testimony was received April 25, 2003, and includes proposed disallowances from $34 million to $76 million. While all Intervenors call for the PUCN to reduce SPPC's requested energy rates for recovery of past energy costs, some also propose to increase customers' energy rates for purchases that will occur during the upcoming deferred accounting period, which would decrease the accumulation of deferred energy costs. A hearing is scheduled to begin on May 12, 2003, and a ruling is required before July 13, 2003. A significant disallowance in either or both of these deferred energy rate cases or in future cases to be filed by either Utility would have a material adverse affect on the future financial position, results of operations, and liquidity of SPR, NPC, and SPPC and could make it difficult for one or more of SPR, NPC or SPPC to continue to operate outside of bankruptcy. See Regulation and Rate Proceedings, later, for additional discussion of the regulatory process underway to recover these deferred costs. If not for deferred energy accounting during 2003 and 2002, SPR's, NPC's and SPPC's results of operations, financial condition, liquidity and capital resources would have been significantly different. For example, without the deferred energy accounting provisions of AB 369, the reported purchased fuel and power costs of SPR, NPC, and SPPC for the quarter ended March 31, 2003, would have decreased (net of income tax) by approximately $54.7 million, $47.3 million, and $7.4 million, respectively, and the reported interest accrued on deferred energy of SPR, NPC, and SPPC would have decreased (net of income tax) by approximately $4.8 million, $3.7 million, and $1.1 million, respectively, for the same period. Similarly, without the deferred energy accounting provisions of AB 369, the reported purchased fuel and power costs of SPR, NPC, and SPPC for the quarter ended March 31, 2002, would have increased (net of income tax) by approximately $9.3 million, $6.3 million, and $3 million, respectively, and the reported interest accrued on deferred energy of SPR, NPC, and SPPC would have decreased (net of income tax) by approximately $15.6 million, $12.9 million, and $2.7 million, respectively, for the same period. The effects of AB 369 on 2002 purchased fuel and power costs and interest accrued on deferred energy discussed above exclude the write-off of $465 million pursuant to the PUCN's March 29, 2002 decision discussed earlier. 31 ACCOUNTING FOR GOODWILL AND MERGER COSTS The order issued by the PUCN in December 1998 approving the merger of SPR and NPC directed both NPC and SPPC to defer three categories of merger costs to be reviewed for recovery through future rates. That order specifically directed both Utilities to defer merger transaction costs, transition costs and goodwill costs for a three-year period. The deferral of these costs was 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 Utilities to propose an amortization period for the merger costs and allows the Utilities to recover the costs to the extent they are offset by merger savings. Costs deferred as a result of the PUCN order were $331.2 million of goodwill and $62.6 million in other merger costs as of March 31, 2003. The deferred other merger costs consist of $40.9 million of transaction and transition costs and $21.7 million of employee separation costs. Employee separation costs were comprised of $17.2 million of employee severance, relocation and related costs, and $4.5 million of pension and post-retirement benefits net of plan curtailment gains. On October 1, 2001, and November 30, 2001, NPC and SPPC, respectively, filed applications with the PUCN for general rate increases that included, among other items, requests to recover deferred merger costs, including goodwill. In its decisions dated March 27, 2002, and May 28, 2002, for NPC and SPPC, respectively, the PUCN decided not to make any determination on the recovery of merger costs until general rate cases are filed with test years ending on or after December 31, 2002. However, the PUCN did instruct the Utilities to continue to recognize these costs as deferred assets without carrying charges. The extent to which goodwill and merger costs will be recovered in future revenues and the timing of those recoveries is expected to be determined in general rate cases that are required to be filed in 2003. To the extent that the Utilities are not permitted to recover any portion of goodwill in future rates, the amount not recoverable will be reviewed for impairment and accounted for under the provisions of SFAS No. 142. A significant disallowance of goodwill or merger costs by the PUCN could have a material adverse affect on the future financial position, results of operations and cash flows of SPR, NPC, and SPPC and could make it difficult for one or more of SPR, NPC, or SPPC to continue to operate outside of bankruptcy. ACCOUNTING FOR GENERATION DIVESTITURE COSTS As a condition to its approval of the merger between SPR and NPC, the Utilities filed, and in February 2000 the PUCN approved, a revised Divestiture Plan stipulation for the sale of the Utilities' generation assets. In May 2000 an agreement was announced for the sale of NPC's 14% undivided interest in the Mohave Generating Station ("Mohave"). In the fourth quarter of 2000, the Utilities announced agreements to sell six additional bundles of generation assets described in the approved Divestiture Plan. The sales were subject to approval and review by various regulatory agencies. AB 369, which was signed into law on April 18, 2001, prohibits until July 2003 the sale of generation assets and directs the PUCN to vacate any of its orders that had previously approved generation divestiture transactions. In January 2001, California enacted a law that prohibits until 2006 any further divestiture of generation properties by California utilities, including SPPC, and could also affect any sale of NPC's interest in Mohave after July 2003 since the majority owner of that project is Southern California Edison. SPPC's request for an exemption from the requirements of a separate California law requiring approval of the CPUC to divest its plants was denied. In September 2002, the California Legislature approved an exemption to AB 6 that would allow SPPC to complete the sale of the hydroelectric units to TMWA subject to review and approval of the sale by the CPUC. The sales agreements for the six bundles provided that they terminate eighteen months after their execution, and all of the agreements have now terminated in accordance with their respective provisions. As of March 31, 2003, NPC and SPPC had incurred costs of approximately $20.6 million and $12.4 million, respectively, in order to prepare for the sale of generation assets. In the fourth quarter of 2001, each Utility requested recovery of its respective costs in its application for a general rate increase filed with the PUCN. In 2002, the PUCN delayed recovery of divestiture costs to future rate case requests but did grant a carrying charge on the costs until such time as recovery is allowed. To the extent that the Utilities are not permitted to recover any portion of these costs in future rates, the disallowed costs and related carrying charges would be required to be written off in current period earnings. IMPAIRMENT OF LONG-LIVED ASSETS SPR and the Utilities evaluate their Utility Plant and definite-lived tangible assets for impairment whenever indicators of impairment exist. As discussed in more detail in Note 21, Pinon Pine, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, SPPC owns a combined cycle generation facility, a post-gasification facility, and, through its wholly owned subsidiaries, owns a gasifier that are collectively referred to as the Pinon 32 Pine Power Project ("Pinon Pine"). Construction of Pinon Pine was completed in June 1998. Included in the Condensed Consolidated Balance Sheets of SPR and SPPC is the net book value of the gasifier and related assets, which is approximately $99 million as of March 31, 2003. To date, SPPC has not been successful in obtaining sustained operation of the gasifier. In 2001 SPPC retained an independent engineering consulting firm to complete a comprehensive study of the Pinon Pine gasification plant. SPPC received a final report of the study in November 2002. SPPC is reviewing the various options outlined in the study. If after evaluating the options presented in the draft report, SPPC decides not to pursue modifications intended to make the facility operational, SPPC intends to seek recovery, net of salvage, through regulated rates in its next general rate case based, in part, on the PUCN's approval of Pinon Pine as a demonstration project in an earlier resource plan. However, if SPPC is unsuccessful in obtaining recovery, there could be a material adverse effect on SPPC's and SPR's financial position, results of operations and cash flows. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES SPR, SPPC, and NPC apply SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. As amended, SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In order to manage loads, resources and energy price risk, the Utilities buy fuel and power under forward contracts. In addition to forward fuel and power purchase contracts, the Utilities also use options and swaps to manage price risk. All of these instruments are considered to be derivatives under SFAS No. 133. The risk management assets and liabilities recorded in the balance sheets of the Utilities and SPR are primarily comprised of the fair value of these forward fuel and power purchase contracts and other energy related derivative instruments. Fuel and purchased power costs are subject to deferred energy accounting. Accordingly, the energy related risk management assets and liabilities and the corresponding unrealized gains and losses (changes in fair value) are offset with a regulatory asset or liability rather than recognized in the statements of operations and comprehensive income. Upon settlement of a derivative instrument, actual fuel and purchased power costs are recognized if they are currently recoverable or deferred if they are recoverable or payable through future rates. The fair values of the forward contracts and swaps are determined based on quotes obtained from independent brokers and exchanges. The fair values of options are determined using a pricing model which incorporates assumptions such as the underlying commodity's forward price curve, time to expiration, strike price, interest rates, and volatility. The use of different assumptions and variables in the model could have a significant impact on the valuation of the instruments. SPR and the Utilities have other non-energy related derivative instruments. The changes in fair values of these non-energy related derivatives are reported in Other comprehensive income until the related transactions are settled or terminate, at which time the amounts are reclassified into earnings. In connection with SPR's issuance of its Convertible Notes (see Note 4, Long-Term Debt), the conversion option, which is treated as a cash-settled written call option, was separated from the debt and accounted for separately as a derivative instrument in accordance with FASB's Emerging Issues Task Force Issue 90-19, "Convertible Bonds with Issuer Option to Settle for Cash upon Conversion". Upon issuance, the fair value of the option was recorded as a current liability in Other current liabilities. The change in the fair value is recognized in earnings in the period of the change. ENVIRONMENTAL CONTINGENCIES SPR and its subsidiaries are subject to federal, state and local regulations governing air and water quality, hazardous and solid waste, land use and other environmental considerations. Nevada's Utility Environmental Protection Act requires approval of the PUCN prior to construction of major utility, generation or transmission facilities. The United States Environmental Protection Agency (EPA), Nevada Division of Environmental Protection (NDEP), and Clark County Health District (CCHD) administer regulations involving air and water quality, solid, hazardous and toxic waste. SPR and its subsidiaries are subject to rising costs that result from a steady increase in the number of federal, state and local laws and regulations designed to protect the environment. These laws and regulations can result in increased capital, operating, and other costs as a result of compliance, remediation, containment and monitoring obligations, particularly with laws relating to power plant emissions. In addition, SPR or its subsidiaries may be a responsible party for environmental clean up at a site identified by a regulatory body. The management of SPR and its subsidiaries cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean up costs and compliance and the possibility that changes will be made to the current environmental laws and regulations. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially 33 responsible parties. SPR and its subsidiaries accrue for environmental costs only when they can conclude that it is probable that they have an obligation for such costs and can reasonably determine the amount of such costs. Note 11, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements discusses the environmental matters of SPR and its subsidiaries that have been identified, and the estimated financial effect of those matters. To the extent that (1) actual results differ from the estimated financial effects, (2) there are environmental matters not yet identified for which SPR or its subsidiaries are determined to be responsible, or (3) the Utilities are unable to recover through future rates the costs to remediate such environmental matters, there could be a material adverse effect on the financial condition and future liquidity and results of operations of SPR and its subsidiaries. LITIGATION CONTINGENCIES Note 11, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements discusses the significant legal matters of SPR and its subsidiaries. SPR and its subsidiaries, through the course of their normal business operations, are 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. DEFINED BENEFIT PLANS AND OTHER POSTRETIREMENT PLANS As further explained in Note 14, Retirement Plan and Post-Retirement Benefits, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, SPR maintains a pension plan as well as other postretirement benefit plans that provide health and life insurance for retired employees. All employees are eligible for these benefits if they reach retirement age while still working for SPR or its subsidiaries. These costs are determined in accordance with the provisions of SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and ultimately collected in rates billed to customers. The amounts funded are then used to meet benefit payments to plan participants. SPR contributed approximately $25.3 million and $41.1 million to its pension plan, and $60,000 and $0.2 million to the other postretirement benefits plan in 2003 and 2002, respectively. Due to the sharp decline in United States equity markets since the third quarter of 2000, the value of a significant portion of the assets held in the plans' trusts to satisfy the obligations of the plans has decreased significantly. As a result, additional contributions may be required in the future to meet the requirements of the plan to pay benefits to plan participants. PENSION PLANS SPR's reported costs of providing non-contributory defined pension benefits (described in Note 14, Retirement Plan and Post-Retirement Benefits, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002) are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. For example, pension costs are impacted by actual employee demographics (including age and employment periods), the level of contributions SPR makes to the plan, and earnings on plan assets. Changes made to the provisions of the plan may also impact current and future pension costs. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and pension costs. SPR has made no changes to pension plan provisions in 2002 or 2003 that have had any significant impact on recorded pension amounts. SPR reduced the discount rate used in determining pension expense for the calendar year 2003 from 7.5% to 6.75%. This change will not have a significant impact on reported pension costs for 2003. SPR's pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased or decreased pension costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could also increase or decrease recorded pension costs. The following chart reflects the sensitivities associated with a change in certain actuarial assumptions by the indicated percentage. While the chart below reflects an increase in the percentage for each assumption, SPR and its actuaries expect that the inverse of this change would impact the projected benefit obligation (PrBO) and the reported annual pension cost on the income statement (PeC) by a similar amount in the opposite direction. Each sensitivity below reflects an evaluation of the change based solely on a change in that assumption only. 34
- ----------------------------------------------------------------------------- Change in Impact on Impact on Actuarial Assumption Assumption PrBO PeC ($ millions) Incr/(Decr) Incr/(Decr) Incr/(Decr) - ----------------------------------------------------------------------------- Discount Rate 1% $ (45.0) $ (4.9) Rate of Return on Plan Assets 1% $ - $ (2.7) - -----------------------------------------------------------------------------
In selecting an assumed discount rate, SPR considered the yield on high quality bonds as measured by the Moody's Investors Service, Inc. (Moody's) Aa composite bond index. In selecting an assumed rate of return on plan assets, SPR considers past performance and economic forecasts for the types of investments held by the plan. The market value of SPR's plan assets has been affected by sharp declines in equity markets since the third quarter of 2000. As a result of SPR's plan asset returns at September 30, 2002, SPR was required to recognize an additional minimum liability in the amount of $89.6 million, as prescribed by SFAS No. 87. The liability was recorded as a reduction to common equity through a charge to Accumulated Other Comprehensive Income, and did not affect net income for 2002. The charge to Accumulated Other Comprehensive Income will be restored through common equity in future periods to the extent fair value of trust assets exceeds the accumulated benefit obligation. Pension cost and cash funding requirements could increase in future years without a substantial recovery in the equity markets. OTHER POSTRETIREMENT BENEFITS SPR's reported costs of providing other postretirement benefits (described in Note 14, Retirement Plan and Post-Retirement Benefits, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002) are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. For example, other postretirement benefit costs are impacted by actual employee demographics (including age and employment periods), the level of contributions made to the plan, earnings on plan assets, and health care cost trends. Changes made to the provisions of the plan may also impact current and future other postretirement benefit costs. Other postretirement benefit costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the postretirement benefit obligation and postretirement costs. SPR has made no changes to other postretirement benefit plan provisions in 2002 or 2003 that have had any significant impact on recorded benefit plan amounts. SPR reduced the discount rate used in determining other postretirement expense for the calendar year 2003 from 7.5% to 6.75%. This change will not have a significant impact on reported other postretirement benefit costs for 2003. However, in determining the other postretirement benefit obligation and related cost, these assumptions can change from period to period, and such changes could result in material changes to such amounts. SPR's other postretirement benefit plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased or decreased other postretirement benefit costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could also increase or decrease recorded other postretirement benefit costs. The following chart reflects the sensitivities associated with a change in certain actuarial assumptions by the indicated percentage. While the chart below reflects an increase in the percentage for each assumption, SPR and its actuaries expect that the inverse of this change would impact the projected accumulated other postretirement benefit obligation (APBO) and the reported annual other postretirement benefit cost on the income statement (PBC) by a similar amount in the opposite direction. Each sensitivity below reflects an evaluation of the change based solely on a change in that assumption only. 35
- ----------------------------------------------------------------------------- Change in Impact on Impact on Actuarial Assumption Assumption APBO PBC ($ millions) Incr/(Decr) Incr/(Decr) Incr/(Decr) - ----------------------------------------------------------------------------- Discount Rate 1% $ (15.7) $ (1.5) Health Care Cost Trend Rate 1% $ 14.9 $ 1.5 Rate of Return on Plan Assets 1% N/A $ (0.5) - -----------------------------------------------------------------------------
In selecting an assumed discount rate, SPR considered the yield on high quality bonds as measured by Moody's Aa composite bond index. In selecting an assumed rate of return on plan assets, SPR considers past performance and economic forecasts for the types of investments held by the plan. The market value of the SPR's plan assets has been affected by sharp declines in equity markets since the third quarter of 2000. Also, other postretirement benefit cost and cash funding requirements could increase in future years without a substantial recovery in the equity markets. COST CAPITALIZATION POLICIES The Utilities continue to devote substantial resources in 2003 on the Centennial Transmission project at NPC and the Falcon to Gonder Transmission project at SPPC. In addition, certain operating units of the Utilities are charged with maintaining, repairing and replacing components of generation, transmission and distribution systems both on a scheduled basis and on an as-needed basis. As described in Note 1, Summary of Significant Accounting Policies, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, the cost of additions, including betterments and replacements of units of property, is charged to utility plant. When units of property are replaced, renewed or retired, their cost, plus removal or disposal costs less salvage, is charged to accumulated depreciation. Certain direct and indirect costs are capitalized, including the cost of debt and equity capital associated with construction and retirement activity as prescribed by Generally Accepted Accounting Principles (GAAP) and the FERC's Uniform System of Accounts. The indirect construction overhead costs capitalized are based upon the following cost components: the cost of time spent by administrative employees in planning and directing construction; 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 level of indirect construction overhead costs capitalized by the Utilities is based upon real-time construction activity. Accordingly, payroll and other costs capitalized will fluctuate based upon seasonal construction activities and the deployment of resources to those efforts. During periods of higher maintenance levels, these payroll and other costs will not be capitalized. As such, operating income could be impacted by the manner in which payroll and related costs are deployed. However, the total cash flow of the Utilities is not impacted by the allocation of these costs to various construction or maintenance activities. During the three months ended March 31, 2003, and March 31, 2002, NPC and SPPC capitalized approximately $3.5 million and $2.1 million, respectively, of AFUDC as a result of construction activity financed primarily by their debt. This amount is a non-cash component reflected in the Consolidated Statements of Operations. Recognition of AFUDC as a cost of utility plant is in accordance with established regulatory ratemaking practices. Such practices permit the Utility to earn a fair return on, and recover in rates, all capital costs charged for Utility services. DEPRECIATION EXPENSE The Utilities have a significant investment in electric plant. SPPC also has an investment in gas distribution plant. Depreciable assets of generation, transmission and distribution operations represent approximately 93% of the Utilities' investment in utility plant. As described in Note 1, Summary of Significant Accounting Policies, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, the Utilities depreciate these assets utilizing a composite rate, which currently includes a component for net negative salvage. These assets are depreciated on a straight-line basis over the remaining useful life of the related assets, which approximates the anticipated physical lives of these assets in most cases. The Nevada Administrative Code requires the Utilities to provide a depreciation study every four years in order to substantiate the remaining physical lives of their investment in utility plant. Adjustments to the estimated depreciable lives of the Utilities' plant are recorded on a prospective basis, as prescribed by GAAP and the FERC's Uniform System of Accounts. Substantially all of the Utilities' plant is subject to the ratemaking jurisdiction of the PUCN or the FERC and, in the case of SPPC's California operations, the CPUC, which also approves any changes the Utilities may make to depreciation rates 36 utilized for this property. Because the Utilities' periodic depreciation expense is included as a component of the revenue requirement utilized in the development of the Utilities' tariff rates, revenue reflects collection of the recognized depreciation expense. Accordingly, the impact of depreciation on net income is not significant. However, operating cash flows are positively affected by the amount of depreciation collected in rates, since depreciation expense is not a current cash outlay for the Utilities. ASSET RETIREMENT OBLIGATIONS In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 provides accounting requirements for the recognition and measurement of liabilities associated with the retirement of tangible long-lived assets. Under the standard, these liabilities will be recognized at fair value as incurred and capitalized as part of the cost of the related tangible long-lived assets. Accretion of the liabilities due to the passage of time will be an operating expense. Retirement obligations associated with long-lived assets included within the scope of SFAS No. 143 are those for which a legal obligation exists under enacted laws, statutes written or oral contracts, including obligations arising under the doctrine of promissory estoppel. The Utilities adopted SFAS No. 143 on January 1, 2003. Prior to adopting SFAS 143, costs for removal of most utility assets were accrued as an additional component of depreciation expense. Under SFAS 143, only the costs to remove an asset with legally binding retirement obligations will be accrued over time through accretion of the asset retirement obligation and depreciation of the capitalized asset retirement cost. Management's methodology to assess its legal obligation included an inventory of assets by system and components, and a review of right of ways and easements, regulatory orders, leases and federal, state, and local environmental laws. Management assumed in determining its Asset Retirement Obligations that transmission, distribution and communications systems will be operated in perpetuity and would continue to be used or sold without land remediation; and, mass asset properties that are replaced or retired frequently would be considered normal maintenance. Management has identified a legal obligation to retire generation plant assets specified in land leases for NPC's jointly-owned Navajo generating station. The land on which the Navajo generating station resides is leased from the Navajo Nation. The provisions of the leases require the lessees to remove the facilities upon request of the Navajo Nation at the expiration of the leases. Although the related retirement obligation and corresponding charges recognized were immaterial to the financial statements of NPC, those amounts were based on certain estimates and assumptions. The estimated liability is based on two levels of decommissioning, minimal and full, and two possible retirement dates. The liability is escalated using average historical Consumer Price Index inflation factors equal to the estimated retirement dates. The liability is discounted using credit-adjusted risk-free rates of return for the respective retirement dates. Changes to future statements of financial position and results of operations will occur to the extent that actual results differ from the estimates and assumptions used, including changes in decommissioning costs, timing or changes in NPC's credit rating. SPPC has no significant asset retirement obligations. The Utilities have various transmission and distribution lines as well as substations that operate under various rights of way that contain end dates and restorative clauses. Management operates the transmission and distribution system as though they will be operated in perpetuity and will continue to be used or sold without land remediation. As a result, the Utilities have not recorded any costs associated with the removal of the transmission and distribution systems. STOCK COMPENSATION PLANS In December 2002, the FASB released SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," as an amendment to SFAS No. 123, "Accounting for Stock-Based Compensation." SPR has previously adopted the disclosure-only provisions of SFAS No. 123, and as of December 31, 2002 has adopted the updated disclosure requirements set forth in SFAS No. 148. Pursuant to those updated disclosure requirements, SPR has included the following discussion on the stock compensation plans. For additional information on SPR's stock compensation plans, see Note 1, Summary of Significant Accounting Policies, and Note 15, Stock Compensation Plans, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002. At March 31, 2003, SPR had several stock-based compensation plans. SPR applies Accounting Principles 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. SPR has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock Based Compensation, and its related amendment(s). UNBILLED RECEIVABLES Revenues related to the sale of energy are recorded based on meter reads, which occur on a systematic basis throughout a month, rather than when the service is rendered or energy is delivered. At the end of each month, the energy 37 delivered to the customers from the date of their last meter read to the end of the month is estimated and the corresponding unbilled revenues are calculated. These estimates of unbilled sales and revenues are based on the ratio of billable days versus unbilled days, amount of energy procured and generated during that month, historical customer class usage patterns and the Utilities' current tariffs. Customer accounts receivable as of March 31, 2003, include unbilled receivables of $48 million and $53 million for NPC and SPPC, respectively. Customer accounts receivable as of March 31, 2002, include unbilled receivables of $57 million and $58 million for NPC and SPPC, respectively. PROVISION FOR UNCOLLECTIBLE ACCOUNTS The Utilities reserve for doubtful accounts based on past experience writing off uncollectible customer accounts. The adequacy of these reserves will vary to the extent that future collections differ from past experience. FINANCIAL CONDITION AND MATERIAL CHANGES IN RESULTS OF OPERATIONS SIERRA PACIFIC RESOURCES The operating results of SPR primarily reflect those of NPC and SPPC, discussed later. During the first three months of 2003, SPR incurred a net loss of $15.5 million compared to a $302.9 million net loss for the same period during 2002. Operating results for the three months ended March 31, 2003 were negatively affected by higher interest costs during the period and lower sales for the reasons discussed later. During the same period, SPR recorded an unrealized gain on the derivative instrument associated with the issuance of $300 million of convertible debt (see Financing Transactions, discussed later). SPR's net loss of $302.9 million for the three months ended March 31, 2002, reflects the write-off of approximately $465 million (before taxes) of deferred energy costs and related carrying charges as a result of PUCN decision in NPC's 2001 deferred energy rate case. SPR did not pay or declare a common dividend in the first quarter of 2003. NPC and SPPC did not declare or pay common stock dividends to their parent, SPR, in the first quarter of 2003. SPPC paid $975,000 in dividends to holders of its preferred stock during the first quarter of 2003. NPC and SPPC each received a capital contribution of $10 million from SPR in March 2002. LIQUIDITY AND CAPITAL RESOURCES (SPR CONSOLIDATED) SPR, on a stand-alone basis, had cash and cash equivalents of approximately $166.7 million at March 31, 2003. On April 21, 2003, SPR utilized approximately $133 million of its cash and cash equivalents to repay unsecured Floating Rate Notes due April 20, 2003. SPR's future liquidity and its ability to pay the principal of and interest on its indebtedness depend on SPPC's ability to continue to pay dividends to SPR, on NPC's financial stability and the restoration of its ability to pay dividends to SPR, and on SPR's ability to access the capital markets or otherwise refinance maturing debt. Further adverse developments at NPC or SPPC, including a material disallowance of deferred energy costs in current and future rate cases or an adverse decision in the pending lawsuit by Enron, could make it difficult for SPR to operate outside of bankruptcy. DIVIDENDS FROM SUBSIDIARIES Since SPR is a holding company, substantially all of its cash flow is provided by dividends paid to SPR by NPC and SPPC on their common stock, all of which is owned by SPR. Since NPC and SPPC are public utilities, they are subject to regulation by state utility commissions which may impose limits on investment returns or otherwise impact the amount of dividends that the Utilities may declare and pay, and to federal statutory limitation on the payment of dividends. In addition, certain agreements entered into by the Utilities set restrictions on the amount of dividends they may declare and pay and restrict the circumstances under which such dividends may be declared and paid. The specific restrictions on dividends contained in agreements to which NPC and SPPC are party, as well as specific regulatory limitations on dividends, are summarized below. - NPC's first mortgage indenture limits the cumulative amount of dividends and other distributions that NPC may pay on its capital stock to the cumulative net earnings of NPC since 1953, subject to adjustments for the net proceeds of sales of capital stock since 1953. At the present time, this restriction precludes NPC from making further payments of dividends on NPC's common stock and will continue to bar dividends until NPC, over time, generates sufficient earnings to eliminate the deficit under this provision (which was approximately $254 million as of March 31, 2003), unless the restriction is earlier waived, amended, or removed by the consent of the first mortgage bondholders, or the first mortgage bonds are redeemed or defeased. There can be no assurance that any such consent could be obtained or that any first mortgage bonds could be redeemed prior to their stated maturity. Under this provision, NPC continues 38 to have capacity to repurchase or redeem shares of its capital stock, although other restrictions set forth below would limit the amount of any such repurchases or redemptions. - NPC's 10 7/8% General and Refunding Mortgage Notes, Series E, due 2009, which were issued on October 29, 2002, limit the amount of payments in respect of common stock that NPC may pay to SPR. However, that limitation does not apply to payments by NPC to enable SPR to pay its reasonable fees and expenses (including, but not limited to, interest on SPR's indebtedness and payment obligations on account of SPR's Premium Income Equity Securities (PIES)) provided that: - those payments do not exceed $60 million for any one calendar year, - those payments comply with any regulatory restrictions then applicable to NPC, and - the ratio of consolidated cash flow to fixed charges for NPC's most recently ended four full fiscal quarters immediately preceding the date of payment is at least 1.75 to 1. The terms of the Series E Notes also permit NPC to make payments to SPR in an aggregate amount not to exceed $15 million from the date of the issuance of the Series E Notes. In addition, NPC may make payments to SPR in excess of the amounts described above so long as, at the time of payment and after giving effect to the payment: - there are no defaults or events of default with respect to the Series E Notes, - NPC has a ratio of consolidated cash flow to fixed charges for NPC's most recently ended four full fiscal quarters immediately preceding the payment date of at least 2.0 to 1, and - the total amount of such dividends is less than: - the sum of 50% of NPC's consolidated net income measured on a quarterly basis cumulative of all quarters from the date of issuance of the Series E Notes, plus - 100% of NPC's aggregate net cash proceeds from contributions to its common equity capital or the issuance or sale of certain equity or convertible debt securities of NPC, plus - the lesser of cash return of capital or the initial amount of certain restricted investments, plus - the fair market value of NPC's investment in certain subsidiaries. If NPC's Series E Notes are upgraded to investment grade by both Moody's Investors Service, Inc. (Moody's) and Standard & Poor's Rating Group, Inc. (S&P), these restrictions will be suspended and will no longer be in effect so long as the Series E Notes remain investment grade. - On October 29, 2002, NPC established an accounts receivables purchase facility. The agreements relating to the receivables purchase facility contain various conditions, including a limitation on payments in respect of common stock by NPC to SPR that is identical to the limitation contained in NPC's General and Refunding Mortgage Notes, Series E, described above. - The PUCN issued a Compliance Order, Docket No. 02-4037, on June 19, 2002, relating to NPC's request for authority to issue long-term debt. The PUCN order requires that, until such time as the order's authorization expires (December 31, 2003), NPC must either receive the prior approval of the PUCN or reach an equity ratio of 42% before paying any dividends to SPR. If NPC achieves a 42% equity ratio prior to December 31, 2003, the dividend restriction ceases to have effect. As of March 31, 2003, NPC's equity ratio was 36.0%. - The terms of NPC's preferred trust securities provide that no dividends may be paid on NPC's common stock if NPC has elected to defer payments on the junior subordinated debentures issued in conjunction with the preferred trust securities. At this time, NPC has not elected to defer payments on the junior subordinated debentures. - SPPC's Term Loan Agreement dated October 30, 2002, which expires October 31, 2005, limits the amount of payments that SPPC may pay to SPR. However, that limitation does not apply to payments by SPPC to enable SPR to pay its reasonable fees and expenses (including, but not limited to, interest on SPR's indebtedness and payment obligations on account of SPR's PIES) provided that those payments do not exceed $90 million, $80 million and $60 million in the aggregate for the twelve month periods ending on October 30, 2003, 2004 and 2005, respectively. The Term Loan Agreement also permits SPPC to make payments to SPR in an aggregate amount not to exceed $10 million during the term of the Term Loan Agreement. In addition, SPPC may make payments to SPR in excess of the amounts described above so long as, at the time of the payment and after giving effect to the payment, there are no defaults or events of default under the Term Loan Agreement, and such amounts, when aggregated with the amount of payments to SPR by SPPC since the date of execution of the Term Loan Agreement, do not exceed the sum of: - 50% of SPPC's Consolidated Net Income for the period commencing January 1, 2003 and ending with last day of fiscal quarter most recently completed prior to the date of the contemplated dividend payment, plus 39 - the aggregate amount of cash received by SPPC from SPR as equity contributions on its common stock during such period. - On October 29, 2002, SPPC established an accounts receivables purchase facility. The agreements relating to the receivables purchase facility contain various conditions, including a limitation on the payment of dividends by SPPC to SPR that is identical to the limitation contained in SPPC's Term Loan Agreement, described above. - SPPC's Articles of Incorporation contain restrictions on the payment of dividends on SPPC's common stock in the event of a default in the payment of dividends on SPPC's preferred stock. SPPC's Articles also prohibit SPPC from declaring or paying any dividends on any shares of common stock (other than dividends payable in shares of common stock), or making any other distribution on any shares of common stock or any expenditures for the purchase, redemption or other retirement for a consideration of shares of common stock (other than in exchange for or from the proceeds of the sale of common stock) except from the net income of SPPC, and its predecessor, available for dividends on common stock accumulated subsequent to December 31, 1955, less preferred stock dividends, plus the sum of $500,000. At the present time, SPPC believes that these restrictions do not materially limit its ability to pay dividends and/or to purchase or redeem shares of its common stock - The Utilities are subject to the provision of the Federal Power Act that states that dividends cannot be paid out of funds that are properly included in capital accounts. Although the meaning of this provision is unclear, it could be interpreted to impose an additional material limitation on a utility's ability to pay dividends in the absence of retained earnings.. Management intends to seek a modification of the financial covenant contained in NPC's first mortgage indenture in the near future. The regulatory limitation contained in the PUCN's Compliance Order, Docket No. 02-4037, dated June 19, 2002, expires on December 31, 2003. Prior to the expiration date of the Compliance Order, management may seek PUCN approval for a payment of dividends by NPC or may seek a waiver from the PUCN of the dividend restriction. EFFECTS OF RATE CASE DECISIONS On March 29 and April 1, 2002, S&P and Moody's lowered the unsecured debt ratings of SPR, NPC and SPPC to below investment grade in response to the decision of the PUCN with respect to NPC's rate cases. On April 23 and 24, 2002, the unsecured debt ratings of SPR and the Utilities were further downgraded by both rating agencies, and the Utilities' secured debt ratings were downgraded to below investment grade. The downgrades affected SPR's, NPC's and SPPC's liquidity primarily in two principal areas: (1) their respective financing arrangements, and (2) NPC's and SPPC's contracts for fuel, for purchase and sale of electricity and for transportation of natural gas. For more detailed discussion of these effects please see SPR's, NPC's and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002. ACCOUNTS RECEIVABLE FACILITY On October 29, 2002, NPC and SPPC established accounts receivable purchase facilities of up to $125 million and $75 million, respectively, which expire on August 28, 2003 unless either NPC or SPPC has activated its respective facility before that date, in which case such facility will be automatically extended to, and will expire on, October 28, 2003. If NPC or SPPC elect to activate their receivables purchase facilities, they will sell all of their accounts receivable generated from the sale of electricity and natural gas to customers to their newly created bankruptcy remote special purpose subsidiaries. The receivables sales will be without recourse except for breaches of customary representations and warranties made at the time of sale. The subsidiaries will, in turn, sell these receivables to a bankruptcy-remote subsidiary of SPR. SPR's subsidiary will issue variable rate revolving notes backed by the purchased receivables. Lehman Brothers Holdings, Inc. has committed to be the sole initial committed purchaser of all of the variable rate revolving notes. The agreements relating to the receivables purchase facilities contain various conditions to purchase, covenants and trigger events, and other provisions customary in receivables transactions. In addition to customary termination and mandatory repurchase events, each Utilities' receivables purchase facility may terminate in the event that the Utility or SPR defaults (i) on the payment of indebtedness, or (ii) on the payment of amounts due under a swap agreement, and such defaults aggregate to greater than $10 million and $5 million for the Utility and SPR, respectively. Under the terms of the agreements relating to the receivables purchase facility, each Utility's facility may not be activated or, if activated, will be terminated in the event of a material adverse change in the condition, operations or business prospects of the Utility. SPR has agreed to guaranty the performance by NPC and SPPC of certain obligations as sellers and servicers under the receivables purchase facilities. NPC and SPPC intend to use their accounts receivables purchase facilities as back-up liquidity facilities and do not plan to activate these facilities in the foreseeable future. 40 CROSS DEFAULT PROVISIONS Certain financing agreements of SPR and the Utilities contain cross-default provisions that would result in an event of default under such financing agreements if there is a failure under other financing agreements of SPR and the Utilities to meet payment terms or to observe other covenants that would result in an acceleration of payments due. Most of these default provisions (other than ones relating to a failure to pay other indebtedness) provide for a cure period of 30-60 days from the occurrence of a specified event during which time, SPR or the Utilities may rectify or correct the situation before it becomes an event of default. The primary cross-default provisions in SPR's and the Utilities' various financing agreements are briefly summarized below: - - The indenture pursuant to which SPR issued its 7.25% Convertible Notes due 2010 provides for an event of default if SPR or any of its significant subsidiaries (NPC and SPPC) fails to pay indebtedness in excess of $10 million or has any indebtedness of $10 million or more accelerated and declared due and payable; - - NPC's General and Refunding Mortgage Indenture provides for an event of default if a matured event of default under NPC's First Mortgage Indenture occurs; - - The terms of NPC's Series E Notes provide that a default with respect to the payment of principal, interest or premium beyond the applicable grace period under any mortgage, indenture or other security instrument, by NPC or any of its restricted subsidiaries, relating to debt in excess of $15 million, triggers a right of the holders of the Series E Notes to require NPC to redeem the Series E Notes at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest and liquidated damages, if any, upon notice given by at least 25% of the outstanding Series E Notes holders; - - NPC's receivables purchase facility may terminate in the event that either NPC or SPR defaults (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million and $5 million for NPC and SPR, respectively; - - SPPC's General and Refunding Mortgage Indenture provides for an event of default if a matured event of default under SPPC's First Mortgage Indenture occurs; - - SPPC's Term Loan Agreement provides for an event of default if (a) SPPC or any of its subsidiaries default (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million, or (b) SPPC's General and Refunding Mortgage Indenture ceases to be enforceable; and - - SPPC's receivables purchase facility may terminate in the event that either SPPC or SPR defaults (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million and $5 million for SPPC and SPR, respectively. FINANCING TRANSACTIONS In January 2003, SPR acquired $8.75 million aggregate principal amount of its Floating Rate Notes due April 20, 2003 in exchange for approximately 1.3 million shares of its common stock, in two privately-negotiated transactions exempt from the registration requirements of the Securities Act of 1933. On February 5, 2003, SPR issued approximately 13.66 million shares of common stock in exchange for a total of 2.1 million of its PIES in five privately-negotiated transactions exempt from the registration requirements of the Securities Act of 1933. On February 14, 2003, SPR issued and sold $300 million of its 7.25% Convertible Notes due 2010. Approximately $53.4 million of the net proceeds from the sale of the notes were used to purchase U.S. government securities that were pledged to the trustee for the first five interest payments on the notes payable during the first two and one-half years. A portion of the remaining net proceeds of the notes were used to repurchase approximately $58.5 million of SPR's Floating Rate Notes due April 20, 2003. Of the remaining net proceeds, approximately $133 million were used to repay the remainder of SPR's Floating Rate Notes due April 20, 2003, and the remaining proceeds will be available for general corporate purposes. The Convertible Notes were issued with registration rights. The Convertible Notes will not be convertible prior to August 14, 2003. At any time on or after August 14, 2003 through the close of business February 14, 2010, holders of the Convertible Notes may convert their notes into shares of SPR's common stock. Until SPR has obtained shareholder approval to fully convert the Convertible Notes into shares of common stock, holders of the Convertible Notes will be entitled to receive 76.7073 shares of common stock and a remaining portion in cash, based on the average closing price of SPR's common stock over five consecutive trading days, for each $1,000 principal amount of notes surrendered for conversion. At an assumed five-day average closing price of $3.87 per share (based on the 41 last reported sale price of SPR's common stock on April 30, 2003), the total amount of the cash payable on conversion of the Convertible Notes would be approximately $165.4 million. If SPR does not obtain shareholder approval, SPR will be required to pay the cash portion of any Convertible Notes as to which the holders request conversion on or after August 14, 2003. Although management does not believe it is likely that a significant amount of the Convertible Notes will be converted in the foreseeable future, in the event that SPR does not have available funds to pay the cash portion of the Convertible Notes upon the requested conversion, SPR may have to issue additional debt to raise the necessary funds. There can be no assurance that SPR will be able to access the capital markets to issue such additional debt. If SPR does obtain shareholder approval, it may elect to satisfy the cash payment component of the conversion price of the Convertible Notes solely with shares of common stock. SPR has agreed to use reasonable efforts to obtain shareholder approval, not later than 180 days after the date of issuance of the Convertible Notes, to issue and deliver shares of SPR's common stock in lieu of the cash payment component of the conversion price of the Convertible Notes. For further information regarding the terms of the Convertible Notes, see Note 4, Long-Term Debt. The indenture under which the Convertible Notes were issued does not contain any financial covenants or any restrictions on the payment of dividends, the repurchase of SPR's securities or the incurrence of indebtedness. The indenture does allow the holders of the Convertible Notes to require SPR to repurchase all or a portion of the holders' Convertible Notes upon a change of control. The indenture also provides for an event of default if SPR or any of its significant subsidiaries, including NPC and SPPC, fails to pay any indebtedness in excess of $10 million or has any indebtedness of $10 million or more accelerated and declared due and payable. EFFECT OF HOLDING COMPANY STRUCTURE Currently, SPR (on a stand-alone basis) has a substantial amount of debt and other obligations including, but not limited to: $300 million of its unsecured 8 3/4% Senior Notes due 2005; and $240 million of its unsecured 7.93% Senior Notes due 2007; and $300 million of its 7.25% Convertible Notes due 2010. Due to the holding company structure, SPR's right as a common shareholder to receive assets of any of its direct or indirect subsidiaries upon a subsidiary's liquidation or reorganization is junior to the claims against the assets of such subsidiary by its creditors and preferred stockholders. Therefore, SPR's debt obligations are effectively subordinated to all existing and future claims of its subsidiaries' creditors, particularly those of NPC and SPPC, including trade creditors, debt holders, secured creditors, taxing authorities, guarantee holders, NPC's preferred trust security holders and SPPC's preferred stockholders. As of March 31, 2003, NPC, SPPC and their subsidiaries had approximately $2.86 billion of debt and other obligations outstanding and approximately $238.9 million of outstanding preferred securities. Although the Utilities are parties to agreements that limit the amount of additional indebtedness they may incur, the Utilities retain the ability to incur substantial additional indebtedness and other liabilities. NEVADA POWER COMPANY During the quarter ended March 31, 2003, NPC incurred a net loss of $15.2 million and did not pay or declare a common stock dividend to its parent, SPR. The causes for significant changes in specific lines comprising the results of operations for NPC are as follows: 42 ELECTRIC OPERATING REVENUE
THREE MONTHS ENDED MARCH 31, -------------------------------------------- Change from 2003 2002 Prior Year % ------------ ------------ ------------ ELECTRIC OPERATING REVENUES ($000): Residential $ 121,707 $ 131,106 -7.2% Commercial 74,917 69,691 7.5% Industrial 92,388 88,760 4.1% ------------ ------------ Retail revenues 289,012 289,557 -0.2% Other 42,640 66,715 -36.1% ------------ ------------ TOTAL REVENUES $ 331,652 $ 356,272 -6.9% ============ ============ Retail sales in thousands of megawatt-hours (MWH) 3,400 3,570 -4.8% Average retail revenue per MWH $ 85.00 $ 81.11 4.8%
NPC's residential revenues decreased for the three months ended March 31, 2003, over the same period in 2002 due to a decrease in electric usage as a result of warmer than normal weather and company sponsored conservation programs. This decrease in revenues was partially offset by an increase in customer growth of 5.3% and an overall rate increase that was effective April 1, 2002. The increase in commercial and industrial revenues for the three months ended March 31, 2003, over the same period in 2002 were due to an overall rate increase effective April 1, 2002 and customer growth. Commercial and industrial growth, 5.7% and 3.3%, respectively, is attributed to the opening of several new elementary and secondary schools, shopping centers, office buildings, casino expansion projects, and new Las Vegas Valley Water District pumping plants in the Las Vegas area. The decrease in other electric revenues for the three month period ended March 31, 2003 over the same period in 2002 was due to lower sales of wholesale power to other utilities as a result of changing market conditions. See NPC's Annual Report on Form 10-K for the year ended December 31, 2002, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, Energy Supply, for a discussion of NPC's purchased power procurement strategies. PURCHASED POWER
THREE MONTHS ENDED MARCH 31, -------------------------------------------- Change from 2003 2002 Prior Year % ------------ ------------ ------------ PURCHASED POWER ($000) $ 119,257 $ 176,066 -32.3% Purchased Power in thousands of MWHs 2,271 2,188 3.8% Average cost per MWH of Purchased Power $ 52.51 $ 80.47 -34.7%
NPC'S purchased power costs were lower for the three months ended March 31, 2003 compared to the same period in 2002 although the volume of energy purchased was slightly greater. The decrease in cost was the result of lower prices of Short-Term Firm energy purchased. Because it was more economical to purchase rather than generate power, mega-watt hours purchased increased as compared to the same period in 2003. See NPC's Annual Report on Form 10-K for the year ended December 31, 2002, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, Energy Supply, for a discussion of NPC's purchased power procurement strategies. 43 FUEL FOR POWER GENERATION
THREE MONTHS ENDED MARCH 31, -------------------------------------------- Change from 2003 2002 Prior Year % ------------ ------------ ------------ FUEL FOR POWER GENERATION ($000) $ 46,537 $ 83,722 -44.4% Thousands of MWHs generated 1,875 2,241 -16.3% Average cost per MWH of Generated Power $ 24.82 $ 37.36 -33.6%
Fuel for generation costs for the three months ended March 31, 2003, were significantly lower than the prior year due to substantial decreases in the price of natural gas and total mega-watt hours generated. The decrease in mega-watt hours generated was due to an overall decrease in the system load requirements. See the earlier explanation of electric operating revenues that corresponds with the reduced load requirements. In addition, Reid Gardner Stations 2 and 3 were down for scheduled maintenance, and Clark Stations 1-3 and Sunrise Unit #1 were not being used because it was more economical to purchase power than generate. DEFERRED ENERGY COSTS
THREE MONTHS ENDED MARCH 31, -------------------------------------------- Change from 2003 2002 Prior Year % ------------ ------------ ------------ DEFERRED ENERGY COSTS DISALLOWED ($000) - 434,123 N/A DEFERRED ENERGY COSTS - NET ($000) $ 72,785 $ (9,636) N/A
Deferred energy costs disallowed for the three months ended March 31, 2002, reflects the write-off of $434 million of deferred energy costs incurred during the seven months ended September 30, 2001, that were disallowed by the PUCN in NPC's 2001 deferred energy rate case. Deferral of energy costs-electric-net increased for the three months ended March 31, 2003, as a result of the amortization of prior deferred costs pursuant to the PUCN decision in NPC's 2001 deferred energy rate case, that resulted in increased rates beginning April 1, 2002. The increase in 2003 also includes additional expense to the extent fuel and purchased power costs recovered through current rates exceeded actual fuel and purchased power costs during the three months ended March 31, 2003. Deferred energy costs - net for the three mounts ended March 31, 2002, reflects the deferral of energy costs to the extent actual fuel and purchased power costs exceeded fuel and purchased power costs recovered through rates during that period. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
THREE MONTHS ENDED MARCH 31, -------------------------------------------- Change from 2003 2002 Prior Year % ------------ ------------ ------------ ALLOWANCE FOR OTHER FUNDS USED DURING CONSTRUCTION ($000) $ 1,158 $ 421 175.1% ALLOWANCE FOR BORROWED FUNDS USED DURING CONSTRUCTION ($000) $ 1,056 $ 1,112 -5.0% ------------ ------------ $ 2,214 $ 1,533 44.4% ============ ============
44 NPC's total allowance for funds used during construction is higher for the three-month period ended March 31, 2003 as a result of an increase in Construction Work in Progress (CWIP) including capital expenditures for the Centennial Project and an increase in the AFUDC equity rate. This increase was offset in part by a decrease in the AFUDC debt rate. OTHER (INCOME) AND EXPENSES
THREE MONTHS ENDED MARCH 31, -------------------------------------------- Change from ($000) 2003 2002 Prior Year % ------------ ------------ ------------ OTHER OPERATING EXPENSE $ 40,540 $ 39,986 1.4% MAINTENANCE EXPENSE $ 13,537 $ 11,650 16.2% DEPRECIATION AND AMORTIZATION $ 25,907 $ 30,809 -15.9% INCOME TAXES $ (10,548) $ (156,423) -93.3% TAXES OTHER THAN INCOME TAXES $ 6,224 $ 6,734 -7.6% INTEREST CHARGES ON LONG-TERM DEBT $ 30,102 $ 24,078 25.0% INTEREST CHARGES-OTHER $ 6,080 $ 2,530 140.3% INTEREST ACCRUED ON DEFERRED ENERGY $ (5,710) $ 11,151 N/A OTHER INCOME $ (3,338) $ (146) 2186.3% OTHER EXPENSE $ 1,432 $ 5,997 -76.1% INCOME TAXES - OTHER INCOME AND EXPENSE $ 2,514 $ (5,645) N/A
Other operating expense for the three-month period ending March 31, 2003 was comparable to the same period in 2002. Maintenance costs for the three-month period ending March 31, 2003, increased from the prior year due to timing of scheduled plant maintenance. Depreciation and amortization was lower for the three-month period ended March 31, 2003 compared to the same period in 2002 as a result of depreciation adjustments made pursuant to a PUCN order on March 29, 2002. This decrease was offset in part by an increase in the computer depreciation rate and additions to plant-in-service. NPC's income tax benefit for the three months ended March 31, 2003, decreased compared to the same period in 2002, due to a corresponding decrease in first quarter 2003 pre-tax loss compared to the prior year. Taxes other than income taxes for the three months ended March 31, 2003, was comparable to the amount recognized during the same period in 2002. Interest charges on long-term debt for the three-month period ending March 31, 2003, increased over the same period in 2002 due, primarily, to the issuance in October 2002 of $250 million additional debt at an interest rate of 10.875%. The redemption, in October 2002, of $15 million debt slightly offset the increase in interest during 2003 over 2002. Interest charges-other for the three-month period ending March 31, 2003, increased over the prior year due to interest on delayed/terminated contracts, charges related to fees associated with NPC's credit facilities and receivables conduit and to the amortization of increased debt discount charges related to the issuance in October 2002 of $250 million additional debt. Interest accrued on deferred energy of $5.7 million during the three-month period ending March 31, 2003 compared favorably to the loss of $11.2 million during the same period in 2002. This was due to the first quarter 2002 write-off of approximately $20.1 million of carrying charges, net of taxes, on deferred energy costs that were disallowed by the PUCN in their March 29, 2002 decision on NPC's deferred energy rate case. The 2002 write-off was offset, in part, by the recording of carrying charges on deferred energy costs incurred. Other income for the three months ended March 31, 2003, increased over the same period in 2002 due to the following factors: a) In 2003, NPC recognized income from the disposition of SO2 allowances of approximately $.8 million; (b) NPC also recognized an increase in gains from the disposition of non-utility property in 2003 of $1.6 million; and (c) NPC recognized carrying charges related to divestiture costs, ordered by the PUCN, totaling $.4 million during the first quarter of 2003. Other expense decreased during the three months ended March 31, 2003, compared to the same period in 2002 due, primarily, to the 2002 write-off of $5.0 million relating to the disposition of SO2 allowances as ordered by the PUCN. The 45 decrease in expense relating to the SO2 emissions was offset partially by increases in charges related to depreciation on non-utility property and corporate advertising. NPC's income tax expense on other income and expense changed from a tax benefit during the three months ended March 31, 2002, to a tax expense in the three months ended March 31, 2003. This was due to a corresponding change from pre-tax losses in 2002 to pre-tax income in 2003. ANALYSIS OF CASH FLOWS NPC's cash flows were less during the three-months ended March 31, 2003, compared to the same period in 2002, resulting primarily from decreases in cash flows from operating and financing activities and, to a lesser extent, an increase in cash used for investing activities. The decrease in cash from operating activities was substantially as a result of the receipt in 2002 of an income tax refund. The decrease operating cash flow was partially offset by the collection of previously deferred energy costs due to the PUCN decision in NPC's 2001 deferred energy rate case, that resulted in increased rates beginning April 1, 2002. Cash flows from financing activities were lower in 2003 because of cash provided by short-term borrowings during 2002. NPC also utilized additional cash for financing activities in 2003 for the Centennial Plan and other construction projects. LIQUIDITY AND CAPITAL RESOURCES NPC had cash and cash equivalents of approximately $91 million at March 31, 2003. NPC's liquidity would be significantly affected by an adverse decision in the lawsuit by Enron, or by unfavorable rulings by the PUCN in pending or future NPC or SPPC rate cases. S&P and Moody's have NPC's credit ratings on "negative outlook" and "stable," respectively. Future downgrades by either S&P or Moody's could preclude NPC's access to the capital markets, and could adversely affect NPC's ability to continue to purchase power and fuel. Adverse developments with respect to any one or a combination of the foregoing could have a material adverse effect on NPC's financial condition and liquidity, and could make it difficult for NPC to continue to operate outside of bankruptcy. EFFECT OF RATE CASE DECISIONS On March 29 and April 1, 2002, following the decision by the PUCN in NPC's deferred energy rate case, S&P and Moody's lowered NPC's unsecured debt ratings to below investment grade. On April 23 and 24, 2002, NPC's unsecured debt ratings were further downgraded and its secured debt ratings were downgraded to below investment grade. As a result of these downgrades, NPC's ability to access the capital markets to raise funds were severely limited. Since SPR's credit ratings were similarly downgraded, SPR's ability to make capital contributions to NPC also became severely limited. For more detailed discussion of these effects please see NPC's Annual Report on Form 10-K for the year ended December 31, 2002. ACCOUNTS RECEIVABLE FACILITY On October 29, 2002, NPC established an accounts receivable purchase facility of up to $125 million, which was arranged by Lehman Brothers. The receivables purchase facility expires on August 28, 2003 unless NPC has activated the facility prior to that date, in which case the facility will be automatically extended to, and will expire on, October 28, 2003. If NPC elects to activate the receivables purchase facility, NPC will sell all of its accounts receivable generated from the sale of electricity to customers to its newly created bankruptcy remote special purpose subsidiary. The receivables sales will be without recourse except for breaches of customary representations and warranties made at the time of sale. The subsidiary will, in turn, sell these receivables to a bankruptcy-remote subsidiary of SPR. SPR's subsidiary will issue variable rate revolving notes backed by the purchased receivables. Lehman Brothers Holdings, Inc. has committed to be the sole initial committed purchaser of all of the variable rate revolving notes. The agreements relating to the receivables purchase facility contain various conditions to purchase, covenants and trigger events, and other provisions customary in receivables transactions. In addition to customary termination and mandatory repurchase events, the receivables purchase facility may terminate in the event that either NPC or SPR defaults (i) in the payment of indebtedness, or (ii) in the payment of amounts due under a swap agreement, and such defaults aggregate to greater than $10 million and $5 million for NPC and SPR, respectively. Under the terms of the agreements relating to the receivables purchase facility, NPC's facility may not be activated or, if activated, will be terminated in the event of a material adverse change in the condition, operations or business prospects of NPC. In addition, the agreements contain a limitation on the payment of dividends by NPC to SPR that is identical to the limitation contained in NPC's General and Refunding Mortgage Notes, Series E, described below. SPR has agreed to guaranty NPC's performance of certain obligations as a seller and servicer under the receivables purchase facility. 46 NPC has agreed to issue $125 million principal amount of its General and Refunding Mortgage Bonds upon activation of the receivables purchase facility. The full principal amount of the bond would secure certain of NPC's obligations as seller and servicer, plus certain interest, fees and expenses thereon to the extent not paid when due, regardless of the actual amounts owing with respect to the secured obligations. As a result, in the event of an NPC bankruptcy or liquidation, the holder of the bond securing the receivables purchase facility may recover more on a pro rata basis than the holders of other General and Refunding Mortgage securities, who could recover less on a pro rata basis, than they otherwise would recover. However, in no event will the holder of the bond recover more than the amount of obligations secured by the bond. NPC intends to use the accounts receivable purchase facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. NPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $125 million General and Refunding Mortgage Bond. MORTGAGE INDENTURES NPC's first mortgage indenture creates a first priority lien on substantially all of NPC's properties. As of March 31, 2003, $372.5 million of NPC's first mortgage bonds were outstanding. NPC agreed in connection with its Series E Notes that it would not issue any more first mortgage bonds. NPC's General and Refunding Mortgage Indenture creates a lien on substantially all of NPC's properties in Nevada that is junior to the lien of the first mortgage indenture. As of March 31, 2003, $870 million of NPC's General and Refunding Mortgage securities were outstanding. Additional securities may be issued under the General and Refunding Mortgage Indenture on the basis of (i) 70% of net utility property additions, (ii) the principal amount of retired General and Refunding Mortgage Bonds, and/or (iii) the principal amount of first mortgage bonds retired after delivery to the indenture trustee of the initial expert's certificate under the General and Refunding Mortgage Indenture. As of March 31, 2003, NPC had the capacity to issue approximately $1.13 billion of additional General and Refunding Mortgage securities. However, the financial covenants contained in the Series E Notes limits NPC ability to issue additional General and Refunding Mortgage Bonds or other debt. NPC has reserved $125 million of General and Refunding Mortgage bonds for issuance upon the initial funding of NPC's receivables facility. NPC also has the ability to release property from the liens of the two mortgage indentures on the basis of net property additions, cash and/or retired bonds. To the extent NPC releases property from the lien of its General and Refunding Mortgage Indenture, it will reduce the amount of bonds issuable under that indenture. CROSS DEFAULT PROVISIONS Certain financing agreements of NPC contain cross-default provisions that would result in an event of default under such financing agreements if there is a failure under other financing agreements of NPC and SPR to meet payment terms or to observe other covenants that would result in an acceleration of payments due. Most of these default provisions (other than ones relating to a failure to pay other indebtedness) provide for a cure period of 30-60 days from the occurrence of a specified event during which time, NPC or SPR may rectify or correct the situation before it becomes an event of default. The primary cross-default provisions in NPC's various financing agreements are briefly summarized below: - - NPC's General and Refunding Mortgage Indenture provides for an event of default if a matured event of default under NPC's First Mortgage Indenture occurs; - - The terms of NPC's Series E Notes provide that a default with respect to the payment of principal, interest or premium beyond the applicable grace period under any mortgage, indenture or other security instrument, by NPC or any of its restricted subsidiaries, relating to debt in excess of $15 million, triggers a right of the holders of the Series E Notes to require NPC to redeem the Series E Notes at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest and liquidated damages, if any, upon notice given by at least 25% of the outstanding Series E Notes holders; and - - NPC's receivables purchase facility may terminate in the event that either NPC or SPR defaults (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million and $5 million for NPC and SPR, respectively. 47 SIERRA PACIFIC POWER COMPANY During the quarter ended March 31, 2003, SPPC recognized net income of $4.0 million and did not pay or declare a common stock dividend to its parent, SPR. During the same period, SPPC paid $975,000 in dividends to holders of its preferred stock and neither declared nor paid dividends on its common stock, all of which is held by its parent, SPR. The components of SPPC's gross margin are set forth below (dollars in thousands):
THREE MONTHS ENDED MARCH 31, ------------------------------------ Change from 2003 2002 Prior Year % -------- -------- ------------ Operating Revenues: Electric $205,454 $224,754 -8.6% Gas 64,617 55,083 17.3% -------- -------- Total Revenues $270,071 $279,837 -3.5% ======== ======== Energy Costs: Electric $132,256 $147,863 -10.6% Gas 53,137 46,786 13.6% -------- -------- Total Energy Costs 185,393 194,649 -4.8% ======== ======== Gross Margin by Segment: Electric $ 73,198 $ 76,891 -4.8% Gas 11,480 8,297 38.4% -------- -------- Total $ 84,678 $ 85,188 -0.6% ======== ========
The causes for significant changes in specific lines comprising the results of operations for SPPC are as follows: ELECTRIC OPERATING REVENUES
THREE MONTHS ENDED MARCH 31, -------------------------------------------- Change from 2003 2002 Prior year % -------- -------- ------------ ELECTRIC OPERATING REVENUES ($000): Residential $ 59,869 $ 60,403 -0.9% Commercial 63,128 62,716 0.7% Industrial 66,178 63,132 4.8% -------- -------- Retail revenues 189,175 186,251 1.6% Other 16,279 38,503 -57.7% -------- -------- TOTAL REVENUES $205,454 $224,754 -8.6% ======== ======== Retail sales in thousands of MWH 2,134 2,136 -0.1% Average retail revenue per MWH $ 88.65 $ 87.20 1.7%
SPPC's retail revenues for the three months ending March 31, 2003 were comparable to the same period in the prior year. An overall rate increase for the residential and commercial customers, which was effective June 1, 2002, was offset by lower sales due to warmer than normal temperatures during the first quarter of 2003. The decrease in other electric operating revenues for the three-month period ended March 31, 2003, compared to the same period in 2002 was due to a decrease in wholesale sales to other utilities. See SPPC's Annual Report on Form 10-K for the year ended December 31, 2002 Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, Energy Supply, for a discussion of SPPC's purchased power procurement strategies. 48 GAS OPERATING REVENUES
THREE MONTHS ENDED MARCH 31, ------------------------------------------ Change from 2003 2002 Prior year % ------- ------- ------------ GAS OPERATING REVENUES ($000): Residential $28,624 $29,472 -2.9% Commercial 14,274 17,004 -16.1% Industrial 4,839 7,664 -36.9% ------- ------- Retail revenue 47,737 54,140 -11.8% Wholesale revenue 16,377 547 2894.0% Miscellaneous 503 396 27.0% ------- ------- TOTAL REVENUES $64,617 $55,083 17.3% ======= ======= Retail sales in thousands of decatherms 5,029 6,006 -16.3% Average retail revenues per decatherm $ 9.49 $ 9.01 5.3%
Retail revenues for the three-month period ended March 31, 2002 were lower than the same period in the prior year due to a decrease in gas usage as a result of warmer than normal temperatures in the first quarter of 2003. Also, industrial revenues decreased as a result of some SPPC's industrial customers who switched to a gas transportation tariff, which gave them the ability to procure the commodity from another source other than SPPC. Under SPPC's gas transportation tariff, those customers are billed for only the transportation of the commodity and the associated revenues are reflected under miscellaneous revenues. Wholesale gas revenues for the three months ended March 31, 2003 were higher than for the same period in 2002. The increase in wholesale gas sales was primarily a result of utilizing idle gas transportation capacity to move gas from Canada to California for resale. PURCHASED POWER
THREE MONTHS ENDED MARCH 31, ------------------------------------------ Change from 2003 2002 Prior Year % -------- -------- ------------ PURCHASED POWER ($000): $ 87,178 $105,417 -17.3% Purchased Power in thousands of MWHs 1,593 1,703 -6.5% Average cost per MWH of Purchased Power $ 54.73 $ 61.90 -11.6%
Purchased power costs were lower for the three-month period ended March 31, 2003, than the prior year because the majority of SPPC's total energy requirements were satisfied by Short-Term Firm power purchases for which costs have decreased as compared to a year ago. In addition, volumes of and prices for SPPC's risk management activities have decreased. Risk management activities include transactions entered into for hedging purposes and to minimize purchased power costs. See SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, Energy Supply, for a discussion of SPPC's purchased power procurement strategies. 49 FUEL FOR POWER GENERATION
THREE MONTHS ENDED MARCH 31, --------------------------------------------- Change from 2003 2002 Prior Year % ------- ------- ------------ FUEL FOR POWER GENERATION ($000) $33,676 $47,051 -28.4% Thousands of MWHs generated 963 1,212 -20.5% Average fuel cost per MWH of Generated Power $ 34.97 $ 38.82 -9.9%
Fuel for power generation costs for the three-month period ended March 31, 2003 were lower than the same period in the prior year as both volumes generated and natural gas prices decreased. Generation as well as purchase power volumes are down as total system requirements decreased in comparison to last year. GAS PURCHASED FOR RESALE
THREE MONTHS ENDED MARCH 31, ---------------------------------------------- Change from 2003 2002 Prior Year % ------- ------- ------------ GAS PURCHASED FOR RESALE ($000) $42,334 $38,594 9.7% Gas Purchased for Resale (thousands of decatherms) 7,621 5,960 27.9% Average cost per decatherm $ 5.55 $ 6.48 -14.4%
Gas purchased for resale increased significantly for the three-month period ended March 31, 2003, compared to the prior year as an increase in wholesale activity more than offset the decrease in gas prices. DEFERRED ENERGY COSTS
THREE MONTHS ENDED MARCH 31, ------------------------------------------- Change from 2003 2002 Prior Year % ------- ------- ------------ DEFERRED ENERGY COSTS - ELECTRIC - NET ($000) $11,402 $(4,605) N/A DEFERRED ENERGY COSTS - GAS - NET ($000) $10,803 $ 8,192 31.9%
The increase in deferral of energy costs-electric-net for the three month period ended March 31, 2003, reflects the amortization of prior deferred costs pursuant to the PUCN decision in SPPC's 2002 deferred energy rate case, that resulted in increased rates beginning June 1, 2002. The 2003 increase was offset, in part, by the recording of current year deferrals of electric energy costs to the extent actual fuel and purchased power costs for the three months ended March 31, 2003, exceeded fuel and purchased power costs recovered through current rates during that period. Deferral of energy costs-electric-net for the three months ended March 31, 2002, reflects the deferral of electric energy costs in 2002 that were in excess of purchased power costs recovered through rates at that time. SPPC's deferred energy costs-gas-net, for the three months ended March 31, 2003 reflects the amortization of prior deferred costs due to the PUCN-authorized recovery of those costs. The increase in 2003 also includes additional expense to the extent natural gas costs recovered through current rates exceeded actual natural gas costs. 50 ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
THREE MONTHS ENDED MARCH 31, -------------------------------------- Change from 2003 2002 Prior Year % ------ ------ ------------ ALLOWANCE FOR OTHER FUNDS USED DURING CONSTRUCTION ($000) $ 602 $ 236 155.1% ALLOWANCE FOR BORROWED FUNDS USED DURING CONSTRUCTION ($000) 700 391 79.0% ------ ------ $1,302 $ 627 107.7% ====== ======
Total allowance for funds used during construction increased for the three-month period ended March 31, 2003, compared to the prior year due to an increase in CWIP and an increase in the AFUDC Rate. OTHER (INCOME) AND EXPENSES
THREE MONTHS ENDED MARCH 31, ------------------------------------------ Change from ($000) 2003 2002 Prior Year % -------- -------- ------------ OTHER OPERATING EXPENSE $ 29,213 $ 27,762 5.2% MAINTENANCE EXPENSE $ 5,187 $ 5,257 -1.3% DEPRECIATION AND AMORTIZATION $ 19,706 $ 17,558 12.2% INCOME TAXES $ 2,090 $ 4,901 -57.4% TAXES OTHER THAN INCOME TAXES $ 4,662 $ 4,776 -2.4% INTEREST CHARGES ON LONG-TERM DEBT $ 18,781 $ 16,445 14.2% INTEREST CHARGES-OTHER $ 3,125 $ 1,142 173.6% INTEREST ACCRUED ON DEFERRED ENERGY $ (1,925) $ (5,027) -61.7% OTHER INCOME $ (1,065) $ (1,837) -42.0% OTHER EXPENSE $ 1,905 $ 2,462 -22.6% INCOME TAXES - OTHER INCOME AND EXPENSE $ 303 $ 1,432 -78.8%
Other operating expense for the three-month period ending March 31, 2003 was greater than the prior year, due to credits associated with the discontinuation of billing services for Truckee Meadows Water Authority in July 2002 along with increased billing/collection efforts associated with delinquent customer accounts and higher employee labor overhead costs in 2003. Maintenance costs for the three-month period ending March 31, 2003 were comparable to amounts recognized during the same period in 2002. Depreciation and amortization increased for the three-month period ended March 31, 2003, compared to the same period in 2002 as a result of an increase in additions to plant-in-service assets. SPPC recorded lower operating income tax expense for the three months ended March 31, 2003 compared to the same period in 2002. This decrease is due to a corresponding decrease in first quarter 2003 pre-tax income compared to the prior year. Taxes other than income taxes for the three months ended March 31, 2003, was comparable to the amount recognized during the same period in 2002. Interest charges on long-term debt for the three-month period ending March 31, 2003, increased over the same period in 2002 due, primarily, to the issuance in October 2002 of $100 million additional debt at an interest rate of 10.5%. Interest charges-other for the three-month period ending March 31, 2003, increased over the prior year due to interest on delayed/terminated contracts, charges related to fees associated with SPPC's credit facilities and receivables conduit, and to 51 the increase of amortization resulting from increased debt discount charges related to the issuance, in October 2002 of $100 million additional debt. Interest accrued on deferred energy decreased for the three-month period ending March 31, 2003, compared to the same period, 2002, due to lower deferred fuel and purchased power balances during 2003. Other income for the three months ended March 31, 2003, decreased compared to the same period in the prior year due, primarily, to a decrease in interest income and subsidiary earnings, partially offset by increases in lease revenues and miscellaneous non-operating income. Other expense for the three months ended March 31, 2003, decreased, compared to the prior year, due, primarily, to the occurrence in 2002 of miscellaneous charges related to SPPC's sale of its water division. The decrease in 2003 was offset partially by higher charges related to corporate advertising, during 2003. SPPC recorded lower income tax expense on other income and expense for the three months ended March 31, 2003, compared to 2002 due to lower net other income during 2003. ANALYSIS OF CASH FLOWS SPPC's cash flows during the three-months ended March 31, 2003, improved compared to the same period in 2002, as a result of an increase in cash flows from operating activities, partially offset, by an increase in cash used for investing activities. Cash flows from operating activities improved primarily as a result of the collection of previously deferred energy costs due to the PUCN decision in SPPC's 2002 deferred energy rate case, that resulted in increased rates beginning June 1, 2002. Cash flows from investing activities decreased in 2003 because of additional cash requirements for increased construction activity during 2003. Cash flows from financing activities were comparable for both periods. LIQUIDITY AND CAPITAL RESOURCES SPPC had cash and cash equivalents of approximately $128 million at March 31, 2003. SPPC's future liquidity could be significantly affected by unfavorable rulings by the PUCN in pending or future SPPC or NPC rate cases. S&P and Moody's have SPPC's credit ratings on "negative outlook" and "stable", respectively. Future downgrades by either S&P or Moody's could preclude SPPC's access to the capital markets and could adversely affect SPPC's ability to continue purchasing power and fuel. Adverse developments with respect to any one or a combination of the factors and contingencies set forth above could have a material adverse effect on SPPC's financial condition and liquidity, and could make it difficult to continue to operate outside of bankruptcy. EFFECT OF RATE CASE DECISIONS On March 29 and April 1, 2002, following the decision by the PUCN in NPC's deferred energy rate case, S&P and Moody's lowered SPPC's unsecured debt ratings to below investment grade. On April 23 and 24, 2002, SPPC's unsecured debt ratings were further downgraded and its secured debt ratings were downgraded to below investment grade. The decision of the PUCN on May 29, 2002, on SPPC's deferred energy application to disallow $53 million of deferred purchased fuel and power costs accumulated between March 1, 2001 and November 30, 2001, did not result in any further downgrades of SPPC's securities. As a result of the downgrades, SPPC's ability to access the capital markets to raise funds is severely limited. Since SPR's credit ratings were similarly downgraded, SPR's ability to make capital contributions to SPPC also became severely limited. For more detailed discussion of these effects please see SPPC's Annual Report on Form 10-K for the year ended December 31, 2002. ACCOUNTS RECEIVABLE FACILITY On October 29, 2002, SPPC established an accounts receivable purchase facility of up to $75 million, which was arranged by Lehman Brothers. The receivables purchase facility expires on August 28, 2003 unless SPPC has activated the facility prior to that date, in which case the facility will be automatically extended to, and will expire on, October 28, 2003. If SPPC elects to activate the receivables purchase facility, SPPC will sell all of its accounts receivable generated from the sale of electricity and natural gas to customers to its newly created bankruptcy remote special purpose subsidiary. The receivables sales will be without recourse except for breaches of customary representations and warranties made at the time of sale. The subsidiary will, in turn, sell these receivables to a bankruptcy-remote subsidiary of SPR. SPR's subsidiary will issue variable rate revolving notes backed by the purchased receivables. Lehman Brothers Holdings, Inc. has committed to be the sole initial committed purchaser of all of the variable rate revolving notes. 52 The agreements relating to the receivables purchase facility contain various conditions to purchase, covenants and trigger events, and other provisions customary in receivables transactions. In additional to customary termination and mandatory repurchase events, the receivables purchase facility may terminate in the event that either SPPC or SPR defaults (1) on the payment of indebtedness, or (2) on the payment of amounts due under a swap agreement, and such defaults aggregate to greater than $10 million and $5 million for SPPC and SPR, respectively. Under the terms of the agreements relating to the receivables purchase facility, SPPC's facility may not be activated or, if activated, will be terminated in the event of a material adverse change in the condition, operations or business prospects of SPPC. In addition, the agreements contain a limitation on the payment of dividends by SPPC to SPR that is identical to the limitation contained in SPPC's Term Loan Agreement, described below. SPR has agreed to guaranty SPPC's performance of certain obligations as a seller and servicer under the receivables purchase facility. SPPC has agreed to issue $75 million principal amount of its General and Refunding Mortgage Bonds upon activation of the receivables purchase facility. The full principal amount of the bond would secure certain of SPPC's obligations as seller and servicer, plus certain interest, fees and expenses thereon to the extent not paid when due, regardless of the actual amounts owing with respect to the secured obligations. As a result, in the event of an SPPC bankruptcy or liquidation, the holder of the bond securing the receivables purchase facility may recover more on a pro rata basis than the holders of other General and Refunding Mortgage securities, who could recover less on a pro rata basis, than they otherwise would recover. However, in no event will the holder of the bond recover more than the amount of obligations secured by the bond. SPPC intends to use the accounts receivable purchase facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. SPPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $75 million General and Refunding Mortgage Bond. MORTGAGE INDENTURES SPPC's First Mortgage Indenture creates a first priority lien on substantially all of SPPC's properties in Nevada and California. As of March 31, 2003, $505.3 million of SPPC's first mortgage bonds were outstanding. SPPC agreed in its General and Refunding Mortgage Indenture that it would not issue any additional first mortgage bonds. SPPC's General and Refunding Mortgage Indenture creates a lien on substantially all of SPPC's properties in Nevada that is junior to the lien of the first mortgage indenture. As of March 31, 2003, $419.8 million of SPPC's General and Refunding Mortgage bonds were outstanding. Additional securities may be issued under the General and Refunding Mortgage Indenture on the basis of (1) 70% of net utility property additions, (2) the principal amount of retired General and Refunding Mortgage bonds, and/or (3) the principal amount of first mortgage bonds retired after delivery to the indenture trustee of the initial expert's certificate under the General and Refunding Mortgage Indenture. At March 31, 2003, SPPC had the capacity to issue approximately $435.7 million of additional General and Refunding Mortgage securities, which amount does not include SPPC's $80 million General and Refunding Mortgage Note, Series D, due 2004. However, the financial covenants contained in SPPC's Term Loan Agreement and Receivable Purchase Facility Agreements limit SPPC's ability to issue additional General and Refunding Mortgage Securities or other debt. SPPC has reserved $75 million of General and Refunding Mortgage Bonds for issuance upon the initial funding of its receivables purchase facility. SPPC also has the ability to release property from the liens of the two mortgage indentures on the basis of net property additions, cash and/or retired bonds. To the extent SPPC releases property from the lien of its General and Refunding Mortgage Indenture, it will reduce the amount of bonds issuable under that indenture. FINANCING TRANSACTIONS AND COVENANTS On May 1, 2003, SPPC's $80 million Washoe County, Nevada, Water Facilities Refunding Revenue Bonds, Series 2001, were successfully remarketed. The interest rate on the bonds was adjusted from their prior two-year 5.75% term rate to a 7.50% term rate for the period of May 1, 2003 to and including May 3, 2004. The bonds will be subject to remarketing on May 3, 2004. In the event that the bonds cannot be successfully remarketed on that date, SPPC will be required to purchase the outstanding bonds at a price of 100% of principal amount, plus accrued interest. From May 1, 2003 to and including May 3, 2004, SPPC's payment and purchase obligations in respect of the bonds are secured by SPPC's $80 million General and Refunding Mortgage Note, Series D, due 2004. SPPC's $100 million Term Loan Agreement, entered into on October 30, 2002 with several lenders and Lehman Commercial Paper Inc., as Administrative Agent, contains two financial maintenance covenants. The first requires that SPPC maintain a ratio of consolidated total debt to consolidated total capitalization at all times during each of the following quarters in an amount not to exceed (i) .650 to 1.0 for the fiscal quarters ended December 31, 2002 through December 31, 2003, (ii) .625 to 1.0 for the fiscal quarters ended March 31, 2004 through December 31, 2004, and (iii) .600 to 1.0 for the fiscal quarter ended March 31, 2005 and for each fiscal quarter thereafter. The second covenant requires that SPPC maintain a consolidated 53 interest coverage ratio for the four consecutive fiscal quarters ending with each of the following fiscal quarters of not less than (i) 1.75 to 1.00 for the fiscal quarters ended December 31, 2002 and March 31, 2003, (ii) 2.50 to 1.0 for the fiscal quarters ended June 30, 2003 through December 31, 2003, (iii) 2.75 to 1.0 for the fiscal quarters ended March 31, 2004 through September 30, 2004, and (iv) 3.00 to 1.0 for the fiscal quarter ended December 31, 2004 and for each fiscal quarter thereafter. SPPC expects to deliver a certificate to the Administrative Agent on or before May 15, 2003 as required by the Term Loan Agreement stating that SPPC was in compliance with these covenants as of March 31, 2003. The Term Loan Facility, which is secured by a $100 million Series C General and Refunding Mortgage Bond, will expire October 31, 2005. CROSS DEFAULT PROVISIONS Certain financing agreements of SPPC contain cross-default provisions that would result in an event of default under such financing agreements if there is a failure under other financing agreements of SPPC and SPR to meet payment terms or to observe other covenants that would result in an acceleration of payments due. Most of these default provisions (other than ones relating to a failure to pay other indebtedness) provide for a cure period of 30-60 days from the occurrence of a specified event during which time, SPPC or SPR may rectify or correct the situation before it becomes an event of default. The primary cross-default provisions in SPPC's various financing agreements are briefly summarized below: - - SPPC's General and Refunding Mortgage Indenture provides for an event of default if a matured event of default under SPPC's First Mortgage Indenture occurs; - - SPPC's Term Loan Agreement provides for an event of default if (a) SPPC or any of its subsidiaries default (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million, or (b) SPPC's General and Refunding Mortgage Indenture ceases to be enforceable; and - - SPPC's receivables purchase facility may terminate in the event that either SPPC or SPR defaults (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million and $5 million for SPPC and SPR, respectively. SIERRA PACIFIC RESOURCES (HOLDING COMPANY) The Condensed Consolidated Statements of Operations of SPR for the three-months ended March 31, 2003, include the operating results of the holding company. The holding company recognized higher interest costs, $20.1 million in 2003 compared to $19.2 million in 2002, due to the issuance of $300 million of convertible notes in February 2003. TUSCARORA GAS PIPELINE COMPANY The Condensed Consolidated Statements of Operations of SPR for the three months ended March 31, 2003, and March 31, 2002, include the operating results of Tuscarora Gas Pipeline Company (TGPC), a wholly owned subsidiary of SPR. TGPC contributed $.9 million in net income for both the three-month periods ended March 31, 2003, and March 31, 2002. e [MID DOT] THREE The Condensed Consolidated Statements of Operations of SPR for the three months ended March 31, 2003, and March 31, 2002, include the operating results of e [MID DOT] three, a wholly owned subsidiary of SPR. e [MID DOT] three incurred net losses of $.3 and $.2 million, respectively, for the three- month periods ended March 31, 2003 and March 31, 2002, respectively. SIERRA PACIFIC COMMUNICATIONS The Condensed Consolidated Statements of Operations of SPR for the three months-ended March 31, 2003, and March 31, 2002, include the operating results of Sierra Pacific Communications (SPC), a wholly owned subsidiary of SPR. SPC incurred net losses of $.9 million and $.7 million for the three-month periods ended March 31, 2003, and March 31, 2002, respectively. REGULATORY MATTERS Substantially all of the utility operations of both NPC and SPPC are conducted in Nevada. As a result both Utilities are subject to utility regulation within Nevada and therefore deal with many of the same regulatory issues. 54 NEVADA MATTERS NEVADA POWER COMPANY 2001 DEFERRED ENERGY CASE On November 30, 2001, NPC filed an application with the PUCN seeking repayment for purchased fuel and power costs accumulated between March 1, 2001, and September 30, 2001, as required by law. The application sought to establish a rate to repay accumulated purchased fuel and power costs of $922 million and spread the recovery of the deferred costs, together with a carrying charge, over a period of not more than three years. On March 29, 2002, the PUCN issued its decision on the deferred energy application, allowing NPC to recover $478 million over a three-year period, but disallowing $434 million of deferred purchased fuel and power costs and $30.9 million in carrying charges consisting of $10.1 million in carrying charges accrued through September 2001 and $20.8 million in carrying charges accrued from October 2001 through February 2002. The order stated that the disallowance was based on alleged imprudence in incurring the disallowed costs. On April 11, 2002, NPC filed a lawsuit in the First District Court of Nevada seeking to reverse portions of the PUCN's decision. NPC's lawsuit requested that the District Court reverse portions of the PUCN's order and remand the matter to the PUCN with direction that the PUCN authorize NPC to immediately establish rates that would allow NPC to recover its entire deferred energy balance of $922 million, with a carrying charge, over three years. The Bureau of Consumer Protection (BCP) of the Nevada Attorney General's Office filed a petition in the case seeking additional disallowances. On April 28, 2003, the District Court issued its decision, denying NPC's requests and affirming the PUCN's order, and also denying the BCP's petition. NPC's management is evaluating its options in regard to the District Court's decision. Various interveners in NPC's deferred energy case before the PUCN filed petitions with the PUCN for reconsideration of the PUCN's order, seeking additional disallowances of between $12.8 million and $488 million. On May 24, 2002, the PUCN issued an order denying any further disallowances and granted NPC the authority to increase the deferred energy cost recovery charge for the month of June 2002 by one cent per kilowatt-hour. This increase accelerated the recovery of the deferred balance by approximately $16 million for the month of June 2002 only. NEVADA POWER COMPANY 2002 DEFERRED ENERGY CASE On November 14, 2002, NPC filed an application with the PUCN seeking repayment for purchased fuel and power costs accumulated between October 1, 2001, and September 30, 2002, as required by law. The application seeks to establish a rate to repay accumulated purchased fuel and power costs of $195.7 million, together with a carrying charge, over a period of not more than three years. The application also requests a reduction to the going-forward rate for energy, reflecting reduced wholesale energy costs. The combined effect of these two adjustments results in an overall rate reduction of 5.3%. Intervenors filed their direct testimony on March 7, 2003, and supplemental testimony was filed March 27, 2003, calling for disallowances between approximately $108 and $300 million of the total fuel and purchased power costs. The largest of the proposed disallowances are based on the same alleged imprudence as found in the PUCN order for NPC's 2001 Deferred Energy Case relating to NPC's failure to enter into power contracts in 1999. Certain Intervenors' testimony, in the current case, have argued in favor of disallowances based on the same alleged imprudence as cited in the last deferred order but have not quantified their proposals and in some cases have argued in favor of disallowances in excess of the ranges previously indicated. The PUCN Staff does not support this disallowance but calculated a range of $116 to $347 million in the event that the PUCN disallows deferred energy costs based upon the same alleged imprudence cited by the PUCN in its 2001 decision relative to this issue. While all Intervenors have called for the PUCN to reduce NPC's requested energy rates for recovery of past energy costs, some have also proposed to increase customers' energy rates for purchases that will occur during the upcoming deferred accounting period, which would decrease the accumulation of deferred energy costs. NPC's rebuttal testimony was filed March 31, 2003. The hearing commenced on April 7, and was completed on April 17, 2003. A special agenda meeting is scheduled for May 9, 2003, at which time a ruling from the Commission is expected. 55 NEVADA POWER COMPANY DEMAND REDUCTION PROGRAMS On November 14, 2002, NPC filed an application with the PUCN seeking recovery of expenses incurred in the implementation and operation of programs for energy conservation and load management. In the filing, NPC requested a one-year recovery of approximately $1.9 million. This would result in an average 0.12% increase in present rates. NPC asked for this increase to become effective simultaneously with the rate change to be ordered in its 2002 deferred energy case discussed above. The parties to the case subsequently negotiated a settlement agreement which approved NPC's request for cost recovery with the exception of a small disallowance ($14,673). The stipulation was approved at the agenda meeting held April 4, 2003. SIERRA PACIFIC POWER COMPANY 2003 DEFERRED ENERGY CASE On January 14, 2003, SPPC filed an application with the PUCN, as required by law, seeking to clear deferred balances for purchased fuel and power costs accumulated between December 1, 2001 and November 30, 2002. The application seeks to establish a DEAA rate to clear accumulated purchased fuel and power costs of $15.4 million and spread the cost recovery over a period of not more than three years. It also seeks to recalculate the Base Tariff Energy Rate to reflect anticipated ongoing purchased fuel and power costs. The total rate increase resulting from the requested DEAA would amount to 0.01%. The intervenors' testimony was received April 25, 2003, and includes proposed disallowances from $34 million to $76 million. While all Intervenors call for the PUCN to reduce SPPC's requested energy rates for recovery of past energy costs, some also propose to increase customers' energy rates for purchases that will occur during the upcoming deferred accounting period, which would decease the accumulation of deferred energy costs. A hearing is scheduled to begin on May 12, 2003, and a ruling is required before July 13, 2003. SIERRA PACIFIC POWER COMPANY DEMAND REDUCTION PROGRAMS On January 14, 2003, SPPC filed with the PUCN an application seeking recovery of expenses incurred in the implementation and operation of programs for energy conservation and load management. In the filing, SPPC requested a one-year recovery of approximately $0.9 million. This would result in an average 0.12% increase in present rates. SPPC asked for this increase to become effective simultaneously with the rate change to be ordered in its 2003 deferred energy case discussed above. The parties to the case subsequently negotiated a settlement agreement that is expected to be approved by the PUCN coincident with its 2003 deferred energy ruling. The agreement called for complete recovery of the $0.9 million balance. CUSTOMERS FILE TO BE SERVED BY NEW PROVIDERS UNDER NRS 704B (AB 661) AB 661, passed by the Nevada legislature in 2001 and incorporated into Nevada Revised Statutes as NRS 704B, allows commercial and governmental customers with an average demand greater than 1 MW to select new energy suppliers. The Utilities would continue to provide transmission, distribution, metering and billing services to such customers. NRS 704B requires customers wishing to choose a new supplier to receive the approval of the PUCN and meet public interest standards. In particular, departing customers must secure new energy resources that are not under contract to the Utilities, the departure must not burden the Utilities with increased costs or cause any remaining customers to pay increased costs, and the departing customers must pay their portion of any deferred energy balances. The PUCN adopted regulations prescribing the criteria that will be used to determine if there will be negative impacts to remaining customers or the Utility. Customers wishing to choose a new supplier must provide 180-day notice to the Utilities. Twelve applications for departure are pending for NPC. These applications total approximately 350 MW of peak load. In eleven of these applications stipulations have been reached that addressed all issues except treatment of Base Tariff General Rate (BTGR) revenue impacts arising from departure. The commission has issued a compliance order for these eleven applications that will allow the customers to depart upon completion of items in the compliance order. The remaining application is pending with a decision anticipated in second quarter of 2003. NPC continues to pursue resolution of the BTGR revenue impact issue. The most recent departure orders allow NPC to establish a regulatory asset to recover the BTGR revenue impact. According to the commission's order, the BTGR revenue impact will be offset by load growth from new customers. NPC has requested clarification of the land growth calculation methodology. The Bureau of Consumer Protection is opposed to the regulatory asset for BTGR impacts and has filed for reconsideration. A decision from the PUCN is expected in the second quarter of 2003. As this issue is being resolved, the customers seeking to depart are continuing to address the requirements of the compliance order which include executing supply, transmission, and distribution contracts. All compliance items must be filed no later than 100 days after the date of their compliance order. Some such customers are also proceeding with the implementation of metering and communications equipment. However, at this point, no customer has provided written notice of their intent to proceed with departure from NPC. NPC is obligated to plan for and secure energy supplies for these customers until official departure notice is received. The written departure notice must provide a minimum of 60 days notice. 56 Should customers elect to proceed with departure, such departures would begin in the third quarter of 2003 and generally are anticipated to be phased in based upon each customer's implementation plan. CALIFORNIA MATTERS (SPPC) RATE STABILIZATION PLAN SPPC serves approximately 44,500 customers in California. On June 29, 2001, SPPC filed with the California Public Utilities Commission (CPUC) a Rate Stabilization Plan, which included two phases. Phase One, which was also filed June 29, 2001, was an emergency electric rate increase of $10.2 million annually or 26%. The increase was applicable to all customers except those eligible for low-income and medical-needs rates and went into effect July 18, 2002. Phase Two of the Rate Stabilization Plan was filed with the CPUC on April 1, 2002, and includes a general rate case and requests the CPUC to reinstate the Energy Cost Adjustment Clause, which would allow SPPC to file for periodic rate adjustments to reflect its actual costs for wholesale energy supplies. Phase Two also includes a proposal to terminate the 10% rate reduction mandated by AB 1890, but does not include a performance -based rate-making proposal. This request was for an additional overall increase in revenues of 17.1%, or $8.9 million annually. On December 19, 2002, SPPC filed an amendment to the Phase Two application reducing the requested increase by $4.1 million to $4.8 million or 9.2% annually. SPPC agreed to make certain changes to the application and file the amendment following discussions with the CPUC Office of Ratepayer Advocates. In February 2003, the Office of the Ratepayer Advocates (ORA) filed testimony on cost of service proposing to reduce SPPC's request by $3.2 million resulting in a $1.6 million increase or 3.3%. On March 14, 2003, SPPC filed rebuttal testimony. On March 10, 2003, the ORA filed testimony on revenue allocation and rate design and on April 2, 2003, Sierra and the California Ski Areas Association filed rebuttal testimony. Hearings were held on April 9, 2003. A comparative table of issues is due by April 30 with opening and reply briefs scheduled for May 16, 2003 and June 13, 2003, respectively. A decision by the CPUC regarding the Energy Cost Adjustment Clause is expected in May 2003 and a decision on all other issues is expected in late 2003. CALIFORNIA ASSEMBLY BILL 1235 On September 24, 2002, the Governor of California signed into law Assembly Bill 1235 (AB 1235), which allows the transfer of hydroelectric plants along the Truckee River from SPPC to the Truckee Meadows Water Authority (TMWA). AB 1235 effectively amends previous California legislation (AB 6X) that prevented until 2006 private utilities from selling any power plants that provide energy to California customers. AB 1235 provides an exemption for the four "run-of-the-river" hydroelectric plants that SPPC sold to TMWA as part of the sale of its water business in June 2001. On November 9, 2002, SPPC filed an application with the CPUC for authority to sell the four hydroelectric plants. On January 13, 2003, the CPUC issued a ruling that the California Environmental Quality Act applies to this proceeding and SPPC must supplement the application with a certified environmental document. SPPC has begun informal discussions with the CPUC on the environmental issues and cannot yet predict the outcome of this proceeding. On April 17, 2003, the CPUC issued a ruling dismissing the application without prejudice. The decision allows SPPC to re-file the application including an environmental assessment. Sierra plans to file a new application by the end of the second quarter of 2003. FERC MATTERS (SPPC, NPC) In December 2001, the Utilities filed ten wholesale purchased power complaints with the FERC under Section 206 of the Federal Power Act seeking to reduce prices of certain forward power purchase contracts that the Utilities entered into prior to the price caps established by the FERC during the western United States utility crisis. The Utilities believe the prices under these purchased power contracts are unjust and unreasonable. The Utilities negotiated a settlement with Duke Energy Trading and Marketing, but were unable to reach agreement in bilateral settlement discussions with other respondents. The Utilities have already paid the full contact price for all power actually delivered by these suppliers, but are contesting claims made for terminated power suppliers, including those terminated by Enron. The Administrative Law Judge ("ALJ") overseeing the Utilities' complaints and proceedings under Section 206 of the Federal Power Act issued an initial decision on December 19, 2002 which stated that the Utilities' complaints did not meet the public interest standard of proof, which the ALJ believed applied to the reformation of their contracts. NPC, SPPC and other parties to these proceedings filed Briefs on Exceptions to the ALJ's initial order with the FERC. Oral argument before the three commissioners of the FERC took place on April 23, 2003. We are unable to predict the timing or outcome of the FERC's decision on the Utilities' Section 206 complaints. FERC is expected to issue a decision in this matter by May 31, 2003. 57 On March 26, 2003, the Staff of the FERC (the Staff) concluded that supply-demand imbalance, flawed market design and inconsistent rules made significant market manipulation possible in the Western states in 2000 and 2001. The FERC has not decided how or if this manipulation impacted NPC's and SPPC's claims to the FERC in their Section 206 proceedings. Additionally, the Staff recommended that certain market participants identified in the Cal ISO Report released January 6, 2003, including SPPC, be directed to show cause why their behavior did not constitute gaming in violation of the Cal ISO and Cal PX tariffs. In its report, the Cal ISO indicated that it was unclear as to the reason SPPC received certain revenues in the amount of approximately $6 thousand. The total revenues for all companies for which the Staff recommended show cause orders are approximately $2.8 million. SPPC was one of the over 30 market participants included in the Staff's recommendation. On April 7, 2003, SPR submitted documentation to the FERC demonstrating that SPPC did not engage in gaming in violation of the Cal ISO or Cal PX tariffs, nor in the manipulation of the Western energy market. The FERC has not yet decided whether to issue a show cause order to SPPC or to any of the other companies identified by the FERC staff. The Staff also recommended that the Cal ISO fully explain the screen that was used to identify the subject transactions and that the information should be made available to the public. For more information regarding the Section 206 proceedings, please see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulation and Rate Proceedings - FERC Matters - FERC 206 Complaints in SPR's, NPC's and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002. OPEN ACCESS TRANSMISSION TARIFF On September 27, 2002, the Utilities filed with the FERC a revised Open Access Transmission Tariff. The purpose of the filing was to implement changes that are required to implement retail open access in Nevada. The Utilities requested the changes to become effective November 1, 2002, the date retail access was scheduled to commence in Nevada in accordance with provisions of AB 661, passed in the 2001 session of the Nevada Legislature. On October 11, 2002, the Utilities filed with the FERC, revised rates, terms, and conditions for ancillary services offered in the OATT designated Docket No. ER03-37-000. On November 25, 2002, the FERC suspended the rates in Docket No. ER03-37-000 for a nominal period and made them effective subject to refund on January 1, 2003, as requested by the Utilities. On November 21, 2002, the FERC suspended the revised OATT in Docket No. ER02-2607-000 for a nominal period, made it effective subject to refund, set certain issues for hearing, and directed the Utilities to make a compliance filing. The compliance filing was submitted on December 23, 2002. This order additionally established hearing procedures and consolidated the two dockets for hearing. On March 11, 2003, all parties to these dockets reached a settlement in principle regarding all issues. The settlement agreement is expected to be filed with the FERC on or before May 2003. 58 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the Annual Report on Form 10-K of SPR, NPC, and SPPC for the year ended December 31, 2002, Item 7A, Quantitative And Qualitative Disclosures About Market Risk for disclosures about market risk. There have been no material changes to the information previously disclosed in that report, except as described in the following discussion. CREDIT RISK The Utilities monitor and manage credit risk with their trading counterparties. As of March 31, 2003, the Utilities had outstanding transactions with over 40 energy and financial services companies. The Utilities credit risk associated with these transactions was approximately $25 million as of March 31, 2003. ITEM 4. CONTROLS AND PROCEDURES SPR, NPC, and SPPC maintain disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") designed to ensure that they are able to collect the information required to be disclosed in the reports they file with the Securities and Exchange Commission (SEC), and to process, summarize and disclose this information accurately and within the time periods specified in the rules of the SEC. The chief executive officer and chief financial officer of each of SPR, NPC, and SPPC have reviewed and evaluated SPR's, NPC's and SPPC's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the disclosure controls and procedures of SPR, NPC, and SPPC are effective in bringing to their attention on a timely basis material information relating to SPR, NPC, and SPPC required to be included in periodic filings under the Exchange Act. Since the Evaluation Date, there have not been any significant changes in the internal controls of SPR, NPC, and SPPC, or in other factors that could significantly affect these controls subsequent to the Evaluation Date. 59 PART II ITEM 1. LEGAL PROCEEDINGS Refer to Item 3 of SPR's, NPC's and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, and Note 18 to SPR's consolidated financial statements contained in that report and Note 11 to SPR's condensed consolidated financial statements contained in this report for a description of legal proceedings presently pending. Except as set forth below, there are no additional material legal proceedings or material developments with respect to previously reported proceedings involving SPR, NPC or SPPC. SIERRA PACIFIC RESOURCES AND NEVADA POWER COMPANY Lawsuit Against Merrill Lynch and Allegheny Energy, Inc. On April 2, 2003, SPR and NPC filed a complaint in the U.S. District Court for the District of Nevada against Merrill Lynch & Co., Inc. and Merrill Lynch Capital Services, Inc. (collectively, "Merrill Lynch") and Allegheny Energy, Inc., and Allegheny Energy Supply Company, LLC (collectively, "Allegheny") seeking actual and punitive damages in excess of $850 million and demanding a jury trial for all claims triable by jury. The complaint alleges that the Merrill Lynch defendants engaged in misrepresentation, suppression and concealment, breach of fiduciary duty, wrongful hiring and supervision of Daniel Gordon, and breach of contract and alleges that both Merrill Lynch and Allegheny engaged in intentional interference with contractual and prospective advantage, conspiracy and racketeering (in violation of Nevada Revised Statutes Section 207.470). The complaint also alleges that the improper behavior of Merrill Lynch and Allegheny was the direct and proximate cause of the March 2002 decision by the PUCN to disallow $180 million of rate adjustments in NPC's 2001 deferred energy accounting adjustment rate application. Lawsuit Against Natural Gas Providers On April 21, 2003, SPR and NPC filed a complaint in the U.S. District Court for the District of Nevada against natural gas providers El Paso Corporation, El Paso Natural Gas Company, El Paso Merchant Energy Company, El Paso Tennessee Pipeline Company, El Paso Merchant Energy-Gas Company, Sempra Energy, Southern California Gas Company, San Diego Gas and Electric Company, Dynegy Holdings, Inc., Dynegy Energy Services, Inc., and Does 1-100, seeking $600 million in total damages. The complaint alleges, among other things, that as a result of the defendants' conspiracies and fraudulent behavior, SPR and NPC were forced to enter into natural gas purchase contracts "at artificially high, supracompetitive prices." The complaint further states that between 1996 and 2001, certain of the defendants and their subsidiaries conspired, in secret meetings, to decrease competition by restricting the amount of pipeline capacity and fuel available to NPC while other defendants decreased natural gas supplies and drove up prices by illegally withholding pipeline capacity, maintained control over output and prices by manipulating natural gas price indexes, and harmed market competition and the plaintiffs by driving up prices and increasing the volatility of natural gas supplies. SPR and NPC assert that the defendants conspired to prevent the construction of new gas transportation capacity to deliver gas to the southern Nevada area by preventing the planned expansion of the Kern River Pipeline upon which NPC relies for its primary supply of natural gas for its generation facilities. The complaint also alleges that certain of the defendants "systematically misrepresented the price and volume of their trades" to key trade publications, creating the appearance of supply volatility and escalating prices starting in 2000 and continuing through the beginning of 2002. SPR and NPC assert claims for fraud, violation of Nevada's RICO Act and conspiracy to violate Nevada's RICO Act, compensatory damages, treble damages, punitive damages, legal fees, interest and other such relief deemed just and proper by the court. NEVADA POWER COMPANY AND SIERRA PACIFIC POWER COMPANY Enron Litigation Hearings were held on April 3, 2003, in the Bankruptcy Court for the Southern District of New York, in the lawsuit filed by Enron against NPC and SPPC for liquidated damages in the amount of approximately $216 million and $87 million, respectively, related to its termination of its power supply agreement with NPC and SPPC and for power previously delivered to the Utilities. The Bankruptcy Court heard arguments regarding Enron's motion to dismiss the Utilities' counterclaims against Enron for unspecified damages to be determined during the case. The Utilities' counterclaims seek damages for acts and omissions of Enron in manipulating the power markets, wrongful termination of its transactions with the Utilities, and fraudulent inducement to enter into transactions with Enron, among other issues. The Court has not ruled on this matter nor has it indicated when a decision on this matter can be expected. The Utilities continue to participate in non-binding court-ordered mediation proceedings along with all of Enron's other terminated purchased power counterparties. For more information regarding the Enron litigation, please see Note 11 to SPR's condensed consolidated financial statements contained in this report and Item 3 - Legal Proceedings in SPR's, NPC's and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002. 60 NEVADA POWER COMPANY Morgan Stanley Proceedings In March 2003, the arbitrator overseeing the arbitration proceedings initiated by Morgan Stanley Capital Group ("MSCG") regarding various power supply contract terminated by MSCG in April 2002 dismissed MSCG's demand for arbitration and agreed that the issues raised by MSCG were not calculation issues subject to arbitration and that NPC's contract defenses were likewise not arbitrable. For more information regarding the MSCG arbitration proceedings, please see Note 11 to SPR's condensed consolidated financial statements contained in this report and tem 3 - Legal Proceedings in SPR's, NPC's and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002. NPC has since filed a complaint for declaratory relief in the U.S. District Court for the District of Nevada asking the Court to declare that NPC is not liable for any damages as a result of MSCG's termination of its power supply contracts. MSCG has not yet answered or responded to the complaint; however, on April 17, 2003, MSCG filed a complaint against NPC at the FERC conceding that the issues raised by NPC were litigable in court but asking the FERC to declare that under the WSPP agreement NPC should post the $25 million in dispute as collateral pending the outcome of the litigation. NPC is unable to predict the outcome of these proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed with this Form 10-Q: SIERRA PACIFIC RESOURCES Exhibit 4.1 Indenture dated as of February 14, 2003 between Sierra Pacific Resources and The Bank of New York, as Trustee, in connection with the issuance of 7.25% Convertible Notes due 2010. Exhibit 4.2 Form of Sierra Pacific Resources' 7.25% Convertible Note due 2010. NEVADA POWER COMPANY AND SIERRA PACIFIC POWER COMPANY Exhibit 10.1 Western Systems Power Pool ("WSPP") Agreement effective February 1, 2003 between Nevada Power Company as a member of the WSPP, Sierra Pacific Power Company as a member of the WSPP and the other members of the WSPP. SIERRA PACIFIC RESOURCES, NEVADA POWER COMPANY AND SIERRA PACIFIC POWER COMPANY Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: Form 8-K dated January 16, 2003, filed by SPR- Item 5, Other Events Disclosed SPR agreements to acquire $8,750,000 aggregate principal amount of its Floating Rate Notes due April 20, 2003 in exchange for 1,295,211 shares of its common stock in two privately-negotiated transactions. Form 8-K dated February 3, 2003, filed by SPR - Item 5, Other Events Disclosed, and included as an exhibit, SPR's press release dated February 3, 2003, announcing SPR reached agreements to exchange 30% of its Premium Income Equity Securities ("PIES") for shares of its common stock, par value 61 $1.00 per share. Under terms of the privately-negotiated agreements, with a limited number of investors, the Company issued approximately 13.66 million shares of common stock in exchange for a total of 2,095,650 PIES. Form 8-K dated February 10, 2003, filed by SPR, NPC and SPPC - Item 5, Other Events Disclosed, and included as an exhibit, SPR's press release dated Febraury 10, 2003, reporting financial results for the quarter ended December 31, 2002. Form 8-K dated February 10, 2003, filed by SPR- Item 5, Other Events Disclosed, and included as an exhibit, SPR's press release regarding an offering of $250 million aggregate principal amounts of its convertible Notes due 2010 under Rule 144A.. Form 8-K dated February 11, 2003, filed by SPR, NPC and SPPC - Item 5, Other Events Disclosed SPR's Preliminary Offering Memorandum for distribution to potential purchasers. The long-term convertible debt issued in the form of 7.25% Convertible Notes due 2010. Also disclosed as an exhibit were excerpts from the Preliminary Offering Memorandum. 62 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. SIERRA PACIFIC RESOURCES ----------------------------- (Registrant) Date: May 6, 2003 By: /s/ Richard K. Atkinson ----------------------------- Richard K. Atkinson Vice President Chief Financial Officer (Principal Financial Officer) Date: May 6, 2003 By: /s/ John E. Brown ------------------------------ John E. Brown Vice President Controller (Principal Accounting Officer) NEVADA POWER COMPANY ------------------------------ (Registrant) Date: May 6, 2003 By: /s/ Richard K. Atkinson ------------------------------ Richard K. Atkinson Vice President Chief Financial Officer (Principal Financial Officer) Date: May 6, 2003 By: /s/ John E. Brown ------------------------------ John E. Brown Vice President Controller (Principal Accounting Officer) SIERRA PACIFIC POWER COMPANY ------------------------------ (Registrant) Date: May 6, 2003 By: /s/ Richard K. Atkinson ------------------------------ Richard K. Atkinson Vice President Chief Financial Officer (Principal Financial Officer) Date: May 6, 2003 By: /s/ John E. Brown ----------------------------- John E. Brown Vice President Controller (Principal Accounting Officer) 63 QUARTERLY CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REQUIRED BY SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002 I, Walter M. Higgins III, certify that: 1. I have reviewed this quarterly report of Sierra Pacific Resources, Nevada Power Company and Sierra Pacific Power Company on Form 10-Q for the period ending March 31, 2003; 2. Based on my knowledge, the combined quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this quarterly report; 4. The chief financial officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrants and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrants' disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The chief financial officer and I have disclosed, based on our most recent evaluation, to the registrants' auditors and the audit committee of registrants' board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants' ability to record, process, summarize and report financial data and have identified for the registrants' auditors any material weaknesses in internal controls; and 64 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants' internal controls; and 6. The chief financial officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 5, 2003 /s/ Walter M. Higgins III ------------------------------------- Walter M. Higgins III Chief Executive Officer 65 QUARTERLY CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REQUIRED BY SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002 I, Richard K. Atkinson, certify that: 1. I have reviewed this quarterly report of Sierra Pacific Resources, Nevada Power Company and Sierra Pacific Power Company on Form 10-Q for the period ending March 31, 2003; 2. Based on my knowledge, the combined quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this quarterly report; 4. The chief executive officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrants and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrants' disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The chief executive officer and I have disclosed, based on our most recent evaluation, to the registrants' auditors and the audit committee of registrants' board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants' ability to record, process, summarize and report financial data and have identified for the registrants' auditors any material weaknesses in internal controls; and 66 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants' internal controls; and 6. The chief executive officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 5, 2003 /s/ Richard K. Atkinson Richard K. Atkinson Chief Financial Officer 67 EX-4.1 3 b46521spexv4w1.txt INDENTURE DATED FEBRUARY 14, 2003 Exhibit 4.1 SIERRA PACIFIC RESOURCES 7.25% Convertible Notes due 2010 ---------------------------------------------------------- INDENTURE Dated as of February 14, 2003 ---------------------------------------------------------- THE BANK OF NEW YORK TRUSTEE ---------------------------------------------------------- CROSS REFERENCE TABLE*
TIA SECTION INDENTURE SECTION 310(a)(1)................................................... 7.08 (a)(2)................................................... 7.08 (a)(3)................................................... N.A. (a)(4)................................................... N.A. (b)...................................................... 7.07; 7.09 (c)...................................................... N.A. 311(a)...................................................... 7.12 (b)...................................................... 7.12 (c)...................................................... N.A. 312(a)...................................................... 2.05 (b)...................................................... 13.03 (c)...................................................... 13.03 313(a)...................................................... 7.13 (b)(1)................................................... N.A. (b)(2)................................................... 7.13 (c)...................................................... 13.02 (d)...................................................... 7.13 314(a)...................................................... 4.02; 4.03; 13.02 (b)...................................................... N.A. (c)(1)................................................... 13.04 (c)(2)................................................... 13.04 (c)(3)................................................... N.A. (d)...................................................... 12.01 (e)...................................................... 13.05 (f)...................................................... N.A. 315(a)...................................................... 7.01 (b)...................................................... 7.14; 13.02 (c)...................................................... 7.01 (d)...................................................... 7.01 (e)...................................................... 6.11 316(a) (last sentence)...................................... 2.08 (a)(1)(A)................................................ 6.05 (a)(1)(B)................................................ 6.04 (a)(2)................................................... N.A. (b)...................................................... 6.07 317(a)(1)................................................... 6.08 (a)(2)................................................... 6.09 (b)...................................................... 2.04 318(a)...................................................... 13.01
N.A. means Not Applicable. - ---------------------------- * Note: This Cross Reference Table shall not, for any purpose, be deemed to be part of the Indenture. TABLE OF CONTENTS*
PAGE ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION....................................... 1 SECTION 1.01 Definitions.......................................................................... 1 SECTION 1.02 Other Definitions.................................................................... 8 SECTION 1.03 Incorporation by Reference of Trust Indenture Act.................................... 9 SECTION 1.04 Rules of Construction................................................................ 10 SECTION 1.05 Acts of Holders...................................................................... 10 ARTICLE 2 THE NOTES..................................................................................... 11 SECTION 2.01 Form and Dating...................................................................... 11 SECTION 2.02 Execution and Authentication......................................................... 13 SECTION 2.03 Registrar, Paying Agent and Conversion Agent......................................... 13 SECTION 2.04 Paying Agent to Hold Money and Notes in Trust........................................ 14 SECTION 2.05 Noteholder Lists..................................................................... 14 SECTION 2.06 Transfer and Exchange................................................................ 14 SECTION 2.07 Replacement Notes.................................................................... 16 SECTION 2.08 Outstanding Notes; Determinations of Holders' Action................................. 16 SECTION 2.09 Temporary Notes...................................................................... 17 SECTION 2.10 Cancellation......................................................................... 17 SECTION 2.11 Persons Deemed Owners................................................................ 18 SECTION 2.12 Global Notes......................................................................... 18 SECTION 2.13 CUSIP Numbers........................................................................ 22 SECTION 2.14 Defaulted Interest................................................................... 23 ARTICLE 3 REDEMPTION AND PURCHASES...................................................................... 23 SECTION 3.01 Optional Redemption.................................................................. 23 SECTION 3.02 Notice to Trustee.................................................................... 23 SECTION 3.03 Selection of Notes to be Redeemed.................................................... 23 SECTION 3.04 Notice of Redemption................................................................. 24 SECTION 3.05 Effect of Notice of Redemption....................................................... 25 SECTION 3.06 Deposit of Redemption Price.......................................................... 25 SECTION 3.07 Notes Redeemed in Part............................................................... 25 SECTION 3.08 Conversion Arrangement on Call for Redemption........................................ 26 SECTION 3.09 Repurchase of Notes at Option of the Holder upon Change of Control................... 26 SECTION 3.10 Effect of Change of Control Repurchase Notice........................................ 30 SECTION 3.11 Deposit of Change of Control Repurchase Price........................................ 30 SECTION 3.12 Notes Purchased in Part.............................................................. 31
- ---------------------------- * Note: This Table of Contents shall not, for any purpose, be deemed to be part of the Indenture. i SECTION 3.13 Covenant to Comply with Securities Laws upon Purchase of Notes....................... 31 SECTION 3.14 Repayment to the Company............................................................. 31 ARTICLE 4 COVENANTS..................................................................................... 31 SECTION 4.01 Payment of Principal, Premium, Interest on the Notes................................. 31 SECTION 4.02 SEC and Other Reports................................................................ 32 SECTION 4.03 Compliance Certificate............................................................... 32 SECTION 4.04 Further Instruments and Acts......................................................... 32 SECTION 4.05 Maintenance of Office or Agency...................................................... 32 SECTION 4.06 Delivery of Certain Information...................................................... 33 SECTION 4.07 Additional Interest Notice........................................................... 33 ARTICLE 5 MERGERS AND SALES OF ASSETS................................................................... 33 SECTION 5.01 When Company May Merge or Transfer Assets............................................ 33 ARTICLE 6 DEFAULTS AND REMEDIES......................................................................... 34 SECTION 6.01 Events of Default.................................................................... 34 SECTION 6.02 Acceleration......................................................................... 36 SECTION 6.03 Other Remedies....................................................................... 37 SECTION 6.04 Waiver of Past Defaults.............................................................. 37 SECTION 6.05 Control by Majority.................................................................. 37 SECTION 6.06 Limitation on Suits.................................................................. 37 SECTION 6.07 Rights of Holders to Receive Payment................................................. 38 SECTION 6.08 Collection Suit by Trustee........................................................... 38 SECTION 6.09 Trustee May File Proofs of Claim..................................................... 38 SECTION 6.10 Priorities........................................................................... 39 SECTION 6.11 Undertaking for Costs................................................................ 39 SECTION 6.12 Waiver of Stay, Extension or Usury Laws.............................................. 39 ARTICLE 7 TRUSTEE....................................................................................... 40 SECTION 7.01 Duties and Responsibilities of the Trustee; During Default; Prior to Default......... 40 SECTION 7.02 Certain Rights of the Trustee........................................................ 41 SECTION 7.03 Trustee Not Responsible for Recitals, Disposition of Notes or Application of Proceeds Thereof...................................................... 43 SECTION 7.04 Trustee and Agents May Hold Notes; Collections, etc.................................. 43 SECTION 7.05 Moneys Held by Trustee............................................................... 43 SECTION 7.06 Compensation and Indemnification of Trustee and Its Prior Claim...................... 43 SECTION 7.07 Conflicting Interests................................................................ 44 SECTION 7.08 Persons Eligible for Appointment as Trustee.......................................... 44 SECTION 7.09 Resignation and Removal; Appointment of Successor Trustee............................ 44 SECTION 7.10 Acceptance of Appointment by Successor Trustee....................................... 45 SECTION 7.11 Merger, Conversion, Consolidation or Succession to Business of Trustee............... 46 SECTION 7.12 Preferential Collection of Claims Against the Company................................ 46
ii SECTION 7.13 Reports by the Trustee............................................................... 46 SECTION 7.14 Trustee to Give Notice of Default, But May Withhold in Certain Circumstances......... 47 ARTICLE 8 SATISFACTION AND DISCHARGE OF INDENTURE....................................................... 47 SECTION 8.01 Termination of the Company's Obligations............................................. 47 SECTION 8.02 Application of Trust Money........................................................... 48 SECTION 8.03 Reinstatement........................................................................ 48 SECTION 8.04 Repayment of the Company............................................................. 48 SECTION 8.05 Conversion of Notes Upon Discharge................................................... 48 ARTICLE 9 AMENDMENTS.................................................................................... 49 SECTION 9.01 Without Consent of Holders........................................................... 49 SECTION 9.02 With Consent of Holders.............................................................. 49 SECTION 9.03 Compliance with Trust Indenture Act.................................................. 50 SECTION 9.04 Revocation and Effect of Consents, Waivers and Actions............................... 50 SECTION 9.05 Notation on or Exchange of Notes..................................................... 51 SECTION 9.06 Trustee to Sign Supplemental Indentures.............................................. 51 SECTION 9.07 Effect of Supplemental Indentures.................................................... 51 ARTICLE 10 CONVERSION................................................................................... 51 SECTION 10.01 Conversion Right and Conversion Rate................................................. 51 SECTION 10.02 Exercise of Conversion Right......................................................... 52 SECTION 10.03 Fractions of Shares.................................................................. 54 SECTION 10.04 Adjustment of Conversion Rate........................................................ 54 SECTION 10.05 Notice of Adjustments of Conversion Rate............................................. 65 SECTION 10.06 Notice Prior to Certain Actions...................................................... 65 SECTION 10.07 Company to Reserve Common Stock...................................................... 66 SECTION 10.08 Taxes on Conversions................................................................. 66 SECTION 10.09 Covenant as to Common Stock.......................................................... 66 SECTION 10.10 Cancellation of Converted Notes...................................................... 67 SECTION 10.11 Effect of Reclassification, Consolidation, Merger or Sale............................ 67 SECTION 10.12 Responsibility of Trustee for Conversion Provisions.................................. 68 ARTICLE 11 DIVIDEND PROTECTION PAYMENT.................................................................. 69 SECTION 11.01 Additional Interest Amounts.......................................................... 69 ARTICLE 12 SECURITY..................................................................................... 69 SECTION 12.01 Security............................................................................. 69 ARTICLE 13 MISCELLANEOUS................................................................................ 70 SECTION 13.01 Trust Indenture Act Controls......................................................... 70 SECTION 13.02 Notices.............................................................................. 70 SECTION 13.03 Communication by Holders with Other Holders.......................................... 71 SECTION 13.04 Certificate and Opinion as to Conditions Precedent................................... 71
iii SECTION 13.05 Statements Required in Certificate or Opinion........................................ 72 SECTION 13.06 Separability Clause.................................................................. 72 SECTION 13.07 Rules by Trustee, Paying Agent, Conversion Agent and Registrar....................... 72 SECTION 13.08 Legal Holidays....................................................................... 72 SECTION 13.09 GOVERNING LAW........................................................................ 72 SECTION 13.10 No Recourse Against Others........................................................... 73 SECTION 13.11 Successors........................................................................... 73 SECTION 13.12 Multiple Originals................................................................... 73
EXHIBITS Exhibit A-1 Form of Global Note Exhibit A-2 Form of Certificated Note Exhibit B-1 Transfer Certificate Exhibit B-2 Form of Letter to Be Delivered by Accredited Investors iv INDENTURE dated as of February 14, 2003 between SIERRA PACIFIC RESOURCES, a Nevada corporation (the "Company"), and THE BANK OF NEW YORK, a New York banking corporation, as Trustee hereunder (the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of its 7.25% Convertible Notes due 2010 (herein called the "Notes") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Notes, when the Notes are executed by the Company and authenticated and delivered hereunder, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. Further, all things necessary to duly authorize the issuance of the Common Stock of the Company issuable upon the conversion of the Notes, and to duly reserve for issuance the number of shares of Common Stock issuable upon such conversion, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Notes, as follows: ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.01 Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; and (3) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For purposes of this definition, "control" when used with respect to any specified person means the power to direct or cause the direction of the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or 1 otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Applicable Procedures" means, with respect to any transfer or transaction involving a Global Note or beneficial interest therein, the rules and procedures of the Depositary for such Note, in each case to the extent applicable to such transaction and as in effect from time to time. "Board of Directors" means the Board of Directors of the Company or the Executive Committee or any other committee of the Board of Directors duly authorized to act for the Company hereunder. "Board Resolution" means a resolution duly adopted by the Board of Directors, a copy of which, certified by the Secretary or an Assistant Secretary of the Company to be in full force and effect on the date of such certification, shall have been delivered to the Trustee. "Business Day" means each day of the year other than a Saturday or a Sunday on which banking institutions are not required or authorized to close in The City of New York. "Capital Stock" of any corporation means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) stock issued by that corporation. "Certificated Notes" means Notes that are in the form of the Notes attached hereto as Exhibit A-2. "Closing Price" of any security on any date of determination means: (1) the closing sale price (or, if no closing sale price is reported, the last reported sale price) of such security on the New York Stock Exchange on such date; (2) if such security is not listed for trading on the New York Stock Exchange on any such date, the closing sale price as reported in the composite transactions for the principal U.S. securities exchange on which such security is so listed; (3) if such security is not so listed on a U.S. national or regional securities exchange, the closing bid price as reported by the NASDAQ Stock Market; (4) if such security is not so reported, the last quoted bid price for such security in the over-the-counter market as reported by the National Quotation Bureau or similar organization; or (5) if such bid price is not available, the average of the mid-point of the last bid and ask prices of such security on such date from at least three nationally recognized independent investment banking firms retained for this purpose by the Company. 2 "Common Stock" means the Common Stock, par value $1.00 per share, of the Company as it exists on the date of this Indenture, or, subject to Section 10.11 hereof, any shares of Capital Stock of the Company into which the Common Stock shall be reclassified or changed. "Company" means the party named as the "Company" in the first paragraph of this Indenture until a successor replaces it pursuant to the applicable provisions of this Indenture and, thereafter, shall mean such successor. The foregoing sentence shall likewise apply to any subsequent such successor or successors. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any two Officers. "Conversion Agent" means any person authorized by the Company to convert Notes in accordance with Article 10 hereof. "Corporate Trust Office" means the principal office of the Trustee at which at any time its corporate trust business shall be administered, which office at the date hereof is located at 101 Barclay Street, 8W, New York, New York, 10286, or such other address as the Trustee may designate from time to time by notice to the Holders and the Company, or the principal corporate trust office of any successor Trustee (or such other address as a successor Trustee may designate from time to time by notice to the Holders and the Company). "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Dollar" or "$" means a dollar or other equivalent unit in such coin or currency of the United States as at the time shall be legal tender for the payment of public and private debts. "Exchange Act" means the United States Securities Exchange Act of 1934 (or any successor statute), as amended from time to time. "GAAP" means accounting principles generally accepted in the United States of America, as in effect from time to time. "Global Notes" means Notes that are in the form of the Notes attached hereto as Exhibit A-1, and to the extent that such Notes are required to bear the Legend required by Section 2.06(f), such Notes will be in the form of a 144A Global Note. "Government Securities" means the direct obligations of, obligations fully guaranteed by, or participations in pools consisting solely of obligations of or obligations guaranteed by the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the option of the issuer thereof. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. 3 "Holder" or "Noteholder" means a person in whose name a Note is registered on the Registrar's books. "Indebtedness" means, with respect to any person, without duplication: (a) all liabilities of such person for borrowed money (including overdrafts) or for the deferred purchase price of property or services, excluding any trade payables and other accrued current liabilities incurred in the ordinary course of business, but including, without limitation, all obligations, contingent or otherwise, of such person in connection with any letters of credit and acceptances issued under letter of credit facilities, acceptance facilities or other similar facilities; (b) all obligations of such person evidenced by bonds, notes, debentures or other similar instruments; (c) indebtedness of such person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), but excluding trade payables arising in the ordinary course of business; (d) all capitalized lease obligations of such person; (e) all obligations of such person under or in respect of interest rate agreements or currency agreements; (f) all indebtedness referred to in (but not excluded from) the preceding clauses of other persons and all dividends of other persons, the payment of which is secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien or with respect to property (including, without limitation, accounts and contract rights) owned by such person, even though such person has not assumed or become liable for the payment of such indebtedness (the amount of such obligation being deemed to be the lesser of the value of such property or asset or the amount of the obligation so secured); (g) all Guarantees by such person of indebtedness referred to in this definition or of any other person; (h) all Redeemable Capital Stock of such person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends; and (i) the present value of the obligation of such person as lessee for net rental payments (excluding all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges to the extent included in such rental payments) during the remaining term of the lease included in such sale and leaseback transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended. Such present value shall be 4 calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with GAAP. "Indenture" means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof, including the provisions of the TIA that are deemed to be a part hereof. "Institutional Accredited Investor" means an institutional "accredited investor" as described in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Notes. "Interest Rate" means 7.25% per annum. "Issue Date" of any Note means the date on which the Note was originally issued or deemed issued as set forth on the face of the Note. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset given to secure Indebtedness, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction with respect to any such lien, pledge, charge or security interest). "Liquidated Damages Amount" shall have the meaning assigned to such term in the Registration Rights Agreement. "Notes" has the meaning ascribed to it in the first paragraph under the caption "Recitals of the Company." "Officer" means the Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Treasurer or Secretary thereof or any other officer specifically authorized to act by the Board of Directors of the Company. "Officers' Certificate" means a written certificate containing the information specified in Sections 13.04 and 13.05, signed in the name of the Company by two Officers or by an Officer other than the Secretary and an Assistant Treasurer or an Assistant Secretary of the Company, and delivered to the Trustee. An Officers' Certificate given pursuant to Section 4.03 shall be signed by the principal financial Officer, principal accounting Officer or principal executive Officer of the Company but need not contain the information specified in Sections 13.04 and 13.05. "144A Global Note" means a permanent Global Note in the form of the Note attached hereto as Exhibit A-1, and that is deposited with and registered in the name of the Depositary, representing Notes sold in reliance on Rule 144A under the Securities Act. 5 "Opinion of Counsel" means a written opinion containing the information specified in Sections 13.04 and 13.05, from legal counsel who is acceptable to the Trustee and such acceptance shall not be unreasonably withheld. The counsel may be an employee of, or counsel to, the Company or the Trustee. "person" or "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, or government or any agency or political subdivision thereof. "Pledge Account" means an account established by the Trustee pursuant to the terms of the Pledge Agreement for the deposit of the Pledged Securities purchased by the Company with a portion of the proceeds from the sale of the Notes. "Pledge Agreement" means the Pledge Agreement, dated as of the date hereof, made by the Company in favor of the Trustee, governing the disbursement of funds from the Pledge Account, as such agreement may be amended, restated, supplemented or otherwise modified from time to time, and the term Pledge Agreement includes the Control Agreement referred to therein and contemplated thereby, as such agreement may be amended, restated, supplemented or otherwise modified from time to time. "Pledged Securities" means the Government Securities to be purchased by the Company and held in the Pledge Account in accordance with the Pledge Agreement. "principal" of a Note means the principal amount due on the Stated Maturity as set forth on the face of the Note. "Redeemable Capital Stock" means any class of the Company's Capital Stock that, either by its terms, by the terms of any securities into which it is convertible or exchangeable or by contract or otherwise, is, or upon the happening of an event or passage of time would be, required to be redeemed (whether by sinking fund or otherwise) prior to the date that is 91 days after the final scheduled maturity of the Notes or is redeemable at the option of the holder thereof at any time prior to such date, or is convertible into or exchangeable for debt securities at any time prior to such date (unless it is convertible or exchangeable solely at the Company's option). "Redemption Date" or "redemption date" means the date specified for redemption of the Notes in accordance with the terms of the Notes and this Indenture. "Redemption Price" or "redemption price" when used with respect to any security to be redeemed, means the price at which it is redeemed pursuant to this Indenture. "Registration Rights Agreement" shall mean the registration rights agreement dated the date hereof between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated. "Regular Record Date" means, with respect to the interest payable on any Interest Payment Date, the close of business on January 31 or July 31 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. 6 "Responsible Officer" means, when used with respect to the Trustee, any officer within the Corporate Finance Unit of the Corporate Trust Division of the Trustee (or any successor unit, department or division of the Trustee) located at the Corporate Trust Office of the Trustee who has direct responsibility for the administration of the Indenture, and, for the purposes of clause (b) of the third paragraph of Section 7.01 and Section 7.14 hereof, shall also include any other officer of the Trustee to whom any corporate trust matter is referred because of such person's knowledge of and familiarity with the particular subject. "Restricted Note" means a Note required to bear the restrictive legend set forth in the form of Note attached as Exhibits A-1 and A-2 of this Indenture. "Rule 144A" means Rule 144A under the Securities Act (or any successor provision), as it may be amended from time to time. "SEC" means the Securities and Exchange Commission. "Securities Act" means the United States Securities Act of 1933 (or any successor statute), as amended from time to time. "Significant Subsidiary" means a Subsidiary of the Company, including its Subsidiaries, which meets any of the following conditions: (a) the Company's and its other Subsidiaries' investments in and advances to such Subsidiary exceed 10 percent of the total assets of the Company and its Subsidiaries consolidated as of the end of any two of the three most recently completed fiscal years; or (b) the Company's and its other Subsidiaries' proportionate share of the total assets of such Subsidiary exceeds 10 percent of the total assets of the Company and its Subsidiaries consolidated as of the end of any two of the three most recently completed fiscal years; or (c) the Company's and its other Subsidiaries' equity in the income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principles of such Subsidiary exceeds 10 percent of such income of the Company and its Subsidiaries consolidated as of the end of any two of the three most recently completed fiscal years. "Stated Maturity" when used with respect to any Note or any installment of interest thereon, means the date specified in such Note as the fixed date on which the principal of such Note or such installment of interest is due and payable. "Subsidiary" means (i) a corporation, a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is, at the date of determination, directly or indirectly owned by the Company, by one or more Subsidiaries of the Company or by the Company and one or more Subsidiaries of the Company, (ii) a partnership in which the Company or a Subsidiary of the Company holds a majority interest in the equity capital or profits of such partnership, or (iii) any other person (other than a corporation or a partnership) in which the Company, a Subsidiary of the Company or the Company and one or more Subsidiaries of the 7 Company, directly or indirectly, at the date of determination, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such person. "TIA" means the Trust Indenture Act of 1939 as in effect on the date of this Indenture, provided, however, that in the event the TIA is amended after such date, TIA means, to the extent required by any such amendment, the TIA as so amended. "Trading Day" means a day during which trading in securities generally occurs on the New York Stock Exchange or, if the Common Stock is not listed on the New York Stock Exchange, on the principal other national or regional securities exchange on which the Common Stock is then listed or, if the Common Stock is not listed on a national or regional securities exchange, on the National Association of Securities Dealers Automated Quotation System or, if the Common Stock is not quoted on the National Association of Securities Dealers Automated Quotation System, on the principal other market on which the Common Stock is then traded. "Trustee" means the party named as the "Trustee" in the first paragraph of this Indenture until a successor replaces it pursuant to the applicable provisions of this Indenture and, thereafter, shall mean such successor. The foregoing sentence shall likewise apply to any subsequent such successor or successors. "United States" means the United States of America (including the States and the District of Columbia), its territories, its possessions (including Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands) and other areas subject to its jurisdiction. "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof at any time prior to the Stated Maturity of the Notes, and shall also include depository receipts issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. SECTION 1.02 Other Definitions
Defined in Term Section ---- ---------- "Act"......................................................................... 1.05(a) "Additional Interest Amount".................................................. 11.01
8 "Additional Interest Payment Notice".......................................... 4.07 "Agent Members"............................................................... 2.12(e) "Bankruptcy Law".............................................................. 6.01 "Cash Payment Component" ..................................................... 10.01 "Change of Control"........................................................... 3.09(a) "Change of Control Repurchase Date"........................................... 3.09(a) "Change of Control Repurchase Notice"......................................... 3.09(c) "Change of Control Repurchase Price".......................................... 3.09(a) "Conversion Date"............................................................. 10.02 "Conversion Rate"............................................................. 10.01 "Current Market Price"........................................................ 10.04(h) "Custodian"................................................................... 6.01 "Depositary".................................................................. 2.01(a) "DTC"......................................................................... 2.01(a) "Event of Default"............................................................ 6.01 "excluded securities"......................................................... 10.04(d) "Expiration Time"............................................................. 10.04(f) "fair market value"........................................................... 10.04(h) "Legal Holiday"............................................................... 13.08 "Legend"...................................................................... 2.06(f) "Non-Electing Share".......................................................... 10.11 "Notice of Default"........................................................... 6.01 "Paying Agent"................................................................ 2.03 "Purchased Shares"............................................................ 10.04(f) "QIB"......................................................................... 2.01(a) "Record Date"................................................................. 10.04(h) "Reference Period"............................................................ 10.04(d) "Registrar"................................................................... 2.03 "Rule 144A Information"....................................................... 4.06 "Share Payment Component"..................................................... 10.01 "Shareholder Approval Condition".............................................. 10.01 "Trigger Event"............................................................... 10.04(d)
SECTION 1.03 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "indenture securities" means the Notes. "indenture security holder" means a Holder or a Noteholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. 9 "obligor" on the indenture securities means the Company. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. SECTION 1.04 Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) 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; (c) "or" is not exclusive; (d) "including" means including, without limitation; and (e) words in the singular include the plural, and words in the plural include the singular. SECTION 1.05 Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture 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 their agent 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 Trustee 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 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 this Indenture and conclusive in favor of the Trustee 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 such officer the execution thereof. Where such execution is by a signer acting in a capacity other than such signer's individual capacity, such certificate or affidavit shall also constitute sufficient proof of such signer's 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 Trustee deems sufficient. The ownership of Notes shall be proved by the register for the Notes or by a certificate of the Registrar. 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 10 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 Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Note. If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a resolution of the Board of Directors, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for purposes of determining whether Holders of the requisite proportion of outstanding Notes have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the outstanding Notes shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. ARTICLE 2 THE NOTES SECTION 2.01 Form and Dating. The Notes and the Trustee's certificate of authentication to be borne by such Notes shall be substantially in the form annexed hereto as Exhibits A-1 and A-2, which are incorporated in and made a part of this Indenture. The terms and provisions contained in the form of Note shall constitute, and are hereby expressly made, a part of this Indenture and to the extent applicable, the Company, by its execution and delivery of this Indenture, and the Holders, by their acceptance of the Notes, expressly agree to such terms and provisions and to be bound thereby. Any of the Notes may have such letters, numbers or other marks of identification and such notations, legends and endorsements as the officers executing the same may approve (execution thereof to be conclusive evidence of such approval) and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities exchange or automated quotation system on which the notes may be listed or designated for issuance, or to conform to usage. (a) 144A Global Notes. Notes offered and sold within the United States to qualified institutional investors as defined in Rule 144A ("QIBs") in reliance on Rule 144A shall be issued, initially in the form of one or more 144A Global Notes, which shall be deposited with the Trustee at its Corporate Trust Office, as custodian for the Depositary (as defined below) and registered in the name of The Depository Trust Company ("DTC") or the nominee thereof (such depositary, or any successor thereto, and any such nominee being hereinafter referred to as the "Depositary"), duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the 144A Global Notes may from time to time be 11 increased or decreased by adjustments made on the records of the Trustee and the Depositary as hereinafter provided. (b) Certificated Notes. Notes not issued as interests in the Global Notes will be issued in certificated form substantially in the form of Exhibit A-2 attached hereto. Except as provided in this Section 2.01, 2.06 or 2.12, owners of beneficial interests in Global Notes will not be entitled to receive physical delivery of Certificated Notes. Notes offered and sold within the United States to Institutional Accredited Investors shall be issued, initially in the form of a Certificated Note, duly executed by the Company and authenticated by the Trustee as hereinafter provided. (c) Global Notes in General. Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Notes from time to time endorsed thereon and that the aggregate amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges, redemptions and conversions. Any adjustment of the aggregate principal amount of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee in accordance with instructions given by the Holder thereof as required by Section 2.12 hereof and shall be made on the records of the Trustee and the Depositary as hereinafter provided. (d) Book-Entry Provisions. This Section 2.01(d) shall apply only to Global Notes deposited with or on behalf of the Depositary. The Company shall execute and the Trustee shall, in accordance with Section 2.02 hereof, authenticate and deliver initially one or more Global Notes that (a) shall be registered in the name of the Depositary or its nominee, (b) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions and (c) shall bear legends substantially to the following effect: "UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE ISSUER 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 THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. 12 TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE TWO OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF." SECTION 2.02 Execution and Authentication. The Notes shall be executed on behalf of the Company by any Officer, under its corporate seal reproduced thereon. The signature of the Officer on the Notes may be manual or facsimile. Notes bearing the manual or facsimile signatures of individuals who were at the time of the execution of the Notes the proper Officers of the Company shall bind the Company, 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 authentication of such Notes. 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 duly executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder. The Trustee shall authenticate and deliver Notes for original issue in an aggregate principal amount of up to $300,000,000 upon a Company Order without any further action by the Company. The aggregate principal amount of Notes outstanding at any time may not exceed the amount set forth in the foregoing sentence, except as provided in Section 2.07. The Notes shall be issued only in registered form without coupons and only in denominations of $1,000 in principal amount and any integral multiple thereof. SECTION 2.03 Registrar, Paying Agent and Conversion Agent. The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange ("Registrar"), an office or agency where Notes may be presented for purchase or payment ("Paying Agent") and an office or agency where Notes may be presented for conversion (together with any other person authorized by the Company to convert Notes in accordance with the provisions of Article 10 hereof, the "Conversion Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may have one or more co-Registrars, one or more additional Paying Agents and one or more additional Conversion Agents. The term Paying Agent includes any additional paying agent, including any named pursuant to Section 4.05. The term Conversion Agent includes any additional conversion agent, including any named pursuant to Section 4.05. The Company shall enter into appropriate agency agreements with any Registrar, Paying Agent, Conversion Agent or co-Registrar, if other than the Trustee. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify 13 the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar, Paying Agent or Conversion Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.06. The Company or any Subsidiary or an Affiliate of either of them may act as Paying Agent, Registrar, Conversion Agent and/or co-Registrar. The Company initially appoints the Trustee as Registrar, Conversion Agent and Paying Agent in connection with the Notes. SECTION 2.04 Paying Agent to Hold Money and Notes in Trust. Except as otherwise provided herein, on or prior to each due date of payments in respect of any Note, the Company shall deposit with the Paying Agent a sum of money (in immediately available funds if deposited on the due date) or Common Stock (pursuant to Section 3.10 hereof) sufficient to make such payments when so becoming due. The Company shall require each Paying Agent (if other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Noteholders or the Trustee all money and Common Stock held by the Paying Agent for the making of payments in respect of the Notes and shall notify the Trustee of any default by the Company in making any such payment. At any time during the continuance of any such default, the Paying Agent shall, upon the written request of the Trustee, forthwith pay to the Trustee all money and Common Stock so held in trust. If the Company, a Subsidiary or an Affiliate of either of them acts as Paying Agent, it shall segregate the money and Common Stock held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money and Common Stock held by it to the Trustee and to account for any funds and Common Stock disbursed by it. Upon doing so, the Paying Agent shall have no further liability for the money or Common Stock. SECTION 2.05 Noteholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Noteholders. If the Trustee is not the Registrar, the Company shall cause to be furnished to the Trustee at least semiannually on January 31 and July 31 a listing of Noteholders dated within 15 days of the date on which the list is furnished and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Noteholders. SECTION 2.06 Transfer and Exchange. Subject to Section 2.12 hereof, (a) upon surrender for registration of transfer of any Note, together with a written instrument of transfer satisfactory to the Registrar duly executed by the Noteholder or such Noteholder's attorney duly authorized in writing, at the office or agency of the company designated as Registrar or co-registrar pursuant to Section 2.03, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denomination or denominations, of a like aggregate principal amount. The Company shall not charge a service charge for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges that may be imposed in connection with the transfer or exchange of the Notes from the Noteholder requesting such transfer or exchange. 14 At the option of the Holder, Notes may be exchanged for other Notes of any authorized denomination or denominations, of a like aggregate principal amount, upon surrender of the Notes to be exchanged, together with a written instrument of transfer satisfactory to the Registrar duly executed by the Noteholder or such Noteholder's attorney duly authorized in writing, at such office or agency. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Notes which the Holder making the exchange is entitled to receive. The Company shall not be required to make, and the Registrar need not register, transfers or exchanges of Notes selected for redemption (except, in the case of Notes to be redeemed in part, the portion thereof not to be redeemed) or any Notes in respect of which a Change of Control Repurchase Notice (as defined in Section 3.09(c)) has been given and not withdrawn by the Holder thereof in accordance with the terms of this Indenture (except, in the case of Notes to be purchased in part, the portion thereof not to be purchased) or any Notes for a period of 15 days before the mailing of a notice of redemption of Notes to be redeemed. (b) Notwithstanding any provision to the contrary herein, so long as a Global Note remains outstanding and is held by or on behalf of the Depositary, transfers of a Global Note, in whole or in part, shall be made only in accordance with Section 2.12 and this Section 2.06(b). Transfers of a Global Note shall be limited to transfers of such Global Note in whole, or in part, to nominees of the Depositary or to a successor of the Depositary or such successor's nominee. (c) Successive registrations and registrations of transfers and exchanges as aforesaid may be made from time to time as desired, and each such registration shall be noted on the register for the Notes. (d) Any Registrar appointed pursuant to Section 2.03 hereof shall provide to the Trustee such information as the Trustee may reasonably require in connection with the delivery by such Registrar of Notes upon transfer or exchange of Notes. (e) No Registrar shall be required to make registrations of transfer or exchange of Notes during any periods designated in the text of the Notes or in this Indenture as periods during which such registration of transfers and exchanges need not be made. (f) If Notes are issued upon the transfer, exchange or replacement of Notes subject to restrictions on transfer and bearing the legends set forth on the form of Note attached hereto as Exhibits A-1 and A-2 setting forth such restrictions (collectively, the "Legend"), or if a request is made to remove the Legend on a Note, the Notes so issued shall bear the Legend, or the Legend shall not be removed, as the case may be, unless there is delivered to the Company and the Registrar such satisfactory evidence, which shall include an Opinion of Counsel, as may be reasonably required by the Company and the Registrar, that neither the Legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A or Rule 144 under the Securities Act or that such Notes are not "restricted" within the meaning of Rule 144 under the Securities Act. Upon (i) provision of such satisfactory evidence, or (ii) notification by the Company to the Trustee and Registrar of the sale of such Note pursuant to a registration statement that is effective at the time of such sale, the 15 Trustee, at the written direction of the Company, shall authenticate and deliver a Note that does not bear the Legend. If the Legend is removed from the face of a Note and the Note is subsequently held by an Affiliate of the Company, the Legend shall be reinstated. SECTION 2.07 Replacement Notes. If (a) any mutilated Note is surrendered to the Trustee, or (b) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, and there is delivered to the Company and the Trustee such Note or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Note has been acquired by a bona fide purchaser, the Company shall execute and upon its written request the Trustee shall authenticate and deliver, in exchange for any such mutilated Note or in lieu of any such destroyed, lost or stolen Note, a new Note of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable, or is about to be purchased by the Company pursuant to Article 3 hereof, the Company in its discretion may, instead of issuing a new Note, pay or purchase such Note, as the case may be. Upon the issuance of any new Notes under this Section 2.07, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Note issued pursuant to this Section 2.07 in lieu of any mutilated, 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 benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section 2.07 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 2.08 Outstanding Notes; Determinations of Holders' Action. Notes outstanding at any time are all the Notes authenticated by the Trustee except for those cancelled by it or delivered to it for cancellation, those paid pursuant to Section 2.07 and those described in this Section 2.08 as not outstanding. A Note does not cease to be outstanding because the Company or an Affiliate thereof holds the Note; provided, however, that in determining whether the Holders of the requisite principal amount of the outstanding Notes have given or concurred in any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Subject to the foregoing, only Notes outstanding at the time of such determination shall be 16 considered in any such determination (including, without limitation, determinations pursuant to Articles 6 and 9). If a Note is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the Paying Agent holds, in accordance with this Indenture, on a Redemption Date, or on the Business Day following the Change of Control Repurchase Date, or on Stated Maturity, money or securities, if permitted hereunder, sufficient to pay Notes payable on that date, then immediately after such Redemption Date, Change of Control Repurchase Date or Stated Maturity, as the case may be, such Notes shall cease to be outstanding and interest on such Notes shall cease to accrue; provided 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 Trustee has been made. If a Note is converted in accordance with Article 10, then upon conversion of such Note and in accordance with Section 10.02, such Note shall cease to be outstanding and interest shall cease to accrue on such Note. SECTION 2.09 Temporary Notes. Pending the preparation of definitive Notes, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Notes may determine, as conclusively evidenced by their execution of such Notes. If temporary Notes are issued, the Company 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 Company designated for such purpose pursuant to Section 2.03, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. SECTION 2.10 Cancellation. All Notes surrendered for payment, purchase by the Company pursuant to Article 3, conversion, redemption or registration of transfer or exchange shall, if surrendered to any person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Notes so delivered shall be promptly cancelled by the Trustee. The Company may not issue new Notes to replace Notes it has paid or delivered to the Trustee for cancellation or that any Holder has converted pursuant to Article 10. No Notes shall be authenticated in lieu of or in exchange for any Notes cancelled as provided in 17 this Section 2.10, except as expressly permitted by this Indenture. All cancelled Notes held by the Trustee shall be disposed of by the Trustee in accordance with its customary procedures in effect at the time and the Trustee shall deliver a certificate of destruction to the Company. SECTION 2.11 Persons Deemed Owners. Prior to due presentment of a Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Note is registered as the owner of such Note for the purpose of receiving payment of principal of the Note or the payment of any Redemption Price or Change of Control Repurchase Price in respect thereof, and interest thereon, for the purpose of conversion and for all other purposes whatsoever, whether or not such Note be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 2.12 Global Notes. (a) Notwithstanding any other provisions of this Indenture or the Notes, (A) transfers of a Global Note, in whole or in part, shall be made only in accordance with Section 2.06 and Section 2.12(a)(i), (B) transfer of a beneficial interest in a Global Note for a Certificated Note shall comply with Section 2.06 and Section 2.12(a)(ii) below, and (C) transfers of a Certificated Note shall comply with Section 2.06 and Section 2.12(a)(iii) and (iv) below. (i) Transfer of Global Note. A Global Note may not be transferred, in whole or in part, to any Person other than the Depositary or a nominee or any successor thereof, and no such transfer to any such other Person may be registered; provided that this clause (i) shall not prohibit any transfer of a Note that is issued in exchange for a Global Note but is not itself a Global Note. No transfer of a Note to any Person shall be effective under this Indenture or the Notes unless and until such Note has been registered in the name of such Person. Nothing in this Section 2.12(a)(i) shall prohibit or render ineffective any transfer of a beneficial interest in a Global Note effected in accordance with the other provisions of this Section 2.12(a). (ii) Restrictions on Transfer of a Beneficial Interest in a Global Note for a Certificated Note. A beneficial interest in a Global Note may not be exchanged for a Certificated Note except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a transfer of a beneficial interest in a Global Note in accordance with Applicable Procedures for a Certificated Note in the form satisfactory to the Trustee, together with: (a) so long as the Notes are Restricted Notes, certification, in the form set forth in Exhibit B-1, and, if requested by the Company or the Registrar, certification in the form set forth in Exhibit B-2, that such beneficial interest in the Global Note is being transferred to an Institutional Accredited Investor; (b) written instructions to the Trustee to make, or direct the Registrar to make, an adjustment on its books and records with respect to such Global Note to reflect a decrease in the aggregate principal amount of the Notes represented by the Global Note, such instructions to contain information regarding the Depositary account to be credited with such decrease; and 18 (c) if the Company or Registrar so requests, an opinion of counsel or other evidence reasonably satisfactory to them as to the compliance with the restrictions set forth in the Legend, then the Trustee shall cause, or direct the Registrar to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Registrar, the aggregate principal amount of Notes represented by the Global Note to be decreased by the aggregate principal amount of the Certificated Note to be issued, shall issue such Certificated Note and shall debit or cause to be debited to the account of the Person specified in such instructions a beneficial interest in the Global Note equal to the principal amount of the Certificated Note so issued. (iii) Transfer and Exchange of Certificated Notes. When Certificated Notes are presented to the Registrar with a request: (x) to register the transfer of such Certificated Notes; or (y) to exchange such Certificated Notes for an equal principal amount of Certificated Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Certificated Notes surrendered for transfer or exchange: (a) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (b) so long as such Notes are Restricted Notes, such Notes are being transferred or exchanged pursuant to an effective registration statement under the Securities Act or pursuant to clause (A), (B) or (C) below, and are accompanied by the following additional information and documents, as applicable: (A) if such Certificated Notes are being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect; or (B) if such Certificated Notes are being transferred to the Company, a certification to that effect; or (C) if such Certificated Notes are being transferred pursuant to an exemption from registration, (i) a certification to that effect (in the form set forth in Exhibits B-1 and B-2, if applicable) and (ii) if the Company or Registrar so requests, an opinion of counsel or other evidence reasonably satisfactory to them as to the compliance with the restrictions set forth in the Legend. 19 (iv) Restrictions on Transfer of a Certificated Note for a Beneficial Interest in a Global Note. A Certificated Note may not be exchanged for a beneficial interest in a Global Note except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Certificated Note, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (A) so long as the Notes are Restricted Notes, certification, in the form set forth in Exhibit B-1, that such Certificated Note is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A; and (B) written instructions directing the Trustee to make, or to direct the Registrar to make, an adjustment on its books and records with respect to such Global Note to reflect an increase in the aggregate principal amount of the Notes represented by the Global Note, such instructions to contain information regarding the Depositary account to be credited with such increase, then the Trustee shall cancel such Certificated Note and cause, or direct the Registrar to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Registrar, the aggregate principal amount of Notes represented by the Global Note to be increased by the aggregate principal amount of the Certificated Note to be exchanged, and shall credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Global Note equal to the principal amount of the Certificated Note so cancelled. If no Global Notes are then outstanding, the Company shall issue and the Trustee shall authenticate, upon written order of the Company in the form of an Officers' Certificate, a new Global Note in the appropriate principal amount. (b) Subject to the succeeding paragraph, every Note shall be subject to the restrictions on transfer provided in the Legend including the delivery of an opinion of counsel, if so provided. Whenever any Restricted Note is presented or surrendered for registration of transfer or for exchange for a Note registered in a name other than that of the Holder, such Note must be accompanied by a certificate in substantially the form set forth in Exhibit B-1, dated the date of such surrender and signed by the Holder of such Note, as to compliance with such restrictions on transfer. The Registrar shall not be required to accept for such registration of transfer or exchange any Note not so accompanied by a properly completed certificate. (c) The restrictions imposed by the Legend upon the transferability of any Note shall cease and terminate when such Note has been sold pursuant to an effective registration statement under the Securities Act or transferred in compliance with Rule 144 under the Securities Act (or any successor provision thereto) or, if earlier, upon the expiration of the holding period applicable to sales thereof under Rule 144(k) under the Securities Act (or any successor provision). Any Note as to which such restrictions on transfer shall have expired in accordance with their terms or shall have terminated may, upon a surrender of such Note for exchange to the Registrar in accordance with the provisions of this Section 2.12 (accompanied, in the event that such restrictions on transfer have terminated by reason of a transfer in compliance with Rule 144 or any successor provision, by an opinion of counsel having substantial experience in practice under the Securities Act and otherwise reasonably acceptable 20 to the Company, addressed to the Company and in form acceptable to the Company, to the effect that the transfer of such Note has been made in compliance with Rule 144 or such successor provision), be exchanged for a new Note, of like tenor and aggregate principal amount, which shall not bear the restrictive Legend. The Company shall inform the Trustee of the effective date of any registration statement registering the Notes under the Securities Act. The Trustee shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the aforementioned opinion of counsel or registration statement. (d) As used in the preceding two paragraphs of this Section 2.12, the term "transfer" encompasses any sale, pledge, transfer, hypothecation or other disposition of any Note. (e) The provisions below shall apply only to Global Notes: (1) Notwithstanding any other provisions of this Indenture or the Notes, except as provided in Section 2.12(a)(ii), a Global Note shall not be exchanged in whole or in part for a Note registered in the name of any Person other than the Depositary or one or more nominees thereof, provided that a Global Note may be exchanged for Notes registered in the names of any person designated by the Depositary in the event that (i) the Depositary has notified the Company that it is unwilling or unable to continue as Depositary for such Global Note or such Depositary has ceased to be a "clearing agency" registered under the Exchange Act, and a successor Depositary is not appointed by the Company within 90 days or (ii) an Event of Default has occurred and is continuing with respect to the Notes. Any Global Note exchanged pursuant to clause (i) above shall be so exchanged in whole and not in part, and any Global Note exchanged pursuant to clause (ii) above may be exchanged in whole or from time to time in part as directed by the Depositary. Any Note issued in exchange for a Global Note or any portion thereof shall be a Global Note; provided that any such Note so issued that is registered in the name of a Person other than the Depositary or a nominee thereof shall not be a Global Note. (2) Notes issued in exchange for a Global Note or any portion thereof shall be issued in definitive, fully registered form, without interest coupons, shall have an aggregate principal amount equal to that of such Global Note or portion thereof to be so exchanged, shall be registered in such names and be in such authorized denominations as the Depositary shall designate and shall bear the applicable legends provided for herein. Any Global Note to be exchanged in whole shall be surrendered by the Depositary to the Trustee, as Registrar. With regard to any Global Note to be exchanged in part, either such Global Note shall be so surrendered for exchange or, if the Trustee is acting as custodian for the Depositary or its nominee with respect to such Global Note, the principal amount thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Trustee. Upon any such surrender or adjustment, the Trustee shall authenticate and deliver the Note issuable on such exchange to or upon the order of the Depositary or an authorized representative thereof. (3) Subject to the provisions of clause (5) below, the registered Holder may grant proxies and otherwise authorize any Person, including Agent Members (as defined 21 below) and persons that may hold interests through Agent Members, to take any action which a holder is entitled to take under this Indenture or the Notes. (4) In the event of the occurrence of any of the events specified in clause (1) above, the Company will promptly make available to the Trustee a reasonable supply of Certificated Notes in definitive, fully registered form, without interest coupons. (5) Neither any members of, or participants in, the Depositary (collectively, the "Agent Members") nor any other Persons on whose behalf Agent Members may act shall have any rights under this Indenture with respect to any Global Note registered in the name of the Depositary or any nominee thereof, or under any such Global Note, and the Depositary or such nominee, as the case may be, may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner and holder of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or such nominee, as the case may be, or impair, as between the Depositary, its Agent Members and any other person on whose behalf an Agent Member may act, the operation of customary practices of such Persons governing the exercise of the rights of a holder of any Note. (6) Each Holder of a Note agrees to indemnify the Trustee against any liability that may result from the transfer, exchange or assignment of such Holder's Note in violation of any provision of this Indenture and/or applicable United States Federal or state securities law. (7) The Trustee shall have no responsibility or obligation to any beneficial owner of an interest in a Global Note, a member of, or a participant in, DTC or other Person with respect to the accuracy of the records of DTC or its nominee or of any participant or member thereof, with respect to any ownership interest in the Notes or with respect to the delivery to any participant, member, beneficial owner or other Person (other than DTC) of any notice or the payment of any amount under or with respect to such Notes. (8) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note (including any transfers between or among Agent Members or beneficial owners of interests in any Global Note) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 2.13 CUSIP Numbers. The Company in issuing the Notes may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed 22 on the Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. SECTION 2.14 Defaulted Interest. If the Company defaults in a payment of interest on the Notes, it shall pay, or shall deposit with the Paying Agent, money in immediately available funds sufficient to pay, the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date. A special record date, as used in this Section 2.14 with respect to the payment of any defaulted interest, shall mean the 15th day next preceding the date fixed by the Company for the payment of defaulted interest, whether or not such day is a Business Day. At least 15 days before the subsequent special record date, the Company shall mail to each Holder and to the Trustee a notice that states the subsequent special record date, the payment date and the amount of defaulted interest to be paid. ARTICLE 3 REDEMPTION AND PURCHASES SECTION 3.01 Optional Redemption. The Notes are not redeemable prior to February 14, 2008. On and after February 14, 2008, the Company may, at its option, redeem the Notes for cash, in whole at any time or in part from time to time, on any date prior to maturity, upon notice as set forth in Section 3.04, at the following prices (expressed in percentages of the principal amount) (the "Redemption Price"), together with accrued and unpaid interest to, but excluding, the date fixed for redemption (the "Redemption Date"), subject to the right of Holders of record on the immediately preceding Regular Record Date to receive the interest due on the succeeding Interest Payment Date. During the twelve months commencing February 14 of the years set forth below:
Year Redemption Price ---- ---------------- 2008................................................. 102.1% 2009................................................. 101.0%
SECTION 3.02 Notice to Trustee. If the Company elects to redeem Notes pursuant to Section 3.01 hereof, it shall notify the Trustee at least 30 days prior but not more than 60 days prior to the Redemption Date of such intended Redemption Date, the principal amount of Notes to be redeemed and the CUSIP numbers of the Notes to be redeemed. SECTION 3.03 Selection of Notes to be Redeemed. If fewer than all the Notes are to be redeemed, the Trustee shall select the particular Notes to be redeemed from the outstanding Notes on a pro rata basis or by lot or in accordance with any other method of Trustee considers fair and appropriate. Notes and portions thereof that the Trustee selects shall be in principal amounts equal to $1,000 or any integral multiple thereof. 23 If any Note selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Note so selected, the converted portion of such Note shall be deemed to be first taken from the portion selected for redemption (provided, however, that the Holder of such Note so converted and deemed redeemed shall not be entitled to any additional interest payment as a result of such deemed redemption than such Holder would have otherwise been entitled to receive upon conversion of such Note). Notes which have been converted during a selection of Notes to be redeemed may be treated by the Trustee as outstanding for the purpose of such selection. The Trustee shall promptly notify the Company and the Registrar (if other than the Trustee) in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Notes shall relate, in the case of any Notes redeemed or to be redeemed only in part, to the portion of the principal amount of such Notes which has been or is to be redeemed. SECTION 3.04 Notice of Redemption. Notice of redemption shall be given in the manner provided in Section 13.02 hereof to the Holders of Notes to be redeemed. Such notice shall be given not less than 30 nor more than 60 days prior to the Redemption Date for redemption pursuant to Section 3.01. All notices of redemption shall state: (1) the Redemption Date; (2) the Redemption Price and interest accrued and unpaid to the Redemption Date, if any; (3) if fewer than all the outstanding Notes are to be redeemed, the aggregate principal amount of Notes to be redeemed and the aggregate principal amount of Notes which will be outstanding after such partial redemption; (4) that on the Redemption Date the Redemption Price and interest accrued and unpaid to the Redemption Date, if any, will become due and payable upon each such Note to be redeemed, and that (unless the Company defaults in making payment of the Redemption Price) interest thereon shall cease to accrue on and after such date; (5) the Conversion Rate, the date on which the right to convert the principal of the Notes to be redeemed will terminate and the places where such Notes may be surrendered for conversion; (6) in the event that the Shareholder Approval Condition shall have been satisfied, the election of the Company (which, subject to the provisions of Article 10 of this Indenture, shall be irrevocable) to pay the Cash Payment Component or to deliver shares of Common Stock in lieu of such Cash Payment Component with respect to any 24 Note (or portion thereof) that may be exchanged after mailing of such notice prior to the Redemption Date; (7) the place or places where such Notes are to be surrendered for payment of the Redemption Price and accrued and unpaid interest, if any; and (8) the CUSIP number of the Notes. The notice given shall specify the last date, if any be applicable, on which exchanges or transfers of Notes may be made pursuant to Section 2.06 hereof. Notice of redemption of Notes to be redeemed at the election of the Company shall be given by the Company. SECTION 3.05 Effect of Notice of Redemption. Notice of redemption having been given as provided in Section 3.04 hereof, the Notes so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued and unpaid interest) such Notes shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with such notice, such Note shall be paid by the Company at the Redemption Price plus accrued and unpaid interest, if any; provided, however, that the installments of interest on Notes whose Stated Maturity is prior to or on the Redemption Date shall be payable to the Holders of such Notes, or one or more Predecessor Notes, registered as such on the relevant Record Date according to their terms and the provisions of Section 2.01 hereof. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium, if any, shall, until paid, bear interest from the Redemption Date at the Interest Rate. SECTION 3.06 Deposit of Redemption Price. Prior to 10:00 a.m. (New York City time) on any Redemption Date, the Company shall deposit with the Trustee or with the Paying Agent (or, if the Company or a Subsidiary or an Affiliate of either of them is acting as the Paying Agent, shall segregate and hold in trust as provided in Section 2.04) an amount of money (in immediately available funds) sufficient to pay the Redemption Price of all the Notes to be redeemed on that Redemption Date, other than any Notes called for redemption on that date which have been converted prior to the date of such deposit, and accrued and unpaid interest, if any, on such Notes. If any Note called for redemption is converted, any money deposited with the Trustee or with the Paying Agent or so segregated and held in trust for the redemption of such Note shall (subject to any right of the Holder of such Note or any Predecessor Note to receive interest as provided in Section 4.01 hereof) be paid to the Company on a Company Request or, if then held by the Company, shall be discharged from such trust. SECTION 3.07 Notes Redeemed in Part. Any Note which is to be redeemed only in part shall be surrendered at an office or agency of the Company designated for that purpose pursuant to Section 4.05 hereof (with, if the Company or the Trustee so requires, 25 due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or the Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Note without service charge, a new Note or Notes of any authorized denomination as requested by such Holder in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Note so surrendered. SECTION 3.08 Conversion Arrangement on Call for Redemption. In connection with any redemption of Notes, the Company may arrange for the purchase and conversion of any Notes called for redemption by an agreement with one or more investment banks or other purchasers to purchase such Notes by paying to the Trustee in trust for the Noteholders, at or prior to 10:00 a.m. New York City time on the Redemption Date, an amount that, together with any amounts deposited with the Trustee by the Company for the redemption of such Notes, is not less than the Redemption Price of such Notes. Notwithstanding anything to the contrary contained in this Article 3, the obligation of the Company to pay the Redemption Price of such Notes shall be deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into, any Notes not duly surrendered for conversion by the Holders thereof may, at the option of the Company, be deemed, to the fullest extent permitted by law, acquired by such purchasers from such Holders and (notwithstanding anything to the contrary contained in Article 10) surrendered by such purchasers for conversion, all as of immediately prior to the close of business on the Redemption Date, subject to payment of the above amount as aforesaid. The Trustee shall hold and pay to the Holders whose Notes are selected for redemption any such amount paid to it for purchase and conversion in the same manner as it would moneys deposited with it by the Company for the redemption of Notes. Without the Trustee's prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Notes shall increase or otherwise affect any of the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture, and the Company agrees to indemnify the Trustee from, and hold it harmless against, any loss, liability or expense arising out of or in connection with any such arrangement for the purchase and conversion of any Notes between the Company and such purchasers, including the costs and expenses incurred by the Trustee in the defense of any claim or liability arising out of or in connection with the exercise or performance of any of its powers, duties, responsibilities or obligations under this Indenture with respect to such arrangement for the purchase and conversion of any Notes. SECTION 3.09 Repurchase of Notes at Option of the Holder upon Change of Control. (a) If there shall have occurred a Change of Control, all or any portion of the Notes of any Holder equal to $1,000 or an integral multiple of $1,000, not previously called for redemption, shall be repurchased by the Company, at the option of such Holder, at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, together with interest accrued and unpaid to, but excluding, the repurchase date (the "Change of Control Repurchase Price"), on the date (the "Change of Control Repurchase Date") that is 30 days after the Change of Control Repurchase Notice; provided, however, that installments of interest on Notes whose Stated Maturity is prior to or on the Change of Control Repurchase Date shall be payable to the Holders of such Notes, or one or more predecessor Notes, registered as such on the relevant Regular Record Date according to their terms. Such right to require the repurchase of the Notes shall not continue after a discharge of the Company from its obligations with respect 26 to the Notes in accordance with Article 8, unless a Change of Control shall have occurred prior to such discharge. Whenever in this Indenture (including without limitation Sections 2.01, 6.01(a) and 6.07 hereof) or Exhibits A-1 and A-2 annexed hereto there is a reference, in any context, to the principal of any Note as of any time, such reference shall be deemed to include reference to the Change of Control Repurchase Price payable in respect to such Note to the extent that such Change of Control Repurchase Price is, was or would be so payable at such time, and express mention of the Change of Control Repurchase Price in any provision of this Indenture shall not be construed as excluding the Change of Control Repurchase Price in those provisions of this Indenture when such express mention is not made. A "Change of Control" of the Company shall be deemed to have occurred at such time as any of the following events shall occur: (i) the acquisition by any person, including any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly (determined in accordance with Rule 13d-3 under the Exchange Act), through a purchase, merger or other acquisition transaction or series of transactions of shares of the Capital Stock of the Company entitling that person to exercise 50% or more of the total voting power of all shares of Capital Stock entitled to vote generally in elections of directors, other than any acquisition by the Company, any of its Subsidiaries or any of its employee benefit plans; (ii) any consolidation or merger of the Company with or into any other person, any merger of another person into the Company, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of the Company's properties and assets to another person, other than: (1) any transaction (A) that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of the Company's Capital Stock and (B) pursuant to which holders of the Company's Capital Stock immediately prior to the transaction are entitled to exercise, directly or indirectly, 50% or more of the total voting power of all shares of the Company's Capital Stock entitled to vote generally in the election of directors of the continuing or surviving person immediately after the transaction; or (2) any merger solely for the purpose of changing the Company's jurisdiction of incorporation and resulting in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock of the surviving entity; (iii) during any consecutive two-year period, individuals who at the beginning of that two-year period constituted the Company's board of directors (together with any new directors whose election to such board of directors, or whose nomination for election by the Company's stockholders, was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose 27 election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Company's board of directors then in office; or (iv) the Company is liquidated or dissolved or the Company's stockholders pass a special resolution approving a plan of liquidation or dissolution and no additional approvals of the Company's stockholders are required under applicable law to cause a liquidation or dissolution. (b) Unless the Company shall have theretofore called for redemption all of the outstanding Notes, prior to or on the 30th day after the occurrence of a Change of Control, the Company, or, at the written request and expense of the Company, the Trustee, shall give to all Noteholders, in the manner provided in Section 13.02 hereof, notice of the occurrence of the Change of Control and of the repurchase right set forth herein arising as a result thereof. If the Trustee is requested to give such notice the Company will provide the written request at least one Business Day prior. The Company shall also deliver a copy of such notice of a repurchase right to the Trustee. The notice shall include a form of Change of Control Repurchase Notice (as defined in Section 3.9(c)) to be completed by the Noteholder and shall state: (1) briefly, the events causing a Change of Control and the date of such Change of Control; (2) the date by which the Change of Control Repurchase Notice pursuant to this Section 3.09 must be given; (3) the Change of Control Repurchase Date; (4) the Change of Control Repurchase Price; (5) the name and address of the Paying Agent and the Conversion Agent; (6) the Conversion Rate and any adjustments thereto; (7) that Notes as to which a Change of Control Repurchase Notice has been given may be converted pursuant to Article 10 hereof only if the Change of Control Repurchase Notice has been withdrawn in accordance with the terms of this Indenture; (8) that Notes must be surrendered to the Paying Agent to collect payment of the Change of Control Repurchase Price; (9) that the Change of Control Repurchase Price for any Note as to which a Change of Control Repurchase Notice has been duly given and not withdrawn will be paid promptly following the later of the Change of Control Repurchase Date and the time of surrender of such Note as described in (8) above; (10) briefly, the procedures the Holder must follow to exercise rights under this Section 3.09; (11) briefly, the conversion rights of the Notes; 28 (12) the procedures for withdrawing a Change of Control Repurchase Notice; (13) that, unless the Company defaults in making payment of such Change in Control Repurchase Price, interest on Notes surrendered for repurchase will cease to accrue on and after the Change of Control Repurchase Date; and (14) the CUSIP number of the Notes. (c) A Holder may exercise its rights specified in Section 3.09(a) hereof upon delivery of a written notice of purchase (a "Change of Control Repurchase Notice") to the Paying Agent at any time prior to the close of business on the Change of Control Repurchase Date, stating: (1) the certificate number of the Note which the Holder will deliver to be purchased (unless such Note is held in book-entry form); (2) the portion of the principal amount of the Note which the Holder will deliver to be purchased, which portion must be $1,000 or an integral multiple thereof; and (3) that such Note shall be purchased pursuant to the terms and conditions specified in paragraph 7 of the Notes. The delivery of such Note to the Paying Agent prior to, on or after the Change of Control Repurchase Date (together with all necessary endorsements) at the offices of the Paying Agent shall be a condition to the receipt by the Holder of the Change of Control Repurchase Price therefor; provided, however, that such Change of Control Repurchase Price shall be so paid pursuant to this Section 3.09 only if the Note so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Change of Control Repurchase Notice. The Company shall purchase from the Holder thereof, pursuant to this Section 3.09, a portion of a Note if the principal amount of such portion is $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to the purchase of all of a Note also apply to the purchase of such portion of such Note. Any purchase by the Company contemplated pursuant to the provisions of this Section 3.09 shall be consummated by the delivery of the consideration to be received by the Holder promptly following the later of the Change of Control Repurchase Date and the time of delivery of the Note to the Paying Agent in accordance with this Section 3.09. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Change of Control Repurchase Notice contemplated by this Section 3.09(c) shall have the right to withdraw such Change of Control Repurchase Notice at any time prior to the close of business on the Change of Control Repurchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 3.10. The Paying Agent shall promptly notify the Company of the receipt by it of any Change of Control Repurchase Notice or written withdrawal thereof. 29 SECTION 3.10 Effect of Change of Control Repurchase Notice. Upon receipt by the Paying Agent of the Change of Control Repurchase Notice specified in Section 3.09(c), the Holder of the Note in respect of which such Change of Control Repurchase Notice was given shall (unless such Change of Control Repurchase Notice is withdrawn as specified in the following two paragraphs) thereafter be entitled to receive solely the Change of Control Repurchase Price with respect to such Note. Such Change of Control Repurchase Price shall be paid to such Holder, subject to receipts of funds and/or Notes by the Paying Agent, promptly following the later of (x) the Change of Control Repurchase Date with respect to such Note (provided the conditions in Section 3.09(c) have been satisfied) and (y) the time of delivery of such Note to the Paying Agent by the Holder thereof in the manner required by Section 3.09(c). Notes in respect of which a Change of Control Repurchase Notice, has been given by the Holder thereof may not be converted pursuant to Article 10 hereof on or after the date of the delivery of such Change of Control Repurchase Notice unless such Change of Control Repurchase Notice has first been validly withdrawn as specified in the following two paragraphs. A Change of Control Repurchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the office of the Paying Agent in accordance with the Change of Control Repurchase Notice at any time prior to the close of business on the Change of Control Repurchase Date specifying: (1) the certificate number of the Note in respect of which such notice of withdrawal is being submitted (or such other information as is necessary to identify the holder, with respect to a book-entry transfer), (2) the principal amount of the Note with respect to which such notice of withdrawal is being submitted, and (3) the principal amount, if any, of such Note which remains subject to the original Change of Control Repurchase Notice and which has been or will be delivered for purchase by the Company. There shall be no repurchase of any Notes pursuant to Section 3.09 if there has occurred (prior to, on or after, as the case may be, the giving, by the Holders of such Notes, of the required Change of Control Repurchase Notice) and is continuing an Event of Default (other than a default in the payment of the Change of Control Repurchase Price with respect to such Notes). The Paying Agent will promptly return to the respective Holders thereof any Notes (x) with respect to which a Change of Control Repurchase Notice has been withdrawn in compliance with this Indenture, or (y) held by it during the continuance of an Event of Default (other than a default in the payment of the Change of Control Repurchase Price with respect to such Notes) in which case, upon such return, the Change of Control Repurchase Notice with respect thereto shall be deemed to have been withdrawn. SECTION 3.11 Deposit of Change of Control Repurchase Price. Prior to 10:00 a.m. (New York City time) on the Business Day following the Change of Control Repurchase Date, the Company shall deposit with the Trustee or with the Paying Agent (or, if the Company or a Subsidiary or an Affiliate of either of them is acting as the Paying Agent, shall segregate and hold in trust as provided in Section 2.04) an amount of money (in immediately 30 available funds if deposited on such Business Day) sufficient to pay the aggregate Change of Control Repurchase Price of all the Notes or portions thereof which are to be purchased as of the Change of Control Repurchase Date. SECTION 3.12 Notes Purchased in Part. Any Note which is to be purchased only in part shall be surrendered at the office of the Paying Agent (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Note, without service charge, a new Note or Notes, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Note so surrendered which is not purchased. SECTION 3.13 Covenant to Comply with Securities Laws upon Purchase of Notes. In connection with any offer to purchase or repurchase Notes under Section 3.09 hereof (provided that such offer or purchase constitutes an "issuer tender offer" for purposes of Rule 13e-4 (which term, as used herein, includes any successor provision thereto) under the Exchange Act at the time of such offer or purchase), the Company shall (i) comply with Rule 13e-4, Rule 14e-1 and any other tender offer rules under the Exchange Act which may then be applicable, (ii) file the related Schedule 13E-3 (or any successor schedule, form or report) or any other schedule required under the Exchange Act, and (iii) otherwise comply with all federal and state securities laws so as to permit the rights and obligations under Section 3.09 to be exercised in the time and in the manner specified in Section 3.09. SECTION 3.14 Repayment to the Company. The Trustee and the Paying Agent shall return to the Company any cash that remains unclaimed as provided in paragraph 13 of the Notes, together with interest, if any, thereon, held by them for the payment of the Change of Control Repurchase Price; provided, however, that to the extent that the aggregate amount of cash deposited by the Company pursuant to Section 3.11 exceeds the aggregate Change of Control Repurchase Price of the Notes or portions thereof which the Company is obligated to purchase as of the Change of Control Repurchase Date then promptly after the Business Day following the Change of Control Repurchase Date the Trustee shall return any such excess to the Company together with interest or dividends, if any, thereon. ARTICLE 4 COVENANTS SECTION 4.01 Payment of Principal, Premium, Interest on the Notes. The Company will duly and punctually pay the principal of and premium, if any, and interest (including Additional Interest Amounts, if any) in respect of the Notes in accordance with the terms of the Notes and this Indenture. The Company will deposit or cause to be deposited with the Trustee, no later than the day of the Stated Maturity of any Note or installment of interest, all payments so due. Principal amount, Redemption Price, Change of Control Repurchase Price, and cash interest shall be considered paid on the applicable date due if on such date (or, in the case of a Change of Control Repurchase Price on the Business Day following the applicable 31 Change of Control Repurchase Date) the Trustee or the Paying Agent holds, in accordance with this Indenture, money or Notes, if permitted hereunder, sufficient to pay all such amounts then due. The Company shall, to the extent permitted by law, pay cash interest on overdue amounts at the rate per annum set forth in paragraph 1 of the Notes, which interest shall accrue from the date such overdue amount was originally due to the date payment of such amount, including interest thereon, has been made or duly provided for. All such interest shall be payable on demand. SECTION 4.02 SEC and Other Reports. The Company shall file with the Trustee, within 15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. Such reports shall be provided at the times the Company would have been required to provide reports had it continued to have been subject to such reporting requirements. The Company also shall comply with the other provisions of TIA Section 314(a). Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on an Officers' Certificate). SECTION 4.03 Compliance Certificate. The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company (beginning with the fiscal year ending on December 31, 2003) an Officer's Certificate, stating whether or not to the best knowledge of the signer thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 4.04 Further Instruments and Acts. Upon request of the Trustee, the Company 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 purposes of this Indenture. SECTION 4.05 Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, the City of New York, an office or agency of the Trustee, Registrar, Paying Agent and Conversion Agent where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer, exchange, purchase, redemption or conversion and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The principal corporate trust office of The Bank of New York, located at 101 Barclay Street, 8W, New York, NY 10286, attention: Corporate Trust Division, shall initially be such office or agency for all of the aforesaid purposes. The Company shall give prompt written notice to the Trustee of the location, and of any change in the location, of any such office or agency (other than a change in the location of the office of the Trustee). If 32 at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 13.02. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York, for such purposes. SECTION 4.06 Delivery of Certain Information. At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, upon the request of a holder or any beneficial holder of Notes or shares of Common Stock issued upon conversion thereof, the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder or any beneficial holder of Notes or holder of shares of Common Stock issued upon conversion of Notes, or to a prospective purchaser of any such security designated by any such holder, as the case may be, to the extent required to permit compliance by such Holder or holder with Rule 144A under the Securities Act in connection with the resale of any such security. "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act. SECTION 4.07 Additional Interest Notice. In the event the Company is required to pay amounts pursuant to the terms hereof, the Company shall provide a notice (an "Additional Interest Payment Notice") to the Trustee of its obligation to pay an Additional Interest Amount no later than fifteen days prior to the payment date for the Additional Interest Amount, and the Additional Interest Payment Notice shall set forth the dividend per share of Common Stock payable by the Company on the Common Stock on the related record date, the related dividend payment date, the aggregate amount of Additional Interest Amounts to be paid and the amount of Additional Interest Amount to be paid for each $1,000 principal amount of Notes by the Company on such payment date. The Trustee shall not at any time be under a duty or owe a responsibility to any holder of the Notes to determine the amount of the Additional Interest Amount, or with respect to the nature, extent or calculation of the amount of Additional Interest Amounts when made, or with respect to the method employed in such calculation of the Additional Interest Amounts. ARTICLE 5 MERGERS AND SALES OF ASSETS SECTION 5.01 When Company May Merge or Transfer Assets. The Company shall not consolidate with, merge with or into any other person or convey, transfer or lease its properties and assets substantially as an entirety to any person, unless: (a) either (1) the Company shall be the continuing corporation or (2) the person (if other than the Company) formed by such consolidation or into which the Company is merged or the person which acquires by conveyance, transfer or lease the properties and assets of the Company substantially as an entirety (i) shall be organized and validly existing under the laws of 33 the United States or any State thereof or the District of Columbia and (ii) shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, all of the obligations of the Company under the Notes and this Indenture; (b) at the time of such transaction, no Event of Default and no event which, after notice or lapse of time, would become an Event of Default, shall have happened and be continuing; and (c) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, comply with this Article 5 and that all conditions precedent herein provided for relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by assignment, sale or otherwise) of the properties and assets of one or more Subsidiaries (other than to the Company or another Subsidiary), which, if such assets were owned by the Company, would constitute all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. The successor person formed by such consolidation or into which the Company is merged or the successor person to which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor had been named as the Company herein; and thereafter, except in the case of obligations the Company may have under a supplemental indenture pursuant to Section 10.11, the Company shall be discharged from all obligations and covenants under this Indenture and the Notes. Subject to Section 9.06, the Company, the Trustee and the successor person shall enter into a supplemental indenture to evidence the succession and substitution of such successor person and such discharge and release of the Company. ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01 Events of Default. An "Event of Default" occurs if: (1) the Company fails to pay when due the principal of or premium, if any, on any of the Notes at maturity, upon redemption or exercise of a repurchase right or otherwise; (2) the Company fails to pay an installment of interest (including Liquidated Damages Amounts and Additional Interest Amounts, if any) on any of the Notes that continues for 30 days after the date when due, provided that a failure to make or provide for the payment of any of the first five scheduled interest payments on the Notes within three Business Days after an Interest Payment Date will constitute an Event of Default with no additional grace or cure period; 34 (3) the Company fails to (A) deliver shares of Common Stock, together with cash in lieu of fractional shares, when such Common Stock or cash in lieu of fractional shares is required to be delivered upon conversion of a Note, or (B) make payment of the Cash Payment Component when such cash is required to be delivered upon conversion of a Note, and, in each case, that failure continues for 10 days after the relevant delivery date; (4) the Company fails to perform or observe any other term, covenant or agreement contained in the Notes or this Indenture for a period of 60 days after receipt by the Company of a Notice of Default (as defined in this Section 6.01); (5) (A) the Company or any Significant Subsidiary fails to pay at maturity (after giving effect to any applicable grace period) any Indebtedness in an aggregate principal amount in excess of $10 million or (B) any of the Company's Indebtedness, or Indebtedness of any Significant Subsidiary, aggregating $10 million or more shall have been accelerated and declared due and payable prior to the scheduled maturity thereof, and such acceleration is not rescinded or annulled within a 30-day period after the date of such acceleration; (6) the Company or any Significant Subsidiary pursuant to or under or within the meaning of any Bankruptcy Law: (A) commences a voluntary case or proceeding; (B) consents to the entry of an order for relief against it in an involuntary case or proceeding or the commencement of any case against it; (C) consents to the appointment of a Custodian of it or for any substantial part of its property; (D) makes a general assignment for the benefit of its creditors; (E) files a petition in bankruptcy or answer or consent seeking reorganization or relief; or (F) consents to the filing of such a petition or the appointment of or taking possession by a Custodian; and (7) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary in an involuntary case or proceeding, or adjudicates the Company or any Significant Subsidiary insolvent or bankrupt; (B) appoints a Custodian of the Company or any Significant Subsidiary or for any substantial part of its or their properties; or 35 (C) orders the winding up or liquidation of the Company or any Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 days. "Bankruptcy Law" means Title 11, United States Code, or any similar federal or state law for the relief of debtors. "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. (8) the Pledge Agreement shall cease to be in full force and effect or enforceable in accordance with its terms, prior to the termination thereof in accordance with Section 18 of the Pledge Agreement. A Default under clause (4) above is not an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in aggregate principal amount of the Notes at the time outstanding notify the Company and the Trustee, of the Default and the Company does not cure such Default (and such Default is not waived) within the time specified in clause (4) above after actual receipt of such notice. Any such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default". The Company will deliver to the Trustee, within five Business Days of becoming aware of the occurrence of an Event of Default, written notice thereof. In addition, the Company shall deliver to the Trustee, within 30 days after it becomes aware of the occurrence thereof, written notice of any event which with the lapse of time would become an Event of Default under clause (4) above, its status and what action the Company is taking or proposes to take with respect thereto. SECTION 6.02 Acceleration. If an Event of Default (other than an Event of Default specified in Section 6.01(6) or (7)) occurs and is continuing, the Trustee by Notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Notes at the time outstanding by notice to the Company and the Trustee, may declare the notes due and payable at their principal amount together with accrued and unpaid interest. Upon a declaration of acceleration, such principal and accrued and unpaid interest to the date of payment shall be immediately due and payable. If an Event of Default specified in Section 6.01(6) or (7) above occurs and is continuing, then the principal and the interest on all the Notes shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Noteholders. The Holders of a majority in aggregate principal amount of the Notes at the time outstanding, by notice to the Trustee (and without notice to any other Noteholder) may rescind or annul an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of the principal and any accrued cash interest that have become due solely as a result of acceleration 36 and if all amounts due to the Trustee under Section 7.06 have been paid. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03 Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of the principal, the premium, if any, and any accrued cash interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if the Trustee does not possess any of the Notes or produce any of the Notes in the proceeding. A delay or omission by the Trustee or any Noteholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of, or acquiescence in, the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.04 Waiver of Past Defaults. The Holders of a majority in aggregate principal amount of the Notes at the time outstanding, by notice to the Trustee (and without notice to any other Noteholder), may waive an existing Default and its consequences except (a) an Event of Default described in Section 6.01(1) or (2), (b) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Noteholder affected or (c) a Default which consists of a failure to convert any Note in accordance with the terms of Article 10. When a Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. This Section 6.04 shall be in lieu of Section 316(a)1(B) of the TIA and such Section 316(a)1(B) is hereby expressly excluded from this Indenture, as permitted by the TIA. SECTION 6.05 Control by Majority. The Holders of a majority in aggregate principal amount of the Notes at the time outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or that the Trustee determines in good faith is unduly prejudicial to the rights of other Noteholders or would involve the Trustee in personal liability unless the Trustee is offered indemnity satisfactory to it against loss, liability or expense. This Section 6.05 shall be in lieu of Section 316(a)1(A) of the TIA and such Section 316(a)1(A) is hereby expressly excluded from this Indenture, as permitted by the TIA. SECTION 6.06 Limitation on Suits. A Noteholder may not pursue any remedy with respect to this Indenture or the Notes unless: (1) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; (2) the Holders of at least 25% in aggregate principal amount of the Notes at the time outstanding make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee reasonable indemnity satisfactory to the Trustee against any loss, liability or expense; 37 (4) the Trustee does not comply with the request within 60 days after receipt of such notice, request and offer of indemnity; and (5) the Holders of a majority in aggregate principal amount of the Notes at the time outstanding do not give the Trustee a direction inconsistent with the request during such 60-day period. A Noteholder may not use this Indenture to prejudice the rights of any other Noteholder or to obtain a preference or priority over any other Noteholder. SECTION 6.07 Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of the principal amount, premium, if any, plus Redemption Price, Change of Control Repurchase Price or any accrued cash interest (including Additional Interest Amounts, if any) in respect of the Notes held by such Holder, on or after the respective due dates expressed in the Notes or any Redemption Date, and to convert the Notes in accordance with Article 10, or to bring suit for the enforcement of any such payment on or after such respective dates or the right to convert, shall not be impaired or affected adversely without the consent of such Holder. SECTION 6.08 Collection Suit by Trustee. If an Event of Default described in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount owing with respect to the Notes and the amounts provided for in Section 7.06. SECTION 6.09 Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Notes or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal amount, Redemption Price, Change of Control Repurchase Price or any accrued cash interest in respect of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of any such amount) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of the principal amount, Redemption Price, Change of Control Repurchase Price or any accrued cash interest (including, without limitation, Additional Interest Amounts) and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel or any other amounts due the Trustee under Section 7.06) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such 38 payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.06. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10 Priorities. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: (1) to the Trustee for amounts due under Section 7.06; (2) to Noteholders for amounts due and unpaid on the Notes for the principal amount, Redemption Price, Change of Control Purchase Price or any accrued cash interest (including Additional Interest Amounts, if any) as the case may be, ratably, without preference or priority of any kind, according to such amounts due and payable on the Notes; and (3) the balance, if any, to the Company. The Trustee may fix a record date and payment date for any payment to Noteholders pursuant to this Section 6.10. At least 15 days before such record date, the Trustee shall mail to each Noteholder and the Company a notice that states the record date, the payment date and the amount to be paid. SECTION 6.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant (other than the Trustee) in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in aggregate principal amount of the Notes at the time outstanding. This Section 6.11 shall be in lieu of Section 315(e) of the TIA and such Section 315(e) is hereby expressly excluded from this Indenture, as permitted by the TIA. SECTION 6.12 Waiver of Stay, Extension or Usury Laws. The Company 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 or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company from paying all or any portion of the principal amount, Redemption Price, Change of Control Repurchase Price or any accrued cash interest (including Additional Interest Amounts, if any) in respect of Notes, or any interest on such amounts, as contemplated herein, or which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives 39 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 Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 7 TRUSTEE SECTION 7.01 Duties and Responsibilities of the Trustee; During Default; Prior to Default. (a) The Trustee, prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all such Events of Default which may have occurred, (1) 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 Trustee; and (2) in the absence of bad faith on its part, 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 Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. In case an Event of Default hereunder has occurred (which has not been cured or waived), the Trustee shall exercise such of 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 man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (b) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all such Events of Default which may have occurred: (i) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such statements, certificates or opinions which by any provision 40 hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (c) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (d) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders pursuant to Section 6.05 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers. The provisions of this Section 7.01 are in furtherance of and subject to Sections 315 and 316 of the TIA. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 7.01. SECTION 7.02 Certain Rights of the Trustee. In furtherance of and subject to the TIA and subject to Section 7.01: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, Officers' Certificate or any other certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon, Note or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the secretary or an assistant secretary of the Company; (c) the Trustee may consult with counsel of its selection and any advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in reliance thereon; (d) the Trustee shall be under no obligation to exercise any of the trusts or powers vested in it by this Indenture at the request, order or direction of any of the Noteholders pursuant to the provisions of this Indenture, unless such Noteholders shall have offered to the Trustee security or indemnity satisfactory to the Trustee against the 41 costs, expenses and liabilities which might be incurred by it in compliance with such request, order or direction; (e) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the sole cost of the Company and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder; (h) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence by herein specifically prescribed) may, in the absence of bad faith on its part, conclusively rely upon an Officers' Certificate; (i) the Trustee shall not be deemed to have or be charged with knowledge of any Default or Event of Default unless a Responsible Officer of the Trustee has received at the Corporate Trust Office of the Trustee written notice of such Default or Event of Default, as the case may be, from the Company or any Holder of the Notes, and such notice references the Notes and this Indenture; (j) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder; (k) the Trustee may request that the Company deliver an Officers' Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers' Certificate may be signed by any person authorized to sign an Officers' Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded; (l) the permissive right of the Trustee to take action under this Indenture shall not be construed as a duty. 42 SECTION 7.03 Trustee Not Responsible for Recitals, Disposition of Notes or Application of Proceeds Thereof. The recitals contained herein and in the Notes, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of any of the Notes or of the proceeds thereof. SECTION 7.04 Trustee and Agents May Hold Notes; Collections, etc. The Trustee or any agent of the Company or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Notes with the same rights it would have if it were not the Trustee or such agent and, subject to Sections 7.07 and 7.12, if operative, may otherwise deal with the Company and receive, collect, hold and retain collections from the Company with the same rights it would have if it were not the Trustee or such agent. SECTION 7.05 Moneys Held by Trustee. All moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by mandatory provisions of law. Neither the Trustee nor any agent of the Company or the Trustee shall be under any liability for interest on any moneys received by it hereunder except as may otherwise be agreed in writing with the Company. SECTION 7.06 Compensation and Indemnification of Trustee and Its Prior Claim. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) to be agreed to in writing by the Trustee and the Company, and the Company covenants and agrees to pay or reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of it in accordance with any of the provisions of this Indenture (including (i) the reasonable compensation and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ and (ii) interest at the prime rate on any disbursements and advances made by the Trustee and not paid by the Company within 5 days after receipt of an invoice for such disbursement or advance) except any such expense, disbursement or advance as may arise from its negligence or willful misconduct. The Company also covenants to indemnify the Trustee and each predecessor Trustee for, and to hold them harmless against, any loss, liability or expense incurred without negligence or willful misconduct on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including the costs and expenses of defending itself against or investigating any claim of liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the Company under this Section 7.06 to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture, the resignation or removal of the Trustee and the termination of the Indenture. Such additional indebtedness shall be a senior claim to that of the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the Holders of particular Notes, and the Notes are hereby effectively subordinated to 43 such senior claim to such extent. The provisions of this Section 7.06 shall survive the satisfaction and discharge of this Indenture, the resignation or removal of the Trustee and the termination, for any reason, of this Indenture. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 6.01 or in connection with Article 6 hereof, the expenses (including the reasonable fees and expenses of its counsel) and the compensation for services in connection therewith are to constitute expenses of administration under any Bankruptcy Law. SECTION 7.07 Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the TIA, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the TIA. For purposes of Section 310(b)(1) of the Trust Indenture Act and to the extent permitted thereby, the Trustee shall not be deemed to have a conflicting interest arising from its capacity as trustee in respect of any series of securities issued under the Indenture, dated as May 1, 2000, by and between the Company and The Bank of New York, as trustee, or any securities issued under or in connection with the Purchase Contract Agreement dated as of November 16, 2001, between the Company and The Bank of New York, as purchase contract agent. SECTION 7.08 Persons Eligible for Appointment as Trustee. The Trustee shall at all times be a corporation or banking association having a combined capital and surplus of at least $50,000,000. If such corporation or banking association publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then, for the purposes of this Section 7.08, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 7.08, the Trustee shall resign immediately in the manner and with the effect specified in Section 7.09. SECTION 7.09 Resignation and Removal; Appointment of Successor Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign with respect to one or more or all series of Notes by giving written notice of resignation to the Company and by mailing notice thereof by first class mail to the Holders of Notes at their last addresses as they shall appear on the Note register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees by written instrument in duplicate, executed by authority of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee or trustees. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Noteholder who has been a bona fide Holder of a Note for at least six months may, subject to the provisions of Section 7.10, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: 44 (i) the Trustee shall fail to comply with the provisions of Section 7.07 with respect to any Notes after written request therefor by the Company or by any Noteholder who has been a bona fide Holder of a Note for at least six months; or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 7.08 and shall fail to resign after written request therefor by the Company or by any Noteholder; or (iii) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or a receiver or liquidator of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors of the Company, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 7.10, any Noteholder who has been a bona fide Holder of a Note for at least six months may on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. If no successor trustee shall have been appointed and have accepted appointment within 30 days after a notice of removal has been given, the removed trustee may, at the cost and expense of the Company, petition a court of competent jurisdiction for the appointment of a successor trustee. (c) The Holders of a majority in aggregate principal amount of the Notes at the time outstanding may at any time remove the Trustee and appoint a successor trustee by delivering to the Trustee so removed, to the successor trustee so appointed and to the Company the evidence provided for in Section 1.05 of the action in that regard taken by the Noteholders. (d) Any resignation or removal of the Trustee and any appointment of a successor trustee pursuant to any of the provisions of this Section 7.09 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 7.10. SECTION 7.10 Acceptance of Appointment by Successor Trustee. Any successor trustee appointed as provided in Section 7.09 shall execute and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee hereunder; but, nevertheless, on the written request of the Company or of the successor trustee, upon payment of its charges then unpaid, the trustee ceasing to act shall pay over to the successor trustee all moneys at the time held by it hereunder and shall execute and deliver an instrument transferring to such 45 successor trustee all such rights, powers, duties and obligations. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a prior claim pursuant to Section 7.06 upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 7.06. No successor trustee shall accept appointment as provided in this Section 7.10 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 7.07 and eligible under the provisions of Section 7.08. Upon acceptance of appointment by any successor trustee as provided in this Section 7.10, the Company shall mail notice thereof by first class mail to the Holders of Notes at their last addresses as they shall appear in the register. If the acceptance of appointment is substantially contemporaneous with the resignation, then the notice called for by the preceding sentence may be combined with the notice called for by Section 7.09. If the Company fails to mail such notice within ten days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. SECTION 7.11 Merger, Conversion, Consolidation or Succession to Business of Trustee. Any corporation or banking association into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation or banking association resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation or banking association succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such corporation or banking association shall be qualified under the provisions of Section 7.07 and eligible under the provisions of Section 7.08, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case at the time such successor to the 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 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 Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force and effect that this Indenture provides for the certificate of authentication of the Trustee; provided, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Notes in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 7.12 Preferential Collection of Claims Against the Company. The Trustee shall comply with the provisions of Section 311 of the TIA. SECTION 7.13 Reports by the Trustee. (a) The Trustee shall transmit to Holders and other persons such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the TIA on or before July 15 in each year that such report is required, such reports to be dated as of the immediately preceding May 15. (b) A copy of each such report shall, at the time of such transmission to Noteholders, be furnished to the Company and be filed by the Trustee with each stock exchange 46 upon which the Notes are listed and also with the SEC. The Company agrees to notify promptly the Trustee when and as the Notes become admitted to trading on any national securities exchange and of any delisting thereof. SECTION 7.14 Trustee to Give Notice of Default, But May Withhold in Certain Circumstances. The Trustee shall transmit to the Noteholders, as the names and addresses of such Holders appear on the Note register, notice by mail of all Defaults known to the Trustee which have occurred, such notice to be transmitted within 90 days after the occurrence thereof, unless such defaults shall have been cured before the giving of such notice; provided that, except in the case of Default in the payment of the principal of, interest on, or other similar obligation with respect to, any of the Notes, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors or trustees and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the best interests of the Noteholders. ARTICLE 8 SATISFACTION AND DISCHARGE OF INDENTURE SECTION 8.01 Termination of the Company's Obligations. Except as otherwise provided in this Section 8.01 and in Section 8.05 hereof, the Company may terminate its obligations under the Notes and this Indenture if: (i) all Notes previously authenticated and delivered (other than destroyed, lost or stolen Notes that have been replaced or Notes that are paid pursuant to Section 2.07 hereof or Notes for whose payment money or securities have theretofore been held in trust and thereafter repaid to the Company, as provided in Section 8.03 hereof) have been delivered to the Trustee for cancellation and the Company has paid all sums payable by it hereunder; or (ii) (A) all of the Notes mature within one year or all of them are to be called for redemption within one year under arrangements satisfactory to the Trustee for giving the notice of redemption, (B) the Company deposits in trust with the Trustee during such one-year period, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds solely for the benefit of the Holders for that purpose, money or U.S. Government Obligations sufficient to pay principal, premium, if, any, and interest on the Notes to maturity or redemption, as the case may be, and to pay all other sums payable by it hereunder, (C) no Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit, (D) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound and (E) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the satisfaction and discharge of this Indenture have been complied with. 47 With respect to the foregoing clause (i), the Company's obligations under Section 7.06 hereof shall survive. With respect to the foregoing clause (ii), the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 4.01, 4.05, 7.06, 7.09 and 8.03 and in Article 10 of this Indenture shall survive until the Notes are no longer outstanding. Thereafter, only the Company's obligations in Sections 7.06 and 8.03 of this Indenture shall survive. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations, as the case may be, under the Notes and this Indenture, except for those surviving obligations specified above. SECTION 8.02 Application of Trust Money. The Trustee or Paying Agent shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.01 and shall apply the deposited money and the money from U.S. Government Obligations in accordance with the Notes and this Indenture to the payment of principal of, premium, if any, and interest on the Notes; but such money need not be segregated from other funds except to the extent required by law. SECTION 8.03 Reinstatement. If the Trustee or the Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.01 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.01 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.01; provided that, if the Company has made any payment of principal of, premium, if any, or interest on any Notes because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. SECTION 8.04 Repayment of the Company. The Trustee and the Paying Agent shall return to the Company upon written request any money or securities held by them for the payment of any amount with respect to the Notes that remains unclaimed for two years, subject to applicable unclaimed property law. After return to the Company, Holders entitled to the money or securities must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person and the Trustee and the Paying Agent shall have no further liability to the Noteholders with respect to such money or securities for that period commencing after the return thereof. SECTION 8.05 Conversion of Notes Upon Discharge. Notwithstanding any satisfaction or discharge of this Indenture pursuant to the provisions of this Article 8, for so long as any of the Notes are outstanding, the conversion right of Noteholders set forth in this Indenture shall not expire until the close of business on February 14, 2010 and the Company shall remain obligated to issue duly authorized, fully paid and nonassessable shares of Common Stock upon conversion of the Notes in accordance with the terms of this Indenture. 48 ARTICLE 9 AMENDMENTS SECTION 9.01 Without Consent of Holders. The Company and the Trustee may amend this Indenture or the Notes without the consent of any Noteholder for the purposes of, among other things: (1) adding to the Company's covenants or obligations under this Indenture for the benefit of the Holders; (2) surrendering any right, power or option conferred upon the Company by this Indenture; (3) providing for conversion rights of Holders if any reclassification or change of Common Stock or any consolidation, merger or sale of all or substantially all of the Company's assets occurs; (4) providing for the assumption of the Company's obligations to the Holders in the case of a merger, consolidation, conveyance, transfer or lease; (5) increasing the Conversion Rate, provided that the increase will not adversely affect the interests of Holders in any material respect; (6) complying with the requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA; (7) making any changes or modifications to this Indenture necessary in connection with the registration of the Notes under the Securities Act as contemplated by the registration rights agreement, provided that this action does not adversely affect the interests of the Holders in any material respect; (8) curing any ambiguity or correcting or supplementing any defective provision contained in this Indenture; provided that such modification or amendment does not, in the good faith opinion of the Board of Directors, adversely affect the interests of the Holders in any material respect; (9) adding or modifying any other provisions which the Company may deem necessary or desirable and which will not adversely affect the interests of the Holders in any material respect; or (10) to evidence and provide for the acceptance of appointment of a successor Trustee. SECTION 9.02 With Consent of Holders. With the written consent of the Holders of at least a majority in aggregate principal amount of the Notes at the time outstanding, the Company and the Trustee may amend this Indenture or the Notes. However, without the consent of each Noteholder affected, an amendment to this Indenture or the Notes may not: 49 (1) change the maturity of the principal of or any installment of interest on any Note (including any payment of Liquidated Damages Amounts); (2) reduce the principal amount of, or any premium or interest on (including any payment of Liquidated Damages Amounts or Additional Interest Amounts), any Note; (3) change the currency of payment of such Note or interest thereon; (4) impair the right to institute suit for the enforcement of any payment on or with respect to any Note; (5) except as otherwise permitted or contemplated by provisions concerning corporate reorganizations, adversely affect the repurchase option of Holders upon a Change of Control or the conversion rights of Holders; (6) modify the provisions relating to the pledge of securities in Article 12 hereof, in a manner that adversely affects the interests of the Holders; or (7) reduce the percentage in aggregate principal amount of Notes outstanding necessary to modify or amend this Indenture or to waive any past default. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. After an amendment under this Section 9.02 becomes effective, the Company shall mail to each Holder a notice briefly describing the amendment. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to consent to any indenture supplemental hereto. If a record date is fixed, the Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to consent to such supplemental indenture, whether or not such Holders remain Holders after such record date; provided, that unless such consent shall have become effective by virtue of the requisite percentage having been obtained prior to the date which is 90 days after such record date, any such consent previously given shall automatically and without further action by any Holder be cancelled and of no further effect. SECTION 9.03 Compliance with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall comply with the TIA. SECTION 9.04 Revocation and Effect of Consents, Waivers and Actions. Until an amendment, waiver or other action by Holders becomes effective, a consent thereto by a Holder of a Note hereunder is a continuing consent by the Holder and every subsequent Holder of that Note or portion of the Note that evidences the same obligation as the consenting Holder's Note, even if notation of the consent, waiver or action is not made on the Note. However, any such Holder or subsequent Holder may revoke the consent, waiver or action as to such Holder's Note or portion of the Note if the Trustee receives the notice of revocation before the date the 50 amendment, waiver or action becomes effective. After an amendment, waiver or action becomes effective, it shall bind every Noteholder. SECTION 9.05 Notation on or Exchange of Notes. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Company as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Notes so modified as to conform, in the opinion of the Board of Directors, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for outstanding Notes. SECTION 9.06 Trustee to Sign Supplemental Indentures. The Trustee shall sign any supplemental indenture authorized pursuant to this Article 9 if the amendment contained therein does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign such supplemental indenture. In signing such supplemental indenture the Trustee shall be entitled to receive, and (subject to the provisions of Section 7.01) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture. SECTION 9.07 Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. ARTICLE 10 CONVERSION SECTION 10.01 Conversion Right and Conversion Rate. (a) The Notes will not be convertible prior to August 14, 2003. At any time on or after August 14, 2003, subject to and upon compliance with the provisions of this Article, at the option of the Holder thereof, any Note or any portion of the principal amount thereof which is $1,000 or an integral multiple of $1,000 may be converted at the principal amount thereof, or of such portion thereof, into a combination of cash and duly authorized, fully paid and nonassessable shares of Common Stock (or, in the event that the Shareholder Approval Condition shall have been satisfied and the Company so elects, entirely into shares of Common Stock) as provided in this Section 10.01. Such conversion right shall expire at the close of business on February 14, 2010. In case a Note or portion thereof is called for redemption, such conversion right in respect of the Note or the portion so called shall expire at the close of business on the Business Day immediately preceding the Redemption Date, unless the Company defaults in making the payment due upon redemption. A Note for which a Holder has delivered a Change of Control Repurchase Notice requiring the Company to repurchase the Note may be surrendered for conversion only if such notice is withdrawn in accordance with Section 3.10 hereof. 51 (b) Upon conversion of any Note or any portion of the principal amount thereof prior to the time the Shareholder Approval Condition has been satisfied, the Company shall deliver to the Holder for each $1,000 principal amount of such Note surrendered for conversion (1) a number of shares of Common Stock equal to the Share Payment Component in effect at the time of conversion and (2) an amount of cash (the "Cash Payment Component") equal to the then conversion market value of a number of shares of Common Stock equal to the difference between the Conversion Rate in effect at the time of conversion and the Share Payment Component in effect at that time. The conversion market value shall be determined based on the average Closing Price of the Common Stock for the five consecutive Trading Days immediately following the second Business Day after the date on which the Conversion Agent receives the related conversion notice. In the event that the Shareholder Approval Condition shall have been satisfied, the Company may elect to deliver shares of Common Stock in lieu of paying the Cash Payment Component upon any subsequent conversion of any Note or any portion of the principal amount thereof. If the Company so elects, it shall deliver to the Holder for each $1,000 principal amount of a Note surrendered for conversion a number of shares of Common Stock equal to the Conversion Rate in effect at the time of conversion. The Company shall notify a Holder of its election to deliver Common Stock in lieu of cash within two Business Days after the Conversion Agent receives such Holder's conversion notice, unless the Company shall have given a notice of redemption pursuant to Section 3.04 hereof. The "Conversion Rate" shall initially be 219.1637 and shall be adjusted in certain instances as provided in Section 10.04 hereof. The Share Payment Component shall initially be 76.7073 and shall be subject to adjustment in the same manner and under the same circumstances as the Conversion Rate, subject to any limitation under applicable rules of the New York Stock Exchange. The "Shareholder Approval Condition" shall be satisfied if and when the issuance and delivery of shares of Common Stock upon conversion of the aggregate principal amount of the Notes shall have been approved by a majority of the outstanding shares of Common Stock entitled to vote on the matter. The Company shall use its reasonable efforts to obtain such shareholder approval not later than 180 days after the earliest date of original issuance of any of the Notes. In the event that the Shareholder Approval Condition has been satisfied, the Company shall promptly notify the Holders thereof and use its reasonable efforts to post this information on its website or otherwise publicly disclose this information. SECTION 10.02 Exercise of Conversion Right. To exercise the conversion right, a Holder must satisfy the requirements in paragraph 9 of the Notes. The date on which the Holder satisfies all those requirements is the conversion date (the "Conversion Date") with respect to such Holder's Notes. The Conversion Agent shall notify the Company within one Business Day of receiving a Holder's conversion notice. In the event that the Shareholder Approval Condition shall have been satisfied, within two Business Days after the Conversion Agent receives such Holder's conversion notice, the Company shall deliver to the Holder, through the Conversion Agent, written notice of whether the Company shall pay the Cash Payment Component or deliver shares of Common Stock in lieu thereof, unless the Company shall have delivered a notice of redemption pursuant to Section 3.04. Unless the Shareholder 52 Approval Condition shall have been satisfied and the Company has elected to deliver Common Stock in lieu of the Cash Payment Component, the Company shall deliver to the Holder through the Conversion Agent the amount of cash payable, together with the number of full shares of Common Stock deliverable and cash in lieu of any fractional share determined pursuant to Section 10.03 hereof, no later than the tenth Business Day following the Conversion Date. If the Shareholder Approval Condition shall have been satisfied and the Company shall have notified the Holder that it shall deliver Common Stock in lieu of the Cash Payment Component, the Company shall deliver to the Holder through the Conversion Agent, as promptly as practicable but in any event no later than the fifth Business Day following the Conversion Date, the number of full shares of Common Stock deliverable upon the conversion and cash in lieu of any fractional share determined pursuant to Section 10.03 hereof. The Company may not change its election with respect to the consideration to be delivered upon conversion of a Note (or any portion of the principal amount thereof) once the Company has notified the Holder in accordance with this paragraph. The person in whose name the shares of Common Stock delivered as consideration are registered shall be treated as a stockholder of record on and after the Conversion Date; provided, however, that no surrender of a Note (or any portion of the principal amount thereof) on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the person or persons entitled to receive the shares of Common Stock upon such conversion as the record holder or holders of such shares of Common Stock on such date, but such surrender shall be effective to constitute the person or persons entitled to receive such shares of Common Stock as the record holder or holders thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open; such conversion shall be made based on the Conversion Rate and Share Payment Component, as applicable, in effect on the date that such Note shall have been surrendered for conversion, as if the stock transfer books of the Company had not been closed. Upon conversion of a Note (or any portion of the principal amount thereof) on the Conversion Date (or such later date as such person is constituted the record holder of the shares of Common Stock into which such Note is converted, as provided for in the proviso to the preceding sentence), such person shall no longer be a Holder of such Note (or such portion of the principal amount thereof). Notes surrendered for conversion, other than those called for redemption pursuant to Section 3.01, during the period from the close of business on any Regular Record Date to the opening of business on the next succeeding Interest Payment Date shall be accompanied by payment in New York Clearing House funds or other funds acceptable to the Company of an amount equal to the interest (including any Liquidated Damages Amounts or Additional Interest Amounts that would be due and payable on such Interest Payment Date) to be received on such Interest Payment Date on the principal amount of Notes being surrendered for conversion. No such payment will be required if the Notes are called for redemption pursuant to Section 3.01. In the case of any Note which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Note or Notes of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Note. If shares of Common Stock to be issued upon conversion of a Restricted Note, or securities to be issued upon conversion of a Restricted Note in part only, are to be registered in a name other than that of the Holder of such Restricted Note, such Holder must deliver to the 53 Conversion Agent a certificate in substantially the form set forth in the form of Note set forth in Exhibit A-1 or A-2 (as applicable) annexed hereto, dated the date of surrender of such Restricted Note and signed by such Holder, as to compliance with the restrictions on transfer applicable to such Restricted Note. Neither the Trustee nor any Conversion Agent or Registrar shall be required to register in a name other than that of the Holder shares of Common Stock or Notes issued upon conversion of any such Restricted Note not so accompanied by a properly completed certificate. If the last day on which a Note may be converted is a Legal Holiday, the Note may be surrendered on the next succeeding day that is not a Legal Holiday. The Company hereby initially appoints the Trustee as the Conversion Agent. SECTION 10.03 Fractions of Shares. No fractional shares of Common Stock shall be issued upon conversion of any Note or Notes. If more than one Note shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issued upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Notes (or specified portions thereof) so surrendered. Instead of any fractional share of Common Stock which would otherwise be issued upon conversion of any Note or Notes (or specified portions thereof), the Company shall pay a cash adjustment in respect of such fraction (calculated to the nearest one-hundredth of a share) in an amount equal to the same fraction of the quoted price of the Common Stock as of the Trading Day preceding the Conversion Date. SECTION 10.04 Adjustment of Conversion Rate. The Conversion Rate shall be subject to adjustments, calculated by the Company, from time to time as follows (without duplication): (a) In case the Company shall hereafter pay a dividend or make a distribution to all holders of the outstanding Common Stock in shares of Common Stock, the Conversion Rate in effect at the opening of business on the date following the date fixed for the determination of holders of Common Stock entitled to receive such dividend or other distribution shall be increased by multiplying such Conversion Rate by a fraction: (1) the numerator of which shall be the sum of (x) the number of shares of Common Stock outstanding at the close of business on the Record Date (as defined in Section 10.04(h)) fixed for such determination and (y) the total number of shares constituting such dividend or other distribution payable to the holders of Common Stock; and (2) the denominator of which shall be the number of shares of Common Stock outstanding at the close of business on the Record Date fixed for such determination. Such increase shall become effective immediately after the opening of business on the day following the Record Date. If any dividend or distribution of the type described in this Section 10.04(a) is declared but not so paid or made, the Conversion Rate shall again 54 be adjusted to the Conversion Rate which would then be in effect if such dividend or distribution had not been declared. (b) In case the outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (c) In case the Company shall issue rights or warrants (other than any rights or warrants referred to in Section 10.04(d)) to all holders of its outstanding shares of Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price per share (or having a conversion price per share) less than the Current Market Price (as defined in Section 10.04(h)) on the Record Date fixed for the determination of stockholders entitled to receive such rights or warrants, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by multiplying the Conversion Rate in effect at the opening of business on the date after such Record Date by a fraction: (1) the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the Record Date plus the number of additional shares of Common Stock so offered to the holders of Common Stock for subscription or purchase (or into which the convertible securities so offered are convertible), and (2) the denominator of which shall be the number of shares of Common Stock outstanding at the close of business on the Record Date plus the number of shares which the aggregate offering price of the total number of shares of Common Stock so offered for subscription or purchase (or the aggregate conversion price of the convertible securities so offered, which shall be determined by multiplying the number of shares of Common Stock issuable upon conversion of such convertible securities by the conversion price per share of Common Stock pursuant to the terms of such convertible securities) would purchase at such Current Market Price. Such adjustment shall become effective immediately after the opening of business on the day following the Record Date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock (or securities convertible into Common Stock) are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants the Conversion Rate shall be readjusted to the Conversion Rate which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of the delivery 55 of only the number of additional shares of Common Stock (or securities convertible into Common Stock) actually delivered. In the event that such rights or warrants are not so issued, the Conversion Rate shall again be adjusted to be the Conversion Rate which would then be in effect if such date fixed for the determination of holders of Common Stock entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such Current Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration if other than cash, to be determined by the Board of Directors. (d) (I) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of Capital Stock of the Company (other than any dividends or distributions to which Section 10.04(a) or Section 10.04(g) applies), evidences of indebtedness or other assets (including securities of any Person other than the Company, but excluding (A) any rights or warrants referred to in Section 10.04(c), (B) any stock, securities or other property or assets (including cash) distributed in connection with a reclassification, merger, consolidation, statutory share exchange, combination, sale or conveyance to which Section 10.11 hereof applies (the securities described in foregoing clauses (A) and (B) hereinafter in this Section 10.04(d) called the "excluded securities") and (C) dividends or distributions paid exclusively in cash), then in each such case the Conversion Rate shall be adjusted so that the same shall be equal to the rate determined by multiplying the Conversion Rate in effect immediately prior to the close of business on the Record Date (as defined in Section 10.04(h)) with respect to such distribution by a fraction: (1) the numerator of which shall be the Current Market Price on such Record Date (determined as provided in Section 10.04(h)), and (2) the denominator of which shall be such Current Market Price on such Record Date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and set forth in a Board Resolution) on such Record Date of the portion of the Capital Stock, evidences of indebtedness or other assets so distributed (other than excluded securities) applicable to one share of Common Stock (determined on the basis of the number of shares of the Common Stock outstanding on such Record Date). Such increase shall become effective immediately prior to the opening of business on the day following the Record Date with respect to such distribution. However, in the event that the then fair market value (as so determined) of the portion of the Capital Stock, evidences of indebtedness or other assets so distributed (other than excluded securities) applicable to one share of Common Stock is equal to or greater than the Current Market Price on the Record Date with respect to such distribution, in lieu of the foregoing adjustment, adequate provision shall be made so that each Holder shall have the right to receive upon conversion of a Note (or any portion thereof) the amount of Capital Stock, evidences of indebtedness or other assets so distributed (other than excluded securities) that such Holder would have received had such Holder converted such Note (or portion 56 thereof) immediately prior to such Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Rate shall again be adjusted to be the Conversion Rate which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 10.04(d) by reference to the actual or when issued trading market for any securities comprising all or part of such distribution (other than excluded securities), it must in doing so consider the prices in such market over the same period (the "Reference Period") used in computing the Current Market Price pursuant to Section 10.04(h) to the extent possible, unless the Board of Directors in a Board Resolution determines in good faith that determining the fair market value during the Reference Period would not be in the best interest of the Holder. (II) With respect to any shareholder rights plan existing on the date hereof or in the event that the Company implements any other shareholder rights plan (in each case, a "Rights Agreement"), such rights plan shall provide, subject to customary exceptions and limitations, that upon conversion of the Notes the Holders will receive, in addition to the Common Stock issuable upon such conversion, the rights (the "Rights") issued under such Rights Agreement (notwithstanding the occurrence of an event causing such Rights to separate from the Common Stock at or prior to the time of conversion); provided, a Holder who is a holder of Common Stock (or direct or indirect interests therein) at the time of conversion, but who is not entitled as such a holder to such Rights pursuant to the terms of any such Rights Agreement, shall not be eligible to receive any such Rights hereunder. Any distribution of Rights pursuant to a Rights Agreement complying with the requirements set forth in the immediately preceding sentence of this paragraph shall not constitute a distribution of rights or warrants for the purposes of this Section 10.04(d). (III) Rights or warrants distributed by the Company to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Company's Capital Stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("Trigger Event"): (i) are deemed to be transferred with such shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall be deemed not to have been distributed for purposes of this Section 10.04(d) (and no adjustment to the Conversion Rate under this Section 10.04(d) will be required) until the occurrence of the earliest Trigger Event. If such right or warrant is subject to subsequent events, upon the occurrence of which such right or warrant shall become exercisable to purchase different securities, evidences of indebtedness or other assets or entitle the holder to purchase a different number or amount of the foregoing or to purchase any of the foregoing at a different purchase price, then the occurrence of each such event shall be deemed to be the date of issuance and record date with respect to a new right or 57 warrant (and a termination or expiration of the existing right or warrant without exercise by the holder thereof). (IV) In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Trigger Event or other event (of the type described in the preceding paragraph) with respect thereto, that resulted in an adjustment to the Conversion Rate under this Section 10.04(d): (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Rate shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder of Common Stock with respect to such rights or warrant (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants all of which shall have expired or been terminated without exercise, the Conversion Rate shall be readjusted as if such rights and warrants had never been issued. (V) For purposes of this Section 10.04(d) and Sections 10.04(a), 10.04(b) and 10.04(c), any dividend or distribution to which this Section 10.04(d) is applicable that also includes shares of Common Stock, a subdivision or combination of Common Stock to which Section 10.04(b) applies, or rights or warrants to subscribe for or purchase shares of Common Stock to which Section 10.04(c) applies (or any combination thereof), shall be deemed instead to be: (1) a dividend or distribution of the evidences of indebtedness, assets, shares of Capital Stock, rights or warrants other than such shares of Common Stock, such subdivision or combination or such rights or warrants to which Sections 10.04(a), 10.04(b) and 10.04(c) apply, respectively (and any Conversion Rate increase required by this Section 10.04(d) with respect to such dividend or distribution shall then be made), immediately followed by (2) a dividend or distribution of such shares of Common Stock, such subdivision or combination or such rights or warrants (and any further Conversion Rate increase required by Sections 10.04(a), 10.04(b) and 10.04(c) with respect to such dividend or distribution shall then be made), except: (A) the Record Date of such dividend or distribution shall be substituted for (x) "the date fixed for the determination of holders of Common Stock entitled to receive such dividend or other distribution", "Record Date fixed for such determinations" and "Record Date" within the meaning of Section 10.04(a), (y) "the day upon which such subdivision becomes effective" and "the day upon which such combination becomes effective" within the meaning of Section 10.04(b), 58 and (z) "the Record Date fixed for the determination of stockholders entitled to receive such rights or warrants" and "Record Date" within the meaning of Section 10.04(c), and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 10.04(a) and any increase or reduction in the number of shares of Common Stock resulting from such subdivision or combination shall be disregarded in connection with such dividend or distribution. (e) In case the Company shall, by dividend or otherwise, distribute (a "Triggering Distribution") to all holders of its Common Stock cash (excluding any cash that is distributed upon a reclassification, merger, consolidation, statutory share exchange, combination, sale or conveyance to which Section 10.11 hereof applies or as part of a distribution referred to in Section 10.04(d) hereof), in an aggregate amount that, combined together with: (x) the aggregate amount of any other such distributions to all holders of Common Stock made exclusively in cash within the 12 months preceding the date of payment of such Triggering Distribution, and in respect of which no adjustment pursuant to this Section 10.04(e) has been made, and (y) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and set forth in a Board Resolution) of any other consideration payable in respect of any tender offer by the Company or any of its subsidiaries for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such Triggering Distribution, and in respect of which no adjustment pursuant to Section 10.04(f) hereof has been made, exceeds 5% of the product of the Current Market Price (determined as provided in Section 10.04(h)) on the Business Day (the "Determination Date") immediately preceding the day on which such Triggering Distribution is declared by the Company multiplied by the number of shares of Common Stock outstanding on the Determination Date (excluding shares held in the treasury of the Company), then and in each such case, effective immediately prior to the opening of business on the day following the date on which the Triggering Distribution is paid, the Conversion Rate shall be increased so that the same shall equal the rate determined by multiplying the Conversion Rate in effect immediately prior to the Determination Date by a fraction: (1) the numerator of which shall be equal to such Current Market Price on the Determination Date, and (2) the denominator of which shall be equal to such Current Market Price on the Determination Date less the sum of the aggregate amount of cash and the aggregate fair market value (determined as aforesaid) of any such other 59 consideration so distributed, paid or payable within such 12 months (including, without limitation, the Triggering Distribution) applicable to one share of Common Stock (determined on the basis of the number of shares of Common Stock outstanding on the Determination Date). However, in the event that the sum of the aggregate amount of cash and the aggregate fair market value (as so determined) of any such other consideration so distributed, paid or payable within such 12 months applicable to one share of Common Stock is equal to or greater than the Current Market Price on the Determination Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Holder shall have the right to receive upon conversion of a Note (or any portion thereof) the amount of cash such Holder would have received had such Holder converted such Note (or portion thereof) immediately prior to the Record Date with respect to such distribution. In the event that such dividend or distribution is not so paid or made, the Conversion Rate shall again be adjusted to be the Conversion Rate which would then be in effect if such dividend or distribution had not been declared. (f) In case a tender offer made by the Company or any of its subsidiaries for all or any portion of the Common Stock shall expire and such tender offer (as amended upon the expiration thereof) shall require the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration in an amount (determined as the sum of the aggregate amount of cash consideration and the aggregate fair market value (as determined by the Board of Directors, whose determination shall be conclusive and set forth in a Board Resolution) of any other consideration) that, combined together with the aggregate amount of: (x) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and set forth in a Board Resolution), as of the expiration of such tender offer, of consideration payable in respect of any other tender offers by the Company or any of its subsidiaries for all or any portion of the Common Stock expiring within the 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to this Section 10.04(f) has been made, and (y) the aggregate amount of any distributions to all holders of the Company's Common Stock made exclusively in cash within 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to Section 10.04(e) has been made, exceeds 5% of the product of the Current Market Price (determined as provided in Section 10.04(h)) as of the last date (the "Expiration Date") tenders could have been made pursuant to such tender offer (as it may be amended) (the last time at which such tenders could have been made on the Expiration Date is hereinafter sometimes referred to as the "Expiration Time") multiplied by the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the Expiration 60 Date, the Conversion Rate shall be increased so that the same shall equal the rate determined by multiplying the Conversion Rate in effect immediately prior to close of business on the Expiration Date by a fraction: (1) the numerator of which shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares of Common Stock validly tendered and not withdrawn as of the Expiration Time (the shares of Common Stock deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price (determined as provided in Section 10.04(h)) of the Common Stock on the Trading Day next succeeding the Expiration Date, and (2) the denominator of which shall be the number of shares of Common Stock outstanding (including any tendered shares but excluding any shares held in the treasury of the Company) at the Expiration Time multiplied by such Current Market Price on the Trading Day next succeeding the Expiration Date. Such increase (if any) shall become effective immediately prior to the opening of business on the day following the Expiration Date. In the event that the Company is obligated to purchase shares pursuant to any such tender offer, but the Company is permanently prevented by applicable law from effecting any or all such purchases or any or all such purchases are rescinded, the Conversion Rate shall again be adjusted to be the Conversion Rate which would then be in effect based upon the number of shares actually purchased. If the application of this Section 10.04(f) to any tender offer would result in a reduction in the Conversion Rate, no adjustment shall be made for such tender offer under this Section 10.04(f). (g) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of Capital Stock of any class or series, or similar equity interests, of or relating to a subsidiary or other business unit of the Company, then, in each such case, the Conversion Rate shall be adjusted in accordance with the formula: R' = R x (1 + F/M) where: R' = the adjusted Conversion Rate. R = the current Conversion Rate. M = the average of the Post-Distribution Prices of the Common Stock for the 10 Trading Days commencing on and including the fifth Trading Day after the date on which "ex-dividend trading" commences for such dividend or distribution on the 61 principal United States exchange or market which such securities are then listed or quoted (the "Ex-Dividend Date"). F = the fair market value of the securities distributed in respect of each share of Common Stock which for purposes of this Section 10.04(g) shall mean the number of securities distributed in respect of each share of Common Stock multiplied by the average of the Post-Distribution Prices of those securities distributed for the 10 Trading Days commencing on and including the fifth Trading Day after the Ex-Dividend Date. "Post-Distribution Price" of Capital Stock or any similar equity interest on any date means the closing per unit sale price (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on such date for trading of such units on a "when issued" basis without due bills (or similar concept) as reported in the composite transactions for the principal United States securities exchange on which such Capital Stock or equity interest is traded or, if the Capital Stock or equity interest, as the case may be, is not listed on a United States national or regional securities exchange, as reported by the National Association of Securities Dealers Automated Quotation System or by the National Quotation Bureau Incorporated; provided that if on any date such units have not traded on a "when issued" basis, the Post-Distribution Price shall be the closing per unit sale price (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on such date for trading of such units on a "regular way" basis without due bills (or similar concept) as reported in the composite transactions for the principal United States securities exchange on which such Capital Stock or equity interest is traded or, if the Capital Stock or equity interest, as the case may be, is not listed on a United States national or regional securities exchange, as reported by the National Association of Securities Dealers Automated Quotation System or by the National Quotation Bureau Incorporated. In the absence of such quotation, the Company shall be entitled to determine the Post-Distribution Price on the basis of such quotations that reflect the post-distribution value of the Capital Stock or equity interests as it considers appropriate. (h) For purposes of this Section 10.04, the following terms shall have the meanings indicated: (1) "Current Market Price" shall mean the average of the daily Closing Prices per share of Common Stock for the ten consecutive Trading Days immediately prior to the date in question; provided, however, that if: (i) the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Rate pursuant to Section 10.04(a), (b), (c), (d), (e), (f) or (g) occurs during such ten consecutive Trading Days, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Rate is so required to be adjusted as a result of such other event; 62 (ii) the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Rate pursuant to Section 10.04(a), (b), (c), (d), (e), (f) or (g) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the fraction by which the Conversion Rate is so required to be adjusted as a result of such other event; and (iii) the "ex" date for the issuance or distribution requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (i) or (ii) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 10.04(d) or (f), whose determination shall be conclusive and set forth in a Board Resolution) of the evidences of indebtedness, shares of Capital Stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For purposes of any computation under Section 10.04(f), the Current Market Price of the Common Stock on any date shall be deemed to be the average of the daily Closing Prices per share of Common Stock for such day and the next two succeeding Trading Days; provided, however, that if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to the Conversion Rate pursuant to Section 10.04(a), (b), (c), (d), (e), (f) or (g) occurs on or after the Expiration Date for the tender or exchange offer requiring such computation and prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the fraction by which the Conversion Rate is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, when used: (A) with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution; (B) with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and 63 (C) with respect to any tender or exchange offer, means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such offer. Notwithstanding the foregoing, whenever successive adjustments to the Conversion Rate are called for pursuant to this Section 10.04, such adjustments shall be made to the Current Market Price as may be necessary or appropriate to effectuate the intent of this Section 10.04 and to avoid unjust or inequitable results as determined in good faith by the Board of Directors. (2) "fair market value" shall mean the amount which a willing buyer would pay a willing seller in an arm's length transaction. (3) "Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). (i) The Company may make such increases in the Conversion Rate, in addition to those required by Section 10.04(a), (b), (c), (d), (e), (f) or (g), as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. To the extent permitted by applicable law, the Company from time to time may increase the Conversion Rate by any amount for any period of time if the period is at least 20 days and the increase is irrevocable during the period and the Board of Directors determines in good faith that such increase would be in the best interests of the Company, which determination shall be conclusive and set forth in a Board Resolution. Whenever the Conversion Rate is increased pursuant to the preceding sentence, the Company shall mail to the Trustee and each Holder at the address of such Holder as it appears in the Register a notice of the increase at least 15 days prior to the date the increased Conversion Rate takes effect, and such notice shall state the increased Conversion Rate and the period during which it will be in effect. (j) No adjustment in the Conversion Rate shall be required unless such adjustment would require an increase or decrease of at least 1% in such rate; provided, however, that any adjustments which by reason of this Section 10.04(j) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 10 shall be made by the Company and shall be made to the nearest cent or to the nearest one thousandth of a share, as the case may be. No 64 adjustment need be made for a change in the par value or no par value of the Common Stock. (k) In any case in which this Section 10.04 provides that an adjustment shall become effective immediately after a Record Date for an event, the Company may defer until the occurrence of such event (i) issuing to the Holder of any Note converted after such Record Date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of any fraction pursuant to Section 10.03 hereof. (l) For purposes of this Section 10.04, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. SECTION 10.05 Notice of Adjustments of Conversion Rate. Whenever the Conversion Rate is adjusted as herein provided (other than in the case of an adjustment pursuant to the second paragraph of Section 10.04(i) for which the notice required by such paragraph has been provided), the Company shall promptly file with the Trustee and any Conversion Agent other than the Trustee an Officers' Certificate setting forth the adjusted Conversion Rate and showing in reasonable detail the facts upon which such adjustment is based and the date on which such adjustment becomes effective. Promptly after delivery of such Officers' Certificate, the Company shall prepare a notice stating that the Conversion Rate has been adjusted and setting forth the adjusted Conversion Rate and the date on which each adjustment becomes effective, and shall mail such notice to each Holder at the address of such Holder as it appears in the Register within 20 days of the effective date of such adjustment. Failure to deliver such Officers' Certificate or such notice shall not affect the legality or validity of any such adjustment. SECTION 10.06 Notice Prior to Certain Actions. In case at any time after the date hereof: (1) the Company shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its capital surplus or its consolidated retained earnings; (2) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of Capital Stock of any class (or of securities convertible into shares of Capital Stock of any class) or of any other rights; (3) there shall occur any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding Common Stock, a change in par value, a change from par value to no par value or a change from no par value to par value), or any merger, consolidation, statutory share exchange or 65 combination to which the Company is a party and for which approval of any shareholders of the Company is required, or the sale, transfer or conveyance of all or substantially all of the assets of the Company; or (4) there shall occur the voluntary or involuntary dissolution, liquidation or winding up of the Company; the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Notes pursuant to Section 4.05 hereof, and shall cause to be provided to the Trustee and all Holders in accordance with Section 13.02 hereof, at least 20 days (or 10 days in any case specified in clause (1) or (2) above) prior to the applicable record or effective date hereinafter specified, a notice stating: (A) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (B) the date on which such reclassification, merger, consolidation, statutory share exchange, combination, sale, transfer, conveyance, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, merger, consolidation, statutory share exchange, sale, transfer, dissolution, liquidation or winding up. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings or actions described in clauses (1) through (4) of this Section 10.06. SECTION 10.07 Company to Reserve Common Stock. The Company shall at all times use its best efforts to reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of Notes, the full number of shares of fully paid and nonassessable Common Stock then issuable upon the conversion of all Notes outstanding. SECTION 10.08 Taxes on Conversions. Except as provided in the next sentence, the Company will pay any and all taxes (other than taxes on income) and duties that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Notes pursuant hereto. A Holder delivering a Note for conversion shall be liable for and will be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the Holder of the Note or Notes to be converted, and no such issue or delivery shall be made unless the Person requesting such issue has paid to the Company the amount of any such tax or duty, or has established to the satisfaction of the Company that such tax or duty has been paid. SECTION 10.09 Covenant as to Common Stock. The Company covenants that all shares of Common Stock which may be issued upon conversion of Notes will upon issue 66 be fully paid and nonassessable and, except as provided in Section 10.08, the Company will pay all taxes, liens and charges with respect to the issue thereof. SECTION 10.10 Cancellation of Converted Notes. All Notes delivered for conversion shall be delivered to the Trustee to be canceled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 2.10. SECTION 10.11 Effect of Reclassification, Consolidation, Merger or Sale. If any of following events occur, namely: (1) any reclassification or change of the outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (2) any merger, consolidation, statutory share exchange or combination of the Company with another corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash or any combination thereof) with respect to or in exchange for such Common Stock, or (3) any sale or conveyance of all or substantially all of the properties and assets of the Company to any other corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash or any combination thereof) with respect to or in exchange for such Common Stock, the Company or the successor or purchasing corporation, as the case may be, shall, as a condition precedent to such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance, execute with the Trustee a supplemental indenture (which shall comply with the TIA as in force at the date of execution of such supplemental indenture if such supplemental indenture is then required to so comply) providing that such Note shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash or any combination thereof) which such Holder would have been entitled to receive upon such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance had such Notes been converted into Common Stock immediately prior to such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance assuming such holder of Common Stock did not exercise its rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("Non-Electing Share"), then for the purposes of this Section 10.11 the kind and amount of securities, cash or other property receivable upon such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance for each Non-Electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-Electing Shares). Such 67 supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 10. If, in the case of any such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance, the stock or other securities and assets receivable thereupon by a holder of shares of Common Stock includes shares of stock or other securities and assets of a corporation other than the successor or purchasing corporation, as the case may be, in such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance, then such supplemental indenture shall also be executed by such other corporation and shall contain such additional provisions to protect the interests of the Holders of the Notes as the Board of Directors shall reasonably consider necessary by reason of the foregoing, including to the extent practicable the provisions providing for the repurchase rights set forth in Section 3.09 hereof. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each Holder, at the address of such Holder as it appears on the Register, within 20 days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture. The above provisions of this Section 10.11 shall similarly apply to successive reclassifications, mergers, consolidations, statutory share exchanges, combinations, sales and conveyances. If this Section 10.11 applies to any event or occurrence, Section 10.04 hereof shall not apply. SECTION 10.12 Responsibility of Trustee for Conversion Provisions. The Trustee, subject to the provisions of Section 7.01 hereof, and any Conversion Agent shall not at any time be under any duty or responsibility to any Holder of Notes to determine whether any facts exist which may require any adjustment of the Conversion Rate, or with respect to the nature or intent of any such adjustments when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same or the calculation thereof. Neither the Trustee, subject to the provisions of Section 7.01 hereof, nor any Conversion Agent shall be accountable with respect to the validity or value (of the kind or amount) of any Common Stock, or of any other securities or property, which may at any time be issued or delivered upon the conversion of any Note; and it or they do not make any representation with respect thereto. Neither the Trustee, subject to the provisions of Section 7.01 hereof, nor any Conversion Agent shall be responsible for any failure of the Company to make any cash payment or to issue, transfer or deliver any shares of stock or share certificates or other securities or property upon the surrender of any Note for the purpose of conversion; and the Trustee, subject to the provisions of Section 7.01 hereof, and any Conversion Agent shall not be responsible or liable for any failure of the Company to comply with any of the covenants or other obligations of the Company contained in this Article. 68 ARTICLE 11 DIVIDEND PROTECTION PAYMENT SECTION 11.01 Additional Interest Amounts. In the event the Company declares a dividend on its Common Stock, the Company shall pay to each Holder of record as of the record date for such dividend an amount equal to the product of (i) such per share dividend declared by the Company multiplied by (ii) the number of shares of Common Stock such Holder would possess had such Holder converted its Notes into a number of shares of Common Stock equal to the Conversion Rate as of the record date for such dividend (each such payment an "Additional Interest Amount and, collectively the "Additional Interest Amounts"); provided, however, that such amount shall not be due and no payment with respect thereto shall be made with respect to the Notes unless such dividend is paid to holders of Common Stock. The payment date for an Additional Interest Amount shall be the same as the payment date for the dividend to which the Additional Interest Amount relates. Holders of Notes shall not be entitled to receive any Additional Interest Amount with respect to any dividend that causes an adjustment to the Conversion Rate. ARTICLE 12 SECURITY SECTION 12.01 Security. (a) On the date of this Indenture, the Company shall (i) enter into the Pledge Agreement and comply with the terms and provisions thereof and (ii) purchase the Pledged Securities to be pledged to the Trustee for the benefit of the Holders in such amount as will be sufficient upon receipt of scheduled interest and/or of principal payments of such Pledged Securities to provide for payment in full of the first five scheduled interest payments (up to and including the interest payment due on August 14, 2005) due on the Notes. The Pledged Securities shall be pledged by the Company to the Trustee for the benefit of the Holders and shall be held by the Trustee in the Pledge Account pending disposition pursuant to the Pledge Agreement. (b) Each Holder, by its acceptance of a Note, consents and agrees to the terms of the Pledge Agreement (including, without limitation, the provisions providing for foreclosure and release of the Pledged Securities) as the same may be in effect or may be amended from time to time in accordance with its terms, and authorizes and directs the Trustee to enter into the Pledge Agreement and to perform its respective obligations and exercise its respective rights thereunder in accordance therewith. The Company will do or cause to be done all such acts and things as may be necessary or reasonably requested by the Trustee, or as may be required by the provisions of the Pledge Agreement, to assure and confirm to the Trustee the security interest in the Pledged Securities contemplated hereby, by the Pledge Agreement or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and of the Notes secured hereby, according to the intent and purposes herein and therein expressed. The Company, in consultation with the Trustee, shall take, or shall cause to be taken, any and all actions reasonably required to cause the Pledge Agreement to create and maintain, as security for the obligations of the Company under this Indenture and the Notes, 69 valid and enforceable first priority liens in and on all the Pledged Securities, in favor of the Trustee, superior to and prior to the rights of third Persons and subject to no other Liens. (c) The release of any Pledged Securities pursuant to the Pledge Agreement will not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Pledged Securities are released pursuant to this Indenture and the Pledge Agreement. To the extent applicable, the Company shall cause TIA Section 314(d) relating to the release of property or securities from the Lien and security interest of the Pledge Agreement and relating to the substitution therefor of any property or securities to be subjected to the Lien and security interest of the Pledge Agreement to be complied with. Any certificate or opinion required by TIA Section 314(d) may be made by an Officer of the Company, except in cases where TIA Section 314(d) requires that such certificate or opinion be made by an independent Person, which Person shall be an independent engineer, appraiser or other expert selected by the Company. (d) The Company shall cause TIA Section 314(b), relating to opinions of counsel regarding the Lien under the Pledge Agreement, to be complied with. The Trustee may accept, to the extent permitted by Sections 4.03 and 7.13 as conclusive evidence of compliance with the foregoing provisions, the appropriate statements contained in such instruments. (e) The Trustee may, in its sole discretion and without the consent of the Holders, on behalf of the Holders, take all reasonable actions in accordance with the Pledge Agreement necessary or appropriate in order to (i) enforce any of the terms of the Pledge Agreement and (ii) collect and receive any and all amounts payable in respect of the obligations of the Company thereunder. The Trustee shall have power to institute and to maintain such suits and proceedings as the Trustee may reasonably deem expedient to preserve or protect its interests and the interests of the Holders in the Pledged Securities (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or be prejudicial to the interests of the Holders or of the Trustee). ARTICLE 13 MISCELLANEOUS SECTION 13.01 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. SECTION 13.02 Notices. Any request, demand, authorization, notice, waiver, consent or other communication shall be in writing and delivered in person or mailed by first-class mail, postage prepaid, addressed as follows or transmitted by facsimile transmission (confirmed by guaranteed overnight courier) to the following facsimile numbers: 70 if to the Company: Sierra Pacific Resources 6100 Neil Road Reno, Nevada 89520-0400 Telephone No. (775) 834-5643 Facsimile No. (775) 834-5462 Attention: Kelly Langley if to the Trustee: The Bank of New York 101 Barclay Street, 8W New York, New York 10286 Attention: Corporate Trust Division Telephone No. (212) 815-5845 Facsimile No. (212) 815-5707 The Company or the Trustee by notice given to the other in the manner provided above may designate additional or different addresses for subsequent notices or communications. Except as otherwise provided in this Indenture, no notice or other communication given hereunder to the Trustee shall be deemed to be given or effective unless and until it is actually received by the Trustee at the aforementioned address. Any notice or other communication given to a Noteholder shall be mailed to the Noteholder, by first-class mail, postage prepaid, at the Noteholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not received by the addressee. If the Company mails a notice or communication to the Noteholders, it shall mail a copy to the Trustee and each Registrar, Paying Agent, Conversion Agent or co-registrar. SECTION 13.03 Communication by Holders with Other Holders. Noteholders may communicate pursuant to TIA Section 312(b) with other Noteholders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar, the Paying Agent, the Conversion Agent and anyone else shall have the protection of TIA Section 312(c). SECTION 13.04 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture (except that, in the case of any request or application as to which the furnishing of such 71 documents is specifically required by any provision of this Indenture relating to such particular request or application, no additional certificate or opinion need be furnished), the Company shall furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 13.05 Statements Required in Certificate or Opinion. Each Officers' Certificate or Opinion of Counsel with respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that each person making such Officers' Certificate or Opinion of Counsel has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such Officers' Certificate or Opinion of Counsel are based; (3) a statement that, in the opinion of each such person, he has made such examination or investigation as is necessary to enable such person to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement that, in the opinion of such person, such covenant or condition has been complied with. SECTION 13.06 Separability Clause. 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. SECTION 13.07 Rules by Trustee, Paying Agent, Conversion Agent and Registrar. The Trustee may make reasonable rules for action by or a meeting of Noteholders. The Registrar, Conversion Agent and the Paying Agent may make reasonable rules for their functions. SECTION 13.08 Legal Holidays. A "Legal Holiday" is any day other than a Business Day. If any specified date (including a date for giving notice) is a Legal Holiday, the action shall be taken on the next succeeding day that is not a Legal Holiday, and, if the action to be taken on such date is a payment in respect of the Notes, no interest, if any, shall accrue for the intervening period. SECTION 13.09 GOVERNING LAW. THIS INDENTURE AND THE NOTES WILL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 72 SECTION 13.10 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 this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Notes. SECTION 13.11 Successors. All agreements of the Company in this Indenture and the Notes shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 13.12 Multiple Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. 73 IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this Indenture on behalf of the respective parties hereto as of the date first above written. SIERRA PACIFIC RESOURCES By: ___________________________ Name: Title: THE BANK OF NEW YORK, as Trustee By: ___________________________ Name: Stacy B. Poindexter Title: Assistant Treasurer EXHIBIT A-1 [FORM OF GLOBAL NOTE] [Form of Face of Global Note] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE ISSUER 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 THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY, OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE TWO OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE, THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF, AGREES TO OFFER, SELL, OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE"), WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH SIERRA PACIFIC RESOURCES (THE "COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE) ONLY (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) FOR SO LONG AS THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED A-1-1 INSTITUTIONAL BUYER TO WHICH NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT, IF AVAILABLE, (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT AND CONTINUES TO BE EFFECTIVE AT THE TIME OF TRANSFER OR (E) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT. IF THE PROPOSED TRANSFER IS PURSUANT TO CLAUSES (C) OR (E) ABOVE, SUCH TRANSFER IS SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHTS PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO THE COMPANY, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THE HOLDER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED HEREBY IS TRANSFERRED (OTHER THAN PURSUANT TO CLAUSE D ABOVE) A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. [THE FOREGOING LEGEND MAY BE REMOVED FROM THIS NOTE ON SATISFACTION OF THE CONDITIONS SPECIFIED IN THE INDENTURE.] A-1-2 SIERRA PACIFIC RESOURCES 7.25% Convertible Notes due 2010 No.: 1 CUSIP: 826428 AE 4 Issue Date: ISIN: US826428AE48 SIERRA PACIFIC RESOURCES, a Nevada corporation (the "Company"), promises to pay to Cede & Co. or registered assigns, the principal sum of THREE HUNDRED MILLION DOLLARS ($300,000,000) on February 14, 2010. This Note shall bear interest as specified on the other side of this Note. This Note is convertible as specified on the other side of this Note. Additional provisions of this Note are set forth on the other side of this Note. A-1-3 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officer. Dated: February __, 2003 SIERRA PACIFIC RESOURCES By_________________________________ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION THE BANK OF NEW YORK, as Trustee, certifies that this is one of the Notes referred to in the within-mentioned Indenture (as defined on the other side of this Note). By_____________________________ Authorized Signatory A-1-4 [Form of Reverse Side of Note] 7.25% Convertible Note due 2010 1. Cash Interest. The Company promises to pay interest in cash on the principal amount of this Note at the rate per annum of 7.25%. The Company will pay cash interest semiannually in arrears on February 14 and August 14 of each year (each an "Interest Payment Date") to Holders of record at the close of business on January 31 and July 31 (whether or not a business day) (each a "Regular Record Date"), as the case may be, immediately preceding such Interest Payment Date. Cash interest on the Notes will accrue from the most recent date to which interest has been paid or duly provided or, if no interest has been paid, from the Issue Date. Cash interest will be computed on the basis of a 360-day year of twelve 30-day months. In accordance with the terms of the Registration Rights Agreement, during the first 90 days following the day on which an Event (as defined in the Registration Rights Agreement) has occurred and is continuing, the Interest Rate borne by the Notes shall be increased by 0.25% to 7.5% per annum. From and after the 91st day following the day on which an Event has occurred and such Event is continuing, the Interest Rate borne by the Notes shall be increased by an additional 0.25% to 7.75% per annum. In no event shall the Interest Rate borne by the Notes exceed 7.75% per annum. Any amount of additional interest will be payable in cash semiannually, in arrears, on each Interest Payment Date and will cease to accrue on the date the Event is cured. The Holder of this Note is entitled to the benefits of the Registration Rights Agreement. The Holder of this Note is entitled to the benefits of the Pledge Agreement, dated February 14, 2003, between the Company and The Bank of New York (the "Trustee"), pursuant to which the Company has placed in the Pledge Account cash or Pledged Financial Assets sufficient to provide for the payment of the first five interest payments (up to and including the interest payment due on August 14, 2005) on this Note. The terms capitalized but undefined in this paragraph have the meanings given to them in the Pledge Agreement. 2. Payment of Additional Interest Amounts. In the event the Company declares a dividend on its Common Stock, the Company shall pay to each Holder of record as of the record date for such dividend an amount equal to the product of (i) such per share dividend declared by the Company multiplied by (ii) the number of shares of Common Stock such Holder would possess had such Holder converted its Notes into a number of shares of Common Stock equal to the Conversion Rate as of the record date for such dividend (each such payment an "Additional Interest Amount and, collectively the "Additional Interest Amounts"); provided, however, that such amount shall not be due and no payment with respect thereto shall be made with respect to the Notes unless such dividend is paid to holders of Common Stock. The payment date for an Additional Interest Amount shall be the same as the A-1-5 payment date for the dividend to which the Additional Interest Amount relates. Holders of Notes shall not be entitled to receive any Additional Interest Amount with respect to any dividend that causes an adjustment to the Conversion Rate. 3. Method of Payment. Subject to the terms and conditions of the Indenture, the Company will make payments in respect of the principal of, premium, if any, and cash interest on this Note to a Paying Agent. In respect of Redemption Prices and Change of Control Repurchase Prices, the Company will make payments in respect of the principal of, premium, if any, and cash interest on this Note to Holders who surrender Notes to a Paying Agent to collect such payments in respect of the Notes. The Company will pay cash amounts in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may make such cash payments by check payable in such money. A holder of Notes with an aggregate principal amount in excess of $10,000,000 will be paid by wire transfer in immediately available funds at the election of such holder. Any payment required to be made on any day that is not a Business Day will be made on the next succeeding Business Day. 4. Paying Agent, Conversion Agent and Registrar. Initially, the Trustee will act as Paying Agent, Conversion Agent and Registrar. The Company may appoint and change any Paying Agent, Conversion Agent, Registrar or co-registrar without notice, other than notice to the Trustee, except that the Company will maintain at least one Paying Agent in the State of New York, The City of New York, and Borough of Manhattan, which shall initially be an office or agency of the Trustee. The Company or any of its Subsidiaries or any of their Affiliates may act as Paying Agent, Conversion Agent, Registrar or co-registrar. 5. Indenture. The Company issued the Notes under an Indenture dated as of February 14, 2003 (the Indenture"), between the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as in effect from time to time (the "TIA"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the TIA for a statement of those terms. The Notes are general unsecured obligations of the Company (except as provided in Article 12 of the Indenture) limited to $300,000,000 aggregate principal amount. The Indenture does not limit other indebtedness of the Company, secured or unsecured. 6. Redemption of the Notes at the Option of the Company. At any time on or after February 14, 2008, the Company may redeem the Notes in whole at any time or in part from time to time upon not less than 30 nor more than 60 days' notice, at the following prices (expressed in percentages of the principal amount) together with accrued but unpaid interest to, but excluding, the date fixed for redemption. However, if a redemption date is A-1-6 any interest payment date, the semi-annual payment of interest becoming due on such date shall be payable to the holder of record as of the relevant record date and the redemption price shall not include such interest payment. During the twelve months commencing February 14 of the years set forth below:
Year Redemption Price ---- ---------------- 2008................................ 102.1% 2009................................ 101.0%
If the Company does not redeem all the Notes, the Trustee will select the Notes to be redeemed in principal amounts of $1,000 or integral multiples of $1,000 by lot or on a pro rata basis. If any Notes are to be redeemed in part only, a new Note or Notes in principal amount equal to the unredeemed principal portion thereof will be issued. If a portion of a Holder's Notes is selected for partial redemption and the Holder converts a portion of its Notes, the converted portion will be deemed to be taken from the portion selected for redemption. No sinking fund is provided for the Notes. 7. Repurchase by the Company at the Option of the Holder. If a Change of Control occurs, the Holder, at the Holder's option, shall have the right, in accordance with the provisions of the Indenture, to require the Company to repurchase the Notes (or any portion of the principal amount hereof that is at least $1,000 or an integral multiple thereof, provided that the portion of the principal amount of this Note to be outstanding after such repurchase is at least equal to $1,000) at the Change of Control Repurchase Price in cash, plus any interest accrued and unpaid to, but excluding, the Change of Control Repurchase Date. A Change of Control Repurchase Notice will be given by the Company to the Holders as provided in the Indenture. To exercise a repurchase right, a Holder must deliver to the Trustee a written notice as provided in the Indenture. Holders have the right to withdraw any Change of Control Repurchase Notice by delivering to the Paying Agent a written notice of withdrawal in accordance with the provisions of the Indenture. 8. Notice of Redemption. Notice of redemption will be mailed not less than 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at the Holder's registered address. If money sufficient to pay the Redemption Price of all Notes (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent prior to or on the Redemption Date, immediately after such Redemption Date interest ceases to accrue on such Notes or portions thereof. Notes in denominations A-1-7 larger than $1,000 of principal amount may be redeemed in part but only in integral multiples of $1,000 of principal amount. 9. Conversion. The Notes will not be convertible prior to August 14, 2003. At any time on or after August 14, 2003, subject to and upon compliance with the provisions of the Indenture, at the option of the Holder thereof, any Note or any portion of the principal amount thereof which is $1,000 or an integral multiple of $1,000 may be converted at the principal amount thereof, or of such portion thereof, into a combination of cash and duly authorized, fully paid and nonassessable shares of Common Stock (or, in the event that the Shareholder Approval Condition described in the Indenture shall have been satisfied and the Company so elects, entirely into shares of Common Stock) as provided in the Indenture. Such conversion right shall expire at the close of business on February 14, 2010. The "Conversion Rate" shall initially be 219.1637 and shall be adjusted in certain instances as provided in the Indenture. The "Share Payment Component" shall initially be 76.7073 and shall be subject to adjustment in the same manner and under the same circumstances as the Conversion Rate, subject to any limitation under applicable rules of the New York Stock Exchange. The Company shall pay a cash adjustment as provided in the Indenture in lieu of any fractional share of Common Stock. To convert a Note, a Holder must (1) complete and sign the conversion notice below (or complete and sign a facsimile of such notice) and deliver such notice to the Conversion Agent, (2) surrender the Note duly signed and endorsed to the Conversion Agent, (3) furnish appropriate endorsements and transfer documents if required by the Conversion Agent, the Company or the Trustee and (4) pay any transfer or similar tax or payment detailed below, if required. Notes surrendered for conversion, other than those called for redemption pursuant to paragraph 6 above, during the period from the close of business on any Regular Record Date to the opening of business on the next succeeding Interest Payment Date shall be accompanied by payment in New York Clearing House funds or other funds acceptable to the Company of an amount equal to the interest (including any Liquidated Damages Amounts or Additional Interest Amounts that would be due and payable on such Interest Payment Date) to be received on such Interest Payment Date on the principal amount of Notes being surrendered for conversion. No such payment will be required if the Notes are called for redemption pursuant to paragraph 6 above. 10. Conversion Arrangement on Call for Redemption. Any Notes called for redemption, unless surrendered for conversion before the close of business on the Redemption Date, may be deemed to be purchased from the Holders of such Notes at an amount not less than the Redemption Price, by one or more investment bankers or other purchasers who may agree with the Company to purchase such Notes A-1-8 from the Holders, to convert them into Common Stock of the Company and to make payment for such Notes to the Trustee in trust for such Holders. 11. Denominations; Transfer; Exchange. The Notes are in fully registered form, without coupons, in denominations of $1,000 of principal amount and integral multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange (i) any Notes selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed), (ii) any Notes in respect of which a Change of Control Repurchase Notice has been given and not withdrawn (except, in the case of a Note to be purchased in part, the portion of the Note not to be purchased) or (iii) any Notes for a period of 15 days before the mailing of a notice of redemption of Notes to be redeemed. 12. Persons Deemed Owners. The registered Holder of this Note may be treated as the owner of this Note for all purposes. 13. Unclaimed Money or Notes. The Trustee and the Paying Agent shall return to the Company upon written request any money or Notes held by them for the payment of any amount with respect to the Notes that remains unclaimed for two years, subject to applicable unclaimed property law. After return to the Company, Holders entitled to the money or Notes must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person. 14. Amendment; Waiver. Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in aggregate principal amount of the Notes at the time outstanding and (ii) certain Defaults may be waived with the written consent of the Holders of a majority in aggregate principal amount of the Notes at the time outstanding. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, to make any change that does not adversely affect the rights of any Noteholder, or to comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA. 15. Defaults and Remedies. Under the Indenture, Events of Default include (1) the Company fails to pay when due the principal of or premium, if any, on any of the Notes at maturity, upon redemption or exercise of a repurchase right or otherwise; (2) the Company fails to pay an installment of interest (including Liquidated Damages Amounts and Additional Interest Amounts, if any) on any of the Notes that continues for 30 days after the date when due, provided that a failure to make or provide for the A-1-9 payment of any of the first five scheduled interest payments on the Notes within 3 Business Days after an Interest Payment Date will constitute an Event of Default with no additional grace or cure period; (3) the Company fails to (A) deliver shares of Common Stock, together with cash in lieu of fractional shares, when such Common Stock or cash in lieu of fractional shares is required to be delivered upon conversion of a Note, or (B) make payment of the Cash Payment Component when such cash is required to be delivered upon conversion of a Note, and, in each case, that failure continues for 10 days after the relevant delivery date; (4) the Company fails to perform or observe any other term, covenant or agreement contained in the Notes or the Indenture for a period of 60 days after written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Notes then outstanding; (5) (A) the Company or any Significant Subsidiary fails to pay at maturity (after giving effect to any applicable grace period) any Indebtedness in an aggregate principal amount in excess of $10 million or (B) any of the Company's Indebtedness, or Indebtedness of any Significant Subsidiary, aggregating $10 million or more shall have been accelerated and declared due and payable prior to the scheduled maturity thereof, and such acceleration is not rescinded or annulled within a 30-day period after the date of such acceleration; (6) certain events of bankruptcy, insolvency or reorganization with respect to the Company or any Significant Subsidiary; and (7) the Pledge Agreement shall cease to be in full force and effect or enforceable in accordance with its terms, prior to the termination thereof in accordance with Section 18 of the Pledge Agreement. If an Event of Default (other than an Event of Default specified in clause (6) above) occurs and is continuing, the Trustee, or the Holders of at least 25% in aggregate principal amount of the Notes at the time outstanding, may declare all the Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes becoming due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in aggregate principal amount of the Notes at the time outstanding may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default (except a Default in payment of amounts specified in clause (1) or (2) above) if it determines that withholding notice is in their interests. 16. Trustee Dealings with the Company. Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 17. 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 Indenture or for any claim based on, A-1-10 in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 18. Authentication. This Note shall not be valid until an authorized signatory of the Trustee signs the Trustee's Certificate of Authentication on the other side of this Note. 19. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 20. GOVERNING LAW. THE INDENTURE AND THIS NOTE WILL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. The Company will furnish to any Noteholder upon written request and without charge a copy of the Indenture which has in it the text of this Note in larger type. A-1-11
ASSIGNMENT FORM CONVERSION NOTICE To assign this Note, fill in the form below: To convert this Note into Common Stock of the Company, check the box: I or we assign and transfer this Note to To convert only part of this Note, state the ______________________________________________ principal amount to be converted (which ______________________________________________ must be $1,000 or an integral multiple of $1,000): (Insert assignee's social security or tax ID no.) $_____________________ ______________________________________________ If you want the stock certificate made out in another person's name, fill in the form ______________________________________________ below: ______________________________________________ ______________________________________________ ______________________________________________ (Print or type assignee's name, address and (Insert other person's social security or tax zip code) ID no.) and irrevocably appoint ______________________________________________ _____________________ agent to transfer ______________________________________________ this Note on the books of the Company. The agent may substitute another to act for him. ______________________________________________ ______________________________________________ (Print or type other person's name, address and zip code)
________________________________________________________________________________ Date: _____________________ Your Signature: ___________________________________ ________________________________________________________________________________ (Sign exactly as your name appears on the other side of this Note) SIGNATURE GUARANTEE Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-1-12 EXHIBIT A-2 [Form of Face of Certificated Note] THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE, THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF, AGREES TO OFFER, SELL, OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE"), WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH SIERRA PACIFIC RESOURCES (THE "COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE) ONLY (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) FOR SO LONG AS THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHICH NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT, IF AVAILABLE, (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT AND CONTINUES TO BE EFFECTIVE AT THE TIME OF TRANSFER OR (E) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT IF THE PROPOSED TRANSFER IS PURSUANT TO CLAUSES (C) OR (E) ABOVE, SUCH TRANSFER IS SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHTS PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO THE COMPANY, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THE HOLDER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED HEREBY IS TRANSFERRED (OTHER THAN PURSUANT TO CLAUSE D ABOVE) A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. A-2-1 [THE FOREGOING LEGEND MAY BE REMOVED FROM THIS NOTE ON SATISFACTION OF THE CONDITIONS SPECIFIED IN THE INDENTURE.] A-2-2 SIERRA PACIFIC RESOURCES 7.25% Convertible Notes due 2010 No.: CUSIP: Issue Date: SIERRA PACIFIC RESOURCES, a Nevada corporation (the "Company"), promises to pay to Cede & Co. or registered assigns, the principal sum of ___________ DOLLARS ($___________) on February 14, 2010. This Note shall bear interest as specified on the other side of this Note. This Note is convertible as specified on the other side of this Note. Additional provisions of this Note are set forth on the other side of this Note. Dated: SIERRA PACIFIC RESOURCES By__________________________________ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION THE BANK OF NEW YORK, as Trustee, certifies that this is one of the Notes referred to in the within-mentioned Indenture (as defined on the other side of this Note). By_____________________________ Authorized Signatory Dated: ________________________ A-2-3 EXHIBIT B-1 Transfer Certificate In connection with any transfer of any of the Notes within the period prior to the expiration of the holding period applicable to the sales thereof under Rule 144(k) under the Securities Act of 1933, as amended (the "Securities Act") (or any successor provision), the undersigned registered owner of this Note hereby certifies with respect to $____________ principal amount of the above-captioned Notes presented or surrendered on the date hereof (the "Surrendered Notes") for registration of transfer, or for exchange or conversion where the Notes issuable upon such exchange or conversion are to be registered in a name other than that of the undersigned registered owner (each such transaction being a "transfer"), that such transfer complies with the restrictive legend set forth on the face of the Surrendered Notes for the reason checked below: - A transfer of the Surrendered Notes is made to the Company or any subsidiaries; or - The transfer of the Surrendered Notes complies with Rule 144A under the U.S. Securities Act of 1933, as amended (the "Securities Act"); or - The transfer of the Surrendered Notes is to an institutional accredited investor, as described in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act; or - The transfer of the Surrendered Notes is pursuant to an effective registration statement under the Securities Act, or - The transfer of the Surrendered Notes is pursuant to an offshore transaction in accordance with Rule 904 of Regulation S under the Securities Act; or - The transfer of the Surrendered Notes is pursuant to another available exemption from the registration requirement of the Securities Act. and unless the box below is checked, the undersigned confirms that, to the undersigned's knowledge, such Notes are not being transferred to an "affiliate" of the Company as defined in Rule 144 under the Securities Act (an "Affiliate"). - The transferee is an Affiliate of the Company. DATE: ______________________________ __________________________________ Signature(s) (If the registered owner is a corporation, partnership, or fiduciary, the title of the Person signing on behalf of such registered owner must be stated.) B-1-1 EXHIBIT B-2 Form of Letter to Be Delivered by Accredited Investors Sierra Pacific Resources 6100 Neil Road Reno, Nevada 89520-0400 Attention: Vice President and Chief Financial Officer The Bank of New York 101 Barclay Street, 8W New York, NY 10286 Attention: Corporate Trust Division Telephone No. (212) 815-5845 Facsimile No. (212) 815-5707 Dear Sirs: We are delivering this letter in connection with the proposed transfer of $_____________ principal amount of the 7.25% Convertible Notes due 2010 (the "Notes") of Sierra Pacific Resources (the "Company"), which are convertible into shares of the Company's Common Stock, $1.00 par value per share (the "Common Stock"). We hereby confirm that: (i) we are an "accredited investor" within the meaning of Rule 501(a)(1), (2) or (3) under the Securities Act of 1933, as amended (the "Securities Act"), or an entity in which all of the equity owners are accredited investors within the meaning of Rule 501(a)(1), (2) or (3) under the Securities Act (an "Institutional Accredited Investor"); (ii) the purchase of Notes by us is for our own account or for the account of one or more other Institutional Accredited Investors or as fiduciary for the account of one or more trusts, each of which is an "accredited investor" within the meaning of Rule 501(a)(7) under the Securities Act and for each of which we exercise sole investment discretion or (B) we are a "bank," within the meaning of Section 3(a)(2) of the Securities Act, or a "savings and loan association" or other institution described in Section 3(a)(5)(A) of the Securities Act that is acquiring Notes fiduciary for the account of one or more institutions for which we exercise sole investment discretion; (iii) we have such knowledge and experience in financial and business matters that we are capable of evaluating the merits and risks of purchasing Notes; and (iv) we are not acquiring Notes with a view to distribution thereof or with any present intention of offering or selling Notes or the Common Stock issuable upon conversion thereof, except as permitted below; provided that the disposition of our B-2-1 property and property of any accounts for which we are acting as fiduciary shall remain at all times within our control. We understand that the Notes were originally offered and sold in a transaction not involving any public offering within the United States within the meaning of the Securities Act and that the Notes and the shares of Common Stock (the "Notes") issuable upon conversion thereof have not been registered under the Securities Act, and we agree, on our own behalf and on behalf of each account for which we acquire any Notes, that if in the future we decide to resell or otherwise transfer such Notes prior to the date (the "Resale Restriction Termination Date") which is two years after the later of the original issuance of the Notes and the last date on which the Company or an affiliate of the Company was the owner of the Note, such Notes may be resold or otherwise transferred only (i) to the Company or any subsidiary thereof, or (ii) for as long as the Notes are eligible for resale pursuant to Rule 144A, to a person it reasonably believes is a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) that purchases for its own account or for the account of a qualified institutional buyer to which notice is given that the transfer is being made in reliance on Rule 144A, or (iii) to an Institutional Accredited Investor that is acquiring the Note for its own account, or for the account of such Institutional Accredited Investor for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act, or (iv) pursuant to another available exemption from registration under the Securities Act (if applicable), or (v) pursuant to a registration statement which has been declared effective under the Securities Act and, in each case, in accordance with any applicable securities laws of any State of the United States or any other applicable jurisdiction and in accordance with the legends set forth on the Notes. We further agree to provide any person purchasing any of the Notes other than pursuant to clause (v) above from us a notice advising such purchaser that resales of such Notes are restricted as stated herein. We understand that the trustee or the registrar, as the case may be, for the Notes will not be required to accept for registration of transfer any Notes pursuant to (iii) or (iv) above except upon presentation of evidence satisfactory to the Company that the foregoing restrictions on transfer have been complied with. We further understand that any Notes will be in the form of definitive physical certificates and that such certificates will bear a legend reflecting the substance of this paragraph other than certificates representing Notes transferred pursuant to clause (v) above. We acknowledge that the Company, others and you will rely upon our confirmations, acknowledgments and agreements set forth herein, and we agree to notify you promptly in writing if any of our representations or warranties herein ceases to be accurate and complete. B-2-2 THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. ___________________________________________ (Name of Purchaser) By:________________________________________ Name: Title: Address: B-2-3 EX-4.2 4 b46521spexv4w2.txt FORM OF SIERRA PACIFIC RESOURCES' NOTE Exhibit 4.2 [FORM OF GLOBAL NOTE] [Form of Face of Global Note] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE ISSUER 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 THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY, OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE TWO OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE, THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF, AGREES TO OFFER, SELL, OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE"), WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH SIERRA PACIFIC RESOURCES (THE "COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE) ONLY (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) FOR SO LONG AS THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED 1-1 INSTITUTIONAL BUYER TO WHICH NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT, IF AVAILABLE, (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT AND CONTINUES TO BE EFFECTIVE AT THE TIME OF TRANSFER OR (E) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT. IF THE PROPOSED TRANSFER IS PURSUANT TO CLAUSES (C) OR (E) ABOVE, SUCH TRANSFER IS SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHTS PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO THE COMPANY, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THE HOLDER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED HEREBY IS TRANSFERRED (OTHER THAN PURSUANT TO CLAUSE D ABOVE) A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. [THE FOREGOING LEGEND MAY BE REMOVED FROM THIS NOTE ON SATISFACTION OF THE CONDITIONS SPECIFIED IN THE INDENTURE.] 1-2 SIERRA PACIFIC RESOURCES 7.25% Convertible Notes due 2010 No.: 1 CUSIP: 826428 AE 4 Issue Date: ISIN: US826428AE48 SIERRA PACIFIC RESOURCES, a Nevada corporation (the "Company"), promises to pay to Cede & Co. or registered assigns, the principal sum of THREE HUNDRED MILLION DOLLARS ($300,000,000) on February 14, 2010. This Note shall bear interest as specified on the other side of this Note. This Note is convertible as specified on the other side of this Note. Additional provisions of this Note are set forth on the other side of this Note. 1-3 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officer. Dated: February __, 2003 SIERRA PACIFIC RESOURCES By_____________________________ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION THE BANK OF NEW YORK, as Trustee, certifies that this is one of the Notes referred to in the within-mentioned Indenture (as defined on the other side of this Note). By_____________________________ Authorized Signatory 1-4 [Form of Reverse Side of Note] 7.25% Convertible Note due 2010 1. Cash Interest. The Company promises to pay interest in cash on the principal amount of this Note at the rate per annum of 7.25%. The Company will pay cash interest semiannually in arrears on February 14 and August 14 of each year (each an "Interest Payment Date") to Holders of record at the close of business on January 31 and July 31 (whether or not a business day) (each a "Regular Record Date"), as the case may be, immediately preceding such Interest Payment Date. Cash interest on the Notes will accrue from the most recent date to which interest has been paid or duly provided or, if no interest has been paid, from the Issue Date. Cash interest will be computed on the basis of a 360-day year of twelve 30-day months. In accordance with the terms of the Registration Rights Agreement, during the first 90 days following the day on which an Event (as defined in the Registration Rights Agreement) has occurred and is continuing, the Interest Rate borne by the Notes shall be increased by 0.25% to 7.5% per annum. From and after the 91st day following the day on which an Event has occurred and such Event is continuing, the Interest Rate borne by the Notes shall be increased by an additional 0.25% to 7.75% per annum. In no event shall the Interest Rate borne by the Notes exceed 7.75% per annum. Any amount of additional interest will be payable in cash semiannually, in arrears, on each Interest Payment Date and will cease to accrue on the date the Event is cured. The Holder of this Note is entitled to the benefits of the Registration Rights Agreement. The Holder of this Note is entitled to the benefits of the Pledge Agreement, dated February 14, 2003, between the Company and The Bank of New York (the "Trustee"), pursuant to which the Company has placed in the Pledge Account cash or Pledged Financial Assets sufficient to provide for the payment of the first five interest payments (up to and including the interest payment due on August 14, 2005) on this Note. The terms capitalized but undefined in this paragraph have the meanings given to them in the Pledge Agreement. 2. Payment of Additional Interest Amounts. In the event the Company declares a dividend on its Common Stock, the Company shall pay to each Holder of record as of the record date for such dividend an amount equal to the product of (i) such per share dividend declared by the Company multiplied by (ii) the number of shares of Common Stock such Holder would possess had such Holder converted its Notes into a number of shares of Common Stock equal to the Conversion Rate as of the record date for such dividend (each such payment an "Additional Interest Amount and, collectively the "Additional Interest Amounts"); provided, however, that such amount shall not be due and no payment with respect thereto shall be made with respect to the Notes unless such dividend is paid to holders of Common Stock. The payment date for an Additional Interest Amount shall be the same as the 1-5 payment date for the dividend to which the Additional Interest Amount relates. Holders of Notes shall not be entitled to receive any Additional Interest Amount with respect to any dividend that causes an adjustment to the Conversion Rate. 3. Method of Payment. Subject to the terms and conditions of the Indenture, the Company will make payments in respect of the principal of, premium, if any, and cash interest on this Note to a Paying Agent. In respect of Redemption Prices and Change of Control Repurchase Prices, the Company will make payments in respect of the principal of, premium, if any, and cash interest on this Note to Holders who surrender Notes to a Paying Agent to collect such payments in respect of the Notes. The Company will pay cash amounts in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may make such cash payments by check payable in such money. A holder of Notes with an aggregate principal amount in excess of $10,000,000 will be paid by wire transfer in immediately available funds at the election of such holder. Any payment required to be made on any day that is not a Business Day will be made on the next succeeding Business Day. 4. Paying Agent, Conversion Agent and Registrar. Initially, the Trustee will act as Paying Agent, Conversion Agent and Registrar. The Company may appoint and change any Paying Agent, Conversion Agent, Registrar or co-registrar without notice, other than notice to the Trustee, except that the Company will maintain at least one Paying Agent in the State of New York, The City of New York, and Borough of Manhattan, which shall initially be an office or agency of the Trustee. The Company or any of its Subsidiaries or any of their Affiliates may act as Paying Agent, Conversion Agent, Registrar or co-registrar. 5. Indenture. The Company issued the Notes under an Indenture dated as of February 14, 2003 (the Indenture"), between the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as in effect from time to time (the "TIA"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the TIA for a statement of those terms. The Notes are general unsecured obligations of the Company (except as provided in Article 12 of the Indenture) limited to $300,000,000 aggregate principal amount. The Indenture does not limit other indebtedness of the Company, secured or unsecured. 6. Redemption of the Notes at the Option of the Company. At any time on or after February 14, 2008, the Company may redeem the Notes in whole at any time or in part from time to time upon not less than 30 nor more than 60 days' notice, at the following prices (expressed in percentages of the principal amount) together with accrued but unpaid interest to, but excluding, the date fixed for redemption. However, if a redemption date is 1-6 any interest payment date, the semi-annual payment of interest becoming due on such date shall be payable to the holder of record as of the relevant record date and the redemption price shall not include such interest payment. During the twelve months commencing February 14 of the years set forth below:
Year Redemption Price ---- ---------------- 2008..................................................... 102.1% 2009..................................................... 101.0%
If the Company does not redeem all the Notes, the Trustee will select the Notes to be redeemed in principal amounts of $1,000 or integral multiples of $1,000 by lot or on a pro rata basis. If any Notes are to be redeemed in part only, a new Note or Notes in principal amount equal to the unredeemed principal portion thereof will be issued. If a portion of a Holder's Notes is selected for partial redemption and the Holder converts a portion of its Notes, the converted portion will be deemed to be taken from the portion selected for redemption. No sinking fund is provided for the Notes. 7. Repurchase by the Company at the Option of the Holder. If a Change of Control occurs, the Holder, at the Holder's option, shall have the right, in accordance with the provisions of the Indenture, to require the Company to repurchase the Notes (or any portion of the principal amount hereof that is at least $1,000 or an integral multiple thereof, provided that the portion of the principal amount of this Note to be outstanding after such repurchase is at least equal to $1,000) at the Change of Control Repurchase Price in cash, plus any interest accrued and unpaid to, but excluding, the Change of Control Repurchase Date. A Change of Control Repurchase Notice will be given by the Company to the Holders as provided in the Indenture. To exercise a repurchase right, a Holder must deliver to the Trustee a written notice as provided in the Indenture. Holders have the right to withdraw any Change of Control Repurchase Notice by delivering to the Paying Agent a written notice of withdrawal in accordance with the provisions of the Indenture. 8. Notice of Redemption. Notice of redemption will be mailed not less than 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at the Holder's registered address. If money sufficient to pay the Redemption Price of all Notes (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent prior to or on the Redemption Date, immediately after such Redemption Date interest ceases to accrue on such Notes or portions thereof. Notes in denominations 1-7 larger than $1,000 of principal amount may be redeemed in part but only in integral multiples of $1,000 of principal amount. 9. Conversion. The Notes will not be convertible prior to August 14, 2003. At any time on or after August 14, 2003, subject to and upon compliance with the provisions of the Indenture, at the option of the Holder thereof, any Note or any portion of the principal amount thereof which is $1,000 or an integral multiple of $1,000 may be converted at the principal amount thereof, or of such portion thereof, into a combination of cash and duly authorized, fully paid and nonassessable shares of Common Stock (or, in the event that the Shareholder Approval Condition described in the Indenture shall have been satisfied and the Company so elects, entirely into shares of Common Stock) as provided in the Indenture. Such conversion right shall expire at the close of business on February 14, 2010. The "Conversion Rate" shall initially be 219.1637 and shall be adjusted in certain instances as provided in the Indenture. The "Share Payment Component" shall initially be 76.7073 and shall be subject to adjustment in the same manner and under the same circumstances as the Conversion Rate, subject to any limitation under applicable rules of the New York Stock Exchange. The Company shall pay a cash adjustment as provided in the Indenture in lieu of any fractional share of Common Stock. To convert a Note, a Holder must (1) complete and sign the conversion notice below (or complete and sign a facsimile of such notice) and deliver such notice to the Conversion Agent, (2) surrender the Note duly signed and endorsed to the Conversion Agent, (3) furnish appropriate endorsements and transfer documents if required by the Conversion Agent, the Company or the Trustee and (4) pay any transfer or similar tax or payment detailed below, if required. Notes surrendered for conversion, other than those called for redemption pursuant to paragraph 6 above, during the period from the close of business on any Regular Record Date to the opening of business on the next succeeding Interest Payment Date shall be accompanied by payment in New York Clearing House funds or other funds acceptable to the Company of an amount equal to the interest (including any Liquidated Damages Amounts or Additional Interest Amounts that would be due and payable on such Interest Payment Date) to be received on such Interest Payment Date on the principal amount of Notes being surrendered for conversion. No such payment will be required if the Notes are called for redemption pursuant to paragraph 6 above. 10. Conversion Arrangement on Call for Redemption. Any Notes called for redemption, unless surrendered for conversion before the close of business on the Redemption Date, may be deemed to be purchased from the Holders of such Notes at an amount not less than the Redemption Price, by one or more investment bankers or other purchasers who may agree with the Company to purchase such Notes 1-8 from the Holders, to convert them into Common Stock of the Company and to make payment for such Notes to the Trustee in trust for such Holders. 11. Denominations; Transfer; Exchange. The Notes are in fully registered form, without coupons, in denominations of $1,000 of principal amount and integral multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange (i) any Notes selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed), (ii) any Notes in respect of which a Change of Control Repurchase Notice has been given and not withdrawn (except, in the case of a Note to be purchased in part, the portion of the Note not to be purchased) or (iii) any Notes for a period of 15 days before the mailing of a notice of redemption of Notes to be redeemed. 12. Persons Deemed Owners. The registered Holder of this Note may be treated as the owner of this Note for all purposes. 13. Unclaimed Money or Notes. The Trustee and the Paying Agent shall return to the Company upon written request any money or Notes held by them for the payment of any amount with respect to the Notes that remains unclaimed for two years, subject to applicable unclaimed property law. After return to the Company, Holders entitled to the money or Notes must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person. 14. Amendment; Waiver. Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in aggregate principal amount of the Notes at the time outstanding and (ii) certain Defaults may be waived with the written consent of the Holders of a majority in aggregate principal amount of the Notes at the time outstanding. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, to make any change that does not adversely affect the rights of any Noteholder, or to comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA. 15. Defaults and Remedies. Under the Indenture, Events of Default include (1) the Company fails to pay when due the principal of or premium, if any, on any of the Notes at maturity, upon redemption or exercise of a repurchase right or otherwise; (2) the Company fails to pay an installment of interest (including Liquidated Damages Amounts and Additional Interest Amounts, if any) on any of the Notes that continues for 30 days after the date when due, provided that a failure to make or provide for the 1-9 payment of any of the first five scheduled interest payments on the Notes within 3 Business Days after an Interest Payment Date will constitute an Event of Default with no additional grace or cure period; (3) the Company fails to (A) deliver shares of Common Stock, together with cash in lieu of fractional shares, when such Common Stock or cash in lieu of fractional shares is required to be delivered upon conversion of a Note, or (B) make payment of the Cash Payment Component when such cash is required to be delivered upon conversion of a Note, and, in each case, that failure continues for 10 days after the relevant delivery date; (4) the Company fails to perform or observe any other term, covenant or agreement contained in the Notes or the Indenture for a period of 60 days after written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Notes then outstanding; (5) (A) the Company or any Significant Subsidiary fails to pay at maturity (after giving effect to any applicable grace period) any Indebtedness in an aggregate principal amount in excess of $10 million or (B) any of the Company's Indebtedness, or Indebtedness of any Significant Subsidiary, aggregating $10 million or more shall have been accelerated and declared due and payable prior to the scheduled maturity thereof, and such acceleration is not rescinded or annulled within a 30-day period after the date of such acceleration; (6) certain events of bankruptcy, insolvency or reorganization with respect to the Company or any Significant Subsidiary; and (7) the Pledge Agreement shall cease to be in full force and effect or enforceable in accordance with its terms, prior to the termination thereof in accordance with Section 18 of the Pledge Agreement. If an Event of Default (other than an Event of Default specified in clause (6) above) occurs and is continuing, the Trustee, or the Holders of at least 25% in aggregate principal amount of the Notes at the time outstanding, may declare all the Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes becoming due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in aggregate principal amount of the Notes at the time outstanding may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default (except a Default in payment of amounts specified in clause (1) or (2) above) if it determines that withholding notice is in their interests. 16. Trustee Dealings with the Company. Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 17. 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 Indenture or for any claim based on, 1-10 in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 18. Authentication. This Note shall not be valid until an authorized signatory of the Trustee signs the Trustee's Certificate of Authentication on the other side of this Note. 19. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 20. GOVERNING LAW. THE INDENTURE AND THIS NOTE WILL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. The Company will furnish to any Noteholder upon written request and without charge a copy of the Indenture which has in it the text of this Note in larger type. 1-11
ASSIGNMENT FORM CONVERSION NOTICE To assign this Note, fill in the form below: To convert this Note into Common Stock of the Company, check the box: I or we assign and transfer this Note to To convert only part of this Note, state the ______________________________________________ principal amount to be converted (which ______________________________________________ must be $1,000 or an integral multiple of $1000): (Insert assignee's social security or tax ID no.) $________________________ ______________________________________________ If you want the stock certificate made out in another person's name, fill in the form ______________________________________________ below: ______________________________________________ _____________________________________________ (Print or type assignee's name, address and zip code) _____________________________________________ (Insert other person's social security or tax and irrevocably appoint ID no.) _____________________ agent to transfer _____________________________________________ this Note on the books of the Company. The agent may substitute another to act for him. _____________________________________________ _____________________________________________ _____________________________________________ (Print or type other person's name, address and zip code)
________________________________________________________________________________ Date: ______________________ Your Signature: __________________________________ ________________________________________________________________________________ (Sign exactly as your name appears on the other side of this Note) SIGNATURE GUARANTEE Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. 1-12 [Form of Face of Certificated Note] THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE, THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF, AGREES TO OFFER, SELL, OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE"), WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH SIERRA PACIFIC RESOURCES (THE "COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE) ONLY (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) FOR SO LONG AS THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHICH NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT, IF AVAILABLE, (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT AND CONTINUES TO BE EFFECTIVE AT THE TIME OF TRANSFER OR (E) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT IF THE PROPOSED TRANSFER IS PURSUANT TO CLAUSES (C) OR (E) ABOVE, SUCH TRANSFER IS SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHTS PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO THE COMPANY, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THE HOLDER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED HEREBY IS TRANSFERRED (OTHER THAN PURSUANT TO CLAUSE D ABOVE) A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. [THE FOREGOING LEGEND MAY BE REMOVED FROM THIS NOTE ON SATISFACTION OF THE CONDITIONS SPECIFIED IN THE INDENTURE.] 2-1 SIERRA PACIFIC RESOURCES 7.25% Convertible Notes due 2010 No.: CUSIP: Issue Date: SIERRA PACIFIC RESOURCES, a Nevada corporation (the "Company"), promises to pay to Cede & Co. or registered assigns, the principal sum of ___________ DOLLARS ($___________) on February 14, 2010. This Note shall bear interest as specified on the other side of this Note. This Note is convertible as specified on the other side of this Note. Additional provisions of this Note are set forth on the other side of this Note. Dated: SIERRA PACIFIC RESOURCES By_____________________________ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION THE BANK OF NEW YORK, as Trustee, certifies that this is one of the Notes referred to in the within-mentioned Indenture (as defined on the other side of this Note). By_____________________________ Authorized Signatory Dated: ____________________ 2-2 EX-10.1 5 b46521spexv10w1.txt WESTERN SYSTEMS POWER POOL AGREEMENT Exhibit 10.1 ATTACHMENT A WESTERN SYSTEMS POWER POOL AGREEMENT NONREDLINED VERSION Western Systems Power Pool. Rate Schedule FERC No.6 WESTERN SYSTEMS POWER POOL AGREEMENT Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool Original Sheet No. 1 Rate Schedule FERC No. 6 TABLE OF CONTENTS
PAGE 1. PARTIES................................................................... 4 2. RECITALS.................................................................. 4 3. AGREEMENT................................................................. 5 4. DEFINITIONS............................................................... 5 5. TERM AND TERMINATION...................................................... 11 6. SERVICE SCHEDULES AND WSPP DEFAULT TRANSMISSION TARIFF.................... 12 7. HUB AND OPERATING AGENT................................................... 13 8. ORGANIZATION AND ADMINISTRATION........................................... 16 9. PAYMENTS.................................................................. 20 10. UNCONTROLLABLE FORCES..................................................... 22 11. WAIVERS................................................................... 24 12. NOTICES................................................................... 24 13. APPROVALS................................................................. 25 14. TRANSFER OF INTEREST IN AGREEMENT......................................... 27 15. SEVERABILITY.............................................................. 28 16. MEMBERSHIP................................................................ 28 17. RELATIONSHIP OF PARTIES................................................... 29 18. NO DEDICATION OF FACILITIES............................................... 30
Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 2 Rate Schedule FERC No. 6 Superseding Original Sheet No. 2 TABLE OF CONTENTS
PAGE 19. NO RETAIL SERVICES..................................................... 30 20. THIRD PARTY BENEFICIARIES.............................................. 30 21. LIABILITY AND DAMAGES.................................................. 30 22. DEFAULT OF TRANSACTIONS UNDER THIS AGREEMENT AND CONFIRMATION AGREEMENTS................................................ 34 23. OTHER AGREEMENTS....................................................... 43 24. GOVERNING LAW.......................................................... 43 25. JUDGMENTS AND DETERMINATIONS........................................... 43 26. COMPLETE AGREEMENT..................................................... 44 27. CREDITWORTHINESS....................................................... 44 28. NETTING................................................................ 46 29. TAXES.................................................................. 47A 30. CONFIDENTIALITY........................................................ 48 31. TRANSMISSION TARIFF.................................................... 49 32. TRANSACTION SPECIFIC TERMS AND ORAL AGREEMENTS......................... 49 33. PERFORMANCE, TITLE, AND WARRANTIES FOR TRANSACTIONS UNDER SERVICE SCHEDULES................................................ 52A 34. DISPUTE RESOLUTION..................................................... 53 35. FORWARD CONTRACTS...................................................... 56
Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool Third Revised Sheet No. 3 Rate Schedule FERC No.6 Superseding Second Revised Sheet No. 3 TABLE OF CONTENTS
PAGE 36. TRADE OPTION EXCEPTION.............................................. 56 37. ADDITIONAL REPRESENTATIONS AND WARRANTIES........................... 57 38. FLOATING PRICES..................................................... 58 39. AMENDMENT........................................................... 58B 40. EXECUTION BY COUNTERPARTS........................................... 58C 41. WITNESS............................................................. 59
EXHIBIT A: NETTING EXHIBIT B: FORM OF COUNTERPARTY GUARANTEE AGREEMENT EXHIBIT C: SAMPLE FORM FOR CONFIRMATION EXHIBIT D: WSPP MEDIATION AND ARBITRATION PROCEDURES SERVICE SCHEDULES A. ECONOMY ENERGY SERVICE B. UNIT COMMITMENT SERVICE C. FIRM CAPACITY/ENERGY SALE OR EXCHANGE SERVICE LIST OF MEMBERS Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool Original Sheet No. 4 Rate Schedule FERC No.6 1. PARTIES: The Parties to this Western Systems Power Pool Agreement (hereinafter referred to as "Agreement") are those entities that have executed this Agreement, hereinafter sometimes referred to individually as "Party" and collectively as "Parties," but excluding any such entity that withdraws its participation in the Agreement. 2. RECITALS: 2.1 The WSPP experiment has been successfully concluded. Its main purpose was to determine the feasibility of a marketing arrangement which would increase the efficiency of interconnected power system operations above that already being accomplished with existing agreements through increased market knowledge and market pricing of commodities. 2.2 The Parties now desire to proceed with a similar marketing arrangement on a long term basis for prescheduled and real-time coordinated power transactions, such as economy energy transactions, unit commitment service, firm system capacity/energy sales or exchanges. Accordingly, this Agreement, together with any applicable Confirmation Agreement, sets forth the terms and conditions to implement these services within any applicable rate ceilings set forth in the Service Schedules in conformance with FERC orders where applicable. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 5 Rate Schedule FERC No. 6 Superseding Original Sheet No. 5 2.3 Each Party meets the membership requirements set out in Section 16. 2.4 The Parties are willing to utilize their respective electric generation and transmission systems or contractual rights thereto to the extent of their respective obligations which are set forth in this Agreement. 3. AGREEMENT: In consideration of the mutual covenants and promises herein set forth, the Parties agree as follows: 4. DEFINITIONS: The following terms, when used herein with initial capitalization, whether in the singular or in the plural, shall have the meanings specified: 4.1 Agreement: This Western Systems Power Pool Agreement, including the Service Schedules and Exhibits attached hereto, as amended; provided, however, that Confirmation Agreements are not included within this definition. 4.1a Broker: An entity or person that arranges trades or brings together Purchasers and Sellers without taking title to the power. 4.1b Business Day(s): Any day other than a Saturday or Sunday or a national (United States or Canadian, whichever is applicable) holiday. United States holidays shall be holidays observed by Federal Reserve member banks in New York City. Where both the Seller and the Purchaser have their principal place of business in the United States, Canadian holidays shall not apply. Similarly, where both the Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool Third Revised Sheet No. 6 Rate Schedule FERC No.6 Superseding Second Revised Sheet No. 6 Seller and the Purchaser have their principal place of business in Canada, UnitedStates holidays shall not apply. In situations where one Party has its principal place of business within the United States and the other Party's principal place of business is within Canada, both United States and Canadian holidays shall be observed. 4.1c California ISO: The California Independent System Operator Corporation or any successor organization. 4.1d Confirmation Agreement(s): Any oral agreement or written documentation for transactions under the Service Schedules which sets forth terms and conditions for transactions that are in addition to, substitute, or modify those set forth in the Agreement. A sample written confirmation document is included as Exhibit C. Section 32 of this Agreement provides for such Confirmation Agreements. The Parties may agree to modify terms of this Agreement for more than one transaction pursuant to a separate written agreement. The changes to the Agreement agreed to through such written agreements shall be considered part of the Confirmation Agreement and shall apply to all transactions entered into between the two Parties under the Agreement unless the Parties specifically agree to override such changes for a particular transaction consistent with Section 32 of this Agreement. 4.1e Contract Price: The price agreed to between the Seller and the Purchaser for a transaction under the Agreement and any Confirmation Agreement. Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Second Revised Sheet No. 6A Rate Schedule FERC No. 6 Superseding First Revised Sheet No. 6A 4.1f Contract Quantity: The amount of electric energy and/or capacity to be supplied for a transaction under a Service Schedule as agreed to through any Confirmation Agreement. 4.2 Control Area: Shall mean an electric system capable of regulating its generation in order to maintain its interchange schedule with other electric systems and to contribute its frequency bias obligation to the interconnection as specified in the North American Electric Reliability Council (NERC) Operating Guidelines. 4.2a Costs: As defined in Section 22.3 of this Agreement. 4.2b Dealer: An entity or person that buys or sells power and takes title to the power at some point. 4.2c Defaulting Party: As defined in Section 22.1 of this Agreement. 4.2d Determination Period: As defined in Section 38.2 of this Agreement. 4.3 Economy Energy Service: Non-firm energy transaction whereby the Seller has agreed to sell or exchange and the Purchaser has agreed to buy or exchange energy that is subject to immediate interruption upon notification, in accordance with the Agreement, including Service Schedule A, and any applicable Confirmation Agreement. Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Second Revised Sheet No. 7 Rate Schedule FERC No. 6 Superseding First Revised Sheet No. 7 4.4 Electric Utility: An entity or lawful association which (i) is a public utility, Independent Power Producer, or Power Marketer regulated under applicable state law or the Federal Power Act, or (ii) is exempted from such regulation under the Federal Power Act because it is the United States, a State or any political subdivision thereof or an agency of any of the foregoing, or a Rural Utilities Service cooperative, or (iii) is a public utility, Independent Power Producer, or Power Marketer located in Canada or Mexico that is similarly regulated. 4.4a ERCOT: Electric Reliability Council of Texas, Inc., the corporation that administers Texas's power grid and is a regional reliability council. 4.4b Event of Default: As defined in Section 22.1 of this Agreement. 4.5 Executive Committee: That committee established pursuant to Section 8 of this Agreement. 4.6 FERC: The Federal Energy Regulatory Commission or its regulatory successor. 4.7 Firm Capacity/Energy Sale or Exchange Service: Firm capacity and/or energy transaction whereby the Seller has agreed to sell or exchange and the Purchaser has agreed to buy or exchange for a specified period available capacity with or without associated energy which may include a Physically-Settled Option and a capacity transaction in accordance with the Agreement, including Service Schedule C, and any applicable Confirmation Agreement. Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Original Sheet No. 7A Rate Schedule FERC No. 6 4.7a First Party: As defined in Section 27 of this Agreement. 4.7b Floating Price: As defined in Section 38.1 of this Agreement. 4.7c Gains: As defined in Section 22.3 of this Agreement. 4.7d Guarantee Agreement: An agreement providing a guarantee issued by a parent company or another entity guaranteeing responsibility for specific obligations for transactions under this Agreement and Confirmation Agreements. A sample form of guarantee is provided in Exhibit B. 4.7e Guarantor: The entity providing a guarantee pursuant to a Guarantee Agreement. Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Second Revised Sheet No. 8 Rate Schedule FERC No. 6 Superseding First Revised Sheet No. 8 4.8 Hub: An electronic communication center that functions as a central point to electronically receive and assemble data for offers to buy or sell power or transmission service from each Party and make that data electronically available concurrently to all Parties. 4.9 Incremental Cost: The forecasted expense incurred by the Seller in providing an additional increment of energy or capacity during a given hour. 4.10 Independent Power Producer: An entity which is a non-traditional public utility that produces and sells electricity but which does not have a retail service franchise. 4.11 Interconnected Transmission System: The total of all transmission facilities owned or operated by the Parties, including transmission facilities over which Parties have scheduling rights. 4.11a Letter of Credit: An irrevocable, transferable, standby letter of credit, issued by an issuer acceptable to the Party requiring the Letter of Credit. 4.11b Losses: As defined in Section 22.3 of this Agreement. 4.11c Market Disruption Event: As defined in Section 38.2 of this Agreement. 4.11d NERC: North American Electric Reliability Council or any successor organization. 4.11e Non-Defaulting Party: As defined in Section 22.1(a) of this Agreement. 4.11f Non-Performing Party: As defined in Section 21.3(a) of this Agreement. Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Original Sheet No. 8A Rate Schedule FERC No. 6 4.11g Non-Standard Confirmation Provisions: As defined in Section 32.5 of this Agreement. 4.11h NYMEX: New York Mercantile Exchange, the physical commodity futures exchange and a trading forum for energy and precious metals. 4.12 Operating Agent: Arizona Public Service Company, or its successor as may be designated by the Executive Committee. 4.13 Operating Committee: That committee established pursuant to Section 8 of this Agreement. 4.13a Party or Parties: As defined in Section 1 of this Agreement. 4.13b Performing Party: As defined in Section 21.3(a) of this Agreement. Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool First Revised Sheet No. 9 Rate Schedule FERC No. 6 Superseding Original Sheet No. 9 4.14 Power Marketer: An entity which buys, sells, and takes title to electric energy, transmission and/or other services from traditional utilities and other suppliers. 4.14a Physically-Settled Option: Includes (i) a call option which is the right, but not the obligation, to buy an underlying power product as defined under Service Schedules B or C according to the price and exercise terms set forth in the Confirmation Agreement; and (ii) a put option which is the right, but not the obligation, to sell an underlying power product as defined under Service Schedules B or C according to the price and exercise terms set forth in the Confirmation Agreement. 4.14b Premium: The amount paid by the Purchaser of a Physically-Settled Option to the Seller of such Option by the date agreed to by the Parties in the Confirmation Agreement. 4.14c Present Value Rate: As defined in Section 22.3(b) of this Agreement. 4.15 Purchaser: Any Party which agrees to buy or receive from one or more of the other Parties any service pursuant to the Agreement under any Service Schedule and any applicable Confirmation Agreement. 4.16 Qualifying Facility: A facility which is a qualifying small power production facility or a qualifying cogeneration facility as these terms are defined in Federal Power Act Sections 3(17)(A), 3(17)(C), 3(18)(A), and 3(18)(B); which meets the requirements set forth in 18 C.F.R. Sections 292.203-292.209; or a facility in Canada or Mexico that complies with similar requirements. Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Second Revised Sheet No. 10 Rate Schedule FERC No. 6 Superseding First Revised Sheet No. 10 4.16a Replacement Price: The price at which the Purchaser, acting in a commercially reasonable manner, effects a purchase of substitute electric energy in place of the electric energy not delivered by the Seller or, absent such a purchase, the market price for such quantity of electric energy, as determined by the Purchaser in a commercially reasonable manner, at the delivery point (agreed upon by the Seller and the Purchaser for the transaction). 4.16b Retail Entity: A retail aggregator or supplier or retail customer; provided, however, only those Retail Entities eligible for transmission service under the FERC's pro forma open access transmission tariff are eligible to become members of the WSPP. 4.16c Sales Price: The price at which the Seller, acting in a commercially reasonable manner, effects a resale of the electric energy not received by the Purchaser or, absent such a resale, the market price for such quantity of electric energy at the delivery point (agreed upon by the Seller and the Purchaser), as determined by the Seller in a commercially reasonable manner. 4.16d Second Party: As defined in Section 27 of this Agreement. 4.17 Seller: Any Party which agrees to sell or provide to one or more of the other Parties any service pursuant to the Agreement under any Service Schedule and any applicable Confirmation Agreement. 4.18 Service Schedule: A schedule of services established pursuant to Section 6 of this Agreement. Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool First Revised Sheet No. 10A Rate Schedule FERC No. 6 Superseding Original Sheet No. 10A 4.18a Successor in Operation: The successor entity which takes over the wholesale electric trading operations of the first entity either through a merger or restructuring. A Successor in Operation shall not include an entity which merely acquires power sales contracts from the first entity either through a purchase or other means without taking over the wholesale electric trading operations of the first entity. 4.18b Terminated Transaction: As defined in Section 22.2 of this Agreement. 4.18c Termination Payment: As defined in Section 22.2 of this Agreement. 4.18d Trading Day: As defined in Section 38.2 of this Agreement. 4.19 Uncontrollable Forces: As defined in Section 10 of this Agreement or in a Confirmation Agreement. 4.20 Unit Commitment Service: A capacity and associated scheduled energy transaction or a Physically-Settled Option which the Seller has agreed to sell and the Purchaser has agreed to buy from a specified unit(s) for a specified period, in Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool First Revised Sheet No. 11 Rate Schedule FERC No. 6 Superseding Original Sheet No. 11 accordance with the Agreement, including Service Schedule B, and any applicable Confirmation Agreement. 4.20a WSPP: The Western Systems Power Pool. 4.20b WSPP Default Transmission Tariff: The transmission tariff filed on behalf of WSPP Members with FERC as it may be amended from time to time. 4.20c WSPP Homepage: WSPP's internet web site, www.wspp.org. 5. TERM AND TERMINATION: 5.1 This Agreement shall become effective as of July 27, 1991 when acceptance or approvals required under Section 13.2 of this Agreement with respect to those Parties that are subject to FERC jurisdiction have been obtained; provided, however, that this Agreement shall not become effective as to any Party in the event the pre-grant of termination requested under Section 13.3 is not allowed by FERC, absent that Party's consent; and provided, further, that this Agreement shall not become effective as to any Party if any terms, conditions or requirements imposed by FERC are found unacceptable by that Party. This Agreement shall continue in effect for a period of ten (10) years from said effective date and thereafter on a year to year basis until terminated by the Parties; provided, however, that any Party may withdraw its participation at any time after the effective date of this Agreement on thirty (30) days prior written notice to all other Parties. Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Original Sheet No. 11A Rate Schedule FERC No. 6 5.2 As of the effective date of any withdrawal, the withdrawing Party shall have no further rights or obligations under this Agreement except the right to collect Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool First Revised Sheet No. 12 Rate Schedule FERC No. 6 Superseding Original Sheet No. 12 money or receive service owed to it for transactions under any Service Schedule and the obligation to pay such amounts due to another Party and to complete any transactions agreed to under any Service Schedule as of said date. No Party shall oppose, before any court or regulatory agencies having jurisdiction, any other Party's withdrawal as provided in this Section. 5.3 Except as provided for in Section 5.2, after termination, or withdrawal with respect to the withdrawing Party, all rights to services provided under this Agreement or any tariff or rate schedule which results from or incorporates this Agreement shall cease, and no Party shall claim or assert any continuing right to such services under this Agreement. Except as provided for in Section 5.2, no Party shall be required to provide services based in whole or in part on the existence of this Agreement or on the provision of services under this Agreement beyond the termination date, or date of withdrawal with respect to the withdrawing Party. 6. SERVICE SCHEDULES AND WSPP DEFAULT TRANSMISSION TARIFF: 6.1 The Parties contemplate that they may, from time to time, add or remove Service Schedules under this Agreement. The attached Service Schedules A through C for Economy Energy Service, Unit Commitment Service, and Firm Capacity/Energy Sale or Exchange Service are hereby approved and made a part of this Agreement. Nothing contained herein shall be construed as affecting in any way the right of the Parties to jointly make application to FERC for a change Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Original Sheet No. 13 Rate Schedule FERC No. 6 in the rates and charges, classification, service, terms, or conditions affecting WSPP transactions under Section 205 of the Federal Power Act and pursuant to FERC rules and regulations promulgated thereunder. Subject to the provisions of Section 13, future Service Schedules, if any, shall be adopted only by amendment of this Agreement and shall be attached hereto and become a part of this Agreement. 6.2 [RESERVED] 6.3 When the WSPP Default Transmission Tariff applies as specified in the preamble to such Default Transmission Tariff, Transmission Service under it shall be available both to Parties and nonParties under this Agreement; provided, however, each Party or nonParty must be an eligible customer under the WSPP Default Transmission Tariff in order to receive service. 7. HUB AND OPERATING AGENT: 7.1 The Operating Agent shall act for itself and as agent for the Parties to carry out its designated responsibilities under this Agreement. 7.2 The Operating Agent shall, as directed by the Operating Committee pursuant to Section 8.2.4, and on behalf of the Parties, either (i) purchase or lease, and install or have installed, operate and maintain the necessary equipment to operate the Hub or (ii) contract for Hub services. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 14 Rate Schedule FERC No. 6 7.3 The Operating Agent's estimated total costs to be incurred under Section 7.2 shall be subject to review by the Operating Committee and approval by the Executive Committee. 7.4 At least sixty (60) days prior to each calendar year that this Agreement is in effect, the Operating Agent shall prepare a budget for said year of operation under this Agreement and shall submit same to the Operating Committee for review, and to the Executive Committee for approval. Subsequent budget revisions shall be submitted to the Operating Committee for review and to the Executive Committee for approval. 7.5 The Operating Agent shall perform other administrative tasks necessary to implement this Agreement as directed by the Executive Committee. 7.6 Except as provided in Section 7.7, all Parties shall share equally in all costs of the Operating Agent incurred under this Agreement, including but not limited to initial FERC filing fees and any reasonable legal fees. 7.7 Each Party, in coordination with the Operating Agent, shall at its own expense acquire, install, operate, and maintain all necessary software and hardware on its system and the necessary communications link to the Hub to conduct transactions under this Agreement. 7.8 The Operating Agent shall bill the Parties for costs incurred under this Agreement on an estimated basis reasonably in advance of when due, and such billings shall be paid by the Parties when due. Such billings shall be adjusted in the following Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 15 Rate Schedule FERC No. 6 month(s) to reflect recorded costs. Billing and payment of the Operating Agent's costs shall otherwise be implemented in accordance with the provisions of Section 9. 7.9 The Operating Agent, at reasonable times and places, shall make available its records and documentation supporting costs for bills rendered under this Agreement for the inspection of any Party for a period of time not to exceed two (2) years from the time such bills were rendered. 7.9.1 A Party requesting review of the Operating Agent's records shall give the Operating Agent sufficient notice of its intent, but in no event less than thirty (30) days. 7.9.2 The requesting Party may perform this review using personnel from its own staff or designate a certified public accounting firm for the purpose of this review. 7.9.3 All costs incurred to perform this review shall be at the requesting Party's own expense. 7.9.4 The Party performing the review shall not voluntarily release the Operating Agent's records or disclose any information contained therein to any third party unless the written consent of the Operating Agent and the Executive Committee has been obtained. 7.10 Upon the termination of this Agreement, unless otherwise directed by the Executive Committee, the Operating Agent shall either dispose of any Hub Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 16 Rate Schedule FERC No. 6 equipment which it has purchased, or have the right of first refusal to purchase such equipment at original cost less depreciation, and shall apply any net proceeds from the sale of the Hub equipment against its costs incurred under this Agreement. The Operating Agent shall refund any excess proceeds equally to the Parties. 8. ORGANIZATION AND ADMINISTRATION: As a means of securing effective and timely cooperation within the activities hereunder and as a means of dealing on a prompt and orderly basis with various problems which may arise in connection with system coordination and operation under changing conditions, the Parties hereby establish an Executive Committee and an Operating Committee. 8.1 Executive Committee: The Executive Committee shall consist of one representative and an alternate from each Party designated pursuant to Section 8.5 herein. The responsibilities of the Executive Committee are as follows: 8.1.1 To establish sub-committees as it may from time to time deem necessary. 8.1.2 To review at least annually the service activities hereunder to ensure that such activities are consistent with the spirit and intent of this Agreement. 8.1.3 To review any unresolved issues which may arise hereunder and endeavor to resolve the issues. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 17 Rate Schedule FERC No. 6 8.1.4 To review and approve the Operating Agent's annual budget under this Agreement, and any revision thereto, within thirty (30) days of recommendation by the Operating Committee. 8.1.5 To establish and approve any additional budgets under this Agreement as may be deemed necessary. 8.1.6 To review and recommend to the Parties for approval any additions or amendments to this Agreement, including Service Schedules. 8.1.7 To review and act on the application of an entity to become a Party to this Agreement. 8.1.8 To designate a successor to the Operating Agent, if necessary. 8.1.9 To do such other things and carry out such duties as specifically required or authorized by this Agreement; provided, however, that the Executive Committee shall have no authority to amend this Agreement. 8.1.10 To notify any Party of the rescission of its interest in this Agreement due to its failure to continue to meet the requirements of Section 16.1. 8.1.11 To arrange for legal representation for filing this Agreement (and any subsequent amendments) with FERC and supporting the Agreement (or amendments) in any FERC proceeding, and for other purposes as required. 8.2 Operating Committee: Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 18 Rate Schedule FERC No. 6 The Operating Committee shall consist of one representative and an alternate from each Party designated pursuant to Section 8.5. The responsibilities of the Operating Committee are as follows: 8.2.1 To establish, review, approve, or modify procedures and standard practices, consistent with the provisions hereof, for the guidance of load dispatchers and other operating employees in the Parties' electric systems as to matters affecting transactions under this Agreement. 8.2.2 To submit to the Executive Committee any proposed new or revised Service Schedules. 8.2.3 To establish, review, approve, or modify any scheduling or operating procedures required in connection with transactions under this Agreement. 8.2.4 To direct the Operating Agent in matters governed by this Agreement. 8.2.5 To review and make recommendations to the Executive Committee for approval of the Operating Agent's annual budget under this Agreement, including any proposed revisions thereto, within thirty (30) days of receipt from the Operating Agent. 8.2.6 To review and recommend as necessary the types and arrangement of equipment for intersystem communication facilities to enhance transactions and benefits under this Agreement. 8.2.7 To review the Operating Agent's estimated total costs of providing, having provided or contracting for a Hub. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 19 Rate Schedule FERC No. 6 8.2.8 To review new member applications for membership to this Agreement and make recommendations on said applications to the Executive Committee. 8.2.9 To do such other things and carry out such duties as specifically required or authorized by this Agreement or as directed by the Executive Committee; provided, however, that the Operating Committee shall have no authority to amend this Agreement. 8.3 All matters which require Operating Committee or Executive Committee approval as provided in this Agreement shall be by no less than ninety percent (90%) affirmative agreement of the committee members present. 8.4 Unless otherwise agreed by all committee members, the chairperson of each committee shall provide the other Parties at least ten (10) Business Days advance notification of all committee meetings, including an agenda of matters to be discussed and voted on at the meeting. All material issues to be submitted to a vote of the committee shall appear on the agenda. Prior to the selection of a chairperson the Operating Agent shall provide such advance notice for the initial meeting of each committee. 8.5 Each Party shall give written notice to the other Parties of the name of its designated representative and alternate representative (to act in the absence of the designated representative) on each committee within thirty (30) days after the execution of this Agreement. Notice of any change of representative or alternate Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 20 Rate Schedule FERC No. 6 Superseding Original Sheet No. 20 representative shall be given by written notice to the other Parties. Each Party's designated representative shall be authorized to act on its behalf with respect to those committee responsibilities provided herein. 8.6 Each committee shall meet as necessary or at the request of any Party. 8.7 Each committee shall elect a chairperson and other officers at its first meeting. 9. PAYMENTS: 9.1 The accounting and billing period for transactions under Service Schedules to this Agreement shall be one (1) calendar month, unless otherwise specified in a Service Schedule agreed to through a Confirmation Agreement. Bills sent to any Party shall be sent to the appropriate billing address as set forth on the WSPP homepage or as otherwise specified by such Party. 9.2 Payments for amounts billed under Service Schedules hereto shall be paid so that such payments are received by the Party to be paid on the 20th day of the invoicing month or the tenth (10) day after receipt of the bill, whichever is later. Notwithstanding the foregoing, Premiums shall be paid within three (3) Business Days of receipt of the invoice therefor. Payment shall be made at the location designated by the Party to which payment is due. Payment shall be considered received when payment is received by the Party to which Payment is due at the location designated by that Party. If the due date falls on a non-Business Day of either Party, then the payment shall be due on the next following Business Day. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2001 Western Systems Power Pool Issued on: May 2, 2001 Western Systems Power Pool Original Sheet No. 20A Rate Schedule FERC No. 6 9.3 Amounts not paid on or before the due date shall be payable with interest accrued at the rate of one percent (1%) per month, or the maximum interest rate permitted Issued by: Michael E. Small, General Counsel to Effective: July 1, 2001 Western Systems Power Pool Issued on: May 2, 2001 Western Systems Power Pool First Revised Sheet No. 21 Rate Schedule FERC No. 6 Superseding Original Sheet No. 21 by law, if any, whichever is less, prorated by days from the due date to the date of payment unless and until the Executive Committee shall determine another rate. 9.4 In case any portion of any bill is in dispute, the entire bill shall be paid when due. Any excess amount of bills which, through inadvertent errors or as a result of a dispute, may have been overpaid shall be returned by the owing Party upon determination of the correct amount, with interest accrued at the rate of one percent (1%) per month, or the maximum interest rate permitted by law, if any, whichever is less, prorated by days from the date of overpayment to the date of refund unless and until the Executive Committee shall determine another rate. The Parties shall have no rights to dispute the accuracy of any bill or payment after a period of two (2) years from the date on which the first bill was delivered for a specific transaction. 9.5 If a Party's records reveal that a bill was not delivered for a specific transaction, then the Party may deliver to the appropriate Party a bill within two (2) years from the date on which the bill would have been delivered under Section 9.1 of this Agreement. The right to payment is waived with respect to transactions, or portions thereof, not billed within such two (2) year period. 9.6 Each Party, or any third party representative of a Party, shall keep complete and accurate records, and shall maintain such data as may be necessary for the purpose of ascertaining the accuracy of all relevant data, estimates, or statements Issued by: Michael E. Small, General Counsel to Effective: July 1, 2001 Western Systems Power Pool Issued on: May 2, 2001 Western Systems Power Pool Original Sheet No. 21A Rate Schedule FERC No. 6 of charges submitted hereunder for a period of two (2) years from the date the first bill was delivered for a specific transaction completed under this Agreement. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2001 Western Systems Power Pool Issued on: May 2, 2001 Western Systems Power Pool Second Revised Sheet No. 22 Rate Schedule FERC No. 6 Superseding First Revised Sheet No. 22 Within a two (2) year period from the date the first bill was delivered under this Agreement, any Party to that transaction may request in writing copies of the records of the other Party for that transaction to the extent reasonably necessary to verify the accuracy of any statement or charge. The Party from which documents or data has been requested shall cooperate in providing the documents and data within a reasonable time period. 10. UNCONTROLLABLE FORCES: No Party shall be considered to be in breach of this Agreement or any applicable Confirmation Agreement to the extent that a failure to perform its obligations under this Agreement or any such Confirmation Agreement shall be due to an Uncontrollable Force. The term "Uncontrollable Force" means an event or circumstance which prevents one Party from performing its obligations under one or more transactions, which event or circumstance is not within the reasonable control of, or the result of the negligence of the claiming Party, and which by the exercise of due diligence, the claiming Party is unable to avoid, cause to be avoided, or overcome. So long as the requirements of the preceding sentence are met, "Uncontrollable Forces" may include and are not restricted to flood, drought, earthquake, storm, fire, lightning, epidemic, war, riot, civil disturbance or disobedience, labor dispute, labor or material shortage, sabotage, restraint by court order or public authority, and action or nonaction by, or failure to obtain the necessary authorizations or approvals from, any governmental agency or authority. Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool Original Sheet No. 22A Rate Schedule FERC No. 6 The following shall not be considered "Uncontrollable Forces": (i) the price of electricity faced by Seller; or (ii) Purchaser's inability due to price to use or resell the power purchased hereunder. No Party shall, however, be relieved of liability for failure of performance to the extent that such failure is due to causes arising out of its own negligence or due to removable or remediable causes which it fails to remove or remedy within a reasonable time period. Nothing contained herein shall be construed to require a Issued by: Michael E. Small, General Counsel to Effective: February 1, 2001 Western Systems Power Pool Issued on: December 1, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 23 Rate Schedule FERC No. 6 Superseding Original Sheet No. 23 Party to settle any strike or labor dispute in which it may be involved. Any Party rendered unable to fulfill any of its obligations by reason of an Uncontrollable Force shall give prompt notice of such fact and shall exercise due diligence, as provided above, to remove such inability within a reasonable time period. If oral notice is provided, it shall be promptly followed by written notice. Notwithstanding the "due diligence" obligations or obligations to remove or remedy the causes set forth in the foregoing paragraph (which do not apply to this paragraph except as specified below), where the entity providing transmission services for transactions under any Service Schedule interrupts such transmission service, the interruption in transmission service shall be considered an Uncontrollable Force under this Section 10 only in the following two sets of circumstances: (1) An interruption in transmission service shall be considered an Uncontrollable Force if (a) the Parties agreed on a transmission path for that transaction at the time the transaction under this Agreement was entered into by the Parties' thereto, (b) firm transmission involving that transmission path was obtained pursuant to a transmission tariff or contract to effectuate the transaction under the applicable Service Schedule, and (c) the entity providing transmission service curtailed or interrupted such firm transmission pursuant to the applicable transmission tariff or contract; (2) if the Parties did not agree on the transmission path for a transaction at the time the transaction was entered into, an interruption in transmission service shall be Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 24 Rate Schedule FERC No. 6 considered an Uncontrollable Force only if (a) the Party contracting for transmission services shall have made arrangements with the entity providing transmission service for firm transmission to effectuate the transaction under the applicable Service Schedule, (b) the entity providing transmission service curtailed or interrupted such transmission service due to an event of Uncontrollable Forces or provision of like effect, and (c) the Party which contracted for such firm transmission services could not obtain alternate energy at the delivery point, alternate transmission services, or alternate means of delivering energy after exercising due diligence. No Party shall be relieved by operation of this Section 10 of any liability to pay for power delivered to the Purchaser or to make payments then due or which the Party is obligated to make with respect to performance which occurred prior to the Uncontrollable Force. 11. WAIVERS: Any waiver at any time by any Party of its rights with respect to a default under this Agreement or any Confirmation Agreements, or any other matter under this Agreement, shall not be deemed a waiver with respect to any subsequent default of the same or any other matter. 12. NOTICES: 12.1 Except for the oral notice provided for in Section 10 of this Agreement, any formal notice, demand or request provided for in this Agreement shall be in Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 25 Rate Schedule FERC No. 6 Superseding Original Sheet No. 25 writing and shall be deemed properly served, given or made if delivered in person, or sent by either registered or certified mail (postage prepaid), prepaid telegram, fax, overnight delivery (with record of receipt), or other means agreed to by the Parties. 12.2 RESERVED 12.3 Notices and requests of a routine nature applicable to delivery or receipt of power or energy or operation of facilities shall be given in such manner as the committees from time to time or the Parties to a transaction shall prescribe. 13. APPROVALS: 13.1 This Agreement is subject to valid laws, orders, rules and regulations of duly constituted authorities having jurisdiction. Nothing contained in this Agreement shall give FERC jurisdiction over those Parties not otherwise subject to such jurisdiction or be construed as a grant of jurisdiction over any Party by any state or federal agency not otherwise having jurisdiction by law. 13.2 This Agreement, including any Service Schedule hereto, shall become effective as to any Party when it is accepted for filing by FERC, without changes or conditions unacceptable to such Party, for application to the Parties subject to FERC jurisdiction under the Federal Power Act; provided, however, that nothing in this Agreement is intended to restrict the authority of the Bonneville Power Administration (BPA) pursuant to applicable statutory authority to use its existing Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Original Sheet No. 25A Rate Schedule FERC No. 6 wholesale power and transmission rates or to adopt new rates, rate schedules, or general rate schedule provisions for application under this Agreement and obtain Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Original Sheet No. 26 Rate Schedule FERC No. 6 interim or final approval of those rates from FERC pursuant to Section 7 of the Pacific Northwest Electric Power Planning and Conservation Act, 16 U.S.C. Sec. 839e, provided such rates do not exceed the maximum rates in the applicable Service Schedule and are consistent with the terms and conditions of said Service Schedule. If, upon filing of this Agreement by Parties subject to FERC jurisdiction under the Federal Power Act, FERC orders a hearing to determine whether this Agreement or a Service Schedule under this Agreement is just and reasonable under the Federal Power Act, the Agreement or Service Schedule shall not become effective until the date when an order issued by FERC, determining this Agreement or the Service Schedule to be just and reasonable without changes or new conditions unacceptable to the Parties, is no longer subject to judicial review. Any changes or conditions imposed by any agency or court, including FERC ordering a hearing, shall be cause for immediate withdrawal by any nonconsenting Party. 13.3 The Parties subject to FERC jurisdiction under the Federal Power Act shall have the right to terminate their participation in this Agreement, and any rate schedule or services included herein, pursuant to the terms of Section 5 of this Agreement and without the necessity of further filing with or approval by FERC. 13.4 Any amendment or change in maximum rates specified in the Service Schedules shall not become effective with regard to any Party that is subject to FERC jurisdiction under the Federal Power Act until it is accepted for filing or Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 27 Rate Schedule FERC No. 6 Superseding Original Sheet No. 27 confirmed and approved by FERC as specified in and subject to the conditions of Section 13.2. 13.5 Nothing contained in this Agreement shall be construed to establish any precedent for any other agreement or to grant any rights to or impose any obligations on any Party beyond the scope and term of this Agreement. 14. TRANSFER OF INTEREST IN AGREEMENT: No Party shall voluntarily transfer its membership under this Agreement without the written consent and approval of all other Parties except to a Successor in Operation of such Party. With regard to the transfer of the rights and obligations of any Party associated with transactions under the Service Schedules, neither Party may assign such rights or obligations unless (a) the other Party provides its prior written consent which shall not be unreasonably withheld; or (b) the assignment is to a Successor in Operation which provides reasonable creditworthiness assurances (see Section 27 for examples of such assurances) if required by the non-assigning Party based upon its reasonably exercised discretion. Any successor or assignee of the rights of any Party, whether by voluntary transfer, judicial or foreclosure sale or otherwise, shall be subject to all the provisions and conditions of this Agreement and Confirmation Agreements (where applicable) to the same extent as though such successor or assignee were the original Party under this Agreement or the Confirmation Agreements, and no assignment or transfer of any rights under this Agreement or any Confirmation Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Original Sheet No. 27A Rate Schedule FERC No. 6 Agreement shall be effective unless and until the assignee or transferee agrees in writing to assume all of the obligations of the assignor or transferor and to be bound by all of the provisions and Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool First Revised Sheet No. 28 Rate Schedule FERC No. 6 Superseding Original Sheet No. 28 conditions of this Agreement and any Confirmation Agreement (where applicable). The execution of a mortgage or trust deed or a judicial or foreclosure sale made thereunder shall not be deemed a voluntary transfer within the meaning of this Section 14. 15. SEVERABILITY: In the event that any of the terms, covenants or conditions of this Agreement or any Confirmation Agreement, or the application of any such term, covenant or condition, shall be held invalid as to any person or circumstance by any court, regulatory agency, or other regulatory body having jurisdiction, all other terms, covenants or conditions of this Agreement and the Confirmation Agreement and their application shall not be affected thereby, but shall remain in force and effect unless a court, regulatory agency, or other regulatory body holds that the provisions are not separable from all other provisions of this Agreement or such Confirmation Agreement. 16. MEMBERSHIP: 16.1 Any Electric Utility, Retail Entity or Qualifying Facility may become a Party to this Agreement. The Executive Committee shall notify such Electric Utility, Retail Entity or Qualifying Facility of its decision within sixty (60) days of a request to become a Party to this Agreement, and any acceptable entity shall become a Party hereto by the execution of this Agreement or a counterpart hereof, payment of costs pursuant to Section 16.4, and concluding any necessary acceptance or approval referred to in Section 13. Any such Party, if it is subject to the ratemaking jurisdiction of FERC, Issued by: Michael E. Small, General Counsel to Effective: July 1, 2001 Western Systems Power Pool Issued on: May 2, 2001 Western Systems Power Pool Original Sheet No. 29 Rate Schedule FERC No. 6 shall be responsible for any FERC filing necessary for it to implement its performance under this Agreement. 16.2 Each Party shall continue to meet the requirements of Section 16.1 in order to remain a Party to this Agreement 16.3 Being a Party to this Agreement shall not serve as a substitute for contractual arrangements that may be needed between any Party which operates a Control Area and any other Party which operates within that Control Area. 16.4 Any entity that becomes a Party to this Agreement which was not a party to the experimental Western Systems Power Pool Agreement shall pay a one time fee of $25,000 under this Agreement in recognition of prior efforts and costs incurred by the parties to the experimental Western Systems Power Pool Agreement, which efforts greatly facilitated development of this Agreement. Such fee shall be credited to future costs of the Operating Agent incurred hereunder. 17. RELATIONSHIP OF PARTIES: 17.1 Nothing contained herein or in any Confirmation Agreement shall be construed to create an association, joint venture, trust, or partnership, or impose a trust or partnership covenant, obligation, or liability on or with regard to any one or more of the Parties. Each Party shall be individually responsible for its own covenants, obligations, and liabilities under this Agreement and under any applicable Confirmation Agreement. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Second Revised Sheet No. 30 Rate Schedule FERC No. 6 Superseding First Revised Sheet No. 30 17.2 All rights of the Parties are several, not joint. No Party shall be under the control of or shall be deemed to control another Party. Except as expressly provided in this Agreement, no Party shall have a right or power to bind another Party without its express written consent. 18. NO DEDICATION OF FACILITIES: Any undertaking by one Party to another Party under any provision of this Agreement shall not constitute the dedication of the electric system or any portion thereof of the undertaking Party to the public or to the other Party, and it is understood and agreed that any such undertaking under any provision of this Agreement by a Party shall cease upon the termination of such Party's obligations under this Agreement. 19. NO RETAIL SERVICES: Nothing contained in this Agreement shall grant any rights to or obligate any Party to provide any services hereunder directly to or for retail customers of any Party. 20. THIRD PARTY BENEFICIARIES: This Agreement shall not be construed to create rights, in, or to grant remedies to, any third party as a beneficiary of this Agreement or of any duty, obligation or undertaking established herein except as provided for in Section 14. 21. LIABILITY AND DAMAGES: 21.1a This Agreement contains express remedies or measures of damages in Sections 21.3 and 22 for non-performance or default. Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool First Revised Sheet No. 30A Rate Schedule FERC No. 6 Superseding Original Sheet No. 30A ALL OTHER DAMAGES OR REMEDIES ARE HEREBY WAIVED. Therefore, except as provided in Sections 21.3 and 22, no Party or its directors, members of its governing bodies, officers or employees shall be liable to any other Party or Parties for any loss or damage to property, loss of earnings, or revenues, personal injury, or any other direct, indirect, or consequential damages or injury, or punitive damages, which may occur or result from the performance or non-performance of this Agreement (including any applicable Confirmation Agreement), including any negligence arising hereunder. Any liability or damages faced by an officer or employee of a Federal agency or by that agency that would result from the operation of this provision shall not be inconsistent with Federal law. Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool First Revised Sheet No. 31 Rate Schedule FERC No. 6 Superseding Original Sheet No. 31 21.2 Notwithstanding any other provision in this Agreement, any Party due monies under this Agreement, the amounts of which are not in dispute or if disputed have been the subject of a decision awarding such amounts, (i) shall have the right to seek payment of such monies in any forum having competent jurisdiction and (ii) shall possess the right to seek relief directly from that forum without first utilizing the mediation or arbitration provisions of this Agreement and without exercising termination and liquidation rights under Section 22. 21.3 The following damages provision shall apply to transactions under Service Schedules B and C. For transactions under Service Schedule A, this damages provision or some other damages provision will apply only if such a damages provision is agreed to through a Confirmation Agreement. The damages under this Section 21.3 apply to a Party's failure to deliver or receive electric power or energy in violation of the terms of the Agreement and any Confirmation Agreement. The Contract Quantity and Contract Price referred to in this Section Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool Original Sheet No. 31A Rate Schedule FERC No. 6 21.3 are part of the agreement between the Parties for which damages are being calculated under this Section. (a) If either Party fails to deliver or receive, as the case may be, the quantities of electric power or energy due under the Agreement and any Confirmation Agreement (thereby becoming a "Non-Performing Party" for the purposes of this Section 21.3), the other party (the "Performing Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool Original Sheet No. 32 Rate Schedule FERC No. 6 Party") shall be entitled to receive from the Non-Performing Party an amount calculated as follows (unless performance is excused by Uncontrollable Forces as provided in Section 10, the applicable Service Schedule, or by the Performing Party): (1) If the amount the Purchaser scheduled or received in any hour is less than the applicable hourly Contract Quantity, then the Purchaser shall be liable for (a) the product of the amount (whether positive or negative), if any, by which the Contract Price differed from the Sales Price (Contract Price - Sales Price) and the amount by which the quantity received by the Purchaser was less than the hourly Contract Quantity; plus (b) the amount of transmission charge(s), if any, for firm transmission service upstream of the delivery point, which the Seller incurred to achieve the Sales Price, less the reduction, if any, in transmission charge(s) achieved as a result of the reduction in the Purchaser's schedule or receipt of electric energy (based on Seller's reasonable commercial efforts to achieve such reduction). If the total amounts for all hours calculated under this paragraph (1) are negative, then neither the Purchaser nor the Seller shall pay any amount under this Section 21.3(a)(1). Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 33 Rate Schedule FERC No. 6 Superseding Original Sheet No. 33 (2) If the amount the Seller scheduled or delivered in any hour is less than the applicable hourly Contract Quantity, then the Seller shall be liable for (a) the product of the amount (whether positive or negative), if any, by which the Replacement Price differed from the Contract Price (Replacement Price - Contract Price) and the amount by which the quantity delivered by the Seller was less than the hourly Contract Quantity; plus (b) the amount of transmission charge(s), if any, for firm transmission service downstream of the delivery point, which the Purchaser incurred to achieve the Replacement Price, less the reduction, if any, in transmission charge(s) achieved as a result of the reduction in the Seller's schedule or delivery (based on Purchaser's reasonable commercial effort to achieve such reduction). If the total amounts for all hours calculated under this paragraph (2) are negative, then neither the Purchaser nor the Seller shall pay any amount under this Section 21.3(a)(2). (3) The Non-Performing Party also shall reimburse the Performing Party for any charges imposed on the Performing Party under open access transmission tariffs due to the non-performance. Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool First Revised Sheet No. 33A Rate Schedule FERC No. 6 Superseding Original Sheet No. 33A (4) The Non-Performing Party shall pay any amount due from it under this section within the billing period as specified in Section 9 of this Agreement or agreed to in the applicable Confirmation Agreement if the Parties agreed to revise the billing period in Section 9. Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool Original Sheet No. 34 Rate Schedule FERC No. 6 (b) The Parties agree that the amounts recoverable under this Section 21.3 are a reasonable estimate of loss and not a penalty, and represent the sole and exclusive remedy for the Performing Party. Such amounts are payable for the loss of bargain and the loss of protection against future risks. (c) Each Party agrees that it has a duty to mitigate damages in a commercially reasonable manner to minimize any damages it may incur as a result of the other Party's performance or non-performance of this Agreement. (d) In the event the Non-Performing Party disputes the calculation of the damages under this Section 21.3, the Non-Performing Party shall pay the full amount of the damages as required by Section 9 of this Agreement to the Performing Party. After informal dispute resolution as required by Section 34.1, any remaining dispute involving the calculation of the damages shall be referred to binding dispute resolution as provided by Section 34.2 of this Agreement. If resolution or agreement results in refunds or the need for refunds to the Non-Performing Party, such refunds shall be calculated in accordance with Section 9.4 of this Agreement. 22. DEFAULT OF TRANSACTIONS UNDER THIS AGREEMENT AND CONFIRMATION AGREEMENTS: 22.1 EVENTS OF DEFAULT An "Event of Default" shall mean with respect to a Party ("Defaulting Party"): Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 35 Rate Schedule FERC No. 6 Superseding Original Sheet No. 35 (a) the failure by the Defaulting Party to make, when due, any payment required pursuant to this Agreement or Confirmation Agreement if such failure is not remedied within two (2) Business Days after written notice of such failure is given to the Defaulting Party by the other Party ("the Non-Defaulting Party"). The Non-Defaulting Party shall provide the notice by facsimile to the designated contact person for the Defaulting Party and also shall send the notice by overnight delivery to such contact person; or (b) the failure by the Defaulting Party to provide clear and good title as required by Section 33.3, or to have made accurate representations and warranties as required by Section 37 and such failure is not cured within five (5) Business Days after written notice thereof to the Defaulting Party; or (c) The institution, with respect to the Defaulting Party, by the Defaulting Party or by another person or entity of a bankruptcy, reorganization, moratorium, liquidation or similar insolvency proceeding or other relief under any bankruptcy or insolvency law affecting creditor's rights or a petition is presented or instituted for its winding-up or liquidation; or (d) The failure by the Defaulting Party to provide adequate assurances of its ability to perform all of its outstanding material obligations to the Non-Defaulting Party under the Agreement or Confirmation Agreement Issued by: Michael E. Small, General Counsel to Effective: February 1, 2001 Western Systems Power Pool Issued on: December 1, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Second Revised Sheet No. 36 Rate Schedule FERC No. 6 Superseding First Revised Sheet No. 36 pursuant to Section 27 of this Agreement or any substitute or modified provision in the Confirmation Agreement. (e) With respect to its Guarantor, if any: (i) if a material representation or warranty made by a Guarantor in connection with this Agreement, or any transaction entered into hereunder, is false or misleading in any material respect when made or when deemed made or repeated; or (ii) the failure of a Guarantor to make any payment required or to perform any other material covenant or obligation in any guarantee made in connection with this Agreement, including any transaction entered into hereunder, and such failure shall not be remedied within three (3) Business Days after written notice; or (iii) the institution, with respect to the Guarantor, by the Guarantor or by another person or entity of a bankruptcy, reorganization, moratorium, liquidation or similar insolvency proceeding or other relief under any bankruptcy or insolvency law affecting creditor's rights or a petition is presented or instituted for its winding-up or liquidation; or (iv) the failure, without written consent of the other Party, of a Guarantor's guarantee to be in full force and effect for purposes of this Agreement (other than in accordance with its terms) prior to Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Second Revised Sheet No. 36A Rate Schedule FERC No. 6 Superseding First Revised Sheet No. 36A the satisfaction of all obligations of such Party under each transaction to which such guarantee shall relate; or (v) a Guarantor shall repudiate, disaffirm, disclaim, or reject, in whole or in part, or challenge the validity of, any guarantee. 22.2 REMEDIES FOR EVENTS OF DEFAULT If an Event of Default occurs, the Non-Defaulting Party shall possess the right to terminate all transactions between the Parties under this Agreement upon written notice (by facsimile or other reasonable means) to the Defaulting Party, such notice of termination to be effective immediately upon receipt. If the Non-Defaulting Party fails to exercise this right of termination within thirty (30) days following the time when the Event of Default becomes known (or more than thirty days if the Non-Defaulting and Defaulting Parties agree to an extension), then such right of termination shall no longer be available to the Non-Defaulting Party as a remedy for the Event(s) of Default; provided, however, this thirty day requirement for exercising termination rights shall not apply to defaults pursuant to Sections 22.1(c) and 22.1(e)(iii). The Non-Defaulting Party terminating transaction(s) under this Section 22.2 may do so without making a filing at FERC. Upon termination, the Non-Defaulting Party shall liquidate all transactions as soon as practicable, provided that in no event will the Non-Defaulting Party be allowed to liquidate Service Schedule A transactions. The payment associated with termination ("Termination Payment") shall be calculated in accordance with Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool First Revised Sheet No. 36B Rate Schedule FERC No. 6 Superseding Original Sheet No. 36B this Section 22.2 and Section 22.3. The Termination Payment shall be the sole and exclusive remedy for the Non-Defaulting Party for each terminated transaction ("Terminated Transaction") for the time period beginning at the time notice of termination under this Section 22 is received. Prior to receipt Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool Original Sheet No. 37 Rate Schedule FERC No. 6 of such notice of termination by the Defaulting Party, the Non-Defaulting Party may exercise any remedies available to it under Section 21.3 of this Agreement or Confirmation Agreement(s), and any other remedies available to it at law or otherwise. Upon termination, the Non-Defaulting Party may withhold any payments it owes the Defaulting Party for any obligations incurred prior to termination under this Agreement or Confirmation Agreement(s) until the Defaulting Party pays the Termination Payment to the Non-Defaulting Party. The Non-Defaulting Party shall possess the right to set-off the amount due it under this Section 22 by any such payments due the Defaulting Party as provided in Section 22.3(d). 22.3 LIQUIDATION CALCULATION OPTIONS The Non-Defaulting Party shall calculate the Termination Payment as follows: (a) The Gains and Losses shall be determined by comparing the value of the remaining term, transaction quantities, and transaction prices under each Terminated Transaction had it not been terminated to the equivalent quantities and relevant market prices for the remaining term either quoted by a bona fide third-party offer or which are reasonably expected to be available in the market under a replacement contract for each Terminated Transaction. To ascertain the market prices of a replacement contract, the Non-Defaulting Party may consider, among other valuations, quotations Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 38 Rate Schedule FERC No. 6 Superseding Original Sheet No. 38 from Dealers in energy contracts, any or all of the settlement prices of the NYMEX power futures contracts (or NYMEX power options contracts in the case of Physically-Settled Options) and other bona fide third party offers, all adjusted for the length of the remaining term and differences in transmission. It is expressly agreed that the Non-Defaulting Party shall not be required to enter into replacement transactions in order to determine the Termination Payment. (b) The Gains and Losses calculated under paragraph (a) shall be discounted to present value using the Present Value Rate as of the time of termination (to take account to the period between the time notice of termination was effective and when such amount would have otherwise been due pursuant to the relevant transaction). The "Present Value Rate" shall mean the sum of 0.50% plus the yield reported on page "USD" of the Bloomberg Financial Markets Services Screen (or, if not available, any other nationally recognized trading screen reporting on-line intraday trading in United States government securities) at 11:00 a.m. (New York City, New York time) for the United States government securities having a maturity that matches the average remaining term of the Terminated Transactions; and (c) The Non-Defaulting Party shall set off or aggregate, as appropriate, the Gains and Losses (as calculated in Section 22.3(a)) and Costs and notify Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool First Revised Sheet No. 39 Rate Schedule FERC No. 6 Superseding Original Sheet No. 39 the Defaulting Party. If the Non-Defaulting Party's aggregate Losses and Costs exceed its aggregate Gains, the Defaulting Party shall, within three (3) Business Days of receipt of such notice, pay the Termination Payment to the Non-Defaulting Party, which amount shall bear interest at the Present Value rate from the time notice of termination was received until paid. If the Non-Defaulting Party's aggregate Gains exceed its aggregate Losses and Costs, the Non-Defaulting Party, after any set-off as provided in paragraph (d), shall pay the remaining amount to the Defaulting Party within three (3) Business Days of the date notice of termination was received including interest at the Present Value from the time notice of termination was received until the Defaulting Party receives payment. (d) The Non-Defaulting Party shall aggregate or set off, as appropriate, at its election, any or all other amounts owing between the Parties (discounted at the Present Value Rate) under this Agreement and any Confirmation Agreements against the Termination Payment so that all such amounts are aggregated and/or netted to a single liquidated amount. The net amount due from any such liquidation shall be paid within three (3) Business Days following the date notice of termination is received. (e) (i) If the Non-Defaulting Party owes the Defaulting Party monies under this Section 22.3, then notwithstanding the three Business Day payment requirement detailed above, the Non-Defaulting Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool First Revised Sheet No. 39A Rate Schedule FERC No. 6 Superseding Original Sheet No. 39A Party may elect to pay the Defaulting Party the monies owed under this Section 22.3 over the remaining life of the contract(s) being terminated. The Non-Defaulting Party may make this election by providing written notice to the Defaulting Party within three Business Days of the notice being provided to terminate and liquidate under this Section 22.3. The Non-Defaulting Party shall provide the Defaulting Party with the details on the method for recovering the monies owed over the remaining life of the contract(s). That method shall ensure that the Defaulting Party receives a payment each month through the end of the term of each contract which allows it to receive the monies which would have been due it under Sections 22.3(c) and (d) in total (to be recovered over the term of the contract(s) to replicate as closely as possible the payment streams under such contract(s)) provided that the discounting using the Present Value Rate referenced in Section 22.3 (b) shall not be reflected in determining the amounts to be recovered under this provision. Any disputes as to the methodology shall be resolved pursuant to the dispute resolution procedures in Section 34, with binding arbitration pursuant to Section 34.2 required for disputes as to the methodology if mediation is unsuccessful. Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool First Revised Sheet No. 39B Rate Schedule FERC No. 6 Superseding Original Sheet No. 39B (ii) This Section 22.3(e) and the rights and obligations under it shall survive termination of any applicable transactions or agreements. (iii) The Party owed monies under this Section 22.3(e) shall have the right to request credit assurances consistent with Section 27 even after termination of any contract or transaction. (iv) If the Party owing money defaults on its payment obligations consistent with Section 22.1(a) or defaults with regard to providing credit assurances consistent with Section 22.1(d), then the other Party shall have the right (by written notice) at any time after the Party owing money defaults to require that Party to pay all monies owed under all of the contracts subject to this Section 22.3(e) within three Business Days of receipt of the written notice. The monies to be paid under this accelerated payment provision shall be the remaining amounts to be paid under the contract(s) reflecting a discount using the Present Value Rate from the date of the written notice. If the Defaulting Party disagrees with the calculation of the Termination Payment and the Parties cannot otherwise resolve their differences, the calculation issue shall be submitted to informal dispute resolution as provided in Section 34.1 Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool First Revised Sheet No. 40 Rate Schedule FERC No. 6 Superseding Original Sheet No. 40 of this Agreement and thereafter binding dispute resolution pursuant to Section 34.2 if the informal dispute resolution does not succeed in resolving the dispute. Pending resolution of the dispute, the Defaulting Party shall pay the full amount of the Termination Payment calculated by the Non-Defaulting Party within three (3) Business Days of receipt of notice as set forth in Sections 22.3(c) and (d) subject to the Non-Defaulting Party refunding, with interest, pursuant to Section 9.4, any amounts determined to have been overpaid. For purposes of this Section 22.3: (i) "Gains" means the economic benefit (exclusive of Costs), if any, resulting from the termination of the Terminated Transactions, determined in a commercially reasonable manner as calculated in accordance with this Section 22.3; (ii) "Losses" means the economic loss (exclusive of Costs), if any, resulting from the termination of the Terminated Transactions, determined in a commercially reasonable manner as calculated in accordance with this Section 22.3; (iii) "Costs" means brokerage fees, commissions and other similar transaction costs and expenses reasonably incurred in terminating any specifically related arrangements which replace a Terminated Transaction, transmission and ancillary service costs associated with Terminated Transactions, and reasonable attorneys' fees, if any, incurred in connection Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Original Sheet No. 41 Rate Schedule FERC No. 6 with the Non-Defaulting Party enforcing its rights with regard to the Terminated Transactions. The Non-Defaulting Party shall use reasonable efforts to mitigate or eliminate these Costs. (iv) In no event, however, shall a Party's Gains, Losses or Costs include any penalties or similar charges imposed by the Non-Defaulting Party. 22A. DEFAULT IN PAYMENT OF WSPP OPERATING COSTS: 22A.1 A Party shall be deemed to be in default in payment of its share of WSPP operating costs pursuant to Section 7 of this Agreement, if any, when payment is not received within ten (10) days after receipt of written notice. A default by any Party in such payment obligations shall be cured by payment of all overdue amounts together with interest accrued at the rate of one percent (1%) per month, or the maximum interest rate permitted by law, if any, whichever is less, prorated by days from the due date to the date the payment curing the default is made unless and until the Executive Committee shall determine another rate. 22A.2 A defaulting Party, which is in default under Section 22.A1, shall be liable for all costs, including costs of collection and reasonable attorney fees, plus interest as provided in Section 22.A1 hereof. 22A.3 The rights under this Agreement of a Party which is in default of its obligation to pay operating costs under this Agreement for a period of three (3) months or more may be revoked by a vote of the non-defaulting Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 42 Rate Schedule FERC No. 6 Parties' representatives on the Executive Committee consistent with Section 8.3. The defaulting Party's rights shall not be revoked, however, unless said Party has received at least thirty (30) days written notice of the non-defaulting Parties' intent to revoke such rights. Said notice shall state the date on which the revocation of rights shall become effective if the default is not cured and shall state all actions which must be taken or amounts which must be paid to cure the default. This provision allowing the non-defaulting Parties to revoke such rights is in addition to any other remedies provided in this Agreement or at law and shall in no way limit the non-defaulting Parties' ability to seek judicial enforcement of the defaulting Party's obligations to pay its share of the operating costs under this Agreement. Upon the effective date of such revocation of rights, the defaulting party shall not be allowed to enter into any new transactions under this Agreement. The defaulting party under the Agreement or any Confirmation Agreements shall be required to carry out all obligations that existed prior to the effective date of such revocation. If a defaulting Party's rights under this Agreement have been revoked, the Executive Committee may restore that Party's rights upon the defaulting Party paying all amounts due and owing under this Agreement. 22A.4 Upon revocation of the rights of a defaulting Party under this Agreement, Operating Agent costs hereunder shall be equally shared among the Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 43 Rate Schedule FERC No. 6 Superseding Original Sheet No. 43 remaining Parties. Cost allocation adjustments shall be retroactive to the date of the default. 23. OTHER AGREEMENTS: No provision of this Agreement shall preclude any Party from entering into other agreements or conducting transactions under existing agreements with other Parties or third parties. This Agreement shall not be deemed to modify or change any rights or obligations under any prior contracts or agreements between or among any of the Parties. 24. GOVERNING LAW: This Agreement and any Confirmation Agreement shall be governed by and construed in accordance with the laws of the State of Utah, without regard to the conflicts of laws rules thereof. The foregoing notwithstanding, (1) if both the Seller and Purchaser are organized under the laws of Canada, then the laws of the province of the Seller shall govern, or (2) if the Seller or Purchaser is an agency of or part of the United States Government, then the laws of the United States of America shall govern. 25. JUDGMENTS AND DETERMINATIONS: Whenever it is provided in this Agreement that a Party shall be the sole judge of whether, to what extent, or under what conditions it will provide a given service, its exercise of its judgment shall be final and not subject to challenge. Whenever it is provided that (i) a service under a given transaction may be curtailed under certain conditions or circumstances, the existence of which are determined by or in the judgment of a Party, or (ii) the existence of qualifications for membership shall be determined by Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Original Sheet No. 44 Rate Schedule FERC No. 6 the Executive Committee pursuant to Section 16, that Party's or the Executive Committee's determination or exercise of judgment shall be final and not subject to challenge if it is made in good faith and not made arbitrarily or capriciously. 26. COMPLETE AGREEMENT: This Agreement and any subsequent amendments, including the Service Schedules and Exhibits incorporated herein, and any Confirmation Agreement, shall constitute the full and complete agreement of the Parties with respect to the subject matter hereof, and all prior or contemporaneous representations, statements, negotiations, understandings and inducements are fully merged and incorporated in this Agreement. 27. CREDITWORTHINESS: Should a Party's creditworthiness, financial responsibility, or performance viability become unsatisfactory to the other Party in such other Party's reasonably exercised discretion with regard to any transaction pursuant to this Agreement and any Confirmation Agreement (after the transaction is agreed to or begins), the dissatisfied Party (the "First Party") may require the other Party (the "Second Party") to provide, at the Second Party's option (but subject to the First Party's acceptance based upon reasonably exercised discretion), either (1) the posting of a Letter of Credit, (2) a cash prepayment, (3) the posting of other acceptable collateral or security by the Second Party, (4) a Guarantee Agreement executed by a creditworthy entity; or (5) some other mutually agreeable method of satisfying the First Party. The Second Party's obligations under this Section 27 shall be limited to a reasonable estimate of the damages to the First Party Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 45 Rate Schedule FERC No. 6 (consistent with Section 21.3 of this Agreement) if the Second Party were to fail to perform its obligations. Events which may trigger the First Party questioning the Second Party's creditworthiness, financial responsibility, or performance viability include, but are not limited to, the following: (1) The First Party has knowledge that the Second Party (or its Guarantor if applicable) are failing to perform or defaulting under other contracts. (2) The Second Party has exceeded any credit or trading limit set out in the Confirmation Agreement or other agreement between the Parties. (3) The Second Party or its Guarantor has debt which is rated as investment grade and that debt falls below the investment grade rating by at least one rating agency or is below investment grade and the rating of that debt is downgraded further by at least one rating agency. (4) Other material adverse changes in the Second Party's financial condition occur. (5) Substantial changes in market prices which materially and adversely impact the Second Party's ability to perform under this Agreement or any Confirmation Agreement occur. If the Second Party fails to provide such reasonably satisfactory assurances of its ability to perform a transaction hereunder within three (3) Business Days of demand therefore, that will be considered an Event of Default under Section 22 of this Agreement and the First Party shall have the right to exercise any of the remedies provided for under Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 46 Rate Schedule FERC No. 6 Superseding Original Sheet No. 46 that Section 22. Nothing contained in this Section 27 shall affect any credit agreement or arrangement, if any, between the Parties. 28. NETTING: 28.1 If the Purchaser and the Seller are each required to pay an amount to each other in the same calendar month for transactions under this Agreement, then such amounts with respect to each Party may be aggregated and the Parties may discharge their obligations to pay through netting of the respective amounts due, in which case the Party, if any, owing the greater aggregate amount may pay to the other Party the difference between the amounts owed. Each Party reserves to itself all rights, set-offs, counterclaims, and other remedies and defenses (to the extent not expressly herein waived or denied) which such Party has or may be entitled to arising from or out of this Agreement and any applicable Confirmation Agreements. 28.2 Parties shall net payments (associated with transactions under this Agreement and Confirmation Agreement) in accordance with Exhibit A, if such Parties have executed the form attached as Exhibit A. The Parties obligation to net shall include the netting of all payments received by the Parties in the same calendar month. Parties that have executed Exhibit A shall provide a signed copy of Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool First Revised Sheet No. 47 Rate Schedule FERC No. 6 Superseding Original Sheet No. 47 Exhibit A to a representative of the WSPP and to any Party that requests a copy and indicate on the WSPP Homepage that they have so executed Exhibit A (once the WSPP Homepage possesses the necessary capability). If a Party indicated its election to net payments on the WSPP Homepage and that Party desires to withdraw its agreement to net, that Party shall provide at least 30 days notice on the WSPP Homepage of the change in its election to net and also shall provide, concurrent with its withdrawal notice, written notice to all Parties with which it has ongoing transactions or with which it has committed to future transactions under the Agreement at the time of the notice. Any such changes in netting status shall apply beginning at least 30 days after notice required by this Section 28.2 is provided and only shall apply to transactions agreed to beginning on or after the date the change in netting status becomes effective. 28.3 The Parties may by separate agreement either through a Confirmation Agreement or some other agreement set out specific terms relating to the implementation of the netting in addition to or in lieu of Exhibit A. Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool Original Sheet No. 47A Rate Schedule FERC No. 6 29. TAXES: The Contract Price for all transactions under the Service Schedules shall include full reimbursement for, and the Seller is liable for and shall pay, or cause to be paid, or reimburse the Purchaser for if the Purchaser has paid, all taxes applicable to a transaction that arise prior to the delivery point. If the Purchaser is required to remit such tax, the amount shall be deducted from any sums due to the Seller. The Seller shall indemnify, Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool Original Sheet No. 48 Rate Schedule FERC No. 6 defend, and hold harmless the Purchaser from any claims for such taxes. The Contract Price does not include reimbursement for, and the Purchaser is liable for and shall pay, cause to be paid, or reimburse the Seller for if the Seller has paid, all taxes applicable to a transaction arising at and from the delivery point, including any taxes imposed or collected by a taxing authority with jurisdiction over the Purchaser. The Purchaser shall indemnify, defend, and hold harmless the Seller from any claims for such taxes. Either Party, upon written request of the other Party, shall provide a certificate of exemption or other reasonably satisfactory evidence of exemption if either Party is exempt from taxes, and shall use reasonable efforts to obtain and cooperate with the other Party in obtaining any exemption from or reduction of any tax. Taxes are any amounts imposed by a taxing authority associated with the transaction. 30. CONFIDENTIALITY: The terms of any transaction under the Service Schedules or any other information exchanged by the Purchaser and Seller relating to the transaction shall not be disclosed to any person not employed or retained by the Purchaser or the Seller or their affiliates, except to the extent disclosure is (1) required by law, (2) reasonably deemed by the disclosing Party to be required to be disclosed in connection with a dispute between or among the Parties, or the defense of any litigation or dispute, (3) otherwise permitted by consent of the other Party, which consent shall not be unreasonably withheld, (4) required to be made in connection with regulatory proceedings (including proceedings relating to FERC, the United States Securities and Exchange Commission or any other Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 49 Rate Schedule FERC No. 6 federal, state or provincial regulatory agency); (5) required to comply with North American Electric Reliability Organization, regional reliability council, or successor organization requirements; or (6) necessary to obtain transmission service. In the event disclosure is made pursuant to this provision, the Parties shall use reasonable efforts to minimize the scope of any disclosure and have the recipients maintain the confidentiality of any documents or confidential information covered by this provision, including, if appropriate, seeking a protective order or similar mechanism in connection with any disclosure. This provision shall not apply to any information that was or is hereafter in the public domain (except as a result of a breach of this provision). 31. TRANSMISSION TARIFF: Pursuant to FERC Order No. 888, issued on April 24, 1996, and FERC orders where applicable, the WSPP Default Transmission Tariff has been filed and has become effective. The Parties agree to be bound by the terms of that Tariff for so long as they are Western Systems Power Pool members. 32. TRANSACTION SPECIFIC TERMS AND ORAL AGREEMENTS: 32.1 The Parties' agreement to transaction specific terms which constitute the Confirmation Agreement shall be made by one of the following methods: (1) provision of pertinent information through written Confirmation Agreements (see Exhibit C for a sample); or (2) oral conversation, provided that such oral conversation is recorded electronically. By mutual agreement and consistent with and pursuant to the provisions of this Section 32, the Parties to a transaction under Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Third Revised Sheet No. 50 Rate Schedule FERC No. 6 Superseding Second Revised Sheet No. 50 this Agreement may agree to modify any term of this Agreement which applies to such transaction (but not to provisions regarding the operation of the WSPP as an organization including Sections 7 and 8), such agreement to be reflected in a Confirmation Agreement. Written confirmation shall be required for all transactions of one week or more. Upon request of the Purchaser or at the election of the Seller, the Seller shall provide written confirmation which must be received by the Purchaser within five Business Days of the date of the agreement or request. The Purchaser shall have five Business Days from date of receipt to respond to the confirmation. If the Purchaser does not respond within that time period, the Seller's written confirmation shall be considered as accepted and final except as provided in Section 32.5. If the Seller fails to provide any required written confirmation within five Business Days, as described above, then the Purchaser may submit a written confirmation to the Seller. The Purchaser shall submit such written confirmation within five Business Days after the deadline for submitting a written confirmation applicable to the Seller as set forth above has expired. If the Seller fails to respond to Purchaser's confirmation within five Business Days, then the Purchaser's written confirmation shall be considered as accepted and final except as provided in Section 32.5. Notwithstanding the foregoing, any failure of the Seller or the Purchaser to provide written confirmation of the transaction shall not invalidate any oral agreement of the Parties except for oral agreements prohibited by Section 32.5. Nor shall any oral agreement of the Parties be considered invalidated Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool First Revised Sheet No. 50A Rate Schedule FERC No. 6 Superseding Original Sheet No. 50A before and during the time period the confirmation process is ongoing and no final Confirmation Agreement under these procedures or through mutual agreement has been reached. Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool Original Sheet No. 51 Rate Schedule FERC No. 6 32.2 The Parties agree not to contest, or assert any defense with respect to, the validity or enforceability of any agreement to the terms concerning a specific transaction(s), on the basis that documentation of such terms fails to comply with the requirements of any statute that agreements be written or signed. Each Party consents to the recording by the other Party, without any further notice, of telephone conversations between representatives of the Parties, which contain agreements to or discussion concerning the terms of a specific transaction(s). All such recordings may be introduced and admitted into evidence for the purpose of proving agreements to terms, and any objection to such introduction or admission for such purpose is hereby expressly waived. The terms documented hereunder, whether stated in a written document or a recording, are intended by the Parties as a final expression of their agreement with respect to such terms as are included therein and may not be contradicted by evidence of any prior agreement, but may be supplemented by course of dealing, performance, usage of trade and evidence of consistent additional mutually agreed-upon terms. 32.3 For individual transactions under the Service Schedules, the Agreement as it may be modified or supplemented by a Confirmation Agreement shall bind the Parties and govern the transactions; provided, however, if the Parties to a transaction do not reach agreement on such modification or change to a term of the Agreement, or the Confirmation Agreement is not considered accepted and final pursuant to Section 32.1, then the term or terms of the Agreement, which the Parties could not Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Second Revised Sheet No. 52 Rate Schedule FERC No. 6 Superseding First Revised Sheet No. 52 reach agreement to modify or change or which are not considered modified pursuant to Section 32.1, shall apply to that transaction. In the event of a conflict between a binding and effective Confirmation Agreement and this Agreement, the Confirmation Agreement shall govern. 32.4 The Seller shall not be required to file written confirmations with FERC except as provided in the Service Schedules. 32.5 When a Confirmation Agreement contains Non-Standard Confirmation Provisions which are provisions other than those set forth in paragraphs (a) - (l) of Exhibit C, those Non-Standard Confirmation Provisions shall not be deemed to be accepted pursuant to Section 32.1 unless agreed to: (i) orally, with that oral agreement recorded (provided that such oral agreement option only shall be available for transactions of less than one week); or (ii) in a writing executed by both Parties. 32.6 Other Products and Service Levels: The Parties may agree to use a product/service level defined by a different agreement (e.g., the California ISO tariff, the ERCOT agreement or the EEI agreement) for a particular transaction under this Agreement. Unless the Parties expressly state and agree that all the terms and conditions of such other agreement will apply to any such transaction, the transaction shall be subject to all the terms of this Agreement, except that (1) all service level/product definitions, (2) force majeure/uncontrollable force definitions, and (3) other terms as mutually agreed shall have the meaning Issued by: Michael E. Small, General Counsel to Effective: September 1, 2002 Western Systems Power Pool Issued on: July 2, 2002 Western Systems Power Pool Original Sheet No. 52A Rate Schedule FERC No. 6 ascribed to them in the different agreement or in the applicable confirmation notice or agreement. 32.7 Written confirmation pursuant to this Section 32 may be provided in electronic format so long as the Parties to the affected transaction or transactions have agreed on the procedures and format for doing so. 33. PERFORMANCE, TITLE, AND WARRANTIES FOR TRANSACTIONS UNDER SERVICE SCHEDULES: 33.1 Performance 33.1.1 The Seller shall deliver to the delivery point(s) as agreed to in the applicable Confirmation Agreement and sell to the Purchaser in accordance with the terms of the Agreement and such Confirmation Agreement. 33.1.2 The Purchaser shall receive and purchase the Contract Quantity, as agreed to by the Parties in the applicable Confirmation Agreement, at the delivery point(s) and purchase from the Seller in accordance with the terms of the Agreement and such Confirmation Agreement. 33.2 Title and Risk of Loss Title to and risk of loss of the electric energy shall pass from the Seller to the Purchaser at the delivery point agreed to in the Confirmation Agreement; provided, however, with regard to federal agencies or parts of the United States Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool Original Sheet No. 53 Rate Schedule FERC No. 6 Government, title to and risk of loss shall pass to Purchaser to the extent permitted by and consistent with applicable law. 33.3 Warranties The Seller warrants that it will transfer to the Purchaser good title to the electric energy sold under the Agreement and any Confirmation Agreement, free and clear of all liens, claims, and encumbrances arising or attaching prior to the delivery point and that Seller's sale is in compliance with all applicable laws and regulations. THE SELLER HEREBY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 34. DISPUTE RESOLUTION: 34.1 INFORMAL DISPUTE RESOLUTION Before binding dispute resolution or any other form of litigation may proceed, any dispute between the Parties to a transaction under this Agreement first shall be referred to nonbinding mediation. The Parties shall attempt to agree upon a mediator from a list of ten (10) candidates provided by the Chairman of the WSPP Operating Committee or his or her designee. If the Parties are unable to agree, then the Chairman or the designee shall appoint a mediator for the dispute. Neither the mediator nor the person involved on behalf of the WSPP in developing a list of mediators for the Parties to choose from or in selecting the Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 54 Rate Schedule FERC No. 6 mediator (if the Parties are unable to do so) shall possess a direct or indirect interest in either Party or the subject matter of the mediation. The WSPP shall establish procedures for the appointment of mediators and the conduct of mediation and those procedures shall apply to the mediation. 34.2 BINDING DISPUTE RESOLUTION The Parties to a dispute may elect binding dispute resolution using the following process unless binding arbitration of certain disputes is required under this Agreement in which event the Parties shall use the process set forth in this Section 34.2 to resolve such disputes, unless the Parties otherwise agree: (a) WSPP Dispute Resolution: A Party to a dispute (if binding dispute resolution is required) or all Parties to a dispute (if agreement of the Parties is required for binding dispute resolution) may initiate binding dispute resolution under WSPP procedures by notifying the Chairman of the WSPP Operating Committee or his or her designee. The Chairman or his or her designee shall provide the Parties with a list of ten (10) eligible arbitrators. Within ten (10) days of receiving the list, the Parties shall agree on a single arbitrator from the list to conduct the arbitration, or notify the Chairman of the Operating Committee or the designee of their inability to reach agreement. If notified of the Parties inability to reach agreement, then the Chairman or the designee shall choose the arbitrator from the list within five (5) days. Neither the arbitrator nor the person Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 55 Rate Schedule FERC No. 6 involved on behalf of the WSPP in developing a list of arbitrators for the Parties to choose from or in selecting the arbitrator (if the Parties are unable to do so) shall possess a direct or indirect interest in either Party or the subject matter of the arbitration. The Procedures to be used for this arbitration shall follow the arbitration procedures which shall be developed and maintained by the WSPP and the procedures will be generally consistent with the commercial arbitration rules of the American Arbitration Association though not involving the Association. If the Parties agree to binding dispute resolution under this Section 34.2, each Party understands that it will not be able to bring a lawsuit concerning any dispute that may arise which is covered by this arbitration provision. Notwithstanding the foregoing, nothing herein is intended to waive any provision of the Federal Arbitration Act, 9 U.S.C. Section 1, et. seq., or any right under state statute or common law to challenge an arbitration award or to prevent any action to enforce any arbitration award. A Party's liability and damages under any arbitration award resulting from the process set forth in this Section 34.2 shall be limited as provided in this Agreement or in any Confirmation Agreement. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 56 Rate Schedule FERC No. 6 34.3 COSTS Each Party shall be responsible for its own costs and those of its counsel and representatives. The Parties shall equally divide the costs of the arbitrator or mediator and the hearing. 34.4 CONFIDENTIALITY Any arbitration or mediation under this Section 34 shall be conducted on a confidential basis and not disclosed, including any documents or results which shall be considered confidential, unless the Parties otherwise agree or such disclosure is required by law. 35. FORWARD CONTRACTS: The Parties acknowledge and agree that all transactions under the Agreement and Confirmation Agreement(s) are forward contracts and that the Parties are forward contract merchants, as those terms are used in the United States Bankruptcy Code. The Parties acknowledge and agree that all of their transactions, together with this Agreement and the related Confirmation Agreement(s) form a single, integrated agreement, and agreements and transactions are entered into in reliance on the fact that the agreements and each transaction form a single agreement between the Parties. 36. TRADE OPTION EXCEPTION The Parties intend that any Physically Settled Option under this Agreement shall qualify under the trade option exception, 17 C.F.R. Section 32.4. Accordingly, each Party buying or selling a Physically Settled Option agrees and warrants that any such option Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 57 Rate Schedule FERC No. 6 shall be offered only to a provider, user, or merchant and that the entities entering into the options are doing so solely for purposes related to their business. 37. ADDITIONAL REPRESENTATIONS AND WARRANTIES: Each Party warrants and represents to the other(s) that it possesses the necessary corporate, governmental and legal authority, right and power to enter into and agree to the applicable Confirmation Agreement for a transaction or transactions and to perform each and every duty imposed, and that the Parties' agreement to buy and sell power under this Agreement and the Confirmation Agreement represents a contract. Each Party also warrants and represents to the other(s) that each of its representatives executing or agreeing through a Confirmation Agreement to a transaction under this Agreement is authorized to act on its behalf. Each Party further warrants and represents that entering into and performing this Agreement and any applicable Confirmation Agreement does not violate or conflict with its Charter, By-laws or comparable constituent document, any law applicable to it, any order or judgment of any court or other agency of government applicable to it or any agreement to which it is a party and that this Agreement and applicable Confirmation Agreement(s), constitute a legal, valid and binding obligation enforceable against such Party in accordance with the terms of such agreements. Each Party also represents that it is solvent and that on each delivery this representation shall be deemed renewed unless notice to the contrary is given in writing by the Purchaser to the Seller before delivery. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 58 Rate Schedule FERC No. 6 Superseding Original Sheet No. 58 38. FLOATING PRICES: 38.1 In the event the Parties intend that the price for a transaction is to be based on an index, exchange or any other kind of variable reference price (such price being a "Floating Price"), the Parties shall specify the "Floating Price" to be used to calculate the amounts in a Confirmation Agreement due Seller for that transaction. 38.2 Market Disruption. If a Market Disruption Event has occurred and is continuing during the Determination Period, the Floating Price for the affected Trading Day shall be determined as follows. The Parties shall negotiate in good faith to agree on a Floating Price (or a method for determining a Floating Price) for the affected Trading Day. If the Parties have not so agreed on or before the twelfth Business Day following the first Trading Day on which the Market Disruption Event occurred or existed, then the Floating Price shall be determined in good faith by the Parties based upon (1) quotes from Dealers in energy contracts; and/or (2) quotes from Brokers in energy contracts. Each Party may obtain up to a maximum of four quotes which must be provided to the other Party no later than twenty-two Business Days following the first Business Day on which the Market Disruption Event occurred or existed. These quotes shall reflect transacted prices. The Floating Price for the affected Trading Day shall equal a simple average of the quotes obtained and provided by the Parties consistent with the provisions of this Section 38. Each Party providing quote(s) to the other Party also shall Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool Original Sheet No. 58A Rate Schedule FERC No. 6 identify to that other Party the Dealer(s) and/or the Broker(s) who provided each of the quotes to allow verification. "Determination Period" means each calendar month during the term of the relevant transaction; provided that if the term of the transaction is less than one calendar month the Determination Period shall be the term of the transaction. "Market Disruption Event" means, with respect to an index, any of the following events (the existence of which shall be determined in good faith by the Parties): (a) the failure of the index to announce or publish information necessary for determining the Floating Price; (b) the failure of trading to commence or the permanent discontinuation or material suspension of trading in the relevant options contract or commodity on the exchange or market acting as the index; (c) the temporary or permanent discontinuance or unavailability of the index; (d) the temporary or permanent closing of any exchange acting as the index; or (e) a material change in the formula for or the method of determining the Floating Price. "Trading Day" means a day in respect of which the relevant price source published the relevant price or would have published the relevant price but for the Market Disruption Event. 38.3 Calculation of Floating Price. For the purposes of the calculation of a Floating Price, all numbers shall be rounded to three (3) decimal places. If the fourth (4th) decimal number is five (5) or greater, then the third (3rd) decimal number shall be Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool First Revised Sheet No. 58B Rate Schedule FERC No. 6 Superseding Original Sheet No. 58B increased by one (1), and if the fourth (4th) decimal number is less than five (5), then the third (3rd) decimal number shall remain unchanged. 38.4 Corrections. For the purposes of determining the relevant prices for any day, if the price published or announced on a given day and used or to be used to determine the relevant price is subsequently corrected and the correction is published or announced by the person responsible for that publication or announcement, either Party may notify the other Party of (i) that correction and (ii) the amount (if any) that is payable as a result of that correction. If a Party gives notice that an amount is so payable, the Party that originally either received or retained such amount will pay such amount consistent with the provisions of this Section 38.4. The amount that is payable as a result of the correction shall be included in the billing cycle in which the notice of the correction is provided. 39. AMENDMENT: 39.1 This Agreement may be amended upon the submission to FERC and acceptance by FERC of that amendment. The Parties through the Executive Committee shall direct the filing of any amendments. The Parties to this Agreement agree to bound by this Agreement as it may be amended, provided that the Parties possess the right to challenge any amendments at FERC and to exercise any applicable withdrawal rights under this Agreement. 39.2 Unless otherwise stated in the amendment, all amendments shall apply only to new transactions entered into or agreed to on or after the effective date of the amendment. Preexisting agreements and transactions shall operate under the Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool Original Sheet No. 58C Rate Schedule FERC No. 6 version of the WSPP Agreement effective at the time of the agreement for the transaction unless the Parties to a transaction or transactions mutually agree otherwise. 39.3 An agreement modifying this Agreement or a Confirmation Agreement for a transaction needs no consideration to be binding. 40. EXECUTION BY COUNTERPARTS: This Agreement may be executed in any number of counterparts, and upon execution by all Parties, each executed counterpart shall have the same force and effect as Issued by: Michael E. Small, General Counsel to Effective: February 1, 2003 Western Systems Power Pool Issued on: December 3, 2002 Western Systems Power Pool First Revised Sheet No. 59 Rate Schedule FERC No. 6 Superseding Original Sheet No. 59 an original instrument and as if all Parties had signed the same instrument. Any signature page of this Agreement may be detached from any counterpart of this Agreement without impairing the legal effect of any signatures thereon, and may be attached to another counterpart of this Agreement identical in form hereto but having attached to it one or more signature pages. 41. WITNESS: IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representative as of the 27th day of July, 1991 (or as of the date of execution of this Agreement by each Party's duly authorized representation, in the case of any Party that becomes a signatory to this Agreement subsequent to July 27, 1991). By:________________________________ Name: Title: Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool Original Sheet No. 60 Rate Schedule FERC No. 6 EXHIBIT A NETTING Each Party that executes this Exhibit A to the Agreement agrees to net payments for transactions under WSPP Service Schedule A, B, and C with any other Party or Parties which also have agreed to net payments by executing a copy of this Exhibit A. The Party executing this Exhibit A shall indicate below when it desires that its agreement to net becomes effective. A Party agreeing to net under this Exhibit A shall comply with the provisions of Section 28.2 of the Agreement. Defined terms used herein are as defined in the WSPP Agreement. Netting shall be done in accordance with the following provision: If the Purchaser and Seller are each required to pay an amount on the payment due date in the same month for transactions under the Agreement or Confirmation Agreement, then such amounts with respect to each Party will be aggregated and the Parties will discharge their obligations to pay through netting, in which case the Party owing the greater aggregate amount will pay to the other party the difference between the amounts owed consistent with the payment times in Section 9.2 of the Agreement, unless the Parties have otherwise agreed to a different payment time as allowed by the Agreement. Each Party reserves to itself all rights, set-offs, counterclaims and other remedies and/or defenses to which it is or may be entitled, arising from or out of the Agreement. All outstanding payments between the Parties which are to be netted pursuant to this Exhibit A for transactions under WSPP Service Schedule A, B, and C shall be offset against each other or set off or recouped therefrom. ____________________________________ _________________________________ Name of Authorized Representative Effective Date for Netting ____________________________________ Name of WSPP Member ____________________________________ _________________________________ Signature of Authorized Date of Execution Representative Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 61 Rate Schedule FERC No. 6 [WSPP SAMPLE FORM - PARTIES ARE FREE TO USE THIS OR DISREGARD IT.] EXHIBIT B FORM OF COUNTERPARTY GUARANTEE AGREEMENT This Guarantee Agreement (this "Guarantee"), dated, as of [__________], 199[__], is made and entered into by [_____________], a [__________] corporation ("Guarantor"). WITNESSETH: WHEREAS, [___________________] (the "Company") may enter into transactions involving power sales under the Western Systems Power Pool ("WSPP Agreement") and related confirmation agreements(1) (collectively "Agreements") with [Company Name] ("Guaranteed Party"); and WHEREAS, Guarantor will directly or indirectly benefit from the Agreements. NOW THEREFORE, in consideration of the Guaranteed Party agreeing to conduct business with Company, Guarantor hereby covenants and agrees as follows: 1. GUARANTY. Subject to the provisions hereof, Guarantor hereby irrevocably and unconditionally guarantees the timely payment when due of the obligations of Company (the "Obligations") to the Guaranteed Party in accordance with the Agreements. If Company fails to pay any Obligations, Guarantor shall promptly pay to the Guaranteed Party no later than the next Business Day (as defined in the WSPP Agreement), after notification, the amount due in the same currency and manner provided for in the Agreements. This Guarantee shall constitute a guarantee of payment and not of collection. Guarantor shall have no right of subrogation with respect to any payments it makes under this Guarantee until all of the Obligations of Company to the Guaranteed Party are paid in full. The liability of Guarantor under the Guarantee shall be subject to the following: (a) Guarantor's liability hereunder shall be and is specifically limited to payments expressly required to be made in accordance with the Agreements (even if such payments are deemed to be damages) and, except to the extent specifically provided in the Agreements, in no event shall Guarantor be subject hereunder to consequential, exemplary, equitable, loss of profits, punitive, tort, or any other even if such fees together with the payments - ----------------------- (1) Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 62 Rate Schedule FERC No. 6 exceed the cap in Section 1(b), damages, costs, except that Guarantor shall be required to pay reasonable attorney fees. (b) The aggregate liability of the Guarantor shall not exceed [_____] Million U.S. Dollars [___________]. 2. DEMANDS AND NOTICE. If Company fails or refuses to pay any Obligations, the Guaranteed Party may make a demand upon Guarantor (hereinafter referred to as a "Payment Demand"). A Payment Demand shall be in writing and shall reasonably and briefly specify in what manner and what amount Company has failed to pay and an explanation of why such payment is due, with a specific statement that the Guaranteed Party is calling upon Guarantor to pay under this Guarantee. A Payment Demand satisfying the foregoing requirements shall be deemed sufficient notice to Guarantor that it must pay the Obligations. A single written Payment Demand shall be effective as to any specific default during the continuance of such default, until Company or Guarantor has cured such default, and additional Payment Demands concerning such default shall not be required until such default is cured. 3. REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants that: (a) it is a corporation duly organized and validly existing under the laws of the State of [_____________] and has the corporate power and authority to execute, deliver and carry out the terms and provisions of this Guarantee; (b) no authorization, approval, consent or order of, or registration or filing with, any court or other governmental body having jurisdiction over Guarantor is required on the part of Guarantor for the execution and delivery of this Guarantee; and (c) this Guarantee constitutes a valid and legally binding agreement of Guarantor enforceable against Guarantor in accordance with its terms, except as the enforceability of this Guarantee may be limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity. 4. EFFECT OF BANKRUPTCY BY COMPANY. The Guarantor's obligation to pay under this Guarantee shall not be affected in any way by the institution with respect to the Company of a bankruptcy, reorganization, moratorium or similar insolvency proceeding or other relief under any bankruptcy or insolvency law affecting creditor's rights or a petition for the Company's winding-up or liquidation. 5. AMENDMENT. No term or provision of this Guarantee shall be amended, modified, altered, waived, or supplemented except in a writing signed by the Guarantor and Guaranteed Party hereto. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 63 Rate Schedule FERC No. 6 6. WAIVERS. Guarantor hereby waives (a) notice of acceptance of this Guarantee; (b) presentment and demand concerning the liabilities of Guarantor, except as expressly hereinabove set forth; and (c) any right to require that any action or proceeding be brought against Company or any other person, or except as expressly hereinabove set forth, to require that the Guaranteed Party seek enforcement of any performance against Company or any other person, prior to any action against Guarantor under the terms hereof. Except as to applicable statutes of limitation, no delay of the Guaranteed Party in the exercise of, or failure to exercise, any rights hereunder shall operate as a waiver of such rights, a waiver of any other rights or a release of Guarantor from any obligations hereunder. Guarantor consents to the renewal, compromise, extension, acceleration or other changes in the time of payment of or other changes in the terms of the Obligations, or any part thereof or any changes or modifications to the terms of the Agreements. Guarantor may terminate this Guarantee by providing written notice of such termination to the Guaranteed Party and upon the effectiveness of such termination, Guarantor shall have no further liability hereunder, except as provided in the last sentence of this paragraph. No such termination shall be effective until fifteen (15) Business Days after receipt by the Guaranteed Party of such termination notice. No such termination shall affect Guarantor's liability with respect to any obligations arising under any transaction entered into prior to the time the termination is effective, which transaction shall remain guaranteed pursuant to the terms of this Guarantee. 7. ASSIGNMENT. The Guarantor shall not assign this Guarantee without the express written consent of the Guaranteed Party. The Guaranteed Party shall be entitled to assign its rights under this Agreement in its sole discretion. 8. NOTICE. Any Payment Demand, to the Guaranteed Party or the Guarantor notice, request, instruction, correspondence or other document to be given hereunder by any party to another (herein collectively called "Notice") shall be in writing and delivered personally or mailed by certified mail, postage prepaid and return receipt requested, or by telegram or telecopier, as follows: Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 64 Rate Schedule FERC No. 6 To [Name of Guaranteed Party] ____________________________ ______________________________ ______________________________ Attn: _______________________ Fax No.: (___) _______________ To Guarantor: ____________________________ ____________________________ ____________________________ Attn: _____________________ Fax No.: (___) _____________ Notice given by personal delivery or mail shall be effective upon actual receipt. Notice given by telegram or telecopier shall be effective upon actual receipt if received during the recipient's normal business hours, or at the beginning of the recipient's next business day after receipt if not received during the recipient's normal business hours. All Notices by telegram or telecopier shall be confirmed promptly after transmission in writing by certified mail or personal delivery. Any party may change any address to which Notice is to be given to it by giving notice as provided above of such change of address. 8. MISCELLANEOUS. THIS GUARANTEE SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF [State], WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. This Guarantee shall be binding upon Guarantor, its successors and assigns and inure to the benefit of and be enforceable by the Guaranteed Party, its successors and assigns. The Guarantee embodies the entire agreement and understanding between Guarantor and the Guaranteed Party and supersedes all prior agreements and understandings relating to the subject matter hereof. The headings in this Guarantee are for purposes of reference only, and shall not affect the meaning hereof. This Guarantee may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. EXECUTED as of the day and year first above written. [___________________________] By: ________________________ Name: _______________________ Title: ______________________ Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Second Revised Sheet No. 65 Rate Schedule FERC No. 6 Superseding First Revised Sheet No. 65 EXHIBIT C SAMPLE FORM FOR CONFIRMATION 1. TRANSACTION SPECIFIC AGREEMENTS The undersigned Parties agree to sell and purchase electric energy, or a Physically-Settled Option, pursuant to the WSPP Agreement as it is supplemented and modified below: (a) Seller: __________________________________ (b) Purchaser: __________________________________ (c) Period of Delivery: From __\__\__ To __\__\__ (d) Schedule (Days and Hours): __________________ (e) Delivery Rate:________________________________ (f) Delivery Point(s): __________________________ (g) Type of Service (Check as Applicable) Service Schedule A _________ Service Schedule B _________ Service Schedule C _________ Physically-Settled Option Service Schedule B ______ Physically-Settled Option Service Schedule C ______ Other products per Section 32.6 _________________ [DESCRIBE PRODUCT] (h) Contract Quantity: ________ Total MWhrs. (i) Contract or Strike Price: _____________________ (j) Transmission Path for the Transaction (If Applicable): (k) Date of Agreement if different: _____________ (l) Additional Information for Physically-Settled Options (i) Option Type: Put __________ Call______________ (ii) Option Style: __________ (iii) Exercise Date or Period: __________ (iv) Premium: __________ (v) Premium Payment Date: _________ (vi) Method for providing notice of exercise ________________ (m) Special Terms and Exceptions: See Attachment A [Special Terms and Exceptions shall be shown on an Attachment to this Confirmation.] _______________________________ __________________________________ Name of Trader for Purchaser Name of Trader for Seller Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool Original Sheet No. 66 Rate Schedule FERC No. 6 ___________________________ ____________________________ Authorized Signature Authorized Signature for Purchaser for Seller Date Date Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 67 Rate Schedule FERC No. 6 EXHIBIT D WSPP MEDIATION AND ARBITRATION PROCEDURES I. MEDIATION A. INFORMAL MEDIATION. WSPP members with a dispute or a potential dispute involving transactions under the WSPP Agreement may request non-binding, informal mediation by contacting the WSPP's General Counsel and by providing a brief explanation in writing of the dispute and the remedy being sought. All parties to the dispute must request this Informal Mediation for it to become effective. After this contact, a telephonic conference call will be arranged among the affected WSPP members and the WSPP's General Counsel, the Chairman of the Operating Committee, and/or some other independent and knowledgeable person requested by the Chairman of the Operating Committee to participate. The purpose of the conference call will be to discuss the issues and to have an independent person or persons state their views. Best efforts will be made to set up this conference call within five Business Days after the WSPP's General Counsel is contacted subject to accommodating the schedules of all involved. This Informal Mediation shall be considered as satisfying the Mediation requirements of Section 34.1 of the WSPP Agreement. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 68 Rate Schedule FERC No. 6 B. INITIATING FORMAL MEDIATION. A WSPP member which believes that it possesses a claim against another WSPP member relating to a WSPP transaction, which is unable to resolve the dispute through agreement with the other member to the transaction, and which desires to pursue that claim shall initiate non-binding formal mediation pursuant to Section 34.1 of the WSPP Agreement. The member initiating such mediation shall do so by Serving written notice to the Chairman of the WSPP Operating Committee, the WSPP's General Counsel, and the other members against which the claim is directed. Such notice shall state the nature of the dispute, the remedy sought, and support the claim. C. RESPONSE TO DOCUMENT INITIATING FORMAL MEDIATION. Within eight days, the member or members against which the claim is directed may provide a response to the notice which shall be Served on the member which initiated the Mediation, the Chairman of the WSPP's Operating Committee, and the WSPP's General Counsel. D. CHOOSING THE MEDIATOR. The Mediator shall be chosen in accordance with the procedures set forth in Section 34.1 of the WSPP Agreement. Each Party may suggest persons to be included on the list of Mediators to be presented to the Parties provided that these suggested persons shall be provided to the WSPP Representative together with relevant personal histories within two Business Days Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 69 Rate Schedule FERC No. 6 of the date by which time the list of Mediators is to be sent out. The WSPP Representative shall allow at least one person suggested by each Party to be added to the list of Mediators. A brief personal history of each person on the list of potential mediators shall be provided to the Parties, with that history showing the person's employment over the last five years and any other relevant facts. The WSPP Representative shall provide the Parties with the list of Mediators within five days of receipt of notice of the dispute. The Parties then shall have five days in which to reach agreement on a Mediator or inform the WSPP Representative that they were unable to reach agreement in which event the WSPP Representative shall appoint the Mediator consistent with Section 34.1 of the WSPP Agreement. Upon request of the Parties for expedition, the WSPP Representative shall use best efforts to expedite this process. E. LOCATION FOR THE FORMAL MEDIATION. The Parties shall agree on a location for the Mediation. If the Parties fail to reach agreement, then the WSPP Representative shall set the location which shall be convenient for the Parties and the Mediator. F. TIME FOR THE FORMAL MEDIATION. The Parties shall agree on the time for the Mediation after consultation with the Mediator if one has been appointed. If the Parties fail to reach agreement, then the WSPP Representative shall set the time Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 70 Rate Schedule FERC No. 6 which shall not be more than twenty-one days after the notice initiating the Mediation is received after consultation with the Parties and any Mediator. G. CONDUCT OF THE FORMAL MEDIATION. The Mediator shall have the ability to conduct the Mediation in any manner which the Mediator believes is appropriate to facilitate resolution of the dispute. Each Party shall have at least one representative with the authority to settle the dispute present at the Mediation. The Mediation shall be private and confidential and the Mediator shall have the authority to exclude any person not directly involved unless the Parties agree otherwise in writing. At the Mediation, each Party shall have the right to make a brief presentation of its case and to question the other Party. Each Party also may be represented by counsel. H. REPLACEMENT OF THE MEDIATOR. If the Mediator resigns, withdraws or is no longer able to serve, then the Parties shall have two Business Days in which to agree on a new Mediator. If the Parties are unable to agree within such time, the WSPP Representative shall appoint a replacement Mediator from the list used to select the first Mediator within two Business Days after being notified that the Parties are unable to agree. The dates and deadlines in this section may require modification if the mediator is replaced. Any extensions shall be as limited as possible. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 71 Rate Schedule FERC No. 6 II. ARBITRATION A. INITIATING ARBITRATION. A WSPP member which initiates Arbitration pursuant to Section 34.2 of the WSPP Agreement shall do so by Serving the Chairman of the WSPP Operating Committee, the WSPP General Counsel and the members against which the claim is directed with written notice of its demand for arbitration. Such notice shall state the nature of the dispute, the remedy sought, and support the claim. B. RESPONSE. Within ten days of receipt of the notice, any member or members against which the claim is directed may provide a response to the notice. Such response must include any counterclaims which the member believes are appropriate. If a counterclaim is submitted, then the member which submitted the notice may respond to the counterclaim within ten days of receipt. All such responses shall be Served on the Parties, the Chairman of the WSPP Operating Committee, and the WSPP General Counsel. C. CHOOSING THE ARBITRATOR. The Arbitrator shall be chosen in accordance with the procedures set forth in Section 34.2 of the WSPP Agreement. Each Party may suggest persons to be included on the list of Arbitrators to be presented to the Parties provided that these suggested persons are provided to the WSPP Representative together with relevant personal histories within two business days Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 72 Rate Schedule FERC No. 6 of the date by which time the list of Arbitrators is to be sent out. The WSPP Representative shall allow at least one person suggested by each Party to be added to the list of potential Arbitrators. A brief personal history of each person on the list of potential Arbitrators shall be provided to the Parties, with that history showing the person's employment over the last five years and any other relevant facts. The WSPP Representative shall provide the Parties with the list of Arbitrators within seven days of receipt of notice of the request for Arbitration. The Parties then shall have ten days in which to reach agreement on the Arbitrator or to inform the WSPP Representative that they were unable to reach agreement in which event the WSPP Representative shall appoint the Arbitrator consistent with Section 34.2 of the Agreement. Upon request of the Parties for expedition, the WSPP Representative shall use best efforts to cause this process to be expedited. D. LOCATION FOR THE ARBITRATION. The Parties shall agree on a location for the Arbitration. If the Parties fail to reach agreement, then the WSPP Representative shall set the location which shall be convenient for the Parties and the Arbitrator. E. TIME FOR THE ARBITRATION. The Parties shall agree on the time for the Arbitration and coordinate that time with the Arbitrator if one has been agreed to or appointed. If the Parties fail to reach agreement, then the WSPP Representative Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 73 Rate Schedule FERC No. 6 shall set the time which shall not be more than 60 days after the notice is received. The WSPP Representative shall set a time after consultation with the Parties and the Arbitrator to check their schedules. F. DISCOVERY. After appointment of the Arbitrator, each Party shall be entitled to obtain relevant documents from the other Parties and to take depositions. Each Party shall respond to such a document request within seven days of receipt of the request and make its employees or consultants available for depositions to the extent that the employee or consultant possesses knowledge and information relevant to the dispute. Each Party shall disclose documents that are confidential or commercially sensitive subject to a reasonable protective order. Any disputes concerning discovery shall be promptly referred to the Arbitrator who shall have authority to resolve such disputes, including the authority to require attendance of witnesses at depositions. The Federal Rules of Civil Procedure shall apply to discovery under these procedures. G. CONDUCT OF ARBITRATION IF THE PARTIES AGREE TO WAIVE AN ORAL HEARING. If the Parties agree to waive an oral hearing, then the Parties shall Serve Initial Briefs no later than 35 days after the notice is received or notify the Arbitrator that they do not wish to submit any additional documents. Parties shall Serve any Reply Briefs no later than ten days after the date for Service of Initial Briefs. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 74 Rate Schedule FERC No. 6 H. CONDUCT OF THE ARBITRATION HEARING. No later than fifteen days before any hearing, any Party may Serve an Initial Brief or notify the Arbitrator that they do not wish to submit any additional documents. A Party shall Serve any Reply Brief no later than five Business Days before any hearing. The Arbitrator shall preside over any hearing and rule on all objections including objections as to the admissibility of evidence or whether the questioning is proper. All testimony shall be submitted under oath. The Arbitrator is not bound to follow any particular rules governing the conduct of the proceeding. The Arbitrator may rely on legal advice provided through the WSPP. The Arbitrator may require any person employed by a Party to attend and testify at the hearing. Each Party shall possess the right to present evidence, including witnesses, and to cross-examine other Parties' witnesses. The Arbitration shall be private and the Arbitrator shall have the authority to exclude any person not directly involved unless the Parties otherwise agree. Each Party may be represented by counsel. A stenographic record of the Arbitration shall be kept. I. DECISION. Within ten Business Days after the end of the Arbitration hearing, the Arbitrator shall issue his award in writing. If the Parties waived the right to an oral hearing, then the Arbitrator shall issue the award within ten Business Days of the last date Briefs were to be submitted. The Arbitrator is not limited in the Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 75 Rate Schedule FERC No. 6 remedies he may order so long as any arbitration award is consistent with the provisions and limitations of the WSPP Agreement and any applicable Confirmation Agreement with respect to the liability and damages of any Party; provided, however, upon agreement of the Parties to the dispute, the Arbitrator's choice of remedies may be limited. J. REPLACEMENT OF THE ARBITRATOR. If the Arbitrator resigns, withdraws, or is no longer able to serve then the Parties shall have two Business Days in which to agree on a new Arbitrator. If the Parties are unable to agree within such time, the WSPP Representative shall appoint a replacement Arbitrator from the list used to select the first Arbitrator within two Business Days after being notified that the Parties are unable to agree. The dates and deadlines in this section may require modification if the mediator is replaced. Any extensions shall be as limited as possible. III. MISCELLANEOUS A. CONFIDENTIALITY. Any Arbitration or Mediation shall be confidential as provided in Section 34.4 of the WSPP Agreement. B. COSTS. Costs shall be borne by Parties as provided in Section 34.3 of the WSPP Agreement. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 76 Rate Schedule FERC No. 6 C. RESTRICTIONS ON LAWSUITS. Each Party shall be subject to the restrictions provided in Section 34.2 of the WSPP Agreement. D. ATTORNEY-CLIENT/ATTORNEY WORKPRODUCT. The Arbitrator or Mediator shall not take any action which would result in disclosure of information in violation of the attorney-client privilege or attorney workproduct doctrine. IV. DEFINITIONS A. ARBITRATOR OR ARBITRATION. The Arbitrator appointed pursuant to these procedures and Section 34.2 of the WSPP Agreement and the Arbitration pursuant to these procedures and the WSPP Agreement. B. INITIAL OR REPLY BRIEFS. Written documents submitted by the Parties to support their positions and respond to each others positions. Such documents shall be limited to 25 pages. C. BUSINESS DAYS. Defined as in the WSPP Agreement. D. MEDIATOR OR MEDIATION. The Mediator appointed pursuant to these procedures and Section 34.1 of the WSPP Agreement and the Mediation pursuant to these procedures and the WSPP Agreement. E. PARTIES. The WSPP members involved in the Mediation or Arbitration which have a direct interest in the dispute. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 77 Rate Schedule FERC No. 6 F. SERVICE, SERVING, OR SERVED. The method of service shall be by fax, unless impracticable because of the size of the document. In all events, the document should be delivered to the Party by overnight mail. Parties also should attempt to send the document out by email if possible. Service will be accomplished to a Party if sent to the Party's contact person for the disputed transaction. If there are multiple contact persons for one Party, service to one such person shall suffice. Service shall be to those individuals or entities specified in this procedures, but must include service to the Parties, the Mediator or Arbitrator (if either has been appointed), and to the WSPP General Counsel. G. WSPP REPRESENTATIVE. The Chairman of the WSPP Operating Committee or his or her designee for the purposes of the Arbitration or Mediation. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 78 Rate Schedule FERC No. 6 SERVICE SCHEDULE A ECONOMY ENERGY SERVICE A-1 PARTIES: This Service Schedule is agreed upon as a part of this Agreement by the Parties. A-2 PURPOSE: The purpose of this Service Schedule is to define additional specific procedures, terms and conditions for requesting and providing Economy Energy Service. A-3 TERMS: A-3.1 A Party may schedule Economy Energy Service from another Party by mutual agreement; provided, however, that each Party shall be the sole judge as to the extent to and the conditions under which it is willing to provide or receive such service hereunder consistent with statutory requirements and contractual commitments including the Agreement and any applicable Confirmation Agreement. A-3.2 Scheduling of Economy Energy Service hereunder shall be a responsibility of the Parties involved. A-3.3 Each Seller/Purchaser may prepare a daily estimate of the amount of Economy Energy Service that it is willing and able to sell/buy each hour and the associated hourly sale/purchase price for the next Business Day, plus the weekend and Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 79 Rate Schedule FERC No. 6 holidays, and communicate this information to all other Parties via the Hub. A-3.4 Purchasers shall arrange purchases directly with Sellers, and shall be responsible for transmission arrangements. A-3.5 Unless otherwise mutually agreed between the Purchaser and the Seller, all Economy Energy Service transactions shall be pre-scheduled, and billings shall be based on amounts and prices agreed to in advance by schedulers, subject to Paragraphs A-3.6 and 3.7 and subject to change by mutual agreement between dispatchers or schedulers due to system changes. A-3.6 The price for Economy Energy Service shall be mutually agreed to in advance between Seller and Purchaser and shall not be subject to the rate caps specified in Section A-3.7 in either of the following two circumstances: (1) where the Seller is a FERC regulated public utility and that Seller has been authorized to sell power like that provided for under this Service Schedule at market-based rates; or (2) where the Seller is not a FERC regulated public utility. A Party is a FERC regulated public utility if it is a "public utility" as defined in Section 201(e) of the Federal Power Act, 16 U.S.C. Section 824(e). A-3.7 Except as provided for in Section A-3.6, the price shall not exceed the Seller's forecasted Incremental Cost plus up to: $7.32/kW/ month; $1.68/kW/week; Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 80 Rate Schedule FERC No. 6 33.78(cent)/kW/day; 14.07 mills/kWh; or 21.11 mills/kWh for service of sixteen (16) hours or less per day. The hourly rate is capped at the Seller's forecasted Incremental Cost plus 33.78(cent)/kW/ day. The total demand charge revenues in any consecutive seven-day period shall not exceed the product of the weekly rate and the highest demand experienced on any day in the seven-day period. In lieu of payment, such Parties may mutually agree to exchange economy energy at a ratio not to exceed that ratio provided for in Section C-3.7 of Service Schedule C. The Seller's forecasted Incremental Cost discussed above also may include any transmission and/or ancillary service costs associated with the sale, including the cost of any transmission and/or ancillary services that the Seller must take on its own system. Any such transmission and/or ancillary services charges shall be separately identified by the Seller to the Purchaser for transactions under this Schedule including the exchange of economy energy. The transmission and ancillary service rate ceilings shall be available through the WSPP's Hub or homepage. Any such transmission services (and ancillary service provided in conjunction with such transmission service) by Seller shall be provided pursuant to any applicable transmission tariff or agreement, and the rates therefore shall be consistent with such tariff or agreement. A-3.8 Unless otherwise agreed, the Purchaser shall be responsible for maintaining Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 81 Rate Schedule FERC No. 6 operating reserve requirements as back-up for Economy Energy Service purchased and the Seller shall not be required to maintain such operating reserve. A-3.9 Each Party that is a FERC regulated public utility as defined in A-3.6 shall file the Confirmation Agreement with FERC for each transaction under this Service Schedule with a term in excess of one year no later than 30 days after service begins if that Party would have been required to file such Confirmation Agreements or similar agreements with FERC under an applicable FERC accepted market based rate schedule. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 82 Rate Schedule FERC No. 6 SERVICE SCHEDULE B UNIT COMMITMENT SERVICE B-1 PARTIES: This Service Schedule is agreed upon as part of this Agreement by the Parties. B-2 PURPOSE: The purpose of this Service Schedule is to define additional specific procedures, terms, and conditions for requesting and providing Unit Commitment Service. B-3 TERMS: B-3.1 A Party may schedule Unit Commitment Service from another Party by mutual agreement; provided, however, that each Party shall be the sole judge as to the extent to and the conditions under which it is willing to provide or receive such service hereunder consistent with statutory requirements and contractual commitments including the Agreement and any applicable Confirmation Agreement. Once an agreement is reached, then the obligation for Unit Commitment Service becomes a firm commitment, for both Parties, for the agreed capacity and terms. B-3.2 Unless otherwise mutually agreed by the Parties involved in a Unit Commitment Service transaction, the terms set forth in this Service Schedule B shall govern such transaction. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 83 Rate Schedule FERC No. 6 B-3.3 Unless otherwise agreed between the Purchaser and the Seller, all transactions shall be prescheduled, subject to any conditions agreed to by schedulers, for a specified unit for a specified period of time. B-3.4 Purchasers shall arrange purchases directly with Sellers. B-3.5 The price for Unit Commitment Service shall be mutually agreed to in advance between Seller and Purchaser and shall not be subject to the rate caps specified in Section B-3.6 in either of the following two circumstances: (1) where the Seller is a FERC regulated public utility and that Seller has been authorized to sell power like that provided for under this Service Schedule at market-based rates; or (2) where the Seller is not a FERC regulated public utility. A Party is a FERC regulated public utility if it is a "public utility" as defined in Section 201(e) of the Federal Power Act, 16 U.S.C. Section 824(e). B-3.6 Except as provided for in Section B-3.5, the price shall not exceed the Seller's forecasted Incremental Cost plus up to: $7.32/kW/month; $1.68/kW/week; 33.78(cent)/kW/day; 14.07 mills/kWh; or 21.11 mills/kWh for service of sixteen (16) hours or less per day. The hourly rate is capped at the Seller's forecasted Incremental Cost plus 33.78(cent)/kW/day. The total demand charge revenues in any consecutive seven-day period shall not exceed the product of the weekly rate and the Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 84 Rate Schedule FERC No. 6 highest demand experienced on any day in the seven-day period. The Seller's forecasted Incremental Cost discussed above also may include any transmission and/or ancillary service costs associated with the sale, including the cost of any transmission and/or ancillary services that the Seller must take on its own system. Any such transmission and/or ancillary service charges shall be separately identified by the Seller to the Purchaser. The transmission and ancillary service rate ceilings shall be available through the WSPP's Hub or homepage. B-3.7 Start-up costs and no-load costs if included by the Seller shall be stated separately in the price. B-3.8 Energy schedules for the Purchaser's share of a unit may be modified by the Purchaser with not less than a thirty (30) minute notice before the hour in which the change is to take place, unless otherwise mutually agreed or unforeseen system operating conditions occur. B-3.9 Unit Commitment Service is intended to have assured availability; however, scheduled energy deliveries may be interrupted or curtailed as follows: (a) By the Seller by giving proper recall notice to the Purchaser if the Seller and the Purchaser have mutually agreed to recall provisions, (b) By the Seller when all or a portion of the output of the unit is unavailable, by an amount in proportion to the amount of the reduction in the output of the Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 85 Rate Schedule FERC No. 6 unit, unless otherwise agreed by the schedulers, (c) By the Seller to prevent system separation during an emergency, provided the Seller has exercised all prudent operating alternatives prior to the interruption or curtailment, (d) Where applicable, by the Seller to meet its public utility or statutory obligations to its customers, or (e) By either the Seller or the Purchaser due to the unavailability of transmission capacity necessary for the delivery of scheduled energy. B-3.10 Each Party that is a FERC regulated public utility as defined above in B-3.5 shall file the Confirmation Agreement with FERC for each transaction under this Service Schedule with a term in excess of one year no later than 30 days after service begins if that Party would have been required to file such Confirmation Agreements or similar agreements with FERC under an applicable FERC accepted market based rate schedule. B-4 BILLING AND PAYMENT PROVISIONS: B-4.1 Except as provided in Sections B-4.2 and B-5, billing for Unit Commitment Service shall be computed based upon the agreed upon prices. B-4.2 In the event the Seller requests recall of Unit Commitment Service in a shorter time frame than was mutually agreed pursuant to Section B-3.9(a) and the Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 86 Rate Schedule FERC No. 6 Purchaser agrees to allow such recall, the Purchaser shall be relieved of any obligation to pay start-up costs. B-5 TERMINATION PROVISION: In the event Unit Commitment Service is curtailed or interrupted except as provided in Section B-3.9(a), the Purchaser shall have the option to cancel the Unit Commitment Service at any time by paying the Seller for (i) all energy deliveries scheduled up to the notice of termination and (ii) all separately stated start-up and no-load costs. Issued by: Michael E. Small, General Counsel to Effective: July 1, 2000 Western Systems Power Pool Issued on: September 29, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 87 Rate Schedule FERC No. 6 Superseding Original Sheet No. 87 SERVICE SCHEDULE C FIRM CAPACITY/ENERGY SALE OR EXCHANGE SERVICE C-1 PARTIES: This Service Schedule is agreed upon as a part of this Agreement by the Parties. C-2 PURPOSE: The purpose of this Service Schedule is to define additional specific procedures, terms, and conditions for requesting and providing Firm Capacity/Energy Sale or Exchange Service. C-3 TERMS: C-3.1 A Party may schedule Firm Capacity/Energy Sale or Exchange Service from another Party by mutual agreement; provided, however, that each Party shall be the sole judge as to the extent to and the conditions under which it is willing to provide or receive such service hereunder consistent with statutory requirements and contractual commitments including the Agreement and any applicable Confirmation Agreement. Once an agreement is reached, then the obligation for Firm Capacity/Energy Sale or Exchange Service becomes a firm commitment, for both Parties, for the agreed service and terms. C-3.2 Unless otherwise agreed between the Purchaser and the Seller, all transactions shall be prescheduled, subject to any conditions agreed to by schedulers. C-3.3 Firm capacity transactions shall include buying, selling, or exchanging capacity between Parties with or without associated energy. Firm capacity is deemed a capacity sale from the Seller's resources and backed by the Seller's Issued by: Michael E. Small, General Counsel to Effective: February 1, 2001 Western Systems Power Pool Issued on: December 1, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 88 Rate Schedule FERC No. 6 Superseding Original Sheet No. 88 capacity reserves. C-3.4 Firm energy transactions shall include buying, selling, or exchanging firm energy between Parties. Subject to mutual agreement, firm energy is deemed a quantity of energy the Seller has agreed to sell and deliver and the Purchaser has agreed to buy within a specified time period. C-3.5 Purchaser shall arrange purchases directly with Sellers. C-3.6 The price for Firm Capacity/Energy Sale or Exchange Service shall be mutually agreed to in advance between Seller and Purchaser and shall not be subject to the rate caps specified in Section C-3.7 in either of the following two circumstances: (1) where the Seller is a FERC regulated public utility and that Seller has been authorized to sell power like that provided for under this Service Schedule at market-based rates; or (2) where the Seller is not a FERC regulated public utility. A Party is a FERC regulated public utility if it is a "public utility" as defined in Section 201(e) of the Federal Power Act, 16 U.S.C. Section 824(e). C-3.7 Except as provided for in Section C-3.6, the price shall not exceed the Seller's forecasted Incremental Cost plus up to: $7.32/kW/month; $1.68/kW/week; 33.78(cent)/kW/day; 14.07 mills/kWh; or 21.11 mills/kWh for service of sixteen (16) hours or less per day. The hourly rate is capped at the Seller's forecasted Incremental Cost plus 33.78(cent)/kW/day. The total demand charge revenues in any consecutive seven-day period shall not exceed the product of the weekly rate and the Issued by: Michael E. Small, General Counsel to Effective: February 1, 2001 Western Systems Power Pool Issued on: December 1, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 89 Rate Schedule FERC No. 6 Superseding Original Sheet No. 89 highest demand experienced on any day in the seven-day period. Exchange ratios among such Parties shall be as mutually agreed between the Purchaser and the Seller, but shall not exceed the ratio of 1.5 to 1.0. The Seller's forecasted Incremental Cost discussed above also may include any transmission and/or ancillary service costs associated with the sale, including the cost of any transmission and/or ancillary services that the Seller must take on its own system. Any such transmission and/or ancillary service charges shall be separately identified by the Seller to the Purchaser for transactions under this Schedule including exchanges. The transmission and ancillary service rate ceiling shall be available through the WSPP's Hub or homepage. Any such transmission service (and ancillary services provided in conjunction with such transmission service) by Seller shall be provided pursuant to any applicable transmission tariff or agreement, and the rates therefore shall be consistent with such tariff or agreement. C-3.8 Firm Capacity/Energy Sale or Exchange Service shall be interruptible only if the interruption is: (a) within the recall time or allowed by other applicable provisions governing interruptions of service under this Service Schedule mutually agreed to by the Seller and the Purchaser, (b) due to an Uncontrollable Force as provided in Section 10 of this Agreement; or (c) where applicable, to meet Seller's public utility or statutory obligations to its customers. If service under this Service Schedule is interrupted under Section C-3.8(a) or (b), neither Seller nor Purchaser shall be obligated to pay any damages under this Agreement or Confirmation Agreement. If service under this Service Schedule is interrupted for any reason Issued by: Michael E. Small, General Counsel to Effective: February 1, 2001 Western Systems Power Pool Issued on: December 1, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool Original Sheet No. 89A Rate Schedule FERC No. 6 other than pursuant to Section C-3.8(a) or (b), the Non-Performing Party shall be responsible for payment of damages as provided in Section 21.3 of this Agreement or in any Confirmation. Issued by: Michael E. Small, General Counsel to Effective: February 1, 2001 Western Systems Power Pool Issued on: December 1, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 90 Rate Schedule FERC No. 6 Superseding Original Sheet No. 90 C-3.9 Each Party that is a FERC regulated public utility as defined in Section C-3.6 shall file the Confirmation Agreement with FERC for each transaction under this Service Schedule with a term in excess of one year no later than 30 days after service begins if that Party would have been required to file such Confirmation Agreements or similar agreements with FERC under an applicable FERC accepted market based rate schedule. C-3.10 Seller shall be responsible for ensuring that Service Schedule C transactions are scheduled as firm power consistent with the most recent rules adopted by the applicable NERC regional reliability council. Wspp/WSPP Agreement Effective 2-1-03 edits redlined version Issued by: Michael E. Small, General Counsel to Effective: February 1, 2001 Western Systems Power Pool Issued on: December 1, 2000 Filed to comply with order of the Federal Energy Regulatory Commission, Docket Nos. ER00-3338, et al., issued September 15, 2000. Western Systems Power Pool First Revised Sheet No. 91 Rate Schedule FERC No. 6 Superseding Original Sheet No. 91 LIST OF MEMBERS ACN Power, Inc. City of Sikeston, Board of Municipal AES NewEnergy, Inc. Utilities Allegheny Energy Supply Co., LLC City Utilities of Springfield, Missouri Amerada Hess Corporation City Water & Light (Jonesboro, AR) Ameren Energy Generating Company Clatskanie PUD American Electric Power Service Cleco Marketing & Trading LLC Corporation as agent for Ohio Power Cleco Power LLC Company, Public Service Company of CMS Marketing, Services and Trading Oklahoma and Southwestern Electric Company Power Company CNG Power Services Corp. APS Energy Services Company, Inc. Colorado River Commission of Nevada Aquila Energy Marketing Corporation Colorado Springs Utilities Arizona Electric Power Co. Colton, City of Arizona Public Service Co. Columbia Energy Power Marketing Arkansas Electric Coop. Corp. Columbia Power Corporation Associated Electric Cooperative, Inc. Cominco, Ltd. Astra Oil Company, Inc. Commonwealth Energy Corporation Avista Corporation ConAgra Energy Services, Inc. Avista Energy, Inc. Conectiv Energy Supply, Inc. Basin Electric Power Cooperative Conoco Gas & Power Marketing - a Benton Public Utility District No. 1 of division of Conoco Inc. Benton County Constellation Power Source Blackhills Power & Light Company Cook Inlet Energy Supply Bonneville Power Adm. Coral Power, L.L.C. BP Energy Company Deseret G&T Burbank, City of DTE Energy Trading, Inc. Calif. Dept. of Water Resources Duke Energy Trading & Marketing, LLC Calpine Energy Services, L.P. Duke Power Candela Energy Corporation Duke Solutions, Inc. Cargill-Alliant, LLC Duke/Louis Dreyfuss, LLC Carolina Power & Light Company Dynegy Power Marketing, Inc. Cheyenne Light, Fuel and Power Co. Dynegy Power Services, Inc. Cinergy Capital & Trading, Inc. E prime Cinergy Operating Companies Edison Mission Marketing & Trading, Inc. City of Anaheim, Public Utilities Dept. Edison Source City of Azusa Edmonton Power Authority, Alberta City of Banning El Paso Electric City of Glendale Water & Power Dept. El Paso Merchant Energy, L.P. City of Independence Empire District Electric Co. City of Klamath Falls Energy Transfer Group, LLC City of Palo Alto EnerZ Corporation City of Riverside, California City of Santa Clara Electric Department
Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool First Revised Sheet No. 92 Rate Schedule FERC No. 6 Superseding Original Sheet No. 92 Engage Energy America LLC Louisville Gas & Electric Company Engelhard Power Marketing, Inc. Maclaren Energy Inc. ENMAX Energy Corporation Mason County PUD No. 3 ENMAX Energy Marketing Inc. McMinnville Water & Light Enron Power Marketing, Inc. Merchant Energy Group of the Americas, Enserco Energy Inc. Inc. Entergy Arkansas, Inc. Merrill Lynch Capital Services, Inc. Entergy Gulf States, Inc. Metropolitan Water District Entergy Louisiana, Inc. MidAmerican Energy Company Entergy Mississippi, Inc. MidCon Power Services Corp. Entergy New Orleans, Inc. MIECO, Inc. Entergy Power, Inc. Minnesota Power, Inc. Entergy Services, Inc. as agent for th Mirant Americas Energy Marketing, LP Entergy Operating Companies Missouri Joint Municipal Electric Utility Entergy-Koch Trading, LP Comm. Equitable Power Services Co. Modesto Irrigation District Eugene Water & Electric Board Morgan Stanley Capital Group, Inc. Exelon Generation Company, LLC M-S-R Public Power Agency Farmington, City of Municipal Energy Agency of Mississippi Federal Energy Sales, Inc. Municipal Energy Agency of Nebraska FPL Energy Power Marketing Inc. Nebraska Public Power District Golden Spread Electric Cooperative Nevada Power Co. Grand River Dam Authority New West Energy Hafslund Energy Trading, LLC NorthPoint Energy Solutions Inc. Hetch-Hetchy Water & Power Northern California Power Agency Hinson Power Co., LLC Northern States Power Company Howard Energy Co., Inc. NP Energy Inc. IDACORP Energy L.P. NRG Power Marketing Inc. Idaho Power Company OGE Energy Resources, Inc. IGI Resources, Inc. Oklahoma Gas & Electric Illinova Energy Partners, Inc. Oklahoma Municipal Power Authority Imperial Irrigation District Omaha Public Power District Industrial Energy Applications, Inc. ONEOK Power Marketing Company InterCoast Power Marketing Otter Tail Power Company J. Aron & Company Pacific Gas & Electric Co. KAMO Electric Cooperative, Inc. Pacific Northwest Generating Coop. Kansas City Board of Public Utilities PacifiCorp Kansas City Power & Light PacifiCorp Power Marketing, Inc. KN Energy Marketing PanCanadian Energy Services Lafayette Utilities System Pasadena, City of LG&E Energy Marketing Inc. PG&E Energy Services Lincoln Electric System PG&E Energy Trading - Power, L.P. Los Alamos County PG&E Power Services Company Los Angeles Dept. of Water & Power Louisiana Generating LLC
Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 Western Systems Power Pool Sixth Revised Sheet No. 93 Rate Schedule FERC No. 6 Superseding Fifth Sheet No. 93 Phibro Inc. Tenaska Power Services Co. Pinnacle West Capital Corporation Tennessee Valley Authority Plains Elec. Gen. & Trans. Coop. Inc. Texaco Energy Services Platte River Power Authority Texas-New Mexico Power Company Portland General Electric Co. The Detroit Edison Co. Power Exchange Corporation The Energy Authority Powerex The Montana Power Company PPL Electric Utilities Corporation The Power Company of America, LP PPL EnergyPlus, LLC Tractebel Energy Marketing, Inc. PPL Montana, LLC TransAlta Energy Marketing (US) Inc. Public Service Co. of NM TransCanada Power, div. of TransCanada Public Service Co. of Colorado Energy Ltd. Public Util. Dist. No. 1 of Douglas Cty. Tri-State Generation and Transmission Public Util. Dist. No. 1 of Franklin Cty Assoc. PUD No. 1 of Chelan County Tucson Electric Power PUD No. 1 of Grays Harbor County Turlock Irrigation District PUD No. 1 of Snohomish County TXU Energy Trading Company PUD No. 2 of Grant County Union Electric Company Puget Sound Energy Utah Associated Municipal Power Systems QST Energy Trading Inc. UtiliCorp United Questar Energy Trading Vastar Power Marketing, Inc. Rainbow Energy Marketing Corporation Vernon, City of Redding, City of VIASYN, Inc. Reliant Energy Services, Inc. Virginia Electric and Power Company Rocky Mountain Generation Coop., Inc. Vitol Gas & Electric LLC Roseville Electric WAPA-Colorado River Storage Project Sacramento Municipal Utility District Management Center Salt River Project WAPA-Desert Southwest Region San Diego Gas & Electric Co. WAPA-Rocky Mountain Region Seattle City Light WAPA-Upper Great Plains Region Sempra Energy Resources WAPA-Sierra Nevada Region Sempra Energy Solutions West Kootenay Power Ltd. Sempra Energy Trading Corp. Western Farmers Electric Co-op Sierra Pacific Power Co. Western Power Services, Inc. Southern Calif. Edison Co. Western Resources, Inc. Southern California Water Company Williams Energy Marketing & Trading Co. Southern Company Services, Inc. WPS Energy Services, Inc. Southern Illinois Power Cooperative XCEL Energy Services, Inc. Southwest Power Administration Southwestern Public Service Split Rock Energy LLC Statoil Energy Trading, Inc. Strategic Energy LLC Sunflower Electric Power Corp. Tacoma Power
Issued by: Michael E. Small, General Counsel to Effective: March 1, 2002 Western Systems Power Pool Issued on: December 21, 2001 EX-99.1 6 b46521spexv99w1.txt SECTION 906 CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the combined Quarterly Report of Sierra Pacific Resources, Nevada Power Company and Sierra Pacific Power Company (the "Companies") on Form 10-Q for the period ending March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Walter M. Higgins, III, Chief Executive Officer of the Companies, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the combined Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the combined Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Companies. /s/ Walter M. Higgins, III - ---------------------------- Walter M. Higgins, III Chief Executive Officer May 5, 2003 THIS CERTIFICATION ACCOMPANIES THIS REPORT PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 AND SHALL NOT, EXCEPT TO THE EXTENT REQUIRED BY THE SARBANES-OXLEY ACT OF 2002, BE DEEMED FILED BY THE COMPANY FOR PURPOSES OF SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO THE COMPANIES AND WILL BE RETAINED BY THE COMPANIES AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. EX-99.2 7 b46521spexv99w2.txt SECTION 906 CERTIFICATION Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the combined Quarterly Report of Sierra Pacific Resources, Nevada Power Company and Sierra Pacific Power Company (the "Companies") on Form 10-Q for the period ending March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard K. Atkinson, Chief Financial Officer of the Companies, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the combined Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the combined Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Companies. /s/ Richard K. Atkinson - -------------------------------- Richard K. Atkinson Chief Financial Officer May 5, 2003 THIS CERTIFICATION ACCOMPANIES THIS REPORT PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 AND SHALL NOT, EXCEPT TO THE EXTENT REQUIRED BY THE SARBANES-OXLEY ACT OF 2002, BE DEEMED FILED BY THE COMPANY FOR PURPOSES OF SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO THE COMPANIES AND WILL BE RETAINED BY THE COMPANIES AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. -----END PRIVACY-ENHANCED MESSAGE-----