UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
X EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________
Commission File Number 333-52664
BLACK HILLS CORPORATION
Incorporated in South Dakota IRS Identification Number 46-0458824
625 Ninth Street
Rapid City, South Dakota 57701
Registrant's telephone number, including area code
(605) 721-1700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common stock of $1.00 par value New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
X
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant.
At February 28, 2002 $734,526,500
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 28, 2002
----- --------------------------------
Common stock, $1.00 par value 26,694,625 shares
Documents Incorporated by Reference
1. Definitive Proxy Statement of the Registrant filed pursuant to Regulation
14A for the 2002 Annual Meeting of Stockholders to be held on May 29, 2002,
is incorporated by reference in Part III.
TABLE OF CONTENTS
Page
ITEMS
1 & 2. BUSINESS AND PROPERTIES.....................................................................................3
General...................................................................................................3
Industry Overview.........................................................................................5
Strategy..................................................................................................6
Integrated Energy.........................................................................................8
Power Generation........................................................................................9
Fuel Production.........................................................................................14
Fuel Marketing..........................................................................................15
Electric Utility - Black Hills Power, Inc.................................................................17
Communications............................................................................................20
Competition...............................................................................................20
Risk Management...........................................................................................21
Regulation................................................................................................21
Energy Regulation.......................................................................................22
Environmental Regulation................................................................................22
Exploration and Production..............................................................................26
Other Properties..........................................................................................26
Employees.................................................................................................26
ITEM 3. LEGAL PROCEEDINGS...........................................................................................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................................27
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................28
ITEM 6. SELECTED FINANCIAL DATA.....................................................................................29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................................................30
BUSINESS STRATEGY.........................................................................................30
RESULTS OF OPERATIONS.....................................................................................31
CRITICAL ACCOUNTING POLICIES..............................................................................39
LIQUIDITY AND CAPITAL RESOURCES...........................................................................40
MARKET RISK DISCLOSURES...................................................................................46
RATE REGULATION...........................................................................................51
NEW ACCOUNTING PRONOUNCEMENTS.............................................................................52
SAFE HARBOR FOR FORWARD LOOKING INFORMATION...............................................................53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................................54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE......................................................................87
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................................87
ITEM 11. EXECUTIVE COMPENSATION......................................................................................88
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................................88
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................................88
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................................88
SIGNATURES..................................................................................................92
2
FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking statements" as defined by the
Securities and Exchange Commission. These statements concern our plans,
expectations and objectives for future operations. All statements, other than
statements of historical facts, included in this Form 10-K that address
activities, events or developments that we expect, believe or anticipate will or
may occur in the future are forward-looking statements. The words "believe,"
"plan," "intend," "anticipate," "estimate" "project" and similar expressions are
also intended to identify forward-looking statements. These forward-looking
statements include, among others, such things as:
o expansion and growth of our business and operations;
o future financial performance;
o future acquisition and development of power plants;
o future production of coal, oil and natural gas;
o reserve estimates; and
o business strategy.
These forward-looking statements are based on assumptions, which we believe
are reasonable based on current expectations and projections about future events
and industry conditions and trends affecting our business. However, whether
actual results and developments will conform to our expectations and predictions
is subject to a number of risks and uncertainties which could cause actual
results to differ materially from those contained in the forward-looking
statements, including the following factors:
o prevailing governmental policies and regulatory actions with
respect to allowed rates of return, industry and rate structure,
acquisition and disposal of assets and facilities, operation and
construction of plant facilities, recovery of purchased power and
other capital investments, and present or prospective wholesale
and retail competition;
o changes in and compliance with environmental and safety laws and
policies;
o weather conditions;
o population growth and demographic patterns;
o competition for retail and wholesale customers;
o pricing and transportation of commodities;
o market demand, including structural market changes;
o changes in tax rates or policies or in rates of inflation;
o changes in project costs;
o unanticipated changes in operating expenses or capital
expenditures;
o capital market conditions;
o technological advances;
o competition for new energy development opportunities; and
o legal and administrative proceedings that influence our business
and profitability.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
General
We are a growth oriented, diversified energy holding company operating
principally in the United States. Our regulated and unregulated businesses have
expanded significantly in recent years. Our integrated energy group produces and
markets power and fuel. We produce and sell electricity in a number of markets,
with a strong emphasis on the western United States. We also produce coal,
natural gas and crude oil primarily in the Rocky Mountain region and market fuel
products nationwide. Our electric utility serves approximately 59,200 customers
in South Dakota, Wyoming and Montana. Our communications group offers
state-of-the-art broadband communication services to residential and business
customers in Rapid City and the northern Black Hills region of South Dakota. Our
predecessor company was incorporated and began providing electric utility
service in 1941 and began selling and marketing various forms of energy on an
unregulated basis in 1956.
3
As the following table illustrates, we have experienced significant growth over
the last five years, primarily as a result of the expansion of our integrated
energy business and increases in wholesale electric sales.
- ----------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Net income available for common
(in thousands):
Integrated energy $ 56,246 $ 28,213 $ 11,588 $ 10,068 $ 10,471
Electric utility 45,238 37,100 27,362 24,825 22,106
Communications (12,300) (11,382) (968) (280) (218)
Corporate expenses and
intersegment eliminations (1,634) (1,161) (915) - -
Oil and gas write-down - - - (8,805) -
-------- --------- -------- -------- --------
$ 87,550 $ 52,770 $ 37,067 $ 25,808 $ 32,359
======== ========= ======== ======== ========
Earnings per share - diluted $3.42 $2.37 $1.73 $1.60(2) $1.49
Total assets (in thousands) $1,658,767 $1,320,320 $668,492 $559,417 $508,741
Capital expenditures (in thousands) $594,156 $173,517(1) $154,609 $27,225 $28,319
The following is unaudited:
Generating capacity (megawatts)
Utility (owned generation) 395 393 353 353 353
Utility (purchased capacity) 65 70 75 75 75
Independent power generation 617 250 - - -
---------- ---------- -------- --------- ---------
Total generating capacity 1,077 713 428 428 428
========== ========== ======== ========= =========
Utility electric sales (megawatt-hours):
Regulated utility
Firm electric sales 2,012,354 1,973,066 1,920,005 1,923,331 1,932,347
Wholesale off-system 965,030 684,378 445,712 371,104 279,612
---------- ---------- ---------- ---------- ----------
Total utility electric sales 2,977,384 2,657,444 2,365,717 2,294,435 2,211,959
========== ========== ========== ========== ==========
Oil and gas reserves (Mmcfe) 48,401 44,882 44,114 30,160 24,022
Oil and gas production sold (Mmcfe) 7,293 5,278 4,698 4,120 3,541
Tons of coal sold (thousands of tons) 3,518 3,050 3,180 3,280 3,251
Average daily marketing volumes:
Natural gas (MMbtus) 1,047,700 860,800 635,500 524,800 231,000
Crude oil (barrels) 36,500 44,300 19,270 19,000 12,600(3)
Coal (tons) 6,100 4,400 4,500 4,400(3) -
Communications:
Residential customers 15,660 8,368 143 - -
Business customers 2,250 646 110 - -
Fiber optic backbone miles 242 210 200 - -
Hybrid fiber coaxial cable miles 737 588 100 - -
- ----------------------------------------------------------------------------------------------------------------------
(1) Excludes the non-cash acquisition of Indeck Capital, Inc.
(2) Excludes impact of $0.41 per share non-cash write-down of oil and gas
properties due to historically low oil prices, lower natural gas prices and a
decline in the value of unevaluated properties.
(3) Since date of inception of marketing operations.
For additional information on our business segments see - "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and
Note 14 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS."
4
Industry Overview
In the last decade, many U.S. regulatory bodies have taken steps to transform
the energy sectors which they regulate to encourage competition, introduce
customer choice and, in some cases, to improve the operational performance of
strategic energy assets. In particular, the electric power industry is
undergoing substantial change as a result of regulatory initiatives at the
federal and state levels. As early as the mid-1990's, new regulatory initiatives
to increase competition in the domestic power generation industry had been
adopted or were being considered at the federal level and by many states. The
primary focus of such efforts was to increase competition through the
disaggregation of the traditional utility functions of generation, transmission,
distribution and marketing of electricity into competitive or partially
regulated businesses. This resulted in new investment opportunities to enter
previously non-competitive or closed markets.
In 1992, the Federal Energy Regulatory Commission (FERC) issued Order 636,
followed by Order 888 in 1996, to increase competition by easing entry into
natural gas and electricity markets. These orders require owners and operators
of natural gas and power transmission systems to make transmission service
available on a non-discriminatory basis to energy suppliers. In order to better
assure competitive access to the transmission network on a non-discriminatory
basis, FERC issued Order 2000 in December 1999, which encourages electric
utilities with power transmission assets to voluntarily form regional
transmission organizations to provide regional management and control of
transmission assets independent of firms that sell electricity.
The electric power industry has also witnessed growing consumer demand and
frequent regional shortages of electricity over the past several years. The
summers of 1998, 1999 and 2000 and the winter of 2000-2001 have all been
characterized by very high peak prices for electricity in a number of recently
created wholesale electricity markets. Mild weather patterns in the summer of
2001 and winter of 2001-2002 and the current recession have mitigated most
regional energy shortages. However, we believe that the reduction in demand for
energy is temporary and there remains a long-term need for new electric
generating capacity to relieve shortages of electricity and to replace
inefficient and obsolete facilities.
The oil and gas industry has experienced volatile changes in commodity prices in
the last year. Price increases have been driven in part by several years of
modest drilling activity combined with strong growth in demand for energy
commodities. Price decreases have been driven by weather patterns, the recession
and actions by OPEC. Natural gas is expected to remain the fuel of choice and
demand for natural gas is expected to be strong in the future as an increasing
number of gas-fired power plants are brought into service.
The telecommunications industry is currently undergoing widespread changes
brought about by, among other things, the Telecommunications Act of 1996, the
decisions of federal and state regulators to open the monopoly local telephone
and cable television markets to competition and the need for higher speed,
higher capacity networks to meet the increasing consumer demand for expanded
telecommunications services, including broader video choices and high speed data
and Internet services. The convergence of these trends and the inherent
limitations of most existing networks have created opportunities for new types
of communications companies capable of providing a wide range of voice, video
and data services through new and advanced high speed, high capacity
telecommunications networks.
As a result of historical and anticipated regulatory initiatives and the
increasing demand for electricity, fuel and broadband services, we believe there
are significant opportunities for the development and growth of our integrated
energy businesses, our regulated utility and our communications business.
5
Strategy
Our strategy is to build long-term shareholder value by adding and augmenting
revenue streams from our diverse integrated energy operations. We have
implemented a balanced, integrated and risk managed approach to fuel production,
energy marketing and independent power. We expect our integrated energy
businesses to operate nationwide, with an integrated regional emphasis on the
western half of the United States. Built on the strength of our electric
utility, we have enhanced our local operations by providing broadband
communications. Our utility and communications businesses intend to continue
focusing their retail operations primarily in Rapid City and the northern Black
Hills region of South Dakota, with wholesale power sales concentrated primarily
in the Rocky Mountain and West Coast regions and the ability to move a limited
amount of power to the eastern markets. Our diverse operations avoid reliance on
any single element to achieve our growth objective. This diversity provides a
measure of stability in volatile or cyclical periods.
Our strategy includes the following key elements:
o grow our power generation segment by developing and acquiring power
projects in targeted western markets;
o expand the generating capacity of our existing sites through a
strategy known as "brownfield development;"
o sell a large percentage of the production from our independent power
projects through long-term contracts in order to secure attractive
investment returns;
o increase our reserves and production of natural gas and crude oil;
o maintain abundant clean coal reserves to assure low-cost generation
capability;
o exploit our fuel cost advantages and our operating and marketing
expertise to remain a low-cost power producer;
o exploit our knowledge and market expertise while managing the risks
inherent in fuel marketing;
o build and maintain strong relationships with wholesale energy
customers; and
o capitalize on our utility's established market presence, relationships
and customer loyalty.
Grow our Power Generation Segment by Developing and Acquiring Power Projects in
Targeted Western Markets. Our aim is to continue the development of power plants
in regional markets based on prevailing supply and demand fundamentals in a
manner that complements our existing fuel assets and fuel and energy marketing
capabilities. This approach aims to capitalize on market growth while managing
our fuel procurement needs. Over the next few years, we intend to grow through a
combination of disciplined acquisitions and development of new power generation
facilities primarily in the western region where we believe we have the detailed
knowledge of market fundamentals and competitive advantage to achieve attractive
returns. We believe the following trends will provide us with growth
opportunities in the future:
o Demand for electricity in the western regions will grow and new
generation capacity will be required over the next several years.
o New electric generation construction will be predominantly gas-fired,
which may create further competitive cost advantages for new and
existing coal-fired generation assets.
6
o Transmission construction will significantly lag new generation
development, favoring new development located near load centers or
existing, unconstrained transmission locations.
o Disaggregation of the electric utility industry from traditionally
vertically integrated utilities into separate generation,
transmission, distribution and marketing entities will continue,
thereby creating opportunities for acquisitions and joint ventures.
Expand the Generating Capacity of Our Existing Sites Through a Strategy Known as
"Brownfield Development." We believe that existing sites with opportunities for
brownfield expansion generally offer the potential for greater returns than
development of new sites through a "greenfield" strategy. Brownfield sites
typically offer several competitive advantages over greenfield development,
including:
o proximity to existing transmission systems;
o operating cost advantages related to ownership of shared facilities;
o a less costly and time consuming permitting process; and
o potential ability to share infrastructure with existing facilities at
the same site.
We are currently expanding our capacity with brownfield development underway at
our Arapahoe, Las Vegas and Wyodak sites, and believe that our Fountain Valley,
Wyodak and Las Vegas sites in particular provide further opportunities for a
significant expansion of our gas- and coal-fired generating capacity over the
next several years.
Sell a Large Percentage of the Production From Our Independent Power Projects
Through Long-Term Contracts in Order to Secure Attractive Investment Returns. By
selling the majority of our energy and capacity under mid- and long-term
contracts, we believe that we can satisfy the requirements of our customers
while earning more stable revenues and greater returns over the long term than
we could by selling our energy into the more volatile spot markets.
Approximately 90 percent of our power generation assets are under long-term
contracts.
Increase Our Reserves and Production of Natural Gas and Crude Oil and Maintain
Abundant Clean Coal Reserves to Assure Low-Cost Generation Capability. We aim to
support the fuel requirements of our growing portfolio of power plants as well
as power plants owned by others by emphasizing natural gas and coal production.
Our strategy is to expand our natural gas reserves through a combination of
acquisitions and drilling programs and expand our coal production through the
construction of mine-mouth coal-fired generation plants at our Wyodak mine
location. Our objective is to maintain coal reserves to serve our mine-mouth
coal-fired generation plants directly and to maintain sufficient natural gas
production either to directly serve or indirectly hedge the fuel cost exposure
of our gas-fired generation plants. Specifically, we plan to:
o substantially increase our natural gas reserves while minimizing
exploration risk by focusing on lower-risk exploration and development
drilling as well as acquisitions of proven reserves;
o exploit our belief that the long-term demand for natural gas will
remain strong by emphasizing natural gas in our acquisition and
drilling activities;
o add natural gas reserves and increase production by focusing on
various shallow gas plays in the Rocky Mountain region, where the
added production can be integrated with our fuel marketing and/or
power generation activities;
7
o increase coal production and sales from our Wyodak mine by continuing
to develop additional mine-mouth generating facilities at the site,
including the Wygen plant, which is scheduled for completion in first
quarter 2003; and
o pursue future sales of coal from the Wyodak mine to rail-served
customers by reducing the moisture content of our coal so that we can
ship it greater distances.
Exploit Our Fuel Cost Advantage and Our Operating and Marketing Expertise to
Remain a Low-Cost Power Producer. We expect to expand our portfolio of power
plants having relatively low marginal costs of producing energy and related
products and services. We intend to utilize a low-cost power production
strategy, together with access to coal and natural gas reserves, to protect our
revenue stream as an increasing number of gas-fired power plants are brought
into operation. Low marginal production costs can result from a variety of
factors, including low fuel costs, efficiency in converting fuel into energy,
and low per unit operation and maintenance costs. We have aggressively managed
each of these factors to achieve very low production costs, especially at our
coal-fired and hydroelectric generating facilities.
Our primary competitive advantage is our coal mine, which is located in close
proximity to our retail service territory. We are exploiting the competitive
advantage of this native fuel source by building additional mine-mouth
coal-fired generating capacity. This strengthens our position as a low-cost
producer since transportation costs often represent the largest component of the
delivered cost of coal.
Exploit Our Knowledge and Market Expertise While Managing the Risks Inherent in
Fuel Marketing. We aim to apply our knowledge of and expertise in the natural
gas transmission system and trading markets in the western and northwestern
regions of the United States and western Canada in order to exploit market
inefficiencies and maximize our profits in our fuel marketing businesses. Our
fuel marketing operations require effective management of price, counterparty
and operational risks. To mitigate these risks, we have implemented risk
management policies and procedures for each of our marketing companies that
establish price risk exposure levels, counterparty credit limits and committees
to monitor compliance with our policies. We also limit exposure to energy
marketing risks by maintaining separate credit facilities for each of our
marketing companies.
Build and Maintain Strong Relationships with Wholesale Energy Customers. We
strive to build strong relationships with utilities, municipalities and other
wholesale customers, who we believe will continue to be the primary providers of
electricity to retail customers in a deregulated environment. We further believe
that these entities will need products, such as capacity, in order to serve
their customers reliably. By providing these products under long-term contracts,
we are able to meet our customers' energy needs. Through this approach, we also
believe we can earn more stable revenues and greater returns over the long term
than we could by selling energy into the more volatile spot markets.
Capitalize On Our Utility's Established Market Presence, Relationships and
Customer Loyalty. As a result of its firmly established market presence, our
electric utility has built solid brand recognition and customer loyalty in the
Black Hills region. By ensuring a reliable supply of power to retail customers
in our South Dakota and Wyoming service territory at rates below the national
average, we have developed a strong, supportive relationship with our utility
regulators. Our utility provides a solid foundation of support for the expansion
of our integrated energy and communications businesses. In addition, industry,
technical and market expertise from our utility supports the growth of our
integrated energy businesses, and our strong brand recognition assists us in
achieving rapid customer acceptance of our bundled communications services in
our Black Hills service territory.
Integrated Energy
Our integrated energy group engages in the production and sale of electric power
through ownership of a diversified portfolio of generating plants, the
production of coal, natural gas and crude oil primarily in the Rocky Mountain
region, and the marketing of fuel products nationwide. Net income from the
integrated energy group exceeded net
8
income derived from our electric utility in 2001. We expect that earnings growth
from the integrated energy group over the next few years will be driven
primarily by our continued expansion in the power generation and oil and gas
segments. The integrated energy group consists of four segments: power
generation, oil and gas, coal mining and fuel marketing.
Power Generation. Our power generation segment acquires, develops and expands
unregulated power plants. We hold varying interests in operating independent
power plants in California, New York, Massachusetts, Wyoming, Nevada and
Colorado with a total net ownership of 593 megawatts, as well as minority
interests in several power-related funds with a net ownership interest of 24
megawatts.
Project Development Program. Power generation projects currently under
construction include:
o Arapahoe CC5, a 50 megawatt combined cycle expansion of our gas-fired
turbines at the Arapahoe site located in the Front Range of Colorado,
which is expected to be placed in service in mid-2002;
o Las Vegas Cogeneration expansion, a 224 megawatt gas-fired
co-generation power plant project located near Las Vegas, Nevada,
which is expected to be placed in service in the third quarter of
2002; and
o Wygen, a 90 megawatt coal-fired plant under construction at our
Wyodak, Wyoming site which is expected to be operational in the first
quarter of 2003. We will lease this plant.
We also have an active acquisition and development program through which we are
pursuing a number of additional generation projects in early stages of
development, including a coal-fired mine-mouth power plant with generating
capacity of up to 500 megawatts, to be located at our Wyodak site near Gillette,
Wyoming. No assurance can be given that we will be successful in completing any
or all of the projects currently under consideration.
How We Manage Our Portfolio. We strive to maintain diversification and balance
in our portfolio of regulated and unregulated power plants. Our portfolio
(including plants currently operating and those under construction) is
diversified in terms of fuel mix and geographic location, with 87 percent of net
unregulated capacity being gas-fired, 9 percent coal-fired, and the remainder
hydroelectric. Our independent power plants are located in California, Wyoming,
Colorado, Nevada, New York and Massachusetts. In contrast, our electric utility
capacity is approximately 50 percent coal-fired, 38 percent oil or gas-fired,
and 12 percent under purchased power contracts, with plants located in South
Dakota and Wyoming.
We also have a diversified mix of revenue sources. We typically sell two types
of products: energy and capacity, including ancillary services. Although these
are separate products, both are typically sold together. Energy refers to the
actual electricity generated by our facilities for ultimate transmission and
distribution to consumers of electricity. Energy is the only one of our products
that is subsequently distributed to consumers. Capacity refers to the physical
capability of a facility to produce energy. Ancillary services generally are
capacity support products used to ensure the safe and reliable operation of the
electric power supply system. Examples of ancillary services include:
o automatic generation control, which is used to balance energy supply
with energy demand, referred to in our industry as "load," on a
real-time basis; and
o operating reserves, which are used on an hourly or daily basis to
generate additional energy if demand increases or if major generating
resources go off-line or if transmission facilities become
unavailable.
Our output is sold under contracts of varying length and subject to merchant
pricing, thereby allowing us to take advantage of current favorable price
trends, while hedging the impact of a potential downturn in prices in the
future. We currently sell energy and capacity under a combination of short- and
long-term contracts as well as direct sales into the merchant energy markets.
Currently, we sell approximately 90 percent of our unregulated generating
capacity
9
in operation under contracts greater than one year in duration. We sell
the remainder of this capacity under short-term contracts or directly into the
merchant markets. Substantially all of the energy and capacity to be generated
by our projects under construction is also under long-term contracts.
How We Develop and Acquire Power Plants. We plan to actively pursue power plant
acquisitions and development opportunities in areas we view as attractive
throughout North America. Our current focus has been, and is likely to remain,
in the North American Reliability Council region known as the Western Systems
Coordinating Council, or "WSCC." Among those factors we consider critical in
evaluating the relative attractiveness of new generation opportunities are the
following:
o electric demand growth potential in the targeted region;
o requirements for permitting and siting;
o proximity of the proposed site to high transmission capacity
corridors;
o fuel supply reliability and pricing;
o the local regulatory environment; and
o the potential to exploit market expertise and operating efficiencies
relating to geographic concentration of new generation with our
existing power plant portfolio.
Our goal is to sell approximately 80 percent of the independent power generation
portfolio under long-term contracts, while leaving the remainder available for
merchant, or "spot" sales. We aim to secure long-term power sales contracts in
conjunction with project financing. This enables us to minimize our liability
and to design a debt repayment schedule to closely match the term of the power
sales contracts so that at the end of the contract term, the debt has largely
been repaid.
Independent Power Plants
General. Power facilities are often classified by cost of production. Facilities
that have the lowest costs of production relative to other power plants in the
region are usually the facilities that are first used to provide energy. These
plants are known as "baseload" facilities and typically operate more than 60
percent of the time they are available. Our hydroelectric assets in New York and
the Wygen coal-fired facility under construction in Wyoming are examples of
low-cost, baseload plants.
As demand for electricity rises during the year or even during the course of a
day, power plants that have higher costs of production are dispatched to supply
additional energy. Facilities that regularly provide additional energy during a
day and that are typically used between 10 percent and 60 percent of the time
are known as "intermediate" facilities.
Power plants with the highest costs of production are called upon only in times
of exceptionally high demand and are known as "peaking units." Peaking units are
generally dispatched less than 10 percent of the time they are available.
Rocky Mountain and West Coast Facilities. We own approximately 525 megawatts of
generating capacity in the WSCC states of California, Colorado, Nevada and
Wyoming, and are in the process of constructing or acquiring another 364
megawatts in the region. All of these facilities in operation are gas-fired,
with all but our Harbor Cogeneration facility in California operating under
long-term power purchase or tolling agreements whereby the purchaser assumes the
fuel risk. The Harbor Cogeneration facility currently operates as a merchant
peaking plant selling ancillary services and energy into the California market.
10
WSCC Facilities
Total Net
Fuel Capacity Capacity Start
Power Plant Type State (MWs) Interest (MWs) Date
---- ----- -------- -------- -------- -----
In Operation:
Fountain Valley Gas CO 240.0 100% 240.0 2001
Arapahoe Unit 5 Gas CO 40.0 100% 40.0 2000
Arapahoe Unit 6 Gas CO 40.0 100% 40.0 2000
Valmont Unit 7 Gas CO 40.0 100% 40.0 2000
Valmont Unit 8 Gas CO 40.0 100% 40.0 2001
Las Vegas I Gas NV 53.0 50% 26.5 1994
Ontario Gas CA 12.0 50% 6.0 1984
Harbor Gas CA 80.0 53.3% 42.6 1989
Harbor Expansion Gas CA 18.0 53.3% 9.6 2001
Gillette CT Gas WY 40.0 100% 40.0 2001
----- -----
Total in Operation 603.0 524.7
----- -----
Under Construction:
Arapahoe CC5 Gas CO 50.0 100% 50.0 2002
Las Vegas II Gas NV 224.0 100% 224.0 2002
Wygen Coal WY 90.0 100% 90.0 2003
----- -----
Total in Construction 364.0 364.0
----- -----
Total WSCC 967.0 888.7
===== =====
Arapahoe, Valmont and Fountain Valley Facilities
In Operation: Our Fountain Valley, Arapahoe and Valmont plants are wholly-owned
gas-fired peaking facilities in the Front Range of Colorado, with a total
capacity of 400 megawatts, including 280 megawatts which became operational
during the summer of 2001. We sell all of the output from these plants to Public
Service Company of Colorado under tolling contracts expiring in May 2012. These
contracts also cover the Arapahoe expansion project described below.
Under Construction: We expect to increase our capacity by 50 megawatts at the
Arapahoe plant by mid 2002.
Las Vegas Cogeneration Facility
In Operation: Las Vegas Cogeneration, is a 53 megawatt, gas-fired plant
northeast of Las Vegas, Nevada. Most of the power from this plant is sold to
Nevada Power under a long-term contract that expires in 2024. We own 50 percent
of this plant, however under generally accepted accounting principles, we
consolidate 100 percent.
Under Construction/Expansion: We are currently expanding the Las Vegas
Cogeneration facility by an additional 224 megawatts. The expansion is expected
to become fully operational during the third quarter of 2002. The power
generated by the expansion will be sold under a long-term contract with
Allegheny Energy Supply L.L.C. that expires in 2017. We own 100 percent of the
expansion project.
Wygen Facility
Under Construction: The Wygen facility is a leased mine-mouth coal-fired plant
with a total capacity of 90 megawatts, which is expected to be completed by
first quarter 2003. The Wygen plant will be substantially identical in design to
our electric utility's Neil Simpson II facility, completed in 1995. The plants
will run on pulverized low-sulfur coal fed by conveyor from our adjacent Wyodak
mine. The plant will burn approximately
11
500,000 tons of coal per year, and will use the latest available environmental
control technology. We intend to sell the majority of the power from the
facility under long-term unit contingent capacity and energy sales contracts,
under which delivery is not required during plant outages. We have entered into
a contract to sell 60 megawatts of unit contingent capacity from this plant to
Cheyenne Light, Fuel and Power Company with a term of 10 years from the date the
plant becomes operational. We have also signed a contract to sell an additional
20 megawatts of unit contingent capacity and energy to the Municipal Electric
Agency of Nebraska for a term of 10 years.
Gillette CT
The Gillette CT facility, a gas-fired combustion turbine facility located at the
same site as our Wygen plant, has a total capacity of 40 megawatts and became
operational in May 2001. The energy and capacity from this facility is sold to
Cheyenne Light, Fuel and Power Company under a 10-year tolling agreement.
Ontario Cogeneration Facility
Ontario Cogeneration Company is a 12 megawatt, gas-fired power plant in Ontario,
California, which is currently being operated as a baseload plant. Electrical
output from the plant is subject to a 25-year power purchase agreement with
Southern California Edison, which expires in January 2010. The project also
sells all of its steam production to Sunkist Growers, Inc. under a five-year
agreement, which terminates in November 2002. For a description of certain
issues relating to our operation of this plant, see "--Regulation--Environmental
Regulation--Clean Air Act."
Harbor Cogeneration Facility
Harbor Cogeneration, a gas-fired plant located in Wilmington, California, is
currently being operated as a merchant peaking plant selling ancillary services
and energy into the California Independent System Operator, or "CAISO," market.
It formerly operated under a 30-year power purchase agreement with Edison
Mission Energy. This contract was terminated in February 1999 under a settlement
agreement with Southern California Edison. Under the buyout agreement, Harbor
Cogeneration will receive payments pursuant to a termination payment schedule
for an amount equal to the total payment under the original contract due for the
11-year period beginning April 1, 1997 and ending on October 1, 2008. During
2001, we completed an expansion of the Harbor Cogeneration plant adding 18
megawatts (10 megawatt net ownership interest). The plant has sold the peaking
capacity from its expansion to the CAISO for the peak summer periods of 2001
through 2003 under an agreement that provides for payments to us of
approximately $0.6 million per year of the contract. We plan to sell the
remaining capacity and all of the energy from this plant in the California
market on a merchant basis.
Northeast Facilities. We currently own approximately 68 net megawatts of
generation capacity in eight plants in the Northeast region, all of which are
located in New York and Massachusetts. Fifty-nine percent of this generation is
"run-of-river" hydroelectric, with the remainder being gas-fired peaking
capacity.
12
Total Net
Fuel Capacity Capacity Start
Power Plant Type State (MWs) Interest (MWs) Date
---- ----- -------- -------- -------- -----
Northeast
New York State Dam Hydro NY 11.4 100% 11.4 1990
Middle Falls Hydro NY 2.3 50% 1.2 1989
Sissonville Hydro NY 3.0 100% 3.0 1990
Warrensburg Hydro NY 2.9 100% 2.9 1988
Hudson Falls Hydro NY 41.9 33.0% 13.8 1995
South Glens Falls Hydro NY 13.9 30.2% 4.2 1994
Fourth Branch Hydro NY 3.4 100% 3.4 1988
Pepperell Gas MA 40.0 70.7% 28.3 1990
----- ----
Total Northeast 118.8 68.2
===== ====
Adirondack Hydro Development
The seven "run-of-river" hydroelectric plant interests are:
o New York State Dam, an 11.4 megawatt plant located in Waterford and
Cohoes, New York;
o Middle Falls, a 2.3 megawatt plant located in Easton, New York;
o Sissonville, a 3.0 megawatt plant located in Potsdam, New York;
o Warrensburg, a 2.9 megawatt plant located in Warrensburg, New York;
o Hudson Falls, a 41.9 megawatt plant located in Moreau, New York;
o South Glens Falls, a 13.9 megawatt plant located in South Glens Falls,
New York; and
o Fourth Branch, a 3.4 megawatt plant located in Waterford, New York.
The seven projects were initially covered by long-term power purchase contracts
with Niagara Mohawk Power Corporation for all or most of their output.
Currently, four projects have been restructured to allow the power purchase
contracts to be bought out and for us eventually to sell power into the New York
Independent System Operator (ISO). The New York State Dam, Sissonville, Fourth
Branch and Warrensburg facilities are currently subject to short-term transition
power sales agreements expiring in 2002 and 2003, at which point these plants
will sell directly into the market on a merchant basis. The remaining three New
York plants, Hudson Falls, South Glens Falls and Middle Falls, continue to
operate under long-term power purchase agreements with Niagara Mohawk.
Pepperell Facility
The Pepperell facility is a 40 megawatt gas-fired combined-cycle plant located
in Pepperell, Massachusetts. The plant has capacity contracts covering 2002 and
sells merchant wholesale energy into the New England ISO. The facility also has
a steam sales agreement with the Pepperell Paper Company expiring in December
2002.
13
Power Funds. In addition to our ownership of the power plants described above,
we hold various indirect interests in power plants through our investment in
energy and energy-related funds, both domestic and international, as described
below:
Left to
Total be Number Total Net
Amount Funded of Capacity Capacity
Fund Name ($MM) ($MM) Plants (MWs) Interest (MWs)
- ------------------------------- --------- ------- -------- ---------- -------- ----------
Energy Investors Fund I $159.5 $0 5 76.0 12.6% 9.6
Energy Investors Fund II $115.0 $0 5 66.6 6.9% 4.6
Project Finance Fund III $101.0 $0 3 136.8 5.3% 7.3
Caribbean Basin $75.0 $60 2 60.3 3.7% 2.2
----- ----
Total Fund Interests 339.7 23.7
===== ====
Financing of Our Independent Power Projects. We have financed our principal
independent power generation facilities primarily with non-recourse debt that is
repaid solely from the project's revenues. This type of financing is referred to
as "project financing." These financings generally are secured by the physical
assets, major project contracts and agreements, cash accounts and, in certain
cases, our ownership interest, in the related project. True project financing is
not available for all projects, including some assets purchased out of
bankruptcy, some merchant plants and some purchases of minority stock positions
in publicly traded companies. Even in those instances, however, we may still be
able to finance a smaller portion of the total cost with project financing, with
the remainder financed with debt that is either raised or supported at the
corporate rather than the project level.
Project financing transactions generally are structured so that all revenues of
a project are deposited directly with a bank or other financial institution
acting as escrow or security deposit agent. These funds then are payable in a
specified order of priority set forth in the financing documents to ensure that,
to the extent available, they are used first to pay operating expenses, senior
debt service and taxes and to fund reserve accounts. Thereafter, subject to
satisfying debt service coverage ratios and certain other conditions, available
funds may be disbursed for management fees or dividends or, where there are
subordinated lenders, to the payment of subordinated debt service.
These project financing structures are designed to prevent the lenders from
relying on us or our other projects for repayment; that is, they are
"non-recourse" to us and our affiliates not involved in the project, unless we
or another affiliate expressly agree to undertake liability. In the event of a
foreclosure after a default, our project affiliate owning the facility would
only retain an interest in the assets, if any, remaining after all debts and
obligations were paid. In addition, the debt of each operating project may
reduce the liquidity of our equity interest in that project because the interest
is typically subject both to a pledge securing the project's debt and to
transfer restrictions set forth in the relevant financing agreements. Also, our
ability to transfer or sell our interest in certain projects or the project's
power is restricted by certain purchase options or rights of first refusal in
favor of our partners and certain change of control restrictions in the project
financing documents.
We may also choose to finance these projects from time to time by other means
including using our short-term credit facilities on an interim basis.
Fuel Production
Coal
Our coal production segment mines and processes low-sulfur sub-bituminous coal
near Gillette, Wyoming. The Wyodak mine, which we acquired in 1956 from
Homestake Gold Mining Company, is located in the Powder River Basin, one of the
largest coal reserves in the United States. We believe the Wyodak mine is the
oldest operating surface coal mine in the nation, with an annual production of
approximately 3.5 million tons. Mining rights to the coal are based on four
federal leases and one state lease. We pay royalties of 12.5 percent and 9.0
percent,
14
respectively, of the selling price on all federal and state coal. As of
December 31, 2001, we had coal reserves of 276.6 million tons, enough to satisfy
present contracts for approximately 70 years. Substantially all of our coal
production is currently sold under long-term contracts to Black Hills Power,
Inc., our electric utility, and to PacifiCorp.
Our coal segment's agreement with Black Hills Power limits earnings from all
coal sales to Black Hills Power to a specified return on our original cost
depreciated investment base. Black Hills Power made a commitment to the South
Dakota Public Utilities Commission, the Wyoming Public Service Commission and
the City of Gillette that coal would be furnished and priced as provided by that
agreement for the life of our Neil Simpson II plant.
The price for unprocessed coal sold to PacifiCorp for its 80 percent interest in
the Wyodak Plant is determined by a coal supply agreement terminating in 2022.
This is a new agreement that began January 1, 2001 and was part of a litigation
settlement with PacifiCorp.
Over the next several years, we expect to increase coal production to supply:
o the Wygen 90 megawatt mine-mouth power plant, which is scheduled for
completion in 2003;
o additional mine mouth generating capacity of up to 500 megawatts at
the same site as the Wygen plant, which is in the early stages of
development; and
o future sales of coal to rail-served customers.
In addition, if our coal enhancement K-Fuel plant is re-started, we expect to
increase production from the Wyodak mine and market any low-moisture, high-heat
content coal we produce to an expanded customer base.
Natural Gas and Crude Oil
Our oil and gas exploration and production segment operates approximately 385
oil and gas wells, all of which are located in Wyoming, Colorado and Nebraska.
The majority of these wells are in the Finn-Shurley Field area, located in
Weston and Niobrara Counties in Wyoming. We also own a working interest in, but
do not operate, an additional 428 wells located in California, Montana,
Louisiana, Colorado, North Dakota, Texas, Wyoming, Oklahoma and offshore in the
Gulf of Mexico. In addition, we have accumulated significant acreage in the
Rocky Mountain region, which we plan to utilize for oil and gas exploration.
We plan to substantially increase our natural gas reserves and minimize
exploration risk by focusing on lower-risk exploration and development drilling
and acquisitions of proven producing properties. A key component of this
strategy is the pursuit of shallow gas opportunities in the Rocky Mountain
region. We also expect to modestly increase our Mid-continent area production in
the future but do not plan to serve as the operator for those production
activities.
As of December 31, 2001, we had proved reserves of 4.0 million barrels of oil
and 24.1 billion cubic feet of natural gas, with approximately 63 percent of
current production consisting of natural gas. In 2001, our oil and gas
production increased 38 percent over 2000 levels, with strong drilling results,
acquisitions and year-end reserves.
In April 2001, we purchased certain operating and non-operating interests in 74
oil and gas wells located primarily in Colorado and Wyoming from Stewart
Petroleum Corporation. These properties added to our proved reserves
approximately 8.7 billion cubic feet of natural gas and approximately 200,000
barrels of oil.
Fuel Marketing. We market natural gas, oil and coal in specific regions of the
United States. We offer physical and financial wholesale fuel marketing and
price risk management products and services to a variety of customers. These
customers include natural gas distribution companies, municipalities, industrial
users, oil and gas producers, electric
15
utilities, coal mines, energy marketers and retail gas users. Our average daily
marketing volumes for the year ended December 31, 2001, were 1,047,700 million
British thermal units of gas, 36,500 barrels of oil and 6,100 tons of coal.
The following table briefly summarizes the location of our fuel marketing
operations and sales offices:
Marketing
Company Fuel Operations Sales Offices
- ------------------------------ ----------- ----------- -------------------------------------
Enserco Energy Natural Gas Golden, CO Calgary, Alberta, Canada
Black Hills Energy Resources Crude Oil Houston, TX Tulsa, OK; Midland, TX; Longview, TX
Black Hills Coal Network Coal Mason, OH St. Clairsville, OH
Gas Marketing
Our natural gas marketing operations are headquartered in Golden, Colorado, with
a satellite office in Calgary, Canada. Our gas marketing operations focus
primarily on wholesale marketing and producer marketing services. Producer
services include providing for direct purchases of wellhead gas and for risk
transfer and hedging products. Our gas marketing efforts are concentrated in the
Rocky Mountain and West Coast regions and in Western Canada, which are areas in
which we believe we have a competitive advantage due to our knowledge of local
markets. We contractually hold natural gas storage capacity and both long and
short-term transportation capacity on several major pipelines in the western
United States and Canada. We utilize this capacity to move relatively low cost
natural gas from the producer regions to more expensive end-use market areas.
Oil Marketing and Transportation
Our crude oil marketing and transportation operations are headquartered in
Houston, Texas and are concentrated primarily in Texas, Oklahoma and Louisiana.
At December 31, 2001 we owned a 33 percent interest in Millennium Pipeline
Company, L.P., which owns and operates a 200-mile pipeline. In March 2002, we
acquired the remaining 67 percent interest in Millennium. The pipeline has a
capacity of approximately 65,000 barrels of oil per day, and transports imported
crude oil from Beaumont, Texas to Longview, Texas, which is the transfer point
to connecting carriers. We also acquired additional ownership interest in
Millennium Terminal Company, L.P., which has 1.1 million barrels of crude oil
storage connected to the Millennium Pipeline at the Oil Tanking terminal in
Beaumont. The Millennium system is presently operating near capacity through
shipper agreements. These acquisitions give us 100 percent ownership in the
Millennium companies.
Coal Marketing
We market coal to various industrial customers and power plants located
primarily in the Midwest and eastern regions of the United States through our
coal marketing subsidiary, Black Hills Coal Network. We formed Black Hills Coal
Network in 1998 to acquire the assets and hire the operational management of
Coal Network and Coal Niche, based in Mason, Ohio. These predecessor companies
were coal brokerage and agency companies with customers located primarily east
of the Mississippi River.
16
Electric Utility - Black Hills Power, Inc.
Our electric utility, Black Hills Power, is engaged in the generation,
transmission and distribution of electricity. It provides a solid foundation of
revenues, earnings and cash flow that support utility capital expenditures,
dividends, and overall performance and growth.
Distribution and Transmission. Our electric utility distribution and
transmission businesses serve approximately 59,200 electric customers, with an
electric transmission system of 447 miles of high voltage lines and 541 miles of
lower voltage lines. In addition, we jointly own 43 miles of high voltage lines
with Basin Electric Cooperative. Our utility's service territory covers a 9,300
square mile area of western South Dakota, eastern Wyoming and southeastern
Montana with a strong and stable economic base. Over 90 percent of our utility's
retail electric revenues are generated in South Dakota.
The following are characteristics of our distribution and transmission
businesses:
o We have a diverse customer and revenue base. Our revenue mix in 2001
is comprised of 22 percent commercial, 17 percent residential, 11
percent industrial, 8 percent long-term contract wholesale, 10 percent
short-term contract wholesale, 31 percent wholesale off-system sales
and 1 percent municipal. Approximately 65 percent of our large
commercial and industrial customers are provided service under
long-term contracts. We have historically optimized the utilization of
our power supply resources by selling wholesale power to other
utilities and to power marketers in the spot market and through
short-term sales contracts.
o In 1999, the South Dakota Public Utilities Commission extended our
previous retail rate freeze for another five-years, through January 1,
2005. The rate freeze preserves our low-cost rate structure at levels
below the national average for our retail customers while allowing us
to retain the benefits from cost savings and from wholesale
"off-system" sales, which are not covered by the rate freeze. This
provides us with flexibility in allocating our generating capacity to
maximize returns in changing market environments.
o Forty-one percent of our electric revenues for the year ended December
31, 2001 consisted of off-system and short-term contract wholesale
sales compared to 29 percent in 2000 and 8 percent in 1999. Although
the demand for power in the western markets has eased from the record
levels seen in the first half of 2001, further increases in the volume
of off-system sales are expected in the future due to demand growth in
the Rocky Mountain region and the early 2002 addition of 40 megawatts
of gas-fired generating capacity.
o Our system has the capability of connecting to either the eastern or
western transmission systems, which provides us with access between
the WSCC region and the Mid-Continent Area Power Pool, or "MAPP"
region. This allows us the opportunity to improve system reliability
and take advantage of power price differentials between the two
electric grids. We are able to interconnect up to 80 megawatts of our
generation into the MAPP. Alternatively, we can have up to 80
megawatts of our load served from the MAPP region. The available
transmission capacity of the MAPP transmission system determines how
much of this 80 megawatts can be served from the eastern
interconnection.
o We have firm transmission access to deliver up to 60 megawatts of
power on PacifiCorp's system to wholesale customers in the western
region during 2002, scheduled to decline to 50 megawatts by 2004.
On October 15, 2000, we indicated to FERC our intent to participate in a
regional transmission organization, or RTO. Our transmission system is a part of
the western transmission grid governed by the WSCC, and it interconnects with
transmission systems operated by the Western Area Power Administration, or WAPA,
and by PacifiCorp. WAPA continues to evaluate participation in the RTOs which
will involve transmission systems in Colorado and the southwest region, while
PacifiCorp is involved in the development of the RTO West which will involve
transmission
17
systems in Wyoming and the northwest region. We will continue to
monitor the development of these two RTOs and decide in the future which RTO
best fits our transmission system and operations.
Power Sales Agreements. We sell approximately 50 percent of our utility's
current load under long-term contracts. Our key contracts include a 10-year
contract expiring in 2007 with Montana-Dakota Utilities Company for the sale of
up to 55 megawatts of energy and capacity to service the Sheridan, Wyoming
electric service territory, and a contract with the City of Gillette, Wyoming,
expiring in 2012, to provide the city's first 23 megawatts of capacity and
energy. Both contracts are integrated into our control system and are treated as
firm native load. In May 2001, we began selling 30 megawatts of firm capacity
and energy up to the contract capacity to Public Service Company of Colorado for
a period through 2004. We have entered into an agreement with the Municipal
Electric Agency of Nebraska for the sale of 30 megawatts of unit contingent
energy and capacity for a period through the completion of construction of the
Wygen independent power facility, which is expected in first quarter 2003. For
the 10-year period beginning with the completion of the Wygen facility, our
utility and our power generation segment will each provide 20 megawatts of unit
contingent energy and capacity to the Municipal Electric Agency of Nebraska.
Our utility's electric load is served by coal-, oil- and natural gas-fired
generating units providing 395 megawatts of generation capacity and from the
following purchased power and capacity contracts with PacifiCorp:
o a power sales agreement expiring in 2023, involving the purchase by us
of 60 megawatts of baseload power in 2002, and scheduled to decline to
50 megawatts by 2004;
o a reserve capacity integration agreement expiring in 2012, which makes
available to us 100 megawatts of reserve capacity in connection with
the utilization of the Ben French CT units; and
o a capacity option call, which gives us an option to purchase up to 60
megawatts of peaking capacity seasonally through March 31, 2007.
Regulated Power Plants. Since 1995, our utility has been a net producer of
energy. Our utility owns 395 megawatts of generating capacity with an additional
40 megawatts under construction, all of which is located in the Rocky Mountain
region. Our utility's peak system load of 392 megawatts was reached in August
2001. None of our generation is restricted by hours of operation, thereby
providing us with the ability to generate power to meet demand whenever
necessary and feasible.
18
The following table describes our utility's portfolio of power plants:
Total Net
Fuel Capacity Capacity
Power Plant Type State (MWs) Interest (MWs) Start Date
----------- ---- ----- ----- -------- ----- ----------
In Operation:
------------
Ben French Coal SD 25.0 100% 25.0 1960
Ben French Diesels 1-5 Diesel SD 10.0 100% 10.0 1965
Ben French CTs 1-4 Gas/Oil SD 100.0 100% 100.0 1977-1979
Neil Simpson I Coal WY 21.8 100% 21.8 1969
Neil Simpson II Coal WY 91.0 100% 91.0 1995
Neil Simpson CT Gas WY 40.0 100% 40.0 2000
Osage Coal WY 34.5 100% 34.5 1948
Wyodak Coal WY 362.0 100% 72.4 1978
----- -----
Total in Operation 684.3 20% 394.7
----- -----
Under Construction:
------------------
Lange CT Gas SD 40.0 100% 40.0 2002
----- -----
Total Utility 724.3 434.7
===== =====
Ben French
Ben French is a wholly owned coal-fired plant situated in Rapid City, South
Dakota, with a capacity of 25 megawatts. This plant was put into service in 1960
and has since been operating as a baseload plant. Coal for the plant is
purchased from our Wyodak mine and delivered by truck.
Ben French Diesel Units 1-5
The Ben French Diesel Units 1-5 are wholly owned diesel-fired plants located in
Rapid City, South Dakota, with a capacity of 10 megawatts. These plants were put
into service in 1965, and are being operated as peaking plants.
Ben French CT's 1-4
The Ben French Combustion Turbines 1-4 are wholly owned gas and oil-fired units
with a capacity of 100 megawatts located in Rapid City, South Dakota. These
facilities were put into service from 1977 to 1979, and are being operated as
peaking units.
Neil Simpson I and II
Neil Simpson I and II are air-cooled, coal-fired wholly owned facilities located
near Gillette, Wyoming. Neil Simpson I has a capacity of 21.8 megawatts and was
put into service in 1969. Neil Simpson II has a capacity of 91.0 megawatts and
was put into service in 1995. These plants are operated as baseload facilities,
and are mine-mouth coal-supplied plants, receiving their coal directly from our
Wyodak mine.
Neil Simpson CT
The Neil Simpson Combustion Turbine is a wholly owned gas-fired plant located
near Gillette, Wyoming with a capacity of 40 megawatts. This plant was put into
service in 2000, and was installed to provide peaking capabilities.
19
Osage
The Osage plant is a wholly owned coal-fired plant in Osage, Wyoming with a
total capacity of 34.5 megawatts and was put into service from 1948 to 1952.
This plant has three turbine generation units, and is being operated as a
baseload plant. Coal for the plant is purchased from our Wyodak mine and
delivered by truck.
Wyodak
Wyodak is a 362 megawatt mine mouth coal-fired plant owned jointly by PacifiCorp
and us and in which we hold a 20 percent (72.4 net megawatt) ownership interest.
Our Wyodak mine furnishes all the coal fuel supply for the Wyodak plant. The
plant was put into service in 1978, and is currently being operated as a
baseload plant.
Lange CT
The Lange Combustion Turbine is a wholly owned 40 megawatt gas-fired plant under
construction near Rapid City, South Dakota. The plant is expected to be placed
in service early 2002. The Lange Project was originally planned as an
independent power plant, but is being constructed by our utility as a regulated
power plant to provide peaking capacity and voltage support for the area.
Communications
Our communications group, whose primary business is Black Hills FiberCom, was
formed to provide state-of-the-art broadband telecommunications services to the
underserved markets of Rapid City and the northern Black Hills of South Dakota.
We offer residential and business customers a full suite of telecommunications
services, including local and long distance telephone service, expanded cable
television service, cable modem Internet access and high speed data and video
services. We have completed a 242-mile inter- and intra-city fiber optic network
and currently operate 737 miles of two-way interactive hybrid fiber coaxial or
"HFC" cable. We believe we are one of the first companies in the United States
to provide video entertainment service, high-speed Internet access, and local
and long distance telephone services over an advanced broadband infrastructure.
We have bundled these services into value packages with a single consolidated
bill for all of these services.
We introduced our broadband communications services to the Rapid City and
northern Black Hills areas in November 1999. As of December 31, 2001, we had
attracted 15,660 residential customers and 2,250 business customers. Our goal is
to attain 60 percent residential and commercial market penetration within our
service territory.
The construction of our communications network is approximately 85 percent
complete and we expect to substantially complete construction of the base
network in 2002.
Competition
The independent power, fuel production and fuel marketing industries are
characterized by numerous strong and capable competitors, some of which may have
more extensive operating experience, larger staffs or greater financial
resources than us. In particular, the independent power industry in recent years
has been characterized by increased competition for asset purchases and
development opportunities.
In addition, Congress has considered various pieces of legislation to
restructure the electric industry that would require, among other things,
customer choice and/or repeal of the Public Utility Holding Company Act of 1935,
or PUHCA. The debate is likely to continue and perhaps intensify. The effect of
enacting such legislation cannot be predicted with any degree of certainty.
Industry deregulation may encourage the disaggregation of vertically integrated
utilities into separate generation, transmission and distribution businesses. As
a result of these potential regulatory changes, significant additional
competitors could become active in the generation segment of our industry.
20
Our communications unit faces competition from numerous well established
companies, including Qwest Communications, Rapid City's incumbent local exchange
carrier, Midcontinent Communications, the area's incumbent cable television
provider, as well as long distance providers and Internet service providers. Our
success in this business will depend upon, among other things, the quality of
our customer service, the willingness of residential and business customers to
accept us as an alternative provider of broadband communications services, our
products and services and our ability to offer an attractive package of bundled
products.
Risk Management
Our fuel marketing operations require effective risk management of price,
counterparty performance and operational risks. Price risk is created through
the volatility of energy prices. Counterparty performance risk is the risk that
a counterparty will fail to satisfy its contractual obligations to us, and
includes credit risk. Operational risk arises from a lack of internal controls.
We have implemented controls to mitigate each of these risks.
Our fuel marketing operations are conducted in accordance with guidelines
established through separate risk management policies and procedures for each
marketing company and through our credit policy. These policies are established
and approved by our board of directors, reviewed on a regular basis and
monitored as described below.
We maintain a working risk management committee for each of our marketing
companies, and a credit committee at the parent company level. The risk
management committees focus on implementation of risk management procedures and
on monitoring compliance with established policies. The credit committee sets
counterparty credit limits, monitors credit exposure levels and reviews
compliance with established credit policies. Additionally, we employ a risk
manager and a credit manager responsible for overseeing these functions.
Our risk management policies and procedures specify maximum price risk exposure
levels within which each respective marketing company must operate. These
policies and procedures establish relatively low exposure levels and generally
prohibit speculative trading strategies.
As part of our enterprise-wide risk management strategy, we limit our exposure
to energy marketing risks by maintaining separate credit facilities within each
of our fuel marketing companies. These credit facilities have security interests
solely against the assets of the respective marketing company, with the
exception of a $1 million guarantee by our coal mining subsidiary on our coal
marketing unit's credit facility.
A significant potential risk related to power sales is the price risk arising
from the sale of wholesale power that exceeds our generating capacity. Short
positions can arise from unplanned plant outages or from unanticipated load
demands. To control such risks, we restrict wholesale off-system sales to
amounts by which our anticipated generation capabilities exceed our anticipated
load requirements plus a required reserve margin. We further control this risk
by selling only in the day-ahead power market and by entering into longer-term
sales contracts that are made on a "unit contingent" basis, under which delivery
is not required during unplanned outages at specified power plants.
Regulation
We are subject to a broad range of federal, state and local energy and
environmental laws and regulations applicable to the development, ownership and
operation of our projects. These laws and regulations generally require that a
wide variety of permits and other approvals be obtained before construction or
operation of a power plant commences and that, after completion, the facility
operate in compliance with their requirements. We strive to comply with the
terms of all such laws, regulations, permits and licenses and believe that all
of our operating plants are in material compliance with all such applicable
requirements.
21
Energy Regulation
Federal Power Act. The Federal Power Act gives FERC exclusive ratemaking
jurisdiction over wholesale sales of electricity and the transmission of
electricity in interstate commerce. Pursuant to the Federal Power Act, all
public utilities subject to FERC's jurisdiction are required to file rate
schedules with FERC prior to commencement of wholesale sales or interstate
transmission of electricity. Public utilities with cost-based rate schedules are
also subject to accounting, record-keeping and reporting requirements
administered by FERC.
The Energy Policy Act. The passage of the Energy Policy Act in 1992 further
encouraged independent power production by providing certain exemptions from
regulation for exempt wholesale generators, or EWGs. All of our subsidiaries
that would otherwise be treated as public utilities are currently treated as
EWGs under the Energy Policy Act. An EWG is an entity that is exclusively
engaged, directly or indirectly, in the business of owning or operating
facilities that are exclusively engaged in generation and selling electric
energy at wholesale. An EWG will not be regulated under PUHCA, but is subject to
FERC and state public utility commission regulatory reviews, including rate
approval. Since EWGs are only allowed to sell power at wholesale, their rates
must receive initial approval from FERC rather than the states. All of our EWGs
to date that have sought rate approval from FERC have been granted market-based
rate authority, which allows FERC to waive certain accounting, record-keeping
and reporting requirements imposed on public utilities with cost-based rates.
However, FERC customarily reserves the right to suspend, upon complaint,
market-based rate authority on a prospective basis if it is subsequently
determined that we or any of our EWGs exercised market power. If FERC were to
suspend market-based rate authority, it would most likely be necessary to file,
and obtain FERC acceptance of, cost-based rate schedules for any of our EWGs.
Also, the loss of market-based rate authority would subject the EWGs to the
accounting, record keeping and reporting requirements that are imposed on public
utilities with cost-based rate schedules.
In addition, if there occurs a "material change" in facts that might affect any
of our subsidiaries' eligibility for EWG status, within 60 days of the material
change, the relevant EWG must (1) file a written explanation of why the material
change does not affect its EWG status, (2) file a new application for EWG
status, or (3) notify FERC that it no longer wishes to maintain EWG status. If
any of our subsidiaries were to lose EWG status, we, along with our affiliates,
would be subject to regulation under PUHCA as a public utility company. Absent a
substantial restructuring of our business, it would be difficult for us to
comply with PUHCA without a material adverse effect on our business.
State Energy Regulation. In areas outside of wholesale rate regulation (such as
financial or organizational regulation), some state utility laws may give their
public utility commissions broad jurisdiction over steam sales or EWGs that sell
power in their service territories. The actual scope of the jurisdiction over
steam or independent power projects depends on state law and varies
significantly from state to state.
Environmental Regulation
The construction and operation of power projects are subject to extensive
environmental protection and land use regulation in the United States. These
laws and regulations often require a lengthy and complex process of obtaining
licenses, permits and approvals from federal, state and local agencies. If such
laws and regulations are changed and our facilities are not grandfathered,
extensive modifications to project technologies and facilities could be
required.
General. Based on current trends, we expect that environmental and land use
regulation will continue to be stringent. Accordingly, we actively review
proposed construction projects that could subject us to stringent pollution
controls imposed on "major modifications," as defined under the Clean Air Act,
and changes in "discharge characteristics," as defined under the Clean Water
Act. The goal of these actions is to achieve compliance with applicable
regulations, administrative consent orders and variances from applicable
air-quality related regulations.
22
Clean Air Act. Our Neil Simpson II, Neil Simpson CT, Gillette CT, the Arapahoe,
Valmont, Fountain Valley, Lange CT and Wyodak plants are all subject to Title IV
of the Clean Air Act, which requires certain fossil-fuel-fired combustion
devices to hold sulfur dioxide "allowances" for each ton of sulfur dioxide
emitted. We currently hold sufficient allowances credited to us as a result of
sulfur removal equipment previously installed at the Wyodak plant to apply to
the operation of all units subject to Title IV through 2031 without requiring
the purchase of any additional allowances. With respect to any future plants, we
plan to comply with the need for holding the appropriate number of allowances by
reducing sulfur dioxide emissions through the use of low sulfur fuels,
installation of "back end" control technology and if necessary, the purchase of
allowances on the open market. We expect to integrate the costs of obtaining the
required number of allowances needed for future projects into our overall
financial analysis of such projects.
On July 14, 2000, the South Coast Air Quality Management District, known as
SCAQMD, sent a letter to our affiliate, Black Hills Ontario, L.L.C., the
operator of a 12 megawatt natural-gas fired co-generation facility located in
Ontario, California, stating that the SCAQMD had determined, as a result of a
facility audit completed for the compliance year ended June 1, 1999, that the
facility's nitrogen oxide, or NOx, emissions were 28,958 pounds over the
facility's NOx allocation established by the SCAQMD's RECLAIM emissions trading
program. As a result, the SCAQMD indicated that it would be reducing the
facility's NOx allocation by the same number of allowances for the compliance
year subsequent to a final determination on this issue. Black Hills Ontario
provided documentation to the SCAQMD disputing this proposed reduction and by
letter on August 14, 2001, the SCAQMD agreed that Ontario had not exceeded its
NOx allocation and stated the issue is now resolved. Black Hills Ontario was
able to purchase NOx allowances for the 2001-2002 compliance period and projects
that it will need to continue purchasing NOx allowances for all future
compliance years. Annual purchases are anticipated to be approximately 30,000
allowances. There is currently significant volatility in the price and supply of
RECLAIM NOx allowances; although the SCAQMD has proposed a revision to its
regulations to stabilize the RECLAIM market, it is unclear whether these rules
will mitigate Black Hills Ontario's potential exposure for its projected
allowance shortfall. Accordingly, no assurance can be given at this time
regarding whether RECLAIM NOx allowances will be available for purchase to allow
Black Hills Ontario to comply with RECLAIM requirements for the year ended June
30, 2002, or, if allowances are available, as to the cost of those allowances.
In July 1999, the United States Environmental Protection Agency (EPA) finalized
rules designed to protect and improve visibility impairment resulting from air
emissions. Among other things, the regulations required states to identify
sources of emissions (including certain coal-fired generating units built
between 1962 and 1977) by 2004 that would be subject to "Best Available Retrofit
Technology," known as BART. These sources would be required to implement BART
within five years after the EPA approved state plans adopted to combat
visibility impairment. The submission of these plans is due between 2004 and
2008. In January 2001, the EPA proposed guidance to assist states in determining
which sources should be subject to the BART requirement. That guidance is
currently under review by the Whitehouse Office of Management and Budget and is
expected to be final in 2002. Management believes that the only existing plant
which may be required to comply with Clean Air Act requirements is our Neil
Simpson I plant and that any capital expenditures associated with bringing the
plant into compliance would not have a material adverse effect on our financial
position or results of operations.
Title V of the Clean Air Act imposes federal requirements, which dictate that
all of our fossil fuel-fired generation facilities must obtain operating
permits. All of our existing facilities subject to this requirement are in the
process of or have submitted Title V permit applications and either have
received or are in the process of receiving permits.
On November 3, 1999, the United States Department of Justice filed suit against
a number of electric utilities for alleged violations of the Clean Air Act's
"new source review" requirements related to modifications of air emissions
sources at electric generating stations located in the southern and Midwestern
regions of the United States. Several states have joined these lawsuits. In
addition, the EPA has also issued administrative notices of violation alleging
similar violations at additional power plants owned by some of the same
utilities named as defendants in the Department of Justice lawsuit, and also
issued an administrative order to the Tennessee Valley Authority for similar
violations at some of its power plants. The EPA has also issued requests for
information pursuant to the Clean Air
23
Act to numerous other electric utilities seeking to determine whether those
utilities also engaged in activities that may have been in violation of the
Clean Air Act's new source review requirements. No such proceedings have been
initiated or requests for information issued with respect to any of our
facilities, but there can be no assurance that we will not be subject to similar
proceedings in the future.
In December 2000, the EPA announced its intention to regulate mercury emissions
from coal-fired and oil-fired electric power plants under Section 112 of the
Clean Air Act. The EPA is committed to proposing a rule to regulate such
emissions by no later than 2003. Because we do not know what the EPA may require
with respect to this issue, we are not able to evaluate the impact of potential
mercury regulations on the operation of our facilities.
Since the adoption of the United Nations Framework on Climate Change in 1992,
there has been worldwide attention with respect to greenhouse gas emissions. In
December 1997, the Clinton administration participated in the Kyoto, Japan
negotiations, where the basis of a climate change treaty was formulated. Under
the treaty, known as the Kyoto Protocol, the United States would be required,
between 2008 and 2012 to reduce its greenhouse gas emissions by 7 percent from
1990 levels. However, because of opposition to the treaty in the United States
Senate, the Kyoto Protocol has not been submitted to the Senate for
ratification. Although legislative developments on the state level related to
controlling greenhouse gas emissions have occurred, we are not aware of any
similar developments in the states in which we operate. If the United States
ratifies the Kyoto Protocol or we otherwise become subject to limitations on
emissions of carbon dioxide from our plants, these requirements could have a
significant impact on our operations. In March 2001, the Bush administration
announced that it would not seek to impose any limitations on carbon dioxide
emissions.
Clean Water Act. Our existing facilities are also subject to a variety of state
and federal regulations governing existing and potential water/wastewater
discharges. Generally, such regulations are promulgated under authority of the
Clean Water Act and govern overall water/wastewater discharges through National
Pollutant Discharge Elimination System, or NPDES, permits. Under current
provisions of the Clean Water Act, existing NPDES permits must be renewed every
five years, at which time permit limits are extensively reviewed and can be
modified to account for changes in regulations or program initiatives. In
addition, the permits have re-opener clauses which allow the permitting
authority (which may be the United States or an authorized state) to attempt to
modify a permit to conform to changes in applicable laws and regulations. Some
of our existing facilities have been operating under NPDES permits for many
years and have gone through one or more NPDES permit renewal cycles. All of our
facilities required to have NPDES permits have those in place and are in
compliance with discharge limitations.
Solid Waste Disposal. We dispose of all solid wastes collected as a result of
burning coal at our power plants in approved solid waste disposal sites. Each
disposal site has been permitted by the state of its location in compliance with
law. Ash and wastes from flue gas and sulfur removal from the Wyodak and Neil
Simpson II plants are deposited in mined areas. These disposal areas are located
below some shallow water aquifers in the mine. None of the solid wastes from the
burning of coal is classified as hazardous material, but the wastes do contain
minute traces of metals that would be perceived as polluting if such metals were
leached into underground water. Recent investigations have concluded that the
wastes are relatively insoluble and will not measurably affect the post-mining
ground water quality. While management does not believe that any substances from
our solid waste disposal activities will pollute underground water, they can
give no assurances that pollution will not occur over time. In this event, we
could experience material costs to mitigate any resulting damages. Agreements in
place require PacifiCorp to be responsible for any such costs that would be
related to the solid waste from its 80 percent interest in the Wyodak plant.
Additional unexpected material costs could also result in the future if the
federal or state government determines that solid waste from the burning of coal
contains some hazardous material that requires special treatment, including
solid waste of which we previously disposed. In that event, the government
regulator could consequently hold those entities that disposed of such waste
responsible for such treatment.
24
Mine Reclamation. Under federal and state laws and regulations, we are required
to submit to the regulation by, and receive approval from, the Wyoming
Department of Environmental Quality (DEQ) for a mining and reclamation plan
which provides for orderly mining, reclamation and restoration of all of our
Wyodak coal mine in conformity with state laws and regulations. We have an
approved mining permit and are otherwise in compliance with other land quality
permitting programs.
Based on extensive reclamation studies, we currently estimate the cost of
reclamation for our mine at approximately $26 million and have currently accrued
approximately $18.2 million on our accompanying Consolidated Balance Sheet for
these reclamation costs. No assurance can be given that additional requirements
in the future will not be imposed that would cause an unexpected material
increase in reclamation costs.
One situation that could result in substantial unexpected increases in costs
relating to our reclamation permit concerns three depressions -- the "South"
depression, the "Peerless" depression and the "North Pit" depression - that have
or will result from our mining activities at the Wyodak mine. Because of the
thick coal seam and relatively shallow overburden, the current restoration plan
would leave these depressions, which have limited reclamation potential, with
interior drainage only. Although the DEQ has accepted the current plan to limit
reclamation of these depressions, it has reserved the right to review and
evaluate future reclamation plans or to reevaluate the existing reclamation
plan. If as a result of our mining activities, additional overburden becomes
available, the DEQ may require us to conduct additional reclamation of the
depressions, particularly if the DEQ finds that the current limited reclamation
is resulting in exceedances in the DEQ's water quality standards.
Ben French Oil Spill. In 1990 and 1991, we discovered extensive underground fuel
oil contamination at the Ben French plant site. With the help of expert
consultants, we worked closely with the South Dakota Department of Environment
and Natural Resources to assess and remediate the site. Our assessment and
remediation efforts continue today and we continue to monitor the site. All of
our underground oil-carrying facilities from which the contamination occurred
are now above ground. There have been no significant recoveries of free fuel oil
product since 1994. Soil borings and monitoring wells on the perimeters of our
Ben French plant property provide no indication of contamination beyond the
property's limits. Management believes that the underground spill has been
sufficiently remedied so as to prevent any oil from migrating off site. However,
due to underground gypsum deposits in this area, the fuel oil has the potential
of migrating to area waterways. In such event, cleanup costs could be greatly
increased. Management believes that sufficient remediation efforts to prevent
such a migration are currently in place, but due to the uncertainties of
underground geology, no assurance can be given.
Cleanup costs recognized to date total approximately $0.5 million, of which
amount $0.4 million has been reimbursed by the South Dakota Petroleum Release
Compensation Fund. To date, no penalties, claims or actions have been taken or
threatened against us because of this oil spill. In late 2001, the South Dakota
Department of Environment and Natural Resources started preparing a review,
which is directed at permanently closing numerous monitoring wells which have
shown no contamination for several years.
PCBs. Under the federal Toxic Substances Control Act, the EPA has issued
regulations that control the use and disposal of polychlorinated biphenyls, or
PCBs. PCBs were widely used as insulating fluids in many electric utility
transformers and capacitors manufactured before the Toxic Substances Control Act
prohibited any further manufacture of PCB equipment. We remove and dispose of
PCB-contaminated equipment in compliance with law as it is discovered.
Release of PCB-contaminated fluids, especially any involving a fire or a release
into a waterway, could result in substantial cleanup costs. Several years ago,
we began a testing program of potential PCB-contaminated transformers, and in
1997 completed testing of all transformers and capacitors which are not located
in our electric substations. We have not completed the testing of sealed
potential transformers and bushings located in our electric substations as the
testing of this equipment requires their destruction. Release of
PCB-contaminated fluid, if present, from our equipment is unlikely and the
volume of fluid in such equipment is generally less than one gallon. Moreover,
any release of this fluid would be confined to our substation site.
25
Exploration and Production
Our oil and gas exploration and production operations are subject to various
types of regulation at the federal, state and local levels. They include:
o requiring permits for the drilling of wells;
o maintaining bonding requirements in order to drill or operate wells;
o submitting and implementing spill prevention plans;
o submitting notification relating to the presence, use and release of
certain contaminants incidental to oil and gas operations;
o regulating the location of wells, the method of drilling and casing
wells, the use, transportation, storage and disposal of fluids and
materials used in connection with drilling and production activities;
and
o regulating surface usage and the restoration of properties upon which
wells have been drilled, the plugging and abandoning of wells and the
transporting of production.
Our operations are also subject to various conservation matters, including the
regulation of the size of drilling and spacing units or proration units, the
number of wells which may be drilled in a unit and the unitization or pooling of
oil and gas properties. In this regard, some states allow the forced pooling or
integration of tracts to facilitate exploration while other states rely on
voluntary pooling of lands and leases, which may make it more difficult to
develop oil and gas properties. In addition, state conservation laws establish
maximum rates of production from oil and gas wells, generally prohibit the
venting or flaring of gas and impose certain requirements regarding the ratable
purchase of production. The effect of these regulations is to limit the amounts
of oil and gas we can produce from our wells and to limit the number of wells or
the locations at which we can drill. In addition, various federal, state and
local laws and regulations concerning the discharge of contaminants into the
environment, the generation, storage, transportation and disposal of
contaminants and the protection of public health, natural resources, wildlife
and environment affect our exploration, development and production operations
and our related costs.
Other Properties
In addition to the other properties described herein, we own an eight-story
office building consisting of approximately 47,000 square feet of office space
in Rapid City, South Dakota. We occupy approximately 75 percent of this building
and lease the remainder to others.
Employees
At December 31, 2001, we had 785 employees, approximately 287 of who are
employed in our utility business, 236 of who are employed in our integrated
energy businesses, 209 of who are employed in our communications business and 53
of who are employed by the parent company.
Approximately one-half of our utility employees are covered by collective
bargaining agreements with the International Brotherhood of Electrical Workers,
which expire on April 1, 2003. We have experienced no significant labor
stoppages or labor disputes at our facilities.
26
ITEM 3. LEGAL PROCEEDINGS
There are currently no pending material legal proceedings to which we are a
party. There are currently no pending material legal proceedings to which an
officer or director is a party or has a material interest adverse to us or our
subsidiaries. There are also no material administrative or judicial proceedings
arising under environmental quality or civil rights statutes pending or known to
be contemplated by governmental agencies to which we are or would be a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of 2001.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock ($1 par value) is traded on The New York Stock Exchange.
Quotations for the common stock are reported under the symbol BKH. At year-end,
the Company had 5,509 common shareholders of record and approximately 16,000
beneficial owners. All 50 states and the District of Columbia plus 10 foreign
countries are represented.
We have declared common stock dividends payable in cash in each year since our
predecessor's incorporation in 1941. At our January 2002 meeting, the Board of
Directors raised the quarterly dividend to 29 cents per share, equivalent to an
annual increase of 4 cents per share. This regular quarterly dividend is payable
March 1, 2002. Dividend payment dates are normally March 1, June 1, September 1
and December 1.
Quarterly dividends paid and the high and low common stock prices, as reported
in the New York Stock Exchange Composite Transactions, for the last two years
were as follows:
Year ended December 31, 2001
1st 2nd 3rd 4th
--- --- ---- ---
Dividends paid per share $0.28 $0.28 $0.28 $0.28
Common stock prices
High
High $45.74 $58.50 $45.55 $34.20
Low $31.00 $39.50 $27.76 $26.00
Year ended December 31, 2000
1st 2nd 3rd 4th
--- --- ---- ---
Dividends paid per share $0.27 $0.27 $0.27 $0.27
Common stock prices
High
High $25.19 $25.19 $30.13 $46.06
Low $20.44 $20.88 $22.00 $27.00
28
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31, 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
TOTAL ASSETS (in thousands) $1,658,767 $1,320,320 $668,492 $559,417 $508,741
PROPERTY AND INVESTMENTS
(in thousands)
Total property and investments $1,626,519 $1,122,266 $710,488 $619,549 $598,306
Accumulated depreciation and depletion 328,400 277,848 246,299 229,942 197,179
Capital expenditures 594,156 173,517* 154,609 27,225 28,319
CAPITALIZATION (in thousands)
Long-term debt $415,798 $307,092 $160,700 $162,030 $163,360
Preferred stock equity 5,549 4,000 - - -
Common stock equity 509,615 278,346 216,606 206,666 205,403
-------- -------- -------- -------- --------
Total capitalization $930,962 $589,438 $377,306 $368,696 $368,763
======== ======== ======== ======== ========
CAPITALIZATION RATIOS
Long-term debt 44.7% 52.1% 42.6% 43.9% 44.3%
Preferred stock equity 0.6 0.7 - - -
Common stock equity 54.7 47.2 57.4 56.1 55.7
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
TOTAL OPERATING REVENUES
(in thousands) $1,558,558 $1,623,836 $791,875 $679,254 $313,662
NET INCOME AVAILABLE FOR
COMMON STOCK (in thousands) $87,550 $52,770 $37,067 $25,808** $32,359
DIVIDENDS PAID ON COMMON STOCK
(in thousands) $28,517 $23,527 $22,602 $21,737 $20,540
COMMON STOCK DATA
(in thousands)
Shares outstanding, average 25,374 22,118 21,445 21,623 21,692
Shares outstanding, average diluted 25,771 22,281 21,482 21,665 21,706
Shares outstanding, end of year 26,652 22,921 21,372 21,578 21,705
(in dollars)
Basic earnings per average share $ 3.45 $ 2.39 $ 1.73 $ 1.19** $ 1.49
Diluted earnings per average share $ 3.42 $ 2.37 $ 1.73 $ 1.19** $ 1.49
Dividends paid per share $ 1.12 $ 1.08 $ 1.04 $ 1.00 $ 0.95
Book value per share, end of year $ 19.12 $ 12.14 $ 10.14 $ 9.58 $ 9.46
RETURN ON COMMON STOCK EQUITY
(year-end) 17.2% 19.0% 17.1% 12.5%** 15.8%
*Excludes the non-cash acquisition of Indeck Capital, Inc.
**Includes impact of $8.8 million, or 41 cents per average share, write-down
of certain oil and gas properties
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We are a growth oriented, diversified energy holding company operating
principally in the United States. Our unregulated and regulated businesses have
expanded significantly in recent years. Our integrated energy group, Black Hills
Energy, Inc. (formerly Black Hills Energy Ventures, Inc.), produces and markets
electric power and fuel. We produce and sell electricity in a number of markets,
with a strong emphasis in the western United States. We also produce coal,
natural gas and crude oil, primarily in the Rocky Mountain region, and market
fuel products nationwide. Our electric utility, Black Hills Power, Inc., serves
approximately 59,200 customers in South Dakota, Wyoming and Montana. Our
communications group offers state-of-the-art broadband communications services
to residential and business customers in Rapid City and the northern Black Hills
region of South Dakota through Black Hills FiberCom, LLC.
Business Strategy
We are executing a long-term growth strategy by adding and augmenting revenue
streams from our diverse integrated energy operations. We have implemented a
balanced, integrated and risk-managed approach to fuel production, energy
marketing and power generation. Built on the strength of our electric utility,
we have enhanced our local operations by providing broadband communications. Our
diverse operations help to avoid reliance on any single element to achieve our
growth objective. This diversity provides a measure of stability in volatile or
cyclical periods. We believe the strength of our low-cost assets and the
expertise of our management team together forge sustained opportunity for growth
and success.
Prospective Information
We reaffirm our goal of long-term annual earnings per share growth of 10 percent
to 15 percent off a "normalized" 2000 earnings per share base of $2.00, which
adjusts for the impact of high energy prices at that time. However, due to the
current low price environment in energy markets, near-term results may be lower
than our long-term objective.
Net income from the integrated energy group exceeded net income derived from our
electric utility in 2001. We expect that earnings growth from the integrated
energy group over the next few years will be driven primarily by our continued
expansion in the power generation and oil and gas production segments. The
following key elements are an integral part of our plan to achieve this
objective:
o grow our power generation segment by developing and acquiring power
projects in targeted western markets, and, in particular, by expanding the
generation capacity of our existing sites through a strategy known as
"brownfield development;"
o sell a large percentage of our production from new projects through
long-term contracts in order to secure revenue stability at attractive
returns;
o increase our reserves of natural gas and crude oil and expand our fuel
production;
o manage the risks inherent in fuel marketing by maintaining position limits
that minimize price risk exposure;
o conduct business with a diversified group of counterparties of high credit
quality;
o exploit our fuel cost advantages and our operating and marketing expertise
to remain a low-cost power producer;
o increase margins from our coal production through an expansion of mine
mouth generation and increased coal sales;
o build and maintain strong relationships with wholesale energy customers;
and
o capitalize on our utility's established market presence, relationships and
customer loyalty to expand our integrated energy businesses.
Although we believe our integrated energy group will continue to grow as our
largest business group, we are unable to predict the price environment and
growth in the energy markets.
Our electric utility has continued to produce modest growth in revenue and
earnings from the retail business over the past two years. We believe that this
trend is stable and that, absent unplanned system outages, it will continue for
the
30
next several years due to the extension of our electric utility's rate
freeze until January 1, 2005. (See Rate Regulation.) We forecast firm energy
sales in our retail service territory to increase over the next 10 years at an
annual compound growth rate of approximately one percent, with the system demand
forecasted to increase at a rate of two percent. These forecasts are derived
from studies conducted by us whereby we examined and analyzed our service
territory to estimate changes in the needs for electrical energy and demand over
a 20-year period. These forecasts are only estimates, and the actual changes in
electric sales may be substantially different. Weather deviations can also
affect energy sales significantly when compared to forecasts based on normal
weather. The portion of the utility's future earnings that will result from
wholesale off-system sales will depend on many factors, including native load
growth, plant availability and electricity demand and commodity prices in the
western markets.
Although our broadband communications business significantly increased
residential and business customers in 2001, we expect it will sustain
approximately $6.5 million in net losses in 2002, with annual losses decreasing
thereafter and profitability expected by 2004. The recovery of capital
investment and future profitability are dependent primarily on our ability to
attract new customers, including customers from incumbent providers. Our goal is
to attain 60 percent penetration for both residential and commercial customers
within our service territory. If we are unable to attract additional customers
or technological advances make our network obsolete, we could have a material
write-down of assets. While we do not anticipate being regulated in the local
markets, we are unable to predict future markets, future government impositions
and future economic and competitive conditions that could affect the
profitability of the communications operations.
Results of Operations
Consolidated Results
Overview
Revenue and net income (loss) provided by each business group as a percentage of
our total revenue and net income were as follows:
2001 2000 1999
---- ---- ----
Revenue:
Integrated energy 85% 89% 83%
Electric utility 14 11 17
Communications 1 - -
--- --- ---
100% 100% 100%
=== === ===
Net Income (Loss):
Integrated energy 63% 55% 31%
Electric utility 51 70 74
Communications (14) (25) (5)
--- --- ---
100% 100% 100%
=== === ===
2001 Compared to 2000
Consolidated net income for 2001 was $87.6 million, compared to $52.8 million in
2000, or $3.42 per average common share in 2001, compared to $2.37 per average
common share in 2000. This equates to a 17.2 percent and 19.0 percent return on
year-end common equity in 2001 and 2000, respectively. The return on year-end
common equity in 2001 was diluted due to the net proceeds of $163 million from
the public stock offering in 2001.
We reported record earnings in 2001, primarily due to strong natural gas
marketing activity, increased fuel production, expanded power generation and
increased wholesale off-system electric utility sales. Strong results in our
integrated energy business group and electric utility business group were
partially offset by losses in our communications business. Unusual energy market
conditions stemming primarily from gas and electricity shortages in the West
contributed to our strong financial performance in 2001 and 2000. There was
approximately a $1.40 and a $0.40
31
contribution to 2001 and 2000 earnings per share, respectively, due to
prevailing prices of gas and electricity and unusually wide gas trading margins
in the last part of year 2000 and first half of 2001.
Consolidated revenues were slightly lower in 2001 at $1.56 billion compared to
$1.62 billion in 2000. Revenue increases in fuel production, independent power
generation, the electric utility and communications were offset by a decrease in
fuel marketing revenue. The effects of decreases in energy prices beginning in
late spring 2001 were partially offset by higher sales volumes. Daily volumes of
natural gas marketed increased 22 percent from 860,800 million British thermal
units per day in 2000 to 1,047,700 million British thermal units in 2001. Prices
of financial and physical natural gas marketed decreased from an average of
$2.77 per million British thermal units in 2000 to $2.14 per million British
thermal units in 2001.
Earnings in 2001 included a $4.4 million after-tax charge ($0.17 per share) for
a financial exposure to Enron Corporation and certain of its subsidiaries now in
bankruptcy. The exposure is primarily related to the value of a long-term swap
to provide natural gas to a power plant. We have taken action to mitigate this
exposure. By negotiations or by appropriate legal action filed in U.S.
Bankruptcy Court, Southern District of New York, we will seek authority to
"net," or offset, certain obligations with Enron and its subsidiaries, both
payable and receivable, among our subsidiaries. If we are successful in these
efforts, substantially all of the financial value of the fuel swap could be
recovered, and we would not have any remaining exposure to Enron and its
bankrupt subsidiaries.
Earnings in 2001 also reflect a $0.12 per share charge for employee stock bonus
awards and the funding of a new non-profit foundation to advance our charitable
and philanthropic endeavors. Both of these transactions were funded with Black
Hills Corporation common stock.
2000 Compared to 1999
Consolidated net income for 2000 was $52.8 million, compared to $37.1 million in
1999, or $2.37 per average common share in 2000, compared to $1.73 per average
common share in 1999. This equates to a 19.0 percent and 17.1 percent return on
year-end common equity in 2000 and 1999, respectively.
Earnings growth in 2000 was primarily due to strong natural gas marketing
activity, increased fuel production, expanded power generation and increased
wholesale off-system electric utility sales. Strong results in our integrated
energy business group were partially offset by losses in our communications
business. Unusual energy market conditions stemming primarily from gas and
electricity shortages in the West during the last part of 2000 contributed to
our strong financial performance. There was approximately a $0.40 contribution
to 2000 earnings per share due to higher prevailing prices of gas and
electricity and unusually wide gas trading margins.
Consolidated revenues more than doubled in 2000 to $1.6 billion compared to
1999. The growth in revenues in 2000 was a result of high energy commodity
prices and increased volumes of fuel marketed, primarily as a result of extreme
price volatility in the western markets, acquisitions and growth in the
integrated energy business group and increases in off-system sales by our
electric utility. Prices of financial and physical natural gas marketed
increased from an average of $1.38 per million British thermal units in 1999 to
$2.77 per million British thermal units in 2000.
The following business group and segment information does not include
intercompany eliminations.
32
Integrated Energy Group
2001 2000 1999
---- ---- ----
(in thousands)
Revenue:
Fuel marketing $1,185,049 $1,366,970 $614,228
Power generation 94,294 39,660 -
Oil and gas 33,408 20,328 13,052
Coal mining 31,800 30,530 31,095
---------- ---------- --------
Total revenue 1,344,551 1,457,488 658,375
Expenses 1,245,109 1,398,461 645,123
---------- ---------- --------
Operating income $ 99,442 $ 59,027 $ 13,252
========== ========== ========
Net income $ 56,246 $ 28,213 $ 11,588
========== ========== ========
EBITDA $ 137,715 $ 63,389 $ 23,807
========== ========== ========
EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is used by management and some investors as an indicator of
a company's historical ability to service debt. Management believes that an
increase in EBITDA is an indicator of improved ability to service existing debt,
to sustain potential future increases in debt and to satisfy capital
requirements. However, EBITDA is not intended to represent cash flows for the
period, nor has it been presented as an alternative to either operating income,
or as an indicator of operating performance or cash flows from operating,
investing and financing activities, as determined by generally accepted
accounting principles. EBITDA as presented may not necessarily be comparable to
other similarly titled measures of other companies.
The following is a summary of sales volumes of our coal, oil and natural gas
production and various measures of power generation:
2001 2000 1999
---- ---- ----
Tons of coal sold 3,518,000 3,050,000 3,180,000
Barrels of oil sold 445,500 334,000 318,000
Mcf of natural gas sold 4,619,500 3,274,000 2,791,000
Mcf equivalent sales 7,292,500 5,278,000 4,698,000
MWs of independent power
capacity in service 617 250 -
MWs of independent power
capacity under construction 364 470 -
The following is a summary of average daily fuel marketing volumes:
2001 2000 1999
---- ---- ----
Natural gas - MMBtus 1,047,700 860,800 635,500
Crude oil - barrels 36,500 44,300 19,270
Coal - tons 6,100 4,400 4,500
2001 Compared to 2000
Net income of our integrated energy group nearly doubled in 2001 compared to
2000. These strong earnings resulted primarily from the unusually high prices of
natural gas and high gas trading margins received in western markets during the
first half of 2001, an increase in volumes marketed and fuel production, and
expanded power generation.
33
In addition, in 2001, we reached a settlement of ongoing litigation with
PacifiCorp concerning rights and obligations under a coal supply agreement under
which PacifiCorp purchased coal from our coal mine to meet the coal requirements
of the Wyodak Power Plant. As a result of this settlement, we recognized $5.6
million pre-tax non-operating income. In addition, we sold the "North Conveyor
System" which resulted in a $2.6 million pre-tax gain. See Note 10 of Notes to
Consolidated Financial Statements.
The integrated energy business group's revenues decreased 8 percent in 2001
compared to 2000. A full year of independent power operations revenues related
to the July 2000 acquisition of Indeck Capital and an increase in fuel
production revenue was offset by decreased gas marketing revenue. Although daily
volumes of natural gas marketed increased 22 percent, gas marketing revenues
declined due to a decrease in prices of financial and physical natural gas
marketed from an average of $2.77 per million British thermal units in 2000 to
$2.14 per million British thermal units in 2001.
The integrated energy business group's total operating expenses decreased 11
percent due to a decrease in the cost of sales related to lower commodity
prices. EBITDA and operating income increased over 117 percent and 68 percent,
respectively from 2000 levels due to the decline in operating expenses and
higher production volumes.
2000 Compared to 1999
Net income of our integrated energy group increased 144 percent in 2000 compared
to 1999. Operating expenses, operating income and EDITDA increased over 117
percent, 345 percent and 166 percent, respectively. These increases resulted
primarily from our gas marketing operations--which experienced a dramatic
increase in both trading volumes and margins, a significant increase in fuel
production volumes, record fuel and power prices and expanded power generation,
including the acquisition of Indeck Capital.
The integrated energy business group's revenues increased 121 percent in 2000
compared to 1999. The revenue increase was a direct result of gas and
electricity shortages in the West Coast markets and the closing of the Indeck
Capital acquisition. Daily volumes of natural gas marketed increased 35 percent.
Fuel Marketing
Our fuel marketing companies produced the following results:
2001 2000 1999
---- ---- ----
(in thousands)
Revenue $1,185,049 $1,366,970 $614,228
Operating income (loss) 54,071 23,774 (2,248)
Net income (loss) 35,058 14,009 (185)
EBITDA 55,414 23,977 2,995
Our fuel marketing companies generate large amounts of revenue and corresponding
expense related to buying and selling energy commodities. Fuel marketing is
extremely competitive, and margins are typically very small.
2001 Compared to 2000
Earnings from the fuel marketing segment increased $21.1 million due
substantially to high gas margins received in the first half of 2001, as well as
a 22 percent increase in natural gas average daily volumes marketed in 2001
compared to 2000. Revenues decreased 13 percent from 2000 as a decline in
margins in the last half of 2001 more than offset higher daily volumes.
The unusual energy market conditions stemming primarily from natural gas and
electricity shortages in California and our ability to capture the higher
margins contributed significantly to the strong financial performance.
34
2000 Compared to 1999
The strong increase in earnings in 2000 compared to 1999 was due to the unusual
energy market conditions that existed in the last half of 2000 stemming from the
natural gas and electricity shortages in California. Average daily volumes of
natural gas marketed increased 35 percent in 2000 compared to 1999.
Power Generation
Our power generation segment produced the following results:
2001 2000 1999
---- ---- ----
(in thousands)
Revenue $94,294 $39,660 $ -
Operating income (loss) 27,455 20,374 (157)
Net income (loss) 1,576 3,241 (109)
EBITDA 44,363 17,630 (157)
2001 Compared to 2000
2001 reflects the first full year of operations of our power generation segment
and our continued expansion of generation facilities. We now own 617 net
megawatts in currently operating plants. Of these 617 net megawatts,
approximately 90 percent are under contracts or tolling arrangements with at
least one year remaining. An additional 364 megawatts of generating capacity is
currently under construction. Substantially all of this output will be sold
pursuant to existing long-term contracts. The increased production capacity was
offset by a $4.4 million after-tax charge for Enron exposure, reserves for
exposure to western power markets and reduced water flow at hydro power plants
in New York.
2000 Compared to 1999
Results from the power generation segment were not significant in 1999. In July
2000, we completed the acquisition of Indeck Capital, representing a significant
advancement of our position in the power generation segment. At December 31,
2000 we owned 250 net megawatts of generation in operating plants and had 470
megawatts of generating capacity under construction.
Oil and Gas
Oil and gas operating results were as follows:
2001 2000 1999
---- ---- ----
(in thousands)
Revenue $33,408 $20,328 $13,052
Operating income 15,193 7,906 3,978
Net income 10,197 4,992 2,462
EBITDA 23,033 12,005 6,392
The following is a summary of our oil and gas reserves at December 31:
2001 2000 1999
---- ---- ----
Barrels of oil (in thousands) 4,055 4,413 4,109
Mcf of natural gas 24,071 18,404 19,460
Total in Mcf equivalents 48,401 44,882 44,114
35
These reserves are based on reports prepared by Ralph E. Davis Associates, Inc.,
an independent consulting and engineering firm. Reserves were determined using
constant product prices at the end of the respective years. Estimates of
economically recoverable reserves and future net revenues are based on a number
of variables, which may differ from actual results. We intend to increase our
net proved reserves by selectively increasing our oil and gas exploration and
development activities and by acquiring producing properties.
2001 Compared to 2000
Record net income in 2001 was primarily a result of a 27 percent increase in the
average price received and a 38 percent increase in production volumes. The
increase in gas reserves at December 31, 2001 was due to strong drilling results
and reserve acquisitions.
In 2001, we acquired the operating and non-operating interests in 74 gas and oil
wells located in Colorado and Wyoming from Stewart Petroleum Corporation of
Denver, Colorado, for approximately $10 million. The acquired interest in these
fuel assets represents approximately 10 billion cubic feet equivalent of natural
gas. The acquisition increased our proved reserves by approximately 22 percent
(based on year-end 2000 reserve estimates) and our current production rates by
10 percent.
2000 Compared to 1999
The increase in net income in 2000 was primarily the result of record natural
gas prices, higher crude oil prices, and a significant increase in production
volumes. The increase in economically recoverable oil reserves at December 31,
2000 was due to improved product prices.
Coal Mining
Coal mining results were as follows:
2001 2000 1999
---- ---- ----
(in thousands)
Revenue $31,800 $30,530 $31,095
Operating income 6,586 8,794 12,606
Net income 11,591 7,173 9,715
EBITDA 18,468 11,361 14,965
2001 Compared to 2000
Coal mining earnings increased $4.4 million as a result of a coal contract
settlement, a gain on the sale of mining equipment and a 15 percent increase in
tons sold, partially offset by lower average coal prices due to a coal contract
settlement and an increase in mining related expenses. Tons of coal sold
increased primarily due to the commencement of sales through our train load-out
facility.
In 2001, we reached a settlement of ongoing litigation with PacifiCorp
concerning rights and obligations under a coal supply agreement under which
PacifiCorp purchased coal from our coal mine to meet the coal requirements of
the Wyodak Power Plant. As a result of this settlement, we recognized $5.6
million pre-tax non-operating income. In addition, we sold the "North Conveyor
System" which resulted in a $2.6 million pre-tax gain. See Note 10 of Notes to
Consolidated Financial Statements.
2000 Compared to 1999
A planned five-week outage at the Wyodak Plant resulted in lower coal sales and
earnings in 2000 compared to 1999.
36
Electric Utility Group
2001 2000 1999
---- ---- ----
(in thousands)
Revenue $212,355 $173,308 $133,222
Operating expenses 128,247 105,100 80,936
-------- -------- --------
Operating income $ 84,108 $ 68,208 $ 52,286
======== ======== ========
Net income $ 45,238 $ 37,100 $ 27,362
======== ======== ========
EBITDA $ 96,189 $ 83,367 $ 67,804
======== ======== ========
We currently have a winter peak of 344 megawatts established in December 1998
and a summer peak of 392 megawatts established in August 2001. We own 395
megawatts of electric utility generating capacity and purchase an additional 65
megawatts under a long-term agreement (decreasing to 60 megawatts in 2002). An
additional 40 megawatts of generating capacity is currently under construction.
2001 Compared to 2000
Electric revenue increased 23 percent in 2001 compared to 2000. The increase in
electric revenue in 2001 was primarily due to a 78 percent increase in wholesale
off-system sales at an average price that was 27 percent higher than the average
price in 2000. The increase in off-system sales was driven by high spot market
prices for energy in early 2001, which enabled us to generate more energy from
our combustion turbine facilities, including the Neil Simpson combustion
turbine, which we placed into commercial operation in June 2000. Megawatt-hours
generated from our oil-fired diesel and natural gas-fired combustion turbines
were 440,368 in 2001, compared to 305,767 in 2000. Historically, market prices
were not sufficient to support the economics of generating from these
facilities, except to meet peak demand and as standby use for native load
requirements.
Firm kilowatt-hour sales increased 2 percent in 2001. Residential and commercial
sales increases of 3 percent in 2001 were partially offset by a slight decrease
in industrial sales, primarily due to load reductions at Homestake Gold Mine.
Degree days, a measure of weather trends, were 3 percent below normal in 2001
and 4 percent below 2000.
Revenue per kilowatt-hour sold was 7.0 cents in 2001 compared to 6.4 cents in
2000. The number of customers in the service area increased to 59,237 from
58,601 in 2000. The increase in the revenue per kilowatt-hour sold in 2001 is
due to a 41 percent increase in wholesale off-system sales to 965,030
megawatt-hours and strong average wholesale power prices.
Electric utility operating expenses increased 22 percent in 2001 primarily due
to a 29 percent increase in purchased power costs and a 14 percent increase in
the average cost of generation. The increase in the average cost of generation
was primarily associated with the operation of certain gas-fired combustion
turbines.
In addition, 2001 results include a $2.0 million after-tax non-cash charge
related to the contribution of Black Hills Corporation Common Stock to the newly
formed Black Hills Corporation Foundation. This Foundation was created to
enhance our longstanding practice of giving back to our communities. Through the
Foundation, we may strengthen our service to our valued customers and fellow
citizens for generations to come.
2000 Compared to 1999
Electric revenue increased 30 percent in 2000 compared to 1999. The increase in
electric revenue in 2000 was primarily due to a 381 percent increase in
wholesale off-system sales at an average price that was 3 times higher than the
average price in 1999. The increase in off-system sales was driven by high spot
market prices for energy in late 2000, which enabled us to generate more energy
from our combustion turbine facilities, including the Neil Simpson combustion
turbine, which we placed into commercial operation in June 2000. Megawatt-hours
generated from our oil-fired diesel and natural gas-fired combustion turbines
were 305,767 in 2000 compared to 25,882 in 1999.
37
Firm kilowatt-hour sales increased 3 percent. Residential and commercial sales
increases of 4 percent were partially offset by a 2 percent decrease in
industrial sales, primarily due to load reductions at Homestake Gold Mine.
Degree days, a measure of weather trends, were 16 percent above 1999 and 1
percent above normal.
Revenue per kilowatt-hour sold was 6.4 cents in 2000 compared to 5.4 cents in
1999. The number of customers in the service area increased to 58,601 in 2000
from 57,709 in 1999. The increase in the revenue per kilowatt-hour sold in 2000
is due to a 54 percent increase in wholesale off-system sales to 684,378
megawatt-hours and robust wholesale power prices.
Electric utility operating expenses increased by 30 percent in 2000 primarily
due to increased fuel, purchased power, and operating and maintenance expenses,
partially offset by lower depreciation. Fuel expense in 2000 included the cost
associated with the additional combustion turbine generation.
Communications Group
2001 2000 1999
---- ---- ----
(in thousands)
Revenue - external* $ 20,258 $ 7,689 $ 278
Revenue - intersegment* 4,250 3,682 3,145
Operating expenses 37,758 23,857 7,070
--------- -------- -------
Operating loss $(13,250) $(12,486) $(3,647)
======== ======== =======
Net loss $(12,300) $(11,382) $ (968)
======== ======== =======
EBITDA $ (3,142) $ (6,484) $(1,659)
========= ======== =======
- ---------------------------
*External revenue is revenue from our broadband communications business.
Intersegment revenue is primarily revenue from our information services company
derived from providing services to our other business segments. This
intersegment revenue and associated expenses are eliminated in the consolidation
process.
2001 2000 1999
---- ---- ----
Residential customers 15,660 8,368 143
Business customers 2,250 646 110
Fiber optic backbone miles 242 210 200
Hybrid fiber coaxial cable miles 737 588 100
In September 1998, we formed our broadband communications business to provide
facilities-based communications services for Rapid City and the northern Black
Hills of South Dakota. We have invested approximately $125 million in
state-of-the-art technology that offers local and long distance telephone
service, expanded cable television service, Internet access, and high-speed data
and video services. We began serving communications customers in late 1999 and
market our services to schools, hospitals, cities, economic development groups,
and business and residential customers. The build-out is approximately 85
percent complete at December 31, 2001. Losses are expected to continue as we
proceed with building the network and increasing the customer base. We expect
our communications group will sustain approximately $6.5 million in net losses
in 2002, with annual losses decreasing thereafter and profitability expected by
2004. The recovery of capital investment and future profitability are dependent
primarily on our ability to attract new customers. If we are unable to attract
additional customers or technological advances make our network obsolete, we
could have a material write-down of assets.
2001 Compared to 2000
Our customer base nearly doubled in 2001 to 15,660 residential customers and
2,250 business customers. The increase in revenues from a larger customer base
in 2001 was partially offset by increases in reserves for inventory and carrier
billings and increased interest expense. Operating expense increased due to the
expansion of the business. Operating performance in 2001 was in line with our
expectations.
38
2000 Compared to 1999
Operating losses in 2000 were attributable to increased interest, depreciation
and operating expenses. Operating losses in 1999 were primarily due to start-up
organizational costs, increased depreciation expense and increased interest
expense associated with the capital deployment.
Critical Accounting Policies
We prepare the consolidated financial statements in conformity with accounting
principles generally accepted in the United States. We are required to make
certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. The significant accounting policies which we believe are the most
critical in understanding and evaluating our reported financial results include
the following:
Valuation of Long-Lived Assets
We periodically review the carrying value of our long-lived assets, including
goodwill and other intangibles, for continued appropriateness. This review is
based upon our projections of anticipated future cash flows. If the anticipated
future cash flows are less than our carrying value, then a permanent non-cash
write-down is required to be charged to earnings. Although we believe our
estimates of future cash flows are reasonable, different assumptions regarding
such cash flows could materially affect our evaluations.
Full Cost Method of Accounting for Oil and Gas Activities
We account for our oil and gas activities under the full cost method whereby all
productive and nonproductive costs related to acquisition, exploration and
development drilling activities are capitalized. These costs are amortized using
a unit-of-production method based on volumes produced and proved reserves. Any
conveyances of properties, including gains or losses on abandonments of
properties, are treated as adjustments to the cost of the properties with no
gain or loss recognized. Net capitalized costs are subject to a "ceilings test"
that limits such costs to the aggregate of the present value of future net
revenues of proved reserves and the lower of cost or fair value of unproved
properties. This method values the reserves based upon actual oil and gas prices
at the end of each reporting period adjusted for contracted price changes. If
the net capitalized costs exceed the full-cost ceiling, then a permanent
non-cash write-down is required to be charged to earnings in that reporting
period. Although our net capitalized costs were less than the full cost ceiling
at December 31, 2001, we can make no assurances that a write-down in the future
will not occur depending on oil and gas prices at that point in time. In
addition, we rely on an independent consulting and engineering firm to determine
the amount of our proved reserves based on a number of assumptions about
variables. We can make no assurances that these assumptions will not differ from
actual results.
Fair Value of Derivative Instruments
Derivative instruments used in our trading activities are recorded at fair
value, and realized and unrealized gains and losses are recorded as a component
of income. Fair values are based on listed market prices, where possible. If
listed market prices are not available, fair value is determined based on other
relevant factors. Fair values for certain derivative contracts are derived from
pricing models that consider current market and contractual prices for the
underlying financial instruments or commodities, as well as time value and yield
curve or volatility factors underlying the positions.
Pricing models and their underlying assumptions impact the amount and timing of
unrealized gains and losses recognized, and the use of different pricing models
or assumptions could produce different financial results. Changes in the
commodity markets will impact our estimates of fair value in the future. To the
extent financial contracts have extended maturity dates, our estimates of fair
value may involve greater subjectivity due to the lack of transparent market
data available upon which to base modeling assumptions.
39
Counterparty Credit Risk
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current creditworthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issue that we have identified. While most credit losses have
historically been within our expectations and provisions established, we cannot
guarantee that we will continue to experience the same credit loss rates that we
have in the past or that an investment grade counterparty will not default as
was the case with Enron in 2001. We accrued for a $4.4 million after-tax loss in
2001 in regards to the Enron bankruptcy, which was outside our original
provision. In addition, in 2001 we accrued approximately $1.0 million after-tax
loss for payments owed by Southern California Edison, however this payment was
collected in the first quarter of 2002.
Pension and Other Postretirement Plans
The determination of our obligation and expense for pension and other
postretirement benefits is dependent on the use of certain assumptions by
actuaries in calculating the amounts. Those assumptions are described in Note 11
of our Notes to Consolidated Financial Statements and include, among others, the
discount rate, the expected long-term rate of return on assets and the rate of
increase in compensation levels and healthcare benefits. In accordance with
generally accepted accounting principles, actual results that differ from our
assumptions are accumulated and amortized over future periods and therefore,
generally affect our recognized expense and recorded obligation in future
periods. Although we believe our assumptions are appropriate, significant
differences in our actual experience or significant changes in our assumptions
may materially affect our pension and other postretirement obligations and our
future expense.
Liquidity and Capital Resources
Cash Flow Activities
2001
In 2001, we generated sufficient cash flow from operations to meet our operating
needs, to pay dividends on common and preferred stock, to pay long-term debt
maturities and to fund a material amount of our property additions. We continue
to fund property and investment additions primarily related to construction of
additional electric generation facilities for our integrated energy business
group through a combination of operating cash flow, increased short-term debt
and long-term non-recourse project financing. Cash flows from operations
increased $107 million, primarily due to increased net income, depreciation,
deferred taxes and decreased working capital.
In the second quarter of 2001, we issued 3.4 million shares of common stock
through an underwritten public offering at $52 per share. Total net proceeds of
approximately $163 million were used to repay a portion of current indebtedness
under revolving credit facilities, to fund various power plant construction
projects and for general corporate purposes.
Also, in the second quarter of 2001 we acquired the Fountain Valley facility, a
240 megawatt generation facility located near Colorado Springs, Colorado,
featuring six LM-6000 simple-cycle, gas-fired turbines from Enron Corporation.
The facility became operational in the third quarter of 2001. Total project cost
was approximately $183 million that we financed primarily with non-recourse
debt. We have an 11-year contract with Public Service Company of Colorado to
utilize the facility for peaking purposes under a tolling arrangement in which
we assume no fuel risk.
In the third quarter of 2001, we purchased a 277 megawatt gas-fired
co-generation power plant project located in North Las Vegas, Nevada from Enron
North America, a wholly owned subsidiary of Enron Corporation. The facility
currently has a 53 megawatt co-generation power plant in operation of which we
own 50 percent. Although we only
40
own 50 percent of this power plant, under generally accepted accounting
principles we are required to consolidate 100 percent of this plant. Most of the
power from the 53 megawatt facility is sold under a long-term contract expiring
in 2024. In addition, the project also has a 224 megawatt combined-cycle
expansion under construction, of which we own 100 percent. The facility is
scheduled to be fully operational in third quarter 2002 and will utilize LM-6000
technology. The power to be generated by the expansion project is also under a
long-term sales contract that expires in 2017. Total cost of the project is
estimated to be approximately $330 million of which $240 million was expended
and financed with short-term borrowings at December 31, 2001. We plan on
financing the transaction primarily with non-recourse project level debt in
2002.
In addition, during the third quarter of 2001, we completed a $400 million
revolving credit facility, which replaced our previous short-term credit lines,
which totaled $290 million.
2000
In 2000, we generated sufficient cash flow from operations to meet our operating
needs, to pay common and preferred dividends and to pay long-term debt
maturities. We funded property additions primarily related to construction of
additional electric generation facilities for our integrated energy business
group through a combination of operating cash flow, increased short-term debt
and long-term non-recourse project financing. Investing and financing activities
increased primarily as a result of the acquisition of Indeck Capital in July
2000 and construction of several generating facilities. Cash flows from
operations decreased $2.9 million, primarily due to increased working capital
partially offset by increased net income and depreciation. We expect increased
operating cash flows resulting from our investing activities to support the
additional indebtedness.
As part of our acquisition of Indeck Capital, we incurred $40.3 million of
additional debt through an increase in borrowings on our short-term credit
facilities, which were used to repay certain obligations of Indeck Capital. In
addition, we issued 1.537 million shares of common stock and 4,000 shares of
convertible preferred stock to the former Indeck Capital shareholders.
Dividends
Dividends paid on our common stock totaled $1.12 per share in 2001. This
reflected increases approved by our board of directors from $1.08 per share in
2000 and $1.04 per share in 1999. All dividends were paid out of current
earnings. Our three-year annual dividend growth was 3.8 percent. In January
2002, our board of directors increased the quarterly dividend 3.6 percent to 29
cents per share. If this dividend is maintained during 2002, it will be
equivalent to $1.16 per share, an annual increase of 4 cents per share. The
determination of the amount of future cash dividends, if any, to be declared and
paid will depend upon, among other things, our financial condition, funds from
operations, the level of our capital expenditures, restrictions under our credit
facilities and our future business prospects.
Short-Term Liquidity and Financing Transactions
Our principal sources of short-term liquidity are our revolving bank facilities
and cash provided by operations. As of December 31, 2001 we had available a $200
million 364-day facility and a $200 million three-year facility both dated
August 28, 2001. In addition, on January 4, 2002, we entered into a $50.0
million bridge credit agreement that expires June 30, 2002. These bank
facilities can be used to fund our working capital needs, for general corporate
purposes and to provide liquidity for a commercial paper program if implemented.
At December 31, 2001, we had $360 million of bank borrowings outstanding under
these facilities. The corresponding amount outstanding at February 28, 2002 was
$384 million. After inclusion of applicable letters of credit, the remaining
borrowing capacity under the bank facilities was $7.0 million and $32.0 million
at December 31, 2001 and February 28, 2002, respectively.
The above bank facilities include covenants that are common in such
arrangements. Such covenants include a consolidated net worth in an amount of
not less than the sum of $375 million and 50 percent of the aggregate
consolidated net income beginning June 30, 2001; a recourse leverage ratio not
to exceed 0.65 to 1.00; an interest
41
coverage ratio of not less than 3.00 to 1.00; and a credit rating of at least
"BBB-" from Standard & Poor's or "Baa3" from Moody's Investor Service. If these
covenants are violated, it would be considered an event of default and the
lender has the right to terminate the remaining commitment and accelerate the
principal and interest outstanding to become immediately due. In addition,
certain of our interest rate swap agreements with a $150 million notional amount
at December 31, 2001 include cross-default provisions. These provisions would
allow the counterparty the right to terminate the swap agreement and liquidate
at a prevailing market rate, in the event of default.
In addition, Enserco Energy, Inc., our gas marketing unit, has a $75.0 million
uncommitted, discretionary line of credit to provide support for the purchase of
natural gas. The line of credit is secured by all of Enserco's assets. We
provide no other guarantees to the lender under this facility. At December 31,
2001 and 2000, there were outstanding letters of credit issued under the
facility of $36.2 million and $69.8 million, respectively, with no borrowing
balances on the facility.
Similarly, Black Hills Energy Resources, Inc., our oil marketing unit, has a
$25.0 million uncommitted, discretionary credit facility secured by all of its
assets. We provide no other guarantees to the lender under this facility. This
line of credit provides credit support for the purchases of crude oil by Black
Hills Energy Resources. At December 31, 2001 and 2000, Black Hills Energy
Resources had letters of credit outstanding of $4.4 million and $8.5 million,
respectively, and no balance outstanding on its overdraft line.
Based upon our expected cash flows from operations, expected project financings
for the year, credit facility capacity, and projected cash needs in the near
term, we do not expect any liquidity issues in the foreseeable future.
On March 15, 2002, we closed on $135 million of senior secured financing for our
Arapahoe and Valmont Facilities, 210 megawatts of gas-fired generation located
in the Denver, Colorado area. Proceeds from this financing were used to
refinance $53.8 million of an existing seven-year senior secured term facility,
pay down approximately $50.0 million of short-term credit facility borrowings
and approximately $31.0 million will be used for future project construction
costs.
In addition, we plan on seeking long-term project-level non-recourse financing
for the Las Vegas Project, a 277 megawatt gas-fired generation complex located
in North Las Vegas, Nevada during 2002. Total project costs are estimated to be
$330 million of which approximately $240 million was expended as of December 31,
2001 and was funded with short-term credit facility borrowings.
Our consolidated net worth was $515 million at December 31, 2001. The long-term
debt component of our capital structure at December 31, 2001 and 2000 was 45
percent and 52 percent, respectively. Our total debt leverage (long-term debt
and short-term debt) was 61 percent and 65 percent at December 31, 2001 and
2000, respectively.
42
The following information is provided to summarize cash obligations and
commercial commitments. As shown in the table, we have $35.9 million of
long-term debt maturing in 2002.
Payments Due by Period
------------------------------------------------------------------------------------------
(in thousands)
Contractual Less 1-3 4-5 After 5
Obligations Total Than 1 Year Years Years Years
----------- ----- ----------- ----- ----- -----
Notes payable $ 361,240 $361,240 $ - $ - $ -
First mortgage bonds 130,316 18,018 6,978 3,910 101,410
Project financing debt (a) 293,016 17,839 63,101 153,611 58,465
Other long-term debt 28,370 47 187 175 27,961
Unconditional
purchase obligations (b) 232,081 25,815 36,656 32,159 137,451
Other long-term obligations (c) 149,255 - 11,324 12,942 124,989
---------- -------- -------- -------- --------
Total contractual cash obligations
$1,194,278 $422,959 $118,246 $202,797 $450,276
========== ======== ======== ======== ========
(a) Approximately 74 percent of the floating rate term loans has been hedged
with an interest rate swap moving the floating rates to fixed rates. See -
"Financing Activities under Market Risk Disclosures."
(b) Unconditional purchase obligations include the capacity costs associated
with a purchase power agreement with PacifiCorp and certain coal purchase,
gas purchase, and gas transportation agreements. The energy charge under
the purchase power agreement and the commodity price under the gas purchase
contract are variable costs which for purposes of estimating our future
obligations, were calculated using existing prices at December 31, 2001.
(c) Black Hills Generation, a subsidiary in our power generation segment, has
entered into agreements with Wygen Funding, Limited Partnership to lease
the Wygen Plant, a 90 megawatt coal-fired power plant under construction in
Campbell County, Wyoming. Wygen Funding is a special purpose entity that
owns the Wygen Plant and has financed the project. Total cost of the
project is estimated to be $130 - $140 million. Neither Wygen Funding, its
owners, nor its officers are related to us, and other than the lease
transaction and obligations incurred as a result of the transaction, we
have no obligation to provide additional funding or issue securities to
Wygen Funding. Lease payments are based on final construction and financing
costs and are currently estimated to be approximately $6.5 million per year
based on five-year treasury rates. Lease payments will begin after
substantial completion of construction scheduled to occur in the first
quarter of 2003. The lease will be accounted for as an operating lease. The
initial lease term is five years with two five-year renewal options and
includes a purchase option equal to the adjusted acquisition cost. The
adjusted acquisition cost is essentially equal to the cost of the project.
If Black Hills Generation elects to terminate and not renew the lease and
not purchase the project, then it must make a termination payment equal to
the lesser of 83.5 percent of the adjusted acquisition cost or the
shortfall proceeds received from the sale of the project. Black Hills
Corporation has guaranteed the agreements.
Amount of Commitment Expiration
Per Period
--------------------------------------------------------------------------------------
(in thousands)
Other Total
Commercial Amounts Less 1-3 4-5 After 5
Commitments Committed Than 1 Year Years Years Years
----------- --------- ----------- ----- ----- -----
Letters of credit $74,300 $73,400 $900 $ - $ -
Reclamation liability (a) 18,161 - - - 18,161
------- ------- ---- ----- -------
Total commercial commitments $92,461 $73,400 $900 $ - $18,161
======= ======= ==== ===== =======
43
(a) Under our coal mining permit, we are required to reclaim all land where we
have mined coal reserves. The cost of reclaiming the land is accrued as the
coal is mined. While the reclamation process takes place on a continual
basis, much of the reclamation occurs over an extended period after we mine
the area. Approximately $0.7 million is charged to operations as
reclamation expense annually. As of December 31, 2001, accrued reclamation
costs were approximately $18.2 million.
Credit Ratings
As of February 28, 2002, our corporate credit rating is "A3" by Moody's
Investors Service and "BBB" by Standard & Poor's. In addition, our utility's
first mortgage bonds are rated "A1" and "BBB+" by Moody's and Standard & Poor's,
respectively. These security ratings are subject to revision and/or withdrawal
at any time by the respective rating organizations.
Capital Requirements
Our primary capital requirements for the three years ended December 31, 2001
were as follows:
2001 2000 1999
---- ---- ----
(in thousands)
Property and investment additions:
Integrated energy $532,788 $130,332 $73,656
Electric utility 41,313 25,257 31,911
Communications and other 20,055 59,377 49,042
Common stock dividends 28,517 23,527 22,602
Maturities/redemptions of long-term debt 13,960 1,330 1,330
-------- -------- --------
$636,633 $239,823 $178,541
======== ======== ========
Our capital additions for 2001 were $594 million. The major capital items for
the year included the following:
o Acquisition of the 240 megawatt Fountain Valley gas-fired turbine
generation facility located near Colorado Springs, Colorado which was
placed in service in third quarter 2001.
o Acquisition of the 277 megawatt gas-fired co-generation power plant project
located near Las Vegas, Nevada of which 53 megawatts were operational and
224 megawatts is expected to be placed in service in the third quarter of
2002.
o Construction of the 50 megawatt combined-cycle expansion at our Arapahoe
site in Denver, Colorado, which is expected to be placed in service in
mid-2002.
o Completion of construction of the 40 megawatt gas-turbine expansion at our
Valmont, Colorado site, which we placed in service in July 2001.
o Completion of construction of the 40 megawatt gas-fired combustion turbine
unit at our Wyodak site, which we placed in service in May 2001.
o Completion of the 18 megawatt combined-cycle upgrade of the Harbor facility
near Long Beach, California.
o Acquisitions of various interests in partnerships in which we previously
held a minority interest.
o Acquisition of operating and non-operating interests in 74 gas and oil
wells from Stewart Petroleum Corporation.
o Construction of a 40 megawatt gas-fired turbine known as the Lange project,
which is expected to be placed in service in early 2002.
o Construction of our communications fiber optic network.
44
Forecasted capital requirements for projected plant construction, other
integrated energy investments, regulated utility capital improvements and
completion of the communications network are as follows:
2002 2003 2004
---- ---- ----
(in thousands)
Integrated energy $ 148,996 $210,161 $336,489
Electric utility 47,745 24,180 15,271
Communications 16,312 4,269 3,230
--------- -------- --------
$ 213,053 $238,610 $354,990
========= ======== ========
Our integrated energy business group's forecasted capital requirements include
the following:
o Completion of construction of the 224 megawatt gas-fired co-generation
power plant project located near Las Vegas, Nevada which is expected to be
placed in service in the third quarter of 2002.
o Completion of construction of a 50 megawatt combined-cycle expansion at our
Arapahoe, Colorado site (expected in mid-2002).
o Deployment of $500 million for generating projects and acquisitions of
proven producing natural gas properties and low-risk exploration and
development drilling in years 2003-2004.
We expect to finance our integrated energy business group's purchase and
construction of electric generating facilities, primarily with long-term,
non-recourse project level debt. We expect that any project-level debt will
contain significant restrictions on distributions of cash from the project to
us.
In addition to the above forecasted capital items we will lease the Wygen Plant,
a 90 megawatt coal-fired plant under construction at our Wyodak, Wyoming site
through an off-balance sheet financing arrangement discussed above under
Short-term Liquidity and Financing Transactions. Because of the leasing
arrangement, the $130 - $140 million total construction cost of the plant is not
included in the above three-year capital expenditure forecast. Wygen will be
similar in design to our Neil Simpson II facility, which was completed in 1995
at the same site. The plant will run on low-sulfur coal fed by conveyor from our
adjacent Wyodak coal mine and will use the latest available environmental
control technology. We anticipate that the Wygen Plant will be operational in
the first quarter of 2003.
Forecasted capital expenditures for our electric utility operations include
completion of construction of a 40 megawatt gas-fired turbine known as the Lange
project expected to be in service in mid-2002, construction of an AC/DC/AC Tie
which is expected to be placed in service in 2003, transmission and substation
projects, re-build projects on existing transmission lines, distribution
projects in response to customer requests for electric service, capital projects
associated with our utility's existing generation plants, and other
miscellaneous items.
Our communications group's capital requirements forecast primarily consists of
2002 costs related to the completion of our fiber optic network in Rapid City
and the northern Black Hills of South Dakota, nominal extensions of the base
network to reach additional customers, and capital improvements to the existing
network infrastructure.
45
Market Risk Disclosures
Our operations and financial results are impacted by numerous factors including,
but not limited to, commodity price risk, interest rate risk and counterparty
risk. We are exposed to commodity price variability in nearly all of our core
energy marketing and trading businesses. In addition, fuel requirements for our
gas-fired generation and our natural long position in crude oil and natural gas
production introduce additional commodity price risk.
Fuel Marketing Activities
We market natural gas, coal, and crude oil in specific areas of the United
States and Canada. We offer wholesale fuel marketing and price risk management
products and services to a variety of customers. These activities are subject to
numerous risks, including commodity price risk.
We have adopted Risk Management Policies and Procedures (RMP&P) covering all
marketing activities. These RMP&P's have been approved by our Board of Directors
and are routinely reviewed by the Audit Committee of the Board of Directors. The
RMP&P include, but are not limited to, trader limits, position limits and credit
exposure limits.
We employ risk management methods to mitigate our commodity price risk. As a
general policy, we only permit speculation with limited "open" positions as
defined in the RMP&P. Therefore, substantially all of our marketing activities
are fully hedged or back-to-back positions; in other words, each sale is matched
with a purchase.
To maintain compliance with these RMP&P and mitigate our commodity price risk,
we routinely utilize fixed price forward purchase and sales contracts and
over-the-counter swaps and options. We attempt to balance our fixed price
physical and financial purchase and sale commitments in terms of volume and
timing of performance and delivery obligations. However, we may at times have a
bias in the market, within established guidelines, resulting from the management
of our portfolio. In addition, we may, at times, be unable to fully hedge our
portfolio for certain market risks as a result of marketplace illiquidity and
other factors.
Our fuel marketing operations fall under the purview of Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities" and Emerging Issues Task Force Issue No. 98-10,
"Accounting for Energy Trading and Risk Management Activities" (EITF 98-10). As
such, these activities are accounted for under mark-to-market accounting. The
fair values are recorded as either Derivative assets and/or Derivative
liabilities on the accompanying Consolidated Balance Sheet. The net gains or
losses are recorded as Revenues in the accompanying Consolidated Statements of
Income.
46
The contract or notional amounts and terms of our derivative commodity
instruments held for trading purposes at December 31, 2001 and 2000, are set
forth below:
2001 2000
---- ----
Maximum Maximum
Notional Term Notional Term
Amounts in Years Amounts in Years
-------- -------- -------- --------
(thousands of MMBtu's)
Natural gas basis swaps purchased 9,882 1 25,578 2
Natural gas basis swaps sold 10,696 1 26,060 2
Natural gas fixed-for-float swaps purchased 10,646 2 6,476 1
Natural gas fixed-for-float swaps sold 11,815 2 7,361 1
Natural gas swing swaps purchased 465 1 - -
Natural gas swing swaps sold 930 1 - -
Natural gas physical purchases 13,159 1 - -
Natural gas physical sales 19,339 1 - -
(thousands of barrels)
Crude oil purchased 3,139 1 2,186 1
Crude oil sold 3,142 1 2,530 1
(thousands of tons)
Coal purchased 1,554 4 896 1
Coal sold 1,448 4 988 1
As required under SFAS 133 and EITF 98-10, derivatives and energy trading
activities were marked to fair value on December 31, 2001, and the gains and/or
losses recognized in earnings. The amounts related to the accompanying
Consolidated Balance Sheets and Statements of Income as of December 31, 2001 and
2000 are as follows (in thousands):
Current Non-current Current Non-current Unrealized
December 31, 2001 Assets Assets Liabilities Liabilities Gain
------ ------ ----------- ----------- ----
Natural gas $29,755 $ 661 $25,437 $953 $4,026
Crude Oil 6,267 - 5,497 - 770
Coal 1,192 467 1,018 - 641
------- ------ ------- ---- ------
$37,214 $1,128 $31,952 $953 $5,437
======= ====== ======= ==== ======
December 31, 2000
Natural gas $61,008 $ 391 $56,968 $3,532 $ 899
Crude oil 1,523 - 1,000 - 523
Coal 5,370 - 4,460 - 910
------- ------ ------- ------ ------
$67,901 $ 391 $62,428 $3,532 $2,332
======= ====== ======= ====== ======
At December 31, 2001, we had a mark to fair value unrealized gain of $5.4
million for our fuel marketing activities. Of this amount, $5.2 million was
current and $0.2 million was non-current. The current portion of unrealized
gains included $5.5 million gain associated with hedged transactions and $(0.3)
million loss associated with open positions. We anticipate that substantially
all of the current portion of unrealized gains for hedged transactions will be
realized during the next twelve months. Conversely, estimated and actual
realized gains or losses related to open positions will likely change during
2002 as market prices change from the December 31, 2001 estimates.
47
Non-trading Energy Activities
We produce natural gas and crude oil through our exploration and production
activities. These natural "long" positions, or unhedged open positions,
introduce commodity price risk and variability in our cash flows. We employ risk
management methods to mitigate this commodity price risk and preserve our cash
flows. We have adopted guidelines covering hedging for our natural gas and crude
oil production. These guidelines have been approved by our Board of Directors
and are routinely reviewed by our Audit Committee.
To mitigate commodity price risk and preserve cash flows, we use
over-the-counter swaps and options. These derivative instruments fall under the
purview of SFAS 133 and we elect to utilize hedge accounting as allowed under
this Statement.
At December 31, 2001, we had a portfolio of swaps to hedge portions of our crude
oil and natural gas production. These transactions were previously identified as
cash flow hedges, properly documented and met prospective effectiveness testing.
At year-end, these transactions met retrospective effectiveness testing criteria
and retained their cash flow hedge status.
At December 31, 2001, the derivatives were marked to fair value and were
recorded as Derivative assets or Derivative liabilities on the Consolidated
Balance Sheet. The effective portion of the gain or loss on these derivatives
was reported in other comprehensive income and the ineffective portion was
reported in earnings.
On January 1, 2001 (the transition adjustment date for SFAS 133 adoption), and
on December 31, 2001, we had the following swaps and related balances (in
thousands):
Accumulated
Maximum Non- Non- Other
Terms in Current current Current current Comprehensive
January 1, 2001 Notional Years Assets Assets Liabilities Liabilities Income (Loss) Earnings
-------- ----- ------ ------ ----------- ----------- ------------- --------
Crude oil swap 294,000 2 $ 33 $151 $ - $ - $ 184 $ -
Crude oil options 120,000 1 472 - - - 472 -
Natural gas swaps 1,581,000 1 - 3,411 - (3,411) -
------- ---- ------ ----- -------- ------
-
$ 505 $151 $3,411 $ - $ (2,755) $ -
======= ==== ====== ===== ======== ======
December 31, 2001
Crude oil swaps 90,000 1 $ 529 $ - $ - $ - $ 529 $ -
Natural gas swaps 1,216,000 1 1,593 - - - 1,463 130
------ ----- ------ ----- -------- ------
$2,122 $ - $ - $ - $ 1,992 $ 130
====== ===== ====== ===== ======== ======
*Crude in bbls, gas in MMBtu's
Most of our crude oil and natural gas hedges are highly effective, resulting in
very little earnings impact prior to realization. During 2001, we recorded $0.1
million in earnings due to ineffectiveness for certain natural gas swaps due to
basis risk.
All existing hedges at December 31, 2001 expire during the year ended December
31, 2002. The unrealized earnings gains or losses currently recorded in
accumulated other comprehensive income are expected to be realized in earnings
during 2002. Based on December 31, 2001 market prices, $2.0 million will be
realized and reported in earnings during 2002. These estimated realized gains
for 2002 were calculated using December 31, 2001 market prices. Estimated and
actual realized gains will likely change during 2002 as market prices change.
In addition, we acquired several natural gas swaps when we completed the Las
Vegas Cogeneration acquisition on August 31, 2001 (See Note 15). The project has
a long-term fixed price power sales agreement and an index-priced natural gas
purchase contract for 5,000 MMBtus per day through April 30, 2010. These swaps
fix the long-term purchase price of the index-priced natural gas purchase
contract. At acquisition close, the fair value of these swaps
48
was $6.0 million. These swaps were executed with Enron North America Corp.
(Enron), which is currently in bankruptcy proceedings.
These swaps are derivatives under SFAS 133. We elected to treat these
derivatives as cash flow hedges so that any gains or losses on the fair values
of the swaps could be deferred and subsequently recognized when the underlying
hedged natural gas was consumed in the plant. The swaps were properly documented
and met the criteria for cash flow hedges.
During the fourth quarter of 2001, we determined that it was probable that Enron
would default on its obligations to us in conjunction with these swaps. Upon
that determination, we ceased to account for these swaps as cash flow hedges. In
addition, we recognized a $6.0 million pre-tax valuation reserve in recognition
of Enron's probable performance default and resulting consequence that we would
not receive payment for these amounts. We have taken action to mitigate this
exposure. By negotiations or by appropriate legal action filed in U.S.
Bankruptcy Court, Southern District of New York, we will seek authority to "net"
or offset, certain obligations with Enron and its subsidiaries, both payable and
receivable, among our subsidiaries. If we are successful in these efforts,
substantially all of the financial value of the fuel swap could be recovered,
and we would not have any remaining exposure to Enron or its bankrupt
subsidiaries.
Financing Activities
We engage in activities to manage risks associated with changes in interest
rates. We have entered into floating-to-fixed interest rate swap agreements to
reduce our exposure to interest rate fluctuations associated with our floating
rate debt obligations. At December 31, 2001, these hedges met effectiveness
testing criteria and retained their cash flow hedge status. At December 31,
2001, we had $291.4 million of notional amount floating-to-fixed interest rate
swaps, having a maximum term of five years and a fair value of $(14.4) million.
These hedges are substantially effective and any ineffectiveness was immaterial.
In addition to the above interest rate swaps, we have entered into a $100
million forward starting floating-to-fixed interest rate swap to hedge the
anticipated floating rate debt financing related to the Las Vegas Cogeneration
expansion. The forward starting period for the swap is the second quarter of
2002, with a term of ten years. The swap will terminate and cash settle on its
forward starting date, based on the fair market value of the swap at the
starting date. At December 31, 2001, the swap had a fair market value of $2.3
million. The hedge has met effectiveness criteria. Upon completion of the
long-term financing of the project, any gain or loss on the fair market value of
the swap is anticipated to be amortized over the life of the long-term
financing.
On January 1, 2001 (the transition adjustment date for SFAS 133 adoption) and on
December 31, 2001, our interest rate swaps and related balances were as follows
(in thousands):
Weighted
Average Accumulated
Fixed Maximum Non- Non- Other
Interest Terms in Current current Current current Comprehensive
January 1, 2001 Notional Rate Years Assets Assets Liabilities Liabilities Income (Loss)
-------- ---- ----- ------ ------ ----------- ----------- - -------------
Swaps on project
financing $127,416 7.38% 5 $ - $ 265 $ 2,440 $5,332 $ (7,507)
======== ======= ======= ======== ====== =========
December 31, 2001
Swaps on project
financing $316,397 5.85% 4 $ - $5,746 $10,212 $5,949 $(10,415)
Swaps on corporate
debt 75,000 4.45% 3 - - 1,535 217 (1,752)
-------- ------- ------ ------- ------ --------
$391,397 $ - $5,746 $11,747 $6,166 $(12,167)
======== ======= ====== ======= ====== ========
49
We anticipate a portion of unrealized losses recorded in accumulated other
comprehensive income will be realized as increased interest expense in 2002.
Based on December 31, 2001 market interest rates, $11.7 million will be realized
as additional interest expense during 2002. Estimated and realized amounts will
likely change during 2002 as market interest rates change.
At December 31, 2001, we had $655.8 million of outstanding, floating-rate debt
of which $264.4 million was not offset with interest rate swap transactions that
effectively convert the debt to a fixed rate. A 100 basis point increase in
interest rates would cause interest expense to increase $2.6 million.
The table below presents principal (or notional) amounts and related weighted
average interest rates by year of maturity for our short-term investments and
long-term debt obligations, including current maturities (in thousands).
2002 2003 2004 2005 2006 Thereafter Total
Cash equivalents
Fixed rate $ 29,666 $ - $ - $ - $ - $ - $ 29,666
Long-term debt
Fixed rate $ 18,065 $ 3,122 $ 2,017 $ 2,026 $ 2,036 $128,565 $ 155,831
Average interest rate 6.98% 9.31% 9.50% 9.52% 9.54% 8.28% 8.20%
Variable rate (a) $ 17,839 $ 19,301 $ 21,126 $ 22,674 $ 135,285 $ 79,646 $ 295,871
Average interest rate 3.45% 3.45% 3.45% 3.45% 3.32% 3.48% 3.40%
Total long-term debt $ 35,904 $ 22,423 $ 23,143 $ 24,700 $ 137,321 $ 208,211 $ 451,702
Average interest rate 5.22% 4.27% 3.98% 3.95% 3.41% 6.44% 5.05%
(a) Approximately 74 percent of the variable rate debt has been hedged with
interest rate swaps moving the floating rates to fixed rates with an
average interest rate of 5.85 percent.
Credit Risk
Credit risk relates to the risk of financial loss resulting from non-performance
of contractual obligations by a counterparty. We maintain credit policies with
regards to our counterparties that we believe limit our overall credit risk.
For our fuel marketing, energy production and risk management activities, we
attempt to mitigate our credit risk by conducting a majority of our business
with investment grade companies, obtaining netting agreements where possible and
securing our exposure with less creditworthy counterparties through parental
guarantees, prepayments and letters of credit.
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current creditworthiness, as
determined by our review of their current credit information. We maintain a
provision for estimated credit losses based upon our historical experience and
any specific customer collection issue that we have identified. While most
credit losses have historically been within our expectations and provisions
established, we cannot guarantee that we will continue to experience the same
credit loss rates that we have in the past or that an investment grade
counterparty will not default as was the case with Enron in 2001.
At the end of the year, our credit exposure (exclusive of regulated utility
retail customers and communications) was concentrated with investment grade
companies. Approximately 85 percent of our credit exposure was with investment
grade companies. For the 15 percent credit exposure with non-investment grade
rated counterparties, approximately 60 percent of this exposure was supported
through letters of credit, prepayments, parental guarantees and asset liens.
50
Rate Regulation
Existing Rate Regulation
In June 1999, the South Dakota Public Utilities Commission approved a
settlement, which extended a rate freeze in effect since 1995 until January 1,
2005.
The South Dakota settlement provides that, absent an extraordinary event, we may
not file for any increase in our rates or invoke any fuel and purchased power
adjustment tariff which would take effect during the freeze period. The
specified extraordinary events are:
o new governmental impositions increasing annual costs for South Dakota
customers by more than $2.0 million;
o simultaneous forced outages of both our Wyodak plant and Neil Simpson II
plant projected to continue at least 60 days;
o forced outages occurring to either plant which continue for a period of
three months and are projected to last at least nine months;
o an increase in the Consumer Price Index at a monthly rate for six months
which would result in a 10 percent or higher annual inflation rate;
o the loss of a South Dakota customer or revenue from an existing South
Dakota customer that would result in a loss of revenue of $2.0 million or
more during any 12-month period;
o the cost of coal to our South Dakota customers increases and is projected
to increase by more than $2.0 million over the cost for the most recent
calendar year; and
o electric deregulation occurs as a result of either federal or state
mandate, which allows any of our customers to choose its provider of
electricity at any time during the freeze period.
During the freeze period, except as identified above, we are undertaking the
risks of:
o machinery failure;
o load loss caused by either an economic downturn or changes in regulation;
o increased costs under power purchase contracts over which we have no
control;
o government interferences; and
o acts of nature and other unexpected events that could cause material
losses of income or increases in costs of doing business.
However, the settlement anticipates that we will retain, during that period of
time, earnings realized from more efficient operations, sales from load growth,
and off-system sales of power and energy.
Over the last four years we have initiated an effort to enter into new contracts
with our largest industrial customers. The new contracts contain "meet or
release" provisions that grant us a five-year right to continue to serve a
customer at market rates in the event of deregulation. Additionally, through our
General Service Large Optional Combined Account Billing Tariff, we have allowed
general service customers to aggregate their loads. This tariff also provides us
with a five-year right to continue to serve those customers in the event of
deregulation. Our "meet or release" contracts currently total more than 124
megawatts of large commercial and industrial load. These contracts provide us
the assurance of a firm local market for our power resources, in the event
deregulation occurs. These industrial and large commercial customers, together
with our wholesale power sale agreements with the City of Gillette, Wyoming and
Montana-Dakota Utilities Company, equal approximately 50 percent of our
utility's firm load.
51
Regulatory Accounting
As it pertains to the accounting for our utility operations, we follow SFAS No.
71, "Accounting for the Effects of Certain Types of Regulation," and our
financial statements reflect the effects of the different ratemaking principles
followed by the various jurisdictions in which we operate. As a result of our
regulatory activity, a 50-year depreciable life for the Neil Simpson II plant is
used for financial reporting purposes. If we were not following SFAS 71, a 35-
to 40-year life would probably be more appropriate which would increase
depreciation expense by approximately $0.6 million per year. If rate recovery of
generation-related costs becomes unlikely or uncertain, due to competition or
regulatory action, these accounting standards may no longer apply to our
generation operations. In the event we determine that we no longer meet the
criteria for following SFAS 71, the accounting impact to us could be an
extraordinary non-cash charge to operations of an amount that could be material.
Criteria that may give rise to the discontinuance of SFAS 71 include increasing
competition that could restrict our ability to establish prices to recover
specific costs and a significant change in the manner in which rates are set by
regulators from cost-based regulation to another form of regulation. We
periodically review these criteria to ensure that the continuing application of
SFAS 71 is appropriate.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141)
and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Intangible assets with a defined life will continue to be amortized over their
useful lives (but with no maximum life). The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, we
were required to adopt SFAS 142 effective January 1, 2002. We are currently
evaluating the effects adoption has on our consolidated financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred with the associated asset
retirement costs being capitalized as part of the carrying amount of the
long-lived asset. Over time, the liability is accreted to its present value each
period and the capitalized cost is depreciated over the useful life of the
related asset. We expect to adopt SFAS 143 effective January 1, 2003 and are
currently evaluating the effects adoption will have on our consolidated
financial statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). SFAS 144 supersedes FASB Statement 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121) and
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" (APB 30). SFAS 144 establishes a single
accounting model for long-lived assets to be disposed of by sale as well as
resolves implementation issues related to SFAS 121. We were required to adopt
SFAS 144 effective January 1, 2002. Adoption did not have a material impact on
our consolidated financial position, results of operations or cash flows.
52
Safe Harbor for Forward Looking Information
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (Reform Act), we are hereby filing cautionary
statements identifying important factors that could cause our actual results to
differ materially from those projected in forward-looking statements (as such
term is defined in the Reform Act) made by or on behalf of the Company in our
Annual Report on Form 10-K, Annual Report, Quarterly Report on Form 10-Q, and
presentations, or in response to questions or otherwise. These statements
concern our plans, expectations and objectives for future operations. All
statements, other than statements of historical fact that address activities,
events or developments that we expect, believe or anticipate will or may occur
in the future are forward-looking statements. The words "anticipate," "believe,"
"estimate," "expect," "intend," "plan," "predicts," "project," "will likely
result," "will continue," or similar expressions are not statements of
historical fact and may be forward-looking. These forward-looking statements
include, among others, such things as:
o expansion and growth of our business and operations;
o future financial performance;
o future acquisition and development of power plants;
o future production of coal, oil and natural gas;
o reserve estimates; and
o business strategy.
Forward-looking statements are based on assumptions that we believe are
reasonable based on current expectations and projections about future events and
industry conditions and trends affecting our business. However, whether actual
results and developments will conform to our expectations and predictions is
subject to a number of risks and uncertainties which could cause actual results
to differ materially from those contained in the forward-looking statements,
including the following factors:
o prevailing governmental policies and regulatory actions, with respect
to allowed rates of return, industry and rate structure, acquisition
and disposal of assets and facilities, operation and construction of
plant facilities, recovery of purchased power and other capital
investments, and present or prospective wholesale and resale
competition;
o changes in and compliance with environmental and safety laws and
policies;
o weather conditions;
o population growth and demographic patterns;
o competition for retail and wholesale customers;
o pricing and transportation of commodities;
o market demand, including structural market changes;
o changes in tax rates or policies or in rates of inflation;
o changes in project costs;
o unanticipated changes in operating expenses or capital expenditures;
o capital market conditions;
o creditworthiness of counterparties;
o technological advances;
o competition for new energy development opportunities; and
o legal and administrative proceedings that influence our business and
profitability.
Any forward-looking statement speaks only as to the date on which that statement
is made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which that statement is
made or to reflect the occurrence of an anticipated event. New factors emerge
from time to time, and it is not possible for management to predict all such
factors, nor can it assess the impact of any such factor on the business or the
extent to which factor, or combination of factors, may cause results to differ
materially from those contained in any forward-looking statement.
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants 54
Consolidated Statements of Income
for the three years ended December 31, 2001 55
Consolidated Balance Sheets as of December 31, 2001 and 2000 56
Consolidated Statements of Cash Flows
for the three years ended December 31, 2001 57
Consolidated Statements of Common Stockholders' Equity
for the three years ended December 31, 2001 58
Notes to Consolidated Financial Statements 59-86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Black Hills Corporation:
We have audited the accompanying consolidated balance sheets of Black Hills
Corporation (a South Dakota corporation) and Subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of income, common
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Black Hills Corporation and
Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 2 to the consolidated financial statements, effective
January 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 22, 2002
54
BLACK HILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001 2000 1999
---- ---- ----
(in thousands, except per share amounts)
Operating revenues $1,558,558 $1,623,836 $ 791,875
---------- ---------- ---------
Operating expenses:
Fuel and purchased power 1,165,144 1,370,841 637,302
Operations and maintenance 65,556 46,054 36,463
Administrative and general 80,635 44,423 18,272
Depreciation, depletion and amortization 54,051 32,864 25,067
Taxes, other than income taxes 22,993 14,904 12,880
---------- ---------- ---------
1,388,379 1,509,086 729,984
---------- ---------- ---------
Operating income 170,179 114,750 61,891
---------- ---------- ---------
Other income (expense):
Interest expense (39,626) (30,342) (15,460)
Interest income 2,378 7,075 3,614
Other, net 9,876 2,996 876
---------- ---------- ---------
(27,372) (20,271) (10,970)
---------- ---------- ---------
Income before minority interest and income taxes 142,807 94,479 50,921
Minority interest (4,186) (11,273) 1,935
Income taxes (50,544) (30,358) (15,789)
---------- ---------- ---------
Net income 88,077 52,848 37,067
Preferred stock dividends (527) (78) -
---------- ---------- ---------
Net income available for common stock $ 87,550 $ 52,770 $ 37,067
========== ========== =========
Earnings per share of common stock:
Basic $ 3.45 $ 2.39 $ 1.73
========== ========== =========
Diluted $ 3.42 $ 2.37 $ 1.73
========== ========== =========
Weighted average common shares outstanding:
Basic 25,374 22,118 21,445
========== ========== =========
Diluted 25,771 22,281 21,482
========== ========== =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
55
BLACK HILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
At December 31, 2001 2000
---- ----
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 29,666 $ 24,913
Securities available-for-sale 3,550 2,113
Receivables (net of allowance for doubtful accounts of $5,913
and $3,631, respectively) 117,259 299,719
Derivative assets 39,336 67,901
Other current assets 30,540 23,973
---------- ----------
220,351 418,619
---------- ----------
Investments 59,895 50,137
---------- ----------
Property, plant and equipment 1,566,624 1,072,129
Less accumulated depreciation and depletion (328,400) (277,848)
---------- ----------
1,238,224 794,281
---------- ----------
Other assets:
Derivative assets 6,874 391
Goodwill and other intangible assets 115,081 45,905
Other 18,342 10,987
---------- ----------
140,297 57,283
---------- ----------
$1,658,767 $1,320,320
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 102,041 $ 247,596
Accrued liabilities 40,178 49,661
Current maturities of long-term debt 35,904 13,960
Notes payable 361,240 211,679
Derivative liabilities 43,699 62,428
---------- ----------
583,062 585,324
---------- ----------
Long-term debt, net of current maturities 415,798 307,092
---------- ----------
Deferred credits and other liabilities:
Federal income taxes 75,398 62,679
Derivative liabilities 7,119 3,532
Other 42,693 41,386
---------- ----------
125,210 107,597
---------- ----------
Minority interest in subsidiaries 19,533 37,961
---------- ----------
Commitments and contingencies (Notes 10, 11 and 15)
Stockholders' equity:
Preferred stock - no par Series 2000-A; 21,500 shares authorized; issued
and outstanding: 5,177 shares in 2001, 4,000 shares in 2000 5,549 4,000
---------- ----------
Common stock equity-
Common stock $1 par value; 100,000,000 shares authorized;
issued: 26,890,943 shares in 2001 and 23,302,111 shares in 2000 26,891 23,302
Additional paid-in capital 240,454 73,442
Retained earnings 250,515 191,482
Treasury stock, at cost (4,503) (9,067)
Accumulated other comprehensive loss (3,742) (813)
---------- ----------
509,615 278,346
---------- ----------
Total stockholders' equity 515,164 282,346
---------- ----------
$1,658,767 $1,320,320
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
56
BLACK HILLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 2000 1999
---- ---- ----
(in thousands)
Operating activities:
Net income available for common $87,550 $52,770 $37,067
Principal non-cash items-
Depreciation, depletion and amortization 54,051 32,864 25,067
Issuance of treasury stock (Note 4) 4,243 - -
Provision for valuation allowances 9,632 3,353 (203)
Net change in derivative assets and liabilities (4,186) (2,332) -
Gain on sales of assets (2,587) (3,736) (2,541)
Deferred income taxes and investment tax credits 9,792 1,937 2,291
Undistributed earnings in associated companies (9,287) (3,672) -
Minority interest 4,186 11,273 (1,935)
Change in operating assets and liabilities-
Accounts receivable 181,738 (204,662) 2,435
Other current assets (7,446) (3,513) (4,003)
Accounts payable (146,603) 165,394 6,268
Accrued liabilities (9,483) 18,678 4,013
Other, net 5,796 2,444 5,284
--------- -------- --------
177,396 70,798 73,743
--------- -------- --------
Investing activities:
Property, plant and equipment additions (378,479) (134,855) (102,290)
Payment for acquisition of net assets, net of cash acquired (199,001) (28,688) -
Payment for acquisition of minority interest (16,676) - -
Increase in investments (471) (9,974) (52,319)
Proceeds from sales of assets 2,900 5,500 3,463
Available-for-sale securities purchased - - (7,870)
Available-for-sale securities sold - 4,660 22,959
--------- -------- --------
(591,727) (163,357) (136,057)
--------- -------- --------
Financing activities:
Dividends paid on common stock (28,517) (23,527) (22,602)
Treasury stock issued (purchased) 321 (1,037) (4,949)
Common stock issued 168,522 3,854 424
Increase in short-term borrowings 149,561 73,848 92,489
Long-term debt - issuance 144,610 60,082 -
Long-term debt - repayments (13,960) (1,330) (1,330)
Subsidiary distributions to minority interests (1,453) (10,900) -
--------- -------- ---------
419,084 100,990 64,032
--------- -------- ---------
Increase in cash and cash equivalents 4,753 8,431 1,718
Cash and cash equivalents:
Beginning of year 24,913 16,482 14,764
--------- -------- ---------
End of year $ 29,666 $ 24,913 $ 16,482
========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for-
Interest $39,595 $31,292 $15,297
Income taxes $40,917 $18,518 $13,173
Noncash net assets acquired through issuance of common
and preferred stock (Note 15) $ 3,628 $34,493 $ -
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
57
BLACK HILLS CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Treasury Stock Other
---------------------- Paid-In Retained --------------------- Comprehensive
Shares Amount Capital Earnings Shares Amount Income (loss) Total
------ ------ ------- -------- ------ ------ ------------- -----
(in thousands, except share amounts)
Balance at
December 31, 1998 21,719 $ 21,719 $ 40,254 $147,774 141 $(3,081) - $206,666
------ -------- -------- -------- ---- ------- ----------- --------
Comprehensive Income:
Net income - - - 37,067 - - - 37,067
------ -------- -------- -------- ---- ------- ----------- --------
Total comprehensive income - - - 37,067 - - - 37,067
Dividends on common stock - - - (22,602) - - - (22,602)
Issuance of common stock 20 20 404 - - - - 424
Treasury stock acquired, net - - - - 227 (4,949) - (4,949)
------ -------- -------- -------- ---- ------- ----------- --------
Balance at
December 31, 1999 21,739 21,739 40,658 162,239 368 (8,030) - 216,606
------ -------- -------- -------- ---- ------- ----------- --------
Comprehensive Income:
Net income - - - 52,848 - - - 52,848
Other comprehensive
income, net of tax:
Unrealized loss on available
for sale securities - - - - - - (813) (813)
------ -------- -------- -------- ---- ------- ----------- --------
Total comprehensive income - - - 52,848 - - (813) 52,035
Dividends on preferred stock - - - (78) - - - (78)
Dividends on common stock - - - (23,527) - - - (23,527)
Issuance of common stock 1,563 1,563 32,784 - - - - 34,347
Treasury stock acquired, net - - - - 13 (1,037) - (1,037)
------ -------- -------- -------- ---- ------- ----------- --------
Balance at
December 31, 2000 23,302 23,302 73,442 191,482 381 (9,067) (813) 278,346
------ -------- -------- -------- ---- ------- ----------- --------
Comprehensive Income:
Net income - - - 88,077 - - - 88,077
Other comprehensive income,
net of tax:
Unrealized gain on available
for sale securities - - - - - - 1,438 1,438
Initial impact of adoption of
SFAS 133, net of minority
interest - - - - - - (4,510) (4,510)
Fair value adjustment on
derivatives designated as cash
flow hedges, net of minority
interest - - - - - - 143 143
------ -------- -------- -------- ---- -------- ----------- --------
Total comprehensive income - - - 88,077 - - (2,929) 85,148
Dividends on preferred stock - - - (527) - - - (527)
Dividends on common stock - - - (28,517) - - - (28,517)
Issuance of common stock 3,589 3,589 167,012 - - - - 170,601
Treasury stock issued, net - - - - (142) 4,564 - 4,564
------ -------- -------- -------- ---- -------- ----------- --------
Balance at
December 31, 2001 26,891 $ 26,891 $240,454 $250,515 239 $(4,503) $ (3,742) $509,615
====== ======== ======== ======== ==== ======= =========== ========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
58
BLACK HILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
(1) BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
Black Hills Corporation and its subsidiaries operate in three primary operating
groups: non-regulated integrated energy, regulated electric utility and
communications. The Company operates its integrated energy businesses through
its direct and indirect subsidiaries: Wyodak Resources related to coal, Black
Hills Exploration and Production related to oil and natural gas, Enserco Energy,
Black Hills Energy Resources and Black Hills Coal Network related to fuel
marketing of natural gas, oil and coal, respectively, and Black Hills Energy
Capital and its subsidiaries and Black Hills Generation related to independent
power activities, all aggregated for reporting purposes as Black Hills Energy
(formerly Black Hills Energy Ventures); operates its public utility electric
operations through its subsidiary, Black Hills Power, Inc.; and operates its
communications operations through its indirect subsidiaries Black Hills Fiber
Systems, Black Hills FiberCom L.L.C. and Daksoft. For further descriptions of
the Company's business segments, see Note 14.
In December 2000, the Company effected a holding company structure under the
renamed holding company, Black Hills Corporation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates relate to allowance for
uncollectable accounts receivable, inventory obsolescence, realization of market
value of derivatives due to commodity risk, intangible asset valuations and
useful lives, proved oil and gas reserve volumes, employee benefit plans,
environmental accruals and contingencies. Actual results could differ from those
estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Black Hills
Corporation and its wholly owned and majority-owned subsidiaries and certain
subsidiaries in which the Company's ownership interest may be less than 50
percent but represents voting control. Generally, the Company uses equity
accounting for investments of which it owns between 20 and 50 percent and
investments in partnerships under 20 percent if the Company exercises
significant influence.
All significant intercompany balances and transactions have been eliminated in
consolidation except for revenues and expenses associated with intercompany coal
sales in accordance with the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS 71). Total intercompany coal sales not eliminated were $11.2 million, $9.7
million and $7.7 million in 2001, 2000 and 1999, respectively.
The Company owns 51 percent of the voting securities of Black Hills FiberCom,
LLC (FiberCom). During 2000, FiberCom's operating losses reduced its members'
equity below zero. At that point, the Company began to recognize 100 percent of
FiberCom's operating losses and will continue to do so until such time as
additional equity investments are made by third parties or future net income
restores members' equity to a positive amount.
As discussed in Note 15, the Company and its subsidiaries made several
acquisitions during 2001 and 2000. The Company's consolidated statements of
income include operating activity of these companies beginning with their
acquisition date.
The Company uses the proportionate consolidation method to account for its
working interests in oil and gas properties.
59
Minority Interest in Subsidiaries
Minority interest in the accompanying Consolidated Statements of Income
represents the share of income or loss of certain consolidated subsidiaries
attributable to the minority shareholders of those subsidiaries. The minority
interest in the accompanying Consolidated Balance Sheets reflect the amount of
the underlying net assets of those certain consolidated subsidiaries
attributable to the minority shareholders in those subsidiaries.
Regulatory Accounting
The Company's subsidiary, Black Hills Power, is subject to regulation by various
state and federal agencies. The accounting policies followed are generally
subject to the Uniform System of Accounts of the Federal Energy Regulatory
Commission (FERC). These accounting policies differ in some respects from those
used by the Company's non-regulated businesses.
Black Hills Power follows the provisions of SFAS 71, and its financial
statements reflect the effects of the different ratemaking principles followed
by the various jurisdictions regulating Black Hills Power. As a result of Black
Hills Power's 1995 rate case settlement, a 50-year depreciable life for the Neil
Simpson II plant is used for financial reporting purposes. If Black Hills Power
were not following SFAS 71, a 35 to 40 year life would be more appropriate,
which would increase depreciation expense by approximately $0.6 million per
year. If rate recovery of generation-related costs becomes unlikely or
uncertain, due to competition or regulatory action, these accounting standards
may no longer apply to Black Hills Power's generation operations. In the event
Black Hills Power determines that it no longer meets the criteria for following
SFAS 71, the accounting impact to the Company could be an extraordinary non-cash
charge to operations of an amount that could be material. Criteria that give
rise to the discontinuance of SFAS 71 include increasing competition that could
restrict Black Hills Power's ability to establish prices to recover specific
costs and a significant change in the manner in which rates are set by
regulators from cost-based regulation to another form of regulation. The Company
periodically reviews these criteria to ensure that the continuing application of
SFAS 71 is appropriate.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Securities Available-for-Sale
The Company has investments in marketable securities that are classified as
available-for-sale securities and are carried at fair value in accordance with
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
unrealized gain or loss resulting from the difference between the securities'
fair value and cost basis is included as a component of accumulated other
comprehensive income in common stockholders' equity.
Inventory
Materials, supplies and fuel are generally stated at the lower of cost or market
on a first-in, first-out basis. During 2001, 2000 and 1999, provisions of $1.4
million, $1.5 million and $0, respectively, were charged to operations to
write-down inventories at the Company's communications group to estimated net
realizable value. Natural gas, oil and coal inventories held in fuel marketing
companies are stated at market.
Property, Plant and Equipment
Additions to property, plant and equipment are recorded at cost when placed in
service. Included in the cost of regulated construction projects is an allowance
for funds used during construction (AFUDC) which represents the approximate
composite cost of borrowed funds and a return on capital used to finance the
project. The AFUDC was computed at an annual composite rate of 10.2, 9.7 and 8.3
percent during 2001, 2000 and 1999, respectively. In addition, the Company
capitalizes interest, when applicable, on certain non-regulated construction
projects. The amount of AFUDC and interest capitalized was $7.5 million, $2.0
million and $1.2 million in 2001, 2000 and 1999, respectively. The cost of
regulated electric property, plant and equipment retired, or otherwise disposed
of in the ordinary course of business, together with removal cost less salvage,
is charged to accumulated depreciation. Retirement or disposal of all other
assets, except for oil and gas properties as described
60
below, result in gains or losses recognized as a component of income. Repairs
and maintenance of property are charged to operations as incurred.
Depreciation provisions for regulated electric property, plant and equipment is
computed on a straight-line basis using an annual composite rate of 3.0 percent
in 2001, 2.8 percent in 2000 and 3.1 percent in 1999. Non-regulated property,
plant and equipment are depreciated on a straight-line basis using estimated
useful lives ranging from 3 to 39 years. Capitalized coal mining costs and coal
leases are amortized on a unit-of-production method on volumes produced and
estimated reserves.
Goodwill and Intangible Assets
Goodwill represents the excess of acquisition costs over the fair value of the
net assets of acquired businesses and through 2001 was amortized on a
straight-line basis over the estimated useful lives of such assets, which ranged
from 8 to 25 years. The cost of other acquired intangibles is amortized on a
straight-line basis over their estimated useful lives. Amortization expense was
$4.4 million, $3.1 million and $2.7 million in 2001, 2000 and 1999,
respectively. Accumulated amortization was $11.1 million, $6.7 million and $3.6
million at December 31, 2001, 2000 and 1999, respectively.
Impairment of Long-Lived Assets and Intangible Assets
The Company periodically evaluates whether events and circumstances have
occurred which may affect the estimated useful life or the recoverability of the
remaining balance of its long-lived assets. If such events or circumstances were
to indicate that the carrying amount of these assets was not recoverable, the
Company would estimate the future cash flows expected to result from the use of
the assets and their eventual disposition. If the sum of the expected future
cash flows (undiscounted and without interest charges) was less than the
carrying amount of the long-lived assets, the Company would recognize an
impairment loss. No impairment loss was recorded during 2001, 2000 or 1999.
Oil and Gas Operations
The Company accounts for its oil and gas activities under the full cost method.
Under the full cost method, all productive and nonproductive costs related to
acquisition, exploration and development drilling activities are capitalized.
These costs are amortized using a unit-of-production method based on volumes
produced and proved reserves. Any conveyances of properties, including gains or
losses on abandonments of properties, are treated as adjustments to the cost of
the properties with no gain or loss recognized.
Under the full cost method, net capitalized costs are subject to a "ceiling
test" which limits these costs to the present value of future net cash flows
discounted at 10 percent, net of related tax effects, plus the lower of cost or
fair value of unproved properties included in the net capitalized costs. Future
net cash flows are estimated based on end-of-period spot market prices adjusted
for contracted price changes. If the net capitalized costs exceed the full cost
"ceiling" at period end, a permanent noncash write-down would be charged to
earnings in that period unless subsequent market price changes eliminate or
reduce the indicated write-down. Given the volatility of oil and gas prices, it
is possible that the Company's estimate of discounted future net cash flows from
proved oil and gas reserves could change in the near term. If oil and gas prices
decline significantly, even if only for a short period of time, it is possible
that a write-down of oil and gas properties could occur in the future. No
"ceiling test" write-downs were recorded during 2001, 2000 or 1999.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under the
liability method, deferred income taxes are recognized, at currently enacted
income tax rates, to reflect the tax effect of temporary differences between the
financial and tax basis of assets and liabilities. Such temporary differences
are the result of provisions in the income tax law that either require or permit
certain items to be reported on the income tax return in a different period than
they are reported in the financial statements. The Company classifies deferred
tax assets and liabilities into current and noncurrent amounts based on the
classification of the related assets and liabilities.
61
Revenue Recognition
Generally, revenue is recognized when there is persuasive evidence of an
arrangement with a fixed or determinable price, delivery has occurred or
services have been rendered, and collectibility is reasonably assured. Fuel
marketing businesses also use the mark-to-market method of accounting. Under
that method, all energy trading activities are recorded at fair value as of the
balance sheet date and net gains or losses resulting from the revaluation of
these contracts to fair value are recognized currently in the results of
operations. For long-term non-utility power sales agreements revenue is
recognized either in accordance with Emerging Issues Task Force Issue No. 91-6,
"Revenue Recognition of Long-Term Power Sales Contracts," or in accordance with
SFAS No. 13, "Accounting for Leases," as appropriate. Under EITF 91-6, revenue
is generally recognized as the lower of the amount billed or at the average rate
expected over the life of the agreement. Under SFAS 13, revenue is generally
levelized over the life of the agreement. For its Investments in Associated
Companies (see Note 3), which are involved in power generation, the Company uses
the equity method to recognize as earnings its pro rata share of the net income
or loss of the associated company.
Earnings Per Share of Common Stock
Basic earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
each year. Diluted earnings per share is computed under the treasury stock
method and is calculated to compute the dilutive effect primarily resulting from
outstanding stock options and conversion of preferred shares.
Reclassifications
Certain 2000 and 1999 amounts in the consolidated financial statements have been
reclassified to conform to the 2001 presentation. These reclassifications had no
effect on the Company's common stockholders' equity or results of operations, as
previously reported.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141)
and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Intangible assets with a defined life will continue to be amortized over their
useful lives (but with no maximum life). The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company was required to adopt SFAS 142 effective January 1, 2002. Management is
currently evaluating the effects adoption has on the Company's consolidated
financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred with the associated asset
retirement costs being capitalized as part of the carrying amount of the
long-lived asset. Over time, the liability is accreted to its present value each
period and the capitalized cost is depreciated over the useful life of the
related asset. Management expects to adopt SFAS 143 effective January 1, 2003
and is currently evaluating the effects adoption will have on the Company's
consolidated financial statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). SFAS 144 supersedes FASB Statement 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121) and
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" (APB 30). SFAS 144 establishes a single
accounting model for long-lived assets to be disposed of by sale as well as
resolves implementation issues related to SFAS 121. The Company was required to
adopt SFAS 144 effective January 1, 2002. Adoption did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
62
Change in Accounting Principle - Derivatives and Hedging Activities
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133, as amended, establishes accounting and reporting standards requiring
that every derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS 133 requires that changes in
the derivative instrument's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
SFAS 133 allows hedge accounting for fair value and cash flow hedges. SFAS 133
provides that the gain or loss on a derivative instrument designated and
qualifying as a fair value hedging instrument as well as the offsetting loss or
gain on the hedged item attributable to the hedged risk be recognized currently
in earnings in the same accounting period. SFAS 133 provides that the effective
portion of the gain or loss on a derivative instrument designated and qualifying
as a cash flow hedging instrument be reported as a component of other
comprehensive income and be reclassified into earnings in the same period or
periods during which the hedged forecasted transaction affects earnings. The
remaining gain or loss on the derivative instrument, if any, must be recognized
currently in earnings.
SFAS 133 requires that on date of initial adoption, an entity shall recognize
all freestanding derivative instruments in the balance sheet as either assets or
liabilities and measure them at fair value. The difference between a
derivative's previous carrying amount and its fair value shall be reported as a
transition adjustment. The transition adjustment resulting from adopting this
Statement shall be reported in net income or other comprehensive income, as
appropriate, as the effect of a change in accounting principle in accordance
with paragraph 20 of Accounting Principles Board Opinion No. 20 (APB 20),
"Accounting Changes."
On January 1, 2001, the Company adopted SFAS 133. Upon adoption, most of the
Company's fuel marketing activities previously accounted for under Emerging
Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk
Management Activities" (EITF 98-10) fell under the purview of SFAS 133. The
effect of adoption on the fuel marketing companies and risk management
activities was not material because, unless otherwise noted, the fuel marketing
companies did not designate their risk management activities as hedge
instruments. This "no hedge" designation resulted in these derivatives being
measured at fair value and gains and losses recognized currently in earnings.
This treatment under SFAS 133 was comparable to the accounting under EITF 98-10.
At January 1, 2001, the Company had certain non-trading energy contracts and
interest rate swaps documented as cash flow hedges. These contracts were defined
as derivatives under SFAS 133 and met the requirements for cash flow hedges.
Because these contracts were documented as hedges prior to adoption, the
transition adjustment was reported in accumulated other comprehensive income.
The aggregated entry for these derivatives identified as cash flow hedges
increased derivative assets by $0.9 million, increased the derivative
liabilities by $11.2 million and decreased accumulated other comprehensive
income by $10.3 million pre-tax.
(2) RISK MANAGEMENT ACTIVITIES
The Company's operations and financial results are impacted by numerous factors
including, but not limited to, commodity price risk, interest rate risk and
counterparty risk. The Company is exposed to commodity price variability in
nearly all core energy marketing and trading businesses. In addition, fuel
requirements at its gas-fired generation and its natural long position in crude
oil and natural gas production introduce additional commodity price risk.
Fuel Marketing Activities
The Company markets natural gas, coal, and crude oil in specific areas of the
United States and Canada. The Company offers wholesale fuel marketing and price
risk management products and services to a variety of customers. These
activities subject the Company to numerous risks including commodity price risk.
The Company has adopted Risk Management Policies and Procedures (RMP&P) covering
all marketing activities. The RMP&P have been approved by the Company's Board of
Directors and are routinely reviewed by the Audit Committee of the Board of
Directors. The RMP&P include, but are not limited to, trader limits, position
limits and credit exposure limits.
63
The Company employs risk management methods to mitigate its commodity price
risk. As a general policy, the Company only permits speculation with limited
"open" positions as defined in the RMP&P. Therefore, substantially all of its
marketing activities are fully hedged or back-to-back positions; in other words,
each sale is matched with a purchase.
To maintain compliance with the RMP&P and mitigate its commodity price risk, the
Company routinely utilizes fixed price forward purchase and sales contracts and
over-the-counter swaps and options. The Company attempts to balance its fixed
price physical and financial purchase and sale commitments in terms of volume
and timing of performance and delivery obligations. However, the Company may at
times have a bias in the market, within established guidelines, resulting from
the management of its portfolio. In addition, the Company may, at times, be
unable to fully hedge its portfolio for certain market risks as a result of
marketplace illiquidity and other factors.
The Company's fuel marketing operations fall under the purview of SFAS 133 and
EITF 98-10. As such, these activities are accounted for under mark-to-market
accounting. The Company records its fair values as either Derivative assets
and/or Derivative liabilities on the accompanying Consolidated Balance Sheet.
The net gains or losses are recorded as Revenues in the accompanying
Consolidated Statements of Income.
The contract or notional amounts and terms of the Company's derivative commodity
instruments held for trading purposes at December 31, 2001 and 2000, are set
forth below:
2001 2000
Notional Maximum Notional Maximum
(thousands of MMBtu's) Amounts Term in Years Amounts Term in Years
-------- ------------- -------- -------------
Natural gas basis swaps purchased 9,882 1 25,578 2
Natural gas basis swaps sold 10,696 1 26,060 2
Natural gas fixed-for float swaps purchased 10,646 2 6,476 1
Natural gas fixed-for-float swaps sold 11,815 2 7,361 1
Natural gas swing swaps purchased 465 1 - -
Natural gas swing swaps sold 930 1 - -
Natural gas physical purchases 13,159 1 - -
Natural gas physical sales 19,339 1 - -
(thousands of barrels)
Crude oil purchased 3,139 1 2,186 1
Crude oil sold 3,142 1 2,530 1
(thousands of tons)
Coal purchased 1,554 4 896 1
Coal sold 1,448 4 988 1
64
As required under SFAS 133 and EITF 98-10, derivatives and energy trading
activities were marked to fair value on December 31, 2001, and the gains and/or
losses recognized in earnings. The amounts related to the accompanying
Consolidated Balance Sheets and Statements of Income as of December 31, 2001 and
2000, are as follows (in thousands):
Current Non-current Current Non-current Unrealized
December 31, 2001 Assets Assets Liabilities Liabilities Gain
------ ------ ----------- ----------- ----
Natural gas $29,755 $ 661 $25,437 $ 953 $4,026
Crude Oil 6,267 - 5,497 - 770
Coal 1,192 467 1,018 - 641
------- ------ ------- ------- ------
$37,214 $1,128 $31,952 $ 953 $5,437
======= ====== ======= ======= ======
December 31, 2000
Natural gas $61,008 $ 391 $56,968 $3,532 $ 899
Crude oil 1,523 - 1,000 - 523
Coal 5,370 - 4,460 - 910
------- ------ ------- ------ ------
$67,901 $ 391 $62,428 $3,532 $2,332
======= ====== ======= ====== ======
At December 31, 2001, the Company had a mark to fair value unrealized gain of
$5.4 million for its fuel marketing activities. Of this amount, $5.2 million was
current and $0.2 million was non-current. The current portion of unrealized
gains included $5.5 million gain associated with hedged transactions and $(0.3)
million loss associated with open positions. The Company anticipates that
substantially all of the current portion of unrealized gains for hedged
transactions will be realized during the next twelve months. Conversely,
estimated and actual realized gains or losses related to open positions will
likely change during 2002 as market prices change from the December 31, 2001
estimates.
Non-trading Energy Activities
The Company produces natural gas and crude oil through its exploration and
production activities. These natural long positions, or unhedged open positions,
introduce commodity price risk and variability in cash flows for the Company.
The Company employs risk management methods to mitigate this commodity price
risk and preserve its cash flows. The Company has adopted guidelines covering
hedging for its natural gas and crude oil production. These guidelines have been
approved by the Company's Board of Directors and are routinely reviewed by its
Audit Committee.
To mitigate commodity price risk and preserve cash flows, the Company uses
over-the-counter swaps and options. These derivative instruments fall under the
purview of SFAS 133 and the Company elects to utilize hedge accounting as
allowed under this Statement.
At December 31, 2001, the Company had a portfolio of swaps to hedge portions of
its crude oil and natural gas production. These transactions were previously
identified as cash flow hedges, properly documented, and met prospective
effectiveness testing. At year-end, these transactions met retrospective
effectiveness testing criteria and retained their cash flow hedge status.
At December 31, 2001, the derivatives were marked to fair value and were
recorded in Derivative assets or Derivative liabilities on the accompanying
Consolidated Balance Sheets. The effective portion of the gain or loss on these
derivatives was reported in other comprehensive income and the ineffective
portion was reported in earnings.
65
On January 1, 2001 (the transition adjustment date for SFAS 133 adoption) and
December 31, 2001, the Company had the following swaps and related balances (in
thousands):
Accumulated
Maximum Other
Terms in Current Non-current Current Non-current Comprehensive
Notional* Years Assets Assets Liabilities Liabilities Income (Loss) Earnings
--------- ----- ------ ------ ----------- ----------- ------------- --------
January 1, 2001
Crude oil swaps 294,000 2 $ 33 $151 $ - $ - $ 184 $ -
Crude oil options 120,000 1 472 - - - 472 -
Natural gas swaps 1,581,000 1 - - 3,411 - (3,411) -
------ ---- ------- ----- -------- ------
$ 505 $151 $ 3,411 $ - $ (2,755) $ -
====== ==== ======= ===== ======== ======
December 31, 2001
Crude oil swaps 90,000 1 $ 529 $ - $ - $ - $ 529 $ -
Natural gas swaps 1,216,000 1 1,593 - - - 1,463 130
------ ------ -------- ----- -------- ------
$2,122 $ - $ - $ - $ 1,992 $ 130
====== ====== ======== ===== ======== ======
- -----------------------
*crude in bbls, gas in MMBtu's
Most of the Company's crude oil and natural gas hedges are highly effective,
resulting in very little earnings impact prior to realization. During 2001, the
Company recorded $0.1 million earnings due to ineffectiveness for certain
natural gas swaps due to basis risk.
All existing hedges at December 31, 2001 expire during the year ended December
31, 2002. The unrealized earnings gains or losses currently recorded in
accumulated other comprehensive income are expected to be realized in earnings
during 2002. Based on December 31, 2001 market prices, $2.0 million will be
realized and reported in earnings during 2002. These estimated realized gains
for 2002 were calculated using December 31, 2001 market prices. Estimated and
actual realized gains will likely change during 2002 as market prices change.
In addition, the Company acquired several natural gas swaps when it completed
the Las Vegas Cogeneration acquisition on August 31, 2001 (Note 15). The project
has a long-term fixed price power sales agreement and an index-priced natural
gas purchase contract for 5,000 MMBtus per day through April 30, 2010. These
swaps fix the long-term purchase price of the index-priced natural gas purchase
contract. At acquisition close, the fair value of these swaps was $6.0 million.
These swaps were executed with Enron North America Corp. (Enron), which is
currently in bankruptcy proceedings.
These swaps are derivatives under SFAS 133. The Company elected to treat these
derivatives as cash flow hedges so that any gains or losses on the fair values
of the swaps could be deferred and subsequently recognized when the underlying
hedged natural gas was consumed in the plant. The swaps were properly documented
and met the criteria for cash flow hedges.
During the fourth quarter of 2001, the Company determined that it was probable
that Enron would default on its obligations to the Company in conjunction with
these swaps. Upon that determination, the Company ceased to account for these
swaps as cash flow hedges. In addition, the Company recognized a $6.0 million
pre-tax valuation reserve in recognition of Enron's probable performance default
and resulting consequence that the Company would not receive payment for these
amounts.
Financing Activities
The Company engages in activities to manage risks associated with changes in
interest rates. The Company has entered into floating-to-fixed interest rate
swap agreements to reduce its exposure to interest rate fluctuations associated
with its floating rate debt obligations. At December 31, 2001, these hedges met
effectiveness testing criteria and retained their cash flow hedge status. At
December 31, 2001, the Company had $291.4 million of notional amount
floating-to-fixed interest rate swaps, having a maximum term of five years and a
fair value of $(14.4) million. These hedges are substantially effective and any
ineffectiveness was immaterial.
In addition to the above interest rate swaps, the Company has entered into a
$100 million forward starting floating-to-fixed interest rate swap to hedge the
anticipated floating rate debt financing related to the Company's Las Vegas
Cogeneration
66
expansion. The forward starting period for the swap is the second
quarter of 2002, with a term of ten years. The swap will terminate and cash
settle on its forward starting date, based on the fair market value of the swap
at the starting date. At December 31, 2001, the swap had a fair market value of
$2.3 million. The hedge has met effectiveness criteria. Upon completion of the
long-term financing of the project, any gain or loss on the fair market value of
the swap is anticipated to be amortized over the life of the long-term
financing.
At December 31, 2001, the Company had $655.8 million of outstanding, floating
rate debt, of which $264.4 million was not offset with interest rate swaps
transactions that effectively convert the debt to fixed rate.
On January 1, 2001 (the transition adjustment date for SFAS 133 adoption) and on
December 31, 2001, the Company's interest rate swaps and related balances were
as follows (in thousands):
Weighted
Average Accumulated
Fixed Maximum Other
Interest Terms in Current Non-current Current Non-current Comprehensive
Notional* Rate Years Assets Assets Liabilities Liabilities Income (Loss)
--------- ---- ----- ------ ------ ----------- ---------- -------------
January 1, 2001
Swaps on project
financing $127,416 7.38% 5 $ - $ 265 $ 2,440 $5,332 $ (7,507)
======== ===== ======= ======= ====== ========
December 31, 2001
Swaps on project
financing $316,397 5.85% 4 $ - $ 5,746 $10,212 $5,949 $(10,415)
Swaps on corporate
debt 75,000 4.45% 3 - - 1,535 217 (1,752)
-------- ----- ------- ------- ------ --------
Total $391,397 $ - $ 5,746 $11,747 $6,166 $(12,167)
======== ===== ======= ======= ====== ========
The Company anticipates a portion of unrealized losses recorded in accumulated
other comprehensive income will be realized as increased interest expense in
2002. Based on December 31, 2001 market interest rates, $11.7 million will be
realized as additional interest expense during 2002. Estimated and realized
amounts will likely change during 2002 as market interest rates change.
Credit Risk
Credit risk relates to the risk of financial loss resulting from non-performance
of contractual obligations by a counterparty. The Company maintains credit
policies with regards to its counterparties that the Company believes limit its
overall credit risk.
For its fuel marketing, energy production and risk management activities, the
Company attempts to mitigate its credit risk by conducting a majority of its
business with investment grade companies, obtaining netting agreements where
possible and securing its exposure with less creditworthy counterparties through
parental guarantees, prepayments and letters of credit.
At the end of the year, the Company's credit exposure (exclusive of regulated
retail customers and communications) was concentrated with investment grade
companies. Approximately 85 percent of the Company's credit exposure was with
investment grade companies. For the 15 percent credit exposure with
non-investment grade rated counterparties, approximately 60 percent of this
exposure was supported through letters of credit, prepayments, parental
guarantees and asset liens.
67
(3) INVESTMENTS IN ASSOCIATED COMPANIES
Included in Investments on the Consolidated Balance Sheets are the following
investments that have been recorded on the equity method of accounting:
o A 33.33 percent interest (see Note 18) in Millennium Pipeline Company,
L.P., a Texas limited partnership, which owns and operates an oil pipeline
in the Gulf Coast region of Texas. The Company has a carrying amount in the
investment of $7.0 million and $6.9 million as of December 31, 2001 and
2000, respectively. The partnership had assets of $23.8 million and $22.0
million, liabilities of $2.8 million and $1.0 million as of December 31,
2001 and 2000, and net income of $3.4 million and $2.8 million during 2001
and 2000, respectively.
o At 12.6 percent, 6.9 percent and 5.3 percent interest in Energy Investors
Fund, L.P., Energy Investors Fund II, L.P., and Project Finance Fund III,
L.P., respectively, which in turn have investments in numerous electric
generating facilities in the United States and elsewhere. The Company has a
carrying amount in the investment of $10.0 million and $8.4 million at
December 31, 2001 and 2000, respectively, which includes $1.9 million and
$2.1 million, respectively, that represents the cost of the investment over
the underlying net assets of the funds. This excess is being amortized over
10 years. As of and for the year ended December 31, 2001, the funds had
assets of $215.1 million, liabilities of $0.7 million and net income of
$37.2 million. As of, and for the year ended December 31, 2000, the funds
had assets of $186.8 million, liabilities of $16.0 million and net income
of $27.1 million.
o A 50 percent interest in two natural gas-fired co-generation facilities
located in Rupert and Glenns Ferry, Idaho. The Company's carrying amount in
the investment is $3.9 million and $4.1 million as of December 31, 2001 and
2000, respectively, which includes $0.5 million that represents the cost of
the investment over the value of the underlying net assets of the projects.
This excess is being amortized over 19 years. As of and for the year ended
December 31, 2001, these projects had assets of $25.6 million, liabilities
of $19.0 million and a net loss of $(0.4) million. As of, and for the year
ended December 31, 2000, these projects had assets of $26.0 million,
liabilities of $18.7 million and net income of $0.9 million.
o A direct and indirect ownership of approximately 53 percent (32 percent in
2000) representing 50 percent voting control, of Harbor Cogeneration
Company (see Note 18). Harbor Cogeneration owns a 98 megawatt gas-fired
plant (expanded from 80 megawatts in 2000) located in Wilmington,
California. At December 31, 2001 and 2000, the Company's carrying amount in
the investment was $47.9 million and $42.2 million, respectively, which
includes $12.2 million and $13.7 million, respectively, which represents
the cost of the investment over the value of the underlying net assets of
Harbor. This excess is being amortized over 15 years. As of and for the
year ended December 31, 2001, Harbor had assets of $51.4 million,
liabilities of $0.4 million and net income of $10.1 million. As of, and for
the year ended December 31, 2000, Harbor had assets of $41.7 million,
liabilities of $0.8 million and net income of $28.8 million.
(4) COMMON STOCK
Common Stock Offering
During 2001, the Company completed a public offering of its common stock through
which approximately 3.4 million shares were sold at $52 per share. Net proceeds
were approximately $163 million after commissions and expenses. The proceeds
were used to repay a portion of current indebtedness under revolving credit
facilities, to fund various power plant construction costs and for general
corporate purposes.
Employee Stock Incentive and Employee Stock Purchase Plans
The Company has several employee stock incentive plans (Stock Incentive Plans),
which allow for the granting of stock options with exercise prices equal to the
stock's fair market value on the date of grant, and an employee stock purchase
plan (ESPP Plan). The Company accounts for such plans under APB No. 25, and has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock
Based Compensation" (SFAS 123). Accordingly, no compensation cost has been
recognized.
68
The Company may grant options for up to 2,200,000 shares of common stock under
the Stock Incentive Plans. The Company has 1,037,882 shares available to grant
at December 31, 2001. The option exercise price equals the fair market value of
the stock on the day of the grant. The options granted vest one-third a year for
three years and all expire after ten years from the grant date.
A summary of the status of the stock option plans at December 31, 2001, 2000 and
1999, and changes during the years then ended are as follows:
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Balance at beginning of year 914,917 $23.43 431,450 $21.35 292,700 $20.29
Granted 203,000 $37.09 492,500 $25.22 140,250 $23.58
Forfeited (30,834) $22.13 (4,000) $23.25 (1,500) $23.06
Exercised (94,211) $20.41 (5,033) $21.33 - $ -
------- ------- -------
Balance at end of year 992,872 $26.55 914,917 $23.43 431,450 $21.35
======= ======= =======
Exercisable at end of year 445,252 $22.76 292,891 $20.43 182,400 $19.19
======= ======= =======
Details of outstanding options at December 31, 2001 are as follows:
Weighted Average
Option Exercise Shares Weighted Average Remaining Weighted Average
Prices Outstanding Exercise Price Contractual Life Shares Exercisable Exercise Price
----- ----------- -------------- ---------------- ------------------ --------------
$16.67 to $25.00 680,872 $21.75 7.4 years 407,600 $21.45
$25.01 to $37.50 151,000 $31.04 9.8 years 3,166 $28.63
$37.51 to $55.36 161,000 $42.65 9.1 years 34,486 $37.69
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model. The weighted average fair value of the
options granted and the assumptions used to estimate the fair value of options
are as follows:
2001 2000 1999
---- ---- ----
Weighted average fair value of options at grant date $10.77 $3.88 $4.16
Weighted average risk-free interest rate 5.92% 6.30% 6.68%
Weighted average expected price volatility 34.92% 20.60% 19.85%
Weighted average expected dividend yield 2.90% 4.20% 4.50%
Expected life in years 10 10 10
Had compensation cost been determined consistent with SFAS 123, the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts for the years ended December 31 (unaudited):
2001 2000 1999
---- ---- ----
(in thousands, except per share amounts)
Net income available for common:
As reported $87,550 $52,770 $37,067
Pro forma $86,845 $52,432 $36,877
Earnings per share (basic and diluted):
As reported - basic $ 3.45 $ 2.39 $1.73
- diluted $ 3.42 $ 2.37 $1.73
Pro forma - basic $ 3.42 $ 2.38 $1.72
- diluted $ 3.39 $ 2.35 $1.72
69
The Company maintains the ESPP Plan under which it sells shares to employees at
90 percent of the stock's market price on the offering date. The Company issued
48,368, 21,394 and 19,565 shares of common stock under the ESPP Plan in 2001,
2000 and 1999, respectively. At December 31, 2001, 177,808 shares are reserved
and available for issuance under the ESPP Plan. The fair value per share of
shares sold in 2001 was $22.50 on the offering date.
Employee Stock Awards
During 2001, the Company issued a total of 36,550 common shares as a stock bonus
award to its non-officer employees. The bonus was grossed up to cover related
employee taxes. The total pre-tax compensation charge recognized by the Company
was $1.9 million, which is based on the market value of the stock on the grant
date. Additionally, approximately 18,000 common shares will be issued at the
two-year anniversary date of the original award, contingent on certain vesting
restrictions. Pre-tax compensation cost related to this portion of the award is
estimated to be $0.9 million and is being expensed over the two-year vesting
period.
During 2001, the Company issued 12,177 restricted common shares (net of 4,512
common shares forfeited) to certain officers. The shares carry a restriction on
the officer's ability to sell the shares, until the shares vest. The shares vest
one-third per year over three years, contingent on employment. Pre-tax
compensation cost related to the award was $0.7 million, which is being expensed
over the three-year vesting period.
Nonemployee stock award
During 2001, the Company issued 100,000 common shares as a charitable
contribution to the newly formed not-for-profit entity, Black Hills Corporation
Foundation. The charitable contribution cost included in "Other, net" on the
2001 Consolidated Statement of Income was $3.1 million, which is based on the
stock market value on the grant date.
Dividend Reinvestment and Stock Purchase Plan
The Company has a Dividend Reinvestment and Stock Purchase Plan under which
shareholders may purchase additional shares of common stock through dividend
reinvestment and/or optional cash payments at 100 percent of the recent average
market price. The Company has the option of issuing new shares or purchasing the
shares on the open market. The Company purchased shares on the open market in
2001, 2000 and 1999. At December 31, 2001, 1,290,797 shares of unissued common
stock were available for future offerings under the Plan.
(5) PREFERRED STOCK
The Company has 25,000,000 authorized shares of no-par preferred stock.
During 2001 and 2000, the Company issued 5,177 preferred shares in the Indeck
Capital acquisition and the related "earn-out" provisions. The preferred shares
issued are non-voting, cumulative, no par shares with a dividend rate equal to 1
percent per annum per share, computed on the basis of $1,000 per share plus an
amount equal to any dividend declared payable with respect to the common stock,
multiplied by the number of shares of common stock into which each share of
preferred stock is convertible. The record and payment dates are the same as the
record and payment dates with respect to the payment of dividends on common
stock. No dividend may be declared or paid with respect to common stock unless
such a dividend is declared and paid with respect to the preferred stock. The
preferred stock is senior to the common stock in liquidation events.
The Company may redeem the preferred stock in whole or in part, at any time
solely at its option. The redemption price per share for the preferred stock
shall be $1,000 per share plus all accrued and unpaid dividends. Each share of
the preferred stock is convertible at the option of the holder into common stock
at any time prior to July 7, 2005 and automatically converted into common stock
on July 7, 2005. Each share of preferred stock is convertible into 28.57 common
shares. If the Company delivers a notice of redemption, the conversion price
shall be adjusted to equal the lesser of (i) the conversion price then in
effect, and (ii) the current market price on the redemption notice date.
70
(6) LONG-TERM DEBT
Long-term debt outstanding at December 31 is as follows (in thousands):
2001 2000
---- ----
First mortgage bonds:
6.50% due 2002 $ 15,000 $ 15,000
9.00% due 2003 2,176 3,215
8.06% due 2010 30,000 30,000
9.49% due 2018 4,840 5,130
9.35% due 2021 33,300 35,000
8.30% due 2024 45,000 45,000
--------- ---------
130,316 133,345
--------- ---------
Other long-term debt:
Pollution control revenue bonds at 6.7% due 2010 12,300 12,300
Pollution control revenue bonds at 7.5% due 2024 12,200 12,200
Other 3,870 3,911
--------- ---------
28,370 28,411
--------- ---------
Project financing floating rate debt (a):
Fountain Valley project at 3.29% (b) due 2006 144,581 -
Hudson Falls at 3.7% (b) due 2010 69,479 74,147
South Glens Falls at 3.7% (b) due 2009 24,008 26,124
Valmont and Arapahoe at 3.31% (b) due 2010 54,948 59,025
--------- ---------
293,016 159,296
--------- ---------
Total long-term debt 451,702 321,052
Less current maturities (35,904) (13,960)
--------- ---------
Net long-term debt $415,798 $307,092
========= =========
- ---------------
(a) Approximately 74 percent of the December 31, 2001 balance has been
hedged with interest rate swaps moving the floating rates to fixed rates
with a weighted average interest rate of 5.85 percent (see Note 2-Risk
Management Activities).
(b) Interest rates are presented as of December 31, 2001.
Substantially all of the Company's utility property is subject to the lien of
the indenture securing its first mortgage bonds. First mortgage bonds of the
Company may be issued in amounts limited by property, earnings and other
provisions of the mortgage indentures.
Project financing debt is non-recourse debt collateralized by a mortgage on each
respective project's land and facilities, leases and rights, including rights to
receive payments under long-term purchase power contracts.
Certain debt instruments of the Company and its subsidiaries contain restrictive
covenants, all of which the Company and its subsidiaries were in compliance with
or have obtained amendments and waivers effective at December 31, 2001.
Scheduled maturities of long-term debt for the next five years are: $35.9
million in 2002, $22.4 million in 2003, $23.1 million in 2004, $24.7 million in
2005 and $137.3 million in 2006.
(7) NOTES PAYABLE
The Company has committed lines of credit with various banks totaling $400
million at December 31, 2001 and $290 million at December 31, 2000. At December
31, 2001, these lines consist of a $200 million revolving credit facility with a
term of 364 days, which terminates August 27, 2002, and a $200 million revolving
credit facility with a term of three years, which terminates on August 27, 2004.
The Company had $360 million of borrowings and $33.0 million of letters of
credit and $211 million of borrowings and $20.6 million of letters of credit
issued on the lines at December 31, 2001 and 2000, respectively. The Company had
no compensating balance requirements associated with these lines of credit.
71
The above facilities contain ratings trigger provisions that, if violated, would
be considered an event of default and would allow the lender to terminate the
remaining commitment and accelerate the principal and interest outstanding to
become immediately due. The Company would be considered in violation of these
ratings trigger provisions if its Standard & Poor's (S&P) Rating ceases to be at
least BBB- or its Moody's Rating ceases to be at least Baa3. In addition,
certain of the Company's interest rate swap agreements with a $150.0 million
notional amount and a $0.7 million fair value at December 31, 2001 include
cross-default provisions. These provisions would allow the counterparty the
right to terminate the swap agreement and liquidate at a prevailing market rate,
in the event of default. The Company's S&P and Moody's Ratings were BBB and A3,
respectively at December 31, 2001.
In addition to the above lines of credit, at December 31, 2001, Enserco Energy
(Enserco) has a $75.0 million ($90.0 million at December 31, 2000) uncommitted,
discretionary line of credit to provide support for the purchases of natural
gas. The line of credit is secured by all of Enserco's assets. The Company and
its other subsidiaries provide no guarantees to the lender. At December 31, 2001
and 2000, there were outstanding letters of credit issued under the facility of
$36.2 million and $69.8 million, respectively, with no borrowing balances on the
facility.
Black Hills Energy Resources (BHER) has a $25.0 million uncommitted,
discretionary credit facility secured by all of its assets. The transactional
line of credit provides credit support for the purchases of crude oil of BHER.
The Company and its other subsidiaries provide no guarantees to the lender. At
December 31, 2001 and 2000, BHER had letters of credit outstanding of $4.4
million and $8.5 million, respectively, with no borrowing balances on the
facility.
Our credit facilities contain certain restrictive covenants. The Company and its
subsidiaries had complied with all the covenants at December 31, 2001.
Interest rates under the facility borrowings vary and are based, at the option
of the Company at the time of the loan origination, on either (i) a prime based
borrowing rate varying from prime rate (4.75 percent at December 31, 2001) to
prime rate plus 1.0 percent, or (ii) on a London Interbank Offered Rate (LIBOR)
based borrowing rate varying from LIBOR plus 0.6 percent to LIBOR plus 0.625
percent. The one-month LIBOR rate at December 31, 2001 was 1.87 percent. In
addition to interest on outstanding borrowings, the credit facilities contain a
0 percent to 0.15 percent annual facility fee on the total facility amount, and
an annual utilization fee ranging from 0 percent to 0.125 percent of the total
used facility amount.
The Company has entered into floating-to-fixed interest rate swaps to hedge a
portion of its exposure to interest rate fluctuations with the above floating
rate obligations. See Note 2 for further details.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
2001 2000
---- ----
(in thousands)
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
Cash and cash equivalents $ 29,666 $ 29,666 $ 24,913 $ 24,913
Securities available-for-sale $ 3,550 $ 3,550 $ 2,113 $ 2,113
Derivative financial instruments - assets $ 46,210 $ 46,210 $ 68,292 $ 68,292
Derivative financial instruments - liabilities $ 50,818 $ 50,818 $ 65,960 $ 65,960
Notes payable $361,240 $361,240 $211,679 $211,679
Long-term debt $451,702 $469,787 $321,052 $337,446
The following methods and assumptions were used to estimate the fair value of
each class of the Company's financial instruments.
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short maturity of these
instruments.
72
Securities Available-for-Sale
The fair value of the Company's investments equals the quoted market price when
available and a quoted market price for similar securities if a quoted market
price is not available. The Company has classified all of its marketable
securities as available-for-sale as of December 31, 2001 and 2000. An unrealized
gain on the Company's investments of $1.4 million and an unrealized loss of $0.8
million was recorded as of December 31, 2001 and 2000, respectively.
Derivative Financial Instruments
These instruments are carried at fair value. Descriptions of the various
instruments the Company uses and the valuation method employed are available in
Note 2 of these Consolidated Financial Statements.
Notes Payable
The carrying amount approximates fair value due to their variable interest rates
with short reset periods.
Long-Term Debt
The fair value of the Company's long-term debt is estimated based on quoted
market rates for debt instruments having similar maturities and similar debt
ratings. The Company's outstanding bonds are either currently not callable or
are subject to make-whole provisions which would eliminate any economic benefits
for the Company to call and refinance the bonds.
(9) JOINTLY OWNED FACILITY
The Company owns a 20 percent interest and Pacific Power owns an 80 percent
interest in the Wyodak Plant (Plant), a 330 megawatt coal-fired electric
generating station located in Campbell County, Wyoming. Pacific Power is the
operator of the Plant. The Company receives 20 percent of the Plant's capacity
and is committed to pay 20 percent of its additions, replacements and operating
and maintenance expenses. As of December 31, 2001, the Company's investment in
the Plant included $71.7 million in electric plant and $22.8 million in
accumulated depreciation, and is included in the corresponding captions in the
accompanying Consolidated Balance Sheets. The Company's share of direct expenses
of the Plant was $5.9 million, $5.6 million and $4.9 million for the years ended
December 31, 2001, 2000 and 1999, respectively, and is included in the
corresponding categories of operating expenses in the accompanying Consolidated
Statements of Income. As discussed in Note 10, the Company's coal mining
subsidiary, Wyodak Resources, supplies coal to the Plant under an agreement
expiring in 2022. This coal supply agreement is collateralized by a mortgage on
and a security interest in some of Wyodak Resources' coal reserves. Under the
coal supply agreement, PacifiCorp is obligated to purchase a minimum of
1,500,000 tons of coal each year of the contract term, subject to adjustment for
planned outages. Wyodak Resources' sales to the Plant were $21.0 million, $23.2
million and $24.9 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
(10) COMMITMENTS AND CONTINGENCIES
Off Balance Sheet Lease
The Company's subsidiary, Black Hills Generation, has entered into an Agreement
for Lease and Lease with Wygen Funding, Limited Partnership for the Wygen Plant,
a 90 megawatt coal-fired power plant under construction in Campbell County,
Wyoming. Wygen Funding is a special purpose entity that owns the Wygen Plant and
has financed the project. Total cost of the project is estimated to be
approximately $130 - $140 million. Neither Wygen Funding, its owners, nor its
officers are related to the Company, and other than the lease transaction and
obligations incurred as a result of this transaction, there is no obligation to
provide additional funding or issue securities to Wygen Funding. Lease payments
are based on final construction and financing costs and are currently estimated
to be approximately $6.5 million per year based on five-year treasury rates.
Lease payments will begin after substantial completion of construction scheduled
for first quarter 2003. The lease will be accounted for as an operating lease.
The initial lease term is five years with two five-year renewal options and
includes a purchase option equal to the adjusted acquisition cost. The adjusted
acquisition cost is essentially equal to the final construction cost of the
project. If the Company elects to terminate or not renew the lease and not
purchase the project, then it must make a termination payment equal to the
lesser of 83.5 percent of the adjusted acquisition cost or the shortfall of
proceeds received from the sale of the project. Black Hills Corporation has
guaranteed the Agreement for Lease and Lease.
73
Power Purchase Agreement - Pacific Power
In 1983, the Company entered into a 40 year power purchase agreement with
Pacific Power providing for the purchase by the Company of 75 megawatts of
electric capacity and energy from Pacific Power's system. An amended agreement
signed in October 1997 reduces the contract capacity by 25 megawatts (5
megawatts per year starting in 2000). The price paid for the capacity and energy
is based on the operating costs of one of Pacific Power's coal-fired electric
generating plants. Costs incurred under this agreement were $13.9 million in
2001, $14.6 million in 2000 and $17.8 million in 1999.
Long-Term Power Sales Agreements
The Company, through its subsidiaries, has the following significant long-term
power sales contracts:
o The Company has long-term power sales contracts with the Public Service
Company of Colorado (PSCC) for the output of several of its plants. All of
the output of the Company's Fountain Valley, Arapahoe and Valmont gas-fired
facilities, totaling 400 megawatts in operation plus an additional 50
megawatts combined-cycle expansion currently under construction, is
included under the contracts which expire in 2012. The contracts are
tolling arrangements in which the Company assumes no fuel price risk.
o Beginning September 1, 2001, the Company has a ten year power sales
contract with Cheyenne Light, Fuel and Power (CLF&P) for the output of the
40 megawatt gas-fired Gillette CT. The contract is a tolling arrangement in
which the Company assumes no fuel risk. In addition, the Company entered
into a ten year contract with CLF&P for 60 megawatts of contingent capacity
from the 90 megawatt Wygen Plant, currently under construction. Twenty
megawatts of the remaining capacity of this plant has been sold under a ten
year contract with the Municipal Electric Agency of Nebraska.
o The Company has secured long-term contracts for the output of the 277
megawatt Las Vegas facility that was acquired during the third quarter of
2001. See Note 15 for a description of the facility and the related
long-term contracts.
o Various long-term contracts with Niagara Mohawk Power Corporation have been
entered into to sell the output of several of the Company's hydroelectric
projects located in upstate New York. The Company's net ownership of
capacity under contract is approximately 21 megawatts with contracts
expiring between 2028 and 2032. There are additional contracts on plants
with a net ownership capacity of approximately 21 megawatts that expire
during 2002 and 2003.
Reclamation Liability
Under its mining permit, Wyodak Resources is required to reclaim all land where
it has mined coal reserves. The cost of reclaiming the land is accrued as the
coal is mined. While the reclamation process takes place on a continual basis,
much of the reclamation occurs over an extended period after the area is mined.
Approximately $0.7 million is charged to operations as reclamation expense
annually. As of December 31, 2001, accrued reclamation costs included in Other
liabilities on the accompanying Consolidated Balance Sheets were approximately
$18.2 million.
Legal Proceedings
Settlement
On April 3, 2001, the Company reached a settlement of ongoing litigation with
PacifiCorp filed in the United States District Court, District of Wyoming, (File
No. 00CV-155B). The litigation concerned the parties' rights and obligations
under the Further Restated and Amended Coal Supply Agreement dated May 5, 1987,
under which PacifiCorp purchased coal from the Company's coal mine to meet the
coal requirements of the Wyodak Power Plant. The Settlement Agreement provided
for the dismissal of the litigation, with prejudice, coupled with the execution
of several new coal-related agreements between the parties discussed below. The
Company believes the value of the Settlement Agreements is equal to the net
present value of the litigated Further Restated and Amended Coal Supply
Agreement.
New Restated and Amended Coal Supply Agreement: Effective January 1, 2001, the
parties agreed to terminate the Further Restated and Amended Coal Supply
Agreement, and replace it with the New Restated and Amended Coal Supply
Agreement (New Agreement). The New Agreement began on January 1, 2001, and
extends to December 31, 2022. Under the New Agreement, the Company received an
extension of sales beyond the June 8, 2013 term of the former Coal Supply
Agreement. PacifiCorp will receive a price reduction for each ton of coal
purchased. The minimum purchase obligation under the New Agreement increased to
1,500,000 tons of coal for each calendar year of the contract term, subject to
adjustment for planned
74
outages. The New Agreement further provided for a special one-time payment by
PacifiCorp in the amount of $7.3 million, which was received in August 2001.
This payment primarily related to disputed billings under the previous agreement
and a value transfer premium. Of this payment, $5.6 million was recognized
currently and is included in "Other, net" non-operating income on the
accompanying Consolidated Statements of Income, $1.0 million was previously
recognized in revenues and the remaining $0.7 million is being recognized as
sales are made under the New Agreement.
Coal Option Agreement: The term of this agreement began October 1, 2001, and
extends until December 31, 2010. The agreement provides that PacifiCorp shall
purchase 1,400,000 tons of coal during the period of October 1, 2001 through
December 31, 2002 and 1,000,000 tons of coal in 2003 at a fixed price. The
agreement further provides the Company with a "put" option for 2002 and 2003
under which the Company may sell to PacifiCorp up to 500,000 tons of coal from
the Wyodak Mine at a market based price. For each calendar year from January 1,
2004 through 2010, the put option is increased to a maximum of 1,000,000 tons at
a market based price. The "put" tonnages will be reduced or offset for
quantities of an enhanced coal known as "K-Fuel" purchased by PacifiCorp under
the KFx Facility Output Agreement. Additionally, for each calendar year during
which the Company is selling to PacifiCorp K-Fuel under the KFx Facility Output
Agreement described below, and in which the Company has not exercised its "put"
option, PacifiCorp may elect to purchase an equal amount of tonnage from the
Company's coal reserves to use in a 50/50 blend with the K-Fuel, up to 500,000
tons per year in 2002 through 2007 at a market based price with a fixed floor.
Asset Option Agreement: This agreement provides PacifiCorp an option to purchase
a 10 percent interest in the KFx facility or the legal entity that owns the KFx
facility at a market based price.
Sale of North Conveyor System: The Company sold the "North Conveyor System" to
PacifiCorp, which served as the backup coal delivery system for the Wyodak Power
Plant which resulted in a $2.6 million gain that is included in "Other, net"
non-operating income on the accompanying Consolidated Statements of Income.
KFx Facility Output Agreement: The KFx plant is a coal enhancement facility the
Company owns located near its Wyodak Coal Mine. The KFx plant was built to
produce an enhanced coal known as "K-Fuel." Assuming the plant becomes
operational, PacifiCorp agrees to purchase K-Fuel for a term beginning January
1, 2002, and extending to December 31, 2007. If the plant is not operational on
or before December 31, 2003, the agreement will become void. Under this
agreement, PacifiCorp agrees to purchase the output of K-Fuel from the KFx
plant, up to a maximum of 500,000 tons for each calendar year from 2002 through
2007 at fixed price with market based escalation. Wyodak reserves the right to
sell up to a total of 100,000 tons from the output of the KFx plant to other
customers during the same time period.
Ongoing Litigation
The Company is subject to various legal proceedings and claims, which arise in
the ordinary course of operations. In the opinion of management, the amount of
liability, if any, with respect to these actions would not materially affect the
consolidated financial position or results of operations of the Company.
(11) EMPLOYEE BENEFIT PLANS
Defined Benefit Pension and Other Postretirement Plans
The Company has a noncontributory defined benefit pension plan (Plan) covering
the employees of the Company and those of the following subsidiaries, Black
Hills Power, Wyodak Resources Development Corp., Black Hills Exploration and
Production and Daksoft who meet certain eligibility requirements. The benefits
are based on years of service and compensation levels during the highest five
consecutive years of the last ten years of service. The Company's funding policy
is in accordance with the federal government's funding requirements. The Plan's
assets are held in trust and consist primarily of equity securities and cash
equivalents.
75
Net pension income for the Plan was as follows:
2001 2000 1999
---- ---- ----
(in thousands)
Service cost $ 945 $ 967 $ 1,174
Interest cost 3,080 2,885 2,598
Estimated return on assets (5,814) (5,257) (4,162)
Amortization of transition amount - (90) (90)
Amortization of prior service cost 231 231 89
Recognized net actuarial gain (556) (537) -
------- ------- -------
Net pension income $(2,114) $(1,801) $ (391)
======= ======= =======
Actuarial assumptions:
Discount rate 7.5% 7.5% 6.75%
Expected long-term rate of return on assets 10.5% 10.5% 10.5%
Rate of increase in compensation levels 5.0%* 5.0% 5.0%
- --------------------------
*The rate of increase in compensation levels for 2001 was changed from a
single rate assumption for all ages to an age-based salary scale
assumption resulting in a weighted average increase of 5.0 percent.
A reconciliation of the beginning and ending balances of the projected benefit
obligation is as follows:
2001 2000
---- ----
(in thousands)
Beginning projected benefit obligation $41,314 $39,615
------- -------
Service cost 945 967
Interest cost 3,080 2,885
Actuarial gains (167) (48)
Benefits paid (2,156) (2,105)
------- -------
Net increase 1,702 1,699
------- -------
Ending projected benefit obligation $43,016 $41,314
======= =======
A reconciliation of the fair value of Plan assets as of October 1 of each year
is as follows:
2001 2000
---- ----
(in thousands)
Beginning market value of plan assets $56,560 $51,212
Benefits paid (2,156) (2,105)
Investment income (loss) (13,136) 7,453
------- -------
Ending market value of plan assets $41,268 $56,560
======= =======
Funding information for the Plan as of October 1 each year was as follows:
2001 2000
---- ----
(in thousands)
Fair value of plan assets $41,268 $56,560
Projected benefit obligation (43,016) (41,314)
------- -------
Funded status (1,748) 15,246
Unrecognized:
Net (gain) loss 5,527 (13,812)
Prior service cost 1,823 2,054
------- -------
Prepaid pension cost $ 5,602 $ 3,488
======= =======
Accumulated benefit obligation $35,695 $33,374
======= =======
76
The Company has various supplemental retirement plans for outside directors and
key executives of the Company. The plans are nonqualified defined benefit plans.
Expenses recognized under the plans were $0.5 million during 2001 and 2000 and
$0.4 million during 1999.
Employees who are participants in the Plan and who retire from the Company on or
after attaining age 55 after completing at least five years of service to the
Company are entitled to postretirement healthcare benefits coverage. These
benefits are subject to premiums, deductibles, copayment provisions and other
limitations. The Company may amend or change the Plan periodically. The Company
is not pre-funding its retiree medical plan.
The net periodic postretirement cost was as follows:
2001 2000 1999
---- ---- ----
(in thousands)
Service cost $ 289 $ 282 $225
Interest cost 507 523 362
Amortization of transition obligation 150 150 150
Loss 21 68 1
------- ------- ----
$ 967 $ 1,023 $738
======= ======= ====
Funding information as of October 1 was as follows:
2001 2000
---- ----
(in thousands)
Accumulated postretirement benefit obligation:
Retirees $3,186 $2,478
Fully eligible active participants 1,803 1,203
Other active participants 3,963 3,172
------ ------
Unfunded accumulated postretirement benefit obligation 8,952 6,853
Unrecognized net loss (2,792) (1,001)
Unrecognized transition obligation (1,648) (1,797)
------ ------
Accrued postretirement cost $4,512 $4,055
====== ======
For measurement purposes, an 8.0 percent annual rate of increase in healthcare
benefits was assumed for 2001; the rate was assumed to decrease gradually to 6.0
percent in 2005 and remain at that level thereafter. The healthcare cost trend
rate assumption has a significant effect on the amounts reported. A one percent
increase in the healthcare cost trend assumption would increase the service and
interest cost $1.0 million or 23.8 percent and the net periodic postretirement
cost $1.2 million or 28.1 percent. A one percent decrease would reduce the
service and interest cost by $0.7 million or 18.3 percent and decrease the net
periodic postretirement cost $0.8 million or 17.2 percent. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.5 percent.
Defined Contribution Plan
The Company also sponsors a 401(k) savings plan for eligible employees.
Participants elect to invest up to 20 percent of their eligible compensation on
a pre-tax basis. Effective January 1, 2000 (May 1, 2000 for employees covered by
the collective bargaining agreement), the Company provides a matching
contribution of 100 percent of the employee's tax-deferred contribution up to a
maximum 3 percent of the employee's eligible compensation. Matching
contributions vest at 20 percent per year and are fully vested when the
participant has 5 years of service with the Company. The Company's matching
contributions totaled $0.9 million for 2001 and $0.6 million for 2000.
77
(12) OTHER COMPREHENSIVE INCOME
The following table displays the related tax effects allocated to each component
of Other Comprehensive Income (Loss) for the year ended December 31, 2001:
Pre-tax Tax Expense Net-of-tax
Amount (Benefit) Amount
------ --------- ------
(in thousands)
Unrealized gain on securities during the year $1,775 $ 337 $ 1,438
Net change in fair value of derivatives designated as cash flow
hedges (net of minority interest share of $2,875) (7,299) (2,932) (4,367)
------- ------- -------
Other comprehensive loss $(5,524) $(2,595) $(2,929)
======= ======= =======
Items of other comprehensive income (loss) were not significant in 2000 or 1999.
(13) INCOME TAXES
Income tax expense for the years indicated was:
2001 2000 1999
---- ---- ----
(in thousands)
Current:
Federal $38,730 $27,140 $13,267
State 2,022 1,281 231
------- ------- -------
40,752 28,421 13,498
Deferred 10,224 2,576 2,931
Tax credits (432) (639) (640)
------- ------- -------
$50,544 $30,358 $15,789
======= ======= =======
The temporary differences, which gave rise to the net deferred tax liability,
were as follows:
Years ended December 31, 2001 2000
---- ----
(in thousands)
Deferred tax assets:
Accelerated depreciation, amortization and other plant-related differences $ 735 $ 5,393
Regulatory asset 2,169 2,507
Valuation reserves 3,099 508
Mining development and oil exploration 1,501 3,605
Employee benefits 4,178 3,308
Items of other comprehensive income 4,540 -
Other 6,176 3,203
------- -------
22,398 18,524
------- -------
Deferred tax liabilities:
Accelerated depreciation and other plant-related differences 74,449 63,559
Regulatory liability 1,425 1,447
Mining development and oil exploration 8,650 8,450
Employee benefits 2,152 1,347
Derivative fair value adjustments 2,000 -
Items of other comprehensive income 1,945 -
Other 7,175 6,400
------- -------
97,796 81,203
------- -------
Net deferred tax liability $75,398 $62,679
======= =======
78
The effective tax rate differs from the federal statutory rate for the years
ended December 31, as follows:
2001 2000 1999
---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
State income tax 1.4 1.4 -
Amortization of investment tax credits - (1.0) (0.9)
Percentage depletion in excess of cost (2.2) (1.1) (1.6)
Other 2.3 2.2 (2.6)
---- ---- ----
36.5% 36.5% 29.9%
==== ==== ====
79
(14) BUSINESS SEGMENTS
The Company's reportable segments are those that are based on the Company's
method of internal reporting, which generally segregates the strategic business
groups due to differences in products, services and regulation. As of December
31, 2001, substantially all of the Company's operations and assets are located
within the United States. The Company's operations are conducted through six
business segments that include: Electric, which supplies electric utility
service to western South Dakota, northeastern Wyoming and southeastern Montana;
Integrated Energy consisting of: Mining, which engages in the mining and sale of
coal from its mine near Gillette, Wyoming; Oil and Gas, which produces, explores
and operates oil and natural gas interests located in the Rocky Mountain region,
Texas, California and other states; Fuel Marketing, which markets natural gas,
oil, coal and related services to customers in the East Coast, Midwest,
Southwest, Rocky Mountain, West Coast and Northwest regions markets; Power
Generation, which produces and sells power to wholesale customers; and
Communications, which primarily markets communications and software development
services.
December 31: 2001 2000
---- ----
(in thousands)
Total assets
Integrated energy:
Coal mining $ 42,198 $ 47,038
Oil and gas 57,766 36,376
Fuel marketing 144,586 340,969
Power generation 867,203 375,801
Electric utility 421,280 412,213
Communications 123,634 106,884
Corporate 2,100 1,039
---------- ----------
Total assets $1,658,767 $1,320,320
========== ==========
Capital expenditures
Integrated energy:
Coal mining $ 7,855 $ 2,419
Oil and gas 27,114 9,259
Fuel marketing 166 273
Power generation 497,653 76,932*
Electric utility 41,313 25,257
Communications 20,030 59,377
Corporate 25 -
--------- ----------
Total capital expenditures $ 594,156 $ 173,517
========= ==========
--------------------------------------------------------------------
*Excludes the non-cash acquisition of Indeck Capital, Inc. as described
in Note 15.
Property, plant and equipment
Integrated energy:
Coal mining $ 63,592 $ 57,720
Oil and gas 104,926 77,812
Fuel marketing 790 1,559
Power generation 698,175 294,805
Electric utility 569,368 530,380
Communications 129,748 109,718
Corporate 25 135
---------- ----------
Total property, plant and equipment $1,566,624 $1,072,129
========== ==========
80
December 31: 2001 2000 1999
---- ---- ----
(in thousands)
External operating revenues
Integrated energy:
Coal mining $ 20,551 $ 20,880 $ 23,431
Oil and gas 30,619 19,183 13,052
Fuel marketing 1,169,232 1,353,795 614,228
Power generation 94,294 39,331 -
Electric utility 212,355 173,308 133,222
Communications 20,258 7,689 278
---------- ---------- --------
Total external operating revenues $1,547,309 $1,614,186 $784,211
========== ========== ========
Intersegment operating revenues
Integrated energy:
Coal mining (a) $ 11,249 $ 9,650 $ 7,664
Oil and gas 2,789 1,145 -
Fuel marketing 15,817 13,175 -
Power generation - 329 -
Communications 4,250 3,682 3,145
Intersegment eliminations (22,856) (18,331) (3,145)
---------- ---------- --------
Total intersegment operating revenues(a) $ 11,249 $ 9,650 $ 7,664
========== ========== ========
--------------------------------------------------------------
(a) In accordance with the provisions of SFAS 71, intercompany coal
sales are not eliminated.
Depreciation, depletion and amortization
Integrated energy:
Coal mining $ 2,984 $ 3,525 $ 3,259
Oil and gas 7,806 4,071 2,953
Fuel marketing 724 644 2,757
Power generation 16,520 3,646 -
Electric utility 15,773 14,966 15,552
Communications 9,944 6,012 546
Corporate 300 - -
---------- ---------- --------
Total depreciation, depletion and amortization $ 54,051 $ 32,864 $ 25,067
========== ========== ========
Operating income (loss)
Integrated energy:
Coal mining $ 6,586 $ 8,794 $ 12,606
Oil and gas 15,193 7,906 3,978
Fuel marketing 54,071 23,774 (2,248)
Power generation 27,455 20,374 (157)
Electric utility 84,108 68,208 52,286
Communications (13,250) (12,486) (3,647)
Corporate (3,984) (1,820) (927)
---------- ---------- --------
Total operating income (loss) $ 170,179 $ 114,750 $ 61,891
========== ========== ========
81
December 31: 2001 2000 1999
---- ---- ----
(in thousands)
Interest income
Integrated energy:
Coal mining $ 8,125 $ 9,974 $ 2,709
Oil and gas 45 39 18
Fuel marketing 1,859 535 347
Power generation 8,992 4,085 101
Electric utility 4,858 5,658 1,190
Communications 15 657 1,050
Corporate 7,379 370 399
Intersegment eliminations (28,895) (14,243) (2,200)
----------- ---------- -----------
Total interest income $ 2,378 $ 7,075 $ 3,614
=========== ========== ===========
Interest expense
Integrated energy:
Coal mining $ 5,752 $ 8,006 $ 1,260
Oil and gas 145 372 568
Fuel marketing 164 535 719
Power generation 33,593 11,911 111
Electric utility 15,780 17,411 13,830
Communications 5,789 6,245 1,155
Corporate 7,298 105 17
Intersegment eliminations (28,895) (14,243) (2,200)
----------- ---------- -----------
Total interest expense $ 39,626 $ 30,342 $ 15,460
=========== ========== ===========
Income taxes
Integrated energy:
Coal mining $ 6,266 $ 2,660 $ 3,439
Oil and gas 4,930 2,609 968
Fuel marketing 21,326 9,323 50
Power generation 1,668 3,154 (58)
Electric utility 24,255 19,469 12,446
Communications (6,561) (6,476) (807)
Corporate (1,340) (381) (249)
----------- ---------- -----------
Total income taxes $ 50,544 $ 30,358 $ 15,789
=========== ========== ===========
Net income (loss) available for common stock
Integrated energy:
Coal mining $ 11,591 $ 7,173 $ 9,715
Oil and gas 10,197 4,992 2,462
Fuel marketing 35,058 14,009 (185)
Power generation 1,576 3,241 (109)
Electric utility 45,238 37,100 27,362
Communications (12,300) (11,382) (968)
Corporate (3,086) (1,175) (295)
Intersegment eliminations (724) (1,188) (915)
----------- ---------- -----------
Total net income available for common stock $ 87,550 $ 52,770 $ 37,067
=========== ========== ===========
82
(15) ACQUISITIONS
On April 11, 2001, the Company's power generation subsidiary, Black Hills Energy
Capital, purchased the Fountain Valley facility, a 240 megawatt generation
facility located near Colorado Springs, Colorado, featuring six LM-6000
simple-cycle, gas-fired turbines. The facility came on-line mid third quarter of
2001. The facility was purchased from Enron Corporation. Total cost of the
project was approximately $183 million and has been financed primarily with
non-recourse project debt. The Company has obtained an 11-year contract with
Public Service of Colorado to utilize the facility for peaking purposes. The
contract is a tolling arrangement in which the Company assumes no fuel risk. The
transaction has been accounted for as an asset purchase recorded at cost.
On August 31, 2001, Black Hills Energy Capital purchased a 277 megawatt
gas-fired co-generation power plant project located in North Las Vegas, Nevada
from Enron North America, a wholly owned subsidiary of Enron Corporation. The
facility currently has a 53 megawatt co-generation power plant in operation.
Most of the power from that facility is under a long-term contract expiring in
2024. The Company has sold 50 percent of this power plant to other parties;
however, under generally accepted accounting principles the Company is required
to consolidate 100 percent of this plant. The project also has a 224 megawatt
combined-cycle expansion under way, which is 100 percent owned by the Company.
The facility is scheduled to be fully operational in the third quarter of 2002
and will utilize LM-6000 technology. The power of the expansion is also under a
long-term contract, which expires in 2017. This contract for the expansion
requires the purchaser to provide fuel to the power plant when it is dispatched.
The cost for the entire facility is expected to be approximately $330 million
and the Company is in the process of obtaining long-term financing, which is
expected to be primarily non-recourse project debt.
The acquisition has been accounted for under the purchase method of accounting
and, accordingly, the purchase price of approximately $205 million has been
allocated to the acquired assets and liabilities based on preliminary estimates
of the fair values of the assets purchased and the liabilities assumed as of the
date of acquisition. Fair values in the allocation include assets acquired of
approximately $157 million (excluding goodwill and other intangibles) and
liabilities assumed of approximately $2.0 million. The estimated purchase price
allocations are subject to adjustment, generally within one year of the date of
the acquisition, should new or additional facts about the acquisitions become
available, any changes to the preliminary estimates will be reflected as an
adjustment to goodwill. The purchase price and related acquisition costs
exceeded the fair values assigned to net tangible assets by approximately $57.0
million, which was recorded as long-lived intangible assets and goodwill.
In addition, during 2001, the Company acquired an additional 31 percent interest
and a 13 percent interest in its consolidated majority-owned subsidiaries, Black
Hills North American Power Fund, L.P. and Indeck North American Power Partners,
L.P., respectively, from minority shareholders. Total consideration paid was
$15.9 million.
Pro forma financial amounts reflecting the effects of the above acquisitions are
not presented as such acquisitions were not significant to the Company's
financial position or results of operations.
On July 7, 2000, the Company acquired Indeck Capital, Inc. and merged it into
its subsidiary, Black Hills Energy Capital, Inc. The acquisition was a stock
transaction with the Company issuing 1,536,747 shares of common stock to the
shareholders of Indeck priced at $21.98 per share, along with $4.0 million in
preferred stock, resulting in a purchase price of $37.8 million. Additional
consideration, consisting of common and preferred stock, may be paid in the form
of an earn-out over a four-year period beginning in 2000. As of December 31,
2001, $3.6 million has been paid under the earn-out. The earn-out consideration
is based on the acquired company's earnings during such period and cannot exceed
$35.0 million in total. Additional consideration paid out under the earn-out is
recorded as an increase to goodwill.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the purchase price was allocated to the acquired assets and
liabilities based on estimates of the fair values of the assets purchased and
the liabilities assumed as of the date of acquisition. Fair values in the
allocation include assets acquired of $151.1 million (excluding goodwill) and
liabilities assumed of $138.7 million. The purchase price and related
acquisition costs exceeded the fair values assigned to net tangible assets by
$25.4 million, which was recorded as goodwill and was being amortized over 25
years on a straight-line basis during 2001 and 2000.
83
In addition during 2000, the Company made several step-acquisitions resulting in
consolidation of $169.5 million of assets and $138.8 million of liabilities. The
related transactions are as follows:
o Through various transactions, acquired an additional 27.11 percent interest
in Indeck North American Power Fund, L.P. and an additional 46.66 percent
interest in Indeck North American Power Partners, L.P., for $13.0 million
in cash.
o Acquired a 39.6 percent interest in each of Northern Electric Power
Company, L.P. and South Glens Falls Limited Partnership for $4.2 million in
cash.
o Acquired substantially all of the partnership interests in Middle Falls
Limited Partnership, Sissonville Limited Partnership and New York State Dam
Limited Partnership for $12.9 million in cash.
(16) OIL AND GAS RESERVES (Unaudited)
Black Hills Exploration and Production has interests in 813 producing oil and
gas properties in nine states. Black Hills Exploration and Production also holds
leases on approximately 228,551 net undeveloped acres.
The following table summarizes Black Hills Exploration and Production's
quantities of proved developed and undeveloped oil and natural gas reserves,
estimated using constant year-end product prices, as of December 31, 2001, 2000
and 1999, and a reconciliation of the changes between these dates. These
estimates are based on reserve reports by Ralph E. Davis Associates, Inc., an
independent engineering company selected by the Company. Such reserve estimates
are based upon a number of variable factors and assumptions, which may cause
these estimates to differ from actual results.
2001 2000 1999
---- ---- ----
Oil Gas Oil Gas Oil Gas
--- --- --- --- --- ---
(in thousands of barrels of oil and MMcf of gas)
Proved developed and undeveloped reserves:
Balance at beginning of year 4,413 18,404 4,109 19,460 2,368 15,952
Production (446) (4,615) (352) (3,285) (309) (2,801)
Additions 749 19,111 625 4,228 376 7,718
Property sales - - - - (164) (66)
Revisions to previous estimates (661) (8,829) 31 (1,999) 1,838 (1,343)
------- ------- ------- ------- ------- -------
Balance at end of year 4,055 24,071 4,413 18,404 4,109 19,460
======= ======= ======= ======= ======= =======
Proved developed reserves at end of
year included above 2,962 22,420 3,047 16,418 2,819 14,391
======= ======= ======= ======= ======= =======
Year-end prices (average well-head) $ 18.12 $ 2.05 $ 26.76 $ 8.05 $ 25.60 $ 1.99
======= ======= ======= ======= ======= =======
84
(17) QUARTERLY HISTORICAL DATA (Unaudited)
The Company operates on a calendar year basis. The following table sets forth
selected unaudited historical operating results and market data for each quarter
of 2001 and 2000.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
2001:
Operating revenues $561,693 $419,049 $302,398 $275,418
Operating income 61,580 64,005 29,439 15,155
Net income available
for common stock 32,050 34,553 16,235 4,712
Earnings per common
share: Basic 1.39 1.35 0.61 0.18
Diluted 1.37 1.34 0.61 0.18
Dividends paid per share 0.28 0.28 0.28 0.28
Common stock prices
High 45.74 58.50 45.55 34.20
Low 31.00 39.50 27.76 26.00
2000:
Operating revenues $247,959 $336,978 $453,231 $585,668
Operating income 16,872 15,200 42,519 40,159
Net income available
for common stock 9,061 8,061 16,285 19,363
Earnings per common
share: Basic 0.42 0.38 0.71 0.84
Diluted 0.42 0.38 0.71 0.83
Dividends paid per share 0.27 0.27 0.27 0.27
Common stock prices
High 25.19 25.19 30.13 46.06
Low 20.44 20.88 22.00 27.00
(18) SUBSEQUENT EVENTS (Unaudited)
On January 4, 2002, the Company closed on a $50.0 million bridge credit
agreement. The credit agreement will supplement our revolving credit facilities
in place at December 31, 2001 and has the same terms as those facilities with an
expiration date of June 30, 2002. Outstanding borrowings under the agreement as
of February 28, 2002 were $21.1 million.
On March 8, 2002, the Company acquired an additional 67 percent ownership
interest in Millennium Pipeline Company, L.P., which owns and operates a
200-mile pipeline. The pipeline has a capacity of approximately 65,000 barrels
of oil per day, and transports imported crude oil from Beaumont, Texas to
Longview, Texas, which is the transfer point to connecting carriers. The Company
also acquired additional ownership interest in Millennium Terminal Company,
L.P., which has 1.1 million barrels of crude oil storage connected to the
Millennium Pipeline at the Oil Tanking terminal in Beaumont. The Millennium
system is presently operating near capacity through shipper agreements. These
acquisitions give the Company 100 percent ownership in the Millennium companies.
Total cost of the acquisitions was $11.0 million and was funded through
borrowings under short-term revolving credit facilities.
On March 15, 2002, the Company closed on $135 million of senior secured
financing for the Arapahoe and Valmont Facilities. These projects have a total
of 210 megawatts in service and under construction and are located in the
Denver, Colorado area. Proceeds from this financing were used to refinance $53.8
million of an existing seven-year senior secured term project-level facility,
pay down approximately $50.0 million of short-term credit facility borrowings
and approximately $31.0 million will be used for future project construction.
85
On March 15, 2002, the Company paid $25.7 million to acquire an additional 30
percent interest in the Harbor Cogeneration Facility (the Facility), a 98
megawatt gas-fired plant located in Wilmington, California. This acquisition was
funded through borrowings under short-term revolving credit facilities and gives
the Company an 83 percent ownership interest and voting control of the Facility.
86
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change of accountants or disagreements on any matter of accounting principles
or practices or financial statement disclosure have occurred.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors is incorporated herein by reference to the
Proxy Statement for the Annual Shareholders' Meeting to be held May 29, 2002.
EXECUTIVE OFFICERS
Daniel P. Landguth, age 55, was elected Chairman of the Board and Chief
Executive Officer in January 1991. Mr. Landguth also currently chairs the
Executive Committee. He has over 30 years of experience with Black Hills. Mr.
Landguth holds a B.S. degree in Electrical Engineering from the South Dakota
School of Mines and Technology.
Everett E. Hoyt, age 62, has been President and Chief Operating Officer since
February 2001. Since 1989, he has been President and Chief Operating Officer of
our electric utility business - a role he continues to play. Mr. Hoyt was
elected to the Board of Directors in 1991. Prior to joining us, Mr. Hoyt was
employed by NorthWestern Corporation for 16 years where he served as Senior Vice
President-Legal and as a member of the Board of Directors. He holds a B.S.
degree in Mechanical Engineering from the South Dakota School of Mines and
Technology and a J.D. from the University of South Dakota School of Law.
Thomas M. Ohlmacher, age 50, has been the President and COO of our Independent
Energy Group since November 2001. He served as Senior Vice President-Power
Supply and Power Marketing since January 30, 2001 and Vice President - Power
Supply since August 1994. Prior to that, he held several positions with our
company since 1974. Mr. Ohlmacher holds a B.S. in Chemistry from the South
Dakota School of Mines and Technology.
Mark T. Thies, age 38, has been our Senior Vice President and Chief Financial
Officer since March 2000. From May 1997 to March 2000, he was our Controller.
From 1990 to 1997, Mr. Thies served in a number of accounting positions with
InterCoast Energy Company, an unregulated energy company and a wholly owned
subsidiary of MidAmerican Energy Holdings Company. Mr. Thies holds B.A.s in
Accounting and Business Administration from Saint Ambrose College and is a
certified public accountant.
Ronald D. Schaible, age 57, has been Senior Vice President of Communications of
Black Hills Corporation and Vice President and General Manager of Black Hills
FiberCom since October 1998. Mr. Schaible has more than 25 years experience in
the telecommunications industry. From 1995 to 1998, he was Vice President and
General Manager of the Kansas City and Missouri subsidiaries of Brooks Fiber
Properties. Mr. Schaible was responsible for both network construction and
operations in Kansas City. He holds a B.S. in Electrical Engineering from South
Dakota State University.
James M. Mattern, age 47, has been the Senior Vice President-Corporate
Administration since September 1999, and was Vice President-Corporate
Administration from January 1994 to September 1999. From 1997 to 1999, he was
also Assistant to the CEO. Mr. Mattern has 12 years of experience with us. He
holds a B.S. in Social Sciences and an M.S. in Administration from Northern
State University.
Steven J. Helmers, age 45, has been our General Counsel and Corporate Secretary
since January 2001. Prior to joining us, Mr. Helmers was a shareholder with the
Rapid City, South Dakota law firms of Truhe, Beardsley, Jensen, Helmers &
VonWald, from 1997 to January 2001, and Lynn, Jackson, Schultz & Lebrun, P.C.,
from 1983 to 1997. He holds a J.D. from the University of South Dakota School of
Law.
87
Roxann R. Basham, age 40, has been our Vice President-Controller since March
2000. From December 1997 to March 2000, she was Vice President-Finance and
Secretary/Treasurer. From 1993 until December 1997, she served as our
Secretary/Treasurer, and has a total of 16 years of experience with us. She
holds a B.S. in Business Administration from the University of South Dakota and
is a certified public accountant.
David R. Emery, age 39, has been our Vice President-Fuel Resources since January
1997. From June 1993 to January 1997, he was General Manager of Black Hills
Exploration and Production. Mr. Emery has 12 years of experience with us. He
holds a B.S. in Petroleum Engineering from the University of Wyoming and an M.S.
in Business Administration from the University of South Dakota.
Kyle D. White, age 42, has been Vice President - Corporate Affairs since January
30, 2001 and Vice President-Marketing and Regulatory Affairs since July 1998.
Mr. White served as Director-Strategic Marketing and Sales from 1993 to January
1998 and Vice President-Energy Services from January 1998 to July 1998. He has a
total of 18 years of experience with us. Mr. White holds a B.S. and M.S. in
Business Administration from the University of South Dakota.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding management remuneration and transactions is incorporated
herein by reference to our Proxy Statement for the Annual Shareholders' Meeting
to be held May 29, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners and
management is incorporated herein by reference to our Proxy Statement for the
Annual Shareholders' Meeting to be held May 29, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference to our Proxy Statement for the Annual
Shareholders' Meeting to be held May 29, 2002.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements
Financial statements required by Item 14 are listed in the index
included in Item 8 of Part II.
2. Schedules
All schedules have been omitted because of the absence of the
conditions under which they are required or because the required
information is included elsewhere in the financial statements
incorporated by reference in the Form 10-K.
88
3. Exhibits
Exhibit
Number Description
------- ------------------------------------------------------------------------------------
2* Plan of Exchange Between Black Hills Corporation and Black Hills Holding Corporation
(filed as an exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-52664)).
3.1* Articles of Incorporation of the Registrant (filed as an exhibit to the Registrant's
Registration Statement on Form S-4 (No. 333-52664)).
3.2* Articles of Amendment of the Registrant (filed as an exhibit to the Registrant's
Form 8-K filed on December 26, 2000).
3.3* Bylaws of the Registrant (filed as an exhibit to the Registrant's Registration
Statement on Form S-4 (No. 333-52664)).
3.4* Statement of Designations, Preferences and Relative
Rights and Limitations of No Par Preferred Stock,
Series 2000-A of the Registrant (filed as an exhibit
to the Registrant's Form 8-K filed on December 26,
2000).
4.1* Restated and Amended Indenture of Mortgage and Deed of Trust of Black Hills
Corporation (now called Black Hills Power, Inc.) dated as of September 1, 1999 (filed
as an exhibit to the Registrant's Registration Statement on Form S-4 (No. 333-52664)).
4.2* Form of Stock Certificate for Common Stock, Par Value $1.00 Per Share (filed as
Exhibit 4.2 to the Registrant's Form 10-K for 2000).
10.1* Agreement for Transmission Service and the Common Use of Transmission Systems dated
January 1, 1986, among Black Hills Power, Inc., Basin Electric Power Cooperative,
Rushmore Electric Power Cooperative, Inc., Tri-County Electric Association, Inc.,
Black Hills Electric Cooperative, Inc. and Butte Electric Cooperative, Inc. (filed as
Exhibit 10(d) to the Registrant's Form 10-K for 1987).
10.2* Restated and Amended Coal Supply Agreement for NS II
dated February 12, 1993 (filed as Exhibit 10(c) to
the Registrant's Form 10-K for 1992).
10.3* Coal Leases between Wyodak Resources Development Corp. and the Federal Government
-Dated May 1, 1959 (filed as Exhibit 5(i) to the Registrant's Form S-7, File No. 2-60755)
-Modified January 22, 1990 (filed as Exhibit 10(h) to the Registrant's Form 10-K for 1989)
-Dated April 1, 1961 (filed as Exhibit 5(j) to the Registrant's Form S-7, File No. 2-60755)
-Modified January 22, 1990 (filed as Exhibit 10(i) to Registrant's Form 10-K for 1989)
-Dated October 1, 1965 (filed as Exhibit 5(k) to the Registrant's Form S-7, File No. 2-60755)
-Modified January 22, 1990 (filed as Exhibit 10(j) to the Registrant's Form 10-K for 1989).
10.4* Restated and Amended Coal Supply Agreement dated as of January 1, 2001 between Wyodak
Resources Development Corp. and PacifiCorp (filed as Exhibit 10.4 to the Registrant's
Form S-1 No. 333-57440).
10.5* Second Restated and Amended Power Sales Agreement dated September 29, 1997, between
PacifiCorp and Black Hills Power, Inc. (filed as Exhibit 10(e) to the Registrant's
Form 10-K for 1997).
10.6* Coal Supply Agreement for Wyodak Unit #2 dated February 3, 1983, and Ancillary
Agreement dated February 3, 1982, between Wyodak Resources Development Corp., Pacific
Power & Light Company and Black Hills Power, Inc. (filed as Exhibit 10(o) to the
Registrant's Form 10-K for 1983). Amendment to Agreement for Coal Supply for
Wyodak #2 dated May 5, 1987 (filed as Exhibit 10(o) to the Registrant's Form 10-K for
1987).
10.7* Reserve Capacity Integration Agreement dated May 5, 1987, between Pacific Power &
Light Company and Black Hills Power, Inc. (filed as Exhibit 10(u) to the Registrant's
Form 10-K for 1987).
10.8* Marketing, Capacity and Storage Service Agreement between Black Hills Power, Inc. and
PacifiCorp dated September 1, 1995 (filed as Exhibit 10(ag) to the Registrant's
Form 10-K for 1995).
10.9* Assignment of Mining Leases and Related Agreement effective May 27, 1997, between
Wyodak Resources Development Corp. and Kerr-McGee Coal Corporation (filed as
Exhibit 10(u) to the Registrant's Form 10-K for 1997).
10.10* Rate Freeze Extension (filed as Exhibit 10(t) to the Registrant's Form 10-K for 1999).
89
10.11*+ Amended and Restated Pension Equalization Plan of Black Hills Corporation dated
January 6, 2000 (filed as Exhibit 10.11 to the Registrant's Form 10-K for 2000).
10.12*+ First Amendment to the Pension Equalization Plan of Black Hills Corporation dated
January 30, 2001 (filed as Exhibit 10.12 to the Registrant's Form 10-K for 2000).
10.13*+ Black Hills Corporation Nonqualified Deferred Compensation Plan dated June 1, 1999
(filed as Exhibit 10.13 to the Registrant's Form 10-K for 2000).
10.14*+ Black Hills Corporation 1996 Stock Option Plan (filed as Exhibit 10(s) to the
Registrant's Form 10-K for 1997).
10.15*+ Black Hills Corporation 1999 Stock Option Plan (filed as Exhibit 10.14 to the
Registrant's Form 10-K for 2000.
10.16+ Black Hills Corporation Omnibus Incentive Compensation Plan dated May 30, 2001.
10.17*+ Agreement for Supplemental Pension Benefit for Everett E. Hoyt dated January 20, 1992
(filed as Exhibit 10(gg) to the Registrant's Form 10-K for 1992).
10.18*+ Change in Control Agreements for various officers (filed as Exhibit 10(af) to the
Registrant's Form 10-K for 1995).
10.19*+ Outside Directors Stock Based Compensation Plan (filed as Exhibit 10(t) to the
Registrant's Form 10-K for 1997).
10.20*+ Officers Short-Term Incentive Plan (filed as Exhibit 10(s) to the Registrant's
Form 10-K for 1999).
10.21* Agreement and Plan of Merger, dated as of January 1, 2000, among Black Hills
Corporation, Black Hills Energy Capital, Inc., Indeck Capital, Inc., Gerald R.
Forsythe, Michelle R. Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe
and John W. Salyer, Jr. (Exhibit 2 to Schedule 13D filed on behalf of the former
shareholders of Indeck Capital, Inc. consisting of Gerald R. Forsythe, Michelle R.
Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr.,
dated July 7, 2000).
10.22* Addendum to the Agreement and Plan of Merger, dated as of April 6, 2000, among Black
Hills Corporation, Black Hills Energy Capital, Inc., Indeck Capital, Inc., Gerald R.
Forsythe, Michelle R. Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe
and John W. Salyer, Jr. (Exhibit 3 to Schedule 13D filed on behalf of the former
shareholders of Indeck Capital, Inc. consisting of Gerald R. Forsythe, Michelle R.
Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr.,
dated July 7, 2000).
10.23* Supplemental Agreement Regarding Contingent Merger Consideration, dated as of January
1, 2000, among Black Hills Corporation, Black Hills Energy Capital, Inc., Indeck
Capital, Inc., Gerald R. Forsythe, Michelle R. Fawcett, Marsha Fournier, Monica
Breslow, Melissa S. Forsythe and John W. Salyer, Jr. (Exhibit 4 to Schedule 13D filed
on behalf of the former shareholders of Indeck Capital, Inc. consisting of Gerald R.
Forsythe, Michelle R. Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe
and John W. Salyer, Jr., dated July 7, 2000).
10.24* Supplemental Agreement Regarding Restructuring of Certain Qualifying Facilities
(Exhibit 5 to Schedule 13D filed on behalf of the former shareholders of Indeck
Capital, Inc. consisting of Gerald R. Forsythe, Michelle R. Fawcett, Marsha Fournier,
Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr., dated July 7, 2000).
10.25* Addendum to the Agreement and Plan of Merger, dated as of June 30, 2000, among Black
Hills Corporation, Black Hills Energy Capital, Inc., Indeck Capital, Inc., Gerald R.
Forsythe, Michelle R. Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe
and John W. Salyer, Jr. (Exhibit 6 to Schedule 13D filed on behalf of the former
shareholders of Indeck Capital, Inc. consisting of Gerald R. Forsythe, Michelle R.
Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr.,
dated July 7, 2000).
10.26* Registration Rights Agreement among Black Hills Corporation, Gerald R. Forsythe,
Michelle R. Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe and John W.
Salyer, Jr. (Exhibit 7 to Schedule 13D filed on behalf of the former shareholders of
Indeck Capital, Inc. consisting of Gerald R. Forsythe, Michelle R. Fawcett, Marsha
Fournier, Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr., dated July 7,
2000).
90
10.27* Shareholders Agreement among Black Hills Corporation, Gerald R. Forsythe, Michelle R.
Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr.
(Exhibit 8 to Schedule 13D filed on behalf of the former shareholders of Indeck
Capital, Inc. consisting of Gerald R. Forsythe, Michelle R. Fawcett, Marsha Fournier,
Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr., dated July 7, 2000).
10.28* 3-year Credit Agreement dated as of August 28, 2001 among Black Hills Corporation,
as Borrower, The Financial Institutions party, hereto, as Banks, ABN AMRO BANK N.V.,
as Administrative Agent, Union Bank of California, N.A., as Syndication Agent, Bank of
Montreal, as Co-Syndication Agent, US Bank, National Association, as Documentation Agent,
and The Bank of Nova Scotia, as Co-Documentation Agent (filed as Exhibit 10.1 to the
Registrant's Form 10-Q for the quarterly period ended September 30, 2001).
10.29* 364-day Credit Agreement dated as of August 28, 2001 among Black Hills Corporation,
as Borrower, The Financial Institutions party, hereto, as Banks, ABN AMRO BANK N.V.,
as Administrative Agent, Union Bank of California, N.A., as Syndication Agent, Bank of
Montreal, as Co-Syndication Agent, US Bank, National Association, as Documentation Agent,
and The Bank of Nova Scotia, as Co-Documentation Agent (filed as Exhibit 10.2 to the
Registrant's Form 10-Q for the quarterly period ended September 30, 2001).
10.30 Purchase and Sale Agreement by and between TLS Investors, LLC and Black Hills
Energy Capital, Inc. dated June 18, 2001 to purchase Southwest Power, LLC.
10.31 Agreement for Lease between Wygen Funding, Limited Partnership and Black Hills
Generation, Inc. dated as of July 20, 2001.
10.32 Amendment No. 1 dated as of December 20, 2001 to Agreement for Lease dated as of July 20, 2001
between Wygen Funding, Limited Partnership as Owner and Black Hills Generation, Inc., as Agent.
10.33 Lease Agreement dated as of July 20, 2001 between Wygen Funding, Limited Partnership as
Lessor and Black Hills Generation, Inc. as Lessee.
21 List of Subsidiaries of Black Hills Corporation.
23.1 Consent of Independent Public Accountants.
23.2 Consent of Petroleum Engineer and Geologist.
99.1 Letter to Commission Pursuant to Temporary Note 3T.
- ----------
* Previously filed as part of the filing indicated and incorporated by reference
herein. + Indicates a board of director or management compensatory plan.
(b) Reports on Form 8-K
We have not filed any Reports on Form 8-K since September 30, 2001.
(c) See (a) 3. Exhibits above.
(d) See (a) 2. Schedules above.
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BLACK HILLS CORPORATION
By DANIEL P. LANDGUTH
-----------------------------
Daniel P. Landguth, Chairman
and Chief Executive Officer
Dated: March 25, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DANIEL P. LANDGUTH Director and Principal March 25, 2002
- ------------------------------------------ Executive Director
Daniel P. Landguth, Chairman,
and Chief Executive Officer
MARK T. THIES Principal Financial Officer March 25, 2002
- -------------------------------------------
Mark T. Thies, Senior Vice President and
Chief Financial Officer
ROXANN R. BASHAM Principal Accounting Officer March 25, 2002
- -------------------------------------------
Roxann R. Basham, Vice President-Controller,
and Assistant Secretary
ADIL M. AMEER Director March 25, 2002
- -------------------------------------------
Adil M. Ameer
BRUCE B. BRUNDAGE Director March 25, 2002
- -------------------------------------------
Bruce B. Brundage
DAVID C. EBERTZ Director March 25, 2002
- -------------------------------------------
David C. Ebertz
JOHN R. HOWARD Director March 25, 2002
- -------------------------------------------
John R. Howard
EVERETT E. HOYT Director and Officer March 25, 2002
- -------------------------------------------
Everett E. Hoyt, President and Chief
Operating Officer
KAY S. JORGENSEN Director March 25, 2002
- -------------------------------------------
Kay S. Jorgensen
DAVID S. MANEY Director March 25, 2002
- -------------------------------------------
David S. Maney
THOMAS J. ZELLER Director March 25, 2002
- -------------------------------------------
Thomas J. Zeller
92
INDEX TO EXHIBITS
Exhibit
Number Description
------- -------------------------------------------------------------------------------------------
2* Plan of Exchange Between Black Hills Corporation and Black Hills Holding Corporation (filed
as an exhibit to the Registrant's Registration Statement on Form S-4 (No. 333-52664)).
3.1* Articles of Incorporation of the Registrant (filed as an exhibit to the Registrant's
Registration Statement on Form S-4 (No. 333-52664)).
3.2* Articles of Amendment of the Registrant (filed as an exhibit to the Registrant's Form 8-K
filed on December 26, 2000).
3.3* Bylaws of the Registrant (filed as an exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-52664)).
3.4* Statement of Designations, Preferences and Relative Rights
and Limitations of No Par Preferred Stock, Series 2000-A
of the Registrant (filed as an exhibit to the Registrant's
Form 8-K filed on December 26, 2000).
4.1* Restated and Amended Indenture of Mortgage and Deed of Trust of Black Hills Corporation
(now called Black Hills Power, Inc.) dated as of September 1, 1999 (filed as an exhibit to
the Registrant's Registration Statement on Form S-4 (No. 333-52664)).
4.2* Form of Stock Certificate for Common Stock, Par Value $1.00 Per Share (filed at Exhibit 4.2
to the Registrant's Form 10-K for 2000).
10.1* Agreement for Transmission Service and the Common Use of Transmission Systems dated
January 1, 1986, among Black Hills Power, Inc., Basin Electric Power Cooperative, Rushmore
Electric Power Cooperative, Inc., Tri-County Electric Association, Inc., Black Hills
Electric Cooperative, Inc. and Butte Electric Cooperative, Inc. (filed as Exhibit 10(d) to
the Registrant's Form 10-K for 1987).
10.2* Restated and Amended Coal Supply Agreement for NS II dated
February 12, 1993 (filed as Exhibit 10(c) to the
Registrant's Form 10-K for 1992).
10.3* Coal Leases between Wyodak Resources Development Corp. and the Federal Government
-Dated May 1, 1959 (filed as Exhibit 5(i) to the Registrant's Form S-7, File No. 2-60755)
-Modified January 22, 1990 (filed as Exhibit 10(h) to the Registrant's Form 10-K for 1989)
-Dated April 1, 1961 (filed as Exhibit 5(j) to the Registrant's Form S-7, File No. 2-60755)
-Modified January 22, 1990 (filed as Exhibit 10(i) to Registrant's Form 10-K for 1989)
-Dated October 1, 1965 (filed as Exhibit 5(k) to the Registrant's Form S-7, File No. 2-60755)
-Modified January 22, 1990 (filed as Exhibit 10(j) to the Registrant's Form 10-K for 1989).
10.4* Restated and Amended Coal Supply Agreement dated as of January 1, 2001 between Wyodak
Resources Development Corp. and PacifiCorp (filed as Exhibit 10.4 to the Registrant's
Form S-1 No. 333-57440).
10.5* Second Restated and Amended Power Sales Agreement dated September 29, 1997, between
PacifiCorp and Black Hills Power, Inc. (filed as Exhibit 10(e) to the Registrant's
Form 10-K for 1997).
93
10.6* Coal Supply Agreement for Wyodak Unit #2 dated February 3, 1983, and Ancillary Agreement
dated February 3, 1982, between Wyodak Resources Development Corp., Pacific Power & Light
Company and Black Hills Power, Inc. (filed as Exhibit 10(o) to the Registrant's Form 10-K
for 1983). Amendment to Agreement for Coal Supply for Wyodak #2 dated May 5, 1987 (filed
as Exhibit 10(o) to the Registrant's Form 10-K for 1987).
10.7* Reserve Capacity Integration Agreement dated May 5, 1987, between Pacific Power & Light
Company and Black Hills Power, Inc. (filed as Exhibit 10(u) to the Registrant's Form 10-K
for 1987).
10.8* Marketing, Capacity and Storage Service Agreement between Black Hills Power, Inc. and
PacifiCorp dated September 1, 1995 (filed as Exhibit 10(ag) to the Registrant's Form 10-K
for 1995).
10.9* Assignment of Mining Leases and Related Agreement effective May 27, 1997, between Wyodak
Resources Development Corp. and Kerr-McGee Coal Corporation (filed as Exhibit 10(u) to the
Registrant's Form 10-K for 1997).
10.10* Rate Freeze Extension (filed as Exhibit 10(t) to the Registrant's Form 10-K for 1999).
10.11*+ Amended and Restated Pension Equalization Plan of Black Hills Corporation dated January 6,
2000 (filed as Exhibit 10.11 to the Registrant's Form 10-K for 2000).
10.12*+ First Amendment to the Pension Equalization Plan of Black
Hills Corporation dated January 30, 2001 (filed as Exhibit
10.12 to the Registrant's Form 10-K for 2000).
10.13*+ Black Hills Corporation Nonqualified Deferred Compensation
Plan dated June 1, 1999 (filed as Exhibit 10.13 to the
Registrant's Form 10-K for 2000).
10.14*+ Black Hills Corporation 1996 Stock Option Plan (filed as Exhibit 10(s) to the Registrant's
Form 10-K for 1997).
10.15*+ Black Hills Corporation 1999 Stock Option Plan (filed as Exhibit 10.14 to the Registrant's
Form 10-K for 2000.
10.16+ Black Hills Corporation Omnibus Incentive Compensation Plan dated May 30, 2001.
10.17*+ Agreement for Supplemental Pension Benefit for Everett E. Hoyt dated January 20, 1992
(filed as Exhibit 10(gg) to the Registrant's Form 10-K for 1992).
10.18*+ Change in Control Agreements for various officers (filed as Exhibit 10(af) to the
Registrant's Form 10-K for 1995).
10.19*+ Outside Directors Stock Based Compensation Plan (filed as Exhibit 10(t) to the Registrant's
Form 10-K for 1997).
10.20*+ Officers Short-Term Incentive Plan (filed as Exhibit 10(s) to the Registrant's Form 10-K
for 1999).
10.21* Agreement and Plan of Merger, dated as of January 1, 2000, among Black Hills Corporation,
Black Hills Energy Capital, Inc., Indeck Capital, Inc., Gerald R. Forsythe, Michelle R.
Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr.
(Exhibit 2 to Schedule 13D filed on behalf of the former shareholders of Indeck Capital,
Inc. consisting of Gerald R. Forsythe, Michelle R. Fawcett, Marsha Fournier, Monica
Breslow, Melissa S. Forsythe and John W. Salyer, Jr., dated July 7, 2000).
10.22* Addendum to the Agreement and Plan of Merger, dated as of April 6, 2000, among Black Hills
Corporation, Black Hills Energy Capital, Inc., Indeck Capital, Inc., Gerald R. Forsythe,
Michelle R. Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe and John W.
Salyer, Jr. (Exhibit 3 to Schedule 13D filed on behalf of the former shareholders of Indeck
Capital,
94
Inc. consisting of Gerald R. Forsythe, Michelle R. Fawcett, Marsha Fournier,
Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr., dated July 7, 2000).
10.23* Supplemental Agreement Regarding Contingent Merger Consideration, dated as of January 1,
2000, among Black Hills Corporation, Black Hills Energy Capital, Inc., Indeck Capital,
Inc., Gerald R. Forsythe, Michelle R. Fawcett, Marsha Fournier, Monica Breslow, Melissa S.
Forsythe and John W. Salyer, Jr. (Exhibit 4 to Schedule 13D filed on behalf of the former
shareholders of Indeck Capital, Inc. consisting of Gerald R. Forsythe, Michelle R. Fawcett,
Marsha Fournier, Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr., dated July 7,
2000).
10.24* Supplemental Agreement Regarding Restructuring of Certain Qualifying Facilities (Exhibit 5
to Schedule 13D filed on behalf of the former shareholders of Indeck Capital, Inc.
consisting of Gerald R. Forsythe, Michelle R. Fawcett, Marsha Fournier, Monica Breslow,
Melissa S. Forsythe and John W. Salyer, Jr., dated July 7, 2000).
10.25* Addendum to the Agreement and Plan of Merger, dated as of June 30, 2000, among Black Hills
Corporation, Black Hills Energy Capital, Inc., Indeck Capital, Inc., Gerald R. Forsythe,
Michelle R. Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe and John W.
Salyer, Jr. (Exhibit 6 to Schedule 13D filed on behalf of the former shareholders of Indeck
Capital, Inc. consisting of Gerald R. Forsythe, Michelle R. Fawcett, Marsha Fournier,
Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr., dated July 7, 2000).
10.26* Registration Rights Agreement among Black Hills Corporation, Gerald R. Forsythe, Michelle
R. Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr.
(Exhibit 7 to Schedule 13D filed on behalf of the former shareholders of Indeck Capital,
Inc. consisting of Gerald R. Forsythe, Michelle R. Fawcett, Marsha Fournier, Monica
Breslow, Melissa S. Forsythe and John W. Salyer, Jr., dated July 7, 2000).
10.27* Shareholders Agreement among Black Hills Corporation, Gerald R. Forsythe, Michelle R.
Fawcett, Marsha Fournier, Monica Breslow, Melissa S. Forsythe and John W. Salyer, Jr.
(Exhibit 8 to Schedule 13D filed on behalf of the former shareholders of Indeck Capital,
Inc. consisting of Gerald R. Forsythe, Michelle R. Fawcett, Marsha Fournier, Monica
Breslow, Melissa S. Forsythe and John W. Salyer, Jr., dated July 7, 2000).
10.28* 3-year Credit Agreement dated as of August 28, 2001 among Black Hills Corporation, as Borrower,
The Financial Institutions party, hereto, as Banks, ABN AMRO BANK N.V.,
as Administrative Agent, Union Bank of California, N.A., as Syndication Agent, Bank of Montreal,
as Co-Syndication Agent, US Bank, National Association, as Documentation Agent, and The Bank
of Nova Scotia, as Co-Documentation Agent (filed as Exhibit 10.1 to the Registrant's Form 10-Q
for the quarterly period ended September 30, 2001).
10.29* 364-Day Credit Agreement dated as of August 28, 2001 among Black Hills Corporation, as Borrower,
The Financial Institutions party, hereto, as Banks, ABN AMRO BANK N.V., as Administrative Agent,
Union Bank of California, N.A., as Syndication Agent, Bank of Montreal, as Co-Syndication
Agent, US Bank, National Association, as Documentation Agent, and The Bank of Nova Scotia,
as Co-Documentation Agent (filed as Exhibit 10.2 to the Registrant's Form 10-Q
for the quarterly period ended September 30, 2001).
95
10.30 Purchase and Sale Agreement by and between TLS Investors, LLC and Black Hills Energy
Capital, Inc. dated June 18, 2001 to purchase Southwest Power, LLC.
10.31 Agreement for Lease between Wygen Funding, Limited Partnership and Black Hills Generation, Inc. dated as
of July 20, 2001.
10.32 Amendment No. 1 dated as of December 20, 2001 to Agreement for Lease dated as of July 20, 2001 between
Wygen Funding, Limited Partnership as Owner and Black Hills Generation, Inc., as Agent.
10.33 Lease Agreement dated as of July 20, 2001 between Wygen Funding, Limited Partnership as Lessor and Black
Hills Generation, Inc. as Lessee.
21 List of Subsidiaries of Black Hills Corporation.
23.1 Consent of Independent Public Accountants.
23.2 Consent of Petroleum Engineer and Geologist.
99.1 Letter to Commission Pursuant to Temporary Note 3T.
- ----------
* Previously filed as part of the filing indicated and incorporated by reference herein.
+ Indicates a board of director or management compensatory plan.
96
Omnibus Incentive Compensation Plan
Black Hills Corporation
Effective May 30, 2001
TABLE OF CONTENTS
Page
Article 1. Establishment, Objectives, and Duration.........................................................1
1.1 Establishment of the Plan.......................................................................1
1.2 Objectives of the Plan..........................................................................1
1.3 Duration of the Plan............................................................................1
Article 2. Definitions.....................................................................................1
Article 3. Administration..................................................................................6
3.1 General.........................................................................................6
3.2 Authority of the Committee......................................................................7
3.3 Decisions Binding...............................................................................7
Article 4. Shares Subject to the Plan and Maximum Awards...................................................7
4.1 Number of Shares Available for Grants...........................................................7
4.2 Lapsed Awards and Awards Not Paid in Shares.....................................................8
4.3 Adjustments in Authorized Shares................................................................8
Article 5. Eligibility and Participation...................................................................8
5.1 Eligibility.....................................................................................8
5.2 Actual Participation............................................................................8
Article 6. Stock Options...................................................................................8
6.1 Grant of Options................................................................................8
6.2 Award Agreement.................................................................................9
6.3 Option Price....................................................................................9
6.4 Duration of Options.............................................................................9
6.5 Exercise of Options.............................................................................9
6.6 Payment.........................................................................................9
6.7 Restrictions on Share Transferability...........................................................9
6.8 Termination of Employment/Directorship.........................................................10
6.9 Nontransferability of Options..................................................................10
6.10 No Cancellation and Reissuance of Options......................................................10
Article 7. Stock Appreciation Rights......................................................................10
7.1 Grant of SARs..................................................................................10
7.2 SAR Agreement..................................................................................11
7.3 Term of SARs...................................................................................11
7.4 Exercise of Freestanding SARs..................................................................11
7.5 Exercise of Tandem SARs........................................................................11
i
7.6 Payment of SAR Amount..........................................................................11
7.7 Termination of Employment/Directorship.........................................................11
7.8 Nontransferability of SARs.....................................................................12
Article 8. Restricted Stock..............................................................................12
8.1 Grant of Restricted Stock......................................................................12
8.2 Restricted Stock Agreement.....................................................................12
8.3 Transferability................................................................................12
8.4 Other Restrictions.............................................................................12
8.5 Voting Rights..................................................................................13
8.6 Dividends and Other Distributions..............................................................13
8.7 Termination of Employment/Directorship.........................................................13
Article 9. Performance Units, Performance Shares, and Cash-Based Awards...................................13
9.1 Grant of Performance Units/Shares and Cash-Based Awards........................................13
9.2 Value of Performance Units/Shares and Cash-Based Awards........................................13
9.3 Earning of Performance Units/Shares and Cash-Based Awards......................................13
9.4 Form and Timing of Payment of Performance Units/Shares and Cash-Based Awards...................14
9.5 Termination of Employment/Directorship........................................................14
9.6 Nontransferability.............................................................................14
Article 10. Other Awards...................................................................................14
Article 11. Performance Measures...........................................................................14
Article 12. Beneficiary Designation........................................................................16
Article 13. Deferrals......................................................................................16
Article 14. Rights of Employees/Directors..................................................................16
14.1 Employment.....................................................................................16
14.2 Participation..................................................................................16
14.3 Rights as a Stockholder........................................................................16
Article 15. Change in Control..............................................................................16
15.1 Treatment of Outstanding Awards................................................................16
15.2 Termination, Amendment, and Modifications of Change-in-Control Provisions......................17
14.3 Pooling of Interests Accounting................................................................17
Article 16. Amendment, Modification, Termination and Bifurcation ..........................................18
16.1 Amendment, Modification, and Termination.......................................................18
16.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events.............18
ii
16.3 Awards Previously Granted......................................................................18
16.4 Compliance with Code Section 162(m)............................................................18
16.5 Bifurcation of the Plan........................................................................18
Article 17. Withholding....................................................................................18
17.1 Tax Withholding................................................................................19
17.2 Share Withholding..............................................................................19
Article 18. Indemnification................................................................................19
Article 19. Successors....................................................................................19
Article 20. General Provisions.............................................................................19
20.1 Gender and Number..............................................................................19
20.2 Severability...................................................................................20
20.3 Requirements of Law............................................................................20
20.4 Securities Law Compliance......................................................................20
20.5 Listing........................................................................................20
20.6 Delivery of Title..............................................................................20
20.7 Investment Representations.....................................................................20
20.8 No Additional Rights...........................................................................20
20.9 Uncertificated Shares..........................................................................21
20.10 Unfunded Status of the Plan....................................................................21
20.11 Governing Law..................................................................................21
iii
Black Hills Corporation
Omnibus Incentive Compensation Plan
Article 1. Establishment, Objectives, and Duration
1.1 Establishment of the Plan. Black Hills Corporation, a South Dakota
corporation (hereinafter referred to as the "Company"), hereby establishes an
incentive compensation plan to be known as the "Black Hills Corporation Omnibus
Incentive Compensation Plan" (hereinafter referred to as the "Plan"), as set
forth in this document. The Plan permits the grant of Nonqualified Stock
Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock,
Performance Shares, Performance Units, and Cash-Based Awards.
The Plan shall become effective when approved by the Shareholders at
the 2001 annual meeting of Shareholders on May 30, 2001, (the "Effective Date")
and shall remain in effect as provided in Section 1.3 hereof.
1.2 Objectives of the Plan. The objectives of the Plan are to optimize
the profitability and growth of the Company through annual and long-term
incentives that are consistent with the Company's goals and that link the
personal interests of Participants to those of the Company's stockholders; to
provide Participants with an incentive for excellence in individual performance;
and to promote teamwork among Participants. The Plan is further intended to
provide flexibility to the Company, its Affiliates, and Subsidiaries, in their
ability to motivate, attract, and retain the services of Participants who make
significant contributions to the Company's success and to allow Participants to
share in such success.
1.3 Duration of the Plan. The Plan shall commence on the Effective
Date, as described in Section 1.1 hereof, and shall remain in effect, subject to
the right of the Board of Directors to amend or terminate the Plan at any time
pursuant to Article 16 hereof, until all Shares subject to it shall have been
purchased or acquired according to the Plan's provisions. However, in no event
may an Award be granted under the Plan on or after the tenth (10th ) anniversary
of the Effective Date.
Article 2. Definitions
Whenever used in the Plan, the following terms shall have the meanings
set forth below, and when the meaning is intended, the initial letter of the
word shall be capitalized:
2.1 "Affiliate" shall have the meaning ascribed to such term in Rule
12b-2 of the General Rules and Regulations of the Exchange Act.
2.2 "Award" means, individually or collectively, a grant under this
Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation
Rights, Restricted Stock, Performance Shares, Performance Units, or Cash-Based
Awards.
1
2.3 "Award Agreement" means an agreement entered into by the Company
and each Participant setting forth the terms and provisions applicable to Awards
granted under this Plan.
2.4 "Beneficial Owner" or "Beneficial Ownership" shall have the meaning
ascribed to such term in Rule l3d-3 of the General Rules and Regulations under
the Exchange Act.
2.5 "Board" or "Board of Directors" means the Board of Directors
of the Company.
2.6 "Cash-Based Award" means an Award granted to a Participant as
described in Article 9 herein.
2.7 "Change in Control" shall mean any of the following events:
(a) An acquisition (other than directly from the Company)
of any Common Stock of the Company by any "Person" (as
the term person is used for purposes of Section 13(d)
or 14(d) of the Exchange Act, as amended (the "Exchange
Act"), immediately after which such Person has
"Beneficial Ownership" (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of thirty
percent (30%) or more of the Common Stock of the
Company; provided, however, in determining whether a
Change in Control has occurred, Common Stock which is
acquired in a "Non-Control Acquisition" (as hereinafter
defined) shall not constitute an acquisition which
would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by (1) an
employee benefit plan (or a trust forming a part
thereof) maintained by (A) the Company or (B) any
corporation or other Person of which a majority of its
voting power or its voting equity securities ("Voting
Securities") or equity interest is owned, directly or
indirectly, by the Company (for purposes of this
definition, a "Subsidiary"), (ii) the Company or its
Subsidiaries, or (iii) any Person in connection with a
"Non-Control Transaction" (as hereinafter defined);
(b) The individuals who, as of the Effective Date are
members of the Board (the "Incumbent Board"), cease for
any reason to constitute at least two-thirds of the
members of the Board; provided, however, that if the
election, or nomination for election by the Company's
common shareholders, of any new director was approved
by a vote of at least two-thirds of the Incumbent
Board, such new director shall, for purposes of this
Plan, be considered as a member of the Incumbent Board;
provided further, however, that no individual shall be
considered a member of the Incumbent Board if such
individual initially assumed office as a result of
either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the Exchange
Act) or other actual or threatened
2
solicitation of proxies or consents by or on behalf of
a Person other than the Board (a "Proxy Contest")
including by reason of any agreement intended to avoid
or settle any Election Contest or Proxy Contest; or
(c) Approval by shareholders of the Company of:
(i)......A merger, consolidation or reorganization
involving the Company, unless such merger,
consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control
Transaction" shall mean a merger,
consolidation or reorganization of the
Company where:
(A) The shareholders of the Company,
immediately before such merger,
consolidation or reorganization, own
directly or indirectly immediately
following such merger, consolidation
or reorganization, at least seventy
percent (70%) of the combined voting
power of the outstanding Voting
Securities of the corporation
resulting from such merger or
consolidation or reorganization (the
"Surviving Corporation") in
substantially the same proportion as
their ownership of the Voting
Securities immediately before such
merger, consolidation or
reorganization,
(B) The individuals who were members of
the Incumbent Board immediately
prior to the execution of the
agreement providing for such merger,
consolidation or reorganization
constitute at least two-thirds of
the members of the board of
directors of the Surviving
Corporation, or a corporation
beneficially directly or indirectly
owning a majority of the Voting
Securities of the Surviving
Corporation, and
(C) No Person other than (i) the
Company, (ii) any Subsidiary, (iii)
any employee benefit plan (or any
trust forming a part thereof)
maintained by the Company, the
Surviving Corporation, or any
Subsidiary, or (iv) any Person who,
immediately prior to such merger,
consolidation or reorganization had
Beneficial Ownership of thirty
percent (30%) or more of the then
outstanding Voting Securities), has
Beneficial Ownership of thirty
percent (30%) or more of the
combined voting power of the
Surviving Corporation's then
outstanding Voting Securities.
(ii) A complete liquidation or dissolution of
the Company; or
(iii) An agreement for the sale or other
disposition of all or substantially all of
the assets of the Company to any Person
other
3
than (x) a transfer to a Subsidiary or
(y) a sale or transfer of a Subsidiary by
the Company except if such sale or transfer
would be a sale or other disposition of all
or substantially all of the assets of the
Company.
(d) Notwithstanding the foregoing, (i) a Change in Control
shall not be deemed to occur solely because any person
(the "Subject Person") acquired Beneficial Ownership of
more than the permitted amount of the then outstanding
Common Stock as a result of the acquisition of Common
Stock by the Company which, by reducing the number of
shares of Common Stock then outstanding, increases the
proportional number of shares Beneficially Owned by the
Subject Persons, provided that if a Change in Control
would occur (but for the operation of this sentence) as
a result of the acquisition of Common Stock by the
Company, and after such stock acquisition by the
Company, the Subject Person becomes the Beneficial
Owner of any additional Common Stock which increases
the percentage of the then outstanding Common Stock
Beneficially Owned by the Subject Person, then a Change
in Control shall occur; and (ii) a Change in Control
shall not be deemed to occur unless and until all
regulatory approvals required to effect a Change in
Control of the Company have been obtained.
2.8 "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
2.9 "Committee" means the committee appointed by the Board to
administer Awards to Employees, as specified in Article 3 herein.
2.10 "Common Stock" means the $1 par value common stock of the
Company.
2.11 "Company" means Black Hills Corporation, a South Dakota
corporation and any successor thereto as provided in Article 19 herein.
2.12 "Covered Employee" means a Participant who, as of the date of
vesting and/or payout of an Award, as applicable, is, or, in the judgment of the
Board, might then be one of the group of "covered employees," as defined in the
regulations promulgated under Code Section 162(m), or any successor statute.
2.13 "Director" means any individual who is a member of the Board of
Directors of the Company; provided, however, that any Director who is employed
by the Company shall be considered an Employee under the Plan.
2.14 "Disability" shall have the meaning ascribed to such term in the
Participant's governing long-term disability plan, or if no such plan exists, at
the discretion of the Committee.
4
2.15 "Effective Date" shall have the meaning ascribed to such term
in Section1.1 hereof.
2.16 "Employee" means any employee of the Company or its
Subsidiaries or Affiliates.
2.17 "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor act thereto.
2.18 "Fair Market Value" shall be determined on the basis of the
closing sale price on the principal securities exchange on which the Shares are
traded or, if there is no such sale on the relevant date, then on the last
previous day on which a sale was reported.
2.19 "Freestanding SAR" means an SAR that is granted independently
of any Options, as described in Article 7 herein.
2.20 "Incentive Stock Option" or "ISO" means an option to purchase
Shares granted under Article 6 herein and that is designated as an Incentive
Stock Option and that is intended to meet the requirements of Code Section 422.
2.21 "Insider" shall mean an individual who is, on the relevant date,
an officer, director or ten percent (10%) beneficial owner of any class of the
Company's equity securities that is registered pursuant to Section 12 of the
Exchange Act, all as defined under Section 16 of the Exchange Act.
2.22 "Nonqualified Stock Option" or "NQSO" means an option to purchase
Shares granted under Article 6 herein and that is not intended to meet the
requirements of Code Section 422, or that otherwise does not meet such
requirements.
2.23 "Option" means an Incentive Stock Option or a Nonqualified Stock
Option, as described in Article 6 herein.
2.24 "Option Price" means the price at which a Share may be purchased
by a Participant pursuant to an Option.
2.25 "Other Award" means an Award granted under Article 10 hereunder.
2.26 "Participant" means an Employee or Director who has been selected
to receive an Award or who has outstanding an Award granted under the Plan.
2.27 "Performance-Based Exception" means the performance-based
exception from the tax deductibility limitations of Code Section 162(m).
2.28 "Performance Share" means an Award granted to a Participant, as
described in Article 9 herein.
5
2.29 "Performance Unit" means an Award granted to a Participant, as
described in Article 9 herein.
2.30 "Period of Restriction" means the period during which the transfer
of Shares of Restricted Stock is limited in some way (based on the passage of
time, the achievement of performance goals, or upon the occurrence of other
events as determined by the Committee, at its discretion), and the Shares are
subject to a substantial risk of forfeiture, as provided in Article 8 herein.
2.31 "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) thereof.
2.32 "Restricted Stock" means an Award granted to a Participant
pursuant to Article 8 herein.
2.33 "Retirement" shall have the meaning ascribed to such term in the
Company's tax-qualified defined benefit retirement plan.
2.34 "Rule 16b-3" means Rule 16b-3 of the regulations promulgated under
Section 16 of the Exchange Act, as amended, or any successor rule in effect from
time to time.
2.35 "Shares" means the shares of Common Stock of the Company.
2.36 "Stock Appreciation Right" or "SAR" means an Award, granted alone
or in connection with a related Option, designated as an SAR, pursuant to the
terms of Article 7 herein.
2.37 "Subsidiary" means any corporation, partnership, joint venture, or
other entity in which the Company has a majority voting interest.
2.38 "Tandem SAR" means an SAR that is granted in connection with a
related Option pursuant to Article 7 herein, the exercise of which shall require
forfeiture of the right to purchase a Share under the related Option (and when a
Share is purchased under the Option, the Tandem SAR shall similarly be
canceled).
Article 3. Administration
3.1 General. Subject to the terms and conditions of the Plan, the Plan
shall be administered by the Committee. The members of the Committee shall be
appointed by the Board from the Compensation Committee of the Board, and shall
serve at the discretion of, the Board of Directors. All members of the Committee
shall meet the definition of "nonemployee directors" as defined in 17 C.F.R. ss.
240.16b-3(b)(3)(i) and "outside directors" as defined in Code regulation ss.
1.162-27(e)(3). The Committee shall have the authority to delegate
administrative duties to
6
officers of the Company; provided, that no delegation may be made of all or any
part of authority under the Plan to the extent such delegation would
result in noncompliance with Rule 16b-3 or Code regulation ss. 1.162-27.
3.2 Authority of the Committee. Except as limited by law or by the
articles of incorporation or bylaws of the Company, and subject to the
provisions of the Plan herein, the Committee shall have full power to select
Employees and Directors who shall participate in the Plan; determine the sizes
and types of Awards; determine the terms and conditions of Awards in a manner
consistent with the Plan; construe and interpret the Plan and any agreement or
instrument entered into under the Plan; establish, amend, or waive rules and
regulations for the Plan's administration; and amend the terms and conditions of
any outstanding Award as provided in the Plan. Further, the Committee shall make
all other determinations that may be necessary or advisable for the
administration of the Plan.
3.3 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Committee shall be final, conclusive, and binding on all
persons, including the Company, its stockholders, Directors, Employees,
Participants, and their estates and beneficiaries.
Article 4. Shares Subject to the Plan and Maximum Awards
4.1 Number of Shares Available for Grants. Subject to adjustment as
provided in Section 4.2 herein, the number of Shares hereby reserved for
issuance to Participants under the Plan shall be one million two hundred
thousand (1,200,000), no more than two hundred forty thousand (240,000) of which
may be granted in the form of Restricted Shares. Such Share may be authorized
but unissued Shares, treasury shares, shares acquired on the open market
specifically for distribution under this Plan, or any combination thereof, as
the Committee may from time to time determine. The Committee shall determine the
appropriate methodology for calculating the number of shares issued pursuant to
the Plan. Unless and until the Committee determines that an Award to a Covered
Employee shall not be designed to comply with the Performance-Based Exception,
the following rules shall apply to grants of such Awards under the Plan:
(a) Stock Options: The maximum aggregate number of Shares
that may be granted in the form of Stock Options,
pursuant to any Award granted in any one fiscal year
to any one single Participant shall be five hundred
thousand (500,000); provided, that the aggregate Fair
Market Value (determined as of the time an Incentive
Stock Option is granted) of the Common Stock with
respect to which Incentive Stock Options are
exercisable for the first time during any calendar
year shall not exceed $100,000.
(b) SARs:.... The maximum aggregate number of Shares that
may be granted in the form of Stock Appreciation
Rights, pursuant to any Award granted in any one
fiscal year to any one single Participant shall be
five hundred thousand (500,000).
7
(c) Restricted Stock: The maximum aggregate grant with
respect to Awards of Restricted Stock granted in any
one fiscal year to any one Participant shall be one
hundred thousand (100,000).
(d) Performance Shares/Performance Units and Cash-Based
Awards: The maximum aggregate grant with respect to
Awards of Performance Shares made in any one fiscal
year to any one Participant shall be equal to the
value of fifty thousand (50,000) Shares; the maximum
aggregate amount awarded with respect to Cash-Based
Awards or Performance Units to any one Participant in
any one fiscal year may not exceed Two Million
Dollars ($2,000,000).
4.2 Lapsed Awards and Awards Not Paid in Shares. If any Award granted
under this Plan is canceled, terminates, expires, or lapses for any reason, any
Shares subject to such Award again shall be available for the grant of an Award
under the Plan. Shares received by the Company as payment for an Award (e.g.,
stock-for-stock exercises), Shares withheld by the Company to satisfy tax
withholding and stock-based Awards that are ultimately settled in cash shall be
available for grant of future Awards under the Plan.
4.3 Adjustments in Authorized Shares. In the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether or
not such reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Company, such adjustment
shall be made in the number and class of Shares that may be delivered under
Section 4.1, in the number and class of and/or price of Shares subject to
outstanding Awards granted under the Plan, and in the Award limits set forth in
subsections 4.1 (a) and 4.1 (b), as may be determined to be appropriate and
equitable by the Committee, in its sole discretion, to prevent dilution or
enlargement of rights; provided, however, that the number of Shares subject to
any Award shall always be a whole number.
Article 5. Eligibility and Participation
5.1 Eligibility. Persons eligible to participate in this Plan
include all Employees and Directors.
5.2 Actual Participation. Subject to the provisions of the Plan, the
Commitee may, from time to time, select from all eligible Employees and
Directors, those to whom Awards shall be granted and shall determine the nature
and amount of each Award.
Article 6. Stock Options
8
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Participants in such number, and upon such terms, and
at any time and from time to time as shall be determined by the Committee.
6.2 Award Agreement. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as the
Committee shall determine which are not inconsistent with the terms of the Plan.
The Award Agreement also shall specify whether the Option is intended to be an
ISO within the meaning of Code Section 422, or an NQSO whose grant is intended
not to fall under the provisions of Code Section 422.
6.3 Option Price. The Option Price for each grant of an Option under
this Plan shall be as determined by the Committee; provided, that the Option
Price may in no event be less than the Fair Market Value of the Shares subject
to the Option on the date of grant of the Option.
6.4 Duration of Options. Each Option granted to a Participant shall
expire at such time as the Committee shall determine at the time of grant;
provided, however, that no ISO shall be exercisable later than the tenth (10th)
anniversary date of its grant.
6.5 Exercise of Options. Options granted under this Article 6 shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for
each grant or for each Participant.
6.6 Payment. Options granted under this Article 6 shall be exercised by
the delivery of a written notice of exercise to the Company, setting forth the
number of Shares with respect to which the Option is to be exercised,
accompanied by full payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent; or (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price (provided that the Shares that are
tendered must have been held by the Participant for at least six (6) months
prior to their tender to satisfy the Option Price); or (c) by a combination of
(a) and (b); or (d) any other method approved by the Committee in its sole
discretion.
The Committee also may allow cashless exercise as permitted under
Federal Reserve Board's Regulation T, subject to applicable securities law
restrictions, or by any other means which the Committee determines to be
consistent with the Plan's purpose and applicable law.
Subject to any governing rules or regulations or to the provisions of
Article 13, as soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).
Unless otherwise determined by the Committee, all payments under all of
the methods indicated above shall be paid in United States dollars.
9
6.7 Restrictions on Share Transferability. The Committee may impose
such restrictions on any Shares acquired pursuant to the exercise of an Option
granted under this Article 6 as it may deem advisable, including, without
limitation, restrictions under applicable federal securities or tax laws, under
the requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws applicable
to such Shares.
6.8 Termination of Employment/Directorship. Each Participant's Award
Agreement shall set forth the extent to which the Participant shall have the
right to exercise the Option following termination of the Participant's
employment or directorship with the Company. Such provisions shall be determined
in the sole discretion of the Committee, shall be included in the Award
Agreement entered into with each Participant, need not be uniform among all
Options issued pursuant to this Article 6, and may reflect distinctions based on
the reasons for termination.
6.9 Nontransferability of Options.
(a) Incentive Stock Options. No ISO granted under the
Plan may be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated, other than by
will or by the laws of descent and distribution.
Further, all ISOs granted to a Participant under the
Plan shall be exercisable during his or her lifetime
only by such Participant.
(b) Nonqualified Stock Options. Except as otherwise
provided in a Participant's Award Agreement, no NQSO
granted under this Article 6 may be sold,
transferred, pledged, assigned, or otherwise
alienated or hypothecated, other than by will or by
the laws of descent and distribution. Further, except
as otherwise provided in a Participant's Award
Agreement, all NQSOs granted to a Participant under
this Article 6 shall be exercisable during his or her
lifetime only by such Participant.
6.10 No Cancellation and Reissuance of Options. In no event shall
the Board or the Committee permit the repricing of Options by any method,
including by cancellation and reissuance.
Article 7. Stock Appreciation Rights
7.1 Grant of SARs. Subject to the terms and conditions of the Plan,
SARs may be granted to Participants at any time and from time to time as shall
be determined by the Committee. The Committee may grant Freestanding SARs,
Tandem SARs, or any combination of these forms of SAR.
Subject to the terms and conditions of the Plan, the Committee shall
have complete discretion in determining the number of SARs granted to each
Participant and, consistent with
10
the provisions of the Plan, in determining the terms and conditions pertaining
to such SARs.
The grant price of a Freestanding SAR shall equal the Fair Market Value
of a Share on the date of grant of the SAR. The grant price of Tandem SARs shall
equal the Option Price of the related Option.
7.2 SAR Agreement. Each SAR grant shall be evidenced by an Award
Agreement that shall specify the grant price, the term of the SAR, and such
other provisions as the Committee shall determine.
7.3 Term of SARs. The term of an SAR granted under the Plan shall
be determined by the Committee, in its sole discretion.
7.4 Exercise of Freestanding SARs. Freestanding SARs may be exercised
upon whatever terms and conditions the Committee, in its sole discretion,
imposes upon them.
7.5 Exercise of Tandem SARs. Tandem SARs may be exercised for all or
part of the Shares subject to the related Option upon the surrender of the right
to exercise the equivalent portion of the related Option. A Tandem SAR may be
exercised only with respect to the Shares for which its related Option is then
exercisable.
Notwithstanding any other provision of this Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO: (a) the Tandem SAR
will expire no later than the expiration of the underlying ISO; (b) the value of
the payout with respect to the Tandem SAR may be for no more than one hundred
percent (100%) of the difference between the Option Price of the underlying ISO
and the Fair Market Value of the Shares subject to the underlying ISO at the
time the Tandem SAR is exercised; and (c) the Tandem SAR may be exercised only
when the Fair Market Value of the Shares subject to the ISO exceeds the Option
Price of the ISO.
7.6 Payment of SAR Amount. Upon exercise of an SAR, a Participant shall
be entitled to receive payment from the Company in an amount determined by
multiplying:
(a) The difference between the Fair Market Value of a
Share on the date of exercise over the grant price; by
(b) The number of Shares with respect to which the SAR is
exercised.
At the discretion of the Committee, the payment upon SAR exercise may
be in cash, in Shares of equivalent value, in some combination thereof, or in
any other manner approved by the Committee at its sole discretion. The
Committee's determination regarding the form of SAR payout shall be set forth in
the Award Agreement pertaining to the grant of the SAR.
7.7 Termination of Employment/Directorship. Each Award Agreement shall
set forth the extent to which the Participant shall have the right to exercise
the SAR following termination of the Participant's employment or directorship
with the Company, its Affiliates,
11
and/or its subsidiaries, as the case may be. Such provisions shall be determined
in the sole discretion of the Committee, shall be included in the Award
Agreement entered into with Participants, need not be uniform among all SARs
issued pursuant to the Plan, and may reflect distinctions based on the reasons
for termination.
7.8 Nontransferability of SARs. Except as otherwise provided in a
Participant's Award Agreement, no SAR granted under the Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, except as
otherwise provided in a Participant's Award Agreement, all SARs granted to a
Participant under the Plan shall be exercisable during his or her lifetime only
by such Participant.
Article 8. Restricted Stock
8.1 Grant of Restricted Stock. Subject to the terms and provisions of
the Plan, the Committee, at any time and from time to time, may grant Shares of
Restricted Stock to Participants in such amounts as the Committee shall
determine.
8.2 Restricted Stock Agreement. Each Restricted Stock grant shall be
evidenced by a Restricted Stock Award Agreement that shall specify the Period(s)
of Restriction, the number of Shares of Restricted Stock granted, and such other
provisions as the Committee shall determine.
8.3 Transferability. Except as provided in this Article 8, the Shares
of Restricted Stock granted herein may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated until the end of the applicable
Period of Restriction established by the Committee and specified in the
Restricted Stock Award Agreement, or upon earlier satisfaction of any other
conditions, as specified by the Committee in its sole discretion and set forth
in the Restricted Stock Award Agreement. All rights with respect to the
Restricted Stock granted to a Participant under the Plan shall be available
during his or her lifetime only to such Participant.
8.4 Other Restrictions. The Committee shall impose such other
conditions and/or restrictions on any Shares of Restricted Stock granted
pursuant to the Plan as it may deem advisable including, without limitation, a
requirement that Participants pay a stipulated purchase price for each Share of
Restricted Stock, restrictions based upon the achievement of specific
performance goals, time-based restrictions on vesting following the attainment
of the performance goals, time-based restrictions, and/or restrictions under
applicable federal or state securities laws.
To the extent deemed appropriate by the Committee, the Company may
retain the certificates representing Shares of Restricted Stock in the Company's
possession until such time as all conditions and/or restrictions applicable to
such Shares have been satisfied.
Except as otherwise provided in this Article 8, Shares of Restricted
Stock covered by each Restricted Stock grant made under the Plan shall become
freely transferable by the
Participant after the last day of the applicable Period of Restriction.
12
8.5 Voting Rights. If the Committee so determines, Participants holding
Shares of Restricted Stock granted hereunder may be granted the right to
exercise full voting rights with respect to those Shares during the Period of
Restriction.
8.6 Dividends and Other Distributions. During the Period of
Restriction, Participants holding Shares of Restricted Stock granted hereunder
may, if the Committee so determines, be credited with dividends paid with
respect to the underlying Shares while they are so held. The Committee may apply
any restrictions to the dividends that the Committee deems appropriate. Without
limiting the generality of the preceding sentence, if the grant or vesting of
Restricted Shares granted to a Covered Employee is designed to comply with the
requirements of the Performance-Based Exception, the Committee may apply any
restrictions it deems appropriate to the payment of dividends declared with
respect to such Restricted Shares, such that the dividends and/or the Restricted
Shares maintain eligibility for the Performance-Based Exception.
8.7 Termination of Employment/Directorship. Each Award Agreement shall
set forth the extent to which the Participant shall have the right to receive
unvested Restricted Shares following termination of the Participant's employment
or directorship with the Company. Such provisions shall be determined in the
sole discretion of the Committee, shall be included in the Award Agreement
entered into with each Participant, need not be uniform among all Shares of
Restricted Stock issued pursuant to the Plan, and may reflect distinctions based
on the reasons for termination.
Article 9. Performance Units, Performance Shares, and Cash-Based
Awards
9.1 Grant of Performance Units/Shares and Cash-Based Awards. Subject to
the terms of the Plan, Performance Units, Performance Shares, and/or Cash-Based
Awards may be granted to Participants in such amounts and upon such terms, and
at any time and from time to time, as shall be determined by the Committee.
9.2 Value of Performance Units/Shares and Cash-Based Awards. Each
Performance Unit shall have an initial value that is established by the
Committee at the time of grant. Each Performance Share shall have an initial
value equal to the Fair Market Value of a Share on the date of grant. Each
Cash-Based Award shall have a value as may be determined by the Committee. The
Committee shall set performance goals in its discretion which, depending on the
extent to which they are met, will determine the number and/or value of
Performance Units/Shares and Cash-Based Awards that will be paid out to the
Participant. For purposes of this Article 9, the time period during which the
performance goals must be met shall be called a "Performance Period."
9.3 Earning of Performance Units/Shares and Cash-Based Awards. Subject
to the terms of this Plan, after the applicable Performance Period has ended,
the holder of
13
Performance Units/Shares and Cash-Based Awards shall be entitled
to receive payout on the number and value of Performance Units/Shares and
Cash-Based Awards earned by the Participant over the Performance Period, to be
determined as a function of the extent to which the corresponding performance
goals have been achieved.
9.4 Form and Timing of Payment of Performance Units/Shares and
Cash-Based Awards.
Payment of earned Performance Units/Shares and Cash-Based Awards shall
be as determined by the Committee and as evidenced in the Award Agreement.
Subject to the terms of the Plan, the Committee, in its sole discretion, may pay
earned Performance Units/Shares and Cash-Based Awards in the form of cash or in
Shares (or in a combination thereof) that have an aggregate Fair Market Value
equal to the value of the earned Performance Units/Shares and Cash-Based Awards
at the close of the applicable Performance Period. Such Shares may be granted
subject to any restrictions deemed appropriate by the Committee. The
determination of the Committee with respect to the form of payout of such Awards
shall be set forth in the Award Agreement pertaining to the grant of the Award.
At the discretion of the Committee, Participants holding Performance
Units/Shares may be entitled to receive dividend units with respect to dividends
declared with respect to the Shares. Such dividends may be subject to the same
accrual, forfeiture, and payout restrictions as apply to dividends earned with
respect to Shares of Restricted Stock, as set forth in Section 8.6 herein, as
determined by the Committee.
9.5 Termination of Employment/Directorship. In the event the employment
or directorship terminates for any reason, including by reason of death,
Disability, or Retirement, all Performance Units/Shares and Cash-Based Awards
shall be forfeited by the Participant to the Company unless determined otherwise
by the Committee, as set forth in the Participant's Award Agreement.
9.6 Nontransferability. Except as otherwise provided in a Participant's
Award Agreement, Performance Units/Shares and Cash-Based Awards may not be sold,
transferred, pledged, assigned, or other-wise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, except as
otherwise provided in a Participant's Award Agreement, a Participant's rights
under the Plan shall be exercisable during the Participant's lifetime only by
the Participant.
Article 10. Other Awards
The Committee shall have the right to grant other Awards which may
include, without limitation, the grant of shares based on attainment of
performance goals established by the Committee, the payment of Shares in lieu of
cash or cash based on attainment of performance goals established by the
Committee, and the payment of Shares in lieu of cash under other Company
incentive or bonus programs. Payment under or settlement of any such Awards
shall be made in such manner and at such times as the Committee may determine.
14
Article 11. Performance Measures
Unless and until the Committee proposes for shareholder vote and
shareholders approve a change in the general performance measures set forth in
this Article 11, the attainment of which may determine the degree of payout
and/or vesting with respect to Awards to Covered Employees that are designed to
qualify for the Performance-Based Exception, the performance measure(s) to be
used for purposes of such grants shall be based upon one or more of the
following performance based criteria, either on a Company-specific basis or in
comparison with peer group performance:
(a) Earnings per share;
(b) Net income (before or after taxes);
(c) Return measures (including, but not limited to,
return on assets, equity, or sales);
(d) Cash flow (including, but not limited to, operating
cash flow and free cash flow);
(e) Cash flow return on investments, which equals net
cash flows divided by owner's equity;
(f) Earnings before or after taxes, interest,
depreciation and/or amortization;
(g) Internal rate of return or increase in net present
value;
(h) Dividends paid;
(i) Gross revenues;
(j) Gross margins;
(k) Share price performance (including, but not limited
to, growth measures and total shareholder return);
(l) Customer satisfaction measures; and
(m) Price earnings ratio.
The Committee in its sole discretion shall have the ability to set such
performance measures at the corporate level or the business unit level.
The Committee may exclude various items and occurrences from business
results before determining Awards under the Plan. To the extent such exclusions
affect Awards to executives covered by Section 162(m), they will be prescribed
in resolutions that meet the requirements of Section 162(m) for deductibility.
Notwithstanding anything contained herein, Awards that are designed to
qualify for the Performance-Based Exception, and that are held by Covered
Employees, may not be adjusted upward (the Committee shall retain the discretion
to adjust such Awards downward).
In the event that applicable tax and/or securities laws change to
permit Committee discretion to alter the governing performance measures without
obtaining shareholder approval of such changes, the Committee shall have sole
discretion to make such changes without obtaining shareholder approval. In
addition, in the event that the Committee determines that it is
15
advisable to grant Awards that shall not qualify for the Performance-Based
Exception, the Committee may make such grants without satisfying the
requirements of Code Section 162(m). No payment for Awards that are designed to
qualify for the Performance-Based Exception shall be paid until the Committee
certifies in writing that the performance goals and all material terms of the
Award were in fact satisfied. Approved minutes of the Committee meeting in which
the certification is made shall be treated as a written certification.
Article 12. Beneficiary Designation
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death before
he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company, and will be effective only when filed by the
Participant in writing with the Company during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
Article 13. Deferrals
The Committee may permit or require a Participant to defer such
Participant's receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant by virtue of the exercise of an
Option or SAR, the lapse or waiver of restrictions with respect to Restricted
Stock, or the satisfaction of any requirements or goals with respect to
Performance Units/Shares and Cash-Based Awards. If any such deferral election is
required or permitted, the Committee shall, in its sole discretion, establish
rules and procedures for such payment deferrals.
Article 14. Rights of Employees/Directors
14.1 Employment. Nothing in the Plan shall interfere with or limit in
any way the right of the Company to terminate any Participant's employment at
any time, nor confer upon any Participant any right to continue in the employ of
the Company, or any right in any Director to be retained in the service of the
Company.
14.2 Participation. No Employee or Director shall have the right to be
selected to receive an Award under this Plan, or, having been so selected, to be
selected to receive a future Award.
14.3 Rights as a Stockholder. A Participant shall have none of the
rights of a shareholder with respect to shares of Common Stock covered by any
Award until the Participant becomes the record holder of such shares.
Article 15. Change in Control
16
15.1 Treatment of Outstanding Awards. Upon the occurrence of a Change
in Control, unless otherwise specifically prohibited under applicable laws, or
by the rules and regulations of any governing governmental agencies or national
securities exchanges, or unless the Committee shall determine otherwise in the
Award Agreement:
(a) Any and all Options and SARs granted hereunder shall
become immediately exercisable, and shall remain
exercisable throughout their entire term;
(b) Any restriction periods and restrictions imposed on
Restricted Shares that are not performance-based
shall lapse; and
(c) The target payout opportunities attainable under all
outstanding Awards of performance-based Restricted
Stock, Performance Units, Performance Shares, and
Cash-Based Awards shall be deemed to have been fully
earned for the entire Performance Period(s) as of the
effective date of the Change in Control. The vesting
of all Awards denominated in Shares shall be
accelerated as of the effective date of the Change
in Control, and there shall be paid out to
Participants within thirty (30) days following the
effective date of the Change in Control a pro rata
number of shares based upon an assumed achievement of
all relevant targeted performance goals and upon the
length of time within the Performance Period that has
elapsed prior to the Change in Control. Awards
denominated in cash shall be paid pro rata to
participants in cash within thirty (30) days
following the effective date of the Change in
Control, with the proration determined as a
function of the length of time within the Performance
Period that has elapsed prior to the Change in
Control, and based on an assumed achievement of all
relevant targeted performance goals.
15.2 Termination, Amendment, and Modifications of Change-in-Control
Provisions.
Notwithstanding any other provision of this Plan (but subject to the
limitations of Section 16.3 hereof) or any Award Agreement provision, the
provisions of this Article 15 may not be terminated, amended, or modified on or
after the date of a Change in Control to affect adversely any Award theretofore
granted under the Plan without the prior written consent of the Participant with
respect to said Participant's outstanding Awards; provided, however, the Board
may terminate, amend, or modify this Article 15 at any time and from time to
time prior to the date of a Change in Control.
14.3 Pooling of Interests Accounting. Notwithstanding any other
provision of the Plan to the contrary, in the event that the consummation of a
Change in Control is contingent on using pooling of interests accounting
methodology, the Board may take any action necessary to preserve the use of
pooling of interests accounting.
17
Article 16. Amendment, Modification, Termination and Bifurcation
16.1 Amendment, Modification, and Termination. Subject to the terms of
the Plan, the Committee may at any time and from time to time, alter, amend,
suspend, or terminate the Plan in whole or in part; provided, that no such
amendment shall be made without the approval of the Company shareholders (a)
that would increase the number of Shares available for issuance in accordance
with the Plan; or (b) if such approval is required, (i) to comply with Section
422 of the Code with respect to Incentive Stock Options; or (ii) for purposes of
Section 162(m) of the Code.
16.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or
Nonrecurring Events.
The Committee may make adjustments in the terms and conditions of, and
the criteria included Awards in recognition of unusual or nonrecurring events
(including, without limitation, the events described in Section 4.3 hereof)
affecting the Company or the financial statements of the Company or of changes
in applicable laws, regulations, or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan; provided that, no such adjustment shall be
authorized to the extent that such authority would be inconsistent with the
Plan's or any Award's meeting the requirements of Section 162(m) of the Code, as
from time to time amended.
16.3 Awards Previously Granted. Notwithstanding any other provision of
the Plan to the contrary (but subject to Section 15.2 hereof), no termination,
amendment, or modification of the Plan shall adversely affect in any material
way any Award previously granted under the Plan, without the written consent of
the Participant holding such Award.
16.4 Compliance with Code Section 162(m). At all times when Code
Section 162(m) is applicable, all Awards granted under this Plan to Employees
who are or could reasonably become Covered Employees as determined by the
Committee shall comply with the requirements of Code Section 162(m); provided,
however, that in the event the Committee determines at the time it makes an
Award or Award(s) available for grant under the Plan that such compliance is not
desired with respect to any Award or Awards available for grant under the Plan,
then compliance with Code Section 162(m) will not be required. In addition, in
the event that changes are made to Code Section 162(m) to permit greater
flexibility with respect to any Award or Awards available under the Plan, the
Committee may, subject to this Article 16, make any adjustments it deems
appropriate.
16.5 Bifurcation of the Plan. Notwithstanding anything in the Plan to
the contrary, the Committee, in its sole discretion, may bifurcate the Plan so
as to restrict, limit or condition the use of any provision of the Plan to
Participants who are subject to Section 16 of the Exchange Act without so
restricting, limiting, or conditioning the Plan with respect to other
Participants.
Article 17. Withholding
18
17.1 Tax Withholding. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, state, and local taxes, domestic or foreign,
required by law or regulation to be withheld with respect to any taxable event
arising as a result of this Plan.
17.2 Share Withholding. With respect to withholding required upon the
exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock,
or upon any other taxable event arising as a result of Awards granted hereunder,
Participants may elect, subject to the approval of the Board, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
Shares having a Fair Market Value on the date the tax is to be determined equal
to the minimum statutory total tax that could be imposed on the transaction. All
such elections shall be irrevocable, made in writing, signed by the Participant,
and shall be subject to any restrictions or limitations that the Committee, in
its sole discretion, deems appropriate.
Article 18. Indemnification
Each person who is or shall have been a member of the Committee, or of
the Board, shall be indemnified and held harmless by the Company against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, action, suit, or proceeding to which he or she may be a party or in which
he or she may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him or her in
settlement thereof, with the Company's approval, or paid by him or her in
satisfaction of any judgment in any such action, suit, or proceeding against him
or her, provided he or she shall give the Company an opportunity, at its own
expense, to handle and defend the same before he or she undertakes to handle and
defend it on his or her own behalf. The foregoing right of indemnification shall
not be exclusive of any other rights of indemnification to which such persons
may be entitled under the Company's articles of incorporation or bylaws, as a
matter of law, or otherwise, or any power that the Company may have to indemnify
them or hold them harmless.
Article 19. Successors
All obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of' a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business
and/or assets of the Company.
Article 20. General Provisions
20.1 Gender and Number. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
19
20.2 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
20.3 Requirements of Law. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
20.4 Securities Law Compliance. With respect to Insiders, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the 1934 Act., unless determined otherwise by the
Committee. To the extent any provision of the Plan or action by the Committee
fails to so comply, it shall be deemed null and void, to the extent permitted by
law and deemed advisable by the Committee. All grants and exercises of Options
and other Awards under the Plan shall be executed in accordance with the
requirements of Section 16 of the Exchange Act, as amended and any regulations
promulgated thereunder. To the extent that any of the provisions contained
herein do not conform with Rule 16b-3 of the Act or any amendments thereto, or
any successor regulation, then the Committee may make such modifications so as
to conform the Plan and any Options or other Awards granted hereunder to the
Rules requirements, except only such modifications as to a Performance-Based
Exception as may be prohibited by Code regulation ss. 1.162-27.
20.5 Listing. The Company may use reasonable endeavors to register
Shares allotted pursuant to the exercise of an Option with the United States
Securities and Exchange Commission or to the effect compliance with the
registration, qualification, and listing requirements of any national securities
laws, stock exchange, or automated quotation system.
20.6 Delivery of Title. The Company shall have no obligation to issue
or deliver evidence of title for shares of Shares under the Plan prior to:
(a) Obtaining any approvals from governmental agencies
that the Company determines are necessary or
advisable; and
(b) Completion of any registration or other qualification
of the Shares under any applicable national or
foreign law or ruling of any governmental body that
the Company determines to be necessary or advisable.
20.7 Investment Representations. As a condition to the exercise of an
Option, the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
20.8 No Additional Rights. Nothing in the Plan shall interfere with or
limit in any way the right of the Company to terminate any Participant's
employment at any time, or confer upon any Participant any right to continue in
the employ of the Company, or upon any Director the right to continue in service
with the Company.
20
20.9 Uncertificated Shares. To the extent that the Plan provides for
issuance of certificates to reflect the transfer of Shares, the transfer of such
Shares may be effected on a non-certificated basis, to the extent not prohibited
by applicable law or the rules of any stock exchange.
20.10 Unfunded Status of the Plan. The Plan is intended to constitute
an "unfunded" Plan. With respect to any payments or deliveries of Shares not yet
made to a Participant by the Company, nothing contained herein shall give any
rights that are greater than those of a general creditor of the Company.
20.11 Governing Law. The Plan and each Award Agreement shall be
governed by the laws of' the state of South Dakota, excluding any conflicts or
choice of law rule or principle that might otherwise refer construction or
interpretation of the Plan to the substantive law of another jurisdiction.
Unless otherwise provided in the Award Agreement, recipients of an Award under
the Plan are deemed to submit to the exclusive jurisdiction and venue of the
federal or state courts of South Dakota, to resolve any and all issues that may
arise out of or relate to the Plan or any related Award Agreement.
21
Exhibit 21
BLACK HILLS CORPORATION
ACTIVE WHOLLY OWNED DIRECT AND INDIRECT SUBSIDIARIES
Acquisition Partners, LP, a New York limited partnership
Adirondack Hydro - Fourth Branch, LLC, a New York limited liability company
Adirondack Hydro Development Corporation, a Delaware corporation
Adirondack Operating Services, LLC, a New York limited liability company
Black Hills Coal Network, Inc., a South Dakota corporation
Black Hills Colorado, LLC, a Delaware limited liability company
Black Hills Energy Capital, Inc., a Delaware corporation
Black Hills Energy Inc., a South Dakota corporation
Black Hills Energy Pipeline, LLC, a Delaware limited liability company
Black Hills Energy Resources, Inc., a South Dakota corporation
Black Hills Energy Terminal, LLC, a South Dakota limited liability company
Black Hills Exploration and Production, Inc., a Wyoming corporation
Black Hills Fiber Systems, Inc., a South Dakota corporation
Black Hills FiberCom, LLC, a South Dakota limited liability company
Black Hills Fountain Valley, LLC, a Delaware limited liability company
Black Hills Generation, Inc., a Wyoming corporation
Black Hills Idaho Operations, LLC, a Delaware limited liability company
Black Hills Long Beach, Inc., a Delaware corporation
Black Hills Millennium Pipeline, Inc., a South Dakota corporation
Black Hills Millennium Terminal, Inc., a South Dakota corporation
1
Black Hills Nevada Operations, LLC, a Delaware limited liability company
Black Hills Nevada Real Estate Holdings, LLC, a Delaware limited liability
company
Black Hills Nevada, LLC, a Delaware limited liability company
Black Hills North America, Inc., a Delaware corporation
Black Hills Power, Inc., a South Dakota corporation
Black Hills Southwest, LLC, a Delaware limited liability company
Black Hills Valmont Colorado, Inc., a Delaware corporation
Daksoft, Inc., a South Dakota corporation
E NextA Equipment Leasing Company, LLC, a Delaware limited liability company
EIF Investors, Inc., a Delaware corporation
Enserco Energy, Inc., a South Dakota corporation
Fountain Valley Power, LLC, a Delaware limited liability company
Hudson Falls, LLC, a New York limited liability company
Landrica Development Company, a South Dakota corporation
Las Vegas Cogeneration Energy Financing Company, LLC, a Delaware limited
liability company
Las Vegas Cogeneration II, LLC, a Delaware limited liability company
Middle Falls Corporation, a New York Corporation
Middle Falls II, LLC, a New York limited liability company
NHP, LP, a New York limited partnership
North American Funding, LLC, a Delaware limited liability company
NYSD Limited Partnership, a New York limited partnership
NYSD Partners, LLC, a New York limited liability company
2
Sissonville Corporation, a New York corporation
Sissonville II, LLC, a New York limited liability company
Sissonville Limited Partners, LLC, a New York limited liability company
Sissonville Limited Partnership, a New York limited partnership
South Glens Falls, LLC, a Delaware limited liability company
State Dam Corporation, a New York corporation
State Dam II, LLC, a New York limited liability company
Sunco Ltd., LLC, a Nevada limited liability company
Warrensburg Corporation, a New York corporation
Warrensburg Hydro Power Limited Partnership, a New York limited partnership
Warrensburg II Corporation, a New York corporation
Wyodak Resources Development Corp., a Delaware corporation
3
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 22, 2002 included or in this Form 10-K, into the Company's
previously filed Registration Statements, File Numbers 33-71130, 33-63059,
333-17451, 333-61969, 333-82787, 333-30272 and 333-63264.
Arthur Andersen LLP
Minneapolis, Minnesota,
March 25, 2002
Exhibit 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEER AND GEOLOGIST
As petroleum engineers, we hereby consent to the inclusion of the information
included in this Form 10-K with respect to the oil and gas reserves of Black
Hills Exploration and Production, Inc., the future net revenues from such
reserves, and the present value thereof, which information has been included in
this Form 10-K in reliance upon the report of this firm and upon the authority
of this firm as experts in petroleum engineering. We hereby further consent to
all references to our firm included in this Form 10-K and to the incorporation
by reference in the Registration Statements on Form S-8 Nos. 33-63059,
333-61969, 333-17451, 333-82787, 333-30272 and 333-63264 and the Registration
Statement on Form S-3, No. 33-71130.
RALPH E. DAVIS ASSOCIATES, INC.
/s/ Ralph E. Davis Associates, Inc.
-----------------------------------
March 22, 2002
PURCHASE AND SALE AGREEMENT
by and between
TLS Investors, L.L.C.
and
Black Hills Energy Capital, Inc.
June 18, 2001
Table of Contents
Page
ARTICLE 1 Certain Definitions...............................................................1
1.1 Certain Defined Terms.................................................................1
1.2 References, Gender, Number............................................................9
ARTICLE 2 Purchase and Sale.................................................................9
ARTICLE 3 Purchase Price and Payment........................................................9
3.1 Purchase Price........................................................................9
3.2 Payment..............................................................................10
3.3 Closing Statement....................................................................10
3.4 Post-Closing Adjustment to the Purchase Price........................................10
3.5 Allocation of Purchase Price.........................................................11
ARTICLE 4 Representations and Warranties...................................................12
4.1 Representations and Warranties of Seller.............................................12
4.2 Representations and Warranties of Buyer..............................................21
ARTICLE 5 Access and Confidentiality.......................................................23
5.1 General Access.......................................................................23
5.2 Confidential Information.............................................................24
5.3 No Other Contract....................................................................24
ARTICLE 6 Tax Matters......................................................................24
6.1 Preparation..........................................................................24
6.2 Access to Information................................................................24
6.3 Transfer Taxes.......................................................................25
6.4 Tax Sharing Agreements...............................................................25
6.5 Assistance and Cooperation...........................................................25
6.6 Tax Indemnity........................................................................25
6.7 Tax Indemnity Claims.................................................................26
6.8 Tax Refunds..........................................................................26
ARTICLE 7 Covenants of Seller and Buyer....................................................27
7.1 Conduct of Business Pending Closing..................................................27
7.2 Qualifications on Conduct............................................................31
7.3 Public Announcements.................................................................32
i
7.4 Actions by Parties...................................................................32
7.5 Supplements to Schedules.............................................................32
7.6 Further Assurances...................................................................32
7.7 Records..............................................................................32
7.8 Assumption of Obligations of SWP and any Subsidiary..................................33
7.9 Regulatory and Other Authorizations and Consents.....................................33
7.10 Fees and Expenses....................................................................35
7.11 Excluded Assets......................................................................35
7.12 Guarantees and Other Affiliate Contracts.............................................36
7.13 Use of Enron Marks...................................................................36
7.14 Insurance............................................................................36
7.15 Lending Matters......................................................................37
ARTICLE 8 Closing Conditions...............................................................37
8.1 Seller's Closing Conditions..........................................................37
8.2 Buyer's Closing Conditions...........................................................38
ARTICLE 9 Closing..........................................................................39
9.1 Closing..............................................................................39
9.2 Seller's Closing Obligations.........................................................39
9.3 Buyer's Closing Obligations..........................................................40
ARTICLE 10 Limitations......................................................................40
10.1 Buyer's Review.......................................................................40
10.2 Disclaimer of Warranties.............................................................41
10.3 Waiver of Damages....................................................................42
ARTICLE 11 Indemnification..................................................................42
11.1 Indemnification By Seller............................................................42
11.2 Indemnification By Buyer.............................................................42
11.3 Limitations on Indemnity.............................................................43
11.4 Third Party Claims...................................................................43
11.5 Survival and Time Limitation.........................................................44
11.6 Sole and Exclusive Remedy............................................................44
ii
11.7 Compliance with Express Negligence Rule..............................................45
ARTICLE 12 Termination and Remedies.........................................................45
12.1 Termination..........................................................................45
12.2 Remedies.............................................................................45
ARTICLE 13 Other Provisions.................................................................46
13.1 Counterparts.........................................................................46
13.2 Governing Law........................................................................46
13.3 Arbitration..........................................................................46
13.4 Entire Agreement.....................................................................47
13.5 Notices..............................................................................47
13.6 Successors and Assigns...............................................................48
13.7 Amendments and Waivers...............................................................48
13.8 Schedules and Exhibits...............................................................49
13.9 Interpretation and Rules of Construction.............................................49
13.10 Agreement for the Parties' Benefit Only..............................................49
13.11 Attorneys' Fees......................................................................50
13.12 Severability.........................................................................50
13.13 Time of Essence......................................................................50
13.14 Bulk Sales or Transfer Laws..........................................................50
ARTICLE 14 Letter of Credit; GUARANTY BY BKH................................................50
14.1 Letter of Credit.....................................................................50
14.2 Guaranty by BKH......................................................................51
14.3 Effect of Failure to Deliver Letter of Credit or Guaranty............................51
iii
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), dated as of June
18, 2001, is by and between TLS Investors, L.L.C., a Delaware limited liability
company ("Seller"), and Black Hills Energy Capital, Inc. ("Buyer") a Delaware
corporation. Seller and Buyer are sometimes referred to herein individually as a
"Party" and collectively as the "Parties."
Recitals:
A. Seller desires to sell, or cause to be sold, to Buyer, and
Buyer desires to purchase, all of the issued and outstanding member interests
the "LLC Interests") of Southwest Power, L.L.C., a Delaware limited liability
company ("SWP"), upon the terms and subject to the conditions set forth in this
Agreement; and
B. In order to maintain the QF status of the Operating Facility, at the
Closing, Buyer will transfer no less than one-half of all of the issued and
outstanding member interests of the owners of the general and limited
partnership interests in the Operating Facility to one or more third parties
that are not electric utilities or electric utility holding companies and are
not affiliated or associated with electric utilities or electric utility holding
companies.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Parties agree as follows:
ARTICLE 1
Certain Definitions
1.1 Certain Defined Terms.
As used in this Agreement, the following terms have the respective
meanings set forth below or set forth in the Sections referred to below:
"Action" means any action, suit, investigation, proceeding,
condemnation, or audit by or before any court or other Governmental Authority or
any arbitration proceeding.
"Additional Project Agreement" is defined in Section 7.1(b)(iii).
"Adjusted Purchase Price" is defined in Section 3.1.
"Affiliate" means, as to the Person specified, any Person controlling,
controlled by or under common control with such specified Person. The concept of
control, controlling or controlled as used in the aforesaid context means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of another, whether through the
ownership of voting securities, by contract or otherwise. No Person shall be
deemed an Affiliate of any Person by reason of the exercise or existence of
rights, interests, or remedies under this Agreement.
"Agreement" is defined in the preamble.
1
"Allegheny" means Allegheny Energy Supply Company, L.L.C., a Delaware
limited liability company.
"Assignment and Assumption Agreements" means the Assignment and
Assumption Agreements, each in substantially the form attached hereto as Exhibit
9.2, pursuant to which the LLC Interests shall be conveyed to Buyer.
"BKH" means Black Hills Corporation, a South Dakota corporation and the
parent corporation of Buyer.
"BKH Guaranty" is defined in Section 14.2.
"Bridge Loan" is defined in Section 3.2.
"Business" with respect to SWP, means the business and operations of
SWP related to the Operating Facility and the Development Project.
"Business Day" means any day which is not a Saturday, Sunday, or legal
holiday recognized by the United States of America.
"Buyer" is defined in the preamble.
"Buyer Indemnified Party" and "Buyer Indemnified Parties" are defined
in Section 11.1.
"Buyer's Construction Representative" is defined in Section 7.1(c).
"Closing" is defined in Section 9.1.
"Closing Date" means the later to occur of either (i) the first
Business Day after the conditions in Section 8.1 and Section 8.2 are either
satisfied or waived by the Party entitled to waive such condition, or (ii)
August 31, 2001, or such other date as may be mutually agreed to by Seller and
Buyer.
"Closing Payment" is defined in Section 3.2.
"Closing Statement" is defined in Section 3.3.
"Closing Statement Arbitrator" is defined in Section 3.4(b).
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidentiality Agreement" is defined in Section 5.2.
"Damage Award" is defined in Section 14.1.
"Deductible Amount" means $500,000.
"Development Budget" means the budget for development and construction
of the Development Project set forth in Exhibit B.
2
"Development Expenses" means any and all costs, expenses or liabilities
incurred, paid or performed by Seller, SWP or any Subsidiary in connection with
the development, permitting or construction of the Development Project in
accordance with Seller Practice, including, without limitation, expenditures for
equipment, consultants, contractors, permits, deposits, lease payments and
finance costs.
"Development Project" means the 222 (nominal) megawatt, natural gas
fired electrical generating facility currently under development by a Subsidiary
on the Development Project Site.
"Development Project Activities" is defined in Section 7.1(b)(i).
"Development Project Site" means the site of the Development Project
more fully described in Part I of Exhibit A.
"Dispute" is defined in Section 13.3.
"Dollar," "Dollars" and "$" mean United States dollars.
"Effective Date" means the date first written above.
"Enron Marks" means the name "Enron" and other trademarks, service
marks, and trade names owned by Seller and its Affiliates.
"Environmental Claim" means any claim by (i) any Governmental Authority
for enforcement, cleanup, removal, response, remedial or other actions or
damages pursuant to any applicable Environmental Law, and (ii) any other Person
seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief (A) resulting from the presence or disposal of Hazardous
Materials off-site or at the Operating Facility or Development Project Site or
(B) otherwise arising under or related to Environmental Laws.
"Environmental Law" means all Laws, as existing as of the date
of this Agreement, relating to (i) the control of any pollutant, or protection
of the air, water, or land, (ii) solid, gaseous or liquid waste generation,
handling, treatment, storage, disposal or transportation, and (iii) exposure to
hazardous, toxic or other harmful substances. "Environmental Laws" shall
include, but not be limited to, the Clean Air Act, 42 U.S.C.ss.7401 et seq.,
the Resource Conservation Recovery Act, 42 U.S.C.ss.6901 et seq., the Federal
Water Pollution Control Act, 33 U.S.C.ss.1251 et seq., the Safe Drinking
Water Act, 42 U.S.C.ss.300f et seq., and the Comprehensive Environmental
Response, Compensation, and Liability Act, as amended by the Superfund
Amendments and Reauthorization Act, 42 U.S.C.ss.9601 et seq.
"EPC Contract" means the Engineering, Procurement and
Construction Contract between Las Vegas Cogeneration II, L.L.C. and Modern
Continental South, Inc., dated as of March 29, 2001.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations promulgated thereunder.
3
"Estimated Adjusted Purchase Price" is defined in Section 3.3.
"Excluded Assets" is defined in Section 7.11
"FERC" means the Federal Energy Regulatory Commission.
"Final Closing Statement" is defined in Section 3.4(b).
"Final Settlement Date" is defined in Section 3.4(a).
"Financial Statements" is defined in Section 4.1(q).
"GAAP" means United States generally accepted accounting principles as
in effect on the Effective Date.
"Government Antitrust Authority" means any Governmental Authority with
jurisdiction over the enforcement of any applicable antitrust Laws.
"Good Operating Practices" means, with respect to the Operating
Facility, the practices, methods, and acts generally engaged in or approved by a
significant portion of the independent electric power industry in the United
States for similarly situated facilities in the United States during a
particular time period, or any of such practices, methods, and acts, which, in
the exercise of reasonable judgment in light of the facts known or that
reasonably should be known at the time a decision is made, would be expected to
accomplish the desired result in a manner consistent with law, regulation,
reliability, safety, environmental protection, economy and expedition, and
taking into consideration the requirements of this Agreement, the applicable
Project Documents, the Transferred Contracts, and the other contracts and
agreements affecting the operation of the Operating Facility. Good Operating
Practices are not intended to be limited to the optimum practices, methods or
acts, to the exclusion of all others, but rather to include a spectrum of
possible practices, methods, or acts generally acceptable in the region during
the relevant period in light of the circumstances.
"Governmental Approvals" means all material consents and approvals of
Governmental Authorities, including those required under the HSR Act or from the
FERC and the Securities and Exchange Commission, that reasonably may be deemed
necessary so that the consummation of the transactions contemplated hereby will
be in compliance with applicable Laws and the failure to comply with which would
have a Material Adverse Effect.
"Governmental Authority" means (i) the United States of America, (ii)
any state, county, municipality, or other governmental subdivision within the
United States of America, and (iii) any court or any governmental department,
commission, board, bureau, agency, or other instrumentality of the United States
of America or of any state, county, municipality, or other governmental
subdivision within the United States of America.
"Guarantees" means any and all obligations relating to the guarantees,
letters of credit, surety bonds, and other credit assurances of a comparable
nature of Seller or any of its Affiliates (other than SWP) for the benefit of
SWP or any Subsidiary and listed or described on Schedule 7.12(a).
4
"Hazardous Material" means (a) any "hazardous substance," as defined by
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, (b) any "hazardous waste," as defined by the Resource Conservation and
Recovery Act, and (c) any pollutant, contaminant or hazardous, dangerous or
toxic chemical, material, waste or substance within the meaning of any
applicable Environmental Law.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976 and the rules and regulations adopted pursuant thereto, as amended.
"Indemnified Party" is defined in Section 11.4.
"Indemnifying Party" is defined in Section 11.4.
"Interest Rate" means a rate of interest equal to the lesser of (i) the
LIBOR Rate or (ii) the maximum rate of interest from time to time allowed by
applicable Law.
"Knowledge of Buyer" means the actual knowledge of any fact,
circumstance or condition by Maurice Klefeker and John Salyer.
"Knowledge of Seller" means the actual knowledge of any fact,
circumstance or condition by Christopher Calger, Jim Gilbert, Jody Blackburn,
Ed Clark and J. D. Hawkins.
"Law" means any applicable statute, law (including common law),
ordinance, regulation (including Environmental Laws), rule, treaty, code,
permit, certificate, license, interpretation, judgment, ruling, order, writ,
injunction, decree, or other official act of or by any Governmental Authority.
"Letter of Credit" is defined in Section 14.1.
"LIBOR Rate" means, for each calendar month, (i) the rate per annum
(rounded upward, if not an integral multiple of 1/100 of 1%, to the nearest
1/100 of 1% per annum) appearing on Telerate Page 3750 (or any successor page)
as the London interbank offered rate for deposits in United States dollars at
approximately 11:00 a.m. (London time) two Business Days before the first day of
such calendar month for a term comparable thereto; (ii) if for any reason the
rate specified in clause (i) of this definition does not so appear on Telerate
Page 3750 (or any successor page), the rate per annum (rounded upward, if not an
integral multiple of 1/100 of 1%, to the nearest 1/100 of 1% per annum)
appearing on Reuters Screen LIBO page (or any successor page) as the London
interbank offered rate for deposits in United States dollars at approximately
11:00 a.m. (London time) two Business Days before the first day of such calendar
month for a term comparable thereto; provided, however, if more than one rate is
specified on Reuters Screen LIBO page (or any successor page), the applicable
rate shall be the arithmetic mean of all such rates; and (iii) if the rate
specified in clause (i) of this definition does not so appear on Telerate Page
3750 (or any successor page) and if no rate specified in clause (ii) of this
definition so appears on Reuters Screen LIBO page (or any successor page), the
interest rate per annum (rounded upward to the nearest whole multiple of 1/16 of
1% per annum if such rate is not such a multiple) equal to the rate per annum at
which deposits in United States dollars are offered by the principal office of
Citibank, N.A. in London, England to prime banks in the London interbank market
at 11:00 a.m. (London time) two Business Days before the first day of such
calendar month.
5
"Lien" means any lien, security interest, charge, claim, mortgage, deed
of trust, option, warrant, purchase right, lease, or other encumbrance.
"LLC Interests" is defined in the Recital.
"Losses" means any and all claims, liabilities, losses, causes of
action, fines, penalties, litigation, lawsuits, administrative proceedings,
administrative investigations, costs, and expenses, including reasonable
attorneys' fees, court costs, and other costs of suit or proceeding.
"LVC Finance" means Las Vegas Cogeneration Energy Financing Company,
L.L.C., a subsidiary of SWP.
"LVC II" means Las Vegas Cogeneration II, L.L.C., a Delaware limited
liability company.
"Material Adverse Effect" means a material adverse effect on the value
of SWP and any Subsidiary taken as a whole, excluding any effect resulting from
any change in economic, industry, or market conditions (whether general or
regional in nature or limited to any area where any assets of SWP or any
Subsidiary are located) or from any change in law or regulatory policy.
"NatWest Loan" means loans and other credit accommodations made to or
for the account of Seller by National Westminster Bank PLC and certain other
lenders pursuant to the Credit Agreement dated August 31, 1999, as in effect as
of the Effective Date.
"Notice of Disagreement" is defined in Section 3.4(a).
"Operating Facility" means the generation and green house facilities
identified in Part II of Exhibit A, and all of the assets related thereto.
"Party" and "Parties" are defined in the preamble.
"Permits" is defined in Section 4.1(t).
"Permitted Exceptions" means, with respect to any Person, any one or
more of the following: (a) Liens for taxes, assessments or other governmental
charges or levies either not yet delinquent or which are being contested in good
faith by appropriate proceedings diligently prosecuted and as to which adequate
reserves shall have been set aside in conformity with GAAP, (b) deposits or
pledges to secure the payment of workers' compensation, unemployment insurance,
social security benefits or obligations arising under similar legislation, or to
secure the performance of public or statutory obligations, surety or appeal
bonds, and other obligations of a like nature incurred in the ordinary course of
business, (c) materialmen's, mechanics', workmen's, repairmen's, employees',
landlord's, lessor's or other like Liens arising in the ordinary course of
business to secure obligations not yet due or being contested in good faith and
as to which adequate reserves shall have been set aside in conformity with GAAP
or as to which adequate bonds shall have been obtained, (d) zoning restrictions,
easements, rights-of-way, restrictions,
6
servitudes, permits, reservations, encroachments, exceptions, conditions,
covenants, and any other restrictions on the use of real property none of which
materially impairs the use of such property by the owner of such property in the
operation of its business, (e) Liens and other matters shown on the Title
Commitment, (f) any obligations or duties affecting any of the property of such
Person to any municipality or public authority with respect to any franchise,
grant, license or permit which do not materially impair the use of such property
for the purposes for which it is held, (g) defects, irregularities and
deficiencies in title to any property of such Person which in the aggregate do
not materially impair the use of such property for the purposes for which such
property is held by such Person, (h) other minor Liens or encumbrances none of
which interferes materially with the use of the property affected in the
ordinary conduct of the Seller's business and which individually or in the
aggregate do not have a Material Adverse Effect, (i) utility easements, building
restrictions and such other encumbrances or charges against real property which
are of a nature generally existing with respect to properties of a similar
character and which do not materially affect the marketability of the same or
interfere with the use thereof in the business of such Person, and (j) Liens in
favor of Allegheny granted pursuant to the Tolling Agreement, which Liens shall
be fully subordinate to liens in favor of any "Senior Lender" as defined in the
Tolling Agreement.
"Person" means any Governmental Authority or any individual, firm,
partnership, corporation, limited liability company, joint venture, trust,
unincorporated organization or other entity or organization.
"Project Documents" is defined in Section 4.1(m)(ii).
"PUHCA" means the Public Utility Holding Company Act of 1935, as
amended.
"Purchase Price" is defined in Section 3.1.
"PURPA" is defined in Section 4.1(v).
"QF" is defined in Section 4.1(v).
"Real Property" is defined in Section 4.1(s).
"Records" means any and all of the books, records, contracts,
agreements and files of SWP and any Subsidiary existing on the Closing Date and
all increases and additions thereto after the Closing Date, including computer
records and electronic copies of such information (but excluding electronic mail
and other computer-based communications) whether maintained by Seller, SWP, or
Buyer or, in each case, its Affiliate, but excluding in each case all
information protected by any attorney/client, work product or like privilege.
"Schedules" means Seller's disclosure schedules attached to this
Agreement.
"Securities Act" is defined in Section 4.2(i).
"Seller" is defined in the preamble.
7
"Seller Guaranty" means the Guaranty of Enron North America Corp. in
substantially the form of Exhibit E.
"Seller Practice" is defined in Section 7.1(b)(i).
"Seller Indemnified Party" and "Seller Indemnified Parties" are defined
in Section 11.2.
"Subordinated Note" means that certain Subordinated Note dated August
31, 1999 by Las Vegas Cogeneration Limited Partnership in favor of Enron North
America Corp. (formerly known as Enron Capital & Trade Resources Corp.).
"Subsidiary" means any limited liability company or limited partnership
of which at least a majority of the voting interests (i.e., member or partner
interests entitled to vote for the election of directors or managers, but
excluding interests entitled so to vote only upon the happening of some
contingency unless such contingency has occurred) are owned directly or
indirectly by SWP.
"SWP" is defined in the Recital.
"Tangible Personal Property" is defined in Section 4.1(r)(i).
"Tax" or "Taxes" means any and all taxes, including any interest,
penalties, or other additions to tax that may become payable in respect thereof,
imposed by any federal, state, local, or foreign government or any agency or
political subdivision of any such government, which taxes shall include, without
limiting the generality of the foregoing, all income or profits taxes, payroll
and employee withholding taxes, unemployment insurance taxes, social security
taxes, severance taxes, license charges, taxes on stock, sales and use taxes, ad
valorem taxes, excise taxes, franchise taxes, gross receipts taxes, business
license taxes, occupation taxes, real and personal property taxes, stamp taxes,
environmental taxes, Transfer Taxes, workers' compensation, and other
obligations of the same or of a similar nature to any of the foregoing.
"Tax Proceeding" is defined in Section 6.5.
"Tax Return" means any and all returns, reports, declarations,
statements, bills, schedules, claims for refund, or written information of or
with respect to any Tax which is required to be supplied to any taxing
authority, including any schedule or attachment thereto, and including any
amendment thereof.
"Title Commitment" means Title Commitment No. 99090132(A)LJJ dated as
of June 5, 2001.
"Title Endorsement" means an endorsement to the Title Policy insuring
Buyer against loss or damage sustained by reason of the Title Company denying
liability under the Title Policy by reason of Knowledge of Seller.
"Title Policy" means that certain Final Title Insurance Policy
No. 99090132LJJ, dated September 1, 1999.
8
"Tolling Agreement" means the Capacity and Ancillary Services Sale and
Tolling Agreement, dated May 4, 2001, between LVC II and Allegheny.
"Transfer Taxes" means all transfer Taxes (excluding Taxes measured by
net income), including without limitation sales, use, excise (including excise
Taxes on petroleum, products of petroleum, petrochemicals and other taxable
substances), stock, stamp, documentary, filing, recording, permit, license,
authorization and similar Taxes, filing fees and similar charges.
"Transferred Contracts" is defined in Section 7.1(h).
"Transition Services" is defined in Section 7.1(e).
"Work Plan" means the activities to be undertaken and pursued by SWP
and any Subsidiary until the Closing Date in connection with the development,
construction and licensing of the Development Project, as set forth on Schedule
7.1.
1.2 References, Gender, Number.
All references in this Agreement to an "Article," "Section" or
"subsection" shall be to an Article, Section, or subsection of this Agreement,
unless the context requires otherwise. Unless the context otherwise requires,
the words "this Agreement," "hereof," "hereunder," "herein," "hereby" or words
of similar import shall refer to this Agreement as a whole and not to a
particular Article, Section, subsection, clause or other subdivision hereof.
Whenever the context requires, the words used herein shall include the
masculine, feminine and neuter gender, and the singular and the plural.
ARTICLE 2
Purchase and Sale
On and subject to the terms and conditions of this Agreement, Seller
agrees to sell and convey, or cause to be sold and conveyed, to Buyer, and Buyer
agrees to purchase and receive, all of the LLC Interests.
ARTICLE 3
Purchase Price and Payment
3.1 Purchase Price.
The purchase price for the sale and conveyance of the LLC Interests to
Buyer shall consist of a cash purchase price of $71,250,000 (the "Purchase
Price") subject to adjustment in accordance with the terms of this Agreement,
and shall be payable by Buyer as provided in Sections 3.2, 3.3 and 3.4. The
"Adjusted Purchase Price" shall be the Purchase Price, (i) plus all Transfer
Taxes applicable to the transactions contemplated hereby, (ii) plus all
Development Expenses which may be paid or incurred by Seller or by SWP or any
Subsidiary through the Closing Date, and (iii) plus the principal amount of (not
to exceed $53,543,000), and accrued and unpaid interest on, the NatWest Loan on
the Closing Date.
9
3.2 Payment.
The "Closing Payment" shall be an amount equal to the Estimated
Adjusted Purchase Price. At the Closing, Buyer shall wire transfer the Closing
Payment in immediately available funds to the account of the Seller. Upon
payment of the Closing Payment to or for the account of Seller, (i) all
indebtedness of Las Vegas Cogeneration II, L.L.C. to Enron North America Corp.
incurred pursuant to that certain Amended and Restated Bridge Loan Agreement
effective as of May 10, 2001, by and between Enron North America Corp., Joint
Energy Development Investments II Limited Partnership, and Las Vegas
Cogeneration II, L.L.C. (the "Bridge Loan") shall be deemed to have been paid in
full and Buyer, SWP and its Subsidiaries shall be released of all liabilities
and obligations thereunder and (ii) all indebtedness of Las Vegas Cogeneration
Limited Partnership under the NatWest Loan and the Subordinated Note shall be
deemed to have been paid in full and Buyer, SWP and its Subsidiaries shall be
released of all liabilities and obligations thereunder.
3.3 Closing Statement.
Not later than three (3) Business Days prior to the Closing Date,
Seller shall prepare and deliver to Buyer a statement (the "Closing Statement")
of the estimated adjustments to the Purchase Price and the estimated Adjusted
Purchase Price which statement shall, among other things, set forth in
reasonable detail the estimated components thereof (the "Estimated Adjusted
Purchase Price").
3.4 Post-Closing Adjustment to the Purchase Price.
(a) Revised Closing Statement. On or before the date that is sixty (60)
days after the Closing Date, Seller shall prepare and deliver to Buyer a revised
Closing Statement setting forth the actual Adjusted Purchase Price which
statement shall, among other things, set forth in reasonable detail the
components thereof. To the extent reasonably required by Seller, Buyer shall
assist in the preparation of such revised Closing Statement. Seller shall
provide to Buyer such data and information as Buyer may reasonably request
supporting the amounts reflected on the revised Closing Statement. The revised
Closing Statement shall become final and binding upon the Parties on the date
(the "Final Settlement Date") that is sixty (60) days following receipt thereof
by Buyer unless Buyer gives written notice of its disagreement ("Notice of
Disagreement") to Seller prior to such date. Any Notice of Disagreement shall
specify in detail the dollar amount, nature, and basis of any disagreement so
asserted. If a Notice of Disagreement is received by Seller in a timely manner,
then the Closing Statement (as revised in accordance with paragraph (b) or (c)
below) shall become final and binding on the Parties on, and the Final
Settlement Date shall be, the earlier of (i) the date upon which Seller and
Buyer agree in writing with respect to all matters specified in the Notice of
Disagreement or (ii) the date upon which the Final Closing Statement is issued
by the Closing Statement Arbitrator.
(b) Final Closing Statement. During the thirty (30) days following the date
upon which Seller receives the Notice of Disagreement, if any, Seller and Buyer
shall attempt in good faith to resolve in writing any differences that they may
have with respect to all matters specified in the Notice of Disagreement. If at
the end of such thirty (30) day period (or earlier by mutual agreement), Buyer
and Seller have not reached agreement on such matters, the matters
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that remain in dispute may be submitted to an arbitrator (the "Closing Statement
Arbitrator") by either Party for review and resolution. The Closing Statement
Arbitrator shall be a nationally recognized independent public accounting firm
that does not serve as Seller's or Buyer's independent auditor, as shall be
agreed upon by Buyer and Seller in writing. The hearing date will be scheduled
by the Closing Statement Arbitrator as soon as reasonably practicable, and shall
be conducted on a confidential basis. Each Party shall, not later than seven (7)
days prior to the hearing date set by the Closing Statement Arbitrator, submit a
brief with dollar figures for settlement of the disputes as to the amount of the
Adjusted Purchase Price (together with a proposed Closing Statement that
reflects such figures). The figures submitted need not be the figures offered
during prior negotiations. The Closing Statement Arbitrator shall render a
decision limited to resolving the matters in dispute (which decision shall
include a written statement of findings and conclusions) within three (3)
Business Days after the conclusion of the hearing, unless the Parties reach
agreement prior thereto and withdraw the dispute from arbitration. The Closing
Statement Arbitrator shall provide to the Parties explanations in writing of the
reasons for its decisions regarding the Adjusted Purchase Price and shall issue
the Final Closing Statement reflecting such decisions. The decision of the
Closing Statement Arbitrator shall be final and binding on the Parties. The cost
of any arbitration (including the fees and expenses of the Closing Statement
Arbitrator) pursuant to this Section 3.4(b) shall be borne equally by Buyer and
Seller. The fees and disbursements of Seller's independent auditors incurred
with the procedures performed with respect to the Closing Statement shall be
borne by Seller and the fees and disbursements of Buyer's independent auditors
incurred in connection with respect to the Notice of Disagreement shall be borne
by Buyer. As used in this Agreement, the term "Final Closing Statement" shall
mean the revised Closing Statement described in Section 3.4(a), as prepared by
Seller and as may be subsequently adjusted to reflect any subsequent written
agreement between the Parties with respect thereto, or if submitted to the
Closing Statement Arbitrator, the Closing Statement issued by the Closing
Statement Arbitrator.
(c) Final Settlement. If the amount of the Adjusted Purchase Price as
set forth on the Final Closing Statement exceeds the amount of the Estimated
Adjusted Purchase Price, then Buyer shall pay to Seller, within five (5)
Business Days after the Final Settlement Date, the amount by which the Adjusted
Purchase Price as set forth on the Final Closing Statement exceeds the amount
of the Estimated Adjusted Purchase Price, together with interest on such excess
amount from the Closing Date until paid at the Interest Rate. If the amount of
the Adjusted Purchase Price as set forth on the Final Closing Statement is less
than the amount of the Estimated Adjusted Purchase Price, then Seller shall pay
to Buyer, within five (5) Business Days after the Final Settlement Date, the
amount by which the Adjusted Purchase Price as set forth on the Final Closing
Statement is less than the amount of the Estimated Adjusted Purchase Price,
together with interest on such deficiency amount from the Closing Date until
paid at the Interest Rate. Any post-Closing payment made pursuant to this
Section 3.4(c) shall be made by means of a wire transfer of immediately
available funds to a bank account designated by the Party receiving the funds.
3.5 Allocation of Purchase Price.
The Parties shall use their reasonable efforts to agree in good faith
upon an allocation of the Adjusted Purchase Price consistent with Section 1060
of the Code and the Treasury regulations thereunder as follows: Buyer shall
deliver to Seller a proposed allocation of the
11
Adjusted Purchase Price among the assets of SWP and the Subsidiaries (the
"Proposed Allocation") as soon as practicable after the Closing Date. Within
twenty (20) days after the receipt of the Proposed Allocation, Seller shall
propose Seller's changes to the Proposed Allocation, if any. Any dispute with
respect to the Proposed Allocation that Buyer and Seller, acting in good faith,
are thereafter unable to resolve within twenty (20) days shall be conclusively
resolved by a nationally recognized independent public accounting firm mutually
agreed to in writing by Buyer and Seller to resolve such dispute, which
resolution shall be final and binding between Buyer and Seller. The Parties
shall report this transaction for federal income tax purposes in accordance with
the allocation so agreed upon, and to file all federal (including without
limitation Form 8594), state and local Tax Returns in accordance with such
allocation after delivery by Seller of its proposed changes to the Proposed
Allocation.
ARTICLE 4
Representations and Warranties
4.1 Representations and Warranties of Seller.
As of the date of this Agreement, Seller represents and warrants to
Buyer as follows:
(a) Organization and Good Standing; Subsidiaries. Seller is a limited
liability company duly organized, validly existing and in good standing under
the Laws of the State of Delaware. SWP is a limited liability company duly
organized, validly existing and in good standing under the Laws of the State of
Delaware. SWP owns, directly or indirectly, no equity or other ownership
interest in any Person, except for the Subsidiaries set forth on Schedule
4.1(a). Each Subsidiary is directly or indirectly wholly owned by SWP and is
duly organized, validly existing and in good standing under the Laws of its
jurisdiction of organization.
(b) Qualification of SWP and any Subsidiary; Business of LVC Finance. Each
of SWP and any Subsidiary has the requisite limited liability company or
partnership power to carry on its business as now being conducted and to own and
use their respective assets. No filing, recording, publication or other act that
has not been made or done is necessary in connection with the continuing
existence and good standing of SWP or any Subsidiary or the conduct of their
Business. Seller has prior to the execution of this Agreement delivered to Buyer
true and complete copies of the certificate of formation, limited liability
company agreements and partnership agreements, as applicable, of SWP and each
Subsidiary as in effect on the date hereof, other than any such documents in
respect of LVC Finance, copies of which shall be delivered prior to the Closing.
SWP and each Subsidiary is duly qualified to do business in the State of Nevada
and in all other places where necessary in light of the business it conducts and
the Real Property it owns and intends to own and in light of the transactions
contemplated hereby. Prior to taking possession of any equipment to be leased to
LVC II, LVC Finance will be authorized and licensed in the State of Nevada as a
company engaged in the business of purchasing goods for resale. Prior to the
Closing Date, LVC Finance shall not have engaged in any business or operations
other than the purchase of equipment for lease to, and the lease of such
equipment to LVC II and related activities. The major items of equipment
acquired to be incorporated into the Development Project will be acquired by LVC
Finance as inventory held for resale.
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(c) Authority. Seller has all requisite limited liability company power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution, delivery and performance of this Agreement and the
transactions contemplated hereby have been duly and validly authorized by all
requisite limited liability company action on the part of Seller.
(d) Enforceability. This Agreement has been duly and validly executed and
delivered by Seller and constitutes a legal, valid and binding obligation of
Seller enforceable against it in accordance with its terms, subject to (i)
applicable bankruptcy, insolvency, reorganization, moratorium, and other similar
Laws of general application from time to time in effect that affect creditors'
rights generally, (ii) general principles of equity, and (iii) the power of a
court to deny enforcement of remedies generally based upon public policy.
(e) LLC Interests. At the Closing, Seller will deliver, or cause to be
delivered, to Buyer good and valid title to the LLC Interests free and clear of
any Liens (except as created by this Agreement and restrictions on sales of
securities under applicable securities Laws). There exists no option, warrant,
purchase right, or other contract or commitment (other than this Agreement) that
would require the sale, transfer, or other disposition of any LLC Interests or
member or partnership interests of any Subsidiary. There exists no voting trust,
proxy, or other agreement or understanding with respect to the voting of any LLC
Interests or member or partnership interests of any Subsidiary.
(f) Capitalization. The LLC Interests constitute all of the issued and
outstanding membership interests of SWP. All of the LLC Interests have been duly
authorized and are validly issued, fully paid, and nonassessable and were not
issued in violation of the preemptive rights of any Person. SWP has no
outstanding convertible security, call, preemptive right, option, warrant,
purchase right, or other contract or commitment that would, directly or
indirectly, require SWP to sell, issue, or otherwise create any membership
interests in addition to the LLC Interests.
(g) No Violation or Breach. Except as set forth in Schedule 4.1(g), neither
the execution and delivery of this Agreement nor the consummation of the
transactions and performance of the terms and conditions hereof by Seller will
(i) result in a violation or breach of any provision of the limited liability
company agreement or other similar governing documents of Seller, SWP or any
Subsidiary or any agreement, indenture or other instrument under which either
Seller, SWP or any Subsidiary is bound, other than such breaches or violations
of agreements, indentures, or other instruments that would not, individually or
in the aggregate, have a Material Adverse Effect or adversely affect the ability
of Seller to perform its obligations under this Agreement, (ii) violate any Law
applicable to Seller, SWP or any Subsidiary, the Operating Facility or the
Development Project in any material respect, other than such violations that
would not, individually or in the aggregate, have a Material Adverse Effect or
adversely affect the ability of Seller to perform its obligations under this
Agreement, or (iii) result in, or create any Lien (other than a Permitted
Exception) upon or with respect to any of the Real Property or Personal Property
now owned or hereafter acquired by SWP or any Subsidiary.
(h) Consents. No consent, approval, authorization or permit of, or filing
with or notification to, any Person is required for or in connection with the
execution and delivery of
13
this Agreement by Seller or for or in connection with the consummation of the
transactions and performance of the terms and conditions contemplated hereby by
Seller, except for (i) requirements of the FERC, if any, (ii) requirements under
the HSR Act (which will be obtained or satisfied prior to the Closing Date),
(iii) the consents, filings, and notices set forth on Schedule 4.1(h), and (iv)
consents, approvals, authorizations, permits, filings or notices that, if not
obtained or made, would not, individually or in the aggregate, have a Material
Adverse Effect.
(i) Actions. Except as set forth on Schedule 4.1(i), there is no Action
pending or, to the Knowledge of Seller, threatened against Seller, SWP or any
Subsidiary, the Operating Facility or the Development Project, except for
threatened Actions that are not reasonably expected by Seller, individually or
in the aggregate, to have a Material Adverse Effect or adversely affect the
ability of Seller to perform its obligations under this Agreement.
(j) Compliance With Laws. Except as set forth on Schedule 4.1(j), and
except with respect to any Environmental Law, Tax Law or any employee matters,
which are exclusively addressed in Sections 4.1(n), (o) and (p), respectively,
no uncured violation of any Law by SWP or any Subsidiary or by Seller (which
could reasonably be expected to relate to the Operating Facility, the
Development Project, SWP or any Subsidiary) exists, other than violations of Law
which could not reasonably be expected by Seller, individually or in the
aggregate, to have a Material Adverse Effect.
(k) Brokerage Fees and Commissions. Neither Seller nor any Affiliate of
Seller has incurred any obligation or entered into any agreement for any
investment banking, brokerage, or finder's fee or commission in respect of the
transactions contemplated by this Agreement for which Buyer or SWP or any
Subsidiary shall have any liability.
(l) Bankruptcy. There are no bankruptcy, reorganization, or arrangement
proceedings pending against, being contemplated by, or, to the Knowledge of
Seller, threatened against Seller, SWP or any Subsidiary.
(m) Project Documents.
(i) Set forth in Part I of Schedule 4.1(m) is a list of the following
agreements and contracts to which SWP or any Subsidiary is a party or by
which SWP or any Subsidiary is bound and which relate to the Operating
Facility:
(A) gas pipeline interconnection agreements, gas supply
agreements, gas purchase and sale agreements, and gas transportation
agreements;
(B) power purchase agreements, tolling services agreements,
electricity transmission agreements, and electricity interconnection
agreements;
(C) swap, exchange, commodity option or hedging agreements;
(D) operating and maintenance agreements;
14
(E) equipment purchase and sale contracts and construction
contracts;
(F) any contract requiring a capital expenditure or a commitment
by SWP or any Subsidiary in excess of $50,000 in any calendar year;
(G) any pending sale or lease of real or personal property of SWP
or any Subsidiary (other than sales of electric energy in the ordinary
course of business) in excess of $50,000;
(H) any loan agreements and related documents;
(I) any contract that contains a covenant not to compete
applicable to SWP or any Subsidiary; and
(J) any amendment relating to any of the foregoing.
(ii) Set forth in Part II of Schedule 4.1(m) is a list of all
agreements and contracts to which SWP or any Subsidiary is a party or by
which SWP or any Subsidiary is bound and which relate to the Development
Project. The agreements and contracts listed in Parts I and II of Schedule
4.1(m) are collectively referred to as the "Project Documents."
(iii) Set forth in Part III of Schedule 4.1(m) is a list of all
material agreements and contracts to which SWP or any Subsidiary is a party
or by which SWP or any Subsidiary is bound and which do not relate to the
Operating Facility or the Development Project.
(iv) Except as set forth in Part IV of Schedule 4.1(m), to the
Knowledge of Seller, neither SWP nor any Subsidiary is, in any material
respect, in breach of or in default under, and no event has occurred and is
continuing which would constitute a material breach or default by SWP or
any Subsidiary under, any material provision of any Project Document and
neither SWP nor any Subsidiary has received written notice from any other
party to any Project Document that SWP or any Subsidiary is in breach of
any Project Document which has not been remedied.
(v) True and complete copies of the Project Documents have been made
available to Buyer.
(n) Environmental Matters. This Section 4.1(n) shall constitute the sole
representations of Seller with respect to environmental matters. Except as set
forth in Schedule 4.1(n), or as would not, individually or in the aggregate,
have a Material Adverse Effect:
(i) there is no uncured violation of any Environmental Law by the
Seller, SWP or any Subsidiary that would result in any remediation
obligations of SWP or any Subsidiary under any Environmental Law;
15
(ii) there have been no written notices or written complaints received
by Seller, SWP or any Subsidiary with respect to a violation of an
Environmental Law by SWP or any Subsidiary;
(iii) no Lien has been imposed on any property of SWP or any
Subsidiary by any Governmental Authority in connection with any violation
of or noncompliance with Environmental Laws;
(iv) to the Knowledge of Seller, there are no facts, circumstances,
conditions or occurrences that would reasonably be expected (A) to form the
basis of an Environmental Claim against SWP or any Subsidiary, or (B) to
cause SWP or any Subsidiary to be subject to any restrictions on ownership,
occupancy, use or transferability under any Environmental Law inconsistent
with the customary and standard operation of the Operating Facility or
development of the Development Project;
(v) there are no past, pending or, to the Knowledge of Seller,
threatened Environmental Claims against SWP or any Subsidiary;
(vi) to the Knowledge of Seller, Hazardous Materials are not now and
have not at any time been used or released at, on, under or from the Real
Property other than in compliance with applicable laws;
(vii) Seller has made available to Buyer all correspondence, studies,
audits, reviews, investigations, analyses, and reports on material
environmental matters relating to the Operating Facility or the Development
Project that are in the possession of Seller, SWP or any Subsidiary; and
(viii) to the Knowledge of Seller, there are no underground storage
tanks, active or abandoned, on the Real Property.
(o) Tax Matters. This Section 4.1(o) is the sole representation of Seller
with respect to tax matters. With respect to each of SWP and any Subsidiary,
except as set forth in Schedule 4.1(o) or as would not, individually or in the
aggregate, have a Material Adverse Effect:
(i) all Tax Returns required to be filed by or with respect to SWP and
any Subsidiary have been or will be timely filed with the appropriate
taxing authorities in all jurisdictions in which such Tax Returns are
required to be filed;
(ii) such Tax Returns are or will be true and correct in all material
respects, and all Taxes reported on such Tax Returns have been or will be
timely paid prior to Closing;
(iii) neither SWP nor any Subsidiary has extended or waived the
application of any statute of limitations of any jurisdiction regarding the
assessment or collection of any Tax;
16
(iv) to the Knowledge of Seller, there are no audits, claims,
assessments, levies, administrative proceedings, or lawsuits pending or
threatened against SWP or any Subsidiary by any taxing authority;
(v) there are no Liens for Taxes (other than for current Taxes not yet
due or payable) upon the assets of either SWP or any Subsidiary);
(vi) neither SWP nor any Subsidiary has any liability for Taxes of any
Person (other than SWP and any Subsidiary) as transferee from or successor
to such Person;
(vii) no election has been made by SWP or any Subsidiary to be treated
as a corporation for federal income tax purposes;
(viii) none of the assets of SWP or any Subsidiary directly or
indirectly secures any debt the interest on which is tax exempt under
Section 103(a) of the Code; and
(ix) Seller is not a person other than a United States person within
the meaning of the Code and the transactions contemplated herein are not
subject to the tax withholding provisions of Chapter 3 of the Code.
Notwithstanding anything in this Section 4.1(o) to the contrary, no
representation or warranty is made with respect to the amount, availability,
expiration, limitation, or reduction of any net operating losses of any of SWP
or any Subsidiary.
(p) Employee Matters. This Section 4.1(p) is the sole representation of
Seller with respect to employee matters. Part I of Schedule 4.1(p) sets forth a
complete list of employees of either SWP or any Subsidiary as of the Effective
Date. Buyer has agreed to provide employment for the employees identified in
Part I of Schedule 4.1(p) in their current positions or in other substantially
similar positions with Buyer. Except as set forth in Part II of Schedule 4.1(p),
neither Seller nor SWP nor any Subsidiary is a party to or is bound by any
collective bargaining or labor agreement with respect to any employees assigned
to the business of SWP, and to the Knowledge of Seller, no present union
organizing efforts are underway with respect to any such employees. Part III of
Schedule 4.1(p) sets forth a complete listing of any employee benefit plan as
defined in Section 3(3) of ERISA that is maintained or sponsored by SWP or any
Subsidiary, or to which SWP or any Subsidiary is a party, or otherwise has any
obligations or liability.
(q) Financial Condition.
(i) Part I of Schedule 4.1(q) hereto contains copies of (A) the
audited financial statements of SWP (including the notes thereto) as of
December 31, 2000 and for the year then ended, and (B) the unaudited
financial statements of SWP (including the notes thereto) as of March 31,
2001 and for the period then ended, (collectively, the "Financial
Statements"). The Financial Statements are in each case true, complete and
correct and fairly present in all material respects the financial condition
of SWP and any Subsidiary as of the date thereof, all in accordance with
GAAP, consistently applied,
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except as disclosed in Part I of Schedule 4.1(q), and in the case of the
Financial Statements which have not been audited, except for the absence of
footnote disclosure and the possibility of audit adjustments which shall
not, in the aggregate, be material in amount.
(ii) As of the Effective Date, and except (A) as set forth in Part II
of Schedule 4.1(q), (B) as reflected, reserved against or otherwise
disclosed in the Financial Statements, (C) as have been incurred in the
ordinary course of business of operating the Operating Facility consistent
with past practice or which may have arisen or have been incurred under any
Project Document, and (D) as would constitute Development Expenses
specified in the Development Budget or otherwise approved by Buyer pursuant
to Section 7.1(b), SWP and any Subsidiary do not have liabilities or
obligations (whether contingent or absolute, matured or unmatured, known or
unknown) which exceed $50,000 in the aggregate.
(iii) Except as disclosed in Part III of Schedule 4.1(q), since the
date set forth in each of the Financial Statements, there has not been any
adverse change in the assets, liabilities, business, results of operation,
or financial condition of SWP and any Subsidiary that would, individually
or in the aggregate, have a Material Adverse Effect.
(r) Personal Property.
(i) SWP and each Subsidiary is in possession of and has good and valid
title to, or has valid leasehold interests in or valid rights under
contract to use, all of its assets constituting personal property (the
"Tangible Personal Property"), and on the Closing Date a Subsidiary will
have possession of and good and valid title to the Tangible Personal
Property which is the subject of the Transferred Contracts, free and clear
of all Liens, except: (A) Liens arising by operation of law for amounts not
yet due and payable; (B) the rights of customers, suppliers, and
subcontractors in the ordinary course of business under general principles
of commercial law for amounts not in default; (C) Liens that would not
reasonably be expected to have a Material Adverse Effect; (D) Liens in
favor or Allegheny granted pursuant to the Tolling Agreement, which Liens
shall be fully subordinate to liens in favor of any "Senior Lender" as
defined in the Tolling Agreement; and (E) Liens listed on Schedule 4.1(r);
it being --------------- agreed that any such Liens relating to or securing
the NatWest Loan, the Bridge Loan and/or the Subordinated Note shall be
released at the Closing.
(ii) To the Knowledge of Seller, SWP and its Subsidiaries have the
exclusive right to use the "Las Vegas Delight" brand name, all
registrations with and applications to any Governmental Authority in
respect of such brand name are in full force and effect, and such brand
name is not being infringed by any other Person.
(s) Real Property. Schedule 4.1(s) lists all real property owned in whole
or in part by SWP and each Subsidiary (the "Real Property"), and except as set
forth on Schedule 4.1(s):
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(i) SWP and each of the Subsidiaries has good and marketable fee
simple title to all of the Real Property owned by it, free and clear of all
Liens, except Permitted Exceptions, it being agreed that Permitted
Exceptions relating to or securing the NatWest Loan, the Bridge Loan and/or
the Subordinated Note shall be released at the Closing;
(ii) there are no leases, subleases, easements, licenses, concessions
or other agreements (written or oral) granting to any Person (other than
SWP or any Subsidiary) the right to use or occupy the Real Property or
granting to any Person a right or interest in any of the Real Property,
except as disclosed in the Title Commitment or which would otherwise be a
Permitted Exception;
(iii) there are no outstanding options, rights of first offer or
rights of first refusal to purchase the Real Property or any portion
thereof or interests therein;
(iv) neither SWP nor any of its Subsidiaries has received any notice
in writing or by publication of any appropriation, condemnation or like
proceeding, or of any violation of any applicable zoning law, regulation or
rule or other law, order, regulation, rule or requirement relating to or
affecting any of the Real Property; and
(v) SWP does not owe any brokerage commissions with respect to the
Real Property.
(t) Permits.
(i) Part I of Schedule 4.1(t) sets forth a list of all material
permits, franchises, approvals, or other authorizations ("Permits") of
Governmental Authorities required to operate the Operating Facility as
currently operated. Each Permit is in full force and effect, SWP and each
Subsidiary is in compliance in all material respects with all its
obligations with respect thereto, and, to the Knowledge of Seller, no event
has occurred which permits, or with or without the giving of notice or the
passage of time or both would permit, the revocation or termination of any
Permit.
(ii) Part II of Schedule 4.1(t) sets forth a list of all Permits
obtained by Seller, SWP or any Subsidiary as of the Effective Date and a
list of all applications for Permits filed with or requested from any
Governmental Authority as of the Effective Date in connection with the
Development Project. Seller has made available to Buyer a true and correct
copy of each of (i) the material documents, reports and correspondence from
SWP or Seller, (ii) the material documents provided by SWP or Seller to any
Governmental Authority, and, to the Knowledge of Seller, the material
documents and correspondence received by Seller form any Governmental
Authority, in each case with respect to such applications.
(iii) Part III of Schedule 4.1(t) sets forth a list of all material
permits, licenses, consents and approvals from a Governmental Authority
which, to the Knowledge of Seller as of the Effective Date, are or will be
required to be obtained by Seller, Buyer, SWP or any Subsidiary for the
development, construction and ownership and operation of the Development
Project.
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(iv) SWP and each Subsidiary is in material compliance with each
Permit issued to it or which governs its operations.
(u) Bank Accounts. Set forth on Schedule 4.1(u) are the names of each bank
or other financial institution with which SWP or any Subsidiary has an account
and description of such account.
(v) QF Status. The Operating Facility has been certified by the FERC as a
qualifying cogeneration facility ("QF") pursuant to the Public Utility
Regulatory Policy Act of 1978, as amended ("PURPA") and the FERC's regulations
implementing PURPA in an order issued on October 17, 1991. The Operating
Facility has satisfied the relevant criteria for QF status at all times after
September 1, 1999, and to the Knowledge of Seller, at all times after October
17, 1991 and prior to September 1, 1999.
(w) Sole Purpose; Nature of Business. Neither SWP nor any Subsidiary has
conducted at any time after August 31, 1999, and is not conducting, any business
or operations, other than the operations of the Operating Facility and related
operations and the development and construction of the Development Project and
the leasing of assets to LVC II in connection with the Development Project.
(x) Status.
(i) None of Seller or any of its Affiliates is or will be by virtue of
the execution, delivery, or performance of this Agreement (A) an "electric
utility company," a "registered holding company" or either a "subsidiary
company" or an "affiliate" of a "registered holding company," as such terms
are defined in PUHCA, (B) subject to regulation under PUHCA except pursuant
to Section 9(a)(2) thereof, or (C) subject to regulation under the
applicable Law of the State of Nevada respecting the rates of electric
utilities.
(ii) Neither SWP nor any Subsidiary is an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940 or an "investment advisor" within the
meaning of the Investment Company Act of 1940.
(y) Affiliate Transactions. There is no indebtedness (other than
indebtedness which will be paid in full prior to the Closing Date) between SWP
or any Subsidiary, on the one hand, and Seller, any officer, director or
Affiliate (other than SWP or any Subsidiary) of Seller, on the other.
(z) Utility Services. All customary utility services necessary in the
development and operation of the Development Project (other than fuel supply and
water supply, the procurement of which is part of the development of the
Development Project), including as necessary, storm and sanitary services,
electric and telephone services and facilities, are or will be available to the
Development Project.
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4.2 Representations and Warranties of Buyer.
Buyer represents and warrants to Seller as follows:
(a) Organization and Qualification. Buyer is a corporation duly organized,
validly existing, and in good standing under the Laws of the State of Delaware
and has the requisite power under its formation documents to carry on its
business as now being conducted. Buyer is duly qualified to do business in each
state in which it conducts business.
(b) Authority. Buyer has all requisite power and authority to execute and
deliver this Agreement and to perform its obligations under this Agreement. The
execution, delivery, and performance of this Agreement and the transactions
contemplated hereby have been duly and validly authorized by all requisite
corporate action on the part of Buyer.
(c) Enforceability. This Agreement has been duly and validly executed and
delivered by Buyer and constitutes a valid and binding agreement of Buyer
enforceable against it in accordance with its terms, subject to (i) applicable
bankruptcy, insolvency, reorganization, moratorium, and other similar Laws of
general application from time to time in effect that affect creditors' rights
generally, (ii) general principles of equity, and (iii) the power of a court to
deny enforcement of remedies generally based upon public policy.
(d) No Violation or Breach. Neither the execution and delivery of this
Agreement nor the consummation of the transactions and performance of the terms
and conditions hereof by Buyer will (i) result in a violation or breach of any
provision of the governing documents of Buyer or any material agreement,
indenture or other instrument under which Buyer is bound, other than such
breaches or violations of agreements, indentures or other instruments that would
not, individually or in the aggregate, reasonably be expected to have a material
adverse effect on Buyer or adversely affect the ability of the Buyer to perform
its obligations under this Agreement or (ii) violate any Law applicable to Buyer
or the assets of Buyer other than such violations of Law that would not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on Buyer or adversely affect the ability of the Buyer to perform
its obligations under this Agreement.
(e) Consents. No consent, approval, authorization, or permit of, or filing
with or notification to, any Person is required for or in connection with the
execution and delivery of this Agreement by Buyer or for or in connection with
the consummation of the transactions and performance of the terms and conditions
contemplated hereby by Buyer, except for any (i) requirements of the FERC, (ii)
requirements under the HSR Act, and (iii) consents, approvals, authorizations,
permits, filings or notices that, if not obtained or made, would not,
individually or in the aggregate, have a material adverse effect on Buyer or its
Affiliates.
(f) Actions. To the Knowledge of Buyer, there is no Action pending or
threatened against Buyer, except for Actions which are not reasonably expected
to have a material adverse effect on Buyer or its assets or adversely affect the
ability of the Buyer to perform its obligations under this Agreement.
(g) Brokerage Fees and Commissions. Neither Buyer nor any Affiliate of
Buyer has incurred any obligation or entered into any agreement for any
investment banking
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brokerage, or finder's fee or commission in respect of the transactions
contemplated by this Agreement for which either Seller, SWP or any Subsidiary
shall incur any liability.
(h) Funds. Buyer has, and at all times prior to Closing will have,
sufficient funds available to it to enable Buyer to consummate the transactions
contemplated hereby and to pay the Closing Payment, the other payments required
of Buyer hereunder, and all fees and expenses of Buyer.
(i) Experienced Investor; No Distribution. The parent company of Buyer is
an experienced and knowledgeable investor in the power generation and
development business in the United States. Prior to entering into this
Agreement, Buyer and its Affiliates were advised by counsel, accountants,
financial advisors, and such other Persons deemed appropriate concerning this
Agreement and has relied solely on an independent investigation and evaluation
of, and appraisal and judgment with respect to, SWP and each Subsidiary and the
revenue, price, and expense assumptions applicable thereto. Buyer hereby
acknowledges that the LLC Interests are not registered under the Securities Act
of 1933, as amended (the "Securities Act"), or registered or qualified for sale
under any state securities laws and cannot be resold without registration
thereunder or exemption therefrom. Buyer is an "accredited investor," as such
term is defined in Regulation D of the Securities Act and will acquire the LLC
Interests for its own account and not with a view to a sale or distribution
thereof in violation of the Securities Act, and the rules and regulations
thereunder, any applicable state blue sky laws or any other applicable
securities laws. Buyer has sufficient knowledge and experience in financial and
business matters to enable it to evaluate the risks of investment in the LLC
Interests and has the ability to bear the economic risk of this investment for
an indefinite period of time.
(j) Bankruptcy. There are no bankruptcy, reorganization, or arrangement
proceedings pending against, being contemplated by, or to the Knowledge of Buyer
threatened against, Buyer.
(k) Inspection. Buyer acknowledges that, prior to its execution of this
Agreement, (i) it has been afforded access to and the opportunity to inspect the
Operating Facility and the Development Project Site, and to review the Project
Documents, and all other due diligence items made available by Seller with
respect to SWP and any Subsidiary, (ii) it has inspected the Operating Facility
and the Development Project Site and reviewed the Project Documents and Permits,
and as of the Closing Date, it will have inspected the Operating Facility and
the Development Project Site and all other due diligence items made available by
Seller with respect to SWP and any Subsidiary to the extent it deems necessary
or advisable, and (iii) it is relying upon its own inspections and investigation
in order to satisfy itself as to the condition and suitability of the Operating
Facility and the Development Project Site.
(l) Qualified Entity. Buyer is a "Qualified Entity" as that term is defined
in the Tolling Agreement.
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ARTICLE 5
Access and Confidentiality
5.1 General Access.
Promptly following the execution of this Agreement and until the
Closing Date (or earlier termination of this Agreement), Seller shall permit
(and with respect to SWP and each Subsidiary, Seller shall cause SWP and each
Subsidiary to permit) Buyer and its representatives:
(a) to have reasonable access, at reasonable times and upon reasonable
advance notice in Seller's and SWP's offices and in a manner so as not to
interfere unduly with the business operations of Seller or SWP or any
Subsidiary, to the books, records, contracts, and documents of each of SWP and
any Subsidiary relating to their assets and operations, and of Seller to the
extent directly relating to the Operating Facility or the Development Project,
insofar as the same may be disclosed without (i) violating any legal constraints
or any legal obligation (it being agreed that if Seller denies access to any
materials pursuant to this clause (a), Seller shall disclose to Buyer the legal
constraints or obligations requiring such denial and shall, at the request of
Buyer, use commercially reasonable efforts to obtain any consents or waivers
necessary to afford Buyer the requested access), (ii) waiving any
attorney/client, work product, or like privilege, (iii) disclosing information
about the activities of Seller or its Affiliates (other than SWP and any
Subsidiary), or (iv) disclosing proprietary models of Seller or any of its
Affiliates pertaining to energy project evaluation, energy or natural gas price
curves or projections, or other economic predictive models; provided that all
requests for access shall be directed to Jody Blackburn or such other persons as
Seller may designate from time to time.
(b) subject to any required consent of any third Person and upon reasonable
advance notice to Seller, to conduct at reasonable times and at Buyer's sole
risk, cost, and expense, in the presence of representatives of Seller,
reasonable inspections of the Operating Facility and the Development Project
Site. Buyer agrees to indemnify and hold harmless, release and defend Seller
Indemnified Parties and SWP and any Subsidiary from and against any and all
Losses arising, in whole or in part, from the acts or omissions of the Buyer
Indemnified Parties in connection with Buyer's inspection of the Operating
Facility, the Development Project Site and other assets and records of Seller or
SWP and any Subsidiary, including claims for personal injuries, property damage,
and reasonable attorneys' fees and expenses, except to the extent that any such
Losses arise from the acts or omissions of any one or more of the Seller
Indemnified Parties.
Nothing in this Article 5 shall be construed to permit Buyer or its
representatives to have access to any files, records, contracts, or documents of
Seller or SWP or any Subsidiary relating to this Agreement or the contemplated
transaction, including any bids or offers received by Seller or SWP or any
Subsidiary for the sale of the LLC Interests or the Operating Facility or the
Development Project Site, it being agreed that all such bids or offers shall be
the sole property of Seller.
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5.2 Confidential Information.
Buyer agrees to maintain all information made available to it under
this Agreement confidential and to cause its officers, directors, agents,
employees, representatives, consultants, and advisors to maintain all
information made available to them under this Agreement confidential, all as
provided in that certain confidentiality agreement dated October 13, 2000, as
amended on May 11, 2001 (the "Confidentiality Agreement"), by and between Seller
and Buyer which is attached hereto as Exhibit 5.2, the terms of which are
incorporated herein by reference and made a part of this Agreement.
5.3 No Other Contract.
Buyer shall not contact or correspond with any customer, employee or
other Person associated with the business of SWP without the prior written
consent of Seller.
ARTICLE 6
Tax Matters
6.1 Preparation.
Any Tax Return to be prepared pursuant to the provisions of this
Section 6.1 shall be prepared in a manner consistent with practices followed in
prior years with respect to similar Tax Returns, except for changes required by
changes in law or fact. Buyer shall not file an amended Tax Return for any
period ending on or prior to the Closing Date without the consent of Seller,
which may be withheld in Seller's sole discretion. The following provisions
shall govern the allocation of responsibility as between Buyer and Seller for
certain Tax matters following the Closing Date:
(a) Tax Periods Ending on or Before the Closing Date. Seller shall
prepare or cause to be prepared and file or cause to be filed all Tax
Returns for SWP and each Subsidiary for all periods ending on or prior to
the Closing Date regardless of when they are to be filed. Seller shall pay
the Taxes attributable to SWP and each Subsidiary with respect to such
periods.
(b) Tax Periods Beginning Before and Ending After the Closing Date.
Buyer shall prepare or cause to be prepared and file or cause to be filed
any Tax Returns of SWP and each Subsidiary for Tax periods which end after
the Closing Date. Seller shall pay to Buyer within fifteen (15) days after
the date on which Buyer delivers substantiation of Taxes paid with respect
to such periods an amount equal to the portion of such Taxes that relates
to the portion of such Tax period ending on the Closing Date.
6.2 Access to Information.
After Closing, Seller shall grant to Buyer (or its designees) access at
all reasonable times to all of the information, books, and records relating to
SWP and any Subsidiary within the possession of Seller (including work papers
and correspondence with taxing authorities), and shall afford Buyer (or its
designees) the right (at Buyer's expense) to take extracts therefrom and to make
copies thereof, to the extent reasonably necessary to permit Buyer (or its
designees) to prepare Tax Returns and to conduct negotiations with taxing
authorities. After Closing,
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Buyer shall grant or cause SWP and any Subsidiary to grant to Seller (or its
designees) access at all reasonable times to all of the information, books and
records relating to SWP and any Subsidiary within the possession of Buyer or SWP
and any Subsidiary (including work papers and correspondence with taxing
authorities), and shall afford Seller (or its designees) the right (at Seller's
expense) to take extracts therefrom and to make copies thereof, to the extent
reasonably necessary to permit Seller (or its designees) to prepare Tax Returns
and to conduct negotiations with Tax authorities.
6.3 Transfer Taxes.
Buyer shall be responsible for the payment of all Transfer Taxes
resulting from the transactions contemplated by this Agreement.
6.4 Tax Sharing Agreements.
On or before the Closing Date, Seller shall ensure that no Tax
indemnity agreement, Tax allocation agreement, or Tax sharing agreement with
respect to SWP or any Subsidiary is in force or effect as to SWP or any
Subsidiary and that there shall be no liability of SWP or any Subsidiary on and
after the Effective Date under any such agreement.
6.5 Assistance and Cooperation.
After the Closing Date, in the case of any threatened or actual audit,
examination, or other proceeding with respect to Taxes ("Tax Proceeding") for
which Seller is or may be liable pursuant to this Agreement, Buyer shall inform
Seller within ten (10) days of the receipt of any notice of such Tax Proceeding,
and shall afford Seller, at Seller's expense, the opportunity to control the
conduct of such Tax Proceedings. Buyer shall execute or cause to be executed
powers of attorney or other documents necessary to enable Seller to take all
actions desired by Seller with respect to such Tax Proceeding to the extent such
Tax Proceeding may affect the amount of Taxes for which Seller is liable
pursuant to this Agreement. Seller shall have the right to control any such Tax
Proceedings and, if there is substantial authority therefor, to initiate any
claim for refund, file any amended return or take any other action which it
deems appropriate with respect to such Taxes.
6.6 Tax Indemnity.
Notwithstanding any other provisions of this Agreement, Sections 6.6
and 6.7 shall apply to indemnifications by Seller to Buyer for, and shall be the
sole remedy of Buyer in respect of, Losses described in the following sentence.
Seller agrees to indemnify and hold harmless Buyer from and against the entirety
of any and all Losses that Buyer may suffer for any Taxes attributable to SWP or
any Subsidiary with respect to any Tax year or portion thereof ending on or
before the Closing Date (or for any Tax year beginning before and ending after
the Closing Date to the extent allocable (determined in a manner consistent with
Section 6.1(b)) to the portion of such period beginning before and ending on the
Closing Date). No right to indemnity shall exist if the Loss is the result of
actions of Buyer or its Affiliates.
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6.7 Tax Indemnity Claims.
The provisions of this Section 6.7 shall apply only to the
indemnification provided for under Section 6.6. If a claim for Taxes is made
against Buyer and if Buyer intends to seek indemnity with respect thereto under
Section 6.6, Buyer shall promptly furnish written notice to Seller of such
claim. Failure of Buyer to so notify Seller within fifteen (15) days of the
claim being made against Buyer shall terminate all rights of Buyer to indemnity
by Seller as to such claim. Seller shall have thirty (30) days after receipt of
such notice to undertake, conduct, and control (through counsel of its own
choosing and at its own expense) the settlement or defense thereof, and Buyer
shall cooperate with it in connection therewith. Seller shall permit Buyer to
participate in such settlement or defense through counsel chosen by Buyer (but
the fees and expenses of such counsel shall be paid by Buyer). So long as
Seller, at Seller's cost and expense, (i) has undertaken the defense of, and
assumed full responsibility for all indemnified Losses with respect to, such
claim, (ii) is reasonably contesting such claim in good faith, by appropriate
proceedings, and (iii) has taken such action (including the posting of a bond,
deposit, or other security) as may be necessary to prevent any action to
foreclose a lien against or attachment of the property of Buyer for payment of
such claim, Buyer shall not pay or settle any such claim. Notwithstanding
compliance by Seller with the preceding sentence, Buyer shall have the right to
pay or settle any such claim, but in such event it shall waive any right to
indemnity by Seller for such claim. If within thirty (30) days after the receipt
of Buyer's notice of a claim of indemnity hereunder, Seller does not notify
Buyer that it elects (at Seller's cost and expense) to undertake the defense
thereof and assume full responsibility for all indemnified Losses with respect
thereto, or gives such notice and thereafter fails to contest such claim in good
faith or to prevent action to foreclose a lien against or attachment of Buyer's
property as contemplated above, Buyer shall have the right to contest, settle,
or compromise such claim and Buyer shall not thereby waive any right to
indemnity for such claim under this Agreement.
6.8 Tax Refunds.
Refunds of Taxes paid or payable with respect to Taxes attributable to
SWP or any Subsidiary shall be promptly paid as follows (or, to the extent
payable but not paid due to offset against other Taxes, shall be promptly paid
by the Party receiving the benefit of the offset as follows): (i) to Seller if
attributable to Taxes with respect to any Tax year or portion thereof ending on
or before the Closing Date (or for any Tax year beginning before and ending
after the Closing Date to the extent allocable (determined in a manner
consistent with Section 6.1(b)) to the portion of such period beginning before
and ending on the Closing Date); and (ii) to Buyer if attributable to Taxes with
respect to any Tax year or portion thereof beginning after the Closing Date (or
for any Tax year beginning before and ending after the Closing Date to the
extent allocable (determined in a manner consistent with Section 6.1) to the
portion of such period ending after the Closing Date).
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ARTICLE 7
Covenants of Seller and Buyer
7.1 Conduct of Business Pending Closing.
Subject to Section 7.2, except as disclosed in Schedule 7.1 or as
otherwise consented to or approved by Buyer (which consent or approval shall not
be unreasonably withheld, conditioned, or delayed), Seller covenants and agrees
that:
(a) Changes in Business. Except as contemplated by Section 7.1(b) in
respect of the Development Project, Seller shall cause SWP and each Subsidiary
to comply with the following:
(i) SWP shall not make, nor permit any Subsidiary to make, any
material change in the conduct of its business or operations, except as
contemplated by the matters described in Schedule 7.1;
(ii) except in the ordinary course of business and consistent with
past practices, and except for the transfer of the Transferred Contracts as
provided in Section 7.1(h), SWP shall not, nor permit any Subsidiary to,
enter into, assign, terminate, or amend in any material respect, any
Project Document;
(iii) Neither SWP nor any Subsidiary shall:
(A) merge into or with or consolidate with any other corporation
or acquire all or substantially all of the business or assets of any
Person;
(B) make any material change in its certificate of formation or
limited liability company agreement or partnership agreement;
(C) purchase any securities of any Person, except for investments
made in the ordinary course of business and consistent with prior
practices;
(D) declare or pay any dividends or make any distributions in
respect of, or issue any of, its equity securities or securities
convertible into its equity securities, or repurchase, redeem, or
otherwise acquire any such securities or make or propose to make any
other change in its capitalization; or
(E) except for obligations that will be repaid in full at or
prior to the Closing, incur any obligations for borrowed money or
guarantee or otherwise become liable for the obligations of, or make
any loans or advances to, any Person not an Affiliate of Seller.
(iv) other than pursuant to the requirements of existing contracts or
commitments, SWP shall not, nor permit any Subsidiary to, sell, lease, or
otherwise dispose of any of its assets, except for (a) assets sold, leased,
or otherwise disposed of in the ordinary course of business, (b) the sale
or disposition of any item of personal property or equipment having a value
of less than $50,000, and (c) the transfer or other
27
disposition of the accounts receivable or advances due or owed to SWP or
any Subsidiary from any Affiliate of Seller;
(v) SWP shall not, nor permit any Subsidiary to, take any action or
enter into any commitment with respect to or in contemplation of any
liquidation, dissolution, recapitalization, reorganization, or other
winding up of its business or operations;
(vi) SWP shall not, nor permit any Subsidiary to, change its
accounting policies or practices (including, without limitation, any change
in depreciation or amortization policies), except as required under GAAP;
(vii) SWP shall not, nor permit any Subsidiary to, enter into any
employment agreement not terminable by SWP or such Subsidiary at will and
without cost to SWP or such Subsidiary; and
(viii) SWP shall not, nor permit any Subsidiary to, create any
employee benefit plan (within the meaning of Section 3(3) of ERISA) or any
other employee benefit plan or program not subject to ERISA, except as
required by Law.
(b) Continued Development of Development Project. Notwithstanding anything
contained in Section 7.1(a) to the contrary, until the Closing Date, Seller and
SWP and any Subsidiary shall continue to pursue and control the development,
permitting and construction of the Development Project, all as Seller and SWP
and any Subsidiary deem appropriate, subject only to the express requirements of
this Agreement. Except as otherwise expressly provided in this Agreement:
(i) all activities of Seller, SWP and any Subsidiary in connection
with the development of the Development Project ("Development Project
Activities") shall be undertaken and pursued in substantial accordance with
the principles and practices which are applicable to Seller's power plant
development projects generally at the time in question ("Seller Practice");
provided, that Seller shall cooperate and coordinate with Buyer through the
Project Transition Committee as provided in Section 7.1(c) with respect to
the development and construction of the Development Project and shall
provide to Buyer, its agents, consultants and counsel upon reasonable prior
notice (which may be delivered by telephone or facsimile transmission),
access to the Development Project by Buyer's representatives on the Project
Transition Committee at all reasonable times for purposes of observing
Seller's development and construction activities and conducting (at Buyer's
expense) any examinations and surveys as Buyer may reasonably request;
(ii) subject to Section 7.1(b)(i), SWP and any Subsidiary and Seller,
on behalf of SWP and any Subsidiary, may spend or incur such Development
Expenses as they deem appropriate in connection with the Development
Project, provided that (x) no cost or expense incurred in connection with a
Change Order under the EPC Contract shall be included in the Adjusted
Purchase Price without Buyer's prior written consent (which consent shall
not be unreasonably withheld, conditioned or delayed), it being understood
28
that in the event Buyer unreasonably withholds, conditions or delays any
such consent to a Change Order which is performed under the EPC Contract
the costs or expenses incurred in connection with such Change Order shall
be included in the Adjusted Purchase Price and borne by Buyer and (y) no
Development Expenses (other than expenses to satisfy obligations under the
EPC Contract) in excess of 110% of the total amount of each line item of
expenses set forth in the Development Budget (determined after the
application by the Seller or SWP of any contingency amount included in the
Development Budget) shall be included in the Adjusted Purchase Price
without Buyer's prior written consent (which consent shall not be
unreasonably withheld, conditioned or delayed), it being understood that in
the event Buyer unreasonably withholds, conditions or delays any such
consent to any such expense the costs or expenses incurred in connection
therewith shall be included in the Adjusted Purchase Price and borne by
Buyer;
(iii) Neither Seller nor SWP or any Subsidiary shall, without Buyer's
prior written consent (which consent shall not be unreasonably withheld,
conditioned or delayed), amend or supplement any existing Project Document,
enter into any new agreement which is not consistent with Seller's Practice
(an "Additional Project Agreement") in respect of the development,
construction, ownership or operation of the Project which is material, or
amend or supplement any Additional Project Agreement once entered into, if
such amendment or supplement or Additional Project Agreement would cause a
Material Adverse Effect or would result in a payment obligation,
individually or in the aggregate, in excess of $50,000;
(iv) SWP and any Subsidiary may deal and contract with Seller, and
Seller and SWP and any Subsidiary may deal and contract with Affiliates of
Seller, freely and without limitation or restriction of any kind and on
such terms and conditions as SWP and any Subsidiary and Seller and such
Affiliates deem appropriate, subject only to the requirement that any
obligations of SWP and any Subsidiary paid or incurred to Seller or any
Affiliates of Seller shall be for reasonably equivalent value on terms no
less favorable to SWP and any Subsidiary than they could obtain in an
arm's-length transaction with a Person that is not an Affiliate of Seller;
and
(v) Seller and SWP and any Subsidiary may take or omit to take any
action in connection with the Development Project, the existing Project
Documents, the Additional Project Agreements or any of the Development
Project Activities for any or no reason, as it deems appropriate. The
phrase "deems appropriate," when used in this Agreement with respect to any
decision, action, or inaction by Seller or SWP and any Subsidiary, means
that the decision, action or inaction may be made or taken for any or no
reason deemed appropriate in the sole discretion of Seller or either of SWP
and any Subsidiary considering only its own interests and not the interests
of any other Person (including, but not limited to, Buyer), subject only to
any requirements of this Agreement.
(c) Transition Committee. Promptly after the Effective Date, Seller and
Buyer shall establish a project transition committee (the "Project Transition
Committee") for the purpose of facilitating ongoing communication between the
Parties with respect to the
29
development of the Development Project prior to the Closing Date. The Project
Transition Committee shall be comprised of four (4) members, two (2) appointed
by Seller and two (2) appointed by Buyer. The Project Transition Committee shall
meet no less frequently than weekly, or more often as the Parties may mutually
agree or this Agreement may require. Meetings shall be held at such locations as
the members of the Project Transition Committee may agree upon, on no less than
twenty-four (24) hours' prior written notice of either Party (which notice may
be waived in writing by both Parties), provided that either Party may call a
special meeting to address an urgent matter on such notice as may be practicable
under the circumstances. All meetings may be held telephonically and all
representatives shall be available for meetings on short notice (and shall
designate an alternate for purposes of unavailability). At each meeting, Seller
shall provide an update on any Development Project Activities undertaken since
the last weekly meeting of the Project Transition Committee (including an update
of Development Expenses) and shall consult with Buyer regarding anticipated
future Development Project Activities. The Parties shall discuss such other
matters related to Development Project Activities generally as they may deem
appropriate. Buyer shall designate one or more individuals (who may be a member
of the Project Transition Committee) to be available on a twenty-four (24) hour
per day basis to consult with Seller in respect of the Development Project and
to be available to receive "time critical" requests from Seller pursuant to
Section 7.1(d) (each such individual being a "Buyer's Construction
Representative").
(d) All requests by Seller for consent by Buyer to Development Expenses for
which Buyer's consent is required pursuant to Section 7.1(b)(ii) hereof shall be
submitted exclusively to the Project Transition Committee (which submission may
be made through any Buyer Construction Representative) and Seller shall have no
obligation to submit such requests to any other Person, notwithstanding anything
to the contrary provided herein. Buyer's representatives on the Project
Transition Committee shall have authority to grant or deny such consent. Seller
may designate certain events as "time critical" in the event Seller has
determined in good faith that such events are material to the Development
Project and are of such a nature that a decision related thereto by the Project
Transition Committee must be reached immediately in order to serve the overall
best interests of the Development Project. Buyer agrees that in the event Seller
designates any such request as "time critical," Buyer's representatives will
respond to such request with Buyer's consent or denial of consent within such
time period as Seller may specify therefor, which shall not in any case be less
than twelve (12) hours after Buyer's Construction Representative has personally
received such request. Any such request for consent shall include such detail as
is reasonably necessary for Buyer's representative to evaluate the merits of
such request. It shall be presumptively unreasonable for Buyer to withhold,
condition, delay or deny consent to any such item if it is substantially
consistent with Seller Practice and the Work Plan.
(e) Buyer may, at its reasonable discretion, engage the services of Seller
or its Affiliates for the purpose of providing any services deemed reasonable
and necessary to assist Buyer or SWP and any Subsidiary with the development and
management of the Development Project, including the services set forth in Part
I on Schedule 7.1(e) (the "Transition Services"). Seller shall have and shall
make available to Buyer and LLC that number of Seller employees which Seller
reasonably believes is necessary to perform fully the Transition Services. Part
II on Schedule 7.1(e) sets forth a list of the key Seller personnel whom Seller
shall make available to render the Transition Services, together with a list of
their hourly billing rates. In the event the
30
Parties mutually agree to utilize personnel not identified in Part I on Schedule
7.1(e), Seller shall bill Buyer or the LLC at an agreed-upon hourly costs for
such Transition Services. Seller, in consultation with Buyer, shall have the
right to exchange or reassign the personnel whom Seller shall make available to
render the Transition Services. All requests from Buyer or SWP or any Subsidiary
and all Transition Services performed by Seller or its affiliates under this
Section 7.1(e) shall be consistent with applicable Laws.
(f) Liens. Seller shall not, and will cause SWP and each Subsidiary not to,
grant any express Lien on any assets of SWP or any Subsidiary, except to the
extent (i) required or permitted incident to the operation of the assets of SWP
or any Subsidiary and the business of SWP or any Subsidiary or (ii) required or
evidenced by any of the Project Documents.
(g) Operation of Operating Facility. Seller shall:
(i) cause the Operating Facility to be maintained and operated in the
ordinary course of business consistent with past practices (including the
repair or replacement of damaged, destroyed, obsolete, depreciated,
non-working, or non-economical items of equipment or other personal
property), and in accordance with Good Operating Practices, maintain
insurance now in force with respect to such Facility, and pay or cause to
be paid all costs and expenses in connection therewith promptly when due;
(ii) cause SWP and each Subsidiary responsible therefor to maintain
the Operating Facility's QF status; and
(iii) cause SWP and each Subsidiary to use its reasonable efforts to
maintain its relationships with suppliers, customers, and others having
material business relationships with SWP and any Subsidiary with respect to
the Operating Facility so that they will be preserved for Buyer on and
after the Closing Date.
(h) Transferred Contracts. On or before the Closing Date, Seller shall
cause each of the contracts described in Schedule 7.1(h) (the "Transferred
Contracts") to be assigned and transferred to, and assumed by, SWP or its
appropriate Subsidiary shown for each such Transferred Contract in Schedule
7.1(h).
(i) Permits. Seller and its Affiliates shall use all commercially
reasonable efforts, and shall cause the SWP and any Subsidiary, to obtain
all authorizations, consents, orders, and approvals of, and to give all
notices to and make all filings with, all Governmental Authorities
(including those pertaining to the Governmental Approvals) and third
parties that may be or become necessary or desirable in connection with
this Agreement and the transactions contemplated hereby in order to
preserve and protect, and not to impair, the Permits (whether already
obtained or applied for).
7.2 Qualifications on Conduct.
Seller, SWP and any Subsidiary may take (or not take, as the case may
be) any of the actions described in Section 7.1 above if reasonably necessary
under emergency circumstances
31
(or if required or prohibited pursuant to Law) and provided Buyer is notified as
soon thereafter as practicable.
7.3 Public Announcements.
Prior to the Closing Date, without the prior written approval of the
other Party (which approval shall not be unreasonably withheld, conditioned, or
delayed), no Party will issue, or permit any agent or Affiliate of such Party to
issue, any press releases or otherwise make, or cause any agent or Affiliate of
such Party to make, any public statements with respect to this Agreement and the
transactions contemplated hereby, except when such release or statement is
deemed in good faith by the releasing Party to be required by Law or under the
applicable rules and regulations of a stock exchange or market on which the
securities of the releasing Party or any of its Affiliates are listed. In each
case to which such exception applies, the releasing Party will use its
reasonable efforts to provide a copy of such release or statement to the other
Party and incorporate any reasonable changes which are suggested by the
non-releasing Party prior to releasing or making the statement. After the
Closing Date, the Parties will confer with each other regarding their initial
public announcement for the transaction contemplated herein.
7.4 Actions by Parties.
Each Party agrees to use commercially reasonable efforts to satisfy the
conditions to Closing set forth in Article 8 and to refrain from taking any
action within its control which would cause a breach of a representation or
warranty set forth herein.
7.5 Supplements to Schedules.
Seller may, from time to time prior to the Closing by written notice to
Buyer, supplement or amend the Schedules to this Agreement to correct any matter
that would constitute a breach of any representation or warranty of Seller in
Section 4.1. For purposes of determining whether Buyer's condition set forth in
Section 8.2(a) has been fulfilled, the Schedules shall be deemed to include only
that information contained therein on the Effective Date and shall be deemed to
exclude all information contained in any supplement or amendment thereto, but if
the Closing shall occur, then all matters disclosed to Buyer pursuant to any
such supplement or amendment at or prior to the Closing shall be deemed to be
waived by Buyer and Buyer shall not be entitled to make any claim thereon or
relating thereto under Section 11.1.
7.6 Further Assurances.
Seller and Buyer each agree that from time to time after the Closing
Date, it will execute and deliver or cause its respective Affiliates (including
SWP and each Subsidiary) to execute and deliver such further instruments, and
take (or cause its respective Affiliates, including SWP and each Subsidiary, to
take) such other action, as may be reasonably necessary to carry out the
purposes and intents of this Agreement.
7.7 Records.
Buyer agrees to maintain, or cause SWP and each Subsidiary to maintain,
the Records in existence on the Closing Date until the fifth (5th) anniversary
of the Closing Date (or for such
32
longer period of time as Seller shall advise Buyer is necessary to have Records
available with respect to open years for Tax audit purposes), or if any of the
Records pertain to any claim or dispute pending on the fifth (5th) anniversary
of the Closing Date, Buyer shall maintain any of the Records designated by
Seller until such claim or dispute is finally resolved and the time for all
appeals has been exhausted. After the Closing Date, Buyer shall provide or cause
SWP and each Subsidiary to provide Seller and its representatives during normal
business hours and upon reasonable notice, reasonable access to and the right to
copy the Records at Seller's cost and expense, for the purposes of:
(i) preparing and delivering any accounting statement provided for
under this Agreement and adjusting, prorating, and settling the charges and
credits provided for in this Agreement;
(ii) complying with any Law affecting Seller's ownership of the LLC
Interests or the Operating Facility, the Development Project or the
Development Project Site prior to the Closing Date;
(iii) preparing any audit of the books and records of any Person
relating to the LLC Interests or the Operating Facility or the Development
Project prior to the Closing Date, or responding to any audit prepared by
such third parties;
(iv) preparing Tax Returns;
(v) responding to or disputing any Tax audit; or
(vi) asserting, defending, or otherwise dealing with any claim or
dispute under this Agreement or with respect to SWP or any Subsidiary or
the Operating Facility or Development Project.
From and after the Closing Date until the fifth (5th) anniversary of
the Closing Date, in no event shall Buyer, SWP or any Subsidiary, or any of
their respective Affiliates destroy any Records without giving Seller at least
sixty (60) days advance written notice thereof and the opportunity, at Sellers
expense, for Seller to obtain such Records prior to their destruction.
Additionally, Buyer shall not, and shall not permit SWP or any Subsidiary to,
after the Closing Date, waive the attorney-client, work product or like
privilege of Seller, its Affiliates, or SWP or any Subsidiary with respect to
any of the Records existing as of the Closing Date, without Seller's prior
written consent.
7.8 Assumption of Obligations of SWP and any Subsidiary.
From and after the Closing Date, Buyer agrees to cause SWP and each
Subsidiary to fully perform and fulfill all of its obligations and commitments,
whether existing as of the Closing Date or arising or incurred thereafter.
7.9 Regulatory and Other Authorizations and Consents.
(a) Filings. Each Party shall use all commercially reasonable efforts to
obtain all authorizations, consents, orders, and approvals of, and to give all
notices to and make all
33
filings with, all Governmental Authorities (including those pertaining to the
Governmental Approvals) and third parties that may be or become necessary for
its execution and delivery of, and the performance of its obligations under,
this Agreement and will cooperate fully with the other Party in promptly seeking
to obtain all such authorizations, consents, orders, and approvals, giving such
notices, and making such filings. To the extent required by the HSR Act, each
Party shall (i) file or cause to be filed, as promptly as practicable but in no
event later than the tenth (10th) Business Day after the execution and delivery
of this Agreement, with the Federal Trade Commission and the United States
Department of Justice, all reports and other documents required to be filed by
such Party under the HSR Act concerning the transactions contemplated hereby and
(ii) promptly comply with or cause to be complied with any requests by the
Federal Trade Commission or the United States Department of Justice for
additional information concerning such transactions, in each case so that the
initial thirty (30) day waiting period applicable to this Agreement and the
transactions contemplated hereby under the HSR Act shall expire as soon as
practicable after the execution and delivery of this Agreement. Each Party
agrees to request, and to cooperate with the other Party in requesting, early
termination of any applicable waiting period under the HSR Act. Seller and Buyer
shall each pay one half of the filing fees in connection with the filings by the
Parties required by the HSR Act.
(b) Additional Undertakings of Buyer. Without limiting the generality of
Buyer's undertakings pursuant to Section 7.9(a), Buyer shall:
(i) take promptly any or all actions, including the following actions,
to the extent necessary to eliminate any concerns on the part of any
Governmental Authority regarding the legality, under any Law, of Buyer's
acquisition of the LLC Interests: entering into negotiations, providing
information, making proposals, entering into and performing agreements or
submitting to judicial or administrative orders, holding separate (through
the establishment of a trust or otherwise) particular assets or categories
of assets, or businesses, of SWP and any Subsidiary or Buyer or its
Affiliates, or agreeing to dispose of one or more assets or properties
(whether owned by Buyer or its Affiliates or SWP or any Subsidiary) whether
before or after the Closing; provided, however, that nothing in this
Agreement shall require Buyer or its Affiliates or SWP or any Subsidiary to
dispose of or sell assets or properties, hold separate particular assets or
categories of assets, or businesses, or agree to dispose of or hold
separate one or more assets or properties or to take any other action that
could have a material adverse impact on Buyer or its Affiliates, or SWP or
any Subsidiary;
(ii) use commercially reasonable efforts (including taking the steps
contemplated by Section 7.9(b)(i)) to prevent the entry in a judicial,
administrative or other proceeding brought under any Law by any
Governmental Authority or any other Person for a permanent or preliminary
injunction or other order that would make consummation of the transactions
contemplated by this Agreement unlawful or that would prevent or delay such
consummation; and
(iii) take promptly, in the event that such an injunction or order has been
issued in such a proceeding, any and all reasonable steps, including
the appeal thereof, the posting of a bond or the steps contemplated by
Section 7.9(b)(i), necessary to
34
vacate, modify, or suspend such injunction or order so as to permit
such consummation on a schedule as close as possible to that
contemplated by this Agreement.
(c) Transfer. If the transfer of any instrument, contract, license, lease,
permit, or other document to Buyer hereunder shall require the consent of any
party thereto other than Seller, then this Agreement shall not constitute an
agreement to assign the same, and such item shall not be assigned to or assumed
by Buyer, if an actual or attempted assignment thereof would constitute a breach
thereof or default thereunder. In such case, Seller and Buyer shall cooperate
and each shall use commercially reasonable efforts to obtain such consents to
the extent required of such other parties and, if and when any such consents are
obtained, to transfer the applicable instrument, contract, license, lease,
permit, or other document. If any such consent cannot be obtained, Seller shall
cooperate in any reasonable arrangement designed to obtain for Buyer all
benefits, privileges, obligations and privileges of the applicable instrument,
contract, license, lease, permit, or document.
(d) Third Party Consents. Buyer will use its best efforts to assist Seller
in obtaining any consents of Persons and Governmental Authorities necessary or
advisable in connection with the transactions contemplated by this Agreement,
including providing to such Persons and Governmental Authorities such financial
statements and other publicly available financial information with respect to
Buyer and its parent company as such Persons or Governmental Authorities may
reasonably request.
7.10 Fees and Expenses.
Except as otherwise expressly provided in this Agreement, all fees and
expenses, including fees and expenses of counsel, financial advisors, and
accountants, incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the Party incurring such fee or expense,
whether or not the Closing shall have occurred. Buyer shall be obligated to pay
any and all costs of any audit of SWP and any Subsidiary as may be required to
enable Buyer to complete and file any filing by Buyer or an Affiliate of Buyer
with the Securities and Exchange Commission.
7.11 Excluded Assets.
Notwithstanding Article 9 hereof, the transactions contemplated by this
Agreement exclude, and prior to the Closing Date, Seller may cause SWP or any
Subsidiary to transfer to Seller or any of its Affiliates (other than SWP and
any Subsidiary) the following (the "Excluded Assets"):
(i) the assets listed or described on Schedule 7.11;
(ii) all insurance policies and rights under any insurance policies in
respect to any and all claims made under such policies whether such claims
are asserted before or after the Closing Date and all rights to any
proceeds payable under any such policy; and
(iii) the Enron Marks.
35
Seller's representations and warranties in Article 4 shall not apply to any of
the items described in clauses (i) through (iii) of the preceding sentence.
7.12 Guarantees and Other Affiliate Contracts.
Buyer shall cause, at the Closing Date, (i) the Guarantees and any
liabilities related thereto to be released as to Seller and any Affiliate of
Seller and (ii) substitute arrangements, if required, of Buyer or its Affiliates
to be in effect for any such Guarantees. At the Closing Date, Seller may
terminate those Project Documents described on Schedule 7.12 as the "Terminated
Contracts."
7.13 Use of Enron Marks.
Enron Marks may appear on some of the assets of SWP or any Subsidiary,
including signage at the Operating Facility and the Development Project Site,
and on supplies, materials, stationery, brochures, advertising materials,
manuals and similar consumable items of SWP and any Subsidiary. Buyer
acknowledges and agrees that it obtains no right, title, interest, license, or
any other right whatsoever to use the Enron Marks. Buyer shall, (i) within
ninety (90) days after the Closing Date, remove the Enron Marks from the assets
of SWP and any Subsidiary, including signage at the Operating Facility and the
Development Project Site, and provide written verification thereof to Seller
promptly after completing such removal and (ii) within two (2) weeks after the
Closing Date, return or destroy (with proof of destruction) all other assets of
SWP and any Subsidiary that contain any Enron Marks that are not removable.
Buyer agrees never to challenge Seller's or its Affiliates' ownership of the
Enron Marks or any application for registration thereof or any registration
thereof or any rights of Seller or its Affiliates therein as a result, directly
or indirectly, of its ownership of SWP and any Subsidiary. Buyer will not do any
business or offer any goods or services under the Enron Marks. Buyer will not
send, or cause to be sent, any correspondence or other materials to any Person
on any stationery that contains any Enron Marks or otherwise operate SWP and any
Subsidiary in any manner which would or might confuse any Person into believing
that Buyer has any right, title, interest, or license to use the Enron Marks.
7.14 Insurance.
Buyer acknowledges and agrees that, effective upon the Closing, the
insurance policies of Seller related to SWP and any Subsidiary shall be
terminated or modified to exclude coverage of all or any portion of SWP and any
Subsidiary, and, as a result, Buyer shall be obligated at or before Closing to
obtain at its sole cost and expense replacement insurance, including insurance
required by any Person to be maintained by SWP and any Subsidiary. Buyer further
acknowledges and agrees that Buyer may need to provide to certain Governmental
Authorities and third parties evidence of such replacement or substitute
insurance coverage for the continued operations of the Businesses of SWP and any
Subsidiary following the Closing. Notwithstanding Section 7.11(ii), if any
claims are made or losses occur prior to the Closing Date that relate solely to
the Businesses of SWP and any Subsidiary and such claims, or the claims
associated with such losses, may be made against the policies retained by Seller
or its Affiliates under Section 7.11(ii) or under policies otherwise retained by
Seller or its Affiliates after the Closing, then Seller shall use its reasonable
commercial efforts so that SWP and any
36
Subsidiary can file, notice, and otherwise continue to pursue such claims
pursuant to the terms of such policies. Seller and its Affiliates shall be
reimbursed by Buyer (or otherwise indemnified and held harmless) for any Losses
or other costs incurred by Seller or its Affiliates (including by way of any
reduction in, or loss of, available insurance to cover other insurable losses or
associated expenses of Seller or its Affiliates) arising out of SWP and any
Subsidiary pursuing such claims under such policies.
7.15 Lending Matters.
Seller agrees to cooperate with Buyer and the Lender and to use
commercially reasonable efforts to assist Buyer in obtaining (x) such consents
from parties to the Project Documents as Buyer's lender may reasonably request,
and (y) mechanics' lien waivers for all work completed and paid for through the
Closing Date under the EPC Contract and material subcontracts thereunder
relating to the Development Project, provided that the inability of Buyer to
obtain any such item which (a) is not in a form reasonably customary for
transactions of this nature or (b) is required to be obtained from any third
party not an Affiliate of Seller shall not excuse Buyer's performance of its
obligations hereunder.
ARTICLE 8
Closing Conditions
8.1 Seller's Closing Conditions.
The obligation of Seller to proceed with the Closing contemplated
hereby is subject, at the option of Seller, to the satisfaction on or prior to
the Closing Date of all of the following conditions:
(a) Representations, Warranties, and Covenants. The representations and
warranties of Buyer contained in Section 4.2 of this Agreement shall be true and
correct in all material respects on and as of the Closing Date, except for
representations and warranties that speak as of a specific date or time other
than the Closing Date (which need only be true and correct in all material
respects as of such date or time) except that all representations and warranties
which by their terms are qualified as to materiality shall be true in all
respects as if made on and as of such date, and the covenants and agreements of
Buyer to be performed on or before the Closing Date shall have been duly
performed in all material respects in accordance with this Agreement, and Buyer
shall have delivered to Seller a Certificate, dated the Closing Date and
executed by a Vice President of Buyer, reasonably satisfactory in form and
substance to Seller, confirming the foregoing.
(b) Closing Documents. On or prior to the Closing Date, Buyer shall have
delivered, or be standing ready to deliver at the Closing, all agreements,
instruments, and documents required to be delivered by Buyer under Section 9.3.
(c) No Action. On the Closing Date, no Action (excluding any such matter
initiated by Seller or any of its Affiliates) shall be pending or threatened
before any Governmental Authority of competent jurisdiction seeking to enjoin or
restrain the consummation of the Closing or recover substantial damages from
Seller or any Affiliate of Seller resulting therefrom.
37
(d) Waiting Period. The waiting period under the HSR Act applicable to the
consummation of the transactions contemplated hereby shall have expired or been
terminated or the Parties shall have otherwise complied with the HSR Act.
(e) Governmental Approvals. The Governmental Approvals and other consents,
filings and notices required for the consummation of the transactions
contemplated hereby, as identified on Schedules 4.1(n) and 8.1(e) hereto, shall
have been obtained.
(f) Purchase Price. Buyer shall have delivered, or be ready, willing and
able to deliver at the Closing, the Closing Payment to Seller by wire transfer
in immediately available funds.
(g) Guarantees. The Guarantees shall be released as to Seller and its
Affiliates and, if required, substitute arrangements of Buyer or its Affiliates
shall be in effect.
(h) Financing Commitment. Buyer shall have provided Seller with a written
commitment from its lender on or before August 24, 2001 acknowledging that all
of the conditions precedent to such lender making its loan to finance the
Adjusted Purchase Price are satisfied (other than the closing of the
transactions contemplated by this Agreement and Buyer's lending documents).
8.2 Buyer's Closing Conditions.
The obligation of Buyer to proceed with the Closing contemplated hereby
is subject, at the option of Buyer, to the satisfaction on or prior to the
Closing Date of all of the following conditions:
(a) Representations, Warranties, and Covenants. The representations and
warranties of Seller in Section 4.1 of this Agreement shall be true and correct
in all material respects on and as of the Closing Date, except for
representations and warranties that speak as of a specific date or time other
than the Closing Date (which need only be true and correct in all material
respects as of such date or time) except that all representations and warranties
which by their terms are qualified as to materiality shall be true in all
respects as if made on and as of such date, and the covenants and agreements of
Seller to be performed on or before the Closing Date shall have been duly
performed in all material respects in accordance with this Agreement, and Seller
shall have delivered to Buyer a Certificate, dated the Closing Date and executed
by a Vice President of Seller, reasonably satisfactory in form and substance to
Buyer, confirming the foregoing.
(b) Closing Documents. On or prior to the Closing Date, Seller shall have
delivered, or be standing ready to deliver at the Closing, all agreements,
instruments, and documents required to be delivered by Seller pursuant to
Section 9.2.
(c) No Action. On the Closing Date, no suit, action or other proceeding
(excluding any such matter initiated by Buyer or any of its Affiliates) shall be
pending or threatened before any court or governmental agency or body of
competent jurisdiction seeking to enjoin or restrain the consummation of the
Closing or recover substantial damages from Buyer or any Affiliate of Buyer
resulting therefrom.
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(d) Waiting Period. The waiting period under the HSR Act applicable to the
consummation of the transactions contemplated hereby shall have expired or been
terminated or the Parties shall have otherwise complied with the HSR Act.
(e) Governmental Approvals. The Governmental Approvals and other consents,
filings and notices required for the consummation of the transactions
contemplated hereby, as identified on Schedules 4.1(h) and 8.2(e) hereto, shall
have been obtained.
(f) Equipment Procurement. At the Closing, Seller shall have caused to be
assigned to SWP or any Subsidiary, the rights of Seller as "buyer" under those
contracts and agreements described on Schedule 8.2(f), but only to the extent
that such contracts and agreements relate to the specific items of equipment
described therein.
(g) Payment of NatWest Loan and Bridge Loan. Buyer shall have received
evidence satisfactory to it that the obligations of SWP and any Subsidiary with
respect to NatWest Loan, the Bridge Loan and the Subordinated Note shall be paid
in full from the proceeds of the Adjusted Purchase Price and evidence
satisfactory to it of the release of Buyer and all Real Property therefrom for
any liabilities, obligations or otherwise under any of the agreement, document
or instrument with respect thereto, including the Subordinated Note and any
interest rate swap or other hedge arrangement in connection with the NatWest
Loan (including the Interest Rate Swap Transaction M186845 dated July 22, 1999
between Las Vegas Cogeneration Limited Partnership and Enron North America Corp.
(formerly known as Enron Capital & Trade Resources Corp.)) and of any Liens
securing such loans.
ARTICLE 9
Closing
9.1 Closing.
A closing (the "Closing") shall be held on the Closing Date at 10:00
a.m., Denver time, at the offices of LeBoeuf, Lamb, Greene & MacRae, LLP, in
Denver, Colorado, or at such other time or place as Seller and Buyer may
otherwise agree in writing. To facilitate the Closing, Buyer and Seller agree
that a pre-closing at which all closing agreements shall be signed shall occur
at least two Business Days prior to the Closing Date.
9.2 Seller's Closing Obligations.
At the Closing, Seller shall execute and deliver, or cause to be
executed and delivered, to Buyer the following:
(i) duly executed copies of the Assignment and Assumption Agreements;
(ii) a duly executed copy of the Seller Guaranty;
(iii) resignations or terminations of the officers, directors, and
managers of each of SWP and each Subsidiary from their status as officers,
directors, and managers effective as of the Closing;
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(iv) the officer's certificate referred to in Section 8.2(a);
(v) an opinion of LeBoeuf, Lamb, Greene & MacRae, LLP or Seller's
in-house counsel covering the matters described on Exhibit C, in form and
substance reasonably satisfactory to Buyer;
(vi) a "non-imputation endorsement affidavit" in the form customarily
used in the State of Nevada to allow Buyer to obtain the Title Endorsement
to the Title Policy; and
(vii) any other documents or instruments reasonably required by Buyer
to consummate the transactions contemplated hereunder.
9.3 Buyer's Closing Obligations.
At the Closing, Buyer shall deliver, or cause to be delivered, to
Seller the following:
(i) the Closing Payment to Seller in immediately available funds to
the bank account as provided in Section 3.2;
(ii) duly executed copies of the Assignment and Assumption Agreements;
(iii) the officer's certificate referred to in Section 8.1(a);
(iv) an opinion of Morgan, Lewis & Bockius LLP or Buyer's in-house
counsel covering the matters described on Exhibit D, in form and substance
reasonably satisfactory to Seller; and
(v) any other documents or instruments reasonably required by Seller
to consummate the transaction contemplated hereunder.
ARTICLE 10
Limitations
10.1 Buyer's Review.
(a) No Reliance. Buyer has reviewed and had access to all documents,
records and information which it has desired to review in connection with its
decision to enter into this Agreement, and to consummate the transactions
contemplated hereby. Buyer has not relied upon any representation, warranty,
statement, advice, document, projection, or other information of any type
provided by Seller or its Affiliates, SWP and any Subsidiary, or any of their
representatives, except for those representations and warranties expressly set
forth herein. In deciding to enter into this Agreement, and to consummate the
transactions contemplated hereby, Buyer has relied solely upon its own
knowledge, investigation, and analysis (and that of its representatives) and not
on any disclosure or representation made by, or any duty to disclose on the part
of, Seller or its Affiliates, SWP and any Subsidiary, or any of their
representatives, other than the express representations and warranties of Seller
set forth herein.
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(b) Limited Duties. Any and all duties and obligations which either Party
may have to the other with respect to or in connection with SWP and any
Subsidiary, this Agreement, or the transactions contemplated hereby are limited
to those set forth in this Agreement. Neither the duties nor obligations of
either Party, nor the rights of either Party, shall be expanded beyond the terms
of this Agreement on the basis of any legal or equitable principle or on any
other basis whatsoever. Neither any equitable nor legal principle nor any
implied obligation of good faith or fair dealing nor any other matter requires
either Party to incur, suffer or perform any act, condition or obligation
contrary to the terms of this Agreement, whether or not existing and whether
foreseeable or unforeseeable. The Parties acknowledge that it would be unfair,
and that they do not intend, to increase any of the obligations of any Party
under this Agreement on the basis of any implied obligation or otherwise.
10.2 Disclaimer of Warranties.
(a) INFORMATION. EXCEPT AS PROVIDED IN SECTION 4.1, SELLER MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS, IMPLIED, AT COMMON LAW, STATUTORY OR
OTHERWISE, WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION,
RECORDS, AND DATA NOW, HERETOFORE, OR HEREAFTER MADE AVAILABLE TO BUYER IN
CONNECTION WITH THIS AGREEMENT (INCLUDING ANY DESCRIPTION OF SWP AND ANY
SUBSIDIARY, THE OPERATING FACILITY, THE DEVELOPMENT PROJECT, REVENUE, PRICE AND
EXPENSE ASSUMPTIONS, ELECTRICITY DEMAND FORECASTS, OR ENVIRONMENTAL INFORMATION,
OR ANY OTHER INFORMATION FURNISHED TO BUYER BY SELLER OR ANY AFFILIATE OF SELLER
OR ANY DIRECTOR, OFFICER, EMPLOYEE, COUNSEL, AGENT, OR ADVISOR THEREOF).
(b) Facilities. Notwithstanding anything contained to the contrary in any
other provision of this Agreement, it is the explicit intent of each Party that
Seller and its Affiliates are not making any representation or warranty
whatsoever, express, implied, at common law, statutory or otherwise, except for
the express representations or warranties given in this Agreement, and it is
understood that Buyer, with such exceptions, takes the LLC Interests, the
Operating Facility, the Development Project, and any other assets of SWP and any
Subsidiary "as is" and "where is." Without limiting the generality of the
immediately preceding sentence, except as expressly provided in this Agreement,
Seller hereby expressly disclaims and negates any representation or warranty,
express or implied, at common law, statutory, or otherwise, relating to (i) the
condition of the Operating Facility, the Development Project, and other assets
of SWP and any Subsidiary (including any implied or express warranty of
merchantability or fitness for a particular purpose, or of conformity to models
or samples of materials, or the presence or absence of any hazardous materials
in or on, or disposed or discharged from, the Operating Facility, the
Development Project Site and other assets of SWP and any Subsidiary) or (ii) the
adequacy, completeness or accuracy of any plans or specifications for the
Development Project, the appropriateness, fitness for use or condition of any
equipment or materials intended to be used in connection with or incorporated
into the Development Project, the accuracy or sufficiency of any schedules or
budgets for completion of the Development Project or estimates of whether the
Development Project, if completed, will perform at any projected levels or will
comply with the terms of any permits or licenses, or any other matters relating
to Development Project, or (iii) any infringement by Seller, SWP or any
Subsidiary, or any of their Affiliates of any patent or proprietary right of any
Person. Buyer has
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agreed not to rely on any representation made by Seller with
respect to the condition, quality, or state of the Operating Facility or the
Development Project except for those in this Agreement, but rather, as a
significant portion of the consideration given to Seller for this purchase and
sale, has agreed to rely solely and exclusively upon its own evaluation of the
SWP and any Subsidiary and the Operating Facility and the Development Project,
except as expressly provided herein. The provisions contained in this Agreement
are the result of extensive negotiations between Buyer and Seller and no other
assurances, representations or warranties about the quality, condition, or state
of SWP and any Subsidiary or the Operating Facility and the Development Project
were made by Seller in the inducement thereof, except as expressly provided
herein.
10.3 Waiver of Damages.
NOTWITHSTANDING ANYTHING CONTAINED TO THE CONTRARY IN THIS AGREEMENT,
SELLER AND BUYER AGREE THAT, EXCEPT FOR THE LIQUIDATED DAMAGES SPECIFICALLY
PROVIDED FOR IN SECTION 12.2, THE RECOVERY BY EITHER PARTY OF ANY DAMAGES
SUFFERED OR INCURRED BY IT AS A RESULT OF ANY BREACH BY THE OTHER PARTY OF ANY
OF ITS OBLIGATIONS UNDER THIS AGREEMENT SHALL BE LIMITED TO THE ACTUAL DAMAGES
SUFFERED OR INCURRED BY THE NON-BREACHING PARTY AS A RESULT OF THE BREACH BY THE
BREACHING PARTY OF ITS OBLIGATIONS HEREUNDER AND IN NO EVENT SHALL THE BREACHING
PARTY BE LIABLE TO THE NON-BREACHING PARTY FOR ANY INDIRECT, CONSEQUENTIAL,
SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES (INCLUDING ANY DAMAGES ON ACCOUNT OF
LOST PROFITS OR OPPORTUNITIES OR LOST OR DELAYED GENERATION) SUFFERED OR
INCURRED BY THE NON-BREACHING PARTY AS A RESULT OF THE BREACH BY THE BREACHING
PARTY OF ANY OF ITS OBLIGATIONS HEREUNDER.
ARTICLE 11
Indemnification
11.1 Indemnification By Seller.
From and after the Closing, subject to the other terms and limitations
in this Agreement, Seller shall indemnify, defend, reimburse, and hold harmless
Buyer and its Affiliates, and its and their directors, officers, partners and
employees (individually a "Buyer Indemnified Party" or collectively, the "Buyer
Indemnified Parties") from and against any and all Losses asserted against or
incurred by any of the Buyer Indemnified Parties (i) for any breach of Seller's
representations or warranties made in this Agreement, (ii) for any breach of the
covenants or obligations of Seller under this Agreement, or (iii) in respect of
the Excluded Assets. In the event and to the extent that any such Losses
incurred by the Buyer Indemnified Parties are adjudicated to be attributable to
contributory negligence, concurrent liability or fault of the Buyer Indemnified
Parties, Seller shall remain liable to indemnify the Buyer Indemnified Parties
for all such Losses that are not so attributable.
11.2 Indemnification By Buyer.
From and after the Closing, subject to the other terms and limitations
in this Agreement, Buyer shall indemnify, defend, reimburse, and hold harmless
Seller, its Affiliates, and its and their directors, officers, partners,
employees, consultants, agents, representatives, advisors,
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successors, and assigns (individually a "Seller Indemnified Party" or
collectively, the "Seller Indemnified Parties") from and against any and all
Losses asserted against or incurred by any of the Seller Indemnified Parties (i)
for any breach of Buyer's representations or warranties made in this Agreement,
(ii) for any breach of the covenants or obligations of Buyer and its Affiliates
under this Agreement, or (iii) that relate to or arise out of the businesses of
SWP or any Subsidiary or the development, construction, ownership, operation, or
maintenance of the Development Project or that otherwise relate to or arise out
of SWP or any Subsidiary (whether relating to periods of time prior to or after
the Closing Date) or to the extent such Losses are not properly asserted by
Buyer (or any Buyer Indemnified Party) under the provisions of Section 6.6 or
Section 11.1 (subject to the limitations in this Agreement) by the date
specified in Section 11.5. Buyer acknowledges that the Losses described in
clause (iii) of the preceding sentence shall be retained by and transferred with
SWP or any Subsidiary and shall continue to be the responsibility of SWP or any
Subsidiary and Buyer. In the event and to the extent that any such Losses
incurred by the Seller Indemnified Parties are adjudicated to be attributable to
contributory negligence, concurrent liability or fault of the Seller Indemnified
Parties', Buyer shall remain liable to indemnify the Seller Indemnified Parties
for all such Losses that are not so attributable.
11.3 Limitations on Indemnity.
None of the Buyer Indemnified Parties shall be entitled to assert any
right to indemnification under Section 11.1 until the aggregate amount of all
the Losses actually suffered by the Buyer Indemnified Parties exceeds the
Deductible Amount, and then only to the extent such Losses exceed, in the
aggregate, the Deductible Amount. Except as provided in the next succeeding
sentence of this Section 11.3, in no event shall Seller ever be required to
indemnify Buyer or the Buyer Indemnified Parties for Losses pursuant to Section
11.1, or any other provision of this Agreement, or pay any other amount in
connection with or with respect to this Agreement or the transactions
contemplated by this Agreement, in an amount exceeding, in the aggregate, the
Purchase Price. Notwithstanding anything contained in this Section 11.3 to the
contrary, Seller's maximum liability for Losses arising out of a breach of
Seller's representations and warranties contained in the first and second
sentences of Section 4.1(e) shall not exceed the Adjusted Purchase Price, and
the limits on liability of the Seller contained in this Section shall not apply
to indemnity claims pursuant to Section 6.6, and Sections 3.2(i) and 3.2(ii)
relating to the release of all liabilities and obligations under the Bridge
Loan, the NatWest Loan or the Subordinated Note.
11.4 Third Party Claims.
If a claim by a Person is made against a Seller Indemnified Party or a
Buyer Indemnified Party (each, an "Indemnified Party"), and if such Indemnified
Party intends to seek indemnity with respect thereto under Article 11, such
Indemnified Party shall promptly furnish written notice to other party (the
"Indemnifying Party") of such claim. The failure of the Indemnified Party to
deliver prompt written notice of a claim shall not affect the indemnity
obligations of the Indemnifying Party hereunder except to the extent the
Indemnifying Party was substantially disadvantaged by such delay in delivery
notice of such claim. The Indemnifying Party shall have thirty (30) days after
receipt of such notice to undertake, conduct, and control (through counsel of
its own choosing and at its own expense) the settlement or defense thereof, and
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the Indemnified Party shall cooperate with it in connection therewith. The
Indemnifying Party shall permit the Indemnified Party to participate in such
settlement or defense through counsel chosen by such Indemnified Party (but the
fees and expenses of such counsel shall be borne by such Indemnified Party). So
long as the Indemnifying Party, at the Indemnifying Party's cost and expense,
(i) has undertaken the defense of, and assumed full responsibility for all
indemnified liabilities with respect to, such claim, (ii) is reasonably
contesting such claim in good faith, by appropriate proceedings, and (iii) has
taken such action (including the posting of a bond, deposit, or other security)
as may be necessary to prevent any action to foreclose a Lien against or
attachment of the property of the Indemnified Party for payment of such claim,
the Indemnified Party shall not pay or settle any such claim. Notwithstanding
compliance by the Indemnifying Party with the preceding sentence, the
Indemnified Party shall have the right to pay or settle any such claim, but in
such event it shall waive any right to indemnity by the Indemnifying Party for
such claim. If within thirty (30) days after the receipt of the Indemnified
Party's notice of a claim of indemnity hereunder, the Indemnifying Party does
not notify the Indemnified Party that it elects (at the Indemnifying Party's
cost and expense) to undertake the defense thereof and assume full
responsibility for all indemnified liabilities with respect thereto, or gives
such notice and thereafter fails to contest such claim in good faith or to
prevent action to foreclose a Lien against or attachment of the Indemnified
Party's property as contemplated above, the Indemnified Party shall have the
right to contest, settle, or compromise such claim and the Indemnified Party
shall not thereby waive any right to indemnity for such claim under this
Agreement.
11.5 Survival and Time Limitation.
The terms and provisions of this Agreement shall survive the Closing of
the transactions contemplated hereunder. Notwithstanding the foregoing, after
Closing, any assertion by Buyer or any Buyer Indemnified Party that Seller is
liable to Buyer or any Buyer Indemnified Party for indemnification under the
terms of this Agreement or otherwise in connection with the transactions
contemplated in this Agreement must be made in writing and must be given to
Seller (or not at all) on or prior to the date that is eighteen (18) months
after the Closing Date, except for indemnification for matters addressed in
Sections 3.2(i), 3.2(ii), 4.1(e) and 6.6 which must be made in writing and must
be given to Seller (or not at all) on or prior to the date that is ninety (90)
days after the date on which the applicable statute of limitations expires with
respect to the matters covered thereby.
11.6 Sole and Exclusive Remedy.
FROM AND AFTER THE CLOSING, EXCEPT AS PROVIDED IN SECTION 6.6 OF THIS
AGREEMENT FOR ANY CLAIM IN RESPECT OF TAXES, THE INDEMNIFICATION PROVISIONS OF
THIS ARTICLE 11 SHALL BE THE SOLE AND EXCLUSIVE REMEDY FOR ANY BREACH OF THE
OTHER PARTY'S REPRESENTATIONS, WARRANTIES, COVENANTS, OR AGREEMENTS CONTAINED IN
THIS AGREEMENT OR OTHERWISE WITH RESPECT TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
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11.7 Compliance with Express Negligence Rule.
ALL RELEASES, DISCLAIMERS, LIMITATIONS ON LIABILITY, AND INDEMNITIES IN
THIS AGREEMENT, INCLUDING THOSE IN THIS ARTICLE 11, SHALL APPLY EVEN IN THE
EVENT OF THE SOLE, JOINT, AND/OR CONCURRENT NEGLIGENCE, STRICT LIABILITY, OR
FAULT OF THE PARTY WHOSE LIABILITY IS RELEASED, DISCLAIMED, LIMITED, OR
INDEMNIFIED.
ARTICLE 12
Termination and Remedies
12.1 Termination.
(a) Termination of Agreement. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the Closing:
(i) by the mutual consent of Seller and Buyer; or
(ii) if the Closing has not occurred by the close of business on
August 31, 2001, then by Seller if any condition specified in Section 8.1
has not been satisfied on or before such close of business, and shall not
theretofore have been waived by Seller; provided, in each case, that the
failure to consummate the transactions contemplated hereby on or before
such date did not result from the failure by Seller to fulfill any
undertaking or commitment provided for herein on the part of Seller that is
required to be fulfilled on or prior to Closing; or
(iii) if the Closing has not occurred by the close of business on
August 31, 2001, then by Buyer if any condition specified in Section 8.2
has not been satisfied or waived on or before such close of business, and
shall not theretofore have been waived by Buyer, provided that the failure
to consummate the transactions contemplated hereby on or before such date
did not result from the failure by Buyer to fulfill any undertaking or
commitment provided for herein on the part of Buyer that is required to be
fulfilled on or prior to Closing.
(b) Effect of Termination. Without limiting Seller's and Buyer's respective
remedies in the event of termination of this Agreement by Seller or Buyer
pursuant to Section 12.1(a), written notice thereof shall promptly be given by
the terminating Party to the other Party, and this Agreement shall thereupon
terminate. Following any such termination, Buyer will continue to be bound by
its obligations set forth in Sections 5.1 and 5.2. If this Agreement is
terminated as provided herein, all filings, applications and other submissions
made to any Governmental Authority shall, to the extent practicable, be
withdrawn from the Governmental Authority to which they were made.
12.2 Remedies.
(a) Seller's Remedies. Notwithstanding anything herein to the contrary,
upon the failure by Buyer to fulfill any undertaking or commitment provided for
herein on the part of Buyer that is required to be fulfilled on or prior to
August 31, 2001 (August 24, 2001 in the case of the condition described in
Section 8.1(h)) for closing, Seller, at its sole option, may (i) enforce
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specific performance of this Agreement or (ii) pursue any rights or remedies
available at law or in equity.
(b) Buyer's Remedies. Notwithstanding anything herein provided to the
contrary, upon failure of Seller to fulfill any undertaking or commitment
provided for herein on the part of Seller that is required to be fulfilled on or
prior to August 31, 2001, Buyer at its sole option may (i) enforce specific
performance of this Agreement or (ii) pursue any rights or remedies available at
law or in equity.
(c) Election of Remedies. If either Party elects to pursue singularly any remedy
available to it under this Section 12.2, then such Party may at any time
thereafter cease pursuing that remedy and elect to pursue any other remedy
available to it under this Section 12.2.
ARTICLE 13
Other Provisions
13.1 Counterparts.
This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been signed by each of the Parties and
delivered to the other Party.
13.2 Governing Law.
THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
AND THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE GOVERNED BY, ENFORCED, AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
13.3 Arbitration.
Except for matters that are covered by Section 3.4, any claim,
counterclaim, demand, cause of action, dispute, and controversy arising out of
or relating to this Agreement (or any agreement delivered in connection with
this Agreement) or in any way relating to the subject matter of this Agreement
involving the Parties or their representatives (each a "Dispute"), even if such
Disputes allegedly are extra-contractual in nature, sound in contract, tort or
otherwise, or arise under state or federal Law, shall be resolved by final and
binding arbitration. Arbitration shall be conducted in accordance with the rules
of arbitration of the Federal Arbitration Act and, to the extent an issue is not
addressed by the federal Law on arbitration, by the commercial arbitration rules
of the American Arbitration Association. The validity, construction and
interpretation of this Agreement to arbitrate, and all other procedural aspects
of the arbitration conducted pursuant hereto shall be decided by the
arbitrators. In deciding the substance of the Parties' Dispute, the arbitrators
shall refer to the governing Law. The arbitrators shall have no authority to
award treble, consequential, exemplary, or punitive damages of any type under
any circumstances whether or not such damages may be available under state or
federal Law, or under the Federal Arbitration Act, or under the commercial
arbitration rules of the American Arbitration Association, the Parties hereby
waiving their right, if any, to recover any such damages or to appeal or object
to the enforcement of any decision or award by the arbitrators. Each Party
agrees that any arbitration award against it may be enforced in any jurisdiction
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in which such Party holds or keeps assets and that judgment on any arbitration
award may be entered by any court having jurisdiction. The arbitration
proceeding shall be conducted in Houston, Texas. Within thirty (30) days of the
notice initiation of the arbitration procedure, each Party shall select one
arbitrator. The two arbitrators shall select a third arbitrator. The third
arbitrator shall be a Person who has over eight (8) years professional
experience in power generation transactions and is not an Affiliate of and who
has not previously been employed by either Party and does not have a direct or
indirect interest in either Party or in any Person having an ownership interest
in either Party or the subject matter of the arbitration. While the third
arbitrator shall be neutral, the two Party appointed arbitrators are not
required to be neutral, and it shall not be grounds for removal of either of the
two Party appointed arbitrators or for vacating the arbitrators' award that
either of such arbitrators has past or present minimal relationships with the
Party that appointed such arbitrator. To the fullest extent permitted by Law,
any arbitration proceeding and the arbitrators award shall be maintained in
confidence by the Parties.
13.4 Entire Agreement.
This Agreement (including the Confidentiality Agreement) and the
Schedules and Exhibits hereto contain the entire agreement between the Parties
with respect to the subject matter hereof and there are no agreements,
understandings, representations, or warranties between the Parties other than
those set forth or referred to herein.
13.5 Notices.
All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally, sent by documented overnight
delivery service or, to the extent receipt is confirmed, by United States Mail,
telecopy or overnight delivery to the appropriate address or number as set forth
below. Notices to Seller shall be addressed as follows:
TLS Investors, L.L.C.
1400 Smith Street
Houston, TX 77002
Attention: President
Telecopy No.: (503) 464-3740
with copy to:
Enron North America Corp.
121 SW Salmon Street, 3WTC0306
Portland, OR 97204
Attention: Dale Rasmussen
Telecopy No.: (503) 464-8058
or at such other address and to the attention of such other Person as
Seller may designate by written notice to Buyer.
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Notices to Buyer shall be addressed to:
Black Hills Energy Capital, Inc.
1075 Noel Avenue
Wheeling, IL 60090
Attention: Maurice Klefeker
Telecopy No.: (847) 459-4140
with copy to:
Morgan, Lewis & Bockius, LLP
300 South Grand Avenue, 22nd Floor
Los Angeles, CA 90071-3132
Attention: Richard A. Shortz, Esq.
Telecopy No.: (213) 612-2554
or at such other address and to the attention of such other Person as Buyer may
designate by written notice to Seller.
Notice given by overnight delivery or mail shall be effective upon
actual receipt. Notice given by 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 telecopier shall be
confirmed promptly after transmission in writing by certified mail or overnight
delivery.
13.6 Successors and Assigns.
The rights and obligations of the Parties shall not be assigned or
delegated by either Party without the written consent of the other Party, which
may be withheld in such Party's sole discretion, except that (and without being
released from any of its obligations hereunder) Buyer shall have the right,
without the consent of Seller, (a) to transfer, pledge or assign this Agreement
as security for any financing, or (b) transfer or assign this Agreement to any
Affiliate of Buyer. In the event of an assignment by Buyer to an Affiliate, such
assignee shall execute and deliver an agreement containing the assumption by
such assignee of the performance and observance of each covenant and condition
of this Agreement to be performed or observed by Buyer. Subject to the
preceding, this Agreement shall be binding upon and inure to the benefit of the
Parties and their successors and assigns.
13.7 Amendments and Waivers.
This Agreement may not be modified or amended except by an instrument
or instruments in writing signed by the Party against whom enforcement of any
such modification or amendment is sought. Any Party may, only by an instrument
in writing, waive compliance by the other Party with any term or provision of
this Agreement on the part of such other Party to be performed or complied with.
The waiver by a Party of a breach of any term or provision of this Agreement
shall not be construed as a waiver of any subsequent breach.
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13.8 Schedules and Exhibits.
All Schedules and Exhibits hereto which are referred to herein are
hereby made a part hereof and incorporated herein by such reference. Each
Schedule to this Agreement shall be deemed to include and incorporate all
disclosures made on the other Schedules to this Agreement. Certain information
set forth in the Schedules is included solely for informational purposes, is not
an admission of liability with respect to the matters covered by the
information, and may not be required to be disclosed pursuant to this Agreement.
The specification of any dollar amount in the representations and warranties
contained in this Agreement or the inclusion of any specific item in the
Schedules is not intended to imply that such amounts (or higher or lower
amounts) are or are not material, and no Party shall use the fact of the setting
of such amounts or the fact of the inclusion of any such item in the Schedules
in any dispute or controversy between the Parties as to whether any obligation,
item, or matter not described herein or included in a Schedule is or is not
material for purposes of this Agreement.
13.9 Interpretation and Rules of Construction.
This Agreement shall not be construed against either Party, and no
consideration shall be given or presumption made, on the basis of who drafted
this Agreement or any particular provision hereof or who supplied the form of
Agreement. In construing this Agreement:
(i) examples shall not be construed to limit, expressly or by
implication, the matter they illustrate;
(ii) the word "includes" and its derivatives means "includes, but is
not limited to" and corresponding derivative expressions;
(iii) a defined term has its defined meaning throughout this Agreement
and each Exhibit and Schedule to this Agreement, regardless of whether it
appears before or after the place where it is defined;
(iv) each Exhibit and Schedule to this Agreement is a part of this
Agreement, but if there is any conflict or inconsistency between the main
body of this Agreement and any Exhibit or Schedule, the provisions of the
main body of this Agreement shall prevail; and
(v) the headings and titles herein are for convenience only and shall
have no significance in the interpretation hereof.
13.10 Agreement for the Parties' Benefit Only.
Except as specified in Section 5.1 and Article 11, which are also
intended to benefit and to be enforceable by the Seller Indemnified Parties,
this Agreement is not intended to confer upon any Person not a party hereto any
rights or remedies hereunder, and no Person, other than the Parties or the
Seller Indemnified Parties, is entitled to rely on any representation, warranty,
covenant, or agreement contained herein.
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13.11 Attorneys' Fees.
The prevailing Party in any legal proceeding brought under or to
enforce this Agreement shall be additionally entitled to recover court costs and
reasonable attorneys' fees from the nonprevailing Party.
13.12 Severability.
If any term or other provision of this Agreement is invalid, illegal,
or incapable of being enforced by any Law or public policy, all other conditions
and provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any adverse manner to a Party. Upon such
determination that any term or other provision is invalid, illegal, or incapable
of being enforced, the Parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the Parties as closely as
possible in an acceptable manner to the end that the transactions contemplated
hereby are fulfilled to the extent possible.
13.13 Time of Essence.
Time is of the essence in this Agreement. If the date specified in this
Agreement for giving any notice or taking any action is not a Business Day (or
if the period during which any notice is required to be given or any action
taken expires on a date which is not a Business Day), then the date for giving
such notice or taking such action (and the expiration date of such period during
which notice is required to be given or action taken) shall be the next day
which is a Business Day.
13.14 Bulk Sales or Transfer Laws.
Seller and Buyer hereby waive compliance by either Party with the
provisions of the bulk sales or transfer laws of all applicable jurisdictions.
ARTICLE 14
Letter of Credit; GUARANTY BY BKH
14.1 Letter of Credit.
In order to secure Buyer's obligations hereunder, it shall deliver to
Seller on or before 5:00 p.m. Central time on June 21, 2001, an irrevocable
letter of credit issued by (a) U.S. Bank or (b) another U.S. commercial bank or
a foreign bank with a U.S. branch, in each case having a minimum market
capitalization of $500,000,000 with the long term senior unsecured debt of such
bank having a credit rating of at least A- from S&P or A3 from Moody's, in a
form reasonably acceptable to Seller, in the principal amount of U.S.
$15,000,000 (the "Letter of Credit"), which may be drawn upon by Seller in the
amount of any Damage Award upon delivering to the issuing bank (i) a draw
request stating that the Agreement has been terminated pursuant to Article 12
hereof, and (ii) a statement that an arbitral body, in accordance with Section
13.3 hereof, shall have awarded Seller damages (the "Damage Award") payable by
Buyer resulting from the failure by Buyer to fulfill any undertaking or
commitment provided for
50
herein. Buyer may, at any time prior to Closing, substitute for the Letter of
Credit the BKH Guaranty as provided in Section 14.2 below.
14.2 Guaranty by BKH.
At Buyer's option, Buyer may at any time prior to Closing deliver to
Seller in substitution for the Letter of Credit (a) an unconditional guaranty by
BKH substantially in the form attached hereto as Exhibit F (the "BKH Guaranty"),
guaranteeing the full payment by Buyer of the Adjusted Purchase Price; provided,
however, that BKH shall in no event be obligated to pay pursuant to the BKH
Guaranty any amounts exceeding, in the aggregate, U.S. $15,000,000; and (b) an
opinion of counsel satisfactory to Seller confirming that the BKH Guaranty
constitutes a valid and binding agreement of BKH enforceable against BKH in
accordance with its terms, subject to (x) applicable bankruptcy, insolvency,
reorganization, moratorium, and other similar laws of general application from
time to time in effect that affect creditors' rights generally, (y) general
principles of equity, and (z) the power of a court to deny enforcement of
remedies generally based upon public policy.
14.3 Effect of Failure to Deliver Letter of Credit or Guaranty.
If Buyer fails to deliver the Letter of Credit or the BKH Guaranty on
or prior to 5:00 p.m. Central time on June 21, 2001, then Seller shall have the
right, but not the obligation, to terminate this Agreement by providing notice
to Buyer on or before 5:00 p.m. Central time on June 25, 2001, without any
further liability or obligation to Buyer.
51
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of
each of the Parties as of the day first above written.
Seller:
TLS Investors, L.L.C.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Buyer:
BLACK HILLS ENERGY CAPITAL, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
52
This Agreement for Lease is
Confidential and Proprietary
EXECUTION COPY
AGREEMENT FOR LEASE
between
WYGEN FUNDING, LIMITED PARTNERSHIP
and
BLACK HILLS GENERATION, INC.
Dated as of July 20, 2001
THIS AGREEMENT HAS BEEN ASSIGNED AS SECURITY
FOR INDEBTEDNESS OF OWNER. SEE SECTION 17.
This Agreement has been manually executed in 10 counterparts, numbered
consecutively from 1 through 10, of which this is No. ___. To the extent, if
any, that this Agreement constitutes chattel paper (as such term is defined in
the Uniform Commercial Code as in effect in any applicable jurisdiction), no
security interest in this Agreement may be created or perfected through the
transfer or possession of any counterpart other than the original executed
counterpart which shall be the counterpart identified as counterpart No. 1.
TABLE OF CONTENTS
(continued)
Page
SECTION 1. DEFINITIONS..........................................................................................1
SECTION 2. APPOINTMENT OF AGENT................................................................................15
SECTION 3. ADVANCES. 18
SECTION 4. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE WITH RESPECT TO THE PROJECT.............................20
SECTION 5. CONDITIONS PRECEDENT TO OWNER'S OBLIGATION TO MAKE INTERIM ADVANCES AFTER THE
INITIAL ADVANCE WITH RESPECT TO THE PROJECT...............................................25
SECTION 6. CONDITIONS PRECEDENT TO THE FINAL ADVANCE WITH RESPECT TO THE PROJECT...............................26
SECTION 7. CONDITIONS PRECEDENT TO COMPLETION ADVANCES WITH RESPECT TO THE PROJECT.............................30
SECTION 8. REPRESENTATIONS AND WARRANTIES OF AGENT.............................................................32
SECTION 9. AFFIRMATIVE COVENANTS...............................................................................40
SECTION 10. NEGATIVE COVENANTS.................................................................................50
SECTION 11. EVENTS OF DEFAULT AND EVENTS OF PROJECT TERMINATION................................................52
SECTION 12. INDEMNITIES........................................................................................63
SECTION 13. LEASEHOLD INTEREST.................................................................................65
SECTION 14. PURCHASE OF THE PROJECT............................................................................65
SECTION 15. EVENTS OF LOSS; TERMINATION UPON CERTAIN EVENTS....................................................65
SECTION 16. PERMITTED CONTESTS.................................................................................67
SECTION 17. SALE OR ASSIGNMENT BY OWNER........................................................................68
SECTION 18. GENERAL CONDITIONS.................................................................................68
Exhibit A Form of Acquisition Certificate
Exhibit B Form of Interim Advance Certificate
Exhibit C Form of Certificate of Substantial Completion
Exhibit D Form of Certificate of Increased Cost
Exhibit E List of Project Contracts
Exhibit F List of Project Authorizations
Exhibit G Budget
Exhibit H Construction Drawdown Schedule
(i)
AGREEMENT FOR LEASE
Agreement for Lease, dated as of July 20, 2001 (as the same may be amended,
restated, modified or supplemented from time to time, "this Agreement"), between
WYGEN FUNDING, LIMITED PARTNERSHIP, a Delaware limited partnership ("Owner"),
formed by Wygen Capital, Inc., its general partner, and BLACK HILLS GENERATION,
INC., a Wyoming corporation ("Agent").
WHEREAS, Owner has acquired or will acquire on the date hereof a leasehold
interest pursuant to a Ground Lease (hereinafter defined) in the Premises
(hereinafter defined); and
WHEREAS, on or about the date of this Agreement, Owner and Agent propose to
enter into the Lease (hereinafter defined), providing for the lease by Agent, as
lessee, of the Project (hereinafter defined) which will be constructed and
located on the Premises pursuant to the terms of this Agreement and the sublease
by Agent of the Premises; and
WHEREAS, Owner desires to appoint Agent to act as agent for Owner in
connection with the construction of the Project, and in connection with all
matters related to such construction, and Agent wishes to accept such
appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Owner and Agent hereby agree as follows:
SECTION 1. DEFINITIONS.
1.1 Defined Terms. For the purposes of this Agreement each of the following
terms shall have the meaning specified with respect thereto:
Accrued Default Obligations: Defined pursuant to subsection 11.2 hereof.
Accrued Project Termination Obligations: With respect to any Event of
Project Termination, all of the losses, damages, costs and expenses (including,
without limitation, attorneys' fees and expenses incurred by Owner and any
Assignee in connection with the exercise of their remedies thereunder, filing
fees and sales or transfer taxes and all costs and expenses related to (i) the
conduct of investigations, studies, sampling and/or testing of the Premises and
(ii) the taking of any action, including, without limitation, any remedial
measures or removal with respect to the Premises each as required by an Assignee
pursuant to the terms of a Financing Arrangement) sustained by Owner by reason
of such Event of Project Termination and the exercise of Owner's rights with
respect thereto, including, without limitation, in the event of a sale by Owner
of its interest in the Project pursuant to subsection 11.4 hereof, all costs and
expenses associated with such sale, excluding, in all cases, costs or expenses
included in the Acquisition Cost.
1
Acquisition Certificate: The certificate delivered by Agent to Owner
pursuant to Section 4 hereof in connection with a request for the Initial
Advance, substantially in the form of Exhibit A hereto.
Acquisition Cost: The sum of (a) the aggregate amount of advances made
pursuant to this Agreement and (b) all other costs of Owner (including costs
incurred by Agent but reimbursed by Owner) with respect to the Project (except
costs for which Owner has been reimbursed by Agent pursuant to the provisions of
Section 12 hereof) arising from the acquisition, construction, equipping, and
financing (including, without limitation, Financing Costs and Owner's
out-of-pocket expenses and fee obligations, including, without limitation the
Management Fee that Owner is obligated to pay to Merrill Leasing pursuant to the
terms of the Management Agreement, prior to the Effective Date).
Additional Rent: Defined pursuant to subsection 1.2 hereof.
Affiliate: Defined pursuant to subsection 1.2 hereof.
Agreement: This Agreement for Lease, as the same may be amended, restated,
modified or supplemented from time to time.
Appraiser: Arthur Andersen & Co.
Assignee: Each Person to which any part of Owner's interest under this
Agreement or in the Project shall at the time have been assigned, conditionally
or otherwise, by Owner in accordance with Section 17 of this Agreement. For
purposes of subsections 2.2, 8.4, 8.5 and 8.13, subsection 9.24, Section 12,
clause (iii) of paragraph (a) of Section 16, the last sentence of paragraph (b)
of Section 17 and subsections 18.3 and 18.4, the term "Assignee" shall include
each lender (and any entity providing liquidity to a lender) to Owner, and any
entity acting as an agent in any capacity for the benefit of such lenders (and
such liquidity providers), under a Financing Arrangement.
Available Commitment: At the time of determination, an amount equal to the
difference between (a) the sum of (i) the aggregate commitment to lend under all
Financing Arrangements and (ii) Owner's existing equity capital and additional
equity capital contributions then available to Owner and (b) the sum of (i) the
aggregate amount of all advances theretofore made pursuant to Section 3 hereof
and (ii) Financing Costs theretofore incurred by Owner or accrued and unpaid
under all Financing Arrangements.
Basic Rent: Defined pursuant to subsection 1.2 hereof.
BHP: Black Hills Power, Inc., a South Dakota corporation, and its
successors.
Budget: The itemized budget for the Project prepared by Agent and delivered
to Owner and attached hereto as Exhibit G, as amended from time to time, which
shall include, without limitation, (a) all costs incurred by Agent in performing
its duties under subsections 2.1 and 2.2 hereof, including, without limitation,
the purchase price of component parts and construction materials, survey and
survey inspection charges, appraisal, architectural, engineering,
2
environmental analysis, soil analysis and market analysis fees,
brokerage commissions, transfer fees and taxes that are customarily the
responsibility of the purchaser, closing adjustments for taxes, utilities and
the like, escrow and closing fees, recording and filing fees, and all related
costs and expenses incurred in acquiring an interest in the Premises, whether
incurred prior to or after the date hereof; (b) the costs incurred by Agent in
connection with and pursuant to the terms of the EPC Contract (or any other
construction contracts entered into by Agent in connection with the completion
of the Project); (c) the costs incurred by Agent in connection with the
construction of a 230kV transmission line interconnecting the Premises and the
Wyodak Substation, including all appurtenant facilities and a step-up
transformer; (d) the costs of architects', attorneys', engineers' and other
professionals' fees and disbursements in connection with the construction and
construction financing of the Project, including, without limitation, the fees
and disbursements of Agent's counsel in connection with this Agreement, the
Lease and the transactions contemplated hereby and thereby and the duties of
Agent hereunder, under the EPC Contract and in all other matters involving or
reasonably related to this transaction; (e) the costs of all insurance, real
estate, property and excise tax assessments, sales and use taxes on materials
used in construction, and other operating and carrying costs paid or accrued by
Agent or levied upon the Project, Agent or Owner in connection with the Project
during the term of this Agreement; (f) costs of Agent's project representatives
(inspectors, consultants, etc.) incurred by Agent in its capacity as agent for
Owner; (g) the fees and disbursements of Owner's counsel in connection with the
preparation, execution and delivery by Owner of this Agreement and the Lease,
and the consummation of the transactions contemplated hereby or thereby; (h) any
financing costs incurred by Agent in connection with its payment of any Project
Costs prior to the date hereof; (i) any internal out-of-pocket costs incurred by
Agent in connection with the negotiation, execution and delivery of this
Agreement, the Lease and the Project Contracts; (j) the Management Fee and all
Financing Costs accruing during the term of this Agreement; and (k) a reasonable
contingency amount with respect to the foregoing items, which amount shall
include Financing Costs and otherwise shall be allocated to unexpected increases
in the costs associated with the Project, including, without limitation, the
payment of any liquidated damages or any performance bonus pursuant to the terms
of any Project Contract; provided that any modification or supplement to the
Budget shall be made in compliance with the provisions of subsection 2.2 hereof.
Business Day: Defined pursuant to subsection 1.2 hereof.
CERCLA: Defined pursuant to paragraph (h) of subsection 8.27 hereof.
CERCLIS: Defined pursuant to paragraph (h) of subsection 8.27 hereof.
Certificate of Increased Cost: The certificate delivered by Agent to Owner
pursuant to Section 7 hereof in connection with a request for a Completion
Advance, substantially in the form of Exhibit D hereto.
Certificate of Substantial Completion: The certificate delivered by Agent
to Owner pursuant to Section 6 hereof in connection with a request for a Final
Advance, substantially in the form of Exhibit C hereto.
3
Cheyenne Consent: The consent from Cheyenne Light, Fuel and Power Company
to Owner and Assignee with respect to, among other things, the pledge of the
Cheyenne Power Purchase Agreement, in form and substance satisfactory to Owner
and Assignee in their reasonable discretion.
Code: The Internal Revenue Code of 1986, as amended.
Completion Advance: Any advance made by Owner upon satisfaction of the
conditions set forth in Section 7 hereof.
Completion Amount: The maximum aggregate amount of the Completion Advance
to be requested by Agent pursuant to Section 7 hereof.
Completion Date: September 30, 2003, unless such Completion Date is
extended by the delivery of the Extension Option as a result of a Force Majeure
Delay, casualty or temporary condemnation, as the case may be, in which case the
Completion Date shall be the date to which the existing Completion Date is
extended pursuant to the Extension Option.
Consent: Defined pursuant to subsection 1.2 hereof.
Construction Documents: The collective reference to the EPC Contract,
the Plans, the Permits, the Insurance Requirements and all other agreements
entered into by Agent with respect to constructing and equipping the Project.
Construction Drawdown Schedule: The schedule of projected construction
drawdowns delivered to Owner pursuant to Section 4 hereof, a copy of which is
attached as Exhibit H hereto.
Contaminant: Defined pursuant to subsection 1.2 hereof.
Easements: Defined pursuant to subsection 1.2 hereof.
Easement Agreement: The Easement Agreement, dated as of the date hereof,
between Black Hills Power, Inc. and Wyodak Resources Development Corp., as
grantors, and Owner, as grantee, as the same may be amended, restated, modified
or supplemented from time to time.
Effective Date: Defined pursuant to subsection 1.2 hereof.
Environmental Approvals: Defined pursuant to subsection 1.2 hereof.
Environmental Consultant: Pilko & Associates, Inc. or such other
environmental consulting firm qualified to evaluate environmental risks
associated with the Project, as selected by Agent and satisfactory in all
respects to Owner and Assignee.
Environmental Damages: Defined pursuant to subsection 1.2 hereof.
Environmental Event: Defined pursuant to subsection 1.2 hereof.
4
Environmental Lien: Defined pursuant to subsection 1.2 hereof.
Environmental Matters: Defined pursuant to subsection 1.2 hereof.
Environmental Requirements: Defined pursuant to subsection 1.2 hereof.
EPC Contract: The Engineering, Procurement and Construction Agreement dated
as of December 27, 2000, as amended by a First Amendment to Engineering,
Procurement and Construction Agreement dated as of April 11, 2001 (the "EPC
First Amendment"), between Agent and the General Contractor with respect to the
Project, as the same may be amended, restated, modified or supplemented from
time to time in accordance with the terms hereof.
EPC Subcontracts: Collectively, the Subcontracts and Supply Contracts (each
as defined in the EPC Contract) entered into by the General Contractor pursuant
to the EPC Contract, as the same may be amended, restated, modified or
supplemented from time to time in accordance with the terms hereof.
Equity Capital: Defined pursuant to subsection 1.2 hereof.
Event of Default: Any of the events specified in subsection 11.1 hereof;
provided that any requirement for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.
Event of Loss: Any of the following events: (a) loss of all or a
substantial portion of the Project or the use thereof due to destruction, damage
beyond economical repair or rendition of the Project permanently unfit for the
use contemplated by the Project Contracts on a commercially feasible basis for
any reason whatsoever; (b) any event which results in an insurance settlement
with respect to the Project on the basis of a total loss or constructive total
loss and Agent fails to demonstrate to the reasonable satisfaction of Owner and
Assignee that the restoration thereof can reasonably be expected to be completed
within the limits of the Budget (taking into account insurance proceeds) so that
the Project will be completed on or before the Completion Date; and (c) the
condemnation or taking or requisition of title or use for an indefinite period
or a period in excess of 180 days by any Governmental Authority which
constitutes the taking of all or a substantial portion of the Project or all or
such a substantial portion of the Premises such that the remainder is not
sufficient to permit operation of the Project on a commercially feasible basis.
A loss of a "substantial portion" of the Project shall be deemed to occur if, in
the judgment of Owner and Assignee, after such event, (i) Agent will not be able
to fully perform its obligations under this Agreement, the Lease, the Facility
Support Agreement or the Project Contracts or (ii) a material diminution in the
value, utility or economic useful life of the Project will occur.
Event of Project Termination: Any of the events specified in subsection
11.3 hereof; provided that, any requirement for the giving of notice, the lapse
of time, or both, or any other condition, has been satisfied.
EWG: Defined pursuant to subsection 1.2 hereof.
5
Extension Option: Agent's extension of the Completion Date due to a Force
Majeure Delay, casualty or temporary condemnation, as the case may be (which
extension may be exercised one or more times); provided that Agent shall have
delivered a written notice to Owner at least ten (10) days prior to the existing
Completion Date (or in the case of a Force Majeure Delay, casualty or temporary
condemnation, as the case may be, occurring after September 20, 2003, promptly
after such occurrence), which notice shall:
(i) certify that (A)(1) a Force Majeure Delay, casualty or
temporary condemnation, as the case may be, has occurred and describe
the nature thereof and (2) such Force Majeure Delay, casualty or
temporary condemnation, as the case may be, will prevent Substantial
Completion from occurring on or prior to the existing Completion Date,
and (B) no Event of Default or Event of Project Termination (other than
an Event of Default or Event of Project Termination which has occurred
solely as a result of the failure of Substantial Completion to have
occurred on or prior to such date due to the Force Majeure Delay,
casualty or temporary condemnation, as the case may be) has occurred
and is continuing, which certifications shall be true; and
(ii) designate the date to which the existing Completion Date
is to be extended, which extension shall be no longer than the time
period reasonably necessary to remedy the event giving rise to the
Force Majeure Delay, casualty or temporary condemnation, as the case
may be.
In the event that such notice shall comply with the conditions and
requirements set forth in clauses (i) and (ii) above, and subject to the further
requirements that no Event of Default or Event of Project Termination (other
than an Event of Default or Event of Project Termination which has occurred
solely as a result of the failure of Substantial Completion to have occurred on
or prior to such date due to the Force Majeure Delay, casualty or temporary
condemnation, as the case may be) shall have occurred and be continuing on the
existing Completion Date, the Completion Date shall, on the existing Completion
Date, be extended to the date set forth in Agent's notice.
FERC: Defined pursuant to subsection 1.2 hereof.
Facility Support Agreement: The Facility Support Agreement, dated as of the
date hereof, between Owner and Agent, as the same may be amended, restated,
modified or supplemented from time to time.
Final Advance: The advance made by Owner upon satisfaction of the
conditions set forth in Sction 6 hereof.
Final Survey: Defined pursuant to paragraph (g) of Section 6 hereof.
Financing Arrangement: Defined pursuant to subsection 1.2 hereof.
Financing Costs: All interest (including, without limitation, interest at a
default rate), commitment or similar fees and other costs, fees and expenses
incurred by Owner under any
6
Financing Arrangement (including any such amounts accruing after the
commencement of a bankruptcy or similar proceeding), premiums, breakage costs
and other costs, fees and expenses incurred by Owner under all Financing
Arrangements (including all costs and expenses arising in connection with the
enforcement, collection or termination of any Financing Arrangement), all
indemnity payments owing by Owner under any Financing Arrangement (except those
for which Owner has been reimbursed by Agent pursuant to the provisions of
Section 12 hereof); all costs and fees incurred in connection with obtaining,
maintaining and terminating Owner's equity financing, including Return on Equity
Capital, all fees payable to Owner's general partner under its partnership
agreement and any premiums and breakage costs incurred by Owner under its
partnership agreement; and all costs, fees and expenses of Owner incurred in the
ordinary course of its business in connection with the transactions contemplated
hereby, including, without limitation, the costs of attorneys', accountants' and
other professionals' fees and disbursements.
Force Majeure Delay: Any circumstance not within the reasonable control,
directly or indirectly, of Agent to the extent that (i) such circumstance,
despite the exercise of reasonable diligence, cannot be or be caused to be
prevented, avoided or removed by Agent, (ii) such event adversely affects (in
cost and/or time) the ability of Agent to perform its obligations under this
Agreement and any other Project Contract and Agent has taken reasonable steps to
mitigate the consequences thereof, and (iii) Agent has given Owner notice of
such Force Majeure Delay as soon as practicable upon becoming aware thereof,
together with reasonable evidence of the nature of the delay and cost effect
attributable to such Force Majeure Delay and its effect upon the time of
performance, and a more precise statement of the mitigation measures taken or to
be taken by Agent.
Fuel Supply Agreements: Collectively, (i) the Coal Supply Agreement, dated
as of July 20, 2001, between Wyodak Resources Development Corp. and Agent; and
(ii) the Agreement for Rights of Usage of Coal Silo and Coal Conveyer, dated as
of July 20, 2001, between Black Hills Power, Inc. and Agent with respect to the
supply of coal to the Project, in each case as the same may be amended,
restated, modified, or supplemented from time to time.
GAAP: Defined pursuant to subsection 1.2 hereof.
GE Turbine Contract: The Purchase Order dated May 11, 2001 and the Terms
and Conditions for Procurement and Shipment of Steam Turbine/Generator Equipment
dated May 1, 2001, between General Electric Company and the General Contractor,
as the same may be amended, restated, modified, or supplemented from time to
time.
General Contractor: The Babcock & Wilcox Company, a Delaware corporation.
Governmental Action: Any action as defined in subsection 8.5 hereof.
Governmental Authority: Defined pursuant to subsection 1.2 hereof.
Ground Lease: Defined pursuant to subsection 1.2 hereof.
Guarantor: Black Hills Corporation, a South Dakota corporation, and its
successors.
7
Guaranty: The Guaranty, dated as of the date hereof, by and between the
Guarantor and Owner, as the same may be amended, restated, modified or
supplemented from time to time.
Indebtedness: Defined pursuant to subsection 1.2 hereof.
Indemnified Person: Any Person as defined in paragraph (a) of Section 12
hereof.
Initial Advance: The advance made by Owner upon satisfaction of the
conditions set forth in Section 4 hereof.
Insurance Broker: Palmer & Cay.
Insurance Requirements: Defined pursuant to subsection 1.2 hereof.
Intellectual Property Rights: Collectively, all patents, patent
applications, trademarks (whether registered or not), trademark applications,
trade names, proprietary computer software or copyrights (or any licenses,
permits or agreements with respect to any of the foregoing) necessary to
construct, operate, lease or use the Project or any part thereof.
Interconnections: The physical points of ongoing operational
interconnection and jurisdictional boundary between the Project and the
facilities located at or available to the Project which are owned, operated and
maintained by Agent or any of its Affiliates and shared with the Project.
Interconnection Agreement: Defined pursuant to subsection 1.2 hereof.
Interim Advance: Any advance made by Owner upon satisfaction of the
conditions set forth in Section 5 hereof.
Interim Advance Certificate: The certificate delivered by Agent to Owner
pursuant to Section 5 hereof in connection with a request for an Interim
Advance, substantially in the form of Exhibit B hereto.
Lease: The Lease Agreement, dated as of the date hereof, by and between
Owner, as lessor or sublessor, and Agent, as lessee or sublessee, as the case
may be, as the same may be amended, restated, modified or supplemented from time
to time.
Legal Requirements: The term "Legal Requirements" shall have the meaning
set forth opposite such term in the Lease, except that the phrase "from the date
hereof through the term of this Agreement" shall substitute for the phrase "from
the date hereof through the Initial Term, each Extended Term and any Renewal
Term."
Letter of Credit: The Irrevocable Letter of Credit No. NY-20511-30029698,
dated April 18, 2001, issued by CitiBank, N.A., in favor of Agent, as the same
may be amended, restated, modified, supplemented, substituted or replaced from
time to time.
Lien: Defined pursuant to subsection 1.2 hereof.
8
Loss Payment: At any time, an amount equal to the difference between (A)(x)
89.9% of the sum of (i) all amounts included in the Acquisition Cost of the
Project that are capitalized into the basis of the Project in accordance with
GAAP, plus (ii) all capitalizable Unreimbursed Project Costs, plus (y) 10.1% of
any costs and expenses incurred by Owner in connection with the acquisition of
the land comprising part of the Premises and (B) all Unreimbursed Project Costs.
Loss Payment Requirements: (a) Receipt by Owner of conveyancing,
assignment, transfer, termination and other documents that are sufficient to (i)
convey and assign to Owner (or a designated assignee of Owner or Assignee) on or
before the earlier of (x) the date that is thirty (30) days after Owner
terminated this Agreement or Agent's right to the use and possession of the
Project in accordance with this Agreement or (y) the date Owner (or a designated
assignee of Owner or Assignee), takes possession of the Project and assumes the
obligations of Agent thereafter accruing under the Project Contracts, (A) good
and marketable title to Agent's interest in the Project, free and clear of Liens
(other than Permitted Liens identified in clauses (a), (b), (c), (f), (g), (h)
(to the extent not attributable to acts or omissions of Agent) and (i) of the
definition thereof), and (B) Agent's right, title and interest in the Project
Contracts existing on such date (conditioned upon the assumption by Owner (or a
designated assignee of Owner or Assignee), of Agent's obligations accruing under
such Project Contracts from and after such date), free and clear of Liens, (ii)
terminate on or before the earlier of (x) the date that is thirty (30) days
after Owner terminated this Agreement or Agent's right to the use and possession
of the Project in accordance with this Agreement or (y) the date Owner (or a
designated assignee of Owner or Assignee), takes possession of the Project and
assumes such obligations, all rights of Agent and all other Persons (other than
Owner and Assignee and any other Person as may be designated by Owner and
Assignee) in and to the Project, and (iii) deliver to Owner such title insurance
policies and surveys as Owner or Assignee may reasonably require in connection
with such conveyance;
(b) In the event the Project has been operated by Agent, receipt by Owner
of evidence, satisfactory in scope and content to Owner and Assignee, to the
effect that the Project is capable of being operated and maintained in
compliance with the performance standards required for Operational Acceptance
under the EPC Contract and all Legal Requirements;
(c) Receipt by Owner of evidence, satisfactory in scope and content to
Owner and Assignee, that Agent's right, title and interest in all Permits and
Intellectual Property Rights existing on such date and transferable by Agent
have been transferred to Owner and can be transferred to any successor or
designated assignee of Owner without further consent or approval by any Person;
(d) Receipt by Owner of all manuals, "as built" plans and design
specifications for the Project (including all Turn Over Documentation and Work
Product, each as defined in the EPC Contract), equipment inspection reports and,
if applicable, maintenance records required to operate the Project in accordance
with the Project Contracts, satisfactory in scope and content to Owner and
Assignee; and
9
(e) Receipt by Owner of an environmental audit, satisfactory in scope and
content to Owner and Assignee (in each case, in their reasonable discretion),
prepared by the Environmental Consultant, to the effect that (i) no
Environmental Matters exist with respect to the Project or the Premises as a
result of the construction, operation and maintenance of the Project and (ii)
the Project may be operated to its design capacity in accordance with the
Project Contracts and in compliance with Environmental Requirements.
Management Agreement: The Management Agreement, dated as of the date
hereof, between Owner and Merrill Leasing, as the same may be amended, restated,
modified or supplemented from time to time.
Management Fee: (i) For each full monthly period commencing on or after the
date hereof and ending on or prior to the Effective Date, an amount computed by
multiplying the following:
(a) the Acquisition Cost at the end of such monthly period,
multiplied by
(b) a fraction having a numerator equal to the number of days in such
monthly period and a denominator of 360, multiplied by
(c) 0.20%.
(ii) for any partial monthly period commencing on or after the date hereof
and ending on or prior to the Effective Date, an amount computed by multiplying
the following:
(a) the Acquisition Cost at the end of such monthly period,
multiplied by
(b) a fraction having a numerator equal to the number of days the
Project is subject to this Agreement and not under lease during
such partial monthly period and a denominator of 360, multiplied
by
(c) 0.20%.
Material Adverse Change: Defined pursuant to subsection 8.10 hereof.
Material Subsidiary: Defined in the Guaranty.
MEAN Consent: The consent from Municipal Energy Agency of Nebraska to Owner
and Assignee with respect to, among other things, the pledge of the MEAN Power
Purchase Agreement, in form and substance satisfactory to Owner and Assignee in
their reasonable discretion.
Merrill: Merrill Lynch Money Markets Inc., a Delaware corporation.
Merrill Leasing: ML Leasing Equipment Corp., a Delaware corporation.
Merrill Lynch: Merrill Lynch & Co., Inc., a Delaware corporation.
10
Monthly Cost of Project Equity: The weighted average percentage cost per
annum (including as part of such cost any distributions or fees payable under or
pursuant to the limited partnership agreement of Owner, but net of any
investment earnings applied to the payment of costs) of equity contributions to
Owner made under the limited partnership agreement at any time during the period
from and including the first day of the monthly period for which Return on
Equity Capital is being computed to and including the last day of the monthly
period for which Return on Equity Capital is being computed (the "Computation
Period") to finance or refinance the acquisition and ownership of the Project.
1935 Act: Defined pursuant to subsection 1.2 hereof.
NPL: Defined pursuant to paragraph (h) of subsection 8.27 hereof.
Operator: Agent, or such other entity designated as successor operator of
the Project by Agent in accordance with the terms of the Lease.
Operative Documents: Defined pursuant to subsection 1.2 hereof.
Owner: Wygen Funding, Limited Partnership or any successor or successors to
all of its rights and obligations as Owner hereunder.
PCBs: Defined pursuant to paragraph (l) of subsection 8.27 hereof.
Performance Bonds: Any payment and performance surety bonds delivered by
subcontractors to the General Contractor and Agent pursuant to Section 3.1 of
the EPC First Amendment.
Permits: All consents, licenses, building and operating permits or other
Governmental Actions, including Environmental Approvals, required for ownership,
leasing, design, construction, completion, and operation of the Project in
accordance with and as contemplated by the Project Contracts, this Agreement and
the Lease.
Permitted Contest: Defined pursuant to paragraph (a) of Section 16 hereof.
Permitted Liens: Defined pursuant to subsection 1.2 hereof.
Person: Defined pursuant to subsection 1.2 hereof.
Plans: The Scope of Work set forth in Exhibit A to the EPC Contract
describing the specifications for the construction of the Project; provided
that, any amendments, modifications or supplements to the Plans, as well as any
subsequent deviation from the Plans, shall be made in compliance with the
provisions of subsection 2.2 hereof.
Pledge Agreement: The Pledge Agreement, dated as of the date hereof, by and
between Agent, as pledgor, and Owner, as pledgee, as the same may be amended,
restated, modified, or supplemented from time to time.
11
Pledged Contracts: The EPC Contract, the Performance Bonds (from and after
the date each such Performance Bond becomes effective), the Letter of Credit,
the Retention Letter of Credit (if any), the EPC Subcontracts (from and after
the date each such EPC Subcontract becomes effective), the Interconnection
Agreement, the Services Agreement, the Fuel Supply Agreements and the Power
Purchase Agreements, in each case as pledged pursuant to the Pledge Agreement.
Potential Default: Any event which, but for the lapse of time, or giving of
notice, or both, would constitute an Event of Default.
Potential Event of Project Termination: Any event which, but for the
lapse of time, or giving of notice, or both, would constitute an Event of
Project Termination.
Power Purchase Agreements: Collectively, (i) the Power Purchase Agreement,
dated as of February 16, 2001, between Agent and Cheyenne Light, Fuel and Power
Company (the "Cheyenne Power Purchase Agreement"), and (ii) the Power Purchase
Agreement, dated as of March 5, 2001, between Agent and Municipal Energy Agency
of Nebraska (the "MEAN Power Purchase Agreement"), as each of the same may be
amended, restated, modified, or supplemented from time to time, pursuant to
which Agent will sell certain electric capacity to each such purchaser as
specified therein.
Premises: Defined pursuant to subsection 1.2 hereof.
Project: Defined pursuant to subsection 1.2 hereof.
Project Contracts: The EPC Contract, the GE Turbine Contract, the Ground
Lease, the Performance Bonds (from and after the date each such Performance Bond
becomes effective), the Letter of Credit, the Retention Letter of Credit (if
any), the EPC Subcontracts (from and after the date each such EPC Subcontract
becomes effective), the Easement Agreement, the Required Easement Agreements
(from and after the date each such Required Easement Agreement becomes
effective), the Interconnection Agreement, the Services Agreement, the Fuel
Supply Agreements and the Power Purchase Agreements, as each of the same may be
amended, restated, modified or supplemented from time to time as permitted
hereunder. A list of the Project Contracts in existence on the date hereof is
attached as Exhibit E hereto.
Project Costs: All costs and expenses described in clauses (a) through (k)
of the definition of "Budget".
Release: Defined pursuant to subsection 1.2 hereof.
Remedial Action: Defined pursuant to subsection 1.2 hereof.
"Required Easement Agreements: Defined pursuant to paragraph (d) of
subsection 9.24 hereof.
Responsible Officer: The President, Vice President, Secretary or Treasurer
of Agent.
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Retention: Either (i) the Retention (as defined in the EPC Contract) to be
withheld by Agent pursuant to Section 7.3 thereof, or (ii) the proceeds of a
drawing made under the Retention Letter of Credit.
Retention Letter of Credit: The Retention Letter of Credit issued pursuant
to Section 7.3 of the EPC Contract.
Return on Equity Capital: (i) For each full monthly period commencing on or
after the date hereof and ending on or prior to the Effective Date, an amount
computed by multiplying the following:
(a) the Equity Capital at the end of such monthly period, multiplied
by
(b) a fraction having a numerator equal to the number of days in such
monthly period and a denominator of 360, multiplied by
(c) the decimal equivalent of a percentage equal to the Monthly Cost
of Project Equity.
(ii) for any partial monthly period commencing on or after the date hereof
and ending on or prior to the Effective Date, an amount computed by multiplying
the following:
(a) the Equity Capital at the end of such monthly period, multiplied
by
(b) a fraction having a numerator equal to the number of days the
Project is subject to this Agreement and not under lease during
such partial monthly period and a denominator of 360, multiplied
by
(c) the decimal referred to in paragraph (i)(c) above.
Services Agreement: Defined pursuant to subsection 1.2 hereof.
Substantial Completion: The satisfaction of all requirements of Section 6
hereof.
Survey: Defined pursuant to paragraph (b) of Section 9.24 hereof.
Surveyor: Eagle Surveying, Inc.
Termination Event: Defined pursuant to paragraph (b) of Section 15 hereof.
Termination Event Date: Defined pursuant to paragraph (b) of Section 15
hereof.
Termination Settlement Date: Defined pursuant to paragraph (c) of Section
15 hereof.
Title Company: Campbell County Abstract Co. or such other title insurance
company as may be approved by Owner in writing.
13
Unrecovered Liabilities and Judgments: All liabilities of Owner, each
general and limited partner of Owner, Merrill, Merrill Lynch, Merrill Leasing,
each Assignee, and their respective successor or successors, and each Affiliate
of each of them, and their respective officers, directors, trustees,
incorporators, shareholders, partners (general and limited), employees, agents
and servants, including, without limitation, taxes, losses, obligations, claims,
damages (including, without limitation, Environmental Damages and strict
liability in tort), penalties, premiums, breakage costs and causes of action,
suits, costs and expenses (including, without limitation, reasonable attorneys',
experts', consultants' and accountants' fees and expenses) or judgments of any
nature against any of the foregoing Persons arising during or relating to any
period prior to the Effective Date and relating to or in any way arising out of
(i) Owner's acquisition, ownership and financing of the Project, (ii) Owner's
acquisition of a leasehold interest in the Premises, (iii) Agent's construction
of the Project or (iv) operation or use of the Premises or the Project by Agent
or any agent or subcontractor of Agent, in each case to the extent that such
Person has not received full indemnification for such liabilities or judgments
by Agent.
Unreimbursed Project Costs: All Project Costs incurred by Agent and not
reimbursed by Owner and which were not yet capitalized by Owner and included as
an element of Acquisition Cost, as evidenced by a certificate from Agent in a
form reasonably satisfactory to Owner and Assignee, (i) stating the total amount
of such expenditures, the date or dates on which such expenditures were
incurred, the name and address of each party to whom the expenditures were
tendered, and such additional information as shall be requested by Owner or
Assignee and (ii) attaching true copies of unreimbursed invoices, receipted
bills and other similar supporting documentation. Owner's and Assignee's good
faith determination of the amount of Unreimbursed Project Costs shall be
conclusive and binding, absent manifest error.
1.2 Other Definitional Provisions.
(a) The terms "Additional Rent", "Affiliate", "Basic Rent", "Business Day",
"Consent", "Contaminant", "Easements", "Effective Date", "Environmental
Approvals", "Environmental Damages", "Environmental Event", "Environmental
Lien", "Environmental Matters", "Environmental Requirements", "Equity Capital",
"EWG", "FERC", "Financing Arrangement", "GAAP", "Governmental Authority",
"Ground Lease", "Indebtedness", "Insurance Requirements", "Interconnection
Agreement", "Lien", "1935 Act", "Operative Documents", "Permitted Liens",
"Person", "Premises", "Project", "Release", "Remedial Action" and "Services
Agreement" have the meanings set forth opposite those terms in the Lease, except
that, for purposes of this Agreement, the terms "the Lessor", "the Lessee" and
"this Lease" if used in those definitions in the Lease shall be deemed to be the
terms "Owner", "Agent" and "this Agreement", respectively.
(b) All terms defined in this Agreement shall have their defined meanings
when used in any certificate or other document made or delivered pursuant
hereto.
(c) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular
14
provision of this Agreement, and section, subsection, paragraph, schedule and
exhibit references are to this Agreement unless otherwise specified.
1.3 Intent of the Parties. (a) It is the intent of Agent and Owner that:
(i) the Lease constitutes an operating lease from Owner to Agent for purposes of
Agent's financial reporting, (ii) the Lease and other transactions contemplated
hereby preserve the ownership of the Project in Agent for federal and state
income tax and bankruptcy purposes, and (iii) the Lease grants to Owner a Lien
on the Project. Agent and Owner agree that Owner shall be deemed to have a valid
and binding security interest in and Lien on the Project, free and clear of all
Liens, other than Permitted Liens, as security for the obligations of Agent
under the Lease and this Agreement (it being understood and agreed that Agent
does hereby grant a Lien, and convey, transfer, assign, mortgage and warrant to
Owner and its successors, transferees and assigns, for the benefit of Owner and
its successors, transferees and assigns, on the Project and any proceeds or
products thereof, to have and hold the same as collateral security for the
payment and performance of the obligations of Agent under this Agreement and the
Lease).
(b) Specifically, without limiting the generality of paragraph (a) of this
subsection 1.3, Agent and Owner intend and agree that in the event of any
insolvency or receivership proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency laws or statute of the United
States of America or any State thereof affecting Agent, Owner, any Assignee or
any collection actions relating thereto, the transactions evidenced by this
Agreement and the Lease shall be regarded as loans made by Owner to Agent.
SECTION 2. APPOINTMENT OF AGENT.
2.1 Appointment and Duties of Agent. Owner hereby appoints Agent as its
agent for the acquisition, design, construction, repair, maintenance, equipping,
and installation of the Project and the provision of security against harm and
damage thereto, and Agent hereby accepts such appointment. Agent agrees, all in
accordance with its best business judgment and this Agreement, to supervise the
good and workmanlike completion of the Project pursuant to the EPC Contract.
Agent will also enter into such other contracts as are necessary for the
completion of the Project pursuant to the EPC Contract; provided that (i) Agent
shall, pursuant to the Pledge Agreement, collaterally assign to Owner, at no
cost to Owner, all of Agent's right, title and interest in such contracts, and
(ii) if any of such contracts could reasonably be expected to cause the Project
Costs to exceed the Budget or adversely affect the performance of the General
Contractor's obligations under the EPC Contract (including, without limitation,
by providing a potential basis for a change order or a Force Majeure Delay or
similar relief thereunder), Agent shall be required to obtain the consent of
Owner and Assignee to such contract prior to its execution of such contract.
Agent and Owner hereby agree that, at such time, if any, as the EPC Contract
provides for the transfer of title to any portion of the Project to Agent, title
to such portion or portions of the Project shall automatically be transferred to
Owner, at no cost to Owner, and Agent shall, upon the request of Owner, execute
or cause such General Contractor to execute, as the case may be, a bill of sale
or similar conveyance instrument to evidence such transfer of title. For
purposes of this Agreement, Owner and Agent acknowledge and agree that Agent is
acting in the capacity of a general construction agent.
15
2.2 Cost and Completion of the Project. Agent agrees that the Acquisition
Cost of the Project shall not exceed $140,000,000. After receiving the Initial
Advance, Agent may from time to time amend, modify or supplement the Plans or
Budget; provided that no such amendment, modification or supplement shall (a) be
made without Agent giving at least five (5) Business Days' prior written notice
of such amendment, modification or supplement to Owner and Assignee and, if such
amendment, modification or supplement shall have the effect of increasing the
Budget, Agent shall provide an endorsement from the Title Company increasing the
amount of coverage under the title policies delivered pursuant to Section 4
hereof in accordance with the amended Budget; (b) result in a breach under
subsection 10.1 of this Agreement; (c) render Agent unable (or have a material
adverse effect on its ability) to perform or observe all of its obligations, if
any, under the Construction Documents, the Project Contracts, the Facility
Support Agreement, this Agreement or the Lease, or otherwise reasonably be
expected to have a material adverse effect on (i) the construction, operation,
maintenance, leasing, ownership, use, value or regulatory status of the Project,
(ii) the ability of the Guarantor to perform its obligations under the Guaranty
in a timely manner, (iii) the business, assets, properties, financial condition,
operations or prospects of Agent or the Guarantor or (iv) the rights or
interests of Owner or Assignee under this Agreement, the Lease, the Facility
Support Agreement, the Construction Documents or the Project Contracts; or (d)
result in the Budget exceeding the amount specified in, or a breach of the
restriction contained in, the first sentence of this subsection 2.2. In the
event that any proposed amendment, modification or supplement to the Plans could
reasonably be expected to (i) result in a material diminution in the value or
usefulness of the Project, or (ii) result in a material adverse effect on the
ability of Agent to perform its obligations under this Agreement, the Lease, the
Facility Support Agreement, the Construction Documents or the Project Contracts,
Agent must obtain the prior consent of Owner and Assignee to any such amendment,
modification or supplement. Agent shall promptly deliver to Owner and any
Assignee any such amended, modified or supplemented Plans or Budget.
2.3 Lease of the Project.
(a) When the requirements for Substantial Completion can be satisfied by
Agent, Agent shall deliver to Owner and Assignee the Certificate of Substantial
Completion, and Agent shall request the Final Advance which, subject to the
provisions of paragraph (b) of this subsection 2.3, shall be sufficient to
provide for payment of all the costs of constructing the Project and completing
any open punch list items (other than those certain specifically identified and
quantified costs that are not yet due to the General Contractor and which will
be included as part of the Completion Advance, provided that the Available
Commitment remaining after the Final Advance is equal to or exceeds the
aggregate amount of all such identified and quantified costs). By delivery of
the Certificate of Substantial Completion, Agent evidences the acceptability of
the Project for lease by Agent under the Lease. If the conditions set forth in
Section 6 hereof have been satisfied in the reasonable judgment of Owner and
Assignee, Owner, within ten (10) Business Days of receipt of the Certificate of
Substantial Completion, shall make the Final Advance. Execution and delivery by
Agent of the Certificate of Substantial Completion shall constitute (i)
acknowledgment by Agent that the Project has been accepted for lease by Agent as
of the Effective Date, (ii) acknowledgment by Agent that the Project is subject
to all of the covenants, terms and conditions of the Lease, and (iii)
certification by Agent that the representations and warranties contained in
Section 2 of the Lease are true and correct in all
16
material respects on and as of the Effective Date as though made on and as of
such date and that there exists on such date no (1) Event of Default hereunder,
Event of Default (as defined in the Lease), Event of Loss, Termination Event or
Event of Project Termination or (2) Potential Default hereunder, Potential
Default (as defined in the Lease) or Potential Event of Project Termination. In
connection with the Final Advance, Owner, within five (5) Business Days of
receipt of a request for such Final Advance and upon Agent's satisfaction of the
conditions to such advance to the reasonable satisfaction of Owner and Assignee,
shall adjust the Acquisition Cost and the Adjusted Acquisition Cost (as defined
in the Lease) to reflect (i) the Completion Amount advanced to Agent hereunder
and (ii) the Retention, if any. The making of the Completion Advance in the
circumstances contemplated by this paragraph (a) shall be governed by paragraph
(b) of this subsection 2.3.
(b) Subject to the terms of subsection 2.2 and 3.1 hereof, up to six (6)
months after the Final Advance has been made, Agent may, by delivering a
Certificate of Increased Cost, request the Completion Advance. On or before the
fifth Business Day prior to the date upon which Agent receives the Final
Advance, Agent shall designate the Completion Amount. After such designation the
aggregate amount of the Completion Advance shall not exceed the Completion
Amount. Agent's designation of the Completion Amount shall be accompanied by a
detailed calculation of the Completion Amount which shall be satisfactory to
Owner and Assignee and which shall reflect all Unreimbursed Project Costs for
which Agent expects to seek reimbursement hereunder after the Final Advance less
the proceeds that Agent expects to receive from the disposition of excess
construction materials. The Completion Amount shall in no event exceed the
aggregate amount of the Completion Advance that Agent is entitled to receive
under the terms hereof. If no Completion Amount is designated as hereinabove
provided, no Completion Advance will be made. Each Certificate of Increased Cost
shall reflect all Unreimbursed Project Costs designated by Agent for payment by
the Completion Advance and all costs incurred by Agent since the last advance to
complete the Project. In the event that the aggregate amount of the Completion
Advance made is less than the Completion Amount, on the day that is six (6)
months after the date of the Final Advance, the Adjusted Acquisition Cost (as
defined in the Lease) shall be reduced by the difference between the Completion
Amount and the aggregate amount of the Completion Advance made. The amount of
any proceeds from the disposition of excess construction materials that exceeds
the amount for such disposition included in the calculation of the Completion
Amount shall reduce the amount of the Completion Advance made by the amount of
such excess, or, if the amount of such excess exceeds the Completion Amount,
shall be paid to Owner. If any amounts are paid to Owner pursuant to the
preceding sentence, the amount so paid shall be added to the decrease of the
Adjusted Acquisition Cost pursuant to the second preceding sentence.
2.4 Powers of Agent. Agent shall have the right to act for and on behalf of
Owner with full and complete authority to perform all obligations, to exercise
all rights under the Construction Documents, to appear before each applicable
Governmental Authority to resolve issues related to the platting, zoning and use
of the Project, to obtain all Permits and Intellectual Property Rights, and to
grant and obtain easements for the benefit of the Project or which are deemed
reasonably necessary by Agent for the intended use of the Project; provided that
if Owner or Assignee shall determine that any proposed action could reasonably
be expected to
17
(a) result in a material diminution in the value or usefulness of the Project or
(b) result in a material adverse effect on the ability of Agent to perform its
obligations under this Agreement, the Lease, the Facility Support Agreement, the
Construction Documents or the Project Contracts, Agent must receive the prior
consent of Owner and Assignee to such action. In addition, Agent shall have the
right to act for and on behalf of Owner with full and complete authority to
appoint, employ and deal with the architects, engineers, consultants,
contractors, vendors and suppliers, purchase and arrange for delivery of all
materials, supplies, furniture, fixtures, and equipment, and to approve all
related vouchers, invoices and statements relating to the Project.
SECTION 3. ADVANCES.
3.1 Agreement to Make Advances. Subject to the conditions and upon the
terms herein provided, including, without limitation, (i) that the Available
Commitment not be exceeded and (ii) to the extent funds are made available to
Owner by the lenders under its Financing Arrangements, Owner agrees to make
available to Agent advances from time to time to pay the Project Costs, up to an
aggregate principal amount not to exceed the maximum amount for the Project set
forth in subsection 2.2 hereof. Subject to the terms of this Agreement, and to
the extent funds are made available to Owner by the lenders under its Financing
Arrangements, Owner agrees to make (a) an Initial Advance in accordance with
Section 4 of this Agreement, (b) Interim Advances from time to time in
accordance with Section 5 of this Agreement, (c) a Final Advance in accordance
with Section 6 of this Agreement and (d) a Completion Advance in accordance with
paragraph (b) of subsection 2.3 and Section 7 of this Agreement.
3.2 Procedure for Advances. Agent shall give Owner notice in accordance
with Sections 4, 5, 6 and 7 hereof, as the case may be, of its irrevocable
request for an advance pursuant to this Agreement, specifying a Business Day on
which such advance is to be made and the amount of the advance. Not later than
2:00 P.M. New York time on the date for the advance specified in such notice,
provided all conditions to that advance have been satisfied, Owner shall provide
to Agent, in immediately available funds, the amount of the advance then
requested. Owner shall have no obligation to make advances (including the
Completion Advance) more often than once every calendar month.
3.3 Determination of Amounts of Advances.
(a) Initial Advance. The amount of the Initial Advance shall be made in
accordance with the Budget and the Acquisition Certificate, and shall be
sufficient to pay in full any acquisition and closing costs of the Premises, all
partially completed improvements to the Project, any amounts owing by Owner to
its lenders under the terms of any interim financing arrangement with respect to
the Project, and any other Project Costs incurred by Agent on or prior to the
date of the Initial Advance. All such costs for which the Initial Advance is
requested shall be specifically set forth in the Budget, and in the request for
the Initial Advance, and Owner shall have no obligation to advance any funds in
the Initial Advance which are not so specifically set forth in such documents.
18
(b) Interim Advances. Disbursements for Project Costs shall be made as the
same are incurred within the limits of the Budget, based upon the certifications
of Agent contained in an Interim Advance Certificate.
(c) Final Advance. The amount of the Final Advance shall be made in
accordance with the Budget and the Certificate of Substantial Completion, and
shall be sufficient, subject to the provisions of paragraph (d) of this
subsection 3.3, for payment in full of all costs of designing, constructing,
equipping and installing the Project (other than those costs that are not yet
due in connection with the designing, constructing, equipping and installing of
the Project and which will be included as part of the Completion Advance,
provided that (i) the Available Commitment remaining after the Final Advance is
equal to or exceeds the aggregate amount of all such costs and (ii) such costs
will not exceed the limits of the Budget), free of all Liens other than
Permitted Liens. Owner shall have no obligation to make the Final Advance unless
Owner is satisfied that all such costs as set forth in the Budget, the
Certificate of Substantial Completion, and the request for the Final Advance
have been actually incurred, or will be incurred, in construction and equipping
of the Project, free of all Liens, except for Permitted Liens, and shall not
cause the Acquisition Cost (inclusive of all costs that are not yet due but will
be subsequently included as part of a Completion Advance) to exceed the maximum
amount for the Project set forth in subsection 2.2 hereof. Agent shall request
the Final Advance within thirty (30) days of achieving Substantial Completion.
(d) Completion Advances. The amount of the Completion Advance shall be made
in accordance with and shall not exceed the amount set forth in the related
Certificate of Increased Cost, shall not cause the Acquisition Cost to exceed
the maximum amount for the Project set forth in subsection 2.2 hereof, and shall
be sufficient for payment of costs that were not the subject of any previous
advance. Owner shall have no obligation to make the Completion Advance unless
Owner is satisfied that all such costs are adequately set forth in the
Certificate of Increased Cost and will be sufficient for payment in full of all
costs due at the time of such Completion Advance with respect to the Project.
3.4 Partial Advances. If any or all conditions precedent to any advance
have not been satisfied on the applicable date for a requested advance, Owner,
in its sole discretion, and with the consent of Assignee (which consent may be
granted or withheld in the absolute and sole discretion of Assignee) may, but
shall have no obligation to, disburse a part of the requested advance.
3.5 Available Commitment. If the cost to complete construction of the
Project shall exceed the amount described in the first sentence of subsection
2.2 hereof, upon the agreement of Agent, Owner and Assignee (which may be
granted or withheld in the absolute and sole discretion of Assignee), the
Available Commitment may be increased by an amount sufficient to complete
construction of the Project, and upon such increase Agent shall continue
diligently to complete construction of the Project in accordance with this
Agreement. Amounts advanced to Agent by Owner to complete construction of the
Project shall be included as part of Acquisition Cost.
19
SECTION 4. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE WITH RESPECT TO THE
PROJECT.
Owner's acquisition of the Project and Owner's obligation to make the
Initial Advance shall both be subject to the satisfaction of the conditions set
forth in this Section 4 and to the receipt by Owner and Assignee of the
documents set forth in this Section 4, in each case in form and substance
reasonably satisfactory to Owner and Assignee. Owner and Assignee shall have at
least ten (10) Business Days to review the Acquisition Certificate and its
attachments prior to making any Initial Advance. For purposes of the Initial
Advance, Permitted Liens shall not include any taxes, assessments, governmental
charges or levies, except to the extent that such taxes, assessments,
governmental charges or levies are due and payable but not yet delinquent and
are included in the Budget.
The following are the documents to be received by Owner and Assignee and
the conditions to be satisfied:
(a) Lease, Facility Support Agreement, Guaranty, Consent, Pledge
Agreement and Related Documents. A fully executed copy of the Lease,
the Facility Support Agreement, the Guaranty, the Consent, the Pledge
Agreement and any consent of the Guarantor as shall be requested by
Owner or Assignee.
(b) Acquisition Certificate. A duly executed copy of an
Acquisition Certificate certified true and correct as to all matters
therein by Agent.
(c) Ground Lease. A copy of the Ground Lease (which Ground Lease
shall not be subject to any Liens other than Permitted Liens),
including a true and complete copy of the metes and bounds legal
description of the Premises, along with any necessary estoppel
certificates, recognition and attornment agreements, confirmations and
subordinations required by Owner's and any Assignee's counsel
regarding the Ground Lease, and two original counterparts of a
memorandum of Ground Lease in the appropriate form for recording in
the jurisdiction in which the Premises are located.
(d) Memorandum of Lease. Two original counterparts of a
memorandum of Lease in the appropriate form for recording in the
jurisdiction in which the Premises are located, executed by Agent, as
lessee, and otherwise reasonably acceptable to Owner and Assignee.
(e) Certificates of Insurance. Certificates of insurance or other
evidence reasonably acceptable to Owner and Assignee certifying that
the insurance on the Project required by subsection 9.3 hereof is in
effect, along with copies of each such policy.
(f) Taxes. Certification by Agent that all due and payable past
and current taxes and assessments applicable to the Premises have been
paid in full or are being contested by Agent as a Permitted Contest
pursuant to paragraph (a) of Section 16 of this Agreement, and that
all such taxes and assessments owed by Agent (or estimated amounts
thereof) are included in the Budget.
20
(g) Availability of Utilities. Certification by Agent that all
utility services and facilities (including, without limitation, gas,
electrical, water, coal supply and storage and sewage services,
Interconnections and facilities) (i) which are necessary and required
during the construction period have been completed or will be
available in such a manner as to assure Owner that construction will
not be impeded by a lack thereof and (ii) which are necessary for
operation and occupancy of the Project are or will be completed in
such a manner and at such a time as will assure the opening and
operation of the Project.
(h) Permits. All Permits and Governmental Actions required for
the construction of the Project and for the use of the Premises in
accordance with and as contemplated by the Project Contracts, this
Agreement and the Lease or are otherwise required prior to the Initial
Advance, have been issued or obtained, are in full force and effect,
are final, are not under appeal, and all applicable appeal periods
have expired. All conditions contained in such Permits and
Governmental Actions have been satisfied by the required date except
to the extent that failure to satisfy such conditions could not
reasonably be expected to result in a material delay or loss or result
in Environmental Damages. There are no proceedings pending or
threatened which seek or which may be expected to rescind, terminate,
modify, suspend or otherwise alter such Permits and Governmental
Actions. All Permits and Governmental Actions required for the
operation of the Project and for the use of the Premises in accordance
with and as contemplated by the Project Contracts, this Agreement and
the Lease have been duly applied for, or will in a timely manner be
applied for, and Agent has no reason to believe that such Permits and
Governmental Actions will not be granted in the ordinary course within
a reasonable time, without burdensome conditions, and prior to the
time required under applicable Legal Requirements.
(i) Site Plan. A site plan prepared on behalf of Agent, showing
the proposed location of the Project to be constructed on the
Premises.
(j) Plans. A copy of the Plans and, if requested by Owner, such
other specifications for the construction of the Project as are
available to Agent.
(k) Use of Proceeds, No Liens and Representations of Agent. (i)
All costs and expenses which are the subject of the Initial Advance
requested have been paid in full or will be paid in full out of the
proceeds of the Initial Advance, (ii) there are no Liens on the
Premises that are not Permitted Liens, (iii) all representations and
warranties in this Agreement, in the Lease, and in connection with the
Initial Advance, are and remain true and correct on and as of the date
of the Initial Advance as if made on and as of the date of the Initial
Advance and (iv) no Event of Loss, Termination Event, Event of
Default, Potential Default, default under a Project Contract, a
Construction Document, the Guaranty or the Pledge Agreement, or Event
of Project Termination or Potential Event of Project Termination under
this Agreement has occurred and is continuing on the date such Initial
Advance is to be made or will exist by reason of giving effect to such
Initial Advance.
21
(l) Environmental Report. An environmental report or reports
certified to Owner and each Assignee and otherwise satisfactory to
Owner and each Assignee in all respects, prepared by the Environmental
Consultant.
(m) Opinions of Counsel for Agent. (i) An opinion of Morrill
Thomas Nooney & Braun, LLP, local counsel for Agent, and (ii) an
opinion of Morgan, Lewis & Bockius LLP, New York counsel for Agent, in
each case in form and substance reasonably satisfactory to Owner and
Assignee.
(n) Budget. Certification by Agent that the Budget attached
hereto as Exhibit G (i) has not been amended, restated or supplemented
as of the date of the Initial Advance, (ii) is true, complete and
correct, (iii) is accurately representative of all expected costs of
the Project, and (iv) is within the dollar limit set forth in the
first sentence of subsection 2.2 hereof.
(o) Request for Initial Advance. A duly executed request for
advance, stating the total amount of the Initial Advance requested,
the date on which the advance is to be made, the name and address of
the party to whom the Initial Advance is to be tendered, wiring
instructions and an itemization of the various costs constituting the
amount of the Initial Advance in such detail as will be necessary to
provide disbursement instructions, including an accounting of
expenditures for costs shown on the Budget for which payment or
reimbursement is being requested.
(p) Project Contracts. A fully executed and complete copy of each
of the Project Contracts in existence on the date hereof.
(q) Title Insurance Policy. Satisfactory evidence that Owner
shall receive upon funding the Initial Advance an ALTA lessee's policy
covering Owner's leasehold and easement interest in the Premises and
covering Owner's fee ownership of the improvements with a pending
improvements clause and a lender's policy with a pending disbursements
clause for the benefit of each Assignee, in each case complying with
the rules and regulations promulgated by the Wyoming Department of
Insurance, issued by the Title Company in an amount at least equal to
the maximum amount set forth in subsection 2.2 hereof, acceptable to
Owner and Assignee in all respects (including a mechanics lien
endorsement, a mineral rights endorsement and such other additional
endorsements as may be reasonably requested by Owner or Assignee),
together with legible photocopies of all underlying documents of
record affecting the Premises as disclosed in the exceptions to
coverage described in the title insurance policies. Owner also shall
have received evidence satisfactory to it that all premiums in respect
of such policies have been paid as of the date of the Initial Advance.
(r) Opinions of Counsel for Guarantor. (i) An opinion of Morrill
Thomas Nooney & Braun, LLP, local counsel for the Guarantor, and (ii)
an opinion of Morgan, Lewis & Bockius LLP, New York counsel for the
Guarantor, in each case in form and substance satisfactory to Owner
and Assignee.
22
(s) Representations and Warranties of Guarantor. All
representations and warranties of the Guarantor set forth in the
Guaranty are and remain true and correct on and as of the date of the
Initial Advance as if made on and as of the date of the Initial
Advance and no default under the Guaranty has occurred and is
continuing on the date such Initial Advance is to be made or will
exist by reason of giving effect to such Initial Advance.
(t) Insurance Report and Insurance Letter. (i) A report prepared
by the Insurance Broker with respect to the insurance to be maintained
on the Project, which report shall be satisfactory to Owner and
Assignee in all respects, and (ii) a letter from an officer of Agent
or one of its Affiliates or a member of the risk management group of
Agent or one of its Affiliates certifying that the insurance required
under subsection 9.3 hereof is in effect and that such insurance is
reasonable in relation to the Project.
(u) Construction Drawdown Schedule. A copy of the Construction
Drawdown Schedule prepared by Agent, which reflects Agent's best
estimates as to the amount and timing of construction drawdowns at the
time delivered.
(v) Construction Progress. If requested by Owner or Assignee,
Owner and Assignee shall have received (i) all progress reports
delivered under the EPC Contract and (ii) true copies of unpaid
invoices, receipted bills and Lien waivers, and such other reasonably
available supporting information as Owner or Assignee may reasonably
request.
(w) No Other Security Interests. All materials and fixtures
incorporated in the construction of the Project have been purchased so
that title thereto may automatically be transferred to Owner pursuant
to the EPC Contract, and there shall be no Liens on such materials and
fixtures other than Permitted Liens.
(x) Material Adverse Change. Since December 31, 2000, there has
been no material adverse change in the business, assets, properties,
revenues, financial condition, operations or prospects of Agent or the
Guarantor.
(y) Conditions Precedent Under Project Contracts. All conditions
precedent under each Project Contract have been satisfied in full
(other than those (i) relating to completion of construction of the
Project, (ii) which the failure to satisfy could not reasonably be
expected to have a material adverse effect on Agent's ability to
perform its obligations under the Project Contracts or (iii) which
will be fulfilled as a result of Agent's execution and delivery of and
performance under this Agreement).
(z) Intellectual Property Rights. All Intellectual Property
Rights necessary for the use and operation of the Project in
accordance with and as contemplated by the Project Contracts, this
Agreement and the Lease have been obtained and are in full force and
effect. There has been no material breach under any such Intellectual
Property Rights, and there are no pending or threatened claims or
proceedings relating thereto which, if adversely determined, could
reasonably be expected to have a material adverse
23
effect on (i) the construction, operation, maintenance, leasing,
ownership, use, value or regulatory status of the Project, (ii) the
ability of Agent to observe and perform its obligations under this
Agreement, the Lease, the Pledge Agreement, the Facility Support
Agreement, the Construction Documents or the Project Contracts in
timely manner or the ability of the Guarantor to perform its
obligations under the Guaranty in a timely manner, (iii) the business,
assets, properties, financial condition, operations or prospects of
Agent or the Guarantor or (iv) the rights or interests of Owner or
Assignee under this Agreement, the Lease, the Construction Documents
or the Project Contracts.
(aa) Easements. The Easements have been obtained and are in full
force and effect and constitute all easements, rights-of-way and
licenses contemplated to be in place under the Project Contracts, this
Agreement and the Lease as of the date of the Initial Advance. There
has been no material breach under any such easement, right-of-way or
license, and there are no pending or, to the best of Agent's
knowledge, threatened claims or proceedings relating thereto which, if
adversely determined, could reasonably be expected to have a material
adverse effect on (i) the construction, operation, maintenance,
leasing, ownership, use, value or regulatory status of the Project,
(ii) the ability of Agent to observe and perform its obligations under
this Agreement, the Lease, the Pledge Agreement, the Facility Support
Agreement, the Construction Documents or the Project Contracts in a
timely manner or the ability of the Guarantor to perform its
obligations under the Guaranty in a timely manner, (iii) the business,
assets, properties, financial condition, operations or prospects of
Agent or the Guarantor or (iv) the rights or interests of Owner or
Assignee under this Agreement, the Lease, the Construction Documents
or the Project Contracts.
(bb) Appraisal. An appraisal prepared by the Appraiser and
reasonably satisfactory to Owner and Assignee in all respects, which
appraisal shall include an initial fair market valuation of at least
$140,000,000 of the Project as constructed, and a fair market
valuation at the end of the Initial Term (as such term is defined in
the Lease) in an amount satisfactory to Owner and Assignee and
indicating the relative value of the equipment and the improvements.
(cc) Notice to Commence Work. A copy of the Notice to Proceed (as
defined in the EPC Contract) delivered or to be simultaneously
delivered to the General Contractor pursuant to Section 24.10 of the
EPC Contract authorizing the commencement of the work in accordance
with the EPC Contract.
(dd) Notice to General Contractor. A copy of the notice delivered
or to be simultaneously delivered to the General Contractor pursuant
to Section 24.2 of the EPC Contract notifying the General Contractor
of each Project Lender providing the Project Financing (as such terms
are defined in the EPC Contract).
(ee) Additional Matters. Such other documents and legal matters
in connection with a request for the Initial Advance as are reasonably
requested by Owner or Assignee.
24
SECTION 5. CONDITIONS PRECEDENT TO OWNER'S OBLIGATION TO MAKE INTERIM
ADVANCES AFTER THE INITIAL ADVANCE WITH RESPECT TO THE PROJECT.
Owner's obligation to make any Interim Advance after the Initial Advance
shall be subject to the satisfaction of the conditions set forth in this Section
5 and to the receipt by Owner and Assignee of the documents set forth in this
Section 5, in each case in form and substance reasonably satisfactory to Owner
and Assignee. Owner shall have at least five (5) Business Days to review the
Interim Advance Certificate and its attachments prior to making any Interim
Advance.
The following are the documents to be received by Owner and Assignee and
the conditions to be satisfied:
(a) Interim Advance Certificate. A duly executed Interim Advance
Certificate certified true and correct as to all matters therein by Agent.
(b) Continuing Representations of Agent. (i) All representations and
warranties in this Agreement (other than the representation and warranty
made in subsection 8.10 hereof), in the Lease (other than the
representation and warranty made in paragraph (i)(f) of Section 2 of the
Lease) and in connection with the Interim Advance are and remain true and
correct in all material respects on and as of the date of the Interim
Advance as if made on and as of the date of the Interim Advance and (ii) no
Event of Loss, Termination Event, Event of Default, Potential Default,
default under a Project Contract, a Construction Document, the Guaranty, or
the Pledge Agreement, or Event of Project Termination or Potential Event of
Project Termination under this Agreement has occurred and is continuing on
the date such Interim Advance is to be made or will exist by reason of
giving effect to such Interim Advance.
(c) Construction Progress. Owner and Assignee shall have received, if
requested by Owner or Assignee, (i) all progress reports delivered under
the EPC Contract, (ii) true copies of unpaid invoices, receipted bills and
Lien waivers, and such other reasonably available supporting information as
Owner or any Assignee may reasonably request and (iii) a certificate from
Agent certifying to Owner and Assignee the amount of Unreimbursed Project
Costs outstanding on the date of such Interim Advance.
(d) No Other Security Interests. All materials and fixtures
incorporated in the construction of the Project have been purchased so that
title thereto may automatically be transferred to Owner pursuant to the EPC
Contract, and there shall be no Liens on such materials and fixtures other
than Permitted Liens.
(e) Request for Interim Advance. A duly executed request for advance,
stating the total amount of the Interim Advance requested, the date on
which such Interim Advance is to be made, wiring instructions and a
specific breakdown of items and costs for which the Interim Advance is
being made.
25
(f) Evidence of Compliance. Agent shall furnish Owner and any Assignee
with such documents, reports, certificates, affidavits, Permits,
Governmental Actions and other information, in form and substance
satisfactory to Owner and any Assignee in their reasonable judgment, as
Owner or any Assignee may require to evidence compliance by Agent with all
of the provisions of this Agreement.
(g) Representations and Warranties of Guarantor. All representations
and warranties of the Guarantor in the Guaranty (other than the
representation and warranty contained in Section 4.7 thereof) are and
remain true and correct in all material respects on and as of the date of
the Interim Advance as if made on and as of the date of such Interim
Advance and no default under the Guaranty has occurred and is continuing on
the date such Interim Advance is to be made or will exist by reason of
giving effect to such Interim Advance.
(h) Satisfactory Title. A notice of title continuation or date down
endorsement issued by the Title Company in respect of Owner's title policy
and Assignee's title policy indicating that, since the last advance, there
have been no changes in the state of title, except for Permitted Liens, and
increasing the pending disbursements/improvements coverage to include the
amount of such Interim Advance costs.
SECTION 6. CONDITIONS PRECEDENT TO THE FINAL ADVANCE WITH RESPECT TO THE
PROJECT
Owner's obligation to make the Final Advance shall be subject to the
satisfaction of the conditions set forth in this Section 6 and to the receipt by
Owner and Assignee of the documents set forth in this Section 6, in each case in
form and substance reasonably satisfactory to Owner and Assignee. When all of
the conditions set forth in this Section 6 shall have been satisfied,
Substantial Completion shall be deemed to occur. Owner shall have at least ten
(10) Business Days to review the Certificate of Substantial Completion and its
attachments prior to making a Final Advance.
The following are the documents to be received by Owner and Assignee and
the conditions to be satisfied:
(a) Certificate of Substantial Completion. A duly executed Certificate
of Substantial Completion certified true and correct as to all matters
therein by Agent.
(b) Final Advance. The Final Advance is sufficient to provide for the
payment of all costs of constructing the Project (other than (1) the cost
of completing any open Punchlist Items (as defined in the EPC Contract) and
(2) those costs in connection with the designing, constructing, equipping
and installing of the Project that are not yet due and which will be
included as part of the Completion Advance, provided that (i) the Available
Commitment remaining after the Final Advance is equal to or exceeds the
aggregate amount of all such costs, (ii) all such costs fall within the
limits of the Budget, and (iii) Agent demonstrates, to the reasonable
satisfaction of Owner and Assignee, that all costs in connection with the
designing, constructing, equipping and installing of the Project that are
not yet due will not exceed such costs).
26
(c) Construction and Equipping of the Project. (i) The Project
(exclusive of any Punchlist Items (as defined in the EPC Contract)) has
been completed (including all performance testing, to the extent required
under the EPC Contract as at the date of Operational Acceptance under the
EPC Contract) in all material respects in accordance with the Plans, the
terms of the EPC Contract, the Construction Documents and the Project
Contracts, and (ii) Operational Acceptance (as defined in the EPC Contract)
shall have been achieved, such that the Project is capable of operating at
performance levels required under the EPC Contract while operating in a
manner consistent with prudent industry practices, all applicable Permits,
Governmental Actions, Intellectual Property Rights and Legal Requirements,
and in accordance with the terms of this Agreement, the Lease and the
Project Contracts.
(d) Commercial Operation. (i) Mechanical Completion of the Plant (as
defined in the EPC Contract) shall have occurred under the EPC Contract and
the Project shall be mechanically complete and checkout and start-up shall
have occurred as evidenced by the execution and delivery of the Certificate
of Mechanical Completion and Certificate of Commissioning of Start Up
Systems (as defined in the EPC Contract); (ii) Operational Acceptance (as
defined in the EPC Contract) shall have occurred under the EPC Contract as
evidenced by (A) the execution and delivery of the Certificate of
Successful Completion of a Commercial Operation Test (as defined in the EPC
Contract), (B) successful completion of the Lime Consumption Guarantee Test
(as defined in the EPC Contract) and (C) successful completion of the
Performance Guarantee Test (as defined in the EPC Contract), in each case
according to the procedures set forth in the EPC Contract; (iii) the
Project's coal, steam and electrical systems shall have been properly
connected to the facilities of BHP at Neil Simpson Unit 2 and the Project
shall be capable of processing and delivering steam and electricity in the
manner contemplated by the EPC Contract; and (iv) the Commercial Operation
Date (as defined in the Power Purchase Agreements) shall have been achieved
under each of the Power Purchase Agreements and the Power Purchase
Agreements shall have become effective. In addition, if Agent elects not to
request a Completion Advance, Agent shall satisfy the requirements of
paragraph (g) of Section 7 hereof.
(e) Permits. All Permits and Governmental Actions necessary for the
occupancy, use and operation of the Project and for the occupancy and use
of the Premises in the manner contemplated in paragraph (c) above and in
accordance with and as contemplated by the Project Contracts and the Lease
have been issued or obtained, are in full force and effect, are final, are
not under appeal, and all applicable appeal periods have expired. All
conditions contained in such Permits and Governmental Actions have been
satisfied by the required date except to the extent that failure to satisfy
such conditions could not reasonably be expected to result in a material
delay or loss or result in Environmental Damages. There are no proceedings
pending or threatened which seek or which may be expected to rescind,
terminate, modify, suspend or otherwise alter such Permits and Governmental
Actions.
27
(f) Liens. The Project has been completed in the manner contemplated
in paragraph (c) above, free of all Liens except for Permitted Liens (all
of which Permitted Liens are to be itemized as to the nature, amount,
claimant and status and provided that such Permitted Liens shall not
include any mechanics' Liens other than those mechanics' Liens that are (i)
to be satisfied or discharged out of the proceeds of the Final Advance or a
Completion Advance or (ii) subject to a Permitted Contest and bonded or
otherwise secured to the satisfaction of Owner and Assignee), and there are
no claims outstanding with respect to any Project Contract (other than any
such claims that are itemized as to the nature, amount, claimant and status
and are bonded or otherwise secured to the satisfaction of Owner and
Assignee) and no current Permitted Contests (or, if any Permitted Contest
exists, the nature, amount, claimant and status thereof).
(g) Final Survey. A final as-built ALTA/ACSM Class A survey (the
"Final Survey"), prepared by the Surveyor or another independent, licensed
registered public land surveyor (reasonably satisfactory to Owner and
Assignee) and certified to and in form and substance reasonably
satisfactory to Owner and any Assignee, with a metes and bounds description
of the perimeter of the Premises, and showing the completed Project, all
servient and beneficial easements pertaining to the Premises, and
indicating the location of access to the Premises. No encroachments are to
exist by the Project onto premises outside the boundary lines of the
Premises or by existing improvements located on adjacent premises onto the
Premises other than those that are Permitted Liens or that may have been
consented to by Owner and Assignee and all set-back requirements have been
complied with. If any discrepancies exist between the legal description set
forth on the Survey delivered pursuant to paragraph (b) of Section 9.24
hereof and the legal description set forth on the Final Survey delivered
pursuant to this paragraph (g), Owner and Agent shall cooperate in amending
the legal descriptions in all recorded documents creating or affecting the
Premises, including, without limitation, any Easements, to reflect the
correct as-built description.
(h) Utilities. Connection has been made to all appropriate utility
facilities (including Interconnections) and the Project is capable of
operation.
(i) Continuing Representations of Agent. (i) All representations and
warranties in this Agreement (other than the representation and warranty
made in subsection 8.10 hereof), in the Lease (other than the
representation and warranty made in paragraph (i)(f) of Section 2 of the
Lease), and in connection with the Final Advance are and remain true and
correct in all material respects on and as of the date of the Final Advance
as if made on and as of the date of the Final Advance and (ii) no Event of
Loss, Termination Event, Event of Default, Potential Default, default under
a Project Contract, a Construction Document, the Guaranty or the Pledge
Agreement, or Event of Project Termination or Potential Event of Project
Termination under this Agreement has occurred and is continuing on the date
such Final Advance is to be made or will exist by reason of giving effect
to such Final Advance.
28
(j) Exhibit E to the Lease. Exhibit E to the Lease shall be amended as
necessary by Agent and Owner to reflect the Acquisition Cost of the
Project.
(k) Request for Final Advance. A duly executed request for advance,
stating the total amount of the Final Advance requested, the date on which
such advance is to be made, wiring instructions and a breakdown of items
and costs for which the Final Advance is to be made.
(l) Satisfactory Title. A notice of title continuation or an
endorsement issued by the Title Company in respect of Owner's title policy
increasing the amount thereof, if required, to reflect the Acquisition Cost
of the Project as of such date, and indicating that since the most recent
notice of title continuation or endorsement issued by the Title Company in
respect of an Interim Advance for the Premises, there have been no changes
in the state of title, except for Permitted Liens, and no additional survey
exceptions not theretofore specifically approved in writing by Owner and
Assignee and increasing the pending disbursements/improvements coverage to
account for other advances. Title to the Project shall have been
transferred to Owner pursuant to the EPC Contract. In addition, if Agent
elects not to request a Completion Advance, Agent shall satisfy the
requirements of paragraph (e) of Section 7 hereof.
(m) Representations and Warranties of Guarantor. All representations
and warranties in the Guaranty (other than the representation and warranty
contained in Section 4.7 thereof) are and remain true and correct in all
material respects on and as of the date of the Final Advance as if made on
and as of the date of the Final Advance and no default under the Guaranty
has occurred and is continuing on the date such Final Advance is to be made
or will exist by reason of giving effect to such Final Advance.
(n) Environmental Compliance. All compliance tests, emissions tests,
filings, notices, certifications and other actions required by any
Environmental Requirements as a precondition to Operational Acceptance (as
defined in the EPC Contract) of the Project shall have been successfully
completed.
(o) Intellectual Property Rights. All Intellectual Property Rights
necessary for the use and operation of the Project in accordance with and
as contemplated by the Project Contracts, this Agreement and the Lease have
been obtained and are in full force and effect. There has been no material
breach under any such Intellectual Property Rights, and there are no
pending or threatened claims or proceedings relating thereto which, if
adversely determined, could reasonably be expected to have a material
adverse effect on (i) the construction, operation, maintenance, leasing,
ownership, use, value or regulatory status of the Project, (ii) the ability
of Agent to observe and perform its obligations under this Agreement, the
Lease, the Pledge Agreement, the Facility Support Agreement, the
Construction Documents or the Project Contracts in a timely manner or the
ability of the Guarantor to perform its obligations under the Guaranty in a
timely manner, (iii) the business, assets, properties, financial condition,
operations or prospects of Agent or the Guarantor, or (iv) the rights or
interests of Owner or Assignee under this Agreement, the Lease, the
Construction Documents or the Project Contracts.
29
(p) Easements. The Easements have been obtained and are in full force
and effect and are not subject to any Liens other than Permitted Liens and
constitute all easements, rights-of-way and licenses contemplated to be in
place under the Project Contracts, this Agreement and the Lease as of the
date of the Final Advance and necessary for Agent's performance of its
obligations under the Project Contracts. There has been no material breach
under any such easement, right-of-way or license, and there are no pending
or, to the best of Agent's knowledge, threatened claims or proceedings
relating thereto which, if adversely determined, could reasonably be
expected to have a material adverse effect on (i) the construction,
operation, maintenance, leasing, ownership, use, value or regulatory status
of the Project, (ii) the ability of Agent to observe and perform its
obligations under this Agreement, the Lease, the Pledge Agreement, the
Facility Support Agreement, the Construction Documents or the Project
Contracts in a timely manner or the ability of the Guarantor to perform its
obligations under the Guaranty in a timely manner, (iii) the business,
assets, properties, financial condition, operations or prospects of Agent
or the Guarantor, or (iv) the rights or interests of Owner or Assignee
under this Agreement, the Lease, the Construction Documents or the Project
Contracts.
(q) Construction Progress. Owner and Assignee shall have received, if
requested by Owner or Assignee, (i) all progress reports delivered under
the EPC Contract, (ii) true copies of unpaid invoices, receipted bills and
Lien waivers, and such other reasonably available supporting information as
Owner or Assignee may reasonably request and (iii) a certificate from Agent
certifying to Owner and Assignee the amount of Unreimbursed Project Costs
outstanding on the date of the Final Advance.
(r) No Other Security Interests. All materials and fixtures
incorporated in the construction of the Project have been purchased so that
title thereto has automatically been transferred to Owner pursuant to the
EPC Contract, and there shall be no Liens on such materials and fixtures
other than Permitted Liens.
SECTION 7. CONDITIONS PRECEDENT TO COMPLETION ADVANCES WITH RESPECT TO THE
PROJECT.
Owner's obligation to make Completion Advances shall be subject to the
satisfaction of the conditions set forth in this Section 7 and to the receipt by
Owner and Assignee of the documents set forth in this Section 7, in each case in
form and substance reasonably satisfactory to Owner and Assignee. Owner shall
have at least ten (10) Business Days to review the Certificate of Increased Cost
and its attachments prior to making a Completion Advance.
The following are the documents to be received by Owner and Assignee and
the conditions to be satisfied:
(a) Certificate of Increased Cost. A duly executed Certificate of
Increased Cost certified true and correct as to all matters therein by
Agent.
30
(b) Completion Advance. The Completion Advance is sufficient to
provide for the payment of (i) all costs of completing any open Punchlist
Items (as defined in the EPC Contract), and (ii) all costs in connection
with the designing, constructing, equipping and installing of the Project
that were not included as part of the Final Advance; provided that all such
costs fall within the limits of the Budget.
(c) Continuing Representations of Agent. All representations and
warranties in this Agreement (other than the representation and warranty
made in subsection 8.10 hereof), in the Lease (other than the
representation and warranty made in paragraph (i)(f) of Section 2 of the
Lease), and in connection with the Completion Advance are and remain true
and correct in all material respects on and as of the date of the
Completion Advance as if made on and as of the date of the Completion
Advance and no Event of Loss, Termination Event, Event of Default,
Potential Default, default under a Project Contract, a Construction
Document, the Guaranty or the Pledge Agreement, or Event of Project
Termination or Potential Event of Project Termination under this Agreement,
or Event of Default or Potential Default (as each such term is defined in
the Lease) has occurred and is continuing on the date the Completion
Advance is to be made or will exist by reason of giving effect to the
Completion Advance.
(d) Request for Completion Advance. A duly executed request for
advance, stating the total amount of the Completion Advance requested, the
date on which such advance is to be made, wiring instructions and a
breakdown of items and costs for which the Completion Advance is to be
made.
(e) Satisfactory Title. A notice of title continuation or endorsement
issued by the Title Company in respect of Owner's title policy increasing
the amount thereof, if required, to reflect the Acquisition Cost of the
Project as of such date, and indicating that since the notice of title
continuation or endorsement issued by the Title Company in respect of the
Final Advance or the last Completion Advance, as the case may be, there
have been no changes in the state of title, except for Permitted Liens,
together with a "Completion of Improvements" endorsement which deletes the
Title Company's exception to coverage with respect to mechanics' liens,
removes the pending disbursements or pending improvements provision of the
policy, as the case may be, and redates the survey coverage provided in the
policy based on the Final Survey.
(f) Representations and Warranties of Guarantor. All representations
and warranties in the Guaranty (other than the representation and warranty
contained in Section 4.7 thereof) are and remain true and correct in all
material respects on and as of the date of the Completion Advance as if
made on and as of the date of the Completion Advance and no default under
the Guaranty has occurred and is continuing on the date such Completion
Advance is to be made or will exist by reason of giving effect to such
Completion Advance.
(g) Final Acceptance. At the time Agent requests the Completion
Advance, evidence satisfactory to Owner and Assignee that (i) Final
Acceptance (as defined in the EPC Contract) has occurred or will occur as a
result of such Completion Advance, as
31
evidenced by the execution and delivery of the Certificate of Final
Acceptance (as defined in the EPC Contract) by Agent, (ii) the Project has
satisfied the Guaranteed Performance Standards (as defined in the EPC
Contract), and (iii) the Project has satisfied the Lime Consumption
Guarantee (as defined in the EPC Contract), in each case according to the
procedures set forth in the EPC Contract.
(h) Construction Progress. If requested by Owner or Assignee, Owner
and Assignee shall have received (i) all progress reports delivered under
the EPC Contract and (ii) true copies of unpaid invoices, receipted bills
and Lien waivers, and such other reasonably available supporting
information as Owner or Assignee may reasonably request.
(i) No Other Security Interests. All materials and fixtures
incorporated in the construction of the Project have been purchased so that
title thereto shall have vested solely in Owner, and there shall be no
Liens on such materials and fixtures other than Permitted Liens. Title to
the Project shall have vested solely in Owner in accordance with the terms
of paragraph (m) of Section 6 hereof.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF AGENT.
Agent represents and warrants to Owner now and on the date of each advance
that:
8.1 Corporate Matters. Agent (a) has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Wyoming, (b) has full power, authority and legal right to own and operate its
properties and to conduct its business as presently conducted and to execute,
deliver and perform its obligations under this Agreement, the Lease, any
Consent, the Project Contracts, the Pledge Agreement, the Facility Support
Agreement and the Construction Documents, and (c) is duly qualified to do
business as a foreign corporation in good standing in each jurisdiction in which
its ownership or leasing of properties or the conduct of its business requires
such qualification.
8.2 Compliance with Other Instruments. The execution, delivery and
performance by Agent of this Agreement, any Consent, the Project Contracts to
which Agent is a party, the Pledge Agreement, the Facility Support Agreement and
the Construction Documents will not result in any violation of any term of the
articles of incorporation or the by-laws of Agent, do not require stockholder
approval or the approval or consent of any trustee or holders of indebtedness of
Agent except such as have been obtained prior to the date hereof and will not
conflict with or result in a breach of any terms or provisions of, or constitute
a default under, or result in the creation or imposition of any Lien (other than
a Permitted Lien) upon any property or assets of Agent under, any indenture,
mortgage or other agreement or instrument to which Agent is a party or by which
it or any of its property is bound, or any existing applicable law, rule,
regulation, license, judgment, order or decree of any Governmental Authority or
court having jurisdiction over Agent or any of its activities or properties.
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8.3 Binding Agreement. This Agreement and the Consent have been, and each
of the Project Contracts to which Agent is a party, and the Construction
Documents has been or will be, duly authorized, executed and delivered by Agent
and, assuming the due authorization, execution and delivery of this Agreement by
Owner and the Consent, the Project Contracts to which Agent is a party, and the
Construction Documents by the parties thereto other than Agent, this Agreement
and the Consent are, and each of the Project Contracts to which Agent is a
party, and the Construction Documents, when executed and delivered was or will
be, a legal, valid and binding obligation of Agent, enforceable according to its
terms.
8.4 Litigation. There is no action, suit, claim, or counterclaim,
proceeding or investigation, at law or in equity, by or before any court,
governmental body, agency, commission or other tribunal now pending or
threatened against or affecting the Project, Agent or the Guarantor or any
property or rights of Agent or the Guarantor or questioning the enforceability
of this Agreement, the Pledge Agreement, the Facility Support Agreement, the
Consent, the Project Contracts or the Construction Documents, which, if
adversely determined, could reasonably be expected to have a material adverse
effect on (a) the construction, operation, maintenance, leasing, ownership, use,
value or regulatory status of the Project, (b) the ability of Agent to observe
and perform its obligations under this Agreement, the Lease, the Pledge
Agreement, the Facility Support Agreement, the Consent, the Construction
Documents or the Project Contracts in a timely manner or the ability of the
Guarantor to perform its obligations under the Guaranty in a timely manner, (c)
the business, assets, properties, financial condition, operations or prospects
of Agent or the Guarantor, or (d) the rights or interests of Owner or Assignee
under this Agreement, the Lease, the Pledge Agreement, the Facility Support
Agreement, the Construction Documents, the Consent or the Project Contracts.
8.5 Governmental Consents. There are no consents, licenses, orders,
authorizations, approvals, Environmental Approvals, Permits, waivers,
exemptions, extensions or variances of, or notices to or registrations or
filings with any Governmental Authority or public body (each a "Governmental
Action") which are or will be required in connection with the valid execution,
delivery and performance of this Agreement, the Pledge Agreement, the Facility
Support Agreement, the Consent, the Project Contracts or the Construction
Documents, or any Governmental Action (a) which is or will be required in
connection with any participation by Owner or any Assignee in the transactions
contemplated by the Project Contracts, the Construction Documents, the Pledge
Agreement, the Facility Support Agreement, the Consent or this Agreement, (b)
which is or will be required in connection with the acquisition or ownership by
Owner of the Project and all equipment for use with respect thereto, (c) which
is or will be required for the lease of the Project or the operation of the
Project in accordance with and as contemplated by the Project Contracts and the
Lease, or (d) which is or will be required to be obtained by Agent, Owner,
Merrill, Merrill Lynch, Merrill Leasing, any Assignee or an Affiliate of the
foregoing, during the term of this Agreement, the Lease or the Project
Contracts, with respect to the Project or the Project Contracts, except for (i)
the filing of an application for EWG status under Section 32 of the 1935 Act and
(ii) filings, if any, required under Section 6111 of the Code, and except such
Governmental Actions (i) each of which has been duly obtained, given or
accomplished, is in full force and effect, is final, is not under appeal, and
all applicable appeal periods have expired, with a true copy thereof delivered
to Owner or (ii) as may be required by applicable law not now in effect.
33
8.6 Compliance with Legal Requirements and Insurance Requirements. The
construction, operation, use, and physical condition of the Project are in full
compliance with all Legal Requirements and Insurance Requirements and all
premiums due with respect to such Insurance Requirements have been paid.
8.7 No Default. Neither Agent nor the Guarantor is in violation of or in
default under or with respect to any Legal Requirement in any respect which
could reasonably be expected to have a material adverse effect on (a) the
construction, operation, maintenance, leasing, ownership, use, value or
regulatory status of the Project, (b) the ability of Agent to observe and
perform its obligations under this Agreement, the Lease, the Pledge Agreement,
the Facility Support Agreement, the Consent, the Construction Documents or the
Project Contracts in a timely manner or the ability of the Guarantor to perform
its obligations under the Guaranty in a timely manner, (c) the business, assets,
properties, financial condition, operations or prospects of Agent or the
Guarantor, or (d) the rights or interests of Owner or Assignee under this
Agreement, the Lease, the Pledge Agreement, the Facility Support Agreement, the
Construction Documents, the Consent or the Project Contracts.
8.8 Liens. The Project is not subject to any Lien, except for Permitted
Liens, and none of such Permitted Liens could reasonably be expected to
materially interfere with the construction, use or possession of the Project or
the use or exercise by Owner of its rights under this Agreement or any other
document contemplated hereby or entered into in connection herewith.
8.9 Financial Statements. Agent has furnished to Owner copies of (a)
Agent's annual unaudited financial statements for the year ended December 31,
2000 and its quarterly unaudited financial statements for the quarter ended
March 31, 2001, and (b) the Guarantor's Annual Report on Form 10-K for the year
ended December 31, 2000, and the Guarantor's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001. The financial statements contained in such
documents fairly present the financial position, results of operations and
consolidated statements of cash flows of Agent and the Guarantor, as the case
may be, as of the dates and for the periods indicated therein and have been
prepared in accordance with GAAP.
8.10 Changes. Since December 31, 2000, there has been no material
adverse change in the business, assets, properties, revenues, financial
condition, operations or prospects of the Project, Agent or the Guarantor, nor
any change which could reasonably be expected to have a material adverse effect
on (a) the construction, operation, maintenance, leasing, ownership, use, value
or regulatory status of the Project, (b) the ability of Agent to observe and
perform its obligations under this Agreement, the Lease, the Pledge Agreement,
the Facility Support Agreement, the Consent, the Project Contracts or the
Construction Documents in a timely manner or the ability of the Guarantor to
perform its obligations under the Guaranty in a timely manner, (c) the business,
assets, properties, financial condition, operations or prospects of Agent or the
Guarantor, or (d) the rights or interests of Owner or Assignee under this
Agreement, the Lease, the Pledge Agreement, the Facility Support Agreement, the
Construction Documents, the Consent or the Project Contracts (hereinafter
referred to as a "Material Adverse Change").
34
8.11 Availability of Utilities. All utility services and facilities
necessary for the construction of the Project without impediment or delay
(including, without limitation, gas, electrical, water and sewage services and
facilities) will be available at the boundaries of the Premises upon the
commencement of construction or will be timely obtained, and all utility
services and Interconnections necessary for the operation of the Project for its
intended purpose will be available on commercially reasonable terms (and with
respect to Interconnections, constructed and in place) at or within the
boundaries of the Premises when needed.
8.12 ERISA. Agent has not established and does not maintain or contribute
to any employee benefit plan that is covered by Title IV of the Employee
Retirement Income Security Act of 1974, as amended from time to time.
8.13 Regulation. Neither Owner nor any Assignee nor any of their respective
Affiliates is or will be, solely by reason of (a) its entering into this
Agreement or any other document contemplated hereby, (b) the acquisition,
ownership, leasing or financing of the Project (or any part thereof) or (c) the
operation of the Project (or any part thereof) in accordance with and as
contemplated by the Project Contracts and the Lease, during the term of this
Agreement, the Lease or the Power Purchase Agreements, subject to regulation
under any Legal Requirement (including any Legal Requirement (i) under the 1935
Act, (ii) imposed by any state or local public utility commission or other
similar regulatory body, authority or group, or (iii) under the Federal Power
Act, as amended).
8.14 Lease. The Lease has been duly authorized, executed and delivered by
Agent and is a legal, valid and binding obligation of Agent, enforceable
according to its terms.
8.15 Construction Documents. Each Construction Document to which Agent is a
party has been duly authorized, executed and delivered by Agent and is a legal,
valid and binding obligation of Agent, enforceable according to its terms. Agent
has not received notice from, nor is there any basis for the receipt of a notice
from, any party to a Construction Document that (a) such party is terminating
any Construction Document, (b) a default has occurred under any Construction
Document or any Person has alleged that a default has occurred under any
Construction Document or (c) there are any claims for damages existing as a
result of Agent's performance of or its failure to perform any of its
obligations under any Construction Document.
8.16 Status of Agent. All of Agent's capital stock is owned (directly or
indirectly) beneficially and of record by the Guarantor.
8.17 Project Authorizations. Agent has obtained, or shall in the ordinary
course of business obtain prior to the time required, all certificates, Permits,
Governmental Actions, licenses, authorizations and approvals required (a) in the
management and operation of the Project in accordance with and as contemplated
by the Project Contracts, the Facility Support Agreement and the Lease, (b) for
any change or modification of the use of the Project, (c) for construction of
any improvements thereto and (d) for acquisition of equipment related to the
Project for use with respect thereto, and a list of all such certificates,
Permits, Governmental Actions, licenses, authorizations and approvals required
by all applicable law in effect on the date hereof is attached as Exhibit F
hereto.
35
8.18 Compliance with Construction Documents and Project Contracts. The
physical condition of the Project as it is presently constructed and as it will
be constructed pursuant to the requirements of the EPC Contract complies with
all material requirements of each Construction Document and each Project
Contract and will enable Agent to perform all of its obligations under the
Construction Documents, the Project Contracts, the Facility Support Agreement
and the Lease in accordance with their respective terms.
8.19 Pledge Agreement. The Pledge Agreement has been duly authorized,
executed and delivered by Agent and, assuming the due authorization, execution
and delivery of the Pledge Agreement by Owner, is a legal, valid and binding
obligation of Agent, enforceable according to its terms. The Pledge Agreement
creates a valid first priority security interest in the Collateral (as defined
in the Pledge Agreement), securing the payment of the Secured Obligations (as
defined in the Pledge Agreement). All action necessary to perfect the security
interest in the Collateral has been taken and such security interest has
priority over any other Lien on the Collateral, except for Permitted Liens.
8.20 Intellectual Property. All Intellectual Property Rights required for
the construction and operation of the Project in accordance with and as
contemplated by the Project Contracts, this Agreement and the Lease, have been
or will in the ordinary course of business be timely obtained and, once
obtained, will remain in full force and effect. Agent owns or has the right to
use all Intellectual Property Rights that are material and are required to
construct the Project and to perform Agent's obligations under the Project
Contracts without any conflict with the rights of others.
8.21 Taxes. Agent has filed or caused to be filed all tax returns which are
required to be filed by it, and has paid all taxes shown to be due and payable
on said returns or on any assessments made against it or any of its assets and
properties and has paid all other taxes, fees or other charges imposed on it by
any Governmental Authority (except taxes, fees and charges subject to a
Permitted Contest).
8.22 Budgets. All budgets (including the Budget) furnished or to be
furnished to Owner and Assignee by or on behalf of Agent and the summaries of
significant assumptions related thereto, if any (a) have been and will be
prepared with due care in accordance with prudent business practices, (b) fairly
present, and will fairly present Agent's expectations as to the matters covered
thereby as of their date, (c) are based on, and will be based on, assumptions
that are reasonable as to all factual and legal matters material to the
estimates therein and (d) are in all material respects consistent with, and will
be in all material respects consistent with, the provisions of this Agreement,
the Lease and the Project Contracts. The Budget includes all costs and expenses
that could reasonably be expected to be incurred in connection with the
construction of the Project.
8.23 Operation of the Project. The Project is being constructed such that,
on and after the achievement of Operational Acceptance (as defined in the EPC
Contract) it will be able (a) to be operated on a safe and reasonably economic
basis in compliance with all material Governmental Actions existing at the time,
the Project Contracts, the Facility Support Agreement and the Lease for a period
of at least 30 years thereafter, and (b) to be mechanically operated on
36
a safe basis in compliance with all existing material Governmental Actions for a
period of at least 30 years thereafter.
8.24 Guaranty. The Guaranty has been duly authorized, executed and
delivered by the Guarantor and constitutes a legal, valid and binding obligation
of the Guarantor, enforceable according to its terms.
8.25 Facility Support Agreement. The Facility Support Agreement has been
duly authorized, executed and delivered by Agent and, assuming the due
authorization, execution and delivery of the Facility Support Agreement by
Owner, is a legal, valid and binding obligation of Agent, enforceable according
to its terms.
8.26 Disclosure. As of the date hereof, there is no fact known to Agent
which could reasonably be expected to have a material adverse effect on (a) the
construction, operation, maintenance, leasing, ownership, use, value or
regulatory status of the Project, (b) the ability of Agent to observe and
perform its obligations under this Agreement, the Lease, the Pledge Agreement,
the Facility Support Agreement, the Consent, the Construction Documents or the
Project Contracts in a timely manner or the ability of the Guarantor to perform
its obligations under the Guaranty in a timely manner (c) the business, assets,
properties, financial condition, operations or prospects of Agent or the
Guarantor, or (d) the rights or interests of Owner or Assignee under this
Agreement, the Lease, the Pledge Agreement, the Facility Support Agreement, the
Construction Documents, the Consent or the Project Contracts, and which has not
been set forth in this Agreement, the Lease or in the other documents,
certificates and written statements furnished by Agent to Owner and Assignee
prior to the date of execution of this Agreement in connection with the
transactions contemplated hereby. The written documentation furnished to Owner
and Assignee by Agent, taken as a whole, including, without limitation, updated
or supplemented written information, is true and accurate in all material
respects and such documentation does not omit to state any fact known to Agent
which could reasonably be expected to have a material adverse effect as
described in the immediately preceding sentence. None of the representations
made by Agent in this Agreement or the Lease, or the financial statements
referred to in subsection 8.9 hereof, contained as of its date any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the representations contained herein or the statements contained
therein not misleading in light of the circumstances under which they were made.
8.27 Environmental Matters. Except as expressly identified in the
environmental reports delivered pursuant to Section 4 of this Agreement:
(a) To the best knowledge of Agent, after due inquiry, Agent and the
Project comply, and have at all times complied, with all Environmental
Requirements applicable to the Project. Agent and the Project shall at all times
comply with all material Environmental Requirements applicable to the Project,
including, without limitation, the use, maintenance and operation of the
Project, and all activities and conduct of business related thereto, including,
without limitation, the treatment, remediation, removal, transport, storage
and/or disposal of any Contaminant, and no material capital expenditures are
anticipated to maintain or achieve compliance with Environmental Requirements;
37
(b) Agent has obtained or has taken appropriate steps, as required by
Environmental Requirements, to obtain, and shall maintain all Environmental
Approvals necessary for the construction and operation of the Project, or, in
the case of Environmental Approvals necessary for operation, will take such
steps as are necessary to secure such Environmental Approvals prior to the
scheduled commencement of operation, all such Environmental Approvals already
obtained are in good standing, are in full force and effect, are final, are not
under appeal, and all applicable appeal periods have expired, and Agent and the
Project are currently in material compliance and shall remain in material
compliance with all terms and conditions of such Environmental Approvals. No
material change in the facts or circumstances reported or assumed in the
applications for or the granting of such Environmental Approvals exists. There
are no proceedings pending or threatened which may be expected to rescind,
terminate, modify, condition, suspend or otherwise alter such Environmental
Approvals, or which would jeopardize the validity of, or the ability of Agent to
obtain, maintain, or comply with, any such Environmental Approvals in a timely
manner;
(c) Agent has not received any notice that any of the third parties with
which Agent has arranged, engaged or contracted to accept, treat, transport,
store, dispose or remove any Contaminant generated or present at the Project, or
which otherwise participate or have participated in activities or conduct
related to the Project, were not properly permitted at the relevant time to
perform the foregoing activities or conduct;
(d) Agent has not received any notice that it or the Project is subject to
any investigation, and is not subject to any judicial or administrative
proceeding, notice, order, judgment, decree or settlement, alleging or
addressing in connection with the Project (i) any violation of any Environmental
Requirements, (ii) any Remedial Action, or (iii) any Environmental Damages,
claims or liabilities and costs arising from the Release or threatened Release
of any Contaminant;
(e) No Environmental Lien has attached to any portion of the Project, and
Agent shall not cause or suffer any action or occurrence that will allow an
Environmental Lien to attach;
(f) Agent has not received, and is not otherwise aware of, any notice,
claim or other communication concerning (i) any alleged violation of any
Environmental Requirements at the Project, whether or not corrected to the
satisfaction of the appropriate authority, (ii) any alleged liability of Agent
for Environmental Damages arising out of or related to the Project, or (iii) any
alleged liability of Agent arising out of or related to the Project for the
Release or threatened Release of a Contaminant at any location, and there exists
no writ, injunction, decree, order or judgment outstanding, nor, to the best
knowledge of Agent, after due inquiry, any lawsuit, claim, proceeding, citation,
directive, summons or investigation, pending or threatened, relating to the
condition, ownership, use, maintenance, construction or operation of the
Project, or the suspected presence of Contaminants thereon or therefrom, nor
does there exist any basis for such lawsuit, claim, proceeding, citation,
directive, summons or investigation being instituted or filed;
(g) To the best knowledge of Agent, after due inquiry, there has been no
Release of any Contaminants which would constitute a violation of any
Environmental Requirement with
38
respect to the Project or which would require any Remedial Action at, to or from
the Project, and Agent shall not cause or suffer any such Release during the
term of this Agreement;
(h) The Project is not listed or proposed for listing on the National
Priorities List ("NPL") pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act, as amended ("CERCLA"), or listed on the
Comprehensive Environmental Response Compensation Liability Information System
List ("CERCLIS") or any similar state list of sites, and Agent is not aware of
any conditions at the Project which, if known to a Governmental Authority, would
qualify the Project for inclusion on any such list;
(i) Neither Agent nor, to the best knowledge of Agent, after due inquiry,
any contractor engaged by Agent in connection with the Project has transported
or arranged for the transport of any Contaminant from the Project to any
facility or site for the purpose of treatment or disposal which (i) is included
on the NPL, or (ii) to the best knowledge of Agent, is or was, at the time of
disposal, subject to a Remedial Action requirement (other than routine,
anticipated regulatory requirements, including, but not limited to,
closure-related corrective action obligations affecting closed solid waste
management units at such facility) issued under the federal Resource
Conservation and Recovery Act or any state, local or foreign solid or hazardous
waste regulatory law, or (iii) at the time of the disposal had received a notice
of violation or was otherwise subject to a governmental enforcement action with
respect to alleged violations of any Environmental Requirements, and Agent shall
use its best efforts not to suffer or permit any such transportation or
arrangement to any such facility or site during the term of this Agreement;
(j) Neither Agent nor, to the best knowledge of Agent, after due inquiry,
any contractor engaged by Agent in connection with the Project has engaged in or
permitted, nor shall Agent engage in or permit, any operations or activities
upon, or any use or occupancy of the Project or any portion thereof, for the
purpose of or in any way involving the illegal or improper release, discharge,
refining or dumping of any Contaminant or the illegal or improper handling,
storage, use or disposal of any Contaminant, nor has Agent or any other Person
caused any Contaminant to be deposited, released, stored, disposed, leached or
otherwise come to be located on, under, in or about the Premises, nor to the
knowledge of Agent has any Contaminant migrated from the Premises onto or
underneath other properties;
(k) To the best knowledge of Agent, after due inquiry, there is not
constructed, placed, deposited, stored, disposed nor located on the Project or
the Premises any asbestos in any form which has become or threatens to become
friable, and Agent shall not cause or suffer the use of any asbestos containing
material in connection with the construction of the Project during the term of
this Agreement;
(l) To the best knowledge of Agent, after due inquiry, there is not
constructed, placed, deposited, released, stored, disposed, leached nor located
on the Project any mono- or poly-chlorinated biphenyls ("PCBs") or transformers,
capacitors, ballasts, or other equipment which contain dielectric fluid
containing PCBs. Agent shall not cause or suffer the use of any article
containing PCBs at or on the Project during the term of this Agreement;
39
(m) To the best knowledge of Agent, Agent has no liability, and has neither
received nor is otherwise aware of any notice, claim or other communication
alleging liability on the part of Agent, for the violation of any Environmental
Requirements, for Environmental Damages, or for the presence, Release, or
threatened Release of any Contaminant in connection with the Project; and
(n) None of the matters identified in the environmental reports delivered
pursuant to Section 4 of this Agreement, individually or in the aggregate, could
reasonably be expected to have a material adverse effect on (i) the
construction, operation, maintenance, leasing, ownership, use, value or
regulatory status of the Project, (ii) the ability of Agent to observe and
perform its obligations under this Agreement, the Lease, the Pledge Agreement,
the Facility Support Agreement, the Consent, the Construction Documents or the
Project Contracts in a timely manner or the ability of the Guarantor to perform
its obligations under the Guaranty in a timely manner, (iii) the business,
assets, properties, financial condition, operations or prospects of Agent or the
Guarantor, or (iv) the rights or interests of Owner or Assignee under this
Agreement, the Lease, the Pledge Agreement, the Facility Support Agreement, the
Construction Documents, the Consent or the Project Contracts.
SECTION 9. AFFIRMATIVE COVENANTS.
Agent hereby agrees that, so long as this Agreement remains in effect,
Agent shall keep and perform fully each and all of the following covenants:
9.1 Performance under Other Agreements. Agent shall duly perform and
observe all of the covenants, agreements and conditions on its part which it is
obligated to perform or observe under the Project Contracts, the Construction
Documents, the Facility Support Agreement and all other agreements related to
the Project. Agent shall perform and observe all of the terms, provisions,
conditions and agreements of the Ground Lease on Owner's part as lessee
thereunder to be performed and observed (including, without limitation, payment
of all rent, additional rent and other amounts payable by Owner as lessee under
such Ground Lease) to the end that all things shall be done which are necessary
to keep unimpaired the rights of Owner under the Ground Lease.
9.2 No Encroachments. The Project shall be constructed entirely on the
Premises or the various locations of the Easements and shall not encroach upon
or overhang any property lying outside the boundaries of the Premises or the
Easements (unless consented to by the affected property owner and unless the
encroachment or overhang does not render the Project unmarketable, does not
cause a reduction in the fair market value of the Project, and does not
adversely affect the use of the Project and any easement or right-of-way on the
land of the affected property owner, and when erected shall be wholly within any
building restriction lines, however established. Upon the reasonable request of
Owner, Agent shall cooperate in acquiring for Owner any easements deemed by
Owner to be necessary or desirable for the benefit of the Project. Upon request
of Owner, Agent shall furnish from time to time satisfactory evidence of
compliance with the foregoing covenants, including, without limitation, a survey
prepared by a registered surveyor or engineer. If any discrepancies exist
between the legal description set forth
40
on the Survey described in paragraph (b) of Section 9.24 hereof and the Final
Survey described in paragraph (g) of Section 6 hereof, Owner and Agent shall
cooperate, at Agent's expense, in amending the legal descriptions in all
recorded documents creating or affecting the Premises, including, without
limitation, any Easements, to reflect the correct as-built description.
9.3 Insurance.
(a) Insurance with respect to the Project. Agent shall procure for Owner
and maintain in full force and effect at all times throughout the term of this
Agreement (and all costs relating thereto shall be reimbursed by Owner by means
of advances under this Agreement, and shall be capitalized by Owner as an
element of the Acquisition Cost of the Project) insurance policies with
responsible insurance companies authorized to do business in the State of
Wyoming with a Best Insurance Reports rating of "A" or better and a financial
size category of "IX" or higher, or if not rated by Best, an S&P claims paying
ability rating of "BBB+" or higher, or if not rated by either of the foregoing,
shall be of substantially equivalent financial strength and creditworthiness of
insurance companies that maintain such ratings (or such other company acceptable
to Owner and Assignee), with such limits and coverage provisions as Agent shall
deem reasonable, but in no event less than the limits and coverage provisions
set forth below:
(i) Workers' Compensation Insurance. Workers' compensation insurance
in accordance with and as required under the laws of the State of Wyoming.
(ii) Employer's Liability Insurance. Employer's liability insurance
providing compensation for occupational diseases and for injuries sustained
by or death resulting to employees of Agent or its subcontractors as
required by law, including the laws of each state wherein any work is
performed under this Agreement and where employment contracts of such
employees were made, including employer's liability insurance coverage with
a $1,000,000 limit per accident.
(iii) Commercial General Liability Insurance. Liability insurance on
an occurrence (or AEGIS or EIM claims-made form) basis against claims for
personal injury (including bodily injury and death) and property damage.
Such insurance shall provide coverage for products-completed operations,
blanket contractual, explosion, collapse and underground coverage, broad
form property damage, personal injury insurance, leased non-owned and hired
motor vehicles, and the hostile fire exception to the pollution liability
exclusion with a $1,000,000 minimum limit per occurrence for combined
bodily injury and property damage.
(iv) Automobile Liability Insurance. Automobile liability insurance
against claims for personal injury (including bodily injury and death) and
property damage covering all owned, leased non-owned and hired motor
vehicles, including loading and unloading, with a $1,000,000 minimum limit
per occurrence for combined bodily injury and property damage and
containing appropriate no-fault insurance provisions wherever applicable.
41
(v) Excess Liability Insurance. Excess liability insurance on an
occurrence (or AEGIS or EIM claims-made form) basis covering claims in
excess of the underlying insurance described in the foregoing clause (iii),
with a $100,000,000 minimum limit per occurrence; provided, however, in the
event the available limit of liability is less than $50,000,000 due to
claims against such excess liability insurance, Agent shall purchase
additional coverage so that the available limit of liability under such
excess liability insurance is not less than $100,000,000.
The amounts of insurance required in the foregoing clause (iii) and
this clause (v) may be satisfied by Agent purchasing coverage in the
amounts specified or by any combination of primary and excess insurance, so
long as the total amount of insurance meets the requirements specified
above.
(vi) All Risk Builders' Insurance. All Risk Builders' Risk Completed
Value Non-Reporting Form Insurance including boiler and machinery, collapse
coverage and fire insurance with extended coverage, in an amount equal to
the greater of (A) one hundred percent (100%) of the completed insurable
value of the Project, or (B) the Acquisition Cost of the Project. For
purposes of this clause (a)(vi), the term "completed insurable value" shall
mean the actual replacement cost of the Project, including the cost of
debris removal, but excluding the cost of constructing foundation and
footings. Notwithstanding anything to the contrary contained in this
subsection 9.3 or in Section 10 of the Lease, in the event that Agent
demonstrates to the reasonable satisfaction of Owner and Assignee that the
Project can and will be rebuilt hereunder in a timely manner, that the
insurance proceeds plus any Available Commitment are sufficient to rebuild
the Project, that no Event of Default hereunder has occurred and is
continuing, that no Event of Default (as defined in the Lease) has occurred
and is continuing under the Lease and that no default has occurred and is
continuing under the Project Contracts, the proceeds from such insurance
shall be payable to the General Contractor in accordance with the terms of
the EPC Contract.
(vii) Environmental Impairment Liability Insurance. Environmental
impairment liability insurance for third party damages and injuries arising
from a sudden and accidental occurrence, in an amount not less than
$10,000,000 per occurrence.
(b) Agent shall comply with the insurance provisions described in Section
10 of the Lease following paragraph (b), except that the terms "Owner", "Agent"
and "this Agreement" shall substitute for the terms "the Lessor", "the Lessee"
and for "this Lease", respectively.
(c) Agent covenants that it will not use, carry on construction with
respect to, or occupy the Project or permit the use, construction, or occupancy
of the Project at a time when the insurance required by paragraph (a) of this
subsection 9.3 is not in force with respect to the Project.
9.4 Inspection of Books and Records. During reasonable business hours,
Owner and Assignee or designated representatives of either of them shall have
the right of entry and free
42
access to the Project, and the right to inspect all work done, labor performed
and materials furnished in and about the Project and at reasonable times the
right to inspect all books, contracts and records of Agent relating to the
Project. Notwithstanding the foregoing, neither Owner nor any Assignee shall
have any duty to make any such inspection.
9.5 Expenses. Owner shall pay directly and simultaneously capitalize into
the Acquisition Cost of the Project or reimburse Agent and simultaneously
capitalize into the Acquisition Cost of the Project all obligations, costs and
expenses with respect to any and all transactions contemplated herein and the
preparation of any document reasonably required hereunder and the prosecution or
defense of any action or proceeding or other litigation affecting Agent or the
Project, including (without limiting the generality of the foregoing) all
Financing Costs and amounts required to pay Owner for its obligations, costs and
expenses arising in connection with the termination of any Financing Arrangement
(whether as a result of a default thereunder or otherwise), all interest
(including, without limitation, interest at a default rate) and other costs,
fees and expenses incurred by Owner under any Financing Arrangement (including
any such accruing after the commencement of a bankruptcy or similar proceeding),
costs incurred in connection with obtaining, maintaining and terminating Owner's
equity financing and refinancing (including, without limitation, any amounts
owing by Owner to its partners as a result of a sale of limited partner
interests by any limited partner of Owner or a modification of the terms of such
equity financing), title and conveyancing charges, recording and filing fees and
taxes, title search fees, rent under the Ground Lease, mortgage taxes,
intangible personal property taxes, escrow fees, revenue and tax stamp expenses,
insurance premiums, brokerage commissions, finders' fees, placement fees, court
costs, surveyors', photographers', appraisers', architects', engineers',
industry consultants', insurance advisors', rating agencies', accountants' and
reasonable attorneys' fees and disbursements.
9.6 Delivery of Information. Agent shall deliver to Owner and Assignee from
time to time, (i) (A) promptly, and in any event not more than 120 days after
the end of each fiscal year of Agent (commencing with the fiscal year 2001),
copies of Agent's annual audited financial statements and promptly, and in any
event not more than 60 days after the end of each of the first three fiscal
quarters of each relevant fiscal year of Agent, copies of Agent's quarterly
unaudited financial statements, both prepared in accordance with GAAP, and (B)
promptly, and in any event not more than 120 days after each fiscal year of the
Guarantor, copies of the Guarantor's Annual Report on Form 10-K and promptly,
and in any event not more than 60 days after the end of each of the first three
fiscal quarters of each relevant fiscal year of the Guarantor, copies of the
Guarantor's Quarterly Reports on Form 10-Q and promptly any other reports the
Guarantor files with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, (ii) promptly upon request, such other
information with respect to Agent's or the Guarantor's operations, business,
properties, assets, financial condition or litigation as Owner or any Assignee
shall reasonably request, (iii) promptly after a Responsible Officer obtains
knowledge of any Event of Default, Potential Default, Event of Loss, Termination
Event, Event of Project Termination or Potential Event of Project Termination
hereunder or any default or alleged default by the other party thereto under any
Project Contract or Construction Document or any other Operative Document, or of
any claims for damages existing as a result of Agent's performance of, or its
failure to perform any of its obligations under, any Project Contract or
Construction Document, a certificate of a Responsible Officer specifying the
nature and period
43
of existence of such Event of Default, Potential Default, Event of Loss,
Termination Event, Event of Project Termination or Potential Event of Project
Termination or default or alleged default under any Project Contract or
Construction Document or any other Operative Document, and what action, if any,
Agent has taken, is taking, or proposes to take with respect thereto, (iv)
promptly after a Responsible Officer obtains knowledge of any material adverse
change in the financial condition or business of Agent, or of any liabilities or
obligations arising as a result of tortious action or omission or Environmental
Damages or in respect of governmental fines or obligations (other than taxes) or
liabilities or obligations arising as a result of Environmental Matters, or of
any material adverse change in the financial condition or business of the
Guarantor or of any litigation of the type described in subsection 8.4, a
certificate of a Responsible Officer describing such change, liabilities,
obligations or litigation, as the case may be, and what action, if any, Agent
has taken, is taking, or proposes to take with respect thereto, (v)
simultaneously with the delivery of each set of annual and quarterly financial
statements referred to in clause (i)(A) of this subsection 9.6, a certificate of
a Responsible Officer stating, to the best knowledge of such Responsible Officer
after reasonable inquiry, whether there exists on the date of such certificate
any Event of Default, Potential Default, Event of Loss, Termination Event, Event
of Project Termination, Potential Event of Project Termination or default under
any Project Contract or Construction Document, and if any Event of Default,
Potential Default, Event of Loss, Termination Event, Event of Project
Termination, Potential Event of Project Termination or default under any Project
Contract or Construction Document exists, specifying the nature and period of
existence thereof and what action, if any, Agent has taken, is taking, or
proposes to take with respect thereto, and (vi) promptly after a Responsible
Officer obtains knowledge of any legal, governmental or regulatory proceeding
that could have a material adverse effect on (a) the construction, operation,
maintenance, leasing, ownership, use, value or regulatory status of the Project,
(b) the ability of Agent to observe and perform its obligations under this
Agreement, the Lease, the Pledge Agreement, the Facility Support Agreement, the
Consent, the Construction Documents or the Project Contracts in a timely manner
or the ability of the Guarantor to perform its obligations under the Guaranty in
a timely manner, (c) the business, assets, properties, financial condition,
operations or prospects of Agent or the Guarantor, or (d) the rights or
interests of Owner or Assignee under this Agreement, the Lease, the Pledge
Agreement, the Facility Support Agreement, the Construction Documents, the
Consent or the Project Contracts, a certificate of a Responsible Officer
describing each such proceeding and what action, if any, Agent has taken, is
taking, or proposes to take with respect thereto.
9.7 Conduct of Business and Maintenance of Corporate Existence. Agent shall
(i) preserve, renew and keep in full force and effect its existence as a
corporation in good standing under the laws of the State of Wyoming, and (ii)
maintain all rights, privileges and franchises material to the conduct of its
business; provided, however, that nothing contained in this subsection 9.7 shall
prevent Agent from consummating any merger, consolidation or sale permitted by
the provisions of subsection 10.2 hereof.
9.8 Notices. Agent shall give notice to Owner and Assignee promptly upon
the occurrence of:
(a) any notice given pursuant to any of the Construction Documents or
other Project Contracts that a default by Agent has occurred thereunder;
44
(b) any notice given by Agent alleging that a default has occurred
pursuant to any of the Construction Documents or any Project Contract;
(c) any condition which constitutes a delay for force majeure under
any Construction Document or any Project Contract with respect to
construction or completion of the Project;
(d) the imposition of any Lien, including Permitted Liens;
(e) any notices received from any party to any Project Contract that
(i) such party is amending, modifying or waiving any term of any Project
Contract (including any change orders under the EPC Contract), (ii) such
party is commencing or proposes to commence any dispute resolution
procedure under the terms of any Project Contract, (iii) such party is
terminating or has proposed to terminate any Project Contract, (iv) a
default has occurred under any Project Contract or any Person has alleged
that a default has occurred under any Project Contract, or (v) there are
claims for damages existing as a result of Agent's performance of or its
failure to perform any of its obligations under any Project Contract;
(f) any pending or threatened litigation or proceeding affecting the
Project in which the amount of damages requested exceeds $100,000 or more
or in which injunctive or similar relief is sought; and
(g) any litigation or proceeding known to Agent affecting BHP or the
General Contractor or the Operator (if any) that could reasonably be
expected to materially impair the ability of such party to perform its
obligations under the Project Contracts.
Each notice pursuant to this subsection 9.8 shall be accompanied by a
statement of a Responsible Officer setting forth details of the occurrence
referred to therein and stating what action, if any, Agent proposes to take with
respect thereto.
9.9 Legal Requirements and Insurance Requirements. Agent shall comply with
every Insurance Requirement and Legal Requirement (including, without
limitation, Environmental Requirements) affecting the execution, delivery and
performance of this Agreement, the Project Contracts and the Construction
Documents and the Project; and Agent will not do or permit any act or thing
which is contrary to any Insurance Requirement or which is contrary to any Legal
Requirement, or which might impair, other than in the normal use thereof, the
value or usefulness of the Project.
9.10 Payment of Taxes. With respect to the Project, Agent shall make all
required reports to the appropriate taxing authorities and shall pay during the
term of this Agreement the taxes that Agent would be required to pay under
paragraph (c) of Section 9 of the Lease. Payment of such taxes shall be on the
terms set forth in paragraph (c) of Section 9 of the Lease. Owner shall
reimburse Agent by means of advances under this Agreement, for all of such
costs, which shall be capitalized by Owner and included as an element of the
Acquisition Cost of the Project.
45
9.11 Filings, Etc. Agent shall promptly and duly execute, deliver, file,
and record, at Agent's expense, all such documents, statements, filings, and
registrations, and take such further action as Owner shall from time to time
reasonably request in writing in order to establish, perfect and maintain
Owner's title to and interest in the Project and any Assignee's interest in this
Agreement or the Project as against Agent or any third party claiming by or
through Agent in any applicable jurisdiction.
9.12 Use of Proceeds. The proceeds of each advance shall be used by Agent
for payment or reimbursement of costs specified in the applicable request for
the advance and in accordance with the Budget.
9.13 Compliance with Project Contracts and Other Requirements. (a) Agent
shall use every reasonable precaution to prevent loss or damage to the Project
and to prevent injury to third Persons or property of third Persons, including,
without limitation, the provision of security on and around the Project such
that access to the Project is limited to employees of Agent and subcontractors
appointed to perform work in connection with the construction of the Project and
to others to whom Agent elects to provide access in furtherance of Agent's
business practices. Agent shall cooperate fully with Owner and all insurance
companies providing insurance pursuant to subsection 9.3 hereof in the
investigation and defense of any claims or suits arising from the ownership or
operation of equipment or ownership, use, or occupancy of the Project; provided,
that nothing contained in this subsection 9.13 shall be construed as imposing on
Owner any duty to investigate or defend any such claims or suits. Agent shall
comply and shall use its best efforts to cause all Persons operating equipment
on, using or occupying the Project (including, without limitation, the parcels
of land with respect to which the Easements are granted) to comply with every
Insurance Requirement and Legal Requirement regarding acquiring, titling,
registering, leasing, subleasing, insuring, using, occupying, operating and
disposing of the Project, and, if applicable, the licensing of operators
thereof.
(b) Agent shall require the General Contractor to obtain all Performance
Bonds required to be delivered by its subcontractors in accordance with the
provisions of the EPC Contract and shall promptly deliver to Owner and Assignee
from time to time copies of such Performance Bonds. 9.14 Operation of Project.
Agent shall, with respect to any operation of the Project at any time prior to
its Effective Date, perform and observe, and cause the Operator to perform and
observe, all of the agreements and conditions set forth in Sections 8 and 9 of
the Lease with respect to the Project, except that this Agreement shall
substitute the terms "Owner" for "the Lessor" and "Agent" for "the Lessee".
9.15 Construction of Project. Agent agrees (a) to construct, maintain,
repair, equip, use and cause the operation of the Project in the manner and for
the purpose contemplated by the Project Contracts and to use its best commercial
efforts to achieve Substantial Completion on or before the Completion Date and
(b) to complete construction of the Project in the manner contemplated by this
Agreement and in accordance with the total amount of the Budget. Agent shall
obtain in a timely manner and maintain in full force and effect all Governmental
Actions required to perform its obligations under the
46
Project Contracts and will promptly upon the request of Owner or any Assignee
provide a copy of each such Governmental Action to Owner and any Assignee.
9.16 Technology. Agent shall obtain and maintain, or cause to be obtained
and maintained, all Intellectual Property Rights necessary in connection with
the construction, operation and maintenance of the Project in accordance with
the requirements of the Project Contracts.
9.17 Project Information. Agent shall furnish to Owner and Assignee:
(a) all material written communications relating to any pending or
threatened investigations, claims or proceedings with respect to any
Governmental Action or proposing to amend, modify or affect any
Governmental Action then required to be in effect;
(b) written notice of the occurrence of any event giving rise (or that
could reasonably be expected to give rise) to a claim under any insurance
policy maintained pursuant to the terms of this Agreement in an amount
greater than $100,000 together with copies of any document relating thereto
(including copies of any such claim) in the possession or control of Agent;
(c) promptly after preparation thereof, any and all revisions to the
Budget or the Construction Drawdown Schedule; and
(d) written notice of the occurrence of any event giving rise or that
could reasonably be expected to give rise to the Project failing to achieve
Operational Acceptance under the EPC Contract prior to the Completion Date,
as such Completion Date may be extended pursuant to the terms of the
Extension Option.
9.18 Lease Covenants. Agent shall perform and observe all of the agreements
and conditions set forth in paragraphs (ii)(a), (ii)(b), (ii)(c), (ii)(d) and
(ii)(g) of Section 2 of the Lease as if set forth in full herein.
9.19 Governmental Approvals. Agent shall (a) duly obtain, or cause to be
obtained, on or prior to such date as the same become legally required, and (b)
thereafter maintain, or cause to be maintained, in effect as long as legally
required, all authorizations, consents, approvals, waivers, exemptions,
variances, registrations, leases, tariffs, certifications, franchises,
permissions, Permits, Governmental Actions and licenses of, and filings and
declarations with, and rulings by, any Governmental Authority (including,
without limitation, Environmental Approvals and those with respect to zoning and
other land use laws, ordinances and regulations) necessary for the construction,
ownership, use, maintenance and operation of the Project in accordance with and
as contemplated by the Project Contracts, this Agreement and the Lease.
9.20 Events of Project Termination. Commencing upon the occurrence of any
Event of Project Termination, Agent shall satisfy all Loss Payment Requirements
and shall, upon the request of Owner or Assignee, exercise all commercially
reasonable efforts (a) to provide Owner
47
(or a designated assignee of Owner or Assignee) with all easements, manuals and
other matters and services to be provided by the Operator (to the extent such
easements, manuals and other matters and services are not being provided
pursuant to the Project Contracts) necessary to enable the Project to operate on
commercially reasonable terms, (b) to provide Owner (or a designated assignee of
Owner or Assignee) with any Project Contracts not assigned to Owner (or a
designated assignee of Owner or Assignee) pursuant to paragraph (a)(i)(B) of the
definition of "Loss Payment Requirements" herein, (c) to provide Owner (or a
designated assignee of Owner or Assignee) with any Permits, Governmental Actions
or Intellectual Property Rights not assigned to Owner (or a designated assignee
of Owner or Assignee) pursuant to paragraph (c) of the definition of "Loss
Payment Requirements" herein that are necessary to enable the Project to operate
on commercially reasonable terms in connection with its operation as an EWG, (d)
to provide Owner (or a designated assignee of Owner or Assignee) with any other
permits, licenses or other Governmental Actions required to enable such party
(provided that such party is not a "public-utility company", as such term is
defined in Section 2(a)(5) of the 1935 Act, or otherwise subject to regulation
as a public utility by any relevant Governmental Authority under the laws of any
state or locality) to operate the Project on commercially reasonable terms as an
EWG and (e) to negotiate in good faith with Owner (or a designated assignee of
Owner or Assignee), or exercise all commercially reasonable efforts to locate a
third party reasonably acceptable to Owner and Assignee who is capable of
operating the Project for Owner (or a designated assignee of Owner or Assignee),
to operate the Project for Owner (or such designated assignee of Owner or
Assignee) for fair market value compensation for such services. Agent's
obligations contained in this subsection 9.20 shall survive the expiration or
other termination of this Agreement until Owner receives payment of (i) all
amounts owing pursuant to this Agreement, (ii) all losses, damages, costs and
expenses (including, without limitation, attorneys' fees and expenses,
commissions, filing fees and sales or transfer taxes) sustained by Owner, (iii)
all amounts owing under the Financing Arrangements, all Equity Capital, and all
Return on Equity Capital owing hereunder and (iv) any unreimbursed costs
incurred by Owner or Assignee with respect to the Project or the Project
Contracts after the term of this Agreement, net of any revenues received from
the operation of the Project.
9.21 Further Assurances. Agent shall from time to time promptly execute and
deliver to Owner and Assignee all such documents and instruments and do all such
other acts and things as Owner or Assignee may reasonably request to obtain the
full benefits of this Agreement, to allow Owner and Assignee to exercise and
enforce its rights and remedies hereunder and under the security interests,
respectively, and to protect Owner's and Assignee's rights and interests in and
to the Project. Agent shall furnish to Owner and Assignee upon request any
information, agreements and documents to assist Owner and Assignee in the
preparation of its federal, state, local, and other tax returns, and in the
maintenance of accurate books of account and records of all transactions
relating to the construction or operation of the Project.
9.22 Force Majeure Delay, Casualty or Condemnation. (a) Upon the occurrence
of a Force Majeure Delay, casualty or temporary condemnation, as the case may
be, which could reasonably be expected to cause the Effective Date to be
delayed, Agent shall use its best efforts to effect Substantial Completion of
the Project and to resolve the event or condition causing such Force Majeure
Delay, casualty or temporary condemnation, as the case may be, as promptly as
practicable.
48
(b) Owner and Agent hereby acknowledge and agree that in the event Agent
requests an extension of the Completion Date due to a Force Majeure Delay which
shall have the effect of extending the Completion Date beyond six (6) months in
the aggregate, in addition to the conditions and requirements set forth in the
definition of "Extension Option", Agent shall also deliver to Owner and Assignee
a certificate from an independent qualified expert (which may be the General
Contractor, an independent engineer or such other expert qualified to evaluate
such risks) as selected by Agent and satisfactory to Owner and Assignee, stating
that in the opinion of such party, the requested extension of the Completion
Date is reasonable and necessary to avoid an Event of Project Termination
pursuant to paragraph (a) of subsection 11.3 hereof.
(c) Notwithstanding anything to the contrary set forth herein, if by reason
of a Force Majeure Delay, funds are no longer made available to Owner under any
Financing Arrangement, Owner shall have the right to terminate this Agreement
and/or Owner's obligations to make any further advances hereunder, whereupon
Agent shall be released from all obligations hereunder (other than indemnity
obligations for which Owner has full recourse against Agent in accordance with
the terms of this Agreement), and Agent shall transfer to Owner all of Agent's
right, title and interest in and to the Project.
9.23 Payment of Insurance Premiums. Agent shall apply the proceeds of
each advance made by Owner under Sections 4, 5, 6 and 7 of this Agreement for
payment in full of all amounts due and owing (if any) with respect to obtaining
and maintaining all insurance policies required by the provisions of paragraph
(a) of subsection 9.3 hereof.
9.24 Delivery of Certain Documents. Agent shall deliver to Owner and
Assignee on or prior to the date that is sixty -five (65) days from the date of
this Agreement:
(a) a fully executed and complete copy of the Cheyenne Consent and the
MEAN Consent;
(b) a current survey of the Premises (including the lands encumbered
by the Required Easement Agreements) dated as of the date of delivery (the
"Survey"), certified by the Surveyor to the Title Company, Agent, Owner and
Assignee and in form and substance satisfactory to Owner and Assignee in
all respects;
(c) a certification by the Surveyor on the Survey or an official of an
appropriate Governmental Authority as to the flood zone designation of the
Premises;
(d) any blanket easements contained in the Easement Agreement shall be
specifically located, and all easement agreements for the benefit of Owner
as are necessary for the construction and operation of the Project over
lands adjacent to the Premises, including, without limitation, easements
for access to a public road, gas lines, transmission lines, water service,
sewer service, coal storage and delivery of coal by conveyors
(collectively, the "Required Easement Agreements"), together with
collateral assignments of such Required Easement Agreements in favor of
Assignee;
49
(e) subordination and/or non-disturbance agreements from any
lienholders of the lands encumbered by the Required Easement Agreements, in
recordable form;
(f) an American Land Title Association 1999 Class A Survey of the
Premises and the lands encumbered by the Required Easement Agreements,
certified to the Title Company, Agent, Owner and Assignee;
(g) an endorsement to the title policy for the Premises deleting any
Survey exception, adding the lands encumbered by the Required Easement
Agreements and containing no additional exceptions not acceptable to Owner
and Assignee, subject only to Permitted Liens (excluding, however, any
exceptions to the title as set forth in the title insurance policy
delivered to Owner and Assignee under Section 4 hereof which are not
acceptable to Owner and Assignee);
(h) amendments reasonably requested by Owner and Assignee to any of
the Operative Documents reflecting the addition of the Required Easement
Agreements;
(i) amendments reasonably requested by Owner and Assignee, to this
Agreement, the Lease, the Memorandum of Lease, any mortgage granted by
Agent and any financing statements filed, reflecting the addition of the
Required Easement Agreements;
(j) all Project Contracts necessary for the operation and maintenance
of the Project, including, without limitation, an agreement for
interconnection service and a services and facilities agreement with any
neighboring power plants shall be available to the Project on commercially
reasonable terms and copies thereof shall have been delivered to Owner and
Assignee upon reasonable request;
(k) evidence of approval from the appropriate Governmental Authority
of Owner's application for EWG status or a representation that Agent has
not received, nor is aware or has any knowledge of, any objections to such
application for EWG status; and
(m) if requested by Owner and Assignee, an opinion of Morrill Thomas
Nooney & Braun, LLP, local counsel and project counsel for Agent, in form
and substance reasonably satisfactory to Owner and Assignee.
SECTION 10. NEGATIVE COVENANTS.
Agent hereby agrees that, so long as this Agreement remains in effect,
Agent shall not directly or indirectly:
10.1 Changes in Plans. (a) Modify or supplement in any material respect the
Plans without the prior written consent of Owner and Assignee and (if required)
of all Governmental Authorities which previously have approved the matters to be
changed or (b) issue, direct, authorize, consent to or permit to be effective
any change order under the EPC Contract that could reasonably be expected to
have a material adverse effect on the construction, operation,
50
maintenance, leasing, ownership, use, value or regulatory status of the Project,
without the prior written consent of Owner and Assignee.
10.2 Prohibition of Fundamental Changes. Consolidate with or merge into any
other Person except as set forth in Section 25 of the Lease, provided that the
term "Owner" shall substitute for the term "the Lessor" and the term "Agent"
shall substitute for the term "the Lessee".
10.3 Assignment of Obligations. Assign any of its obligations hereunder to
any other party, except to an Affiliate of Agent; provided, that (i) such
Affiliate shall assume the obligations of Agent hereunder, under the Lease, the
Construction Documents and the Project Contracts, by execution and delivery of
instruments satisfactory to Owner and Assignee (including, without limitation,
consents under the applicable Construction Documents and Project Contracts (if
required), the execution of an assignment and assumption agreement and the
reaffirmation of the Guaranty, in each case in form and substance satisfactory
to Owner and Assignee), (ii) no Potential Default, Potential Event of Project
Termination, Event of Default or Event of Project Termination shall occur by
reason of giving effect to such assignment, (iii) such assignment shall not
affect Agent's or such successor agent's ability to achieve Substantial
Completion within the Budget by the Completion Date, and (iv) such assignee
shall have complied with any requirements set forth in the Project Contracts.
10.4 Project Contracts. (a) Create, incur, assume or permit to exist any
Lien (other than the Lien of the Pledge Agreement) upon Agent's rights with
respect to any Project Contract, or sell or assign Agent's interest in any
Project Contract, other than as permitted pursuant to a Financing Arrangement
and the Pledge Agreement, or (b) without the prior written consent of Owner and
any Assignee, terminate any Project Contract (except for the expiration of the
EPC Contract in accordance with its terms), or amend, modify, supplement,
restate, replace, grant any consent under, or grant or request any waiver
pursuant to any Project Contract (other than change orders in the manner and to
the extent permitted under Article 8 of the EPC Contract, and any amendment,
modification, supplement, restatement, consent or waiver which could not
reasonably be expected to have a material adverse effect on (i) the
construction, operation, maintenance, leasing, ownership, use, value or
regulatory status of the Project, (ii) the ability of Agent to observe and
perform its obligations under this Agreement, the Lease, the Pledge Agreement,
the Facility Support Agreement, the Consent, the Project Contracts or the
Construction Documents in a timely manner or the ability of the Guarantor to
perform its obligations under the Guaranty in a timely manner, (iii) the
business, assets, properties, financial condition, operations or prospects of
Agent or the Guarantor, or (iv) the rights or interests of Owner or Assignee
under this Agreement, the Lease, the Pledge Agreement, the Facility Support
Agreement, the Construction Documents, the Consent or the Project Contracts).
10.5 No Liens. Agent shall not, without the prior written consent of Owner,
create, incur, assume or permit to exist any Lien upon the Project or create any
Lien upon the Premises other than Permitted Liens.
10.6 Additional Project Costs. Upon the occurrence of a Material Adverse
Change or an Event of Project Termination, Agent shall not, without the prior
written consent of Owner and
51
Assignee, incur any Project Costs, or seek reimbursement from Owner pursuant to
Section 5, 6 or 7 hereof of any Project Costs incurred after the occurrence of a
Material Adverse Change or such Event of Project Termination, as the case may
be.
10.7 Environmental. Agent shall not use or dispose of any Contaminant or
allow any Contaminant to be brought onto or stored or used on or transported or
Released to or from the Project, other than in the ordinary course of business
and in compliance in all material respects with all applicable Environmental
Requirements.
SECTION 11. EVENTS OF DEFAULT AND EVENTS OF PROJECT TERMINATION.
11.1 Events of Default. The occurrence of any of the following shall
constitute an Event of Default:
(a) Involuntary Bankruptcy, Etc. The entry of a decree or order for
relief in respect of Agent or the Guarantor by a court having jurisdiction
in the premises or the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of Agent or the
Guarantor or of any substantial part of Agent's or the Guarantor's
property, or ordering the winding up or liquidation of Agent's or the
Guarantor's affairs, in an involuntary case under the Federal bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal or
state bankruptcy, insolvency or other similar law, and such decree or order
remains unstayed and in effect for thirty (30) consecutive days; or the
commencement against Agent or the Guarantor of an involuntary case under
the Federal bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal or state bankruptcy, insolvency or other similar law,
and the continuance of any such case unstayed and in effect for a period of
thirty (30) consecutive days.
(b) Voluntary Bankruptcy, Etc. The suspension or discontinuance of
Agent's or the Guarantor's business operations, or Agent's or the
Guarantor's insolvency (however evidenced), or Agent's or the Guarantor's
admission of insolvency or bankruptcy, or the commencement by Agent or the
Guarantor of a voluntary case under the Federal bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal or state bankruptcy,
insolvency or other similar law, or the consent by Agent or the Guarantor
to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of
Agent or the Guarantor or of any substantial part of Agent's or the
Guarantor's property, or the making by Agent or the Guarantor of an
assignment for the benefit of creditors, or the failure of Agent or the
Guarantor generally to pay its debts as such debts become due, or the
taking of corporate action by Agent or the Guarantor in furtherance of any
such action.
(c) Environmental Matters. The occurrence of any event or circumstance
relating to Environmental Matters that (A) has arisen directly or
indirectly from Agent's
52
actions or failures to act or from any actions or
failures to act on the part of any contractors or subcontractors of Agent
and (B) has had or could reasonably be expected to have a material adverse
effect on (i) the construction, operation, maintenance, leasing, ownership,
use, value or regulatory status of the Project, (ii) the ability of Agent
to observe and perform its obligations under this Agreement, the Lease, the
Pledge Agreement, the Facility Support Agreement, the Consent or the
Project Contracts in a timely manner or the ability of the Guarantor to
perform its obligations under the Guaranty in a timely manner, (iii) the
business, assets, properties, financial condition, operations or prospects
of Agent or the Guarantor, or (iv) the rights or interests of Owner or
Assignee under this Agreement, the Lease, the Pledge Agreement, the
Facility Support Agreement, the Construction Documents, the Consent or the
Project Contracts.
(d) Other Events. Any of the events referred to in subsection 11.3
hereof shall occur as a result of any direct or indirect fraudulent act,
illegal act, misapplication of funds or willful misconduct on the part of
Agent or any Person directly or indirectly controlling Agent or under the
direct or indirect control of Agent.
(e) Other Defaults. Agent, or any Person under the direct or indirect
control of Agent, shall commit, directly or indirectly, any fraudulent act,
illegal act, willful misconduct or misapplication of funds, including,
without limitation, Agent's failure to comply with the covenant contained
in subsection 9.23 hereof.
11.2 Owner's Rights upon an Event of Default. Upon the occurrence and
continuation of any Event of Default, Owner may in its discretion declare this
Agreement to be in default and do any one or more of the following:
(a) Terminate this Agreement and/or Owner's obligations to make any
further advances hereunder;
(b) Take immediate possession of the Project and remove any equipment
or property of Owner in the possession of Agent, wherever situated, and for
such purpose, enter upon the Premises without liability to Agent for so
doing;
(c) Whether or not any action has been taken under (a) or (b) above,
sell Owner's interest in the Project (with or without the concurrence or
request of Agent);
(d) Hold, use, occupy, operate, repair, remove, lease, sublease or
keep idle the Project as Owner in its sole discretion may determine,
without any duty to mitigate damages with respect to any such action or
inaction or with respect to any proceeds thereof; and
(e) Exercise any other right or remedy which may be available under
applicable law and in general proceed by appropriate judicial proceedings,
either at law or in equity, to enforce the terms hereof or to recover
damages provided for in this subsection 11.2.
53
Suit or suits for the recovery of any default in the payment of any sum due
hereunder or for damages may be brought by Owner from time to time at Owner's
election, and nothing herein contained shall be deemed to require Owner to await
the date whereon this Agreement or the term hereof would have expired by
limitation had there been no such default by Agent or no such termination or
cancellation.
The receipt of any payments under this Agreement by Owner with knowledge of
any breach of this Agreement by Agent or of any default by Agent in the
performance of any of the terms, covenants or conditions of this Agreement,
shall not be deemed to be a waiver of any provision of this Agreement.
No receipt of moneys by Owner from Agent after the termination or
cancellation hereof in any lawful manner shall reinstate or continue this
Agreement, or operate as a waiver of the right of Owner to recover possession of
the Project by proper suit, action, proceedings or remedy or operate as a waiver
of the right to receive any and all amounts owing by Agent to or on behalf of
Owner hereunder; it being agreed that, after the service of notice to terminate
or cancel this Agreement, and the expiration of the time therein specified, if
the default has not been cured in the meantime, or after the commencement of
suit, action or summary proceedings or of any other remedy, or after a final
order, warrant or judgment for the possession of the Project, Owner may demand,
receive and collect any moneys payable hereunder, without in any manner
affecting such notice, proceedings, suit, action, order, warrant or judgment.
Acceptance of the keys to the Project, or any similar act, by Owner, or any
agent or employee of Owner, during the term hereof, shall not be deemed to be an
acceptance of a surrender of the Project unless Owner and Assignee shall consent
thereto in writing.
After any Event of Default, Agent shall be liable for, and Owner may
recover from Agent, (i) all amounts payable pursuant to Section 12 hereof, and
(ii) all of the losses, damages, costs and expenses (including, without
limitation, attorneys' fees and expenses incurred by Owner and any Assignee in
connection with the exercise of their remedies hereunder, filing fees and sales
or transfer taxes and all costs and expenses related to (x) the conduct of
investigations, studies, sampling and/or testing of the Premises and (y) the
taking of any action, including, without limitation, any remedial measures or
removal with respect to the Premises, each as required by an Assignee pursuant
to the terms of a Financing Arrangement) sustained by Owner by reason of such
Event of Default and the exercise of Owner's remedies with respect thereto,
including, without limitation, in the event of a sale by Owner of its interest
in the Project pursuant to this subsection 11.2, all costs and expenses
associated with such sale, and all other amounts owing by Agent hereunder that
are not covered by the liquidated damages provisions of this Agreement,
excluding, in all cases, costs or expenses included in the Acquisition Cost. The
amounts payable in clauses (i) and (ii) above are hereinafter sometimes referred
to as the "Accrued Default Obligations".
After an Event of Default, Owner may sell its interest in the Project upon
any terms that Owner deems satisfactory, free of any rights of Agent or any
Person claiming through or under Agent (including, without limitation, any
rights hereunder or under the Lease or the Project Contracts). In the event of
any such sale, in addition to the Accrued Default Obligations, Owner shall be
entitled to recover from Agent, as liquidated damages and not as a penalty, an
amount
54
equal to the Acquisition Cost, minus the proceeds of such sale received
by Owner. Proceeds of sale received by Owner in excess of the Acquisition Cost
shall be credited against the Accrued Default Obligations Agent is required to
pay under this subsection 11.2. If such excess proceeds and/or such amounts
exceed the Accrued Default Obligations plus the Unrecovered Liabilities and
Judgments, and if Agent has indefeasibly paid all other amounts required to be
paid under this subsection 11.2, such excess shall be paid by Owner to Agent;
provided, however, that Agent shall be liable for any Unrecovered Liabilities
and Judgments that arise after the payment of such excess proceeds to the extent
such Unrecovered Liabilities and Judgments arise from or relate to acts or
omissions occurring, or circumstances or conditions created or existing, at any
time as of or prior to the expiration or termination of this Agreement. As an
alternative to any such sale, or if Agent converts the Project after an Event of
Default, or if the Project is lost or destroyed after an Event of Default has
occurred, in addition to the Accrued Default Obligations, Owner may cause Agent
to pay to Owner, and Agent shall pay to Owner, as liquidated damages and not as
a penalty, an amount equal to the Acquisition Cost, and Owner shall have no
further obligation to reimburse Agent for any Unreimbursed Project Costs. In the
event Owner receives indefeasible payment of the Acquisition Cost, the Accrued
Default Obligations and the Unrecovered Liabilities and Judgments, Owner shall
transfer all of Owner's right, title and interest in and to the Project,
including without limitation, the delivery of the documents contemplated in
Section 14 below, to Agent.
In the event of a sale pursuant to this subsection 11.2, upon indefeasible
receipt by Owner of the amounts payable hereunder, Owner shall transfer all of
Owner's right, title and interest in and to the Project to a purchaser other
than Agent or to Agent, as the case may be.
In the event Owner is not paid an amount equal to the Acquisition Cost plus
the Accrued Default Obligations and Unrecovered Liabilities and Judgments, then,
in addition to Owner's other rights in this subsection 11.2, Agent shall upon
Owner's request (i) assign (or if not legally assignable, cooperate and assist
to the extent necessary or required in the transfer or reissuance thereof) to
Owner (or to an assignee designated by Owner or Assignee), at no cost, all
right, title and interest of Agent in, to and under all Construction Documents,
Governmental Actions and Intellectual Property Rights needed for the equipping,
maintenance, operation or use of the Project and obtained and held by Agent at
that time, (ii) assign to Owner (or to a foreclosure purchaser designated by
Owner or Assignee), at no cost, all right, title and interest of Agent in, to
and under the Project Contracts, and in the event any additional consent of any
party to a Project Contract is required as a precondition thereunder to an
assignment to any other third party assignee designated by Owner or Assignee,
use its best efforts to obtain any such required consent to such proposed
non-foreclosure assignment and assumption of the Project Contracts and (iii)
assign to Owner, at no cost, all right, title and interest of Agent in, to and
under all service agreements in existence at the time of such sale and
transferable by Agent and easements available to Agent and transferable by Agent
in connection with the equipping, maintenance, operation or use of the Project.
Agent acknowledges that it would be difficult to ascertain the value to Owner of
Agent's agreement to assign, transfer or have reissued to Owner such
Construction Documents, Governmental Actions and Intellectual Property Rights,
to assign such Project Contracts (and, if necessary, to obtain such consents to
such assignment) and to assign to Owner such service agreements and easements or
to adequately compensate Owner by an award
55
of damages for Agent's failure to assign to Owner such Construction Documents,
Governmental Actions and Intellectual Property Rights, to assign such Project
Contracts (and, if necessary, to obtain such consents to such assignment) and to
assign to Owner such service agreements and easements, and that therefore Owner
would not have an adequate remedy at law for breach by Agent of its agreement
hereunder to Owner. Accordingly, Agent acknowledges that Owner shall be entitled
to obtain specific performance of Agent's obligation to assign to Owner such
Construction Documents, Governmental Actions and Intellectual Property Rights,
to obtain such consents to such assignment and to assign to Owner the service
agreements and easements. In the event Agent fails to obtain any consents
required in clause (ii) of the third preceding sentence, at the request of Owner
or such purchaser, as the case may be, Agent shall agree to (1) at the expense
of such purchaser or Owner, as the case may be, continue to perform under and
maintain in full force and effect the Project Contracts and pay all sums
received under the Project Contracts to such third party or Owner, as the case
may be, (2) at the expense of such third party or Owner, as the case may be, and
subject to receipt of indemnification reasonably acceptable to Agent, take all
actions requested by such third party or Owner, as the case may be, with respect
to such Project Contracts (including all actions with respect to the enforcement
of Agent's rights and remedies under such Project Contracts), and (3) not amend,
modify, supplement, waive a provision of, grant any consent under or terminate
any such Project Contract without the prior written consent of such third party
or Owner, as the case may be.
In addition to its other rights in this subsection 11.2, Owner may exercise
its various rights under the Facility Support Agreement or transfer such rights
to the purchaser in a sale and Agent acknowledges hereby its agreement to
perform its obligations thereunder.
No remedy referred to in this subsection 11.2 is intended to be exclusive,
but each shall be cumulative and in addition to any other remedy referred to
above or otherwise available to Owner at law or in equity, and the exercise in
whole or in part by Owner of any one or more of such remedies shall not preclude
the simultaneous or later exercise by Owner of any or all such other remedies.
No waiver by Owner of any Event of Default hereunder shall in any way be, or be
construed to be, a waiver of any future or subsequent Event of Default.
With respect to the termination of this Agreement as a result of an Event
of Default, Agent hereby waives service of any notice of intention to re-enter.
To the extent permitted by applicable law, Agent hereby waives any and all
rights to recover or regain possession of the Project or to reinstate this
Agreement as permitted or provided by or under any statute, law or decision now
or hereafter in force and effect.
11.3 Events of Project Termination. The occurrence of any of the following
(which does not constitute an Event of Default, except to the extent
contemplated by subsection 11.1(d) hereof) shall constitute an Event of Project
Termination:
(a) Failure to Complete. If (i) as of the close of business on the
Completion Date, Substantial Completion has not occurred as herein provided
or (ii) the Certificate of Substantial Completion has not been executed and
delivered by the Completion Date.
56
(b) Failure to Make Payments. Failure of Agent to pay amounts due to
Owner at the time of any scheduled sale of the Project hereunder or upon
any date of purchase or termination of the Project as contemplated herein
under subsection 11.2, 11.4 (including, without limitation, failure to pay
the Loss Payment when due) or 18.11 hereof, or failure of Agent to pay any
other amount hereunder within ten (10) days from demand for such payment,
to the extent demand is required, and, if not required, from the date due.
(c) Other Defaults. Agent shall default in the performance or
observance of any other term, covenant, condition or obligation contained
in this Agreement and, in the case of such default (other than a default
arising under subsection 9.3, 9.6(iii), 9.7, 9.18, 9.20 or 9.24 hereof,
each of which shall not be subject to any grace period, or as otherwise
provided in this subsection 11.3), such default shall continue for thirty
(30) days after the earlier of the date (i) Agent becomes aware of such
default or (ii) written notice shall have been given to Agent by Owner
specifying such default and requiring such default to be remedied.
(d) Defaults under Construction Documents. Any default by Agent shall
occur under any of the Construction Documents which could reasonably be
expected to have a material adverse effect on (i) the construction,
operation, maintenance, leasing, ownership, use, value or regulatory status
of the Project, (ii) the ability of Agent to observe and perform its
obligations under this Agreement, the Lease, the Pledge Agreement, the
Facility Support Agreement, the Consent or the Project Contracts in a
timely manner or the ability of the Guarantor to perform its obligations
under the Guaranty in a timely manner, (iii) the business, assets,
properties, financial condition, operations or prospects of Agent or the
Guarantor or (iv) the rights or interests of Owner or Assignee under this
Agreement, the Lease, the Pledge Agreement, the Facility Support Agreement,
the Construction Documents, the Consent or the Project Contracts and any
required notice shall have been given and/or any applicable grace period
shall have expired and such default shall not have been cured by Agent or
waived by Owner and Assignee in writing prior to the expiration of such
grace period.
(e) Negative Covenants. Agent shall default in the performance or
observance of any agreement, covenant or condition contained in Section 10
hereof.
(f) Misrepresentations. Any representation or warranty made by Agent
herein or in any Consent or which is contained in any certificate, document
or financial or other statement furnished under or in connection with this
Agreement shall prove to have been false, misleading or inaccurate in any
material respect on or as of the date made or deemed made.
(g) Other Security Agreements. If (i) Agent executes any chattel
mortgage or other security agreement on a material amount of any materials,
fixtures or articles of personal property used in the construction or
operation of the Project or if a material amount of any such materials,
fixtures or articles are purchased pursuant to any conditional sales
contract or other security agreement or otherwise so that the title thereto
will not vest in Owner, free from encumbrance, except Permitted Liens or
(ii) any such materials, fixtures or articles are not in accordance with
the Plans or (iii) Agent does not furnish to Owner upon request the
contracts, bills of sale, statements, receipted vouchers and other
agreements and documents, or any of them, under which Owner claims title to
such materials, fixtures or articles.
57
(h) Permits. (i) If Agent, after using its best efforts, shall fail to
obtain or be unable to obtain any Permit by the date such Permit is needed,
and such failure shall occur as a result of Agent's actions or failures to
act or from any actions or failures to act on the part of any contractors
or subcontractors of Agent, or (ii) if any Permit shall be modified,
revoked or otherwise cease to be in full force and effect unless Agent
shall have obtained reinstatement or reissuance of such Permit within
thirty (30) days after the revocation or expiration thereof, or if such
reinstatement or reissuance is of a nature that it cannot be completely
effected within thirty (30) days, Owner and Assignee shall be reasonably
satisfied that such reinstatement or reissuance will be effected and the
delay in such reinstatement or reissuance will not have a material adverse
effect on (a) the construction, operation, maintenance, leasing, ownership,
use, value or regulatory status of the Project, (b) the ability of Agent to
observe and perform its obligations under this Agreement, the Lease, the
Pledge Agreement, the Facility Support Agreement, the Consent, the
Construction Documents or the Project Contracts in a timely manner or the
ability of the Guarantor to perform its obligations under the Guaranty in a
timely manner, (c) the business, assets, properties, financial condition,
operations or prospects of Agent or the Guarantor, or (d) the rights or
interests of Owner or Assignee under this Agreement, the Lease, the Pledge
Agreement, the Facility Support Agreement, the Construction Documents, the
Consent or the Project Contracts, and Agent shall have diligently commenced
application for such reinstatement or reissuance and shall thereafter be
diligently proceeding to complete said reinstatement or reissuance.
(i) Environmental Matters. The occurrence of any event or circumstance
relating to Environmental Matters (other than any event or circumstance
described in paragraph (c) of subsection 11.1 hereof) that has had or could
reasonably be expected to have a material adverse effect on (i) the
construction, operation, maintenance, leasing, ownership, use, value or
regulatory status of the Project, (ii) the ability of Agent to observe and
perform its obligations under this Agreement, the Lease, the Pledge
Agreement, the Facility Support Agreement, the Consent or the Project
Contracts in a timely manner or the ability of the Guarantor to perform its
obligations under the Guaranty in a timely manner, (iii) the business,
assets, properties, financial condition, operations or prospects of Agent
or the Guarantor, or (iv) the rights or interests of Owner or Assignee
under this Agreement, the Lease, the Pledge Agreement, the Facility Support
Agreement, the Construction Documents, the Consent or the Project
Contracts.
(j) Event of Loss. An Event of Loss shall occur as a result of Agent's
actions or failure to act or from any actions or failures to act on the
part of any contractors or subcontractors of Agent.
(k) Payment of Obligations. Agent or the Guarantor or any of its
Material Subsidiaries shall fail to pay any principal of or premium or
interest on any Indebtedness
58
which is outstanding in a principal amount of
at least $10,000,000 in the aggregate of Agent or the Guarantor or any such
Material Subsidiary (as the case may be), when the same becomes due and
payable (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise), and such failure shall continue after the applicable
grace period, if any, specified in the agreement or instrument relating to
such Indebtedness; or any other event shall occur or condition shall exist
under any agreement or instrument relating to any such Indebtedness and
shall continue after the applicable grace period, if any, specified in such
agreement or instrument, if the effect of such event or condition is to
accelerate, or to permit the acceleration of, the scheduled maturity of
such Indebtedness; or any such Indebtedness shall be declared to be due and
payable, or required to be prepaid (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof.
(l) Undischarged Judgments. Final judgment or judgments for the
payment of money in excess of $10,000,000 in the aggregate shall be
rendered against Agent or the Guarantor by any court of competent
jurisdiction and the same shall remain undischarged for a period of thirty
(30) days, during which execution of such judgment or judgments shall not
be effectively stayed.
(m) Ground Lease. One or more of the events referred to in the Ground
Lease shall occur which would cause the Ground Lease to terminate without
notice or action by the landlord thereunder or which would entitle the
landlord under the Ground Lease to terminate the Ground Lease and the term
thereof by the giving of notice to Owner without opportunity to cure, as
tenant thereunder, or if the Ground Lease shall be terminated or canceled
for any reason or under any circumstance whatsoever.
(n) The Pledge Agreement. (i) The Pledge Agreement ceases to be in
full force and effect, (ii) Agent defaults in the performance of any
obligation or covenant contained in the Pledge Agreement, any required
notice of such default shall have been given, and any applicable grace
period shall have expired, or (iii) the representation contained in the
second or third sentence of subsection 8.19 shall at any time become
untrue.
(o) The Guaranty. (i) The Guaranty ceases to be in full force and
effect prior to the termination thereof in accordance with its terms, (ii)
the Guarantor asserts that the Guaranty is not valid or in full force and
effect, (iii) the Guarantor shall take any action which impairs in any
material respect the ability of the Guarantor to fulfill its obligations
under the Guaranty, (iv) the Guarantor defaults in the performance of any
obligation or covenant contained in the Guaranty, any required notice of
such default shall have been given, and any applicable grace period shall
have expired, or (v) an Event of Default (as defined in the Guaranty) shall
occur under the Guaranty.
(p) Guarantor Representations. Any representation or warranty made by
the Guarantor in the Guaranty or in any Consent or in any document
contemplated hereby or thereby shall prove to have been false, misleading
or inaccurate in any material respect on or as of the date made or deemed
made.
59
(q) Project Contracts.
(i) If Agent shall receive notice from a party to any Project
Contract alleging or asserting that such party has (or after the
passage of any applicable grace period will have) the right to
terminate such Project Contract, or that such Project Contract is
being terminated by such party, as a result of a default by Agent
under such Project Contract; or
(ii) If a party to any Project Contract has received notice from
Agent that such Project Contract is being terminated by Agent without
the prior written consent of Owner and Assignee (other than as a
result of a default by such party); or
(iii) If any default by Agent shall occur under any of the
Project Contracts which would, after the giving of any required notice
and/or the expiration of any applicable grace period, entitle the
other party to such Project Contract to terminate such Project
Contract as a result of such default by Agent.
11.4 Owner's Rights upon Event of Project Termination. Upon the occurrence
and continuation of any Event of Project Termination, Owner may do any one or
more of the following (subject to the provisions of subsection 18.11 of this
Agreement):
(i) Terminate this Agreement and/or Owner's obligations to make
any further advances hereunder;
(ii) Take immediate possession of the Project and remove any or
all other equipment or property of Owner in the possession of Agent,
wherever situated, and for such purpose, enter upon the Premises
without liability to Agent for so doing;
(iii) Whether or not any action has been taken under clause (i)
or (ii) above, sell Owner's interest in the Project (with or without
the concurrence or request of Agent);
(iv) Hold, use, occupy, operate, repair, remove, lease or keep
idle the Project as Owner in its sole discretion may determine,
without any duty to mitigate damages with respect to any such action
or inaction or with respect to any proceeds thereof; and
(v) Exercise any other right or remedy which may be available
under applicable law and in general proceed by appropriate judicial
proceedings, either at law or in equity, to enforce the terms hereof
or to recover damages provided for in this subsection 11.4 hereof.
Suit or suits for the recovery of any failure to pay any sum due hereunder
or for damages may be brought by Owner from time to time at Owner's election,
and nothing herein contained shall be deemed to require Owner to await the date
whereon this Agreement or the term hereof
60
would have expired by limitation had there been no such Event of Project
Termination or no such termination or cancellation.
The receipt of any payments under this Agreement by Owner with knowledge of
any Event of Project Termination shall not be deemed to be a waiver of any
provision of this Agreement.
No receipt of moneys by Owner from Agent after the termination or
cancellation hereof in any lawful manner shall reinstate, continue or extend
this Agreement, or operate as a waiver of the right of Owner to recover
possession of the Project by proper suit, action, proceedings or remedy or
operate as a waiver of the right to receive any and all amounts owing by Agent
to or on behalf of Owner hereunder; it being agreed that, after the service of
notice to terminate or cancel this Agreement, and the expiration of the time
therein specified, if the Event of Project Termination has not been cured in the
meantime, or after the commencement of any suit, action or summary proceedings
or of any other remedy, or after a final order, warrant or judgment for the
possession of the Project, Owner may demand, receive and collect any moneys
payable hereunder, without in any manner affecting such notice, proceedings,
suit, action, order, warrant or judgment. Acceptance of the keys to the Project,
or any similar act, by Owner, or any agent or employee of Owner, during the term
hereof, shall not be deemed to be an acceptance of a surrender of the Project
unless Owner and Assignee shall consent thereto in writing.
After an Event of Project Termination, Owner may sell its interest in the
Project upon any terms that Owner deems satisfactory, free of any rights of
Agent or any Person claiming through or under Agent (including, without
limitation, any rights hereunder or under the Lease or the Project Contracts).
In the event of any such sale, in addition to all amounts payable pursuant to
Section 12 hereof and any other provision hereof, Owner shall be entitled to
recover from Agent, as liquidated damages and not as a penalty, an amount equal
to the Loss Payment. Proceeds of sale received by Owner in excess of the
Acquisition Cost less the Loss Payment shall be credited against the Accrued
Project Termination Obligations and all amounts payable pursuant to Section 12
hereof and any other provision hereof. If such excess proceeds exceed the sum of
(i) the Accrued Project Termination Obligations and all amounts payable pursuant
to Section 12 hereof and any other provision hereof, plus (ii) the Unrecovered
Liabilities and Judgments and if Agent has indefeasibly paid the Loss Payment,
the Accrued Project Termination Obligations and all amounts payable pursuant to
Section 12 hereof and any other provision hereof and the Unrecovered Liabilities
and Judgments, and if Agent has indefeasibly paid all other amounts required to
be paid under this subsection 11.4, such excess shall be paid by Owner to Agent;
provided, however, that Agent shall be liable for any Unrecovered Liabilities
and Judgments that arise after the payment of such excess proceeds to the extent
such Unrecovered Liabilities and Judgments arise from or relate to acts or
omissions occurring, or circumstances or conditions created or existing, at any
time as of or prior to the expiration or termination of this Agreement. As an
alternative to any such sale, in addition to all amounts payable pursuant to
Section 12 hereof and any other provision hereof, Owner may (and, at the
direction of Assignee, shall) cause Agent to pay to Owner upon the occurrence of
an Event of Project Termination, and Agent shall pay to Owner upon the
occurrence of an Event of Project Termination, as liquidated damages and not as
a penalty, an amount equal to the Loss Payment. If Agent converts the Project or
any part thereof after an Event of Project Termination, or if the Project is
lost or destroyed as a result
61
of Agent's fraudulent act, illegal act, misapplication of funds or willful
misconduct at the time of the Event of Project Termination, in addition to the
Accrued Project Termination Obligations and all amounts payable pursuant to
Section 12 hereof and any other provision hereof, Owner may cause Agent to pay
to Owner, and Agent shall pay to Owner, as liquidated damages and not as a
penalty, an amount equal to the Acquisition Cost, and Owner shall have no
further obligation to reimburse Agent for any Unreimbursed Project Costs. In the
event Owner receives indefeasible payment of the Acquisition Cost, the Accrued
Project Termination Obligations and all amounts payable pursuant to Section 12
hereof and the Unrecovered Liabilities and Judgments, Owner shall transfer all
of Owner's right, title and interest in and to the Project, including without
limitation, the delivery of the documents contemplated in Section 14 below, to
Agent.
In the event of a sale pursuant to this subsection 11.4, upon
indefeasible receipt by Owner of the amounts payable hereunder, Owner shall
transfer all of Owner's right, title and interest in and to the Project to a
purchaser other than Agent or to Agent, as the case may be.
In the event Owner is not paid an amount equal to the Acquisition Cost
plus the Accrued Project Termination Obligations and all amounts payable
pursuant to Section 12 hereof and all Unrecovered Liabilities and Judgments,
then, in addition to Owner's other rights in this subsection 11.4, Agent shall
upon Owner's request (i) assign (or, if not legally assignable, cooperate and
assist to the extent necessary or required in the transfer or reissuance
thereof) to Owner (or to an assignee designated by Owner or Assignee), at no
cost, all right, title and interest of Agent in, to and under all Construction
Documents, Governmental Actions and Intellectual Property Rights needed for the
equipping, maintenance, operation or use of the Project and obtained and held by
Agent at that time, (ii) assign to Owner (or to a foreclosure purchaser
designated by Owner or Assignee), at no cost, all right, title and interest of
Agent in, to and under the Project Contracts, and in the event any additional
consent of any party to a Project Contract is required as a precondition
thereunder to an assignment to any other third party assignee designated by
Owner or Assignee, and use its best efforts to obtain any such required consent
to such proposed non-foreclosure assignment and assumption of the Project
Contracts, and (iii) assign to Owner, at no cost, all right, title and interest
of Agent in, to and under all service agreements in existence at the time of
such sale and easements available to Agent in connection with the equipping,
maintenance, operation or use of the Project. Agent acknowledges that it would
be difficult to ascertain the value to Owner of Agent's agreement to assign,
transfer or have reissued to Owner such Construction Documents, Governmental
Actions and Intellectual Property Rights, to assign such Project Contracts (and,
if necessary, to obtain such consents to such assignment) and to assign to Owner
such service agreements and easements or to adequately compensate Owner by an
award of damages for Agent's failure to assign to Owner such Construction
Documents, Governmental Actions and Intellectual Property Rights, to assign such
Project Contracts (and, if necessary, to obtain such consents to such
assignment) and to assign to Owner such service agreements and easements, and
that therefore Owner would not have an adequate remedy at law for breach by
Agent of its agreement hereunder to Owner. Accordingly, Agent acknowledges that
Owner shall be entitled to obtain specific performance of Agent's obligation to
assign to Owner such Construction Documents, Governmental Actions and
Intellectual Property Rights, to obtain such consents to such assignment, and to
assign to Owner the service agreements and easements. In the event Agent fails
to obtain any consents required in clause (ii) of the third preceding sentence,
at the request
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of Owner or such purchaser, as the case may be, Agent shall agree to (A) at the
expense of such purchaser or Owner, as the case may be, continue to perform
under and maintain in full force and effect the Project Contracts and pay all
sums received under the Project Contracts to such third party or Owner, as the
case may be, (B) at the expense of such third party or Owner, as the case may
be, and subject to receipt of indemnification reasonably acceptable to Agent,
take all actions requested by such third party or Owner, as the case may be,
with respect to such Project Contracts (including all actions with respect to
the enforcement of Agent's rights and remedies under such Project Contracts),
and (C) not amend, modify, supplement, waive a provision of, grant any consent
under or terminate any such Project Contract without the prior written consent
of such third party or Owner, as the case may be.
In addition to its other rights in this subsection 11.4, Owner may
exercise its various rights under the Facility Support Agreement or transfer
such rights to the purchaser in a sale and Agent acknowledges hereby its
agreement to perform its obligations thereunder.
No remedy referred to in this subsection 11.4 is intended to be exclusive,
but each shall be cumulative and in addition to any other right referred to
above or otherwise available to Owner at law or in equity, and the exercise in
whole or in part by Owner of any one or more of such rights shall not preclude
the simultaneous or later exercise by Owner of any or all such other rights. No
waiver by Owner of any Event of Project Termination hereunder shall in any way
be, or be construed to be, a waiver of any future or subsequent Event of Project
Termination.
With respect to the termination of this Agreement as a result of an Event
of Project Termination, Agent hereby waives service of any notice of intention
to re-enter. To the extent permitted by applicable law, Agent hereby waives any
and all rights to recover or regain possession of the Project or to reinstate
this Agreement as permitted or provided by or under any statute, law or decision
now or hereafter in force and effect.
SECTION 12. INDEMNITIES.
(a) Agent shall indemnify, defend, protect and hold harmless Owner and each
successor or successors (each of the foregoing an "Indemnified Person") from and
against any and all liabilities (including, without limitation, strict liability
in tort), taxes, losses, obligations (including, without limitation, all
obligations of Owner under or in respect of any Financing Arrangement), claims,
damages, penalties, causes of action, suits, costs and expenses (including,
without limitation, reasonable attorneys', experts', consultants' and
accountants' fees and expenses) or judgments of any nature relating to or in any
way arising out of:
(i) the ordering, delivery, acquisition, purchase agreement for
the acquisition, construction, title on acquisition, rejection,
installation, possession, titling, retitling, registration,
re-registration, custody by Agent of title and registration documents,
use, non-use, misuse, financing, lease, sublease, security interest
in, operation, transportation, securing, repair, control, lease under
the Ground Lease or disposition of the Project or any portion thereof;
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(ii) the entering into, performance or enforcement of the Project
Contracts and the Construction Documents or any violation, or alleged
violation, of the Project Contracts and the Construction Documents;
(iii) any breach of a representation, warranty or covenant made
herein, in the Lease or in the Guaranty or which is contained in any
certificate, document or financial or other statement furnished by or
on behalf of Agent or the Guarantor under or in connection with this
Agreement, the Lease or the Guaranty;
(iv) any default by Agent in the performance or observance of any
term, covenant, condition or obligation contained in this Agreement or
any failure by Agent to comply with the Ground Lease, the Easements,
the Facility Support Agreement or any Project Contract; and
(v) any of the claims, liabilities, demands, fees, taxes,
violations of contract, or any other matter or situation described in
or contemplated by the indemnification provisions of subparagraphs (a)
and (b) of Section 11 of the Lease, except that this Agreement shall
substitute the terms "Owner" for "the Lessor" and "Agent" for "the
Lessee", or "this Agreement" for "this Lease", as the context shall
require and the term "Acquisition Cost" for purposes of this Section
12 shall mean Acquisition Cost as defined in this Agreement;
provided, that Agent shall only have to indemnify such Indemnified Person for
the matters described in this paragraph (a) to the extent caused directly or
indirectly by, or resulting directly or indirectly from Agent's actions or
failure to act while in possession or control of the Premises or the Project.
Agent and Owner hereby acknowledge and agree that, as used in this Section 12,
"Agent's actions or failure to act while in possession or control of the
Premises or the Project" include any action or failure to act on the part of any
subcontractors of Agent or any other Person permitted by Agent to enter upon the
Premises, provided that, for purposes of this Section 12, Agent shall be deemed
to be in possession and control of the Premises and Project as long as this
Agreement is in effect.
(b) In addition to Agent's obligations set forth in the foregoing paragraph
(a) above, Agent shall indemnify, defend, protect and hold harmless Owner, each
general and limited partner of Owner, Merrill, Merrill Lynch, Merrill Leasing,
each Assignee and their respective assigns and successors and each Affiliate
thereof, and their respective officers, directors, incorporators, shareholders,
members, partners, employees, agents and servants from and against any and all
Environmental Damages relating to or in any way arising out of the Project
arising from or relating to acts or omissions occurring, or circumstances or
conditions created or existing, at any time as of or prior to August 26, 1999.
Agent shall indemnify, defend, protect and hold harmless Owner and each
successor or successors from and against any and all Environmental Damages
arising from or relating to any period as of or prior to the Effective Date.
(c) The indemnification required under this Section 12 shall be upon the
terms provided in the paragraphs of Section 11 of the Lease following paragraph
(b) thereof, except
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that (i) this Agreement shall substitute the terms in the same manner as
described in subparagraph (a)(v) above and (ii) all references to "Indemnified
Person" in the Lease shall mean any Person entitled to indemnity under this
Section 12.
(d) The indemnities contained in this Section 12 shall survive and not be
affected by any expiration or termination of this Agreement.
(e) Agent agrees that any payment made by Agent to Owner hereunder, shall
constitute an acknowledgement that such payment is, as to Agent, in all
respects, in full compliance with the terms of this Section 12.
SECTION 13. LEASEHOLD INTEREST.
The provisions of paragraphs (a) and (c) of Section 28 of the Lease shall
govern the Ground Lease hereunder, except this Agreement shall substitute the
terms "Owner" for "the Lessor" and "Agent" for "the Lessee" and "Section 13" for
"Section 28".
SECTION 14. PURCHASE OF THE PROJECT.
In connection with, and as a condition to, the purchase of the Project by
Agent pursuant hereto, (a) Agent shall pay at the time of purchase, in addition
to the Acquisition Cost and all other amounts payable by Agent under this
Agreement, including, without limitation, all amounts payable pursuant to
Section 12 hereof and all losses, damages, costs and expenses (including,
without limitation, attorneys' fees and expenses, commissions, filing fees,
sales or transfer taxes, transfer gains taxes, mortgage recording tax, if any,
recording and filing fees and all other similar taxes, fees, expenses and
closing costs) sustained by Owner by reason of such purchase or in connection
with the conveyance of the Project to Agent and all other amounts owing
hereunder after taking into account such purchase, and (b) upon indefeasible
receipt of such amounts, Owner shall deliver to Agent a bill of sale, deed or
similar document assigning and conveying to Agent all of Owner's right, title
and interest in and to the Project, the Ground Lease, the Easements, the EPC
Contract and, if applicable, any Project Contract and, to the extent
transferable, any title insurance policies issued to Owner, and when Owner
transfers title, such transfer shall be on an as-is, non-installment sale basis,
without warranty by, or recourse to, Owner (provided that such purchase price,
exclusive of the other amounts payable hereunder in connection with such
purchase, shall equal the Acquisition Cost).
SECTION 15. EVENTS OF LOSS; TERMINATION UPON CERTAIN EVENTS.
(a) If (1) an Event of Loss shall occur and (2) such Event of Loss does not
arise as a result of Agent's actions or the failure of Agent to act or Agent's
fraudulent act, illegal act, misapplication of funds or willful misconduct, then
in any such event, (A) Agent shall promptly notify Owner in writing of such
event, (B) Agent shall either (x) promptly commence the restoration and
reconstruction of the Project or (y) promptly pay to Owner, an amount equal to
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the Acquisition Cost (less, to the extent any such amounts have been paid, the
amount of insurance or condemnation proceeds received by Owner as a result of
such Event of Loss). In the event Agent elects to restore and reconstruct the
Project pursuant to the immediately preceding sentence, (i) Owner shall continue
to be obligated to make advances to Agent pursuant to the terms of Section 5, 6
and 7 of this Agreement, (ii) any insurance or condemnation proceeds payable
with respect to such Event of Loss will be held in the Operating Account for
reimbursement to Agent during the course of Agent's restoration and
reconstruction of the Project pursuant to the provisions of Section 5, 6 and 7
of this Agreement, and (iii) any such insurance or condemnation proceeds
received by Owner shall reduce Acquisition Cost by the amount of such proceeds.
In the event Agent elects to pay Owner the amount described in clause (2)(B)(y)
of the first sentence of this paragraph (a), upon receipt of such amount, Owner
shall deliver to Agent a bill of sale, deed or similar document assigning and
conveying to Agent all of Owner's right, title and interest in and to the
Project, the Ground Lease, the Easements, the EPC Contract and, if applicable,
any Project Contract and, to the extent transferable, any title insurance
policies issued to Owner, and when Owner transfers title, such transfer shall be
on an as-is, non-installment sale basis, without warranty by, or recourse to,
Owner. Insurance and condemnation proceeds, if any, received by Owner in excess
of the Acquisition Cost plus the Unrecovered Liabilities and Judgments, so long
as no Event of Default or Event of Project Termination has occurred and is
continuing, shall be paid by Owner to Agent. In addition, Agent will use its
best efforts to prevent an Event of Loss, including, without limitation promptly
and with due diligence to contest such action by all appropriate proceedings at
law and in equity (including the filing of all appeals), to institute claims and
counterclaims against third parties and to do all things necessary or desirable
to preserve the rights and interests of Owner in the Project.
(b) This Agreement shall terminate and Agent shall be required to purchase
the Project under this Agreement upon the happening of the following events
during the term of this Agreement and Owner's written notice to Agent of Owner's
election to terminate this Agreement (a "Termination Event"): (1) an Event of
Loss occurs as a result of Agent's fraudulent act, illegal act, misapplication
of funds or willful misconduct, or (2) any cessation of construction of the
Project occurs for any period after the date construction shall commence in
excess of sixty (60) days in the aggregate arising as a result of any fraudulent
act, illegal act, misapplication of funds or willful misconduct on the part of
Agent. The date of the occurrence of any Termination Event is herein called the
"Termination Event Date".
(c) In the case of any Termination Event, this Agreement shall terminate on
the Termination Settlement Date. As soon as possible after Agent shall receive
notice of a Termination Event, Agent shall confirm notice thereof to Owner,
which confirming notice shall state that on the twentieth day of the calendar
month next succeeding the Termination Event Date (such date being herein called
the "Termination Settlement Date"), Agent shall be required to pay to Owner, as
the purchase price for Owner's interest in the Project, the Acquisition Cost as
of the Termination Settlement Date. In connection with any purchase under this
paragraph (c), on the Termination Settlement Date, Agent shall pay to Owner, in
addition to any purchase price payable, all amounts payable by Agent pursuant to
Section 12 hereof, all Unrecovered Liabilities and Judgments and all losses,
damages, costs and expenses (including, without limitation, attorneys' fees and
expenses, commissions, filing fees, sales or transfer taxes, transfer gains
taxes, mortgage recording tax, if any, recording and filing fees and all other
similar taxes,
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fees (including, without limitation, brokerage fees), expenses and closing costs
(including reasonable attorneys' fees)) sustained by Owner by reason of such
Termination Event or in connection with the conveyance of the Project to Agent
as contemplated herein, after taking into account such purchase. Upon the
delivery of Owner's notice to Agent as provided in this paragraph (c), Agent
shall become obligated to make the payment required on the Termination
Settlement Date to the same extent as if it had acknowledged in writing its
obligation so to do. Agent's obligation to make such payment if and when due
shall be unconditional and unaffected by any event or matter whatsoever.
SECTION 16. PERMITTED CONTESTS.
(a) Agent shall not be required, nor shall Owner have the right, to pay,
discharge or remove any tax, assessment, levy, fee, rent, charge or Lien, or to
comply or cause the Project to comply with any Legal Requirement applicable to
the Project or the occupancy, use or operation thereof, so long as no Potential
Default or Potential Event of Project Termination and no Event of Default, Event
of Project Termination or Termination Event exists under this Agreement, and, in
the reasonable judgment of Agent's counsel, Agent shall have reasonable grounds
to contest the existence, amount, applicability or validity thereof by
appropriate proceedings, which proceedings in the reasonable judgment of Owner
and Assignee, (i) shall not involve any danger that the Project or any portion
thereof would be subject to sale, forfeiture or loss, as a result of failure to
comply therewith, (ii) shall not affect the payment of any sums due and payable
hereunder, (iii) will not place either Owner or any Assignee in any danger of
civil liability or subject Owner or any Assignee to any danger of criminal
liability, (iv) if involving taxes, shall suspend the collection of the taxes
(unless Agent has provided a bond for the full amount in dispute), (v) are
consistent with prudent business practices, and (vi) shall be permitted under
and be conducted in accordance with the provisions of any other instrument to
which Agent or the Project is subject and shall not constitute a default
thereunder (the "Permitted Contest"). Agent shall conduct all Permitted Contests
in good faith and with due diligence and shall promptly after the final
determination (including appeals) of any Permitted Contest (or, if earlier, upon
any of the above criteria no longer being satisfied) pay and discharge all
amounts which shall be determined to be payable therein. Owner shall cooperate
in good faith with Agent with respect to all Permitted Contests conducted by
Agent pursuant to this Section 16.
(b) In the event Owner or any Assignee deems, in its reasonable discretion,
that its interests under this Agreement or in the Project are not adequately
protected in connection with a Permitted Contest brought by Agent as permitted
under this Section 16, Agent shall give such reasonable security, as may be
demanded by Owner or any Assignee to ensure payment of such tax, assessment,
levy, fee, rent, charge or Lien and compliance with Legal Requirements and to
prevent any sale or forfeiture of the Project or any portion thereof or any
amounts owing hereunder by reason of such nonpayment or noncompliance. Agent
hereby agrees that Owner may assign such security provided by Agent to any
Assignee.
(c) At least ten (10) Business Days prior to the commencement of any
Permitted Contest, Agent shall notify Owner and Assignee in writing of any such
proceeding in which the amount in contest exceeds $100,000, and shall describe
such proceeding in reasonable detail. In
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the event that a taxing authority or subdivision thereof proposes an additional
assessment or levy of any tax for which Agent is obligated to reimburse Owner
under this Agreement, or in the event that Owner is notified of the commencement
of an audit or similar proceeding which could result in such an additional
assessment, then Owner shall in a timely manner notify Agent in writing of such
proposed levy or proceeding.
SECTION 17. SALE OR ASSIGNMENT BY OWNER.
(a) Owner shall have the right to obtain debt and equity financing for the
acquisition and ownership of the Project by selling or assigning its right,
title and interest in any or all amounts due from Agent or any third Person
under this Agreement and granting a security interest in this Agreement and the
Project to a lender or lenders under a Financing Arrangement (or any entity
acting in the capacity of an agent in connection therewith), notice of the
identity of which has been given to Agent; provided that any sale or assignment
by Owner shall be made consistent with the terms of this Agreement and shall be
subject to Permitted Liens and the rights and interests of Agent under this
Agreement and the Lease.
(b) Any Assignee shall, except as otherwise agreed by Owner and such
Assignee, have all the rights, powers, privileges and remedies of Owner
hereunder, and Agent's obligations as between itself and such Assignee hereunder
shall not be subject to any claims or defense that Agent may have against Owner.
Upon written notice to Agent of any such assignment, Agent shall thereafter make
payments of any and all sums due hereunder to Assignee, to the extent specified
in such notice, and such payments shall discharge the obligation of Agent to
Owner hereunder to the extent of such payments. Anything contained herein to the
contrary notwithstanding, no Assignee shall be obligated to perform any duty,
covenant or condition required to be performed by Owner hereunder, and any such
duty, covenant or condition shall be and remain the sole obligation of Owner.
SECTION 18. GENERAL CONDITIONS.
The following conditions shall be applicable throughout the term of this
Agreement:
18.1 Survival. Except as otherwise provided in the Lease, all
agreements, indemnities, representations and warranties shall survive until the
expiration or other termination hereof, provided that (a) any obligations under
this Agreement accrued at the time of or related to periods prior to such
expiration or other termination (including, without limitation, any obligation
to pay Unrecovered Liabilities and Judgments) shall survive such expiration or
other termination, and (b) any obligation under this Agreement which is
expressly provided to be performed after or to survive the expiration or
termination of this Agreement shall survive the expiration or other termination
hereof.
18.2 No Waivers. No advance hereunder shall constitute a waiver of any of
the conditions of Owner's obligation to make further advances nor, in the event
Agent is unable to
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satisfy any such condition, shall any waiver of such condition have the effect
of precluding Owner from thereafter declaring such inability to be an Event of
Default or Event of Project Termination as herein provided. Any advance made by
Owner and any sums expended by Owner pursuant to this Agreement shall be deemed
to have been made pursuant to this Agreement, notwithstanding the existence of
an uncured Event of Default or Event of Project Termination. No advance shall
constitute a waiver of the right of Owner to require compliance with the
covenant contained in subsection 10.1 hereof with respect to any such defects or
material departures from any Plans not theretofore approved by Owner and
Assignee. No advance at a time when an Event of Default or Event of Project
Termination exists shall constitute a waiver of any right or remedy of Owner
existing by reason of such Event of Default or Event of Project Termination,
including, without limitation, the right to refuse to make further advances.
18.3 Owner and Assignee Sole Beneficiaries. All conditions of the
obligation of Owner to make advances hereunder are imposed solely and
exclusively for the benefit of Owner and any Assignee and their assigns, and no
other Person shall have standing to require satisfaction of such conditions in
accordance with their terms or be entitled to assume that Owner will refuse to
make advances in the absence of strict compliance with any or all thereof and no
other Person shall, under any circumstances, be deemed to be a beneficiary of
such conditions, any or all of which may be freely waived in whole or in part by
Owner, with the consent of Assignee, at any time if in its sole discretion it
deems it advisable to do so. Inspections and approvals of any Plans and the
Project and the workmanship and materials used therein impose no responsibility
or liability of any nature whatsoever on Owner or any Assignee, and no Person
shall, under any circumstances, be entitled to rely upon such inspections and
approvals by Owner or any Assignee for any reason.
18.4 No Offsets, Etc. The obligations of Agent to pay all amounts payable
pursuant to this Agreement (including specifically and without limitation
amounts payable under Section 12 hereof) and to purchase the Project when
required hereunder shall be absolute and unconditional under any and all
circumstances of any character, and such amounts shall be paid without notice,
demand, defense, set-off, deduction or counterclaim and without abatement,
suspension, deferment, diminution or reduction of any kind whatsoever, except as
herein expressly otherwise provided. The obligation of Agent to lease or
sublease and pay Basic Rent and Additional Rent and any other amounts due under
the Lease for the Project commencing upon the Effective Date is without any
warranty or representation, express or implied, as to any matter whatsoever on
the part of Owner or any Assignee or any Affiliate of either, or anyone acting
on behalf of any of them.
AGENT HAS SELECTED THE PROJECT ON THE BASIS OF ITS OWN JUDGMENT. EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED HEREIN, UPON A TRANSFER OF OWNER'S INTEREST IN THE
PROJECT TO AGENT, NEITHER OWNER NOR ANY ASSIGNEE NOR ANY AFFILIATE OF EITHER,
NOR ANYONE ACTING ON BEHALF OF ANY OF THEM, MAKES ANY REPRESENTATION OR WARRANTY
OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, AS TO
THE SAFETY, TITLE, CONDITION, QUALITY, QUANTITY, FITNESS FOR USE,
MERCHANTABILITY, CONFORMITY TO SPECIFICATION, OR ANY OTHER CHARACTERISTIC, OF
THE PROJECT, OR AS TO WHETHER THE PROJECT, OR
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THE OWNERSHIP, USE, OCCUPANCY OR POSSESSION THEREOF COMPLIES WITH ANY LAWS,
RULES, REGULATIONS OR REQUIREMENTS OF ANY KIND. AS BETWEEN OWNER AND AGENT, ANY
ASSIGNEE OR ANY INDEMNIFIED PERSON, AGENT ASSUMES ALL RISKS AND WAIVES ANY AND
ALL DEFENSES, SET-OFFS, RECOUPMENTS, ABATEMENTS, DEDUCTIONS, COUNTERCLAIMS (OR
OTHER RIGHTS), EXISTING OR FUTURE, AS TO AGENT'S OBLIGATION TO PAY ALL AMOUNTS
PAYABLE HEREUNDER, INCLUDING, WITHOUT LIMITATION, ANY RELATING TO:
(A) THE SAFETY, TITLE, CONDITION, QUALITY, QUANTITY, FITNESS FOR USE,
MERCHANTABILITY, CONFORMITY TO SPECIFICATION, OR ANY OTHER QUALITY OR
CHARACTERISTIC OF THE PROJECT, LATENT OR NOT;
(B) ANY SET-OFF, COUNTERCLAIM, RECOUPMENT, ABATEMENT, DEFENSE OR OTHER
RIGHT WHICH AGENT MAY HAVE AGAINST OWNER, ANY ASSIGNEE OR ANY INDEMNIFIED PERSON
FOR ANY REASON WHATSOEVER ARISING OUT OF THIS OR ANY OTHER TRANSACTION OR
MATTER;
(C) ANY DEFECT IN TITLE OR OWNERSHIP OF THE PROJECT OR ANY TITLE
ENCUMBRANCE NOW OR HEREAFTER EXISTING WITH RESPECT TO THE PROJECT;
(D) ANY FAILURE OR DELAY IN DELIVERY OR ANY LOSS, THEFT OR DESTRUCTION OF,
OR DAMAGE TO THE PROJECT IN WHOLE OR IN PART, OR CESSATION OF THE USE OR
POSSESSION OF THE PROJECT BY AGENT FOR ANY REASON WHATSOEVER AND OF WHATEVER
DURATION, OR ANY CONDEMNATION, CONFISCATION, REQUISITION, SEIZURE, PURCHASE,
TAKING OR FORFEITURE OF THE PROJECT, IN WHOLE OR IN PART;
(E) ANY INABILITY OR ILLEGALITY WITH RESPECT TO THE USE, OWNERSHIP,
OCCUPANCY OR POSSESSION OF THE PROJECT BY AGENT;
(F) ANY INSOLVENCY, BANKRUPTCY, REORGANIZATION OR SIMILAR PROCEEDING BY OR
AGAINST AGENT OR OWNER OR ANY ASSIGNEE;
(G) ANY FAILURE TO OBTAIN, OR EXPIRATION, SUSPENSION OR OTHER TERMINATION
OF, OR INTERRUPTION TO, ANY REQUIRED LICENSES, PERMITS, CONSENTS,
AUTHORIZATIONS, APPROVALS OR OTHER LEGAL REQUIREMENTS;
(H) THE INVALIDITY OR UNENFORCEABILITY OF THIS AGREEMENT OR ANY OTHER
INFIRMITY HEREIN OR ANY LACK OF POWER OR AUTHORITY OF OWNER OR AGENT TO ENTER
INTO THIS AGREEMENT; OR
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(I) ANY OTHER CIRCUMSTANCES OR HAPPENING WHATSOEVER, WHETHER OR NOT SIMILAR
TO ANY OF THE FOREGOING.
AGENT HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL
RIGHTS WHICH IT MAY NOW HAVE OR WHICH AT ANY TIME HEREAFTER MAY BE CONFERRED
UPON IT, BY STATUTE OR OTHERWISE, TO TERMINATE, CANCEL, QUIT, RESCIND OR
SURRENDER THIS AGREEMENT EXCEPT IN ACCORDANCE WITH THE EXPRESS TERMS HEREOF.
18.5 No Recourse.
Owner's obligations hereunder are intended to be the obligations of the
limited partnership and of the corporation which is the general partner thereof
only and no recourse for the payment of any amount due under this Agreement, any
Project Contract, any Construction Document, the Ground Lease or any other
agreement contemplated hereby, or for any claim based thereon or otherwise in
respect thereof, shall be had against any limited partner of Owner or any
incorporator, shareholder, officer, director or Affiliate, as such, past,
present or future of such corporate general partner or any corporate limited
partner or of any successor corporation to such corporate general partner or to
any corporate limited partner of Owner, or against any direct or indirect parent
corporation of such corporate general partner or of any limited partner of Owner
or any other subsidiary or Affiliate or any such direct or indirect parent
corporation or any incorporator, shareholder, officer or director, as such,
past, present or future, of any such parent or other subsidiary or Affiliate.
Nothing contained in this subsection 18.5 shall be construed to limit the
exercise or enforcement, in accordance with the terms of this Agreement, the
Lease, the Project Contracts and the Construction Documents and any other
documents referred to herein, of rights and remedies against the limited
partnership or the corporate general partner of Owner or the assets of the
limited partnership or the corporate general partner of Owner.
18.6 Notices.
(a) All notices, offers, acceptances, approvals, waivers, requests, demands
and other communications hereunder or under any other instrument, certificate or
other document delivered in connection with the transactions described herein
shall be in writing, shall be addressed as provided below and shall be
considered as properly given (a) if delivered in person, (b) if sent by express
courier service (including, without limitation, Federal Express, Emery, DHL,
Airborne Express, and other similar express delivery services), (c) in the event
overnight delivery services are not readily available, if mailed through the
United States Postal Service, postage prepaid, registered or certified with
return receipt requested, or (d) if sent by telecopy and confirmed; provided
that, in the case of a notice by telecopy, the sender shall in addition confirm
such notice by writing sent in the manner specified in clauses (a), (b) or (c)
of this subsection 18.6. All notices shall be effective upon receipt by the
addressee; provided, however, that, if any notice is tendered to an addressee
and the delivery thereof is refused by such addressee, such notice shall be
effective upon such tender. For the purposes of notice, the addresses of the
parties shall be as set forth below; provided, however, that any party shall
have the right to change its address for notice hereunder to any other location
by giving written notice
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to the other party in the manner set forth herein. The initial addresses of the
parties hereto are as follows:
If to Owner:
Wygen Funding, Limited Partnership
c/o ML Leasing Equipment Corp.
Controller's Office
95 Greene Street, 7th Floor
Jersey City, New Jersey 07302
Attention: Kira Toone
Telephone: (201) 671-0334
Facsimile: (201) 671-4511
with a copy of each such notice to be simultaneously given, delivered, or served
to the following:
ML Leasing Equipment Corp.
95 Greene Street, 7th Floor
Jersey City, New Jersey 07302
Attention: Frank Conley
Facsimile: (201) 671-4511
If to Agent:
Black Hills Generation, Inc.
625 Ninth Street
Rapid City
South Dakota 57701
Attention: Mark Thies
Telephone: (605) 721-2331
Telecopy: (605) 721-2597
with a copy to any Assignee at such address as such Assignee may specify by
written notice to Owner and Agent.
(b) Owner shall within five (5) Business Days give to Agent a copy of all
notices received by Owner pursuant to any Financing Arrangement and any other
notices received with respect to the Project.
18.7 Modifications. Neither this Agreement nor any provision hereof may be
changed, waived or terminated orally, but only by an instrument in writing
signed by the party against whom enforcement of the change, waiver or
termination is sought.
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18.8 Rights Cumulative. All rights, powers and remedies herein given to
Owner are cumulative and not alternative, and are in addition to all statutes or
rules of law; any forbearance or delay by Owner in exercising the same shall not
be deemed to be a waiver thereof, and the exercise of any right or partial
exercise thereof shall not preclude the further exercise thereof, and the same
shall continue in full force and effect until specifically waived by an
instrument in writing executed by Owner. All representations and covenants by
Agent shall survive the making of the advances, and the provisions hereof shall
be binding upon and inure to the benefit of the respective successors and
permitted assigns, if any, of the parties hereto.
18.9 Governing Law and Consent to Jurisdiction; Waiver of Jury Trial. THIS
AGREEMENT HAS BEEN EXECUTED AND DELIVERED IN THE STATE OF NEW YORK. AGENT AND
OWNER AGREE THAT, TO THE MAXIMUM EXTENT PERMITTED BY THE LAWS OF THE STATE OF
NEW YORK, THIS AGREEMENT, AND THE RIGHTS AND DUTIES OF AGENT AND OWNER
HEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK (INCLUDING, WITHOUT LIMITATION, SECTIONS 5-1401 AND 5-1402
OF THE NEW YORK GENERAL OBLIGATIONS LAW) IN ALL RESPECTS, INCLUDING, WITHOUT
LIMITATION, IN RESPECT OF ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE.
AGENT HEREBY IRREVOCABLY SUBMITS, FOR ITSELF AND ITS PROPERTIES, TO THE
JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
NEW YORK AND THE SUPREME COURT OF THE STATE OF NEW YORK IN THE COUNTY OF NEW
YORK IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND RELATED TO OR IN
CONNECTION WITH THIS AGREEMENT, AND TO THE EXTENT PERMITTED BY APPLICABLE LAW,
AGENT HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR
OTHERWISE IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT
PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT,
ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS AGREEMENT OR THE SUBJECT MATTER
HEREOF MAY NOT BE LITIGATED IN OR BY SUCH COURT. THIS SUBMISSION TO JURISDICTION
IS NONEXCLUSIVE AND DOES NOT PRECLUDE OWNER OR ANY ASSIGNEE FROM OBTAINING
JURISDICTION OVER AGENT IN ANY COURT OTHERWISE HAVING JURISDICTION. TO THE
EXTENT PERMITTED BY APPLICABLE LAW, AGENT AGREES NOT TO SEEK AND HEREBY WAIVES
THE RIGHT TO ANY REVIEW OF THE JUDGMENT OF ANY SUCH COURT BY ANY COURT OF ANY
OTHER NATION OR JURISDICTION WHICH MAY BE CALLED UPON TO GRANT AN ENFORCEMENT OF
SUCH JUDGMENT. AGENT AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY
CERTIFIED OR REGISTERED MAIL TO THE ADDRESS FOR NOTICES SET FORTH IN THIS
AGREEMENT OR ANY METHOD AUTHORIZED BY THE LAWS OF NEW YORK. OWNER APPOINTS CT
CORPORATION SYSTEM WHICH CURRENTLY MAINTAINS A NEW YORK CITY OFFICE SITUATED AT
111 EIGHTH AVENUE, 13TH FLOOR, NEW YORK, NEW YORK 10011, UNITED STATES,
73
AS ITS AGENT TO RECEIVE SERVICE OF PROCESS AND AGREES, SO LONG AS OWNER HAS ANY
OBLIGATION UNDER THIS AGREEMENT, THAT IT WILL MAINTAIN A DULY APPOINTED AGENT IN
NEW YORK CITY FOR THE SERVICE OF SUCH PROCESS, AND FURTHER AGREES THAT IF IT
FAILS TO MAINTAIN SUCH AN AGENT, ANY SERVICE OF PROCESS MAY BE MADE UPON IT BY
CERTIFIED OR REGISTERED MAIL TO THE ADDRESS FOR NOTICES SET FORTH IN THIS
AGREEMENT OR ANY METHOD AUTHORIZED BY THE LAWS OF NEW YORK. OWNER AND AGENT
EXPRESSLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
OWNER AND AGENT ACKNOWLEDGE THAT THE PROVISIONS OF THIS SUBSECTION 18.9 HAVE
BEEN BARGAINED FOR AND THAT THEY HAVE BEEN REPRESENTED BY COUNSEL IN CONNECTION
THEREWITH.
18.10 Captions. The captions in this Agreement are for convenience of
reference only, and shall not be deemed to affect the meaning or construction of
any of the provisions hereof.
18.11 Purchase by Agent. Upon the occurrence of an Event of Project
Termination and upon the written request of Agent, which shall be received not
later than fifteen (15) Business Days subsequent to receipt of notice from Owner
or any Assignee pursuant to this Agreement that such Event of Project
Termination has occurred, Agent shall have the right, not later than thirty (30)
Business Days after Owner's receipt of such request, to purchase the Project at
a price equal to the Acquisition Cost; provided that the purchase option
contained in this subsection 18.11 shall only be available to Agent if (a) in
the reasonable judgment of Owner and any Assignee, the purchase price and all
other amounts paid by Agent will not in the circumstances in which such payment
is made constitute a preferential payment or a voidable transfer or otherwise be
subject to recapture pursuant to the provisions of the Federal Bankruptcy Code
in a bankruptcy proceeding by or against Agent and will not otherwise result in
the payment being subject to recapture from Owner or (b) the Guarantor has
provided a guaranty of the payment of such purchase price and all other amounts
required to be paid by Agent under this subsection 18.11, which guaranty shall
be in form and substance reasonably satisfactory to Owner and any Assignee. In
connection with, and as a condition to, the purchase of the Project pursuant
hereto, (i) Agent shall pay at the time of purchase, in addition to the
Acquisition Cost, all other amounts payable by Agent under this Agreement,
including, without limitation, all Accrued Project Termination Obligations
(after taking into account the application under the Financing Arrangements of
such purchase price and other payments made hereunder), all amounts payable
pursuant to Section 12 hereof, and all transfer taxes, transfer gains taxes,
mortgage recording taxes, if any, recording and filing fees and all other
similar taxes, fees, expenses and closing costs (including reasonable attorney's
fees) in connection with the conveyance of the Project to Agent and all other
amounts owing hereunder as of the date of such purchase and all Unrecovered
Liabilities and Judgments, and (ii) when Owner transfers title, such transfer
shall be of all of Owner's right, title and interest in and to the Project, but
on an as-is, non-installment sale basis, without warranty by, or recourse to,
Owner.
18.12 Reassignment of Ground Lease and other Project Contracts. In
connection with the purchase of the Project by Agent or any third party pursuant
to the provisions of this
74
Agreement, Owner shall assign, and Agent (or such third party, as the case may
be) shall accept an assignment of, Owner's interest in the Ground Lease, the EPC
Contract and, if applicable, any other Project Contract, such assignment to be
without warranty by, or recourse to, Owner (provided that, the purchase price,
exclusive of the other amounts payable hereunder in connection with such
purchase, shall equal the Acquisition Cost).
18.13 Right to Perform for Agent. If Agent fails to perform or comply
with any of its covenants or agreements contained in this Agreement, and any
period to cure such failure has expired without Agent curing such failure, Owner
may, upon notice to Agent but without waiving or releasing any obligations or
default, itself perform or comply with such covenant or agreement, and the
amount of the reasonable expenses of Owner incurred in connection with such
performance or compliance shall be capitalized by Owner into the Acquisition
Cost of the Project.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above written.
WYGEN FUNDING, LIMITED PARTNERSHIP,
By Wygen Capital, Inc.,
its General Partner
By
--------------------------------------------
Name:
Title:
BLACK HILLS GENERATION, INC.
By
--------------------------------------------
Name:
Title:
76
EXHIBIT A
FORM OF ACQUISITION CERTIFICATE
BLACK HILLS GENERATION, INC. ("Agent"), Agent under a certain Agreement
for Lease (the "Agreement"), dated as of July 20, 2001, entered into with WYGEN
FUNDING, LIMITED PARTNERSHIP ("Owner"), delivers this Acquisition Certificate
pursuant to Section 4 of the Agreement. All terms used in this Certificate shall
have the meanings given to such terms in the Agreement. Agent hereby certifies
to Owner and Assignee as follows:
1. Ground Lease. Attached hereto at Tab 1 is a copy of the Ground Lease
(which Ground Lease is not subject to any Liens other than Permitted
Liens), including a true and complete copy of the metes and bounds
legal description of the Premises, along with any necessary estoppel
certificates, recognition and attornment agreements, confirmations and
subordinations required by Owner's and any Assignee's counsel
regarding the Ground Lease, and two original counterparts of a
memorandum of Ground Lease in the appropriate form for recording in
the jurisdiction in which the Premises are located.
2. Memorandum of Lease Agreement. Attached hereto at Tab 2 are two
original counterparts of a memorandum of Lease in the appropriate form
for recording in the jurisdiction in which the Premises are located,
executed by Agent, as lessee, and otherwise reasonably acceptable to
Owner and Assignee.
3. Certificates of Insurance. Attached hereto at Tab 3 are certificates
of insurance or other evidence reasonably acceptable to Owner and
Assignee certifying that the insurance on the Project required by
subsection 9.3 of the Agreement is in effect, along with copies of
each such policy.
4. Taxes. All due and payable past and current taxes and assessments
applicable to the Premises have been paid in full or are being
contested by Agent as a Permitted Contest pursuant to paragraph (a) of
Section 16 of the Agreement, and all such taxes and assessments owed
by Agent (or estimated amounts thereof) are included in the Budget.
5. Availability of Utilities. All utility services and facilities
(including, without limitation, gas, electrical, water, coal supply
and storage and sewage services, Interconnections and facilities) (a)
which are necessary and required during the construction period have
been completed or will be available in such a manner as to assure
Owner that construction will not be impeded by a lack thereof and (b)
which are necessary for operation and occupancy of the Project are or
will be completed in such a manner and at such a time as will assure
the opening and operation of the Project.
A-1
6. Permits. All Permits and Governmental Actions required for the
construction of the Project and for the use of the Premises in
accordance with and as contemplated by the Project Contracts, the
Agreement and the Lease or are otherwise required prior to this
Initial Advance, have been issued or obtained, are in full force and
effect, are final, are not under appeal, and all applicable appeal
periods have expired. All conditions contained in such Permits and
Governmental Actions have been satisfied by the required date except
to the extent that failure to satisfy such conditions could not
reasonably be expected to result in a material delay or loss or result
in Environmental Damages. There are no proceedings pending or
threatened which seek or which may be expected to rescind, terminate,
modify, suspend or otherwise alter such Permits and Governmental
Actions. All Permits and Governmental Actions required for the
operation of the Project and for the use of the Premises in accordance
with and as contemplated by the Project Contracts, the Agreement and
the Lease have been duly applied for, or will in a timely manner be
applied for, and Agent has no reason to believe that such Permits and
Governmental Actions will not be granted in the ordinary course within
a reasonable time, without burdensome conditions, and prior to the
time required under applicable Legal Requirements.
7. Site Plan. Attached hereto at Tab 4 is a site plan prepared on behalf
of Agent, showing the proposed location of the Project to be
constructed on the Premises.
8. Plans. Attached hereto at Tab 5 is a copy of the Plans and, as
requested by Owner, such other specifications for the construction of
the Project as are available to Agent.
9. Use of Proceeds, No Liens and Representations of Agent. (a) All costs
and expenses which are the subject of the Initial Advance requested
have been paid in full or will be paid in full out of the proceeds of
this Initial Advance, (b) there are no Liens on the Premises that are
not Permitted Liens, (c) all representations and warranties in the
Agreement, in the Lease, and in connection with this Initial Advance,
are and remain true and correct on and as of the date of this Initial
Advance as if made on and as of the date of this Initial Advance and
(d) no Event of Loss, Termination Event, Event of Default, Potential
Default, default under a Project Contract, a Construction Document,
the Guaranty or the Pledge Agreement, or Event of Project Termination
or Potential Event of Project Termination under the Agreement has
occurred and is continuing on the date this Initial Advance is to be
made or will exist by reason of giving effect to this Initial Advance.
A-2
10. Environmental Report. Attached hereto at Tab 6 is an environmental
report or reports complying with paragraph (l) of Section 4 of the
Agreement.
11. Opinions of Counsel for Agent. (a) Attached hereto at Tab 7 is an
opinion of Morrill Thomas Nooney & Braun, LLP, local counsel for
Agent, and (b) attached hereto at Tab 8 is an opinion of Morgan, Lewis
& Bockius LLP, New York counsel for Agent.
12. Budget. The Budget attached as Exhibit G to the Agreement (a) has not
been amended, restated or supplemented as of the date of this Initial
Advance, (b) is true, complete and correct, (c) is accurately
representative of all expected costs of the Project, and (d) is within
the dollar limit set forth in the first sentence of subsection 2.2 of
the Agreement.
13. Request for Initial Advance. Attached hereto at Tab 9 is a duly
executed Request for Initial Advance complying with paragraph (o) of
Section 4 of the Agreement.
14. Project Contracts. Attached hereto at Tab 10 is a fully executed and
complete copy of each of the Project Contracts in existence on the
date hereof.
15. Title Insurance Policy. Attached hereto at Tab 11 are copies of
pro-forma policies of insurance complying with paragraph (s) of
Section 4 of the Agreement.
16. Opinions of Counsel for Guarantor. (a) Attached hereto at Tab 12 is an
opinion of Morrill Thomas Nooney & Braun, LLP, counsel for the
Guarantor, and (b) attached hereto at Tab 13 is an opinion of Morgan,
Lewis & Bockius LLP, New York counsel for the Guarantor.
17. Representations and Warranties of Guarantor. All representations and
warranties of the Guarantor set forth in the Guaranty are and remain
true and correct on and as of the date of this Initial Advance as if
made on and as of the date of this Initial Advance and no default
under the Guaranty has occurred and is continuing on the date this
Initial Advance is to be made or will exist by reason of giving effect
to this Initial Advance.
18. Insurance Report and Insurance Letter. (a) Attached hereto at Tab 14
is a report prepared by the Insurance Broker with respect to the
insurance to be maintained on the Project, and (b) attached hereto at
Tab 15 is a letter from an officer of Agent or one of its Affiliates
or a member of the risk management group of Agent or one of its
Affiliates certifying that the insurance required under subsection 9.3
of the Agreement is in effect and that such insurance is reasonable in
relation to the Project.
A-3
19. Construction Drawdown Schedule. Attached hereto at Tab 16 is a copy of
the Construction Drawdown Schedule prepared by Agent, which reflects
Agent's best estimates as to the amount and timing of construction
drawdowns on the date of this Initial Advance.
20. Construction Progress. Attached hereto at Tab 17 are (a) copies of all
progress reports delivered under the EPC Contract and requested by
Owner or Assignee and (b) true copies of unpaid invoices, receipted
bills and Lien waivers requested by Owner or Assignee, and such other
reasonably available supporting information as Owner or Assignee may
have reasonably requested.
21. No Other Security Interests. All materials and fixtures incorporated
in the construction of the Project have been purchased so that title
thereto has automatically been transferred to Owner pursuant to the
EPC Contract, and there are no Liens on such materials and fixtures
other than Permitted Liens.
22. Material Adverse Change. Since December 31, 2000, there has been no
material adverse change in the business, assets, properties, revenues,
financial condition, operations or prospects of Agent or the
Guarantor.
23. Conditions Precedent Under Project Contracts. All conditions precedent
under each Project Contract have been satisfied in full (other than
those (a) relating to completion of construction of the Project, (b)
which the failure to satisfy could not reasonably be expected to have
a material adverse effect on Agent's ability to perform its
obligations under the Project Contracts or (c) which will be fulfilled
as a result of Agent's execution and delivery of and performance under
the Agreement).
24. Intellectual Property Rights. All Intellectual Property Rights
necessary for the use and operation of the Project in accordance with
and as contemplated by the Project Contracts, the Agreement and the
Lease have been obtained and are in full force and effect. There has
been no material breach under any such Intellectual Property Rights,
and there are no pending or threatened claims or proceedings relating
thereto which, if adversely determined, could reasonably be expected
to have a material adverse effect on (a) the construction, operation,
maintenance, leasing, ownership, use, value or regulatory status of
the Project, (b) the ability of Agent to observe and perform its
obligations under the Agreement, the Lease, the Pledge Agreement, the
Facility Support Agreement, the Construction Documents or the Project
Contracts in timely manner or the ability of the Guarantor to perform
its obligations under the Guaranty in a timely manner, (c) the
business, assets, properties, financial condition, operations or
prospects of Agent or the Guarantor or (d) the rights or interests of
Owner or Assignee under the Agreement, the Lease or the Project
Contracts.
A-4
25. Easements. The Easements have been obtained and are in full force and
effect and constitute all easements, rights-of-way and licenses
contemplated to be in place under the Project Contracts, the Agreement
and the Lease as of the date of this Initial Advance. There has been
no material breach under any such easement, right-of-way or license,
and there are no pending or, to the best of Agent's knowledge,
threatened claims or proceedings relating thereto which, if adversely
determined, could reasonably be expected to have a material adverse
effect on (a) the construction, operation, maintenance, leasing,
ownership, use, value or regulatory status of the Project, (b) the
ability of Agent to observe and perform its obligations under the
Agreement, the Lease, the Pledge Agreement, the Facility Support
Agreement, the Construction Documents or the Project Contracts in a
timely manner or the ability of the Guarantor to perform its
obligations under the Guaranty in a timely manner, (c) the business,
assets, properties, financial condition, operations or prospects of
Agent or the Guarantor or (d) the rights or interests of Owner or
Assignee under the Agreement, the Lease or the Project Contracts.
26. Appraisal. Attached hereto at Tab 18 is an appraisal prepared by the
Appraiser complying with paragraph (bb) of Section 4 of the Agreement.
27. Notice to Commence Work. Attached hereto at Tab 19 is a copy of the
Notice to Proceed (as defined in the EPC Contract) delivered to the
General Contractor pursuant to Section 24.10 of the EPC Contract
authorizing the commencement of the work in accordance with the EPC
Contract.
28. Notice to General Contractor. Attached hereto at Tab 20 is a copy of
the notice delivered to the General Contractor pursuant to Section
24.2 of the EPC Contract notifying the General Contractor of each
Project Lender providing the Project Financing (as such terms are
defined in the EPC Contract).
29. Additional Matters. Attached hereto at Tab 21 are such other documents
and legal matters in connection with a request for the Initial Advance
as are reasonably requested by Owner or Assignee.
Dated: ______________, ____
BLACK HILLS GENERATION, INC.
By:
--------------------------------
Name:
Title:
A-5
EXHIBIT B
FORM OF INTERIM ADVANCE CERTIFICATE
BLACK HILLS GENERATION, INC. ("Agent"), Agent under a certain Agreement
for Lease (the "Agreement"), dated as of July 20, 2001, entered into with WYGEN
FUNDING, LIMITED PARTNERSHIP ("Owner"), delivers this Interim Advance
Certificate pursuant to Section 5 of the Agreement. All terms used in this
Certificate shall have the meanings given to such terms in the Agreement. Agent
hereby certifies to Owner and Assignee as follows:
1. Continuing Representations of Agent. (a) All representations and
warranties in the Agreement (other than the representation and
warranty made in subsection 8.10 of the Agreement), in the Lease
(other than the representation and warranty made in paragraph (i)(f)
of Section 2 of the Lease) and in connection with this Interim Advance
are and remain true and correct in all material respects on and as of
the date of this Interim Advance as if made on and as of the date of
this Interim Advance and (b) no Event of Loss, Termination Event,
Event of Default, Potential Default, default under a Project Contract,
a Construction Document, the Guaranty, or the Pledge Agreement, or
Event of Project Termination or Potential Event of Project Termination
under the Agreement has occurred and is continuing on the date this
Interim Advance is to be made or will exist by reason of giving effect
to this Interim Advance.
2. Construction Progress. Attached hereto at Tab 1 are (a) all progress
reports delivered under the EPC Contract and requested by Owner or
Assignee, (b) true copies of unpaid invoices, receipted bills and Lien
waivers requested by Owner or Assignee, and such other reasonably
requested supporting information as has been requested by Owner or
Assignee and (c) a certificate from Agent certifying to Owner and
Assignee the amount of Unreimbursed Project Costs outstanding on the
date of this Interim Advance.
3. No Other Security Interests. All materials and fixtures incorporated
in the construction of the Project have been purchased so that title
thereto has automatically been transferred to Owner pursuant to the
EPC Contract, and there are no Liens on such materials and fixtures
other than Permitted Liens.
4. Request for Interim Advance. Attached hereto at Tab 2 is a duly
executed Request for Interim Advance complying with paragraph (e) of
Section 5 of the Agreement.
5. Evidence of Compliance. Attached hereto at Tab 3 are such documents,
reports, certificates, affidavits, Permits, Governmental Actions and
other information as has been requested by Owner or Assignee to
evidence compliance by Agent with all of the provisions of the
Agreement.
B-1
6. Representations and Warranties of Guarantor. All representations and
warranties of the Guarantor in the Guaranty (other than the
representation and warranty contained in Section 4.7 thereof) are and
remain true and correct in all material respects on and as of the date
of this Interim Advance as if made on and as of the date of this
Interim Advance and no default under the Guaranty has occurred and is
continuing on the date this Interim Advance is to be made or will
exist by reason of giving effect to this Interim Advance.
7. Satisfactory Title. Attached hereto at Tab 4 is a notice of title
continuation or endorsement issued by the Title Company and complying
with paragraph (h) of Section 5 of the Agreement.
Dated: ______________, ____
BLACK HILLS GENERATION, INC.
By:
------------------------------
Name:
Title:
B-2
EXHIBIT C
FORM OF CERTIFICATE OF SUBSTANTIAL COMPLETION
BLACK HILLS GENERATION, INC. ("Agent"), Agent under a certain Agreement
for Lease (the "Agreement"), dated as of July 20, 2001, entered into with WYGEN
FUNDING, LIMITED PARTNERSHIP ("Owner"), delivers this Certificate of Substantial
Completion pursuant to Section 6 of the Agreement. All terms used in this
Certificate shall have the meanings given to such terms in the Agreement. Agent
hereby certifies to Owner and Assignee as follows:
1. Payment of All Costs. The Final Advance is sufficient to provide for
the payment of all costs of constructing the Project (other than (a)
the cost of completing any open Punchlist Items (as defined in the EPC
Contract) and (b) those costs in connection with the designing,
constructing, equipping and installing of the Project that are not yet
due and which will be included as part of the Completion Advance,
provided that (i) the Available Commitment remaining after the Final
Advance is equal to or exceeds the aggregate amount of all such costs,
(ii) all such costs fall within the limits of the Budget, and (iii)
Agent demonstrates, to the reasonable satisfaction of Owner and
Assignee, that all costs in connection with the designing,
constructing, equipping and installing of the Project that are not yet
due will not exceed such costs).
2. Construction and Equipping of the Project. (a) The Project (exclusive
of any Punchlist Items (as defined in the EPC Contract)) has been
completed (including all performance testing, to the extent required
under the EPC Contract as at the date of Operational Acceptance under
the EPC Contract) in all material respects in accordance with the
Plans, the terms of the EPC Contract, the Construction Documents and
the Project Contracts, and (b) Operational Acceptance (as defined in
the EPC Contract) has been achieved, such that the Project is capable
of operating at performance levels required under the EPC Contract
while operating in a manner consistent with prudent industry
practices, all applicable Permits, Governmental Actions, Intellectual
Property Rights and Legal Requirements, and in accordance with the
terms of the Agreement, the Lease and the Project Contracts.
3. Commercial Operation. (a) Mechanical Completion of the Plant (as
defined in the EPC Contract) has occurred under the EPC Contract and
the Project is mechanically complete and checkout and start-up has
occurred as evidenced by the execution and delivery of the Certificate
of Mechanical Completion and Certificate of Commissioning of Start Up
Systems (as defined in the EPC Contract); (b) Operational Acceptance
(as defined in the EPC Contract) has occurred under the EPC Contract
as evidenced by (i) the execution and delivery of the Certificate of
Successful
C-1
Completion of a Commercial Operation Test (as defined in
the EPC Contract), (ii) successful completion of the Lime Consumption
Guarantee Test (as defined in the EPC Contract) and (iii) successful
completion of the Performance Guarantee Test (as defined in the EPC
Contract), in each case according to the procedures set forth in the
EPC Contract; (c) the Project's coal, steam and electrical systems
have been properly connected to the facilities of BHP at Neil Simpson
Unit 2 and the Project is capable of processing and delivering steam
and electricity in the manner contemplated by the EPC Contract; and
(d) the Commercial Operation Date (as defined in the Power Purchase
Agreements) shall have been achieved under each of the Power Purchase
Agreements and the Power Purchase Agreements shall have become
effective. [In addition, only if Agent has elected not to request a
Completion Advance, Agent shall satisfy the requirements of paragraph
(g) of Section 7 of the Agreement.]
4. Permits. All Permits and Governmental Actions necessary for the
occupancy, use and operation of the Project and for the occupancy and
use of the Premises in the manner contemplated in paragraph 3 above
and in accordance with and as contemplated by the Project Contracts
and the Lease have been issued or obtained, are in full force and
effect, are final, are not under appeal, and all applicable appeal
periods have expired. All conditions contained in such Permits and
Governmental Actions have been satisfied by the required date except
to the extent that failure to satisfy such conditions could not
reasonably be expected to result in a material delay or loss or result
in Environmental Damages. There are no proceedings pending or
threatened which seek or which may be expected to rescind, terminate,
modify, suspend or otherwise alter such Permits and Governmental
Actions.
5. Liens. (a) The Project has been completed in the manner contemplated
in paragraph 3 above free of all Liens, except for Permitted Liens
(all of which Permitted Liens are itemized in Tab 1 attached hereto,
as to the natur ----- amount, claimant and status thereof, and which
Permitted Liens do not include any mechanics' Liens other than those
mechanics' Liens that are (i) to be satisfied or discharged out of the
proceeds of this Final Advance or a Completion Advance or (ii) subject
to a Permitted Contest and bonded or otherwise secured to the
satisfaction of Owner and Assignee), (b) there are no claims
outstanding with respect to any Project Contract (other than claims
which are itemized in Tab 2 attached hereto, as to the nature, amount,
claimant and status thereof and which claims are bonded or otherwise
secured to the satisfaction of Owner and Assignee), and (c) [there are
no current Permitted Contests] [OR] [the Permitted Contests in
existence as of the date of this Final Advance are itemized in Tab 3
attached hereto, as to the nature, amount, claimant and status
thereof].
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6. Final Survey. Attached hereto at Tab 4 is a final survey complying
with the requirements of paragraph (g) of Section 6 of the Agreement.
7. Utilities. Connection has been made to all appropriate utility
facilities (including Interconnections) and the Project is capable of
operation.
8. Continuing Representations of Agent. (a) All representations and
warranties in the Agreement (other than the representation and
warranty made in subsection 8.10 of the Agreement), in the Lease
(other than the representation and warranty made in paragraph (i)(f)
of Section 2 of the Lease), and in connection with this Final Advance
are and remain true and correct in all material respects on and as of
the date of this Final Advance as if made on and as of the date of
this Final Advance and (b) no Event of Loss, Termination Event, Event
of Default, Potential Default, default under a Project Contract, a
Construction Document, the Guaranty or the Pledge Agreement, or Event
of Project Termination or Potential Event of Project Termination under
the Agreement has occurred and is continuing on the date this Final
Advance is to be made or will exist by reason of giving effect to this
Final Advance.
9. Exhibit E to the Lease. Attached hereto at Tab 5 is a copy of Exhibit
E to the Lease.
10. Request for Final Advance. Attached hereto at Tab 6 is a duly executed
Request for Final Advance complying with paragraph (k) of Section 6 of
the Agreement.
11. Satisfactory Title. Attached hereto at Tab 7 is a notice of title
continuation or endorsement issued by the Title Company and complying
with paragraph (l) of Section 6 of the Agreement.
12. Representations and Warranties of Guarantor. All representations and
warranties of the Guarantor in the Guaranty (other than the
representation and warranty contained in Section 4.7 thereof) are and
remain true and correct in all material respects on and as of the date
of this Final Advance as if made on and as of the date of this Final
Advance and no default under the Guaranty has occurred and is
continuing on the date this Final Advance is to be made or will exist
by reason of giving effect to this Final Advance.
13. Environmental Compliance. All compliance tests, emissions tests,
filings, notices, certifications and other actions required by any
Environmental Requirements as a precondition to Operational Acceptance
(as defined in the EPC Contract) of the Project has been successfully
completed.
C-3
14. Intellectual Property Rights. All Intellectual Property Rights
necessary for the use and operation of the Project in accordance with
and as contemplated by the Project Contracts, the Agreement and the
Lease have been obtained and are in full force and effect. There has
been no material breach under any such Intellectual Property Rights,
and there are no pending or threatened claims or proceedings relating
thereto which, if adversely determined, could reasonably be expected
to have a material adverse effect on (a) the construction, operation,
maintenance, leasing, ownership, use, value or regulatory status of
the Project, (b) the ability of Agent to observe and perform its
obligations under the Agreement, the Lease, the Pledge Agreement, the
Facility Support Agreement, the Construction Documents or the Project
Contracts in a timely manner or the ability of the Guarantor to
perform its obligations under the Guaranty in a timely manner, (c) the
business, assets, properties, financial condition, operations or
prospects of Agent or the Guarantor, or (d) the rights or interests of
Owner or Assignee under the Agreement, Lease or the Project Contracts.
15. Easements. The Easements have been obtained and are in full force and
effect and are not subject to any Liens other than Permitted Liens and
constitute all easements, rights-of-way and licenses contemplated to
be in place under the Project Contracts, the Agreement and the Lease
as of the date of this Final Advance and necessary for Agent's
performance of its obligations under the Project Contracts. There has
been no material breach under any such easement, right-of-way or
license, and there are no pending or, to the best of Agent's
knowledge, threatened claims or proceedings relating thereto which, if
adversely determined, could reasonably be expected to have a material
adverse effect on (a) the construction, operation, maintenance,
leasing, ownership, use, value or regulatory status of the Project,
(b) the ability of Agent to observe and perform its obligations under
the Agreement, the Lease, the Pledge Agreement, the Facility Support
Agreement, the Construction Documents or the Project Contracts in a
timely manner or the ability of the Guarantor to perform its
obligations under the Guaranty in a timely manner, (c) the business,
assets, properties, financial condition, operations or prospects of
Agent or the Guarantor, or (d) the rights or interests of Owner or
Assignee under the Agreement, the Lease or the Project Contracts.
16. Construction Progress. Attached hereto at Tab 8 are (a) copies of all
progress reports delivered under the EPC Contract and requested by
Owner or Assignee, (b) true copies of unpaid invoices, receipted bills
and Lien waivers requested by Owner or Assignee, and such other
reasonably available supporting information as shall have been
reasonably requested by Owner or Assignee and (c) a certificate from
Agent certifying to Owner and Assignee the amount of Unreimbursed
Project Costs outstanding on the date of this Final Advance.
C-4
17. No Other Security Interests. All materials and fixtures incorporated
in the construction of the Project have been purchased so that title
thereto has automatically been transferred to Owner pursuant to the
EPC Contract, and there are no Liens on such materials and fixtures
other than Permitted Liens.
Dated: ______________, _____
BLACK HILLS GENERATION, INC.
By:
-------------------------------
Name:
Title:
C-5
EXHIBIT D
FORM OF CERTIFICATE OF INCREASED COST
BLACK HILLS GENERATION, INC. ("Agent"), Agent under a certain Agreement
for Lease (the "Agreement"), dated as of July 20, 2001, entered into with WYGEN
FUNDING, LIMITED PARTNERSHIP ("Owner"), delivers this Certificate of Increased
Cost pursuant to Section 7 of the Agreement. All terms used in this Certificate
shall have the meanings given to such terms in the Agreement. Agent hereby
certifies to Owner and Assignee as follows:
1. Payment of All Costs. The Completion Advance is sufficient to provide
for the payment of (i) all costs of completing any open Punchlist
Items (as defined in the EPC Contract), and (ii) all costs in
connection with the designing, constructing, equipping and installing
of the Project that were not included as part of the Final Advance;
provided that all such costs fall within the limits of the Budget.
2. Continuing Representations of Agent. (a) All representations and
warranties in the Agreement (other than the representation and
warranty made in subsection 8.10 of the Agreement), in the Lease
(other than the representation and warranty made in paragraph (i)(f)
of Section 2 of the Lease), and in connection with this Completion
Advance are and remain true and correct in all material respects on
and as of the date of this Completion Advance as if made on and as of
the date of this Completion Advance and (b) no Event of Loss,
Termination Event, Event of Default, Potential Default, default under
a Project Contract, a Construction Document, the Guaranty or the
Pledge Agreement, or Event of Project Termination or Potential Event
of Project Termination under the Agreement, or Event of Default or
Potential Default (as each such term is defined in the Lease) has
occurred and is continuing on the date this Completion Advance is to
be made or will exist by reason of giving effect to this Completion
Advance.
3. Request for Completion Advance. Attached hereto at Tab 1 is a duly
executed Request for Completion Advance complying with paragraph (d)
of Section 7 of the Agreement.
4. Satisfactory Title. Attached hereto at Tab 2 is a notice of title
continuation or endorsement issued by the Title Company complying with
paragraph (e) of Section 7 of the Agreement.
D-1
5. Representations and Warranties of Guarantor. All representations and
warranties of the Guarantor in the Guaranty (other than the
representation and warranty contained in Section 4.7 thereof) are and
remain true and correct in all material respects on and as of the date
of this Completion Advance as if made on and as of the date of this
Completion Advance and no default under the Guaranty has occurred and
is continuing on the date this Completion Advance is to be made or
will exist by reason of giving effect to this Completion Advance.
6. Final Acceptance. Evidence satisfactory to Owner and Assignee that (a)
Final Acceptance (as defined in the EPC Contract) has occurred or will
occur as a result of this Completion Advance, as evidenced by the
execution and delivery of the Certificate of Final Acceptance (as
defined in the EPC Contract) by Agent, (b) the Project has satisfied
the Guaranteed Performance Standards (as defined in the EPC Contract),
and (c) the Project has satisfied the Lime Consumption Guarantee (as
defined in the EPC Contract), in each case according to the procedures
set forth in the EPC Contract.
7. Construction Progress. Attached hereto at Tab 3 are (a) copies of all
progress reports delivered under the EPC Contract and requested by
Owner or Assignee and (b) true copies of unpaid invoices, receipted
bills and Lien waivers requested by Owner or Assignee, and such other
reasonably available supporting information as may have reasonably
been requested by Owner or Assignee.
8. No Other Security Interests. All materials and fixtures incorporated
in the construction of the Project have been purchased so that title
thereto has automatically been transferred to Owner pursuant to the
EPC Contract, and there are no Liens on such materials and fixtures
other than Permitted Liens.
Dated: ______________, _____
BLACK HILLS GENERATION, INC.
By:
-------------------------
D-2
EXHIBIT E
LIST OF PROJECT CONTRACTS
o The Engineering, Procurement and Construction Agreement dated as of
December 27, 2000, as amended by a First Amendment to Engineering,
Procurement and Construction Agreement dated as of April 11, 2001, between
Agent and the General Contractor.
o The Irrevocable Letter of Credit No. NY-20511-30029698, dated April 18,
2001, issued by CitiBank, N.A., in favor of Agent.
o The Performance Bonds issued by subcontractors pursuant to the EPC
Contract.
o The Subcontracts and Supply Contracts entered into by the General
Contractor pursuant to the EPC Contract.
o The equipment purchase contract to be entered into by and between General
Electric Company and the General Contractor.
o The Ground Lease Agreement, dated as of July 20, 2001, between Agent, as
ground lessor, and Owner, as ground lessee.
o The Easement Agreement, dated as of July 20, 2001, between Black Hills
Power, Inc. and Wyodak Resources Development Corp., as grantors, and Owner,
as grantee.
o The Power Purchase Agreement, dated as of February 16, 2001, between Agent
and Cheyenne Light, Fuel and Power Company.
o The Power Purchase Agreement, dated as of March 5, 2001, between Agent and
Municipal Energy Agency of Nebraska.
o The Coal Supply Agreement, dated as of July 20, 2001, between Wyodak
Resources Development Corp. and Agent.
o The Agreement for Rights of Usage of Coal Silo and Coal Conveyer, dated as
of July 20, 2001, between Black Hills Power, Inc. and Agent.
o The Agreement for Interconnection Service, dated as of July 20, 2001,
between Black Hills Power, Inc. and Agent.
o The Services Agreement, dated as of July 20, 2001, between Black Hills
Power, Inc. and Agent.
E-1
EXHIBIT F
LIST OF PROJECT AUTHORIZATIONS
o Air Quality Permit No. CT-1236, as modified in Permit No. MD-510A.
o Determination of No Hazard to Air Navigation issued by the Federal Aviation
Administration on February 28, 2001.
o Determination of Exempt Wholesale Generation Status dated April 10, 2001,
95 F.E.R.C.ss.62.025; 2001 WL 357465.
o Acceptance for filing of rate schedule of market-based rates, June 22,
2001, F.E.R.C. Docket No. ER01-1844-000.
F-1
EXHIBIT G
BUDGET
G-1
EXHIBIT H
CONSTRUCTION DRAWDOWN SCHEDULE
H-1
EXECUTION COPY
AMENDMENT NO. 1
Dated as of December 20, 2001
to
AGREEMENT FOR LEASE
Dated as of July 20, 2001
between
WYGEN FUNDING, LIMITED PARTNERSHIP
as Owner
and
BLACK HILLS GENERATION, INC.
as Agent
This Amendment No. 1 has been manually executed in 10 counterparts, numbered
consecutively from 1 through 10, of which this is No. ____. To the extent, if
any, that this Amendment constitutes chattel paper (as such term is defined in
the Uniform Commercial Code as in effect in any jurisdiction), no security
interest in this Amendment may be created or perfected through the transfer or
possession of any counterpart other than the original executed counterpart which
shall be the counterpart identified as counterpart No.1.
This Amendment No. 1 to Agreement for Lease ("this Amendment No. 1"),
dated as of December 20, 2001, between WYGEN FUNDING, LIMITED
PARTNERSHIP, a Delaware limited partnership ("Owner"), and BLACK HILLS
GENERATION, INC., a Wyoming corporation ("Agent"), amending the Agreement
for Lease referred to below.
WHEREAS, Owner and Agent have heretofore entered into an Agreement for
Lease dated as of July 20, 2001 (the "Original Agreement for Lease") (the
Original Agreement for Lease, as amended hereby and as may hereafter be further
amended, modified, supplemented or restated from time to time, the "Agreement
for Lease"); and
WHEREAS, Owner and Agent wish to further amend the Agreement for Lease
as hereinafter provided;
NOW, THEREFORE, Owner and Agent hereby agree that the Agreement for
Lease is amended as follows:
SECTION 1. DEFINITIONS. Capitalized terms used but not defined herein shall
have the meanings assigned to such terms in the Original Agreement for Lease.
SECTION 2. AMENDMENTS. The Original Agreement for Lease is hereby amended
as follows:
2.1 Subsection 1.1 of the Agreement for Lease is amended by deleting the
definition of "Project Contracts" and inserting the following in its place:
"Project Contracts: The EPC Contract, the GE Turbine Contract,
the Ground Lease, the Performance Bonds (from and after the
date each such Performance Bond becomes effective), the Letter
of Credit, the Retention Letter of Credit (if any), the EPC
Subcontracts (from and after the date each such EPC
Subcontract becomes effective), the Easement Agreement, the
Required Easement Agreements (from and after the date each
such Required Easement Agreement becomes effective), the
Interconnection Agreement, the Services Agreement, the
Facility Support Agreement, the Fuel Supply Agreements and the
Power Purchase Agreements, as each of the same may be amended,
restated, modified or supplemented from time to time as
permitted hereunder. A list of the Project Contracts in
existence on the date hereof is attached as Exhibit E hereto."
2.2 Paragraph (a) of Section 15 of the Agreement for Lease is amended by
deleting such paragraph in its entirety and inserting the following in its
place:
"(a) If (1) an Event of Loss shall occur and (2) such Event of
Loss does not arise as a result of Agent's actions or the failure of
Agent to act or Agent's fraudulent act, illegal act, misapplication of
funds or willful misconduct, then in any such event, (A) Agent shall
promptly notify Owner in writing of such event,
1
(B) Agent shall either (x) promptly commence the restoration and
reconstruction of the Project or (y) promptly pay to Owner, an amount
equal to the Acquisition Cost (less, to the extent any such amounts
have been paid, the amount of insurance or condemnation proceeds
received by Owner as a result of such Event of Loss); provided,
however, that any such election to restore and reconstruct the Project
shall be subject to the written consent of Owner and Assignee;
provided, further, that if Owner and Assignee shall fail to grant such
consent to restore and reconstruct the Project, Owner shall have the
right to terminate this Agreement and/or Owner's obligations to make
any further advances hereunder, whereupon Agent shall be released from
all obligations hereunder (other than insurance and condemnation
proceeds, if any, received by Agent and indemnity obligations for which
Owner has full recourse against Agent in accordance with the terms of
this Agreement), and Agent shall transfer to Owner all of Agent's
right, title and interest in and to the Project. In the event Agent
elects to restore and reconstruct the Project pursuant to the
immediately preceding sentence, (i) Owner shall continue to be
obligated to make advances to Agent pursuant to the terms of Section 5,
6 and 7 of this Agreement, (ii) any insurance or condemnation proceeds
payable with respect to such Event of Loss will be held in the
Operating Account for reimbursement to Agent during the course of
Agent's restoration and reconstruction of the Project pursuant to the
provisions of Section 5, 6 and 7 of this Agreement, and (iii) any such
insurance or condemnation proceeds received by Owner shall reduce
Acquisition Cost by the amount of such proceeds. In the event Agent
elects to pay Owner the amount described in clause (2)(B)(y) of the
first sentence of this paragraph (a), upon receipt of such amount,
Owner shall deliver to Agent a bill of sale, deed or similar document
assigning and conveying to Agent all of Owner's right, title and
interest in and to the Project, the Ground Lease, the Easements, the
EPC Contract and, if applicable, any Project Contract and, to the
extent transferable, any title insurance policies issued to Owner, and
when Owner transfers title, such transfer shall be on an as-is,
non-installment sale basis, without warranty by, or recourse to, Owner.
Insurance and condemnation proceeds, if any, received by Owner in
excess of the Acquisition Cost plus the Unrecovered Liabilities and
Judgments, so long as no Event of Default or Event of Project
Termination has occurred and is continuing, shall be paid by Owner to
Agent. In addition, Agent will use its best efforts to prevent an Event
of Loss, including, without limitation promptly and with due diligence
to contest such action by all appropriate proceedings at law and in
equity (including the filing of all appeals), to institute claims and
counterclaims against third parties and to do all things necessary or
desirable to preserve the rights and interests of Owner in the
Project."
2
SECTION 3. MISCELLANEOUS.
3.1 Except as provided herein, all provisions, terms and conditions of the
Agreement for Lease shall remain in full force and effect. As amended hereby,
the Agreement for Lease is ratified and confirmed in all respects.
3.2 This Amendment No. 1 shall in all respects be governed by, and
construed and enforced in accordance with, the laws of the State of New York,
without regard to the conflict of law rules thereof (other than Section 5-1401
of the New York General Obligations Law).
3.3 This Amendment No. 1 may be executed in any number of counterparts,
each of which shall, when executed, be deemed to be an original and all of which
taken together shall be deemed to be one and the same agreement.
[Signature Page Follows]
3
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 the
day and year first above written.
WYGEN FUNDING, LIMITED PARTNERSHIP
By: WYGEN CAPITAL, INC.
its General Partner
By: _____________________________
Name:
Title:
BLACK HILLS GENERATION, INC.
By: ______________________________
Name:
Title:
EXECUTION COPY
CONFIDENTIAL AND PROPRIETARY
LEASE AGREEMENT
Dated as of July 20, 2001
BETWEEN
WYGEN FUNDING, LIMITED PARTNERSHIP
as Lessor
and
BLACK HILLS GENERATION, INC.
as Lessee
THIS LEASE HAS BEEN ASSIGNED AS SECURITY
FOR INDEBTEDNESS OF THE LESSOR. SEE SECTION 20.
This Lease has been manually executed in 10 counterparts, numbered
consecutively from 1 through 10, of which this is No. ___. To the
extent, if any, that this Lease constitutes chattel paper (as such term
is defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction) no security interest in this Lease may be
created or perfected through the transfer or possession of any
counterpart other than the original executed counterpart which shall be
the counterpart identified as counterpart No. 1.
TABLE OF CONTENTS
Page
SECTION 1. DEFINED TERMS........................................................................................1
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSEE.................................................15
SECTION 3. LEASE OF THE PROJECT................................................................................25
SECTION 4. OPERATING LEASE.....................................................................................26
SECTION 5. ABSOLUTE OBLIGATION.................................................................................26
SECTION 6. INITIAL TERM; EXTENDED TERM.........................................................................29
SECTION 7. RENT AND OTHER PAYMENTS.............................................................................29
SECTION 8. RESTRICTED USE; COMPLIANCE WITH LAWS................................................................31
SECTION 9. MAINTENANCE, IMPROVEMENT AND REPAIR OF THE PROJECT..................................................34
SECTION 10. INSURANCE..........................................................................................36
SECTION 11. INDEMNITIES........................................................................................43
SECTION 12. LESSEE'S RIGHT TO TERMINATE........................................................................47
SECTION 13. LESSEE'S RIGHTS OF PURCHASE AND RENEWAL............................................................50
SECTION 14. LESSOR'S RIGHT TO TERMINATE........................................................................52
SECTION 15. LOSS OF OR DAMAGE TO THE PROJECT...................................................................53
SECTION 16. CONDEMNATION AND DEDICATION OF THE PROJECT; EASEMENTS..............................................54
SECTION 17. SURRENDER OF THE PROJECT...........................................................................55
SECTION 18. EVENTS OF DEFAULT..................................................................................55
SECTION 19. RIGHTS UPON DEFAULT................................................................................58
SECTION 20. SALE OR ASSIGNMENT BY LESSOR.......................................................................61
SECTION 21. INCOME TAXES.......................................................................................62
SECTION 22. NOTICES AND REQUESTS...............................................................................62
SECTION 23. COVENANT OF QUIET ENJOYMENT........................................................................63
SECTION 24. RIGHT TO PERFORM FOR LESSEE........................................................................64
SECTION 25. MERGER, CONSOLIDATION OR SALE OF ASSETS............................................................64
SECTION 26. EXPENSES...........................................................................................64
SECTION 27. PERMITTED CONTESTS.................................................................................64
SECTION 28. LEASEHOLD INTERESTS................................................................................65
i
SECTION 29. MISCELLANEOUS......................................................................................66
SECTION 30. NO RECOURSE........................................................................................69
SECTION 31. NO MERGER OF ESTATES...............................................................................70
Exhibit A - Legal Description of Land
Exhibit B - Intentionally Omitted
Exhibit C - List of Project Contracts
Exhibit D - List of Project Authorizations
Exhibit E - Monthly Rent Component
ii
CONFIDENTIAL
LEASE AGREEMENT
Lease Agreement, dated as of July 20, 2001 (as the same may be amended,
restated, modified or supplemented from time to time, "this Lease"), between
WYGEN FUNDING, LIMITED PARTNERSHIP, a Delaware limited partnership, as lessor
(the "Lessor"), formed by Wygen Capital, Inc., its general partner, and BLACK
HILLS GENERATION, INC., a Wyoming corporation, as lessee (the "Lessee").
SECTION 1. DEFINED TERMS.
Unless the context otherwise requires, each term defined in this Section 1
shall, when used in this Lease, have the meaning indicated:
"Accrued Default Obligations" has the meaning set forth in Section 19
hereof.
"Acquisition Cost" means the Acquisition Cost (as defined in the Agreement
for Lease) under the Agreement for Lease after making the Final Advance, plus
(i) the Completion Amount and (ii) the Retention, if any.
"Additional Rent" has the meaning set forth in paragraph (d) of Section 7
hereof.
"Adjusted Acquisition Cost" means, at the time of determination, the
Acquisition Cost of the Project plus any increase in Adjusted Acquisition Cost
provided for under subsection 2.3 of the Agreement for Lease (as adjusted
pursuant to Section 3 of this Lease) less (i) the aggregate amount of all
Monthly Rent Components theretofore included as portions of Basic Rent for any
periods for which Basic Rent has been paid, less (ii) any reduction in Adjusted
Acquisition Cost provided for under paragraph (i) of Section 10 or paragraph (b)
of Section 16 of this Lease.
"Affiliate" of any Person means any other Person controlling, controlled by
or under direct or indirect common control with such Person. For the purposes of
this definition, "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Agreement for Lease" means the Agreement for Lease, dated as of the date
hereof, between the Lessor, as owner, and the Lessee, as agent, providing for
the acquisition, design, construction and equipping of the Project, as the same
may be amended, restated, modified or supplemented from time to time.
1
"Appraisal Procedure" means the following procedure whereby an independent
appraiser shall be appointed by the Lessor and the Lessee, with the consent of
Assignee, to determine (i) the amount of wear and tear in excess of that
attributable to normal use of the Project to which the provisions of paragraph
(b) (iii) or paragraph (c)(iii) of Section 12 apply or (ii) the fair market
value of the Project, if such determination is required under paragraph (d) of
Section 13 of this Lease. If no such appraiser is appointed by the mutual
agreement of the Lessor and the Lessee within thirty (30) days of the written
request of either the Lessor or the Lessee that an appraiser be appointed, the
Lessor and the Lessee shall each appoint an independent appraiser within thirty
(30) days thereafter, and the two appraisers so appointed shall appoint a third
independent appraiser. Each appraiser appointed pursuant to the foregoing
procedure shall, within thirty (30) days after appointment of the last
appraiser, independently determine the amount of wear and tear in excess of that
attributable to normal use or the fair market value of the Project, as the case
may be. If the Lessor or the Lessee shall fail to appoint an independent
appraiser within the above-mentioned thirty (30) day period, the appraiser
appointed by the other party shall determine such amount or value. If a single
appraiser is appointed, such appraiser's determination shall be final. If three
appraisers are appointed, the amounts or values determined by the three
appraisers shall be averaged, the amount or value which differs the most from
such average shall be excluded, the remaining two amounts or values shall be
averaged and such average shall be final. The expenses of all appraisers shall
be paid by the Lessee. Each appraiser appointed pursuant to an "Appraisal
Procedure" shall have experience in appraising coal-fired power plants similar
in size and capacity to the Project.
"Assignee" means each Person to which any part of the Lessor's interest
under this Lease or in the Project shall at the time have been assigned,
conditionally or otherwise, by the Lessor in accordance with Section 20 of this
Lease. For purposes of paragraphs (i)(d), (i)(g) and paragraphs (ii)(c) and (d)
of Section 2, paragraphs (a) and (b) of Section 5, paragraphs (d) and (h) of
Section 8, paragraph (b) of Section 9, clause (iii) of paragraph (b) of Section
10, Section 11, the last sentence of paragraph (b) of Section 20 and clause
(iii) of paragraph (a) of Section 27, the term "Assignee" shall include each
lender (and any entity providing liquidity to a lender) to the Lessor, and any
entity acting as an agent in any capacity for the benefit of such lenders (and
such liquidity providers), under a Financing Arrangement.
"Assignment" means each assignment agreement referred to in Section 20
hereof, between the Lessor and a third party, pursuant to which the Lessor
assigns certain of its rights under this Lease to such third party, as the same
may be amended, restated, modified or supplemented from time to time.
"Basic Rent" means:
(a) At each Basic Rent Payment Date during the Initial Term and any
Extended Term, the sum of the Monthly Rent Component plus an amount (the
"Variable Component of Basic Rent") equal to the sum of (X) plus (Y) plus (Z),
where (X), (Y) and (Z) have the following meanings:
(X) (i) the Equity Capital before payment of Basic Rent for such monthly
period, multiplied by
2
(ii) a fraction having a numerator equal to the number of days in such
monthly period and a denominator of 360, multiplied by
(iii)the decimal equivalent of a percentage equal to the Monthly Cost of
Project Equity.
(Y) (i) the Debt Capital before payment of Basic Rent for such monthly
period multiplied by
(ii) a fraction having a numerator equal to the number of days in such
monthly period and a denominator of 360, multiplied by
(iii)the decimal equivalent of a percentage equal to the Monthly Cost of
Project Debt.
(Z) (i) the Adjusted Acquisition Cost before payment of Basic Rent for such
monthly period, multiplied by
(ii) a fraction having a numerator equal to the number of days in such
monthly period and a denominator of 360, multiplied by
(iii) 0.20%.
(b) For any partial monthly period during the Initial Term and any Extended
Term, an amount equal to the sum of (X) plus (Y) plus (Z), where (X), (Y) and
(Z) have the following meanings:
(X) (i) the Equity Capital, multiplied by
(ii) a fraction having a numerator equal to the number of days the Project
is under lease during such partial monthly period and a denominator of
360 multiplied by
(iii)the applicable decimal referred to in paragraph (a)(X)(iii) above;
provided that, if the Effective Date falls on or after the Lease Rate
Date during such partial monthly period such decimal shall be the
decimal determined as of the next succeeding Lease Rate Date.
(Y) (i) the Debt Capital multiplied by
(ii) a fraction having a numerator equal to the number of days the Project
is under lease during such partial monthly period and a denominator of
360, multiplied by
(iii)the decimal equivalent of a percentage equal to the Monthly Cost of
Project Debt; provided that, if the Effective Date falls on or after
the Lease Rate Date during such partial monthly period, the Monthly
Cost of Project Debt shall be determined as of the next succeeding
Lease Rate Date.
3
(Z) (i) the Adjusted Acquisition Cost, multiplied by
(ii) a fraction having a numerator equal to the number of days the Project
is under lease during such partial monthly period and a denominator of
360, multiplied by
(iii) 0.20%.
(c) For each monthly period during the Renewal Term of the Project, if any,
an amount equal to the fair market rental value thereof, determined as provided
in paragraph (d) of Section 13 hereof.
"Basic Rent Payment Date" means the twentieth (20th) day of each calendar
month during the Initial Term, any Extended Term or any Renewal Term, or, if
such day is not a Business Day, the next succeeding Business Day.
"BHP" means Black Hills Power, Inc., a South Dakota corporation, and its
successors.
"Budget" has the meaning set forth in the Agreement for Lease.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in the City of New York or the State of Wyoming are
authorized by law to close.
"Cash Proceeds" has the meaning set forth in paragraph (a) of Section 12
hereof.
"CERCLA" has the meaning set forth in paragraph (i)(o) of Section 2 hereof.
"CERCLIS" has the meaning set forth in paragraph (i)(o) of Section 2
hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Completion Amount" has the meaning set forth in the Agreement for Lease.
"Computation Period" has the meaning set forth in the definition of Monthly
Cost of Project Debt in this Section 1.
"Consent" means each consent of the Lessee to an Assignment, pursuant to
which the Lessee consents to the terms of such Assignment insofar as they relate
to this Lease and the Agreement for Lease, as the same may be amended, restated,
modified or supplemented from time to time.
"Contaminant" means any pollutant or substance that is or may be harmful to
human health, natural resources or the environment and any hazardous substance,
radioactive substance, hazardous material, toxic substance, hazardous waste,
medical or infectious waste, radioactive waste, special waste, industrial waste,
petroleum or petroleum-derived substance or
4
waste, asbestos, PCBs, pesticide, explosive, paint or coating containing lead or
mercury, urea formaldehyde, radon, or any hazardous, toxic, radioactive, or
infectious constituent thereof defined as such or, regulated under Environmental
Requirements as harmful to human health, natural resources or the environment.
"Debt Capital" means, at the time of determination, an amount equal to
Adjusted Acquisition Cost minus Equity Capital.
"Easements" means (i) the easements and licenses granted or to be granted
to the Lessor by the Lessee or third parties under or pursuant to the Ground
Lease and (ii) the easements and licenses granted to the Lessor by Black Hills
Power, Inc. and Wyodak Resources Development Corp. under the Easement Agreement,
in each case as such easements and licenses may be amended, restated, modified
or supplemented from time to time in accordance with the terms hereof.
"Easement Agreement" means the Easement Agreement, dated as of the date
hereof, between Black Hills Power, Inc. and Wyodak Resources Development Corp.,
as grantors, and the Lessor, as grantee, as the same may be amended, restated,
modified or supplemented from time to time.
"Effective Date" means the date provided in paragraph (a) of Section 3 of
this Lease.
"Environmental Approvals" means all Permits (as defined in the Agreement
for Lease), consents, licenses, orders, waivers, extensions, variances, notices
to or registration or filings with any governmental or public body or authority,
and other approvals or authorizations which are or will be required under
applicable Environmental Requirements.
"Environmental Damages" means any and all claims, judgments, damages
(including, without limitation, punitive damages), losses, penalties, fines,
interest, fees, liabilities (including, without limitation, strict liability),
taxes, obligations, encumbrances, liens, costs and expenses (including, without
limitation, costs and expenses of investigation and defense of any claim,
whether or not such claim is ultimately defeated, and of any good faith
settlement or judgment), of whatever kind or nature, contingent or otherwise,
matured or unmatured, foreseeable or unforeseeable, direct or indirect,
including, without limitation, reasonable attorneys' fees and disbursements and
consultants' fees (collectively "Damages"), any of which are asserted, imposed
or incurred at any time pursuant to Environmental Requirements, including,
without limitation:
(i) Damages arising from the existence of Contaminants at any location or
compliance or noncompliance with, or violation of, Environmental Requirements,
including any material capital expenditure to achieve or maintain compliance
with Environmental Requirements;
(ii) Damages for personal injury or threatened personal injury (including
sickness, disease or death), or injury or threatened injury to property or
natural resources, foreseeable or unforeseeable, including, without limitation,
the cost of demolition and rebuilding of any improvements on real property;
5
(iii) Damages associated with Environmental Matters;
(iv) Damages arising out of any liability in contribution or indemnity to
any third Person or Governmental Authority in connection with the items
referenced in clauses (i), (ii), (iii) and (v) of this definition; and
(v) Reasonable fees incurred for the services of attorneys, consultants,
contractors, doctors, experts, laboratories and all other reasonable costs
incurred in connection with any damages as described in clauses (i) through (iv)
of this definition, and the investigation or remediation of Contaminants or the
suspected presence of Contaminants or the violation or threatened violation of
Environmental Requirements, including, but not limited to, the preparation of
any feasibility studies or reports or the performance of any investigation,
cleanup, treatment, remediation, removal, response, abatement, containment,
closure, storage, disposal, transport, restoration or monitoring work required
by any federal, state, local or foreign governmental agency or political
subdivision, or otherwise expended in connection with such conditions, and
including, without limitation, any reasonable attorneys' fees, costs and
expenses incurred in enforcing this Lease or the Agreement for Lease or
collecting any sums due hereunder or thereunder.
"Environmental Event" has the meaning set forth in paragraph (ii)(f) of
Section 2 hereof.
"Environmental Lien" means a Lien in favor of any Governmental Authority
for any (a) liability under any Environmental Requirement, or (b) damages
arising from, or costs incurred by, such Governmental Authority in response to a
Release or threatened Release of a Contaminant into the environment.
"Environmental Matters" means any matter, fact or situation relating to or
arising from (a) any violation or alleged violation of, or failure to meet, an
Environmental Requirement relating to the Project, (b) any Release or threatened
Release of any Contaminant at, on, under, emanating to or from the Project or
the presence of any Contaminant which has come to be located at, on, from or
under the Project from another location, (c) the generation, treatment,
transport or disposal of any Contaminant at, on, under, to or from the Project,
(d) any injury or threatened injury to human health or safety or the environment
by reason of the matters described in clauses (a), (b) and (c) above, or (e) any
revocation, expiration, termination or failure to obtain or maintain any
Environmental Approval applicable to or required for the Project.
"Environmental Requirements" means all existing and future applicable
federal, state, local and foreign laws (including duties under the common law),
statutes, codes, ordinances, rules, regulations, directives, binding policies,
permits, authorizations, consent decrees or orders relating to or addressing the
environment, natural resources, land use or human health or safety, including,
but not limited to, any law, statute, code, ordinance, rule, regulation,
directive, binding policy, permit, authorization, consent decree or order
relating to (a) the use, handling, disposal, Release or threatened Release of
any Contaminant or (b) worker or public health.
6
"EPC Contract" means the Engineering, Procurement and Construction
Agreement dated as of December 27, 2000, as amended by a First Amendment to
Engineering, Procurement and Construction Agreement dated as of April 11, 2001
(the "EPC First Amendment"), between the Lessee and the General Contractor with
respect to the Project, as the same may be amended, restated, modified or
supplemented from time to time in accordance with the terms thereof.
"EPC Subcontracts" means collectively, the Subcontracts and Supply
Contracts (each as defined in the EPC Contract) entered into by the General
Contractor pursuant to the EPC Contract, as the same may be amended, restated,
modified or supplemented from time to time in accordance with the terms hereof.
"Equity Capital" means, at the time of determination, the aggregate amount
of cash contributions to the Lessor's capitalization made by the Lessor's
general partner and limited partners constituting a part of Adjusted Acquisition
Cost, less the aggregate amount of any returns of capital made to such partners
at such time.
"ERISA" has the meaning set forth in paragraph (i)(m) of Section 2 hereof.
"Event of Default" has the meaning set forth in Section 18 hereof.
"Event of Loss" means any of the following events: (a) loss of all or a
substantial portion of the Project or the use thereof due to destruction, damage
beyond economical repair or rendition of the Project permanently unfit for the
use contemplated by the Project Contracts on a commercially feasible basis for
any reason whatsoever; (b) any event which results in an insurance settlement
with respect to the Project on the basis of a total loss or constructive total
loss; or (c) the repair and restoration of the Project cannot be completed by
the expiry of the existing Lease Term. A loss of a "substantial portion" of the
Project shall be deemed to occur if, in the reasonable judgment of the Lessor
and Assignee, after such event, (i) the Project cannot operate to generate
electricity in accordance with all applicable Permits (as defined in the
Agreement for Lease) and at levels and efficiencies in compliance with the
performance standards required for Operational Acceptance under the EPC
Contract, (ii) the Lessee will not be able to fully perform its obligations
under the Project Contracts, the Facility Support Agreement or this Lease or
(iii) a material diminution in the value, utility or remaining economic useful
life of the Project will occur.
"Extended Term" has the meaning set forth in paragraph (b) of Section 6
hereof.
"EWG" means an Exempt Wholesale Generator, as defined in Section 32(a)(1)
of the 1935 Act.
"Facility Support Agreement" means the Facility Support Agreement, dated as
of the date hereof, between the Lessor and the Lessee, as the same may be
amended, restated, modified or supplemented from time to time.
"FERC" means the Federal Energy Regulatory Commission, or any successor
agency thereto.
7
"Financing Arrangement" means each credit agreement, note purchase
agreement, subordinated loan agreement, security agreement, indenture, mortgage,
deed of trust and each other agreement or arrangement between the Lessor and a
lender or lenders (including any entity acting in the capacity of an agent in
connection therewith and any entity providing liquidity to any such lender or
lenders) to the Lessor or other Person or Persons providing credit support to
the Lessor or to debt issued by or on behalf of the Lessor related to the
financing or refinancing of the Project, as any of the same may be amended,
restated, modified or supplemented from time to time.
"First Extended Term" has the meaning set forth in paragraph (b) of Section
6 hereof.
"Fuel Supply Agreements" means collectively, (i) the Coal Supply Agreement,
dated as of July 20, 2001, between Wyodak Resources Development Corp. and the
Lessee; and (ii) the Agreement for Rights of Usage of Coal Silo and Coal
Conveyer, dated as of July 20, 2001, between Black Hills Power, Inc. and the
Lessee with respect to the supply of coal to the Project, in each case as the
same may be amended, restated, modified, or supplemented from time to time.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, applied on a consistent basis.
"GE Turbine Contract" means the Purchase Order dated May 11, 2001 and the
Terms and Conditions for Procurement and Shipment of Steam Turbine/Generator
Equipment dated May 1, 2001, between General Electric Company and the General
Contractor, as the same may be amended, restated, modified, or supplemented from
time to time.
"General Contractor" means The Babcock & Wilcox Company, a Delaware
corporation.
"Governmental Action" has the meaning set forth in paragraph (i)(d) of
Section 2 hereof.
"Governmental Authority" means any agency, department,
commission, court or other administrative, legislative or regulatory authority
of any federal, state, local or foreign governmental body.
"Ground Lease" means the Ground Lease, dated as of the date hereof, between
the Lessee, as ground lessor, and the Lessor, as ground lessee, relating to the
Premises, as the same may be amended, restated, modified or supplemented from
time to time in accordance with the terms thereof.
"Guarantor" means Black Hills Corporation, a South Dakota corporation, and
its successors.
"Guaranty" means the Guaranty, dated as of the date hereof, by and between
the Guarantor and the Lessor, as the same may be amended, restated, modified, or
supplemented from time to time.
8
"Indebtedness" of any Person means, without duplication, (a) all
indebtedness of such Person for borrowed money, (b) all obligations of such
Person for the deferred purchase price of property or services (other than trade
payables not overdue by more than 60 days incurred in the ordinary course of
such Person's business), (c) all obligations of such Person evidenced by notes,
bonds, debentures or other similar instruments, (d) all obligations of such
Person as lessee under leases that have been, in accordance with GAAP, recorded
as capital leases, (e) all obligations of such Person in respect of
reimbursement agreements with respect to acceptances, letters of credit (other
than trade letters of credit) or similar extensions of credit, (f) all
guaranties, and (g) all reasonably quantifiable obligations under indemnities or
under support or capital contribution agreements, and other reasonably
quantifiable obligations (contingent or otherwise) to purchase or otherwise to
assure a creditor against loss in respect of, or to assure an obligee against
loss in respect of, all Indebtedness of others referred to in clauses (a)
through (f) above guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through an
agreement (i) to pay or purchase such Indebtedness or to advance or supply funds
for the payment or purchase of such Indebtedness, (ii) to purchase, sell or
lease (as lessee or lessor) property, or to purchase or sell services, primarily
for the purpose of enabling the debtor to make payment of such Indebtedness or
to assure the holder of such Indebtedness against loss, (iii) to supply funds to
or in any other manner invest in the debtor (including any agreement to pay for
property or services irrespective of whether such property is received or such
services are rendered) or (iv) otherwise to assure a creditor against loss.
"Indemnified Person" has the meaning set forth in Section 11 hereof.
"Initial Term" has the meaning set forth in Section 6 hereof.
"Insurance Requirements" means all insurance required to be obtained with
respect to the Project pursuant to Section 10 hereof and all terms of any
insurance policy covering or applicable to the Project, all requirements of the
issuer of any such policy, all statutory requirements and all orders, rules,
regulations and other requirements of any governmental body related to insurance
applicable to the Project.
"Intellectual Property Rights" means, collectively, all patents, patent
applications, trademarks (whether registered or not), trademark applications,
trade names, proprietary computer software or copyrights (or any licenses,
permits or agreements with respect to any of the foregoing) necessary to design,
construct, operate, lease or use the Project or any part thereof.
"Interconnections" means the physical points of ongoing operational
interconnection and jurisdictional boundary between the Project and the
facilities located at or available to the Project which are owned, operated and
maintained by the Lessee or any of its Affiliates and shared with the Project.
"Interconnection Agreement" means the Agreement for Interconnection
Service, dated as of July 20, 2001, between Black Hills Power, Inc. and the
Lessee.
"Land" means the premises described in Exhibit A attached hereto.
9
"Lease Rate Date" has the meaning set forth in paragraph (b) of Section 7
hereof.
"Lease Term" means the Initial Term, plus, if this Lease is extended, the
First Extended Term and the Second Extended Term.
"Legal Requirements" means all laws, treaties, directives, judgments,
decrees, ordinances and regulations and any other governmental rules, orders and
determinations and all requirements having the force of law, now or hereinafter
enacted, made or issued, whether or not presently contemplated, and all
agreements, covenants, conditions and restrictions, applicable to the Project
and/or the construction, ownership, operation or use thereof, including, without
limitation, all requirements of labor laws and Environmental Requirements,
compliance with which is required at any time from the date hereof through the
Initial Term, each Extended Term and any Renewal Term, whether or not such
compliance shall require structural, unforeseen or extraordinary changes to the
Project or the operation, occupancy or use thereof.
"Lessee" has the meaning set forth in the first paragraph of this Lease.
"Lessor" means Wygen Funding, Limited Partnership or any successor or
successors to all of its rights and obligations as the Lessor hereunder and, for
purposes of Section 11 hereof, shall include any partnership (general or
limited), corporation, limited liability company, trust, individual or other
entity which computes its liability for income or other taxes on a consolidated
basis with Wygen Funding, Limited Partnership or the income of which for
purposes of such taxes is, or may be, determined or affected directly or
indirectly by the income of the Lessor or its successor or successors. "Letter
of Credit" means the Irrevocable Letter of Credit No. NY-20511-30029698, dated
April 18, 2001, issued by CitiBank, N.A., in favor of the Lessee, as the same
may be amended, restated, modified, supplemented, substituted or replaced from
time to time.
"Lien" means any security interest, mortgage, pledge, hypothecation,
assignment, encumbrance, lien (statutory or other), or other security agreement
of any kind or nature whatsoever (including, without limitation, any conditional
sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the Uniform Commercial Code or comparable law
of any jurisdiction in respect of any of the foregoing).
"Management Agreement" means the Management Agreement, dated as of the date
hereof, between the Lessor and Merrill Leasing, as the same may be amended,
restated, modified or supplemented from time to time.
"Material Subsidiary" has the meaning set forth in the Guaranty.
"Merrill" means Merrill Lynch Money Markets Inc., a Delaware corporation.
"Merrill Leasing" means ML Leasing Equipment Corp., a Delaware corporation.
10
"Merrill Lynch" means Merrill Lynch & Co., Inc., a Delaware corporation.
"Monthly Cost of Project Debt" means the weighted average percentage cost
per annum (including as part of such cost any fees payable under or pursuant to
any Financing Arrangements, but net of any investment earnings applied to the
payment of costs) of borrowings outstanding under any Financing Arrangements
(whether or not interest is accruing at a default rate) at any time during the
period from and including the first day of the monthly period for which Basic
Rent is being computed to and including the last day of the monthly period for
which Basic Rent is being computed (the "Computation Period") to finance or
refinance the acquisition and ownership of the Project.
"Monthly Cost of Project Equity" means the weighted average percentage cost
per annum (including as part of such cost distributions and any fees payable
under or pursuant to the limited partnership agreement of the Lessor, but net of
any investment earnings applied to the payment of costs) of equity contributions
to the Lessor made pursuant to the limited partnership agreement at any time
during the Computation Period to finance or refinance the acquisition and
ownership of the Project.
"Monthly Rent Component" means, with respect to each monthly period during
the Lease Term, the amount (if any) set forth on Exhibit E hereto, as such
Exhibit E may be amended from time to time pursuant to the terms of this Lease.
"1935 Act" means the Public Utility Holding Company Act of 1935, as
amended, and any related Legal Requirement.
"NPL" has the meaning set forth in paragraph (i)(o) of Section 2 hereof.
"Operative Documents" has the meaning set forth in the Guaranty.
"Operator" means the Lessee, or such other entity designated as successor
operator of the Project by the Lessee in accordance with the terms hereof.
"Operating Account" means the Collateral Account (as such term is defined
in any Financing Arrangement).
"PCBs" has the meaning set forth in paragraph (i)(o) of Section 2 hereof.
"Performance Bonds" means any payment and performance surety bonds
delivered by subcontractors to the General Contractor and the Lessee pursuant to
Section 3.1 of the EPC First Amendment.
"Permitted Contest" has the meaning set forth in paragraph (a) of Section
27 hereof.
"Permitted Liens" means the following Liens and other matters affecting the
Project: (a) Liens securing the payment of taxes, assessments and other
governmental charges or levies which are either not delinquent or, if
delinquent, are being contested by the Lessee in good faith as a Permitted
Contest (provided that the Lessee is in compliance with any security
11
requirements under paragraph (b) of Section 27 hereof relating thereto); (b)
zoning and planning restrictions, subdivision and platting restrictions,
easements, rights-of-way, licenses, reservations, covenants, conditions,
waivers, restrictions on the use of the Project, minor encroachments or minor
irregularities of title, none of which individually or in the aggregate could
reasonably be expected to materially impair the intended use or value of the
Project; (c) reservations of mineral interests, none of which individually or in
the aggregate could reasonably be expected to materially impair the intended use
or value of the Project; (d) the Liens created pursuant to any Financing
Arrangement; (e) the rights and interest of any sublessee under a sublease
permitted by paragraph (e) of Section 8 of this Lease; (f) other leases and
licenses in effect with respect to the Project which are permitted by this Lease
or which are delivered to and accepted by the Lessor and Assignee prior to the
Effective Date; (g) other exceptions to the title of the Project as set forth in
the title insurance policy delivered to the Lessor and Assignee under Section 4
of the Agreement for Lease (for the period prior to Substantial Completion), as
such exceptions are revised by the endorsement issued pursuant to Section
9.24(g) of the Agreement for Lease, and in a notice of continuation or
endorsement to the title insurance policy delivered to the Lessor and Assignee
under Section 6 of the Agreement for Lease (for the period on and after
Substantial Completion) other than Liens securing the payment of taxes,
assessments and other governmental charges or levies; (h) inchoate mechanics'
Liens arising in the ordinary course of business on or in respect of the Project
and for amounts the payment of which is either not yet delinquent or is the
subject of a Permitted Contest (provided that the Lessee is in compliance with
any security requirements under paragraph (b) of Section 27 hereof relating
thereto); and (i) such other or additional matters as may be approved in writing
by the Lessor and each Assignee.
"Person" means any individual, corporation, partnership, limited liability
company, private limited company, joint venture, association, joint-stock
company, trust, unincorporated organization of government or any agency or
political subdivision thereof.
"Pledge Agreement" means the Pledge Agreement, dated as of the date hereof,
by and between the Lessee, as pledgor, and the Lessor, as pledgee, as the same
may be amended, restated, modified or supplemented from time to time.
"Pledged Contracts" means the EPC Contract, the Performance Bonds (from and
after the date each such Performance Bond becomes effective), the Letter of
Credit, the Retention Letter of Credit (if any), the EPC Subcontracts (from and
after the date each such EPC Subcontract becomes effective), the Interconnection
Agreement, the Services Agreement, the Fuel Supply Agreements and the Power
Purchase Agreements, in each case as pledged pursuant to the Pledge Agreement.
"Potential Default" means any event which, but for the lapse of time or
giving of notice, or both, would constitute an Event of Default.
"Power Purchase Agreements" means collectively, (i) the Power Purchase
Agreement, dated as of February 16, 2001, between the Lessee and Cheyenne Light,
Fuel and Power Company, and (ii) the Power Purchase Agreement, dated as of March
5, 2001, between the Lessee and Municipal Energy Agency of Nebraska, as each of
the same may be amended,
12
restated, modified, or supplemented from time to time, pursuant to which the
Lessee will sell certain electric capacity to each such purchaser as specified
therein.
"Premises" means collectively the Land and the Easements.
"Project" means the Premises and the improvements and equipment (including
all related appliances, appurtenances, accessions, controls, interconnection
facilities, transmission lines, wiring, furnishings, materials and parts, and
other related facilities and equipment, along with any replacements thereof)
constructed thereon pursuant to the EPC Contract (or any other construction
contracts entered into by the Lessor or the Lessee) and the Agreement for Lease,
which constitute an approximately 90 megawatt coal-fired power plant known as
Wygen #1, consisting of steam turbine generators and related equipment.
"Project Contracts" means the EPC Contract, the GE Turbine Contract, the
Ground Lease, the Performance Bonds (from and after the date each such
Performance Bond becomes effective), the Letter of Credit, the Retention Letter
of Credit (if any), the EPC Subcontracts (from and after the date each such EPC
Subcontract becomes effective), the Easement Agreement, the Required Easement
Agreements (from and after the date each such Required Easement Agreement
becomes effective), the Interconnection Agreement, the Services Agreement, the
Fuel Supply Agreements and the Power Purchase Agreements, as each of the same
may be amended, restated, modified or supplemented from time to time as
permitted hereunder. A list of the Project Contracts in existence on the date
hereof is attached as Exhibit C hereto.
"Reconciliation Amount" has the meaning set forth in paragraph (f) of
Section 7 hereof.
"Release" means the release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, leaching or migrating into the indoor
or outdoor environment of any Contaminant through or in the air, soil, surface
water, groundwater, or any structure.
"Remedial Action" means actions required or undertaken by a Governmental
Authority, or which are appropriate as a matter of prudent business practice and
commercial reasonableness, to (i) clean up, remove, treat, contain or in any
other way address Contaminants in the indoor or outdoor environment; (ii)
prevent the Release or threat of Release or minimize the further Release of
Contaminants; (iii) investigate and determine if a removal or remedial response
is needed; or (iv) design such a response and post-remedial investigation,
monitoring, operation, maintenance and care.
"Removable Improvements" has the meaning set forth in paragraph (b) of
Section 8 hereof.
"Renewal Notice" has the meaning set forth in paragraph (c) of Section 13
hereof.
"Renewal Term" has the meaning set forth in paragraph (c) of Section 13
hereof.
13
"Required Easement Agreements" has the meaning set forth in the Agreement
for Lease.
"Responsible Officer" shall mean the President, Vice President, Secretary
or Treasurer of the Lessee.
"Retention" has the meaning set forth in the Agreement for Lease.
"Retention Letter of Credit" shall mean the Retention Letter of Credit
issued pursuant to Section 7.3 of the EPC Contract.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill,
Inc., and any successor thereto which is a nationally recognized statistical
rating organization.
"Second Extended Term" has the meaning set forth in paragraph (b) of
Section 6 hereof.
"Services Agreement" means the Services Agreement, dated as of July 20,
2001, between Black Hills Power, Inc. and the Lessee, as the same may be
amended, restated, modified or supplemented from time to time.
"Substantial Completion" has the meaning set forth in the Agreement for
Lease.
"Taking" means the requisition, taking or sale in, by or on account of
actual or threatened eminent domain proceedings or other action by any person or
authority having the power of eminent domain.
"Termination Conditions" means the following conditions made by the Lessee
to the Lessor as a condition to the sale of the Project pursuant to Section 12
hereof: on the date of such sale (i) no Event of Loss, Taking, Termination
Event, Event of Default or Potential Default shall have occurred and be
continuing, (ii) the Project shall not be undergoing any repairs, additions or
alterations that could reasonably be expected to diminish the fair market value,
utility or remaining economic useful life which the Project would have had at
such time had such repair, addition or alteration not been undergoing (assuming
the Project is in the condition required hereby), (iii) the Project shall be in
compliance with all Legal Requirements, (iv) the Lessee shall, at its expense,
deliver to the Lessor an environmental audit satisfactory in scope and content
to the Lessor and Assignee in their reasonable discretion, to the effect that
(A) no Environmental Matters exist with respect to the Project as a result of
the construction, operation and maintenance of the Project and (B) the Project
may be operated to its design capacity in accordance with the Project Contracts
and in compliance with Environmental Requirements, and (v) the Lessee shall
deliver to the Lessor and Assignee a report of an independent engineer
reasonably satisfactory to the Lessor and Assignee, to the effect that the
Project (A) has been maintained in accordance with the terms and conditions of
Section 9 of this Lease and (B) is capable of being operated in accordance with
(1) the design specifications required by the EPC Contract, taking into account
normal and proper wear and tear resulting from the operation of the Project, (2)
the performance standards required for Operational Acceptance under the EPC
Contract, taking into account normal and proper wear and tear resulting from the
operation of the Project and (3) prudent industry practices.
14
"Termination Date" has the meaning set forth in paragraph (a) of Section 12
hereof.
"Termination Event" has the meaning set forth in paragraph (a) of Section
14 hereof.
"Termination Notice" has the meaning set forth in paragraph (a) of Section
12 hereof.
"Unrecovered Liabilities and Judgments" means all liabilities of an
Indemnified Person, including, without limitation, taxes, losses, obligations,
claims, damages (including, without limitation, Environmental Damages and strict
liability in tort), penalties, premiums, breakage costs, causes of action,
suits, costs and expenses (including, without limitation, reasonable attorneys',
experts', consultants' and accountants' fees and expenses) or judgments of any
nature against an Indemnified Person relating to or in any way arising during
the term of the Agreement for Lease and relating to or in any way arising out of
(i) the Lessor's acquisition, ownership and financing of the Project, (ii) the
Lessor's acquisition of a leasehold interest in the Premises, (iii) the Lessee's
construction of the Project or (iv) the operation or use of the Premises or the
Project by the Lessee or any agent or subcontractor of the Lessee, in each case
to the extent that such Indemnified Person has not received full indemnification
for such liabilities or judgments by the Lessee.
"Variable Component of Basic Rent" has the meaning set forth in the
definition of Basic Rent in Section 1 hereof.
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSEE.
(i) The Lessee represents and warrants to the Lessor:
(a) Corporate Matters. The Lessee (i) has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Wyoming, (ii) has full power, authority and legal right to own and operate
its properties and to conduct its business as presently conducted and to
execute, deliver and perform its obligations under this Lease, the Agreement for
Lease, the Project Contracts, the Pledge Agreement, the Facility Support
Agreement and any Consent, and (iii) is duly qualified to do business as a
foreign corporation in good standing in each jurisdiction in which its ownership
or leasing of properties or the conduct of its business requires such
qualification.
(b) Binding Agreement. This Lease and the Consent have been duly
authorized, executed and delivered by the Lessee and, assuming the due
authorization, execution and delivery of this Lease by the Lessor and the
Consent by the parties thereto other than the Lessee, this Lease and the Consent
is a legal, valid and binding obligation of the Lessee, enforceable according to
its terms.
(c) Compliance with Other Instruments. The execution, delivery and
performance by the Lessee of this Lease, the Project Contracts to which the
Lessee is a party,
15
the Facility Support Agreement, the Pledge Agreement and any Consent will not
result in any violation of any term of the articles of incorporation or the
by-laws of the Lessee, do not require stockholder approval or the approval or
consent of any trustee or holders of indebtedness of the Lessee except such as
have been obtained prior to the date hereof and will not conflict with or result
in a breach of any terms or provisions of, or constitute a default under, or
result in the creation or imposition of any Lien (other than a Permitted Lien)
upon any property or assets of the Lessee under, any indenture, mortgage or
other agreement or instrument to which the Lessee is a party or by which it or
any of its property is bound, or any existing applicable law, rule, regulation,
license, judgment, order or decree of any Governmental Authority or court having
jurisdiction over the Lessee or any of its activities or properties.
(d) Governmental Consents. There are no consents, licenses, orders,
authorizations, approvals, Environmental Approvals, Permits (as defined in the
Agreement for Lease), waivers, exemptions, extensions or variances of, or
notices to or registrations or filings with any Governmental Authority or public
body (each a "Governmental Action") which are or will be required in connection
with the valid execution, delivery and performance of this Lease, the Agreement
for Lease, the Pledge Agreement, the Facility Support Agreement, the Consent or
the Project Contracts, or any Governmental Action (i) which is or will be
required in connection with any participation by the Lessor or any Assignee in
the transactions contemplated by the Project Contracts, the Pledge Agreement,
the Facility Support Agreement, the Consent, this Lease or the Agreement for
Lease, (ii) which is or will be required in connection with the acquisition or
ownership by the Lessor of the Project and all equipment for use with respect
thereto, (iii) which is or will be required for the lease of the Project or the
operation of the Project in accordance with and as contemplated by the Project
Contracts and this Lease, or (iv) which is or will be required to be obtained by
the Lessee, the Lessor, Merrill, Merrill Lynch, Merrill Leasing, any Assignee or
any Affiliate of the foregoing, during the term of this Lease, the Agreement for
Lease or the Project Contracts, with respect to the Project or the Project
Contracts, except for (i) the filing of an application for EWG status under
Section 32 of the 1935 Act and (ii) filings, if any, required under Section 6111
of the Code, and except such Governmental Actions (A) each of which has been
duly obtained, given or accomplished, is in full force and effect, is final, is
not under appeal, and all applicable appeal periods have expired, with a true
copy thereof delivered to the Lessor or (B) as may be required by applicable law
not now in effect.
(e) Financial Statements. The Lessee has furnished to the Lessor copies of
(i) the Lessee's annual unaudited financial statements for the year ended
December 31, 2000 and its quarterly unaudited financial statements for the
quarter ended March 31, 2001, and (ii) the Guarantor's Annual Report on Form
10-K for the year ended December 31, 2000, and the Guarantor's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2001. The financial statements
contained in such documents fairly present the financial position, results of
operations and consolidated statements of cash flows of the Lessee and the
Guarantor, as the case may be, as of the dates and for the periods indicated
therein and have been prepared in accordance with GAAP.
(f) Changes. Since December 31, 2000, there has been no material adverse
change in the business, assets, properties, revenues, financial condition,
operations or prospects of the Project, the Lessee or the Guarantor, nor any
change which could reasonably be expected
16
to have a material adverse effect on (i) the construction, operation,
maintenance, leasing, ownership, use, value or regulatory status of the Project,
(ii) the ability of the Lessee to observe and perform its obligations under this
Lease, the Agreement for Lease, the Pledge Agreement, the Facility Support
Agreement, the Consent or the Project Contracts in a timely manner or the
ability of the Guarantor to perform its obligations under the Guaranty in a
timely manner, (iii) the business, assets, properties, financial condition,
operations or prospects of the Lessee or the Guarantor, or (iv) the rights or
interests of the Lessor or Assignee under this Lease, the Agreement for Lease,
the Pledge Agreement, the Facility Support Agreement, the Consent or the Project
Contracts.
(g) Litigation. There is no action, suit, claim, or counterclaim,
proceeding or investigation, at law or in equity, by or before any court,
governmental body, agency, commission or other tribunal now pending or
threatened against or affecting the Project, the Lessee or the Guarantor or any
property or rights of the Lessee or the Guarantor or questioning the
enforceability of this Lease, the Pledge Agreement, the Facility Support
Agreement, the Consent or the Project Contracts, which, if adversely determined,
could reasonably be expected to have a material adverse effect on (i) the
construction, operation, maintenance, leasing, ownership, use, value or
regulatory status of the Project, (ii) the ability of the Lessee to observe and
perform its obligations under this Lease, the Agreement for Lease, the Pledge
Agreement, the Facility Support Agreement, the Consent or the Project Contracts
in a timely manner or the ability of the Guarantor to perform its obligations
under the Guaranty in a timely manner, (iii) the business, assets, properties,
financial condition, operations or prospects of the Lessee or the Guarantor, or
(iv) the rights or interests of the Lessor or Assignee under this Lease, the
Agreement for Lease, the Pledge Agreement, the Facility Support Agreement, the
Consent or the Project Contracts.
(h) Intellectual Property. All Intellectual Property Rights required for
the construction and operation of the Project in accordance with and as
contemplated by the Project Contracts or this Lease, have been or will in the
ordinary course of business be timely obtained and, once obtained, will remain
in full force and effect. The Lessee owns or has the right to use all
Intellectual Property Rights that are material and are required to perform the
Lessee's obligations under the Project Contracts without any conflict with the
rights of others.
(i) Project Contracts. Each Project Contract in existence on the date
hereof has been duly authorized, executed and delivered by the parties thereto
and is a legal, valid and binding obligation of the parties thereto, enforceable
according to its terms. The Lessee has not received notice from any party to a
Project Contract that (i) such party is terminating any Project Contract, (ii) a
default has occurred under any Project Contract or any Person has alleged that a
default has occurred under any Project Contract or (iii) there are any claims
for damages existing as a result of the Lessee's performance of or its failure
to perform any of its obligations under any Project Contract. No default has
occurred and is continuing under any Project Contract on the date hereof.
(j) Compliance with Legal Requirements and Insurance Requirements. The
construction, operation, use, and physical condition of the Project are in full
compliance with all Legal Requirements and Insurance Requirements and all
premiums due with respect to such Insurance Requirements have been paid.
17
(k) Liens. The Project is not subject to any Lien, except Permitted Liens,
and none of such Permitted Liens could reasonably be expected to materially
interfere with the use or possession of the Project or the use or exercise by
the Lessor of its rights under this Lease or any other document contemplated
hereby or entered into in connection herewith.
(l) Agreement for Lease. The Project has been built in accordance with the
terms of the Agreement for Lease. The representations and warranties of the
Lessee, as agent, in the Agreement for Lease are true and correct in all
material respects.
(m) ERISA. The Lessee has not established and does not maintain or
contribute to any employee benefit plan that is covered by Title IV of the
Employee Retirement Income Security Act of 1974, as amended from time to time
("ERISA").
(n) Status of Lessee. All of the Lessee's capital stock is owned (directly
or indirectly) beneficially and of record by the Guarantor.
(o) Environmental Matters. Except as expressly identified in the
environmental reports delivered pursuant to Section 4 of the Agreement for
Lease:
(i) To the best knowledge of the Lessee, after due inquiry, the Lessee
and the Project comply, and have at all times complied, with all
Environmental Requirements applicable to the Project. The Lessee and the
Project shall at all times comply with all material Environmental
Requirements applicable to the Project, including, without limitation, the
use, maintenance and operation of the Project, and all activities and
conduct of business related thereto, including, without limitation, the
treatment, remediation, removal, transport, storage and/or disposal of any
Contaminant, and no material capital expenditures are anticipated to
maintain or achieve compliance with Environmental Requirements;
(ii) The Lessee has obtained or has taken appropriate steps, as
required by Environmental Requirements, to obtain, and shall maintain all
Environmental Approvals necessary for the construction and operation of the
Project, and, in the case of Environmental Approvals necessary for
operation, will take such steps as are necessary to secure such
Environmental Approvals prior to the scheduled commencement of operation,
all such Environmental Approvals already obtained are in good standing, are
in full force and effect, are final, are not under appeal, and all
applicable appeal periods have expired, and the Lessee and the Project are
currently in material compliance and shall remain in material compliance
with all terms and conditions of such Environmental Approvals. No material
change in the facts or circumstances reported or assumed in the
applications for or the granting of such Environmental Approvals exists.
There are no proceedings pending or threatened which may be expected to
rescind, terminate, modify, condition, suspend or otherwise alter such
Environmental Approvals, or which would jeopardize the validity of, or the
ability of the Lessee to obtain, maintain, or comply with, any such
Environmental Approvals in a timely manner;
(iii) The Lessee has not received any notice that any of the third
parties with which the Lessee has arranged, engaged or contracted to
accept, treat,
18
transport, store, dispose or remove any Contaminant
generated or present at the Project, or which otherwise participate or have
participated in activities or conduct related to the Project, were not
properly permitted at the relevant time to perform the foregoing activities
or conduct;
(iv) The Lessee has not received any notice that it or the Project is
subject to any investigation, and is not subject to any judicial or
administrative proceeding, notice, order, judgment, decree or settlement,
alleging or addressing in connection with the Project (A) any violation of
any Environmental Requirements, (B) any Remedial Action, or (C) any
Environmental Damages, claims or liabilities and costs arising from the
Release or threatened Release of any Contaminant;
(v) No Environmental Lien has attached to any portion of the Project,
and the Lessee shall not cause or suffer any action or occurrence that will
allow an Environmental Lien to attach to any portion of the Project;
(vi) The Lessee has not received, and is not otherwise aware of, any
notice, claim or other communication concerning (A) any alleged violation
of any Environmental Requirements at the Project, whether or not corrected
to the satisfaction of the appropriate authority, (B) any alleged liability
of the Lessee for Environmental Damages arising out of or related to the
Project, or (C) any alleged liability of the Lessee arising out of or
related to the Project for the Release or threatened Release of a
Contaminant at any location, and there exists no writ, injunction, decree,
order or judgment outstanding, nor, to the best knowledge of the Lessee,
after due inquiry, any lawsuit, claim, proceeding, citation, directive,
summons or investigation, pending or threatened, relating to the condition,
ownership, use, maintenance, construction or operation of the Project, or
the suspected presence of Contaminants thereon or therefrom, nor does there
exist any basis for such lawsuit, claim, proceeding, citation, directive,
summons or investigation being instituted or filed;
(vii) To the best knowledge of the Lessee, after due inquiry, there
has been no Release of any Contaminants which would constitute a violation
of any Environmental Requirement with respect to the Project or which would
require any Remedial Action at, to or from the Project, and the Lessee
shall not cause or suffer any such Release during the term of this Lease;
(viii) The Project is not listed or proposed for listing on the
National Priorities List ("NPL") pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act, as amended
("CERCLA"), or listed on the Comprehensive Environmental Response
Compensation Liability Information System List ("CERCLIS") or any similar
state list of sites, and the Lessee is not aware of any conditions at the
Project which, if known to a Governmental Authority, would qualify the
Project for inclusion on any such list;
(ix) Neither the Lessee nor, to the best knowledge of the Lessee,
after due inquiry, any contractor engaged by the Lessee in connection with
the Project has transported or arranged for the transport of any
Contaminant from the Project to any
19
facility or site for the purpose of treatment or disposal which (A) is
included on the NPL, or (B) to the best knowledge of the Lessee, is or was,
at the time of disposal, subject to a Remedial Action requirement (other
than routine, anticipated regulatory requirements, including, but not
limited to, closure-related corrective action obligations affecting closed
solid waste management units at such facility) issued under the federal
Resource Conservation and Recovery Act or any state, local or foreign solid
or hazardous waste regulatory law, or (C) at the time of the disposal had
received a notice of violation or was otherwise subject to a governmental
enforcement action with respect to alleged violations of any Environmental
Requirements, and the Lessee shall use its best efforts not to suffer or
permit any such transportation or arrangement to any such facility or site
during the term of this Lease;
(x) Neither the Lessee nor, to the best knowledge of the Lessee, after
due inquiry, any contractor engaged by the Lessee in connection with the
Project has engaged in or permitted, nor shall the Lessee engage in or
permit, any operations or activities upon, or any use or occupancy of the
Project or any portion thereof, for the purpose of or in any way involving
the illegal or improper release, discharge, refining or dumping of any
Contaminant or the illegal or improper handling, storage, use or disposal
of any Contaminant, nor has the Lessee or any other Person caused any
Contaminant to be deposited, released, stored, disposed, leached or
otherwise come to be located on, under, in or about the Premises, nor to
the knowledge of the Lessee has any Contaminant migrated from the Premises
onto or underneath other properties;
(xi) To the best knowledge of the Lessee, after due inquiry, there is
not constructed, placed, deposited, stored, disposed nor located on the
Project or the Premises any asbestos in any form which has become or
threatens to become friable. The Lease shall not cause or suffer the use of
any asbestos containing material in connection with its management and
operation of the Project during the term of this Lease;
(xii) To the best knowledge of the Lessee, after due inquiry, there is
not constructed, placed, deposited, released, stored, disposed, leached nor
located on the Project any mono- or poly-chlorinated biphenyls ("PCBs") or
transformers, capacitors, ballasts, or other equipment which contain
dielectric fluid containing PCBs. The Lessee shall not cause or suffer the
use of any article containing PCBs at or on the Project during the term of
this Lease;
(xiii) To the best knowledge of the Lessee, the Lessee has no
liability, and has neither received nor is otherwise aware of any notice,
claim or other communication alleging liability on the part of the Lessee,
for the violation of any Environmental Requirements, for Environmental
Damages, or for the presence, Release, or threatened Release of any
Contaminant in connection with the Project; and
(xiv) None of the matters identified in the environmental reports
delivered pursuant to Section 4 of the Agreement for Lease, individually or
in the aggregate, could reasonably be expected to have a material adverse
effect on (A) the construction, operation, maintenance, leasing, ownership,
use, value or regulatory status of the Project, (B) the ability of the
Lessee to observe and perform its obligations under this Lease, the
Agreement for Lease, the Pledge Agreement, the Facility Support Agreement,
the Consent or the Project Contracts in a timely manner or the ability of
the Guarantor to perform its obligations under the Guaranty in a timely
manner, (C) the business, assets, properties, financial condition,
operations or prospects of the Lessee or the Guarantor, or (D) the rights
or interests of the Lessor or Assignee under this Lease, the Agreement for
Lease, the Pledge Agreement, the Facility Support Agreement, the Consent or
the Project Contracts.
20
(p) Project Authorizations. The Lessee has obtained, or
shall in the ordinary course of business obtain prior to the time required, all
certificates, Permits, Governmental Actions, licenses, authorizations and
approvals required (i) in the management and operation of the Project in
accordance with and as contemplated by the Project Contracts, the Facility
Support Agreement and this Lease, (ii) for any change or modification of the use
of the Project, (iii) for construction of any improvements thereto and (iv) for
acquisition of equipment related to the Project for use with respect thereto,
and a list of all such certificates, Permits, Governmental Actions, licenses,
authorizations and approvals required by all applicable law in effect on the
date hereof is attached as Exhibit D hereto.
(q) Compliance with Project Contracts. The physical condition of the
Project as it is presently constructed complies with all material requirements
of each Project Contract and will enable the Lessee to perform all of its
obligations under the Project Contracts, the Facility Support Agreement and this
Lease in accordance with their respective terms.
(r) Pledge Agreement. The Pledge Agreement has been duly authorized,
executed and delivered by the Lessee and, assuming the due authorization,
execution and delivery of the Pledge Agreement by the Lessor, is a legal, valid
and binding obligation of the Lessee, enforceable according to its terms. The
Pledge Agreement creates a valid first priority security interest in the
Collateral (as defined in the Pledge Agreement), securing the payment of the
Secured Obligations (as defined in the Pledge Agreement). All action necessary
to perfect the security interest in the Collateral has been taken and such
security interest has priority over any other Lien on the Collateral, except for
Permitted Liens.
(s) Operation of the Project. The Project is being constructed such that,
on and after the achievement of Operational Acceptance (as such term is defined
in the EPC Contract) it will be able (i) to be operated on a safe and reasonably
economic basis in compliance with all material Governmental Actions existing at
the time, the Project Contracts, the Facility Support Agreement and this Lease
for a period of at least 30 years thereafter, and (ii) to be mechanically
operated on a safe basis in compliance with all existing material Governmental
Actions for a period of at least 30 years thereafter.
(t) Utility Availability. All utility services and Interconnections
necessary for the operation of the Project (including, without limitation, gas,
electrical, water, coal supply and storage and sewage services and facilities)
are available for use at the boundaries of the Premises or within a reasonable
distance from the Premises.
21
(u) Guaranty. The Guaranty has been duly authorized, executed and delivered
by the Guarantor and constitutes a legal, valid and binding obligation of the
Guarantor, enforceable according to its terms.
(v) Disclosure. None of the representations made by the Lessee in this
Lease or the Agreement for Lease or the financial statements referred to in
paragraph (i)(e) of Section 2 hereof, contained as of its date any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the representations contained herein or the statements contained
therein not misleading in light of the circumstances under which they were made.
(w) No Default. Neither the Lessee nor the Guarantor is in violation of or
in default under or with respect to any Legal Requirement in any respect which
could reasonably be expected to have a material adverse effect on (i) the
construction, operation, maintenance, leasing, ownership, use, value or
regulatory status of the Project, (ii) the ability of the Lessee to observe and
perform its obligations under this Lease, the Agreement for Lease, the Pledge
Agreement, the Facility Support Agreement, the Consent or the Project Contracts
in a timely manner or the ability of the Guarantor to perform its obligations
under the Guaranty in a timely manner, (iii) the business, assets, properties,
financial condition, operations or prospects of the Lessee or the Guarantor, or
(iv) the rights or interests of the Lessor or Assignee under this Lease, the
Agreement for Lease, the Pledge Agreement, the Facility Support Agreement, the
Consent or the Project Contracts.
(x) Taxes. The Lessee has filed or caused to be filed all tax returns which
are required to be filed by it, and has paid all taxes shown to be due and
payable on said returns or on any assessments made against it or any of its
assets and properties and has paid all other taxes, fees or other charges
imposed on it by any Governmental Authority (except taxes, fees and charges
subject to a Permitted Contest).
(y) Budgets. All budgets (including the Budget) furnished or to be
furnished to the Lessor and Assignee by or on behalf of the Lessee and the
summaries of significant assumptions related thereto, if any (i) have been and
will be prepared with due care in accordance with prudent business practices,
(ii) fairly present, and will fairly present the Lessee's expectations as to the
matters covered thereby as of their date, (iii) are based on, and will be based
on, assumptions that are reasonable as to all factual and legal matters material
to the estimates therein and (iv) are in all material respects consistent with,
and will be in all material respects consistent with, the provisions of this
Lease, the Agreement for Lease and the Project Contracts. The Budget includes
all costs and expenses that could reasonably be expected to be incurred in
connection with the construction of the Project.
(z) Facility Support Agreement. The Facility Support Agreement has been
duly authorized, executed and delivered by the Lessee and, assuming the due
authorization, execution and delivery of the Facility Support Agreement by the
Lessor, is a legal, valid and binding obligation of the Lessee, enforceable
according to its terms.
(ii) The Lessee covenants to the Lessor:
22
(a) Distributions in Default. So long as an Event of Default pursuant to
paragraph (a) of Section 18 hereof has occurred and is continuing, the Lessee
will not make any distributions or return of capital of any kind to any of its
equity investors or any payment of management fees or any payments of principal
or interest on any subordinated debt.
(b) Conduct of Business and Maintenance of Corporate Existence. The Lessee
will (i) preserve, renew and keep in full force and effect its existence as a
corporation in good standing under the laws of the State of Wyoming until the
expiration or other termination of this Lease and the indefeasible payment of
all amounts owing hereunder, and (ii) maintain all rights, privileges and
franchises material to the conduct of its business; provided, however, that
nothing contained in this paragraph (b) shall prevent the Lessee from
consummating any merger, consolidation or sale permitted by the provisions of
Section 25 hereof.
(c) Delivery of Information. The Lessee shall deliver to the Lessor and
Assignee from time to time, (i) (A) promptly, and in any event not more than 120
days after the end of each fiscal year of the Lessee (commencing with the fiscal
year 2001), copies of the Lessee's annual audited financial statements and
promptly, and in any event not more than 60 days after the end of each of the
first three fiscal quarters of each relevant fiscal year of the Lessee, copies
of the Lessee's quarterly unaudited financial statements, both prepared in
accordance with GAAP, and (B) promptly, and in any event not more than 120 days
after each fiscal year of the Guarantor, copies of the Guarantor's Annual Report
on Form 10-K and promptly, and in any event not more than 60 days after the end
of each of the first three fiscal quarters of each relevant fiscal year of the
Guarantor, copies of the Guarantor's Quarterly Reports on Form 10-Q and promptly
any other reports the Guarantor files with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, (ii) promptly upon
request, such other information with respect to the Lessee's or the Guarantor's
operations, business, properties, assets, financial condition or litigation as
the Lessor or any Assignee shall reasonably request, (iii) promptly after a
Responsible Officer obtains knowledge of any Event of Default, Potential
Default, Event of Loss, Taking or Termination Event, a certificate of a
Responsible Officer specifying the nature and period of existence of such Event
of Default, Potential Default, Event of Loss, Taking or Termination Event, and
what action, if any, the Lessee has taken, is taking, or proposes to take with
respect thereto, (iv) promptly after a Responsible Officer obtains knowledge of
any material adverse change in the financial condition or business of the
Lessee, or of any liabilities or obligations arising as a result of tortious
action or omission or Environmental Damages or in respect of governmental fines
or obligations (other than taxes) or liabilities or obligations arising as a
result of Environmental Matters, or of any material adverse change in the
financial condition or business of the Guarantor or of any litigation of the
type described in paragraph (i)(g) of this Section 2, a certificate of a
Responsible Officer describing such change, liabilities, obligations or
litigation, as the case may be, and what action, if any, the Lessee has taken,
is taking, or proposes to take with respect thereto, (v) simultaneously with the
delivery of each set of annual and quarterly financial statements referred to in
clause (i) of this paragraph (c), a certificate of a Responsible Officer
stating, to the best knowledge of such Responsible Officer after reasonable
inquiry, whether there exists on the date of such certificate any Event of
Default, Potential Default, Event of Loss, Taking or Termination Event or
default under any Project Contract, and if any Event of Default, Potential
Default, Event of Loss, Taking or Termination Event or default under any Project
Contract exists, specifying the nature and period of existence thereof and what
action, if any, the Lessee has taken, is taking, or
23
proposes to take with respect thereto and (vi) promptly after a Responsible
Officer obtains knowledge of any legal, governmental or regulatory proceeding
that could have a material adverse effect on (A) the construction, operation,
maintenance, leasing, ownership, use, value or regulatory status of the Project,
(B) the ability of the Lessee to observe and perform its obligations under this
Lease, the Agreement for Lease, the Pledge Agreement, the Facility Support
Agreement, the Consent or the Project Contracts in a timely manner or the
ability of the Guarantor to perform its obligations under the Guaranty in a
timely manner, (C) the business, assets, properties, financial condition,
operations or prospects of the Lessee or the Guarantor or (D) the rights or
interests of the Lessor or Assignee under this Lease, the Agreement for Lease,
the Pledge Agreement, the Facility Support Agreement, the Consent or the Project
Contracts, a certificate of a Responsible Officer describing each such
proceeding and what action, if any, the Lessee has taken, is taking, or proposes
to take with respect thereto.
(d) Regulation. Neither the Lessor nor any Assignee nor any of their
respective Affiliates is or will be, solely by reason of (i) its entering into
this Lease, the Agreement for Lease or any other document contemplated hereby,
(ii) the acquisition, ownership, leasing or financing of the Project (or any
part thereof) or (iii) the operation of the Project (or any part thereof) in
accordance with and as contemplated by the Project Contracts and this Lease,
during the term of this Lease, the Agreement for Lease or the Power Purchase
Agreements, subject to regulation under any Legal Requirement (including any
Legal Requirement (A) under the 1935 Act, (B) imposed by any state or local
public utility commission or other similar regulatory body, authority or group,
or (C) under the Federal Power Act, as amended).
(e) Project Information. The Lessee shall furnish to the Lessor and
Assignee:
(i) all material written communications relating to any pending
or threatened investigations, claims or proceedings with respect to
any Governmental Action or proposing to amend, modify or affect any
Governmental Action then required to be in effect with respect to the
Project;
(ii) written notice of the occurrence of any event giving rise
(or that could reasonably be expected to give rise) to a claim under
any insurance policy maintained pursuant to the terms of this Lease in
an amount greater than $100,000 together with copies of any document
relating thereto (including copies of any such claim) in the
possession or control of the Lessee; and
(iii) promptly upon its execution, a copy of any replacement
Project Contract.
(f) Notice of Environmental Events:
(i) The Lessee shall promptly, but in any case within five (5)
Business Days of receiving actual or constructive notice thereof,
notify the Lessor and Assignee if, after the date of this Lease, (A)
any Environmental Matter has occurred involving the Project or any
part thereof (including, but not limited to, the presence, emission or
unpermitted Release of Contaminants or the violation of any applicable
Environmental Requirements) that could reasonably be expected to
result in penalties or other liabilities
24
in excess of $100,000, or (B) the Lessee has received notification
that it, the Project or any part thereof is the subject of a
proceeding that could reasonably be expected to result in any ordered
remediation or corrective action or other liability related to an
Environmental Matter, the cost of which liability is reasonably
expected to exceed $100,000 (each of (A) and (B) an "Environmental
Event").
(ii) Following the receipt of a notice pursuant to (i) above, the
Lessor and Assignee, in each case in their sole discretion, may
require the Lessee to cause to be conducted by a qualified
environmental consultant satisfactory in all respects to the Lessor
and Assignee, an environmental audit of the Project or related
operation on which the Lessor or Assignee may rely, the scope of which
audit shall be limited to confirming the magnitude and anticipated
cost of the liability resulting from the Environmental Event and to
provide a copy of such environmental consultant's report on its audit
to the Lessor and Assignee.
(iii) The Lessee shall immediately initiate, or cause to be
initiated at no cost to the Lessor or Assignee, such actions as may be
necessary to comply in all respects with all applicable Environmental
Requirements and to alleviate any significant risk to human health or
the environment if the same arises from a condition on or in respect
of the Project or any part thereof, whether existing prior to, on or
after the date of this Lease. Once the Lessee commences such actions,
the Lessee shall thereafter diligently and expeditiously proceed to
comply materially and in a timely manner with all Environmental
Requirements and to eliminate any significant risk to human health or
the environment and shall, at the request of the Lessor or Assignee
during the Initial Term or any Extended Term, give periodic progress
reports on its compliance efforts and actions.
(g) Environmental. The Lessee shall not use or dispose of any Contaminant
or allow any Contaminant to be brought onto or stored or used on or transported
or Released to or from the Project, other than in the ordinary course of
business and in compliance in all material respects with all applicable
Environmental Requirements.
SECTION 3. LEASE OF THE PROJECT.
(a) The date upon which the Lessee receives the Final Advance (as defined
in the Agreement for Lease) under the Agreement for Lease, shall be the
"Effective Date". From and after the Effective Date, and during the Initial Term
and any Extended Term and any Renewal Term, the Lessor does hereby lease the
Project (including a sublease of the Lessor's interest in the Premises) to the
Lessee and the Project and the rights and obligations of the Lessor and the
Lessee shall be governed by this Lease and not the Agreement for Lease, except
to the extent otherwise expressly provided in this Lease and the Agreement for
Lease. On the Effective Date, the Lessee shall be deemed to have certified that
all representations and warranties of the Lessee contained in this Lease are
true and correct in all material respects on and as of the Effective Date. As
provided in the Agreement for Lease, on the Effective Date, the Acquisition Cost
and the Adjusted Acquisition Cost shall be adjusted, if necessary, to reflect
(i) the Completion Amount advanced to the Lessee under the Agreement for Lease
and (ii) the Retention, if any.
25
(b) Up to six (6) months after the Final Advance (as defined in the
Agreement for Lease), the Lessee may request a Completion Advance under the
Agreement for Lease by delivering a Certificate of Increased Cost (as defined in
the Agreement for Lease) to the Lessor and otherwise complying with the terms of
Section 7 of the Agreement for Lease. On or before the fifth Business Day prior
to the date upon which the Lessee receives the Final Advance (as defined in the
Agreement for Lease), the Lessee shall designate the Completion Amount. After
such designation the aggregate amount of the Completion Advance shall not exceed
the Completion Amount. The provisions of paragraph (b) of subsection 2.3 and
Section 7 of the Agreement for Lease shall govern (i) the designation of the
Completion Amount, (ii) the making of the Completion Advance and (iii) any
adjustments to the Acquisition Cost and the Adjusted Acquisition Cost occasioned
thereby. At the time the Completion Advance is made, the Lessee shall be deemed
to have certified that all representations and warranties of the Lessee
contained in this Lease are true and correct in all material respects on and as
of such date.
SECTION 4. OPERATING LEASE.
(a) It is the intent of the Lessee and the Lessor that: (i) this Lease
constitutes an operating lease from the Lessor to the Lessee for purposes of the
Lessee's financial reporting, (ii) this Lease and other transactions
contemplated hereby preserve the ownership of the Project in the Lessee for
federal, state and local income tax and bankruptcy purposes, and (iii) this
Lease grants to the Lessor a Lien on the Project. The Lessee and the Lessor
agree that the Lessor shall be deemed to have a valid and binding security
interest in and Lien on the Project, free and clear of all Liens, other than
Permitted Liens, as security for the obligations of the Lessee under this Lease
and the Agreement for Lease (it being understood and agreed that the Lessee does
hereby grant a Lien, and convey, transfer, assign, mortgage and warrant to the
Lessor and its successors, transferees and assigns, for the benefit of the
Lessor and its successors, transferees and assigns, on the Project and any
proceeds or products thereof, to have and hold the same as collateral security
for the payment and performance of the obligations of the Lessee under this
Lease and the Agreement for Lease).
(b) Specifically, without limiting the generality of paragraph (a) of this
Section 4, the Lessee and the Lessor intend and agree that in the event of any
insolvency or receivership proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency laws or statute of the United
States of America or any State thereof affecting the Lessee, the Lessor, any
Assignee or any collection actions relating thereto, the transactions evidenced
by the Agreement for Lease and this Lease shall be regarded as loans made by the
Lessor to the Lessee.
SECTION 5. ABSOLUTE OBLIGATION.
(a) The obligations of the Lessee to pay all amounts payable pursuant to
this Lease (including specifically and without limitation amounts payable under
Sections 7 and 11 hereof) shall be absolute and unconditional under any and all
circumstances of any character, and such amounts shall be paid without notice,
demand, defense, set-off, deduction or counterclaim and without abatement,
suspension, deferment, diminution or reduction of any kind whatsoever,
26
except as herein expressly otherwise provided. The obligation of the Lessee to
lease and pay Basic Rent, Additional Rent, and any other amounts due hereunder
(including, without limitation, the amounts required to be paid pursuant to
paragraph (e) of Section 7 hereof) for the Project accepted for lease pursuant
to this Lease is without any warranty or representation, express or implied, as
to any matter whatsoever on the part of the Lessor or any Assignee or any
Affiliate of either, or anyone acting on behalf of any of them.
THE LESSEE HAS SELECTED THE PROJECT ON THE BASIS OF ITS OWN JUDGMENT.
EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN UPON A TRANSFER OF THE LESSOR'S
INTEREST IN THE PROJECT TO THE LESSEE OR A THIRD PARTY, NEITHER THE LESSOR NOR
ANY ASSIGNEE NOR ANY AFFILIATE OF EITHER, NOR ANYONE ACTING ON BEHALF OF ANY OF
THEM MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND WHATSOEVER, EXPRESS OR
IMPLIED, INCLUDING, WITHOUT LIMITATION, AS TO THE SAFETY, TITLE, CONDITION,
QUALITY, QUANTITY, FITNESS FOR USE, MERCHANTABILITY, CONFORMITY TO
SPECIFICATION, OR ANY OTHER CHARACTERISTIC, OF THE PROJECT, OR AS TO WHETHER THE
PROJECT OR THE OWNERSHIP, USE, OCCUPANCY OR POSSESSION THEREOF COMPLIES WITH ANY
LAWS, RULES, REGULATIONS OR REQUIREMENTS OF ANY KIND.
AS BETWEEN THE LESSEE AND THE LESSOR, ANY ASSIGNEE OR ANY INDEMNIFIED
PERSON, THE LESSEE ASSUMES ALL RISKS AND WAIVES ANY AND ALL DEFENSES, SET-OFFS,
DEDUCTIONS, COUNTERCLAIMS (OR OTHER RIGHTS), EXISTING OR FUTURE, AS TO THE
LESSEE'S OBLIGATION TO PAY BASIC RENT AND ALL OTHER AMOUNTS PAYABLE HEREUNDER,
INCLUDING, WITHOUT LIMITATION, ANY RELATING TO:
(A) THE SAFETY, TITLE, CONDITION, QUALITY, FITNESS FOR USE,
MERCHANTABILITY, CONFORMITY TO SPECIFICATION, OR ANY OTHER QUALITY OR
CHARACTERISTIC OF THE PROJECT, LATENT OR NOT;
(B) ANY SET-OFF, COUNTERCLAIM, RECOUPMENT, ABATEMENT, DEFENSE OR OTHER
RIGHT WHICH THE LESSEE MAY HAVE AGAINST THE LESSOR, ANY ASSIGNEE OR ANY
INDEMNIFIED PERSON FOR ANY REASON WHATSOEVER ARISING OUT OF THIS OR ANY OTHER
TRANSACTION OR MATTER;
(C) ANY DEFECT IN TITLE OR OWNERSHIP OF THE PROJECT OR ANY TITLE
ENCUMBRANCE NOW OR HEREAFTER EXISTING WITH RESPECT TO THE PROJECT;
(D) ANY FAILURE OR DELAY IN DELIVERY OR ANY LOSS, THEFT OR DESTRUCTION OF,
OR DAMAGE TO, THE PROJECT, IN WHOLE OR IN PART, OR CESSATION OF THE USE OR
POSSESSION OF THE PROJECT BY THE LESSEE FOR ANY REASON WHATSOEVER AND OF
WHATEVER DURATION, OR ANY CONDEMNATION, CONFISCATION, REQUISITION, SEIZURE,
PURCHASE, TAKING OR FORFEITURE OF THE PROJECT, IN WHOLE OR IN PART;
27
(E) ANY INABILITY OR ILLEGALITY WITH RESPECT TO THE USE, OWNERSHIP,
OCCUPANCY OR POSSESSION OF THE PROJECT BY THE LESSEE;
(F) ANY INSOLVENCY, BANKRUPTCY, REORGANIZATION OR SIMILAR PROCEEDING BY OR
AGAINST THE LESSEE OR THE LESSOR OR ANY ASSIGNEE;
(G) ANY FAILURE TO OBTAIN, OR EXPIRATION, SUSPENSION OR OTHER TERMINATION
OF, OR INTERRUPTION TO, ANY REQUIRED LICENSES, PERMITS, CONSENTS,
AUTHORIZATIONS, APPROVALS OR OTHER LEGAL REQUIREMENTS;
(H) THE INVALIDITY OR UNENFORCEABILITY OF THIS LEASE OR ANY OTHER INFIRMITY
HEREIN OR ANY LACK OF POWER OR AUTHORITY OF THE LESSOR OR THE LESSEE TO ENTER
INTO THIS CONTRACT;
(I) THE INVALIDITY OR UNENFORCEABILITY OF ANY BILL OF SALE EXECUTED IN
CONNECTION WITH THIS LEASE OR ANY OTHER INFIRMITY THEREIN OR LACK OF POWER OR
AUTHORITY OF ANY PARTY THERETO TO ENTER INTO SUCH BILL OF SALE; OR
(J) ANY OTHER CIRCUMSTANCES OR HAPPENING WHATSOEVER, WHETHER OR NOT SIMILAR
TO ANY OF THE FOREGOING.
THE LESSEE HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY
AND ALL RIGHTS WHICH IT MAY NOW HAVE OR WHICH AT ANY TIME HEREAFTER MAY BE
CONFERRED UPON IT, BY STATUTE OR OTHERWISE, TO TERMINATE, CANCEL, QUIT, RESCIND
OR SURRENDER THIS LEASE EXCEPT IN ACCORDANCE WITH THE EXPRESS TERMS HEREOF. Each
payment of Basic Rent, Additional Rent and any other amount due hereunder made
by the Lessee shall be final, and the Lessee, without waiving any other remedies
it may have, will not seek or have any right to recover all or any part of such
payment from the Lessor or any Assignee for any reason whatsoever.
(b) Notwithstanding any other provision contained in this Lease, it is
specifically understood and agreed that neither the Lessor nor any Assignee nor
any Affiliate of either, nor anyone acting on behalf of any of them makes any
warranties or representations or has any responsibility to disclose any relevant
information, nor, except as set forth in Section 21 of this Lease, has the
Lessor or any Assignee or any Affiliate of either, or anyone acting on behalf of
any of them made any covenants or undertakings or has any other responsibility
or duty, as to the accounting treatment to be accorded the Lessee or as to the
U.S. Federal or any state income or any other tax consequences, if any, to the
Lessee as a result of or by virtue of the transactions contemplated by this
Lease.
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SECTION 6. INITIAL TERM; EXTENDED TERM.
(a) The "Initial Term" shall commence on the Effective Date and shall
continue until June 30, 2008, unless terminated earlier pursuant to Section 13,
14, 15, 16 or 19 hereof.
(b) The "First Extended Term" shall commence on the day following the last
day of the Initial Term and shall continue for up to sixty (60) months, unless
terminated earlier pursuant to Section 12, 13, 14, 15, 16 or 19 hereof. The
"Second Extended Term" shall commence on the day following the last day of the
First Extended Term and shall continue for up to sixty (60) months, unless
terminated earlier pursuant to Section 12, 13, 14, 15, 16 or 19 hereof. The
First Extended Term and the Second Extended Term shall be collectively referred
to herein as the "Extended Term".
SECTION 7. RENT AND OTHER PAYMENTS.
(a) The Lessee hereby agrees to pay the Lessor on each Basic Rent Payment
Date, in immediately available funds, as provided in paragraph (e) of this
Section 7, Basic Rent for the calendar month (or part thereof) in which such
Basic Rent Payment Date falls; provided that, if the Effective Date is on or
after the Lease Rate Date in any first partial monthly period of the Initial
Term, Basic Rent for such partial monthly period shall be payable on the next
succeeding Basic Rent Payment Date.
(b) The Lessor shall furnish to the Lessee on the 16th day of each calendar
month in which a Basic Rent Payment Date falls the Monthly Cost of Project Debt
for such monthly period, or, if such day is not a Business Day, on the next
succeeding Business Day (the "Lease Rate Date"). Prior to each Basic Rent
Payment Date, the Lessor shall furnish the Lessee with a summary of the
calculations of Basic Rent for such Basic Rent Payment Date.
(c) The Lessee hereby agrees to pay on demand all amounts (other than Basic
Rent) payable hereunder, including, without limitation, all amounts payable to
any Indemnified Person pursuant to Section 11 hereof.
(d) Without prejudice to the full exercise by the Lessor of its rights
under Sections 18 and 19 hereof, the Lessee shall pay to the Lessor from time to
time, on demand, as additional rent ("Additional Rent") (i) amounts required to
reimburse the Lessor for its obligations, costs and expenses (not previously
included in Basic Rent or Acquisition Cost) incurred in acquiring, financing
(including obtaining equity financing and refinancing (including without
limitation any amounts owing by the Lessor to its partners as a result of a sale
of limited partnership interests by a limited partner of the Lessor or a
modification of the terms of such equity financing) and maintaining security for
and exercising remedies in connection with any such financing) and leasing the
Project (including, without limitation, all obligations, costs and expenses of
the Lessor arising in connection with the termination of any Financing
Arrangement (whether as a result of a default thereunder or otherwise)), all
interest (including, without limitation, interest at a default rate), breakage
costs and other costs, fees and expenses incurred by the Lessor under any
Financing Arrangement (including any such accruing after the commencement of a
bankruptcy or similar proceeding), fees owing to the general partner of the
29
Lessor under the terms of the Lessor's partnership agreement, rent under the
Ground Lease and amounts owing under any Project Contracts and (ii) to the
extent legally enforceable, an amount computed by multiplying (A) all sums not
paid by the Lessee to the Lessor as provided in this Lease on or before the date
such payments are due, by (B) the decimal equivalent of the Monthly Cost of
Project Debt as most recently furnished by the Lessor, and by (C) a fraction
having a numerator equal to the number of days in the period from but excluding
such due date to and including the date of payment thereof and a denominator of
360. The Lessee shall also pay to the Lessor on demand an amount equal to any
expenses incurred by the Lessor in collecting such unpaid sums.
(e) Basic Rent and Additional Rent and any other amount payable by the
Lessee to the Lessor shall be paid such that immediately available funds in the
full amount due are available on the date due, to the account of the Lessor at
such bank, or to such account of such other Person at such bank, or otherwise as
the Lessor may from time to time designate.
(f) During the Lease Term the Lessor shall calculate, on each Lease Rate
Date (except the first Lease Rate Date hereunder), the difference, if any,
between (i) the Variable Component of Basic Rent paid by the Lessee for the
previous calendar month and (ii) an amount equal to what the Variable Component
of Basic Rent would have been for such calendar month had the Variable Component
of Basic Rent been calculated using the weighted average equivalent percentage
cost per annum of borrowings outstanding at any time (as specified in the
definition of Monthly Cost of Project Debt) and equity contributions made (as
specified in the definition of Monthly Cost of Project Equity) during the
previous calendar month (rather than during the applicable Computation Period);
provided, that with respect to the Variable Component of Basic Rent for the last
month of the Lease Term, such calculation shall occur on the last day of the
Lease Term. On or about August 16 of each year of the Lease Term, and on the
last day of the Lease Term, the Lessor shall furnish to the Lessee a calculation
of the aggregate difference between the amounts determined under clause (i)
above and the correlating amounts determined under clause (ii) above (the
"Reconciliation Amount") for each calendar month since the date of this Lease or
each calendar month since the last time the Reconciliation Amount was
calculated, whichever is later. The Lessor and the Lessee agree that if the
Reconciliation Amount is a positive number, then such amount shall be credited
against the amount of Basic Rent that the Lessee is required to pay on the next
Basic Rent Payment Date (or Basic Rent Payment Dates, if such amount shall
exceed the amount of Basic Rent payable in the next succeeding month), and if
the Reconciliation Amount is a negative number, then such amount shall be
payable by the Lessee on the next Basic Rent Payment Date in addition to the
amount of Basic Rent due and payable on such Basic Rent Payment Date, except
that with respect to the Reconciliation Amount computed on the last day of the
Lease Term, such amount shall be paid by the Lessor to the Lessee (in the case
of a positive number) or by the Lessee to the Lessor (in the case of a negative
number) on the last day of the Lease Term. Any notices required by this
paragraph (f) which are furnished to the Lessee by the Lessor shall be
conclusive, absent manifest error, as to the contents thereof.
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SECTION 8. RESTRICTED USE; COMPLIANCE WITH LAWS.
(a) The Lessee will not do or permit any act or thing which might impair,
other than normal wear and tear arising out of the proper and normal use
thereof, the value or usefulness of the Project.
(b) The Lessee shall promptly and duly execute, deliver, file and record,
at the Lessee's expense, all such documents, statements, filings and
registrations, and take such further action, as the Lessor shall from time to
time reasonably request in order to establish, perfect and maintain the Lessor's
title to and interest in the Project (other than Removable Improvements) and any
Assignee's interest in this Lease or the Project as against the Lessee or any
third party in any applicable jurisdiction. Equipment, machinery, apparatus,
fixtures, structures and installations may be substituted for portions of the
Project (other than Removable Improvements) if (i) the Lessor and Assignee
consent to such substitution, such consent not to be unreasonably withheld or
denied, (ii) the Lessor and Assignee shall determine that such substitution is
consistent with prudent business practices and could not reasonably be expected
to adversely affect the Lessee's ability to perform its obligations under this
Lease, the Facility Support Agreement and the Project Contracts nor result in a
reduction in the value, utility or remaining economic useful life of the Project
(assuming the Project is in the condition required hereby), or (iii) such
substitution is performed by the Lessee or the Operator in the normal course of
operating and maintaining the Project in accordance with the Project Contracts
and is consistent with prudent industry practices. As equipment, machinery,
apparatus, fixtures, structures and installations are added to, or substituted
for, portions of the Project (other than Removable Improvements), title to such
additional or substitute equipment, machinery, apparatus, fixtures, structures
and installations shall automatically be transferred to the Lessor and such
equipment, machinery, apparatus, fixtures, structures and installations shall
become a part of the Project and shall be subject to this Lease and title to the
existing equipment, machinery, apparatus, fixtures, structures and installations
which are being substituted for (other than Removable Improvements) shall be
released by the Lessor to the Lessee. The Lessee may, so long as no Potential
Default, Event of Default, Event of Loss, Taking or Termination Event has
occurred and is continuing, remove any Removable Improvement in its entirety.
"Removable Improvement", for the purposes hereof, shall mean any part that (i)
is in addition to, and not in replacement of or substitution for (x) any part
originally incorporated or installed in or attached to the Project on the
Effective Date or (y) any part in replacement of, or substitution for, any such
part, (ii) is not required to be incorporated or installed in or attached or
added to the Project pursuant to the terms of the Plans (as defined in the
Agreement for Lease), the Project Contracts or this Lease and (iii) can be
removed from the Project without causing damage to the Project or any portion
thereof, without adversely affecting the ability of the Project to operate in
accordance with the Project Contracts, the Facility Support Agreement and this
Lease and without diminishing the value, utility or remaining economic useful
life which the Project would have had at such time had such alteration,
modification or addition not been made (assuming the Project is in the condition
required hereby). Upon the removal by the Lessee of any Removable Improvement as
provided in the immediately preceding two sentences, title thereto shall,
without further act, vest in the Lessee and such Removable Improvement will no
longer be deemed part of the Project. Any Removable Improvement not removed by
the Lessee prior to the return of the Project to the Lessor hereunder shall
remain the property of the Lessor.
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(c) The Lessee shall use every reasonable precaution to prevent loss or
damage to the Project and to prevent injury to third persons or property of
third persons. The Lessee shall cooperate fully with the Lessor and all
insurance companies providing insurance pursuant to Section 10 hereof in the
investigation and defense of any claims or suits arising from the ownership,
operation, occupancy or use of the Project; provided that nothing contained in
this paragraph (c) shall be construed as imposing on the Lessor any duty to
investigate or defend any such claims or suits. The Lessee shall comply and
shall cause all Persons using, operating or occupying the Project to comply with
the Project Contracts and with all Insurance Requirements and Legal Requirements
applicable to the Project, to the Lessee or such Person in connection with such
Person's use, operation or occupancy of the Project (as the case may be) and to
the acquiring, titling, registering, leasing, insuring, using, occupying,
operating and disposing of the Project or any part thereof, and the licensing of
operators thereof.
(d) The Lessor or any Assignee, or any authorized representative of either,
may during reasonable business hours from time to time inspect the Project and
deeds, registration certificates, certificates of title and related documents,
including as to Environmental Matters, covering the Project wherever the same
may be located, but neither the Lessor nor any Assignee shall have any duty to
make any such inspection.
(e) The Lessee shall not, without the prior written consent of the Lessor,
permit, or suffer to exist, any Lien upon the Project, including mechanics'
liens or create any Lien upon the Premises, other than Permitted Liens, nor may
it sell or assign any right or interest herein or in the Project. The Lessee
shall not relinquish possession of the Project or any part thereof, except to
the Operator, the General Contractor and to any other contractor for use in
performing work on the Project for the Lessee pursuant to and in accordance with
the Project Contracts; provided that such relinquishment of possession shall in
no way affect the obligations of the Lessee or the rights of the Lessor
hereunder and with respect to the Project. The Lessee may sublease the Project;
provided, that (i) the terms of the instrument of sublease and the identity of
the sublessee shall be subject to the prior written approval of the Lessor and
any Assignee, which approval shall not be unreasonably withheld or delayed, (ii)
each such sublease shall expressly be made subject and subordinate to the
provisions hereof and shall, at the sole option of the Lessor and Assignee, by
its terms be subject to termination upon the termination for any reason of this
Lease, (iii) no such sublease shall modify or limit any right or power of the
Lessor or Assignee hereunder or affect or reduce any obligation of the Lessee
hereunder, and all such obligations shall continue in full force and effect as
obligations of a principal and not of a guarantor or surety, as though no such
subletting had been made, and (iv) any such sublease made otherwise than as
expressly permitted by this paragraph (e) shall be void and of no force and
effect. As additional security to the Lessor for the performance of the Lessee's
obligations under this Lease, the Lessee hereby assigns to the Lessor and
Assignee all of its right, title and interest in and to all subleases permitted
hereby and agrees to cause any sublessee to enter into attornment agreements
with the Lessor as the Lessor or Assignee shall request. The Lessor shall have
the present and continuing right to collect and enjoy all rents and other sums
of money payable under any such sublease, and the Lessee hereby irrevocably
assigns such rents and other sums to the Lessor for the benefit and protection
of the Lessor; provided that, unless an Event of Default, Event of Loss, Taking
or Termination Event shall have occurred and be continuing hereunder, the Lessee
shall be entitled to collect and enjoy such rents and other sums. The Lessee
shall, within thirty (30) days after the execution of any such sublease, deliver
32
a conformed copy thereof to the Lessor and Assignee. Nothing contained in this
Lease shall be construed as constituting the consent or request of the Lessor or
Assignee, express or implied, to or for the performance by any contractor,
laborer, materialman or vendor of any labor or services or for the furnishing of
any materials for any construction, alteration, addition, repair or demolition
of or to the Project or any part thereof. Notice is hereby given that the Lessor
will not be liable for any labor, services or materials furnished or to be
furnished to the Lessee, or to anyone holding the Project or any part thereof
through or under the Lessee, and that no mechanics' or other liens for any such
labor, services or materials shall attach to or affect the interest of the
Lessor or Assignee in and to the Project.
(f) If any Lien or charge of any kind or any judgment, decree or order of
any court or other Governmental Authority (including, without limitation, any
state or local tax lien affecting the Project), whether or not valid, shall be
asserted or entered which might interfere with the due and timely payment of any
sum payable or the exercise of any of the rights or the performance of any of
the duties or responsibilities under this Lease, the Lessee shall, upon
obtaining knowledge thereof or upon receipt of notice to that effect from the
Lessor, promptly take such action as may be necessary to prevent or terminate
such interference.
(g) So long as this Lease is in effect or thereafter if the Lessee remains
as party to any Project Contract as a result of its failure to assign to the
Lessor (or its designated purchaser) all right, title and interest of the Lessee
in and to such Project Contract pursuant to the terms of this Lease, the Lessee
shall not create, incur, assume or permit to exist any Lien upon the Lessee's
rights or obligations with respect to any Project Contract (other than the Lien
of the Pledge Agreement), or sell or assign the Lessee's interest in any Project
Contract, other than as permitted pursuant to a Financing Arrangement and the
Pledge Agreement. The Lessee agrees that without the prior written consent of
the Lessor and Assignee, no amendment, modification, supplement or restatement
shall be made to any Project Contract, nor shall any Project Contract be
terminated or replaced by a substitute agreement, nor shall the Lessee grant or
request any waiver pursuant to any Project Contract other than (i) change orders
under the EPC Contract in the manner and to the extent permitted under the
Agreement for Lease, (ii) the expiration of the EPC Contract in accordance with
its terms, and (iii) any amendment, modification, supplement, restatement
consent or waiver which could not reasonably be expected to have a material
adverse effect on (A) the construction, operation, maintenance, leasing,
ownership, use, value or regulatory status of the Project, (B) the ability of
the Lessee to observe and perform its obligations under this Lease, the
Agreement for Lease, the Pledge Agreement, the Facility Support Agreement, the
Consent or the Project Contracts in a timely manner or the ability of the
Guarantor to perform its obligations under the Guaranty in a timely manner, (C)
the business, assets, properties, financial condition, operations or prospects
of the Lessee or the Guarantor, or (D) the rights or interests of the Lessor or
Assignee under this Lease, the Agreement for Lease, the Pledge Agreement, the
Facility Support Agreement, the Consent or the Project Contracts.
(h) The Project shall be maintained and operated solely as contemplated by
the Project Contracts. The Lessee shall at its own expense take all actions as
may from time to time be necessary so that neither the Lessor, Assignee nor any
of their Affiliates will, solely as a result of entering into this Lease or any
other document contemplated hereby or entered into in connection herewith or the
transactions contemplated hereby or thereby (including, without limitation, the
acquisition, operation, leasing, ownership or financing of the Project (or any
33
part thereof) or the delivery of electricity) be deemed to be, or be subject to
regulation as, a public utility, an electric utility or a public utility holding
company under any Legal Requirement, and the Lessee shall promptly and duly
prepare and, if necessary, execute and file, and prepare for execution and
filing by the Lessor, Assignee or any Affiliate thereof, such notices,
applications and other documents as shall be necessary so that the Lessor,
Assignee or any such Affiliate, as the case may be, shall be free of all such
regulation. The Lessor, Assignee or any Affiliate thereof shall cooperate with
the Lessee with respect to all actions of the Lessee required by this paragraph
(h).
SECTION 9. MAINTENANCE, IMPROVEMENT AND REPAIR OF THE PROJECT.
(a) Upon the request of the Lessee, the Lessor will, so long as no Event of
Default shall have occurred and be continuing, assign or otherwise make
available to the Lessee any and all rights the Lessor may have under any
vendor's or manufacturer's warranties or undertakings with respect to any
equipment constituting a part of the Project.
(b) The Lessee shall pay all costs, expenses, fees and charges incurred in
connection with the ownership, use, operation or occupancy of the Project.
Except as otherwise provided in Section 15, the Lessee shall at all times, at
its own expense, and subject to reasonable wear and tear, maintain or cause the
Operator to maintain the Project as contemplated by, and during the term of, the
Project Contracts, and upon the expiration of the Project Contracts to maintain
the Project in accordance with generally accepted industry practices. The Lessee
hereby agrees to indemnify and hold the Lessor and each Assignee harmless from
and against all costs, expenses, claims, losses, damages, fines or penalties,
including reasonable counsel fees, arising out of or due to the Lessee's failure
to fulfill its obligations under this paragraph (b).
(c) The Lessee shall pay or discharge: (i) all taxes, assessments, levies,
fees, water and sewer rents and charges, and all other governmental charges,
general and special, ordinary and extraordinary, foreseen and unforeseen, which
are, at any time, imposed or levied upon or assessed against (A) the Project,
(B) any Basic Rent, any Additional Rent or other sum payable hereunder or (C)
this Lease or the leasehold estate hereby created, or which arises in respect of
the ownership, operation, occupancy, possession or use of the Project; (ii) all
gross receipts or similar taxes (i.e., taxes based upon gross income which fail
to take into account all customary deductions (e.g., ordinary operating
expenses, depreciation and interest) relating to the Project) imposed or levied
upon, assessed against or measured by any Basic Rent, or any Additional Rent or
other sum payable hereunder; (iii) all sales, value added, use and similar taxes
at any time levied, assessed or payable on account of the acquisition, leasing
or use of the Project; and (iv) all charges of utilities and communications
services serving the Project. Notwithstanding the previous sentence, the Lessee
shall not be required to pay any estate, income or similar tax of the Lessor or
any of its Affiliates (other than any tax referred to in clause (ii) above)
unless such tax is imposed, levied or assessed in substitution for any other
tax, assessment, charge or levy which the Lessee is required to pay pursuant to
this paragraph (c); provided, however, that, if at any time during the term of
this Lease, the method of taxation shall be such that there shall be levied,
assessed or imposed on the Lessor a capital levy or other tax
34
directly on the rents received therefrom, or upon the value of the Project or
any present or any future improvement or improvements on the Project, then all
such taxes, assessments, levies or charges or the part thereof so measured or
based, shall be payable by the Lessee, and the Lessee shall pay and discharge
the same as herein provided; provided, further, that the provisions of this
paragraph (c) shall not apply to taxes which are excluded from the indemnity
provisions of paragraph (b) of Section 11 hereof. The Lessee will furnish to the
Lessor, promptly after demand therefor, proof of payment of all items referred
to above which are payable by the Lessee. If any such assessments may legally be
paid in installments, the Lessee may pay such assessment in installments. The
Lessee will pay and discharge, or cause to be paid and discharged, all taxes,
assessments and governmental charges or levies imposed upon it or its income or
properties, prior to the date on which penalties attach thereto, except to the
extent that any such tax, assessment, governmental charge or levy is the subject
of a Permitted Contest.
(d) So long as no Potential Default, Event of Default, Event of Loss,
Taking or Termination Event shall have occurred and be continuing, the Lessee
may, at its expense, make or permit additions to and alterations to the Project;
provided that the Lessee has obtained the prior approval of the Lessor and
Assignee that during construction and upon completion of such additions or
alterations (i) neither the fair market value of the Project shall be lessened
thereby nor the condition of the Project impaired, below the value, utility or
condition thereof immediately prior to such action (assuming the Project was
then of a condition and repair required to be maintained pursuant to paragraph
(b) of Section 9 hereof), (ii) such work shall be completed in a good and
workmanlike manner in accordance with generally accepted and prudent engineering
and construction practices and in compliance with all applicable Legal
Requirements and Insurance Requirements applicable to it and (iii) at all times
the Project will be capable of delivering electricity at or above the level of
its capability prior to the undertaking of such additions or alterations and
will continue to be able to fully perform under (without any default or excuse
to performance) all Project Contracts and this Lease.
(e) The Lessee agrees to, or to cause the Operator to, maintain at the
Project at all times the necessary equipment in such condition so as to enable
the Project to be operated and maintained in accordance with generally accepted
and prudent industry practices and any other standards required by the Project
Contracts and this Lease. The Lessee shall obtain or cause to be obtained in a
timely manner and maintain or cause to be maintained in full force and effect
all Governmental Actions required for the ownership, construction, leasing,
operation and maintenance of the Project in accordance with and as contemplated
by the Project Contracts and this Lease and as otherwise necessary to perform
its obligations under the Project Contracts and the Facility Support Agreement
and will promptly upon the request of the Lessor or Assignee provide a copy of
each such Governmental Action to the Lessor and Assignee. The Lessee shall
obtain and maintain, or cause to be obtained and maintained, all Intellectual
Property Rights necessary in connection with the construction, operation and
maintenance of the Project.
(f) The Lessee shall give notice to the Lessor promptly upon the receipt of
any notices from any party to any Project Contract that (i) such party is
amending, modifying or waiving or has proposed to amend, modify or waive any
term of any Project Contract, (ii) such party is commencing or proposes to
commence any dispute resolution procedure under the terms of any Project
Contract, (iii) such party is terminating or has proposed to terminate any
Project Contract, (iv) a default or a force majeure event has occurred under any
Project Contract or any
35
Person has alleged that a default or a force majeure event has occurred under
any Project Contract, or (v) there are claims for damages existing as a result
of the Lessee's performance of or its failure to perform any of its obligations
under any Project Contract.
SECTION 10. INSURANCE.
(a) Insurance pursuant to the Project Contracts. The Lessee shall maintain
or cause to be maintained in full force and effect at all times insurance
required by the terms of the Project Contracts.
(b) Insurance by the Lessee.
(i) The Lessee shall procure at its own cost and expense and maintain in
full force and effect at all times on and after the Effective Date (except with
respect to the physical damage described in clause (ii) below), and continuing
throughout the term of this Lease insurance policies with responsible insurance
companies authorized to do business in the State of Wyoming with a Best
Insurance Reports rating of "A" or better and a financial size category of "IX"
or higher, or if not rated by Best, an S&P claims paying ability rating of
"BBB+" or higher, or, if not rated by either of the foregoing, the Lessee's
insurance companies shall be of substantially equivalent financial strength and
creditworthiness of insurance companies that maintain such ratings (or such
other company acceptable to the Lessor and Assignee), with such deductibles as
are approved by the Lessor and Assignee, and with such limits and coverage as is
consistent with prudent industry practices, but in no event less than the limits
and coverage provisions set forth below:
(1) Workers' Compensation Insurance. Workers' compensation insurance
in accordance with and as required under the laws of the State of
Wyoming.
(2) Employer's Liability Insurance. Employer's liability insurance
providing compensation for occupational diseases and for injuries
sustained by or death resulting to employees of the Lessee or its
subcontractors as required by law, including the laws of each
state wherein any work is performed under the Lease and where
employment contracts of such employees were made, including
employer's liability insurance coverage with a $1,000,000 minimum
limit per accident.
(3) Commercial General Liability Insurance. Liability insurance on an
occurrence (or AEGIS or EIM claims-made form) basis against
claims for personal injury (including bodily injury and death)
and property damage. Such insurance shall provide coverage for
products-completed operations, blanket contractual, explosion,
collapse and underground coverage, broad form property damage,
personal injury insurance, and the hostile fire exception to the
pollution liability exclusion with a $1,000,000 minimum limit per
occurrence for combined bodily injury and property damage.
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(4) Automobile Liability Insurance. Automobile liability insurance
against claims for personal injury (including bodily injury and
death) and property damage covering all owned, leased non-owned
and hired motor vehicles, including loading and unloading, with a
$1,000,000 minimum limit per occurrence for combined bodily
injury and property damage and containing appropriate no-fault
insurance provisions wherever applicable.
(5) Excess Liability Insurance. Excess liability insurance on an
occurrence (or AEGIS or EIM claims-made form) basis covering
claims in excess of the underlying insurance described in the
foregoing subsections (2), (3) and (4), with a $100,000,000
minimum limit per occurrence; provided, however, in the event the
available limit of liability is less than $50,000,000 due to
claims against such excess liability insurance, the Lessee shall
purchase additional coverage so that the available limit of
liability under such excess liability insurance is not less than
$100,000,000.
The amounts of insurance required in the foregoing subsections (2), (3),
(4) and this subsection (5) may be satisfied by the Lessee purchasing coverage
in the amounts specified or by any combination of primary and excess insurance,
so long as the total amount of insurance meets the requirements specified above.
(ii) The Lessee shall procure at its own cost and expense and maintain in
full force and effect at all times on and after the Effective Date and
continuing throughout the term of this Lease insurance policies with responsible
insurance companies authorized to do business in the State of Wyoming with a
Best Insurance Reports rating of "A" or better and a financial size category of
"IX" or higher, or if not rated by Best, an S&P's claims paying ability rating
of "BBB+" or higher, or, if not rated by either of the foregoing, the Lessee's
insurance companies shall be of substantially equivalent financial strength and
creditworthiness of insurance companies that maintain such ratings (or such
other company acceptable to the Lessor and Assignee), with such limits and
coverage provisions sufficient to satisfy the requirements set forth in each of
the Project Contracts, but in no event less than the limits and coverage
provisions set forth below:
All Risk Property Insurance. Property damage insurance on an "all
risk" basis, boiler and machinery insurance on a comprehensive
basis (covering all production machinery, including but not
limited to pressure vessels, electrical turbines, generators,
transformers and other related equipment, motors, air tanks,
boilers, machinery, pressure piping or any other similar objects)
including coverage against damage or loss caused by earth
movement (including but not limited to earthquake, landslide,
subsidence and volcanic eruption) fire, lightning and flood and
providing coverage for (1) the Project in a minimum aggregate
amount equal to the "full insurable value" of the Project, but in
no event less than the Adjusted Acquisition Cost of the Project,
(2) transit including ocean marine transit, if applicable, with
sub-limits of $5,000,000, (3) gas, steam and electrical
transmission lines along with related equipment for which the
Lessee has an insurable
37
interest, (4) foundations and other property below the surface of
the ground and (5) attorneys' fees, engineering and other
consulting costs, and permit fees directly incurred in order to
repair or replace damaged insured property in a minimum amount of
$1,000,000. For purposes of this Section 10(b)(ii), "full
insurable value" shall mean the full replacement value of the
Project, including any improvements, equipment, spare parts, fuel
and supplies, without deduction for physical depreciation and/or
obsolescence. All such insurance may have deductibles of not
greater than $250,000 per occurrence. Such insurance shall (1)
not include any coinsurance provision, (2) provide for increased
cost of construction and loss to undamaged property as the result
of enforcement of building laws or ordinances, and (3) include
debris removal with sub-limits not less than $1,000,000. The
earth movement coverage may be insured with a sub-limit not less
than $100,000,000, and the flood coverage may be insured with a
sub-limit not less than $50,000,000. The property damage coverage
shall not contain an exclusion for freezing, mechanical
breakdown, loss or damage covered under any guaranty or warranty,
or resultant damage caused by faulty workmanship, design or
materials.
If the insurance company providing the physical damage insurance
is different from the insurance company providing the boiler &
machinery insurance required in this Section 10, then a joint
loss agreement between such companies will be required and
included as part of the respective policies.
Environmental Impairment Liability Insurance. Environmental
impairment liability insurance for third party damages and
injuries arising from a sudden and accidental occurrence, in an
amount not less than $10,000,000 per occurrence.
(iii) Endorsements. All policies of insurance required by this Section 10
shall provide for waivers of subrogation by the insurers in favor of the Lessor,
Merrill, Merrill Lynch, Merrill Leasing, the general partner of the Lessor and
its shareholders, officers and directors, the limited partners of the Lessor and
Assignee and their respective officers, directors, members, trustees and
employees (and such other Persons as may be required by the Project Contracts).
All policies of liability insurance required to be maintained by the Lessee
under paragraphs (b)(i)(3), (4) and (5) of this Section 10 shall be endorsed as
follows:
(1) To provide a severability of interest or cross liability clause;
(2) Such that the insurance shall be primary and not excess to or
contributing with any insurance or self-insurance maintained by
the Lessor, Merrill, Merrill Lynch, Merrill Leasing, the general
partner of the Lessor and its shareholders, officers and
directors, the limited partners of the Lessor or Assignee;
38
(3) To name Merrill, Merrill Lynch, Merrill Leasing, the general
partner of the Lessor and its shareholders, officers and
directors, the limited partners of the Lessor and Assignee and
their respective officers, directors, members, trustees and
employees (and such other Persons as may be required by the
Project Contracts) as additional insureds; and
(4) To name the Lessor and its respective officers and employees as a
named insured or an additional insured, as the Lessor may
require.
All policies of insurance required to be maintained by the Lessee under
paragraph (b)(ii) of this Section 10 shall name the Lessor as a named insured
and name Merrill, Merrill Lynch, Merrill Leasing, the general partner of the
Lessor and its shareholders, officers and directors, the limited partners of the
Lessor and Assignee and its respective officers and employees (and such other
Persons as may be required by the Project Contracts) as additional insureds.
(iv) Waiver of Subrogation. The Lessee hereby waives any and all claims for
recovery from the Lessor, Merrill, Merrill Lynch, Merrill Leasing, the general
partner of the Lessor and its shareholders, officers and directors, the limited
partners of the Lessor and Assignee and their respective officers, directors,
members, trustees and employees for any and all loss or damage covered by any of
the insurance policies to be maintained under this Lease to the extent that such
loss or damage is recovered under any such policy. Inasmuch as the foregoing
waiver will preclude the assignment of any such claim to the extent of such
recovery, by subrogation (or otherwise), to an insurance company (or other
Person), the Lessee shall give written notice of the terms of such waiver to
each insurance company which has issued, or which may issue in the future, any
such policy of insurance (if such notice is required by the insurance policy)
and shall cause each such insurance policy to be properly endorsed by the issuer
thereof, or to otherwise contain one or more provisions that prevent the
invalidation of the insurance coverage provided thereunder by reason of such
waiver.
(c) Additional Requirements.
(i) The Lessee shall promptly notify the Lessor and Assignee of any loss in
excess of $100,000 covered by any insurance maintained pursuant to paragraph
(b)(ii) of this Section 10.
(ii) All policies of insurance required to be maintained pursuant to
paragraph (b)(ii) of this Section 10 shall provide that Assignee shall be the
sole loss payee thereunder and that the proceeds of such policies shall be
payable solely to the Operating Account pursuant to a standard first mortgage
endorsement substantially equivalent to the Lenders Loss Payable Endorsement
438BFU or ISO endorsement CP12181091, without contribution. The Lessor and
Assignee shall have the right to join the Lessee in adjusting any loss in excess
of $100,000. All policies (other than in respect to liability or workers
compensation insurance) shall insure the interests of the Lessor, Merrill,
Merrill Lynch, Merrill Leasing, the general partner of the Lessor, the limited
partners of the Lessor and Assignee regardless of any breach or violation by the
Lessee or Lessor of any warranties,
39
declarations or conditions contained in such policies, any action or inaction of
the Lessee or the Lessor or others, or any foreclosure relating to the Project
or any change in ownership of all or any portion of the Project.
(iii) A loss under any insurance required to be carried under paragraph
(b)(ii) of this Section 10 shall be adjusted with the insurance companies,
including the filing in a timely manner of appropriate proceedings by the
Lessee, subject to the approval of the Lessor and Assignee if such loss is in
excess of $100,000. In addition the Lessee may in its reasonable judgment
consent to the settlement of any loss; provided that, in the event that the
amount of the loss exceeds $100,000, the terms of such settlement shall be
consented to by the Lessor and Assignee.
(iv) All policies of insurance required to be maintained pursuant to
paragraph (b) of this Section 10 shall be endorsed so that if at any time they
should be canceled, or coverage shall be reduced in a manner which affects the
interests of the Lessor, Merrill, Merrill Lynch, Merrill Leasing, the general
partner of the Lessor, the limited partners of the Lessor or Assignee, such
cancellation or reductions shall not be effective as to the Lessor, Merrill,
Merrill Lynch, Merrill Leasing, the general partner of the Lessor, officers and
directors, the limited partners of the Lessor and Assignee for 60 days (except
for non-payment of any premium, which shall be for 10 days), after receipt by
the Lessor and Assignee of written notice from such insurer of such cancellation
or reduction.
(v) All policies of insurance required to be maintained pursuant to
paragraph (b)(ii) of this Section 10 shall not include any annual or term
aggregate limits of liability or clause requiring the payment of additional
premium to reinstate the limits after loss except as regards the insurance
applicable to the perils of flood, earth movement, sabotage and terrorism.
(vi) The Lessee may, at its own cost and expense, prosecute any claim
against any insurer or contest any settlement proposed by any insurer, and the
Lessee may bring any such prosecution or contest in the name of the Lessor, the
Lessee, or both, and the Lessor will join therein at the Lessee's request,
provided that the Lessee shall indemnify the Lessor against any losses, costs or
expenses (including reasonable attorney's fees) which the Lessor may incur in
connection with such prosecution or contest.
(d) Evidence of Insurance. On the date of this Lease and on an annual basis
at least 10 days prior to each policy anniversary, the Lessee shall furnish the
Lessor and Assignee with (1) a certificate or other evidence reasonably
acceptable to the Lessor and Assignee that all insurance required under this
Section 10 is in force with respect to the Project and (2) a schedule of the
insurance policies held by or for the benefit of the Lessee and required to be
in force by the provisions of paragraph (b) of this Section 10. Each certificate
shall be executed by each insurer or by an authorized representative of each
insurer where it is not practical for such insurer to execute the certificate
itself. Upon request, the Lessee will promptly furnish the Lessor and Assignee
with copies of all insurance policies, binders and cover notes or other evidence
of such insurance relating to the insurance required to be maintained by the
Lessee.
40
(e) Reports. Upon the request of the Lessor, concurrently with the
furnishing of the certificate referred to in paragraph (d) above, the Lessee
shall furnish the Lessor and Assignee with a letter, signed by an officer of the
Lessee or one of its Affiliates or a member of the risk management group of the
Lessee or one of its Affiliates, stating that in the opinion of such officer or
member, the insurance then carried or to be renewed is in accordance with the
terms of paragraph (b) of this Section 10 and attaching an updated copy of the
schedule of insurance required by paragraph (d) above. In addition, the Lessee
will advise the Lessor and Assignee in writing promptly of any default in the
payment of any premium and of any other act or omission on the part of the
Lessee which may invalidate or render unenforceable, in whole or in part, any
insurance being maintained by the Lessee pursuant to paragraph (b) of this
Section 10.
(f) Failure to Maintain Insurance. In the event the Lessee fails to
maintain the full insurance coverage required by paragraph (b) of this Section
10, the Lessor or Assignee, upon 30 days' prior notice (unless the
aforementioned insurance would lapse within such period, in which event notice
should be given as soon as reasonably possible) to the Lessee of any such
failure, may (but shall not be obligated to) take out the required policies of
insurance and pay the premiums on the same.
(g) No Duty of the Lessor or Assignee to Verify or Review. No provision of
this Section 10, or any provision of this Lease or any Project Contract, shall
impose on the Lessor or Assignee any duty or obligation to verify the existence
or adequacy of the insurance coverage maintained by the Lessee, nor shall the
Lessor or Assignee be responsible for any representations or warranties made by
or on behalf of the Lessee to any insurance company or underwriter. Any failure
on the part of the Lessor or Assignee to pursue or obtain the evidence of
insurance required by this Lease from the Lessee and/or failure of the Lessor or
Assignee to point out any non-compliance of such evidence of insurance shall not
constitute a waiver of any of the insurance requirements in this Lease.
(h) Application of Insurance and Other Proceeds for and Event of Loss and
Certain Takings. It is agreed that (i) any insurance payments received as the
result of the occurrence of any Event of Loss, and (ii) any amounts received in
connection with any event of Taking described in paragraph (a) of Section 16
hereof, shall be paid to the Operating Account and disposed of as set forth in
paragraph (c) of Section 15 hereof.
(i) Application of Insurance and Other Proceeds for Other than Loss or
Taking. The insurance proceeds of any property damage loss to the Project not
constituting an Event of Loss, or any amounts received in connection with any
event of Taking described in paragraph (b) of Section 16 hereof will be held in
the Operating Account and applied in payment (or to reimburse the Lessee) for
repairs or replacement in accordance with the terms of paragraph (b) of Section
15 hereof or paragraph (b) of Section 16 hereof. The Lessee shall be entitled,
subject to its compliance with the immediately succeeding sentence, (i) to
receive the amounts so deposited against certificates, invoices or bills
reasonably satisfactory to the Lessor, delivered to the Lessor from time to time
as such work or repair progresses, and (ii) to direct the investment of the
amounts so deposited as provided in paragraph (j) of this Section 10. To the
extent that the Lessor reasonably estimates that the cost of such work or repair
shall exceed the amount of proceeds, the Lessee shall make adequate provisions
for the payment thereof, which provisions
41
shall be reasonably acceptable to the Lessor and Assignee (as to the terms of
the commitment and the creditworthiness of the funding party). Any moneys
remaining in the aforesaid account after final payment for repairs has been made
shall be used by the Lessor to reduce the Adjusted Acquisition Cost by such
amount. Thereupon, the Lessor shall adjust the Adjusted Acquisition Cost to
reflect such reduction.
(j) Investment. The Lessor, at the Lessee's instruction, shall invest the
amounts deposited with the Lessor pursuant to paragraph (i) of this Section 10
in any investments permitted under a Financing Arrangement. Such investments
shall mature in such amounts and on such dates so as to provide that amounts
shall be available on the draw dates sufficient to pay the amounts requested by
and due to the Lessee. Any interest earned on investments of such funds shall be
paid to the Lessee. The Lessor shall not be liable for any loss resulting from
the liquidation of each and every such investment and the Lessee shall bear the
risk of such loss, if any.
(k) Application. Any amount referred to in paragraphs (c)(ii), (i) or (j)
of this Section 10 which is payable to the Lessee shall not be paid to the
Lessee or, if it has been previously paid to the Lessee, shall not be retained
by the Lessee, if at the time of such payment any Potential Default, Event of
Default, Event of Loss, Taking or Termination Event shall have occurred and be
continuing. In such event, all such amounts shall be paid to and held by the
Lessor as security for the obligations of the Lessee hereunder or, at the
Lessor's option, applied by the Lessor toward payment of any of such obligations
of the Lessee at the time due hereunder as the Lessor may elect. At such time as
there shall not be continuing any Potential Default, Event of Default, Event of
Loss or Taking, all such amounts at the time held by the Lessor in excess of the
amount, if any, which the Lessor shall have elected to apply as above provided
shall be paid to the Lessee.
(l) "Claims Made" Policies for Certain Types of Insurance. If any liability
insurance required under the provisions of this Section 10 is allowed to be
written on a "claims made" basis, then such insurance shall include the
following:
(i) The retroactive date (as such term is specified in each of
such policies) shall be no later than the date of this
Lease; and
(ii) each time any policy written on a "claims made" basis is not
renewed or the retroactive date of such policy is to be
changed, the Lessee shall obtain or cause to be obtained for
each such policy or policies the broadest extended reporting
period coverage, or "tail" reasonably available in the
commercial insurance market for each such policy or
policies, as determined in the reasonable judgment of the
Lessor and Assignee, but in no event less than two years
after the expiration of such policy or policies.
(m) Use or Operation of the Project. The Lessee covenants that it will not
use, occupy or operate the Project or permit the use, occupancy or operation of
the Project at a time when the insurance required by this Section 10 is not in
force.
42
SECTION 11. INDEMNITIES.
(a) The Lessee shall indemnify, protect, defend and hold harmless the
Lessor, each general and limited partner of the Lessor, Merrill, Merrill Lynch,
Merrill Leasing, each Assignee, and their respective assigns and successors, and
each Affiliate of each of them, and their respective officers, directors,
trustees, incorporators, shareholders, members, partners (general and limited),
employees, agents and servants (each of the foregoing an "Indemnified Person")
from and against any and all liabilities (including, without limitation,
Environmental Damages and strict liability in tort), taxes, losses, obligations,
claims, damages, penalties, causes of action, suits, costs and expenses
(including, without limitation, attorneys', experts', consultants' and
accountants' fees and expenses) or judgments of any nature relating to or in any
way arising out of:
(i) the purchasing, ordering, delivery, acquisition, construction, title on
acquisition, rejection, installation, possession, titling, retitling,
registration, re-registration, custody by the Lessee of title and registration
documents, ownership, leasehold or easement interest in the Premises, lease,
sublease, lease or easement interests under the Ground Lease, use, non-use,
misuse, financing (including, without limitation, all obligations of the Lessor
under or in respect of any Financing Arrangement), operation, transportation,
repair or control of the Project or any part thereof, and any accident, injury,
death or property damage on or about the Project, the Project Contracts, or any
other event, act or omission arising from or relating to the execution,
performance, termination or enforcement of this Lease or any other Operative
Document or the transactions contemplated therein, (A) except to the extent that
such costs are included in the Acquisition Cost or Adjusted Acquisition Cost of
the Project or have been paid by the Lessee as Basic Rent or Additional Rent,
(B) except for any general administrative expenses of the Lessor, (C) except the
income taxes with respect to which indemnification is excluded under paragraph
(b) of this Section 11 and (D) except that this indemnity shall not increase any
payment required to be made by the Lessee pursuant to paragraph (b)(iii)(A) or
(c)(iii)(A) of Section 12 of this Lease;
(ii) the assertion of any claim or demand based upon any infringement or
alleged infringement of any patent or other right, by or in respect of the
Project or any part thereof; provided, however, that, upon request of the
Lessee, the Lessor will make available to the Lessee the Lessor's rights under
any similar indemnification arising from any manufacturer's or vendor's
warranties or undertakings with respect to any equipment constituting a part of
the Project;
(iii) any violation, or alleged violation, by the Lessee of this Lease, the
Project Contracts, any Operative Document or of any contracts or agreements to
which the Lessee is a party or by which it is bound or of any laws, rules,
regulations, orders, writs, injunctions, decrees, consents, approvals,
exemptions, authorizations, licenses and withholdings of objection, of any
governmental or public body or authority and all other Legal Requirements
applicable to the Project;
(iv) any breach of a representation, warranty or covenant made herein, in
the Agreement for Lease or in the Guaranty or which is contained in any
certificate,
43
document or financial or other statement furnished by or on behalf of the Lessee
or the Guarantor under or in connection with this Lease, the Agreement for Lease
or the Guaranty;
(v) any default by the Lessee in the performance or observance of any term,
covenant, condition or obligation contained in this Lease or any failure by the
Lessee to comply with the Ground Lease, the Easements, the Facility Support
Agreement, any Project Contract or any other Operative Document;
(vi) any and all Environmental Damages relating to or in any way arising
out of the Project, including, without limitation:
(A) the violation or alleged violation of or compliance or
non-compliance with any Environmental Requirements (i) in connection with
the ownership or operation of the Project, and (ii) by any prior owner or
operator of the Premises in connection with the ownership or operation of
the Premises;
(B) the Release or threatened Release at, to or from any location of
any Contaminants, or Remedial Action or corrective action (as the latter
term is used in Section 3004(u), 3004(v), and 3008(h) of the Resource
Conservation and Recovery Act or any equivalent state, local or foreign
law) to address any Contaminants, (i) generated, treated, recycled, stored,
processed, used or disposed by or on behalf of the Lessee at or in
connection with the Project, (ii) generated, treated, recycled, stored,
processed, used or disposed by or on behalf of any prior owner or operator
of the Premises in connection with the ownership or operation of the
Premises, (iii) transported by or on behalf of the Lessee or any other
Person to or from the Project for treatment, recycling, processing, use or
disposal at any location, or (iv) removed by any Person from any portion of
the Project; and
(C) the presence or alleged presence of any Contaminant at, in, on or
under the Project;
(D) the failure to report, disclose or remediate any of the foregoing
or to comply with any applicable consent order or voluntary agreement with
any Governmental Authority; and
(E) any allegations of any of the foregoing; and
(vii) the Project Contracts and the Operative Documents.
(b) The Lessee agrees to indemnify, protect, defend and hold harmless each
Indemnified Person from and against all U.S. Federal, state, county, municipal,
foreign or other fees and taxes of whatsoever nature, including, but not limited
to, license, qualification, franchise, rental, withholding, sales, use, net
income, gross income, gross receipts, ad valorem, business, personal property,
real estate, value added, excise, motor vehicle, occupation fees and stamp or
other taxes or tolls of any nature whatsoever, and penalties and interest
thereon, whether assessed, levied against or payable by the Lessor or any
Indemnified Person, with respect to the Project or the acquisition, purchase,
sale, rental, use, operation, control or
44
ownership of the Project (including, without limitation, any claim by any
Governmental Authority for transfer tax, transfer gains tax, mortgage recording
tax, filing or other similar taxes or fees in connection with the acquisition of
the Project by the Lessor or otherwise in connection with this Lease) or
measured in any way by the value thereof or by the business of, investment in,
or ownership by the Lessor with respect thereto; provided that this indemnity
shall not apply to (x) Federal, state or local taxes that are based upon or
measured by net income or taxes in lieu of net income taxes (including taxes
based on capital gains and minimum taxes) imposed directly upon any of the
limited or general partners of Wygen Funding, Limited Partnership, or upon Wygen
Funding, Limited Partnership itself, except that such indemnity shall apply to
(1) such net income taxes imposed by a state or local government or other taxing
authority thereof (A) as a result of the location or use of the Project within
the jurisdiction of such government or taxing authority or (B) to the extent
imposed in whole or in part by reason of a relationship or asserted relationship
between such government or other taxing authority and the Project or the
transactions contemplated herein, and (2) such net income taxes to the extent
imposed as a result of the inability to claim, or disallowance or other loss of
deductions customarily allowed in computing net income relating directly or
indirectly to the Project (e.g., interest expense, financing, administrative,
ordinary operating expenses and other fees and expenses); (y) any taxes imposed
upon an Indemnified Person with respect to any voluntary transfer, sale,
financing or other voluntary disposition of any interest in the Project or any
part thereof, or any interest therein or any interest under this Lease (other
than any transfer, sale or other disposition (i) pursuant to the terms of this
Lease, (ii) after the occurrence of an Event of Default, or (iii) in connection
with an Event of Loss); and (z) taxes imposed on an assignee to the extent that
any such taxes exceed the taxes that would have been imposed had no such
assignment taken place, determined under the law as in effect on the date of
such assignment; provided, that this exclusion shall not apply to an assignee
that acquires the interest of an Indemnified Person pursuant to an assignment
during the continuance of an Event of Default.
(c) Subject to paragraph (a) of Section 27 hereof, the Lessee shall
forthwith upon demand, reimburse any Indemnified Person for any sum or sums
expended with respect to any of the foregoing or, upon request from any
Indemnified Person, shall pay such amounts directly. Any payment made to, or on
behalf of, any Indemnified Person pursuant to this Section 11 shall be increased
to such amount as will, after taking into account all taxes imposed with respect
to the accrual or receipt of such payment (as the same may be increased pursuant
to this sentence), equal the amount of the payment, reduced by the amount of any
savings in such taxes actually realized by the Indemnified Person as a result of
the payment or accrual of the amounts in respect of which the payment to or on
behalf of the Indemnified Person hereunder is made. To the extent that the
Lessee in fact indemnifies any Indemnified Person under the indemnity provisions
of this Lease, the Lessee shall be subrogated to such Indemnified Person's
rights in the affected transaction and shall have a right to determine the
settlement of such indemnified claims therein.
(d) The indemnities contained in this Section 11 shall not be affected by
any termination or expiration of this Lease.
(e) Notwithstanding any provisions of this Section 11 to the contrary, the
Lessee shall not indemnify and hold harmless any Indemnified Person against any
claims and
45
liabilities to the extent arising solely from the gross negligence or
willful misconduct of such Indemnified Person.
(f) In the event the Lessor or any Indemnified Person shall be a party
defendant to any litigation arising out of any provision contained in this Lease
for which the Lessee has given indemnification, the Lessor or such other
Indemnified Person shall give prompt notice thereof to the Lessee by telephone
and in writing and shall consult and cooperate, at the Lessee's expenses with
the Lessee, and if the Lessor shall not have appeared or pleaded to any such
action then the Lessor does hereby empower any attorney of any court of record
appointed by the Lessee (who shall give prompt written notice to the Lessor of
such appointment) to appear for the Lessor and in good faith and with due
diligence defend such action, to enter counterclaims, to institute actions
against third parties and to do all things necessary or desirable in the
judgment of such attorney after consultation with the Lessor and the Lessee to
preserve the rights of the Lessor and the Lessee, all at the Lessee's own cost
and expense. No failure or delay of the Lessor to give the notice required by
this Section 11 shall excuse the obligation of the Lessee to indemnify the
Lessor with respect to such litigation except to the extent that any increase in
liability is a direct result of such failure or delay.
(g) The Lessee or its agent shall withhold any taxes required to be
withheld on any payment to or on behalf of the Lessor as a result of such
Indemnified Person not being a United States person within the meaning of
Section 7701 of the Code. The amount payable to the Lessor shall be reduced by
the amount of any such withholding taxes required to be withheld by the Lessee
pursuant to the preceding sentence and the Lessee shall have no liability or
obligation to any Indemnified Person with respect to such withholding taxes,
except to the extent that such withholding taxes arise as the result of a change
in Legal Requirements in which case the Lessee and the Guarantor shall be
responsible for, and shall indemnify and hold harmless any Indemnified Person
(without duplication of any indemnification required in paragraph (b) of this
Section 11) against, any claims regarding such withholding taxes made against
the Lessor to the extent, but only to the extent, the Lessor and its agent has
actually paid funds to a taxing authority with respect to such withholding taxes
or receives a demand for such payments from any taxing authority. In the event
there is a change in Legal Requirements and a withholding tax is otherwise
indemnifiable under paragraph (b) of this Section 11, any payments made after
the change in Legal Requirements hereunder to the Lessor shall be increased to
the amount necessary so that the amount received by the Lessor equals the amount
that would have been received if no withholding tax were payable. If an
Indemnified Person is permitted under Legal Requirements to file or complete a
form, certificate or other document that would entitle such Indemnified Person
to an exemption from or reduction in a withholding tax indemnified hereunder,
the Lessee shall provide such form, certificate or other document to such
Indemnified Person on a timely basis, and each such Indemnified Person hereby
covenants to execute and deliver to the Lessee any such form, certificate or
other document in such manner as shall entitle such Indemnified Person to enjoy
such exemption or reduction to the fullest extent permitted under Legal
Requirements with respect to each payment hereunder unless such Indemnified
Person reasonably determines in its sole discretion that providing such form,
certificate or other document will adversely affect it. In accepting and
carrying out its duties with respect to withholding taxes pursuant to this
paragraph (g), the Lessor shall act as the duly authorized agent of the Lessee
under the withholding provisions of Chapter 3 of the Code. The Lessee shall file
notice of such appointment with the Director of Foreign Operations District of
the Internal
46
Revenue Service in accordance with Treas. Reg. Section 1.1441-7(b). Such agency
shall terminate in the event that Legal Requirements are amended so as to
release the Lessee of the obligation to withhold taxes with respect to payments
made by the Lessee under this Lease and in any event upon termination or
expiration of this Lease. For purposes of this paragraph (g), it shall be
assumed that this Lease constitutes a loan for United States federal income tax
purposes (as is the parties' intention).
SECTION 12. LESSEE'S RIGHT TO TERMINATE.
(a) So long as the Lessee can satisfy the Termination Conditions, the
Lessee shall have the right, upon eighteen (18) months' notice to the Lessor
(the "Termination Notice"), to terminate the lease of the Project as a whole (i)
on the last day of the Initial Term or (ii) on the last day of any Extended Term
or Renewal Term (either of such dates as identified in the Termination Notice
being hereinafter called the "Termination Date"), by arranging, at its own cost
and expense, for the sale of the Project in an arm's-length transaction on the
Termination Date and the receipt by the Lessor of cash in an amount equal to the
sale price of the Project (the "Cash Proceeds"). In the event the Lessee has
given a Termination Notice pursuant to this paragraph (a) and has failed to
arrange for the sale of the Project in an arm's-length transaction on the last
day of the Initial Term pursuant to paragraph (b) of this Section 12, or on the
last day of any Extended Term or Renewal Term pursuant to paragraph (c) of this
Section 12, the Cash Proceeds shall be deemed to be $1.
In the event the Lessee is unable to satisfy the Termination Conditions on
the Termination Date, the Lessee shall not terminate this Lease pursuant to this
paragraph (a), and the Lessee shall purchase the Project as provided in
paragraph (e) of Section 13 hereof, unless the Lessee has obtained the prior
written consent of the Lessor and Assignee to such termination of this Lease and
the sale of the Project. In addition, if the Lessee has given a Termination
Notice and an Event of Default occurs, the Termination Notice shall be
invalidated and the Lessee shall no longer have the right to cause the
termination of the lease of the Project and sale of the Project to its designee
in accordance with the terms of this paragraph (a). At the time the Project is
sold pursuant to this Section 12, the Lessor shall deliver the documents
described in paragraph (h) of Section 29 hereof, and the Lessor's rights and
obligations in respect of the Ground Lease, the Easements, the EPC Contract and
any other Project Contract to which the Lessor is a party, shall be assumed by
the purchaser, with the Lessor released from liability in respect thereof. In
addition, (i) the Lessee shall assign (or if not legally assignable, cooperate
and assist to the extent necessary or required in the transfer or reissuance
thereof) to the purchaser, at no cost, all right, title and interest of the
Lessee in, to and under all Governmental Actions and Intellectual Property
Rights needed for the equipping, maintenance, operation or use of the Project
and obtained and held by the Lessee at that time, (ii) the Lessee shall assign
to the purchaser, at no cost, and the purchaser shall assume, all right, title
and interest of the Lessee in, to and under the Project Contracts, and in the
event any additional consent of any party to a Project Contract is required as a
precondition thereunder to an assignment to any such non-foreclosure purchaser
designated by the Lessee, to use its best efforts to obtain any such required
consent to such proposed non-foreclosure assignment and assumption of the
Project Contracts, (iii) the Lessee shall assign to the purchaser, at no cost,
all right, title and interest of the Lessee in, to and under all service
agreements in existence at that time in connection with the equipping,
47
maintenance, operation or use of the Project, and (iv) as a condition to such
sale, the purchaser shall be entitled to succeed to the Lessor's rights and
obligations under the Facility Support Agreement. In the event the Lessee fails
to obtain any consents required in clause (ii) of the immediately preceding
sentence, at the request of such purchaser, the Lessee shall agree to (1) at the
expense of such purchaser, continue to perform under and maintain in full force
and effect the Project Contracts and pay all sums received under the Project
Contracts to such purchaser, (2) at the expense of such purchaser, and subject
to the receipt of indemnification reasonably acceptable to the Lessee, take all
actions requested by such purchaser with respect to such Project Contracts
(including all actions with respect to the enforcement of the Lessee's rights
and remedies under such Project Contracts), and (3) not amend, modify,
supplement, waive a provision of, grant any consent under or terminate any such
Project Contract without the prior written consent of such purchaser.
(b) In the event the Lessee exercises its right to terminate the lease of
the Project pursuant to this Section 12 on the last day of the Initial Term, or
in the event a termination of the lease of the Project occurs pursuant to
paragraph (a) of Section 14 hereof on or before the last day of the Initial Term
and the Lessee chooses to effect a sale pursuant to this Section 12:
(i) if the Cash Proceeds (or deemed proceeds) are greater than
the Adjusted Acquisition Cost, the Lessor shall pay to the
Lessee the amount by which such Cash Proceeds exceed the
Adjusted Acquisition Cost;
(ii) if the Cash Proceeds (or deemed proceeds) are equal to the
Adjusted Acquisition Cost, no additional payments shall be
required under this clause (ii); and
(iii)if the Cash Proceeds (or deemed proceeds) are less than the
Adjusted Acquisition Cost (the difference being the "Section
12(b) Shortfall"), the Lessee shall pay to the Lessor an
amount equal to the sum of (A) the lesser of (1) the Section
12(b) Shortfall and (2) 83.5% of the Adjusted Acquisition
Cost plus (B) the amount by which the residual value of the
Project has been reduced by wear and tear in excess of that
attributable to normal and proper use (the amount of such
excess wear and tear to be such amount as the Lessor and the
Lessee agree, or if no agreement is reached, the amount
determined pursuant to the Appraisal Procedure).
(c) In the event the Lessee exercises its right to terminate the lease of
the Project pursuant to this Section 12 on the last day of any Extended Term or
any Renewal Term, or in the event a termination of the lease of the Project
occurs pursuant to paragraph (a) of Section 14 hereof, or in the event the
Lessee exercises its option under paragraph (e) of Section 13 to arrange for the
Project to be sold (or if a sale shall be deemed to occur pursuant to such
Section 13(e)), and the date on which such termination occurs is during any
Extended Term or any Renewal Term and the Lessee chooses to effect a sale
pursuant to this Section 12:
48
(i) if the Cash Proceeds (or deemed proceeds) are greater than
the Adjusted Acquisition Cost, the Lessor shall pay to the
Lessee the amount by which such Cash Proceeds exceed the
Adjusted Acquisition Cost;
(ii) if the Cash Proceeds (or deemed proceeds) are equal to the
Adjusted Acquisition Cost, no additional payments shall be
required under this clause (ii); and
(iii)if the Cash Proceeds (or deemed proceeds) are less than the
Adjusted Acquisition Cost (the difference being the "Section
12(c) Shortfall"), the Lessee shall pay to the Lessor an
amount equal to the sum of (A) the lesser of (1) the Section
12(c) Shortfall and (2) 83.5% of the Adjusted Acquisition
Cost plus (B) the amount by which the residual value of the
Project has been reduced by wear and tear in excess of that
attributable to normal and proper use (the amount of such
excess wear and tear to be such amount as the Lessor and the
Lessee agree, or if no agreement is reached, the amount
determined pursuant to the Appraisal Procedure.
(d) All payments and credits referred to in paragraphs (b) and (c) above
shall be made on the Termination Date of the Project pursuant to this Section
12, and the parties shall account to each other for such payments and credits,
and the Lessee shall pay to the Lessor (i) all Basic Rent payable through the
date of termination of this Lease, (ii) the Variable Component of Basic Rent
accrued through the date of termination of this Lease, (iii) any Additional Rent
owing, (iv) all amounts payable pursuant to Sections 11, 24 and 26 hereof, (v)
all losses, damages, costs and expenses (including, without limitation,
attorneys' fees and expenses, commissions, filing fees and sales or transfer
taxes) sustained by the Lessor by reason of such sale, and (vi) all other
amounts owing hereunder (after taking into account the application under the
Financing Arrangements of such purchase price and other payments hereunder),
each as of the Termination Date. Upon indefeasible receipt by the Lessor of the
Cash Proceeds and all other amounts then due and owing hereunder, including,
without limitation, the amount of excess wear and tear determined pursuant to
paragraph (b)(iii) or (c)(iii) of Section 12, as the case may be, the Lessor
shall transfer its interest in the Project to the purchaser at the sale
designated by the Lessee. The "Cash Proceeds" referred to in paragraphs (b) and
(c) of this Section 12 shall mean the cash proceeds (or deemed proceeds) of sale
without reduction for any amounts paid by the Lessee. In the event of a sale
pursuant to this Section 12, neither the Lessee nor any Affiliate of the Lessee
shall purchase the Project.
(e) In its Termination Notice given pursuant to paragraph (a) of this
Section 12, the Lessee shall advise the Lessor if the sale provided for in such
Termination Notice will result in Cash Proceeds (or deemed proceeds) of less
than 16.5% of the Adjusted Acquisition Cost (in the case of paragraph (b)(iii)
above) or 16.5% of the Adjusted Acquisition Cost (in the case of paragraph
(c)(iii) above). If such Termination Notice does not indicate such sale will
result in cash proceeds of less than 16.5% of Adjusted Acquisition Cost, then
the Lessee may not thereafter arrange for a sale which will result in the
application of clause (A)(2) of paragraph (b)(iii) or (c)(iii) of Section 12
hereof. If the Lessee advises the Lessor that such Cash Proceeds will be
applicable, the Lessor shall have the right to arrange for a sale of the Project
to be made to a purchaser designated by the Lessor, if such purchaser will pay
an amount greater than the
49
amount offered by the Lessee's purchaser. Unless the Lessor shall arrange for
such sale and shall give the Lessee notice thereof within one hundred eighty
(180) days of the Lessor's receipt of the Termination Notice, the Lessee may
proceed with the sale to a purchaser designated by it. Within thirty (30) days
of the Lessee's receipt of the Lessor's notice provided for in the preceding
sentence, the Lessee may arrange for such sale to be made to another purchaser
designated by it, if such purchaser shall pay an amount equal to or greater than
16.5% of the Adjusted Acquisition Cost (in the case of paragraph (b)(iii) above)
or 16.5% of the Adjusted Acquisition Cost (in the case of paragraph (c)(iii)
above).
SECTION 13. LESSEE'S RIGHTS OF PURCHASE AND RENEWAL
(a) The Lessee shall have the right, upon ninety (90) days' written notice
to the Lessor, to purchase the Project as a whole on any Basic Rent Payment Date
for an amount equal to its Adjusted Acquisition Cost; provided, however, that,
if an Event of Default has occurred and is continuing, and, prior to the
purchase by the Lessee pursuant to this paragraph (a), the Lessor arranges for
the sale of the Project to a third party purchaser, the Lessee shall no longer
have the right to purchase the Project in accordance with the terms of this
paragraph (a). In connection with, and as a condition to, any purchase under
this Section 13, on the Basic Rent Payment Date upon which such purchase occurs,
the Lessee shall pay to the Lessor (i) the purchase price, (ii) all Basic Rent
payable through the date of purchase, (iii) the Variable Component of Basic Rent
accrued through the date of purchase, (iv) any Additional Rent owing, (v) all
amounts payable pursuant to Sections 11, 24 and 26 hereof, (vi) all Unrecovered
Liabilities and Judgments, (vii) all losses, damages, costs and expenses
(including, without limitation, attorneys' fees and expenses, commissions,
filing fees and sales or transfer taxes) sustained by the Lessor by reason of
such purchase, and (viii) all other amounts owing hereunder (after taking into
account the application under the Financing Arrangements of such purchase price
and other payments hereunder). At the time the Project is sold pursuant to this
paragraph (a), the Lessor shall deliver the documents described in paragraph (h)
of Section 29 hereof, and the Lessor's rights and obligations in respect of the
Ground Lease, the Easements, the EPC Contract and any other Project Contract
shall be assumed by the Lessee, with the Lessor released from liability in
respect of each thereof.
(b) Upon the occurrence of an Event of Default and upon the written request
of the Lessee, which shall be received no later than fifteen (15) Business Days
subsequent to receipt of notice from the Lessor or any Assignee pursuant to this
Lease that an Event of Default has occurred, the Lessee shall have the right,
not later than thirty (30) Business Days after the Lessor's receipt of such
request, to purchase the Project as a whole at a price equal to its then
Adjusted Acquisition Cost; provided that the purchase option contained in this
paragraph shall only be available to the Lessee if (i) in the reasonable
judgment of the Lessor and any Assignee, the purchase price and all other
amounts paid by the Lessee will not in the circumstances in which such payment
is made constitute a preferential payment or a voidable transfer or otherwise be
subject to recapture pursuant to the provisions of the Federal Bankruptcy Code
in a bankruptcy proceeding by or against the Lessee and will not otherwise
result in the payment being subject to recapture from the Lessor or (ii) the
Guarantor has provided a guaranty of the payment of such purchase price and all
other amounts required to be paid by the Lessee under this paragraph (b) in the
event payment of such amounts is recovered as such a preferential
50
payment or a voidable transfer, which guaranty shall be in form and substance
reasonably satisfactory to the Lessor and any Assignee. In connection with, and
as a condition to, the purchase of the Project pursuant hereto, (i) the Lessee
shall pay at the time of purchase, in addition to the purchase price, (A) all
Basic Rent owing through the date of termination, (B) the Variable Component of
Basic Rent accrued through the date of termination of this Lease, (C) any
Additional Rent owing, (D) all amounts payable pursuant to Sections 11, 24 and
26 hereof, (E) all Unrecovered Liabilities and Judgments, (F) all losses,
damages, costs and expenses (including, without limitation, attorneys' fees and
expenses, commissions, filing fees and sales or transfer taxes), sustained by
the Lessor by reason of such purchase, and (G) all other amounts owing by the
Lessee hereunder as of the date of termination, and (ii) when the Lessor
transfers title, such transfer shall be on an as-is, non-installment sale basis,
without warranty by, or recourse to, the Lessor. At the time the Project is sold
pursuant to this paragraph (b), the Lessor shall deliver the documents described
in paragraph (h) of Section 29 hereof, and the Lessor's rights and obligations
in respect of the Ground Lease, the Easements, the EPC Contract and any other
Project Contract shall be assumed by the Lessee, with the Lessor released from
liability in respect of each thereof.
(c) Subject to the provisions of paragraph (a) of Section 14 of this Lease,
so long as (i) no Event of Default, Event of Loss, Taking or Termination Event
has occurred and is continuing and (ii) all amounts owing under any Financing
Arrangements and all Equity Capital have been indefeasibly paid in full (after
taking into account the application under the Financing Arrangements of all
payments hereunder), the Lessee shall have the right, upon twelve (12) months'
written notice to the Lessor (the "Renewal Notice"), to renew the lease of the
Project for an additional term (the "Renewal Term") to be determined by the
Lessee, commencing on the first day of the calendar month following the last day
of the Second Extended Term, on the same terms and conditions (including,
without limitation, being subject to all rights and remedies of the Lessor and
any Assignee relating to Events of Default and Events of Loss) as existed during
the Lease Term, at the fair market value rental.
(d) The fair market value rental of the Project for purposes of paragraph
(c) of this Section 13 shall be an amount agreed to by the Lessor and the Lessee
or, if they are unable to agree, an amount determined pursuant to the Appraisal
Procedure.
(e) In the event the Lessee does not deliver the Renewal Notice in
accordance with the provisions of paragraph (c) of this Section 13, the Lessee
shall be required to select one of the following two options: (i) to purchase,
on the last day of the Lease Term or the Renewal Term, as the case may be, the
Lessor's interest in the Project for cash at its Adjusted Acquisition Cost, in
accordance with the provisions of paragraph (a) of this Section 13 (including
the payment of all amounts described in such paragraph (a)); or (ii) if the
Lessee has provided the Termination Notice to the Lessor in accordance with the
provisions of paragraph (a) of Section 12 hereof, to arrange for the Project to
be sold in accordance with the provisions of Section 12 hereof and with the
consequences therein provided (including, without limitation, receipt by the
Lessor of the Cash Proceeds and all other amounts described in such Section 12),
except that such sale must occur on the last day of such Lease Term or the
Renewal Term, as the case may be; provided, however, that if (A) the Lessee has
provided the Termination Notice to the Lessor in a timely manner and has
complied with all of the other terms and conditions of Section 12, (B) the
Project is not sold pursuant to Section 12 hereof on the last day of the Lease
Term or the
51
Renewal Term, as the case may be and (C) the Lessee does not purchase the
Project pursuant to clause (i) above on the last day of the Lease Term or the
Renewal Term, as the case may be, then a sale of the Lessee's interest in the
Project to the Lessor pursuant to Section 12 shall be deemed to occur, the Cash
Proceeds shall be deemed to be $1, and the provisions of Section 12 and the
eighth paragraph of Section 19 hereof shall be applicable.
SECTION 14. LESSOR'S RIGHT TO TERMINATE.
(a) The Lessor shall have the right, upon written notice to the Lessee, to
terminate the lease of the Project as a whole as of a date stipulated in such
notice, if (i) for any reason (other than an Event of Default by the Lessor
under a Financing Arrangement (as therein defined)) the Lessor does not arrange
for financing to finance or refinance the Project upon terms reasonably
acceptable to the Lessor, and the Lessor may no longer continue its financing
under a Financing Arrangement sufficient to finance or refinance the Project or
(ii) any of the following events (each a "Termination Event") shall occur during
the term of this Lease: (A) solely as a result of this Lease, the Agreement for
Lease, a Financing Arrangement, the Project Contracts and the transactions
contemplated hereby or thereby, the Lessor becomes (or with the passage of time
would become), or is declared by any Governmental Authority to be a
"public-utility company" as defined in the 1935 Act, or the Lessor, Merrill,
Merrill Leasing, Merrill Lynch, any Assignee, any Affiliate of the foregoing or
their respective officers, directors, members, trustees, shareholders, partners
(general and limited, including, without limitation, the general and limited
partners of the Lessor) or employees shall become subject to regulation under
the 1935 Act; (B) solely as a result of this Lease, the Agreement for Lease, a
Financing Arrangement, the Project Contracts and the transactions contemplated
hereby or thereby, the Lessor becomes (or with the passage of time would
become), or is declared by the Secretary of Energy (or any successor thereto) or
the FERC to be, a public utility, an electric utility or a utility holding
company subject to regulation under the Federal Power Act, as amended, or the
Lessor, Merrill, Merrill Leasing, Merrill Lynch, any Assignee, any Affiliate of
the foregoing or their respective officers, directors, shareholders, partners
(general and limited, including, without limitation, the general and limited
partners of the Lessor) or employees shall become subject to regulation by the
FERC; (C) solely as a result of this Lease, the Agreement for Lease, a Financing
Arrangement, the Project Contracts and the transactions contemplated hereby or
thereby, the Lessor becomes (or with the passage of time would become), or is
declared by any relevant Governmental Authority under the laws of any state or
locality to be, subject to regulation as a public utility, an electric utility
or a utility holding company or the Lessor, Merrill, Merrill Leasing, Merrill
Lynch, any Assignee, any Affiliate of the foregoing or their respective
officers, directors, shareholders, partners (general and limited, including,
without limitation, the general and limited partners of the Lessor) or employees
shall become subject to regulation as a public utility, an electric utility or a
utility holding company under any such laws; or (D) any law or regulation or
interpretation of any law or regulation shall be adopted or enforced by any
Governmental Authority (including, without limitation, the Secretary of Energy,
the FERC, the public service commission of any state or any similar commission
of any locality and the Securities and Exchange Commission), and as a result of
such adoption or enforcement, approval of this Lease, the Agreement for Lease, a
Financing Arrangement, the Facility Support Agreement, any Project Contract or
the transactions contemplated thereby shall be required and shall not have been
obtained within any grace period after such adoption or enforcement, or as a
result of which adoption or enforcement this Lease,
52
the Agreement for Lease, a Financing Arrangement, the Facility Support
Agreement, any Project Contract or the transactions contemplated thereby,
including any payments to be made by or to the Lessee or the ownership of the
Project by the Lessor, shall be or become unlawful or unenforceable or the
performance of this Lease, the Agreement for Lease, a Financing Arrangement, the
Facility Support Agreement, any Project Contract or the transactions
contemplated thereby shall be rendered impracticable in any material way.
Promptly upon learning of any action or event, the effect of which results in
any Termination Event, the Lessee shall notify the Lessor of such action or
event.
(b) In the event of a termination with respect to the Project pursuant to
paragraph (a) of this Section 14, the Lessee shall be required, at its option,
either (i) to arrange for the Project to be sold in accordance with the terms of
Section 12 above and with the consequences therein provided, except that if such
sale does not occur on or before the date stipulated in the written notice
contemplated in paragraph (a) of this Section 14 (which date shall be at least
ninety (90) days after the date such notice is given) and the Lessee does not
purchase the Project pursuant to clause (ii) below on the date stipulated in
such notice, then a sale of the Lessee's interest in the Project to the Lessor
pursuant to Section 12 shall be deemed to occur, the Cash Proceeds shall be
deemed to be $1, and the provisions of Section 12 and the eighth paragraph of
Section 19 hereof shall be applicable, or (ii) to purchase, on the date
stipulated in the written notice contemplated by paragraph (a) of this Section
14, the Project for cash at its Adjusted Acquisition Cost. In connection with,
and as a condition to, any purchase under this paragraph, on the date upon which
such purchase occurs, the Lessee shall pay to the Lessor, in addition to any
purchase price payable, all other amounts owing hereunder as of the date of such
purchase including, without limitation, (i) all Basic Rent payable and the
Variable Component of Basic Rent accrued through the date of purchase, (ii) any
Additional Rent owing, (iii) all amounts payable pursuant to Sections 11, 24 and
26 hereof, (iv) all losses, damages, costs and expenses (including, without
limitation, attorneys' fees and expenses, commissions, filing fees and sales or
transfer taxes) sustained by the Lessor by reason of such purchase, (v) all
Unrecovered Liabilities and Judgments and (vi) all other amounts owing hereunder
(after taking into account the application under the Financing Arrangements of
such purchase price and other payments hereunder). At the time the Project is
sold pursuant to this paragraph (b), the Lessor shall deliver the documents
described in paragraph (h) of Section 29 hereof, and the Lessor's rights and
obligations in respect of the Ground Lease, the Easements, the EPC Contract and
any other Project Contract shall be assumed by the purchaser, with the Lessor
released from liability in respect thereof.
SECTION 15. LOSS OF OR DAMAGE TO THE PROJECT.
(a) The Lessee hereby assumes all risk of loss of or damage to the Project,
however caused. No loss of, or damage to, the Project shall impair any
obligation of the Lessee under this Lease, which shall continue in full force
and effect regardless of such loss or damage. The foregoing shall not be
construed as requiring the Lessee to repair the Project when it is not otherwise
required to do so under paragraph (b) of this Section 15.
(b) In the event of damage of any kind whatsoever to the Project, (i) the
Lessee shall promptly notify the Lessor and Assignee in writing of such event,
and (ii) the
53
Lessee (unless the same is reasonably determined by the Lessor and Assignee to
be an Event of Loss), at its own cost and expense, shall place the same in good
operating order, repair, condition and appearance. The Lessee's right to any
proceeds paid under any insurance policy or policies required under Section 10
of this Lease with respect to any such damage to the Project which has been so
placed by the Lessee in good operating order, repair, condition and appearance
is governed by paragraph (i) of Section 10 hereof.
(c) If (A) an Event of Loss shall occur, or (B) a Taking as described in
paragraph (a) of Section 16 shall occur, then in any such event, (i) the Lessee
shall promptly notify the Lessor and Assignee in writing of such event, (ii)
within one hundred eighty (180) days of such event the Lessee shall pay to the
Lessor an amount equal to the Adjusted Acquisition Cost and all other amounts
described in this paragraph (c) and (iii) the Lease Term or Renewal Term shall
continue until the Lessor receives payment from the Lessee of the amount payable
pursuant to this paragraph (c) including, without limitation, (1) all Basic Rent
payable and the Variable Component of Basic Rent accrued through the date of
purchase, (2) any Additional Rent owing, (3) all Unrecovered Liabilities and
Judgments and all amounts payable pursuant to Sections 24 and 26 hereof, (4) all
losses, damages, costs and expenses (including, without limitation, attorneys'
fees and expenses, commissions, filing fees and sales or transfer taxes)
sustained by the Lessor by reason of such event and (5) all other amounts owing
hereunder after taking into account the application under the Financing
Arrangements of such payments hereunder, and shall thereupon terminate. Upon the
indefeasible payment by the Lessee of all amounts referred to in the immediately
preceding sentence, (i) all insurance and condemnation proceeds (net of all
collection costs and all Unrecovered Liabilities and Judgments), shall be paid
by the Lessor to the Lessee, (ii) the Lessee shall be subrogated to the Lessor's
rights resulting from the events described in clauses (A) and (B) above, and
(iii) upon payment by the Lessee to the Lessor of all Unrecovered Liabilities
and Judgments not satisfied from insurance and condemnation proceeds, the Lessor
shall convey title to the Project pursuant to the documents described in
paragraph (h) of Section 29 hereof, including, without limitation, the Lessor's
interest in the Easements, the Ground Lease and the EPC Contract, to the Lessee,
free and clear of the Lien pursuant to any Financing Arrangement.
SECTION 16. CONDEMNATION AND DEDICATION OF THE PROJECT; EASEMENTS.
(a) If the use, occupancy or title to all or a substantial portion of the
Project is subject to a Taking, then the Lessee shall make the payment provided
in, and the Lease Term or Renewal Term shall terminate as provided in, paragraph
(c) of Section 15 hereof. The portion of the proceeds from any award or sale
made in connection with such Taking attributable to the Lessor's interest in the
Project shall be deposited in the Operating Account and, upon the indefeasible
payment by the Lessee of all amounts referred to in respect of clause (B) of
paragraph (c) of Section 15 hereof, such amount shall be paid to the Lessee. A
Taking shall be deemed to affect a "substantial portion" of the Project if, in
the reasonable judgment of the Lessor and Assignee, after such Taking, (i) the
Lessee is not able to fully perform its obligations under the Project Contracts
or this Lease, or (ii) a material diminution in the value, utility or remaining
economic useful life of the Project will occur, or (iii) the Project cannot be
restored by the expiry of the existing Lease Term.
54
(b) If less than a substantial portion of the Project is subject to a
Taking, then this Lease shall continue in effect as to the portion of the
Project not taken and any net proceeds, so long as (i) no Potential Default,
Event of Default, Event of Loss or Termination Event has occurred and is
continuing, and (ii) the Lessor and Assignee shall determine that restoration of
the Project is consistent with prudent business practices and that sufficient
funds are available to complete such restoration, shall be deposited in the
Operating Account and made available to the Lessee for the restoration of the
Project in accordance with paragraph (i) of Section 10 hereof; provided that, if
either of the conditions set forth in clauses (i) or (ii) above are not
satisfied, then the net proceeds held in the Operating Account shall be paid to
the Lessor and if and to the extent that such proceeds are not applied to (or
paid to the Lessee in reimbursement for) the restoration of the Project, the
Adjusted Acquisition Cost shall be reduced by the Lessor by the amount of such
proceeds. Thereupon, the Lessor shall adjust the Adjusted Acquisition Cost to
reflect such reduction.
SECTION 17. SURRENDER OF THE PROJECT.
(a) Subject to the provisions of Sections 12, 13, 14, 15 or 19 hereof, upon
termination of the lease of the Project under this Lease, the Lessee shall
surrender the Project to the Lessor, and the Lessee's rights and obligations in
respect of all Project Contracts shall be assumed by the Lessor, with the Lessee
released from liability in respect thereof. The Project shall be surrendered in
the condition required by paragraph (b) of Section 9.
(b) Upon the surrender of the Project, to the extent possessed by the
Lessee, the Lessee shall deliver to the Lessor or its designee all logs,
manuals, inspection data, books and records or copies thereof and other
information, which are necessary to operate the Project and which are in
accordance with sound industry practice customarily retained (or that the Lessee
actually did retain) or are required by law to be retained with respect to
similar property and equipment, including, without limitation, all software and
manuals applicable to the Project and all design plans, know-how, records and
information used by the Lessee or the Operator during the prior 12 months of
operation of the Project.
SECTION 18. EVENTS OF DEFAULT.
Any of the following events of default shall constitute an "Event of
Default" and shall give rise to the rights on the part of the Lessor described
in Section 19 hereof:
(a) Failure of the Lessee to pay amounts due to the Lessor at the time of
any scheduled sale or deemed sale of the Project hereunder, or under paragraph
(c) of Section 15 hereof, or failure of the Lessee to pay Basic Rent for more
than five (5) days after such payment is due pursuant to Section 7 hereof or
failure of the Lessee to pay any other amount payable by the Lessee hereunder
for more than ten (10) days after such payment is due (or if no due date is
specified, ten (10) days after demand therefor); or
(b) Failure to maintain the insurance required by Section 10 hereof, or
default in the performance of the covenants contained in paragraphs (ii)(a),
(ii)(b), (ii)(c), or (ii)(f) of
55
Section 2, paragraph (g) of Section 8, paragraph (m) of Section 10, Section 25
or paragraph (i) of Section 29; or
(c) The Lessee shall default in the performance or observance of any other
term, covenant, condition or obligation contained in this Lease and, in the case
of such default, such default shall continue for thirty (30) days after the
earlier of the date (i) the Lessee becomes aware of such default or (ii) written
notice shall have been given to the Lessee by the Lessor specifying such default
and requiring such default to be remedied; or
(d) One or more of the events referred to in the Ground Lease shall occur
which would cause the Ground Lease to terminate without notice or action by the
landlord thereunder or which would entitle the landlord under the Ground Lease
to terminate the Ground Lease and the term thereof by the giving of notice to
the Lessor without opportunity to cure, as tenant thereunder, or if the Ground
Lease shall be terminated or canceled for any reason or under any circumstance
whatsoever; or
(e) The occurrence of any event or circumstance relating to Environmental
Matters with respect to the Project that could reasonably be expected to have a
material adverse effect on (i) the construction, operation, maintenance,
leasing, ownership, use, value or regulatory status of the Project, (ii) the
ability of the Lessee to observe and perform its obligations under this Lease,
the Agreement for Lease, the Pledge Agreement, the Facility Support Agreement,
the Consent or the Project Contracts in a timely manner or the ability of the
Guarantor to perform its obligations under the Guaranty in a timely manner,
(iii) the business, assets, properties, financial condition, operations or
prospects of the Lessee or the Guarantor, or (iv) the rights or interests of the
Lessor or Assignee under this Lease, the Agreement for Lease, the Pledge
Agreement, the Facility Support Agreement, the Consent or the Project Contracts;
or
(f) Any representation or warranty made by the Lessee herein or in any
Consent or which is contained in any certificate, document or financial or other
statement furnished under or in connection with this Lease shall prove to have
been false, misleading or inaccurate in any material respect on or as of the
date made or deemed made; or
(g) (i) The Pledge Agreement ceases to be in full force and effect, (ii)
the Lessee defaults in the performance of any obligation or covenant contained
in the Pledge Agreement, any required notice of such default shall have been
given, and any applicable grace period shall have expired, or (iii) the
representation contained in the second or third sentence of paragraph (i)(r) of
Section 2 shall at any time become untrue; or
(h) (i) If the Lessee shall receive notice from a party to any Project
Contract alleging or asserting that such party has (or after the passage of any
applicable grace period will have) the right to terminate such Project Contract,
or that such Project Contract is being terminated by such party, as a result of
a default by the Lessee under such Project Contract; or
(ii) If a party to any Project Contract has received notice from the
Lessee that such Project Contract is being terminated by the Lessee without
the prior
56
written consent of the Lessor and Assignee (other than as a
result of a default by such party); or
(iii) If any default by the Lessee shall occur under any of the
Project Contracts which would, after the giving of any required notice
and/or the expiration of any applicable grace period, entitle the other
party to such Project Contract to terminate such Project Contract as a
result of such default by the Lessee; or
(i) The entry of a decree or order for relief in respect of the Lessee or
the Guarantor by a court having jurisdiction in the premises or the appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or
similar official) of the Lessee or the Guarantor or of any substantial part of
the Lessee's or the Guarantor's property, or ordering the winding up or
liquidation of the Lessee's or the Guarantor's affairs, in an involuntary case
under the Federal bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal or state bankruptcy, insolvency or other similar law, and
such decree or order remains unstayed and in effect for thirty (30) consecutive
days; or the commencement against the Lessee or the Guarantor of an involuntary
case under the Federal bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal or state bankruptcy, insolvency or other similar law,
and the continuance of any such case unstayed and in effect for a period of
thirty (30) consecutive days; or
(j) The suspension or discontinuance of the Lessee's or the Guarantor's
business operations, or the Lessee's or the Guarantor's insolvency (however
evidenced), or the Lessee's or the Guarantor's admission of insolvency or
bankruptcy, or the commencement by the Lessee or the Guarantor of a voluntary
case under the Federal bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal or state bankruptcy, insolvency or other similar law,
or the consent by the Lessee or the Guarantor to the appointment of or taking
possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or other similar official) of the Lessee or the Guarantor or of any substantial
part of the Lessee's or the Guarantor's property, or the making by the Lessee or
the Guarantor of an assignment for the benefit of creditors, or the failure of
the Lessee or the Guarantor generally to pay its debts as such debts become due,
or the taking of corporate action by the Lessee or the Guarantor in furtherance
of any such action; or
(k) (i) The Guaranty ceases to be in full force and effect prior to the
termination thereof in accordance with its terms, (ii) the Guarantor asserts
that the Guaranty is not valid or in full force and effect, (iii) the Guarantor
shall take any action which impairs in any material respect the ability of the
Guarantor to fulfill its obligations under the Guaranty, (iv) the Guarantor
defaults in the performance of any obligation or covenant contained in the
Guaranty, any required notice of such default shall have been given, and any
applicable grace period shall have expired, or (v) an Event of Default (as
defined in the Guaranty) shall occur under the Guaranty; or
(l) Any representation or warranty made by the Guarantor in the Guaranty or
in any Consent or in any document contemplated hereby or thereby shall prove to
have been false, misleading or inaccurate in any material respect on or as of
the date made or deemed made; or
57
(m) The Lessee or the Guarantor or any of its Material Subsidiaries shall
fail to pay any principal of or premium or interest on any Indebtedness which is
outstanding in a principal amount of at least $10,000,000 in the aggregate of
the Lessee or the Guarantor or any such Material Subsidiary (as the case may
be), when the same becomes due and payable (whether by scheduled maturity,
required prepayment, acceleration, demand or otherwise), and such failure shall
continue after the applicable grace period, if any, specified in the agreement
or instrument relating to such Indebtedness; or any other event shall occur or
condition shall exist under any agreement or instrument relating to any such
Indebtedness and shall continue after the applicable grace period, if any,
specified in such agreement or instrument, if the effect of such event or
condition is to accelerate, or to permit the acceleration of, the scheduled
maturity of such Indebtedness; or any such Indebtedness shall be declared to be
due and payable, or required to be prepaid (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof; or
(n) Final judgment or judgments for the payment of money in excess of
$10,000,000 in the aggregate shall be rendered against the Lessee or the
Guarantor by any court of competent jurisdiction and the same shall remain
undischarged for a period of thirty (30) days during which execution of such
judgment or judgments shall not be effectively stayed.
SECTION 19. RIGHTS UPON DEFAULT.
Upon the occurrence and continuation of any Event of Default, the Lessor
may do any one or more of the following (subject to the provisions of paragraph
(b) of Section 13 of this Lease):
(i) Terminate the lease of the Project hereunder;
(ii) Whether or not the lease of the Project is terminated, take
immediate possession of the Project and remove any equipment or
property of the Lessor in the possession of the Lessee, wherever
situated, and for such purpose, enter upon the Premises without
liability to the Lessee for so doing;
(iii) Whether or not any action has been taken under clause (i)
or (ii) above, sell the Project (with or without the concurrence or
request of the Lessee);
(iv) Hold, use, occupy, operate, repair, remove, lease or keep
idle the Project as the Lessor in its sole discretion may determine,
without any duty to mitigate damages with respect to any such action
or inaction or with respect to any proceeds thereof; and
(v) Exercise any other right or remedy which may be available
under applicable law and in general proceed by appropriate judicial
proceedings, either at law or in equity, to enforce the terms hereof.
Suit or suits for the recovery of any default in the payment of any sum due
hereunder or for damages may be brought by the Lessor from time to time at the
Lessor's election, and nothing herein contained shall be deemed to require the
Lessor to await the date
58
whereon this Lease or the term hereof would have expired by limitation had there
been no such default by the Lessee or no such termination or cancellation.
The receipt of any payments under this Lease by the Lessor with knowledge
of any breach of this Lease by the Lessee or of any default by the Lessee in the
performance of any of the terms, covenants or conditions of this Lease, shall
not be deemed to be a waiver of any provision of this Lease.
No receipt of moneys by the Lessor from the Lessee after the termination or
cancellation hereof in any lawful manner shall reinstate, continue or extend the
Lease Term or Renewal Term, or affect any notice theretofore given to the
Lessee, or operate as a waiver of the right of the Lessor to enforce the payment
of Basic Rent or Additional Rent or other charges payable hereunder, or operate
as a waiver of the right of the Lessor to recover possession of by proper suit,
action, proceedings or remedy; it being agreed that, after the service of notice
to terminate or cancel this Lease, and the expiration of the time therein
specified, if the default has not been cured in the meantime, or after the
commencement of any suit, action or summary proceedings or of any other remedy,
or after a final order, warrant or judgment for the possession of the Project,
the Lessor may demand, receive and collect any moneys payable hereunder, without
in any manner affecting such notice, proceedings, suit, action, order, warrant
or judgment. Acceptance of the keys to the Project, or any similar act, by the
Lessor, or any agent or employee of the Lessor, during the term hereof, shall
not be deemed to be an acceptance of a surrender of the Project unless the
Lessor and Assignee shall consent thereto in writing.
After any Event of Default, the Lessee shall be liable for, and the Lessor
may recover from the Lessee, (i) all Basic Rent payable and the Variable
Component of Basic Rent accrued through the date of termination of this Lease,
(ii) any Additional Rent owing, (iii) all amounts payable pursuant to Sections
11, 24 and 26 hereof, (iv) all losses, damages, costs and expenses (including,
without limitation, attorneys' fees and expenses, commissions, filing fees and
sales or transfer taxes and all costs and expenses related to (x) the conduct of
investigations, studies, sampling and/or testing of the Premises and (y) the
taking of any action, including, without limitation, any remedial measures or
removal with respect to the Premises, each as required by an Assignee pursuant
to the terms of a Financing Arrangement) sustained by the Lessor by reason of
such Event of Default and the exercise of the Lessor's remedies with respect
thereto, including without limitation, in the event of a sale by the Lessor of
its interest in the Project pursuant to this Section 19, all costs and expenses
associated with such sale and (v) all other amounts owing hereunder (after
taking into account the application under the Financing Arrangements of any
payments made under this Section 19) excluding, in all cases, costs or expenses
included in Adjusted Acquisition Cost. The amounts payable in clauses (i)
through (v) above are hereinafter sometimes referred to as the "Accrued Default
Obligations".
After an Event of Default, the Lessor may sell its interest in the Project
upon any terms that the Lessor deems satisfactory, free of any rights of the
Lessee or any Person claiming through or under the Lessee (including, without
limitation, any rights hereunder or under the Agreement for Lease). In the event
of any such sale, the Lessor shall be entitled to recover from the Lessee, as
liquidated damages and not as a penalty, and subject to the second succeeding
sentence, an amount equal to the Adjusted Acquisition Cost. Proceeds of sale
received by the Lessor in excess of the Adjusted Acquisition Cost shall be
credited against the amounts the
59
Lessee is required to pay under this Section 19 and any other provision hereof.
If such proceeds plus the Adjusted Acquisition Cost, exceed the sum of (i) the
Adjusted Acquisition Cost and (ii) any Unrecovered Liabilities and Judgments,
and if the Lessee has indefeasibly paid the Adjusted Acquisition Cost, plus all
Unrecovered Liabilities and Judgments and all other amounts required to be paid
under this Section 19 and any other provision hereof, such excess shall be paid
by the Lessor to the Lessee; provided, however, that the Lessee shall remain
liable for any Unrecovered Liabilities and Judgments that arise after the
payment of such excess proceeds to the extent such Unrecovered Liabilities and
Judgments arise from or relate to acts or omissions occurring, or circumstances
or conditions created or existing at any time as of or prior to the expiration
or termination of this Lease. As an alternative to any such sale, the Lessor may
require the Lessee to pay to the Lessor, and the Lessee shall pay to the Lessor,
as liquidated damages and not as a penalty, an amount equal to the Adjusted
Acquisition Cost. If the Lessor subsequently sells its interest in the Project,
the proceeds of any such sale shall be distributed as provided in the third and
fourth sentences of this paragraph. If the Lessee converts the Project or any
part thereof after an Event of Default, or if the Project suffers an Event of
Loss or is otherwise lost or destroyed at the time of the Event of Default the
Lessor may require the Lessee to pay to the Lessor, and the Lessee shall pay to
the Lessor, as liquidated damages and not as a penalty, an amount equal to the
Adjusted Acquisition Cost. In the event the Lessor receives indefeasible payment
from the Lessee of the Adjusted Acquisition Cost of the Project and all
Unrecovered Liabilities and Judgments, the Lessor shall transfer all of the
Lessor's right, title and interest in and to the Project, the Ground Lease, the
Easements, the EPC Contract and any other Project Contract to the Lessee.
In the event of a sale pursuant to this Section 19, upon indefeasible
receipt by the Lessor of the amounts payable hereunder, the Lessor shall
transfer all of the Lessor's right, title and interest in and to the Project to
a purchaser other than the Lessee or to the Lessee, as the case may be.
In the event the Lessor is not paid an amount equal to the Adjusted
Acquisition Cost and all Unrecovered Liabilities and Judgments, then, in
addition to the Lessor's other rights in this Section 19, the Lessee shall upon
the Lessor's request (i) assign (or if not legally assignable, cooperate and
assist to the extent necessary or required in the transfer or reissuance
thereof) to the Lessor (or to an assignee designated by the Lessor or Assignee),
at no cost, all right, title and interest of the Lessee in, to and under all
Governmental Actions and Intellectual Property Rights needed for the equipping,
maintenance, operation or use of the Project and obtained and held by the Lessee
at that time, (ii) assign to the Lessor (or to a foreclosure purchaser
designated by the Lessor or Assignee), at no cost, all right, title and interest
of the Lessee in, to and under the Project Contracts, and in the event any
additional consent of any party to a Project Contract is required as a
precondition thereunder to an assignment to any other third party assignee
designated by the Lessor or Assignee, use its best efforts to obtain any such
required consent to such proposed non-foreclosure assignment and assumption of
the Project Contracts; and (iii) assign to the Lessor, at no cost, all right,
title and interest of the Lessee in, to and under all service agreements in
existence at the time of such sale and transferable by the Lessee and any
easements available to the Lessee and transferable by the Lessee in connection
with the equipping, maintenance, operation or use of the Project. The Lessee
acknowledges that it would be difficult to ascertain the value to the Lessor of
the Lessee's agreement to assign, transfer or have reissued to the Lessor such
Governmental Actions and Intellectual Property
60
Rights, to assign such Project Contracts (and, if necessary, to obtain such
consents to such assignment) and to assign to the Lessor such service agreements
and easements or to adequately compensate the Lessor by an award of damages for
the Lessee's failure to assign to the Lessor such Governmental Actions and
Intellectual Property Rights, to assign such Project Contracts (and, if
necessary, to obtain such consents to such assignment) and to assign to the
Lessor such service agreements and easements, and that therefore the Lessor
would not have an adequate remedy at law for breach by the Lessee of its
agreement hereunder to the Lessor. Accordingly, the Lessee acknowledges that the
Lessor shall be entitled to obtain specific performance of the Lessee's
obligation to assign to the Lessor such Governmental Actions and Intellectual
Property Rights, to obtain such consents to such assignment and to assign to the
Lessor the service agreements and easements. In the event the Lessee fails to
obtain any consents required in clause (ii) of the third preceding sentence, at
the request of the Lessor or such purchaser, as the case may be, the Lessee
shall agree to (A) at the expense of such purchaser or the Lessor, as the case
may be, continue to perform under and maintain in full force and effect the
Project Contracts and pay all sums received under the Project Contracts to such
third party or the Lessor, as the case may be, (B) at the expense of such third
party or the Lessor, as the case may be, and subject to the receipt of
indemnification reasonably acceptable to the Lessee, take all actions requested
by such third party or the Lessor, as the case may be, with respect to such
Project Contracts (including all actions with respect to the enforcement of the
Lessee's rights and remedies under such Project Contracts), and (C) not amend,
modify, supplement, waive a provision of, grant any consent under or terminate
any such Project Contract without the prior written consent of such third party
or the Lessor, as the case may be.
In addition to its other rights in this Section 19, the Lessor may exercise
its various rights under the Facility Support Agreement or transfer such rights
to the purchaser in a sale and the Lessee acknowledges hereby its agreement to
perform its obligations thereunder.
No remedy referred to in this Section 19 is intended to be exclusive, but
each shall be cumulative and in addition to any other remedy referred to above
or otherwise available to the Lessor at law or in equity, and the exercise in
whole or in part by the Lessor of any one or more of such remedies shall not
preclude the simultaneous or later exercise by the Lessor of any or all such
other remedies.
No waiver by the Lessor of any Event of Default hereunder shall in any way
be, or be construed to be, a waiver of any future or subsequent Event of
Default.
With respect to the termination of this Lease as a result of an Event of
Default, the Lessee hereby waives service of any notice of intention to
re-enter. The Lessee hereby waives any and all rights to recover or regain
possession of the Project or to reinstate this Lease as permitted or provided by
or under any statute, law or decision now or hereafter in force and effect.
SECTION 20. SALE OR ASSIGNMENT BY LESSOR.
(a) The Lessor shall have the right to obtain equity and debt financing for
the acquisition and ownership of the Project by selling or assigning its right,
title and interest in any
61
or all amounts due from the Lessee or any third party under this Lease and
granting a security interest in this Lease and the Project to a lender or
lenders under a Financing Arrangement (or any entity acting in the capacity of
an agent in connection therewith), notice of the identity of which shall be
given to the Lessee; provided that, any sale or assignment by the Lessor shall
be made consistent with the terms of this Lease and shall be subject to
Permitted Liens and the rights and interests of the Lessee under this Lease and
the Agreement for Lease.
(b) Any Assignee shall, except as otherwise agreed by the Lessor and such
Assignee, have all the rights, powers, privileges and remedies of the Lessor
hereunder, and the Lessee's obligations as between itself and such Assignee
hereunder shall not be subject to any claims or defense that the Lessee may have
against the Lessor. Upon written notice to the Lessee of any such assignment,
the Lessee shall thereafter make payments of Basic Rent and the Variable
Component of Basic Rent, Additional Rent and other sums due hereunder to
Assignee, to the extent specified in such notice, and such payments shall
discharge the obligation of the Lessee to the Lessor hereunder to the extent of
such payments. Anything contained herein to the contrary notwithstanding, no
Assignee shall be obligated to perform any duty, covenant or condition required
to be performed by the Lessor hereunder, and any such duty, covenant or
condition shall be and remain the sole obligation of the Lessor.
SECTION 21. INCOME TAXES.
The Lessor agrees that it will not file any Federal, state or local income
tax returns or state or local sales tax returns during the Initial Term, or any
Extended Term or Renewal Term with respect to the Project that are inconsistent
with the treatment of the Lessee as owner of the Project for Federal, state and
local income tax purposes and state and local sales tax purposes.
SECTION 22. NOTICES AND REQUESTS.
All notices, offers, acceptances, approvals, waivers, requests, demands and
other communications hereunder or under any other instrument, certificate or
other document delivered in connection with the transactions described herein
shall be in writing, shall be addressed as provided below and shall be
considered as properly given (a) if delivered in person, (b) if sent by express
courier service (including, without limitation, Federal Express, Emery, DHL,
Airborne Express, and other similar express delivery services), (c) in the event
overnight delivery services are not readily available, if mailed through the
United States Postal Service, postage prepaid, registered or certified with
return receipt requested, or (d) if sent by telecopy and confirmed; provided
that, in the case of a notice by telecopy, the sender shall in addition confirm
such notice by writing sent in the manner specified in clause (a), (b) or (c) of
this Section 22. All notices shall be effective upon receipt by the addressee;
provided, however, that, if any notice is tendered to an addressee and the
delivery thereof is refused by such addressee, such notice shall be effective
upon such tender. For the purposes of notice, the addresses of the parties shall
be as set forth below; provided, however, that any party shall have the right to
change its address for notice hereunder to any other location by giving written
notice to the other party in the manner set forth herein. The initial addresses
of the parties hereto are as follows:
62
If to the Lessor:
Wygen Funding, Limited Partnership
c/o ML Leasing Equipment Corp.
Controller's Office
95 Greene Street, 7th Floor
Jersey City, New Jersey 07302
Attention: Kira Toone
Telephone: (201) 671-0334
Facsimile: (201) 671-4511
With a copy of all notices under this Section 22 to be simultaneously given,
delivered or served to the following:
ML Leasing Equipment Corp.
95 Greene Street, 7th Floor
Jersey City, New Jersey 07302
Attention: Frank Conley
Facsimile: (201) 671-4511
If to the Lessee:
Black Hills Generation, Inc.
625 Ninth Street
Rapid City
South Dakota 57701
Attention: Mark Thies
Telephone: (605) 721-2331
Telecopy: (605) 721-2597
with a copy of all notices under this Section 22 to Assignee at such address as
such Assignee may specify by written notice to the Lessor and the Lessee.
SECTION 23. COVENANT OF QUIET ENJOYMENT.
During the Initial Term, or any Extended Term or Renewal Term hereunder and
so long as no Event of Default, Event of Loss, Taking or Termination Event shall
have occurred and be continuing, the Lessor recognizes the Lessee's right to
quiet enjoyment of the Project on the terms and conditions provided in this
Lease without any interference from the Lessor or anyone claiming through or
under the Lessor.
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SECTION 24. RIGHT TO PERFORM FOR LESSEE.
(a) If the Lessee fails to perform or comply with any of its
covenants or agreements contained in this Lease, and any period to cure such
failure has expired without the Lessee curing such failure, the Lessor may, upon
notice to the Lessee but without waiving or releasing any obligations or
default, itself perform or comply with such covenant or agreement, and the
amount of the reasonable expenses of the Lessor incurred in connection with such
performance or compliance shall be payable by the Lessee, not later than ten
(10) days after written notice by the Lessor.
(b) Without in any way limiting the obligations of the Lessee hereunder,
the Lessee hereby irrevocably appoints the Lessor as its agent and attorney at
the time at which the Lessee is obligated to deliver possession of the Project
to the Lessor, to demand and take possession of the Project in the name and on
behalf of the Lessee from whomsoever shall be at the time in possession thereof.
SECTION 25. MERGER, CONSOLIDATION OR SALE OF ASSETS.
The Lessee may consolidate with or merge into any other corporation or sell
all or substantially all of its assets to any Person; provided that, following
such consolidation, merger or sale of assets, (a) the Guarantor shall own
beneficially and of record greater than fifty percent (50%) of the capital stock
of the Lessee (in the case of a consolidation or merger) or greater than fifty
percent (50%) of the equity interests of the transferee (in the case of a sale
of assets), and (b) no Event of Default shall exist under this Lease. The terms
and provisions of this Lease shall be binding upon and inure to the benefit of
the Lessee and its respective successors and assigns.
SECTION 26. EXPENSES.
The Lessee shall pay all of the out-of-pocket costs and expenses incurred
by the Lessor and any Assignee in connection with this Lease, including, without
limitation, the reasonable fees and disbursements of counsel to the Lessor and
counsel to any Assignee.
SECTION 27. PERMITTED CONTESTS.
(a) The Lessee shall not be required, nor shall the Lessor have the right,
to pay, discharge or remove any tax, assessment, levy, fee, rent, charge or
Lien, or to comply or cause the Project to comply with any Legal Requirements
applicable thereto or the occupancy, use or operation thereof, so long as no
Potential Default, Event of Default, Event of Loss, Taking or Termination Event
exists under this Lease, and, in the reasonable judgment of the Lessee's
counsel, the Lessee shall have reasonable grounds to contest the existence,
amount, applicability or validity thereof by appropriate proceedings, which
proceedings in the reasonable judgment of the Lessor and Assignee (i) shall not
involve any danger that the Project or any portion thereof or any Basic Rent or
any Additional Rent would be subject to sale, forfeiture or loss, as a result of
failure to comply therewith, (ii) shall not affect the payment of any Basic Rent
or any Additional Rent or other sums due and payable hereunder or result in any
such sums being payable to any Person other than the Lessor or any Assignee,
(iii) will not place either the Lessor or any
64
Assignee in any danger of civil liability or subject the Lessor or any Assignee
to any danger of criminal liability, (iv) if involving taxes, shall suspend the
collection of taxes (unless the Lessee has provided a bond for the full amount
in dispute), (v) are consistent with prudent business practices, and (vi) shall
be permitted under and be conducted in accordance with the provisions of any
other instrument to which the Lessee or the Project is subject and shall not
constitute a default thereunder (a "Permitted Contest"). The Lessee shall
conduct all Permitted Contests in good faith and with due diligence and shall
promptly after the final determination (including appeals) of any Permitted
Contest (or, if earlier, upon any of the above criteria no longer being
satisfied) pay and discharge all amounts which shall be determined to be payable
therein. The Lessor shall cooperate in good faith with the Lessee with respect
to all Permitted Contests conducted by the Lessee pursuant to this Section 27.
(b) In the event the Lessor or Assignee deems, in its reasonable
discretion, that its interests under this Lease or in the Project are not
adequately protected in connection with a Permitted Contest brought by the
Lessee as permitted under this Section 27, the Lessee shall give such reasonable
security as may be demanded by the Lessor or any Assignee to ensure payment of
such tax, assessment, levy, fee, rent, charge or Lien and compliance with Legal
Requirements and to prevent any sale or forfeiture of the Project or any portion
thereof, any Basic Rent or any Additional Rent by reason of such nonpayment or
noncompliance. The Lessee hereby agrees that the Lessor may assign such security
provided by the Lessee to any Assignee.
(c) At least ten (10) days prior to the commencement of any Permitted
Contest, the Lessee shall notify the Lessor in writing thereof if the amount in
contest exceeds $100,000, and shall describe such proceeding in reasonable
detail. In the event that a taxing authority or subdivision thereof proposes an
additional assessment or levy of any tax for which the Lessee is obligated to
reimburse the Lessor under this Lease, or in the event that the Lessor is
notified of the commencement of an audit or similar proceeding which could
result in such an additional assessment, then the Lessor shall in a timely
manner notify the Lessee in writing of such proposed levy or proceeding.
SECTION 28. LEASEHOLD INTERESTS.
(a) The Lessee hereunder covenants and agrees to perform and to observe all
of the terms, covenants, provisions, conditions and agreements of the Ground
Lease on the Lessor's part as lessee and grantee thereunder to be performed and
observed to the end that all things shall be done which are necessary to keep
unimpaired the rights of the lessee under the Ground Lease and the rights of the
Lessor as grantee with respect to the Easements, except to the extent such
performance is solely under the control of the Lessor.
(b) The Lessee covenants and agrees pursuant to Section 11 hereof to
indemnify and hold harmless the Lessor and each Assignee from and against any
and all liability, loss, damage, suits, penalties, claims and demands of every
kind and nature (including, without limitation, reasonable attorneys' fees and
expenses) by reason of the Lessee's failure to comply with the Ground Lease, the
Easements or the provisions of this Section 28 other than to the extent arising
solely from the gross negligence or willful misconduct of the Lessor.
65
(c) The Lessor and the Lessee agree that during the term of this Lease and
the Agreement for Lease the Lessor shall have no obligation or responsibility to
provide services or equipment required to be provided or repairs or restorations
required to be made in accordance with the provisions of the Ground Lease by the
lessee or grantee thereunder. The Lessor shall in no event be liable to the
Lessee nor shall the obligations of the Lessee hereunder be impaired or the
performance thereof excused because of any failure or delay on the part of the
Lessor as the lessee under the Ground Lease or with respect to the Easements in
providing such services or equipment or making such restorations or repairs and
such failure or delay shall not constitute a basis for any claim against the
Lessor or any offset against any amount payable to the Lessor under this Lease.
SECTION 29. MISCELLANEOUS.
(a) All agreements, indemnities, representations and warranties, and the
obligation to pay Basic Rent and the Variable Component of Basic Rent,
Additional Rent and other amounts contained in this Lease shall survive until
the expiration or other termination of this Lease, provided that (i) any
obligations under this Lease accrued at the time of or related to periods prior
to such expiration or other termination (including, without limitation, any
obligation to pay Unrecovered Liabilities and Judgments) shall survive such
expiration or other termination, and (ii) any obligation under this Lease which
is expressly provided to be performed after or to survive the expiration or
termination of this Lease shall survive the expiration or other termination
hereof.
(b) This Lease and the instruments, documents or agreements referred to
herein constitute the entire agreement between the parties and no
representations, warranties, promises, guarantees or agreements, oral or
written, express or implied, have been made by any party hereto with respect to
this Lease or the Project, except as provided herein or therein.
(c) This Lease may not be amended, modified or terminated, nor may any
obligation hereunder be waived orally, and no such amendment, modification,
termination or waiver shall be effective for any purpose unless it is in
writing, signed by the party against whom enforcement thereof is sought. A
waiver on one occasion shall not be construed to be a waiver with respect to any
other occasion.
(d) The captions in this Lease are for convenience of reference only and
shall not be deemed to affect the meaning or construction of any of the
provisions hereof. Any provision of this Lease which is prohibited by law or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and the parties hereto shall negotiate in good
faith appropriate modifications to reflect such changes as may be required by
law, and, as nearly as possible, to produce the same economic, financial and tax
effects as the provision which is prohibited or unenforceable; and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, the Lessee and the Lessor hereby waive any
provision of law which renders any provision hereof prohibited or unenforceable
in any respect. THIS LEASE HAS BEEN EXECUTED AND DELIVERED IN THE STATE OF NEW
YORK. THE LESSEE AND THE LESSOR AGREE THAT, TO THE MAXIMUM EXTENT
66
PERMITTED BY THE LAW OF THE STATE OF NEW YORK, THIS LEASE, AND THE RIGHTS AND
DUTIES OF THE LESSEE AND THE LESSOR HEREUNDER, SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING,
WITHOUT LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL
OBLIGATIONS LAW) IN ALL RESPECTS, INCLUDING, WITHOUT LIMITATION, IN RESPECT OF
ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. THE LESSEE HEREBY
IRREVOCABLY SUBMITS, FOR ITSELF AND ITS PROPERTIES, TO THE JURISDICTION OF THE
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND THE
SUPREME COURT OF THE STATE OF NEW YORK IN THE COUNTY OF NEW YORK IN ANY ACTION,
SUIT OR PROCEEDING BROUGHT AGAINST IT AND RELATED TO OR IN CONNECTION WITH THIS
LEASE, AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE LESSEE HEREBY WAIVES
AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE IN ANY SUCH
SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE
JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN
INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS
IMPROPER, OR THAT THIS LEASE OR THE SUBJECT MATTER HEREOF MAY NOT BE LITIGATED
IN OR BY SUCH COURT. THIS SUBMISSION TO JURISDICTION IS NONEXCLUSIVE ANDDOES NOT
PRECLUDE LESSOR OR ANY ASSIGNEE FROM OBTAINING JURISDICTION OVER THE LESSEE IN
ANY COURT OTHERWISE HAVING JURISDICTION. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, THE LESSEE AGREES NOT TO SEEK AND HEREBY WAIVES THE RIGHT TO ANY REVIEW OF
THE JUDGMENT OF ANY SUCH COURT BY ANY COURT OF ANY OTHER NATION OR JURISDICTION
WHICH MAY BE CALLED UPON TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT. THE LESSEE
AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED
MAIL TO THE ADDRESS FOR NOTICES SET FORTH IN THIS LEASE OR ANY METHOD AUTHORIZED
BY THE LAWS OF NEW YORK. THE LESSOR APPOINTS CT CORPORATION SYSTEM WHICH
CURRENTLY MAINTAINS A NEW YORK CITY OFFICE SITUATED AT 111 EIGHTH AVENUE, 13TH
FLOOR, NEW YORK, NEW YORK 10011, UNITED STATES, AS ITS AGENT TO RECEIVE SERVICE
OF PROCESS AND AGREES, SO LONG AS THE LESSOR HAS ANY OBLIGATION UNDER THIS
LEASE, THAT IT WILL MAINTAIN A DULY APPOINTED AGENT IN NEW YORK CITY FOR THE
SERVICE OF SUCH PROCESS, AND FURTHER AGREES THAT IF IT FAILS TO MAINTAIN SUCH AN
AGENT, ANY SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED
MAIL TO THE ADDRESS FOR NOTICES SET FORTH IN THIS AGREEMENT OR ANY METHOD
AUTHORIZED BY THE LAWS OF NEW YORK. THE LESSOR AND THE LESSEE EXPRESSLY WAIVE
ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM RELATED TO
THIS LEASE OR THE TRANSACTIONS CONTEMPLATED HEREBY. THE LESSOR AND THE LESSEE
ACKNOWLEDGE THAT THE PROVISIONS OF THIS PARAGRAPH (D) OF SECTION 29 HAVE BEEN
BARGAINED FOR AND THAT THEY HAVE BEEN REPRESENTED BY COUNSEL IN CONNECTION
THEREWITH.
67
(e) In connection with any sale of the Project pursuant to Section 12, 13,
14, 15 or 19 of this Lease, when the Lessor transfers title, such transfer shall
be on an as-is, non-installment sale basis, without warranty by, or recourse to,
the Lessor.
(f) In connection with the sale or purchase of the Project pursuant to
Section 12, 13, 14, 15 or 19 of this Lease, the Lessee shall pay or shall cause
the purchaser of the Project to pay, in addition to the purchase price, all
transfer taxes, transfer gains taxes, mortgage recording tax, if any, recording
and filing fees and all other similar taxes, fees, expenses and closing costs
(including reasonable attorneys' fees) in connection with the conveyance of the
Project to the Lessee or any purchaser.
(g) Each time that the Adjusted Acquisition Cost is increased or decreased
pursuant to the terms of this Lease (other than a decrease in connection with
the amortization of the Acquisition Cost of the Project as contemplated by this
Lease), the Lessor shall promptly revise Exhibit E hereto to reflect such
increase or decrease pro rata over all remaining payments of Monthly Rent
Component and shall provide the Lessee and Assignee a copy of such revised
Exhibit E within three (3) Business Days of such increase or decrease.
(h) In connection with the purchase of the Project by the Lessee or any
third party pursuant to the provisions of this Lease, the Lessor shall deliver
to the Lessee or such third party, as the case may be, a bill of sale, deed or
similar document assigning and conveying to the Lessee or such third party, as
the case may be, and the Lessee or such third party, as the case may be, shall
accept an assignment of, the Lessor's interest in the Ground Lease, the
Easements, the EPC Contract, the Facility Support Agreement and, if applicable,
any other Project Contract, such assignment, conveyance, or other documents to
be without warranty by, or recourse to, the Lessor (provided that the purchase
price paid by the Lessee to the Lessor, exclusive of the other amounts payable
hereunder in connection with such purchase, shall equal the Adjusted Acquisition
Cost).
(i) In the event of any Event of Default, or if a sale of the Project to
the Lessor is deemed to occur pursuant to paragraph (e) of Section 13, the
Lessee shall, to the extent required by the Lessor or Assignee, exercise all
commercially reasonable efforts (i) to provide the Lessor (or a designated
assignee of the Lessor or Assignee) with all easements, manuals and other
matters and services to be provided by the Operator (to the extent such
easements, manuals and other matters and services are not being provided
pursuant to the Project Contracts) necessary to enable the Project to operate on
commercially reasonable terms, (ii) to provide the Lessor (or a designated
assignee of the Lessor or Assignee) with any Project Contracts, Governmental
Actions and Intellectual Property Rights not assigned to the Lessor (or a
designated assignee of the Lessor or Assignee) pursuant to the applicable terms
hereof that are necessary to enable the Project to operate on commercially
reasonable terms, (iii) to provide the Lessor (or a designated assignee of the
Lessor or Assignee) with any permits, licenses or other Governmental Actions (to
the extent not already provided to such party by the Lessee or the Guarantor)
that are necessary to enable the Project to operate on commercially reasonable
terms in connection with its operation as an EWG, including without limitation
all permits, licenses or other Governmental Actions required to enable such
party (provided that such party is not a "public-utility company", as such term
is defined in Section 2(a)(5) of the 1935 Act, or otherwise subject to
regulation as a public utility by any relevant governmental body or similar
entity under the laws of any state or locality) to operate the Project on
commercially reasonable terms as an
68
EWG, and (iv) to negotiate in good faith with the Lessor (or a designated
assignee of the Lessor or Assignee), or exercise all commercially reasonable
efforts to locate a third party reasonably acceptable to the Lessor and Assignee
who is capable of operating the Project for the Lessor (or a designated assignee
of the Lessor or Assignee), to operate the Project for the Lessor (or such
designated assignee of the Lessor or Assignee), for fair market value
compensation for such services. The Lessee's obligations contained in this
paragraph (i) shall survive the expiration or other termination of this Lease
until the Lessor receives payment of (1) all amounts payable pursuant to this
Lease and the Agreement for Lease, (2) all losses, damages, costs and expenses
(including, without limitation, attorneys' fees and expenses, commissions,
filing fees and sales or transfer taxes) sustained by the Lessor, (3) all
amounts owing under the Financing Arrangements and (4) any unreimbursed costs
incurred by the Lessor or Assignee with respect to the Project or the Project
Contracts after the term of this Lease, net of any revenues received from the
operation of the Project.
(j) The Lessee may not assign any of its obligations under this Lease to
any other party, except to an Affiliate of the Lessee; provided, that (i) such
Affiliate shall assume the obligations of the Lessee hereunder, under the
Agreement for Lease and the Project Contracts, by execution and delivery of
instruments satisfactory to the Lessor and Assignee (including, without
limitation, consents under the applicable Project Contracts (if required), the
execution of an assignment and assumption agreement and the reaffirmation of the
Guaranty, in each case in form and substance satisfactory to the Lessor and
Assignee, (ii) no Potential Default, Event of Default or Termination Event shall
occur by reason of giving effect to such assignment, and (iii) such assignee
shall have complied with any requirements set forth in the Project Contracts.
SECTION 30. NO RECOURSE.
The Lessor's obligations hereunder are intended to be the obligations of
the limited partnership and of the corporation which is the general partner
thereof only and no recourse for the payment of any amount due under this Lease,
any Project Contract, or any other agreement contemplated hereby, or for any
claim based thereon or otherwise in respect thereof, shall be had against any
limited partner of the Lessor or any incorporator, shareholder, officer,
director or Affiliate, as such, past, present or future of such corporate
general partner or of any corporate limited partner or of any successor
corporation to such corporate general partner or any corporate limited partner
of the Lessor, or against any direct or indirect parent corporation of such
corporate general partner or of any limited partner of the Lessor or any other
subsidiary or Affiliate of any such direct or indirect parent corporation or any
incorporator, shareholder, officer or director, as such, past, present or
future, of any such parent or other subsidiary or Affiliate. Nothing contained
in this Section 30 shall be construed to limit the exercise or enforcement, in
accordance with the terms of this Lease, the Project Contracts and any other
documents referred to herein, of rights and remedies against the limited
partnership or the corporate general partner of the Lessor or the assets of the
limited partnership or the corporate general partner of the Lessor.
69
SECTION 31. NO MERGER OF ESTATES.
There shall be no merger of this Lease or of the leasehold
estate hereby created with the fee estate in the Project by reason of the fact
that the same person acquires or holds, directly or indirectly, this Lease or
the leasehold estate hereby created or any interest herein or in such leasehold
estate as well as the fee estate in the Project or any interest in such fee
estate.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Lessor and the Lessee have caused this
Lease to be executed and delivered as of the day and year first above written.
WYGEN FUNDING, LIMITED PARTNERSHIP,
By Wygen Capital, Inc.,
its General Partner
By
-------------------------------------------------
Name:
Title:
BLACK HILLS GENERATION, INC.
By
------------------------------------------------
Name:
Title:
71
EXHIBIT A
LEGAL DESCRIPTION OF LAND
A-1
EXHIBIT B
INTENTIONALLY OMITTED
B-1
EXHIBIT C
LIST OF PROJECT CONTRACTS
o The Engineering, Procurement and Construction Agreement dated as of
December 27, 2000, as amended by a First Amendment to Engineering,
Procurement and Construction Agreement dated as of April 11, 2001, between
the Lessee and the General Contractor.
o The Irrevocable Letter of Credit No. NY-20511-30029698, dated April 18,
2001, issued by CitiBank, N.A., in favor of the Lessee.
o The Performance Bonds issued by subcontractors pursuant to the EPC
Contract.
o The Subcontracts and Supply Contracts entered into by the General
Contractor pursuant to the EPC Contract.
o The equipment purchase contract to be entered into by and between General
Electric Company and the General Contractor.
o The Ground Lease Agreement, dated as of July 20, 2001, between the Lessee,
as ground lessor, and the Lessor, as ground lessee.
o The Easement Agreement, dated as of July 20, 2001, between Black Hills
Power, Inc. and Wyodak Resources Development Corp., as grantors, and the
Lessor, as grantee.
o The Power Purchase Agreement, dated as of February 16, 2001, between the
Lessee and Cheyenne Light, Fuel and Power Company.
o The Power Purchase Agreement, dated as of March 5, 2001, between the Lessee
and Municipal Energy Agency of Nebraska.
o The Coal Supply Agreement, dated as of July 20, 2001, between Wyodak
Resources Development Corp. and the Lessee.
o The Agreement for Rights of Usage of Coal Silo and Coal Conveyer, dated as
of July 20, 2001, between Black Hills Power, Inc. and the Lessee.
o The Agreement for Interconnection Service, dated as of July 20, 2001,
between Black Hills Power, Inc. and the Lessee.
o The Services Agreement, dated as of July 20, 2001, between Black Hills
Power, Inc. and the Lessee.
C-1
EXHIBIT D
LIST OF PROJECT AUTHORIZATIONS
o Air Quality Permit No. CT-1236, as modified in Permit No. MD-510A.
o Determination of No Hazard to Air Navigation issued by the Federal Aviation
Administration on February 28, 2001.
o Determination of Exempt Wholesale Generation Status dated April 10, 2001,
95 F.E.R.C.ss.62.025; 2001 WL 357465.
o Acceptance for filing of rate schedule of market-based rates, June 22,
2001, F.E.R.C. Docket No. ER01-1844-000.
D-1
EXHIBIT E
MONTHLY RENT COMPONENT
[As of the date of this Lease, there is no Monthly Rent Component.]
E-1
Exhibit 99.1
Black Hills Corporation
625 Ninth Street
Rapid City, SD 57701
LETTER TO COMMISSION PURSUANT TO TEMPORARY NOTE 3T
March 25, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
Pursuant to Temporary Note 3T to Article 3 of Regulation S-X, Black
Hills Corporation has obtained a letter of representation from Arthur Andersen
LLP stating that the December 31, 2001 audit was subject to their quality
control system for the U.S. accounting and auditing practice to provide
reasonable assurance that the engagement was conducted in compliance with
professional standards, that there was appropriate continuity of Arthur Andersen
LLP personnel working on the audit and availability of national office
consultation to conduct the relevant portions of the audit. Availability of
personnel at foreign affiliates of Arthur Andersen is not relevant to this
audit.
Very truly yours,
Black Hills Corporation
/s/ Mark T. Thies
Mark T. Thies
Senior Vice President and
Chief Financial Officer