October 14, 1998
FirstEnergy Corp.
76 South Main St.
Akron, Ohio 44308
Dear Sirs:
This letter confirms the agreement in principle of
Duquesne Light Company ("DLC"), a Pennsylvania corporation, and
FirstEnergy Corp. ("FE"), an Ohio corporation, acting on behalf
of Ohio Edison Company, Pennsylvania Power Company, The Cleveland
Electric Illuminating Company, and The Toledo Electric Company
(together, "FE Subsidiaries"), regarding the exchange of
interests in certain electric generation facilities (hereinafter
"Generation Exchange"). FE shall cause the FE Subsidiaries to
perform all acts described herein as necessary or appropriate to
fulfill FE's obligations hereunder. The terms of the agreement
in principle are as follows:
1. Interests Exchanged. The Parties intend to
exchange the following interests in electric generation assets:
(a) DLC will assign, convey, transfer and deliver
to the FE Subsidiaries its rights, title and interest in and to
the following electric generation plants: Beaver Valley Power
Station Units Nos. 1 & 2 (subject to Section 3 hereof), Perry
Unit No. 1, W.H. Sammis Unit No. 7, Bruce Mansfield Units Nos. 1,
2 & 3, and Eastlake Unit No. 5 (together, "DLC Interests"), as
described and identified in Exhibit 1 hereof.
(b) The FE Subsidiaries will assign, convey,
transfer and deliver to DLC its rights, title and interest in and
to the following electric generation plants: all units located
at the Avon Lake, New Castle, and Niles generating stations
(together, "FE Interests"), as described and identified in
Exhibit 2 hereof.
(c) Each Party will be responsible for the costs of
any state or local transfer taxes associated with the transfer of
its real property to the other.
2. Structure of Exchange.
(a) The Generation Exchange will be structured to
qualify as a tax deferred, like-kind exchange under Internal
Revenue Code Section 1031. The Parties recognize, however, that
certain assets associated with the exchange may constitute
nonqualifying property under Section 1031.
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(b) The Generation Exchange would be followed
immediately by DLC's sale of the FE Interests to the winning
bidder ("Winning Bidder") in DLC's generation auction ("DLC
Auction"), except as provided in Section 7.
(c) FE will indemnify and hold DLC harmless against
claims and liabilities associated with its temporary ownership of
the FE Interests to the extent such claims and liabilities are
not assumed by the Winning Bidder.
3. Beaver Valley Unit 2. DLC will terminate the
Facility Leases and will be responsible for all payments and
expenses associated with such termination. DLC will indemnify
and hold FE harmless against any claims and liabilities
associated with the termination of the Facility Leases.
4. FE Financial Commitment. FE will provide a
financial commitment that DLC has determined will ensure that the
net proceeds from the DLC Auction will be sufficient, at a
minimum, to maintain or reduce the level of stranded cost
recovery approved by the PaPUC in its May 29, 1998 restructuring
order.
5. Decommissioning. DLC will be responsible for its
share of nuclear decommissioning costs for the Beaver Valley
Power Station and Perry Unit 1. The Parties will cooperate in
developing alternative methods for handling DLC's decommissioning
obligations in a manner that caps such obligations at the total
funding amounts allowed by the PaPUC in the DLC restructuring
order and provides FE the after-tax treatment associated with
those funds that are assumed in such order. Any additional
decommissioning costs, or costs associated with spent nuclear
fuel or the disposal or decommissioning of any other nuclear
equipment, facilities or properties of any kind, will be the sole
responsibility of FE.
6. Labor. The Parties will cooperate to resolve
labor-related matters, including with respect to union contracts,
workforce levels, severance, and employee benefits, in a manner
that treats employees fairly and equitably apportions any related
costs between the Parties. The definitive agreements for the
Generation Exchange shall clearly define and apportion the rights
and obligations of the Parties regarding these matters.
7. FENOC.
(a) DLC will assign, convey, transfer and deliver
its right, title and interest in the Beaver Valley Power Station
to FE, including the transfer of responsibility for the operation
and maintenance of the plant to FirstEnergy Nuclear Operating
Company ("FENOC"), and DLC's interest in Perry Unit 1 ("Nuclear
Interest Transfer"), as soon as practicable after the receipt of
all associated regulatory approvals and the satisfaction of any
other condition, as set forth in the definitive agreements, to
such a transfer, including conditions related to the Facility
Lease, decommissioning, labor-related matters, nuclear fuel, and
transmission as further described Sections 3, 5, 6, 9, and 10
hereof. Such transfers of DLC's right, title and interest and
operating responsibility in or for its nuclear interests will be
made as the conditions precedent for such transfer of Beaver
Valley Unit 1, Beaver Valley Unit 2 and/or Perry Unit 1 are
satisfied.
(b) Upon execution of this agreement in principle,
DLC shall provide written notification to FE that it supports the
pending Nuclear Regulatory Commission application by FENOC to
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assume operating responsibility for Perry Unit 1. DLC's support
for such NRC application shall not constitute a waiver of DLC's
right to withhold consent to the assignment of such operating
responsibility to FENOC pursuant to the Perry Unit 1 Operating
Agreement, dated as of March 10, 1987, such consent to be
required and provided upon execution of the Exchange Agreements
described in Section 14.
8. Cooperation in DLC Auction.
(a) FE will cooperate with DLC in a commercially
reasonable manner to provide for the timely and successful
completion of the DLC Auction, including providing the due
diligence specified in Section 15 and designating a person or
persons having engineering and operational familiarity with
respect to each of the FE Interests to be the principal contact
person(s) for the auction of the FE Interests and causing such
person(s) to make sufficient time available for such purpose as
reasonably required by DLC or its consultants or advisors.
(b) FE agrees that it will not submit a bid in
DLC's auction.
(c) For any FE employee(s) affected by the
Generation Exchange to whom FE desires to submit an offer of
continuing employment, FE shall disclose the identity of such
employee(s) to DLC reasonably in advance of the date when bids
are due in the DLC Auction.
(d) Nothing in this agreement in principle or the
definitive agreements shall be deemed to grant FE any rights with
respect to, or otherwise to participate in, the implementation of
the DLC Auction.
9. Fuel. Each Party will sell, assign, convey,
transfer and deliver to the other its rights, title and interest
in and to the fuel inventories, including nuclear fuel in core,
associated with the generation interests being exchanged at the
cost of such fuel inventories. Each Party will also assign, to
the extent assignable, all rights and obligations under fuel
contracts applicable to such interests. To the extent any such
contract is not assignable, including leases for nuclear fuel,
the Party to such contract shall agree to resell the fuel
delivered under such contract or lease to the other Party and
receive from the other Party the cost of such deliveries on an
as-incurred basis during the term of the contract or lease,
provided that no such contract shall be extended, nor shall any
additional nuclear fuel be added to any such leases.
10. Transmission Facilities. DLC will sell, assign,
convey, transfer and deliver to FE (i) the transmission
facilities necessary and appropriate to permit the delivery of
power from the Beaver Valley Power Station and the Bruce
Mansfield Power Station to the FE transmission system, and (ii)
any substation and related facilities as are necessary to meet
Nuclear Regulatory Commission requirements for the safe and
reliable operation of the Beaver Valley Power Station, provided
that arrangements are made for continued use by DLC of such
substation facilities as are necessary for the integration and
operation of its system. The purchase price for the DLC
facilities so transferred shall be equal to the net book costs of
such facilities at the closing date of such transaction.
11. CAPCO Agreements. All contractual arrangements
associated with the Central Area Power Coordination Group
("CAPCO"), including the unit operating agreements associated
with the DLC Interests, the Transmission Facilities Agreement,
and the CAPCO Basic Operating Agreement, will be modified or
terminated so that DLC shall have no further rights or
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obligations respecting such agreements and in a manner necessary
or appropriate to permit compliance by FE with any law,
regulation or contract.
12. Property Tax Litigation. As of the date of
execution of this agreement in principle, FE will receive the
full benefits, including any refunds, and shall bear the full
costs after such date related to, pending litigation and appeals
regarding the property taxes for the Perry, Eastlake and Sammis
plants, provided, however, that if the Generation Exchange as to
any such unit is not consummated for any reason, the Parties
shall negotiate arrangements that place them in the same position
as to such unit, with respect to any such costs or benefits, as
if this agreement in principle had not been executed. DLC will
continue to take all actions necessary in such proceedings, in
cooperation with FE, until the closing subject to reimbursement
of all expenses upon closing.
13. Litigation. The Generation Exchange will
constitute a full settlement of all existing and future
litigation between the Parties related to their ownership
interests in the CAPCO assets. Following the execution of this
agreement in principle, definitive settlement agreements as to
any pending litigation will be negotiated consistent with this
agreement in principle and will take effect on the date of
closing of the Generation Exchange. In addition, upon execution
of this agreement in principle, the Parties will jointly seek an
order of the Court in the current litigation regarding Eastlake
Unit 5 (the "Eastlake Litigation") to stay all proceedings in the
Eastlake Litigation pending the complete execution of Exchange
Agreements. Upon the complete execution of the Exchange
Agreements, the Parties will jointly present to the Court an
agreed order which will have the effect of suspending the
Eastlake Litigation while preserving the Parties' rights to
continue the Eastlake Litigation in the event that the Generation
Exchange does not close. If the Generation Exchange does not so
close, DLC shall retain all rights with respects to such
litigation, with the exception being that execution of the
Exchange Agreements shall constitute an irrevocable waiver by DLC
of claims for money damages in the Eastlake Litigation but not
for any other remedy, including the partition or sale of the
unit.
14. Definitive Agreements. Following the execution of
this agreement in principle, the Parties shall in good faith
negotiate as soon as practicable definitive agreements (together
with any related schedules, together the "Exchange Agreements")
reflecting the terms of the Generation Exchange as set forth in
this agreement in principle and containing such additional terms,
covenants, representations and warranties, assumptions of
liability and other conditions as are normal and customary for
transactions of this kind. The representations, warranties,
covenants and conditions for FE and DLC are expected to include,
but not necessarily be limited to, those set forth in the Asset
Purchase Agreement Term Sheet, attached as Appendix D to the DLC
Generation Auction Plan.
It is specifically agreed and understood by the Parties
that the terms set forth in this agreement in principle do not
constitute all of the major terms which will be included in the
Exchange Agreements, that the terms set forth herein are subject
to further discussion, negotiation, and due diligence, and that
this agreement in principle is an expression of intent only and
is not intended, nor will it be alleged by either Party, to
create or result in any legally binding obligation upon the
Parties, with the sole exception being this sentence and Sections
7(b) and 23.
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15. Due Diligence.
(a) Between the date of this letter and the date of
consummation of the Generation Exchange, FE will (i) give DLC and
its authorized representatives (including without limitation, its
professional and financial advisors and any qualified bidder in
the DLC Auction, together "DLC Representatives"), access during
regular business hours upon reasonable notice to all of the
generating plants constituting the FE Interests and to all of its
books and records associated with the FE Interests, (ii) permit
DLC Representatives to make such reasonable inspections as it may
require, including the performance of Phase I and Phase II
environmental audits as to the FE Interests, provided that DLC
bears all of the expenses related to such audits and inspections,
(iii) cause FE's officers and those of its subsidiaries to
furnish DLC Representatives with such financial and operating
data and other information with respect to the FE Interests as
DLC Representatives may request from time to time, and (iv) keep
DLC Representatives apprised of material developments in the
operation and maintenance of the FE Interests. As provided in
the letter agreement between FE and DLC respecting confidenti-
ality, the information provided to DLC Representatives will be
treated on a confidential basis. DLC will require any qualified
bidder in the DLC Auction to execute a confidentiality agreement
providing similar protections for due diligence information
provided by FE to such bidders.
(b) Between the date of this letter and the date of
consummation of the transactions contemplated herein or
termination hereof, DLC will keep FE apprised of material
developments regarding the operation and maintenance of the
Beaver Valley Power Station and shall otherwise provide FE access
to such information respecting Beaver Valley as is reasonably
required for FE to perform due diligence for the Generation
Exchange. To the extent DLC determines that certain due
diligence information should be provided to FE only pursuant to a
confidentiality agreement, the Parties shall negotiate such an
agreement in good faith.
16. Assumption of Liabilities. DLC shall cause the
Winning Bidder to assume such liabilities, whether known or
unknown, absolute or contingent, direct or indirect, relating to
the FE Interests as are normal and customary in transactions of
this kind, including liabilities relating to DLC's temporary
ownership of the FE Interests. FE will assume such liabilities,
whether known or unknown, absolute or contingent, direct or
indirect, relating to the DLC Interests as are normal and
customary in transactions of this kind. Each Party shall
indemnify the other against any claim, and any reasonable
expenses incurred by the other party as to such claim, asserting
that the other Party's execution of this agreement in principle
or the Exchange Agreements constitutes an interference with any
contractual obligation of the first Party.
17. Representations and Warranties. FE will provide
representations and warranties to DLC that are normal and
customary for transactions of this kind and the Winning Bidder
shall be an intended third party beneficiary thereof. DLC will
provide representations and warranties to FE with respect to the
DLC Interests that are normal and customary for transactions of
this kind, provided that recognition shall be given for the fact
FE, not DLC, is the operator of certain of the DLC Interests.
18. Covenants. Each Party will provide such covenants
as are normal and customary for transactions of this kind,
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including, without limitation, covenants to operate and maintain
their respective generation interests in the regular and ordinary
course from the date of execution of the Exchange Agreements to
the closing date of the Generation Exchange.
19. Conditions. The Exchange Agreements shall include
conditions to closing the transaction(s) as are normal and
customary for transaction of this kind, including conditions
related to securing necessary regulatory approvals and for the
absence of any material breach of covenants, representations or
warranties under the Exchange Agreements and, furthermore, a
condition that the Agreement and Plan of Merger between DQE, Inc.
and Allegheny Energy, Inc. has been terminated and there is no
court order requiring DQE to consummate the transactions
contemplated under said agreement.
20. Interim Operations; Proration of Expenses. The
Exchange Agreements shall include covenants regarding interim
operation of the FE Interests and DLC Interests following
execution of such agreements and prior to closing of the
Generation Exchange as are normal and customary for transactions
of this kind, including the use of prudent utility practice in
operating and maintaining such interests, a fair apportionment of
the risk of loss or damage to such interests prior to closing,
and limitations on encumbering such interests or making certain
capital expenditures during such period. The Exchange Agreements
also shall include provisions regarding the proration of costs
and expenses as of the closing date, including as to property
taxes, fuel inventories, etc.
21. Expenses. Except as otherwise provided for herein,
each Party will bear its own expenses associated with the
Generation Exchange, including expenses associated with legal,
financial or other advisors retained to negotiate the Exchange
Agreements.
22. Termination. If the Parties do not execute
definitive Exchange Agreements by December 21, 1998, this
agreement in principle shall be terminable by either Party upon
written notice to the other. Following any such termination,
neither Party will have any further liability or obligation to
the other regarding an exchange of generation assets.
23. Public Announcements; Confidentiality.
(a) The parties agree that this agreement in
principle shall be a public document and, as such, may be
disclosed to employees, shareholders and regulatory bodies as
necessary and appropriate. Neither Party, however, shall,
without the prior consent of the other, make public statements
regarding ongoing negotiations to reach agreement with respect to
the Exchange Agreements.
(b) FE acknowledges and agrees that DLC will
submit this agreement in principle to the PaPUC for the purpose
of obtaining PaPUC approval of the Generation Exchange, including
authorization for the accounting for the net proceeds from the
sale of the FE Interests. It is anticipated that the PaPUC will
be in a position to issue an order regarding this Generation
Exchange not later than December 21, 1998.
24. Governing Law. This agreement in principle shall
be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania without giving effect to the
provisions thereof relating to conflicts of law.
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25. Counterparts. This agreement in principle may be
executed in two or more counterparts, each of which shall be
deemed to be an original but all of which shall constitute one
and the same agreement.
If the foregoing correctly reflects the understanding
between us, please so indicate by signing and returning the
enclosed copy of this letter at your earliest convenience.
DUQUESNE LIGHT COMPANY
By: /s/Victor A. Roque
------------------
Name: Victor A. Roque
Title: VP and General Counsel
Agreed to and accepted as of
this 14th day of October 1998
FIRSTENERGY CORP.
By: /s/Anthony J. Alexander
-------------------------------
Name: Anthony J. Alexander
Title: Exec. V.P. & General Counsel
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