Exhibit 99.3 EXECUTION COPY
FOURTH
AMENDMENT
Dated as of March 22, 2007
to
POWER SUPPLY AGREEMENT
between
LONG ISLAND LIGHTING COMPANY
and
KEYSPAN GENERATION LLC
Dated as of
June 26, 1997
This FOURTH AMENDMENT (the "Amendment") is made and entered into as of
March 22, 2007, by and between LONG ISLAND LIGHTING COMPANY d/b/a LIPA, a New
York corporation ("LIPA"), and KEYSPAN GENERATION LLC, a New York limited
liability company ("GENCO"), to the Power Supply Agreement, by and between LIPA
and GENCO, dated as of June 26, 1997 (as amended, supplemented or otherwise
modified from time to time, the "PSA").
RECITALS
WHEREAS, GENCO owns and operates certain Generating Facilities (as defined
in the PSA), including the Northport generating facility (the "Northport Plant")
and the Port Jefferson generating facility (the "Port Jefferson Plant); and
WHEREAS, LIPA is purchasing capacity and energy from the Northport Plant
and the Port Jefferson Plant pursuant to rates, terms and conditions established
in the PSA; and
WHEREAS, GENCO has agreed pursuant to the Agreement and Waiver that as
promptly as practicable following the Effective Date, and subject to technical,
environmental and economic feasibility and the receipt of all required
regulatory approvals reasonably satisfactory to the parties, GENCO will
implement a detailed work program and install General Electric Dense Pack
turbine efficiency improvement systems or their equivalent, including last stage
turbine blades, designed to modernize and enhance the operations and
environmental performance of the Northport Plant Unit Nos. 3 and 4 and, in
connection with such turbine upgrade and in order to decrease NOx emissions from
Northport Plant Unit Nos. 3 and 4, install advanced NOx control systems at
Northport Plant Unit Nos. 3 and 4; and
WHEREAS, GENCO has also agreed pursuant to the Agreement and Waiver that
within a reasonable time following the completion of the upgrades to Northport
Plant Unit Nos. 3 and 4 described above, and subject to technical, environmental
and economic feasibility and the receipt of all required regulatory approvals
reasonably satisfactory to the parties, GENCO will implement a detailed work
program and install General Electric Dense Pack turbine efficiency improvement
systems or their equivalent, designed to modernize and enhance the operations
and environmental performance of the Northport Plant Unit Nos. 1 and 2 and, in
connection with such turbine upgrade and in order to decrease NOx emissions from
Northport Plant Unit Nos. 1 and 2, install advanced NOx control systems at
Northport Plant Unit Nos. 1 and 2; and
WHEREAS, GENCO has also agreed, pursuant to the Agreement and Waiver, that
within a reasonable time following the Effective Date, and subject to technical,
environmental and economic feasibility and the receipt of all required
regulatory approvals reasonably satisfactory to the parties, GENCO will
implement and install advanced NOx emission control systems on Units 3 and 4 of
the Port Jefferson Plant; and
WHEREAS, in consideration of GENCO's agreement to make such turbine
upgrades and install such advanced NOx emission controls, charges to LIPA with
respect to capacity and energy supplied from the Northport Plant and the Port
Jefferson Plant are to be adjusted as provided in the Amendment;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter set forth and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1. Definitions. All capitalized terms used in this Amendment and
not otherwise defined shall have the meanings assigned to them in the PSA.
ARTICLE 2
AMENDMENTS TO PSA
Section 2.1. Amendment to Article 1 of the PSA. Article 1 of the PSA is
hereby amended by inserting the following new definitions in the appropriate
alphabetical order:
"Agreement and Waiver" shall mean that Agreement and Waiver,
dated as of March 22, 2007, by and among National Grid USA,
KeySpan Corporation, KeySpan Electric Services LLC, KeySpan
Generation LLC, KeySpan Energy Trading Services LLC, the Long
Island Lighting Company d/b/a LIPA and the Long Island Power
Authority.
"Turbine Upgrades" shall mean GE Dense Pack turbine efficiency
systems, or equivalent, to be installed at Northport Plant Unit
Nos. 1, 2, 3, and 4 and, in the case of Northport Plant Unit Nos.
3 and 4, shall also include new last stage turbine blades as
generally described in Section 4 of the Agreement and Waiver.
"New Emission Controls" shall mean, advanced NOx emission control
systems for the Northport Plant Unit Nos. 1-4 and the Port
Jefferson Plant Unit Nos. 3 and 4 as generally described in
Section 4 of the Agreement and Waiver.
"Northport Plant" means GENCO's 1500 MW generating facility
located in Northport, New York.
"Port Jefferson Plant" means GENCO's 350 MW generating facility
located in Port Jefferson, New York.
Section 2.2 Amendment to Appendix A of the PSA. At such time as the parties
shall agree, but in no event later than 60 days prior to the anticipated in
service date of the initial Turbine Upgrades or New Emission Controls, GENCO
shall file Appendix A of the PSA (in the form attached hereto as Annex 2) with
the FERC pursuant to Section 205 of the Federal Power Act to amend and replace
in its entirety the current Appendix A of the PSA and to become effective
concurrently with the earliest date on which the Turbine Upgrades and/or New
Emission Controls to be installed at the Northport Plant and the Port Jefferson
Plant begin commercial operation.
2
ARTICLE 3
SYNERGY SAVINGS
Pursuant to the Agreement and Waiver, the parties thereto have agreed to an
amount of estimated synergy savings resulting from the National Grid/KeySpan
Corporation merger (the "Synergy Savings Amount", as defined in the Agreement
and Waiver), a portion of which is to be allocated to GENCO's operations (the
"LIPA PSA Net Synergies"). The parties hereto acknowledge that, since a portion
of the LIPA PSA Net Synergies will be paid to LIPA pursuant to the Agreement and
Waiver, in any proceeding before FERC for the setting of rates under the PSA
following the Effective Date of this Amendment, the cost of service calculation
for the test year shall be modified by crediting to GENCO an amount as set forth
in Annex 1 for that year (pro rated to match the test year). If as determined
pursuant to the provisions of Section 2.2 of the Agreement and Waiver the amount
of synergy savings allocated to GENCO increased, then GENCO shall receive
additional credit to its cost of service in the amount so determined.
The parties hereto further acknowledge that due to the expected timing of
completion of the National Grid/KeySpan Corporation merger, some of the LIPA PSA
Net Synergies may not have yet been achieved and reflected in GENCO's books and
records and, therefore, that such amounts may be included in GENCO's cost of
service for the test year selected for purposes of the FERC rate proceeding to
establish rates for the remaining term of the PSA. In such event, the parties
hereto agree that GENCO shall reduce the amount of the LIPA PSA Net Synergies
that are credited to GENCO's cost of service pursuant to the above paragraph, by
an amount that equals the LIPA PSA Net Synergies not yet achieved. The parties
also agree that any inflationary adjustments up to 2.5 percent per year between
the test year and rate year will not be affected by the LIPA PSA Net Synergies,
such adjustments having been reflected in the Synergy Savings Amount (as defined
in Sections 2.1 and 2.2 of the Agreement and Waiver). GENCO shall separately
identify and account for the actual costs to achieve LIPA PSA Net Synergies.
Such information, together with other reasonably available data used to monitor
the progress of National Grid's integration activities, shall be utilized to
estimate the reduction to the LIPA PSA Net Synergies.
The parties hereto further agree that the modifications to GENCO's cost of
service calculation described in the two preceding paragraphs shall be applied
during any other proceeding that may be before FERC concerning rates under the
PSA.
ARTICLE 4
MISCELLANEOUS
Section 4.1. Effective Date. This Amendment shall be effective upon
satisfaction of each of the following conditions (the date upon which all such
conditions are satisfied, the "Effective Date"): (i) approval (satisfactory to
LIPA and GENCO) of this Fourth Amendment from the New York State Comptroller;
(ii) the FERC shall have permitted (satisfactory to LIPA and GENCO) this Fourth
Amendment to become effective; and (iii) the Agreement and Waiver shall have
3
become effective pursuant to its terms and be in full force and effect. The
conditions set forth in items (i), (ii) and (iii) above are hereinafter referred
to as the "Approvals." Upon receipt of the Approvals from the New York State
Comptroller and the New York State Attorney General, LIPA shall provide GENCO
with copies thereof.
Section 4.2. Affirmation of Representations. The representations and
warranties of GENCO set forth in Section 21.9.1 of the PSA shall be true and
correct in all material respects as of the Effective Date. The representations
and warranties of LIPA set forth in Section 21.9.2 of the PSA shall be true and
correct in all material respects as of the Effective Date.
Section 4.3. Miscellaneous.
(a) Except as amended hereby, the PSA shall remain in full force and
effect. The parties shall cooperate in preparation of an amended and
restated PSA which incorporates the provisions of the original PSA and all
amendments thereto, including this Amendment to be effective as of the
Effective Date.
(b) This Amendment shall be governed, including, without limitation,
as to validity, interpretation and effect, by the Laws of the State of New
York.
(c) This Amendment may be executed in two or more counterparts which
together shall constitute a single agreement.
[Remainder of page left blank for signatures]
4
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
and delivered by their duly authorized officers or representatives as of the
date first above written.
LONG ISLAND LIGHTING COMPANY
d/b/a LIPA
By /s/Richard M. Kessel
--------------------
Name: Richard M. Kessel
Title: CEO & President
KEYSPAN GENERATION LLC
By /s/John J. Bishar Jr.
---------------------
Name: John J. Bishar Jr.
Title: Executive Vice President
5
Annex 1
PSA Synergy Credits
Calendar Year
- ------------------------------- ------------------------------------
Year Amount (US $)
- ------------------------------- ------------------------------------
2007 2,313,247
- ------------------------------- ------------------------------------
2008 4,705,597
- ------------------------------- ------------------------------------
2009 6,944,658
- ------------------------------- ------------------------------------
2010 9,291,618
- ------------------------------- ------------------------------------
2011 10,123,237
- ------------------------------- ------------------------------------
2012 10,446,570
- ------------------------------- ------------------------------------
2013 4,442,200
- ------------------------------- ------------------------------------
Total $48,267,127
- ------------------------------- ------------------------------------
Annex 1-1
Annex 2
Appendix A
Revised for Application in Contract Years Seven through Eleven
Per Settlement and Order dated ________ in KeySpan Generation LLC, FERC Docket
No. ER04-112-000/001(1)
This Appendix provides the manner of setting the Monthly Capacity Charge,
the Monthly Variable Charge and the Monthly Capacity Charge for Turbine Upgrades
and Emissions Controls for each of the first sixteen Contract Years under the
Power Supply Agreement ("PSA"). This Appendix assumes that if the Closing Date
occurs after January 1 of a calendar year, sixteen Contract Years may occur
during the 180 month term of the PSA. Two of the Contract Years will be partial
calendar years and the assessment of the then-applicable annual revenue
requirement through the Monthly Capacity Charge and the Monthly Capacity Charge
for Turbine Upgrades and Emissions Controls will be prorated accordingly.
I. Monthly Capacity Charge:
------------------------
A. The Monthly Capacity Charge is 1/12th of the annual Capacity Charge. In
addition, the Monthly Capacity Charge for the fourth month of each Contract Year
after the first Contract Year shall include any true-up adjustment due under
Sections III and V-B.2 of this Appendix. The Monthly Capacity Charge for any
partial months shall be prorated on a daily basis for such month.
B. The annual Capacity Charge for the first Contract Year is $291,596,000,
reflecting the revenue credit described in Section I-C below. The annual
Capacity Charge for the seventh Contract Year is $305,400,000, reflecting the
$7.1 million revenue credit described in Section I-C below. For each Contract
Year thereafter (other than the twelfth Contract Year), the annual Capacity
Charge is equal to the prior year annual Capacity Charge plus the sum of the
following adjustments:
(1) Budgeted Incremental Net Utility Plant, times PTROR,
(2) Budgeted Incremental Depreciation Expense,
(3) Labor Cost Index Adjustment (Production),
(4) Labor Cost Index Adjustment (Support),
(5) Benefit Cost Index Adjustment (Production),
(6) Benefit Cost Index Adjustment (Support),
(7) Rebased property tax amount described in Section III-B below,
(8) Federal income tax adjustment for cost of removal described in Section
I-G below, and
(9) Incremental Synergy Savings.
- --------
(1) This draft includes Appendix A provisions reflected in the Joint
Stipulation approved by the Commission's June 17, 1999 Notice of Finality
of Initial Decision dated April 15, 1999 in FERC Docket No. ER98-011-000.
Annex 2 - 11
C. The annual Capacity Charge for the twelfth Contract Year shall be
established by recalculating GENCO's revenue requirement in accordance with
Articles 8 and 9 of the PSA and through application to the Federal Energy
Regulatory Commission pursuant to Section 205 of the Federal Power Act and
allocating this amount for recovery through the appropriate charges. The revenue
requirement allocated for collection through the Monthly Capacity Charge will
reflect a credit to LIPA equal to $5,100,000 in the first Contract Year. An
additional revenue credit of $2,020,000 will be applied to the otherwise
applicable revenue requirement in the second Contract Year and the total revenue
credit of $7,120,000 shall continue for each of the remaining 14 Contract Years
of the initial term of the PSA.
D. Adjustments that are positive shall be added to the revenue requirement
to be collected through the Capacity Charge; adjustments that are negative shall
be subtracted from such revenue requirement.
E. The Annual Capacity Charge assumes a federal income tax rate of 35% and
a state income tax rate of 9.03%. If the statutory federal or state income tax
rate changes at any time during the contract life, the new tax rate will be
automatically incorporated into the formula and the effect of the statutory
change will be reflected in the annual Capacity Charge concurrently with the
statutory change.
F. The Annual Capacity Charge shall also be adjusted in the eighth through
eleventh Contract Years to reflect the amortization of the deferral of property
taxes for calendar year 2004 that exceed the base amount of $126,600,000
established in Section III-B below.
G. The level of federal income tax expense included in the cost of service
for each of Contract Years seven through eleven will reflect a deduction for the
cost of removal equal to $14.103 million. That amount will be reconciled each
Contract Year to the actual cost of removal recorded on KeySpan Generation's
books and the resulting change in federal income tax expense will be added to or
subtracted from the Plant Additions True-up calculated pursuant to Section III-C
below.
H. This Section I is not applicable to the capital investments for Turbine
Upgrades and New Emissions Controls described in Sections IV and VIII.
II. Monthly Variable Charge:
------------------------
The Monthly Variable Charge for the first eleven Contract Years is $0.90 per MWH
of net generation of GENCO generating units delivered to LIPA during each month.
The Monthly Variable Charge for Contract Years after the eleventh Contract Year
shall be set in accordance with Articles 8 and 9 of the PSA.
III. True-Up Adjustments:
--------------------
A. In the fourth month following the end of each Contract Year, an annual
lump sum surcharge or credit will be due from or to LIPA, respectively, for the
Tax True-up and the Plant Additions True-up. Except as provided in Section III-B
and the amount attributable to Section III-C(3) hereof, this surcharge or credit
Annex 2-2
will include a carrying charge calculated as follows. With respect to the Tax
True-up portion of the surcharge or credit, interest will be applied at the Base
Interest Rate on the full amount of the True-up as of July 1 of the Contract
Year through the due date of the lump sum surcharge or credit. With respect to
the Plant Additions True-up portion of the surcharge or credit, the Base
Interest Rate will be applied to the outstanding amount computed as of the end
of the Contract Year from the first day after the close of the Contract Year
through the date the surcharge or credit is paid.
B. The Tax True-up shall be equal to the actual property tax paid by GENCO
on its Generating Facilities during the Contract Year, minus the base year
property tax. The base year property tax amount will be $126,600,000 for
Contract Year seven. Any difference between $126.6 million and the actual amount
of property taxes recorded on KeySpan Generation's books in Contract Year seven
will be deferred by KeySpan Generation with interest calculated at a rate equal
to KeySpan Generation's weighted average cost of capital of 7.17% and applied at
that rate as of July l, 2004. This deferred amount inclusive of interest as
described herein will be amortized on a straight line basis over the next four
Contract Years and charged back to LIPA through an additional component to the
Monthly Capacity Charge. The annual amortization will include interest at the
7.17% rate on the monthly unamortized balances of the deferral amount. LIPA, at
its sole option, can elect to prepay any or all of this deferred property tax at
any time throughout Contract Years eight through eleven, but LIPA shall pay all
of the deferred amount by the end of Contract Year eleven. In each of Contract
Years eight through eleven, the base year property tax amount will be revised to
equal the actual amount of property taxes KeySpan Generation recorded on its
books in the previous Contract Year. The base year property tax for Contract
Year twelve shall be determined under Articles 8 and 9 of the PSA.
C. The Plant Additions True-up shall be the sum of:
(1) Actual Incremental Depreciation Expense minus Budgeted
Incremental Depreciation Expense,
(2) (i) Actual Incremental Net Utility Plant minus Budgeted
Incremental Net Utility Plant, times (ii) PTROR, and
(3) the amount of any adjustment derived pursuant to Section I-G
hereof.
D. This Section III is not applicable to the capital investments for
Turbine Upgrades and New Emissions Controls described in Sections IV and VIII,
IV. Monthly Capacity Charge For Turbine Upgrades and New Emission Controls
----------------------------------------------------------------------
A. Beginning on the date on which the Turbine Upgrades and New Emission
Controls begin commercial operation, LIPA shall pay a Monthly Capacity Charge
For Turbine Upgrades and New Emission Controls for each Contract Year that will
be equal to 1/12th of the Annual Capacity Charge for Turbine Upgrades and New
Emission Controls. The Annual Capacity Charge for Turbine Upgrades and New
Emission Controls in any Contract Year shall be the sum of the following costs
Annex 2-3
attributable to the Turbine Upgrades and New Emission Controls, provided, that
recovery of the Annual Capacity Charge for Turbine Upgrades and New Emission
Controls for any given year shall not exceed the fuel and emissions savings
attributable to these items, as calculated in accordance with Section VIII (the
"Fuel and Emission Savings"):
(1) Depreciation expense for the Turbine Upgrades and New Emission
Controls based on the applicable composite depreciation rate for the
related property unit,
(2) Net utility plant for the Turbine Upgrades and New Emission Controls
multiplied by a rate of return assuming 100% debt financing with an
interest rate equal to that obtainable by an A rated issuer of 20-year
fixed rate tax exempt debt determined as of June 30, 2007, and
(3) Cumulative Annual Capacity Charges for costs of Turbine Upgrades and
New Emission Controls in years that exceed the Fuel and Emission
Savings shall be recovered, with an appropriate return (using the same
tax exempt rate referred to in Section IV.A.2 above), subject to the
procedure set forth in paragraph E below.
B. Reserved
C. Prior to the beginning of each Contract Year, the Annual Capacity Charge
for Turbine Upgrades and New Emission Controls will be calculated in the manner
set forth above based on the budgeted level of net utility plant for the Turbine
Upgrades and New Emission Controls forecasted to be included in rate base during
such Contract Year; provided, that such Annual Capacity Charge shall not exceed
the level of Fuel and Emission Savings that are expected to be experienced for
that Contract Year as calculated in accordance with Section VIII. The parties
agree that the budgeted Annual Capacity Charges and the budgeted Fuel and
Emission Savings shall be trued up to the actual amounts for such Contract Year
using the methodology set forth in Section III, paragraph A above, except that
interest on the trued up amounts shall be calculated using the same tax exempt
rate as is used for the Annual Capacity Charges.
D. At the conclusion of each Contract Year, the Annual Capacity Charge for
Turbine Upgrades and New Emission Controls for that year will be compared to the
actual Fuel and Emission Savings for that Contract Year. In the event that the
Annual Capacity Charge for Turbine Upgrades and New Emission Controls calculated
at the beginning of that Contract Year exceeded the actual Fuel and Emission
Savings for that Contract Year, GENCO shall refund the excess to LIPA within
four (4) months after the end of that Contract Year, and the excess shall be
included in amounts that are subject to payment in future years in accordance
with Paragraph IV.E and IV.F below.
E. Annual Capacity Charges for Turbine Upgrades and New Emission Controls
that cannot be recovered in the Contract Year in which they are incurred because
they exceed the Fuel and Emission Savings for such Contract Year shall be
deferred, and shall be included in the calculation of the Annual Capacity Charge
for Turbine Upgrades and New Emission Controls as set forth in Section IV.A.3
above for recovery no earlier than the second Contract Year following the
Contract Year in which Annual Capacity Charges were incurred.
Annex 2-4
F. In the event that the PSA is not renewed on substantially the same terms
and conditions at the expiration of its initial term, and notwithstanding
anything herein to the contrary, LIPA shall pay to GENCO, not later than four
(4) months after the expiration of the PSA, a lump sum payment equal to the
cumulative amount of any remaining Fuel and Emission Savings not previously
applied to offset Annual Capacity Charges, but only to the extent of any Annual
Capacity Charges for Turbine Upgrades and New Emission Controls that have not
been previously offset by such Fuel and Emission Savings and have not been
previously recovered pursuant to this section.
V. Reopeners
---------
A. ROE
---
During the term of the PSA, either party may petition the Commission to
revise the return on common equity component of the revenue requirement
underlying the Monthly Capacity Charge. During the seventh through eleventh
Contract Years, such petition may be filed in the event that the average weekly
yield on 10-year U.S. Treasury bonds over any 3 consecutive month period exceeds
or falls below the average weekly yield on such bonds for the 3-month period
ending December 31, 2003 by more than 200 basis points. The average weekly yield
on 10-year U.S. Treasury bonds over the 3-month period ending December 3l, 2003
was 4.25%. For purposes of implementing this ROE Reopener, the return on common
equity used in the derivation of the Contract Year seven settlement annual
revenue requirement shall be assumed to be 9.5%.
The party making such petition shall seek to change the Monthly Capacity
Charge by only the revenue amount required to reflect the changed rate of return
including related taxes, as applied to the then applicable rate base. In
addition to delineating the change in the Monthly Capacity Charge, the petition
shall specify the proposed new rate of return on equity and shall demonstrate
that the new rate of return is just and reasonable within the meaning of Section
205 of the Federal Power Act. The party making such request may not propose to
change any other component of the revenue requirement used to determine the
Monthly Capacity Charge and the Monthly Variable Charge. The other party may
oppose the proposed change in Monthly Capacity Charge and provide evidence of
mitigating factors that would reduce the amount of the proposed change. The
petitioning party may respond to such allegation of mitigating factors, provided
that such response does not propose to change the amount of adjustment of the
revenue requirement included in the original petition. Unless otherwise agreed
by GENCO and LIPA, if the Commission approves a change in the Monthly Capacity
Charge, the new base used for determining whether the rate may be reopened again
shall be the average weekly yield on 10-year U.S. Treasury bonds over the
3-month period ending in the month before the Commission issues an order
approving the change in the Monthly Capacity Charge.
When the annual Capacity Charge is reset in the twelfth Contract Year in
accordance with Section I-C, the average weekly yield on 10-year U.S. Treasury
bonds over the 3-month period ending in the month before the new Monthly
Capacity Charge becomes effective will be the new base for determining whether
the rate may be reopened thereafter. The new return on equity will be specified
at that time as well.
Annex 2-5
B. A&G
---
1. One Time Allocation Reopener
----------------------------
Either party may petition the Commission to make the limited rate change
described in this paragraph in order to adjust the allocations of Administrative
and General and Common ("A&G") cost components of the revenue requirement
underlying the Monthly Capacity Charge. The amount of A&G included in the annual
revenue requirement as of the Closing Date is $45,420,000. After the Closing
Date, the personnel of the holding company ("HoldCo") created by the combination
of Long Island Lighting Company and Brooklyn Union Gas Company, and HoldCo's
subsidiaries that perform A&G functions will expand the use of time sheets and
perform other direct costing methods to determine the appropriate allocation of
their efforts and associated costs. Such data will be provided to LIPA for
review and verification. In the twenty-fifth month after the Closing Date, GENCO
shall provide LIPA with the results of the time sheet study and the results of
any other direct costing methodology agreed upon by GENCO and LIPA, and the
parties will undertake to agree upon an appropriate reallocation of A&G costs
allocable to LIPA through GENCO. If the parties agree, the agreed upon
reallocation shall be filed with the Commission as a change in rate under
Section 205 of the Federal Power Act. If the parties fail to agree by the close
of the twenty-eighth month after the Closing Date, then within thirty days,
GENCO or LIPA may file its proposed allocation with the Commission under
Sections 205 or 206 of the Federal Power Act, respectively. The other party may
oppose the reallocation and propose any different allocation. Any Commission
order adjusting the revenue requirement to account for a new allocation of A&G
costs shall be retroactive to the beginning of the twenty-fifth month after the
Closing Date and shall prevail through the end of the sixth Contract Year.
2. True-up for New Business Ventures
---------------------------------
If HoldCo or its subsidiaries engage in any new business ventures or form
new corporate subsidiaries to engage in new business ventures after the Closing
Date, HoldCo shall identify on its time sheets, or through other direct costing
methods, the amount of A&G costs attributable to such new business ventures
during the first twenty-four months after the Closing Date. To the extent that
such amounts exceed $2,000,000 in either of the two consecutive twelve month
periods following the Closing Date, GENCO shall pay LIPA forty-four percent
(44%) of the excess above $2,000,000 for each such twelve-month period. Such
payment shall be made in one lump sum between the beginning of the twenty-fifth
month and before the end of the twenty-eighth month following the Closing Date.
VI. Definitions:
------------
For purposes of this Appendix A, the following capitalized terms shall have
the meaning specified below. Terms defined in PSA Article I shall have the same
meaning in this Appendix as they have elsewhere in the PSA.
Annex 2-6
A. "Accumulated Deferred Federal Income Tax Asset" means the sum of the
plant related operating depreciation deferred tax asset or liability reserves as
recorded on GENCO's books and records under the Federal Energy Regulatory
Commission Uniform System of Accounts and Generally Accepted Accounting
Principles. The phrase "operating depreciation deferred tax asset or liability
reserves" refers to the portion of the deferred federal income tax asset or
liability reserves associated with 1) the difference between a) the sum of the
net tax basis of the transferred plant assets as stepped-up to book value at the
Closing Date and the net tax basis of new additions and b) the net book basis of
GENCO's plant assets, times 2) the statutory federal income tax rate.
B. "Approved Net Plant Additions" means aggregate capital additions
approved under Article 9 and placed in service, plus capital additions not
included in an approved Capital Improvement Budget at the beginning of a
Contract Year but later approved by LIPA (but not including cost overruns on
items included in a budget approved by LIPA), minus aggregate scheduled
retirements.
C. "Actual Incremental Depreciation Expense" means the sum of the 12
monthly calculations of actual Approved Net Plant Additions, times 1/12th of the
Composite Depreciation Rate by type.
D. "Actual Incremental Net Utility Plant" means the sum of 1) the 13 Month
Average of actual Approved Net Plant Additions, minus 2) the 13 Month Average of
the excess of ending accumulated depreciation reserve over beginning accumulated
depreciation reserve, and plus 3) the 13 Month Average of the difference between
the ending and beginning Accumulated Deferred Federal Income Tax Asset.
E. "Attrition Factor" means, for the purpose of computing the Labor Cost
Index Adjustment (Production) and Benefit Cost Index Adjustment (Production) for
the Contract Years eight through eleven, the following amounts for the
appropriate Contract Years:
Contract Year Attrition Factor
------------- ----------------
Eight (1-.01)
Nine (1-.02)
Ten (1-.03)
Eleven (1-.04)
Any Attrition Factor applicable to Contract Years after Contract Year twelve
shall be determined under Articles 8 and 9 of the PSA.
F. "Budgeted Incremental Depreciation Expense" means the sum of the 12
monthly calculations for the Contract Year of scheduled monthly Approved Net
Plant Additions, times 1/12th of the Composite Depreciation Rate by type.
G. "Budgeted Incremental Net Utility Plant" means 1) the 13 Month Average
of Approved Net Plant Additions, minus 2) the 13 Month Average of the excess of
ending accumulated depreciation reserve over beginning accumulated depreciation
reserve, and plus 3) the 13 Month Average of the difference between the ending
and beginning Accumulated Deferred Federal Income Tax Asset.
Annex 2-7
H. "Composite Depreciation Rate" means the annual rate to be applied to
gross plant to determine annual depreciation expense. The appropriate rate for
each item of steam production plant, other production plant, common plant and
electric general plant is set forth on the attached Exhibit I.
I. "Defined Labor Index" means, for the Contract Years 1999 - 2000, 3.5%
per year, the effective percentage wage increase provided in LILCO's collective
bargaining agreement dated February 14, 1996. The Defined Labor Index used in
the adjustment for the second Contract Year shall be the appropriate index
multiplied by a fraction equal to (the number of days from the Closing Date
through December 31 divided by 365). For each Contract Year after Contract Year
2000 through the eleventh Contract Year, the Defined Labor Index shall be the
percentage change for the twelve month period ending on the preceding September
30 for the Employment Cost Index for Wages and Salaries Only, Private Industry
Workers, Northeast, Not Seasonally Adjusted, as published by the United States
Bureau of Labor Statistics. The Defined Labor Index for Contract Years alter
Contract Year eleven shall be determined under Articles 8 and 9 of the PSA.
J. "Incremental Synergy Savings" means, with the exceptions noted below,
the sum of the twelve monthly amounts set forth in the table below for the
applicable Contract Months for each Contract Year. For purposes of this
definition, the term "Contract Month" shall mean the number of the month, from 1
to 127, in consecutive order starting with the month in which the Closing Date
occurs.
Monthly Amount
12 Month Period ($ In 000's)
--------------- ------------
1-12 0
13-24 564
25-36 292
37-48 293
49-60 287
61-72 279
73-84 137
85-91 92
92-127 (622.5)
If GENCO and LIPA agree during the establishment of the Annual Capacity Charge
for the seventh Contract year, that the total revenue requirements to be
recovered during that Contract Year reflects all or a portion of the Incremental
Synergy Savings for that or subsequent Contract Years set forth above, the
Incremental Synergy Savings to be applied under the Appendix A will be reduced
accordingly.
Annex 2-8
K. "Labor Cost Index Adjustment (Production)" and "Benefit Cost Index
Adjustment (Production)" for the Contract Years eight through eleven means the
sum of (l) the base labor and benefit costs for the prior Contract Year and (2)
the product of (the Defined Labor Index times the Attrition Factor) times the
prior Contract Year base labor and benefit costs. The base year labor costs
(production) for the seventh Contract Year will be $41.944 million and the base
year benefit costs (production) for the seventh Contract Year will be $5.800
million. The sum of the prior Contract Year base labor costs (production) and
benefit costs (production) and the Labor Cost Index Adjustment (Production) and
Benefit Cost Index Adjustment (Production) for a year shall be the "prior
Contract Year base labor and benefit costs" used for the following Contract
Year's adjustment. The Labor Cost Index Adjustment (Production) and Benefit Cost
Index Adjustment (Production) for Contract Years after Contract Year eleven,
including the appropriate attrition factor, shall be determined under Articles 8
and 9 of the PSA.
L. "Labor Cost Index Adjustment (Support)" and "Benefit Cost Index
Adjustment (Support)" for the Contract Years eight through eleven means the sum
of (1) the base labor and benefit costs for the prior Contract Year and (2) the
product of the Defined Labor Index times the prior Contract Year base labor and
benefit costs. The base year labor costs (support) for the seventh Contract Year
will be $17.278 million and the base year benefit costs (support) for the
seventh Contract Year will be $5.572 million. The sum of the prior Contract Year
base labor costs (support) and benefit costs (support) and the Labor Cost Index
Adjustment (Support) and Benefit Cost Index Adjustment (Support) for a year
shall be the "prior Contract Year base labor and benefit costs" used for the
following Contract Year's adjustment. The Labor Cost Index Adjustment (Support)
and Benefits Cost Index Adjustment (Support) for Contract Years after Contract
Year eleven shall be determined under Articles 8 and 9 of the PSA.
M. "PTROR" means pre-tax return on rate base which shall be 9.8% for each
of Contract Years seven through eleven. For years after Contract Year eleven,
PTROR shall be established under Article 9 of the PSA. PTROR assumes a federal
income tax rate of 35% and a state income tax rate of 9.03%. If the statutory
federal or state income tax rate changes at any time during the contract life,
the new tax rate will be automatically incorporated into the formula and the
effect of the statutory change will be reflected into the PTROR concurrently
with the statutory change.
N. "13 Month Average" means a monthly average developed by 1) taking the
sum of a) the first through eleventh monthly amounts to be averaged, b) one-half
of the twelfth monthly amount to be averaged, and e) one-half of the prior
year's twelfth monthly amount to be averaged and 2) dividing the sum in 1) by
12.
VII. Ramp Down Adjustment:
---------------------
Nothing herein shall be construed to predetermine the amount to be paid by LIPA
to GENCO under Section I 1.1 of the PSA if LIPA exercises its ramp down option.
In addition, the Monthly Capacity Charge for the remaining capacity shall be
adjusted as a result of the ramp down.
Annex 2-9
VIII. Methodology for Calculating Fuel and Emission Savings
-----------------------------------------------------
The following methodology shall be used to calculate the Fuel and Emissions
Savings associated with the Turbine Upgrades and New Emission Controls for
purposes of Section IV above.
A. Fuel Savings. In the three-month period preceding the Turbine Upgrade
outage, a turbine test will be conducted to determine the turbine efficiency for
the unit. Within three (3) months after completion of the Turbine Upgrade, a
turbine test will be conducted in accordance with KeySpan's existing turbine
test procedures entitled, "Modified Turbine Test Procedure for Fossil Fueled
Steam Generating Units" (current rev. June 4, 1999), to determine the
as-modified turbine efficiency. LIPA and its consultants shall have the right to
review all test procedures, witness all tests and review and approve all
calculations associated with the baseline and as-modified tests, all such
approvals not to be unreasonably withheld.
The percentage improvement in turbine efficiency will be multiplied by the
overall unit heat rate to determine the BTU/KWh savings attributable to the
Turbine Upgrades (e.g., 3% x 10,000 BTU/KWh = 300 BTU/KWh). At the end of each
calendar year, the total number of MWh (megawatt hours) generated by the unit
will be multiplied by the BTU/MWh savings calculated from the turbine efficiency
testing described above to determine the total BTU savings for the year. The
total BTUs saved as a result of the Turbine Upgrades will be multiplied by such
year's average fuel cost ($/10(6) BTU) for the unit to determine the annual fuel
cost savings.
Fuel cost savings = Total BTU savings x Avg Fuel Cost ($/10(6) BTU)
B. Emissions Savings - Turbine Upgrades. In order to determine the
emissions avoided and emission credits saved as a result of the Turbine
Upgrades, the achieved efficiency improvement following the installation of
Turbine Upgrades on each Northport unit in BTUs/MWh (as calculated in accordance
with Section A) shall be multiplied by the number of MWh produced for the
calendar year at such unit and then multiplied by the average annual NOx, SO2
and CO2 emission rate (in lbs/mmBTU) at such unit as determined by certified
Continuous Emissions Monitoring Systems ("CEMs") records divided by 2000
(lbs/ton).
The value of such NOx, SO2 and CO2 Emission Savings shall be determined by
multiplying the annual NOx, SO2 and CO2 emission savings in tons from all
Northport units modified with Turbine Upgrades by the average annual NOx, SO2
and CO2 emission credit price for all applicable NOx, SO2 and CO2 emission
regulatory cap and trade programs. The average annual NOx, SO2 and CO2 emission
price for such programs shall be as reported in "Air Daily" or other similar
trade publication as mutually agreed by the parties.
C. Emissions Savings - New Emissions Controls. In order to determine the
effectiveness of, and the emission credit savings attributable to the New
Emissions Controls, the NOx emission rate in lbs/MWh shall be measured using the
plant's certified CEMs before and after the application of the NOx control
technology on each unit. Such measurements shall be made on both natural gas
fuel and fuel oil at the identical steady load over a three-hour period,
pursuant to the then in effect Environmental Protection Agency regulations. LIPA
and its consultants shall have the right to review all test procedures, witness
all tests and confirm all calculations associated with the baseline and
Annex 2-10
as-modified tests. The difference in NOx emission rate in lbs/MWh for each fuel
at each unit shall be established as the achieved emission rate reduction for
each unit and each fuel. The total tons of NOx emission avoided and the
corresponding emission credits saved each year following the application of NOx
emission control technology on each unit shall be calculated as follows at the
end of each calendar year:
Achieved emission rate reduction on gas (lbs/MWh) times the
number of MWh produced on gas plus the achieved emission rate
reduction on oil times the number of MWh produced on oil divided
by 2000 (lbs/ton).
The value of such NOx emission savings shall be determined by multiplying the
annual NOx emission savings in (tons) from all units modified by New Emission
Controls by the average annual NOx emission credit price for all applicable NOx
emission regulatory cap and trade programs. The average annual NOx emission
price for such programs shall be as reported in "Air Daily" or other similar
trade publication as mutually agreed upon by the parties.
D. Fuel and Emission Savings. Fuel and Emission Savings will be calculated as
follows:
Sum of the savings from (A) Fuel Savings, (B) Emission Savings - Turbine
Upgrades and (C) Emission Savings - New Emission Controls.
Fuel and Emission Savings = A + B + C
IX. Excess Emissions Credits
------------------------
To the extent that Emissions Credits saved as a result of the Turbine Upgrades
and New Emission Controls are not required to satisfy the compliance obligations
of the Northport Unit Nos. 1-4 and Port Jefferson Unit Nos. 3 and 4, such
Emissions Credits shall be pooled with those attributable to GENCO's other
generating stations under the PSA (for the term of the PSA) and such pooled
credits shall be applied pro rata to all such generating stations to meet their
compliance obligations under applicable law. All Emissions Credits created in
any year as a result of the Turbine Upgrades and New Emission Controls that are
used to offset the Annual Capacity Charge and are not used to satisfy GENCO's
compliance obligations under applicable law shall be deemed attributable to the
Emission Credits savings derived from the Turbine Upgrades and New Emission
Controls. If such Emissions Credits are sold, LIPA will receive 100 percent of
the net proceeds. Alternatively, LIPA may use such Emissions Credits in its sole
discretion. All other Emissions Credits shall be split in accordance with the
sharing provisions in Section 17 of Schedule F to the Merger Agreement and
Section 8.1.6 of the PSA.
Annex 2-11