Document:

SCHEDULE 1

SCHEDULE 1.1

TO THE FACILITY LEASE

DEFINITIONS; INTERPRETATION

A.

Interpretation.  In each Lease Document, unless a clear contrary intention appears:

(i)

the singular number includes the plural number and vice versa;

(ii)

reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by the Lease Documents, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually;

(iii)

reference to any gender includes each other gender;

(iv)

reference to any agreement (including any Lease Document), document or instrument means such agreement, document or instrument as amended or modified from time to time in accordance with the terms thereof;

(v)

reference to any Law means such Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder and reference to any section or other provision of any Law means that provision of such Law from time to time in effect and constituting the substantive amendment, modification, codification, replacement or re-enactment of such section or other provision;

(vi)

reference in any Lease Document to any Preamble, Recital, Article, Section, Annex, Schedule or Exhibit means such Article or Section thereof or Preamble, Recital, Annex, Schedule or Exhibit thereto;

(vii)

“hereunder”, “hereof”, “hereto” and words of similar import shall be deemed references to a Lease Document as a whole and not to any particular Article, Section or other provision thereof;

(viii)

“including” (and with the correlative meaning “include”) means including without limiting the generality of any description preceding such term; 

(ix)

costs, fees, expenses and other amounts “incurred by or on behalf of Lessor” or words of similar import shall be deemed references to costs, fees, expenses and other amounts incurred (a) by or on behalf of Lessor or (b) by any agents to whom Lessor has delegated any of its obligations pursuant to the Facility Lease; and

(x)

with respect to any rights and obligations of the parties under the Lease Documents, all such rights and obligations shall be construed to the extent permitted by applicable Law.

B.

Computation of Time Periods.  For purposes of computation of periods of time under the Lease Documents, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding.”

C.

Accounting Terms and Determinations.  Unless otherwise specified in any Lease Document, all terms of an accounting character used therein shall be interpreted, all accounting determinations thereunder shall be made, and any financial statements required to be delivered thereunder shall be prepared, in accordance with GAAP.

D.

Conflict in Lease Documents.  If there is any conflict between the Facility Lease and any other Lease Document, such Lease Documents shall be interpreted and construed, if possible, so as to avoid or minimize such conflict.

E.

Definitions.  Unless the context otherwise requires, the following defined terms shall have the meanings ascribed to them below:

“AAA” shall mean the American Arbitration Association or any successor thereto.

“Acceptable Assignee” shall mean a Person that the PSCW determines meets the following requirements: (a) that is a special-purpose entity, whose  governing documents contain all covenants and restrictions related to non-consolidation with its corporate parent in the event of such parent’s bankruptcy or insolvency, (b) (i) whose senior unsecured long-term debt is rated at least A- or its equivalent by a Rating Agency, or (ii) whose Parent has senior unsecured long-term debt rated at least A- or its equivalent by a Rating Agency and who guarantees such Person’s obligations under any Lease Document to which such Person will be a party, and (c) who has at least five years experience in the United States electric generating power industry.

“Acquisition Date” shall mean the first date that Lessor closes on an acquisition of an interest in the Facility. 

“Additional Insureds” shall have the meaning given to such term in Schedule 11.3 of the Facility Lease.

“Affiliate” shall mean, with respect to any Person, (a) each entity that such Person Controls, (b) each Person that Controls such Person, and (c) each entity that is under common Control with such Person.

“Applicable Cost of Debt” shall mean the respective cost of debt as provided in the Annex B to Schedule 5.1 to the Facility Lease.

“Appraisal Report” shall mean a report delivered by an Independent Appraiser.

“Approved Amount” shall mean the total amount of Construction Costs incurred by or on behalf of Lessor with respect to the Leased Facility, not to exceed an amount equal to: 

(a)

Lessor’s Percentage of $737,673,260; plus

(b)

any Construction Costs in excess of the amount set forth in clause (a), but in any case not to exceed 5% of such amount, which are prudently incurred and approved by the PSCW in advance of being recovered in the Rent; plus

(c)

any Construction Costs in excess of the amount set forth in clause (a), which are incurred by or on behalf of Lessor due to an Excused Event, an event of Force Majeure or Event of Loss, which Construction Costs are prudently incurred and approved by the PSCW in advance of being recovered in the Rent; 

provided however, that the Approved Amount shall not exceed actual Construction Costs incurred by or on behalf of Lessor.

“Arbitrator” shall mean an independent arbitrator with no less than ten years arbitration experience in the U.S. electric generation industry who is not employed by, does not provide services to, and does not otherwise derive any financial or other benefit from any of the Parties, their respective Affiliates or the PSCW, other than as provided in the Lease Documents.

“Assignment of Easement Agreement” shall mean the conveyance to Lessee of Lessor’s rights under the Property Rights Agreement, dated as of ________, ____.

“Attorney” shall mean an independent attorney with no less than ten years project development and financing experience in the U.S. electric energy industry who is not employed by, does not provide services to, and does not otherwise derive any financial or other benefit from any of the Parties, their respective Affiliates or the PSCW, other than as provided in the Lease Documents.

“Authorization” shall mean any authorization, consent, approval, license, lease, ruling, permit, tariff, rate, certification, exemption, filing (except any filing relating to the perfection of security interests), variance, claim, order, decree, publication, notices to, declarations of or with or registration by or with any Governmental Authority in connection with the construction, ownership or operation of the Facility.

“Authorized Officer” shall mean, with respect to (a) any Person other than a partnership or limited liability company, the president, any vice president, the treasurer, the chief financial officer or any other similar senior officer of such Person, (b) any Person who is a partnership, the president, any vice president, the treasurer, the chief financial officer or any other similar senior officer of any general partner of such Person, and (c) any Person who is a limited liability company, the president, any vice president, the treasurer, the chief financial officer or any other similar senior officer of the manager or the managing member of such Person.

“Base Term” shall mean the date falling on the earlier of (i) the 30th anniversary of the Commercial Operation Date, and (ii) the number of years and months equal to 80% of the Economic Useful Life determined by an Independent Appraiser pursuant to Section 3.3 of the Facility Lease.

“Basic Rent” shall have the meaning given to such term in Section 5.1(a) of the Facility Lease.

“Business Day” shall mean any day on which commercial banks are not authorized or required to close in Wisconsin.

“CA Approval” shall mean the PSCW order approving the certificate of authority with respect to the Lease of the Leased Facility by MGE.

“Claims” shall mean liabilities, obligations, damages, losses, demands, penalties, interest, fines, claims, actions, suits, judgments, settlements, and reasonable costs, fees, expenses and disbursements (including legal fees) and expenses and costs of investigation), of any kind and nature whatsoever.

“Commercial Arbitration Rules” shall mean the commercial arbitration rules of the AAA.

“Commercial Operation” shall mean that the Facility shall have successfully completed the Commercial Operation Test pursuant to the ERGS Facility Lease.

“Commercial Operation Date” shall mean the “Lease Effective Date” under the ERGS Facility Lease.

“Community Impact Mitigation Costs” shall mean Lessor’s share of costs and expenses associated with satisfying local regulatory requirements or to mitigate any adverse effect the Facility might otherwise have on local communities but in no event to exceed the amount approved by the PSCW.

“Completeness Determination” shall mean an order or approval from the PSCW that the Facility is complete within the meaning of Wis. Stat. § 196.52(9)(b)(7).

“Compliance Auditor” shall have the meaning given to such term in Section 18.1 of the Facility Lease.

“Condemnation Award” shall mean any monetary award in respect of a taking of all or a material portion of the Facility by an exercise of eminent domain or a similar right or power by a Governmental Authority, or as a result of a Governmental Authority ordering the Facility to cease to operate.

“Confidential Information” shall mean, with respect to a Party, all proprietary and confidential business information and data of such Party that is not generally known by or readily ascertainable by or available to, on a legal or authorized basis, the general public; provided, however, “Confidential Information” shall not include any information: (i) which is 

already known to the receiving Party; or (ii) has become generally known to the public through no wrongful act of the receiving Party or its representatives and agents, (iii) has been received by the receiving Party from a third party without (to the receiving Party’s knowledge) restriction on disclosure and without (to the receiving Party’s knowledge) a breach by the third party of an obligation of confidentiality, or (iv) is independently developed by the receiving Party without use of the Confidential Information received from a disclosing Party.

“Construction Costs” shall mean all internal and third party costs, expenses and fees incurred by or on behalf of Lessor in acquiring, negotiating and documenting its interest in the Facility, and Lessor’s applicable share (based upon its percentage ownership interest in Unit 1 and the New Common Facilities) of costs to construct the Facility pursuant to the ERGS Facility Lease, but excluding Community Impact Mitigation Costs, the Monthly Management Fee and those costs paid by the Lessee pursuant to Section 2.1; and less Lessor’s Percentage of any monetary payments (including liquidated damages but excluding liquidated damages or other monetary payments made to Lessee) actually received by Lessor from any contractor in connection with any of the construction contracts or equipment supply agreement with respect to the Facility (net of legal fees and any other expenses incurred by or on behalf of Lessor in connection with the receipt or recovery of such monetary payments).

“Control” shall mean the possession, directly or indirectly, through one or more intermediaries, of the following:

(a)

(i) in the case of a corporation, 50% or more of the outstanding voting securities thereof; (ii) in the case of a limited liability company, partnership, limited partnership or venture, the right to 50% or more of the distributions therefrom (including liquidating distributions); (iii) in the case of a trust or estate, including a business trust, 50% or more of the beneficial interest therein; and (iv) in the case of any other entity, 50% or more of the economic or beneficial interest therein; and

(b)

in the case of any entity, the power or authority, through ownership of voting securities, by contract or otherwise, to exercise a controlling influence over the management of the entity.

“Delay Damages” shall mean for each calendar day after the Scheduled Commercial Operation Date that the Facility fails to achieve Commercial Operation, (i) Lessor’s Percentage of $150,000 for each calendar day May 1 through June 30 in the calendar year in which the Scheduled Commercial Operation Date occurs, and (ii) Lessor’s Percentage of $250,000 for any other calendar day; not to exceed in the aggregate Lessor’s Percentage of $136,875,000.

“Demand Date” shall have the meaning given to such term in Section 15.2(a)(i) of the Facility Lease.

“Demolition and Removal Costs” shall mean the fair value of the liability for the asset retirement obligation, determined in accordance with GAAP, as adjusted periodically in accordance with GAAP.

“Dispute” shall mean any controversy, claim or dispute of whatsoever nature or kind between the Parties, arising out of or relating to the Facility Lease or the validity, execution, performance, discharge, termination or breach thereof.

“Economic Useful Life” shall mean the expected useful life of the Facility as determined by the Independent Appraiser.

“Elm Road Facility” means Units 1 and 2 and associated Common Facilities. 

“Elm Road I Facility Lease” shall mean the proposed Elm Road I Facility Lease Agreement between ERGS and WEPCO, with respect to Unit 1 and related facilities. 

“Emergency Condition” shall mean any condition or situation which presents an imminent threat of danger to life, or threat to health or material property, or could reasonably be expected to cause a significant disruption on or significant damages to the Facility or any material portion thereof or to Lessee’s electric generating facilities or the Transmission Provider’s electric transmission system.

“Environmental Claim” shall mean, with respect to any Person, any notice, claim, administrative, regulatory or judicial action, suit, lien, judgment, demand or other communication (whether written or oral) by any other Person alleging or asserting such Person’s liability for investigatory costs, cleanup costs, governmental response costs, damages to natural resources or other property, personal injuries, fines or penalties arising out of, based on or resulting from: (a) the presence, or Release into the environment, of any Hazardous Material at any location, whether or not owned by such Person; or (b) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law.

“Environmental Law” shall mean any and all Laws, now or hereafter in effect, and any judicial or administrative judgment, relating to the environment, or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or toxic or hazardous substances or wastes into the environment including ambient air, surface water, groundwater, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or toxic or hazardous substances or wastes.

“EPC Contract” shall mean the agreement for the engineering, procurement and construction of the Facility, dated as of April 9, 2004, by and between ERGS and Bechtel Corporation.

“ERGS” shall mean Elm Road Generating Station Supercritical, LLC, a Wisconsin limited liability company.

“ERGS Facility Lease” shall mean the lease agreement, dated as of November 9, 2004, by and between ERGS and WEPCO, with respect to the Facility. 

“Event of Loss” shall mean any loss of, destruction or damage to, or taking of the Facility (or any part thereof) other than an Event of Total Loss.

“Event of Total Loss” shall mean: (a) all or substantially all of the Facility shall be damaged to the extent of being completely or substantially completely destroyed; (b) any damage to the Facility that results in an insurance settlement with respect thereto on the basis of a total loss or an agreed constructive or a compromised total loss of the Facility; or (c) all or substantially all of or a material portion of the Facility shall be taken by exercise of a power of eminent domain or similar right or power, or a Governmental Authority shall order that the Facility shall cease to operate permanently.

“Exceptional Maintenance” shall have the meaning given to such term in Section 13.2(c) of the Facility Lease.

“Excused Event” shall mean any of the following, regardless of the reason for the occurrence thereof:

(a)

any failure or inability by WEPCO to deliver Test Fuel or accept Test Power; provided, that such failure or inability is not a result of ERGS’s failure or inability to: (i) provide WEPCO such information, as WEPCO may reasonably request, as necessary in order to procure (and have delivered) Test Fuel; or (ii) fulfill its obligations under Section 4.3 of the ERGS Facility Lease;

(b)

the occurrence of instability on the Transmission Provider’s electric transmission system (or any event, circumstance, condition or failure relating thereto, including an Emergency Condition) which precludes the Transmission Provider from accepting any Test Power; provided, that such failure or instability is not primarily as a result of any action of Lessor, ERGS or the Facility; and (ii) Lessor is otherwise available to deliver such Test Power;

(c)

the occurrence of instability on Lessee’s system (or any event, circumstance, condition or failure relating thereto) which either prevents or precludes Lessee from accepting, or Lessor from delivering to Lessee, any Test Power; provided, that: (i) such failure or instability is not primarily as a result of any action of Lessor or the Facility; and (ii) Lessor is otherwise available to deliver such Test Power; or

(d)

any other failure or delay of Lessee or the Transmission Provider to meet any of the conditions for the Commercial Operation Date to occur; provided that failure is not primarily the result of any action of Lessor or the Facility.

“Execution Date” shall mean the date of the Facility Lease.

“Existing Units” shall mean the four coal-based electric generating units and one gas-based electric generating unit and related facilities at WEPCO’s Oak Creek generating station.

“Facility” shall mean Unit 2 and related New Common Facilities.

“Facility Lease” shall mean the lease of Unit 2 and related new Common Facilities to which this Schedule 1.1 is attached.

“Fair Market Value” shall mean, with respect to the Facility or any part thereof (including any Improvements thereto) as of any date, the price a purchaser would pay to purchase such Facility or part thereof in an arm’s-length transaction between a willing buyer and a willing seller, neither of them being under any compulsion to buy or sell.

“FERC” shall mean the Federal Energy Regulatory Commission or any successor thereto.

“Financing Documents” shall mean each agreement, document or instrument to which one or more of the Lenders and Lessor are a party from time to time and which provide for construction and/or term debt financing or refinancing to Lessor in connection with the Facility and each other agreement, document or instrument delivered in connection with any of the foregoing.

“Force Majeure” shall mean any cause or occurrence which is beyond the reasonable control, and without the fault or negligence, of the Party claiming the Force Majeure and which causes such Party to be unable, or otherwise materially impairs or delays its ability, to perform its obligations under the Facility Lease and which by the exercise of reasonable foresight such Party could not have been reasonably expected to avoid, including any acts of God, strikes, work stoppages, lockouts or other labor actions that are in each case of an industry or sector-wide nature and that are not directed solely or specifically at such Party, acts of the public enemy, wars, terrorism, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, fires, storms, floods, washouts, civil disturbances, explosions, change in law (including such change that results in any rescission, termination, material modification, suspension or determination of invalidity or lack of effectiveness of any Authorization), any Authorizations (provided that such order has been resisted in good faith by all commercially reasonable means) the acts or omissions of any Governmental Authority or the failure to act on the part of any Governmental Authority, provided, that such action has been timely requested and diligently pursued and any other cause or occurrence whether of the kind herein enumerated or otherwise, which, despite the reasonable efforts of such Party to prevent or mitigate its effects, prevents or delays the performance of such Party, or prevents the obtaining of the benefits of performance by the other Party, and is not within the control of such Party claiming Force Majeure.

“Future Unit” shall mean any electric generating unit that uses that additional portion of the New Common Facilities that are constructed on the Land beyond the requirements of Unit 1, Unit 2 and the Existing Units.

“GAAP” shall mean generally accepted accounting principles in the United States as in effect from time to time applied on a basis consistent with such Person’s most recent audited consolidated financial statements.

“Good Utility Practice” shall mean, at a particular time: (a) any of the practices, methods and acts engaged in or approved by a significant portion of the United States electric power generating industry prior to such time; or (b) any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with applicable Law and good business practices, reliability, safety and expedition; provided that 

“Good Utility Practice” is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather to be a spectrum of possible practices, methods or acts having due regard for, among other things, manufacturers’ warranties and the requirements of Governmental Authority and any applicable agreement.

“Governmental Authority” shall mean the any applicable federal, state, municipal or other government, quasi-government or regulatory authority, agency, board, body, instrumentality, court, or tribunal, or any political subdivision of any thereof, or any arbitrator or panel of arbitrators.

“Guarantee Conditions” shall mean those conditions referenced in Section 1.1 of Schedule 4.2 to the ERGS Facility Lease.

“Guaranteed Performance Level Damages” shall have the meaning given such term in Schedule 3.2.

“Guaranteed Performance Levels” shall have the meaning given such term in Schedule 3.2. 

“Hazardous Material” shall mean, collectively, any petroleum or petroleum product, asbestos in any form that is or could become friable, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls (PCB’s), hazardous waste, hazardous material, hazardous substance, toxic substance, contaminant or pollutant, as defined or regulated as such under any Environmental Law including the Resource Conservation and Recovery Act, as amended, the Comprehensive Environmental Response Compensation and Liability Act, as amended, or any similar state statute.

“Improvements” shall mean those modifications, alterations, additions or improvements to the Leased Facility that involve capital costs and are (a) required or are advisable in accordance with Good Utility Practice, (b) necessary for the efficient operation of the Leased Facility, or (c) required by applicable Law; provided that any such modification, alteration, addition, or improvement shall not (i) have a material adverse effect on the value of Lessor’s investment in the Leased Facility (including an adverse effect on the Fair Market Value, residual value, utility or remaining useful life on the Leased Facility, (ii) cause any manufacturer’s warranties then in effect on the Leased Facility to become void, (iii) create any Liens on the Leased Facility (other than Permitted Encumbrances), (iv) cause the Improvement or Leased Facility to become “limited use” property within the meaning of Rev. Proc. 2001-28, 2001-19 I.R.B. 1156), or (v) otherwise cause harm to the Leased Facility.

“Indemnifying Party” shall have the meaning given to such term in Section 17.1 of the Facility Lease.

“Indemnitee” shall have the meaning given to such term in Section 17.1 of the Facility Lease.

“Independent Appraiser” shall have the meaning given to such term in Schedule 12.1 to the Facility Lease.

“Independent Arbitrator” shall have the meaning given to such term in Section 18.4(b) of the Facility Lease.

“Independent Attorney” shall have the meaning given to such term in Section 18.4(a) of the Facility Lease.

“Independent Auditing Firm” shall mean an independent nationally recognized accounting firm with no less than 10 years experience auditing U.S. electric utilities and/or U.S. independent power producers that is not employed by, does not provide services to, and does not otherwise derive any financial or other benefit from any of the Parties, their respective Affiliates or the PSCW other than as provided in the Lease Documents.

“Independent Engineer” shall have the meaning given to such term in Schedule 12.1 to the Facility Lease.

“Interconnection Agreement” shall mean that certain Interconnection Agreement, dated as of December 14, 2001 between Wisconsin Electric Power Company and American Transmission Company, LLC.

“Investment Grade” shall mean, with respect to the senior unsecured long-term debt of a Person, a rating of at least “BBB” by Standard & Poor’s Rating Services and “Baa3” by Moody’s Investors Services; provided, however, that if either of the Rating Agencies shall have changed its system of classification after the date of the Facility Lease, then the above ratings shall be changed to the new ratings which correspond to the above ratings.

“Land” means the entire parcel owned by WEPCO on which the Existing Units are located and on which Unit 1, Unit 2 and the Future Unit are proposed to be constructed. 

“Late Term Improvements” shall mean any Improvement constructed pursuant to Section 8.3 of the Facility Lease, as well as, (i) any Improvement constructed subsequent to any such Improvement during the Base Term, if the Lease Term has been extended by the first Renewal Term, (ii) any Improvement constructed subsequent to any such Improvement during the first Renewal Term, if the Lease Term has been extended by the second Renewal Term, and (iii) any Improvement constructed subsequent to any such Improvement during the second Renewal Term, if the Lease Term has been extended by the third Renewal Term.

“Law” shall mean any statute, law, regulation, ordinance, rule, judgment, order, decree, permit, concession, grant, franchise, license, agreement, directive, guideline, policy, requirement, or other governmental restriction or any similar form of decision of or determination by, or any interpretation or administration of any of the foregoing by, any Governmental Authority or judicial or administrative body, whether now or hereafter in effect (including any Environmental Law).

“Lease Documents” shall mean the Facility Lease, the Property Rights Agreement, the Assignment of Easement Agreement, the Interconnection Agreement, the Financing Documents, if any, and each other agreement, document or instrument delivered in connection with any of the foregoing.

“Lease Term” shall mean the Base Term and any Renewal Term.

“Leased Facility” shall have the meaning given to such term in the Recitals to the Facility Lease.

“Lenders” shall mean the banks, bond and commercial paper holders and/or financial institutions (together with their administrative agent, collateral agents, depositary banks and other agents) and/or other Persons that provide construction and/or term debt financing and/or working capital and/or other financing or refinancing to Lessor in connection the Leased Facility or any portion thereof.

“Lessee” shall have the meaning given to such term in the Preamble to the Facility Lease.

“Lessee Event of Default” shall have the meaning given to such term in Article 14 of the Facility Lease.

“Lessee Termination Date” shall have the meaning given to such term in Section 2.3(a) of the Facility Lease.

“Lessor” shall have the meaning given to such term in the Preamble to the Facility Lease.

“Lessor Termination Date” shall have the meaning given to such term in Section 2.4(a) of the Facility Lease.

“Lessor’s Liens” shall mean Liens on or against any or all of the Leased Facility or any part thereof, the Lease Documents or any payment of Rent which results from: (a) any act of, or any Claim against, the Member, any Lender or Lessor in any case unrelated to the transactions contemplated by the Lease Documents; (b) any Tax owed by the Member, any Lender or Lessor, except for any Tax required to be paid by Lessee under the Lease Documents, including any Tax for which Lessee is obligated to indemnify the Member, any Lender or Lessor, as the case may be; or (c) any act or omission of the Member, any Lender or Lessor in contravention of the Lease Documents to which it is a party.

“Lessor’s Percentage” shall mean, as of any date, the Unit 1 Ownership Percentage and/or the New Common Facilities Ownership Percentage, as the context requires, as of such date.

“Lien” shall mean, with respect to any property, any mortgage, lien, pledge, charge, lease, easement, servitude, right of others, security interest or encumbrance of any kind in respect of such property.  For purposes of the Lease Documents, Lessee shall be deemed to own, subject to a Lien, any property which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement (other than an operating lease) relating to such property.

“Loss Proceeds” shall mean the net proceeds (including insurance proceeds) paid or payable by a third-party (including an insurer or re-insurer) in respect of any Event of Loss or an Event of Total Loss; provided, however, that “Loss Proceeds” shall not include any third-party 

liability insurance proceeds or other insurance proceeds paid or payable directly to a third party in accordance with the terms of such insurance policy.

“M.A.I.N. Guides” shall mean current Bylaws and Guides of Mid-America  Interconnected Network or any successor thereto.

“Major Equipment Expenditures” shall mean Lessor’s share of all capital expenditures that are related to major equipment procurement as specified in Exhibit A to the Project Development and Services Agreement (as defined in the ERGS Facility Lease).

“Material Adverse Effect” shall mean, with respect to a Party, a material adverse effect on: (a) the development, design, engineering, procurement, permitting, construction, commissioning, financing, ownership, leasing, use operation or maintenance of the Leased Facility; (b) the business, operations, prospects, condition (financial or otherwise) or property of such Party; (c) the ability of such Party to perform its obligations under any of the Lease Documents to which it is a party; or (d) the validity or enforceability of any of the Lease Documents to which it is a party.

“Member” shall mean MGE Power LLC, a Wisconsin limited liability company.

“Metering Point” shall mean the Transmission Provider’s high voltage side of one or more generator step up transformers, as more specifically set forth in the Interconnection Agreement.

“MGE Energy” shall mean MGE Energy, Inc.

“Monthly Management Fee” shall mean, with respect to any calendar month commencing with the month in which the Execution Date occurs, a fee equal to one-twelfth of the budgeted amount of annual management expenses to be incurred by the Lessor, adjusted at the end of each calendar year to equal the actual amount of expenses for such year.  The amount of the Monthly Management Fee that Lessor may recover from Lessee in any calendar year shall not exceed $50,000 (in 2002 dollars), adjusted annually on the anniversary of the Commercial Operation Date, based upon the first published final number for GDP-IPD for 2002, as provided by the Department of Commerce, Bureau of Economic Analysis.

“New Common Facilities” shall have the meaning given to such term in Exhibit A.

“New Common Facilities Adjustment Event” shall have the meaning given to such term in Section 5.4 of the Facility Lease. 

“New Common Facilities Ownership Interest” shall mean, as of any date, the percentage ownership interest in a Component of the New Common Facilities that Lessor holds as of such date pursuant to Section 5.4 of the Facility Lease, as the same may be adjusted from time to time pursuant to Section 5.4 of the Facility Lease. 

“O&M Agreement” shall mean the Operating and Maintenance Agreement, dated as of December 17, 2004, by and among Lessee, WPPI and WEPCO for the Elm Road Generating Station Unit 2.  

“Obsolete Component” shall have the meaning given to such term in Section 7.3(b) of the Facility Lease.

“Officer’s Certificate” shall mean, with respect to any Person, a certificate signed by an Authorized Officer of such Person.

“Operating Agent” shall mean the Person serving as such under the O&M Agreement or any successor agreement.  

“Optional Rules for Emergency Measures of Protection” shall mean those rules set forth by the AAA pursuant to its Commercial Arbitration Rules and governing emergency interim relief procedures.

“Ordinary Wear and Tear” shall mean the deterioration of the Facility which would be reasonably expected to result from operating the Facility in a manner consistent with Good Utility Practice.

“Organic Documents” shall mean: (a) with respect to any Person that is a corporation, its certificate of incorporation, its by-laws and all shareholder agreements, voting trusts and similar arrangements applicable to any of its authorized shares of capital stock; (b) with respect to any Person that is a limited partnership, its certificate of limited partnership and partnership agreement; and (c) with respect to any Person that is a limited liability company, its certificate of formation and its limited liability company agreement, in each case, as amended, supplemented, amended and restated, or otherwise modified and in effect from time to time.

“Overdue Rate” shall mean, as of any date, a rate per annum equal to the Prime Rate as in effect on such date, plus 300 basis points; provided that in no event shall the “Overdue Rate” exceed the maximum rate of interest allowed by applicable Law.

“Ownership Agreement” shall mean the Elm Road II Ownership Agreement, dated as of December 17, 2004, by and among the Lessor, WPPI, ERGS, Elm Road Services, LLC and W.E. Power LLC.

“Parent” shall mean, with respect to any Person, the Person that Controls such Person and that is not itself Controlled by any other Person.

“Party” shall mean either of Lessor or Lessee.

“Permitted Encumbrances” shall mean, in respect of any property:

(a)

Liens for Taxes, assessments or governmental charges not due and delinquent;

(b)

Liens for Taxes, assessments or governmental charges already due, but whose validity or amount is being contested in good faith, by appropriate proceedings initiated timely and diligently prosecuted, and for which adequate reserves in accordance with GAAP are maintained against any adverse determination of such contest or a bond in the full amount thereof has been posted;

(c)

carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business or incident to the construction or improvement of such property in respect of obligations which are not overdue for a period of more than 30 days or which are being contested in good faith, by appropriate proceedings initiated timely and diligently prosecuted, and for which adequate reserves in accordance with GAAP are maintained against any adverse determination of such contest or a bond in the full amount thereof has been posted;

(d)

easements, rights of way, reservations, restrictions, covenants, party-wall agreements, agreements for joint or common use, landlords’ rights of distraint and other similar encumbrances affecting such property, granted in the ordinary course of business, which in the aggregate are not material in amount and which do not in the aggregate materially detract from the value of such property or impair the use of such property for the purposes for which it is held;

(e)

court proceedings affecting such property, provided the execution or other enforcement thereof is effectively stayed and the Claims secured thereby are being contested in good faith, by appropriate proceedings initiated timely and diligently prosecuted, and for which adequate reserves in accordance with GAAP are maintained against any adverse determination of such contest or a bond in the full amount thereof has been posted;

(f)

minor defects and irregularities in title to such property, which do not in the aggregate materially impair the value of such property or the use of such property for the purposes for which it is held; and

(g)

Liens arising in connection with to the Financing Documents.

“Person” shall mean an individual, a corporation, a partnership, a limited liability company, an association, a joint-stock company, a trust, an unincorporated organization and any government or political subdivision thereof.

“Pre-CPCN Expenses” shall mean Lessor’s Percentage of all internal and third-party costs, fees and expenses (including financial, legal, accounting and consulting fees) incurred by or on behalf of Lessor after August 31, 2000 in connection with the development, design, engineering and procurement of the Facility.

“Pre-Tax Return on Equity” shall mean a percentage equal to the product of (a) an after-tax cost of equity equal to 12.7% and (y) a fixed tax rate gross-up factor 1.67043 (provided, that if there is a statutory change in federal or state income tax rates applicable to Subchapter C corporations after the date hereof, such tax rate gross-up will be adjusted upward or downward to 

reflect the change in tax rates and such adjustment shall be effective as of the date the change in tax rates becomes effective (even if retroactive)).

“Pre-Termination Expenses” shall mean (a) Pre-CPCN Expenses and (b) all other costs and expenses approved by the PSCW which have been incurred by or on behalf of Lessor in connection with the development, design, engineering and procurement of the Facility that have not already been reimbursed by Lessee pursuant to Section 2.1(a).

“Prime Rate” shall mean the rate of interest published from time to time by The Wall Street Journal (or any successor publication) as the base rate on corporate loans posted by a certain percentage of the largest banks in the United States; provided that if there is more than one such rate published, the higher rate shall be effective for the purposes of the Lease Documents.

“Project Documents” shall mean the O&M Agreement, Common Facilities O&M Agreement, Ownership Agreement and Common Facilities Ownership Agreement, and each other agreement, document or instrument delivered in connection with the foregoing.

“Property Rights Agreement” shall mean the Elm Road Generating Station Unit 2 Easement and Indemnification Agreement, dated December 17, 2004, by and among WEPCO, as grantor, and Lessor and WPPI, as grantees.

“PSCW” shall mean the Public Service Commission of Wisconsin or any successor thereto.

“Purchase Price” shall be equal to the sum of the following: (a) the Construction Costs incurred by or on behalf of Lessor as of the Required Commercial Operation Date; (b) the aggregate amount of outstanding Return of Capital with respect to such Construction Costs; (c) the amount of outstanding Monthly Management Fee incurred by or on behalf of Lessor as of the Required Commercial Operation Date; and (d) the aggregate amount of outstanding Community Impact Mitigation Costs incurred or on behalf of Lessor as of the Required Commercial Operation Date.

“Rating Agencies” shall mean Standard & Poor’s Rating Services or its successor and Moody’s Investors Services or its successor.

“Release” shall mean any “release” as such term is defined in 42 U.S.C. § 9601(22) or any successor statute.

“Renewal Rent” shall have the meaning given to such term in Section 5.1(c) of the Facility Lease.

“Renewal Term” shall mean any of three terms commencing immediately at the end of the Base Term or previous Renewal Term, as applicable, and terminating as provided in Section 12.2 of the Facility Lease. 

“Rent” shall mean, collectively, Basic Rent, Renewal Rent and/or Supplemental Rent.

“Rent Payment Date” shall mean the 25th day of each calendar month or the next Business Day during the Lease Term.

“Required Commercial Operation Date” shall have the meaning given “Required Lease Effective Date” in the ERGS Facility Lease. 

“Return on Capital” shall mean, with respect to Construction Costs or other capital expenditures or Fair Market Value, an amount equal to the product in dollars of (a) the Return on Capital Percentage and (b) the amount of such Construction Costs or other capital expenditures or Fair Market Value, as the case may be. 

“Return on Capital Percentage” shall mean the monthly percentage (%) equal to the product of (a) 1/12 and (b) the sum of (i) an amount equal to the product of (A) 55% and (B) the Pre-Tax Return on Equity and (ii) an amount equal to the product of (A) 45% and (B) the Applicable Cost of Debt (in %).

“Right of First Refusal Agreement” shall mean the agreement substantially in the form of Exhibit C to the Facility Lease. 

“Scheduled Commercial Operation Date” shall have the meaning given it in the ERGS Facility Lease. 

“Senior Executives” shall mean with respect to (a) any Person other than a partnership or limited liability company, a director-level officer or its equivalent or higher of such Person; and (b) any Person that is a partnership, a director-level officer or its equivalent or higher of the general partner of such Person, and (c) any Person that is a limited liability company, a director-level officer or its equivalent or higher of the manager or managing member of such Person.

“Site Improvements” shall have the meaning given it in the ERGS Facility Lease.

“Supplemental Rent” shall mean any and all amounts, liabilities and obligations which Lessee assumes or agrees or is otherwise obligated to pay under the Facility Lease (other than Basic Rent, Renewal Rent and any other amounts, liabilities and obligations which Lessee assumes or agrees or is otherwise obligated to pay pursuant to Articles 2, 5, 8 or 12 of the Facility Lease) or any other Lease Document (whether or not designated as Supplemental Rent) to Lessor or any other Person, including indemnities and damages for breach of any covenants, representations, warranties or agreements.

“Taxes” and “Tax” shall mean any and all fees (including documentation, recording, license and registration fees), taxes (including income (whether net, gross or adjusted gross), gross receipts, lease, sublease, sales, rental, use, turnover, value-added, property, excise and stamp taxes), levies, imposts, duties, charges, assessments or withholdings of any nature whatsoever, together with any penalties, fines or interest thereon or additions thereto imposed by any Governmental Authority.

“Termination Value” shall mean, with respect to each Rent Payment Date, the net present value of the remaining Basic Rent or Renewal Rent, as the case may be, utilizing a discount rate equal to “RRLF%” as defined in Schedule 5.1 or Schedule 12.2 to the Facility Lease; provided, however, that with respect to each Rent Payment Date occurring after the date Lessee has elected to renew the Facility Lease early in accordance with Section 8.3 of the Facility Lease, the “AALF” component of the Basic Rent and Renewal Rent formulas used to calculate the “Termination Value” shall be increased to include an amount equal to the aggregate amount of project costs and expenses incurred by or on behalf of Lessor prior to such Rent Payment Date to construct the Improvement to the Leased Facility giving rise to the early renewal election.

“Transfer” shall mean the sale, assignment, conveyance, or other direct or indirect disposition by a Party of all or any part of its rights, benefits, advantages, titles or interest in and to this Facility Lease and each other Lease Document to which it is a party and the Leased Facility and all replacements thereof and substitutions thereafter, including all Improvements thereto.

“Test Power” shall mean all energy produced by the Facility during any test thereof prior to Commercial Operation.

“Transmission Provider” shall mean the entity or entities providing transmission service to the Leased Facility under a FERC accepted transmission tariff.

“UCC” shall mean the Uniform Commercial Code of Wisconsin or any other applicable jurisdiction.

“Unit 2” shall have the meaning given to such term in Exhibit A.

“Unit 1” shall mean a unit similar to Unit 2 and related facilities that ERGS or an Affiliate of ERGS proposes to develop, design, engineer, peruse, permit and construct on the Land. 

“WEPCO” shall mean Wisconsin Electric Power Company, a Wisconsin corporation.  

“WPPI” shall mean Wisconsin Public Power Incorporated, a municipal electric power company organized under the laws of the state of Wisconsin.

SCHEDULE 3.2

TO THE FACILITY LEASE

GUARANTEED PERFORMANCE LEVELS

1.1

Guaranteed Performance Levels.  The Guaranteed Performance Levels are as follows:

(a)

“Net Unit Power Guarantee” shall mean a guaranteed net electrical output of the Facility equal to 615 MW, which shall represent the minimum rate at which the Facility is designed to deliver energy at the Metering Point when corrected to Guarantee Conditions.

(b)

“Net Unit Heat Rate Guarantee” shall mean a guaranteed net heat rate of the Facility of no greater than 8850 Btu/kWh, which shall represent the design quantity of BTUs as determined by mine or laboratory analysis, required by the Facility to produce one KWh of energy, at the Facility’s full load, as measured at the Metering Point, using the higher heat value of the delivered fuel as corrected to Guarantee Conditions.

1.2

Guaranteed Performance Level Damages.  For the purposes of the Facility Lease, the following amounts shall be herein referred to as the “Guaranteed Performance Level Damages”:

Net Unit Power Guarantee

Lessor’s Percentage of $1,500/kw

Net Unit Heat Rate Guarantee

Lessor’s Percentage of $80,000/btu/kWh

1.3

Performance Damages Cap.  For the purposes of the Facility Lease, the “Performance Damages Cap” shall equal Lessor’s Percentage of $175,000,000.

SCHEDULE 5.1

TO THE FACILITY LEASE

BASIC RENT – UNIT 2 COMPONENT

Basic Rent for each calendar month shall be calculated as follows:

BRU2 =  PRU2

 x

+  ∑  RRIBT%i * (1 + RRIBT%i)rmbt * IBTi * MARBA

i =1 

(1 + RRIBT%i)rmbt - 1

 y

+  ∑  RRRTPI%j * (1 + RRRTPI%j)f * RTPIj * MARBA

j =1

(1 + RRRTPI%j)f - 1

+  RRIUC% * IUC

+  MMF

+  CIMC

+  PPA

+  DRC

-  ATC

Where:

BRU2  =

Basic Rent for such month (in $) attributable to Unit 2;

PRU2  =

Primary Rent Component of Unit 2.  For the first 60 months of the Base Term, PRU2 shall be:  

0.95* RRLF% * (1 + RRLF%)bt * AALF * MARBA

(1 + RRLF%)bt - 1

For the remaining months of the Base Term, PRU2s shall be:

RRLF% * (1 + RRLF%)rm * UBAALF

(1 + RRLF%)rm - 1

AALF  =

The Approved Amount for the Unit 2 (in $);

RRLF%  =

Rate of Return on AALF and UBAALF, as applicable (monthly), which equals the product of (a) 1/12 and (b) the sum of (i) the product of (A) 0.55 and (B) the Pre-Tax Return on Equity and (ii) the product of (A) 0.45 and (B) the Applicable Cost of Debt (in %);

MARBA =

Monthly Average Rate Base Adjustment for the Base Term calculated in accordance with Annex C to Schedule 5.1 (in %);

UBAALF =

Unamortized Balance of AALF adjusted for MARBA plus any accumulated yet unpaid return on the Leased Facility (in $) at the end of the 60th month of the Base Term;

bt  =

the total number of months in the Base Term;

rm  =

the remaining number of months in the Base Term;

IBTi  =

The aggregate amount of costs and expenses incurred by or on behalf of Lessor to construct an Improvement (other than Improvements to the New Common Facilities and Late Term Improvements) which is deemed complete and in-service (in $);

RRIBT%i =

Rate of Return on IBTi (monthly), which equals the product of (a) 1/12 and (b) the sum of (i) the product of (A) 0.55 and (B) the Pre-Tax Return on Equity and (ii) the product of (A) 0.45 and (B) the Applicable Cost of Debt with respect to the Improvement (in %);

rmbt =

the lesser of (a) the number of months in the useful life of an Improvement (or property unit of which it is a part) or (b) the remaining number of months in the Base Term after the month in which the respective Improvement is placed in service;

x  =

the total number of Improvements made to the Leased Facility (other than Improvements to New Common Facilities and Late Term Improvements) that are deemed complete and in service during the Base Term;

i  =

an Improvement to the Leased Facility (other than Improvements to New Common Facilities and Late Term Improvements), if any, that is deemed complete and in service during such month;

RTPI j1 =

The aggregate amount of costs and expenses incurred by or on behalf of Lessor to construct a Late Term Improvement (other than a Late Term Improvement to New Common Facilities) which is deemed complete and in service (in $);

RRRTPI%j  =

Rate of Return on RTPI j (monthly), if any, which equals the product of (a) 1/12 and (b) the sum of (i) the product of (A) 0.55 and (B) the Pre-Tax Return on Equity and (ii) the product of (A) 0.45 and (B) the Applicable Cost of Debt (in %) with respect to the Improvement;

f =

the sum of (i) the remaining number of months in the Base Term after the month in which the respective RTPIj or RTNCg is placed in service and (ii) the total number of months of the first Renewal Term;

y =

the total number of Late Term Improvements (other than a Late Term Improvement to New Common Facilities) that are deemed complete and in service during the Base Term;

j =

a Late Term Improvement (other than a Late Term Improvement to New Common Facilities), if any, that is deemed complete and in service during such month;

IUC  =

Improvements Under Construction, excluding Improvements to New Common Facilities, if any, which equals the aggregate amount of capital project costs and expenses incurred by or on behalf of Lessor up to and including such month to construct all Lessor-financed Improvements, including Late Term Improvements that have not yet been deemed complete and in service (in $);

RRIUC% =

Rate of Return on IUC (monthly), if any, which equals the product of (a) 1/12 and (b) the sum of (i) the product of (A) 0.55 and (B) the Pre-Tax Return on Equity and (ii) the product of (A) 0.45 and (B) the Applicable Cost of Debt with respect to the Improvement (in %);

MMF =

the Monthly Management Fee for such month (in $); 

CIMC =

Community Impact Mitigation Costs for such month incurred by or on behalf of Lessor on or after the Commercial Operation Date and not already included in AALF (in $);

PPA =

Prior Period Adjustments for such month, which equals any adjustments (other than ATC) to BRU2 in such month, including Pre-Tax Return on Equity retroactive tax rate changes (in $);

DRC =

Demolition and Removal Costs related to Unit 2 divided by the total number of months in the Base Term (in $); and 

ATC =

Allowable Tax Credits, which equals any tax credits allowable against a Lessor’s federal or state income tax liability for the taxable year as determined under the Internal Revenue Code of 1986, as amended, or state income tax Law, to the extent (a) such tax credits are actually utilized by Lessor, (b) such tax credits are not prohibited by Law from being passed on to Lessee and/or to Lessee’s customers and (c) Lessor determines the use of such tax credits does not substantially reduce or eliminate a tax benefit to Lessor (in $).

BASIC RENT – NEW COMMON FACILITIES COMPONENT

In addition, on each monthly Rent Payment Date during the Base Term Lessee shall pay to the Lessor the Basic Rent attributable to New Common Facilities, calculated as follows:

BRNC =  PRCNC

b

+   å  RRINC%a* (1 + RRINC%a)rmbt * INCa* MARBA

     a =1                (1 + RRINC%a)rmbt - 1

h

+   å  RRRTNC%g* (1 + RRINC%g)f * RTNCg* MARBA

     g =1                (1 + RRINCg)f - 1

d

±   å  RRAE%c* (1 + RRAE%c)rm * AEc* MARBA

     c =1                (1 + RRAE%c)rm - 1

+

RRIUC% * IUC 

±

PPA

+

DRC

Where:

BRNC =  

Basic Rent for such month attributable to the New Common Facilities Ownership Interest component of the Leased Facility (in $);

PRCNC =

Primary Rent Component of the New Common Facilities.  For the first 60 months of the Base Term, PRCNC shall be:

0.95 * RRLF% *(1 + RRLF%)bt * AALFNC * MARBA

(1 + RRLF%)bt - 1 

For the remaining months of the Lease Term, PRCNC shall be:

RRLF% *(1 + RRLF%)bt * UBAALFNC

(1 + RRLF%)bt - 1 

AALFNC =  

Approved Amount for the Leased Facility attributable to the New Common Facilities Ownership Interest component of the Leased Facility (in $);

MARBA =  

Monthly Average Rate Base Adjustment for the Base Term calculated in accordance with Annex C to Schedule 5.1 of this Facility Lease (in %);

RRLF% =  

Rate of Return on the Leased Facility as previously defined in the Basic Rent – Unit 2 Component (in %);

UBAALFNC =

Unamoritized balance of AALFNC adjusted for MARBA plus any accumulated yet unpaid return on the Leased Facility RRLF (in $) at the end of the 60th month of the Base Term;

bt =  

the total number of months in the Base Term;

rm = 

the remaining number of months in the Base Term;

INCa =  

The aggregate amount of capital project costs and expenses incurred by or on behalf of Lessor to construct an Improvement (other than Late Term Improvements) to the New Common Facilities which is deemed complete and in service (in $);

RRINC%a =  

Rate of Return on INCa (monthly), which equals the product of (a) 1/12 and (b) the sum of (i) the product of (A) 55% and (B) the Pre-Tax Return on Equity and (ii) the product of (A) 45% and (B) the Applicable Cost of Debt with respect to the Improvement (in %);

rmbt =  

the lesser of (a) the number of months in the useful life of the respective Improvement in New Common Facilities (or property unit of which it is a part) and (b) the remaining number of months in the Base Term after the month in which the respective Improvement is deemed complete and in-service;

b =  

the total number of Lessor-financed Improvements to New Common Facilities (other than Late Term Improvements) that are deemed complete and in-service during the Base Term;

a =  

Lessor-financed Improvements to New Common Facilities (other than Late Term Improvements), if any, that are deemed complete and in-service during such month in the Base Term;

RTNCg =  

The aggregate amount of capital project costs and expenses incurred by or on behalf of Lessor to construct a Late Term Improvement (other than a Late Term Improvement to Unit 2) to the New Common Facilities which is deemed complete and in service (in $);

RRRTNC%g =  

Rate of Return on RTNCg (monthly), which equals the product of (a) 1/12 and (b) the sum of (i) the product of (A) 55% and (B) the Pre-Tax Return on Equity and (ii) the product of (A) 45% and (B) the Applicable Cost of Debt with respect to the Improvement (in %);

rmbt =  

the lesser of (a) the number of months in the useful life of the respective Improvement in New Common Facilities (or property unit of which it is a part) and (b) the remaining number of months in the Base Term after the month in which the respective Improvement is deemed complete and in-service;

h =  

the total number of Lessor-financed Late Term Improvements to New Common Facilities (other than Late Term Improvements to Unit 1) that are deemed complete and in-service during the Base Term;

g =  

Lessor-financed Late Term Improvements to New Common Facilities (other than Late Term Improvements to Unit 1), if any, that are deemed complete and in-service during such month in the Base Term;

f =

the sum of (i) the remaining number of months in the Base Term after the month in which the respective RTNCg or RTPIj is placed in service and (ii) the total number of months of the Renewal Term;

AEc =  

New Common Facilities Adjustment Event which equals the aggregate amount of New Common Facilities costs that are redistributed upon completion of the Future Unit during the Base Term (in $) in accordance with Schedule 5.4 of this Facility Lease; 

RRAE%c  =

Rate of Return on AEc (monthly), if any, which equals the equals the product of (a) 1/12 and (b) the sum of (i) the product of (A) 55%and (B) the Pre-Tax Return on Equity and (ii) the product of (A) 45% and (B) the Applicable Cost of Debt with respect to each New Common Facilities Adjustment Event (in %);   

rm =  

the sum of the remaining number of months in the Base Term after the month in which a New Common Facilities Adjustment Event occurs;

c =  

a New Common Facilities Adjustment Event, if any, that is deemed completed during such month in the Base Term;

d =  

the total number of New Common Facilities Adjustment Events during the Base Term;

IUC =  

Improvements Under Construction, if any, which equals the aggregate amount of capital project costs and expenses incurred by or on behalf of Lessor up to and including such month to construct all Lessor-financed Improvements in New Common Facilities, including Late Term Improvements that have not yet been deemed complete and in-service (in $); 

RRIUC% =  

Rate of Return on IUC (monthly), if any, which equals the product of (a) 1/12 and (b) the sum of (i) the product of (A) 55% and (B) the Pre-Tax Return on Equity and (ii) the product of (A) 45% and (B) the Applicable Cost of Debt with respect to the Improvement (in %); 

PPA =  

Prior Period Adjustments for such month, which equals any adjustments (other than ATC) to BRNC in such month, including Pre-Tax Return on Equity retroactive tax rate changes (in $);

DRC =  

Demolition and Removal Costs associated with the New Common Facilities divided by the total number of months in the Base Term (in $).

ANNEX A TO SCHEDULE 5.1

TO THE FACILITY LEASE

SAMPLE BASIC RENT CALCULATION: BASE TERM – UNIT 2 COMPONENT

Example: Basic Rent in Year 29 for 30-year lease of Elm Road Generating Station Unit 2.  Assumes additional Improvements and changing debt costs.

Unit 2 Component of the Basic Rent as of the Commercial Operation Date

			
	AALF

	$85,820,000

	Approved Amount of the Leased Facility (Unit 2 only)

	 	 55%

	Equity Share of the Rate of Return

	 	 12.7%

	After Tax Cost of Equity

	 	1.67043

	Fixed Tax Rate Gross-Up Factor

	 	 45%

	Debt Share of the Rate of Return

	 	6.0%

	Applicable Cost of Debt for Approved Amount

	RRLF%

	 1.197%

	Monthly Rate of Return at Execution Date

	Bt

	360

	Number of months in Base Term (30 years * 12)

	MARBA

	 99.863%

	Monthly Average Rate Based Adjustment

	Average Monthly Payment $1,040,475 (Before Adjustments; used in Renewal Rent formula)

	Unit 2 Primary Rent Component for Months 1-60 $988,451 (Before Adjustments)

	Unit 2 Primary Rent Component for Months 61-360 $1,096,275 (Before Adjustments (see Amortization Table))

Improvements Deemed Complete and In-Service

			
	IBT

	 $3,000,000 

	Improvements Deemed Complete and In-Service at end of Year 15

	MARBA

	 99.863%

	Monthly Average Rate Based Adjustment

	rmbt

	180

	Number of months remaining in Base Term (15 years * 12)

	RRIBT%

	 1.197%

	Monthly Rate of Return on Improvements (debt cost of 6.0%)

Monthly Payment Adder for Improvements Deemed Complete and In-Service:  $ 40,641

Late Term Improvements

			
	RTPI

	$22,000,000

	Late Term Improvements Deemed Complete and In-Service at end of Year 29, est. remaining useful life = 15 years (total=44 years)

	MARBA

	 99.863%

	Monthly Average Rate Based Adjustment

	f

	72

	Number of months remaining in Base Term (1 year * 12 months) plus renewal term (5 years * 12 months)

	RRRTPI%

	 1.179%

	Monthly Rate of Return on Late Term Improvements (debt cost of 5.5%) 

Monthly Payment Adder for Late Term Improvements:  $ 454,389 

Improvements Under Construction

			
	IUC

	 $3,500,000 

	Improvements Under Construction

	RRIUC%

	 1.235%

	Monthly Rate of Return on Improvements Under Construction  (debt cost of 7%)

Monthly Payment Adder for Improvements Under Construction:  $ 43,219 

			
	 	 	 

Monthly Basic Rent in Year 29 Before Other Adjustments:  $ 1,634,523

			
	 	 	 

Other Adjustments

			
	MMF

	 $4,000 

	Monthly Management Fee 

	CIMC

	$1,667

	Community Impact Mitigation Costs ($240,000*.0833/12 months)

	PPA

	 $0

	Prior Period Adjustments

	DRC

	 $23,839

	Demolition & Removal Costs (10% of original cost/360 mos.)

	ATC

	 $0

	Allowable Tax Credits

Total Monthly Unit 2 Component of the Basic Rent in Year 29:  $ 1,664,029

Amortization Table for the Unit 2 Component

(condensed – assumes no Improvements)

“Approved Amount” :  $85,820,000

“Approved Amount” Adjusted for MARBA:  $85,702,427

							
	 	Monthly

 Payment

	Principal

	Interest

	Unamortized

Balance

	Net Present

Value (NPV)

	 	 	 

	 	 $  85,702,426.60 

	 	$85,702,426.60 

	1

	 $988,450.85 

	 $(37,689.55)

	 $1,026,140.40 

	 $85,740,116.15 

	 	 $976,755.87 

	2

	 $988,450.85 

	 $(38,140.82)

	 $1,026,591.67 

	 $85,778,256.97 

	 	 $965,199.25 

	3

	 $988,450.85 

	 $(38,597.49)

	 $1,027,048.34 

	 $85,816,854.46 

	 	 $953,779.37 

	4

	 $988,450.85 

	 $(39,059.63)

	 $1,027,510.48 

	 $85,855,914.09 

	 	 $942,494.61 

	5

	 $988,450.85 

	 $(39,527.30)

	 $1,027,978.15 

	 $85,895,441.39 

	 	 $931,343.36 

	6

	 $988,450.85 

	 $(40,000.57)

	 $1,028,451.43 

	 $85,935,441.97 

	 	 $920,324.05 

	7

	 $988,450.85 

	 $(40,479.51)

	 $1,028,930.37 

	 $85,975,921.48 

	 	 $909,435.11 

	8

	 $988,450.85 

	 $(40,964.19)

	 $1,029,415.04 

	 $86,016,885.66 

	 	 $898,675.01 

	9

	 $988,450.85 

	 $(41,454.66)

	 $1,029,905.51 

	 $86,058,340.33 

	 	 $888,042.22 

	10

	 $988,450.85 

	 $(41,951.01)

	 $1,030,401.86 

	 $86,100,291.34 

	 	 $877,535.23 

	 	 : 

	 : 

	 : 

	 : 

	 	 : 

	 	 : 

	 : 

	 : 

	 : 

	 	 : 

	58

	 $988,450.85 

	 $(74,277.44)

	 $1,062,728.29 

	 $88,832,495.20 

	 	 $495,621.42 

	59

	 $988,450.85 

	 $(75,166.78)

	 $1,063,617.64 

	 $88,907,661.98 

	 	 $489,757.41 

	60

	 $988,450.85 

	 $(76,066.78)

	 $1,064,517.63 

	 $88,983,728.76 

	 	 $483,962.79 

	61

	 $1,096,274.76 

	 $30,846.35 

	 $1,065,428.40 

	 $88,952,882.41 

	 	 $530,404.56 

	62

	 $1,096,274.76 

	 $31,215.69 

	 $1,065,059.07 

	 $88,921,666.72 

	 	 $524,129.01 

	63

	 $1,096,274.76 

	 $31,589.44 

	 $1,064,685.31 

	 $88,890,077.28 

	 	 $517,927.71 

	 	 : 

	 : 

	 : 

	 : 

	 	 : 

	 	 : 

	 : 

	 : 

	 : 

	 	 : 

	347

	 $1,096,274.76 

	 $928,010.07 

	 $168,264.69 

	 $13,125,322.33 

	 	 $17,630.25 

	348

	 $1,096,274.76 

	 $939,121.40 

	 $157,153.35 

	 $12,186,200.92 

	 	 $17,421.65 

	349

	 $1,096,274.76 

	 $950,365.78 

	 $145,908.97 

	 $11,235,835.14 

	 	 $17,215.53 

	350

	 $1,096,274.76 

	 $961,744.79 

	 $134,529.96 

	 $10,274,090.35 

	 	 $17,011.84 

	351

	 $1,096,274.76 

	 $973,260.05 

	 $123,014.71 

	 $9,300,830.30 

	 	 $16,810.56 

	352

	 $1,096,274.76 

	 $984,913.17 

	 $111,361.58 

	 $8,315,917.13 

	 	 $16,611.66 

	353

	 $1,096,274.76 

	 $996,705.83 

	 $99,568.93 

	 $7,319,211.30 

	 	 $16,415.12 

	354

	 $1,096,274.76 

	 $1,008,639.68 

	 $87,635.07 

	 $6,310,571.61 

	 	 $16,220.90 

	355

	 $1,096,274.76 

	 $1,020,716.42 

	 $75,558.33 

	 $5,289,855.19 

	 	 $16,028.98 

	356

	 $1,096,274.76 

	 $1,032,937.76 

	 $63,336.99 

	 $4,256,917.43 

	 	 $15,839.33 

	357

	 $1,096,274.76 

	 $1,045,305.43 

	 $50,969.33 

	 $3,211,612.00 

	 	 $15,651.93 

	358

	 $1,096,274.76 

	 $1,057,821.18 

	 $38,453.58 

	 $2,153,790.82 

	 	 $15,466.74 

	359

	 $1,096,274.76 

	 $1,070,486.78 

	 $25,787.97 

	 $1,083,304.04 

	 	 $15,283.75 

	360

	 $1,096,274.76 

	 $1,083,304.04 

	 $12,970.72 

	 $0.00 

	 	 $15,102.91 

	 	 	 	 	 	 	 
	 	 	 	 	 	 	 $ 85,702,426.60 

	 	 	 	 	 	 	 

SAMPLE BASIC RENT: BASE TERM – NEW COMMON FACILITIES COMPONENT

Example: Basic Rent in Year 29 of the New Common Facilities.  Assumes additional Improvements and changing debt costs as well as a New Common Facilities Adjustment Event.

New Common Facilities Component of the Basic Rent as of the Lease Effective Date

			
	AALFNC

	$35,240,000

	Approved Amount of the Leased Facility (New Common only)

	RRLF%

	 1.197%

	Monthly Rate of Return at Execution Date

	bt

	360

	Number of months in Base Term (30 years * 12)

	MARBA

	 99.863%

	Monthly Average Rate Based Adjustment

	New Common Facilities Monthly Rent: $427,247 (Before Adjustments; used in Renewal Rent formula)

	New Common Facilities Primary Rent Component for Months 1-60: $405,885 (Before Adjustments)

	New Common Facilities Primary Rent Component for Months 61-360: $450,160 (Before Adjustments)

Improvements Deemed Complete and In-Service

			
	IBTNC

	 $3,000,000 

	Improvements Deemed Complete and In-Service at end of Year 2

	MARBA

	 99.863%

	Monthly Average Rate Based Adjustment

	rmbt

	336

	Number of months remaining in Base Term (28 years * 12)

	RRIBT%

	 1.235%

	Monthly Rate of Return on Improvements (debt cost of 7%)

Monthly Payment Adder for Investments Deemed Complete and In-Service:  $ 37,603

New Common Facilities Adjustment Event (the Future Unit is deemed complete and in-service)

			
	AE

	 ($4,000,000) 

	The Future Unit is deemed complete and in-service at end of Year 4

	MARBA

	 99.863%

	Monthly Average Rate Based Adjustment

	rmbt

	312

	Number of months remaining in Base Term (26 years * 12)

	RRAE%

	 1.197%

	Monthly Rate of Return on New Common Facilities Adjustment Event

Monthly Payment Adder for New Common Facilities Adjustment Event:  ($ 49,023)

Improvements Under Construction

			
	IUC

	 $3,500,000 

	Improvements Under Construction

	RRIUC%

	 1.197%

	Monthly Rate of Return on Improvements Under Construction  (debt cost of 6.0%)

Monthly Payment Adder for Improvements Under Construction:  $ 41,907 

			
	 	 	 

Monthly Basic Rent in Year 30 Before Other Adjustments:  $ 480,646

			
	 	 	 

Other Adjustments

			
	PPA

	 $0

	Prior Period Adjustments

	DRC

	 $9,789

	Demolition & Removal Costs ($10% of original cost/360 mos.)

Total Monthly New Common Facilities Component of the Basic Rent in Year 29:  $ 490,435 

ANNEX B TO SCHEDULE 5.1

TO THE FACILITY LEASE

APPLICABLE COST OF DEBT

The Parties acknowledge and agree that determination of the Applicable Cost of Debt as provided below should result in a cost of debt in the overall cost of capital that is reasonable, prudent and in the best interests of Lessee’s customers throughout the Lease Term:

1.1

Applicable Cost of Debt for the Leased Facility (other than Improvements).

(a)

Construction Term.  Unless otherwise determined under Section 1.1(b), the Applicable Cost of Debt (in %) prior to the Commercial Operation Date shall be equal to the actual all-in interest rate paid by Lessor to finance the Construction Costs.

(b) 

Lease Term.  The Applicable Cost of Debt (in %) during the Lease Term applicable to the Leased Facility (other than Improvements thereto) shall be based upon the Cost of Debt Index (as defined in Section 1.3 below).  At any time during the 180-day period prior to the anticipated Commercial Operation Date, Lessor shall select a cost of debt (in %) from the Cost of Debt Index during such period based on the lowest rated senior unsecured long term debt of MGE Energy.  The Applicable Cost of Debt (in %) during the Lease Term shall be equal to the cost of debt so selected by Lessor, plus an amount (in %) to reflect debt financing costs pursuant to Section 1.1(d).  Lessor shall ensure that the debt financing represented by such Applicable Cost of Debt shall provide for a call or refinancing option exercisable on or after the 10th anniversary of such debt financing (the “Refinancing Option”).  Within 90 days of entering into definitive documentation of such debt financing, Lessor shall provide Lessee written notice of the principal terms and conditions of the Refinancing Option, including, without limitation, the last date which by the Refinancing Option must be exercised (the “Exercise Date”) and any breakage costs or make-whole amounts or other refinancing premiums associated therewith.

(c)

Refinancing During Lease Term.   If Lessee determines that the Refinancing Option should be exercised, then it shall provide written notice thereof to Lessor not later than 90 days prior to the Exercise Date, and any such notice shall be irrevocable.  If Lessor receives such a notice from Lessee, it shall be obligated to exercise the Refinancing Option.  Commencing on the date the Refinancing Option has been exercised and the associated debt has been repaid or refinanced (the “Refinancing Effective Date”), the Applicable Cost of Debt during the Lease Term shall be redetermined in accordance with Section 1.1(b), provided that for purposes of applying Section 1.1(b), the Refinancing Effective Date shall be used instead of the Commercial Operation Date and Lessor shall not be obligated to provide for an additional Refinancing Option.  Within 60 days after the Refinancing Effective Date or as soon thereafter as is reasonable practicable, Lessor shall provide written notice to Lessee of all of the third-party costs and expenses incurred by or on behalf of Lessor in connection with the exercise of the Refinancing Option, including, without limitation, any breakage costs or make-whole amounts or other refinancing premiums and all legal, accounting and financial advisor fees and expenses associated therewith.  Within 30 days of receipt of such notice from Lessor, Lessee shall pay the aggregate amount of costs and expenses specified in such notice to or for the account of Lessor as Lessor shall direct in such notice in immediately available funds.

(d)

Financing Costs.  All costs incurred to underwrite, issue and distribute debt securities and arrange for debt financing (including SEC registration fees, trustee fees, printing costs, legal fees, accounting fees and rating agency fees), shall be included in determining the all-in Applicable Cost of Debt for the Leased Facility during both the Construction Term and the Lease Term. 

1.2

Applicable Cost of Debt for the Improvements. 

(a)

During Construction.

Unless otherwise determined under Section 1.2(b), for all Improvements under construction (and prior to deemed completion and in-service) begun after the Commercial Operation Date, the Applicable Cost of Debt (in %) shall be equal to the actual interest rate paid by Lessor to finance the cost of constructing such Improvements.

(b)

After In-Service Date.  For Improvements deemed completed and in-service after the Lease Effective Date, at anytime after the Improvements are 80% or more complete, but in any event no later than prior to the expected in-service date of the Improvements, Lessor shall select a cost of debt (in %) from the Cost of Debt Index during such period based on the lowest rated senior unsecured long term debt of MGE Energy.  The Applicable Cost of Debt (in %) in respect of such Improvements shall be equal to the cost of debt so selected by Lessor, plus an amount (in %) to reflect the debt financing costs pursuant to Section 1.2(c). 

(c)

Financing Costs.  All costs incurred to underwrite, issue and distribute debt securities and arrange for debt financing (including SEC registration fees, trustee fees, printing fees, legal fees, accounting fees, and rating agency fees), shall be included in determining the all-in Applicable Cost of Debt (in %) for Improvements during both the construction phase and after the in-service date of the Improvement. 

1.3

Applicable Cost of Debt for New Common Facilities Adjustment Events.

(a)

New Common Facilities Ownership Interest Transferred Out.  The Applicable Cost of Debt (in %) for New Common Facilities Ownership Interests being transferred out of this Facility Lease as a result of a New Common Facilities Adjustment Event shall be the weighted average of (1) the Applicable Cost of Debt during the Lease Term (adjusted as necessary for exercise of the Refinancing Option) for the portion of the New Common Facilities Ownership Interest transferred out as constructed at the start of the Lease Term, and (2) the Applicable Cost of Debt for the portion of Improvements in New Common Facilities transferred out, including Improvements under construction and Improvements deemed completed and in service after the Commercial Operation Date.

(b)

New Common Facilities Ownership Interest Transferred In.  The Applicable Cost of Debt (in %) for New Common Facilities Ownership Interests being transferred into this Facility Lease as a result of a New Common Facilities Adjustment Event shall be weighted average of (1) the Applicable Cost of Debt during the Lease Term (adjusted as necessary for exercise of the Refinancing Option) for the portion of the New Common Facilities Ownership Interests transferred in as constructed at the state of the Lease Term, and (2) the Applicable Cost of Debt for any related Improvements in New Common Facilities transferred in, including Improvements under construction and Improvements deemed completed and in service after the Commercial Operation Date.

1.4

Cost of Debt Index.  

(a)

For purposes of this Annex B to Schedule 5.1, the “Cost of Debt Index” shall mean “Moody's Daily Long-Term Corporate Bond Yield Averages" for “Utilities” published by Moody’s Investors Services (“Moody’s”) or any successor index published by Moody’s.  If the “Moody's Daily Long-Term Corporate Bond Yield Averages" for “Utilities” or any successor index is no longer published by Moody’s, or the lowest rated senior unsecured debt for MGE Energy (or the Moody’s equivalent rating, if such debt is not rated by Moody’s) is rated below the lowest rating listed on the Cost of Debt Index, then an alternative index shall be used for the Cost of Debt Index which shall be selected by Lessor and approved by the PSCW.  

(b)

For purposes of selecting the cost of debt (in %) from the Cost of Debt Index, if the lowest rated senior unsecured debt for MGE Energy (or the Moody’s equivalent rating, if such debt is not rated by Moody’s) is rated at one of the ratings listed on the Cost of Debt Index, then the cost of debt for such rating shall be used for purposes of determining the Applicable Cost of Debt.

(c)

If, however, the lowest rated senior unsecured debt for MGE Energy (or the Moody’s equivalent rating, if such debt is not rated by Moody’s) is rated at a rating that is not listed on the Cost of Debt Index, then for purposes of determining the Applicable Cost of Debt, Lessor shall calculate the cost of debt (in %) by using the average of the two costs of debt that are listed on the Cost of Debt Index under the ratings immediately above and below such MGE Energy rating.  

ANNEX C TO SCHEDULE 5.1

TO THE FACILITY LEASE

CALCULATED MONTHLY AVERAGE RATE BASED ADJUSTMENT

The Monthly Average Rate Based Adjustment (“MARBA”) shall be established as of the Commercial Operation Date (to be utilized throughout the Base Term and any Renewal Term) and is calculated as follows:

bt

MARBA

=

∑  MMRt *(1/(1 + RRLF%)t)) 

t =1

AALF

Where:

MMRt

=

the Monthly Revenue Requirement in month “t”, which shall equal:

=

D + ECt + LTDCt + TCt

Where:

D

=

the Depreciation, which shall equal:

=

AALF

(bt) 

Where:

AALF 

=

the Approved Amount 

bt 

= 

total number of months in the Base Term

ECt   

=

the Equity Cost in month “t”, which shall equal:

=

ER *ABt

Where:

ER

= 

the Equity Rate each month, which shall equal:

=

0.127 * 0.55

 12

= 

0.005821

Where:

ABt

=

the Average Balance each month, which shall equal: 

=

BBt + EBt

2

Where:

BBt 

=

the Beginning Balance in month “t”, which shall equal:

=

in month “t=1”, AALF; and 

=

in all other months, EBt-1

EBt

=

the Ending Balance in month “t”, which shall equal:

=

BBt - D

Where:

LTDCt 

=

the Long Term Debt Cost in month “t”, which shall equal:

=

LTDR * ABt

Where:

LTDR

=

the Long Term Debt Rate shall equal:

= 

Applicable Cost of Debt * 0.45 

12

Where:

Applicable Cost of 

Debt

=

the Applicable Cost of Debt with respect to the Leased Facility,  calculated as of the Commercial Operation Date in accordance with Annex B to Schedule 5.1 to the Facility Lease

TCt

= 

the Tax Cost in month “t”, which shall equal:

= 

ECt * TF

Where:

TF

=

the Tax Factor as of the Commercial Operation Date, which shall equal: 

=

0.67043 (provided, that if there is a statutory change in federal or state income tax rates applicable to Subchapter C corporations prior to the Commercial Operation Date, such tax rate gross-up will be adjusted upward or downward to reflect such a change in tax rates and such adjustment shall be effective as of the date the change in tax rates becomes effective (even if retroactive)) 

RRLF%

=

the Rate of Return on AALF (monthly), calculated as of the Commercial Operation Date, which shall equal: the product of (a) 1/12 and (b) the sum of (i) an amount equal to the product of (A) 0.55 and (B) the Pre-Tax Return on Equity and (ii) an amount equal to the product of (A) 0.45 and (B) the Applicable Cost of Debt as of the Commercial Operation Date with respect to the Leased Facility calculated in accordance with Annex B to Schedule 5.1 of this Facility Lease (in %).

SCHEDULE 5.4

TO THE FACILITY LEASE

NEW COMMON FACILITIES OWNERSHIP INTEREST

Lessor’s New Common Facilities Ownership Interest of each Component shall be determined as follows:2

COP  =

AMBNUac

* 

AMBNUc

 AMBUac

 AMBUc

WHERE:

		
	COP

=

	Lessor’s New Common Facilities Ownership Interest in such Component (expressed as a %);

	AMBNUac

=

	the aggregate amount of the Measurement Basis of the Elm Road Facility (assuming all units are commissioned) that use or will use such Component;

	AMBUac

=

	the aggregate amount of the Measurement Basis of the Elm Road Facility and the Existing Units (assuming all units are commissioned) that use or will use such Component;

	AMBNUc

=

	the aggregate amount of the Measurement Basis of Unit 2, Unit 1 (if commissioned), and the Future Unit (if commissioned) that use such Component which is attributable to Lessor and its Affiliates who are owners of such units; and

	AMBUc

=

	the aggregate amount of the Measurement Basis of Unit 2, Unit 1 (if commissioned) and the Future Unit (if commissioned) that use such Component.

For purposes of this Schedule 5.4, the “Measurement Basis” means the design capacity, electrical output, tonnage or other measurement of the facilities located on the Land (the “Elm Road Facility”) that are appropriate for use in allocating the New Common Facilities Ownership Interest of a Component as set forth in Exhibit A.

COMMON FACILITIES ADJUSTMENT EVENTS

The adjustments will be calculated as follows:

With respect to a New Common Facilities Adjustment Event pursuant to Section 5.4, Lessor and Lessee will agree, with the PSCW’s approval, to a reasonable adjustment in the Basic Rent - New Common Facilities Component formula or the Renewal Rent - New Common Facilities Component formula, as applicable, to recognize the portion of Lessor’s New Common Facilities Ownership Interest which is released from the Leased Facility pursuant to Section 5.4 of the Facility Lease and purchased, leased or otherwise used by the Future Unit.  Such adjustment may include an adjustment among the Owners of the New Common Facilities consistent with this Schedule 5.4.                                    

SCHEDULE 11.3

TO THE FACILITY LEASE

INSURANCE AND EVENT OF LOSS PROVISIONS

ARTICLE 1

GENERAL PROVISIONS

1.1

General Insurance Requirements for Lessor.  Without limiting any other obligations or liabilities of Lessor under the Lease Documents, Lessor shall at all times until the Commercial Operation Date carry and maintain or cause to be carried and maintained insurance with the minimum coverages set forth in this Schedule 11.3.  Lessor may satisfy this obligation by contracting with other parties to maintain such insurance.  Lessor shall have no obligation or liability for premiums, commissions, assessments or calls in connection with any insurance policy required to be carried or maintained by Lessee under the Lease Documents.

1.2

General Insurance Requirements for Lessee.  Without limiting any other obligations or liabilities of Lessee under the Lease Documents, Lessee shall at all times during the Lease Term carry and maintain or cause to be carried and maintained insurance with the minimum coverages set forth in this Schedule 11.3 and with such terms and conditions (including the amount, scope of coverage, deductibles, and self-insured retentions) as shall be acceptable to Lessor in all respects.  Lessee may satisfy this obligation by contracting with other parties to maintain such insurance.  Lessee shall have no obligation or liability for premiums, commissions, assessments or calls in connection with any insurance policy required to be carried or maintained by Lessor under the Lease Documents.

1.3

Additional General Insurance Requirements Applicable to the Parties.  The following requirements shall apply to all insurance to be carried or maintained by the Parties pursuant to this Schedule 11.3:

(a)

All such insurance shall be with insurance companies which are rated “A-, VII” or better by A. M. Best’s Key Rating Guide, or other insurance companies of recognized responsibility, or equivalent reasonably satisfactory to the other Party;

(b)

All such property and third-party related insurance policies shall name Lessor as loss payee and the Lenders, if any, and Lessee as additional insureds, as applicable, depending on their respective interests in the Facility, as described in this Schedule 11.3 (the “Additional Insureds”);

(c)

The interest of the Additional Insureds in the Facility shall not be invalidated by any action or inaction of Lessee, Lessor or any other Person, as applicable;

(d)

(i) All such insurance policies shall provide for the waiver of all rights of subrogation against Lessor, Lessee, the Lenders, if any, the Additional Insureds and their respective officers, employees, agents, successors and assigns, as applicable, and shall provide for waiver of any right of setoff and counterclaim and any other right to deduction whether by attachment or otherwise, and (ii) Lessor and Lessee hereby expressly waive all rights of subrogation against one another;

(e)

All such insurance policies shall be primary without right of contribution of any other insurance carried by or on behalf of any of the Additional Insureds with respect to Lessor’s or Lessee’s interest in the Facility, and each such policy insuring against liability to third parties shall contain a severability of interests or a cross-liability provision;

(f)

To the extent available on commercially reasonable terms, all such insurance policies shall provide that if canceled, not renewed, terminated or expiring, or if the coverage is reduced or there is any material change in the coverage, such cancellation, non-renewal, termination, expiration, reduction or material change in coverage shall not be effective as to any of the Additional Insureds for 60 days, except for nonpayment of premiums, in which case it shall not be effective for 10 days after receipt of a written notice sent by registered mail from such insurer regarding such cancellation, non-renewal, termination, expiration, or reduction or material change in coverage with respect to each Additional Insured; and

(g)

To the extent available on commercially reasonable terms, any such insurance policy that is written to cover more than one insured shall provide that all terms, conditions, insuring agreements and endorsements, with the exception of limitations of liability (which shall be applicable to all Additional Insureds as a group) and liability for premiums, shall operate in the same manner as if there was a separate policy covering such insured.

1.4

No Duty to Verify.  Notwithstanding any provision to the contrary contained in any Lease Document, neither Party shall have a duty or obligation to verify the existence or adequacy of the insurance coverage maintained by the other Party, nor shall either Party be responsible for any representations or warranties made by or on behalf of the other Party to any insurance company.

1.5

Adjustment of Losses.  The loss, if any, following any claim under any insurance policy required to be carried or maintained by the Parties under this Schedule 11.3 shall be adjusted with the insurance companies or otherwise collected by Lessee or Lessor, as the case may be.  In addition, each of the Parties shall take all other steps necessary or requested by the other Party to collect from insurers any insurance proceeds with respect to an Event of Loss or an Event of Total Loss covered by any of the insurance policies required under this Schedule 11.3;

1.6

Evidence of Insurance.  Upon execution of the Facility Lease, and 15 days prior to the Commercial Operation Date, as applicable, and on an annual basis at each policy anniversary, Lessor or Lessee, as the case may be, shall furnish to each Additional Insured a certification of all required insurance policies in form reasonably satisfactory to the Additional Insureds.  Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practicable for such insurer to execute the certificate itself.  Such certification shall identify the insureds, the type of insurance, the insurance limits, the risks covered thereby and the policy term and shall specifically state that any special provisions enumerated for such insurance herein are provided by such insurance policy.  Lessor or Lessee, as the case may be, shall certify that the premiums on all such policies have been paid in full for the current year or will be paid when due.  Upon request, Lessor or Lessee, as the case may be, will promptly furnish to each Additional Insured copies of all insurance policies, binders and cover notes or other evidence of such insurance relating to the Facility.

1.7

Reports.  No later than 15 days prior to the expiration date of any insurance policy required to be carried or maintained by the Parties pursuant to Schedule 11.3, Lessor or Lessee, as the case may be, shall furnish to each Additional Insured:  (a) a certificate of insurance with respect to the renewal of each policy, evidencing payment of premium therefor or accompanied by other proof of payment reasonably satisfactory to the other Party; or (b) in lieu thereof, an Officer’s Certificate reasonably satisfactory to the other Party describing the status of renewal of such insurance, and as soon as they are available, the certificates described in clause (a) above.

1.8

Additional Insurance.  At any time, an Additional Insured may, at its own expense and for its own account, carry insurance with respect to its interest in the Leased Facility; provided that the Additional Insured’s insurance does not interfere with Lessor’s or Lessee’s ability to obtain insurance with respect hereto.  Any insurance payments received from insurance maintained by an Additional Insured pursuant to the previous sentence shall be retained by such Additional Insured without reducing or otherwise affecting Lessor’s or Lessee’s obligations under this Schedule 11.3.

1.9

Event of Loss; Event of Total Loss.  Lessee and Lessor shall cooperate and consult with each other in all matters pertaining to the settlement or adjustment of any and all claims and demands for damages on account of any Event of Loss or Event of Total Loss or the settlement, compromise or arbitration of any claim with respect to an Event of Loss or Event of Total Loss.  Neither Lessee nor Lessor shall settle, or consent to the settlement of, any proceeding arising out of any Event of Loss or Event of Total Loss, without the prior written consent of the other.

1.10

Application of Loss Proceeds.

(a)

All Loss Proceeds in respect of Events of Loss or Events of Total Loss received by or on behalf of the Parties with respect to the events occurring prior to the Commercial Operation Date shall be paid as the Lessor shall direct in writing for application toward the replacement, restoration or repair of the Facility by Lessor, or otherwise in accordance with the terms and conditions of the Facility Lease and the other Lease Documents.

(b)

All Loss Proceeds in respect of Events of Loss received by or on behalf of the Parties during the Lease Term, shall, provided no Lessee Event of Default has occurred and is continuing, be paid to the account of Lessee as Lessee shall from time to time direct in writing for application toward the replacement, restoration or repair of the Leased Facility by Lessee or otherwise in accordance with the terms and conditions of the Facility Lease and the other Lease Documents.

(c)

All Loss Proceeds in respect of Events of Total Loss or, if a Lessee Event of Default has occurred and is outstanding, Events of Loss received by or on behalf of the Parties during the Lease Term, shall be paid to the account of Lessor as Lessor shall from time to time direct in writing in accordance with the terms and conditions of the Facility Lease and the other Lease Documents.

1.11

Lender Requirements.  Notwithstanding any provision to the contrary contained in the Facility Lease or any other Lease Document, all of the insurance requirements (including application of Loss Proceeds) set forth in Section 2.4, Article 11, this Schedule 11.3 and any other insurance requirements (including application of Loss Proceeds) set forth in the Lease Documents shall remain subject, in all respects, to the requirements of the Lenders, if any.

ARTICLE 2

INSURANCE UNTIL THE COMMERCIAL OPERATION DATE

2.1

Coverage.  Lessor shall carry or cause to be carried (including through its contractors or subcontractors), and shall maintain or cause to be maintained (including through its contractors or subcontractors) at all times until the Commercial Operation Date the following insurance coverage:

(a)

Builder’s Risk.  All-risk builder’s risk insurance, including coverage for physical loss or damage (including removal of wreckage/debris) to the Facility (including all property associated with the construction of the Facility, including property in transit, on the job site, or at off-site storage locations) covering fabrication, building, commissioning, testing and start-up activities, and marine cargo written on a full replacement cost basis and in an amount equal to the full replacement value of the Facility;

(b)

Commercial General Liability/Umbrella.  Commercial general liability insurance or its equivalent and, if necessary, commercial umbrella or excess insurance with a total limit of not less than $10,000,000 per occurrence.  Such coverage shall include permits/operations, broad form contractual, independent contractors, products/completed operations, broad form property damage, advertising injury and personal injury;

(c)

Workers’ Compensation and Employer’s Liability.

(i)

Workers’ Compensation and Employers Liability insurance in compliance with the applicable Laws of each relevant State; provided, the United States Longshore and Harborworkers’ Compensation Act Coverage endorsement shall be included where construction will include activities on or in close proximity to navigable waterways;

(ii)

Employers’ liability insurance coverage limits of not less than $1,000,000 each accident for bodily injury by accident or $1,000,000 each employee for bodily injury by disease;

(d)

Automobile Liability.  Automobile liability insurance or its equivalent, and, if necessary, commercial umbrella or excess insurance for any auto including owned (if any), or non-owned and hired vehicles with combined single limits for bodily injury/property damage not less than $5,000,000 per occurrence; and

(e)

Other.  Such other insurance as it is required to maintain pursuant to the provisions of any other Lease Document.

2.2

Independent Contractor Coverages.  When Lessor obtains the services of an independent contractor for any services associated with construction of the Facility, Lessor shall cause such independent contractor to obtain and maintain similar coverage as appropriate for the scope of contract work to be performed.

ARTICLE 3

LEASE TERM INSURANCE

3.1

Coverage.  Lessee shall carry or cause to be carried no later than 30 days prior the Commercial Operation Date and shall maintain or cause to be maintained at all times during the Lease Term the following insurance coverage:

(a)

Property and Boiler and Machinery.  All-risk property and boiler and machinery insurance, covering physical loss or damage to the Facility including the coverage described below:

(i)

Commercial property insurance which at a minimum covers the perils insured under an Insurance Services Office special causes of loss form (or its equivalent) commonly referred to as “all-risk” including fire and extended coverage and collapse;

(ii)

Comprehensive boiler and machinery coverage including electrical malfunction, mechanical breakdown and boiler explosion;

(iii)

Extra and expediting expenses coverage;

(iv)

Flood and earthquake coverage to the extent available on commercially reasonable terms;

(v)

Coverage shall be written on a full replacement cost basis and in an amount equal to a minimum of two times the probable maximum loss as determined by an agreed upon expert;

(vi)

The insurance shall contain a valid agreed amount endorsement or equivalent eliminating any co-insurance penalty; and

(vii)

The policy shall be subject to a reasonable deductible which shall be the absolute responsibility of Lessee;

(b)

Commercial General Liability.  Commercial general liability insurance or its equivalent and, if necessary, commercial umbrella or excess insurance with a total limit of not less than $10,000,000 per occurrence.  Such coverage shall include premises/operations, broad form contractual, independent contractors, products/completed operations, broad form property damage, advertising injury and personal injury;

(c)

Workers’ Compensation and Employers’ Liability.

(i)

Workers’ Compensation and Employers’ Liability insurance in compliance with the applicable Laws of each relevant State; provided that the United States Longshore and Harborworkers’ Compensation Act Coverage endorsement shall be included where Lessee will conduct activities on or in close proximity to navigate waterways; and

(ii)

Employers’ liability insurance coverage limits of not less than $1,000,000 each accident for bodily injury by accident or $1,000,000 each employee for bodily injury by disease;

(d)

Automobile Liability.  Automobile liability insurance or its equivalent, and, if necessary, commercial umbrella or excess insurance for any auto including owned (if any), or non-owned and hired vehicles with combined single limits for bodily injury/property damage not less than $5,000,000 per occurrence; and

(e)

Other.  Lessee shall maintain or cause to be maintained such other insurance as it is required to maintain pursuant to the provisions of any other Lease Document.

3.2

Independent Contractor Coverages.  When Lessee obtains the services of an independent contractor for any services associated with the Facility, Lessee shall cause such independent contractor to obtain and maintain in full force and effect:

(a)

Commercial general liability insurance coverage which includes premises/operations, products/completed operations, broad form property damage, advertising injury and personal injury;

(b)

Workers’ Compensation insurance in compliance with the applicable Laws of each relevant State and employers’ liability insurance coverage; and

(c)

Automobile liability insurance for any auto including all owned (if any), non-owned and hired vehicles; 

all with the limits appropriate for the scope of contract work to be performed.

SCHEDULE 12.1

TO THE FACILITY LEASE

SELECTION OF INDEPENDENT APPRAISER AND INDEPENDENT ENGINEER

Whenever an Independent Appraiser or Independent Engineer is to be selected pursuant to the terms of the Facility Lease, the following provisions shall apply:

(a)

Lessor shall, within 30 days of the event giving rise to the requirement for an Independent Appraiser or Independent Engineer, submit to the Lessee, with a copy to the PSCW, a written list of proposed appraisers and engineers, as the case may be.

(b)

Lessee shall select one of the individuals or firms from Lessor's list and give written notice thereof to the Lessor and the PSCW.  The PSCW shall either approve the individual or firm selected by Lessee or choose a different individual or firm from Lessor’s list (the “Independent Appraiser” or “Independent Engineer” as applicable) shall then perform the requested services as required pursuant to the Facility Lease.

The Parties agree that if an Independent Appraiser or Independent Engineer is to be selected pursuant to the Facility Lease, and an “Independent Appraiser” or “Independent Engineer” is to be selected substantially contemporaneously under the ERGS Facility Lease, they may, in lieu of appointing their own Independent Appraiser or Independent Engineer, utilize the services of those Persons chosen under the ERGS Facility Lease.  In such event, any valuation or analysis of the Leased Facility shall be based upon the undivided ownership interest of the Lessor in the Facility. 

SCHEDULE 12.2

TO THE FACILITY LEASE

RENEWAL RENT

Renewal Rent for each calendar month during the first Renewal Term shall be calculated as follows:

RR      =  25% *  (RRLF% * (1 + RRLF%)bt* AALF * MARBA)

(1 + RRLF%)bt - 1 

   

      x

 + 25%*  å   RRIBT%i * (1 + RRIBT%i)rmbt* IBTi * MARBA 

     

   i =1               (1 + RRIBT%i)rmbt- 1

b

+  25% * å  RRINC%a* (1 + RRINC%a)rmbt * INCa* MARBA

 a =1                (1 + RRINC%a)rmbt - 1

 h

+  25%  å  RRRTNC%g* (1 + RRINC%g)f * RTNCg* MARBA

        g =1                (1 + RRINCg)f - 1

   

        d

±  25% * å  RRAE%c* (1 + RRAE%c)rm * AEc* MARBA

   

    c =1                (1 + RRAE%c)rm - 1

     y

+ å  RRRTPI%j * (1 + RRRTPI%j)f* RTPIj * MARBA

     j =1                (1 + RRRTPI%j)f - 1 

     w

+ å  RRIFRT%k * (1 + RRIFRT%k)rmfrt* IFRTk * MARBA

   k =1              (1 + RRIFRT%k)rmfrt– 1

      z

+ å  RRFRTPI%l * (1 + RRFRTPI%l)s* FRTPIl * MARBA 

     l =1                (1 + RRFRTPI%l)s- 1 

+ RRIUC * IUC

+ MMF 

+ CIMC

+ PPA  

- ATC

RENEWAL RENT

Renewal Rent for each calendar month during the second Renewal Term shall be calculated as follows: 

RR      = 15% *  (RRLF% * (1 + RRLF%)bt* AALF * MARBA) 

 (1 + RRLF%)bt- 1 

                        x

+ 15% *  å  RRIBT%i * (1 + RRIBT%i)rmbt* IBTi * MARBA 

               i =1

(1 + RRIBT%i)rmbt - 1

b

+  15% * å  RRINC%a* (1 + RRINC%a)rmbt * INCa* MARBA

 a =1                (1 + RRINC%a)rmbt - 1

 h

+  15%  å  RRRTNC%g* (1 + RRINC%g)f * RTNCg* MARBA

        g =1                (1 + RRINCg)f - 1

   

        d

±  15% *  å  RRAE%c* (1 + RRAE%c)rm * AEc* MARBA

   

    c =1                (1 + RRAE%c)rm - 1

    

      y

+ 25% *  å  RRRTPI%j * (1 + RRRTPI%j)f * RTPIj * MARBA 

                 j =1

(1 + RRRTPI%j)f - 1 

      

 w

+ 25% * å  RRIFRT%k * (1 + RRIFRT%k)rmfrt* IFRTk * MARBA

              k =1

(1 + RRIFRT%k)rmfrt - 1

     z

+ å  RRFRTPI%l * (1 + RRFRTPI%l)s* FRTPIl * MARBA 

     l =1

(1 + RRFRTPI%l)s- 1 

     r

+ å  RRISRT%m * (1 + RRISRT%m)rmsrt * ISRTm * MARBA 

   m =1

(1 + RRISRT%m)rmsrt– 1

   

u

+ å  RRSRTPI%n * (1+RRSRTPI%n)t* SRTPIn * MARBA

   n=1

(1+RRSRTPI%n)t- 1

 + RRIUC * IUC

 + MMF

+ CIMC

+ PPA

- ATC

RENEWAL RENT

Renewal Rent for each calendar month during the third Renewal Term shall be calculated as follows: 

RR      = 15%*   (RRLF% * (1 + RRLF%)bt* AALF * MARBA) 

 (1 + RRLF%)bt - 1 

     

      x

+ 15% *  å  RRIBT%i * (1 + RRIBT%i)rmbt * IBTi * MARBA 

     

   i =1                (1 + RRIBT%i)rmbt- 1

    

     y

+ 15% * å  RRRTPI%j * (1 + RRRTPI%j)f * RTPIj * MARBA

    

   j =1                 (1 + RRRTPI%j)f - 1 

+  15% * å  RRINC%a* (1 + RRINC%a)rmbt * INCa* MARBA

 a =1                (1 + RRINC%a)rmbt – 1

 h

+  15%  å  RRRTNC%g* (1 + RRINC%g)f * RTNCg* MARBA

        g =1                (1 + RRINCg)f - 1

d

±  15% * å  RRAE%c* (1 + RRAE%c)rm * AEc* MARBA

   

   c =1                (1 + RRAE%c)rm - 1

    

    w

+ 15% * å  RRIFRT%k * (1 + RRIFRT%k)rmfrt * IFRTk * MARBA 

  

  k =1               (1 + RRIFRT%k)rmfrt- 1

    

     z

+ 25% * å  RRFRTPI%l * (1 + RRFRTPI%l)s* FRTPIl * MARBA

    

   l =1                 (1 + RRFRTPI%l)s- 1 

   

    r

+ 25% * å  RRISRT%m * (1 + RRISRT%m)rmsrt* ISRTm * MARBA

   

 m =1               (1 + RRISRT%m)rmsrt – 1

u

+ å  RRSRTPI%n * (1+RRSRTPI%n)t *SRTPIn * MARBA

    n =1                       (1+RRSRTPI%n)t - 1

     v

+ å  RRITRT%o * (1 + RRITRT%o)rmtrt * ITRTo * MARBA 

   o =1              (1 + RRITRT%o)rmtrt - 1

 + RRIUC * IUC

 + MMF

+ CIMC

+ PPA

-  ATC

RENEWAL RENT

Terms defined in Schedule 5.1 to the Facility Lease shall have the same meanings as set forth therein.  In addition:

RR  =

Renewal Rent for such month (in $);

IFRTk  =

Lessor-financed Improvements (other than a Late Term Improvements) deemed complete and in service during the first Renewal Term, which equals the aggregate project costs and expenses incurred by or on behalf of Lessor to construct such Improvement (in $);

RRIFRT%k =

Rate of Return on IFRTk (monthly), which equals the product of (a) 1/12 and (b) the sum of (i) the product of (A) 0.55 and (B) the Pre-Tax Return on Equity and (ii) the product of (A) 0.45 and (B) the Applicable Cost of Debt with respect to the Improvement (in %);

rmfrt =

the lesser of (a) the number of months in the useful life of an Improvement (or property unit of which it is a part), or (b) the remaining number of months in the first Renewal Term after the month in which the respective Improvement (other than a Late Term Improvement) is placed in service;

w =

the total number of Improvements (other than Late Term Improvements) made to the Leased Facility during the first Renewal Term that are deemed complete and in service during such Renewal Term;

k =

an Improvement to the Leased Facility made in the first Renewal Term that is deemed complete and in service during such month;

PPA =

Prior Period Adjustments for such month, which equals any adjustments (other than ATC), to RR in such month, including Pre-Tax Return on Equity retroactive tax rate changes (in $);

FRTPIl =

Lessor-financed Late Term Improvements which is constructed and deemed complete and in-service during the first Renewal Term which equals the aggregate project costs and expenses incurred by or on behalf of Lessor up to and including such month to construct such Late Term Improvement (in $) ;

RRFRTPI%l =

Rate of Return on FRTPIl (monthly), if any, which equals the product of (a) 1/12 and (b) the sum of (i) the product of (A) 0.55 and (B) the Pre-Tax Return on Equity and (ii) the product of (A) 0.45 and (B) the Applicable Cost of Debt with respect to the Improvement (in %);

s =

the sum of the remaining number of months in the first Renewal Term after the month in which the respective Improvement is deemed complete and in-service, plus the total number of months in the second Renewal Term;

z =

the total number of Lessor-financed Late Term Improvements deemed complete and in-service during the first Renewal Term;

l =

Lessor-financed Late Term Improvements, if any, deemed complete and in-service during the first Renewal Term;

ISRTm =

Lessor-financed Improvement (other than a Late Term Improvement) deemed complete and in-service during the second Renewal Term, which equals the aggregate project costs and expenses incurred by or on behalf of Lessor to construct such Improvement (in $);

RRISRT%m =

Rate of Return on ISRTm (monthly), if any, which equals the product of (a) 1/12 and (b) the sum of (i) an amount equal to the product of (A) 0.55 and (B) the Pre-Tax Return on Equity and (ii) an amount equal to the product of (A) 0.45 and (B) the Applicable Cost of Debt (in %);

rmsrt =

the lesser of (a) the number of months in the useful life of the respective Improvement (or property unit of which it is a part) and (b) the number of months remaining in the second Renewal Term after the month in which the respective Improvement is deemed complete and in-service;

r =

the total number of Lessor-financed Improvements (other than a Late Term Improvement) deemed complete and in-service during the second Renewal Term;

m =

Lessor-financed Improvements (other than Late Term Improvements), if any, deemed complete and in-service during the second Renewal Term;

SRTPIn =

Lessor-financed Late Term Improvement which is constructed and deemed complete and in-service during the second Renewal Term which equals the aggregate project costs and expenses incurred by or on behalf of Lessor up to and including such month to construct such Late Term Improvement (in $);

RRSRTPI%n =

Rate of Return on SRTPIn (monthly), if any, which equals the product of (a) 1/12 and (b) the sum of (i) an amount equal to the product of (A) 0.55 and (B) the Pre-Tax Return on Equity and (ii) an amount equal to the product of (A) 0.45 and (B) the Applicable Cost of Debt with respect to the Improvement (in %);

t =

the sum of the remaining number of months in the second Renewal Term after the month in which the respective Late Term Improvement is deemed complete and in-service, plus the total number of months in the third Renewal Term;

u =

the total number of Lessor-financed Late Term Improvements deemed complete and in-service during the second Renewal Term;

n =

Lessor-financed Late Term Improvements, if any, deemed complete and in-service during the second Renewal Term;

ITRTo =

Lessor-financed Improvement deemed complete and in-service during the third Renewal Term, which equals the aggregate project costs and expenses incurred by or on behalf of Lessor to construct such Improvement (in $);

RRITRT%o =

Rate of Return on ITRTo (monthly), if any, which equals the product of (a) 1/12 and (b) the sum of (i) the product of (A) 0.55 and (B) the Pre-Tax Return on Equity and (ii) the product of (A) 0.45 and (B) the Applicable Cost of Debt with respect to the Improvement (in %);

rmtrt =

the lesser of (a) the number of months in the useful life of the respective Improvement (or property unit of which it is a part) and (b) the number of months remaining in the third Renewal Term;

v =

the total number of Lessor-financed Improvements deemed complete and in-service during the third Renewal Term;

o =

Lessor-financed Improvements, if any, deemed complete and in-service during the third Renewal Term;

ANNEX A TO SCHEDULE 12.2

 TO THE FACILITY LEASE

SAMPLE RENEWAL RENT CALCULATION: FIRST RENEWAL TERM (YEARS 31-35) 

Example: first Renewal Term Rent in Year 34 for lease of Elm Road Generating Station Unit 2.  Assumes additional Improvements and changing debt costs.

Monthly Renewal Rent at Start of First Renewal Term

			
	AALF, AALFNC

	 $1,467,721 

	Base Term Rent Before Improvements and Other Adjustments

(Unit and New Common Facilities Rents Together)

	IBT

	 $40,641 

	Monthly Rent Adder for Improvements Deemed Complete and In-Service During the Base Term (Unit 2 Only)

	INC

	$37,603

	Monthly Rent Adder for Improvements in New Common Facilities During the Base Term

	AE

	($49,023)

	Rent Reductions for Common Facilities Adjustment Events

	 	 $1,496,942 

	Base Term Rent, including Improvements Deemed Complete and In-Service During Base Term

	 	25.0%

	Adjustment %

	 	 $374,236

	First Renewal Term Renewal Rent before Late Term Improvements

	RTPI

	 $454,389 

	Base Term Late Term Improvements

First Renewal Term Monthly Renewal Rent Payment Before Improvements and Other Adjustments: $828,625

			
	 	55%

	Equity Share of the Rate of Return 

	 	12.7%

	After Tax Cost of Equity

	 	1.67043

	Fixed Tax Rate Gross-Up Factor

	 	45%

	Debt Share of the Rate of Return

	 	6.0%

	Applicable Cost of Debt for Approved Amount

	RRLF

	1.197%

	Monthly Rate of Return at the Execution Date

	 

	60

	Number of months in first Renewal Term (5 years * 12 months) per Appraisal

	MARBA

	99.863%

	Monthly Average Rate Based Adjustment

Improvements Deemed Complete and In-Service

			
	IFRT

	 $6,000,000 

	Improvements Deemed Complete and In-Service at end of Year 3 in first Renewal Term

	rmfrt

	24

	Number of months remaining in first Renewal Term (2 years * 12 months)

	RRIFRT%

	1.216%

	Monthly Rate of Return on Improvements (debt cost of 6.5%)

Monthly Payment Adder for Improvements Deemed Complete and In-Service: $289,364 

Late Term Improvements 

			
	FRTPI

	 $29,000,000 

	Late Term Improvements Deemed Complete and In-Service at end of Year 4, est. remaining useful life = 21 years (total=55 years)

	S

	120

	Number of months remaining in first Renewal Term (1 year * 12 months) plus second Renewal Term (9 years * 12 months)

	RRFRTPI%

	1.254%

	Monthly Rate of Return on Triggering Plant Improvements (debt cost of 7.5%)

Monthly Payment Adder for Late Term Improvements: $ 467,993

Improvements Under Construction

			
	IUC

	 $800,000 

	Improvements Under Construction

	RRIUC%

	1.197%

	Monthly Rate of Return on Improvements Under Construction (debt cost of 6.0%)

Monthly Payment Adder for Improvements Under Construction: $9,579

			
	 	 	 

Monthly Renewal Rent in Year 4 of the first Renewal Term Before Other Adjustments: 

$1,595,561

Other Adjustments

			
	MMF

	 $4,000 

	Monthly Management Fee 

	CIMC

	$1,667

	Community Impact Mitigation Costs ($240,000 * .0833/12 months)

	PPA

	 $0

	Prior Period Adjustments

	DRC

	 $0 

	Demolition & Removal Costs (recovered only in Base Term)

	ATC

	 $0  

	Allowable Tax Credits

Total Monthly Renewal Rent in Year 4 of the first Renewal Term: $1,601,228

ANNEX B TO SCHEDULE 12.2

 TO THE FACILITY LEASE

SAMPLE RENEWAL RENT CALCULATION: SECOND RENEWAL TERM (YEARS 36-44)

Example: Second Renewal Term Rent in Year 43 for lease of Unit 2.  Assumes additional Improvements and changing debt costs.

Renewal Rent at Start of Second Renewal Term

				
	AALF, AALFNC

	 $1,467,721 

	 	Base Term Rent Before Improvements and Other Adjustments

(Unit and New Common Facilities Rents Together)

	IBT

	 $40,641 

	 	Monthly Rent Adder for Improvements Deemed Complete and In-Service During the Base Term (Unit 2 Only)

	INC

	$37,603

	 	Monthly Rent Adder for Improvements in New Common Facilities

During the Base Term

	AE

	($49,023)

	 	Rent Reductions for Common Facilities Adjustment Events

	 	 $1,496,942 

	 	Base Term Rent, including Improvements Deemed Complete and In-Service During Base Term

	 	15.0%

	 	Adjustment %

	 	 $224,541 

	(a)

	Second Renewal Term Renewal Rent before Improvements

	RTPI

	 $454,389 

	 	Base Term Late Term Improvements

	IFRT

	 $289,364 

	 	Monthly Adder for Improvements Deemed Complete and In-Service During first Renewal Term

	 	$743,753

	 	Base Term Late Term Improvements and Monthly Adder for Improvements Deemed Complete and In-Service During the first Renewal Term

	 	25.0%

	 	Adjustment %

	 	 $185,938 

	(b)

	Second Renewal Term Renewal Rent before first Late Term Improvements

	FRTPI

	 $467,993 

	(c)

	First Renewal Term Late Term Improvements

Second Renewal Term Monthly Renewal Rent Payment Before Improvements and Other Adjustments:  

$878,472 (a+b+c)

				
	 	 	 	 
	 	55%

	 	Equity Share of the Rate of Return 

	 	12.7%

	 	After Tax Cost of Equity

	 	1.67043

	 	Fixed Tax Rate Gross-Up Factor

	 	45%

	 	Debt Share of the Rate of Return

	 	6.0%

	 	Applicable Cost of Debt for Approved Amount

	RRLF

	1.197%

	 	Monthly Rate of Return at the Execution Date

	 

	108

	 	Number of months in second Renewal Term (9 years * 12 months) per Appraisal

	MARBA

	99.863%

	 	Monthly Average Rate Based Adjustment

Improvements Deemed Complete and In-Service

			
	ISRT

	 $9,000,000 

	Improvements Deemed Complete and In-Service at end of Year 7 in Second Renewal Term

	rmsrt

	24

	Number of months remaining in second Renewal Term (2 years * 12 months)

	RRISRT%

	1.160%

	Monthly Rate of Return on Improvements (debt cost of 5.0%)

Monthly Payment Adder for Improvements Deemed Complete and In-Service: $431,176

Late Term Improvements

           none

Improvements Under Construction

			
	IUC

	 $4,000,000 

	Improvements Under Construction

	RRIUC%

	1.179%

	Monthly Rate of Return on Improvements Under Construction  (debt cost of 5.5%)

Monthly Payment Adder for Improvements Under Construction: $47,143

				
	 	 	 	 

Monthly Renewal Rent in Year 8 of the Second Renewal Term Before Other Adjustments:   $1,356,791 

Other Adjustments

			
	MMF

	$4,000 

	Monthly Management Fee 

	CIMC

	$1,667

	Community Impact Mitigation Costs ($240,000 * .0833/12 months)

	PPA

	 $0

	Prior Period Adjustments

	DRC

	 $0

	Demolition & Removal Costs (recovered only in Base term)

	ATC

	 $0

	Allowable Tax Credits

	 	 	 

Total Monthly Renewal Rent in Year 8 of the Second Renewal Term: $1,362,458

ANNEX C TO SCHEDULE 12.2

 TO THE FACILITY LEASE

SAMPLE RENEWAL RENT CALCULATION: THIRD RENEWAL TERM (YEARS 45-48)

Example: Third Renewal Term Rent in the final year of the lease for Elm Road Generating Station Unit 2.  Assumes additional Improvements and changing debt costs.

Renewal Rent at Start of Third Renewal Term

				
	AALF, AALFNC

	 $1,467,721 

	 	Base Term Rent Before Improvements and Other Adjustments

(Unit and New Common Facilities Rents Together)

	IBT

	 $40,641 

	 	Monthly Rent Adder for Improvements Deemed Complete and In-Service During the Base Term (Unit 2 Only)

	INC

	$37,603

	 	Monthly Rent Adder for Improvements in New Common Facilities

During the Base Term

	AE

	($49,023)

	 	Rent Reductions for Common Facilities Adjustment Events

	RTPI

	 $454,389 

	 	Base Term Late Term Improvements

	IFRT

	 $289,364 

	 	Monthly Adder for Improvements Deemed Complete and In-Service During first Renewal Term

	 	 $2,240,695 

	 	Base Term Late Term Improvements plus Investments Deemed Complete and In-Service During first Renewal Term

	 	15.0%

	 	Adjustment %

	 	 $336,104 

	(a)

	Third Renewal Term Renewal Rent before Improvements (other than those during the Base Term)

	FRTPI

	 $467,993 

	 	first Renewal Term Late Term Improvements

	ISRT

	 $431,176 

	 	Monthly Adder for Improvements Deemed Complete and In-Service during second Renewal Term

	 	$899,168

	 	first Renewal Term Late Term Improvements plus Improvements Deemed Complete and In-Service during second Renewal Term

	 	25.0%

	 	Adjustment %

	 	 $224,792

	(b)

	Third Renewal Term Renewal Rent before second Renewal Term Late Term Improvements

	SRTPI

	$0

	(c)

	Second Renewal Term Late Term Improvements

Third Renewal Term Renewal Rent Payment Before Improvements and Other Adjustments: 

$560,896     (a+b+c)

				
	 	55%

	 	Equity Share of the Rate of Return 

	 	12.7%

	 	After Tax Cost of Equity

	 	1.67043

	 	Fixed Tax Rate Gross-Up Factor

	 	45%

	 	Debt Share of the Rate of Return

	 	6.0%

	 	Applicable Cost of Debt for Approved Amount

	RRLF

	1.197%

	 	Monthly Rate of Return at Execution Date

	 

	48

	 	Number of months in third Renewal Term (4 years * 12 months) per Appraisal

	MARBA

	99.863%

	 	Monthly Average Rate Based Adjustment

Improvements Deemed Complete and In-Service

			
	ITRT

	 $6,500,000 

	Improvements Deemed Complete and In-Service at end of Year 2 in third Renewal Term

	rmtrt

	24

	Number of months remaining in third Renewal Term (2 years * 12 mos.)

	RRITRT%

	1.179%

	Monthly Rate of Return on Improvements (debt cost of 5.5%)

Monthly Payment Adder for Improvements Deemed Complete and In-Service: $312,095  

Late Term Improvements

none

Improvements Under Construction

none

Monthly Payment in Year 3 of the Third Renewal Term Before Other Adjustments: $872,991

Other Adjustments

			
	MMF

	 $4,000 

	Monthly Management Fee  

	CIMC

	$1,667

	Community Impact Mitigation Costs ($240,000 * .0833/12 months)

	PPA

	 $0   

	Prior Period Adjustments

	DRC

	 $0   

	Demolition & Removal Costs (recovered only in Base Term)

	ATC

	 $0                

	Allowable Tax Credits

Total Monthly Payment in the Final Year of the Facility Lease: $878,658

SCHEDULE 17.2

TO THE FACILITY LEASE

TAX INDEMNITY

ARTICLE 1

DEFINITIONS

Capitalized words and phrases used in this Schedule 17.2 not otherwise defined in this Article I shall have the meaning set forth in Schedule 1 of the Facility Lease.

“ABA Standards” shall have the meaning set forth in Section 3.3.

“Adjustment Notice” shall have the meaning set forth in Section 6.1.

“After Tax Basis” shall mean on a basis such that any payment to be received or receivable by Lessor is supplemented by a further payment or payments (the “Gross-Up” as defined in Section 5.2(a) of this Schedule 17.2) to Lessor so that the sum of all such payments, after deducting all Taxes (taking into account any related current credits or current deductions) payable by Lessor in respect of the receipt or accrual of such amount under any law or Governmental Authority, is equal to the payment due to Lessor, provided, that for these purposes, Lessor shall be assumed to be taxable as a Subchapter C corporation for federal income tax purposes subject to tax at the highest marginal rate(s) applicable to such taxpayers with respect to the amounts in question.

“Applied Amount” shall have the meaning set forth in Section 6.4.

“Code” shall have the meaning set forth in Section 3.1(b).

“Final Determination” shall mean: (a) a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final after all allowable appeals by either party to the action have been exhausted or the time for filing such appeals has expired; (b) a closing agreement entered into in connection with an administrative or judicial proceeding and with the consent of Lessee or as permitted by Section 6.3; (c) the expiration of the time for instituting suit with respect to the claimed deficiency; or (d) the expiration of the time for instituting a claim for refund, or if such a claim was filed, the expiration of the time for instituting suit with respect thereto.

“Gross-up” shall have the meaning set forth in Section 5.2(a).

“Inclusion Event” shall have the meaning set forth in Section 3.3.

“Lessee Act” shall have the meaning set forth in Section 3.3.

“Lessee Person” shall have the meaning set forth in Section 3.2(c).

“Lessor” shall have the same meaning set forth in the Facility Lease, provided, however, that so long as Lessor is disregarded as an entity separate from its owner for the purposes of any Tax or by any Governmental Authority, then the term “Lessor” shall include any person treated as the owner of Lessor’s assets, liabilities, income, gains and losses for federal income tax purposes.

“Member” shall have the meaning set forth in Section 3.1(b).

“Reasonable Basis” shall have the meaning set forth in Section 3.3.

“Tax Assumptions” shall have the meaning set forth in Section 3.1.

“Tax Savings” shall have the meaning set forth in Section 5.3.

“Unit 2 Owners” shall mean Lessor and each other Person that acquires a tenancy in common interest in the Facility.

ARTICLE 2

GENERAL TAX INDEMNITY

2.1

Indemnity Obligation.  Except as otherwise provided herein, Lessee shall pay, and shall indemnify and hold harmless on an After-Tax Basis Lessor from and against, any and all Taxes, however imposed, whether levied or imposed upon Lessor, Lessee, or the Leased Facility or any part thereof, by any Governmental Authority relating to: 

(a)

the Leased Facility or any interest therein;

(b)

the acquisition, manufacture, purchase, ownership, delivery, nondelivery, redelivery, transport, location, lease, sublease, hire, assignment, alteration, improvement, possession, repossession, presence, use, replacement, substitution, operation, insurance, installation, modification, rebuilding, overhaul, condition, storage, maintenance, repair, acceptance, sale, return, abandonment, preparation, transfer of title, or other disposition of the Leased Facility or any part or any interest in any of the foregoing;

(c)

the execution, delivery, or performance of any of the Lease Documents or any future amendment, supplement, waiver, or consent thereto (requested or consented to by Lessee or in connection with a Lessee Event of Default), or any of the transactions contemplated thereby, or any proceeds or payments or amounts payable under any thereof; or

(d)

otherwise with respect to or in connection with the transactions contemplated by the Lease Documents.

2.2

Exclusions to Indemnification.  Notwithstanding the foregoing, Lessee shall not be obligated to pay or indemnify Lessor for any Taxes to the extent such Taxes are attributable to the following:

(a)

Taxes imposed on Lessor by a Governmental Authority, by withholding or otherwise based on, or measured by or with respect to net or gross income, net or gross receipts, minimum tax, capital, franchise, net worth, excess profits, value added, or conduct of business taxes, capital gains taxes, excess profits taxes, minimum and/or alternative minimum taxes, accumulated earnings taxes, personal holding company taxes, succession taxes and estate or other similar taxes, in each case however denominated, other than any such Taxes which are in the nature of sales, use, license, ad valorem, transfer, property or similar taxes, or value added taxes (except to the extent such value added taxes are imposed in direct and clear substitution for an income tax);

(b)

Taxes imposed with respect to any period following the later of (x) the expiration or earlier termination of the Facility Lease, or (y) the payment by Lessee of all amounts due and payable under the Lease Documents;

(c)

Taxes to the extent resulting from a breach by Lessor of any of its covenants, representations or warranties under the Lease Documents;

(d)

Taxes imposed as a result of Lessor’s transfer or other disposition of (i) all or a portion of its interest in the Lease Documents, the Leased Facility or any part thereof, or (ii) any interest in Lessor, other than, in each case, a transfer or disposition pursuant to an exercise of remedies pursuant to Article 15 of the Facility Lease during the continuation of a Lessee Event of Default, the termination of the Facility Lease upon Lessee’s exercise of its options pursuant to Article 12 of the Facility Lease, or a substitution, loss or modification of the Leased Facility;

(e)

Taxes to the extent resulting from the gross negligence or willful misconduct of Lessor (other than gross negligence imputed to Lessor solely by reason of its interest in the Leased Facility);

(f)

Taxes subject to indemnification by Lessee pursuant to Article 3 (or indemnifiable but for an exclusion therein);

(g)

Taxes resulting from the failure of Lessor to provide, at the request of Lessee, any certification, documentation, or other evidence required as a condition to the allowance of a reduction in such Tax, which, if properly complied with, would have resulted in an exemption from, or a reduced rate of such Tax but only if Lessor was eligible to comply with such requirement and Lessor has determined in good faith that compliance with such requirements would not have a materially adverse effect on Lessor or any of its Affiliates;

(h)

Taxes consisting of interest, penalties, or additions to tax imposed on Lessor as a result of a failure of Lessor to file any return, tax report or statement properly or timely, unless such failure is caused by Lessee’s failure to fulfill its obligations, if any, to provide such information required under Section 2.3 or Section 2.4;

(i)

the failure of Lessor to contest a claim in accordance with the contest provisions herein to the extent Lessee’s ability to contest a claim is adversely affected in any material respect;

(j)

Taxes arising as a result of the failure of Lessor (or transferee thereof) to be a “United States person” (as defined in § 7701(a)(30)) of the Code;

(k)

Taxes that result from, or arise out of, or are attributable to the imposition of any Taxes pursuant to ERISA or Section 4975 of the Code; 

(l)

Taxes that are attributable to the situs of organization or incorporation, place of management or control, a place of business, or a permanent establishment of Lessor, in each case, other than as a result of (i) the execution and delivery of the Lease Documents, (ii) the transactions contemplated by the Lease Documents; or (iii) the use, location or operation of the Facility (or any part thereof); or

(m)

Taxes to the extent liability for such Tax could have been reduced or provided through “prudent” action, as defined by Wisc. Public Serv. Corp. v. Public Serv. Comm., 156 Wis. 2d 611 (Ct. App 1990), and as may be interpreted from time to time.

2.3

Reports and Returns.  If any report or return is required to be made with respect to Taxes that are Lessee’s obligations under Section 2.1, Lessee shall, at its sole expense, in a timely and proper fashion, (x) to the extent required or permitted by law, make and file in its own name such return or report (except for any such report or return that any Lessor has notified Lessee that such Lessor intends to file), and (y) in the case of any such return or report required to be made in the name of any Lessor, inform Lessor of such fact and prepare such return or report for filing by Lessor in a manner reasonably acceptable to Lessor or, where such return or report is required to reflect items in addition to any obligations of Lessee under or arising out of the Taxes described in Section 2.1, provide Lessor with information sufficient to permit such return or report to be properly made with respect to any Taxes that are obligations of Lessee under Section 2.1 no later than 30 days prior to the filing date of such return or report.  Lessor shall provide to Lessee such information within Lessor’s possession or control as is reasonably necessary for Lessee to complete and file any such report or return properly, provided that Lessor shall not be required to provide Lessee with copies of its tax returns.

2.4

Receipts and Records.  Lessee shall use reasonable efforts to obtain official receipts indicating the payment of all Taxes that are subject to indemnification under Section 2.1 and that are paid by Lessee, and shall promptly on request send to Lessor each such receipt obtained by Lessee or other such evidence of payment as is reasonably acceptable to such Lessor and reasonably available to Lessee.  Within a reasonable time after Lessee receives from Lessor a written request for specified information or copies of specified records reasonably necessary to enable Lessor or another Unit 2 Owner to fulfill its Tax filing, Tax audit or other Tax obligations or to contest Taxes imposed upon it, Lessee shall provide such information or copies of such records to the requesting party (if, in the case of information or records requested by a Unit 2 Owner, Lessee has such information or records within its possession or control).

ARTICLE 3

INCOME TAX INDEMNITY

3.1

Tax Assumptions.  The transactions contemplated by the Lease Documents have been entered into on the basis of the following tax assumptions (the “Tax Assumptions”):

(a)

True Lease.  For purposes of federal income tax, the Facility Lease will be a “true lease” under which Lessor will be treated as the owner and lessor of the Leased Facility and Lessee will be treated as lessee thereof.

(b)

Corporate Status.  Lessor is not a separate tax-paying entity for federal income tax purposes.  Instead, Lessor is disregarded as an entity separate from its owner for federal income tax purposes.  As such, all of its income, gain, losses and deductions flow through to its sole corporate member.  Therefore, for the purposes of this Article 3, it is assumed that Lessor: (i) is a Subchapter C corporation under the Internal Revenue Code of 1986, as amended (the “Code”); (ii) is subject to tax at the highest marginal rate applicable to Subchapter C corporations in effect at the time an obligation arises under Section 3.3 or Section 4.1; (iii) recognizes income, gain, credits, losses and deductions at the same time and in the same manner as its sole Member; and (iv) is not a member of an affiliated group of corporations filing a consolidated federal or state income tax return.  The assumptions in this Section 3.1(b) shall apply for both federal and state income tax purposes.

(c)

Method of Accounting.  Lessor is a calendar-year taxpayer and will report all items of income, gain, loss, deduction, or credit relating to the transactions effected by the Lease Documents using the accrual method of accounting.

(d)

Inclusions in Income.  Lessor will not be required to include any amount in gross income for federal income tax purposes in connection with the transactions effected by the Lease Documents other than: (i) Renewal Rent and Basic Rent in the amounts and periods as calculated pursuant to Schedules 12.2 and 14.1, respectively, to the Facility Lease; (ii) income realized upon the transfer of Lessor’s direct or beneficial interest in the Facility Lease or the Leased Facility or any portion thereof, other than a transfer attributable to a Lessee Event of Default; (iii) any other amounts (including Termination Value or amounts measured in respect of such value) payable on an After-Tax Basis; (iv) any warranties, refunds, damages, insurance, requisition, or condemnation proceeds received and retained by Lessor; (v) any amount payable to Lessor and specifically designated as interest or late payment charges on overdue payments; and (vi) any other amounts to the extent offset by a corresponding deduction, (the inclusion in income of any amount other than the amounts described in this Section 3.1(d) being referred to herein as an “Inclusion”).

(e)

Tax Reporting Status.  Lessor will not be subject to any minimum tax or alternative minimum tax imposed under the Code.

(f)

Tax Assumptions.  Lessee will have no liability to indemnify Lessor with respect to the Tax Assumptions contained herein.

3.2

Lessee’s Tax Representations and Covenants.  For purposes of this Article 3, Lessee hereby represents and covenants:

(a)

On the Lease Commencement Date, the Leased Facility will not require any improvements, modifications, or additions in order to be rendered complete for its intended use by Lessee and Lessee has no present intention to make any specific material non-severable improvements.

(b)

Any written information provided by Lessee to the appraiser (and identified in an Annex to this Schedule 17.2) providing the appraisal pursuant to Section 3.3 or Article 12 of the Facility Lease was, to the knowledge of Lessee, accurate at the time given.

(c)

During the Basic Term, neither Lessee nor any sublessee or user of the Leased Facility (a “Lessee Person”) (other than Lessor or its affiliates other than Lessee) will (i) make any claim (including, without limitation, filing a tax return) predicated on ownership of the Leased Facility, or take any action or position inconsistent with the Tax Assumptions or the status of Lessor as the sole owner of the Leased Facility for federal, state and local income tax purposes, or (ii) claim deductions for Basic Rent for federal, state or local income tax purposes during the Base Term for any period other than the period to which such Basic Rent is allocated pursuant to Section 5.1, unless, in the case of either (i) or (ii), such position is inconsistent with a Final Determination which is binding on Lessor or Lessee.

(d)

Purchase Options.  As of the Lease Commencement Date, neither Lessee nor any Affiliate thereof has (i) taken any action requiring or authorizing the exercise of any purchase option or renewal option described in Article 12 of the Facility Lease, (ii) made any binding decision to exercise any purchase option or renewal option described in Article 12 of the Facility Lease, or (iii) entered into any agreements with any persons concerning the exercise of any purchase option or renewal option described in Article 12 of the Facility Lease, provided, that the execution, delivery and performance of the Lease Documents in accordance with the terms thereof shall not constitute a breach of the foregoing representation.

(e)

Limited Use Property.  Neither Lessee, nor any sublessee, assignee, agent or user (other than Lessor) of the Leased Facility will construct or install on the Leased Facility any component, improvement, alteration, or addition if the construction or installation will cause the Leased Facility to constitute limited use property within the meaning of Revenue Procedure 2001-28, 2001-19 I.R.B. 1156.

(f)

Sole Remedy.  An indemnity payment hereunder shall be the only remedy for the inaccuracy of any representation or covenant set forth in this Section 3.2.  No representation or warranty of Lessee contained in any of the Lease Documents shall be construed as a representation or warranty that the Facility Lease will constitute a “true lease,” that Lessor will be treated as the tax owner of the Leased Facility, or that the Leased Facility has a specified value or economic useful life.

3.3

Indemnity Obligation.  If at any time Lessor is required by any Governmental Authority to make an Inclusion in connection with the transactions contemplated by the Lease Documents or Lessor is unable to exclude an Inclusion from its federal, state or local tax return (based upon the receipt by Lessor and Lessee not later than the filing date of the related tax return of Lessor of an opinion of independent tax counsel selected by Lessor and reasonably satisfactory to Lessee to the effect that there is no reasonable basis under the standards set forth in ABA Formal Opinion 85-352 (the “ABA Standards”) (such a basis a “Reasonable Basis”) for excluding such Inclusion (which opinion shall set forth in reasonable detail the basis for the conclusions set forth therein) or such claim would be inconsistent with a prior Final Determination of a contest and there has been no change in law or interpretation thereof after such Final Determination) as a result of any of the following:

(a)

the inaccuracy or breach of any representation of Lessee set forth above in Section 3.2 or any covenant, representation, or warranty in the Lease Documents,

(b)

any act or omission of Lessee, other than (i) the negotiation, execution or delivery of the Lease Documents, (ii) an act required or expressly permitted by the Lease Documents (other than any improvement, alteration, addition to, replacement, or temporary or permanent removal from service or retirement, modification, or substitution of the Leased Facility or any part thereof by Lessee or any Lessee Person) or (iii) any act taken by the Lessee at the request of the Lessor,

(c)

any failure by Lessee to take any action expressly required to be taken under the Lease Documents (other than a failure to take action that is requested by Lessor),

(d)

a payment of warranties, refunds, insurance proceeds or similar items, or requisition, condemnation, or similar proceeds to the extent not retained by, or applied for the benefit of Lessor,

(e)

any destruction, damage, loss, condemnation, non-use or requisition of Leased Facility or any part thereof, which does not constitute an Event of Loss or an Event of Total Loss, or

(f)

an actual payment in an amount greater than due, or prior to the due date, of any amount required to be paid by Lessee under the Lease Documents,

(each such event, a “Lessee Act”), then Lessor shall have suffered an “Inclusion Event” and Lessee shall pay to Lessor, as an indemnity a lump-sum amount which, after giving effect to the Gross-Up (as defined in Section 5.2(a)), shall be sufficient to give to Lessor the same Return on Capital that it would have had if no such Inclusion Event had occurred.  In lieu of the lump-sum payment provided for in the preceding sentence, Lessee may elect to pay the indemnity with respect to such Inclusion Event by reimbursing (on an after-tax basis) a Lessor for the taxes (together with any applicable interest, penalties and additions to tax) which such Lessor is required to pay in any calendar year as a result of the Inclusion Event as provided in Section 4.2.

3.4

Excluded Events.  Lessee shall not be required to make any payment in respect of an Inclusion Event to the extent such Inclusion results from one or more of the following events:

(a)

Lessor’s failure to properly exclude income unless Lessor shall have received a written opinion of its independent tax counsel that no Reasonable Basis exists for excluding such income (and for this purpose, such counsel may take into account the failure of Lessee to provide necessary information requested in writing by Lessor to the extent Lessee is required to provide such information);

(b)

any event which requires Lessee to pay an amount equal to or in excess of, or determined by reference to Termination Value to the extent such amount is actually paid;

(c)

the application of Code § 467 or the Treasury Regulations thereunder, other than as a result of (i) an actual payment in an amount greater than due or prior to the due date, of any amount required to be paid by Lessee under the Lease Documents or (ii) the claiming by Lessee during the Base Term of a deduction for Basic Rent for federal, state or local income tax purposes for any period other than the period to which such Basic Rent is allocated pursuant to Section 5.1 of the Facility Lease;

(d)

the imposition of any alternative minimum tax under the Code § 55;

(e)

the breach of any covenant or representation by, or the gross negligence, fraud, or willful misconduct of Lessor;

(f)

any amendment or modification to the Lease Documents that is not requested or consented to by Lessee or is not required by the Lease Documents unless, in each case, the amendment or modification is made in connection with a Lease Event of Default; 

(g)

any change in Lessor’s taxable year or method of accounting or the application of the short taxable year provisions of the Code;

(h)

the failure of the Facility Lease to be treated as a “true lease” for federal income tax purposes, other than as a result of a Lessee Act;

(i)

the failure of Lessor to contest a claim in accordance with the contest provisions herein to the extent Lessee’s ability to contest a claim is adversely affected in any material respect;

(j)

the failure of Lessor to be a “United States person” (as defined in § 7701(a)(30) of the Code);

(k)

consisting of interest, penalties, or additions to tax imposed on Lessor as a result of a failure of Lessor to file any return properly or timely, unless such failure is caused by Lessee’s failure to fulfill its obligations, if any, to provide such information required hereto;

(l)

the sale of the Leased Facility to Lessee pursuant to an exercise of Lessee’s purchase options under the Facility Lease;

(m)

imposed as a result of Lessor’s transfer or other disposition of (i) all or a portion of its interest in the Lease Documents, the Leased Facility or any part thereof, or (ii) any interest in Lessor, other than, in each case, a transfer or disposition pursuant to an exercise of remedies pursuant to Section 15 of the Facility Lease during the continuation of a Lessee Event of Default; 

(n)

the application of Code Section 55-58, 59A, 291, 465, 469, 501, 542, 552, 593, 851, 856, 1272, 1361 or 4975 or the regulations thereunder or the imposition of any Taxes imposed pursuant to ERISA; and

(o)

the failure of the Appraisal Report to be correct, except as a result of the breach or inaccuracy of the income tax representations contained in Section 3.2(a) (b) or (c) hereof.

ARTICLE 4

INDEMNITY FOR LOSSES

4.1

Common Ownership Obligations.  Except as provided in Section 4.2, if Lessor is required to indemnify another Unit 2 Owner under the Unit 2 Owner tax indemnity as a result of a Lessee Act, then the Lessor shall have suffered a “Loss” and Lessee shall reimburse Lessor, on an After Tax Basis, for the amount of such Loss.

4.2

Exceptions.  Notwithstanding Section 4.1, Lessee shall have no obligation to reimburse Lessor for a Loss to the extent such amounts are attributable to any of the following:

(a)

any event described in Section 2.2(a), (b) (c), (f), (g), (h), (i), (j), (k), or (m) applied by substituting “Lessor, any other Unit 2 Owner (other than Lessor), or any lessee of any other Unit 2 Owner” for “Lessor” in each place that it appears;

(b)

any event described in Section 3.4(a), (d), (e), (g), (h), (i), (j), (k), (l) or (n) applied by substituting “Lessor, any other Unit 2 Owner (other than Lessor), or any lessee of any other Unit 2 Owner” for “Lessor” in each place that it appears;

(c)

the failure of the Lessor to assign its rights under the Unit 2 Owner tax indemnity to Lessee, to the extent Lessee’s ability to contest a claim is adversely affected in any material respect, provided Lessor is required to make an assignment pursuant to Section 6.1 hereof;

(d)

Taxes (including any penalties, interests or additions thereto) resulting from the failure of Lessor to timely assert its rights under the Unit 2 Owner tax indemnity to the extent of a resulting increase in Lessee’s indemnity obligation;

ARTICLE 5

PAYMENTS AND GROSS-UPS

5.1

Payment Terms.

(a)

General.  Payments shall be made in immediately available funds and in United States Dollars at such bank or to such account as specified by the payee in written directives at least five Business Days prior to the due date thereof to the payor, or, if no such direction is given, by check of the payor payable to the order of the payee and mailed to the payee by certified mail, postage prepaid at its address as set forth in Section 22.4 of the Facility Lease.

(b)

Time of Payment by Lessee.  Any indemnity payment due under this Schedule 17.2 to Lessor shall be paid by Lessee within 30 days after receipt of a written demand therefor from Lessor, provided, however, Lessee shall not be required to make such payment earlier than (a) in the case of a Tax that is not being contested pursuant to Article 5, five Business Days prior to the date that (i) Lessor files with the applicable Governmental Authority its income tax return, estimated or final as the case may be, which would first properly reflect the additional income tax that would become due as a result of an Inclusion, (ii) the date that Lessor is obligated to indemnify a Unit 2 Owner of an amount indemnified under Section 2.1, or in the case of a Tax indemnified under Section 2.1, the time such Tax is due or (b) in the case of an Inclusion or other Tax that is being contested pursuant to Article 6, 30 days after the date of the Final Determination of such contest.

(c)

Time of Payment by Lessor.  Any payment due by Lessor to Lessee shall be paid within 30 days after the date on which Lessor files with the applicable Governmental Authority its income tax return, estimated or final as the case may be, on which the credits, deductions, or other tax benefits giving rise to such payment could first properly be reflected or in the case of a Tax indemnified under Section 2.1, within 30 days of receipt or accrual of such refund, credit or other tax benefit.  Any payment due hereunder from Lessor to Lessee on account of the receipt of any refund of tax shall be paid within 30 days after the receipt of such refund.

5.2

Calculations of Payments and Gross-Ups.  All payments and calculations made under this Section 5.2 shall be made taking into account the assumption in Section 3.1(b) (regarding the assumption that Lessor is a C corporation for federal and state income tax purposes).

(a)

Gross-Up.  Each payment and indemnity under Section 2.1, Section 3.3 and Section 4.1 shall be made on an After-Tax Basis.  For the purposes of this Section 5.2 and the definition of “After-Tax Basis”, “Gross-Up” means the portion of any payment due from Lessee to Lessor pursuant to Section 2.1, Section 3.3 and Section 4.1 that is calculated to indemnify Lessor or the portion of any reverse payment from Lessor to Lessee on an After-Tax Basis.  As such, the amount payable to Lessor pursuant to Section 2.1, Section 3.3 and Section 4.1 shall be an amount determined after (i) giving effect to any interest, penalties, or additions to tax attributable to the Tax or Inclusion Event (except for any penalties and additions to Tax excluded under Section 2.2(h), Section 3.4(k) or Section 4.2(a) or (b); (ii) deducting all Taxes payable by Lessor in respect of the receipt or accrual of such amount and the amounts specified in clauses (i) and (ii) of this Section 5.2; and (iii) taking into account any Tax Savings (as defined in Section 5.3 below) resulting from such Tax or Inclusion Event, as applicable, (the net effect of items (i), (ii) and (iii), the “Gross-Up”).

(b)

Calculations.  The amount of any indemnity payable by Lessee to Lessor pursuant to Section 2.1, Section 3.3 and Section 4.1 and any Gross-Up shall be calculated on the basis of the tax detriments and benefits incurred or to be incurred (for the purposes of Section 3.3 and Section 4.1 as a result the same event giving rise to such Inclusion Event) by Lessor and such amounts shall be computed (i) for Section 2.1, at the highest marginal rate of federal income tax then in effect and the actual state or local tax rates applicable to Lessor at the time and (ii) for Section 3.3 and Section 4.1, on a notional basis in accordance with the Tax Assumptions.  Any Tax or Inclusion Event which does not result in an increase in Lessor’s federal, state and local income tax liability (or a decrease in Lessor’s refund of such income taxes) in the year of such Tax or Inclusion Event but which reduces any net operating loss, business credit, foreign tax credit carryover or other tax attribute of Lessor shall be treated as giving rise to an increase in U.S. federal, state or local income tax liability in the year for which such tax attribute if not reduced thereby would have given rise to a reduction in Lessor’s federal, state or local tax liability.  Subject to Section 7.2, all calculations with respect to the amount of any indemnity payable hereunder (whether by lump-sum payment or otherwise) shall be made initially by Lessor, and Lessor shall set forth any such amount or adjustment in a statement furnished to Lessee.  Such a statement shall accompany any notice furnished to, or demand made upon, Lessee by Lessor pursuant to this Schedule 17.2.

5.3

Reverse Indemnity.  If, as a result of a Tax indemnified under Section 2.1 herein or an Inclusion Event with respect to which an indemnity has been paid hereunder, Lessor for any taxable year realizes any credits, deductions, or other tax benefits (“Tax Savings”) not otherwise taken into account in computing any payment or indemnity by Lessee hereunder (or as a result thereof Lessor shall be entitled to a refund of income tax (or an offset against other tax liability not indemnified hereunder) or interest on such refund (or offset) taking into account the Tax Assumptions in the case of an Inclusion Event), then Lessor shall pay to Lessee the amount by which such Tax Savings reduce the federal, state or local taxes of Lessor (and the amount of any such refund, offset, or interest to which Lessor is entitled), plus a “gross-up” for any additional federal, state or local income tax savings Lessor realizes as a result of such payment (including such “gross-up”).  The amount of any Tax Savings with respect to a Tax indemnified under Section 2.1 or an Inclusion Event shall be computed on the basis of the tax benefits realized by Lessor and by using the highest marginal rate of federal income tax then in effect and the actual state and local tax rate applicable to Lessor at the time.  Lessor shall not be obligated to make any payment pursuant to this Section 5.3 while a Lessee Event of Default exists or to the extent that the amount of such payment would exceed (1) the aggregate amount of all prior payments by Lessee to Lessor pursuant to Section 2.1, Section 3.3 and Section 4.1, as the case may be, less (2) the aggregate amount of all prior payments by Lessor to Lessee under this Section 5.3, but any such excess shall be carried forward and reduce Lessee’s obligations to make subsequent payments to Lessor pursuant to Section 2.1, Section 3.3 or Section 4.1.  Any subsequent disallowance or loss of all or any portion of a reduction in Lessor’s tax liability which reduction was taken into account under this Section 5.3 (as a result of a redetermination of the claim giving rise to such payment by Lessor to Lessee by any taxing authority or as a result of a judicial proceeding with respect to such claim) shall be treated as a loss subject to indemnification under this Agreement without regard to Section 2.2 (other than Sections 2.2(c) or (e)) or Section 3.4 (other than Section 3.4(e)).

5.4

Lessee a Primary Obligor.  Lessee’s obligations under the indemnities provided for in this Schedule 17.2 are those of a primary obligor whether or not Lessor is also indemnified against the same matter under any other Lease Document or any other document or instrument, and Lessor seeking indemnification from Lessee may proceed directly against Lessee without first seeking to enforce any other right of indemnification.  All indemnities payable by Lessee pursuant to this Schedule 17.2 shall be treated as obligations of Lessee under the Facility Lease and shall constitute Supplemental Rent under the Facility Lease.

ARTICLE 6

CONTEST PROVISIONS

6.1

Notice.  If Lessor receives a formal written notice of a claim or, if at the conclusion of an audit by the Internal Revenue Service or other Governmental Authority, there is a proposed adjustment in any item of income, deduction or credit of Lessor, or Lessor receives notice from a Unit 2 Owner that if is seeking indemnity under the Unit 2 Owner tax indemnity in each case, which if agreed to or accepted by Lessor would result in a Tax for which Lessor would seek indemnification from Lessee pursuant to this Schedule 17.2, then Lessor shall, (a) within 15 days prior to the date on which Lessor is required to act or (b) promptly after the conclusion of an audit, notify Lessee thereof in writing (“Adjustment Notice”), provided that the failure to so notify the Lessee or provide such materials to the Lessee shall not relieve the Lessee of its indemnity obligations except to the extent that such failure materially and adversely affects the Lessee’s ability to conduct a contest in any material respect.  Lessor agrees that upon receipt of a notice from a Unit 2 Owner that it is seeking an indemnity under the Unit 2 Owner tax indemnity, it will notify such Unit 2 Owner, in writing, that it has assigned all of its rights under the Unit 2 Owner tax indemnity to Lessee with respect to such claim.

6.2

Contest Provisions.  If requested by Lessee within 30 days after receipt of the Adjustment Notice, Lessor shall in good faith contest or (if desired by Lessor) permit Lessee to contest the validity, applicability, and amount of any proposed adjustment that would give rise to a Tax or Inclusion Event by (a) not making payment thereof for at least 30 days after providing the Adjustment Notice, unless otherwise required by applicable law or regulations, (b) not paying same except under protest, if protest is necessary and proper, or (c) if payment is made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings; provided, that (aa) in the case of an income tax contest, as a condition to the commencement of such contest, Lessor shall have received a written opinion of its independent tax counsel selected by Lessor and reasonably acceptable to Lessee to the effect that there is a Reasonable Basis for contesting such proposed adjustment, (bb) Lessor shall not be required to contest such proposed adjustment if the aggregate amount of the indemnity, on a before-tax basis, together with the amounts payable with respect to any future related claim, would be less than $25,000 in the case of an administrative contest or less than $50,000 in the case of a judicial contest, (cc) Lessee shall have agreed in writing to pay to Lessor, on demand, all reasonable out-of-pocket costs and expenses which Lessor incurs in connection with and reasonably allocable to contesting such adjustment, including all reasonable legal, accountants’, and investigatory fees and disbursements; (dd) a Lessee Event of Default shall not have occurred and be continuing (provided however, that if a Lessee Event of Default other than as a result of a payment default or bankruptcy shall exist, the foregoing restriction shall not apply if Lessee posts a bond to secure payment of amounts that will fall due in the event of an adverse resolution of the controversy), (ee) Lessor has determined, in good faith, that the contest will not result in a material risk of the loss or forfeiture of the Leased Facility (unless Lessee has provided to Lessor a bond or other sufficient protection against such risk of loss or forfeiture reasonably satisfactory to Lessor) or the imposition of criminal penalties, and (ff) Lessee shall have acknowledged, in writing, that the contest is with respect to a liability that is Lessee’s responsibility under this Schedule 17.2, provided however that such acknowledgement is not required other than to the extent the basis for the IRS’s claim is or becomes reasonably clear.

If requested by Lessee in writing, Lessor will appeal (or, if desired by Lessor, permit Lessee to appeal) any adverse judicial determination, provided, that Lessor shall receive an opinion of its independent tax counsel selected by Lessor and reasonably acceptable to Lessee to the effect that there is substantial authority under ABA Standards and within the meaning of Section 6662 of the Code for a favorable result as a result of such appeal.  Lessor shall not be required to appeal any adverse judicial determination to the United States Supreme Court.

6.3

Compromise or Settlement.  Lessor shall have the right to settle or compromise a contest or a claim by a Unit 2 Owner if Lessor has provided Lessee with a reasonable opportunity to review a copy of that portion of the settlement or compromise proposal which relates to the claim for which Lessor is seeking indemnification hereunder; provided, that if (a) Lessor fails to provide Lessee such a reasonable opportunity to review such portion of such proposal, or (b) after such reasonable opportunity to review such proposal Lessee in writing reasonably withholds its consent to all or part of such settlement or compromise proposal, then Lessee shall not be obligated to indemnify Lessor hereunder to the extent of the amount attributable to the Tax or Inclusion to which such settlement or compromise relates as to which Lessee has reasonably withheld its consent, or with respect to any other Inclusion or Tax for which a successful contest is foreclosed because of such settlement or compromise as to which Lessee has reasonably withheld its consent.

6.4

Refunds.  If Lessor receives a refund of all or any part of any amount paid with respect to a Tax for which Lessee has indemnified Lessor pursuant to Section 2.1, Section 3.3 or Section 4.1 hereof (or if an amount which otherwise would have been a refund was used to offset another liability of Lessor (an “Applied Amount”)), then Lessor shall pay to Lessee an amount equal to the sum of the amount of such refund (or Amount), plus any interest received on such refund (or that would have been received if such Applied Amount had been refunded to Lessor) attributable to any taxes paid by Lessee to or for Lessor net of any taxes incurred on such refund or Applied Amount (plus any tax benefit received or that would have been received by a Lessor on account of such payment, as determined under Section 5.2).  If Lessor receives an award of attorneys’ fees in a contest for which Lessee has paid an allocable portion of the contest expenses, Lessor shall pay to Lessee the same proportion of the amount of such award as the amount of Lessor’s attorneys’ fees paid or reimbursed by Lessee bears to the total amount of attorneys’ fees actually incurred by Lessor in conducting such contest, up to the amount of attorneys’ fees paid or borne by Lessee in connection with such contest.  Lessor shall not be obligated to make any payment to Lessee under this Section 6.4 while a Lessee Event of Default exists.  Any subsequent disallowance or loss of such refund (as a result of a redetermination of the claim giving rise to such payment by Lessor to Lessee by any taxing authority or as a result of a judicial proceeding with respect to such claim) shall be treated as a loss subject to indemnification under this Agreement without regard to Section 2.2 (other than Section 2.2(c) or (e)) or Section 3.4 (other than Section 3.4(e)).

6.5

Failure to Contest.  Notwithstanding anything to the contrary contained in this Article 6 and subject to the exclusion contained in Section 2.2(i), Section 3.4(i) and Section 4.2(c), Lessor may at any time decline to take any further action with respect to a proposed adjustment by notifying Lessee in writing that it has waived its right to any indemnity payment that would otherwise be payable by Lessee pursuant to this Schedule 17.2 in respect of such adjustment and with respect to any other amount for which a successful contest is foreclosed because of such failure to contest (if such failure adversely affects a contest in any material respect) or to permit a contest.  If Lessor fails to contest or to permit a contest hereunder, Lessor will not be required to pay over to Lessee any amount representing tax benefits which result from an Inclusion as to which Lessor has been deemed to have waived its right to any indemnity payment hereunder.

ARTICLE 7

RECOMPUTATIONS

7.1

Termination Value Recomputation.  If Lessor suffers an Inclusion, Termination Values associated with the Leased Facility or with the portion thereof to which such Inclusion relates shall thereupon, without further act of the parties hereto or to the other Lease Documents, be adjusted upward or downward, if and to the extent necessary to reflect such Inclusion (such adjustments to be in accordance with the methodology and assumptions (including the tax assumptions set forth in Section 3.1) as were employed in originally calculating Termination Values, varying such assumptions to take into account the circumstances giving rise to such Inclusion (and any previous Inclusion) and any net tax detriments to Lessor arising as a result thereof).  If any adjustment to Termination Values is required as a result of an Inclusion that has occurred, Lessor shall provide Lessee a statement setting forth the revised Termination Values as determined by Lessor.  Such statement shall describe in reasonable detail the basis for computing such new values.  If no adjustment to Termination Values is required as a result of an Inclusion that has occurred, and if requested in writing by Lessee, Lessor shall provide Lessee with a statement that no such adjustment has been made.  If requested by Lessee, such statement shall be verified in accordance with the same procedures as are provided in Section 7.2 for the verification of amounts payable pursuant to this Schedule 17.2, and such verification shall bind Lessor and Lessee.

7.2

Verification of Calculations.  At Lessee’s request, the accuracy of any calculation of amount(s) payable pursuant to this Schedule 17.2 shall be verified by independent public accountants selected by Lessor and reasonably satisfactory to Lessee, and such verification shall bind Lessor and Lessee.  In order, and to the extent necessary, to enable such independent accountants to verify such amounts, Lessor shall provide to such independent accountants (for their confidential use and not to be disclosed to Lessee or any other person) all information reasonably necessary for such verification, including any computer program, related files, or reports used by Lessor in originally calculating Basic Rent, Termination Values or other Taxes.  Verification shall be at the expense of Lessee, unless, as the result of such verification, the Lessor’s calculation of the applicable amount payable is adjusted by 3% or more (or, in the case of an adjustment of the Basic Rent, the net present value of the Rent as calculated by Lessor is adjusted by more than five basis points) in favor of Lessee, in which case the expense shall be borne by Lessor.

SCHEDULE 22.7

TO THE FACILITY LEASE

The Effect of Rating Agency Downgrades Subsequent to a Transfer

 under the Facility Lease

Rating Downgrade

Within 90 days following the consummation of a Transfer under the terms of Section 22.7(c) from the Lessor to an Acceptable Assignee (other than an Affiliate), if Madison Gas and Electric (“MGE”) has not subleased all or any portion of the Leased Facility under the terms of Section 22.7(f) and if either of the Rating Agencies downgrade the lowest rated credit rating of MGE and expressly state that the reason for the downgrade was the Transfer, then in MGE’s next base rate case proceeding the revenue requirement for any short-term or future new issue long-term debt will be assumed, for ratemaking purposes, to have interest rates priced at the rating prior to the downgrade.

If, for any other reason whatsoever, MGE’s lowest rated credit rating is subsequently further downgraded by one or both Rating Agencies, then the ratings being assumed for ratemaking purposes for any short-term or future new issue long-term debt will likewise be reduced by the same number of rating gradations.

In the next base rate case proceeding after the earlier of (i) the credit rating being returned to the level it was at prior to the downgrade, or (ii) the termination of the Facility Lease, or (iii) a sublease by MGE of all or any portion of the Leased Facility under the terms of Section 22.7(f), the interest rates applicable to short-term and future new issue long-term debt will not be subject to any ratings downgrade adjustment.  However, any outstanding long-term debt previously deemed to be subject to a ratings downgrade adjustment in a base rate case proceeding will continue to be subject to adjustment in subsequent base rate case proceedings in accordance with this provision.

An example:

Suppose MGE’s lowest rated credit rating per Moody’s Investor Services is Aa3 and per Standard & Poor’s is A.  Lessor has transferred it interests to an Acceptable Assignee that is not an Affiliate.  MGE has not subleased any portion of the Leased Facility.  Specifically as a result of the transfer, and within 90 days, Moody’s announces a one-notch downgrade from Aa3 to A1 and S&P announces a one-notch downgrade from A to A-.  For ratemaking purposes, any short-term or future new issue long-term debt would be assumed to have interest rates commensurate with the prior Aa3 (Moody’s) and A (S&P) ratings.  A year after that rate case proceeding, however, both Moody’s and S&P announce four-notch downgrades from A1 to Baa2 (Moody’s) and from A- to BBB- (S&P).  Now, for ratemaking purposes, in the subsequent base rate case proceeding the assumed rates based on credit ratings of Aa3 and A would not remain based at Aa3 and A, nor would they be based on the ratings downgraded to Baa2 and BBB-.  Instead, the credit ratings used to determine the assumed rates would likewise be reduced four notches from Aa3 to Baa1 (Moody’s) and from A to BBB (S&P).

Equity Infusion to Prevent a Ratings Downgrade

In some circumstances the Rating Agencies may be willing to disclose, in advance, the potential for MGE’s lowest rated credit rating to be downgraded as a direct result of a Transfer.  Further, the Rating Agencies may be willing to support retention of the current credit rating based on some pre-determined equity contribution.  In the event that, within 90 days of the Transfer, (i) the Rating Agencies will provide written documentation of the circumstances and recommendations including their determination that a specific potential downgrade is the direct result of the Transfer, (ii) MGE has an opportunity to prevent a credit rating downgrade with an equity infusion, (iii) MGE actually issues equity to prevent the credit rating downgrade, and (iv) neither of the Rating Agencies issues a credit rating downgrade as a result of the equity infusion, then in MGE’s next base rate case proceeding an adjustment will be made to the weighted average cost of capital calculation to hold MGE’s ratepayers harmless from the effects of the equity contribution.  Specifically, the weighted average cost of capital assumed for ratemaking purposes would be calculated as though the credit rating was never changed and the additional equity contribution was never made.

If, for any reason whatsoever, MGE’s lowest rated credit rating is subsequently downgraded by one or both Rating Agencies, then the ratings being assumed for ratemaking purposes for any short-term or future new issue long-term debt will likewise be reduced by the same number of rating gradations.

This provision will end at the next base rate case proceeding after the earlier of (i) the credit rating being increased by either of the Rating Agencies, or (ii) the termination of the Facility Lease, or (iii) a sublease by MGE of all or any portion of the Leased Facility under the terms of Section 22.7(f).

EXHIBIT A

TO THE FACILITY LEASE

DESCRIPTION OF THE FACILITY

The Facility shall consist of “Unit 2,” an approximately 615 MW net nominal supercritical pulverized coal electrical generating unit and related facilities as more fully described in the ERGS Facility Lease.  The Facility shall include the “New Common Facilities” described below: 

(1)

circulating water system (e.g. water intake structured and central distribution system, pumps);

(2)

fuel delivery and handling systems (e.g. railroad infrastructure, central coal unloading, central storage, and central conveying systems);

(3)

Unit 1/Unit 2 common operating systems (e.g. control room, administration building, limestone/gypsum delivery, storage and handling systems); and\

(4)

balance of Land common systems (e.g. roads, training/visitors center, security).

The Leased Facility consists of the Lessor’s undivided interest in the Facility from time to time, as provided in Schedule 5.4 with respect to the New Common Facilities. 

EXHIBIT B

TO THE FACILITY LEASE

FORM OF GUARANTY

This GUARANTY (“Guaranty”) is dated as of [_____], 2004, by MGE ENERGY, INC., a Wisconsin corporation (“Guarantor”), on behalf of MGE POWER ELM ROAD, LLC, a Wisconsin limited liability company (“Lessor”), for the benefit of MADISON GAS AND ELECTRIC COMPANY, a Wisconsin corporation (“Lessee”).  All capitalized terms used but not defined in this Guaranty shall have the meanings given to such terms in the Facility Lease Agreement, dated as of [______], 2004, between Lessor and Lessee relating to the Elm Road Generating Facility (the “Facility Lease”).  Each of Lessee and Guarantor is sometimes herein referred to as a “Party” and Lessee and Guarantor are sometimes herein referred to collectively as the “Parties.”

WITNESSETH:

WHEREAS, Guarantor is the Parent of Lessor;

WHEREAS, Lessor intends to acquire an undivided interest in an “electric generating facility,” as that term is defined in Section 196.52(9), Wis. Stats., consisting of an approximately 615 MW net nominal supercritical pulverized coal electric generating facility and related facilities in Milwaukee and Racine Counties, Wisconsin;

WHEREAS, pursuant to the Facility Lease, Lessor is obligated to provide a guarantee of certain obligations of Lessor under the Lease;

WHEREAS, Guarantor is providing this Guaranty to Lessee for the purpose of fulfilling Lessor’s obligations under the Facility Lease.

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged the Parties hereto agree as follows:

ARTICLE 1

GUARANTY

1.1

Guaranty.  Guarantor hereby irrevocably guarantees to Lessee (as primary obligor and not merely as surety) the full and prompt payment when due and the performance of the payment obligations of Lessor pursuant to and in accordance with Section 2.3 and Section 3.2 of the Facility Lease  (collectively, the “Guaranteed Obligations”); up to, but not in excess of, One Million Six Hundred Sixty-Six Thousand Six Hundred and Sixty-Seven Dollars.  Guarantor hereby further agrees that if Lessor shall fail to pay when due any of the Guaranteed Obligations, Guarantor will promptly pay the same, without any demand or notice whatsoever, and in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due in accordance with the terms of such extension or renewal.  This Guaranty is a guaranty of payment and not of collection.

1.2

Obligations Unconditional.  The obligations of Guarantor under Section 1.1 are absolute and unconditional, irrespective of any lack of value, genuineness, validity, regularity or enforceability of the Facility Lease, and irrespective of any lack of value, genuineness, validity, regularity or enforceability of any other instrument executed and delivered in connection with the Facility Lease, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable Law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 1.2 that the obligations of Guarantor under Section 1.1 shall be absolute and unconditional under any and all circumstances.  Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not affect the liability of Guarantor hereunder:

(a)

at any time or from time to time, without notice to Guarantor, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived;

(b)

any of the acts provided for in the Facility Lease shall be performed or fail to be performed;

(c)

any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect or any right under the Facility Lease shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with;

(d)

any bankruptcy, insolvency, reorganization, arrangement, readjustment, liquidation or similar proceeding with respect to Lessor or any of the properties of Lessor, or any action taken by any trustee or receiver or by any court in any such proceeding;

(e)

any lack of genuineness, authorization, legality, validity or enforceability, in whole or in part, of this Guaranty or the Facility Lease or any term or provision hereof or thereof for any reason, or the disaffirmance or rejection or purported disaffirmance or purported rejection hereof or thereof in any insolvency, bankruptcy or reorganization proceeding relating to Guarantor, Lessor or otherwise;

(f)

whether Lessee shall have taken or failed to have taken any steps to collect or enforce any obligation or liability from Lessor or shall have taken any actions to mitigate its damages

(g)

whether Lessee shall have taken or failed to have taken any steps to collect or enforce any guaranty of or to proceed against any security for any Guaranteed Obligation;

(h)

any applicable laws now or hereafter in effect which might in any manner affect any of the provisions of this Guaranty or the Facility Lease, or any of the rights, powers or remedies hereunder or thereunder of Lessee, or which might cause or permit to be invoked any alteration in the time, amount or manner of payment or performance of any of Guarantor’s or its wholly-owned subsidiary’s obligations and liabilities hereunder or thereunder;

(i)

any merger or consolidation of Lessor or Guarantor into or with any other person or any sale, lease, or transfer of all or any of the assets of Lessor or Guarantor to any other Person; or

(j)

any failure on the part of Guarantor or Lessor to comply with the requirements of law, regulation or order of any Governmental Authority.

1.3

Reinstatement.

  The obligations under this Article 1 shall be automatically reinstated if and to the extent that for any reason any payment by Lessor or on behalf of Lessor (by Guarantor or any other Person) is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a preferential or fraudulent transfer under the Bankruptcy Code, or any applicable state insolvency law, or any other similar Laws now or hereafter in effect or otherwise and Guarantor agrees that it will indemnify Lessee on demand for all reasonable costs and expenses (including reasonable fees of counsel) incurred by Lessee in connection with such rescission or restoration.

1.4

Subrogation.  Any subrogation rights of Guarantor arising by reason of any payments made under this Guaranty shall be subordinate to the performance in full by Lessor of all obligations under the Facility Lease, including, without limitation, payment in full of all amounts which may be owing by Lessor to Lessee thereunder.

1.5

Remedies.  Guarantor agrees that, as between Guarantor and Lessee, the obligations of Lessor under the Facility Lease are due and payable as provided in the Elm Road II Facility Lease for purposes of Section 1.1 notwithstanding any stay, injunction or other prohibition preventing a declaration of payment as against Lessor.  Guarantor also agrees that, in the event that such a declaration is issued, or such obligations become automatically due and payable, such obligations (whether or not due and payable by Lessor) shall forthwith become due and payable by Guarantor for purposes of Section 1.1.

1.6

Continuing Guarantee.  The guarantee in this Article 1 is a continuing guarantee and shall apply to all Guaranteed Obligations whenever arising.

1.7

Waiver of Demands, Notices, etc.  Guarantor hereby unconditionally and irrevocably waives, to the extent permitted by applicable Law, (i) notice of any of the matters referred to in this Article 1; (ii) all notices which may be required by statute, rule or law or otherwise, now or hereafter in effect, to preserve any rights against Guarantor hereunder, including, without limitation, any demand, proof or notice of non-payment of the Guaranteed Obligations; (iii) acceptance of this Guaranty, demand, protest, presentment, notice of default or dishonor and any requirement of diligence; (iv) any requirement to exhaust any remedies or to mitigate any damages resulting from a default by Lessor under the Facility Lease; (v) any requirement that Lessee protect, secure, perfect or insure any security interest in or any lien on any property subject thereto or exhaust any right or take any action against Lessor, Guarantor, any guarantor of the Guaranteed Obligations or any other person or any collateral or security or to any balance of any deposit accounts or credit on the books of Lessee in favor of Lessor, Guarantor or any other person; and (vi) any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge, release or defense of a guarantor or surety, or which might otherwise limit recourse against Guarantor.  

1.8

Severability.  Guarantor hereby further agrees that Lessee may pursue its rights and remedies under this Guaranty and shall be entitled to payment of the full amount owing hereunder notwithstanding any other guarantee of or security, in favor of Lessee or any lack of validity or enforceability thereof, or any failure to perfect or to exercise any right, remedy, power or privilege with respect to such security, if any, or any payment received thereunder.

1.9

Limitation.  Guarantor’s obligations with respect to the Guaranteed Obligations shall be no more or any less than those required of Lessor under the Facility Lease except that Guarantor shall be entitled to a good faith defense that the Guaranteed Obligations of Lessor have been indefeasibly paid by Lessor.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES

Guarantor represents and warrants to Lessee that:

2.1

Due Organization, Etc.  It: (i) is duly formed, validly existing and in good standing under the Laws of the State of Wisconsin, (ii) has all requisite power and all material Government Approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is duly qualified to do business in all jurisdictions in which the nature of the business conducted by it or proposed to be conducted by it makes such qualification necessary.

2.2

Due Authorization.  It has all necessary corporate power and authority to execute, deliver and perform its obligations under this Guaranty, and the execution, delivery and performance by it of this Guaranty have been duly authorized by all necessary corporate action on its part.

2.3

Non-Contravention.  The execution, delivery and performance by it of this Guaranty do not and shall not:

(i)

violate its Organic Documents;

(ii)

violate any Law or Government Approval applicable to it or its property or to the Leased Facility;

(iii)

result in a breach of or constitute a default of this Guaranty or any other material agreement to which it is a party; or

(iv)

result in, or require the creation or imposition of, any Lien (other than a Permitted Encumbrance) on any of its properties.

2.4

Enforceability, Etc.  This Guaranty has been duly authorized and duly and validly executed and delivered by it and constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or other similar Laws affecting creditors’ rights generally and by general principles of equity.

2.5

Litigation.  There is no action, suit or proceeding at law or in equity or by or before any Governmental Authority now pending or, to its knowledge, threatened against or affecting it or any of its properties, rights or assets which could reasonably be expected to have a material adverse effect on its ability to perform its obligations under this Guaranty or the validity or enforceability of this Guaranty.

2.6

Government Approvals.  All Government Approvals necessary under any applicable Law in connection with the due execution and delivery of, and performance by it of its obligations and the exercise of its rights under, this Guaranty have been duly obtained or made and are in full force and effect, are final and not subject to appeal or renewal, are held in its name and are free from conditions or requirements (i) compliance with which could reasonably be expected to have a material adverse effect on its ability to perform its obligations under this Guaranty or (ii) which it does not reasonably expect to be able to satisfy.

2.7

Investment Grade.  As of date of this Guaranty, Guarantor’s primary subsidiary’s senior unsecured long-term debt is rated at least Investment Grade.

ARTICLE 3

MISCELLANEOUS

3.1

Applicable Law.  THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF WISCONSIN.

3.2

Jury Trial.  EACH OF THE PARTIES WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS GUARANTY OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS GUARANTY AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

3.3

Notices.  Unless otherwise expressly specified or permitted by the terms hereof, all communications and notices provided for herein to a Party shall be in writing or shall be produced by a telecommunications device capable of creating a written record, and any such notice shall become effective (a) upon personal delivery thereof, including by overnight mail or next Business Day or courier service, (b) in the case of notice by United States mail, certified or registered, postage prepaid, return receipt requested, upon receipt thereof, or (c) in the case of notice by such a telecommunications device, upon transmission thereof, provided such transmission is promptly confirmed by either of the methods set forth in clause (a) or (b) above, in each case addressed as provided below, or to such other address as any Party may designate by written notice to the other Party.

		
	(a) if to Guarantor:

	MGE Energy, Inc.

P.O. Box 1231

Madison, WI  53701-1231

Telephone:  608-252-7075

Facsimile:  608-252-7098

Attn:  Chief Financial Officer

	(b) if to Lessor:

	MGE Power Elm Road, LLC

P.O. Box 1231

Madison, WI  53701-1231

Telephone:  608-252-7149

Facsimile:  608-252-4794

Attn:  Manager

	(c) if to Lessee:

	Madison Gas and Electric Company

PO Box 1231

Madison, WI  53701-1231

Telephone:  608-252-7075

Facsimile:  608-252-7098

Attn:  Chief Financial Officer

3.4

Counterparts.  This Guaranty may be executed in one or more counterparts and all such counterparts taken together shall constitute one of the same instrument.

3.5

Severability.  Whenever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable Law; but if any provision of this Guaranty shall be prohibited by or deemed invalid under any applicable Law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty.

3.6

Successors and Assigns; Grant of Security Interest.  This Guaranty shall be binding upon the Parties and their respective successors and permitted assigns and each subsequent holder of the Guaranteed Obligations; provided, however, that Guarantor shall not be permitted to assign all or any part of its rights, benefits, advantages, titles or interest hereunder without the prior written consent of Lessee.

3.7

Third-Party Beneficiaries.  Except as expressly provided herein, none of the provisions of this Guaranty are intended for the benefit of any Person except the Parties, their respective successors and permitted assigns.

3.8

Entire Agreement.  This Guaranty and the Facility Lease state the rights of the Parties with respect to the leasing of the Leased Facility, guarantee thereof and the other transactions contemplated by this Guaranty and the Facility Lease and supersede all prior agreements, oral or written, with respect to the subject matter hereof.

3.9

Headings.  Section headings used in this Guaranty are for convenience of reference only and shall not affect the construction of this Guaranty.

3.10

No Joint Venture.  Any intention to create a joint venture or partnership relation between Guarantor and Lessee is hereby expressly disclaimed.

3.11

Amendments and Waivers.  No term, covenant, agreement or condition of this Guaranty may be terminated, amended or compliance therewith waived (either generally or in a particular instance, retroactively or prospectively) except by an instrument or instruments in writing executed by both Parties.

3.12

Survival.  Except as expressly provided herein, and except for accrued monetary obligations, the warranties and covenants made by each Party shall not survive the expiration or termination of this Guaranty and/or the Facility Lease in accordance with its terms.

3.13

Termination.  This Guaranty shall terminate, and be of no further force and effect, upon the payment, satisfaction or expiration of the Guaranteed Obligations of Lessor in accordance with the provisions of the Facility Lease.

IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed and delivered under seal by its respective officer thereunto duly authorized.

MGE ENERGY, INC.,

as Guarantor

By:  ______________________________________

Name:

Title:

Acknowledged and Agreed:

MADISON GAS AND ELECTRIC COMPANY,

as Lessee

By:  

______________________________________

Name:

Title:

EXHIBIT C

TO THE FACILITY LEASE

FORM OF RIGHT OF FIRST REFUSAL AGREEMENT

This RIGHT OF FIRST REFUSAL AGREEMENT, dated as of [__________], 20[__] (this “Right of First Refusal Agreement”), is among MADISON GAS AND ELECTRIC COMPANY, a Wisconsin corporation, as lessee (“Lessee”), MGE POWER ELM ROAD, LLC, a Wisconsin limited liability company, as lessor (“Lessor”), MGE POWER LLC, a Wisconsin limited liability company, as the sole member of Lessor (“Member”), and MGE ENERGY, INC., a Wisconsin corporation, as the parent and sole member of Member (“Parent”).  Lessee, Lessor, Member and Parent are sometimes herein referred to individually as a “Party” and collectively as the “Parties”.

WITNESSETH:

WHEREAS, Member is the sole member of Lessor and owns 100% of the membership interests in Lessor;

WHEREAS, Parent is the sole member of Member and owns 100% of the membership interest in Member;

WHEREAS, Elm Road Generating Station Supercritical, LLC is expected to cause to be developed, designed, engineered, procured, permitted, constructed and commissioned an approximately 615 MW net nominal supercritical pulverized coal electric generating facility and a correlative undivided ownership interest in certain new common facilities (collectively, the “Facility”) to be constructed on land owned by Wisconsin Electric Power Company in Oak Creek Wisconsin;

WHEREAS, Lessor has an option to acquire an undivided ownership interest in the Facility;

WHEREAS, upon exercise of the option, Lessor will lease to Lessee a portion of the Facility (the “Leased Facility”) pursuant to the terms and conditions of that certain Facility Lease Agreement executed between Lessor and Lessee, dated as of the date hereof (the “Facility Lease”) (all capitalized terms used but not defined in these herein shall have the meanings given to such terms in Schedule 1.1 of the Facility Lease );

WHEREAS, the Facility Lease contemplates that the Parties will enter into this Right of First Refusal Agreement pursuant to which Member will grant Lessee a right of first refusal with respect to any sale, disposition or other transfer, other than a pledge to secure financing for the Leased Facility or any sale following foreclosure thereunder (“Transfer”), by Member of greater than 50% interest in Lessor and by Parent of greater than 50% interest in Member, respectively (in each case, the “Controlling Interest”) to a Person in certain circumstances; and

WHEREAS, the Parties wish to set forth the terms and conditions of such right of first refusal;

NOW, THEREFORE, in consideration of the foregoing premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

ARTICLE 1

TRANSFER RESTRICTIONS

1.1

Transfer Restrictions Applicable to Member.

(a)

Except as otherwise permitted in Section 1.5, the Member may not Transfer its Controlling Interest in and to Lessor to any Person until after the seventh anniversary of the Commercial Operation Date.  Thereafter, the Member may not Transfer its Controlling Interest except to an Acceptable Assignee or an Affiliate.  

(b)

The Organic Documents of the Acceptable Assignee shall require the favorable vote of one independent director or independent member, as the case may be, only in respect of taking any of the following voluntary actions in anticipation of insolvency or bankruptcy:

(i)

applying for or consenting to the appointment of a receiver, trustee or liquidator of it or of all or a substantial part of its assets;

(ii)

filing a voluntary petition in bankruptcy, or admitting in writing its inability to pay it debts as they come due;

(iii)

making a general assignment for the benefit of its creditors;

(iv)

filing a petition or an answer seeking reorganization or arrangement with its creditors or taking advantage of any insolvency Law;

(v)

filing an answer admitting the material allegations of, or consenting to, or defaulting in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceedings; or 

(vi)

agreeing to be the subject of an order, judgment or decree entered by any court of competent jurisdiction, approving a petition seeking reorganization of it or appointing a receiver, trustee or liquidator of it or of all or a substantial part of its assets; and

such Acceptable Assignee’s Organic Documents shall not permit the Acceptable Assignee to amend same if such amendment could reasonably be expected to have a material adverse effect on its ability to perform its obligations under this Right of First Refusal and the other Lease Documents to which it is a party or the validity or enforceability of such Lease Documents.

(c)

Prior to any Transfer to an Acceptable Assignee, the PSCW shall determine that the transferee meets the requirements of an Acceptable Assignee.

1.2

Transfer Restrictions Applicable to Parent.  

(a)

Except as otherwise permitted in Section 1.5, Parent may not Transfer its Controlling Interest in and to Member to any Person until after the seventh anniversary of the date of Commercial Operation of Unit 2.  Thereafter, the Parent may not Transfer its Controlling Interest except to an Acceptable Assignee or an Affiliate.  

(b)

The Organic Documents of the Acceptable Assignee shall require the favorable vote of one independent director or independent member, as the case may be, only in respect of taking any of the following voluntary actions in anticipation of insolvency or bankruptcy:

(i)

applying for or consenting to the appointment of a receiver, trustee or liquidator of it or of all or a substantial part of its assets;

(ii)

filing a voluntary petition in bankruptcy, or admitting in writing its inability to pay it debts as they come due;

(iii)

making a general assignment for the benefit of its creditors;

(iv)

filing a petition or an answer seeking reorganization or arrangement with its creditors or taking advantage of any insolvency Law;

(v)

filing an answer admitting the material allegations of, or consenting to, or defaulting in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceedings; or

(vi)

agreeing to be the subject of an order, judgment or decree entered by any court of competent jurisdiction, approving a petition seeking reorganization of it or appointing a receiver, trustee or liquidator of it or of all or a substantial part of its assets; and

such Acceptable Assignee’s constituent documents do not permit the Acceptable Assignee to amend its constituent documents if such amendment could reasonably be expected to have a material adverse effect on its ability to perform its obligations under this Right of First Refusal and the other Lease Documents to which it is a party or the validity or enforceability of such Lease Documents.

(c)

Prior to any Transfer to an Acceptable Assignee, the PSCW shall determine that the transferee meets the requirements of an Acceptable Assignee.

1.3

Assumption of Obligations.  It shall be a condition precedent to any Transfer by Member or Parent that the transferee enter into an assignment and assumption agreement, in form and substance reasonably satisfactory to the Parties, pursuant to which such transferee shall assume and Member or Parent, as the case may be, shall assign all or a proportionate share, as the case may be, of its rights, obligations, benefits, advantages, titles and interests in this Right of First Refusal Agreement.  Upon such Transfer, the Facility Lease and each Lease Document that is in effect shall continue in full force and effect.  

1.4

Adverse Tax Consequences.  Notwithstanding anything to the contrary contained herein, if, as a result of the existence and/or exercise of the Right of First Refusal, Parent, or if Member ceases to be an entity disregarded from its owner for federal income tax purposes, Member, is not treated as the owner of the Leased Facility for federal income tax purposes, Lessee will indemnify such Parent or Member, as applicable, on an after-tax basis for any adverse tax consequences resulting therefrom.

1.5

Permissible Transfers. 

(a)

By Member.  Notwithstanding any provision to the contrary contained herein or in the Facility Lease, Member may (without the consent of Lessee) Transfer: (i) less than 50% percent of its interest in Lessor to any Person; (ii) any of its interest in Lessor to an Affiliate of Member; (iii) any of its interest in Lessor in connection with a public offering or sale of any such interest; and (iv) any of its interest in Lessor to an Affiliate of Parent or to the shareholders of Parent or the shareholders of an Affiliate of Parent in connection with a spin-off.

(b)

By Parent.   Notwithstanding any provision to the contrary contained herein or in the Facility Lease, Parent may (without the consent of Lessee) Transfer: (i) less than 50% percent of its interest in Member to any Person; (ii) any of its interest in Member to an Affiliate of Parent; (iii) any of its interest in Member in connection with a public offering or sale of any such interest; and (iv) any of its interest in Member to an Affiliate of Parent or to the shareholders of Parent or the shareholders of an Affiliate of Parent in connection with a spin-off.

ARTICLE 2

RIGHT OF FIRST REFUSAL

2.1

From Member to Lessee.  No less than 120 days prior to a Transfer by Member of a Controlling Interest to an Acceptable Assignee (other than pursuant to Section 1.5 hereof), Member shall provide to Lessee, with a copy to Lessor, a written notice of the proposed Transfer, including the terms and conditions of the proposed Transfer and the name of the Acceptable Assignee.  Lessee shall have 60 days from receipt of such notice to notify Member in writing of its election to purchase the Controlling Interest on the same terms and conditions as the proposed Transfer (the “Right of First Refusal”); provided, however, that if Lessee fails to notify Member, with a copy to Lessor, of its election to exercise the Right of First Refusal within such 60-day period, Lessee shall be deemed to have waived the Right of First Refusal with respect to the sale of such Controlling Interest.  If Lessee notifies Member of its election to exercise its Right of First Refusal within such 60-day period, then within 30 days of delivery of such notice to Member, the Parties shall meet to negotiate the terms and conditions of the transfer documents by which Member shall transfer the Controlling Interest to Lessee; provided, that the terms and conditions of the transfer documents shall be no less favorable to Member than the terms and conditions of the proposed Transfer of the Controlling Interest by Member to the Acceptable Assignee.  Notwithstanding anything to the contrary contained herein, upon Lessee’s exercise of its Right of First Refusal, the Facility Lease and each Lease Document that is in effect shall continue in full force and effect unless agreed otherwise by the Parties.

2.2

From Parent to Lessee.  No less than 120 days prior to a Transfer by Parent of a Controlling Interest to an Acceptable Assignee (other than pursuant to Section 1.5 hereof), Parent shall provide to Lessee, with a copy to Member and Lessor, a written notice of the proposed Transfer, including the terms and conditions of the proposed Transfer and the name of the Acceptable Assignee.  Lessee shall have 60 days from receipt of such notice to notify Parent in writing of its election to purchase the Controlling Interest on the same terms and conditions as the proposed Transfer (the “Right of First Refusal”); provided, however, that if Lessee fails to notify Parent, with a copy to Member and Lessor, of its election to exercise the Right of First Refusal within such 60-day period, Lessee shall be deemed to have waived the Right of First Refusal with respect to the sale of such Controlling Interest.  If Lessee notifies Parent of its election to exercise its Right of First Refusal within such 60-day period, then within 30 days of delivery of such notice to Parent, the Parties shall meet to negotiate the terms and conditions of the transfer documents by which Parent shall transfer the Controlling Interest to Lessee; provided, that the terms and conditions of the transfer documents shall be no less favorable to Parent than the terms and conditions of the proposed Transfer of the Controlling Interest by Parent to the Acceptable Assignee.  Notwithstanding anything to the contrary contained herein, upon Lessee’s exercise of its Right of First Refusal, the Facility Lease and each Lease Document that is in effect shall continue in full force and effect unless agreed otherwise by the Parties.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES

Each of Lessee, Lessor, Member and Parent represents and warrants to each other Party, as of the date hereof as follows:

3.1

Due Organization, Etc.  It: (i) is duly formed, validly existing and in good standing under the Laws of the State of Wisconsin; (ii) has all requisite power and all material Government Approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is duly qualified to do business in all jurisdictions in which the nature of the business conducted by it or proposed to be conducted by it makes such qualification necessary.

3.2

Due Authorization.  It has all necessary corporate power and authority to execute, deliver and perform its obligations under this Right of First Refusal Agreement, and the execution, delivery and performance by it of this Right of First Refusal Agreement has been duly authorized by all necessary corporate action on its part.

3.3

Non-Contravention.  The execution, delivery and performance by it of this Right of First Refusal Agreement does not and shall not:

(a)

violate its Organic Documents;

(b)

violate any Law or Government Approval applicable to it or its property or to the Leased Facility;

(c)

result in a breach of or constitute a default under any agreement to which it is a party; or

(d)

result in, or require the creation or imposition of, any Lien (other than a Permitted Encumbrance) on any of its properties.

3.4

Enforceability, Etc.  This Right of First Refusal Agreement: (a) has been duly authorized and duly and validly executed and delivered by it; and (b) assuming the due authorization, execution and delivery thereof by the other Parties, constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or other similar Laws affecting creditors’ rights generally and by general principles of equity.

3.5

Litigation.  No court order, judgment or arbitral award has been issued and is outstanding with respect to it or any of its properties, rights or assets (including the Leased Facility) which prohibits it from executing or delivering this Right of First Refusal Agreement or performing in any material respect its obligations under this Right of First Refusal Agreement.

3.6

Government Approvals.  All Government Approvals required by applicable Law to have been obtained by it prior to the date of this representation and warranty in connection with the due execution and delivery of, and performance by it of its obligations and the exercise of its rights under, this Right of First Refusal Agreement have been obtained and are in full force and effect, and are held in its name and are free from conditions or requirements (a) compliance with which could reasonably be expected to have a material adverse effect on its ability to perform its obligations under this Right of First Refusal Agreement or the validity or enforceability of this Right of First Refusal Agreement or (b) which it does not reasonably expect to be able to satisfy.

ARTICLE 4

MISCELLANEOUS

4.1

Applicable Law.  THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS RIGHT OF FIRST REFUSAL AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF WISCONSIN.

4.2

Jury Trial.  EACH OF THE PARTIES WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS RIGHT OF FIRST REFUSAL AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS RIGHT OF FIRST REFUSAL AGREEMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

4.3

Notices.  Unless otherwise expressly specified or permitted by the terms hereof, all communications and notices provided for herein to a Party shall be in writing or shall be produced by a telecommunications device capable of creating a written record, and any such notice shall become effective (a) upon personal delivery thereof, including, by overnight mail or next Business Day or courier service, (b) in the case of notice by United States mail, certified or registered, postage prepaid, return receipt requested, upon receipt thereof, or (c) in the case of notice by such a telecommunications device, upon transmission thereof, provided such transmission is promptly confirmed by either of the methods set forth in clause (a) or (b) above, in each case addressed as provided below, or to such other address as any Party may designate by written notice to the other Parties.

If to the Lessee:

Madison Gas and Electric Company

P.O. Box 1231

Madison, WI 53701-1231

Attn: Chief Financial Officer

Tel:  608-252-7075

Fax:  608-252-7098

If to the Lessor:

MGE Power Elm Road, LLC

c/o MGE Power LLC

P.O. Box 1231

Madison, WI  53701

Attn:  Manager

Tel:  608-252-7149

Fax:  608-252-4794

If to Member:

MGE Power LLC

P.O. Box 1231

Madison, WI  53701

Attn:  Manager

Tel:  608-252-7149

Fax:  608-252-4794

If to Parent:

MGE Energy, Inc.

P.O. Box 1231

Madison, WI  53701

Attn: Chief Financial Officer

Tel:  608-252-7075

Fax:  608-252-7098

4.4

Counterparts.  This Right of First Refusal Agreement shall be executed in several counterparts, each of which is an original but all of which together constitute the same instrument.

4.5

Severability.  Whenever possible, each provision of this Right of First Refusal Agreement shall be interpreted in such manner as to be effective and valid under applicable Law; but if any provision of this Right of First Refusal Agreement shall be prohibited by or deemed invalid under any applicable Law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Right of First Refusal Agreement.

4.6

Transfer Restrictions.  This Right of First Refusal Agreement shall be binding upon the Parties and their respective successors and permitted assigns.  Unless otherwise specified in this Right of First Refusal Agreement, no Party may transfer all or any part of its rights, benefits, advantages, titles or interest in and to this Agreement without the prior written consent of the other Parties, and any such Transfer in contravention of this Section 4.6 shall be null and void ab initio.

4.7

Termination.  This Right of Refusal Agreement shall automatically terminate upon the expiration or early termination of the Facility Lease.

4.8

Third-Party Beneficiaries.  Except as expressly provided herein, none of the provisions of this Right of First Refusal Agreement are intended for the benefit of any Person except the Parties, their respective successors and permitted assigns.

4.9

Entire Agreement.  This Right of First Refusal Agreement and the other Lease Documents state the rights and obligations of the Parties with respect to Lessee’s Right of First Refusal and other transactions contemplated hereby and thereby and supersede all prior agreements, oral or written, with respect thereto.

4.10

Headings.  Section headings used in this Right of First Refusal Agreement are for convenience of reference only and shall not affect the construction of this Agreement.

4.11

No Joint Venture.  Any intention to create a joint venture or partnership relation among the Parties is hereby expressly disclaimed.

4.12

Amendments and Waivers.  No term, covenant, agreement or condition of this Right of First Refusal Agreement may be terminated, amended or compliance therewith waived (either generally or in a particular instance, retroactively or prospectively) except by an instrument or instruments in writing executed by the Parties.

4.13

Further Assurances.  Each Party shall promptly and duly execute and deliver such further documents and assurances for and take such further actions reasonably requested by another Party, all as may be reasonably necessary to carry out the purpose of this Right of First Refusal Agreement.

[SIGNATURE PAGE FOLLOWS ON NEXT PAGE]

IN WITNESS WHEREOF, Lessee, Lessor and Member have caused this Right of First Refusal Agreement to be duly executed and delivered under seal by their respective officers thereunto duly authorized.

MADISON GAS AND ELECTRIC COMPANY,

  as Lessee

By:

______________________________

Name:

Title:

MGE POWER ELM ROAD, LLC,

  as Lessor

By:

______________________________

Name:

Title:

MGE POWER LLC,

  as Member

By:

______________________________

Name:

Title:

MGE ENERGY, INC.,

  as Parent

By:

______________________________

Name:

Title:

EXHIBIT D

TO THE FACILITY LEASE

FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT

This ASSIGNMENT AND ASSUMPTION AGREEMENT(this “Assignment and Assumption Agreement”), dated as of [__________], 20[__] (the “Transfer Date”), is between Madison Gas and Electric Company, a Wisconsin corporation, as lessee (“Lessee”), and MGE Power Elm Road, LLC, a Wisconsin limited liability company, as lessor (“Lessor”).  Lessee and Lessor are sometimes herein referred to individually as a “Party” and collectively as the “Parties”.

WITNESSETH:

WHEREAS, Lessor and Lessee are parties to that certain Elm Road II Facility Lease Agreement, dated as of [_________], 2004 (the “Facility Lease”) pursuant to which Lessor will develop, design, engineer, procure, permit, construct, commission and lease to Lessee (i) an ownership interest in an approximately 615 MW net nominal supercritical pulverized coal electric generating facility and related facilities and (ii) an ownership interest in certain facilities to be used in common by Unit 1, Unit 2, the Future Unit and the Existing Units to be constructed on the site in Racine and Milwaukee counties in Wisconsin on land owned by Lessee;

WHEREAS, pursuant to the Facility Lease: (a) in Section 2.6(b)(iv), Section 11.2(c), Section 12.3(h) and Section 15.2(a)(i)(F), Lessor has agreed to assign and Lessee has agreed to assume certain of Lessor’s rights, benefits, titles, interests, duties and obligations in, to and under the Project Documents to which it is a party if Lessor sells its ownership interest in the Leased Facility to Lessee; and (b) in Section 2.6(c)(iv), Section 13.1(b)(x) and Section 15.2(a)(vii), Lessee has agreed to assign and Lessor has agreed to assume certain of Lessee’s rights, benefits, titles, interests, duties and obligations in, to and under the Project Documents to which it is a party if the Facility Lease terminates and Lessor retains the Leased Facility; and

WHEREAS, the Parties wish to set forth the terms and conditions by which [Lessor/Lessee] (“Assignor”) shall assign and [Lessee/Lessor] (“Assignee”) shall assume all of Assignor’s rights, benefits, titles, duties and obligations in, to and under the Project Documents to which Assignor is a party.

NOW, THEREFORE, in consideration of the foregoing premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 

ARTICLE 1:  DEFINITIONS

Capitalized terms used but not defined herein shall have the meanings set forth in Schedule 1.1 of the Facility Lease, and the rules of interpretation set forth in Schedule 1.1 of the Facility Lease shall apply to this Assignment and Assumption Agreement.

ARTICLE 2:  ASSIGNMENT AND ASSUMPTION

2.1

Assignment of the Project Documents.  Assignor hereby irrevocably assigns, conveys, transfers and delivers all of its rights, benefits, titles, interests, duties and obligations in, to and under the Project Documents to which it is a party to Assignee, its successors and assigns.  

2.2

Assumption of the Project Documents.  Assignee hereby irrevocably accepts the assignment of all of Assignor’s rights, benefits, titles, interests, duties and obligations in, to and under the Project Documents to which Assignor is a party and agrees to perform and discharge all of the liabilities and obligations of Assignor under and pursuant to the Project Documents.  

2.3

No Further Liability.  From and after the Transfer Date, Assignor shall have no further duties, obligations or liabilities under the Project Documents to which Assignor is a party and Assignee agrees to indemnify Assignor from any third party liability resulting from the performance or nonperformance of any of Assignor’s duties and obligations under the Project Documents to which Assignor was a party, whether now existing or hereafter arising.

ARTICLE 3:  REPRESENTATIONS AND WARRANTIES

Each of Assignor and Assignee represent and warrant to the other Party, as of the date hereof as follows:

3.1

Due Organization, Etc.  It: (i) is duly formed, validly existing and in good standing under the Laws of the State of Wisconsin; (ii) has all requisite power and all material Government Approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is duly qualified to do business in all jurisdictions in which the nature of the business conducted by it or proposed to be conducted by it makes such qualification necessary.

3.2

Due Authorization.  It has all necessary corporate power and authority to execute, deliver and perform its obligations under this Assignment and Assumption Agreement, and the execution, delivery and performance by it of this Assignment and Assumption Agreement has been duly authorized by all necessary corporate action on its part.

3.3

Non-Contravention.  The execution, delivery and performance by it of this Assignment and Assumption Agreement does not and shall not:

(a)

violate its Organic Documents;

(b)

violate any Law or Government Approval applicable to it or its property or to the Leased Facility;

(c)

result in a breach of or constitute a default under any agreement to which it is a party; or

(d)

result in, or require the creation or imposition of, any Lien (other than a Permitted Encumbrance) on any of its properties.

3.4

Enforceability, Etc.  This Assignment and Assumption Agreement: (a) has been duly authorized and duly and validly executed and delivered by it; and (b) assuming the due authorization, execution and delivery thereof by the other Party, constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or other similar Laws affecting creditors’ rights generally and by general principles of equity.

3.5

Litigation.  No court order, judgment or arbitral award has been issued and is outstanding with respect to it or any of its properties, rights or assets (including the Leased Facility) which prohibits it from executing or delivering this Assignment and Assumption Agreement or performing in any material respect its obligations under this Assignment and Assumption Agreement.

3.6

Government Approvals.  All Government Approvals required by applicable Law to have been obtained by it prior to the date of this representation and warranty in connection with the due execution and delivery of, and performance by it of its obligations and the exercise of its rights under, this Assignment and Assumption Agreement have been obtained and are in full force and effect, and are held in its name and are free from conditions or requirements (a) compliance with which could reasonably be expected to have a material adverse effect on its ability to perform its obligations under this Assignment and Assumption Agreement or the validity or enforceability of this Assignment and Assumption Agreement or (b) which it does not reasonably expect to be able to satisfy.

ARTICLE 4:  MISCELLANEOUS

4.1

Applicable Law.  THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS ASSIGNMENT AND ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF WISCONSIN.

4.2

Jury Trial.  EACH OF THE PARTIES WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS ASSIGNMENT AND ASSUMPTION AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS ASSIGNMENT AND ASSUMPTION AGREEMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

4.3

Notices.  Unless otherwise expressly specified or permitted by the terms hereof, all communications and notices provided for herein to a Party shall be in writing or shall be produced by a telecommunications device capable of creating a written record, and any such notice shall become effective (a) upon personal delivery thereof, including, by overnight mail or next Business Day or courier service, (b) in the case of notice by United States mail, certified or registered, postage prepaid, return receipt requested, upon receipt thereof, or (c) in the case of notice by such a telecommunications device, upon transmission thereof, provided such transmission is promptly confirmed by either of the methods set forth in clause (a) or (b) above, in each case addressed as provided below, or to such other address as any Party may designate by written notice to the other Party.

If to Assignor:

[To be inserted]

If to Assignee:

[To be inserted]

4.4

Counterparts.  This Assignment and Assumption Agreement shall be executed in multiple counterparts, each of which is an original but all of which together constitute the same instrument.  

4.5

Severability.  Whenever possible, each provision of this Assignment and Assumption Agreement shall be interpreted in such manner as to be effective and valid under applicable Law; but if any provision of this Assignment and Assumption Agreement shall be prohibited by or deemed invalid under any applicable Law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Assignment and Assumption Agreement.

4.6

Transfer Restrictions.  This Assignment and Assumption Agreement shall be binding upon the Parties and their respective successors and permitted assigns.  Unless otherwise specified in this Assignment and Assumption Agreement, no Party may transfer all or any part of its rights, benefits, advantages, titles or interest in and to this Agreement without the prior written consent of the other Parties, and any such Transfer in contravention of this Section 4.6 shall be null and void ab initio.  

4.7

Third-Party Beneficiaries.  Except as expressly provided herein, none of the provisions of this Assignment and Assumption Agreement are intended for the benefit of any Person except the Parties, their respective successors and permitted assigns.

4.8

Entire Agreement.  This Assignment and Assumption Agreement and the other Lease Documents state the rights and obligations of the Parties with respect to the assignment and assumption of the Project Documents and other transactions contemplated hereby and thereby and supersede all prior agreements, oral or written, with respect thereto.

4.9

Headings.  Section headings used in this Assignment and Assumption Agreement are for convenience of reference only and shall not affect the construction of this Agreement.

4.10

No Joint Venture.  Any intention to create a joint venture or partnership relation among the Parties is hereby expressly disclaimed.

4.11

Amendments and Waivers.  No term, covenant, agreement or condition of this Assignment and Assumption Agreement may be terminated, amended or compliance therewith waived (either generally or in a particular instance, retroactively or prospectively) except by an instrument or instruments in writing executed by the Parties.

4.12

Further Assurances.  Each Party shall promptly and duly execute and deliver such further documents and assurances for and take such further actions reasonably requested by another Party, all as may be reasonably necessary to carry out the purpose of this Assignment and Assumption Agreement.

[SIGNATURE PAGE FOLLOWS ON NEXT PAGE]

IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment and Assumption Agreement to be duly executed and delivered under seal by their respective officers thereunto duly authorized.

MGE POWER ELM ROAD, LLC,

  as Assignor/Assignee]

By:  _____________________________________

Name:

Title:

MADISON GAS AND ELECTRIC COMPANY, 

  as [Assignor/Assignee]

By:  _____________________________________

Name:

Title:

Footnotes

1

RTPI is an acronym for “Renewal Triggering Plant Investments,” a term defined in the ERGS Facility Lease.  This Facility Lease uses the term “Late Term Improvement” to describe the same concept, but in the interest of maintaining consistency between the formulas used in this Facility Lease and the ERGS Facility Lease, “RTPI” has been retained here.

2 

If there occurs a New Common Facilities Adjustment Event pursuant to Section 5.4 of the Facility Lease, Lessor’s New Common Facilities Ownership Interest in each Component will be decreased by an appropriate amount commensurate with the adjustment to the Basic Rent and Renewal Rent formulas pursuant to Section (B) of this Schedule 5.4.Converted by EDGARwiz

EXECUTION COPY

OPERATING AND MAINTENANCE AGREEMENT

by and among

WISCONSIN ELECTRIC POWER COMPANY,

MADISON GAS AND ELECTRIC COMPANY, AND

WISCONSIN PUBLIC POWER INC.,

AS LESSEE/OWNER PARTIES

AND

WISCONSIN ELECTRIC POWER COMPANY, AS OPERATING AGENT

FOR THE

ELM ROAD GENERATING STATION UNIT 2

Dated as of December 17, 2004

TABLE OF CONTENTS

ARTICLE I RULES OF INTERPRETATIONS; DEFINITIONS

2

SECTION 1.1

RULES OF INTERPRETATION.

2

SECTION 1.2

DEFINITIONS.

3

ARTICLE II OPERATING AGENT

13

SECTION 2.1

APPOINTMENT OF OPERATING AGENT.

13

SECTION 2.2

OPERATING AGENT’S DUTIES AND RESPONSIBILITIES.

14

SECTION 2.3

EMERGENCIES.

17

SECTION 2.4

CONTRACTS.

17

SECTION 2.5

STANDARDS OF CONDUCT GOVERNING OPERATING AGENT’S ACTIONS.

18

SECTION 2.6

COOPERATION WITH OPERATING AGENT.

19

SECTION 2.7

CHANGE OF OPERATING AGENT.

19

ARTICLE III OPERATING COMMITTEE

21

SECTION 3.1

ESTABLISHMENT AND NATURE OF OPERATING COMMITTEE.

21

SECTION 3.2

SCOPE OF OPERATING COMMITTEE’S REVIEW AND ADVICE.

23

SECTION 3.3

OPERATING COMMITTEE’S AUTHORITY FOR CERTAIN DECISIONS.

24

SECTION 3.4

SINGLE OPERATING COMMITTEE FOR UNIT 1, UNIT 2 AND COMMON FACILITIES

28

ARTICLE IV PROVISION AND USE OF INFORMATION

28

SECTION 4.1

OPERATING AGENT TO PROVIDE RELEVANT INFORMATION.

28

SECTION 4.2

SPECIFIC INFORMATION REQUIREMENTS.

29

SECTION 4.3

PARTIES’ RIGHTS OF ACCESS.

30

SECTION 4.4

AUDITS.

30

ARTICLE V TRANSITION

32

SECTION 5.1

CONTROL DURING AND AFTER TRANSITION PERIOD.

32

SECTION 5.2

DOCUMENTS AND AGREEMENTS.

32

SECTION 5.3

COOPERATION.

32

SECTION 5.4

COSTS INCURRED BY OPERATING AGENT DURING TRANSITION PERIOD.

32

SECTION 5.5

TESTING AND INITIAL START-UP.

33

SECTION 5.6

CALEDONIA PAYMENTS.

33

ARTICLE VI OPERATIONS AND SCHEDULING

33

SECTION 6.1

COMMERCIAL OPERATION.

33

SECTION 6.2

AUXILIARY SERVICES.

33

SECTION 6.3

OPERATION BEYOND NET GENERATING CAPABILITY.

33

SECTION 6.4

ALLOCATION OF CAPACITY.

34

SECTION 6.5

MINIMUM SCHEDULE OBLIGATIONS.

34

SECTION 6.6

GENERATION CONTROL.

34

SECTION 6.7

OPERATING EMERGENCIES.

36

SECTION 6.8

COORDINATION OF MAINTENANCE.

36

SECTION 6.9

METERING.

37

ARTICLE VII COMMON FACILITIES

38

ARTICLE VIII FUEL PROCUREMENT AND DELIVERY

38

SECTION 8.1

COAL SUPPLIES.

38

SECTION 8.2

COAL HANDLING SERVICES.

44

SECTION 8.3

OTHER FUEL SUPPLIES.

44

SECTION 8.4

AFFILIATE CONTRACTS.

44

SECTION 8.5

INFORMATION REGARDING COAL DELIVERED TO THE UNIT.

44

SECTION 8.6

INFORMATION REGARDING COAL DELIVERED TO OTHER WEPCO UNITS.

45

SECTION 8.7

AUDIT RIGHTS REGARDING FUEL-RELATED CONTRACTS.

46

SECTION 8.8

CONFIDENTIALITY.

47

TABLE OF CONTENTS

ARTICLE IX ALLOCATION OF CAPITAL COSTS AND OPERATING COSTS

47

SECTION 9.1

GENERAL PRINCIPLES.

47

SECTION 9.2

COMPUTATION OF THE OPERATING AGENT’S LABOR COSTS.

49

SECTION 9.3

COSTS UNIQUE TO OR ORIGINATING AT ELM ROAD UNIT 2.

50

SECTION 9.4

COSTS ALLOCATED FROM THE COMMON FACILITIES O&M AGREEMENT.

50

SECTION 9.5

COSTS UNIQUE TO WEPCO’S FOSSIL FUEL GENERATING FACILITIES.

51

SECTION 9.6

COSTS RELATING TO WEPCO’S AND WISCONSIN GAS COMPANY’S UTILITY OPERATIONS.

51

SECTION 9.7

OTHER SUPPORT COSTS.

51

SECTION 9.8

MISCELLANEOUS.

52

SECTION 9.9

REIMBURSEMENT RESPONSIBILITY.

53

ARTICLE X PAYMENTS AND BILLINGS

53

SECTION 10.1

BILLING PROCEDURES.

53

SECTION 10.2

OPERATING DEPOSIT.

54

SECTION 10.3

COAL COSTS.

54

SECTION 10.4

EXTRAORDINARY COSTS AND REVENUES.

54

SECTION 10.5

PAYMENT IN EVENT OF DISPUTE.

55

SECTION 10.6

ANNUAL TRUE-UPS.

55

SECTION 10.7

FINAL ACCOUNTING.

55

SECTION 10.8

AUDIT ADJUSTMENTS.

56

ARTICLE XI TAXES

56

ARTICLE XII CLEAN AIR ACT EMISSION ALLOWANCE REQUIREMENTS

56

SECTION 12.1

ANNUAL ALLOWANCE REQUIREMENT, INITIAL SHARE, AND ALLOWANCE CONTRIBUTION.

56

SECTION 12.2

INITIAL FUNDING OF ELM ROAD UNIT 2 ALLOWANCE ACCOUNT.

57

SECTION 12.3

QUARTERLY ADJUSTMENT OF ALLOWANCE HOLDINGS.

57

SECTION 12.4

ANNUAL ADJUSTMENT OF ALLOWANCE CONTRIBUTION.

57

SECTION 12.5

ANNUAL CONTRIBUTION OF THIRD YEAR ALLOWANCES.

58

SECTION 12.6

ADJUSTMENT OF ANNUAL ALLOWANCE REQUIREMENT.

58

SECTION 12.7

EXCESS ALLOWANCES.

58

SECTION 12.8

ACQUISITION OF ALLOWANCES BY OPERATING AGENT; REIMBURSEMENT OF COSTS.

58

SECTION 12.9

PROCEDURES FOR TRANSFERRING ALLOWANCES; COMPLIANCE USE DATES.

59

SECTION 12.10

RESTRICTIONS ON ALLOWANCE TRANSFERS TO COVER EXCESS EMISSIONS.

59

SECTION 12.11

NEW/FUTURE REGULATORY REQUIREMENTS.

59

ARTICLE XIII INSURANCE

59

SECTION 13.1

OPERATING AGENT’S DUTY TO PROVIDE INSURANCE COVERAGE.

59

SECTION 13.2

INSPECTIONS.

60

SECTION 13.3

CONTRACTORS’ INSURANCE.

60

ARTICLE XIV LOSSES, INTERCONNECTION, AND TRANSMISSION

60

SECTION 14.1

LOSSES.

60

SECTION 14.2

INTERCONNECTION.

60

SECTION 14.3

TRANSMISSION SERVICE.

61

ARTICLE XV DAMAGE TO FACILITY

61

SECTION 15.1

ALLOCATION OF LOSS PROCEEDS.

61

SECTION 15.2

EVENT OF TOTAL LOSS.

61

SECTION 15.3

EVENT OF LOSS.

62

ARTICLE XVI INDEMNIFICATION AND LIABILITY

62

SECTION 16.1

GENERAL INDEMNITY.

62

SECTION 16.2

INDEMNIFICATION FOR REGULATORY PENALTIES.

63

SECTION 16.3

LIABILITY AMONG THE PARTIES.

63

TABLE OF CONTENTS

SECTION 16.4

COOPERATION REGARDING CLAIMS.

64

SECTION 16.5

SURVIVAL OF PROVISIONS.

64

ARTICLE XVII ASSIGNMENTS AND DELEGATIONS

64

SECTION 17.1

SUCCESSORS AND ASSIGNS.

64

SECTION 17.2

ASSIGNMENT BY OPERATING AGENT.

65

SECTION 17.3

ASSIGNMENT BY LESSEE/OWNER PARTIES.

65

ARTICLE XVIII DEFAULT AND REMEDIES

65

SECTION 18.1

EVENTS OF DEFAULT.

65

SECTION 18.2

EFFECT OF DEFAULT.

66

ARTICLE XIX FORCE MAJEURE

66

SECTION 19.1

EFFECT OF FORCE MAJEURE.

66

SECTION 19.2

DEFINITION OF FORCE MAJEURE.

67

SECTION 19.3

NOTICE OF FORCE MAJEURE.

67

ARTICLE XX DISPUTE RESOLUTION

67

SECTION 20.1

EXCLUSIVE PROCEDURE.

67

SECTION 20.2

DISPUTE NOTICES.

68

SECTION 20.3

INFORMAL RESOLUTION OF DISPUTES.

68

SECTION 20.4

RESOLUTION OF NON-TECHNICAL DISPUTES.

68

SECTION 20.5

RESOLUTION OF TECHNICAL DISPUTES.

69

SECTION 20.6

BINDING ARBITRATION OF TECHNICAL DISPUTES.

69

SECTION 20.7

ENFORCEMENT OF ARBITRAL AWARD.

70

SECTION 20.8

FEES AND EXPENSES.

70

SECTION 20.9

CONTINUED PERFORMANCE.

70

SECTION 20.10

SURVIVAL.

70

ARTICLE XXI REPRESENTATIONS AND WARRANTIES

70

ARTICLE XXII CONFIDENTIALITY

72

SECTION 22.1

NON-DISCLOSURE OBLIGATIONS.

72

SECTION 22.2

LAW.

73

ARTICLE XXIII TERM

73

ARTICLE XXIV MISCELLANEOUS

73

SECTION 24.1

APPLICABLE LAW.

73

SECTION 24.2

JURY TRIAL.

73

SECTION 24.3

NOTICES.

74

SECTION 24.4

COUNTERPARTS.

75

SECTION 24.5

SEVERABILITY.

75

SECTION 24.6

THIRD-PARTY BENEFICIARIES.

75

SECTION 24.7

ENTIRE AGREEMENT.

75

SECTION 24.8

SCHEDULES.

75

SECTION 24.9

NO JOINT VENTURE.

75

SECTION 24.10

AMENDMENTS AND WAIVERS.

75

SECTION 24.11

SURVIVAL.

76

SECTION 24.12

FURTHER ASSURANCES.

76

SECTION 24.13

INTERPRETATION NECESSITATED BY CERTAIN FUTURE MGE OR WPPI ELECTIONS.

76

SECTION 24.14

CERTIFICATIONS AND OPINIONS OF COUNSEL.

76

TABLE OF CONTENTS

SCHEDULES

Schedule 1.1

Examples of Interest Calculation

Schedule 3.1

Initial Operating Committee Members

Schedule 8.1

Allocation of Coal Consumption

Schedule 9.1

FERC Accounts

Schedule 9.2

Productive Labor Rate

Schedule 9.3

Costs Unique to Elm Road Unit 2

Schedule 9.4

Costs Allocated from the Common Facilities O&M Agreement

Schedule 9.5

Costs Unique to WEPCO’s Fossil Fuel Generating Facilities

Schedule 9.6

Costs Unique to WEPCO’s Utility Operations

Schedule 9.7

Other Support Costs

Schedule 20.3

Form of Agreement to Arbitrate Technical Disputes

Schedule 24.14

Legal Opinion Matters

TABLE OF CONTENTS

ELM ROAD GENERATING STATION UNIT 2

OPERATING AND MAINTENANCE AGREEMENT

This ELM ROAD GENERATING STATION UNIT 2 OPERATING AND MAINTENANCE AGREEMENT (this “Agreement”), dated as of December 17, 2004, is by and among WISCONSIN ELECTRIC POWER COMPANY, a Wisconsin corporation, in its capacity as a Lessee/Owner Party (“WEPCO”), MADISON GAS AND ELECTRIC COMPANY, a Wisconsin corporation (“MGE”), WISCONSIN PUBLIC POWER INCORPORATED, a municipal electric company organized under the laws of Wisconsin (“WPPI”), and WISCONSIN ELECTRIC POWER COMPANY, a Wisconsin corporation, in its capacity as Operating Agent (the “Operating Agent”).  Each of WEPCO (in either of its capacities), MGE and WPPI may be hereinafter referred to as a “Party” and collectively two or more of them may be referred to as “Parties.”

WITNESSETH

WHEREAS, WEPCO owns the Oak Creek/Elm Road Site in the Counties of Milwaukee and Racine, Wisconsin, on which WEPCO currently owns and operates four coal-based electric generating units and one gas-based electric generating unit and related facilities and on which ERGS, a subsidiary of WEC, currently plans to develop a two-unit coal-based generating station pursuant to or consistent with the order of the Public Service Commission of Wisconsin (“PSCW”); and

WHEREAS, WEPCO has agreed to lease a portion of the Land to ERGS, pursuant to a Ground Lease, dated as of November 9, 2004, and WEPCO has entered into an Easement and Indemnification Agreement with MGE Power and WPPI dated as of the date hereof, granting to MGE Power and WPPI certain property rights related to the ownership and siting of the Unit at the Elm Road Site; 

WHEREAS, ERGS, MGE Power and WPPI have entered or are, simultaneously with this Agreement, entering into the Elm Road 2 Ownership Agreement pursuant to which MGE Power and WPPI may elect to become co-owners of Unit 2 of the Elm Road Generating Station, which will consist of a supercritical, pulverized-coal-based electric generating facility with a net nominal capacity of approximately 615 MW, to be constructed at the Elm Road Site and is anticipated to achieve commercial operations in 2009;

WHEREAS, ERGS, MGE Power and WPPI have entered or are, simultaneously with this Agreement, entering into the New Common Facilities Ownership Agreement which will govern the ownership of the New Common Facilities after the Lease Effective Date;

WHEREAS, the Parties hereto have entered or are, simultaneously with this Agreement, entering into the Elm Road Generating Station Common Facilities Operating & Maintenance Agreement which will govern the operation of the Common Facilities;

WHEREAS, upon completion of construction of Elm Road Unit 2 and satisfaction of certain other conditions, ERGS will lease its interest to WEPCO under a long-term facility lease dated as of November 9, 2004, and MGE Power will, if it elects to become a co-owner of the 

Unit, lease its interest to MGE under a long-term facility lease in the form approved by the PSCW; 

WHEREAS, the Parties desire to set forth their agreements and understandings regarding the operation and maintenance of Elm Road Unit 2, and the rights of WEPCO, MGE and WPPI, as lessees or owners, to receive the energy production and related ancillary services and the revenues generated by the sale of byproducts associated with their respective undivided interests in Elm Road Unit 2, as well as other matters; and

WHEREAS, the Parties desire to appoint WEPCO as Operating Agent for Elm Road Unit 2 and to set forth the terms upon which the Operating Agent will, among other things, operate and maintain Elm Road Unit 2, procure fuel, and perform related activities.

NOW, THEREFORE, in consideration of the foregoing premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

ARTICLE I

RULES OF INTERPRETATIONS; DEFINITIONS

SECTION 1.1

Rules of Interpretation.

(a)

In this Agreement, unless a clear contrary intention is apparent from the context:

(i)

the singular includes the plural and vice versa;

(ii)

references to a person shall include such person’s successors and assigns; provided, however, that with respect to a Party and its rights and obligations under this Agreement, references to a Party shall only include such Party’s successors and assigns if such successors and assigns are permitted by this Agreement; provided, further, references to a person in a particular capacity excludes such person in any other capacity or individually;

(iii)

references to any gender include the other genders;

(iv)

references to any agreement (including this Agreement), document or instrument mean such agreement, document or instrument as amended or modified from time to time in accordance with the terms, conditions and provisions thereof;

(v)

references to any Law mean such Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder and reference to any section or other provision of any Law means that provision of such Law from time to time in effect and constituting the substantive amendment, modification, codification, replacement or re-enactment of such section or other provision;

(vi)

references to the Preamble or to any Article, Section, Appendix, or Schedule mean the Preamble hereto or such Article or Section hereof or Appendix or Schedule hereto;

(vii)

“hereunder”, “hereof”, “hereto” and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Article, Section or other provision hereof;

(viii)

“including” (and other correlative meanings such as “include”) means including any listed examples but without limiting the generality of any description preceding such term; and

(ix)

with respect to any rights and obligations of the Parties, all such rights and obligations shall be construed to the extent permitted by applicable Law.

(b)

Computation of Time Periods.  For purposes of computation of periods of time under this Agreement, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding”.

(c)

Accounting Terms and Determinations.  Unless otherwise specified in this Agreement, all terms of an accounting character used herein shall be interpreted, all accounting determinations required to be made hereunder shall be made, and any financial statements required to be delivered hereunder shall be prepared, in accordance with Accounting Practices.

(d)

Legal Representation of the Parties.  This Agreement was negotiated by the Parties with the benefit of legal representation and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against a person drafting the contract provisions shall not apply to any construction or interpretation thereof.

(e)

Headings.  Section headings and the table of contents used in this Agreement (including the Schedules hereto) are for convenience of reference only and shall not affect the construction of this Agreement.

(f)

Coordination With Other Agreements.  If there is any conflict between this Agreement and any of the other Elm Road 2 Documents, this Agreement and the Elm Road 2 Document(s) shall be interpreted and construed, if possible, so as to avoid or minimize such conflict.  Notwithstanding anything else to the contrary in this Agreement, the Operating Agent shall not be required to administer the provisions of any Project Agreement to the extent that doing so would cause it to violate an express provision of the WEPCO Facility Lease.  

SECTION 1.2

Definitions.

Capitalized terms used herein and in the Schedules hereto shall have the meanings ascribed to such terms below.

“Acceptable Credit” shall mean, with respect to any person, except as provided in the next sentence, a rating of its senior long-term unsecured debt of BBB or better by Standard & Poor’s 

Ratings Group or Baa2 or better by Moody’s Investor Service.  In the case of a municipal electric company or other political subdivision, “Acceptable Credit” shall mean a rating of its senior long-term debt, which debt is not secured by any tangible assets, of BBB or better by Standard & Poor’s Ratings Group or Baa2 or better by Moody’s Investor Service.  A person shall be deemed to have Acceptable Credit if its obligations are guaranteed by a person with Acceptable Credit. 

“Accounting Practices” shall mean requirements, practices, procedures, methodologies and principles as set forth in the “Uniform System of Accounts Prescribed for Public Utilities and Licensees subject to the provisions of the Federal Power Act” (18 C.F.R. Part 101), applicable to “major” utilities as therein defined, in effect on the date hereof, as amended from time to time, and consistent with Generally Accepted Accounting Principles.

“Affiliate” shall mean, with respect to any person, (a) each entity that such person Controls, (b) each person that Controls such person, and (c) each entity that is under common Control with such person.

“Agreement” shall mean this Elm Road Generating Station Unit 2 Operating and Maintenance Agreement, together with all of the Schedules hereto.

“Allowance Account” shall mean the number of sulfur dioxide emission allowances held in the Elm Road Unit 2 allowance account that are allocated to each Lessee/Owner Party pursuant to Section 12.1(b).

“Annual Allowance Contribution” shall mean each Lessee/Owner Party’s Pro Rata Share of the projected Annual Allowance Requirement, as such Requirement or Contribution may be adjusted pursuant to Section 12.6.

“Annual Allowance Requirement” shall have the meaning given to such term in Section 12.1.

“Applicable Electric Reliability Organization” shall mean the North American Electric Reliability Council, and any successor national organization with responsibility to establish reliability standards, and any regional electric reliability organization with responsibility, for reliability purposes, over the area that encompasses Eastern Wisconsin (currently Mid-America Interconnected Network, Inc.).

“Applicable Transmission System Operator” shall mean one or more entities authorized by the FERC to operate the transmission facilities (i) with which the Unit is interconnected; and/or (ii) required to deliver the output of the Unit as directed by the Lessee/Owner Parties.  The Applicable Transmission System Operator currently is the Midwest Independent System Operator, Inc.

“Arbitration Notice” shall have the meaning given to such term in Section 20.6.

“Available Net Generating Capability” shall mean the Net Generating Capability adjusted for capacity not available, or additional capacity available, for any reason, including daily, monthly or seasonal rating changes, derates and operating constraints, but shall not include the capability 

above Net Generating Capability during testing or during a system emergency pursuant to Section  6.3.

“Business Day” shall mean any day on which commercial banks are not authorized or required to close in Milwaukee, Wisconsin.  For the avoidance of doubt, Saturday and Sunday shall not be Business Days.

“Capital Costs” shall mean those costs required to be capitalized under Accounting Practices, without carrying charges (unless otherwise agreed) or markup, incurred by or on behalf of the Operating Agent at Elm Road Unit 2 in connection with its performance under this Agreement in accordance with Prudent Utility Practice and this Agreement.

“Coal Costs” shall mean all costs incurred under the Coal Supply Agreements for the supply and transportation of coal to the Unit in accordance with Article VIII.

“Coal Supply Agreements” shall have the meaning given to such term in Section 8.1(a)(i).

“Common Facilities” shall mean the Existing Common Facilities and the New Common Facilities.

“Common Facilities O&M Agreement” shall mean the Elm Road Generating Station Common Facilities Operating and Maintenance Agreement among the owners and/or lessees of the Common Facilities from time to time.

“Compounded Monthly” shall mean the addition to principal of each month’s interest at the end of such calendar month.

“Confidential Information” shall mean, with respect to a Party, all proprietary and confidential business information and data of such Party, including Trade Secrets, that is not generally known by or readily ascertainable by or available to, on a legal or authorized basis, the general public; and which (1) has been expressly and clearly designated as confidential by the Party providing the information, (2) is within a category of information that the Operating Committee has designated as confidential, or (3) the receiving Party would normally consider and treat as confidential if the information were its own.  For the avoidance of doubt, “Confidential Information” shall not include any information: (a) which is already known to the receiving Party; or (b) which (i) has become generally known to the public through no wrongful act of the receiving Party or its representatives, (ii) has been received by the receiving Party from a third party without (to the receiving Party’s knowledge) restriction on disclosure and without (to the receiving Party’s knowledge) a breach by the third party of an obligation of confidentiality, (iii) is independently developed by the receiving Party without use of the Confidential Information received from a disclosing Party; or (iv) when received by the receiving Party constituted Confidential Information but, due to the passage of time, the factual predicate justifying treatment as Confidential Information no longer applies.

“Control” shall mean the possession, directly or indirectly, through one or more intermediaries, of the following:

(a) (i)  in the case of a corporation, 50% or more of the outstanding voting securities thereof; (ii) in the case of a limited liability company, partnership, limited partnership or venture, the right to 50% or more of the distributions therefrom (including liquidating distributions); (iii) in the case of a trust or estate, including a business trust, 50% or more of the beneficial interest therein; and (iv) in the case of any other entity, 50% or more of the economic or beneficial interest therein; and

(b)

in the case of any entity, the power or authority, through ownership of voting securities, by contract or otherwise, to exercise a controlling influence over the management of the entity.

“Default Interest Rate” shall mean the daily interest rate to be applied each day during the period for which such interest is to be calculated, to be applied as illustrated in Schedule 1.1.  Such daily rate shall remain the same for each day for which interest is to be calculated in any given calendar month.  Such daily rate shall equal 1/365 of the sum of the per annum prime lending rate published in The Wall Street Journal under “Money Rates” on the first Business Day of such month, plus two percentage points (200 basis points); provided, that the Default Interest Rate shall not exceed the maximum rate permitted by applicable Law.

“Dispute” shall have the meaning given to such term in Section 20.1.

“Dispute Notice” shall have the meaning given to such term in Section 20.2.

“Disputing Party” shall have the meaning given to such term in Section 20.2.

“Elm Road 2 Documents” shall mean this Agreement, the Ownership Agreement, the New Common Facilities Ownership Agreement, the Common Facilities O&M Agreement, the Interim Use and Operating Agreement and the Property Rights Agreement.

“Elm Road Coal Pile” shall mean the coal pile(s) maintained at the Elm Road Site from which coal is supplied to Elm Road Unit 2.

“Elm Road Generating Station” shall mean the coal-based generating station consisting of Elm Road Units 1 and 2 and New Common Facilities to be developed by ERGS on the Land. 

“Elm Road I Ground Lease” shall mean the Elm Road I Ground Lease and Easement Agreement between WEPCO and ERGS. 

“Elm Road II Ground Lease” or “Ground Lease” shall mean the Elm Road II Ground Lease and Easement Agreement between WEPCO and ERGS.

“Elm Road Site” shall mean (i) those portions of Parcel 1 and Parcel 2, respectively, on which the Elm Road Generating Station is located, (ii) the Land Easement Areas, and (iii) those portions of the Land on which the Site Common Facilities are located.

“Elm Road Unit 2” or the “Unit” shall mean the approximately 615 MW (net) supercritical pulverized coal electric generating facility and related facilities described in Exhibit A to the Ownership Agreement, excluding New Common Facilities. 

“Elm Road Units 1 & 2” shall mean Elm Road Unit 2 and the approximately 615 MW (net) supercritical pulverized coal electric generating facility and related facilities described in Exhibit A to the Unit 1 Ownership Agreement excluding New Common Facilities.

“Energy Scheduling Business Day” shall mean Monday through Friday, with the exception of holidays observed by the North American Electric Reliability Council or any successor thereto.

“EPA” shall mean the United States Environmental Protection Agency, or its successor.

“EPC Contract” shall mean the Turnkey Engineering, Procurement and Construction Contract, dated as of April 9, 2004 between the Project Manager and the EPC Contractor, or any successor agreement between the Project Manager and the EPC Contractor for the construction of the Elm Road Generating Station.

“EPC Contractor” shall mean Bechtel Power Corporation, a Nevada corporation, or any replacement contractor under the EPC Contract.

“ERGS” shall mean Elm Road Generating Station Supercritical, LLC.

“Event of Default” shall mean any of the events enumerated in Section 18.1.

“Event of Loss” shall mean any loss of, destruction or damage to, or taking of any part of Elm Road Unit 2 other than an Event of Total Loss.

“Event of Total Loss” shall mean: (a) all or substantially all of Elm Road Unit 2 shall be damaged to the extent of being completely or substantially completely destroyed; (b) any damage to Elm Road Unit 2 that results in an insurance settlement with respect thereto on the basis of a total loss or an agreed constructive or a compromised total loss of Elm Road Unit 2; or (c) all or substantially all of or a material portion of Elm Road Unit 2 has been taken by exercise of eminent domain or a similar right or power by a Governmental Authority or a Governmental Authority shall order Elm Road Unit 2 to cease to operate permanently.

“Existing Common Facilities” shall mean any and all facilities, components, equipment and materials which are (a) utilized in support of the operation and maintenance of the Oak Creek Power Plant and one or both of Elm Road Units 1 or 2, (b) owned or leased by WEPCO and (c) in-place and operational prior to the initiation of construction of Elm Road Unit 1, as such facilities, components, equipment and materials may be repaired from time to time.

“FERC” shall mean the Federal Energy Regulatory Commission, or its successor.

“Force Majeure” shall have the meaning given to such term in Section 19.2.

“Generally Accepted Accounting Principles” shall mean generally accepted accounting principles in the United States of America as in effect from time to time, applied on a consistent basis with WEPCO’s other utility operations.

“Government Approval” shall mean any authorization, consent, approval, license, lease, ruling, permit, tariff, rate, certification, exemption, variance, order, judgment, decree, publication, declaration, or registration issued by any Governmental Authority.

“Governmental Authority” shall mean any applicable federal, state, county, municipal or other government, quasi-government or regulatory authority, agency, board, body, commission, instrumentality, court or tribunal, or any political subdivision of any thereof.

“Gross Negligence” shall be determined by reference to Wisconsin common law concepts of gross negligence, provided, that no Party shall use the absence of a gross negligence concept under Wisconsin law as a defense to a claim alleging Gross Negligence or as a basis to substitute a standard other than Gross Negligence where provided for in this Agreement.

“GTIA” shall mean the Generation-Transmission Interconnection Agreement dated as of December 14, 2001 between WEPCO and American Transmission Company LLC concerning the Elm Road Generating Station.

“Indemnified Party” shall have the meaning given such term in Section 16.4.

“Indemnifying Party” shall have the meaning given such term in Section 16.4.

“Interim Use and Operating Agreement” shall mean the Interim Use and Operating Agreement dated as of the date hereof between the Operating Agent and the Project Manager.

“Land” shall mean the property owned by WEPCO on which the Oak Creek Power Plant, the Existing Common Facilities, the Elm Road Generating Station will all be located, as more completely set forth in Exhibit A to the Ground Lease. 

“Land Easement Areas” shall mean collectively "Land Easement Areas" as defined in the Elm Road I Ground Lease and "Land Easement Areas" as defined in the Elm Road II Ground Lease.

“Law” shall mean any statute, law, regulation, ordinance, rule, judgment, order, decree, permit, concession, grant, franchise, license, agreement, directive, guideline, policy, requirement, or other governmental restriction or any similar form of decision of or determination by, or any interpretation or administration of any of the foregoing by, any Governmental Authority or judicial or administrative body, whether now or hereafter in effect.

“Lease Effective Date” shall have the meaning given to it in the WEPCO Facility Lease; provided, however, if the WEPCO Facility Lease has terminated or expired prior to the Lease Effective Date, Lease Effective Date shall mean the date on which the Unit shall have achieved Commercial Operation, as defined in the WEPCO Facility Lease.

“Lessee/Owner Party” shall mean WEPCO, in its role as lessee of the Unit under the WEPCO Facility Lease, as distinct from its role as Operating Agent, or MGE or WPPI, and the plural shall refer to any combination of WEPCO (as lessee), MGE and WPPI.

“Loss” shall mean any liability, obligation, damage, loss, demand, penalty, interest, fine, claim, action, suit, judgment, settlement, together with reasonable costs, fees, expenses and disbursements (including reasonable legal fees and expenses and costs of investigation), arising out of this Agreement.

“MAIN” shall mean Mid-America Interconnected Network, Inc. or any successor with responsibility for establishing the criteria for monitoring compliance with the rating of generation equipment located at the Land.

“Major Operating Decision” shall have the meaning given to such term in Section 3.3(c).

“Majority Vote” shall mean the affirmative vote of one or more voting representatives the sum of whose votes exceed 50% of the voting rights in the Unit.

“MGE” shall mean Madison Gas and Electric Company.

“MGE Facility Lease” shall mean the Elm Road Unit 2 Facility Lease Agreement between MGE Power and MGE.

“MGE Power” shall mean MGE Power Elm Road, LLC.

“Minimum Net Generation” shall mean the lowest net power output at which the Unit under normal operating conditions can be reliably maintained in service on a continuous basis using only coal as fuel, as determined by the Operating Agent from time to time, consistent with Prudent Utility Practice and manufacturers’ recommendations.

“MW capacity” shall have the meaning given to such term in Section 9.1(b)(xi).

“Net Generating Capability” shall mean that amount of kilowatts, less station use (including the Unit’s share of power usage by Common Facilities), that the Unit can normally supply at the Point of Delivery, taking into account transformer losses between the Unit and the Point of Delivery, consistent with Prudent Utility Practice and manufacturers’ recommendations, and determined in accordance with an URGE test conducted pursuant to MAIN standards.

“New Common Facilities” shall mean certain separate facilities, as such facilities may be modified from time to time, that are to be constructed as part of the Elm Road Generating Station and that will be utilized in common in the operation and maintenance of the Elm Road Units 1 and 2 and, where applicable, one or more units of the Oak Creek Power Plant.

“New Common Facilities Ownership Agreement” shall mean the New Common Facilities Ownership Agreement among ERGS, WPPI and MGE Power.

“Oak Creek Power Plant” shall mean the existing coal-based units (Units 5 through 8) and the gas-based unit (Unit 9) currently located on the Land, and any replacement or additional units installed on or adjacent to the site now occupied by Units 5 through 9 other than the Elm Road Generating Station.

“Operating Agent” shall mean the agent, including any Successor Operating Agent, acting on behalf of the Lessee/Owner Parties and appointed pursuant to Article II, to perform the Operating Functions with respect to Elm Road Unit 2 during the Term of this Agreement.  Throughout the Term of this Agreement, while WEPCO is the Operating Agent, any reference to the Operating Agent shall mean WEPCO acting solely in its capacity as Operating Agent, and shall not refer to WEPCO acting in any other capacity under this Agreement or any other Project Agreement.

“Operating Committee” shall have the meaning given to such term in Section 3.1.

“Operating Committee Member” shall have the meaning given to such term in Section 3.1(b).

“Operating Costs” shall mean those costs and expenses, without carrying charges or markup, and excluding Capital Costs and Coal Costs, incurred by or on behalf of the Operating Agent in connection with its performance under this Agreement in accordance with Prudent Utility Practice and this Agreement.

“Operating Emergency” shall mean an unplanned event or circumstance, including forced outage, which causes or necessitates, or may cause or necessitate, a reduction or curtailment in the availability of power or energy from the Unit.

“Operating Functions” shall mean the duties and responsibilities assigned to the Operating Agent under this Agreement.

“Ownership Agreement” shall mean the Elm Road II Ownership Agreement among ERGS, MGE Power, WPPI, the Project Manager and, for the limited purpose set forth therein, WE Power.

“Parcel 1” shall mean the land described on Exhibit B-1 to the Elm Road I Ground Lease. 

“Parcel 2” shall mean the land described on Exhibit B-1 to the Elm Road II Ground Lease.

“Payment Date” shall mean the date occurring 15 Business Days after the date an invoice is transmitted.

“Payment Default Period” shall have the meaning given to such term in Section 18.2

“Point of Delivery” shall mean, with respect to energy and ancillary services delivered from the Unit, the high side of the generator step-up transformer.

“Primary Destination Coal Commodity Contract” shall mean any Coal Supply Agreement under which it is anticipated that more than 10% of the tonnage of coal to be purchased pursuant thereto shall be delivered to Elm Road Unit 2.

“Primary Destination Coal Transportation Contract” shall mean any Coal Transportation Agreement under which it is anticipated that more than 10% of the tonnage of coal to be transported pursuant thereto shall be delivered to Elm Road Unit 2.

“Primary Destination Contract” shall mean a Primary Destination Coal Commodity Contract or Primary Destination Coal Transportation Contract.

“Pro Rata Share” shall mean each Lessee/Owner Party’s owned or leased share of the Unit, as in effect from time to time.  WPPI’s Pro Rata Share shall equal its Unit 2 Ownership Percentage under the Ownership Agreement.  WEPCO’s Pro Rata Share shall equal ERGS’s Unit 2 Ownership Percentage under the Ownership Agreement which is leased to WEPCO pursuant to the WEPCO Facility Lease.  MGE’s Pro Rata Share shall equal MGE Power’s Unit 2 Ownership Percentage under the Ownership Agreement, which is leased to MGE pursuant to the MGE Facility Lease.

“Project Agreements” shall mean the Elm Road 2 Documents, the WEPCO Facility Lease, the MGE Facility Lease, the EPC Contract, all material agreements that the Operating Agent enters into on behalf of the Parties pursuant to this Agreement, and all other material agreements conveyed to the Operating Agent and continuing in effect after the Lease Effective Date.

“Project Manager” shall mean Elm Road Services, LLC.

“Property Rights Agreement” shall mean the Elm Road Generating Station Unit 2 Easement and Indemnification Agreement by and among WEPCO, MGE Power and WPPI, dated as of the date hereof.

“Provisional Certification Date” shall mean the date on which the Unit’s sulfur dioxide emission monitoring system is provisionally certified pursuant to 40 C.F.R. §75.20(a)(3).

“Prudent Utility Practice” shall mean any of the practices, methods and acts, which, in the exercise of reasonable judgment in the light of the facts known at the time the decision was made (including, but not limited to, the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry prior thereto), reasonably could have been expected to accomplish the desired result consistent with reliability, safety, good business practice and expediency.  Prudent Utility Practice is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather is a spectrum of possible practices, methods or acts which reasonably could have been expected to accomplish the desired result at a reasonable cost consistent with reliability, safety, good business practice and expediency.  Prudent Utility Practice includes due regard for manufacturers’ warranties, environmental considerations, and the requirements of governmental agencies that have jurisdiction.  In applying the standard of Prudent Utility Practice to any matter under this Agreement, equitable consideration shall be given to the circumstances, requirements and obligations of each of the Parties.

“PSCW” shall mean the Public Service Commission of Wisconsin or successor regulatory body.

“Representative” shall mean, with respect to any Party, its officers, directors, employees, contractors, agents and representatives; provided, however, that neither the Operating Agent nor the Project Manager shall be a Representative of any Party for purposes of Article XVI of this Agreement. 

“Scheduled Commercial Operation Date” shall have the meaning given to such term in the WEPCO Facility Lease.

“Scheduling” (and other verb forms thereof) shall mean a Lessee/Owner Party scheduling, dispatching, or otherwise calling upon Elm Road Unit 2 to generate all or a portion of the Lessee/Owner Party’s Pro Rata Share of the Unit’s Available Net Generating Capability and/or ancillary services capability, and shall include such electronic or other automated methods as dynamic scheduling and operation through a pseudo-tie.

“Successor Operating Agent”  shall mean any successor to the Operating Agent under this Agreement.

“Technical Dispute” means any Dispute which each of the Disputing Parties agrees satisfies the following conditions:  a Dispute requiring specialized knowledge relating, directly and solely, to the technical aspects of engineering, construction, operation or maintenance of the Elm Road Generating Station and its immediately related facilities, or accounting for and assigning costs under this Agreement.  For the avoidance of doubt, the issue of whether a Party’s actions constitute Gross Negligence or willful misconduct shall not be considered a Technical Dispute.

“Technical Expert” shall mean a person or entity selected by the Disputing Parties to arbitrate a Technical Dispute in accordance with Section 20.6.  If the Disputing Parties cannot agree on the identity of a Technical Expert for a specific Technical Dispute, a Technical Expert shall be selected on their behalf in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in force and effect.

“Term” shall have the meaning given to such term in Article XXIII.

“Trade Secrets” shall mean, with respect to a Party, information of such Party, including a formula, pattern, compilation, program, device, technique or process, which (a) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and (b) is the subject of efforts to maintain its secrecy that are reasonable under the circumstances.

“Transition Period” shall mean the period commencing on the day that is 24 months prior to the Scheduled Commercial Operation Date, and ending on the Lease Effective Date.

“True-Up Interest Rate” shall mean the daily interest rate to be applied each day during the period for which such interest is to be calculated, to be applied as illustrated in Schedule 1.1.  Such daily rate shall remain the same for each day for which interest is to be calculated in any given calendar month.  Such daily rate shall equal 1/365 of the per annum prime lending rate published in The Wall Street Journal under “Money Rates” on the first Business Day of such month; provided, that the True-Up Interest Rate shall not exceed the maximum rate permitted by applicable Law.

“Unit 1 O&M Agreement” shall mean the Unit 1 Operating and Maintenance Agreement among WEPCO, MGE  and WPPI for the Elm Road Generating Station Unit 1.

“Unit 1 Ownership Agreement” shall mean the Elm Road I Ownership Agreement among ERGS, MGE Power, WPPI, the Project Manager and, for the limited purpose set forth therein, WE Power.

“Units of Property” shall have the same meaning as “retirement units” as that term is used in the “Uniform System of Accounts Prescribed for Public Utilities and Licensees subject to the provisions of the Federal Power Act” (18 C.F.R. Part 101), in effect on the date hereof, as amended from time to time (including any successor term used in any such amendments).

“URGE” shall have the meaning given to such term in Section 9.1(b)(xi).

“WEC” shall mean Wisconsin Energy Corporation.

“WE Power” shall mean W.E. Power, LLC.

“WEPCO” shall mean Wisconsin Electric Power Company.

“WEPCO Affiliate Contract” shall mean any transaction entered into by WEPCO, acting as the Operating Agent, for the purchase of any goods or services from, or any sale of any goods or services to, or any other contract, renegotiation or settlement with, any party that would be deemed an affiliate of WEPCO under Section 196.52(1) of the Wisconsin Statutes; provided, that the Interim Use and Operating Agreement shall not be deemed a WEPCO Affiliate Contract.

“WEPCO Facility Lease” shall mean the Elm Road II Facility Lease Agreement between ERGS and WEPCO.

“WPPI” shall mean Wisconsin Public Power Inc.

ARTICLE II

OPERATING AGENT

SECTION 2.1

Appointment of Operating Agent.

The Lessee/Owner Parties hereby appoint WEPCO, and WEPCO hereby accepts such appointment, as Operating Agent to serve as such until the termination of this Agreement or the resignation or removal of WEPCO as Operating Agent pursuant to Section 2.7(a) or 3.3(d).  

Whenever this Agreement references the acts of the Operating Agent, such reference will mean WEPCO, acting in its capacity as Operating Agent pursuant to the authority granted by this Agreement and in accordance with the approval provided by the PSCW, inter alia, of WEPCO as operator, for so long as WEPCO is the Operating Agent.

SECTION 2.2

Operating Agent’s Duties and Responsibilities.

Commencing with the Lease Effective Date, and, to the extent applicable, the first day of the Transition Period, the Operating Agent shall, subject to the standards of conduct and other limitations set forth in this Agreement, and after review and due consideration of the Operating Committee’s actions and recommendations, but without being bound to follow those actions and recommendations except for the written decisions of the Operating Committee as to the matters set forth in Section 3.3(e), take or cause to be taken on behalf of the Lessee/Owner Parties all actions and incur such costs which, in the reasonable judgment of the Operating Agent, are necessary and appropriate to safely, efficiently and reliably operate and maintain the Unit in good operating condition to permit the Unit to be operated as a high-availability base-load power supply resource, in accordance with Prudent Utility Practice, all applicable warranties and manufacturer specifications, and all applicable Laws, and without adverse distinction as between the Lessee/Owner Parties.  The Operating Agent’s duties shall include the following:

(a)

Furnish and train the personnel necessary for performance of the Operating Functions and be responsible for all personnel matters, including hiring, disciplining, discharging, training and promoting.

(b)

Consistent with Section 2.4, procure, contract for, and furnish the services and materials, including equipment, apparatus, machinery, spare parts, tools and supplies necessary for the performance of the Operating Functions, and administer and comply with all contracts entered into by the Operating Agent with third parties that relate to the performance of this Agreement.

(c)

Use its best efforts to comply with any and all Laws pertaining to the Operating Functions, Elm Road Unit 2, and the Elm Road Site, and with any applicable Government Approvals.

(d)

Seek to achieve the reliability, availability, efficiency, and cost goals established by the Operating Committee for Elm Road Unit 2.

(e)

Establish operating and performance parameters, including Minimum Net Generation, Available Net Generating Capability, ramp rates and heat rates for Elm Road Unit 2 from time to time.

(f)

Shortly before the beginning of each year, establish the Net Generating Capability of Elm Road Unit 2 for each month of such year, in accordance with test criteria that are consistent with utility industry practice in Eastern Wisconsin and the rules and guidelines of any Applicable Electric Reliability Organization.

(g)

Establish the maintenance schedule for Elm Road Unit 2, using commercially reasonable efforts to coordinate such maintenance schedule with the requests of the Lessee/Owner Parties; provided, however, that the Operating Agent shall retain the final responsibility for determining the maintenance schedule for the Unit.

(h)

Recommend to the Operating Committee action to be taken in connection with the retirement or replacement of, or additions or improvements to, components of Elm Road Unit 2.

(i)

Make or cause to be made, on behalf of the Lessee/Owner Parties, each capital renewal, replacement, improvement, enhancement, modification, alteration or addition to Elm Road Unit 2 that is required by applicable Law, is necessary or appropriate for the efficient operation of the Unit or is consistent with Prudent Utility Practice.

(j)

Keep records and provide information to the Operating Committee as required by Article IV hereof.

(k)

Not allow any liens arising from the Operating Agent’s actions or inaction (where such actions and/or inaction are not consistent with Prudent Utility Practice), unless otherwise authorized by the Elm Road 2 Documents, to remain in effect undischarged against Elm Road Unit 2; provided, that the Operating Agent shall not be required to pay or discharge any such lien as long as the collection or enforcement of such lien remains suspended as a result of the Operating Agent’s good-faith challenge to the lawfulness or validity of the lien.

(l)

Assist, as reasonably requested, any Lessee/Owner Party, its insurer or attorneys in the investigation, adjustment, litigation and settlement of any Losses or any claim that may result in Losses arising out of the Operating Functions.

(m)

Contract for, accept and supervise deliveries of fuel and manage all other aspects of the fuel supply for Elm Road Unit 2 in accordance with Article VIII.

(n)

Market, or employ an entity to market, the sale of the Unit’s byproducts.

(o)

Maintain and revise, as necessary, a Units of Property list for Elm Road Unit 2.

(p)

Purchase and maintain adequate insurance in accordance with Article XIII.

(q)

Execute and file with applicable Governmental Authorities all necessary and appropriate applications, amendments, reports and other documents and filings for or in connection with the Operating Functions, in order to secure Government Approvals and comply with all regulatory requirements with respect to operation and maintenance of Elm Road Unit 2.  Prior to executing and filing any applications for Government Approvals that will or are expected to have a material impact on the operation of the Unit or the costs related thereto, the Operating Agent shall deliver to each of the Lessee/Owner Parties all relevant and significant documents and information and provide each of said Parties a reasonable opportunity to review and comment on such applications, and the Operating Agent shall consider all such comments in good faith.

(r)

Receive on each Lessee/Owner Party’s behalf any notice or other communication from any Governmental Authority relating to a regulatory citation, review or enforcement action with respect to Elm Road Unit 2.  The Operating Agent shall deliver a copy of each such notice or other communication to each of the Lessee/Owner Parties as soon as reasonably practicable following receipt.

(s)

Bring suit, file or settle any type of legal action, on behalf of any or all of the Parties, to protect the Lessee/Owner Parties’ rights under this Agreement and/or to enforce agreements entered into by the Operating Agent pursuant Section 2.2(b).  Prior to bringing or settling any such action, the Operating Agent shall provide each of the Lessee/Owner Parties with notice and a description of such suit or settlement, provide each of the Parties with a reasonable opportunity to comment on such suit or settlement, and consider all such comments in good faith.  Notwithstanding the foregoing, the Parties agree that the Operating Agent shall not be required to act on behalf of MGE or WPPI under this subsection to the extent that it is being asked to bring suit, file or settle any type of legal action involving WEPCO or an Affiliate of WEPCO, it being understood that MGE and WPPI shall retain the right to bring such actions on their own behalf with respect to the provisions of this Agreement for so long as WEPCO is the Operating Agent.

(t)

Investigate, adjust, defend, and settle claims by third parties arising out of or in connection with the Operating Functions, provided, however, that prior to settling any such claim, the Operating Agent shall provide each of the Lessee/Owner Parties with notice and a description of such claim, provide each of the Parties with a reasonable opportunity to comment on such claim, and consider all such comments in good faith.

(u)

Appoint individuals to serve as the Designated Representative and Alternate Designated Representative for Elm Road Unit 2, and such other individuals as it may deem appropriate, all in accordance with 40 C.F.R. Part 72, Subpart B, and notify the Operating Committee of such appointments.

(v)

Prepare and provide proposed budgets and budget updates to the Operating Committee in accordance with Section 3.3(b), and prepare proposed goals for the review and approval of the Operating Committee, and otherwise create and retain documents and records relating to Elm Road Unit 2, in accordance with the provisions of this Agreement.

(w)

Where WPPI identifies actions necessary to be taken, or not taken, pursuant to this Agreement to avoid an adverse impact on the tax-exempt status of interest on its bonds, cooperate in a commercially reasonable manner with WPPI in structuring the Operating Agent’s actions to avoid such adverse impact, provided, that such actions comply with Prudent Utility Practice and, to the extent such actions are non-routine and cause the Operating Agent or other Lessee/Owner Parties to incur costs that are more than de minimis, WPPI shall bear such costs. 

(x)

Take such other actions as the Operating Agent reasonably determines to be necessary or appropriate, or as may be required under the regulations or directives of Governmental Authorities, to achieve the purposes of this Agreement.

SECTION 2.3

Emergencies.

Notwithstanding any other provisions of this Agreement, in the event of exigent or emergency conditions, the Operating Agent, as operator of Elm Road Unit 2 and acting on behalf of the Lessee/Owner Parties, shall take such action as reasonably deemed necessary to ensure personnel safety or the safety of the Unit itself; provided, however, the Operating Agent shall notify the Lessee/Owner Parties’ marketing personnel simultaneously as soon as practicable after taking any such actions.

SECTION 2.4

Contracts.

(a)

To the extent reasonably practicable and permitted by Law, the Operating Agent shall purchase on behalf of and for the account of a Lessee/Owner Party that Party’s allocable share of any supplies, equipment, spare parts or other materials required for the Operating Agent to perform its obligations hereunder, in a manner that will enable that Lessee/Owner Party to achieve or retain material benefits such as exemption from sales taxes.

(b)

Prior to entering any material contract with respect to Elm Road Unit 2, other than fuel and fuel-related contracts, under which the Operating Agent, or the Operating Agent on behalf of the Lessee/Owner Parties collectively, will incur obligations expected to amount to $2,500,000 or more (adjusted annually from the Lease Effective Date for changes in the CPI-U consumer price index (all items) for Milwaukee-Racine, Wisconsin):  

(i)

The Operating Agent shall use commercially reasonable efforts to obtain permission from the other parties to such material contract to deliver to each of the Lessee/Owner Parties drafts of such material contract and provide each of said Parties with a reasonable opportunity to review and comment on such draft material contract.  The Operating Agent shall consider all comments received from the Lessee/Owner Parties with respect to such draft material contracts in good faith.  All requirements regarding fuel and fuel-related contracts are set forth in Article VIII of this Agreement.

(ii)

Where such material contract involves Capital Costs that pertain to a renewal, replacement, improvement, modification, alteration or addition to Elm Road Unit 2, the Operating Agent shall, in such contract, designate each Lessee/Owner Party as an owner or lessee of Elm Road Unit 2 and a third-party beneficiary under such contract, and shall obtain for the Lessee/Owner Parties the right to receive copies of any Confidential Information provided to the Operating Agent thereunder.

(c)

Whether or not a contract is a material contract for purposes of Section 2.4(b), the Operating Agent shall, consistent with Section 2.5, administer each contract related to the performance of the Operating Functions so as to provide each Lessee/Owner Party the benefit of each contract (including all warranties) and use commercially reasonable efforts to obtain for the Lessee/Owner Parties access to Confidential Information provided thereunder as if each Lessee/Owner Party’s Pro Rata Share interest in the contract were assigned to the applicable Party.

SECTION 2.5

Standards of Conduct Governing Operating Agent’s Actions.

Notwithstanding any other provisions of this Agreement, in discharging its duties and responsibilities hereunder, the Operating Agent shall at all times comply with the following requirements:

(a)

The Operating Agent shall perform the Operating Functions on behalf of the Lessee/Owner Parties in good faith in accordance with the terms of this Agreement and applicable Law, consistent with Prudent Utility Practice, in a manner that is commercially reasonable under the circumstances without adverse distinction as between and among the Parties.

(b)

The Operating Agent shall take due consideration of the actions and recommendations of the Operating Committee and shall comply with the written decisions of the Operating Committee as to the matters listed in Section 3.3(e).

(c)

The Operating Agent shall act in accordance with the principle of full disclosure to the Lessee/Owner Parties of all information pertinent to their interests in the Unit.  The Operating Agent shall (i) provide in a timely manner to the Lessee/Owner Parties all necessary or appropriate information respecting the operation of Elm Road Unit 2, in accordance with Article IV hereof, and (ii) regularly consult with the Operating Committee, the Lessee/Owner Parties’ operations centers, and/or other Lessee/Owner Party personnel and consultants, as appropriate, regarding the operation of Elm Road Unit 2.

(d)

The Operating Agent shall keep, repair, maintain and preserve the Unit in all material respects:  (i) in good condition (ordinary wear and tear excepted), repair and working order; (ii) in accordance with Prudent Utility Practice and all insurance policies required to be maintained by the Operating Agent pursuant to this Agreement; (iii) so as not to cause any manufacturer’s warranties then in effect on the Unit to be terminated other than for lapse of time; and (iv) subject to the provisions of Section 1.1(f), in compliance with the material terms of all Project Agreements of which the Operating Agent has knowledge and all applicable Laws and Government Approvals.

(e)

The Operating Agent shall perform the Operating Functions in accordance with the budget provisions of Section 3.3(b).

(f)

The Operating Agent shall perform the Operating Functions in a manner consistent with any agreements with, procedures of, and instructions issued by the Applicable Transmission System Operator and any Applicable Electric Reliability Organization.

(g)

The Operating Agent shall not in connection with the Operating Functions enter into or modify any WEPCO Affiliate Contract, or settle a dispute regarding any WEPCO Affiliate Contract, unless (i) the terms of such arrangements are completed on an arms-length basis and are subject to terms and conditions no less favorable than could be obtained with an independent third party and, where the Operating Agent is paying for services provided by an Affiliate, the price shall be no more than cost as determined or approved by a PSCW order, including a tariff order, and (ii) the Operating Agent’s action is otherwise in accordance with its 

obligations under this Agreement.  The Operating Agent shall not in connection with the Operating Functions enter into or modify any WEPCO Affiliate Contract with a value of more than $1,000,000, or settle a dispute with regard to such WEPCO Affiliate Contract, absent full advance disclosure to all of the Operating Committee Members of the proposed material terms of such contract, modification or settlement, together with evidence sufficient to show that the requirements of the preceding sentence have been satisfied.

SECTION 2.6

Cooperation with Operating Agent.

Each of the Lessee/Owner Parties agrees that it will cooperate with the Operating Agent, promptly, as and when reasonably requested by the Operating Agent in order for it to perform its duties, responsibilities and obligations under this Agreement.  Such cooperation shall include taking all reasonable actions necessary to comply with applicable Laws and to obtain any necessary or desirable Government Approvals, and executing and delivering documents, certificates or instruments necessary or appropriate to the Operating Agent’s duties, responsibilities and obligations under this Agreement. 

SECTION 2.7

Change of Operating Agent.

Subject in all cases to the applicable PSCW requirements in effect from time to time:

(a)

WEPCO may, at its sole discretion, resign as Operating Agent by providing written notice to the other Parties at least 180 days in advance of the date, stated in the notice, upon which it will no longer act as Operating Agent.

(b)

The Operating Committee may remove WEPCO as Operating Agent, or reduce the scope of its duties and responsibilities as Operating Agent, pursuant to and subject to the limitations set forth in Section 3.3(d).  Any removal of WEPCO as Operating Agent, or reduction of the scope of Operating Functions for which WEPCO is to be responsible, shall be without prejudice to WEPCO’s rights in its capacity as a Lessee/Owner Party to this Agreement, and WEPCO may be removed as Operating Agent or have the scope of its Operating Functions reduced only to the extent or in such a manner that such removal or reduction of scope does not interfere with WEPCO’s operation of any facilities solely owned by it on the Land.

(c)

In the event that WEPCO resigns or is removed as Operating Agent (or has the scope of its Operating Functions reduced), the Operating Committee shall promptly meet and attempt to reach consensus on appointment of a Successor Operating Agent to perform the Operating Functions that WEPCO will no longer fulfill.  If WEPCO has tendered its resignation and the unanimous consensus of the Operating Committee cannot be reached within four months prior to the effective date of WEPCO’s resignation, the Successor Operating Agent shall be appointed by a Majority Vote of the Operating Committee.  If the Operating Committee has voted to remove WEPCO as Operating Agent or reduce the scope of its Operating Functions, selection of the Successor Operating Agent must be approved by affirmative vote of two of the three voting Operating Committee Members.

(d)

No entity shall be allowed to bid as Successor Operating Agent unless it has (i) Acceptable Credit and (ii) at least ten years experience (together with its predecessors and 

Affiliates) operating major coal-fired generating plants.  The selection of a Successor Operating Agent shall be made following a Request for Proposals, and shall be based upon the foregoing objective factors, together with other pertinent factors, such as (x) whether, in operating major coal-fired plants, the entity achieved favorable results in terms of cost, efficiency and unit availability compared to the North American average for such plants; (y) the entity’s ability to dedicate sufficient qualified and trained employees to the Operating Functions; and (z) the entity’s ability to mobilize such employees within the time constraints applicable hereunder.

(e)

In the event that WEPCO is removed as Operating Agent (or has the scope of its Operating Functions reduced) pursuant to Section 3.3(d), WEPCO shall continue to perform all Operating Functions until the Successor Operating Agent has been appointed and is prepared to assume operations of Elm Road Unit 2 (or its assigned scope of Operating Functions, where applicable).  In the event that WEPCO resigns as Operating Agent, WEPCO shall have no obligation to continue to perform the Operating Functions under this Agreement from and after the earlier of:  (i) the date upon which the Successor Operating Agent has fully assumed its role as Successor Operating Agent and WEPCO has been provided notice of such assumption, or (ii) the date specified in WEPCO’s notice of resignation.

(f)

WEPCO shall reasonably cooperate with the Successor Operating Agent in facilitating the assumption of such position by the Successor Operating Agent and in familiarizing the Successor Operating Agent, its employees and agents with Elm Road Unit 2 and its physical orientation and operation.  In furtherance of this succession, provided, that WEPCO is provided with adequate assurances that all Confidential Information to be delivered to the Successor Operating Agent will be treated by such entity as confidential in accordance with the requirements of Article XXII (and if deemed necessary by WEPCO, the execution by the Successor Operating Agent of a confidentiality agreement reasonably acceptable in form and substance to WEPCO), WEPCO agrees that it will take all reasonable actions (including turning over all manuals and as-built drawings, and providing all other plant records and pertinent documents) to permit the Successor Operating Agent to carry out its responsibilities for operations and management of Elm Road Unit 2 under all necessary Government Approvals.  If WEPCO has resigned (rather than been removed), WEPCO shall be reimbursed for its costs of undertaking such matters as are required to assist a Successor Operating Agent under this Section.

(g)

1) If the Successor Operating Agent is an Affiliate of WEPCO, the duties, responsibilities, rights and liabilities of such Successor Operating Agent shall be governed by the term of this Agreement in the same fashion as were the duties, responsibilities, rights and liabilities of WEPCO as Operating Agent; provided, however, that the Lessee/Owner Parties, by mutual agreement, may determine whether (and if so, how) the provisions of this Agreement should be modified; and provided, further that the Successor Operating Agent shall not be permitted to charge a management fee or other markup on costs incurred hereunder.

(ii)

If the Successor Operating Agent is not an Affiliate of WEPCO, prior to the effective succession of any Successor Operating Agent, the Lessee/Owner Parties shall negotiate with the Successor Operating Agent in good faith to execute an amended 

and restated Agreement with such entity specifying the duties, responsibilities, compensation and liabilities of such Successor Operating Agent.  In such event, in the negotiations with the Successor Operating Agent, the Lessee/Owner Parties shall advocate and support terms and conditions therein that, as among the Lessee/Owner Parties, are neither more nor less favorable to each of them than exist pursuant to this Agreement (except where all of the Lessee/Owner Parties agree otherwise).

ARTICLE III

OPERATING COMMITTEE

SECTION 3.1

Establishment and Nature of Operating Committee.

(a)

There is hereby established an Operating Committee to exercise the responsibilities specified in this Agreement and to perform such other duties as may from time to time be assigned to it in writing by the Parties.

(b)

The Operating Committee shall consist of six members (“Operating Committee Members”), two each to be designated by the Lessee/Owner Parties.  Each such Party may also designate one or more alternates who may act in the absence of the Party’s Operating Committee Member(s).  Each Lessee/Owner Party shall evidence such appointments by written notice to the other Parties, and by similar notice, any Party may change any of its Members or alternates on such Committee at any time.  A list of the initial Operating Committee Members is provided in Schedule 3.1.  The list of Operating Committee Members will be updated by the Operating Agent and distributed to each of the Parties with appropriate contact information as necessary to keep the list current as to membership on the Operating Committee.

(c)

So long as WEPCO has a Pro Rata Share of 50% or more, one of WEPCO’s Members on the Operating Committee shall be the chairman of the Operating Committee.  If WEPCO’s Pro Rata Share falls below 50%, then the chairmanship of the Operating Committee shall rotate among the Lessee/Owner Parties’ Members on an annual basis such that each Lessee/Owner Party shall appoint a Member to serve as the Operating Committee chairman every third year.  The chairman of the Operating Committee shall have the following duties and responsibilities:

(i)

coordinate with the other Operating Committee Members to schedule meetings of the Operating Committee, and make arrangements for meetings to take place at such time and place as appropriate (i.e., at the Elm Road Site or as the Parties may otherwise agree);

(ii)

provide notice to the other Operating Committee Members and the Operating Agent of the date, time and place for each meeting of the Operating Committee at least 20 days in advance of such meeting, except in cases of emergencies or if all the Operating Committee Members consent in writing.  The attendance of an Operating Committee Member at an Operating Committee meeting is a waiver of such notice unless such Member’s attendance is to protest the holding of the meeting;

(iii)

preside at each Operating Committee meeting and conduct all Operating Committee meetings in accordance with rules and procedures established and adopted by the Operating Committee and not inconsistent with the terms of this Agreement;

(iv)

establish an agenda for each Operating Committee meeting, including such items or matters as the chairman shall deem appropriate and such items or matters as may be requested by any other Operating Committee Member, and, reasonably in advance of the meeting, provide each other Operating Committee Member with a copy of the agenda, identifying all proposed actions to be voted upon; and

(v)

appoint a secretary for the Operating Committee, who need not be an Operating Committee Member, who shall (A) prepare a draft of the minutes for each Operating Committee meeting, in accordance with Section 3.1(g), and deliver or mail a copy of such draft minutes to each Operating Committee Member within five Business Days after the close of each Operating Committee meeting and (B) take custody of and maintain the records of all Operating Committee meetings.

(d)

The Operating Committee shall make reasonable efforts, but nonetheless shall not be obligated, to make decisions or recommendations on a consensus basis.  Where consensus is not reached and a vote is required, only one Operating Committee Member on behalf of each Lessee/Owner Party shall vote.  Such voting Operating Committee Member shall exercise, as a block, a voting right equal to the total percentage ownership or leasehold interest in Elm Road Unit 2 held by the Party on whose behalf the Operating Committee Member votes.  Except as otherwise expressly provided herein, any action of the Operating Committee shall be by Majority Vote.

(e)

The Operating Committee shall not have the authority to (i) modify the terms or provisions of this Agreement or any other Elm Road 2 Document or (ii) take any action which is contrary to Prudent Utility Practice or any material term of this Agreement or any other Project Agreement, or which is unreasonable or inequitable under the circumstances.  The Operating Committee, and each Operating Committee Member, shall perform all of the responsibilities, duties and functions assigned to the Operating Committee under this Agreement in accordance with Prudent Utility Practice and the terms of this Agreement.

(f)

The Operating Committee shall be formed and shall conduct its first meeting on or before the commencement of the Transition Period.  After its initial meeting, the Operating Committee shall hold regularly scheduled meetings on at least a quarterly basis and shall meet at other times upon the reasonable request of any Party.  Any regularly scheduled meeting of the Operating Committee may be omitted but only by unanimous consent of the three voting Operating Committee Members.  The Lessee/Owner Parties shall cause their members of the Operating Committee to attend meetings and pursue diligently their obligations as members of the Operating Committee.  Meetings of the Operating Committee may be conducted by telephone conference.  In addition to the Operating Committee Members, other individuals representing one or more of the Parties may attend meetings of the Operating Committee but will have no right to vote on behalf of such Party.  Representatives of the Operating Agent shall be invited to and shall attend all Operating Committee meetings (except for any portion of any 

meeting in which one or more Operating Committee Members request the absence of the Operating Agent representatives), but will have no right to vote.

(g)

The minutes of each Operating Committee meeting shall record the following:

(i)

the date, time, location and names of the attendees of the meeting;

(ii)

the agenda of the meeting and the items or matters discussed;

(iii)

resolutions, motions and actions approved; agreements reached and decisions made by the Operating Committee, including the votes of the Operating Committee Members on such resolutions, motions, actions, agreements and decisions, and including descriptions of both majority and minority positions as to material issues; and

(iv)

the scheduled date, time and place of the next meeting of the Operating Committee.

(h)

The expenses of each Operating Committee Member shall be borne by the Lessee/Owner Party such Member represents.

SECTION 3.2

Scope of Operating Committee’s Review and Advice.

The Operating Committee shall receive information from and provide counsel to the Operating Agent on matters related to the operation and management of Elm Road Unit 2.  The review and advisory functions of the Operating Committee shall be:

(a)

To provide liaison among the Parties with respect to the provisions of this Agreement;

(b)

To monitor the work of the Operating Agent and provide input and advice to the Operating Agent in connection with the Operating Agent’s performance of its obligations, duties and responsibilities under this Agreement.  In order to facilitate such monitoring and input, the Operating Committee may from time to time require the Operating Agent to conduct (or cause to be conducted) assessments or studies, the results of which shall be provided to the Operating Committee and the costs of which shall be recoverable as Operating Costs;

(c)

To review and make recommendations regarding the Operating Agent’s schedule for planned outages and maintenance, in accordance with Section 6.8;

(d)

To review and make recommendations regarding policies for appropriate levels of the inventory for spare parts and other materials and supplies;

(e)

To review and provide guidance regarding the form and content of the statistical and administrative reports, budgets, and information and other similar records regarding the operation of the Unit, including fuel, power and energy compliance and environmental compliance, to be kept by and furnished by the Operating Agent to the Lessee/Owner Parties in 

accordance with Article IV hereof (excluding accounting records used internally for the purpose of accumulating financial and statistical data, such as books of original entry, ledgers, work papers, and source documents);

(f)

To review and make recommendations regarding the Minimum Net Generation and the Net Generating Capability of Elm Road Unit 2;

(g)

To review and make recommendations concerning procedures for performance and efficiency testing;

(h)

To review and make recommendations regarding written operating practices and procedures, and to establish the procedures called for in Section 3.3(a);

(i)

To review the records maintained by the Operating Agent relative to the performance of the Operating Functions, in support of billings to the Lessee/Owner Parties, and such other documents and records as may be necessary for the Lessee/Owner Parties to review to determine whether charges to them under such billings are proper and allowable;

(j)

To consider and, if appropriate, recommend amendments to this Agreement; provided, however, the Operating Committee shall not have authority to approve and adopt any such amendments;

(k)

To review and make recommendations regarding any proposal by the Operating Agent to implement a physical change to, or material change in the method of operation of, Elm Road Unit 2; and

(l)

To perform such other functions and duties as may be assigned to it by agreement of all the Parties and to make any recommendations to the Operating Agent deemed appropriate or desirable.

SECTION 3.3

Operating Committee’s Authority For Certain Decisions.

(a)

Development of Procedures.  Not later than 30 days prior to the Scheduled Commercial Operation Date, the Operating Committee shall establish mutually acceptable (i) practices and procedures, in the form of a manual, for keeping each Lessee/Owner Party advised of the operating status of the Unit and key operating parameters, including Available Net Generating Capability, Operating Costs, Capital Costs, Coal Costs, availability of ancillary services, and each Lessee/Owner Party’s obligation under Article VI hereof to schedule its Pro Rata Share of the Minimum Net Generation, and (ii) detailed written coordinating and operating procedures, in the form of a manual, for the dispatch and delivery of power and energy and ancillary services, from Elm Road Unit 2 in accordance with the Scheduling information furnished by each Lessee/Owner Party.  Such procedures shall enable each Lessee/Owner Party to have its share of the output of the Unit electronically Scheduled to the balancing authority or energy-control system designated by that Party and capable of absorbing the energy.  The Operating Committee shall deliver the written procedures to each of the Parties, who shall be responsible for updating each of their copies of the procedures manuals.  The Operating Committee shall be responsible for the distribution of any revised or additional procedures 

developed by the Operating Committee pursuant to this Agreement.  The Operating Agent will assist the Operating Committee with the development of the procedures and the procedures manual, and will maintain the official version of such procedures manual, which shall be available at the Elm Road Site for review by the Parties during regular business hours.  Copies of the official procedures so designated shall be provided by the Operating Agent to the Lessee/Owner Parties within five Business Days of any request therefor.

(b)

Budgets.  All operating and capital budgets for Elm Road Unit 2, and significant variances from such budgets, shall be subject to prior review and approval of the Operating Committee in accordance with the provisions below.  The Operating Agent shall prepare and present to the Operating Committee proposed operating and capital budgets, as described below, for the Operating Committee’s review, modification (if appropriate) and approval.

(i)

A budget detailing the monthly projected Operating Costs and Coal Costs to be incurred during the Transition Period, showing expected costs by categories consistent with Accounting Practices, shall be submitted by the Operating Agent at least 30 days prior to the initial meeting of the Operating Committee.  The Operating Committee shall review, modify, if appropriate, and approve the proposed Transition Period budget at its initial meeting.

(ii)

Budgets detailing the monthly projected Operating Costs, Coal Costs and Capital Costs to be incurred in the first partial calendar year of commercial operation of Elm Road Unit 2, showing expected costs by categories consistent with Accounting Practices, shall be submitted by the Operating Agent by February 1 of the year preceding the year in which the Lease Effective Date is scheduled to  occur.  The Operating Agent shall also prepare and submit Operating Costs, Coal Costs and Capital Costs budgets for such partial year to the Operating Committee by September 15 of the year preceding the year in which the Lease Effective Date is scheduled to occur, and if the Scheduled Commercial Operation Date is later than April 30, updated Capital Costs, Coal Costs and Operating Costs budgets for such partial year approximately 120 days before the Scheduled Commercial Operation Date.  The Operating Committee shall review, modify, if appropriate, and approve the proposed first partial year budgets at its first meeting following receipt of the proposed budgets (which meeting shall be scheduled to allow sufficient time for the Lessee/Owner Parties to review and evaluate the proposed budgets).

(iii)

For each full calendar year thereafter during the Term, the Operating Agent shall submit proposed budgets detailing the projected Operating Costs, Coal Costs and Capital Costs to be incurred in each month of the succeeding two years, and annual forecast amounts for the three years thereafter, showing expected costs by categories consistent with Accounting Practices.  Such budgets shall be prepared and proposed to the Operating Committee by February 1 of the year prior to the first budget year for the succeeding two years and annual forecast amounts for the three years thereafter (e.g., by February 1, 2010, the Operating Agent will propose preliminary budgets for 2011 and 2012).  The Operating Committee will review, modify (if appropriate), and approve these budgets on or before March 1.  The Operating Agent shall also prepare and submit to the 

Operating Committee no later than September 15 of each year updated Operating Costs, Coal Costs and Capital Costs budgets (e.g., by September 15, 2010, the Operating Agent will propose the updated Operating Costs, Coal Costs and Capital Cost budgets for 2011, and by September 15, 2011 it will propose the updated budgets for 2012).  Each such updated budget shall include an explanation, in reasonable detail, of each material variance from the March 1 budgets.  The Operating Committee shall approve or modify and subsequently approve the proposed updated Operating Costs, Coal Costs and Capital Costs budgets at its last quarterly meeting of the year prior to each budget year (which meeting shall be scheduled to allow sufficient time for the Lessee/Owner Parties to review and evaluate the proposed updated budgets, provided, however, that such meeting shall be held no later than November 1).

(iv)

Upon request of any Lessee/Owner Party, the Operating Agent shall update the budgeting information provided pursuant to Section 3.3(b)(iii), provided, however, that if the data requested requires the Operating Agent to develop information that goes beyond the data previously provided (e.g., development of budgeting data for a test year for which a budget has not yet been prepared) and to incur additional costs that are more than de minimis, the requesting Lessee/Owner Party shall bear such costs.  Any such data, once developed, shall be made available to all Lessee/Owner Parties. 

(v)

The Operating Agent shall inform the Operating Committee as soon as practicable of the need to expend amounts that exceed an approved Operating Costs, Coal Costs or Capital Costs budget by more than 5%.  

(c)

Major Operating Actions.  If the Operating Agent proposes to take any of the actions described below, it shall first provide reasonable advance notice that fully informs all members of the Operating Committee of the proposed action.  Such actions, known as Major Operating Actions, shall be:

(i)

the replacement of, addition to, modification of, or repair or refurbishment of any items of property relating to Elm Road Unit 2, or the settlement of any asserted right, claim, or penalty by a third party, which replacement, addition, modification, repair, refurbishment, or settlement has an estimated total combined cost of $2,500,000 or more of Capital Costs, Coal Costs and/or annual Operating Costs; provided, that after the first full year of operations of Elm Road Unit 2 the $2,500,000 threshold amount shall be adjusted annually for changes in the CPI-U consumer price index (all items) for Milwaukee-Racine, Wisconsin;

(ii)

any planned action that would alter by more than 5% the Net Generating Capability or heat rate of Elm Road Unit 2, excluding expected variations due to normal operating constraints, seasonal variations, and other temporary unit deratings;

(iii)

temporary suspension of operation of Elm Road Unit 2 for reasons other than an Operating Emergency, routine maintenance or direction of the Applicable Transmission System Operator, or that none of the Lessee/Owner Parties has Scheduled energy from the Unit;

(iv)

establishment of annual reliability, availability, efficiency, and cost goals for Elm Road Unit 2; and

(v)

adoption of a fuel-supply plan, including minimum inventory levels, inventory target, and annual consumption target for Elm Road Unit 2. 

(d)

Removal of Operating Agent.  Subject to the applicable PSCW requirements in effect from time to time, the Operating Committee may, for cause, remove WEPCO as Operating Agent or reduce the scope of its agency, but only where all of the following conditions are met:

(i)

WEPCO shall have materially and substantially breached its obligations under this Agreement;

(ii)

the breach shall have been subject to the dispute resolution provisions in Article XX, including the senior management negotiation portion of the dispute resolution mechanism;

(iii)

there shall have been an admission by WEPCO’s senior management or, if applicable, findings in an arbitration or court proceeding that WEPCO has materially and substantially breached its obligations as Operating Agent under this Agreement as a result of its Gross Negligence or willful misconduct, and that WEPCO’s acts or omissions, unless corrected, will cause a substantial reduction in the value of any Lessee/Owner Party’s interest in the Unit and/or will materially and directly lessen any Lessee/Owner Party’s ability to provide reliable service, or will increase the cost of such service by more than twenty percent (20%);

(iv)

subsequent to the determinations described in subsection 3.3(d)(iii) ab, WEPCO shall have been given reasonable notice of such determinations and a reasonable opportunity to comply with such decision and/or cure any material and substantial breaches and provide assurance that such breaches will not be repeated;

(v)

the courts or arbitrators referred to in Article XX shall have determined in writing that WEPCO shall have failed within a reasonable time to have effected such cure and/or provided such assurance to a material and substantial extent; and

(vi)

removal of WEPCO as Operating Agent or reduction of the scope of its responsibilities as Operating Agent shall have been approved by affirmative vote of at least two of the three voting Operating Committee Members.

(e)

Decisions Requiring Special Operating Committee Vote.

(i)

The following decisions shall be made by the Operating Committee only with the approval of at least two of the three voting Operating Committee Members:

(A)

removal of the Operating Agent pursuant to Section 3.3(d); and

(B)

replacement of the Operating Agent pursuant to Section 2.7(c) if WEPCO is removed as Operating Agent.

(ii)

The following decisions shall be made by the Operating Committee only with the unanimous approval of the three voting Operating Committee Members:

(A)

approval of WEPCO Affiliate Contracts entered into by the Operating Agent relating to fuel supply and fuel transportation, other than for the purchase and delivery of natural gas pursuant to Section 8.4; and

(B)

selection of the accounting firm to undertake the audits required by Section 4.4(b).

SECTION 3.4

Single Operating Committee for Unit 1, Unit 2 and Common Facilities 

The Parties acknowledge and agree that it is the intent of the Parties not to duplicate the functions of the Operating Committees established under this Agreement, the Unit 1 O&M Agreement and the Common Facilities O&M Agreement.  To the fullest extent reasonably practicable, the Operating Committees under all of these agreements shall conduct their business as a single group, and shall hold combined meetings.  Where voting on an issue is required, however, only those Operating Committee Members representing Lessee/Owner Parties affected by the decision shall be eligible to vote (e.g., where a decision affects only Unit 1, only the voting Operating Committee Members appointed under the Unit 1 O&M Agreement shall vote). 

ARTICLE IV

PROVISION AND USE OF INFORMATION

SECTION 4.1

Operating Agent to Provide Relevant Information.

The Operating Agent shall, in a timely manner, provide to each of the Lessee/Owner Parties, through their Operating Committee Members and their alternates, information in the possession of the Operating Agent regarding Elm Road Unit 2 that is necessary or appropriate for each of the Lessee/Owner Parties to protect and make full use of its interest in the Unit, including all information reasonably requested by a Party.  The Operating Agent shall keep the Operating Committee Members promptly advised of all significant matters with respect to the operation of Elm Road Unit 2, including changes in conditions or other developments related to the Unit or the performance of Operating Functions.  The Operating Agent shall provide to the Operating Committee Members statistical and administrative reports, budgets, accounting records and information, and other records pertaining to Operating Functions as may be reasonably requested by the Operating Committee Members or as are necessary for the Operating Committee to perform its responsibilities hereunder.

SECTION 4.2

Specific Information Requirements.

Without limiting the obligations of the Operating Agent pursuant to Section 4.1, the Operating Agent shall be required to develop, maintain, and provide the following specific types of information:

(a)

Recordkeeping.  The Operating Agent shall separately maintain, or cause to be separately maintained, appropriate documentation and records of expenditures made and costs incurred by the Operating Agent together with all other charges, payments and any expenses or revenues relating to Elm Road Unit 2.  Such records of the Operating Agent shall be readily identifiable and, upon request, be made available for inspection at a reasonable time at the Operating Agent’s offices by any Lessee/Owner Party and/or its auditors or consultants.  The Operating Agent shall also make available for inspection and copying at the Operating Agent’s offices within a reasonable time by any Lessee/Owner Party upon reasonable request any bids, contracts, purchase orders and related documents respecting Elm Road Unit 2.  The Operating Committee shall develop reasonable policies and procedures for the Operating Agent’s retention of documents relating to Elm Road Unit 2, consistent with applicable requirements of Law.  Incremental costs associated with recordkeeping requirements, if any, that (i) arise solely from the request of a Lessee/Owner Party to keep records in a  manner that does not result from legal, regulatory or accounting requirements applicable to such Lessee/Owner Party and (ii) would impose a significant administrative burden, the costs of which it would be inequitable to allocate on a Pro Rata Share basis, shall be a reimbursable expense to be borne in full by the requesting Lessee/Owner Party.

(b)

Unit Availability.  The Operating Agent shall keep all Lessee/Owner Parties simultaneously and reasonably informed in a timely manner of the projected availability of Elm Road Unit 2 and of any required or projected limitations on dispatch.

(c)

Notices.  The Operating Agent shall promptly furnish the Lessee/Owner Parties with copies of material notices related to Elm Road Unit 2 delivered by the Operating Agent to any third party or received by the Operating Agent from any third party.  

(d)

Key Personnel.  At or prior to the first meeting of the Operating Committee, the Operating Agent shall provide to each Operating Committee Member (and alternate) a listing of the names, titles, telephone and fax numbers, and e-mail addresses of the key Elm Road Unit 2 personnel, which shall include the plant manager, operations manager (if different than the plant manager), 24-hour desk, accounting and billing contacts, and fuel procurement manager.  Updates to the list shall be provided by the Operating Agent to each Operating Committee Member (and alternate) whenever there is a change in the listed information.  Each Lessee/Owner Party shall, at or prior to the second meeting of the Operating Committee, identify its key personnel for each comparable position, to the extent applicable, and shall inform the Operating Agent whenever there is a change in such personnel.  The Operating Agent shall circulate such information  and shall provide updated lists to each Operating Committee Member (and alternate) whenever there is a change in any of the listed information.  

(e)

Monthly Reports.  As soon as reasonably practicable but in no event later than the tenth Business Day of the month, the Operating Agent shall prepare and provide to each 

Operating Committee Member by e-mail a report comparing budget-to-actual expenditures for the preceding month and year-to-date, with explanations for material variance.  In addition, the report shall include forecasts of year-end Operating Costs, Coal Costs and Capital Costs, monthly and cumulative operating statistics, and other information reasonably available to the Operating Agent.

(f)

Quarterly Reports.  No later than 30 days after each calendar quarter, the Operating Agent shall prepare and submit to each Operating Committee Member a written report documenting heat rate, capability, availability, scheduled outages, full and partial forced outages, fuel cost, environmental, and financial performance measures in respect of Elm Road Unit 2 during the previous quarter.  This report shall also include the most recent electronic version of generator availability data system (“GADS”) data.  In addition, unusual operating events, accidents, damage to Elm Road Unit 2, and injuries (including OSHA recordable and lost-time accidents) shall be documented in reasonable detail in this report.

(g)

Annual Reports.  At least annually, or more frequently as determined by the Operating Committee, the Operating Agent shall provide to the Operating Committee Members unaudited statements for the preceding fiscal year for all costs that have been incurred pursuant to this Agreement.  The Operating Agent will make a reasonable effort to provide this accounting in a form that is acceptable to all Lessee/Owner Parties.

SECTION 4.3

Parties’ Rights of Access.

Commencing on the Lease Effective Date, each Lessee/Owner Party shall have reasonable rights of access to (i) go upon and into the Elm Road Site and to inspect and observe operation of Elm Road Unit 2, subject to the Project Agreements and such reasonable conditions as the Operating Agent may impose for safety, security and operating reasons, and (ii) during normal business hours, review documents and records relating to Elm Road Unit 2 being maintained by the Operating Agent in accordance with this Agreement, at its own expense.  The Lessee/Owner Parties’ rights of access to the Elm Road Site and documents are not intended to substitute for or diminish in any way the Operating Agent’s affirmative duty to provide information as provided for herein.

SECTION 4.4

Audits.

(a)

Each Lessee/Owner Party shall have the right from time to time (but not more frequently than once each year) to conduct audits of the books, records and other documents maintained by the Operating Agent with respect to the Unit, and such other documents as may be necessary to ensure compliance with this Agreement, including ascertaining the correctness and propriety of all charges to, and payments made by, the Lessee/Owner Party under this Agreement; provided, however, that the audits of fuel supply and transportation contracts shall be governed by Article VIII hereof.  Such audits may be made either by the Lessee/Owner Party’s own officers or employees, or through its duly authorized agents or representatives, subject to Article XXII.  No payment under this Agreement shall constitute a waiver of the right of the Party to conduct an audit, or to question or contest the correctness of any charge, credit, allocation, or other accounting matter hereunder.  The Operating Agent shall cooperate with any Lessee/Owner Party in the conduct of any such audit, which shall include the responsibility to 

furnish requested records and make requested copies in a timely manner, and to retain custody and care of the records pertinent to Elm Road Unit 2 and this Agreement in an orderly and accessible fashion.  During normal business hours the Operating Agent shall provide each Lessee/Owner Party, through its duly authorized agents or representatives (including any auditor utilized by a Party, or any nationally recognized accounting firm retained by such Party), access to, and upon request, copies of the Operating Agent’s books, records and other documents with respect to the Unit, and such other third-party documents (subject to Section 4.4(b)) as may be necessary to ascertain the correctness and propriety of all charges to, and payments made by, the Lessee/Owner Party under this Agreement, which books, records and other documents shall be in a form sufficient to enable each Lessee/Owner Party to verify the costs that have been allocated and billed to each Party pursuant to this Agreement.  All such audits shall be conducted at the Lessee/Owner Party’s sole cost and expense and subject to its compliance with the Operating Agent’s reasonable policies and procedures, including security and safety requirements, and the confidentiality provisions of Article XXII below.

(b)

To the extent that third-party documents requested by a Lessee/Owner Party under Section 4.4(a) cannot be made available to a requesting Lessee/Owner Party consistent with the confidentiality requirements imposed by such third party, notwithstanding the Operating Agent’s commercially reasonable efforts to obtain such documents for the Lessee/Owner Parties and the requesting Lessee/Owner Party’s willingness to execute such non-disclosure agreements as the third party and/or the Operating Agent may reasonably require, the Operating Agent shall, on the request and at the expense of the requesting Lessee/Owner Party, cause the Operating Agent’s independent auditor to prepare an audit report responding to such questions as the requesting Lessee/Owner Party identifies.

(c)

On or before March 1 following the second full calendar year of commercial operation of Elm Road Unit 2, a nationally recognized accounting firm selected by the unanimous vote of the three voting Operating Committee Members shall conduct an audit of (i) records maintained by the Operating Agent and (ii) all costs charged to each Party under this Agreement.  Such audits shall be conducted on a regular basis thereafter (but in no event at intervals greater than every five years), and a final audit shall be conducted no later than six months after the retirement of the Unit.  The costs of such audits shall be borne by the Lessee/Owner Parties on the basis of their Pro Rata Shares.

(d)

At the request of any of the Lessee/Owner Parties, the Operating Agent agrees to permit the Lessee/Owner Parties and their agents to make such reasonable investigations as they deem necessary or appropriate with respect to the effective operation of the Operating Agent’s system of internal control over financial reporting (the “Internal Controls”), including a report on Internal Controls from a nationally recognized audit firm.  The Operating Agent agrees to respond to reasonable inquiries of the Lessee/Owner Parties and their respective independent auditors with respect to the Internal Controls to enable them to conclude that the Internal Controls are operating effectively.  The Parties agree that all incremental internal and third party expenses incurred by the Operating Agent in respect of such investigations, reports and inquiries shall be borne by the requesting Lessee/Owner Party.  All agents and audit firms engaged by the requesting Party shall comply with the confidentiality terms and conditions provided in Article XXII hereof unless otherwise required by Law.

ARTICLE V

TRANSITION

SECTION 5.1

Control During and After Transition Period.

During the Transition Period, the Operating Agent will begin preparation for the Operating Functions related to Elm Road Unit 2.  Except as otherwise provided in the proviso of the immediately succeeding sentence, prior to the Lease Effective Date, in accordance with the terms of the Ownership Agreement and EPC Contract, the Project Manager shall be in control of Elm Road Unit 2.  During this period, all acts by the Operating Agent in preparation for the operation of such Unit shall be taken with the knowledge and approval of the Project Manager and shall not materially interfere with or impair the activities of the Project Manager or EPC Contractor; provided, however, that all systems of Elm Road Unit 2 turned over to the Operating Agent by the Project Manager, in accordance with the Interim Use and Operating Agreement or otherwise, shall be under the control of the Operating Agent and all acts of the Project Manager and EPC Contractor with respect to such systems will be undertaken only with the knowledge and approval of the Operating Agent.

SECTION 5.2

Documents and Agreements.

(a)

From and after the Lease Effective Date, the Operating Agent shall be responsible for maintaining and updating all warranty information, drawings and documents related to Elm Road Unit 2.

(b)

At an Operating Committee meeting prior to the Scheduled Commercial Operation Date, the Operating Committee, in conjunction with the Operating Agent, shall review all executory contracts then in place respecting Elm Road Unit 2 and determine which contracts are reasonably necessary to the Operating Functions.  Following the Lease Effective Date, such contracts shall be enforced by the Operating Agent consistent with Sections 2.2(s) and 2.2(t).

SECTION 5.3

Cooperation.

During the Transition Period, each of the Parties shall use reasonable efforts to ensure that its actions at the Elm Road Site are consistent with and support the efforts of the Project Manager and EPC Contractor to complete construction in a timely manner.

SECTION 5.4

Costs Incurred by Operating Agent During Transition Period.

It is anticipated that the Operating Agent will incur certain costs during the Transition Period in connection with the performance of its duties as Operating Agent during this period.  Such costs may include costs of labor and labor overheads; costs of procuring initial inventories of fuel, spare parts, materials and supplies; costs of procuring certain types of plant equipment, such as office equipment and shop tools; and costs associated with employee training.  To the extent such costs are incurred consistent with Prudent Utility Practice on behalf of the Lessee/Owner Parties in connection with the preparation for commercial operations of the Unit, and are not reimbursed to the Operating Agent and billed as “Project Costs” under the 

Ownership Agreement, the Operating Agent shall invoice each Lessee/Owner Party monthly (or as incurred, with respect to Coal Costs) for such Lessee/Owner Party’s Pro Rata Share, or other appropriately allocated share, of such costs consistent with the cost-allocation and billing provisions of this Agreement.

SECTION 5.5

Testing and Initial Start-up.

The Operating Agent’s role in the initial start-up and testing of the Unit during the Transition Period shall be as set forth with respect to WEPCO as Lessee in Article IV of Schedule 3.1(a) to the WEPCO Facility Lease.  Start-up and test fuel and revenue from the sale of energy produced during start-up and testing shall be accounted for consistent with Schedule 4.3 of the WEPCO Facility Lease.  Costs of and revenues derived from such testing and start-up shall be accounted for in accordance with the terms of the Ownership Agreement and shall not be included in the cost recovery under this Agreement.

SECTION 5.6

Caledonia Payments.

Commencing as early as 2005, the Operating Agent will begin making payments to the township of Caledonia in connection with the Caledonia Settlement Agreement dated July 27, 2004.  Notwithstanding any provision of any agreement to the contrary, the Parties agree that such payments shall constitute Operating Costs that are reimbursable pursuant to Section 9.3 hereof.  

ARTICLE VI

OPERATIONS AND SCHEDULING

SECTION 6.1

Commercial Operation.

The provisions in this Article VI shall take effect as of the Lease Effective Date.  WEPCO shall take all actions necessary to satisfy its obligations under and pursuant to the WEPCO Facility Lease (including Schedule 5.1 thereto) in a timely manner such that the Lease Effective Date will occur simultaneously with the Commercial Operation Date (as defined in the Ownership Agreement as of the date of execution thereof) or as soon thereafter as practicable.

SECTION 6.2

Auxiliary Services.

The Operating Agent shall procure such auxiliary services, including startup power and water, as are required from time to time in connection with the Unit’s operations.

SECTION 6.3

Operation Beyond Net Generating Capability.

It is the intent of the Parties that Elm Road Unit 2 will be operated within the parameters recommended by the manufacturers of the Unit in order to maximize the useful life of Elm Road Unit 2 and preserve its ability to operate as a high-availability base-load power supply resource and to avoid high maintenance costs that may be incurred due to operation of the Unit above its Net Generating Capability.  It is further recognized that at times of testing, or in the case of a 

system emergency or where requested by a Lessee/Owner Party that foresees or has implemented firm-load-obligation interruptions after taking all other prudent actions to avoid such interruptions, it may become necessary or appropriate to operate the Unit for short periods of time (generally not to exceed four hours) above its Net Generating Capability.  Consistent with Prudent Utility Practice, the Operating Agent shall keep such operations to a minimum and simultaneously communicate with all Lessee/Owner Parties regarding such operations.

SECTION 6.4

Allocation of Capacity.

Each Lessee/Owner Party shall own its Pro Rata Share of the Net Generating Capability of Elm Road Unit 2, plus its Pro Rata Share of any additional capacity or energy which may be obtainable from the Unit.

SECTION 6.5

Minimum Schedule Obligations.

When any Lessee/Owner Party Schedules energy from the Unit, each other Lessee/Owner Party shall, subject to reasonable advance notice of start, Schedule for its account at least its share of Minimum Net Generation, which shall be the product of the Party’s Pro Rata Share percentage and the Minimum Net Generation established for the Unit.

SECTION 6.6

Generation Control.

(a)

Subject to Section 6.6(f), each Lessee/Owner Party is entitled at all times to its Pro Rata Share of the Available Net Generating Capability of the Unit and energy produced therefrom, and all ancillary services that the Unit is capable of producing.  The Operating Agent shall keep the Lessee/Owner Parties advised, through simultaneous communications, of the Available Net Generating Capability and the ancillary services capability, and of any increase or decrease in the Available Net Generating Capability that will or may occur, or any known or suspected conditions that could cause such change.  Operation of the Unit above its Net Generating Capability may be requested by a Lessee/Owner Party only in accordance with Section 6.3.  Except as provided in Section 6.3, the maximum amount of energy during any hour that may be Scheduled by any Lessee/Owner Party from the Unit at the Point of Delivery shall be its respective Pro Rata Share of the Unit’s Available Net Generating Capability during that hour.  Subject to the requirements of Section 6.5, each Lessee/Owner Party may Schedule any amount less than this maximum amount.  The failure of a Lessee/Owner Party to Schedule its maximum amount of energy during any hour shall not permit any other Lessee/Owner Party to Schedule energy from the first Party’s Pro Rata Share of the Unit absent the consent and agreed-upon compensation of the first Party for the sale of such energy.

(b)

The Lessee/Owner Parties shall each have the same rights and obligations with respect to Scheduling and dispatch of the Unit.  Detailed written protocols and procedures for coordination and communications regarding Scheduling shall be developed and updated pursuant to Section 3.3(a) above.

(c)

Each Lessee/Owner Party shall have the right to have its share of the output of Elm Road Unit 2 on automated generation control and/or Scheduled by automated electronic means to the balancing authority or energy control system designated by that Party and capable 

of absorbing the energy.  Where a Lessee/Owner Party has elected to utilize such equipment, new or changed schedules shall go into effect immediately upon electronic notification by the Party through use of such equipment.  Each Party utilizing electronic Scheduling equipment shall ensure that it operates in such a manner as to comply with the minimum and maximum Scheduling requirements established in this Article VI.  All costs of installing, operating and maintaining electronic Scheduling equipment at Elm Road Unit 2 (and associated communications charges) shall be allocated based on the relative Pro Rata Shares of all Parties who utilize electronic Scheduling; provided, however, that a Party may elect to purchase, install, operate, and maintain its own communications equipment at Elm Road Unit 2, in which case it shall not be allocated any portion of other Parties’ costs of such equipment.  To the extent practicable, the Scheduling procedures in Section 6.6(d) shall apply to instances when electronic Scheduling equipment fails.

(d)

In the event a Lessee/Owner Party is not using electronic Scheduling to receive its share of the output of Elm Road Unit 2, that Party shall Schedule hourly energy deliveries with the Unit’s control center prior to 12:00 noon (or such other Scheduling deadline convention imposed in the region) of the last Energy Scheduling Business Day prior to the date in which the schedule is to begin.  The Operating Agent will use its best efforts to accommodate any subsequent schedule changes, subject to the operating constraints of the Unit.  The Operating Agent will notify all Parties, by 7:00 AM of the last Energy Scheduling Business Day prior to the date in which a schedule is to begin, of the expected Available Net Generating Capability for each hour during the date(s) covered by the schedule.  

(e)

In all events, the Operating Agent shall terminate or reduce, as appropriate, deliveries from the Unit to a Lessee/Owner Party hereunder at any time when an Applicable Transmission System Operator notifies the applicable Party or the Operating Agent that transmission service for the Party’s power and energy from the Unit is being interrupted or curtailed as permitted by the applicable transmission service tariffs or agreements.  Procedures shall be established among the Parties and the Applicable Transmission System Operator(s) to implement this requirement so that operation of the Unit shall be adjusted as promptly as possible consistent with Prudent Utility Practice.

(f)

The Operating Agent shall at all times, subject only to the limitations in the next sentence, operate the Unit to deliver at the Point of Delivery to each Lessee/Owner Party its Scheduled amount of energy up to such Lessee/Owner Party’s Pro Rata Share of the output available from the Unit.  The output available from the Unit (i.e., its Available Net Generating Capability) shall be limited only by scheduled outages, curtailments, Operating Emergencies, derates, operating constraints (e.g., start-up time and ramp rates), and, when necessary, for testing purposes.

(g)

Each Energy Scheduling Business Day, the Operating Agent shall provide an hourly log of each Party’s generation schedule and the Unit’s actual electric generation and capability for the previous day(s).  The Operating Agent shall reconcile on a daily basis the dispatch of the Unit as Scheduled by each Party against the actual generation output for each Party.

(h)

In the event that the Applicable Transmission System Operator adopts rules and/or requirements that are inconsistent with the provisions of this Article VI, the Parties shall in good faith negotiate amendments to such provisions of this Agreement as are necessary and appropriate to take into account the new rules or requirements, while preserving to the maximum extent possible the Parties’ original intent and rights under this Agreement.

SECTION 6.7

Operating Emergencies.

(a)

In the event of an Operating Emergency, the Operating Agent shall take any and all steps reasonably necessary to terminate the Operating Emergency as soon as is reasonably possible consistent with Prudent Utility Practice.

(b)

As soon as reasonably possible after the commencement of an Operating Emergency, the Operating Agent shall, simultaneously, advise the Lessee/Owner Parties of the occurrence of the Operating Emergency, its nature and the steps taken or to be taken to terminate the Operating Emergency.

SECTION 6.8

Coordination of Maintenance.

(a)

By September 15 of each year, the Operating Agent shall submit to the Operating Committee for its review pursuant to Section 3.2(c) scheduled maintenance plans for the following calendar year and for the four calendar years thereafter.  The one-year plan shall describe in reasonable detail the contemplated time and duration of each outage and shall cross-reference the related budget; the four-year plan need only include the contemplated time and duration of each outage, the maintenance work to be performed and the estimated cost thereof, to the extent reasonably projected, for major maintenance projects.  The Operating Committee shall make recommendations concerning the maintenance plans at its last quarterly meeting of the year (which meeting shall be scheduled to allow sufficient time for the Lessee/Owner Parties to review and evaluate the proposed maintenance schedule, provided, that such meeting shall be held no later than November 1).  In establishing the maintenance schedule for Elm Road Unit 2, the Operating Agent shall use commercially reasonable efforts to accommodate the preferences of the Lessee/Owner Parties, taking into account the schedules already established for maintenance of their other resources; provided, however, that the Operating Agent shall retain the final responsibility for determining the maintenance schedule for Elm Road Unit 2.  Scheduled maintenance plans may be changed by the Operating Agent from time to time as deemed appropriate by the Operating Agent, provided, that the Lessee/Owner Parties are simultaneously informed of all such changes on a timely basis, including being provided as much advance notice as is practicable of any anticipated changes to the maintenance schedule, and are provided a reasonable opportunity to comment on such revisions, which the Operating Agent shall consider in good faith.  The Operating Agent makes no representation, warranty or promise of any kind as to the accuracy of any estimates or other information contained in any scheduled maintenance plans, other than that they will be prepared in accordance with Prudent Utility Practice and the other requirements of this Agreement.

(b)

Scheduled outages for major maintenance shall be as required by the manufacturers’ applicable conditions of sale and delivery of the affected facilities and equipment or at intervals consistent with Prudent Utility Practice and manufacturers’ recommendations.  

The Operating Agent may shut down Elm Road Unit 2, reduce power or take other appropriate action necessary to ensure proper operation of the Unit in accordance with Prudent Utility Practice and compliance with Law.

(c)

For maintenance not included in the annual maintenance plan, where the Operating Agent (following Prudent Utility Practice) has discretion as to the timing of such maintenance, the Operating Agent shall simultaneously provide the Lessee/Owner Parties as much advance notice as is practicable of the need for any such maintenance, and provide a reasonable opportunity to comment on the timing of such maintenance, which the Operating Agent shall consider in good faith.

(d)

The scheduling of maintenance outages shall be consistent with the requirements of the Applicable Transmission System Operator for the transmission system to which the Unit is interconnected.  The Lessee/Owner Parties shall all be kept timely and simultaneously informed of the Unit’s outage schedule, and any known or likely changes therein.

(e)

If outages of the Unit are required because of maintenance associated with transmission facilities subject to the control of the Applicable Transmission System Operator for the transmission system to which the Unit is interconnected, Operating Agent shall simultaneously notify the Lessee/Owner Parties upon receiving notice from such Applicable Transmission System Operator of the need for such outage.  In the case of outages of the Unit required for scheduled transmission maintenance, the Operating Agent shall provide a reasonable opportunity for Lessee/Owner Parties to comment to the Operating Agent on the timing of such outage.  The Operating Agent shall consider such comments in communicating with such Applicable Transmission System Operator regarding the timing of such maintenance.

SECTION 6.9

Metering.

(a)

The Operating Agent shall maintain the necessary metering equipment to determine the amounts of net capacity and energy from Elm Road Unit 2 at the Point of Delivery.

(b)

The Operating Agent shall regularly read the meters at times determined by the Operating Committee and will promptly forward a duplicate copy of such meter readings to each of the Lessee/Owner Parties.  Metering records shall be available during normal business hours to authorized representatives of each Party.

(c)

Each meter used shall, by comparison with accurate standards, be tested and calibrated by the Operating Agent in accordance with Prudent Utility Practice and consistent with the GTIA.  The results of all tests and calibrations shall be open to examination by each Party and a report of every test shall be furnished promptly to each Party.

(d)

Any Lessee/Owner Party shall have the right to request that a special meter accuracy check test be made at any time.  Payment for such test shall be borne by the requesting Lessee/Owner Party if such meter is within 1% accuracy and by all Lessee/Owner Parties based on their Pro Rata Shares if outside said accuracy.

(e)

If, as a result of any test, any meter is found not to register within 1% accuracy, the readings of such meter previously taken shall be corrected according to the percentage of inaccuracy so found.  Such correction shall cover the entire period of the inaccuracy, if the Parties can determine that period; otherwise, the correction shall apply to half of the period since the last testing of the meter.  If any metering equipment fails to register or if the meter registration is erratic, the power and energy produced shall be determined by the Parties.

(f)

The Operating Agent shall maintain sufficient metering and interconnection arrangements and procedures with the Applicable Transmission System Operator to enable delivery and proper accounting of all of each of the Lessee/Owner Parties’ power and energy from the Unit.

ARTICLE VII

COMMON FACILITIES

(a)

The Operating Agent shall operate and maintain the Common Facilities pursuant to the terms and conditions of the Common Facilities O&M Agreement.  All costs relating to Common Facilities will be shared by the Parties as provided therein.

(b)

The Parties recognize that the Unit is one of several electric generating units that utilize the Common Facilities.  Accordingly, the Parties agree to cooperate with each other in the event that circumstances or conflicts arise with respect to the availability or use of the Common Facilities that do not permit full operation of all the units on the Land.  In such event, circumstances may require an adjustment of the Lessee/Owner Parties’ Scheduling requests during any such period, provided, that the Operating Agent shall, after taking into consideration each of the Parties’ desires and needs to utilize the Common Facilities, use reasonable good faith efforts to honor the Lessee/Owner Parties’ Scheduling requests to the fullest extent possible, consistent with the Unit’s availability, the Operating Agent’s rights and obligations under the Common Facilities O&M Agreement, and Prudent Utility Practice.

ARTICLE VIII

FUEL PROCUREMENT AND DELIVERY

SECTION 8.1

Coal Supplies. 

(a)

Operating Agent’s Contracting Obligations.

(i)

In accordance with Prudent Utility Practice and this Agreement, the Operating Agent shall be responsible for the purchase and delivery of all the coal necessary for the reliable and cost-effective operation of Elm Road Unit 2.  Accordingly, the Operating Agent shall enter into and administer any and all contracts for the supply and transportation of coal for the Unit (“Coal Supply Agreements”), and may do so as part of the coal supply and transportation arrangements for WEPCO’s other coal-fired facilities.  In entering into and administering Coal Supply Agreements, including scheduling deliveries thereunder, the Operating Agent shall provide for the adequate 

supply and transportation of coal for the Unit, determined on the basis of commercial reasonableness in light of prevailing market conditions and practices, and taking into account the Unit’s estimated monthly requirements, the Operating Committee’s stockpile objectives, and the combined coal quantity designations of the Parties pursuant to this Section 8.1.  All such coal shall meet the operating and permit requirements for Elm Road Unit 2. 

(ii)

The Operating Agent shall consult with the Lessee/Owner Parties from time to time concerning the Operating Agent’s strategy related to the length, pricing and other material terms of the Coal Supply Agreements, the net benefits that may be realized by incurring any contract minimum penalties or charges in connection with substitute spot-market purchases, and other opportunities for cost savings that may arise.  The Operating Agent shall keep the Lessee/Owner Parties informed regularly and in reasonable detail concerning all significant issues that arise in connection with the fuel procurement process and strategy for supply of Elm Road Unit 2 or any of the Coal Supply Agreements relevant to Elm Road Unit 2, and will consider the input from the Lessee/Owner Parties with respect to such issues. 

(iii)

Prior to entering any Primary Destination Contract, the Operating Agent shall use commercially reasonable efforts to obtain permission from the other prospective parties thereto to deliver to each of the Lessee/Owner Parties drafts of such Primary Destination  Contracts and provide each of the Lessee/Owner Parties with a reasonable opportunity to review and comment on such draft Primary Destination Contracts prior to signing.  The Operating Agent shall consider all comments received in a timely manner from the Lessee/Owner Parties with respect to such draft Primary Destination Contract.

(iv)

To assist in providing input and comments in connection with subsections (ii) and (iii) above, a Lessee/Owner Party shall have the right to retain its own consultant, at such Party’s expense.  Subject to appropriate confidentiality requirements and the other provisions of this Article, such consultant may participate in meetings with the Operating Agent conducted pursuant to Section 8.1(a)(ii), and review draft Primary Destination Contracts, executed Primary Destination Contracts, and other information provided to Lessee/Owner Parties under this Article. 

(v)

The Operating Agent's responsibility to administer all Coal Supply Agreements in accordance with its obligations under Section 8.1(a) includes enforcement  of any rights the Operating Agent may have under the Coal Supply Agreements and settlements of any disputes thereunder or amendments thereto, consistent with the requirements of Section 2.2(s) and Section 2.2(t) above.

(vi)

The Operating Agent shall be responsible for all activities related to the delivery and handling of coal at Elm Road Unit 2.  The Operating Agent shall determine the appropriate method for delivery, and may from time to time use railcars, barges, lake vessels and trucks to deliver the coal.  The railcars used to deliver coal to the Unit may consist of a combination of leased or purchased railcars, and shall be operated as a fleet in combination with other railcars already owned or leased by WEPCO.  The costs of 

owning or leasing and operating and maintaining railcars that are part of a fleet of railcars owned or leased by WEPCO shall be allocated to Elm Road Unit 2 based upon the ton-miles of coal transported using such fleet of railcars.  If, based on WEPCO’s actual experience with its fleet of leased and owned railcars, it can be shown that the average cost per ton-mile of leasing and owning or operating and maintaining the railcars used to deliver coal to Elm Road Unit 2 differs materially from the average cost per ton-mile of leasing and owning or operating and maintaining the railcars used to deliver coal to the remainder of the units served by WEPCO’s fleet, the Parties shall adjust the allocation methodology to reasonably reflect actual cost incurrence, which new methodology shall be subject to further adjustments by the Parties from time to time to reasonably reflect actual cost incurrence.  The Operating Agent shall oversee all maintenance work  for the railcars, consistent with its obligations under this Agreement.  This work may be performed at a combination of railroad and private railcar repair facilities.  Costs under this Section 8.1(a)(vi) shall be allocated in accordance with this Section and Article IX.  

(b)

Ownership of Coal Inventory.  Upon delivery of coal supplies to the Elm Road Coal Pile for Elm Road Unit 2, each Lessee/Owner Party shall take title to and thereafter own its designated portion of the coal inventory, as determined herein, which may be referred to as the Party’s coal inventory (although separate physical stockpiles for individual Lessee/Owner Parties will not be maintained at the Elm Road Site).  Coal purchased by the Operating Agent on behalf of each Lessee/Owner Party will be added to such Lessee/Owner Party's inventory in tons and MBTUs delivered.

(c)

Coal Inventory Quantities.  After reviewing recommendations provided by the Operating Agent, the Operating Committee shall establish both a minimum coal inventory quantity and a target coal inventory quantity for Elm Road Unit 2.  If the Operating Agent, acting in accordance with Section 8.1(a), believes that it is necessary or appropriate to increase the minimum coal inventory and/or target coal inventory quantity (e.g., in anticipation of a strike), it shall bring the situation to the attention of all Operating Committee Members, and recommend appropriate action.  Each Lessee/Owner Party shall designate a coal inventory level that it wishes the Operating Agent to maintain on the Party’s behalf for operation of Elm Road Unit 2, based on the Party’s expected usage of the Unit and other appropriate considerations.  Each Lessee/Owner Party must designate a  level no less than its Pro Rata Share of the minimum inventory level approved by the Operating Committee.  Each Lessee/Owner Party shall have the right to designate a level above such minimum levels up to the Party’s Pro Rata Share of the inventory targets established by the Operating Committee.  Any Lessee/Owner Party’s designation of a level above its Pro Rata Share of the inventory target approved by the Operating Committee shall be accommodated (i) if the purchase of such additional amounts is permitted under the terms of applicable Coal Supply Agreements and (ii) to the extent storage of such additional fuel stock can be accommodated at the Elm Road Site.   In such event, the requesting Party shall bear all costs associated with the purchase, transportation and stockpile maintenance of such coal supply above its Pro Rata Share of the approved inventory target, to the extent not otherwise billed pursuant to Article IX or the Common Facilities O&M Agreement.

(d)

Coal Inventory Management.  The Parties intend that the Operating Agent shall manage coal procurement, deliveries, and inventories, taking into account both overall Elm Road 

Unit 2 considerations and the designated coal inventory levels of each of the Lessee/Owner Parties.  The inventories of the Lessee/Owner Parties shall be subject to the following provisions.

(i)

Excess Inventory Condition Developing: If a Lessee/Owner Party’s coal inventory accumulates to the point that it exceeds its Pro Rata Share of the inventory target approved by the Operating Committee and that is greater than the excess inventory that can be accommodated at the Elm Road Site pursuant to Section 8.1(c), the Operating Agent may require the Party to reduce its inventory to the highest level that can be accommodated at the Elm Road Site.

(ii)

External Transfer:  The Operating Agent, in its sole discretion, shall consider the request of any Lessee/Owner Party to transfer coal directly from its stockpile to be used at another of its plants in order to avert an operational emergency affecting the  reliability at the other plant; provided, that such transfer does not reduce the Party’s stockpile below its Pro Rata Share of the minimum inventory level approved by the Operating Committee  and, in the reasonable judgment of the Operating Agent, inventories and expected receipts are such that the Unit’s operation will not be jeopardized.  The Operating Agent shall permit such transfers only if and to the extent they can be conducted in a manner that will not materially adversely affect Elm Road Unit 2 or other units on the Land, and will be in full compliance with all applicable Laws and local restrictions.  In such cases, the Operating Agent shall deduct the quantity transferred from the Lessee/Owner Party’s inventory at the average inventory cost per ton of its stockpile at the time the transfer is completed.  Any incremental cost resulting from any such transfer to another site by any Lessee/Owner Party will be the sole responsibility of that Lessee/Owner Party.  All external transfers shall be scheduled by the Operating Agent in a manner so as to accommodate to the extent possible the timing needs of the transferring Lessee/Owner Party while minimizing the impact on the Unit, and if the transfer utilizes the Unit’s coal handling personnel and facilities, the transferring Lessee/Owner Party shall be charged on the same basis as otherwise applies to such usage.   The Operating Agent shall provide an estimate of such charges prior to the transfer.  All external transfers will require the approval of the Operating Agent as to scheduling, handling and transportation methods.

(iii)

Internal Transfers:  Any Lessee/Owner Party may transfer coal from its stockpile to another consenting Lessee/Owner Party, provided, that if the transfer alters future receipts in a way that triggers minimum-purchase requirements, take-or-pay penalties, or similar provisions, the Lessee/Owner Parties participating in the transfer shall bear the associated costs.  These transfers shall be made at rates, terms (including provisions for assigning the costs resulting from associated changes in future receipts), and amounts agreed to by the affected Lessee/Owner Parties.  No Party shall be required to participate in such transfer.

(iv)

External Sales:  Sales from the stockpile other than to the Lessee/Owner Parties may be made only by the Operating Agent, as agent for the applicable Lessee/Owner Party.  External sales may be made only after consulting with the Operating Committee.  Further, the Operating Agent shall permit such transfers only if 

and to the extent they can be conducted in a manner that will not materially adversely affect Elm Road Unit 2 or other units on the Land, and will be in full compliance with all applicable Laws and local restrictions.  If more than one Lessee/Owner Party desires to participate in such sale, such participation shall be in proportion to the relative Pro Rata Shares of the Parties seeking to participate (unless otherwise agreed by the participating Parties); provided, however, that no Party shall be required to participate in such sale.  All tons of coal sold by each Lessee/Owner Party shall be deducted from the inventory of such Party at its average inventory cost per ton at the time the sale is completed.  Any incremental handling and transportation costs (determined consistent with Section 8.1(d)(ii)) shall be shared in proportion to the relative tons sold by the Parties participating in the sale.  Revenues from the sale shall likewise be shared in proportion to the relative tons sold by the Parties participating in the sale.

(e)

Cost and Contractual Responsibilities.  The charges to the Lessee/Owner Parties for coal hereunder shall be the Operating Agent’s actual delivered cost of such coal to the Elm Road Site.  The Lessee/Owner Parties shall pay the Operating Agent pursuant to Section 10.3 for their respective shares of Coal Costs incurred under the Coal Supply Agreements for the supply and transportation of coal to the Unit in accordance with this Article VIII.  In the event that the applicable Coal Supply Agreements contain any minimum-purchase requirements, take-or-pay penalties, or similar provisions, each Lessee/Owner Party shall be responsible for its share of such charges or penalties based upon its coal quantities, adjusted (if appropriate) to take into account the extent to which the liability for such charges or penalties is related to each Party’s actual use of (or failure to use) the coal contracted for thereunder.  In the event that the applicable Coal Supply Agreements provide for credits, discounts, rebates, BTU adjustment or similar provisions, each Lessee/Owner Party shall receive the benefit of such provisions as applicable to the coal delivered for each of their respective accounts, adjusted (if appropriate) to take into account the extent to which the credits, discounts, rebates or other adjustments are related to each Party’s actual use of (or failure to use) the coal contracted for thereunder.  The Lessee/Owner Parties shall also receive or bear (as the case may be) shares of any benefits received or penalties imposed in any litigation or dispute settlement under the Coal Supply Agreements, as such benefits or penalties relate to the Unit, in proportion to coal delivered for their respective accounts, adjusted (if appropriate) to take into account the extent to which the benefits received or penalties imposed are related to each Party’s actual use of (or failure to use) the coal contracted for thereunder.

(f)

Recordkeeping.

(i)

The Operating Agent shall adopt practices and procedures  for accurately keeping track of coal procurement decisions, as well as coal received, coal consumed and the respective inventories of the Lessee/Owner Parties, including records of coal sampling, analysis and weights and methods used to determine MBTUs delivered, and weighing, sampling and analysis of coal consumed. The Operating Committee shall review and make recommendations regarding such procedures. A monthly coal accounting report will be provided to the Lessee/Owner Parties, including each Party’s beginning inventory, additions, transfers and sales, consumption and ending inventory.  

The monthly report also will provide the heat rate information  necessary to determine each Party’s coal consumption.  The Operating Agent shall inform each Lessee/Owner Party of any accruals for Coal Costs that it should record at month-end.  Physical inventories of the Elm Road Coal Pile shall be made annually in accordance with Prudent Utility Practice.  Reasonable and appropriate adjustments shall be made to the Lessee/Owner Parties’ book inventories based upon the results of the annual physical inventory.

(ii)

The coal consumption of each Lessee/Owner Party shall be determined on the basis of the BTUs of coal consumed by the Unit.  At the end of each month, each Lessee/Owner Party shall be allocated a share of the total BTUs consumed in the operation of the Unit equal to its share of the energy production of the Unit received that month.  The amount of BTUs so determined shall be deducted from the sum of each Party’s beginning-of-the-month coal inventory in BTUs plus BTUs of coal added to such Party’s inventory as a result of coal deliveries during the month, and netted of any BTU coal transfers or sales.  In the event that the Lessee/Owner Parties utilize their Pro Rata Shares of the Unit at different relative loading levels, with the result that any Party believes that due to adverse heat rate impacts of such differential loading the foregoing method of determination of the coal consumption of the respective Parties is inequitable, the Parties shall adopt a method of allocating the total BTUs consumed in the operation of the Unit that takes into account the heat rate curve of the Unit and allocates fuel burn in BTUs based upon each Party’s relative loading of its Pro Rata Share of the Unit.  Using this methodology, each Party initially would be allocated BTUs for its share of energy received by using the heat rate curve of the Unit and the Party’s hourly loading of (i.e., hourly energy received from) its share of the Unit’s Available Net Generating Capability to make an initial calculation of such BTU allocation.  The final BTU allocation of each Party would be determined by multiplying the ratio of the initial calculated BTU allocation of each Party to the sum of the initial calculated BTU allocations of all the Parties times the measured total BTU consumption of the Unit during the month.  Schedule 8.1 shows this calculation.  The Parties may also agree to alternative methods of  allocating BTUs.

(iii)

The Operating Agent shall maintain, and make available to any Lessee/Owner Party on request, records from which the calculations described in Section 8.1(a)(vi) (regarding railcar fleet costs) can be made.

(iv)

The Operating Agent may establish an on-line, on-site coal sampling system for Elm Road Unit 2.

(g)

Alternate Fuel Supplies.  If appropriate, the Operating Agent shall propose arrangements for use of coal ash/sludge from WEPCO’s other units that could be used as fuel for Elm Road Unit 2.  Any such arrangement shall be subject to the agreement of all Parties, such agreement not to be unreasonably withheld or delayed.

SECTION 8.2

Coal Handling Services.

The Operating Agent shall perform or contract for coal handling services, the costs of which shall be accounted for as Operating Costs shared in accordance with Article IX and the Common Facilities O&M Agreement.

SECTION 8.3

Other Fuel Supplies.

The Operating Agent shall be responsible for the purchase and delivery of natural gas, fuel oil, and any other fuel, as necessary for the reliable operation of the Elm Road Unit 2, in accordance with Prudent Utility Practice and the provisions of this Agreement.  Adequacy of such fuel supplies will be determined on the basis of commercial reasonableness in light of prevailing market conditions and practices.  All such fuel shall meet the operating and permit requirements for Elm Road Unit 2.  Each Lessee/Owner Party shall reimburse the Operating Agent for its actual delivered costs of providing such other fuel supplies pursuant to Article IX.

SECTION 8.4

Affiliate Contracts.

The Operating Agent may not enter into any WEPCO Affiliate Contract for fuel supply or fuel transportation without the unanimous consent of the Operating Committee, except for the purchase and delivery of natural gas.

SECTION 8.5

Information Regarding Coal Delivered to the Unit.

(a)

The Operating Agent shall provide each of the Lessee/Owner Parties with a copy of each Elm Road Unit 2 Primary Destination Coal Commodity Contract and each Primary Destination Coal Transportation Contract.

(b)

The Operating Agent shall provide each month to each  of the Lessee/Owner Parties the following information relating to all coal delivered in the preceding month to the Elm Road Coal Pile for Elm Road Unit 2 (whether or not pursuant to a Primary Destination Contract):

Delivery Date

Coal Source (Contract/Mine)

Purchase Price $/ton

Transportation Medium (Supplier/Contract)

Transportation Cost ($/ton)

Delivered Cost ($/ton and $/MBTU)

Average Heat Content (BTU/lb.)

Total Tons and MBTUs Delivered for use by Elm Road Unit 2

Tons/MBTUs Allocated to each Lessee/Owner Party

Coal Characteristics (e.g., sulfur content, sodium, moisture, ash, etc.)

In the event that coal is supplied to the Elm Road Coal Pile for Elm Road Unit 2 pursuant to a non-Primary Destination Contract that prohibits the release of pricing information to any of the Lessee/Owner Parties, the Operating Agent shall not be obligated to provide the above-listed purchase price and transportation cost information for such coal deliveries.  In such cases, 

however, the Operating Agent shall provide all other information identified above, including delivered cost information.

(c)

The Operating Agent shall provide each month to each  of the Lessee/Owner Parties the following information relating to all coal delivered in the preceding month to the Elm Road Coal Pile (whether or not pursuant to a Primary Destination Contract) other than coal delivered for Elm Road Unit 2:

Delivery Date

Coal Source (Contract/Mine) 

Coal Contract Length (e.g., spot, one year, multi-year)

Transportation Medium

Delivered Cost ($/ton and $/MBTU) 

Average Heat Content (BTU/lb.)

Total Tons and MBTUs Delivered to Elm Road Coal Pile

Coal Characteristics (e.g., sulfur content, sodium, moisture,  ash, etc.)

At least annually (but no later than February 15 of each year), the Operating Agent shall provide information to the Lessee/Owner Parties indicating the aggregate amount of any adjustments to the Delivered Cost information provided pursuant to this Section 8.5 as a result of any discounts, rebates, penalties or other adjustments received or imposed during the preceding calendar year under any coal commodity or transportation contracts used to deliver coal to the Elm Road Coal Pile.  The Operating Agent shall indicate the calendar years to which such adjustments apply.

SECTION 8.6

Information Regarding Coal Delivered to Other WEPCO Units.

At least annually (but no later than February 15 of each year), the Operating Agent shall provide to the Lessee/Owner Parties the following information relating to all coal delivered during each month in the preceding calendar year to any coal unit (or plant) that is owned or operated by WEPCO or any Affiliate of WEPCO (other than a unit served in whole from the Elm Road Coal Pile):

Plant or Unit Name

Delivery Month

Coal Source (Mine)

Coal Contract Length (e.g., spot, one year, multi-year)

Transportation Medium

Average Heat Content (BTU/lb.)

Total Tons and MBTUs Delivered

Average Delivered Cost ($/ton and $/MBTU)

Coal Characteristics (e.g., sulfur content, sodium, moisture, ash, etc.)

To the extent not already reflected in the Average Delivered Cost of coal from such coal source, the Operating Agent shall include a statement, for each affected calendar year, indicating for each coal source the aggregate impact (in $/ton and $/MBTU) of any discounts, rebates and penalties or other adjustments received in the preceding calendar year.  

SECTION 8.7

Audit Rights Regarding Fuel-Related Contracts.

(a)

Each Lessee/Owner Party, at its expense, shall have the right to review any commodity or transportation contracts that supply the Elm Road Coal Pile and audit not more often than once per year fuel supply and transportation costs and inventory for all coal delivered to the Elm Road Coal Pile, subject to the following procedures and limitations:

(i)

The Lessee/Owner Party and its auditor or consultant  may review the Primary Destination Contracts and related documents to conduct the audit as it pertains to those Contracts and charges incurred thereunder.

(ii)

The Lessee/Owner Party and its independent auditor or consultant may review the applicable commodity contract(s), and related documents, to conduct the audit as it pertains to charges incurred for Elm Road Unit 2 under commodity contracts other than a Primary Destination Coal Commodity Contract where (a) at least 10% of the coal delivered to the Elm Road Coal Pile for Elm Road Unit 2 during a calendar year was delivered from a particular source (under one or more commodity contracts); and (b) the delivered cost of coal to Elm Road Unit 2 from such source, calculated using the applicable commodity and transportation contracts, is greater than the weighted average cost in $/MBTU under the Primary Destination Contracts used to supply coal to Elm Road Unit 2 during that calendar year.  In addition, the Lessee/Owner Party and such independent auditor or consultant may review the applicable transportation contract(s), and related documents, to conduct the audit as it pertains to charges incurred for Elm Road Unit 2 under a transportation contract other than a Primary Destination Coal Transportation Contract where (x) at least 10% of the coal delivered to the Elm Road Coal Pile for Elm Road Unit 2 during a calendar year was delivered pursuant to such transportation contract; and (y) the delivered cost of coal to Elm Road Unit 2 delivered using such transportation contract is greater than the weighted average cost in $/MBTU under the Primary Destination Contracts used to supply coal to Elm Road Unit 2 during that calendar year.  In such audits, as an addition to the applicable confidentiality requirements under Section 8.8 below, the Lessee/Owner Party’s independent auditor or consultant may disclose to such Lessee/Owner Party the audit report, but not the associated work papers unless agreed by Operating Agent.

(iii)

To the extent Lessee/Owner Parties incur charges under transportation and/or commodity contracts other than those covered under subsections (i) and (ii) above, the Operating Agent shall, on the request and at the expense of one or more Lessee/Owner Parties, cause its independent auditor to prepare an audit report certifying to such Lessee/Owner Party those matters set forth in Section 8.5(c) and such other questions as the requesting Lessee/Owner Parties identify.

(b)

For all natural gas and fuel oil supply commodity and transportation contracts intended solely for supply to the Elm Road Site, and for all WEPCO Affiliate Contracts used to supply natural gas and fuel oil to the Elm Road Site, the Operating Agent shall obtain the consents needed to permit each of the Lessee/Owner Parties, at  its expense, to review such contracts  and not more often than once per year audit the invoices generated by such contracts.  

To the extent the Elm Road Site uses natural gas or fuel oil supplied pursuant to contracts not covered by the prior sentence, each Lessee/Owner Party, at its own cost and expense, shall have the right to review such contracts and not more often than once per year audit the invoices generated by such contracts, and shall follow the independent auditor procedures set forth in Section 8.7(a)(iii) to the extent the Operating Agent is unable, despite commercially reasonable efforts, to obtain the consents needed to permit a Lessee/Owner Party to review such contracts and related documents reasonably requested to conduct the audit.

SECTION 8.8

Confidentiality.

All information provided to the Lessee/Owner Parties pursuant to this Article VIII shall be considered Confidential Information, except to the extent publicly available.  No employee of any Lessee/Owner Party that has daily direct involvement in generation-marketing activities may be provided access to fuel-related contracts and/or data provided pursuant to this Article VIII, except to the extent that such contracts and/or data are publicly available and/or relate solely to coal supplies for Elm Road Unit 2 (and, if applicable, other units of which the receiving party is a lessee or an owner).  Additionally, the Lessee/Owner Parties agree that upon delivery of such information, they shall agree to be subject to any reasonable additional confidentiality provisions set forth in the information and contracts being reviewed.

ARTICLE IX

ALLOCATION OF CAPITAL COSTS AND OPERATING COSTS

SECTION 9.1

General Principles.

(a)

The Operating Agent shall maintain separate accounts for Elm Road Unit 2, and all Capital Costs and Operating Costs for the Unit shall be kept and recorded in separate accounts where practical and shall include separate accounts at a minimum for plant, inventory, income and expense accounts.  The Operating Agent’s accounting will be in conformance with Accounting Practices and the provisions of this Article IX.  An initial list of the specific FERC accounts in which costs of Elm Road Unit 2 shall be recorded is included in Schedule 9.1 attached.  The inclusion of a particular FERC account is not intended to indicate that all costs recorded in that account are appropriate to be charged to Elm Road Unit 2 or the Lessee/Owner Parties, nor is the absence of an account intended to indicate exclusion of costs recorded in such account that are appropriate to be charged to Elm Road Unit 2 or the Lessee/Owner Parties.

(b)

It is the intent of the Parties that the Capital Costs and Operating Costs for which the Operating Agent is to be reimbursed under this Agreement will be assigned to Elm Road Unit 2 and then to the Lessee/Owner Parties.  These costs shall be directly charged or allocated to Elm Road Unit 2, as appropriate, and all costs so directly charged or allocated to Elm Road Unit 2 will be further allocated to the Lessee/Owner Parties in an equitable manner.  The Parties agree that the following basic principles will guide the classification of costs and the assignment of such costs to Elm Road Unit 2 and the Lessee/Owner Parties hereunder.

(i)

The guiding principle in cost assignment should be cost causation.  If operation and maintenance of Elm Road Unit 2 did not cause a cost to be incurred, none 

of that cost shall be assigned to Elm Road Unit 2 or the Lessee/Owner Parties.  Thus, for example, the Operating Agent will not include in its cost assignment to Elm Road Unit 2 any charges relating to WEC’s support of its non-electric utilities or other businesses that are not engaged in support of the Unit.

(ii)

In general, there are two levels of cost assignment.  The first level is where costs are directly charged or allocated to Elm Road Unit 2.  The second level is where those costs are allocated to the Lessee/Owner Parties.

(iii)

First Level:  Costs are to be either directly charged to Elm Road Unit 2 or allocated to Elm Road Unit 2.  Direct charges shall mean those costs incurred directly for the benefit of Elm Road Unit 2 or that can be directly assigned to Elm Road Unit 2 on the basis of specific information unique to Elm Road Unit 2.  The Operating Agent shall, whenever practical, directly charge Elm Road Unit 2 for costs that relate specifically to the operation and maintenance of Elm Road Unit 2.  Allocated costs are those costs that pertain to more than Elm Road Unit 2 that must be allocated to one or more units, including Elm Road Unit 2.  The following principles shall apply in allocating costs to Elm Road Unit 2:

(A)

Costs shall be allocated from where they are managed, in order to eliminate multi-layer allocations and in order to facilitate tracing of costs to their sources;

(B)

Where costs are directly charged to Elm Road Unit 2 and the costs remaining in the same cost pool or cost center are then allocated using a more general method, all users of the cost pool or cost center must first be directly charged and only costs remaining that cannot be directly charged shall be allocated to all users proportionately based on the direct charges; and 

(C)

Costs may be allocated to Elm Road Unit 2 based upon the number of employees, quantity of fuel delivered, share of net generation, or MW capacity (as described below), or other factors, as appropriate in light of cost-causation principles and the nature of the costs.

(iv)

Second Level:  The following principles shall apply in allocating Elm Road Unit 2 costs to the Lessee/Owner Parties:

(A)

Some costs will be inventoried, e.g., limestone and start-up fuel, and, upon delivery to the Elm Road Site, each Lessee/Owner Party will record its share of the inventory; and

(B)

Allocation of Elm Road Unit 2 costs may be based on quantity of coal delivered, share of net generation received, MW capacity leased or owned, or other factors, as appropriate in light of cost-causation principles and the nature of the costs.

(v)

Certain costs assigned to Elm Road Unit 2 and/or the Lessee/Owner Parties will be trued up in accordance with Section 10.6 to reflect actual values at the end of each calendar year and, if appropriate, during the year to minimize year-end adjustments.

(vi)

The Parties recognize that adjustments to the allocators specified in the Schedules for assigning costs to Elm Road Unit 2 may be appropriate from time to time to effectuate the Parties’ original intent in light of changed circumstances, such as a WEC corporate restructuring.

(vii)

The Parties acknowledge that in many instances it will be in their mutual best interest for the Operating Agent to optimize certain costs, including administrative and general costs and supervisory costs, by sharing them between the operation of Elm Road Unit 2 and WEPCO’s other operations.

(viii)

Costs incurred by the Operating Agent consistent with this Agreement in special or unusual circumstances must be evaluated for appropriate cost sharing.  When appropriate, the Parties will develop a special method for handling these costs to ensure equitable allocations consistent with the foregoing principles.

(ix)

The Parties have endeavored to identify in the Schedules the types of costs expected to be incurred and the appropriate treatment of such costs.  To the extent that costs are incurred by the Operating Agent consistent with this Agreement that are not specifically identified in the Schedules, they shall be assigned in accordance with the general cost-sharing principles of this Article IX, as best reflects the nature of such costs.  If such costs are expected to recur, the Parties shall modify the applicable Schedule to reflect the agreed-upon treatment of such costs.  

(x)

As an exception to the general method of cost assignment, costs incurred solely for the benefit of an identified Lessee/Owner Party will be directly charged to such Party where such direct charges are specifically provided for in this Agreement.

(xi)

Where the term “MW capacity” is used to allocate costs under this Agreement, the MW capacity of a unit shall be the most recent net generating capacity value, determined by an URGE (Uniform Rating of Generation Equipment) test as specified by MAIN, and accepted for summer capacity planning by MAIN.  For the avoidance of doubt, the MW capacity for Unit 2 shall be its Net Generating Capability; provided, however, that prior to the Lease Effective Date, the MW capacity for Unit 2 shall be 615 MW.  If an URGE/MAIN test results in a change to a unit’s net generating capacity value in the middle of a billing period, the new value shall be incorporated in the next billing period.  

SECTION 9.2

Computation of the Operating Agent’s Labor Costs.

(a)

All costs associated with the Operating Agent’s internal labor shall be charged using productive labor rates.  Productive labor rates initially will be computed using an estimate of labor costs divided by estimated productive hours (base and overtime hours) for each relevant 

employee group.  Each productive labor rate will be trued up to reflect actual labor costs and hours of the relevant employee group at least annually, or more often if it is determined that a significant variance from the original estimate has occurred.  An example of a productive labor rate calculation is included in Schedule 9.2.

(b)

By way of example, a productive labor rate may include the following costs:

(i)

Compensation for overtime and shift premiums incurred by employees located at the Elm Road Generating Station who provide services to Elm Road Unit 2;

(ii)

Benefits including health insurance, pension and other retirement benefits, payroll taxes and other costs associated with compensation of such employees;

(iii)

Compensated absences paid to such employees including vacation, sick leave, disability and FMLA related compensation; and

(iv)

Incentive-based compensation payable to Elm Road Unit 2 management for meeting various operational and safety goals consistent with WEPCO’s general incentive plans.  The Parties acknowledge that incentive compensation may be an integral component of management employee total compensation and that the Operating Agent may pay such compensation to motivate employees to achieve operational and safety objectives.  To ensure alignment of the incentive compensation with the interests of the Lessee/Owner Parties, the Lessee/Owner Parties shall reimburse the Operating Agent for their allocated portion of such incentive payment based upon the percentage (on a weighted basis, if the business unit compensation plan so provides) of the Unit’s achievement of the unit-specific goals defined in the business unit compensation plan under which the incentive compensation is provided.

(c)

Labor charges shall be assigned to Elm Road Unit 2 using productive hours worked.

(d)

The Operating Agent shall maintain lists of all employees primarily assigned to the Elm Road Generating Station in order to facilitate the true-up of the productive labor rates for such employees.

SECTION 9.3

Costs Unique to or Originating at Elm Road Unit 2.

Costs that are unique to or originate at Elm Road Unit 2 are identified in Schedule 9.3 and are those costs that relate directly to Elm Road Unit 2.  Schedule 9.3 lists these costs, together with the method utilized to assign each category of such costs (i) to Elm Road Unit 2 and (ii) to the Lessee/Owner Parties.

SECTION 9.4

Costs Allocated from the Common Facilities O&M Agreement.

Costs that are allocated from the Common Facilities O&M Agreement are identified in Schedule 9.4 and are those costs that constitute Elm Road Unit 2’s appropriate share of the costs of the combined operation of multiple units located on the Land that cannot be directly assigned 

to a single unit.  The assignment of such costs to Elm Road Unit 2 is addressed in the Common Facilities O&M Agreement, but the apportionment of such costs to the Lessee/Owner Parties shall be governed by this Agreement.  Schedule 9.4 lists these costs, together with the methods utilized to allocate each category of such costs to the Lessee/Owner Parties.

SECTION 9.5

Costs Unique to WEPCO’s Fossil Fuel Generating Facilities.

(a)

Costs that are unique to WEPCO's fossil fuel generating facilities are identified in Schedule 9.5 and represent Elm Road Unit 2’s appropriate share of costs that are incurred by WEPCO in connection with its operation of coal- and gas-fired generating facilities and that cannot be directly assigned to one or more facilities.  Schedule 9.5 lists these costs, together with the methods utilized to assign each category of such costs (i) between Elm Road Unit 2 and other fossil fuel generating facilities operated by WEPCO and (ii) to the Lessee/Owner Parties.

(b)

As an exception to the general rule that Capital Costs are not to include any carrying costs, the Parties agree that costs charged under this Section 9.5 shall include an appropriate share of WEPCO’s costs of owning capitalized computer hardware and software used to support the information technology services identified in Schedule 9.5.  The Parties acknowledge that there may be other similar capitalized equipment costs that the Parties may agree to treat similarly.  In such events, the Parties intend that the Lessee/Owner Parties shall be charged for these capitalized costs on the same basis on which WEPCO generally charges its retail customers for such capitalized costs, i.e., — using WEPCO’s pre-tax weighted average cost of capital and the applicable depreciation rates as established in its most recent general rate case before the PSCW.

SECTION 9.6

Costs Relating to WEPCO’s and Wisconsin Gas Company’s Utility Operations.

Costs relating to WEPCO's and Wisconsin Gas Company's utility operations are identified in Schedule 9.6 and are those that are Elm Road Unit 2’s appropriate share of costs that are incurred by (a) WEPCO in connection with the operation of its other electric utility operations, and/or (b) Wisconsin Gas in connection with the operation of its natural gas utility operations, which cannot be directly assigned to one or more facilities.  Schedule 9.6 lists these costs, together with the methods utilized to assign each category of such costs  (i) to Elm Road Unit 2 and (ii) to the Lessee/Owner Parties.

SECTION 9.7

Other Support Costs.

To the extent the operation of the Elm Road Unit 2 requires other corporate support not included in the costs directly charged or allocated to Elm Road Unit 2 pursuant to Sections 9.3, 9.4, 9.5 and 9.6, such Operating Costs will be directly charged to Elm Road Unit 2 using reasonable billing practices consistent with WEPCO’s method of billing affiliated non-utility operations.  The areas that may supply these other support costs, as well as support costs fully excluded from assignment to Elm Road Unit 2, are identified in Schedule 9.7.

SECTION 9.8

Miscellaneous.

(a)

Accrual Accounting Methods.  Notwithstanding any other provisions of this Agreement, the Parties recognize that application of accrual accounting in determining costs to be assigned to Elm Road Unit 2 and the Lessee/Owner Parties, to the extent consistent with Accounting Practices, can operate unfairly in certain circumstances.  Where Accounting Practices require the Operating Agent to accrue for potential future liabilities, excluding pensions and other post-retirement benefits, but (A) the Operating Agent does not reasonably expect to pay out such potential costs within one month, and (B) the Operating Agent will not deposit accrual payments upon receipt into an external interest-bearing account identified for that purpose, the Operating Agent shall not collect the accruals on an ongoing basis from the Lessee/Owner Parties.  Instead, it shall inform the Lessee/Owner Parties that each of them should record its share of such potential costs, along with the normal monthly accruals for Capital Costs and Operating Costs, as an obligation in its own accrual accounting, and the Operating Agent shall bill and collect the costs only at the time and in the amount the accrued cost is actually paid by the Operating Agent.  If, based on an audit, it is determined that accrued costs were collected by the Operating Agent for costs that were not actually paid at or about the time originally anticipated at the time the accrual was initiated and are not likely to be paid out within one month, the Operating Agent shall make appropriate refunds of such amounts, plus interest at the True-Up Interest Rate, Compounded Monthly, over the actual number of days elapsed from the payment by the Lessee/Owner Party to the date of such refund.

(b)

Change of Accounting Rules.  If accounting rules change during the term of the Agreement such that the Operating Agent is required to make any form of catch-up cost accrual or payments associated with labor or other costs arising out of past periods, catch-up accruals or payments associated with such labor or other costs relating to prior periods shall be permitted only to the extent related to activities or services provided in connection with this Agreement, and in no event prior to the Transition Period.

(c)

Capital Costs.  Any accounting for retirements, replacements, additions or improvements shall follow prescribed Accounting Practices including the Operating Agent’s consistently applied policies for determining capital versus expense.  Each Lessee/Owner Party shall pay, or shall cause its appropriate Affiliate to pay, for its share of all Capital Costs directly related to Elm Road Unit 2 that meet the WEPCO Facility Lease criteria for improvements.  Unless the Parties agree that the costs of any replacement, addition, improvement, or retirement not associated with permanent retirement of the Unit from service should be borne on the basis of each Lessee/Owner Party’s energy usage of the Unit, each Lessee/Owner Party’s responsibility for such Capital Costs will be based on its Pro Rata Share.  No “allowance for funds used during construction” shall be included in the Capital Cost obligations of WPPI or MGE, regardless of whether WEPCO records such AFUDC in the construction work in progress records or the fixed asset accounts for WEPCO’s proportionate share, as Lessee/Owner Party, of capital investments for the Unit.

(d)

Non-Recurring Costs.  The Lessee/Owner Parties’ obligations to reimburse the Operating Agent for payments made pursuant to any settlements, to satisfy any judgments, and/or as a penalty for violation of any Law or Government Approval shall be governed by 

Article XVI.  The Lessee/Owner Parties’ responsibility for any other special and/or non-recurring costs the Operating Agent may incur consistent with this Agreement in connection with Elm Road Unit 2 shall be allocated in accordance with the general principles established in this Article IX, as determined by agreement of the Parties.

(e)

Income.  All income related to Elm Road Unit 2 (except for income related to the sale of byproducts governed by Section 9.8(f)) shall be allocated among the Lessee/Owner Parties in accordance with the general principles established in this Article IX, as determined by agreement of the Parties.

(f)

Byproducts.  Each Lessee/Owner Party shall have the right to receive revenues from the sale of byproducts of Elm Road Unit 2 on a basis up to its Pro Rata Share, provided, that it shares in the costs associated with such byproducts on the same basis.  If all Lessee/Owner Parties elect to share in the revenues and costs of such byproduct sale to the extent of their full Pro Rata Shares, then the revenues and charges associated with such sales shall be included in the income and expense accounts attributable to the Unit.  If the participation of the Lessee/Owner Parties in such byproduct sale is on a basis other than their Pro Rata Shares, then the revenues and charges associated with such sales shall be separately accounted for and charged or credited to the participating Parties in proportion to their participation in such byproduct sales.

(g)

Title to Improvements.  Notwithstanding any provision to the contrary contained in this Agreement, the Parties acknowledge and agree that title to all replacements, additions or improvements to the Unit of any kind or nature whatsoever shall automatically vest with the Unit 2 owners pursuant to the Ownership Agreement.

SECTION 9.9

Reimbursement Responsibility.

The Lessee/Owner Parties shall reimburse the Operating Agent for all Capital Costs and Operating Costs it incurs in connection and consistent with this Agreement, pursuant to the sharing principles described in this Article IX, except to the extent (i) a Party (including the Operating Agent) is solely responsible for the costs under this Agreement or the Agreement otherwise limits the Operating Agent’s right to reimbursement of such costs, or (ii) in the future it is determined by mutual agreement of all the Parties, or by Dispute resolution pursuant to Article XX upon any issue raised by any Party, that operation of any particular provision is inequitable under the circumstances at the time, in which case the Operating Agent shall be reimbursed the amounts in question pending resolution of the Dispute and shall thereafter refund such amount as determined by such Dispute resolution, together with interest at the True-Up Interest Rate over the actual number of days elapsed from the payment by the Lessee/Owner Party to the date of such refund.

ARTICLE X

PAYMENTS AND BILLINGS

SECTION 10.1

Billing Procedures.

Commencing with the second month of the Transition Period, the Operating Agent shall prepare and render monthly invoices setting forth the amount due from each Lessee/Owner Party on account of Elm Road Unit 2 Capital Costs and Operating Costs incurred during the preceding month.  Coal Costs shall be separately invoiced pursuant to Section 10.3.  All invoices shall be itemized by FERC account, shall provide reasonable detail to enable the Lessee/Owner Parties to determine the correctness and propriety of the charges and allow appropriate true-ups to be calculated, and shall otherwise conform to the requirements of Article IX.  The Operating Agent shall provide each monthly invoice by e-mail and fax to the Lessee/Owner Parties on or before the fifth Business Day of the month.  Each Lessee/Owner Party shall pay the invoiced amount by the Payment Date via a bank wire transfer or ACH debit to the Operating Agent’s bank account in accordance with the instructions provided in writing by the Operating Agent.  Interest shall be payable on all amounts not paid on or before the Payment Date, over the actual number of days elapsed from the Payment Date to the date such amounts are paid, at the Default Interest Rate, Compounded Monthly.

SECTION 10.2

Operating Deposit.

(a)

The Parties recognize that the Operating Agent may be obligated to make payments of Operating Costs before it receives the monthly payments from the Lessee/Owner Parties.  To provide cash flow to enable the Operating Agent to pay such costs, each Lessee/Owner Party shall maintain with the Operating Agent an operating deposit equal to 50% of the amount of its current invoice for Operating Costs.  Each monthly invoice, commencing with the second, shall reflect an adjustment (payment amount or credit) equal to the difference between the Lessee/Owner Party’s current operating deposit obligation, and its balance after the preceding deposit.

(b)

The operating deposit percentage set forth in Section 10.2(a) shall be reassessed and adjusted, if appropriate, based upon actual experience after the first two years of commercial operation of Elm Road Unit 2 as part of each audit performed pursuant to Section 4.4(b).

SECTION 10.3

Coal Costs.

Coal Costs are to be paid by the Lessee/Owner Parties when payment is due to the supplier rather than through monthly invoices.  The Operating Agent shall provide to each of the Lessee/Owner Parties a copy of each invoice from coal and coal transportation suppliers for coal delivered to Elm Road Unit 2 by fax and e-mail (if such invoice was transmitted to WEPCO by e-mail), together with the determination of the Lessee/Owner Party’s appropriate share of such invoice, as soon as practicable after receipt of the invoice from the supplier, but no later than five Business Days prior to the date on which payment of the invoice is due.  Each of the Lessee/Owner Parties shall pay its share of such invoice to the Operating Agent’s bank account in accordance with the instructions provided in writing by the Operating Agent on or before the 

date payment is due to the supplier.  Interest shall be payable on all amounts not paid on or before such date, over the actual number of days elapsed from the due date to the date such amounts are paid, at the Default Interest Rate, Compounded Monthly.

SECTION 10.4

Extraordinary Costs and Revenues.

If the Operating Agent incurs extraordinary costs related to Elm Road Unit 2, it may request accelerated payment from the Lessee/Owner Parties.  In no event will payment be due earlier than 15 Business Days after the date the invoice was transmitted.  If the Operating Agent receives extraordinary revenues relating to Elm Road Unit 2, it shall pay the Lessee/Owner Parties their respective shares within five Business Days of receipt.

SECTION 10.5

Payment in Event of Dispute.

If upon receipt of an invoice hereunder, a Party disputes the existence or extent of any obligation to make any payment hereunder, it shall nevertheless make payment in full of all invoices when due, with a written protest, submitted at the time of or subsequent to such payment, directed to the Operating Agent, with copies to the other Parties.  When any Dispute regarding payment is resolved and any amount is to be refunded, payment of amounts due shall be refunded within ten days thereafter, together with interest at the True-Up Interest Rate, Compounded Monthly, based upon the actual number of days elapsed from the date of the payment to which the correction relates to the date of the refund.

SECTION 10.6

Annual True-Ups.

It is expected that many of the cost allocators identified in Article IX, as well as the productive labor rates, will initially be computed using budgeted or estimated values.  In those instances, the cost allocators and productive labor rates shall be trued-up at least on an annual basis so actual allocation factors and actual productive labor rates are used to determine the costs assigned to Elm Road Unit 2 and the Lessee/Owner Parties.  The annual true-ups shall be conducted as part of the final accounting pursuant to Section 10.7.  If the annual true-up results in an adjustment to actual annual costs in excess of 3%, higher or lower, of the total Operating Costs billed on a monthly basis under Section 10.1, interest at the True-Up Interest Rate shall be assessed on one-half the balance due to the Lessee/Owner Parties or payable to Operating Agent over the actual number of days elapsed from the commencement of the preceding year to the date of payment or reimbursement.  If the annual true-up results in an adjustment of 3% or less of the total Operating Costs billed under Section 10.1, no interest shall be assessed on the balance due from or payable to the Lessee/Owner Parties.

SECTION 10.7

Final Accounting.

Within 60 days following the end of each calendar year, the Operating Agent shall submit to the Lessee/Owner Parties a final accounting for the previous calendar year showing all amounts expended and billed hereunder and the apportionment of such expenditures among the Parties.  Adjustments (including interest at the True-Up Interest Rate, if applicable) shall be made among the Parties, if required, so that all costs properly incurred in the performance of Operating Functions shall have been shared by the Parties in accordance with this Agreement.  

This final accounting shall include the annual true-up provided for in Section 10.6, and any resulting adjustments (including interest calculated separately as provided for therein).  Within 180 days of receiving the final accounting, each Lessee/Owner Party shall raise all billing issues that it can reasonably identify on the basis of the information provided in the final accounting.  However, this time limit shall not bar any Lessee/Owner Party from subsequently raising any billing dispute the basis for which was not reasonably discernable based on the information provided in the final accounting, and which became known to the Lessee/Owner Party only through later-acquired information (including without limitation the results of any audit or other review covering the period of the disputed invoice).

SECTION 10.8

Audit Adjustments.

Where an audit pursuant to Section 4.4 or other review of the Operating Agent’s activities (including an assessment or study pursuant to Section 3.2(b)) identifies a cost for which the Operating Agent invoiced to any Lessee/Owner Party an amount either higher or lower than the costs for which such Party is properly chargeable under this Agreement, then the Operating Agent shall, as appropriate, refund or invoice each affected Party an amount equal to (a) the difference between the amount invoiced and the amount properly charged plus (b) interest on such difference at the True-Up Interest Rate, Compounded Monthly, over the actual number of days elapsed from the date of payment of the original invoice to the date of refund or payment of shortfall.

ARTICLE XI

TAXES

To the extent possible, each Lessee/Owner Party shall report, file returns with respect to, be responsible for and pay all real property, franchise, business, gross receipts, or other Taxes arising out of or relating to its respective output and any of its other rights, benefits, advantages, titles and interests under this Agreement.  To the extent that the Lessee/Owner Parties do not pay directly for Taxes relating to Elm Road Unit 2, such Taxes shall be included as Operating Costs and paid by the Lessee/Owner Parties pursuant to Article IX.

ARTICLE XII

CLEAN AIR ACT EMISSION ALLOWANCE REQUIREMENTS

SECTION 12.1

Annual Allowance Requirement, Initial Share, and Allowance Contribution.

(a)

The Operating Agent shall calculate a projected Annual Allowance Requirement for each year of Elm Road Unit 2 operations, which shall be equal to the estimated annual emissions of sulfur dioxide (in tons) from the Unit for the year based on the expected sulfur dioxide emission rate and estimated total heat input at the maximum expected energy production.  The Operating Agent’s calculation of each year’s projected Annual Allowance Requirement shall be subject to review and approval of the Operating Committee.

(b)

Each Lessee/Owner Party shall be responsible for providing and maintaining its Annual Allowance Contributions to the Elm Road Unit 2 allowance account in accordance with this Article XII.  The Operating Agent shall maintain records that allocate the allowances held in the Elm Road Unit 2 account at any given time to each Lessee/Owner Party, by compliance year, based on (i) the number of allowances contributed to the account by each Lessee/Owner Party, (ii) the number of allowances acquired by the Operating Agent on behalf of each Lessee/Owner Party pursuant to Section 12.8, (iii) the number of allowances transferred from the account at the direction of each Lessee/Owner Party pursuant to Section 12.7, and (iv) the number of allowances deducted from the account by EPA attributed to each Lessee/Owner Party pursuant to Section 12.4.

SECTION 12.2

Initial Funding of Elm Road Unit 2 Allowance Account.

(a)

The Elm Road Unit 2 allowance account within the Allowance Tracking System maintained by EPA pursuant to 40 C.F.R. Part 73, Subpart C, or any other subsequently applicable regulations, shall be funded in an amount equal to the projected Annual Allowance Requirement for each of the first three calendar years of operation, except that the projected Annual Allowance Requirement for the first calendar year of operation shall be prorated according to the portion of the calendar year as of the Provisional Certification Date.

(b)

Each Lessee/Owner Party shall be obligated to provide its Annual Allowance Contributions for each of the first three calendar years of operation no later than the date that is six months prior to the Scheduled Commercial Operation Date.

SECTION 12.3

Quarterly Adjustment of Allowance Holdings.

By the 15th day after the close of each calendar quarter after the Provisional Certification Date, the Operating Agent shall advise each Lessee/Owner Party of its allocated share of the actual sulfur dioxide emissions from the Unit for the calendar year through the end of that quarter; for purposes of these true-ups, the allocations shall be based on each Lessee/Owner Party’s proportionate share of energy delivered from the Unit during the calendar year through the end of that quarter.  Each Lessee/Owner Party shall be obligated to provide additional allowances within 30 days to the extent that its allocated share of actual sulfur dioxide emissions exceeded its Annual Allowance Contribution for the year in question (prorated according to the portion of the calendar year being examined in the true-up, as adjusted for scheduled outages and other operating factors).

SECTION 12.4

Annual Adjustment of Allowance Contribution.

Each Lessee/Owner’s allocation of allowances shall be reduced upon EPA’s annual deduction of allowances from the Unit’s allowance account pursuant to 40 C.F.R. § 73.35, or other subsequently applicable regulations, in an amount equal to its allocated share of the Unit’s sulfur dioxide emissions for the year.  To the extent that a Lessee/Owner Party’s allowance allocation for the year just concluded exceeds its allocated share of the Unit’s sulfur dioxide emissions, such excess allowances shall be credited to that Lessee/Owner Party’s Allowance Allocation for the current year.

SECTION 12.5

Annual Contribution of Third Year Allowances.

Each year after the Provisional Certification Date, the Operating Agent shall use its best efforts to advise each Lessee/Owner Party by June 30th of the projected Annual Allowance Requirement for the calendar year beginning the second year after the end of the current calendar year.  Each Party shall be obligated to provide its Annual Allowance Contribution for the second year after the end of the current calendar year within 30 days after receiving notice from the Operating Agent of the Annual Allowance Requirement for that year, but no earlier than July 31.

SECTION 12.6

Adjustment of Annual Allowance Requirement.

After consultation with the Operating Committee, the Operating Agent may adjust the projected Annual Allowance Requirement and/or one or more Lessee/Owner Parties’ Annual Allowance Contributions for any or all years, as may be warranted by operating experience, expected operating changes, or (in the case of revised Annual Allowance Contributions not resulting from a revised Annual Allowance Requirement) relative expected uses of the Unit by the Lessee/Owner Parties.  Each Lessee/Owner Party shall be obligated to provide additional allowances to meet any increase in its Annual Allowance Contribution within 30 days after receipt of notice of the amount of the resulting shortfall.

SECTION 12.7

Excess Allowances.

A Lessee/Owner Party may direct the Operating Agent at any time to transfer allowances from a given year’s subaccount within the Unit’s allowance account to an account designated by such Lessee/Owner Party to the extent that such Party’s Allowance Allocation for such year exceeds 110% of its Annual Allowance Contribution for such year determined pursuant to this Article XII.

SECTION 12.8

Acquisition of Allowances by Operating Agent; Reimbursement of Costs.

In the event that any Lessee/Owner Party has failed to supply its Annual Allowance Contribution by the established deadlines, the Operating Agent shall provide notice thereof to such Lessee/Owner Party.  If such Lessee/Owner Party does not provide its Annual Allowance Contribution within 30 days thereafter, the Operating Agent shall use commercially reasonable efforts to acquire allowances to cover the shortfall.  In acquiring allowances pursuant to this Article to cover any Lessee/Owner Party’s share of required allowances, the Operating Agent shall use reasonable efforts to obtain such allowances at the lowest cost at which such allowances are available at the time of the transaction.  The costs incurred by the Operating Agent to acquire allowances pursuant to this Section 12.8 (including commercially reasonable brokerage fees) shall be reimbursed by such Party within 30 days after receipt by such Party of an invoice from the Operating Agent documenting the incurrence and amount of such costs.  In addition, the deficient Lessee/Owner Party shall pay a penalty equal to 25% of the costs incurred by the Operating Agent to acquire the deficient Party’s required allowances; the penalty proceeds shall be distributed by the Operating Agent to the non-deficient Lessee/Owner Parties in proportion to their Pro Rata Shares.

SECTION 12.9

Procedures for Transferring Allowances; Compliance Use Dates.

All allowances transfers required or authorized by this Article XII shall be effected in accordance with procedures specified by EPA applicable to the Allowance Tracking System or as otherwise provided for in this Agreement.  An obligation hereunder to transfer or acquire allowances required for a given calendar year shall be deemed satisfied only if the allowances transferred to the Unit account bear a compliance-use date (as such term is currently defined in 40 C.F.R. § 72.2 or any subsequently applicable regulations) for such year (or any earlier year).

SECTION 12.10

Restrictions on Allowance Transfers to Cover Excess Emissions.

The Operating Agent shall direct that the representatives appointed pursuant to Section 2.2(u) shall not authorize the transfer of any allowances supplied by a Lessee/Owner Party from the Elm Road Unit 2 account to the account of any other unit on the Land to cover excess emissions at such other unit pursuant to 40 C.F.R. § 73.35(b)(3) or any subsequently applicable regulations, or for any purpose (other than the Party’s exercise of its rights under Section 12.7), without the prior approval of such Lessee/Owner Party.  In no event shall the Operating Agent permit the Designated Representative or Alternate Designated Representative for the Unit to authorize any transfer of allowances from the Elm Road Unit 2 account if such transfer would cause the Unit’s total allowance account balance to fall below the Annual Allowance Requirement for any year.

SECTION 12.11

New/Future Regulatory Requirements.

The Operating Committee shall be responsible for establishing equitable procedures for the Unit’s compliance with future environmental Laws, including any requirements relating to NOx, mercury, or carbon dioxide.

ARTICLE XIII

INSURANCE

SECTION 13.1

Operating Agent’s Duty to Provide Insurance Coverage.

The Operating Agent shall procure insurance coverage for the Unit, effective on the Lease Effective Date, that is consistent with Prudent Utility Practice and the insurance coverage provided for in the WEPCO Facility Lease for the Unit.  The Operating Agent shall use commercially reasonable efforts to ensure that all insurance coverage obtained pursuant to this section provides that (a) each Lessee/Owner Party is a “named insured” with respect to its ownership or leasehold interest, (b) each Lessee/Owner Party will receive at least 30 days (10 days in the event of non-payment) written notice from the insurer prior to the cancellation or termination or any material change in such insurance coverages, and (c) the Operating Agent, on behalf of the Lessee/Owner Parties, shall be solely responsible for pursuing claims and/or negotiating settlements in respect of claims under such insurance coverages.  Such insurance may be obtained by the Operating Agent under policies that cover more than one of the generating units owned by WEPCO or in which WEPCO has an insurable interest.  The costs of such insurance coverage shall be directly charged or allocated to Elm Road Unit 2 consistent 

with the methodology set forth in Article IX.  Each Lessee/Owner Party shall be responsible for its Pro Rata Share of such insurance costs and any deductibles.  If this Agreement terminates but the WEPCO Facility Lease is still in effect, WEPCO shall be obligated to procure and maintain, on behalf and at the cost of the Lessee/Owner Parties, insurance for the Unit under this Section 13.1 until termination of the WEPCO Facility Lease or, if sooner, the effective date of any replacement operating agreement pursuant to which the Lessee/Owner Parties’ new Operating Agent is required to obtain equivalent insurance coverage.  The obligations of the Lessee/Owner Parties under this section shall survive termination of this Agreement.

SECTION 13.2

Inspections.

Commencing on the Lease Effective Date, the Operating Agent shall be responsible for overseeing the engineering and loss-prevention inspections at Elm Road Unit 2.  The Lessee/Owner Parties reserve the right to perform inspections and review all specifications and drawings of the Unit, including those for fire protection and boiler and machinery.

SECTION 13.3

Contractors’ Insurance.

The Operating Agent shall require all contractors, sub-contractors, engineers, and all equipment suppliers or manufacturers providing services or equipment for the Unit to provide certificates demonstrating that they have reasonably adequate insurance (naming the Lessee/Owner Parties as “additional insureds”) and limits thereof as determined by the Operating Agent, for workers’ compensation, public liability, contractors’ liability and such other hazards as the Operating Agent determines to be appropriate with respect to Elm Road Unit 2.

ARTICLE XIV

LOSSES, INTERCONNECTION, AND TRANSMISSION

SECTION 14.1

Losses.

Each Lessee/Owner Party shall be responsible for its respective share of station and step-up transformer losses based upon MWH received at the Point of Delivery.

SECTION 14.2

Interconnection.

The Operating Agent shall be responsible for entering into any amendments to the GTIA and for entering into other agreements, if any, required by the Applicable Transmission System Operator for Elm Road Unit 2 on an Elm Road Generating Station or total-Unit basis (i.e., relating to services or functions that cannot be separately contracted for by each of the Lessee/Owner Parties with respect to its leasehold or ownership interest in the Unit).  As to any amendment to the GTIA or other Elm Road Generating Station or total Unit contract with the Applicable Transmission System Operator, (a) the Operating Agent shall provide each of the Lessee/Owner Parties an opportunity to review drafts and participate in the negotiation of same and shall not execute any such amendment or agreement without the approval of the Operating Committee, and (b) notwithstanding the rights established in (a), each of the Lessee/Owner Parties shall retain the right to challenge any such amendment or agreement in any appropriate 

forum.  The Operating Agent shall make reasonable efforts to minimize the extent to which contracts with the Applicable Transmission System Operator must be entered into or maintained on an Elm Road Generating Station or total-Unit basis.

SECTION 14.3

Transmission Service.

Each Lessee/Owner Party shall be responsible for all transmission costs and arrangements associated with receipt of its share of the output of the Unit at, and for delivery from, the Point of Delivery.

ARTICLE XV

DAMAGE TO FACILITY

SECTION 15.1

Allocation of Loss Proceeds.

(a)

If Elm Road Unit 2 is to be repaired or reconstructed following an Event of Loss, or Event of Total Loss, then each of the Lessee/Owner Parties agrees that any insurance proceeds received by the Operating Agent in connection with such Event of Loss or Event of Total Loss, shall be used by the Operating Agent in connection with the repair or reconstruction of Elm Road Unit 2.

(b)

If Elm Road Unit 2 is not repaired or reconstructed following an Event of Loss or Event of Total Loss, then any insurance proceeds received by the Operating Agent in connection with such Event of Loss or Event of Total Loss shall be paid to each Elm Road Unit 2 owner or Lessee/Owner Party in accordance with the applicable Project Agreements.

(c)

The Parties acknowledge that events and circumstances giving rise to an Event of Loss or Event of Total Loss under this Agreement may also give rise to an “Event of Loss” or “Event of Total Loss” under the Unit 1 O&M Agreement and/or the New Common Facilities O&M Agreement and that all or a portion of any Loss Proceeds received by the Lessee/Owner Parties pursuant to this Agreement may also constitute “Loss Proceeds” subject to the Unit 1 O&M Agreement and/or the New Common Facilities O&M Agreement.  The Parties further acknowledge and agree that if and to the extent that there is any conflict between the insurance provisions (including any provisions with respect to the receipt, payment, control and use of Loss Proceeds) in this Agreement and in the Unit 1 O&M Agreement and/or the New Common Facilities O&M Agreement, that all such insurance provisions shall be interpreted and construed, if possible, so as to avoid or minimize any such conflict.

SECTION 15.2

Event of Total Loss.

(a)

If an Event of Total Loss occurs after the Lease Effective Date, and the WEPCO Facility Lease is subsequently terminated as a result of the Event of Total Loss, this Agreement shall terminate upon termination of the WEPCO Facility Lease.

(b)

If an Event of Total Loss occurs after the Lease Effective Date, and the WEPCO Facility Lease is continued by mutual agreement of the parties thereto and as approved by the 

PSCW, this Agreement shall terminate as to any Lessee/Owner Party that does not continue to have an ownership or leasehold interest in the Unit.  Each remaining Lessee/Owner Party acknowledges and agrees that (i) WEPCO, acting as Operating Agent for the remaining Lessee/Owner Parties, shall be responsible for rebuilding the Unit in accordance with the WEPCO Facility Lease and (ii) it shall be responsible for and shall pay, or cause the payment of, its then Pro Rata Share of any costs and expenses incurred by WEPCO to rebuild the Unit in accordance with this sentence.

SECTION 15.3

Event of Loss.

(a)

If an Event of Loss occurs after the Lease Effective Date and the WEPCO Facility Lease is in full force and effect, then the Lessee/Owner Parties acknowledge and agree that WEPCO, acting as Operating Agent for the remaining Lessee/Owner Parties, shall be responsible for repairing the Unit in accordance with the WEPCO Facility Lease.  Each of the Lessee/Owner Parties agrees that it shall be responsible for and shall pay, or cause the payment of, its Pro Rata Share of any costs and expenses incurred by WEPCO to repair the Unit in accordance with the immediately preceding sentence.

(b)

If an Event of Loss occurs after the Lease Effective Date and the WEPCO Facility Lease has terminated, but this Agreement has not terminated, then this Agreement shall terminate as to any Lessee/Owner Party that does not continue to have an ownership or leasehold interest in the Unit.

ARTICLE XVI

INDEMNIFICATION AND LIABILITY

SECTION 16.1

General Indemnity.

(a)

Each Lessee/Owner Party shall, severally and not jointly, in accordance with its Pro Rata Share, indemnify, defend and hold harmless the Operating Agent, in its capacity as Operating Agent, and its Representatives from and against any and all Losses asserted against, imposed upon or incurred by the Operating Agent or its Representatives by reason of or resulting from claims of third parties, except for those Losses arising directly or indirectly from the Operating Agent’s or its Representatives’ Gross Negligence or willful misconduct.

(b)

The Operating Agent shall indemnify, defend and hold harmless each Lessee/Owner Party and its Representatives from and against any and all Losses and any and all regulatory penalties and fines and reasonable expenses (including reasonable attorneys’ fees and expenses) asserted against, imposed upon or incurred by a Lessee/Owner Party or its Representatives by reason of or resulting from claims of third parties arising directly or indirectly from the Operating Agent’s or its Representatives’ Gross Negligence or willful misconduct.

(c)

Each Lessee/Owner Party shall indemnify, defend and hold harmless the other Lessee/Owner Parties and their Representatives from and against any and all Losses asserted against, imposed upon or incurred by any of them by reason of or resulting from the Indemnifying Party’s or its Representatives’ Gross Negligence or willful misconduct.

SECTION 16.2

Indemnification for Regulatory Penalties.

(a)

Each Lessee/Owner Party shall indemnify, defend and hold harmless the Operating Agent and its Representatives from and against any and all regulatory penalties and fines and reasonable expenses (including reasonable attorneys’ fees and expenses) arising from such Lessee/Owner Party’s violation of any Law or Government Approval in connection with the Operating Agent’s or its Representatives' performance of (or failure to perform) the Operating Functions.

(b)

Each Lessee/Owner Party shall indemnify, defend and hold harmless the other Lessee/Owner Parties and their Representatives from and against any and all regulatory penalties and fines and reasonable expenses (including reasonable attorneys’ fees and expenses) arising from such Indemnifying Lessee/Owner Party’s violation of any Law or Government Approval in connection with its performance of (or failure to perform) its duties under this Agreement.

(c)

Each Lessee/Owner Party shall, severally and not jointly, in accordance with its Pro Rata Share, indemnify, defend and hold harmless the Operating Agent and its Representatives for any and all regulatory penalties and reasonable expenses (including reasonable attorneys’ fees and expenses) arising from the Operating Agent’s and its Representatives' violation of any Law or Government Approval; provided, that such penalties, fines and expenses did not result from the Operating Agent’s or its Representatives' Gross Negligence or willful misconduct; and provided, further, that settlement language characterizing the Operating Agent’s or its Representatives' actions as constituting or not constituting Gross Negligence or willful misconduct shall not be dispositive as among the Parties.

SECTION 16.3

Liability Among the Parties.

(a)

As among the Parties, each Lessee/Owner Party shall bear its respective responsibility and liability for the receipt, transmission and distribution of its energy from the Unit, and the Operating Agent shall have no responsibility or liability, beyond the Point of Delivery.

(b)

All issues of liability as between and among the Parties arising under this Agreement shall constitute Disputes to be resolved pursuant to the provisions of Article XX.

(c)

Notwithstanding any provision in this Agreement to the contrary, no Party, nor any of its Representatives, shall be liable hereunder for any consequential or indirect loss or damage, including loss of profit, cost of capital, loss of goodwill, loss of revenues from the sale of capacity or energy, increased operating costs or any other special or incidental damages.  It is the intent of the Parties that the limitation on damages be without regard to the cause or causes thereof, including the negligence of any Party, and whether such negligence be sole, joint or concurrent, or active or passive.

(d)

Any indemnification obligation of the Operating Agent shall not constitute Operating Costs or other costs hereunder for which the Operating Agent is entitled to be reimbursed.

SECTION 16.4

Cooperation Regarding Claims.

Except with respect to claims against the Lessee/Owner Parties with respect to agreements entered into by the Operating Agent pursuant to Section 2.2(b) or Section 2.2(m), which claims shall be governed by Sections 2.2(s) and 2.2(t), if any Party (in such capacity, an “Indemnified Party”) receives notice or has knowledge of any Loss that may result in a claim for indemnification by such Indemnified Party against any other Party (in such capacity, an “Indemnifying Party”) pursuant to this Article XVI, such Indemnified Party shall as promptly as possible give the Indemnifying Party notice of such Loss; provided, that failure promptly to give such Notice or to provide such information and documents shall not relieve the Indemnifying Party from the obligation hereunder to respond to or to defend the Indemnified Party against such Loss unless such failure shall materially diminish the ability of the Indemnifying Party to respond to such claim or to defend the Indemnified Party.  Such notice shall include a reasonably detailed description of the facts and circumstances relating to such Loss, and a complete copy of all notices, pleadings and other papers related thereto, and in reasonable detail the basis for its potential claim for indemnification with respect thereto.  The Indemnifying Party, upon its acknowledgment in writing of its obligation to indemnify the Indemnified Party, shall be entitled to assume the defense or to represent the interests of the Indemnified Party in respect of such Loss, which shall include the right to select and direct legal counsel and other consultants, appear in proceedings on behalf of such Indemnified Party and to propose, accept or reject offers of settlement, all at its sole cost; provided, that if and to the extent that any such settlement is reasonably likely to involve injunctive, equitable or prospective relief or materially and adversely affect the Indemnified Party’s business or operations other than as a result of money damages or other money payments, then such settlement will be subject to the reasonable approval of the Indemnified Party.  Nothing herein shall prevent an Indemnified Party from retaining its own legal counsel and other consultants and participating in its own defense at its own cost and expense.  The Parties shall cooperate with each other in any notification to insurers.

SECTION 16.5

Survival of Provisions.

The provisions of this Article XVI shall survive the termination of this Agreement.

ARTICLE XVII

ASSIGNMENTS AND DELEGATIONS

SECTION 17.1

Successors and Assigns.

This Agreement shall be binding on each Party’s successors and permitted assigns.

SECTION 17.2

Assignment by Operating Agent.

(a)

The Operating Agent shall not assign this Agreement or assign its rights hereunder without the prior written consent of all Lessee/Owner Parties, which consent shall not be unreasonably withheld, delayed or conditioned; provided, however, that without the consent of the Lessee/Owner Parties, Operating Agent may (i) assign its rights under this Agreement to 

an Affiliate with Acceptable Credit, or (ii) transfer or assign this Agreement to any person or entity succeeding to all or substantially all of the assets of the Operating Agent, subject to the assignee’s having Acceptable Credit; provided, however, that in each such case, prior to such assignment any such assignee shall agree in writing to be bound by the terms and conditions hereof.

(b)

The Operating Agent shall not delegate all or substantially all of its obligations hereunder without the prior written consent of all Lessee/Owner Parties.  The Operating Agent may partially delegate its obligations by subcontracting with third parties (including Affiliates) for the performance of certain Operating Functions, subject to applicable consultation and approval rights of the Lessee/Owner Parties with respect to such contracts, as provided under this Agreement.  In any event, the Operating Agent shall remain liable to the Lessee/Owner Parties for the performance of all of the Operating Functions hereunder.

SECTION 17.3

Assignment by Lessee/Owner Parties.

(a)

Without the prior written consent of the other Lessee/Owner Parties (which consent shall not be unreasonably withheld, delayed or conditioned), no Lessee/Owner Party may assign this Agreement or assign its rights or delegate its duties hereunder except (i) in the case of WEPCO or MGE, to (x) ERGS or MGE Power, respectively, or (y) an Acceptable Assignee (as defined in the applicable Facility Lease as of its execution) that is its transferee pursuant to and under the WEPCO Facility Lease or MGE Facility Lease, respectively; and (ii) in the case of WPPI, to a party that is its transferee as permitted by Article XIII of the Ownership Agreement.  

(b)

In the case of any transfer by (i) WEPCO or MGE under their respective Facility Leases, or (ii) WPPI under the Ownership Agreement, the transferor shall require in connection with such transfer that its transferee execute a counterpart of this Agreement to evidence its assent hereto.  Upon such execution, the transferring Party shall be released from its obligations hereunder, except for any obligations that survive termination of this Agreement.

ARTICLE XVIII

DEFAULT AND REMEDIES

SECTION 18.1

Events of Default.

The following shall be Events of Default under this Agreement:

(a)

The failure of a Lessee/Owner Party to make a payment when due under this Agreement within the later of (i) 15 Business Days after such amount becomes due and owing; or (ii) five Business Days after the date such Lessee/Owner Party receives notice of such non-payment from the Operating Agent; or

(b)

The failure of any Party to perform or abide by any material obligation under this Agreement, other than payment, within 60 days of receipt of written notice of non-performance; provided, however, that if such default cannot be cured within such 60-day period, no Event of 

Default shall occur for so long as the non-performing Party is diligently pursuing a cure, and such non-performance is curable; or 

(c)

The commencement, with respect to a Party, by such Party or by another person or entity of a bankruptcy, reorganization, moratorium, liquidation or similar insolvency proceeding or other relief under any bankruptcy or insolvency law affecting creditors’ rights or a petition is presented or instituted for its winding-up or liquidation.

SECTION 18.2

Effect of Default.

(a)

Upon the occurrence of an Event of Default pursuant to Section 18.1(a) involving the failure to pay an aggregate amount in excess of $25,000, the defaulting Party shall not be entitled to its Pro Rata Share of the Available Net Generating Capability of the Unit and energy produced therefrom from such date until it has remedied its payment default (“Payment Default Period”).  The defaulting Lessee/Owner Party shall continue to be responsible for its allocated share of Operating Costs and Capital Costs in accordance with Article IX during the Payment Default Period.  The non-defaulting Lessee/Owner Parties shall not be entitled to Schedule any additional energy in excess of their normal Pro Rata Shares, unless such Lessee/Owner Parties’ Pro Rata Shares are insufficient to attain Minimum Net Generation, and then only to the extent required to attain Minimum Net Generation (which increase shall be shared by the non-defaulting Parties in accordance with their respective Pro Rata Shares).

(b)

Subject to Section 18.2(c), upon the occurrence of any Event of Default, the non-defaulting Parties shall be entitled to exercise all remedies available to them at law or in equity, including specific performance, it being agreed that monetary damages may not be an adequate remedy for the breach of the Parties’ obligations hereunder.  

(c)

Notwithstanding any remedies otherwise available to the non-defaulting Parties at law or in equity that may be pursued in accordance with Article XX, in the event of a breach or default by any Party it is the Parties’ intention that (i) this Agreement may be terminated only pursuant to its express terms and (ii) the Lessee/Owner Parties shall have no right to replace the Operating Agent or reduce the scope of its duties except as provided in Section 3.3(d).

ARTICLE XIX

FORCE MAJEURE

SECTION 19.1

Effect of Force Majeure.

If any Party is rendered unable by an event of Force Majeure to carry out, in whole or part, its obligations under this Agreement, then, for only the pendency of such event of Force Majeure, the Party affected by the event shall be temporarily relieved of its obligations hereunder (other than the obligation to make payments then due or becoming due with respect to performance which occurred prior to the event) insofar as they are affected by such event of Force Majeure but for no longer period.

SECTION 19.2

Definition of Force Majeure.

“Force Majeure” shall mean any cause or occurrence, beyond the reasonable control, and without the fault or negligence of the Party claiming Force Majeure, which causes the Party to be unable, or otherwise materially impairs its ability, to perform its obligations under this Agreement and which such Party could not have been reasonably expected to avoid by the exercise of reasonable foresight, including any acts of God, strikes, work stoppages, lockouts or other labor actions that are in each case of an industry or sector-wide nature and that are not directed solely or specifically at such Party, acts of the public enemy, wars, terrorism, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, fires, storms, floods, washouts, civil disturbances, explosions, change in Law (including such change that results in any rescission, termination, material modification, suspension of determination of invalidity or lack of effectiveness of any Government Approval), the binding order of any Governmental Authority (provided, that such order has been resisted in good faith by all reasonable legal means), the failure to act on the part of any Governmental Authority (provided, that such action has been timely requested and diligently pursued) and any other cause whether of the kind herein enumerated or otherwise, which, despite the reasonable efforts of such Party to prevent or mitigate its effects, prevents or delays the performance of such Party, or prevents the obtaining of the benefits of performance by the other Parties, and is not within the control of the Party claiming excuse.

SECTION 19.3

Notice of Force Majeure.

As soon as reasonably practicable following the occurrence of an event of Force Majeure, the affected Party shall provide the other Parties with written notice thereof setting forth the full details of such event, the efforts being undertaken to remove or mitigate the Force Majeure, and the expected time of removal.  The party affected by such event of Force Majeure shall take all reasonable measures to mitigate or minimize the effects of such event of Force Majeure.

ARTICLE XX

DISPUTE RESOLUTION

SECTION 20.1

Exclusive Procedure.

Any controversy, claim or dispute of whatsoever nature or kind between or among the Parties arising out of this Agreement or its validity or interpretation (each a “Dispute”) shall be resolved pursuant to the procedures of this Article XX.

SECTION 20.2

Dispute Notices.

If a Dispute arises between or among the Parties, then any Party may provide written notice thereof to the Operating Agent and each of the Operating Committee Members, including a detailed description of the subject matter of the Dispute (the “Dispute Notice”).  The Dispute Notice shall specify whether the Disputing Party believes such Dispute is a Technical Dispute.  If the Disputing Party believes that the Dispute is a Technical Dispute, such Dispute Notice shall have been issued not later than six months after obtaining written knowledge of the facts giving 

rise to such Technical Dispute.  The Dispute Notice shall identify the Party directly opposed, which shall participate in the Dispute resolution process.  Each other Party in receipt of a Dispute Notice shall inform the other Parties whether it will participate in the Dispute resolution process.  If a Party in receipt of a Dispute Notice believes that it has counterclaims arising out of the same set of facts as the Dispute, it shall promptly notify the other Parties of such counterclaim no later than two Business Days before the first meeting of the senior executives required pursuant to Section 20.3 hereof.  Each initiating Party, each opposing Party named in the Dispute Notice, and each other Party electing to participate shall be referred to as a “Disputing Party.”

SECTION 20.3

Informal Resolution of Disputes.

(a)

Upon the issuance or receipt of a Dispute Notice, the plant manager and/or the Operating Committee Members of each Disputing Party shall in good faith attempt to resolve such Dispute by informal negotiations within 20 Business Days from the date of receipt of such Dispute Notice.

(b)

If the Dispute is not resolved within 20 Business Days following receipt of the Dispute Notice or within any mutually agreed extended time, each Party shall promptly designate the most senior executive of that Party responsible for the subject matter of the Dispute who shall have authority to resolve the Dispute.  The senior executives shall obtain such information as necessary to inform themselves of the substance and particulars of the Dispute and shall meet within ten Business Days, at a mutually agreed time and place.

(c)

If the senior executives are unable to resolve the Dispute within ten Business Days of their first meeting or within any mutually agreed extended time, then the Disputing Parties shall decide within 15 Business Days whether they unanimously agree that the Dispute is a Technical Dispute subject to arbitration in accordance with the provisions of Section 20.5.  If the Disputing Parties agree to arbitrate, their senior executives shall execute a certificate in the form attached as Schedule 20.3 evidencing their agreement to submit such Technical Dispute, and any identified counter-claims, to final and binding arbitration in accordance with Section 20.6.  If the Disputing Parties do not unanimously agree that the Dispute (or any counter claim) is a Technical Dispute, the provisions of Section 20.4 shall apply.

SECTION 20.4

Resolution of Non-Technical Disputes.

Except for Disputes over matters where a regulatory body has exclusive jurisdiction, any and all Disputes that are not agreed by all of the Disputing Parties to be Technical Disputes shall be resolved solely and exclusively by the state or federal courts situated in Milwaukee County, Wisconsin.  The Court may award attorneys fees and costs to the prevailing Party.  

SECTION 20.5

Resolution of Technical Disputes.

Any and all Technical Disputes shall be resolved solely and exclusively by binding arbitration undertaken pursuant to the procedures set forth in this Article XX.  The Parties explicitly and irrevocably waive any right to trial and any right to trial by jury with respect to Technical Disputes.

SECTION 20.6

Binding Arbitration of Technical Disputes.

(a)

If the Disputing Parties have elected to refer a Technical Dispute to arbitration pursuant to Section 20.3(c), the Disputing Party that initially raised the Dispute shall prepare a notice (“Arbitration Notice”) and shall deliver the Arbitration Notice to the other Disputing Parties.  The Arbitration Notice shall contain a detailed statement of the nature of the Technical Dispute, the type of Technical arbitration (i.e., whether it is solely of an accounting nature), the proposed Technical Expert, the amount involved, if any, the factual and legal position of the Disputing Party requesting arbitration and the remedy sought.

(b)

Within 15 Business Days after receipt of the Arbitration Notice, each Disputing Party named in the Arbitration Notice as opposing the Party initiating the Dispute shall deliver a response in writing to each of the other Disputing Parties.  Each response shall contain:  (i) a detailed response to any claims made in the Arbitration Notice, including a statement of the position of the Party with respect to all matters raised in the Arbitration Notice and the relief sought by the responding Party; and (ii) any counterclaims that are of the same nature and directly arising out of the same nexus of facts as the Technical Dispute and that are within the scope of the agreement to arbitrate, the factual and legal position of the Disputing Party asserting the counterclaim and the remedy sought.  Any other Disputing Party also may elect to prepare and deliver a response.

(c)

Unless specifically otherwise agreed between the Disputing Parties, any arbitration of a Technical Dispute shall be (i) conducted before a Technical Expert, and (ii) held in Milwaukee, Wisconsin in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in force and effect, except as otherwise expressly set forth herein.

(d)

Each Technical Expert shall be an individual or enterprise having specialized knowledge relating to the areas of Technical Dispute as it affects accounting, operation, engineering, construction or maintenance of facilities similar to the Elm Road Generating Station.  A Technical Expert will be disqualified if such Technical Expert is employed by or otherwise has business dealings with one of the Parties.

(e)

Not later than five Business Days after the deadline for responses under Section 20.6(b), the Disputing Party requesting arbitration shall deliver to the designated Technical Expert copies of (i) the executed agreement to arbitrate; (ii) the Arbitration Notice; (ii) all responses to the Arbitration Notice, and (iv) a written request on behalf of the Disputing Parties that the Technical Expert promptly proceed with the arbitration.

(f)

It is the intent of the Parties that the Technical Expert shall exercise due diligence to expedite full submission of the Technical Dispute and completion of hearings.  The Technical Expert shall conduct its arbitration as expeditiously as possible, shall strive to hold any preliminary hearing within ten days after all pleadings have been served, shall require the Disputing Parties to make expedited disclosure of any directly relevant information pertaining to the Technical Dispute and shall establish hearing dates as soon as practicable.  The Technical Expert shall decide the matters submitted to it within 30 days after conclusion of the hearings, unless such time period is extended or waived by all the Disputing Parties.

(g)

The Technical Expert’s award of damages shall be subject to Section 16.2(c).  The Technical Expert may award reasonable attorneys’ fees and costs of arbitration to the prevailing Disputing Party.

SECTION 20.7

Enforcement of Arbitral Award.

The Technical Expert shall decide the matters submitted to it based upon the evidence presented, the terms of this Agreement and the laws of the State of Wisconsin or of the United States if applicable.  The Technical Expert shall issue a written award which shall state the basis of the award and include findings of fact and conclusions of law.  The award shall be final and binding upon the Parties.  The Parties irrevocably waive all objections they may have to, and consent to, the jurisdiction and venue of the court situated in the Circuit Court of the State of Wisconsin located in Milwaukee County for the purposes of enforcing this agreement to arbitrate and for purposes of confirming any award issued by the Technical Expert.

SECTION 20.8

Fees and Expenses.

During the pendency of an arbitration, the Disputing Parties shall equally share the fees and expenses of the Technical Expert, such as travel, lodging and any service charges required by the American Arbitration Association, as well as stenographic costs and other hearing-related expenses.

SECTION 20.9

Continued Performance.

During the pendency of any Dispute, each Party shall continue to perform all of its obligations under this Agreement.

SECTION 20.10

Survival.

The provisions of this Article XX shall survive the termination of this Agreement.

ARTICLE XXI

REPRESENTATIONS AND WARRANTIES

Each Party hereby represents and warrants to each other Party as of the date of this Agreement as follows:

(a)

Due Organization, Etc.  It:  (i) is duly formed, validly existing and in good standing under the Laws of the State of Wisconsin, (ii) has all requisite power and all material Government Approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is duly qualified to do business in all jurisdictions in which the nature of the business conducted by it or proposed to be conducted by it makes such qualification necessary.

(b)

Due Authorization.  It has all necessary corporate power and authority to execute, deliver and perform its obligations under this Operating Agreement and each other Project 

Agreement to which it is a party, and the execution, delivery and performance by it of this Agreement and each other Project Agreement to which it is a party have been duly authorized by all necessary corporate action on its part.

(c)

Non-Contravention.  The execution, delivery and performance by it of this Agreement and each other Project Agreement to which it is a party does not and shall not:

(i)

violate its constituent documents;

(ii)

violate any Law or Government Approval applicable to it or its property or to the Unit; or

(iii)

result in a breach of or constitute a default under any Project Agreement or any other material agreement to which it is a party.

(d)

Enforceability, Etc.  This Operating Agreement and each other Project Agreement to which it is a party:  (i) has been duly authorized and duly and validly executed and delivered by it; and (ii) assuming the due authorization, execution and delivery thereof by the other parties thereto, constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, conditions and provisions, except as the same may be limited by bankruptcy, insolvency or other similar laws affecting creditors’ rights generally and by general principles of equity.

(e)

Litigation.  Except as disclosed in writing to the other Parties, there is no action, suit or proceeding at law or in equity or by or before any Governmental Authority now pending or, to its knowledge, threatened against or affecting it or any of its properties, rights or assets, which could reasonably be expected to have a material adverse effect on its ability to perform its obligations under this Agreement and each other Project Agreement to which it is party.

(f)

Government Approvals.  Except as disclosed in writing to the other Parties, all Government Approvals necessary under any applicable Law in connection with the due execution and delivery of, and performance by it of its obligations and the exercise of its rights under, this Agreement and each other Project Agreement to which it is a party have been duly obtained or made and are in full force and effect, are final and not subject to appeal or renewal, are held in its name and are free from conditions or requirements compliance with which could reasonably be expected to have a material adverse effect or which it does not reasonably expect to be able to satisfy.

(g)

No Breach of Project Agreements.  It is not in breach of any material obligation under any of the Project Agreements to which it is a party.

ARTICLE XXII

CONFIDENTIALITY

SECTION 22.1

Non-Disclosure Obligations.

(a)

Each Party agrees that it, its Affiliates and its Affiliates’ respective directors, officers, employees, representatives, agents and advisors will use any Confidential Information and Trade Secrets of another Party solely for the purposes of implementing and enforcing this Agreement and the other Project Agreements to which it is a party.  Each Party further agrees that a receiving Party may disclose Confidential Information or Trade Secrets only to such Representatives who are involved in the receiving Party’s implementation or enforcement of this Agreement and other Project Agreements, and then only on a need to know basis.  

(b)

Subject to Section 22.1(c) and (e), each Party agrees that it will not (and each Party shall take full responsibility for ensuring that all of its Affiliates and all of its and its Affiliates’ respective Representatives do not) in any way disclose, communicate, transfer or use (other than as permitted by this Article XXII) any Confidential Information or Trade Secrets of another Party, without the prior written consent in each instance of such other Party.  With respect to Trade Secrets, the covenants in the preceding sentence shall apply for as long as the underlying information or data remains a Trade Secret; and with respect to Confidential Information, the covenants in the preceding sentence shall apply for two years after the expiration or termination of this Agreement, as to such Party or Parties.

(c)

Notwithstanding Section 22.1(b), each Party shall have the right to disclose Confidential Information or Trade Secrets without the consent of the other Parties to its lenders and with the consent of the other Parties, such consent not to be unreasonably withheld, to any Person (and its Representatives) contemplating a purchase, directly or indirectly, of all or an interest in such Party or such Party’s interest in Elm Road Unit 2, provided, that such lender or Person agrees in writing that it (and its Representatives) will maintain such Confidential Information and Trade Secrets in accordance with the terms and conditions of this Article XXII.

(d)

Notwithstanding any other provision of this Agreement to the contrary, if a Party seeks to use information in a court or regulatory proceeding as part of its implementation or enforcement of this Agreement, the fact that such information has been deemed Confidential Information hereunder shall not foreclose the Party from attempting to establish that, under the circumstances present at the time of the proceeding, the information need not be subject to a protective order or similar confidential treatment in such proceeding.

(e)

Notwithstanding anything herein to the contrary, any Party (and its Representatives) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated by this Agreement and all materials of any kind (including opinions or other tax analyses) that are provided to it relating to such tax treatment and tax structure.  However, any such information relating to the tax treatment or tax structure is required to be kept confidential to the extent necessary to comply with any applicable federal or state securities laws.

SECTION 22.2

Law.

Each Party agrees that if it becomes subject to a subpoena or other Law to disclose any of the Confidential Information or Trade Secrets of another Party, it will provide such Party with prompt notice so that such Party may seek a protective order or other appropriate remedy.  If such protective order or other appropriate remedy is denied or otherwise not obtained, the Party required to furnish the information shall furnish only that portion of the Confidential Information and/or Trade Secrets which is, in the opinion of its counsel, legally compelled, and will cooperate with the other Party and its counsel to enable the other Party to attempt to obtain a protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information and/or Trade Secrets to be disclosed.

ARTICLE XXIII

TERM

This Agreement shall be binding on each signatory upon execution of this Agreement by WEPCO, as Operating Agent and Lessee/Owner Party, and any other Lessee/Owner Party.  The term (“Term”) of this Agreement shall commence, for each of MGE and WPPI, upon the closing of the acquisition of an ownership interest in the Unit by MGE Power and WPPI, respectively, pursuant to the Ownership Agreement.  The Term of the Agreement shall commence, for WEPCO as both Lessee/Owner Party and Operating Agent, upon the first of such closings.  The Term of this Agreement shall terminate upon the expiry of the stated term of the WEPCO Facility Lease, including any renewal terms (if the WEPCO Facility Lease is renewed); provided, however, that if WEPCO acquires or has acquired an ownership interest in the Unit at or before the termination of the WEPCO Facility Lease, this Agreement shall remain in full force and effect so long as WEPCO retains such ownership; and provided, further that this Agreement shall terminate following an Event of Total Loss or Event of Loss to the extent provided in Article XV.  For the avoidance of doubt, the termination of this Agreement shall not relieve any Party of any liabilities accrued up to the date of termination.

ARTICLE XXIV

MISCELLANEOUS

SECTION 24.1

Applicable Law.

The rights and obligations of the Parties under this Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Wisconsin.

SECTION 24.2

Jury Trial.

EACH OF THE PARTIES WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

SECTION 24.3

Notices.

Unless otherwise expressly specified or permitted by the terms of this Agreement, all communications and notices provided for herein to a Party shall be in writing or shall be produced by a telecommunications device capable of creating a written record, and any such notice shall be effective (a) upon personal delivery thereof, including by overnight mail or next Business Day or same-day courier service, (b) in the case of notice by United States mail, certified or registered, postage prepaid, return receipt requested, upon receipt thereof, or (c) in the case of notice by electronic means, upon transmission thereof, provided, such transmission is promptly confirmed by either of the methods set forth in clause (a) or (b) above, in each case addressed as provided below or to such other address as any Party may designate by written notice to the other Parties.

If to WEPCO:

Wisconsin Electric Power Company

231 West Michigan Street

Milwaukee, WI 53203

Fax:

414-221-2140

Attn:

General Counsel

Vice President - Fossil Operations

If to MGE:

Madison Gas and Electric Company

P.O. Box 1231 

Madison, WI 53701-1231

or

133 South Blair Street 

Madison, WI  53703  

Fax:

608-252-4794

Attn:

Chief Financial Officer

General Counsel

Vice President-Power Operations

If to WPPI:

Wisconsin Public Power Inc.

1425 Corporate Center Drive

Sun Prairie, WI 53590-9109

Fax:

608-837-0274

Attn:

Senior Vice President--Legal and Regulatory Affairs

Senior Vice President--Power Supply

SECTION 24.4

Counterparts.

This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute the same agreement.

SECTION 24.5

Severability.

Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable Law; provided, however, if any provision of this Agreement shall be prohibited by or deemed invalid under any applicable Law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

SECTION 24.6

Third-Party Beneficiaries.

Except as expressly provided herein, none of the provisions of this Agreement is intended for the benefit of any person except the Parties, their respective successors and permitted assigns.

SECTION 24.7

Entire Agreement.

This Agreement states the rights of the Parties with respect to operation and maintenance of the Unit and the other transactions contemplated by this Agreement and supersedes all prior agreements, oral or written, with respect thereto.

SECTION 24.8

Schedules.

The Schedules, along with all attachments referenced therein, are incorporated herein by reference and made a part hereof.

SECTION 24.9

No Joint Venture.

Any intention to create a joint venture or partnership relation between any of the Parties is hereby expressly disclaimed.  Each of the Parties shall be severally, and not jointly, liable for its obligations hereunder.

SECTION 24.10

Amendments and Waivers.

(a)

No term, covenant, agreement or condition of this Agreement may be terminated or amended except by an instrument or instruments in writing executed by all of the Parties.  Failure or forbearance by a Party to exercise any of its rights or remedies under this Agreement shall not constitute a waiver of such rights or remedies.  No Party shall be deemed to have waived or forborne any right or remedy resulting from such failure to perform unless it has made such waiver specifically in writing.

(b)

WPPI agrees that in any Dispute arising under this Agreement, it will not assert as a defense any rights or protections that it may have under Wis. Stat. § 893.80, or claim sovereign immunity based upon its status as a political subdivision and body politic and corporate of the State of Wisconsin.

SECTION 24.11

Survival.

Except as expressly provided herein, the warranties and covenants made by each Party shall not survive the expiration or termination of this Agreement in accordance with its terms.

SECTION 24.12

Further Assurances.

Each Party shall promptly and duly execute and deliver such further documents and assurances for and take such further actions reasonably requested by the other Parties, all as may be reasonably necessary to carry out the purpose of this Agreement.

SECTION 24.13

Interpretation Necessitated by Certain Future MGE or WPPI Elections.

If either MGE or WPPI elects not to participate in the ownership or lease of the Unit, the Agreement shall be interpreted as an Agreement between and among the participating Party (either MGE or WPPI) and WEPCO, as Lessee/Owner Parties, and WEPCO, as Operating Agent, as necessary to give reasonable effect to the provisions of the Agreement, and all references to the non-participating Party should be disregarded.

SECTION 24.14

Certifications and Opinions of Counsel.

On each Closing Date (as defined in the Ownership Agreement), each Party shall provide to the other Parties: 

(a)

an officer’s certificate, duly executed by an authorized officer of such Party, dated as of such Closing Date, with respect to the accuracy of the representations and warranties of such Party set forth in Article XXI; and

(b)

 an opinion of in-house counsel of such Party, dated as of such Closing Date, with respect to the matters set forth in Schedule 24.14 hereto.

 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, each of the Parties have caused this Elm Road Operating and Maintenance Agreement to be duly executed and delivered under seal by their respective duly authorized officers as of the date first above written.

WISCONSIN ELECTRIC POWER COMPANY, as Lessee/Owner Party

By:  /s/ Scott A. Patulski

Title: Vice President

MADISON GAS AND ELECTRIC COMPANY, as Lessee/Owner Party

By:  /s/ Gary J. Wolter

Title: Chairman, President and CEO

WISCONSIN PUBLIC POWER INC., as Lessee/Owner Party

By:  /s/ J. Leroy Thilly

Title: President and CEO

WISCONSIN ELECTRIC POWER COMPANY, as Operating Agent

By:  /s/ Scott A. Patulski

Title: Vice President

SCHEDULE 1.1

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Examples of Interest Calculation

SCHEDULE 3.1

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Initial Operating Committee Members

WEPCO:

Scott Patulski

Robin Smerchek

MGE POWER:

Peter J. Waldron

Jeffrey C. Newman

WPPI:

Steve Frey

Cole Price

SCHEDULE 8.1

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Allocation of Coal Consumption Using Heat Rate 

Curve Methodology under Section 8.1(f)(ii)

The following method of allocating MBTUs of coal burned by Unit 2 among the Lessee/Owner Parties shall be used if a Party believes that allocation of the MBTUs of coal burn using the ratio of each Party’s MWh received from Unit 2 during a month to the sum of the MWh received by all of the Lessee/Owner Parties during the month is inequitable.  Using this methodology, for any Lessee/Owner Party, the MBTUs of coal burn allocated to that Party for a month shall be calculated as follows:

MBTUA = (MBTUC/MBTUTC)* MBTUAT

Where,

MBTUA =

MBTUs of actual monthly coal burn allocated to the Party for the month.

MBTUH =

Calculated MBTUs of coal burned during an hour to supply the MWh received by the Party during that hour.  This value is calculated using the MW loading by the Party of its Pro Rata Share of Unit 2 and the net heat rate curve of Unit 2.  The net heat rate curve shall be defined in 100 BTU/kWh increments for loading levels expressed in percentages ranging from Minimum Net Generation (e.g., 40% loading) to the expected maximum Net Generating Capability of Unit 2 (100% loading).

MBTUC = 

Sum of the MBTUH’s for the Party in the Month.

MBTUTC = 

Sum of the MBTUCs calculated for all Parties for the month.

MBTUAT = 

Measured actual MBTU coal consumption of Unit 2 during the month.

Example:

In a given hour Party A dispatches 80% of its Pro Rata Share.  Parties B and C dispatch their Pro Rata Shares at 100%.  Using the net heat rate curve, the MBTUH value for Party A for that hour is calculated at 80% loading.  Similarly, Parties B and C’s, MBTUHs are calculated for the hour at 100% loading using the net heat rate curve.  The values of MBTUC for each Party and the value of MBTUTC for all Parties are then calculated using the formulas described above.  Each Party’s actual value of MBTUA for the month is then determined using the formula at the top.  This formula adjusts for differences between the calculated MBTU and actual MBTU consumption of Unit 2 to ensure that the MBTUs allocated to the Lessee/Owner Parties match the measured BTU consumption of Unit 2.

SCHEDULE 9.1

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

FERC Accounts

There follows an initial list of the specific FERC accounts in which direct operation and maintenance costs of Elm Road Unit 2 shall be recorded.  The list will be revised as necessary.

404

Amortization of limited term electric plant

408.1

Taxes other than income taxes, utility operating income

500

Operation supervision & engineering

501

Fuel Expenses

502

Steam expenses

505

Electric expenses

506

Miscellaneous steam power expenses

507

Rents

510

Maintenance supervision & engineering

511

Maintenance of structures

512

Maintenance of boiler plant

513

Maintenance of electric plant

514

Maintenance of miscellaneous steam plant

There follows an initial list of the specific FERC accounts from which a portion of the costs may be allocated to Elm Road Unit 2.  The list will be revised as necessary.

920

Administrative & general salaries

921

Office supplies & expenses

923

Outside services employed

924

Property insurance

925

Injuries & damages

926

Employee pensions & benefits

930.2

Miscellaneous general expenses

931

Rents

935

Maintenance of general plant

SCHEDULE 9.2

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Productive Labor Rate

SCHEDULE 9.3

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Costs Unique to Elm Road Unit 2* 

				
	Type of Cost

	Basis for Assigning Costs to Elm Road Unit 2

	Basis for Allocating Costs to LOPs

	Comments

	Elm Road Dedicated Labor 

	Directly charged based on time sheets and productive labor rates

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Annual true-up of productive labor rates.

Primarily maintenance staff.

	Materials- used

	Invoice/Issue ticket

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Outside Contractor Costs

	Invoice

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	CEM maintenance - technician

	Directly charged based on time sheets and productive labor rates

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Software upgrades separately charged pursuant to Schedule 9.5.

	Transmission Maintenance

	Directly charged based on time sheets and productive labor rates

	LOP MW capacity/Elm Road Unit 2 total MW capacity(S)

	Direct charge from Electric Operations.

	Start-up fuel used (gas, oil, propane)

	Directly charged based on Elm Road Unit 2 use

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Oil will be inventoried.

	Limestone used

	Directly charged based on Elm Road Unit 2 use

	LOP MWH net generation/Total Unit 2 MWH net generation (T)

	Limestone will be inventoried.

	Ammonia used

	Directly charged based on Elm Road Unit 2 use

	LOP MWH net generation/Total Unit 2 MWH net generation (T)

	Ammonia will be inventoried.

	Auxiliary power

	Directly assigned based on metered data 

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Payments to Town of Caledonia 

	Directly assigned based on the Caledonia Settlement Agreement referenced in Section 5.6

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 

SCHEDULE 9.4A

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Costs Allocated from Common Facilities O&M Agreement - 

Unique to Elm Road Units 1 & 2* 

				
	Type of Cost

	Basis for Assigning Costs to Elm Road Unit 2

	Basis for Allocating Costs to LOPs

	Comments

	Materials-spare parts inventory

	Elm Road Unit 2 total MW capacity/Total Elm Road Units 1&2 MW capacity (A)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Will be inventoried.

	Elm Road Dedicated Labor 

	Elm Road Unit 2 total MW capacity/Total Elm Road Units 1&2 MW capacity (A)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Annual true-up of productive labor rates.

Primarily operating staff.

	Management Labor

	Elm Road Unit 2 total MW capacity/Total Elm Road Units 1&2 MW capacity (A)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Annual true-up of productive labor rates.

Primarily operating staff.

	Oil/Propane inventory

	Elm Road Unit 2 total MW capacity/Total Elm Road Units 1&2 MW capacity (A)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Will be inventoried.

	Limestone inventory

	Elm Road Unit 2 total MW capacity/Total Elm Road Units 1&2 MW capacity (A)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Will be inventoried.

	Ammonia inventory

	Elm Road Unit 2 total MW capacity/Total Elm Road Units 1&2 MW capacity (A)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Will be inventoried.

	Chemicals, boiler make-up water 

	Elm Road Unit 2 total MW capacity/Total Elm Road Units 1&2 MW capacity (A)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Ash handling

	Elm Road Unit 2 MWH net generation/Total Elm Road Units 1&2 MWH net generation (B)

	LOP MWH net generation/Total Unit 2 MWH net generation (T)

	 
	Materials Management / Storeroom Costs

	Elm Road Unit 2 total MW capacity/Total Elm Road Units 1&2 MW capacity (A)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 

SCHEDULE 9.4B

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Costs Allocated from Common Facilities O&M Agreement - Unique to Land* 

				
	Type of Cost

	Basis for Assigning Costs to Elm Road Unit 2

	Basis for Allocating Costs to LOPs

	Comments

	Telecom Leased Lines

	Elm Road Unit 2 total MW capacity/Total Land MW capacity (C)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Coal Handling

Operating and Maintenance Costs

	Annual Elm Road Unit 2 coal tons nominated/Annual Land coal tons nominated (D)

	Annual LOP coal tons nominated/Annual Elm Road Unit 2 coal tons nominated (U)

	Coal handling includes Land rail, Elm Road Coal Pile, dumper costs.  Annual true-up based on actual annual coal tons delivered.

	Cooling water intake system operating/main-tenance costs

	Elm Road Unit 2 GPM capacity/Total Land GPM capacity (E)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	GPM based on design capacity.

	Wastewater maintenance

	Elm Road Unit 2 GPM capacity/Total Land GPM capacity (E)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	GPM based on design capacity.

	Land security costs

	Elm Road Unit 2 total MW capacity/Total Land MW capacity (C)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Common grounds maintenance

	Elm Road Unit 2 total MW capacity/Total Land MW capacity (C)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Includes road maintenance

	Visitor/Training center

	Elm Road Unit 2 total MW capacity/Total Land MW capacity (C)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Utilities

	Elm Road Unit 2 total MW capacity/Total Land MW capacity (C)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Fishing pier

	Elm Road Unit 2 total MW capacity/Total Land MW capacity (C)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Recreation trail

	Elm Road Unit 2 total MW capacity/Total Land MW capacity (C)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Insurance on New Common Facilities 

	Elm Road Unit 2 total MW capacity/Total Land MW capacity (C)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 

SCHEDULE 9.5

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Costs Unique to WEPCO’s Fossil Fuel Generating Facilities*

								
	Type of Cost

	Basis for Assigning Costs to Elm Road Unit 2

	Basis for Allocating Costs to LOPs 

	Comments

	Fuel procurement costs – coal

	Annual Elm Road Unit 2 coal tons nominated / Annual system coal tons nominated(F)

	Annual LOP coal tons nominated/Annual Elm Road Unit 2 coal tons nominated (U)

	Annual true-up based on actual annual coal tons delivered.  

	Fuel procurement costs – natural gas/propane

	Therms delivered to Elm Road Unit 2/System therms delivered (G)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Rail Car Maintenance Costs

	Annual estimated coal ton-miles for delivery to Elm Road Unit 2/Annual estimated system coal ton-miles delivered (H)

	Annual estimated coal ton-miles for delivery to LOP/Annual estimated coal ton-miles for delivery to Elm Road Unit 2 (V)

	Estimates based on annual coal nominations.  Annual true-up based on actual coal ton miles.

	Rail Car Lease Costs

	Annual estimated coal ton-miles for delivery to Elm Road Unit 2/Annual estimated system coal ton-miles delivered (H)

	Annual estimated coal ton-miles for delivery to LOP/Annual estimated coal ton-miles for delivery to Elm Road Unit 2 (V)

	Estimates based on annual coal nominations.  Annual true-up based on actual coal ton miles.

	By-product sales - costs 

	Elm Road Unit 2 by-product tons sold/Total by-product tons sold (I)

	See Section 9.8(f) of the Agreement.

	 
	Electric production environmental support-Direct charges

	Directly assigned based on time sheets and productive labor rates

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Annual true-up of productive labor rates.

	Electric production environmental support-Indirect charges

	Elm Road Unit 2 direct charges/All environmental direct charges (J)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Services must be direct charged to all generating units.  Remaining pool should be relatively small.  Annual true-up of productive labor rates.

	WEPCO Specialized Engineering Services-Direct charges

	Directly charged based on time sheets and productive labor rates

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Annual true-up of productive labor rates.

	WEPCO Specialized Engineering Services-Indirect charges

	Elm Road Unit 2 direct charges/All engineering direct charges (J)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Services must be direct charged to all generating units.  Remaining pool should be relatively small.  Annual true-up of productive labor rates.

	Information technology application support

	Elm Road Unit 2 total MW capacity/Entire fossil operations MW capacity (K)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Fossil operations accounting and budget support

	Elm Road Unit 2 total MW capacity/Entire fossil operations MW capacity (K)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 
	Property insurance

	Directly assigned to Elm Road Unit 2 based on locational rate developed by insurance broker schedule for premium calculation.

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	To be provided by insurance broker.

	Boiler and machinery insurance

	Directly assigned to Elm Road Unit 2 based on locational rate developed by insurance broker schedule for premium calculation.

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	To be provided by insurance broker.

	General liability insurance

	Directly assigned to Elm Road Unit 2 based on locational rate developed by insurance broker schedule for premium calculation.

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	To be provided by insurance broker.

	Fossil operations personnel, human resources, and training costs

	Elm Road Unit 2 employee count/Employee count of fossil operations (L)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Elm Road Unit 2 employee count shall include allocated employees on a basis consistent with the labor allocations set forth in Schedules 9.3 and 9.4.

	Fossil operations supervisory oversight

	Elm Road Unit 2 employee count/Employee count of fossil operations (L)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Elm Road Unit 2 employee count shall include allocated employees on a basis consistent with the labor allocations set forth in Schedules 9.3 and 9.4.

	Fossil operations safety program costs

	Elm Road Unit 2 employee count/Employee count of fossil operations (L)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Elm Road Unit 2 employee count shall include allocated employees on a basis consistent with the labor allocations set forth in Schedules 9.3 and 9.4.

	CEM software upgrades

	Number of Elm Road Unit 2 CEM units/Total number of CEM units supported (M)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	 

SCHEDULE 9.6

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Costs Relating to WEPCO and Wisconsin Gas Utility Operations*

				
	Type of Cost

	Basis for Assigning Costs to Elm Road Unit 2

	Basis for Allocating Costs to LOPs

	Comments

	WEPCO Specialized Lab Services-Direct charges

	Time sheets and productive labor rates

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Annual true-up of productive labor rates.

	WEPCO Specialized Lab Services-Indirect charges

	Elm Road Unit 2 direct charges/All lab services direct charges (J)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Services must be direct charged to all generating units.  Remaining pool should be relatively small. Annual true-up of productive labor rates.

	Corporate Human Resources costs

	Elm Road Unit 2 direct employees/Total WEPCO and Wisconsin Gas employees (N)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Elm Road Unit 2 employee count shall include allocated employees on a basis consistent with the labor allocations set forth in Schedules 9.3 and 9.4.

	Employee Communication costs

	Elm Road Unit 2 direct employees/Total WEPCO and Wisconsin Gas employees (N)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Elm Road Unit 2 employee count shall include allocated employees on a basis consistent with the labor allocations set forth in Schedules 9.3 and 9.4.

	Information technology technical support

	IT billing methodology

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Standard pricing method based on hardware at Land and a published cost-based corporate pricing list used consistently across WEC.

	Corporate purchasing and accounts payable

	Supply chain corporate billing methodology

	LOP MW capacity/Elm Road Unit 2 total MW capacity(S)

	Standard pricing method currently being developed by WEC.

	Corporate accounting and budget support

	Elm Road Unit 2 direct employees/Total WEPCO and Wisconsin Gas employees (N)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Elm Road Unit 2 employee count shall include allocated employees on a basis consistent with the labor allocations set forth in Schedules 9.3 and 9.4.

	Corporate payroll support

	Elm Road Unit 2 direct employees/Total WEPCO and Wisconsin Gas employees (N)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Elm Road Unit 2 employee count shall include allocated employees on a basis consistent with the labor allocations set forth in Schedules 9.3 and 9.4.

	Corporate security

	Elm Road Unit 2 direct employees/Total WEPCO and Wisconsin Gas employees (N)

	LOP MW capacity/Elm Road Unit 2 total MW capacity (S)

	Elm Road Unit 2 employee count shall include allocated employees on a basis consistent with the labor allocations set forth in Schedules 9.3 and 9.4.

SCHEDULE KEY

LOP = 

Lessee/Owner Party

“MW capacity” shall have the meaning specified in Section 9.1(b)(xi).

(A) =

Elm Road Unit 2 total MW capacity

Total Elm Road Units 1 & 2 MW capacity

(B) =

Elm Road Unit 2 MWH net generation

Total Elm Road Units 1&2 MWH net generation

(C) =

Elm Road Unit 2 total MW capacity

Total Land MW capacity

(D) =

Annual Elm Road Unit 2 coal tons nominated

Annual Land coal tons nominated

(E) =

Elm Road Unit 2 gallons per minute capacity

Total Land gallons per minute capacity

(F) =

Annual Elm Road Unit 2 coal tons nominated

Annual system coal tons delivered

(G) =

Therms delivered to Elm Road Unit 2

System therms delivered

(H) =

Annual estimated coal-ton miles for delivery to Elm Road Unit 2

Annual estimated system coal-ton miles delivered

(I) =

Elm Road Unit 2 by-product tons sold

Total by-product tons sold

(J) =

Elm Road Unit 2 direct charges

All [environmental] [engineering] [lab services] direct charges, as the case may be

(K) =

Elm Road Unit 2 total MW capacity

Entire fossil operations MW capacity

(L) =

Elm Road Unit 2 employee count

Employee count of fossil operations

(M) =

Number Elm Road Unit 2 CEM units

Total number of CEM units supported

(N) =

Elm Road Unit 2 direct employees

Total WEPCO and Wisconsin Gas Company employees

SCHEDULE KEY

(S) =

LOP MW capacity

Elm Road Unit 2 total MW capacity

 (T) =

LOP MWH net generation

Total Unit 2 MWH net generation

(U) =

Annual LOP coal tons nominated

Annual Elm Road Unit 2 coal tons nominated

(V) =

Annual estimated coal ton-miles for delivery to LOP

Annual estimated coal ton-miles for delivery to Elm Road Unit 2

Note:

All allocations are monthly unless otherwise noted.

SCHEDULE 9.7

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Other Support Costs

Corporate costs that are only to be billed as used, and not generally included in allocations:

 ̈

Legal Support;

 ̈

Regulatory Support;

 ̈

Non-Employee Communications;

 ̈

Treasury/Tax/Finance Support (e.g., support for specific tax issues benefiting Lessee/Owner Parties).

To the extent based on productive labor rates, costs will be trued-up annually.

Fully Excluded Costs

Information/Technology:

 ̈

Application support for software and hardware not used by Fossil Operations.

Environmental:

 ̈

Costs associated with manufactured gas plant mitigation or other costs not related to the current operation of Fossil Operations electric generating units.

Finance/Accounting:

 ̈

External reporting costs;

 ̈

Treasury function (cash management, capitalization);

 ̈

Property accounting;

 ̈

Corporate financial planning;

 ̈

Internal audit;

 ̈

Tax;

 ̈

Investor relations;

 ̈

Support costs dedicated to operating areas other than Fossil Operations.

Additional costs that should be specifically excluded regardless of the source or allocation method:

 ̈

Industry association dues;

 ̈

Contributions to, or sponsorships of, conventions and meetings of the industry;

 ̈

Expenditures for civic, political and related activities;

 ̈

Advertising costs;

 ̈

EPRI dues or expenses unless a program has been demonstrated to directly benefit Elm Road Unit 2;

 ̈

Research, development and demonstration expenses not directly applicable to Elm Road Unit 2;

 ̈

Regulatory expenses that are not applicable to or do not benefit Elm Road Unit 2;

 ̈

Franchise requirements;

 ̈

Accruals to cover possible property losses or liability claims not covered by insurance;

 ̈

All costs related to bondholders and stockholders or other type of investors;

 ̈

Merger or restructuring costs, absent a demonstration by the Operating Agent that the quantifiable benefits to Elm Road Unit 2 are greater than the costs;

 ̈

Any other expense where, by reason of unusual circumstances or material change in the Operating Agent’s corporate structure or that of its parent or affiliates, the allocation of an otherwise allocable expense would be unreasonable or unfair;

 ̈

Penalties not related to Elm Road Unit 2;

 ̈

Donations;

 ̈

Costs, such as the post-retirement benefits transition obligation, that were incurred by any of the WEC companies before the Transition Period, and then only to the extent provided in Section 9.8(b); 

 ̈

Monthly Management Services Costs paid to ERGS under WEPCO Facility Lease; and

 ̈

Any employee compensation from bonus or incentive programs where compensation is based specifically on the profitability of Elm Road Unit 2.

SCHEDULE 20.3

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Form of Agreement to Arbitrate Technical Disputes

Technical Expert:  _________________________

Initiating Party(ies):

________________________

Responding Party(ies):  _________________________

Issues agreed to be the subject of the arbitration (including counterclaims):*

_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

*Issues are to be framed objectively in form of “questions presented,” without arguments for any position.  All such advocacy is to be restricted to the Arbitration Notice(s) and Response(s) thereto.

WISCONSIN ELECTRIC POWER COMPANY, ____________(initiating or responding) Party

By:  

Name:

Title:

MADISON GAS AND ELECTRIC COMPANY, ____________(initiating or responding) Party

By:  

Name:

Title:

WISCONSIN PUBLIC POWER INC., ____________(initiating or responding) Party

By:  

Name:

Title:

Date:

__________________

SCHEDULE 24.14

ELM ROAD UNIT 2 OPERATING AND MAINTENANCE AGREEMENT

Legal Opinion Matters

Matters to be covered by opinion of counsel to each of the Parties, which may be in-house:

1.

Each Party is a corporation/municipal electric company duly formed, validly existing and in current good standing under the laws of the State of Wisconsin.

2.

Each Party has all requisite entity power and authority to execute, deliver and perform its obligations under this Agreement and the Project Agreements to which it is a party, and to carry on its business as now being conducted and as proposed to be conducted under the Project Agreements to which it is a party.

3.

The execution, delivery and performance by each Party of the Project Agreements to which it is a party have been duly authorized by each such Party.

4.

Each of the Project Agreements to which a Party is a party constitutes the legal, valid and binding obligations of each such Party enforceable against each such Party in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws relating to creditors’ rights generally and by general principles of equity (whether considered in a proceeding in equity or at law).

The foregoing opinions are limited solely to (i) the internal substantive laws of the State of Wisconsin as applied by courts located in the State of Wisconsin, without regard to choice of law, and (ii) the federal laws of the United States of America, in all cases insofar as such laws are applicable to the matters covered hereby, and no opinion is expressed herein on the applicability or effect of the laws of any other jurisdiction.  In addition, no opinion is expressed with respect to the applicability or effect of any other federal or state laws, statutes, ordinances or regulations promulgated by any Governmental Authority.

Endnotes

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