File No. _______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM U-1
APPLICATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Energy East Corporation
P.O. Box 1196
Stamford, Connecticut 06904-1196
and
Merger Co.
c/o Energy East Corporation
P.O. Box 1196
Stamford, Connecticut 06904-1196
Kenneth M. Jasinski
Executive Vice President and General Counsel
c/o Energy East Corporation
P.O. Box 1196
Stamford, Connecticut 06904-1196
Telephone: (203) 325-0690
(Names and addresses of agents for service)
Copies to:
Frank Lee, Esq. Adam Wenner, Esq.
Huber Lawrence & Abell Vinson & Elkins
605 Third Avenue 1455 Pennsylvania Avenue, N.W.
New York, New York 10158 Washington, D.C. 20004
Telephone: (212) 682-6200 Telephone: (202) 639-6500
Item 1. Description of Proposed Transaction.
A. Introduction
Pursuant to Sections 3(a)(1), 9(a)(2) and 10 of the Public
Utility Holding Company Act of 1935, as amended (the "Act"),
Energy East Corporation ("Energy East"), a New York corporation
and an exempt public utility holding company, hereby requests
that the Securities and Exchange Commission (the "Commission")
authorize the transaction described herein (the "Transaction")
pursuant to which Energy East will acquire all of the issued and
outstanding common stock of Connecticut Energy Corporation
("Connecticut Energy"), a Connecticut corporation and an exempt
public utility holding company.
As noted above, Energy East is currently a public utility
holding company exempt from all provisions of the Act, except
Section 9(a)(2), under Section 3(a)(1) of the Act by order of the
Commission dated February 12, 1999. See, Energy East
Corporation, et.al, Holding Co. Act Release No. 26976 (February
12, 1999). Energy East currently holds, directly and indirectly,
in excess of 5% of the voting securities of two public utility
companies as defined under the Act: New York State Electric & Gas
Corporation ("NYSEG") and CMP Natural Gas, L.L.C. ("Maine
GasCo"). NYSEG is engaged in purchasing, transmitting and
distributing electricity, and purchasing, transporting and
distributing natural gas exclusively in the State of New York.
Maine GasCo is engaged in distributing natural gas exclusively in
the State of Maine. Maine GasCo's revenues account for a de
minimis portion of Energy East's consolidated revenues.
Connecticut Energy, through its wholly-owned subsidiary, The
Southern Connecticut Gas Company ("Southern Connecticut"), is
engaged in the retail distribution of natural gas for
residential, commercial and industrial uses and the
transportation of natural gas for commercial and industrial users
exclusively in the State of Connecticut. Southern Connecticut is
the only public utility subsidiary of Connecticut Energy.
Energy East and Connecticut Energy have entered into an
Agreement and Plan of Merger, dated as of April 23, 1999, as
amended as of July 15, 1999 (the "Merger Agreement"), pursuant to
which Energy East has agreed to acquire all of the issued and
outstanding common stock of Connecticut Energy. Pursuant to the
Merger Agreement, Connecticut Energy will be merged with and into
Merger Co., a Connecticut corporation and a wholly-owned Energy
East subsidiary ("Merger Co."). Upon consummation of the
Transaction, Merger Co. will be the surviving party, will remain
a wholly-owned subsidiary of Energy East and will change its name
to, and operate under, the name of "Connecticut Energy
Corporation." Under the Merger Agreement, Southern Connecticut
will become a direct wholly-owned subsidiary of Merger Co. and an
indirect, wholly-owned subsidiary of Energy East. The Merger
Agreement is filed as Exhibit B-1 hereto.
The Transaction is expected to produce benefits to the
public, investors and consumers and will satisfy all of the
applicable standards under Section 10 of the Act. It is expected
that the Transaction will help position the combined company to
become one of the most efficient energy distribution companies in
the northeastern United States by operating more cost-
effectively, increasing financial flexibility and providing
strategic growth opportunities that will benefit the combined
company and its shareholders and customers. Energy East believes
that, upon consummation of the Transaction, the combined company
will be better positioned to take advantage of operating
economies and efficiencies through, among other measures, joint
management and optimization of their respective portfolios of gas
supply, transportation and storage assets.
A combination of the companies' complementary expertise and
infrastructure, including Connecticut Energy's competitive
natural gas distribution facilities in Connecticut and Energy
East's diversified electric and natural gas businesses throughout
the northeastern United States, will provide the combined company
with the size and scope necessary to be an effective participant
in the emerging and increasingly competitive electric and natural
gas markets. The combined company will use its distribution
channels to market a portfolio of energy-related services
throughout the northeastern United States. The Transaction will
create a company with the ability to develop and market
competitive new products and services and to provide integrated
energy solutions for its customers.
The combined company will also be financially stronger and
will have a broader customer base than Connecticut Energy has as
an independent entity. Based on the actual results for
Connecticut Energy and Energy East, the total annual revenues for
the combined company for the twelve months ended June 30, 1999
were approximately $2.7 billion. In addition, the combined
company will serve approximately 826,000 electric customers in
the State of New York and more than 402,000 natural gas customers
in New York, Connecticut and Maine. With Energy East's strong
capital base, the combined company intends to invest in the
expansion of Connecticut Energy's gas distribution system and
enhance marketing efforts in order to enlarge Connecticut
Energy's customer base. These actions will significantly
increase competition and customer choice in the State of
Connecticut.
Energy East seeks an order of exemption for itself and for
Merger Co. following the consummation of the Transaction.
Notwithstanding the fact that Southern Connecticut will be an
indirect public utility subsidiary of Energy East organized and
operating in the State of Connecticut, Energy East will continue
to be entitled to an exemption under Section 3(a)(1) of the Act
because Southern Connecticut will not account for a material part
of the net operating revenue (operating margin) of the combined
company1 and Maine GasCo accounts for a de minimis part of Energy
East's utility operations. Thus, Energy East and each public
utility subsidiary from which it derives a material part of its
income (i.e., NYSEG) will continue to be organized and to operate
predominantly in the State of New York. After consummation of
the Transaction, Merger Co. will be entitled to an exemption
under Section 3(a)(1) of the Act because Merger Co. and Southern
Connecticut will both be organized and carry on their business in
the State of Connecticut, and neither Merger Co. nor Southern
Connecticut will derive a material part of its income from a
public utility subsidiary that carries on its business and/or is
organized outside of the State of Connecticut. In addition,
since this application has no impact on the status of Energy East
Enterprises, Inc. ("Enterprises") as a public utility holding
company, Enterprises will continue to be entitled to an exemption
under Section 3(a)(1) of the Act because Enterprises and each
public utility subsidiary from which it derives a material part
of its income (i.e., Maine GasCo) will continue to be organized
and operating in the State of Maine.
B. Description of Parties to the Transaction
1. Description of Energy East and Subsidiaries
On May 1, 1998, Energy East became the holding company for
NYSEG and NGE Generation, Inc., which at that time was engaged in
the business of generating electricity and was an electric
utility company as defined in the Act.2 Energy East is an exempt
holding company and neither owns nor operates any physical
properties. Energy East, through its subsidiaries, is an energy
delivery, products and services company with operations in New
York, Massachusetts, Maine, New Hampshire, Vermont and New
Jersey, and has offices in New York and Connecticut. Energy
East's common stock is publicly traded on the New York Stock
Exchange under the symbol "NEG." Energy East's principal
executive offices are located at One Canterbury Green, P.O. Box
1196, Stamford, Connecticut 06904-1196.
Merger Co., a wholly-owned subsidiary of Energy East, was
organized in 1999 and was formed solely for the purpose of
consummating the Transaction. It currently holds no public
utility assets and is neither a "public utility company" nor a
"holding company" under the Act.
NYSEG, a regulated public utility incorporated under the
laws of the State of New York, is engaged in the business of
purchasing, transmitting and distributing electricity and
purchasing, transporting and distributing natural gas. NYSEG
also generates electricity from its 18% share of a nuclear
station and its hydroelectric stations. NYSEG has agreed to sell
its share of the nuclear station; the sale is expected to be
completed by early next year. NYSEG's service territory, 99% of
which is located outside the corporate limits of cities, is in
the central, eastern and western parts of the State of New York.
NYSEG's service territory has an area of approximately 19,900
square miles and a population of 2,400,000. The larger cities in
which NYSEG serves both electricity and natural gas customers are
Binghamton, Elmira, Auburn, Geneva, Ithaca and Lockport. NYSEG
serves approximately 826,000 electric customers and approximately
244,000 natural gas customers. The service territory reflects a
diversified economy, including high-tech firms, light industry,
colleges and universities, agriculture and recreational
facilities. No customer accounts for 5% or more of either
electric or natural gas revenues. During 1996 through 1998,
approximately 84% of NYSEG's operating revenue was derived from
electric service with the balance derived from natural gas
service.
Maine GasCo is a gas utility company as defined in the Act.
Maine GasCo is in the process of constructing a local natural gas
distribution system in the State of Maine, and began providing
service to retail customers in May 1999.
Energy East also has a number of direct and indirect
subsidiaries that are not "public utility companies" under the
Act.3 These include Enterprises and XENERGY Enterprises, Inc.
("XENERGY Enterprises"), a Delaware corporation.
Enterprises was organized in 1998 and owns natural gas and
propane air distribution companies. Enterprises is a wholly-
owned subsidiary of Energy East and is currently an exempt public
utility holding company under the Act by order of the Commission
dated February 12, 1999. See Energy East Corporation, et. al.,
Holding Co. Act Release No. 26976 (February 12, 1999). It
indirectly holds public utility assets through its ownership of a
majority of the voting securities of Maine GasCo. Enterprises'
nonutility subsidiaries consist of New Hampshire Gas Corporation,
an energy services company in New Hampshire specializing in
propane air distribution systems; Southern Vermont Natural Gas
Corporation, which is developing a combined natural gas supply
and distribution project that includes an extension of a pipeline
from New York to Vermont and the development of natural gas
distribution systems in Vermont; and Seneca Lake Storage, Inc.,
which proposes to own and operate a gas storage facility in New
York.
XENERGY Enterprises was organized in 1992 and invests in
providers of energy and telecommunications services. XENERGY
Enterprises is a wholly-owned subsidiary of Energy East. It
currently holds no public utility assets and is neither a public
utility company nor a holding company under the Act. XENERGY
Enterprises' principal subsidiaries include XENERGY Inc., an
energy services, information systems and consulting company that
specializes in energy management, conservation engineering and
demand-side management; Energy East Solutions, Inc., which
markets electricity and natural gas to end users and provides
wholesale commodities to retail electric suppliers in the
northeastern United States; NYSEG Solutions, Inc., which markets
electricity and natural gas to end users and provides wholesale
commodities to retail electric suppliers in the State of New
York; Energy East Telecommunications, Inc., which provides
telecommunication services, including the construction and
operation of fiber optic networks; and Cayuga Energy, Inc., which
holds investments in cogeneration facilities.
Energy East's other current direct nonutility subsidiaries
are as follows:
Energy East Management Corporation, a Delaware corporation,
invests the proceeds of the sale of NGE Generation, Inc.'s
generation assets.
Oak Merger Co., a Connecticut corporation, was formed solely
for the purpose of consummating the proposed merger with CTG
Resources, Inc. ("CTG"), a Connecticut corporation, pursuant to
an Agreement and Plan of Merger dated as of June 29, 1999. Oak
Merger Co. will be the surviving party in such merger and will
remain a wholly-owned subsidiary of Energy East. Upon
consummation of such merger, Oak Merger Co. will change its name
to, and operate under, the name of "CTG Resources, Inc." CTG is
a holding company by virtue of owning all of the common stock of
Connecticut Natural Gas Corporation, a public utility company as
defined in the Act, which owns and operates a natural gas local
distribution system in the State of Connecticut. CTG is
currently exempt from all provisions of the Act, except Section
9(a)(2), under Section 3(a)(1) of the Act and Rule 2 thereunder.
EE Merger Corp., a Maine corporation, was formed solely for
the purpose of consummating the proposed merger with and into CMP
Group, Inc., ("CMP"), a Maine corporation, pursuant to an
Agreement and Plan of Merger dated as of June 14, 1999. CMP will
be the surviving party in such merger and will become a wholly-
owned subsidiary of Energy East. CMP is a holding company by
virtue of owning, directly or indirectly, more than 5% of the
voting securities of Central Maine Power Company, Maine Electric
Power Company, Inc., NORVARCO and Maine GasCo, all public utility
companies as defined in the Act. CMP is exempt from all
provisions of the Act, except Section 9(a)(2), under Section
3(a)(1) of the Act, by order of the Commission dated February 12,
1999. See, CMP Group, Inc. et. al., Holding Co. Act Release No.
26977 (February 12, 1999).4
For the year ended December 31, 1998, electric revenues of
approximately $1,706,876,000 and gas revenues of approximately
$305,881,000 accounted for approximately 85% and 15%,
respectively, of Energy East's consolidated gross utility
revenues. For the year ended December 31, 1998, Energy East's
utility operating income and utility net income available for
common stock were $482,720,000 and $205,215,000, respectively.
Consolidated assets of Energy East and its subsidiaries as of
December 31, 1998, were approximately $4.9 billion, consisting of
$3.9 billion in net utility plant and $1.0 billion in other
utility and nonutility assets. For the twelve months ended
December 31, 1998, consolidated operating revenues, operating
income and net income for Energy East and its subsidiaries were
approximately $2,499,418,000, $474,839,000, and $194,205,000,
respectively.
2. Description of Connecticut Energy and Subsidiaries
Connecticut Energy is a holding company primarily engaged in
the retail distribution of natural gas through its principal
wholly-owned subsidiary, Southern Connecticut. Connecticut
Energy is an exempt holding company and neither owns nor operates
any physical properties. Connecticut Energy, through its
subsidiaries, is an energy delivery, products and services
company that provides an array of energy commodities and services
to commercial and industrial customers throughout New England.
Connecticut Energy s common stock is publicly traded on the New
York Stock Exchange under the symbol "CNE." Connecticut Energy s
principal executive offices are located at 855 Main Street,
Bridgeport, Connecticut 06604.
Connecticut Energy s operating revenues totaled
approximately $242,431,000 for the fiscal year ended September
30, 1998. Connecticut Energy s consolidated net income for the
same period was $19 million. Connecticut Energy and its
subsidiaries had 480 full-time employees as of December 31, 1998.
Southern Connecticut had 467 employees as of December 31, 1998.
Southern Connecticut, a public service company incorporated
under the laws of the State of Connecticut, is engaged in the
retail distribution of natural gas for residential, commercial
and industrial uses and the transportation of natural gas for
commercial and industrial users. Southern Connecticut serves
approximately 158,000 customers in the State of Connecticut,
primarily in 22 towns along the southern Connecticut coast from
Westport to Old Saybrook, which include the urban communities of
Bridgeport and New Haven. Southern Connecticut is the sole
distributor of natural gas in its service area.
Connecticut Energy also has a number of direct and indirect
subsidiaries that are not "public utility companies" under the
Act. These include CNE Energy Services Group, Inc. ("CNE
Energy"), CNE Development Corporation ("CNE Development") and CNE
Venture-Tech, Inc. ( CNE Venture-Tech ). All three of these
nonutility subsidiaries are Connecticut corporations.
CNE Energy provides an array of energy products and services
to commercial and industrial customers throughout New England,
both on its own and through its participation as a member of
various energy-related limited liability companies. CNE Energy
is a wholly-owned subsidiary of Connecticut Energy. CNE Energy's
principal subsidiaries include Conectiv/CNE Energy Services, LLC,
a 50/50 joint venture of CNE Energy and Conectiv s bulk energy
group that sells natural gas, fuel oil and other services to
commercial, industrial and municipal customers in New England and
in which Energy East Solutions, Inc., a subsidiary of Energy
East, anticipates acquiring, prior to the consummation of the
Transaction, the 50% interest formerly owned by Conectiv; Total
Peaking Services, LLC, which is a 50/50 joint venture of CNE
Energy and Conectiv Energy Supply, Inc. and operates a Federal
Energy Regulatory Commission ("FERC") certificated 1.2 billion
cubic foot liquefied natural gas open access storage facility in
Milford, Connecticut; and Conectiv/CNE Peaking, LLC, which is
also a 50/50 joint venture of CNE Energy and Conectiv Energy
Supply, Inc. operating out of the State of Delaware and which
provides a firm in-market supply source to assist energy
marketers and local gas distribution companies in meeting the
maximum demands of their customers by offering firm supplies for
peak-shaving and emergency deliveries.
CNE Development, a wholly-owned subsidiary of Connecticut
Energy, is a 16.67% equity participant in East Coast Natural Gas
Cooperative, LLC, which purchases and stores gas spot supplies,
provides storage service utilization services and is involved in
bundled sales.
CNE Venture-Tech, a wholly-owned subsidiary of Connecticut
Energy, invests in ventures that produce or market
technologically advanced energy-related products. CNE Venture-
Tech s investments include a 7.8884% limited partnership interest
in Nth Power Technologies Fund I, L.P., which invests in
companies that develop, produce and market innovative energy-
related products; and CIS Service Bureau, LLC, a service bureau
which provides access to customer-billing software and other
related services for local distribution and other utility-type
companies (including Southern Connecticut) and which is wholly-
owned by CNE Venture-Tech.
3. Description of Energy East Gas and Electric Utility
Operations
As discussed in more detail above, NYSEG, a regulated public
utility incorporated under the laws of the State of New York, is
engaged in the business of purchasing, transmitting and
distributing electricity, and purchasing, transporting and
distributing natural gas. NYSEG also generates electricity from
its 18% share of a nuclear station and its hydroelectric
stations. NYSEG has agreed to sell its share of the nuclear
station; the sale is expected to be completed by early next year.
NYSEG is subject to regulation with respect to its retail gas and
electric service, among other things, by the Public Service
Commission of the State of New York (the "NYPSC") under the
Public Service Law of the State of New York and to regulation
with respect to its wholesale sales of electricity by the FERC.
NYSEG currently provides natural gas service to customers
throughout thirty-one counties, incorporating eighty-six cities
and villages, and one hundred forty-nine towns in the State of
New York. NYSEG's natural gas business consists primarily of
rural natural gas distribution, covering 6,594 square miles with
a population of 1,095,000 people. NYSEG operates and maintains
approximately 400 miles of transmission pipeline, 3,600 miles of
distribution main, 3,400 miles of service laterals and 80 gate
stations. NYSEG has transportation and/or storage contracts with
eight major interstate pipelines, including the Tennessee Gas
Pipeline ("Tennessee"), the Iroquois Gas Transmission System
("Iroquois"), the Algonquin Gas Transmission Company
("Algonquin") and the Texas Eastern Transmission Company ("Texas
Eastern"), two intrastate pipelines, the TransCanada Pipeline and
four New York local distribution companies.
NYSEG began offering open access gas transportation to its
large commercial and industrial customers in 1986. In 1988,
NYSEG began offering unbundled transportation to small commercial
customers. In 1996, NYSEG began its aggregation transportation
program for residential and small commercial customers. NYSEG
currently has over two thousand transportation-only customers,
which constitute more than one-third of its system throughput.
NYSEG operates its local natural gas distribution business
through thirteen division offices, each capable of constructing,
operating and maintaining a non-contiguous gas system. A
Corporate Engineering, Operations, and Quality Assurance
Department supports all field operations, operates a gas meter
testing laboratory and performs gas quality testing from
suppliers. NYSEG generally performs all engineering, operation
and maintenance work with its internal work force. Pipeline
contractors perform ninety percent of all new pipeline
construction. Independent heating dealers perform consumer
equipment conversions and new installations. NYSEG also
maintains an active trade ally program that provides training,
advertising, feedback, and other support to heating, ventilation
and air conditioning contractors. NYSEG provides gas emergency
response training to fire departments and emergency responders in
every community it serves. Additionally, NYSEG's state-of-the-
art gas control facilities include real-time data communications
from gate stations and transportation customers. NYSEG also
contracts for and manages pipeline capacity and gas supply for
existing and new franchises in order to remain competitive with
alternative fuels.
NYSEG also provides unbundled transportation customers with
ancillary services such as balancing, a gas supply pool, a
capacity assignment tariff and an electronic bulletin board. In
addition, NYSEG operates the only operational bedded salt storage
facility in the northeastern United States. It is also an active
releaser of pipeline capacity and participates in the off-system
gas market. Approximately 63% of NYSEG's gas supply originates
from the Texas and Louisiana Basins, 28.5% from the Western
Canadian Sedimentation Basin, 7.2% from Appalachia, and 1.3% from
other sources. In addition to Energy East s gas operations in
the State of New York, conducted through NYSEG, Energy East also
has gas operations in the State of Maine, conducted through Maine
GasCo. Maine GasCo is in the process of constructing a local
natural gas distribution system in certain areas of Maine, and
began to provide service to retail customers in May 1999. Maine
GasCo currently derives its supply of natural gas from the
Western Canadian Sedimentation Basin via the Portland Natural Gas
Transmission System pipeline ("PNGTS"). Maine GasCo also expects
to derive some of its supply of natural gas from the gas fields
near Sable Island off Nova Scotia via the Maritimes & Northeast
pipeline ("M&N"), which is currently under development and is
proceeding on schedule. PNGTS commenced commercial operation in
early 1999, and M&N expects commercial operation in November,
1999.
As stated above, Energy East is currently exempt from
registration pursuant to Section 3(a)(1) of the Act. In
addition, there is de facto integration of Energy East's gas and
electric utility properties. Specifically, the Energy East system
currently consists of a large integrated electric utility system
and a smaller integrated gas utility system which together are
operated on a coordinated basis offering services to customers in
substantially the same area in the State of New York. The entire
Energy East system is operated as a single coordinated system to
the extent that there is a significant degree of centralized
planning (including accounting, financial planning and analysis,
financial reporting, human resources, regulatory affairs,
information systems, insurance, legal, payroll, purchasing, tax,
training, treasury, transportation, billing support,
telecommunications, meter installation and reading, real estate,
facilities management, call center services, engineering,
construction and environmental services and general
administrative services). Coordination of NYSEG's system with
the Maine GasCo System and the provision of any services by NYSEG
or any other Energy East subsidiary is done in accordance with
NYPSC-approved affiliate transaction procedures. Allocations of
cost are done pursuant to cost allocation guidelines, which were
filed with the NYPSC. The provision of services to Maine GasCo
by NYSEG and its affiliates is pursuant to a master services
agreement which conforms to NYPSC rules and guidelines and which
has been approved by the Maine Public Utilities Commission.
4. Description of Connecticut Energy Gas Utility
Operations
As described above, Southern Connecticut, a regulated public
service company incorporated under the laws of the State of
Connecticut, is engaged in the retail distribution of natural gas
for residential, commercial and industrial uses and the
transportation of natural gas for commercial and industrial
users. In providing this service, Southern Connecticut is
subject to regulation with respect to retail rates, among other
things, by the Connecticut Department of Public Utility Control
(the "DPUC").
Southern Connecticut currently provides natural gas service
to customers in twenty-two towns in the State of Connecticut.
Southern Connecticut s natural gas business consists of both
urban and suburban natural gas distribution, serving
approximately 158,000 customers. Southern Connecticut operates
and maintains approximately 2,160 miles of distribution main,
1,390 miles of service laterals and 10 gate stations.
Effective April 1, 1996, Southern Connecticut began offering
firm transportation service to commercial and industrial
customers. As of September 30, 1998, there were 1,789 firm
transportation customers representing 2,094 accounts purchasing
natural gas directly from marketers. Southern Connecticut also
provides interruptible sales and special contract services. In
the year ended September 30, 1998, interruptible sales, gas
transportation and special customer services represented
approximately 13% of operating revenues and approximately 37% of
total gas throughput. Southern Connecticut also engaged in off-
system sales. In the year ended September 30, 1998, Southern
Connecticut dispatched approximately 4,484,100 Mcf of volume as
part of its off-system sales program.
Southern Connecticut s long-term supply sources include (1)
Canadian supplies purchased from Alberta Northeast Gas Limited
with transportation on the Iroquois pipeline, (2) transportation
and storage services from the Tennessee pipeline with direct
purchase of supply from producers and marketers, (3)
transportation and storage services from the Texas Eastern
pipeline with direct purchase of supply from producers and
marketers, (4) transportation services from the Algonquin
pipeline, (5) transportation and storage services from CNG
Transmission Corporation, (6) transportation service from
Transcontinental Gas Pipeline Corporation, (7) transportation
service from National Fuel Gas Supply Corporation and (8) liquid
and vapor supplies from Distrigas of Massachusetts Corporation.
These arrangements result in gas deliveries into Southern
Connecticut s service territory through interconnections with
three interstate pipelines: Algonquin, Iroquois and Tennessee.
In addition to its long-term firm supply arrangements, Southern
Connecticut purchases spot supplies and utilizes interruptible
transportation services from interstate pipeline companies.
Approximately 64% of Southern Connecticut s gas supply originates
from the Texas and Louisiana Basins via the Tennessee and
Algonquin pipelines, 35% from the Western Canadian Sedimentation
Basin via the Iroquois pipeline and 1% from other sources.
Southern Connecticut performs construction, maintenance and
certain customer service operations from its Operations Center in
Orange, Connecticut. It also operates a satellite operations
facility in Madison, Connecticut to support rapid response to
customers in shoreline communities east of New Haven. Southern
Connecticut has a capital construction budget of approximately
$15 to $16 million for new business, main replacement and system
improvements. In addition, Southern Connecticut spends
approximately $1 million annually on gas leak surveys and leak
repairs. There are currently approximately 45 union employees in
the construction and maintenance areas and another 15 supervisory
employees supporting construction and maintenance services.
Through its Customer Service Department, Southern
Connecticut currently provides the following services: gas leak
detection, meter turn on and turn-offs, maintenance on
facilities, meter installations and meter changes. Southern
Connecticut also provides from the same department additional
services such as repair and maintenance of most heating equipment
and water heaters.
C. Description of the Transaction
During 1998, senior management of Energy East and
Connecticut Energy had limited discussions about the possibility
of a business combination, but these discussions were terminated.
In March of 1999, the chief executive officers of Energy East and
Connecticut Energy had several discussions about the possibility
of a business combination, leading to a preliminary proposal for
the merger of Connecticut Energy into a subsidiary of Energy
East. On April 14, 1999, the two companies entered into a
confidentiality and standstill agreement. From April 14 through
April 22, 1999, Energy East and Connecticut Energy each conducted
a detailed due diligence review of the other, and the executives
of the two companies and their respective legal and financial
advisors conducted extensive negotiations regarding the specific
terms and conditions of the definitive Merger Agreement. On
April 22, 1999, Energy East proposed a price of $42.00 per share
of Connecticut Energy common stock, 50% in cash and 50% in Energy
East common stock. The same day, the Connecticut Energy Board of
Directors unanimously approved Energy East s offer and the Merger
Agreement. On April 23, 1999, the Energy East Board of Directors
unanimously approved the proposed acquisition and Connecticut
Energy and Energy East executed the Merger Agreement and publicly
announced the Transaction.
The Merger Agreement provides that Connecticut Energy will
merge into Merger Co. Merger Co. will be the surviving company
and will continue to conduct Connecticut Energy s business as a
direct, wholly-owned subsidiary of Energy East under the name of
"Connecticut Energy Corporation." Under the Merger Agreement,
upon the effective date of the Transaction, all outstanding
shares of common stock of Connecticut Energy (other than those
that are held by Connecticut Energy shareholders who have not
voted in favor of the Transaction and have properly demanded
dissenters rights) will be converted into the right to receive
the merger consideration. Connecticut Energy shareholders can
elect to receive cash, Energy East shares, or a combination of
cash and Energy East shares. The cash consideration amounts to
$42.00 in cash, without interest, per share. The stock
consideration is a number of Energy East shares that will vary
depending on the "Average Market Price," which is the average of
the closing prices of Energy East shares on the New York Stock
Exchange during the 20 trading days immediately preceding the
second trading day prior to the effective time of the
Transaction. If the Average Market Price is equal to or more
than $23.10 per share and equal to or less than $29.40 per share,
then a Connecticut Energy share will be exchanged for $42.00
worth of Energy East shares. If the Average Market Price is less
than $23.10, then a Connecticut Energy share will be exchanged
for 1.82 Energy East shares. If the Average Market Price is more
than $29.40, then a Connecticut Energy share will be exchanged
for 1.43 Energy East shares. Connecticut Energy shareholders who
have properly demanded dissenters' rights will not receive the
merger consideration but will have those rights that are granted
by Connecticut law.
Subject to an adjustment for tax reasons described below,
50% of all outstanding Connecticut Energy shares will be
converted into cash and 50% will be converted into Energy East
shares. Connecticut Energy shareholders as a group may submit
elections to convert more than half of the outstanding
Connecticut Energy shares into cash or more than half into Energy
East shares. If either cash or Energy East shares is
oversubscribed, then an equitable pro rata adjustment will be
made to ensure that half of the outstanding Connecticut Energy
shares are converted into cash and half are converted into Energy
East shares.
The Transaction is intended to be a "reorganization" within
the meaning of Section 368(a) of the Internal Revenue Code of
1986, as amended. Therefore, if the value of the Energy East
shares received would otherwise be less than 45% of the value of
the total consideration, the number of Connecticut Energy shares
that will be converted into Energy East shares will be increased,
and the number of Connecticut Energy shares converted into cash
will be correspondingly decreased.
On a pro forma basis, based upon the number of shares
outstanding on June 30, 1999 and the assumed conversion of half
of the Connecticut Energy shares into 1.60 Energy East shares per
Connecticut Energy share and half into $42.00 in cash per
Connecticut Energy share, those shareholders of Connecticut
Energy who receive Energy East shares will effectively acquire,
in exchange for their Connecticut Energy shares, about 7% of the
issued and outstanding Energy East shares.
The Transaction is subject to the approval of two-thirds of
the Connecticut Energy shares. A special meeting of
shareholders, at which the Transaction will be submitted to the
Connecticut Energy shareholders, is scheduled to be held on
September 14, 1999. The Transaction is also subject to various
regulatory approvals in addition to the approval of the
Commission. Reference is made to the Proxy Statement/Prospectus,
which is a part of the Registration Statement on Form S-4, filed
herewith as Exhibit C-1, for a more complete description of the
Transaction and the terms of the Merger Agreement.
After the effective time of the Transaction, the Board of
Directors of the surviving company will consist of the current
directors of Merger Co. and J.R. Crespo, the Chairman, President
and Chief Executive Officer of Connecticut Energy. In addition,
Energy East will elect Mr. Crespo to its Board of Directors. Mr.
Crespo will also be the President, Chief Executive Officer and
Chairman of the Board of Directors of the surviving company and
will be an officer of Energy East with the title of Vice
Chairman. The surviving company will establish an advisory board
comprised of the individuals who were directors of Connecticut
Energy immediately before the effective time of the Transaction.
The advisory board will meet at least quarterly and will provide
advice to the surviving company Board of Directors as requested.
The Transaction is subject to customary closing conditions,
including approval of this application by the Commission. The
Transaction is also subject to approval by the Connecticut Energy
shareholders and the approval of the DPUC. The Transaction may
be terminated by either party if the Transaction has not been
completed by April 23, 2000 (or October 23, 2000, if the only
barrier to such completion is the inability to obtain the
requisite governmental approvals), so long as the delay has not
been caused by a failure of the party seeking termination to
fulfill its obligations under the Merger Agreement. Connecticut
Energy may terminate the Transaction before its shareholders
approve the Merger Agreement if an alternative proposal for the
acquisition of Connecticut Energy meeting certain conditions is
made. If the Connecticut Energy Board of Directors decides to
pursue such an alternative proposal, or under certain
circumstances Connecticut Energy agrees to consummate or does
consummate such an alternative proposal, Connecticut Energy will
be required to pay Energy East a "break-up" fee of $17 million.
The Merger Agreement also contains other termination provisions
as are customary in merger transactions generally.
The Merger Agreement contains certain covenants relating to
the conduct of business by the parties pending the consummation
of the Transaction, which are customarily contained in merger
transactions generally. As a general matter, among other things,
Connecticut Energy and its subsidiaries must carry on their
business in substantially the same manner as previously
conducted, and may not increase their dividends beyond specified
levels or issue capital stock, except as otherwise specified.
The Merger Agreement also contains customary restrictions on,
among other things, charter and bylaw amendments, capital
expenditures, acquisitions, dispositions, incurrence of
indebtedness and certain increases in employee compensation and
benefits.
Item 2. Fees, Commissions and Expenses.
The fees, commissions and expenses paid or incurred, or to
be paid or incurred, directly or indirectly, in connection with
the Transaction by the Applicant or any associate company
thereof, are estimated to total approximately $4.5 million, as
follows:
Accounting Fees. . . . . . . . . . . . . .$ 75,000*
Legal Fees . . . . . . . . . . . . . . . . .1,600,000*
Investment Bankers' Fees
Chase Securities, Inc. . . . . . . . . . . .860,000*
Hart-Scott-Rodino Fees . . . . . . . . . . . . 45,000
SEC Filing Fees relating to
Registration Statement on Form S-4 . . . . . 41,424**
Printing and delivery . . . . . . . . . . . 42,500**
Miscellaneous costs. . . . . . . . . . . . .1,836,076*
Total. . . . . . . . . . . . . . . . . .$ 4,500,000*
____________________
* Estimated
** Pursuant to the Merger Agreement, the SEC filing fees and
printing costs are to be shared equally by Connecticut Energy and
Energy East. The total SEC filing fees paid were $82,847 and
total printing costs are estimated to be $85,000.
Item 3. Applicable Statutory Provisions.
Sections 3(a)(1), 9(a)(2) and 10 of the Act apply to the
Transaction. Section 9(a)(2) of the Act makes it unlawful,
without the approval of the Commission under Section 10, "for any
person ... to acquire, directly or indirectly, any security of
any public utility company, if such person is an affiliate ... of
such company and of any other public utility or holding company,
or will by virtue of such acquisition become such an affiliate."
Because Energy East presently is an "affiliate" (i.e., directly
or indirectly owning, controlling or holding with power to vote
5% or more of the voting securities) of two public utility
companies (i.e., NYSEG and Maine GasCo) and by virtue of the
Transaction will also become an "affiliate" of Southern
Connecticut, which is a gas utility company within the meaning of
Section 2(a)(4) of the Act, the Transaction will require
Commission approval under Sections 9(a)(2) and 10 of the Act.
For the reasons explained below, the Commission should grant
approval of the Transaction pursuant to Section 9(a)(2) of the
Act based upon the Transaction's compliance with the applicable
standards of Section 10 of the Act and grant Energy East and
Merger Co. exemptions pursuant to Section 3(a)(1) from all of the
provisions of the Act (except for Section 9(a)(2) thereof). In
addition, this application has no impact on the status of
Enterprises as a holding company. Enterprises will continue to
be entitled to an exemption under Section 3(a)(1) of the Act.
Accordingly, Energy East requests an order under Section 3(a)(1),
confirming Enterprises' exemption from all provisions of the Act,
except Section 9(a)(2).
A. Approval of the Transaction under Section 9(a)(2)
As recognized in the comprehensive report issued by the
Division of Investment Management in June 1995 entitled "The
Regulation of Public-Utility Holding Companies" (the "Division
Report"), the framers of the Act intended and understood the need
for the Act to be interpreted in a flexible manner to account for
changes in the utility industry over time. Commission decisions
have recognized the framers' intent. While the Applicants
believe that the requested authorization is well within existing
Commission precedent, changes in the utility industry make the
case for the Transaction even more compelling. The utility
industry is evolving towards a broadly-based energy-related
business. As discussed below, the evolution of the utility
industry dramatically affects the appropriate notion of what a
utility system consists of and the appropriate standards for
exemption under Section 3(a) of the Act.
Sections 10(b), 10(c) and 10(f) of the Act set forth the
standards for approval of the Transaction. The Transaction
satisfies all of the requirements of Section 10 and should
therefore be approved. Specifically, as the following discussion
more fully explains:
- - the Transaction will not tend towards interlocking relations
or the concentration of control of public utility companies
to the detriment of investors and consumers;
- - the consideration, including all commissions and fees, to be
paid in connection with the Transaction is reasonable;
- - the Transaction will not unduly complicate the capital
structure of the Energy East holding company system;
- - the Transaction is in the public interest and the interests
of consumers and investors;
- - the Transaction will tend towards the economical and
efficient development of an integrated gas utility system;
and
- - the Transaction will comply with all applicable State laws.
1. Section 10(b)
Section 10(b) of the Act requires the Commission to approve
an acquisition pursuant to Section 9(a)(2) unless the Commission
finds that:
(1) such acquisition will tend towards interlocking
relations or the concentration of control of public
utility companies, of a kind or to an extent
detrimental to the public interest or the interest of
investors or consumers;
(2) in case of the acquisition of securities or utility
assets, the consideration, including all fees,
commissions, and other remuneration, to whomsoever
paid, to be given, directly or indirectly, in
connection with such acquisition is not reasonable or
does not bear a fair relation to the sums invested in
or the earning capacity of the utility assets to be
acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate the capital
structure of the holding company system of the
applicant or will be detrimental to the public interest
or the interest of investors or consumers or the proper
functioning of such holding company system.
The Applicant respectfully submits that no adverse finding should
be made under any of these paragraphs.
a. Section 10(b)(1)
Section 10(b)(1) provides that, if the requirements of
Section 10(f) are satisfied, the Commission shall approve an
acquisition unless:
(1) such acquisition will tend towards interlocking
relations or the concentration of control of public utility
companies, of a kind or to an extent detrimental to the
public interest or the interest of investors or consumers.
(i) Interlocking Relationships
All business combinations, by their nature, result in the
creation of new links and relationships between companies that
had been unrelated prior to the combination. However, these
links and relationships are not the types of prohibited
"interlocking relationships" contemplated by Section 10(b)(1) of
the Act, which was intended primarily to prevent business
combinations from being entered into for reasons unrelated to
operating efficiencies.5 The Merger Agreement provides that,
following the merger, Mr. J.R. Crespo, the current Chairman,
President and Chief Executive Officer of Connecticut Energy will
retain those positions with the surviving company (which will be
a subsidiary of Energy East) and will become an officer of Energy
East with the title of Vice Chairman and a director of Energy
East. This management interlock is necessary and desirable in
order to integrate Connecticut Energy into the Energy East
holding company system. Furthermore, there will be continuity of
management because following the consummation of the Transaction,
the management of Southern Connecticut, the regulated utility,
will largely be comprised of Southern Connecticut's current
management. In addition, the Merger Agreement also provides that
the current Board of Directors of Connecticut Energy will serve
as an advisory board to the surviving company. Such continuity
of management oversight will help to assure that the management
of Connecticut Energy and, perhaps more importantly, of Southern
Connecticut remains responsive to local regulation and to other
essentially local interests (e.g., consumers, labor, etc.). The
Transaction has been carefully structured to protect the
interests of consumers and other local interests while ensuring
that the only management interlocks created are those which are
necessary and desirable in order to integrate Connecticut Energy
into the Energy East holding company system. Thus, the
Transaction is not prohibited by Section 10(b)(1) of the Act.
(ii) Concentration of Control
Section 10(b)(1) requires a finding that control is "of a
kind or to an extent detrimental to the public interest or the
interest of investors or consumers." The framers of the Act
sought through Section 10(b)(1) to avoid "an excess of
concentration and bigness" and "huge, complex and irrational
holding company systems," while preserving the "opportunities for
economies of scale, the elimination of duplicative facilities and
activities, the sharing of production capacity and reserves and
generally more efficient operations" afforded by certain
combinations. American Electric Power Co., Inc., 46 SEC 1299,
1307-1309 (1978). In applying Section 10(b)(1) to utility
acquisitions, the Commission must determine whether the
acquisition will create "the type of structures and combinations
at which the Act was specifically directed." Vermont Yankee
Nuclear Corp., 43 SEC 693,700 (1968). The Transaction will not
create an "excess of concentration and bigness" or a "huge,
complex or irrational system" but rather, as discussed in more
detail below, will afford the opportunity to achieve the
economies of scale and efficiencies, particularly in the area of
joint management of gas supply, transportation and storage
assets, that the Act's framers intended to preserve for the
benefit of investors and consumers.
The operations of Energy East's utility subsidiaries are
confined almost exclusively to the State of New York,6 and will
remain predominantly intrastate in character even after Energy
East's acquisition of Connecticut Energy, which is a far smaller
company. Furthermore, the Transaction is not being undertaken
for the purpose of extending Energy East's control over regulated
public utilities and will not lead to the type of concentration
of control over utilities, unrelated to operating efficiencies,
that Section 10(b)(1) was intended to prevent. As explained in
the Proxy Statement/Prospectus, the primary objective in Energy
East's acquisition of Connecticut Energy is to become positioned
to participate in the growing and increasingly competitive
northeastern United States energy market. The parties to the
Transaction believe that the Transaction will help position the
combined company to become one of the premier companies in the
energy distribution business and other energy-related services
business in the northeastern United States by providing increased
financial flexibility and strategic growth opportunities that
will benefit the combined company and its shareholders and
customers. The Transaction will join two companies with
complementary operations as well as a common vision of the future
of the retail and wholesale energy markets in the northeastern
United States, which will enable them to offer customers a
broader array of energy products and services than either company
alone could offer, and at the same time create a larger and more
diverse asset and customer base, which will create opportunities
for operating efficiencies.
Size - If approved, the Energy East system will provide
natural gas service to approximately 402,000 residential,
commercial and industrial customers in New York, Connecticut and
Maine, as well as electric service to approximately 826,000
customers, all in the State of New York. On a pro forma basis,
the combined net utility plant (gas and electric) of Energy East
and Connecticut Energy as of December 31, 1998 totaled
approximately $4.1 billion and combined gross operating revenues
for the fiscal year 1998 totaled approximately $2.7 billion ($500
million of gas revenues and $2.2 billion of electric revenues).
By comparison, the Commission has recently approved several
acquisitions involving significantly larger combination gas and
electric utilities. See, e.g., Sempra Energy, 67 SEC Docket 994
(June 26, 1998) (merger of Pacific Enterprises, a gas utility
holding company, and Enova Corporation, a holding company of an
electric and gas system, resulting in a system having combined
utility assets of more than $6 billion); CONECTIV, Inc., 66 SEC
Docket 1260 (February 25, 1998) (merger of Delmarva Power & Light
Company, a combination electric and gas company, and Atlantic
Energy, Inc., resulting in a system having combined utility
assets of more than $5.5 billion); AMEREN Corporation, 66 SEC
Docket 485 (December 30, 1997) (merger of two combination gas and
electric companies, resulting in a system having combined utility
assets of approximately $6.5 billion); TUC Holding Company, et
al., Holding Co. Act Release No. 26749 (August 1, 1997)
(acquisition by Texas Utilities of Enserch Corporation, resulting
in a system having combined utility assets of $19.6 billion); New
Century Energies, Inc., Holding Co. Act Release No. 26748 (August
1, 1997) (merger of combination electric and gas company with
another electric utility, resulting in a system having combined
utility assets of approximately $7 billion); and CINergy Corp.,
Holding Co. Act Release No. 26146 (October 21, 1994) (merger of
combination gas and electric company with another electric
utility, resulting in a system having combined utility assets of
approximately $7.4 billion).
Efficiencies and Economies - In considering an acquisition
by a holding company, under Section 10(b)(1), the Commission must
consider various factors, including the efficiencies and
economies that can be achieved through the integration and
coordination of utility operations. Among other things, the
Transaction will present Energy East and Connecticut Energy with
the opportunity to achieve operating economies and efficiencies
through joint management and coordination of their respective
portfolios of natural gas supply, transportation and storage
assets. These expected economies and efficiencies from joint
portfolio management are described in greater detail in the
discussion on Section 10(c)(2) below.
Competitive Effects - Under Section 10(b)(1), the Commission
must also consider the anti-competitive effects of an
acquisition. As the Commission noted in Northeast Utilities, 47
SEC Docket 1270 at 1282 (December 21, 1990), the "antitrust
ramifications of an acquisition must be considered in light of
the fact that the public utilities are regulated monopolies and
that federal and state administrative agencies regulate the rates
charged to the customers." In this case, there is no basis for
the Commission to conclude that this Transaction is likely to
have anti-competitive effects.
The Transaction will have no adverse effect on the
competitive environment in which Energy East's electric business
operates. Following the Transaction, Energy East's electric
business will face the same competitive forces as prior to the
Transaction. The Transaction will have no adverse effect on the
competitive environments in which Energy East's and Connecticut
Energy's gas businesses operate. To the contrary, Energy East
and Connecticut Energy believe that customers in the northeastern
United States will benefit from the combined companies' increased
flexibility and capacity in financing their operations and
enhanced ability to take advantage of future strategic
opportunities in the competitive marketplace, particularly in the
areas of coordinated gas supply and expanded energy services in
the northeastern United States, as the energy market becomes
increasingly competitive.
There will continue to be competition in the retail market
for industrial and commercial customers of natural gas in
Connecticut. In the past, local distribution companies did not
directly compete with other local distribution companies for
retail customers because they were not permitted to serve
customers located outside of their franchise territories.
However, as a result of legislative and regulatory initiatives,
which culminated at the federal level with FERC Order 636, local
distribution companies and larger end users can now purchase gas
supply from a wide choice of producers, marketers and brokers.
In April 1996, Southern Connecticut began providing firm
transportation service to commercial and industrial customers
that purchase their gas requirements from third parties.
In addition, under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") and rules thereunder,
the Transaction may not be consummated until Energy East and
Connecticut Energy each have filed Notification and Report Forms
with the Department of Justice and the Federal Trade Commission
describing the effects of the Transaction on competition in the
relevant market and expiration or termination of the required
waiting period. Energy East and Connecticut Energy intend to
file the required Notification and Report Forms.
b. Section 10(b)(2)
Section 10(b)(2) provides that an acquisition should be
approved unless the price paid, including fees and expenses of
the Transaction:
is not reasonable or does not bear a fair
relation to the sums invested in or the
earning capacity of the utility assets to be
acquired or the utility assets underlying the
securities to be acquired.
(i) Reasonableness of Consideration
In its determinations as to whether or not a price meets
such standard, the Commission has considered whether the price
was decided as the result of arms'-length negotiations7 and the
opinions of investment bankers,8 among other things. For the
reasons given below, there is no basis in this case for the
Commission to make any negative findings concerning the
consideration being offered by Energy East in the Transaction.
The Commission has previously recognized that when the
consideration to be paid in an acquisition is the result of
arms'-length negotiations between the managements of the
companies involved, supported by opinions of financial advisors,
there is persuasive evidence that the requirements of Section
10(b)(2) have been satisfied. See, Entergy Corporation, et al.,
Holding Co. Act Release No. 25952 (December 17, 1993); The
Southern Company, et al., 40 SEC Docket 350 at 352 (February 12,
1988). In this case, the Transaction has been structured to give
Connecticut Energy shareholders $42 in value for each Connecticut
Energy share, to be paid either in cash or in Energy East shares,
or a combination thereof, which represents a 33.9% premium over
the closing price of the Connecticut Energy shares on April 22,
1999, the date prior to the date on which the Transaction was
publicly announced. The terms of the Merger Agreement, including
the exchange ratio, were the product of extensive and vigorous
arms'-length negotiations between Energy East and Connecticut
Energy. The announcement of the Merger Agreement was preceded by
extensive due diligence and analysis, and by evaluation of the
assets, liabilities and business prospects of Connecticut Energy.
Finally, the terms of the Merger Agreement are subject to
approval by Connecticut Energy's shareholders.
Moreover, in connection with its evaluation of Energy East s
offer, Connecticut Energy engaged Morgan Stanley & Co.
Incorporated ("Morgan Stanley") to provide financial advisory
services in connection with the Transaction, including the
preparation and delivery of a "fairness" opinion to the
Connecticut Energy Board of Directors. At a meeting of the
Connecticut Energy Board of Directors on April 22, 1999, Morgan
Stanley rendered its oral opinion, subsequently confirmed in
writing by opinions dated April 22, 1999, and July 22, 1999, that
as of the dates of such opinion, based upon and subject to the
various considerations noted in the opinion, the consideration to
be received in the merger was fair from a financial point of view
to Connecticut Energy shareholders (see Appendix B to Proxy
Statement/Prospectus).
In rendering its fairness opinions, Morgan Stanley, among
other things, reviewed certain publicly available financial
statements and other information of Energy East and Connecticut
Energy, including certain internal financial statements,
projections and other financial and operating data concerning
Energy East and Connecticut Energy prepared by their respective
managements. Morgan Stanley also discussed the past and current
operations and financial condition and the prospects of Energy
East and Connecticut Energy with their respective senior
executives, reviewed the pro forma impact of the Transaction on
Energy East s earnings per share, and reviewed the reported
prices and trading activity for Energy East shares and
Connecticut Energy shares. In addition, Morgan Stanley compared
the financial performance of Energy East and Connecticut Energy
and the prices and trading activity of Energy East shares and
Connecticut Energy shares with that of certain other comparable
publicly traded companies and their securities and reviewed the
financial terms, to the extent available, of certain comparable
acquisition transactions. Finally, Morgan Stanley participated
in discussions and negotiations among representatives of Energy
East and Connecticut Energy and their financial and legal
advisors; reviewed the draft Merger Agreement and certain related
documents; and performed such other analyses as Morgan Stanley
had deemed appropriate. The price ranges for Connecticut
Energy s shares implied by these various valuation methods
support the price being offered by Energy East. For a more
complete discussion of Morgan Stanley's fairness opinion and the
valuation methods used by Morgan Stanley, see pages 34 to 39 of
the Proxy Statement/Prospectus.
In light of these opinions and an analysis of all relevant
factors, including the benefits that may be realized as a result
of the Transaction, the proposed exchange ratio falls within the
range of reasonable ratios for transactions involving comparable
companies.
(ii) Relationship of Consideration to be Paid to
Earnings Capacity of Utility Assets Underlying
Securities to be Acquired.
Likewise, there is no basis for the Commission to conclude
that the consideration to be paid by Energy East for the
Connecticut Energy shares does not bear a fair relation to the
earnings capacity of Connecticut Energy utility assets. In this
regard, it must be emphasized again that the proposed Transaction
resulted from arms'-length negotiations and that the Merger
Agreement was executed after extensive negotiations and due
diligence on the part of Energy East. In addition, Energy East
engaged Chase Securities, Inc. ("Chase") to provide financial
advisory services in connection with the Transaction, including
the preparation and delivery of a "fairness" opinion to the
Energy East Board of Directors. At a meeting of the Energy East
Board of Directors on April 23, 1999, Chase rendered its oral
opinion, subsequently confirmed in writing, that based upon and
subject to the various considerations noted in the opinion, the
Transaction was fair from a financial point of view to Energy
East's shareholders. Furthermore, the market, which provides the
best check on Energy East's assessment of Connecticut Energy's
future earnings capacity, has not penalized Energy East. To the
contrary, on April 22, 1999, the last full trading day prior to
the announcement of the Transaction, the Energy East shares
closed at $26.25 per share. On August 26, 1999, the last full
trading day for which it was practicable to obtain market price
data prior to the filing of this application, Energy East shares
closed at $26.0625 per share.
(iii) Reasonableness of Fees
Energy East believes that the overall fees, commissions and
expenses incurred and to be incurred by Energy East in connection
with the Transaction are reasonable and fair in light of the size
and complexity of the Transaction relative to other similar
transactions and that the anticipated benefits of the Transaction
to investors and consumers will be consistent with recent
precedent, and will meet the standards of Section 10(b)(2) of the
Act.
As set forth in Item 2 of this application, Energy East
expects to incur a total of approximately $4.5 million in fees,
commissions and expenses in connection with the Transaction.
This total is an estimate, but Energy East believes that the
actual total will not vary significantly. Connecticut Energy
expects to incur approximately $6.9 million in fees, commissions
and expenses. Energy East believes that the total estimated fees
and expenses in this matter (i.e., $11.4 million) bear a fair
relation to the value of the combined company and the strategic
benefits to be achieved by the Transaction, and that the fees and
expenses are fair and reasonable in light of the complexity of
the Transaction. The total estimated fees and expenses are
significantly less than those in other recent transactions. For
example, TUC and Enserch incurred $37 million in fees,
commissions and expenses in connection with their reorganization
as subsidiaries of TUC Holdings, Inc., Cincinnati Gas & Electric
Company and PSI Resources incurred $47.1 million in fees,
commissions and expenses in connection with their reorganization
as subsidiaries of CINergy, and Entergy alone incurred
approximately $38 million in fees, commissions and expenses in
connection with its acquisition of Gulf States Utilities -- all
of which amounts were approved as reasonable by the Commission.
See TUC Holding Company, et al., Holding Co. Act Release No.
26749 (August 1, 1997); CINergy Corp., Holding Co. Act Release
No. 26146 (October 21, 1994); and Entergy Corporation et al.,
Holding Co. Act Release No. 25952 (December 17, 1993).
Furthermore, based on a price of $42.00 per share for
Connecticut Energy stock, the Transaction would be valued at
approximately $436 million (excluding the outstanding debt of
Connecticut Energy). Energy East's estimated fees and expenses
of $4.5 million represents approximately 1% of the value of the
consideration to be paid by Energy East to Connecticut Energy
shareholders, and is lower than percentages previously approved
by the Commission. See, e.g., Entergy Corporation et al.,
Holding Co. Act Release No. 25952 (December 17, 1993) (fees and
expenses represented approximately 1.7% of the value of the
consideration paid to the shareholders of Gulf States Utilities);
Northeast Utilities, Holding Co. Act Release No. 25548 (June 3,
1992) (fees and expenses represented approximately 2% of the
value of the assets to be acquired). Energy East expects to pay
approximately $860,000 to its financial advisor. Given the size
and complexity of the Transaction, Energy East believes that this
amount is reasonable and is certainly lower than fees paid in
similar transactions. Thus, Energy East believes that the fees
payable to its investment bankers are fair and reasonable.
c. Section 10(b)(3)
Section 10(b)(3) directs approval of an acquisition unless
the Commission finds that:
(3) such acquisition will unduly complicate
the capital structure of the holding company
system of the applicant ... or will be
detrimental to ... the proper functioning of
such holding company system.
Section 10(b)(3) (along with Section 10(c)(1), discussed below)
relates to the corporate simplification standards of Section
11(b)(2), which require that each registered holding company take
the necessary steps:
to ensure that the corporate or continued
existence of any company in the holding-
company system does not unduly or
unnecessarily complicate the structure ... of
such holding-company system.
The intent of these requirements is to assure the financial
soundness of the holding company system, with a proper balance of
debt and equity. No such complexities will result from the
Transaction. The capital structure of Energy East after the
Transaction will not be unduly complicated and will be
substantially unchanged from the Energy East capital structure
prior to consummation of the Transaction. Energy East will issue
additional shares of its common stock, and cash, in exchange for
all of the outstanding voting securities of Connecticut Energy.
Connecticut Energy will become a direct, wholly-owned, subsidiary
of Energy East. The existing long-term debt of Connecticut
Energy and its subsidiaries will not be affected by the
Transaction and will remain the obligations solely of those
companies. In this regard, the Energy East capital structure
will closely resemble that of most registered holding company
systems.
Set forth below are summaries of the historical capital
structures of Energy East and Connecticut Energy as of June 30,
1999, and the pro forma consolidated capital structure of Energy
East, as of June 30, 1999 (assuming that the consideration paid
by Energy East for the Connecticut Energy Shares consisted of 50%
cash and 50% Energy East shares):
Energy East and Connecticut Energy
Historical Capital Structures
(000s omitted)
Energy East Connecticut Energy
Common stock equity $1,536,225 51.9% $191,420
Preferred stock equity 35,131 1.2% -
Long-term debt 1,386,621 46.9% 148,458
$2,957,977 100.0% $339,878
Energy East Pro Forma Consolidated Capital Structure
(000s omitted) (unaudited)
Energy East
Common stock equity $1,754,365 52.8%
Preferred stock equity 35,131 1.0%
Long-term debt 1,535,079 46.2%
$3,324,575 100.0%
Energy East's pro forma consolidated common equity total
capitalization ratio of 52.8% as of June 30, 1999, is
substantially higher than the "traditionally acceptable 30%
level." See, Northeast Utilities, 47 SEC Docket 1270 (December
21, 1990). Furthermore, the impact of the Transaction on Energy
East's financial position (including its capitalization) and its
results of operations is not material.
As set forth more fully in the discussion of the standards
in Section 10(c)(2), below, and elsewhere herein, the Transaction
will create opportunities for Energy East and Connecticut Energy
to achieve savings, such as in the area of joint management of
their respective portfolios of gas supply, transportation and
storage assets. The Transaction will therefore be in the public
interest and in the interest of investors and consumers, and will
not be detrimental to the proper functioning of Energy East's
holding company system. Moreover, as noted by the Commission in
Entergy Corporation, et al., Holding Co. Act Release No. 25952
(December 17, 1993), "concerns with respect to investors'
interests have been largely addressed by developments in the
federal securities laws and the securities markets themselves."
Energy East is currently, and will continue to be, a reporting
company subject to the continuous disclosure requirements of the
Securities Exchange Act of 1934 following completion of the
Transaction, which will provide investors with readily available
information concerning Energy East. Furthermore, the Transaction
is subject to various state and federal regulatory approvals (see
Item 4 - Regulatory Approvals, below). For these reasons, the
Applicant submits that the Commission would have no basis for
making a negative finding under Section 10(b)(3).
2. Section 10(c)
The relevant provisions of Section 10(c) of the Act state
that the Commission shall not approve:
(1) an acquisition of securities or
utility assets, or of any other
interest, which is unlawful under
the provisions of section 8 or is
detrimental to the carrying out of
the provisions of section 11; or
(2) the acquisition of securities
or utility assets of a public
utility or holding company unless
the Commission finds that such
acquisition will serve the public
interest by tending towards the
economical and the efficient
development of an integrated public
utility system.
The Applicants respectfully submit that the requirements of
Section 10(c) are satisfied.
a. Section 10(c)(1)
Section 10(c)(1) requires that the proposed acquisition not
be "unlawful under the provisions of Section 8" or "detrimental
to the carrying out of the provisions of Section 11." Section 8,
by its terms, only applies to registered holding companies and
thus, the Transaction could not be unlawful under Section 8
because, after consummation of the Transaction, Energy East will
continue to be an exempt holding company. However, even if
Section 8 were applied to exempt holding companies, the
Transaction would not be unlawful since there is no state law,
regulation or policy against combination gas and electric
companies and the approval of the DPUC is required in order to
consummate the Transaction.
Section 10(c)(1) also requires that such acquisition not be
detrimental to the carrying out of the provisions of Section 11
of the Act. Section 11 relates to the simplification of holding
company systems. Section 11(b)(1) sets forth the principal
elements of Section 11's simplification standard. It
specifically mandates that the Commission require each registered
holding company to limit the operations of the holding company
system to a single integrated public utility system. Section
11(b)(1) also provides for the acquisition and retention of more
than one integrated system only if the requirements of Section
11(b)(1)(A)-(C) ("ABC clauses") are satisfied. By its terms,
however, Section 11(b)(1) applies only to registered holding
companies and therefore would not preclude the acquisition and
ownership of a combination gas and electric system by an exempt
holding company, such as Energy East, whose ownership of both gas
and electric operations in New York is permitted and is subject
to "affirmative state regulation." See WPL Holdings, Inc.,
Holding Co. Act Release No. 24590 (February 26, 1988), aff'd in
part and rev'd in part sub nom., Wisconsin's Environmental
Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir. 1989), reaffirmed,
49 SEC Docket 1255 (September 18, 1991); Dominion Resources,
Inc., Holding Co. Act Release No. 24618 (April 5, 1988).
The Commission has also previously determined that a
holding company may acquire utility assets that will not, when
combined with the acquiring company's existing utility assets,
make up an integrated system or comply fully with the ABC
clauses, provided that there is de facto integration of
contiguous utility properties and the holding company will be
exempt from registration under Section 3 of the Act following the
acquisition. See, e.g., NIPSCO Industries, Inc., Holding Co. Act
Release No. 26975 (February 10, 1999); PP&L Resources, Inc., et
al., 67 SEC Docket 1685 (August 12, 1998); Sempra Energy, 67 SEC
Docket 994 (June 26, 1998); BL Holding Corp., Holding Co. Act
Release No. 26875 (May 15, 1998); and TUC Holding Company, et
al., Holding Co. Act Release No. 26749 (August 1, 1997).
As stated above, Energy East is currently exempt, and is
requesting an order exempting it following the consumation of the
Transaction, from the registration requirements under the Act
pursuant to Section 3(a)(1) of the Act. In addition, there is
and will continue to be after consummation of the Transaction de
facto integration of Energy East's gas and electric utility
properties. Specifically, the Energy East system currently
consists of a large integrated electric utility system and a
smaller integrated gas utility system which together are operated
on a coordinated basis offering services to customers in
substantially the same area in the State of New York and offering
gas service to customers in the State of Maine. The entire
Energy East system is currently operated as a single coordinated
system in that there is a significant degree of centralized
planning (including accounting, financial planning and analysis,
financial reporting, human resources, regulatory affairs,
information systems, insurance, legal, payroll, purchasing, tax,
training, treasury, transportation, billing support,
telecommunications, meter installation and reading, real estate,
facilities management, call center services, engineering,
construction and environmental services and general
administrative services). The Transaction will have no effect on
the current electric and gas properties of Energy East or on the
way rates and services are currently regulated by the NYPSC or
the Maine Public Utilities Commission, nor will the Transaction
affect the ability of the DPUC to regulate the operations of
Southern Connecticut. Furthermore, as discussed in more detail
below, after consummation of the Transaction, the existing gas
properties of Energy East and the Connecticut Energy gas
properties will constitute an integrated gas utility system.
Finally, in this regard, it must be pointed out that the
Commission has held on several occasions that, because Section 11
by its terms applies only to registered holding companies,
Section 10(c)(1) does not preclude an acquisition by an exempt
holding company of the securities of another public-utility
company, even though the existing properties of the exempt
holding company and those of the company to be acquired together
would not constitute a single integrated system, provided that
the acquisition is not unlawful under Section 8 and would have
the integrating tendencies required by Section 10(c)(2). See
Union Electric Company, 45 SEC 489, 501 (1974), aff'd without
opinion sub nom., City of Cape Girardeau v. SEC, 521 F.2d 324
(D.C. Cir. 1975); WPL Holdings, Inc., Holding Co. Act Release No.
24590 (February 26, 1988), aff'd in part and rev'd in part sub
nom., Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d 523
(D.C. Cir. 1989), reaffirmed 49 SEC Docket 1255 (September 18,
1991); In the Matter of Gaz Metropolitain, Inc., et al., Holding
Co. Act Release No. 26170 (November 23, 1994); TUC Holding
Company, et al., Holding Co. Act Release No. 26749 (August 1,
1997); and BL Holding Corp., Holding Co. Act Release No. 26875
(May 15, 1998). Accordingly, as long as the acquisition of
Connecticut Energy by Energy East would have the integrating
tendencies required by Section 10(c)(2), discussed below, it is
of no consequence that Energy East's existing electric system
would not form a part of the same integrated system as Energy
East's and Connecticut Energy's combined gas properties.
b. Section 10(c)(2)
Section 10(c)(2) requires that an acquisition not be
approved unless the Commission finds that:
[S]uch acquisition will serve the public
interest by tending towards the economical
and efficient development of an integrated
public-utility system.
Section 2(a)(29)(B) defines an "integrated public utility system"
as applied to gas utility companies as:
[A] system consisting of one or more gas
utility companies which are so located and
related that substantial economies may be
effectuated by being operated as a single
coordinated system confined in its operation
to a single area or region, in one or more
States, not so large as to impair
(considering the state of the art and the
area or region affected) the advantages of
localized management, efficient operation,
and the effectiveness of regulation:
Provided, that gas utility companies deriving
natural gas from a common source of supply
may be deemed to be included in a single area
or region.
Unlike the definition of an "integrated electric utility
system" in Section 2(a)(29)(A) of the Act, physical
interconnection of the component parts of a gas utility system is
not required. Furthermore, the Commission has not traditionally
required that the pipeline facilities of an integrated system be
interconnected.9
The acquisition by Energy East of Connecticut Energy will
satisfy the integration standard set forth in Section 2(a)(29)(B)
of the Act for the following reasons:
Connecticut Energy's gas system and Energy East's gas system
will share a "common source of supply" and will be operated
as a "single coordinated system;"
Connecticut Energy and Energy East will be able to achieve
"substantial economies" in gas supply through the increased
purchasing power and gas supply coordination that will
result from being part of the larger combined gas system;
and
The area or region served by NYSEG and by Southern
Connecticut will not be "so large as to impair . . . the
advantages of localized management, efficient operation, and
the effectiveness of regulation." To the contrary, the
management of Southern Connecticut will largely remain
intact after the consummation of the Transaction and the
Southern Connecticut gas system will be independent of, but
coordinated with (in order to promote efficient operation)
that of Energy East's current gas system, and will be
subject to effective local regulation by the DPUC.
Under these circumstances, and because the acquisition of
Connecticut Energy will have the integrating features required by
Sections 10(c)(2) and 2(a)(29)(B), the Commission should approve
the Transaction.
(i) Single Area or Region
The NYSEG and Southern Connecticut retail gas service areas
will be located in adjoining states. In addition, Section
2(a)(29)(B) specifically contemplates that "gas utility companies
deriving natural gas from a common source of supply may be deemed
to be included in a single area or region." Moreover, in
considering whether an "area or region" is so large as to impair
"the advantages of localized management, efficient operation, and
the effectiveness of regulation," the Commission must consider
the "state of the art" in the industry. Both the Commission's
precedent and the "state of the art" in the natural gas industry
lead to the conclusion that, with the Connecticut Energy gas
system included, Energy East's gas utility system will operate as
a coordinated system confined in its operation to a single area
or region because Southern Connecticut and NYSEG will derive
almost all of their natural gas from a common source of supply.
Neither the Act, the Commission's orders and rulings nor the
Commission staff's no-action letters provide a definition as to
what constitutes a "common source of supply." Historically, in
determining whether two gas companies share a "common source of
supply," the Commission has looked to such issues as from whom
the distribution companies within the system receive a
significant portion of their gas supply.10 The Commission has
also considered both purchases of gas from a common pipeline11 as
well as from different pipelines when the gas originates from the
same gas field.12 Since the time of most of these decisions, the
state of the art in the industry has developed to allow efficient
operation of systems whose gas supplies derive from many sources.
Following consummation of the Transaction, both NYSEG and
Southern Connecticut will derive almost all of their gas from a
common source of supply under Section 2(a)(29)(B). As previously
mentioned, NYSEG receives approximately 63% of its gas supply
from the Texas and Louisiana Basins and approximately 28.5% of
its gas supply from the Western Canadian Sedimentation Basin,
which together account for over 91% of NYSEG's gas supply. In
addition, over 36% of NYSEG's total transportation capacity
requirements are carried on the Tennessee, Iroquois, Algonquin
and Texas Eastern pipelines. Southern Connecticut receives
approximately 64% of its gas supply from the Texas and Louisiana
Basins and approximately 35% of its gas supply from the Western
Canadian Sedimentation Basin, which together account for 99% of
Southern Connecticut's gas supply. In addition, nearly all of
Southern Connecticut's total transportation capacity requirements
from each of the basins mentioned above are carried on the
Tennessee, Iroquois, Algonquin and Texas Eastern pipelines. As
noted above, purchases from a common gas field, as well as
purchases transported over a common pipeline, have been found to
satisfy the "common source of supply" requirement of Section
2(a)(29)(B) of the Act. Accordingly, there is substantial
evidence that NYSEG and Southern Connecticut will share a common
source of supply for almost all of their respective gas supplies.
The "state of the art" in the gas industry must also be
considered in determining the appropriate size of the area or
region under Sections 10(c)(2) and 2(a)(29)(B) of the Act. The
"state of the art" in the gas industry continues to evolve and
change primarily as a result of decontrol of wellhead prices, the
continuing development of an integrated national gas
transportation network and construction of new pipeline capacity,
the emergence of marketers and brokers and the "un-bundling" of
the commodity and transportation functions of pipelines and local
distribution companies in response to various FERC and state
initiatives.13 Of particular importance has been the development
and operation of market centers, trading hubs, and pooling areas.
Today, trading activity conducted at market centers and trading
hubs play a critical role in the overall management of the assets
in a gas portfolio (supply, transportation and storage). Market
centers, trading hubs and pooling areas essentially serve to
facilitate transactions through information exchanges, physical
exchanges of gas, the provision of transportation related
services (e.g., storage, parking), and the aggregation of
supplies of all merchants. Thus, a producer in a given basin
may, through such market mechanisms, sell gas to a buyer several
pipeline systems away without the payment of additional
transportation costs, thus making gas produced in one basin more
competitive with gas produced in a geographically closer locale.
This represents a significant change from the last 50 years,
when local distribution companies typically bought all of their
gas at the city-gate from the interconnecting pipeline. Such
creative arrangements, however, are dependent upon the existence
of significant physical interconnections and market centers
between the production area and ultimate delivery point. While
these conditions may not currently exist throughout all of the
contiguous 48 states, the nation's interstate pipeline system
continues to expand at a significant rate, in terms of both long-
haul capacity and interregional interconnections. Several new
expansion projects have been announced to alleviate capacity
constraints in those few areas of the country where they still
exist. Moreover, market centers and storage capacity are
becoming increasingly integrated into the pipeline network. In
summing up the current state of the nation's pipeline delivery
system, taking into account completion by the end of the year
2000 of projects that will expand transportation capacity from
the Rocky Mountains, New Mexico, and West Texas producing areas
to the Midwest and Northeast markets, the Department of Energy
has observed that "the interstate natural gas pipeline network
will come closer to being a national grid where production from
almost any part of the country can find a route to customers in
almost any area." See, Energy Information Agency,
"Deliverability on the Interstate Natural Gas Pipeline System,"
DOE/EIA-0618(98) (Washington, D.C., May 1998). (Emphasis added).
As indicated above, NYSEG and Southern Connecticut operate
in adjoining states and derive almost all of their respective gas
supply from common gas producing basins (i.e., the Texas and
Louisiana Basins and the Western Canadian Sedimentation Basin)
and are supplied by some of the same interstate pipelines (i.e.,
the Tennessee, Iroquois, Algonquin and Texas Eastern pipelines).
In addition, as the state of the art in the gas industry
continues to advance, NYSEG and Southern Connecticut will have
the enhanced ability to physically coordinate and manage their
portfolios of supply, transportation and storage and to support,
if necessary, the underlying physical side of various financial
derivatives as a means of managing price volatility.
Given that there is substantial evidence that the
acquisition will have integrating features (e.g., common source
of supply, local management, realization of substantial economies
and efficiencies through coordinated operation and effective
local regulation) and that exempt holding companies like Energy
East are not subject to the strict integration standards of
Section 11(b)(1), the Commission should have little reason to
interpret the integration standards of Section 10(c)(2) and
Section 2(a)(29)(B), as applied to the Transaction, in a narrow
or restrictive manner. In other recent cases involving
acquisitions by exempt holding companies, such as In the Matter
of Gaz Metropolitain, Inc., et al., Holding Co. Act Release No.
26170 (November 23, 1994), TUC Holding Company, et al., Holding
Co. Act Release No. 26749 (August 1, 1997), and NIPSCO
Industries, Inc., Holding Co. Act Release No. 26975 (February 10,
1999), the Commission has exhibited a willingness to interpret
the integration standards of Section 10(c)(2) flexibly, focusing
instead on the demonstrated benefits of the transaction from the
perspectives of both investors and consumers. It should do the
same here.
(ii) Coordinated Operations of Combined Gas Properties
After consummation of the Transaction, there will be a
formal relationship between the two gas supply departments which
will enable them to integrate the overall planning and management
of the two companies' respective portfolios of physical and
contractual gas assets. This could be accomplished by merging
gas supply departments on a functional basis and linking gas
departments through a centralized gas control system. In
addition, the parties to the Transaction expect that the
functional merging of the two gas supply departments would result
in the integration and coordination of certain functions
currently performed by each group, including the development and
implementation of marketing policies and programs, rate design
and implementation, engineering services and the development and
implementation of safety policies and programs.
(iii) Economies and Efficiencies
Under Section 10(c)(2) of the Act, the Commission must find
that a proposed acquisition will produce economies and
efficiencies. Energy East and Connecticut Energy believe that
the Transaction will likely yield substantial economies and
efficiencies over the long term, particularly in the areas of
coordination of gas procurement, optimization of pipeline
capacity usage, more efficient use of existing gas storage
facilities, sharing of technological, operational and management
experience, capital savings, and savings in management and
administrative expenses. A Commission finding of "efficiencies
and economies" may be based "on the potential for economies
presented by the acquisition even where these are not precisely
quantifiable." See American Electric Power Co., 46 SEC 1299,
1322 (1978); accord, Centerior Energy Corp., Holding Co. Act
Release No. 24073 (April 29, 1986) ("specific dollar forecasts of
future savings are not necessarily required; a demonstrated
potential for economies will suffice even when these are not
precisely quantifiable"). In addition, Section 10(c)(2) of the
Act does not require that the future savings be large in relation
to the gross revenues of the companies involved. See In the
Matter of American Natural Gas Company, Holding Co. Act Release
No. 15620 (December 12, 1966).
In this case, Energy East and Connecticut Energy believe
that the Transaction will provide significant financial and
organizational advantages and as a result, the potential for
substantial economies and efficiencies should be found to meet
the standard of Section 10(c)(2) of the Act. Any attempt to
quantify potential savings in a marketplace with no regulatory
certainty and which is subject to dramatic changes in physical
supply, capacity and market participants' practices, is unlikely
to produce accurate or even meaningful estimates with respect to
dollar impacts of the Transaction. However, although the parties
to the Transaction have not quantified the value of the resulting
economies and efficiencies, they have identified specific aspects
of their respective gas portfolios (supply, transportation and
storage) which, through joint management and coordination, will
enable the two companies to exploit opportunities in the
marketplace to achieve savings. As discussed above, both
companies purchase almost all of their gas supply from the same
supply basins in the Texas and Louisiana Basins and the Western
Canadian Sedimentation Basin and hold capacity on the Tennessee,
Iroquois, Algonquin and Texas Eastern pipelines. These common
portfolio resources will present significant opportunities to
benefit customers. Moreover, as the dynamics and structure of
the natural gas industry continue to change, the marketplace will
create even more opportunities for the parties to the Transaction
to create value through coordination of their respective
portfolios of physical and contractual assets. Finally, the
parties to the Transaction are in the process of identifying
additional long-term opportunities for the merged company to
achieve administrative savings.
(iv) No Impairment
The Energy East system will also meet the requirement that
it be "not so large as to impair (considering the state of the
art and the area or region affected) the advantages of localized
management, efficient operation and the effectiveness of
regulation." In In The Matter of American Natural Gas Company,
Holding Co. Act Release No. 15620 (December 12, 1966), the
Commission found that the American Natural Gas system would meet
the above requirement after its acquisition of an Indiana gas
utility:
Although American Natural will provide
certain central facilities, equipment and
personnel ... Central Indiana will retain its
own local management and board of directors,
a majority of whom will be residents of
Indiana. Central Indiana will continue to
be subject to regulation by the Public
Service Commission of Indiana.
In this case, the separate corporate identity and local
corporate headquarters of Connecticut Energy will be maintained
and the Merger Agreement assures continuity in the management of
Connecticut Energy and Southern Connecticut after the Transaction
is consummated. Furthermore, after the Transaction is
consummated, Southern Connecticut will remain subject to
regulation as to rates, service, and other matters by the DPUC,
which must also approve the Transaction. Finally, by maintaining
the separate corporate existence of Connecticut Energy and
Southern Connecticut, there will be no change in the manner in
which Energy East's regulated subsidiaries are currently
regulated.
3. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any
acquisition ... under this section unless it
appears to the satisfaction of the Commission
that such State laws as may apply in respect
of such acquisition have been complied with,
except where the Commission finds that
compliance with such State laws would be
detrimental to the carrying out of the
provisions of section 11.
As explained below in Item 4 - Regulatory Approvals, the
Transaction is subject to the approval of the DPUC. A copy of
the DPUC Petition is filed as Exhibit D-1 hereto, and a copy of
the DPUC Order pursuant thereto will be filed as Exhibit D-2 by
amendment hereto.
B. The Exemption under Section 3(a)(1)
As demonstrated below, Energy East and Merger Co.
respectfully submit that they should both be granted, by
Commission order, exemptions under Section 3(a)(1) of the Act.
Section 3(a)(1) of the Act exempts a "holding company" from all
of the provisions of the Act (except for Section 9(a)(2) thereof)
if:
such holding company, and every subsidiary
company thereof which is a public-utility
company from which such holding company
derives, directly or indirectly, any material
part of its income, are predominately
intrastate in character and carry on their
business substantially in a single State in
which such holding company and every such
subsidiary company thereof are organized.
Energy East and Merger Co. will satisfy such requirements after
consummation of the Transaction. Furthermore, since this
application has no impact on the status of Enterprises as a
public utility holding company, the Commission should confirm
Enterprises' status as an exempt public utility holding company.
Southern Connecticut is not incorporated in the State of New
York and does not conduct public utility operations in the State
of New York, the state of Energy East's incorporation. However,
following the acquisition by Energy East of Connecticut Energy
and, indirectly of Southern Connecticut, (i) Energy East will not
derive any material part of its income from Southern Connecticut,
and (ii) Energy East and each of its public utility subsidiary
companies from which it derives any material part of its income
(i.e., NYSEG) will remain predominantly intrastate in character
and carry on their business substantially in a single state,
namely, New York. In addition, Merger Co., after consummation of
the Transaction, and its public utility subsidiary (i.e.,
Southern Connecticut) will not derive any part of their income
from a utility company that carries on its business and/or is
organized outside of the State of Connecticut.
In considering the materiality of out-of-state subsidiaries
under Section 3(a)(1) of the Act, the Commission has consistently
focused on the relative size of the out-of-state subsidiary,
expressed as a percentage of the applicant holding company's
total operations. Historically, the Commission has taken into
account various financial comparisons without necessarily
indicating which financial measure, if any, was entitled to
greatest deference.14
Recently, in NIPSCO Industries, Inc., Holding Co. Act
Release No. 26975 (February 10, 1999), the Commission adopted a
size comparison based on operating margin (gross revenue less
cost of gas and cost of fuel for electric generation) (i.e., net
operating revenues). In doing so, the Commission agreed with the
applicant's assertion that a comparison based on gross operating
revenues overstated the comparative size of the out-of-state
utility. The Commission, at page 13 of its order, noted:
[I]t is relevant to consider that the
components of gross revenues are different
for electric and gas utilities. Retail rates
often contain automatic adjustment clauses
that provide for the relatively current pass-
through to customers of the actual cost of
gas, in the case of gas utilities, and of
fuel for generation and purchased power, in
the case of electric utilities. These pass-
through costs represent a larger part of
revenues in the gas utility business than in
the electric utility business. In addition,
changes in the cost of gas have a
significantly greater effect on gas utility
gross revenues than on electric utility gross
revenues. The cost of delivered gas may thus
distort the comparison. Bay State's
delivered cost of gas has historically been
significantly higher than NIPSCO's.
[Footnote Omitted] As noted above, the cost
of gas is essentially a pass-through to
customers; it has an obvious impact on gross
revenues, but little effect, if any, on net
operating revenues. The application asserts
that a size comparison based on net operating
revenues (gross revenues less cost of gas and
cost of fuel for electric generation)
eliminates these distortions. We agree that
this suggestion is consistent with our
approach under section 3(a)(1) of focussing
on the size of the subsidiary relative to the
holding company. The recent trend toward
combined gas and electric systems makes this
approach particularly appropriate.
Similar to the NIPSCO-Bay State transaction, the Energy East
utility system is currently predominantly electric, while the
Connecticut Energy system is exclusively gas. As the Commission
noted in the NIPSCO-Bay State transaction, components of gross
revenues are different for electric and gas utilities. The same
circumstances are present in the instant Transaction as were
present in the NIPSCO-Bay State transaction which warranted use
of operating margin as the relevant financial measure in
determining the size of Bay State relative to NIPSCO. In the
present case, gross operating revenues, net operating revenues
(operating margin), utility operating income, net utility income
and net utility plant of Connecticut Energy, and the percentage
of each for each of the past three years, to the total combined
gross operating revenues, net operating revenues, utility
operating income, net utility income and net utility plant of
Energy East and subsidiaries, on a pro forma basis, are as
follows:
Connecticut Energy Actual
Fiscal Year Ended
1998 1997 1996
(thousands of dollars, except percentages)
Gross operating revenues $242,431 8.84% $252,008 10.40% $261,093 11.02%
Net operating revenues $121,859 8.29% $119,336 8.05% $119,465 8.16%
(operating margin)
Utility operating income $ 32,352 6.36% $ 29,721 6.37% $ 28,808 6.00%
Net utility income $ 18,407 8.14% $ 16,185 8.32% $ 15,285 8.16%
Net utility plant, as of $275,222 6.65% $269,122 6.42% $257,761 6.08%
September 30
Energy East Pro Forma
Giving effect to the Connecticut Energy Merger
Fiscal Year Ended
1998 1997 1996
(thousands of dollars, except percentages)
Gross operating revenues $2,741,849 $2,422,110 $2,369,958
Net operating revenues $1,470,385 $1,481,714 $1,464,609
(operating margin)
Utility operating income $ 508,952 $ 466,269 $ 480,231
Net utility income $ 226,085 $ 194,618 $ 187,406
Net utility plant, $4,137,906 $4,191,394 $4,240,125
as of December 31
Connecticut Energy's net operating revenues, or operating
margin, would represent between approximately 8.05% and 8.29% of
the combined operating margins (gas and electric), on a pro forma
basis, of Energy East and Connecticut Energy over the three year
period 1996-1998. These percentages are significantly lower than
the corresponding percentages of operating margins represented by
out-of-state utilities in the NIPSCO-Bay State transaction.15
Thus, Connecticut Energy's operating margins are well within the
range of operating margins which the Commission has permitted in
connection with the exemption under Section 3(a)(1) of the Act.
Although the Commission has not utilized a bright-line test
of materiality under Section 3(a)(1) of the Act, the recent
NIPSCO-Bay State decision and the Report of the Division of
Investment Management lend further support for Energy East's
assertion that Energy East, after consummation of the
Transaction, "will not derive, directly or indirectly, any
material part of its income" from any public utility subsidiary
outside of the State of New York. In its Report, the Division of
Investment Management recommended that the Commission apply a
more liberal standard for exemptions under Section 3(a). Rather
than redefining phrases such as "predominantly intrastate" and
"material part of income" in terms of any bright-line numerical
limits, however, the Division urged the Commission to adopt a
more flexible standard for exemption under Section 3(a) that
would take into account the ability of the affected states to
"adequately protect utility consumers against any detriment that
might be associated with certain activities of exempt holding
companies." Report of the Division of Investment Management, pp.
119 - 120.
Section 3(a) of the Act provides that, if an applicant
satisfies the objective requirements for an exemption, the
applicant shall be granted the exemption, "unless and except
insofar as [the Commission] finds the exemption detrimental to
the public interest or the interest of investors or consumers."
In assessing whether a proposed exemption is "detrimental," the
Commission has focused upon the presence of state regulation,
establishing that federal intervention is unnecessary when state
control is adequate. See, e.g., KU Energy Corp., Holding Co. Act
Release No. 25409 (November 13, 1991); CIPSCO Inc., Holding Co.
Act Release No. 25152 (September 18, 1990).16 The Transaction
will have no effect on the current electric and gas properties of
Energy East or on the way rates and services are currently
regulated by the NYPSC or the Maine Public Utilities Commission
nor will the Transaction affect the ability of the DPUC to
regulate the operations of Southern Connecticut.
The Commission should find that sufficient safeguards exist
under state law to ensure that no potential adverse consequences
would result from the Transaction. The DPUC must approve the
Transaction and the DPUC will continue to regulate Southern
Connecticut.
Item 4. Regulatory Approvals.
The Transaction, insofar as it relates to Southern
Connecticut, is subject to the jurisdiction of the DPUC. The
DPUC has jurisdiction over Southern Connecticut, Connecticut
Energy's principal operating subsidiary, as a Connecticut public
service company. Energy East and Connecticut Energy have filed
an application with the DPUC, filed as Exhibit D-1 hereto. The
application requests approval for Energy East to control directly
Connecticut Energy and to control indirectly Southern Connecticut
pursuant to Connecticut law. The DPUC will consider the
suitability and financial responsibility of Energy East as well
as the ability of Southern Connecticut to continue to provide
safe, adequate and reliable service to the public. A copy of the
DPUC order will be filed as Exhibit D-2 by amendment hereto.
Under the HSR Act and rules thereunder, the Transaction may
not be consummated until Energy East and Connecticut Energy each
have filed Notification and Report Forms with the Department of
Justice and the Federal Trade Commission describing the effects
of the Transaction on competition in the relevant market and
expiration or termination of the required waiting period. Energy
East and Connecticut Energy intend to file the required
Notification and Report Forms. In addition, under the
Communications Act of 1934, Southern Connecticut has filed an
application with the Federal Communications Commission ("FCC")
for approval of the indirect transfer of certain radio licenses
in connection with its dispatch center and certain communications
equipment and devices. A copy of the application is filed as
Exhibit D-3 hereto. A copy of the FCC order will be filed as
Exhibit D-4 by amendment hereto.
No other state or federal commission has jurisdiction over
the Transaction.
Item 5. Procedure.
The Applicant hereby requests that the Commission publish a
notice under Rule 23 with respect to the filing of this
Application as soon as practicable and that the Commission's
order be issued as soon as possible. A form of notice suitable
for publication in the Federal Register is attached hereto as
Exhibit H-1.
The Applicant does not believe that there should be a
recommended decision by a hearing officer or any other
responsible officer of the Commission or that there should be a
30-day waiting period between the issuance of the Commission's
order and the date on which it is to become effective. The
Applicant requests that the Commission's order become effective
immediately upon the entry thereof. The Applicant consents to
the Division of Investment Management assisting in the
preparation of the Commission's decision or order in this matter,
unless such Division opposes this application.
<PAGE>
Item 6. Exhibits and Financial Statements.
NO. DESCRIPTION METHOD OF FILING
(a) Exhibits
A-1 Restated Certificate of Incorporation of Incorporated by reference
Energy East filed in the Office of the to Exhibit 4-1 to Energy
Secretary of State of the State of New York East's Post-effective
on April 23, 1998 Amendment No. 1 to Regis-
tration No. 033-54155.
A-2 Certificate of Amendment of the Certificate Incorporated by reference
of Incorporation of Energy East filed in the to Exhibit 3-3 to Energy
Office of the Secretary of State of the State East's Form 10-Q for the
of New York on April 26, 1999. quarter ended March 31,
1999, File No. 1-14766.
A-3 Amended and Restated Certificate of Incor- Incorporated by reference
poration of Connecticut Energy. to Exhibit 3 to Connec-
ticut Energy's Form 10-Q
for the quarter ended
June 30, 1999, File No.
1-08369.
A-4 By-Laws of Energy East as amended Incorporated by reference
April 23, 1999. to Exhibit 3-4 to
Energy East's Form 10-Q
for the quarter ended
March 31, 1999, File
No. 1-14766.
A-5 Amended and Restated By-Laws Incorporated by reference
of Connecticut Energy. to Item 6 of Connecticut
Energy's Form 10-Q for
the quarter ended March
31, 1995, File No.
1-08369.
B-1 Agreement and Plan of Merger, dated as of Incorporated by reference
April 23, 1999, amended as of July 15, to Appendix A to Energy
1999, by and among Connecticut Energy, East's Registration No.
Energy East and Merger Co. 333-83437.
C-1 Registration Statement of Energy East on Incorporated by reference
Form S-4, filed with the Commission to Energy East's Regis-
on July 22, 1999. tration No. 333-83437.
D-1 Joint Application of Energy East and Filed herewith.
Connecticut Energy for Approval of a
Change of Control to Connecticut Department
of Public Utility Control, dated July 22, 1999.
D-2 Order of Connecticut Department of Public To be filed by amendment.
Utility Control Approving a Change of Control.
D-3 Application of Southern Connecticut to the Filed herewith.
Federal Communications Commission for
approval of the indirect transfer for
certain radio licenses.
D-4 Approval of the Federal Communications To be filed by amendment.
Commission of the indirect transfer of
certain radio licenses.
E-1 Map of natural gas service areas of To be filed by amendment.
NYSEG and Connecticut Energy, major
interstate pipelines and market hubs.
F-1 Preliminary opinion of Huber To be filed by amendment.
Lawrence & Abell, counsel to Energy East.
F-2 Past-tense opinion of Huber Lawrence & To be filed by amendment.
Abell, counsel to Energy East.
F-3 Preliminary opinion of Brody, Wilkinson To be filed by amendment.
and Ober, P.C., Connecticut counsel
to Energy East.
F-4 Past-tense opinion of Brody, Wilkinson To be filed by amendment.
and Ober, P.C., Connecticut counsel
to Energy East.
G-1 Financial Data Schedules. Filed herewith and
titled "Exhibit-27"
H-1 Form of Notice suitable for Filed herewith.
pubication in the Federal Register.
(b) Financial Statements
1 Per books and pro forma balance sheet of Filed herewith.
Energy East as of June 30, 1999, and per
books and pro forma statement of income and
statement of retained earnings of Energy East
for the twelve months ended June 30, 1999.
3.1 Balance sheet of Connecticut Energy as of Included in balance
June 30, 1999, and statements of income and sheet and statement of
surplus of Connecticut Energy for the twelve income and statement of
months ended June 30, 1999. retained earnings of
Energy East, filed
herewith as Financial
Statement No. 1.
3.2 Statements of income and surplus of Incorporated by reference
Connecticut Energy for the fiscal years to Connecticut Energy's
ending September 30, 1998, 1997 and 1996. Form 10-K for the year
ended September 30, 1998,
File No. 1-08369.
Item 7. Information as to Environmental Effects.
The Applicant does not believe that the Transaction would
involve a "Major federal action" nor would it "significantly
affect the quality of the human environment" as those terms are
used in Section 102(2)(c) of the National Environmental Policy
Act. The only federal actions related to the Transaction pertain
to the Commission's approval of this application and granting of
the exemptions requested herein and the approval of the FCC. The
Transaction would not result in changes in the operations of
Energy East that would have any impact on the environment. No
Federal agency has prepared or is preparing an environmental
impact statement with respect to the Transaction.
<PAGE>
1 Specifically, Southern Connecticut's net operating revenue
(operating margin) would represent, on a pro forma basis, between
8.05% and 8.29% of the combined net operating revenues of Energy
East and Connecticut Energy over the three year period 1996-1998.
Although the term "material part of its income" is not defined in
the Act, recently, in NIPSCO Industries, Inc., Holding Co. Act
Release No. 26975 (1999), on facts similar to the instant case, a
company with out-of-state utility subsidiaries accounting for a
substantially higher percentage of net utility revenues was
granted an exemption under Section 3(a)(1) of the Act.
2 In March and May 1999, NGE Generation sold its electric
generating stations and ceased to engage in the business of
generating electricity. NGE Generation has been dissolved.
3 Such subsidiaries were set forth in more detail in Energy
East's application on Form U-1 in File No. 70-9369.
4 Energy East intends to file with the Commission an application
for approval under the Act of the acquisition of CTG Resources,
Inc. and CMP Group, Inc. Energy East will register as a holding
company under the Act in connection with these transactions.
5 See Section 1(b)(4) of the Act (finding that the public
interest and interests of consumers and investors are adversely
affected "when the growth and extension of holding companies
bears no relation to economy of management and operation or the
integration and coordination of related operating
properties...").
6 Maine GasCo is de minimis in size relative to Energy East and
Energy East derives only a de minimis part of its revenues (less
than 1/100 of 1%) from Maine GasCo's operations.
7 In the Matter of American Natural Gas Company, Holding Co. Act
Release No. 15620 (Dec. 12, 1966).
8 Consolidated Natural Gas Company, Holding Co. Act Release No.
25040 (Feb. 14, 1990).
9 See In the Matter of Pennzoil Company, Holding Co. Act Release
No. 15963 (1968) (finding an integrated system where respective
facilities both connected with an unaffiliated transmission
company but not each other). See also, In the Matter of American
Natural Gas Company, Holding Co. Act Release No. 15620 (1966)
("it is clear the integrated or coordinated operations of a gas
system under the Act may exist in the absence of [physical]
interconnection").
10 See e.g., In the Matter of Philadelphia Company and Standard
Power and Light Company, Holding Co. Act Release No. 8242 (1948)
("most of the gas used by these companies in their operations is
obtained from common sources of supply"); Consolidated Natural
Gas Company, Holding Co. Act Release No. 25040 (1990) (finding
integrated system where each company derived natural gas from two
transmission companies, although one such company also received
gas from other sources).
11 In the Matter of the North American Company, Holding Co. Act
Release No. 10320 (1950) (finding Panhandle Eastern pipeline to
be a common source of supply).
12 See In the Matter of Central Power Company and Northwestern
Public Service Company, Holding Co. Act Release No. 2471 (1941),
in which the Commission declared an integrated system to exist
where two entities purchase from different pipeline companies
since "both pipelines run out of the Otis field, side by side,
and are interconnected at various points in their transmission
system; and that they are within two miles of each other at
Kearney."
13 The Commission has taken notice of the regulatory and
technological changes that have reshaped the natural gas industry
over the past two decades. See "The Regulation of Public-Utility
Holding Companies," Report of the Division of Investment
Management (June 1995), pp. 29 - 31. In its Report, the Division
of Investment Management recommended that the Commission
"interpret the single area or region requirement [of Section
2(a)(29)] flexibly, recognizing technological advances,
consistent with the purposes and provisions of the Act." Id. at
73. The Division also stated that the focus of inquiry under
Section 10(c)(2) should be on whether a transaction would promote
the economic and efficient development of a utility system and on
whether the resulting system would be subject to effective
regulation.
14 See Atlanta Gas Light Company, et al., 61 SEC Docket 1057
(March 5, 1996) (percentage of consolidated operating revenues
and total assets represented by out-of-state subsidiary);
Providence Energy Corporation, 60 SEC Docket 2109 (November 30,
1995) (percentage of consolidated gas revenues and income
represented by out-of-state subsidiary); UNICOM Corporation, 57
SEC Docket 660 (July 22, 1994) (percentage of consolidated
operating revenues, consolidated net income, consolidated net
utility plant and consolidated total assets represented by out-
of-state subsidiary); and WPL Holdings, Inc., Holding Co. Act
Release No. 24590 (February 26, 1988) (percentage of operating
revenues represented by out-of-state subsidiary).
15 In the NIPSCO-Bay State transaction, Bay State's operating
margin represented, on a pro forma basis, between 10.8% and 11.2%
of the combined operating margins (gas and electric) of NIPSCO
and Bay State over the three year period 1995-1997.
16 Furthermore, the Commission Staff has stated its support for
greater flexibility in the administration of existing exemptions
in consultation and cooperation with state regulators. See,
Division of Investment Management, The Regulation of Public
Utility Holding Companies, supra, at 119-20.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused
this statement to be signed on their behalf by the undersigned
thereunto duly authorized.
Energy East Corporation
Date: August 30, 1999 By:/s/ Kenneth M. Jasinski
Kenneth M. Jasinski
Executive Vice President and
General Counsel
Merger Co.
Date: August 30, 1999 By:/s/ Kenneth M. Jasinski
Kenneth M. Jasinski
Vice President, Secretary and
Treasurer
EXHIBIT D-1
- - i -
STATE OF CONNECTICUT
DEPARTMENT OF PUBLIC UTILITY CONTROL
JOINT APPLICATION OF ENERGY EAST : DOCKET NO. 99-07-
CORPORATION AND CONNECTICUT ENERGY :
CORPORATION FOR APPROVAL OF A :
CHANGE OF CONTROL :
: JULY 22, 1999
JOINT APPLICATION
FOR
APPROVAL OF A CHANGE OF CONTROL
For Energy East Corporation For Connecticut Energy
Corporation
Kenneth M. Jasinski,
Executive Vice President and David Silverstone
General Counsel 855 Main Street
One Canterbury Green Bridgeport, Connecticut
P.O. Box 1196 06604
Stamford, Connecticut 06904- Telephone: (203) 382-8301
1196 Facsimile: (203) 382-8357
Telephone: (203) 325-0690
Facsimile: (203) 325-1901
James E. Rice
Brody, Wilkinson and Ober,
P.C.
2507 Post Road
Southport, CT 06490-1259
Telephone: (203) 319-7112
Facsimile: (203) 254-1772
TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY 1
I. INTRODUCTION 6
II. DESCRIPTION OF APPLICANTS 9
A. Energy East Corporation 9
B. Connecticut Energy Corporation
12
C. Communications/Correspondence 14
III. REASONS FOR THE MERGER AND DESCRIPTION OF THE 15
TRANSACTION
A. Reasons for the Merger 15
1. Enhanced Competitive Position 15
2. New Regulatory Framework 17
B. A Description of the Transaction 18
IV.ALL OF THE STATUTORY CONDITIONS UNDER CONN. GEN. 20
STAT. 16-47 ARE SATISFIED FOR THE DEPARTMENT TO
APPROVE THE CHANGE IN CONTROL
A. Energy East is Financially Suitable to Acquire 20
Control of Connecticut Energy Corporation
B. Technological and Managerial Suitability of Energy 21
East
C. The Southern Connecticut Gas Company Will Continue 25
to Provide Safe, Adequate and Reliable Service to
the Public
TABLE OF CONTENTS
Page
D. Management and Operations 26
1.Location and Access of Management and Operations 26
V. THE MERGER WILL BENEFIT CONNECTICUT, EMPLOYEES AND 27
CONSUMERS
VI.CONCLUSION 31
APPENDIX I - Compliance with Conn. Gen. Stat. 16-47
Requirements 34
APPENDIX II - List of Exhibits
43
EXECUTIVE SUMMARY
Through this Application, Energy East Corporation
("Energy East") and Connecticut Energy Corporation
("Connecticut Energy") seek the Department's approval of a
change in control of Connecticut Energy and The Southern
Connecticut Gas Company ("Southern"). This proposed
strategic combination will increase competition and economic
growth in the State of Connecticut, provide increased
choices for consumers and ensure the continuation of
superior safe and reliable customer service.
Connecticut Energy has a rich history of serving the
communities of southern Connecticut for over 150 years. The
last decade, however, has brought the most dramatic and
rapid change in Connecticut Energy's history. In addition to
changes in the business and economic environments, shifts in
federal and state regulation opening natural gas markets to
competition have provided further impetus for altering
operating strategies. To meet many of the challenges
resulting from these changes, Connecticut Energy added
unregulated activities complementary to that of Southern,
its regulated local distribution ("LDC") business. These
unregulated activities of Connecticut Energy have benefited
customers of Southern in important ways. They have helped to
reduce risk and spread costs previously borne exclusively by
customers of the regulated utility and allocated costs away
from the regulated utility. With both the liquefied natural
gas facility in Milford1 ("LNG Facility") and the financing
of an 11-mile high pressure main to supply the Bridgeport
Energy merchant power facility in Bridgeport2, Southern's
ratepayers gain the benefits of Connecticut Energy's
nonutility operations as risks have shifted away from the
regulated utility's customers. At the same time, Southern
has obtained access to new sources of cost reimbursements
and revenue streams.
Connecticut Energy faces growing competition within the
unregulated businesses and an increasing demand for
investments in marketing and infrastructure improvements.
On the regulated side, pressure is growing on Southern to
take advantage of new opportunities and new demand for
services. Additional resources are necessary.
Connecticut Energy has carefully followed developments
in the electric and natural gas utility industries in recent
years that have substantially increased competition in these
industries, particularly for the small and medium-sized
utility companies, making it difficult for them to compete
as effectively as larger companies in both regulated and
unregulated sectors. As a result, over the past several
years Connecticut Energy has developed strategic plans to
respond to the evolving competitive environment. Management
concluded that Connecticut Energy's competitive position and
growth prospects in this new environment would be
significantly enhanced by, among other things, increasing
the scale of its operations and the size of its customer
base.
Energy East has been a leader in developing a
competitive marketplace in the electric and natural gas
utility industries, with particular emphasis on the growth
of competition in the northeastern region of the country.
Energy East's primary subsidiary, New York State Electric
and Gas ("NYSEG"), was among the first regulated electric
utilities to divest itself of all of its generation assets
and open its system to choice (on a voluntary basis).
Energy East's goal is to be a premier energy services
provider in the Northeast and Energy East has elected to
achieve this goal by selectively reinvesting in electric and
gas distribution businesses in the Northeast region.
This transaction and the recently announced
transactions with CTG Resources, Inc. ("CTG Resources") and
CMP Group, Inc., the parent of Central Maine Power Company
("CMP Group"), strategically position Energy East as a
leading energy provider in the Northeast. This
transformation began in 1998 with an electric restructuring
plan that lowered prices for NYSEG customers, aggressively
promoted competition by allowing all of its customers to
choose their electricity suppliers by August 1, 1999, and
created the holding company, Energy East. Energy East
determined that its future would best be served by focusing
on the distribution of energy. The sale of coal-fired
generation assets, which resulted in after-tax proceeds of
approximately $1.3 billion, and the recently announced sale
of NYSEG's 18% ownership in the Nine Mile Point 2 nuclear
plant eliminated all generation stranded costs, including
nuclear stranded costs.3 With the cash proceeds from the
sale of generation, the company's strategy has been to
selectively grow its electric and natural gas distribution
businesses.
Upon completion of the transactions, Energy East will
have the scale and critical mass necessary to succeed in
today's ever-changing energy marketplace. Energy East will
become one of the largest energy providers in the Northeast
and will have more than 1.3 million electric customers and
more than 500,000 natural gas customers in Connecticut,
Maine and New York.
Energy East is committed to competitive electric and
natural gas markets, open to all qualified suppliers, while
maintaining the highest reliability and customer service
standards. Energy East is also committed to introducing an
innovative new approach to natural gas ratemaking in
Connecticut with its proposal for a Rate Plan Alternative
("RPA") - rate regulation which rewards the utility for
achieving growth and assuming risks while providing
ratepayers with rate certainty and revenue sharing above
certain earnings thresholds. Energy East intends to use its
strong balance sheet and the proceeds from the sale of its
generation assets to selectively grow Connecticut Energy's
and CTG Resources' distribution business in Connecticut.
Connecticut Energy and Energy East believe that this
transaction presents a unique opportunity to increase
competition for both electricity and natural gas in
Connecticut.
Energy East has all the necessary qualifications to
acquire control of Connecticut Energy and has satisfied,
through this Application, the statutory prerequisites for
approval of the Merger.
The ability of Southern to provide safe, adequate and
reliable service through its plant, equipment and manner of
operation will not be adversely affected by the Merger.
Indeed it will be enhanced. Southern will continue to be
regulated as a public service company by the DPUC and will
continue to remain subject to federal regulation. The
change of control will not affect the ability of the DPUC to
regulate the operations of Southern. Southern (and
Connecticut Energy) will remain headquartered in Bridgeport
and Southern's local management will continue. Any employee
reductions that result from the transaction will be
accomplished through attrition wherever possible.
Furthermore, Southern's infrastructure improvements and
charitable contributions to its communities will increase
from current levels.
The merger of Connecticut Energy and Energy East will
benefit Southern, Southern employees, its customers, and
Connecticut.
I. INTRODUCTION
Energy East Corporation and Connecticut Energy
(collectively "Applicants") herein request that the
Department of Public Utility Control ("Department") approve
the change of control of Connecticut Energy, and
particularly its regulated subsidiary, Southern, to Energy
East. This application ("Application") is made pursuant to
Connecticut General Statutes ("Conn. Gen. Stat.") 16-47 and
16-1-65A and 16-1-65B of the Regulations of Connecticut
State Agencies ("R.C.S.A.").
The proposed change of control transaction is
structured as a merger of Merger Co., ("Merger Sub")4 and
Connecticut Energy. Connecticut Energy will merge into
Merger Sub, with Merger Sub being the surviving company and
Merger Sub will continue to conduct Connecticut Energy's
utility operations as a direct wholly-owned subsidiary of
Energy East (the "Merger"). Merger Sub will be renamed
"Connecticut Energy Corporation". As a result of the
transaction, Merger Sub will become a wholly-owned first
tier subsidiary of Energy East, with Southern remaining as a
first tier wholly-owned subsidiary of Merger Sub.5 Southern
will, after consummation of the Merger, become an indirect
wholly-owned subsidiary of Energy East. There is no merger
of public service companies.6 The change of control
transaction will not affect the Department's ability to
regulate the operations of Southern.
Southern's management will remain in place, including
the Chairman, President and Chief Executive Officer ("CEO"),
who will remain located in Bridgeport. Southern's CEO will
also become an officer of Energy East and a member of the
Energy East Board of Directors, and the current Southern
Board of Directors will continue as an Advisory Board with
responsibility for local community issues, including the
investment of $500,000 in community activities. All of
these efforts will ensure continued control and involvement
by current Connecticut Energy and Southern management in
Southern's future after the merger is completed.
To effectuate the transaction, Energy East and
Connecticut Energy have executed an Agreement and Plan of
Merger ("Merger Agreement"), dated April 23, 1999, a copy of
which is attached as Exhibit 1, and described in more detail
below. The proposed transaction will be consummated in
accordance with all applicable federal and state laws and
regulations, including, but not limited to, the Securities
Act of 1933, the Securities Exchange Act of 1934, the Hart-
Scott-Rodino Antitrust Improvements Act of 1976,7 and rules
promulgated thereunder, the Natural Gas Act8, the
Communications Act of 19349, the Public Utility Holding
Company Act of 1935 ("PUHCA") and the Connecticut Business
Corporation Act. The Merger must be approved by Connecticut
Energy shareholders10, the Department and the Securities and
Exchange Commission ("SEC") pursuant to PUHCA.
The Merger will become effective when the parties to
the Merger Agreement file a certificate of merger with the
Secretary of State of Connecticut in accordance with the
Connecticut Business Corporation Act, or at a later time
that Energy East and Connecticut Energy may specify in the
certificate of merger. If the Merger is approved at the
Special Meeting, the effective time will occur as promptly
as possible after satisfaction or waiver of the remaining
conditions to the merger contained in the Merger Agreement,
including the receipt of regulatory approvals.
The Merger Agreement commits Energy East and
Connecticut Energy to consummate the transaction once all
regulatory and other required approvals are obtained.11 The
Applicants desire to complete the Merger as expeditiously as
possible.12 The speed at which regulatory, technological and
competitive changes in the electric and natural gas utility
and nonutility energy industries are occurring makes it
important for the Department to act expeditiously on this
Application. In addition, the pendency of the Merger creates
market uncertainties and delays the expected benefits of the
Merger. Accordingly, the Applicants urge the Department to
act as expeditiously as possible to approve the proposed
Merger. The Applicants will work cooperatively with the
relevant governmental agencies, including the Department, to
minimize any delay.13
Based on the information provided herein, the
Applicants respectfully request that the Department find
that Energy East has satisfied the statutory criteria in
Conn. Gen. Stat. 16-47. In particular, Applicants request
that the Department find that: (i) Energy East has the
financial, technological and managerial suitability and
responsibility to obtain control of Connecticut Energy and
Southern; (ii) Southern's ability to provide safe, adequate
and reliable service using its plant, equipment and manner
of operation will not be adversely affected if the Merger is
approved; and (iii) the approval of the Merger will not have
any effect on the location and accessibility of management
and operations and on the proportion and number of state
resident employees.
II. DESCRIPTION OF APPLICANTS
A. Energy East Corporation
The legal name and principal place of business of
Energy East is:
Energy East Corporation
One Canterbury Green
P.O. Box 1196
Stamford, Connecticut 06904-1196
Energy East is a corporation created and existing under
the laws of the State of New York, and has its principal
office in Stamford, Connecticut. Energy East was formed in
1997 and became the parent of NYSEG on May 1, 1998. Energy
East, which is currently an exempt public utility holding
company under PUHCA, intends to register with the SEC as a
holding company under the Act. Energy East is an energy
delivery, products and services holding company with
subsidiary operations in New York, Massachusetts, Maine, New
Hampshire, Vermont and New Jersey, and has corporate offices
in New York and Connecticut. Energy East's nonutility
subsidiaries include Xenergy Enterprises, Inc. and Energy
East Enterprises, Inc., which invest in energy ventures and
providers of energy and telecommunications services. As a
holding company, Energy East neither owns nor operates any
physical properties.
NYSEG, Energy East's principal subsidiary, is a public
utility company engaged primarily in purchasing,
transmitting and distributing electricity and purchasing,
transporting, and distributing natural gas. As part of
corporate strategy, it recently completed a divestiture of
all of its coal-fired electric generation facilities (2300
MW). In accordance with its strategy of exiting the base-
load power generation business, NYSEG recently agreed to
sell its 18% nonoperating interest in the Nine Mile Point 2
nuclear plant located in Oswego, New York, which transaction
is expected to close early next year. NYSEG's service
territory, 99% of which is located outside the corporate
limits of cities, is in the central, eastern and western
parts of the State of New York. NYSEG's service territory
has an area of approximately 19,900 square miles and a
population of 2,400,000. The larger cities in which NYSEG
serves both electricity and natural gas customers are
Binghamton, Elmira, Auburn, Geneva, Ithaca and Lockport.
NYSEG serves approximately 817,000 electric customers and
243,000 natural gas customers. The service territory
reflects a diversified economy, including high-tech firms,
light industry, colleges and universities, agriculture, and
recreational facilities. No customer accounts for 5% or more
of either electric or natural gas revenues. During 1996
through 1998, approximately 84% of NYSEG's operating
revenues were derived from electric service with the balance
derived from natural gas service.
Upon final approval of Energy East's announced merger
with CMP Group, Energy East also is gaining control of
Central Maine Power Company, which serves 530,000 electric
customers in Central and Southern Maine. The transaction,
which values CMP Group common equity at approximately $957
million and includes the assumption of $271 million in
preferred stock and long-term debt, has no adverse affect on
Energy East's merger with Connecticut Energy.
Upon final approval of Energy East's announced merger
with CTG Resources, Inc., Energy East would also gain
control of Connecticut Natural Gas Corporation, which serves
approximately 142,000 customers in 21 municipalities in
Connecticut, principally in greater Hartford and Greenwich.
The transaction, which values CTG Resources common equity at
approximately $355 million and includes the assumption of
$220 million in long-term debt, likewise has no adverse
affect on Energy East's merger with Connecticut Energy.
At a time when Connecticut's electric utilities have
been grappling with electric deregulation, Energy East
brings into Connecticut NYSEG's experience in recently
concluding a successful sale of coal-fired electric
generation assets, which produced after-tax proceeds of $1.3
billion in cash and the recently announced sale of NYSEG's
18% ownership in the Nine Mile Point. These sales have
eliminated all generation stranded costs, including nuclear
stranded costs. Furthermore, NYSEG has completely opened its
gas distribution system to competition for all consumer
sectors. As of August 1, 1999, NYSEG's electric distribution
system will be open to all qualified electric suppliers to
serve any of NYSEG's nearly 817,000 electric customers who
elect to switch.
Energy East's consolidated 1998 adjusted revenues were
$2,499,418,000, with a net income of $194,205,000.
Additional financial information regarding Energy East is
attached hereto in the Proxy (Exhibit 2) and in Exhibit 3.
B. Connecticut Energy Corporation
The legal name and principal place of business of
Connecticut Energy is:
Connecticut Energy Corporation
855 Main Street
Bridgeport, Connecticut 06604
Connecticut Energy, a Connecticut corporation, is an
exempt public utility holding company.14 As such, Connecticut
Energy neither owns nor operates any physical properties. It
has four direct wholly-owned subsidiaries, all engaged in
the functionally distinct operations described below.
Connecticut Energy is engaged, through its subsidiaries, in
operations principally in Connecticut, with retail marketing
of natural gas in Massachusetts, New Hampshire, Rhode
Island, Connecticut, and to a few customers in New York.
The Southern Connecticut Gas Company. Southern, a
Connecticut public service company wholly-owned by
Connecticut Energy, is primarily engaged in the retail
distribution of natural gas for residential, commercial, and
industrial uses and the transportation of natural gas for
commercial and industrial uses. Southern's predecessor
companies, New Haven Gas Company and The Bridgeport Gas
Company, originally were incorporated in Connecticut in 1847
and 1849, respectively. Southern was formed in 1967 as a
result of the merger of New Haven Gas Company and The
Bridgeport Gas Company. Southern serves approximately
158,000 customers in Connecticut.
CNE Energy Services Group, Inc. CNE Energy, a
Connecticut corporation wholly-owned by Connecticut Energy,
provides energy products and services to commercial and
industrial customers in New England and to a few customers
in New York, both on its own and through its participation
as a member in various energy-related limited liability
companies.
CNE Development Corporation. CNE Development, a
Connecticut corporation wholly-owned by Connecticut Energy,
markets natural gas through equity participation in a
natural gas purchasing cooperative.
CNE Venture-Tech, Inc. CNE Venture-Tech, a Connecticut
corporation and a wholly-owned subsidiary of Connecticut
Energy, invests in ventures that produce or market
technologically advanced energy-related products. CNE
Venture-Tech owns 100 percent of the member interest of CIS
Service Bureau, LLC, a Delaware limited liability company
providing service bureau access to customer billing software
and other related services for local distribution and other
utility-type companies.
Connecticut Energy's operating revenues totaled
approximately $242,431,000 for the fiscal year ended
September 30, 1998. Connecticut Energy's consolidated net
income for the same period was $19 million. Connecticut
Energy and its subsidiaries had 480 full-time employees as
of December 31, 1998. Southern had 467 employees as of
December 31, 1998. Additional consolidated financial
information regarding Connecticut Energy is attached hereto
as Exhibits 2, 3 and 4.
C. Communications/Correspondence
All communications and correspondence with respect to
this Application should be addressed or directed to the
attorneys for Energy East as follows:
Kenneth M. Jasinski, Executive Vice President &
General Counsel
Energy East Corporation
One Canterbury Green
P.O. Box 1196
Stamford, Connecticut 06904-1196
Telephone: (203) 325-0690
Facsimile: (203) 325-1901
with copies to:
James E. Rice
Brody, Wilkinson and Ober, P.C.
2507 Post Road
Southport, CT 06490-1259
Telephone: (203) 319-7112
Facsimile: (203) 254-1772
and to the attorney for Connecticut Energy:
David Silverstone
855 Main Street
Bridgeport, Connecticut 06604
Telephone: (203) 382-8301
Facsimile: (203) 382-8357
III. REASONS FOR THE MERGER AND DESCRIPTION OF THE
TRANSACTION
A. Reasons for the Merger
The Boards of Directors and management of Energy East
and Connecticut Energy believe that the Merger will help
position their combined companies to become one of the
premier distribution companies for energy and other services
in the northeastern United States by increasing financial
flexibility and providing strategic growth opportunities
that will benefit both companies and their customers,
employees, and shareholders in a manner that neither company
could achieve on its own.
1. Enhanced Competition
The Applicants believe the merger will join two
companies with complementary operations as well as a common
vision of the future of the retail and wholesale energy
markets in the northeastern region of the United States. As
a result of utility deregulation and the increasingly-
competitive pressures electric and natural gas utility
companies face in the northeastern United States, natural
gas distribution companies must be efficient, low-cost
suppliers of energy and related services with a diverse
customer base. The Applicants believe the merger will allow
Connecticut Energy to achieve these goals and , especially
when combined with the opportunities that the CTG Resources
and CMP Group mergers present, will provide substantial
strategic and financial benefits to Connecticut Energy.
A combination of the companies' complementary expertise
and infrastructure, including Connecticut Energy's
competitive natural gas distribution facilities in
Connecticut and Energy East's diversified electric and
natural gas businesses throughout the northeastern United
States, will provide the combined company with the size and
scope necessary to be an effective participant in the
emerging and increasingly competitive electric and natural
gas markets. With Energy East's strong capital base, the
combined company intends to invest in the expansion of
Connecticut Energy's and CTG Resources' gas distribution
systems and enhance marketing efforts in order to
significantly increase competition and customer choice in
Connecticut.
A combined company will also use its distribution
channels to market a portfolio of energy-related services
throughout the northeastern United States. The merger will
create a company with the ability to develop and market
competitive new products and services and to provide
integrated energy solutions for its customers.
The combined company will also be financially stronger
and will have a broader customer base than Connecticut
Energy as an independent entity. Based on the 1998 results
for Connecticut Energy and Energy East, the total annual
revenues for the combined company for the first year after
the merger is projected to be approximately $3.385 billion.15
In addition, the combined company will serve approximately
1.3 million electric customers in New York and Maine and
more than 500,000 natural gas customers in New York and
Connecticut.16 This will allow Connecticut Energy to make
the investments in infrastructure necessary to substantially
expand Connecticut Energy's customer base.
2. New Regulatory Framework
Energy East intends to introduce its RPA, a regulatory
framework for competitive growth in southern Connecticut to
achieve consumer benefits and the Applicants' objectives.
This regulatory framework has the following characteristics:
- - Four Year Term;
- - Price cap for residential sales customers (including
gas costs) and flexible pricing for non-residential sales
customers, who would have the option of selecting a fixed or
an indexed price based on the market price of gas supply
where Southern would absorb any changes in gas costs;
- - Elimination of the effects of the Purchased Gas
Adjustment and associated future deferrals and relief from
the Department's Decision in Docket No. 94-01-12 regarding
hedging transactions;
- - Competitive Earnings Sharing Mechanism - 50% to
customers and 50% to shareholders for earnings over a 13.5%
threshold;
- - Open access for all approved customers and qualified
suppliers;
- - Negotiated pricing and service offerings for large non-
residential customers using over 5,000 dekatherms annually
without pre-approval from the DPUC;
- - Implementation of BTU billing (therms);
- - Adoption of performance standards for measuring service
quality; and
- - Adoption of exogenous cost factors.
The details of this regulatory framework are set forth
in the testimony of George Bonner, filed in Docket No. 99-04-
18, Application of The Southern Connecticut Gas Company to
Increase its Rates and Charges, Phase II.
B. A Description of the Transaction
The Merger Agreement provides that Connecticut Energy
will merge into Merger Co., a wholly-owned subsidiary of
Energy East. Merger Co. will be the surviving company and
will continue to conduct Connecticut Energy's utility and
nonutility operations as a direct, wholly-owned subsidiary
of Energy East. In the merger, each outstanding Connecticut
Energy share (other than those that are held by Connecticut
Energy shareholders who have not voted in favor of the
merger and have properly demanded dissenters' rights) will
be converted into the right to receive cash, Energy East
shares or a combination of cash and Energy East shares.
Each eligible Connecticut Energy shareholder can elect
the form of consideration he or she would like to receive,
but this election is subject to proration and an adjustment
driven by tax considerations. Under the merger agreement,
50% of all issued and outstanding Connecticut Energy shares
must be exchanged for cash, and 50% must be exchanged for
Energy East shares. If Connecticut Energy shareholders
owning in excess of 50% of Connecticut Energy shares elect
to receive cash, the number of Connecticut Energy shares
converted into cash will be less than the number elected.
Similarly, if Connecticut Energy shareholders owning in
excess of 50% of Connecticut Energy shares elect to receive
Energy East shares, the number of Connecticut Energy shares
converted into stock will be less than the number elected.
For tax reasons, Energy East may have to increase the number
of Connecticut Energy shares converted into Energy East
shares and decrease the number of Connecticut Energy shares
converted into cash.
The per share cash consideration amounts to $42.00 in
cash, without interest. The per share stock consideration is
a number of Energy East shares that will vary depending on
the "Average Market Price," which is the average of the
closing prices of Energy East shares on the New York Stock
Exchange during the 20 trading days immediately preceding
the second trading day prior to the effective time of the
merger. If the Average Market Price is between $23.10 per
share and $29.40 per share, then each Connecticut Energy
share converted into stock will be exchanged for $42.00
worth of Energy East shares. For example, if the Average
Market Price is $28.00, each Connecticut Energy share
converted into stock will be exchanged for 1.5 Energy East
shares. If the Average Market Price is less than or equal to
$23.10, then each Connecticut Energy share converted into
stock will be exchanged for 1.82 Energy East shares,
irrespective of the value of those shares. Finally, if the
Average Market Price is greater than or equal to $29.40 per
share, then each Connecticut Energy share can be exchanged
for 1.43 Energy East shares, again irrespective of the value
of those shares.
The total value of consideration to be received by
Connecticut Energy shareholders in the merger, based on the
number of Connecticut Energy shares outstanding on July 12,
1999 and assuming that the Average Market Price of Energy
East is between $23.10 per share and $29.40 per share, is
approximately $436.5 million . Energy East anticipates
funding the cash portion of the merger consideration with
internally generated funds or the proceeds from the sale of
its generation assets.
IV. ALL OF THE STATUTORY CONDITIONS UNDER CONN. GEN. STAT.
16-47 ARE SATISFIED FOR THE DEPARTMENT TO APPROVE THE
CHANGE IN CONTROL
Energy East has all of the necessary qualifications to
acquire control of Connecticut Energy and its regulated
subsidiary, Southern, and has satisfied, through this
Application, the statutory prerequisites for approval of the
Merger. In analyzing the transfer of control under Conn.
Gen. Stat. 16-47, the Department is required to take into
consideration: (i) the financial, technological and
managerial suitability and responsibility of Energy East;
(ii) the ability of Southern to provide safe, adequate and
reliable service to the public through its plant, equipment
and operations, assuming the Application is approved by the
Department; and (iii) the effect of the approval on the
location and accessibility of management and operations and
on the proportions and number of state resident employees in
Connecticut. As discussed below and in the numerous
exhibits attached, all the requirements in Conn. Gen. Stat.
16-47 are satisfied fully.
A. Energy East is Financially Suitable to Acquire Control
of Connecticut Energy
Energy East is considered a progressive leader in the
introduction of competition to the natural gas and electric
industries. Total operating revenues were $2.5 billion in
1998, up 15 percent from the 1996 level of $2.17 billion.
Net income was $194 million in 1998, up 11 percent from $175
million in 1997. Earnings per share were also up to $1.517 in
1998, an increase of 18 percent compared to earnings per
share of $1.29 in 1997. With these strong financial
results, Energy East is better positioned to grow and meet
the challenges of an emerging competitive market. Energy
East is in a strong financial position that makes it well
suited to acquire Connecticut Energy. Energy East's total
return in 1998 significantly outperformed the Standard &
Poor's 500 Index. The very successful auction of NYSEG's
coal-fired generation facilities resulted in significant
gains that eliminated stranded costs, including nuclear
costs. NYSEG's nuclear operating risk and the risk of
increasing decommissioning costs will also be eliminated as
a result of the recently announced sale of NYSEG's 18%
ownership in the Nine Mile 2 nuclear facility to AmerGen.
Energy East recently received a credit rating upgrade
by Moody's from Baa1 to A3 and an upgrade of senior secured
debt by Standard & Poor's from BBB+ to A. The reduced risk
and the significant cash from the sale of generating assets
have put Energy East in a position from which it can expand
its core business.
The merger of Energy East and Connecticut Energy will
result in a larger company with a significantly increased
customer base and revenue stream and will provide
significant growth potential that could not be achieved by
Connecticut Energy alone. The further addition of CMP Group
and CTG Resources will increase the growth potential even
more.
B. Technological and Managerial Suitability of
Energy East
The best way to describe the technological and
managerial suitability and responsibility of Energy East to
exercise control over Connecticut Energy and Southern is to
look at the operation of Energy East's largest subsidiary,
NYSEG. NYSEG is a combination electric and gas corporation
which provides electric service to 817,000 customers in 149
cities and villages, and 373 towns; and provides gas service
to 243,000 customers in 85 cities and villages, and 143
towns. The electric systems presently provide open access
transmission and distribution to large commercial and
industrial customers and, as of August 1, 1999, all
customers will be able to choose their own electric supplier
and have the transmission and distribution service provided
by NYSEG. The natural gas system has provided
transportation services for large customers since 1986, and
for all customers since 1996. At the present time
approximately 38% of the throughput of the gas system is
third-party gas. The gas business unit of NYSEG holds firm
transportation on 11 pipelines, and has contracted for
storage on three pipelines. NYSEG also owns and operates
the only high deliverability salt storage field in the
Northeast.
As of year end 1998, NYSEG owned and operateed 55 miles
of high pressure pipeline, 400 miles of transmission
pipeline, 4,000 miles of main, 3,200 miles of services, and
1,195 regulator stations. NYSEG receives its gas at 85
separate delivery points and continues to add new delivery
points each year as NYSEG expands its service territory. In
the last four years, NYSEG has instituted service to 25 new
franchise areas in the State of New York, which is more
system expansion than all the other utility companies in New
York have added in the last 20 years. In order to
successfully grow its system in a time of substantial change
in the gas industry, it was necessary to develop a new
approach to providing service to the customers. The
approach had many features and covered everything from gas
supply and operations to customer service and rates.
In the operations area, NYSEG rewrote its operations
manual so that it meets and exceeds the requirements of the
safety codes of New York State and the U.S. Department of
Transportation. Policies were instituted to provide for
more preventive maintenance, additional leak surveys and the
repair of all leaks on the system, no matter how small.
NYSEG updated its meter testing lab with state-of-the-art
equipment to make it more efficient. The gas training
department was enhanced to provide all the necessary
training and operator qualification training required to
meet the federal and state codes and job requirements and
also provide training to all fire, police and emergency
responders in the service territory so that they are capable
of dealing with a gas emergency situation.
NYSEG uses contractors to perform most of its
construction and main replacement through an alliance
program. This program, which has been approved by the New
York Public Service Commission, allows NYSEG to work with a
select list of contractors instead of putting jobs out for
bid each time they come up. Working with these select
contractors has resulted in a 35% reduction in the cost of
construction for NYSEG.
The gas supply department purchases the gas necessary
to meet the customers' requirements and manages all of
NYSEG's pipeline and storage assets. NYSEG purchases its
gas from approximately 25 different suppliers under varying
contract terms. Approximately 45% of its gas is purchased
under contracts with a term of one to three years. Twenty-
two percent is purchased under contracts with a term of less
than one year, and 33% is purchased on the spot market. The
gas supply department, which includes a team of gas trading
specialists, also does the hedging required to manage
NYSEG's gas supply price risk and is constantly involved in
purchasing or selling futures, options, puts, calls and
swaps, and in release of pipeline capacity. The gas supply
department also acts as an agent for many large industrial
customers by purchasing gas for them and arranging
transportation for them to city gates under long-term fixed-
price contracts.
In the customer service area, a centralized call center
was established so that customer inquiries could be handled
more expeditiously and consistently. The activities of the
customer service unit have resulted in NYSEG obtaining the
lowest customer complaint rate of any utility in the State
of New York, and an 85% customer satisfaction rating.
Another important part of customer service is NYSEG's
economic development department, which works with local
authorities to retain and attract industrial and commercial
customers to provide jobs within the communities and
marketing department which sells energy services directly
with large industrial and commercial customers. The
economic development unit also develops a database for each
category of NYSEG's service territory relating to
facilities, real estate, taxes, utilities and special
incentives that could be available to industrial customers
moving into the area. The unit then makes this data
available to companies throughout the United States and, in
some cases, other countries, to interest them in locating
new facilities in the service territory. The key account
representatives work with the existing customers in order to
retain companies in the service territory or to help them
expand and provide additional jobs in the service territory.
NYSEG has a program to make low interest loans available to
any industrial customer for new equipment in order to retain
or obtain additional jobs, with the loan being paid back
from the margin of the gas services over three to five
years. Also, the company will provide a special discounted
rate for any increased service that is utilized to provide
additional jobs.
In summary, Energy East brings to Connecticut the
technological and managerial resources and experience from
NYSEG that perfectly complement those of Connecticut Energy
and the planned combination with CTG Resources.
C. Southern Will Continue to Provide Safe, Adequate
and Reliable
Service to the Public
The ability of Southern to provide safe, adequate and
reliable service through its plant, equipment and manner of
operation will not be adversely affected by the Merger but
rather will be enhanced. Southern, which will continue to
be headquartered in Bridgeport, operated independently, and
regulated as a public service company in the manner
prescribed by Title 16 of the Connecticut General Statutes,
in regulations promulgated thereunder, and in DPUC decisions
and orders. Southern also will continue to remain subject to
various federal regulations, including regulations which (1)
provide for emergency authority and curtailment allocations
under the Natural Gas Policy Act of 1978 when pipeline
supplies are limited and (2) establish certain retail
policies for natural gas utilities under the Public Utility
Regulatory Policies Act of 1978. Southern will likewise
continue to be subject to the Natural Gas Pipeline Safety
Act of 1968 with respect to the construction, operation and
maintenance of its mains, services and LNG Facility as well
as other federal regulations pertaining to safety standards
concerning such facilities.
Upon completion of the Merger, Southern anticipates no
adverse impact on its commitment to providing safe, adequate
and reliable service to the public through Southern's plant,
equipment and manner of operation. Southern's maintenance
and operation of its gas distribution system facilities will
not change. Southern's investments in infrastructure will
not be adversely affected and are expected to increase
especially in those areas of Southern's franchise territory
to which Southern has not yet extended service and in
additional investments in replacement of cast iron and bare
steel. Southern has recently completed its implementation
of a new customer information system, which enhances
Southern's ability to provide safe, adequate and reliable
service to the public. To further ensure reliability, the
modernization of this major computer system, along with the
addition of mobile data terminal interfaces in each of
Southern's service vehicles and interfaces to the existing
electronic terminals on customer meters, provides new
enhancements and efficiencies to Southern's existing high
quality customer service system. These and other similar
projects to ensure reliability will not be adversely
affected by the Merger.
D. Management and Operations
1. Location and Access of Management and Operations
Southern expects no adverse change in management or
operations as a result of the Merger. The Merger Agreement
provides that Energy East will not make involuntary
employment reductions, Southern's chief executive officer
will continue in that capacity for Southern and Connecticut
Energy, and Southern's operating headquarters will remain in
Bridgeport. In addition, Connecticut Energy's Chairman and
CEO will become an officer of Energy East and a member of
the Energy East Board, and the existing Southern Board will
continue as an Advisory Board. Both Southern's headquarters
and Southern's Operations Center in Orange are subject to
long-term leases unaffected by the Merger. Books and records
relevant to Southern's utility operations will remain in
Connecticut. Furthermore, the Southern employees with whom
the Department interacts in response to consumer complaints,
operational issues, and regulatory matters will not change
their locations. The Department and the public will continue
to have access to Southern management after the Merger.
Since the service obligations of Southern will
continue, approval of the Merger should not have any adverse
effects on the number of Connecticut residents employed by
Southern. The Merger Agreement stipulates that the corporate
headquarters of two of Energy East's unregulated
subsidiaries, Xenergy Enterprises, Inc., and Energy East
Enterprises, Inc., will move to Connecticut after the Merger
is completed.
V. THE MERGER WILL BENEFIT CONNECTICUT, EMPLOYEES AND
CONSUMERS
The Merger will join two companies with complementary
operations as well as a common vision of the future of the
retail and wholesale energy markets in the northeastern
region of the United States. As a result of utility
deregulation and the increasingly competitive pressures
faced by electric and natural gas utility companies in the
Northeast, the Applicants believe that in order to succeed
in such a market, Connecticut Energy must be an efficient,
low-cost supplier of energy and related services with a
diverse customer base. The Connecticut Energy Board of
Directors expects the Merger to allow Connecticut Energy to
achieve these goals and to provide substantial strategic and
financial benefits. Furthermore, Energy East and NYSEG,
together with Connecticut Energy, CTG Resources, and CMP
Group, can leverage its collective experience and skills to
profitably grow its utility and non-utility businesses in
its expanded service territory. The combined companies will
have the assets and superior management team (which includes
Connecticut Energy and Southern participation) to succeed.
The Merger will therefore benefit Southern, Southern's
employees, natural gas consumers within Southern's franchise
territory (including those potential customers not currently
served), and consumers of unbundled utility services
throughout Connecticut. The combined experience and
resources of Connecticut Energy and Energy East will provide
increased expertise, financial resources and economies of
scale. These greater resources will enable Southern and
Connecticut Energy to: (i) accelerate investments in
marketing efforts and infrastructure to achieve distribution
system expansion to increase natural gas market penetration
within the franchise territory; (ii) continue Southern's
commitment to service quality in an increasingly-competitive
and dynamic regulatory environment; and (iii) introduce new
energy-related products and services to provide integrated
energy solutions for customers within Southern's franchise
territory and throughout Connecticut.
As the Department is well aware, the natural gas
industry is in the midst of a transition from bundled to
unbundled service. Unbundling began in Connecticut as of
April 1, 1996 with respect to commercial and industrial
customers. The process of unbundling to residential
customers is being examined. This creates a climate of
competitive and increasingly dynamic forces in which
Southern operates. Against that background, Southern now
provides natural gas service to less than fifty (50%)
percent of the potential utility customers on main and 38%
of the potential utility customers within its franchise
territory in the twenty-two communities in which Southern
currently serves. While Southern is authorized to install
mains and sell natural gas in another ten communities in its
franchise territory, Southern currently has no facilities in
these towns.
Historically, Southern has balanced its desire to
invest in system expansion with prudent fiscal management
policies and limits on Southern's ability to borrow to make
such infrastructure investments. Especially with
deregulation and the other increasingly competitive
pressures Southern faces, the Merger provides Southern with
a substantial increase in financial stability and access to
capital which will provide greater opportunities to invest
in system expansion and further penetrate Southern's
franchise territory. This new financial strength through a
combined company, which will have a broader customer base
than either Connecticut Energy or Energy East as independent
entities, will benefit Southern, Southern's employees and
all consumers in Connecticut, especially those consumers
situated in Southern's franchise territory. Upon completion
of all three of the pending transactions with Connecticut
Energy, CTG Resources and CMP Group, Energy East will have
the scale and critical mass necessary to succeed in today's
rapidly-changing energy marketplace. Energy East will have
more than 1.3 million electric customers and more than
500,000 natural gas customers in Connecticut, Maine and New
York.
The Merger will also allow Southern to continue its
commitment to the highest service quality in this
competitive environment while also maintaining Southern's
commitment to the communities which it serves. Southern has
already committed substantial resources to upgrading its
customer information system and other computer-related
hardware, software and telecommunications infrastructure, in
part to mitigate risks associated with the Year 2000
problem. Southern's objective with its computer and
telecommunications infrastructure investments has been to
achieve efficiencies and quality in order to monitor and
record customer data with greater flexibility.
As a result of the Merger, Southern is planning a
substantial increase in investments in infrastructure
improvements, including extending service to areas not
currently served and increasing replacements of cast iron
and bare steel mains.
Southern's tradition of investing in Connecticut and
the communities in which it serves will continue as a result
of the Merger and actually increase. Southern's operating
headquarters will remain in Bridgeport. Energy East also has
pledged in the Merger Agreement not only to continue
Southern's historic level of charitable contributions, but
to increase the charitable contributions to $500,000 per
year. Southern also intends to continue employee programs
promoting volunteerism and supporting employee donations to
needy charities, especially in the communities in which
Southern serves. Southern therefore is continuing its rich
history as a generous corporate citizen in Connecticut.
After the Merger and the completion of the CTG
Resources transaction, Energy East will be ideally
structured to offer Connecticut consumers new energy-related
products and services which package integrated energy
solutions for customers within Southern's franchise
territory and throughout Connecticut. As previously-
mentioned, two of Energy East's subsidiaries, Xenergy
Enterprises and Energy East Enterprises, Inc., will relocate
to Connecticut. Energy East and Connecticut Energy intend to
integrate those Energy East subsidiaries with the nonutility
operations of Connecticut Energy's current subsidiaries to
offer consumers in Connecticut and throughout the Northeast
region new energy-related products and services.
As the benefits of electric deregulation become
available in Connecticut, the merged company's nonutility
subsidiaries will be ideally situated to offer meaningful
competition in the Connecticut electricity marketplace. At a
time when many natural gas marketing companies are
struggling to survive in the climate of volatile natural gas
prices and changing transportation tariff requirements
imposed by local distribution companies in Connecticut, the
merged company will also offer Connecticut's commercial and
industrial natural gas consumers a financially-solid natural
gas marketing competitor. As the benefits of natural gas
deregulation become available to residential consumers in
Connecticut, the merged company's nonutility subsidiaries
will also be poised to deliver competitive energy products
and services to homeowners throughout Connecticut. In
short, the Merger presents a unique opportunity for
Connecticut Energy to bring to Connecticut the resources of
a leading energy delivery, products and services company in
the Northeast region. Connecticut Energy's customers
throughout Connecticut will benefit from the Merger.
VI. CONCLUSION
For the reasons discussed above, the proposed Merger
meets applicable statutory requirements. The Merger will
serve the interests of all customers of natural gas and
energy services in Connecticut in the context of a rapidly
changing natural gas and energy environment. Accordingly,
Energy East and Connecticut Energy request the Department to
approve the Merger.
Respectfully submitted,
ENERGY EAST CORPORATION
By:
Kenneth M. Jasinski
Executive Vice President and
General Counsel
One Canterbury Green
P.O. Box 1196
Stamford, Connecticut 06904-
1196
Tel: (203) 325-0690
Fax: (203) 325-1901
By:
James E. Rice
Brody, Wilkinson and Ober, P.C.
2507 Post Road
Southport, CT 06490-1259
Tel: (203) 319-7112
Fax: (203) 254-1772
CONNECTICUT ENERGY CORPORATION
By:
David Silverstone
855 Main Street
Bridgeport, Connecticut 06604
Tel: (203) 382-8301
Fax: (203) 382-8357
This document (including all Exhibits) contains forward-
looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. The forward-looking
statements are subject to various risks and uncertainties.
Discussion of factors that could cause actual results to
differ materially from management's projections, forecasts,
estimates and expectations may include factors that are
beyond the company's ability to control or estimate
precisely, such as estimates of future market conditions,
the ability to realize cost savings, and the timing and
terms associated with obtaining regulatory approvals. Other
factors include, but are not limited to, weather conditions,
economic conditions in the companies' service territories,
fluctuations in energy-related commodity prices, marketing
efforts and other uncertainties. Other risk factors are
detailed from time to time in the Applicants' SEC reports.
APPENDIX I
Docket No. 99-07-
July 22, 1999
I. COMPLIANCE WITH CONN. GEN. STAT. 16-47 REQUIREMENTS
For purposes of the following R.C.S.A. sections, the
Applicants are Energy East and Connecticut Energy:
Section 16-1-46(a)
Application should state clearly the
request for approval of the merger; cite
the statutory provisions and authority
under which authorization can be granted
by the Department; and also include (a)
name of each person seeking authorization
and the address and principal place of
business as well as the state under which
the corporation was organized; (b) name,
title, address and telephone number of the
attorney to whom correspondence should be
addressed and service made, (c) a concise
and explicit statement of the facts
relevant to the Department's authorization
or approval including public convenience
and necessity; and (d) an explanation of
any unusual circumstances involving the
petition or application, including
emergency conditions.
(a)
See Application, Sections I, II.A., and
II.B.
(b)
See Application, Section II.C.
(c)
See Generally Application and Exhibits
thereto.
(d) The Merger Agreement intends an effective
time prior to
April 23, 2000. See Merger Agreement at
41 (Exhibit 1).
Section 16-1-65(a)
General description of the property, field
of operation, and existing business
interests of the applicant or description
of the official, board or commission
purporting to act under any governmental
authority other than that of this state
(Connecticut) or of its divisions,
municipal corporations or courts.
See Exhibit 10 (Energy East SEC Form 10-K for year
ended 12/31/98);
Exhibit (Energy East 1998 Annual Report).
11
Section 16-1-65(b)
Applicant's financial statement for the
most recent fiscal year and the pro forma
period (include assumptions), giving
effect to the acquisition, to include
balance sheet, income statement and
statement of source and application of
funds.
See Exhibit 3 (Energy East and Connecticut Energy
Unaudited Pro Forma Combined Financial
Statements).
Section 16-1-65(c)
Applicant's most recent Form 10-K and
subsequent Forms 10-Q filed with the SEC
or comparable information.
See Exhibit 3 (Energy East and Connecticut Energy
Unaudited Pro Forma Combined Financial
Statements);
See Exhibit 4 (Connecticut Energy SEC Form 10-K for
the fiscal year ending 9/30/98);
(Connecticut Energy SEC Form 10-Q of
Exhibit 5 the period ending);
(Connecticut Energy SEC Form 10-Q for
Exhibit 6 the period ending 3/31/99);
(Connecticut Energy SEC Form 10-K for
Exhibit 10 the year ending 12/31/98);
(Energy East 1998 Annual Report);
Exhibit 11
Exhibit (Energy East SEC Form 10-Q for the
12 period ending 3/31/99);
Exhibit (Connecticut Energy 1998 Annual Report
27 and 1998 Proxy Statement).
Section 16-1-65(d)
Applicant's most recent Form 8-K filed
with the SEC or comparable information.
See Exhibit 13 (Energy East SEC Form 8-
K dated 4/26/99);
Exhibit 18 (Connecticut Energy SEC
From 8-K dated 4/28/99).
Section 16-1-65(e)
Applicant's most recent annual report to
stockholders, or comparable information is
such report if not published.
See Exhibit 11 (Energy East 1998
Annual Report);
Exhibit 27 (Connecticut Energy 1998
Annual Report and 1998 Proxy Statement).
Section 16-1-65(f)
Applicant's latest proxy statement sent to
stockholders, or comparable information if
such report is not published.
See Exhibit 15 (Energy East Notice of
1999 Annual Meeting and Proxy Statement);
Exhibit 27 (Connecticut Energy 1998
Annual Report and 1998 Proxy Statement).
Section 16-1-65(g)
Description of transaction or series of
transactions, including intended
financing, by which the proposed
transaction will be effected, and
agreements or other instruments associated
with the proposed transaction.
See Application, Section III.B.,
Exhibit (Merger Agreement);
1
Exhibit (Final Draft Connecticut Energy Proxy
2 Statement/Prospectus as filed on
7/22/99 (the "Merger Proxy").
Section 16-1-65(h) A
statement of the purpose and intent of the
applicant in undertaking the proposed
transaction(s).
See Application, Section III.A.,
Exhibit (Merger Agreement);
1
Exhibit (Merger Proxy).
2
Section 16-1-65(i) A
statement of the benefits, including
rates, standards of service and efficiency
and adequacy of management, that would
result to the customers and stockholders
of the public service company or holding
company the interference with, or
acquisition or control of which, is the
subject of the application (hereinafter
"affected company").
See Application, Sections IV and V;
Exhibit (Merger Agreement);
1
Exhibit (Merger Proxy).
2
Section 16-1-65(j)
Any prospectus, official statement,
preliminary prospectus or preliminary
official statement prepared by or on
behalf of the applicant or any other
person with regard to the proposed
transaction.
See Exhibit (Energy East SEC Form S-4 Registration
14 Statement);
Exhibit (Merger Proxy);
2
Exhibit (Energy East SEC Form 8-K dated
13 4/26/99);
Exhibit (Connecticut Energy SEC Form 8-A/A
19 dated 5/14/99).
Section 16-1-65(k) Applicant's capital structure and
capitalization ratios, present and pro
forma (include assumptions), assuming
approval of the proposed transaction.
See Exhibit 20 (Energy East Capital
Structure and Ratios, Including Pro
Forma);
Exhibit 25 (Connecticut Energy
Capital Structure and Ratios).
Section 16-1-65(l)
Applicant's interest (before and after
income taxes) and fixed charge coverages,
present and pro forma (include
assumptions), assuming approval of the
proposed transaction.
See Exhibit 21 (Energy East Interest
and Fixed Charge Coverages, Including Pro
Forma).
Section 16-1-65(m)
Proposed table of organization of the
management of the applicant, and of the
affected company, after giving effect to
the proposed transaction, including the
name of each executive officer on each
such proposed table of organization.
See Exhibit 6 (Connecticut Energy SEC
Form 10-Q for the period ending 3/31/99);
Exhibit 8 (Energy East and
Connecticut Energy Proposed Organization
Chart and Officers - Post Merger).
Section 16-1-65(n)
Names of the proposed members of the board
of directors of the applicant, and of the
affected company, after giving effect to
the proposed transaction.
See Exhibit 9 (Energy East and
Connecticut Energy Proposed Boards of
Directors - Post Merger).
Section 16-1-65(o)
Narrative description of the proposed
operations of the applicant and the
affected company for the first calendar
year following the effectiveness of the
proposed transactions(s), including, but
not limited to, employment levels and
office and service center locations, and
details of all changes from the existing
operations of the affected company.
See Application, Section IV.
Section 16-1-65(p) A
description of the experience of each of
the applicants in the operation,
management or control of any public
service company, and, to the extent not
otherwise provided, a statement as to the
suitability of the applicants to control
the affected company.
See Application, Sections II.A., II.B.,
IV.A., and IV.B.
Section 16-1-65(q) A
list of all department orders, rulings and
regulations in effect and applicable to
the affected company, and an indication of
those which the applicant proposes would
be discontinued in connection with the
proposed transaction(s), together with a
statement of the reason for each such
proposed discontinuance.
The Applicants do not anticipate that the Merger will
have any impact on any Department orders, rulings, or
regulations in effect and applicable to Southern.
Section 16-1-65(r) A
list of stockholder approval and all
federal, state and local governmental
approvals required in order to effect the
proposed transaction(s), together with a
description of the status of the
applicant's efforts to obtain each such
approval as of the date reasonably
proximate to the date of the application.
Department of Hart-Scott-Rodino
Justice/Antitrust Division: premerger notification to
be filed as expeditiously
as possible. (The
Department of Justice
will conduct a review of
the competitive aspects
of the Merger
transaction.)
Federal Trade Commission: Premerger notification
forms to be filed.
Securities and Exchange Application seeking
Commission ("SEC"): approval to be filed as
soon as practicable.
Federal Communications Application seeking
Commission ("FCC"): approval for the transfer
of control of certain FCC
authorizations to be
filed as soon as
practicable.
Department of Public Utility This Application.
Control
Connecticut Energy Merger Proxy will be
shareholders: mailed to Shareholders
during the week of July
26, 1999A special meeting
of Connecticut Energy
shareholders is scheduled
for September 14, 1999.
Section 16-1-65(s) A
statement of the percentage of voting
securities of the affected company owned
or controlled by the applicant, and
control exercised or capable of being
exercised over the public service company
after the conclusion of the proposed
transaction.
See Exhibit (Merger Proxy).
2
For purposes of the following R.C.S.A. sections "affected"
company is interpreted to mean Connecticut Energy:
Section 16-1-65B(a)
Affected company's financial statements
for the most recent fiscal year and the
pro forma period (include assumptions),
with and without approval of the proposed
transaction, to include balance sheet,
income statement and statement of source
and application of funds.
See Exhibit 4 (Connecticut Energy SEC Form 10-K for
the fiscal year ending 9/30/98);
Exhibit 5 (Connecticut Energy SEC Form 10-Q for
the period ending 12/31/98);
Exhibit 6 (Connecticut Energy SEC Form 10-Q for
the period ending 3/31/99);
Exhibit 27 (Connecticut Energy 1998 Annual Report
and 1998 Proxy Statement).
Section 16-1-65B(b)
Affected company's existing reporting
structure for personnel, from Connecticut
local operations to chief executive
officer, including board of directors.
See Exhibit 24 (Existing Connecticut
Energy Corporate Structure).
Section 16-1-65B(c)
Affected company's capital structure and
capitalization ratios, present and pro
forma (include assumptions), giving effect
to the proposed transaction.
See Exhibit 25 (Connecticut Energy Capital
Structure and Ratios).
Section 16-1-65B(d)
Affected company: any prospectus,
official statement, preliminary prospectus
or preliminary official statement
associated with the transaction for which
approval is sought.
See Exhibit 2 (Merger Proxy);
Exhibit 18 (Connecticut Energy SEC Form 8-K dated
4/28/99);
Exhibit 19 (Connecticut Energy SEC Form 8-A/A
dated 5/14/99).
Section 16-1-65B(e)
Affected company: a statement of the
interference, authority or control that
applicant is capable of exercising over
the affected company after completion of
the proposed transaction.
See Exhibit 1 (Merger Agreement);
Exhibit 2 (Merger Proxy).
II. COMPLIANCE WITH CONN. GEN. STAT. 16-43 REQUIREMENTS
For purposes of the following regulations, the applicant is
Southern:
Section 16-1-61(a)(1)
Statement of financial condition of
applicant and surviving company. These
statements must reflect the financial
condition of the surviving company before
and after the merger.
See Exhibit 22 (Southern Unaudited 1998 Financial
Statements);
See Exhibit 23 (Southern Annual Report to DPUC on FERC
Form No. 2 for the period ending
9/30/99).
Section 16-1-61(a)(2)
Copy of the merger or acquisition
agreement.
See Exhibit 1 (Merger Agreement).
Section 16-1-61(a)(3)
Description of applicant's property, field
of operation, original cost of property
and equipment (individually or by class),
cost of property and equipment to
applicant, depreciation and amortization
reserves applicable to such property and
equipment (individually or by class).
See Exhibit 26 (Southern Fixed Asset Report);
Exhibit 2 (Merger Proxy).
Section 16-1-61(a)(4)
Financial structure of the deal.
See Application, Section III.B.,
Exhibit (Merger Agreement);
1
Exhibit 2 (Merger Proxy).
Section 16-1-61(a)(5)
Copies of instruments defining the terms
of any proposed security, any plans or
offers of reorganization or readjustment
of indebtedness or capitalization, and any
plan for the retirement or exchange of
securities.
N/A
Section 16-1-61(a)(6)
Statement of the purpose for which the
securities are to be issued (including
some discussion of the consideration for
the Merger and the method of arriving at
that amount).
N/A
Section 16-1-61(a)(7)
Complete description of
obligations/liabilities assumed by
applicant.
N/A
Section 16-1-61(a)(8)
Copy of the latest proxy statement and
annual report of applicant or parent
company.
See Exhibit 2 (Merger Proxy);
Exhibit 27 (Connecticut Energy 1998 Annual Report
and 1998 Proxy Statement).
Section 16-1-61(a)(9)
Copies of all SEC filings of applicant or
parent company in connection with the
merger.
See Exhibit 2 (Merger Proxy);
Exhibit 18 (Connecticut Energy SEC Form 8-K dated
4/28/99);
Exhibit 19 (Connecticut Energy SEC Form 8-A/A
dated 5/14/99).
Section 16-1-61(a)(10)
Description of the property involved in
the transaction.
See Exhibit 26 (Southern Fixed Asset Report);
Exhibit 2 (Merger Proxy).
Section 16-1-61(a)(11)
Certified copy of the Board of Directors
resolutions approving the initiation of
the acquisition.
See Exhibit 7 (Connecticut Energy
Board of Directors Resolutions).
APPENDIX II
Docket No. 99-07-
July 22, 1999
Consisting of 1
page
Exhib Title
it
1 Merger Agreement
2 Connecticut Energy Proxy Statement/Prospectus
3 Energy East and Connecticut Energy Unaudited Pro Forma
Combined Financial Statements
4 Connecticut Energy SEC Form 10-K for the fiscal year
ending 9/30/98
5 Connecticut Energy SEC Form 10-Q for the period ending
12/31/98
6 Connecticut Energy SEC Form 10-Q for the period ending
3/31/99
7 Connecticut Energy Board of Directors Resolutions
8 Energy East and Connecticut Energy Proposed
Organization Chart and Officers - Post Merger
9 Energy East and Connecticut Energy Proposed Boards of
Directors - Post Merger
10 Energy East SEC Form 10-K for year ended 12/31/98
11 Energy East 1998 Annual Report
12 Energy East SEC Form 10-Q for the period ending
3/31/99
13 Energy East SEC Form 8-K dated 4/26/99
14 Energy East SEC Form S-4 Registration Statement
15 Energy East Notice of 1999 Annual Meeting and Proxy
Statement
16 Energy East SEC Form S-8/Registration Statement filed
12/17/98
17 Connecticut Energy SEC Form 8-K dated 3/4/99
18 Connecticut Energy SEC Form 8-K dated 4/28/99
19 Connecticut Energy SEC Form 8-A/A dated 5/14/99
20 Energy East Capital Structure and Ratios, Including
Pro Forma
21 Energy East Interest and Fixed Charge Coverages,
Including Pro Forma
22 Southern Unaudited 1998 Financial Statement
23 Southern Annual Report to DPUC on FERC Form No. 2 for
the period ending 9/30/998
24 Existing Connecticut Energy Corporate Structure
25 Connecticut Energy Capital Structure and Ratios
26 Southern Fixed Asset Report
27 Connecticut Energy 1998 Annual Report and 1998 Proxy
Statement
28 Sworn Written Testimony of Robert E. Rude
29 Sworn Written Testimony of George Bonner
30 Sworn Written Testimony of Vincent L. Ammann, Jr.
_______________________________
1 In Docket No. 96-04-30, the Department approved
Southern's application to sublease its LNG Facility to an
unregulated entity 50-percent owned by an affiliate so as to
achieve ratepayer savings while optimizing the facility in
the competitive wholesale gas supply marketplace.
2 In Docket No. 97-12-18, the Department approved an
agreement between Southern, a nonutility affiliate and a
major gas customer which allocated construction financing
risk to the nonutility affiliate and resulted in margin
sharing between ratepayers, Southern and the nonutility
affiliate.
3 The sale of the Nine Mile Point 2 nuclear plant is
expected to close early in 2000.
4 Merger Sub is a Connecticut corporation formed by Energy
East in April 1999 solely for the purpose of merging with
Connecticut Energy. Merger Sub is wholly owned by Energy
East. The mailing address of Merger Sub's principal
executive offices is c/o Energy East Corporation, One
Canterbury Green, Fourth Floor, Stamford, Connecticut,
06901.
5 Southern is subject to the jurisdiction of the
Department as a public service company pursuant to Title 16
of the Connecticut General Statutes: Southern is a "gas
company" and therefore, by definition, a public service
company. Conn. Gen. Stat. 16-1.
6 To the extent that the Department should find Conn. Gen.
Stat. 16-43 applicable to this Merger, the Applicants and
Southern have filed herein all information required in
R.C.S.A. 16-1-61, and request the Department to accept this
Application as a request for approval under Conn. Gen. Stat.
16-43.
7 The Department of Justice ("DOJ") will conduct an
antitrust review of the transaction under Section 7A of the
Clayton Act, 15 U.S.C. 18a, as added by Section 201 of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, Pub.
L. No. 94-435, 90 Stat. 1390.
8 The Federal Energy Regulatory Commission ("FERC") has
issued a certificate of public convenience and necessity
under Section 7(c) of the Natural Gas Act to Total Peaking
Services, L.L.C. ("Total Peaking"), of which Connecticut
Energy indirectly holds a fifty percent (50%) interest, with
respect to the LNG Facility. Total Peaking is required to
notify FERC of the merger and FERC may exercise its
authority to re-examine Total Peaking's tariff sheets as a
result of the merger.
9 Southern holds radio station licenses from the Federal
Communications Commission ("FCC") pursuant to the
Communications Act of 1934 with respect to its dispatch
center and certain of its communications equipment and
devices. Southern will be applying to the FCC to approve
transfer of the indirect holder of the licenses pursuant to
47 U.S.C. 310(d) as a result of the merger.
10 Shareholder approval of the merger transaction requires
the affirmative vote of the holders of at least two-thirds
of the shares of Connecticut Energy common stock outstanding
on the July 12, 1999 record date for the special meeting of
Connecticut Energy shareholders to vote on the Merger. No
approval by the shareholders of Energy East is required to
effect the Merger. The Connecticut Energy Board of
Directors has determined that the Merger Agreement and the
transactions contemplated thereby are in the best interests
of Connecticut Energy and have recommended unanimously that
the Connecticut Energy shareholders vote for the Merger
proposal. During the week of July 26, 1999, Connecticut
Energy intends to mail its Proxy Statement/Prospectus to
shareholders, a copy of which is annexed hereto as Exhibit
2. A special shareholders' meeting to vote on the Merger is
scheduled for September 14, 1999 ("Special Meeting").
11 As part of Appendix I, the Applicants have provided a
brief description of the status of Applicants' efforts to
obtain each such approval.
12 The Merger Agreement contemplates an effective date
prior to April 23, 2000 (or October 23, 2000, if the only
barrier to closing is the inability to obtain the requisite
governmental approvals).
13 Pursuant to Conn. Gen. Stat. 16-47(c), a surety bond in
the amount of $50,000, conditioned to indemnify the
Department for such expenses, has been filed with the
transmittal letter accompanying this Application.
14 Connecticut Energy is a holding company that is exempt
from the registration requirement of PUHCA.
15 This pro forma figure includes CMP Group and CTG
Resources financials and adjustments for, among other items,
merger-related expenses. See Exhibit 2 of this Application
for details.
16 With Energy East's merger with CMP Group and the
recently announced merger with CTG Resources, the combined
company will have 1,347,000 electric customers in New York
and Maine and more than 542,000 natural gas customers in
Connecticut, Maine and New York.
17 Earnings per share restated on a post-split basis.
EXHIBIT D-3
UNITED STATES OF AMERICA
FEDERAL COMMUNICATIONS COMMISSION
PART I - APPLICATION FOR CONSENT TO TRANSFER CONTROL OF
CORPORATION HOLDING STATION LICENSE
1. (a) Name of corporate licensee: The Southern Connecticut
Gas Company
(b) Number and street address: 60 Marsh Hill Road
(c) City: Orange (d) State: CT (e) ZIP Code: 06477
2. Internet address: [email protected]
3. Taxpayer Identification Number: 06-0835501
4. Call sign and radio service of each station: KCC259
IW POWER
5. (a) Fee Type Code: PATM
(b) Fee Multiple: 1
(c) Fee Due: $45.00
6. Name and Address of Transferee:
The Southern Connecticut Gas Company
60 Marsh Hill Road, Orange, Ct 06477-3624
7. Subsequent to the Transfer of Control, will the licensee
corporation be the same corporate entity? That is, will it
retain its present name, corporate charter, State of
incorporation, etc.? If "NO", give details on Page 3.
YES
8. Subsequent to the Transfer of Control, will the licensee
corporation be a representative of any foreign government? If
"YES", give details on Page 3.
NO
CERTIFICATION
. Applicant waives any claim to the use of any particular
frequency regardless of prior use by license or otherwise;
. Applicant will have unlimited access to the radio equipment
and will control access to exclude unauthorized persons;
. Neither applicant nor any member thereof is a foreign
government or representative thereof;
. Applicant certifies that all statements made in this
application and attachments are true, complete and made in
good faith;
. Neither the applicant nor any other party to the application
is subject to a denial of Federal benefits that includes FCC
benefits pursuant to Section 5301 of the Anti-Drug Abuse Act
of 1988, 21 U.S.C. Section 862, because of a conviction for
possession or distribution of a controlled substance.
WILLFUL FALSE STATEMENTS MADE ON THIS FORM ARE PUNISHABLE BY FINE
AND/OR IMPRISONMENT (U.S. CODE, TITLE 18, SECTION 1001), AND/OR
REVOCATION OF ANY STATION LICENSE OR CONSTRUCTION PERMIT (U.S.
CODE, TITLE 47, SECTION 312(A)(1)), AND/OR FORFEITURE (U.S. CODE,
TITLE 47, SECTION 503).
SIGNATURE /s/ Peter D. Loomis DATE: 8/18/99
SIGNATURE /s/ Peter D. Loomis DATE: 8/18/99
Individual Partner Officer X Other (Specify):_____
<PAGE>
DETAILS / ADDITIONAL INFORMATION:
Exhibit A
Description of the proposed merger transaction
between Energy East Corporation
and Connecticut Energy Corporation
The Southern Connecticut Gas Company ("SCG") is a
Connecticut public service company wholly-owned by Connecticut
Energy Corporation ("Connecticut Energy"). On April 23, 1999,
Connecticut Energy entered into an Agreement and plan of Merger
("the Merger Agreement") with Energy East Corporation ("Energy
East"), a New York corporation.
Under the terms of the Merger Agreement, Connecticut Energy
will merge into Merger Co., a wholly-owned subsidiary of Energy
East. Merger Co. will be the surviving company, will change its
name to Connecticut Energy Corporation, and will continue to
conduct Connecticut Energy's utility and nonutility operations as
a direct, wholly-owned subsidiary of Energy East. Pursuant to
the Merger Agreement, SCG will not be merged with any of Energy
East's currently existing operating utility companies.
Since this is a merger involving a holding company, rather
than a merger of operating utility companies, no substantive
changes are expected in the manner in which the FCC licenses
subject to this application will be utilized. In particular,
following the merger, SCG will remain the licensee and will not
change its name.
Connecticut Energy expects to obtain shareholder approval at
a special meeting on September 14, 1999. No Energy East
shareholder approval is required. The parties are currently in
the process of obtaining a variety of state and federal
regulatory approvals, and hope to consummate the merger by the
end of 1999. As a result, an expedited approval of this
application is respectfully requested as necessary.
<TABLE> <S> <C>
<ARTICLE> OPUR1 EXHIBIT 27
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S COMBINED CONDENSED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED
JUNE 30, 1999 INCLUDED IN ITS FORM U-1 FILING AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<BOOK-VALUE> PER-BOOK PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 2,155,804 2,432,364
<OTHER-PROPERTY-AND-INVEST> 99,328 109,170
<TOTAL-CURRENT-ASSETS> 1,599,666 1,430,164
<TOTAL-DEFERRED-CHARGES> 0 0
<OTHER-ASSETS> 274,362 654,765
<TOTAL-ASSETS> 4,129,160 4,626,463
<COMMON> 1,174 1,257
<CAPITAL-SURPLUS-PAID-IN> 819,960 1,038,017
<RETAINED-EARNINGS> 754,088 754,088
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,536,225 1,754,365
25,000 25,000
10,131 10,131
<LONG-TERM-DEBT-NET> 1,386,621 1,535,079
<SHORT-TERM-NOTES> 0 4,150
<LONG-TERM-NOTES-PAYABLE> 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,018 3,647
0 0
<CAPITAL-LEASE-OBLIGATIONS> 0 0
<LEASES-CURRENT> 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,169,165 1,294,091
<TOT-CAPITALIZATION-AND-LIAB> 4,129,160 4,626,463
<GROSS-OPERATING-REVENUE> 2,475,995 2,706,279
<INCOME-TAX-EXPENSE> 225,355 231,764
<OTHER-OPERATING-EXPENSES> 353,538 405,341
<TOTAL-OPERATING-EXPENSES> 1,892,006 2,087,460
<OPERATING-INCOME-LOSS> 583,989 618,819
<OTHER-INCOME-NET> 7,888 9,013
<INCOME-BEFORE-INTEREST-EXPEN> 0 0
<TOTAL-INTEREST-EXPENSE> 129,534 142,974
<NET-INCOME> 231,213 245,782
5,775 5,775
<EARNINGS-AVAILABLE-FOR-COMM> 0 0
<COMMON-STOCK-DIVIDENDS> 102,061 102,061
<TOTAL-INTEREST-ON-BONDS> 0 0
<CASH-FLOW-OPERATIONS> 0 0
<EPS-BASIC> 1.88 1.87
<EPS-DILUTED> 1.88 1.87
</TABLE>
EXHIBIT H-1
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
under the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
(Release No. 35-_____; 70-______) _____________,
1999
_____________________________
In the Matter of )
)
Energy East Corporation, et al.)
P.O. Box 1196 )
Stamford, Connecticut 06904-1196)
_____________________________ )
NOTICE IS HEREBY GIVEN that Energy East Corporation ( Energy
East ), P.O. Box 1196, Stamford, Connecticut 06904-1196, a New
York corporation and an exempt public utility holding company,
has filed with this Commission an application pursuant to the
Public Utility Holding Company Act of 1935 (the Act ),
designating Section 3(a)(1), Section 9(a)(2) and Section 10 of
the Act as applicable to the proposed transaction. Energy East
requests an order of the Commission authorizing Energy East to
acquire all of the issued and outstanding common stock of
Connecticut Energy Corporation ( Connecticut Energy ), a
Connecticut corporation, and exempting Energy East and its
wholly-owned subsidiary, Merger Co., under Section 3(a)(1) of the
Act. Connecticut Energy is an exempt public utility holding
company pursuant to Section 3(a)(1) and Rule 2 of the Act.
Energy East, an exempt holding company under Section 3(a)(1)
of the Act by order of the Commission, currently holds, directly
and indirectly, in excess of 5% of the voting securities of two
public utility companies as defined under the Act: New York
State Electric & Gas Corporation ( NYSEG ) and CMP Natural Gas,
L.L.C. NYSEG is engaged in purchasing, transmitting and
distributing electricity, and purchasing, transmitting and
distributing natural gas exclusively in the State of New York.
NYSEG serves approximately 826,000 electric customers and 244,000
natural gas customers. CMP Natural Gas, L.L.C. is engaged in
distributing natural gas exclusively in the State of Maine and
began providing service to retail customers in May 1999.
For the year ended December 31, 1998, electric revenues of
approximately $1.7 billion and gas revenues of approximately $306
million accounted for approximately 85% and 15%, respectively, of
Energy East s consolidated gross utility revenues. Consolidated
assets of Energy East and its subsidiaries as of December 31,
1998 were approximately $4.9 billion, consisting of $3.9 billion
in net utility plant and $1.0 billion in other utility and
nonutility assets. For the twelve months ended December 31,
1998, consolidated operating revenues, operating income and net
income for Energy East and its subsidiaries were approximately
$2.5 billion, $475 million and $194 million, respectively.
Energy East also has a number of direct and indirect
subsidiaries that are not public utility companies under the
Act, including Energy East Enterprises, Inc. and XENERGY
Enterprises, Inc. Energy East Enterprises, a wholly owned
subsidiary of Energy East and currently an exempt public utility
holding company under the Act by order of the Commission dated
February 12, 1999, owns natural gas and propane air distribution
companies. Energy East Enterprises nonutility subsidiaries
consist of New Hampshire Gas Corporation, an energy services
company in New Hampshire specializing in propane air distribution
systems; Southern Vermont Natural Gas Corporation, which is
developing a combined natural gas supply and distribution project
in Vermont; and Seneca Lake Storage, Inc., which proposes to own
and operate a gas storage facility in New York.
XENERGY Enterprises, Inc., a wholly owned subsidiary of
Energy East, invests in providers of energy and
telecommunications services. It currently holds no public
utility assets and is neither a public utility company nor a
holding company under the Act. XENERGY Enterprises' principal
subsidiaries include XENERGY Inc., an energy services,
information systems and consulting company that specializes in
energy management, conservation engineering and demand-side
management; Energy East Solutions, Inc., which markets
electricity and natural gas to end users and provides wholesale
commodities to retail electric suppliers in the northeastern
United States; NYSEG Solutions, Inc., which markets electricity
and natural gas to end users and provides wholesale commodities
to retail electric suppliers in the State of New York; Energy
East Telecommunications, Inc., which provides telecommunication
services, including the construction and operation of fiber optic
networks; and Cayuga Energy, Inc., which holds investments in
cogeneration facilities.
Energy East s other current direct nonutility subsidiaries
include Energy East Management Corporation, which invests the
proceeds of the sale of several coal-fired generation stations;
Merger Co., formed solely for the purpose of consummating the
proposed transaction; Oak Merger Co., formed solely for the
purpose of consummating a proposed merger with CTG Resources,
Inc.; and EE Merger Corp., formed solely for the purpose of
consummating a proposed merger with CMP Group, Inc.
Connecticut Energy is a holding company primarily engaged in
the retail distribution of natural gas through its principal
wholly-owned subsidiary, The Southern Connecticut Gas Company
( Southern Connecticut ). Connecticut Energy neither owns nor
operates any physical properties. Connecticut Energy, through
its subsidiaries, is an energy delivery, products and services
company that provides an array of energy commodities and services
to commercial and industrial customers throughout New England.
Connecticut Energy s operating revenues totaled
approximately $242 million for the fiscal year ended September
30, 1998. Connecticut Energy s consolidated net income for the
same period was $19 million.
Southern Connecticut, a public service company incorporated
under the laws of Connecticut, is engaged in the retail
distribution of natural gas for residential, commercial and
industrial uses and the transportation of natural gas for
commercial and industrial users. Southern Connecticut serves
approximately 158,000 customers in the State of Connecticut.
Connecticut Energy also has a number of direct and indirect
subsidiaries that are not public utility companies under the
Act. These include CNE Energy Services Group, Inc. ( CNE
Energy ), CNE Development Corporation ( CNE Development ) and CNE
Venture-Tech, Inc. ( CNE Venture-Tech ). CNE Energy provides an
array of energy products and services to commercial and
industrial customers throughout New England, both on its own and
through its participation as a member of various energy-related
limited liability companies. CNE Energy s principal subsidiaries
include Conectiv/CNE Energy Services, LLC, which sells natural
gas, fuel oil and other services to commercial, industrial and
municipal customers in New England; Total Peaking Services, LLC,
which operates a federally certificated 1.2 billion cubic foot
liquefied natural gas open access storage facility in Milford,
Connecticut; and Conectiv/CNE Peaking, LLC, which provides a firm
in-market supply source to assist energy marketers and local gas
distribution companies in meeting the maximum demands of their
customers by offering firm supplies for peak-shaving and
emergency deliveries. CNE Development is a 16.67% equity
participant in East Coast Natural Gas Cooperative, LLC, which
purchases and stores gas spot supplies, provides storage service
utilization services and is involved in bundled sales. CNE
Venture-Tech invests in ventures that produce or market
technologically advanced energy-related products and energy
service companies.
The acquisition by Energy East of the common stock of
Connecticut Energy will be effected pursuant to the terms of the
Agreement and Plan of Merger by and among Connecticut Energy,
Energy East and Merger Co., dated as of April 23, 1999, as
amended (the Merger Agreement ), which provides for the merger
of Connecticut Energy into Merger Co. (the Transaction ). Upon
consummation of the Transaction, the surviving entity, Merger
Co., will change its name to, and conduct a public utility
business in Connecticut as, a direct wholly-owned subsidiary of
Energy East under the name Connecticut Energy Corporation.
Under the Merger Agreement, upon the effective date of the
Transaction, all outstanding shares of common stock of
Connecticut Energy (other than those that are held by Connecticut
Energy shareholders who have not voted in favor of the
Transaction and have properly demanded dissenters rights) will
be converted into the right to receive the merger consideration.
Connecticut Energy shareholders can elect to receive cash, Energy
East shares, or a combination of cash and Energy East shares.
The cash consideration amounts to $42.00 in cash, without
interest, per share. The stock consideration is a number of
Energy East shares that will vary depending on the average of the
closing prices of Energy East shares on the New York Stock
Exchange during the 20 trading days immediately preceding the
second trading day prior to the effective time of the
Transaction. Subject to an adjustment for tax reasons, 50% of
all outstanding Connecticut Energy shares will be converted into
cash and 50% will be converted into Energy East shares. If
Connecticut Energy shareholders as a group submit elections to
convert more than half of the outstanding Connecticut Energy
shares into cash or more than half into Energy East shares, then
an equitable pro rata adjustment will be made to ensure that half
of the outstanding Connecticut Energy shares are converted into
cash and half are converted into Energy East shares.
The Transaction has been approved by the boards of directors
of Energy East and Connecticut Energy and will be considered and
voted upon by the shareholders of Connecticut Energy at a special
meeting of shareholders to be held on September 14, 1999. The
Transaction does not require the approval of the shareholders of
Energy East. Consummation of the Transaction is conditioned on
the approval of this Commission under the Act, approvals of the
Connecticut Department of Public Utility Control; approval of the
Federal Communications Commission and on the filing of Pre-Merger
Notification Report Forms under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
The application states that following the consummation of
the Transaction, both NYSEG and Southern Connecticut will derive
almost all of their gas from a common source of supply under
Section 2(a)(29)(B). NYSEG receives approximately 63% of its gas
supply from the Texas and Louisiana Basins and approximately
28.5% of its gas supply from the Western Canadian Sedimentation
Basin. Southern Connecticut receives approximately 64% of its
gas supply from the Texas and Louisiana Basins and approximately
35% of its gas supply from the Western Canadian Sedimentation
Basin. Over 36% of NYSEG s total transportation capacity
requirements and nearly all of Connecticut Energy s total
transportation capacity requirements are carried on the
Tennessee, Iroquois, Algonquin and Texas Eastern pipelines.
Energy East states that it will not derive a material part of its
income from Southern Connecticut, and Energy East and each of its
public utility subsidiary companies from which it derives any
material part of its income (i.e., NYSEG) will remain
predominantly intrastate in character and carry on their business
substantially in a single state, namely, New York. Accordingly,
Energy East is requesting an order of exemption under Section
3(a)(1) of the Act.
The application and any amendments thereto are available for
public inspection through the Commission s Office of Public
Reference. Interested persons wishing to comment or request a
hearing should submit their views in writing by ____________,
1999 to the Secretary, Securities and Exchange Commission,
Washington, D.C. 20549, and serve a copy on Energy East at the
address specified above. Proof of service (by affidavit or, in
case of attorney at law, by certificate) should be filed with the
request. Any request for a hearing must identify specifically
the issues of fact or law that are disputed. A person who so
requests will be notified of any hearing, if ordered, and will
receive a copy of any notice or order issued in this matter.
After said date, the application, as filed or as it may be
amended, may be granted and/or permitted to become effective.
For the Commission, by the Division of Investment Management
pursuant to delegated authority.
Jonathan G. Katz
Secretary
<TABLE>
<CAPTION>
Exhibit 1
Energy East Corporation
Combined Condensed Balance Sheet
Giving Effect to the
Connecticut Energy Merger
At June 30, 1999
Actual and Pro Forma
(Unaudited)
<S> <C> <C> <C> <C>
Connecticut
Energy Connecticut Energy Merger
East Energy Pro Forma Pro Forma
Actual Actual Adjustments Energy East
- ----------------------------------------------------------------------------------------------
(Thousands)
Assets
Current Assets
Cash and cash equivalents. . $1,291,845 $ 5,966 ($218,140)(4) $1,079,671
Special deposits . . . . . . 911 911
Accounts receivable, net . . 133,094 32,778 165,872
Other. . . . . . . . . . . . 173,816 9,894 - 183,710
---------- -------- --------- ----------
Total Current Assets . . . 1,599,666 48,638 (218,140) 1,430,164
Utility Plant, at Original Cost. . 4,129,975 415,728 - 4,545,703
Less accumulated depreciation . . 1,983,423 145,411 - 2,128,834
---------- -------- --------- ----------
Net utility plant in service. . 2,146,552 270,317 - 2,416,869
Construction work in progress . . 9,252 6,243 - 15,495
---------- -------- --------- ----------
Total Utility Plant. . . . 2,155,804 276,560 - 2,432,364
Other Property and Investments, Net . . 99,328 9,842 - 109,170
Regulatory Assets . . . . . . 249,033 81,392 - 330,425
Other Assets. . . . . . . . . 25,329 47,195 7,016(5) 79,540
Goodwill. . . . . . . . . . . - - 244,800(5)(6)(7) 244,800
---------- -------- --------- ----------
Total Assets . . . . . . . $4,129,160 $463,627 $ 33,676 $4,626,463
========== ======== ========= ==========
The notes on pages 5 through 7 of this exhibit are an integral part of the pro forma combined
condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Energy East Corporation
Combined Condensed Balance Sheet
Giving Effect to the
Connecticut Energy Merger
At June 30, 1999
Actual and Pro Forma
(Unaudited)
<S> <C> <C> <C> <C>
Connecticut
Energy Connecticut Energy Merger
East Energy Pro Forma Pro Forma
Actual Actual Adjustments Energy East
- ----------------------------------------------------------------------------------------------
Liabilities (Thousands)
Current Liabilities
Current portion of long-term debt $ 2,018 $ 1,629 - $ 3,647
Notes payable. . . . . . . . - 4,150 - 4,150
Taxes accrued. . . . . . . . 298,215 10,156 - 308,371
Other. . . . . . . . . . . . 227,554 23,702 $ 4,500(7) 255,756
---------- --------- -------- ----------
Total Current Liabilities. 527,787 39,637 4,500 571,924
Regulatory Liabilities
Other . . . . . . . . . . . 106,127 2,111 - 108,238
---------- --------- -------- ----------
Total Regulatory Liabilities. . 106,127 2,111 - 108,238
Deferred income taxes . . . 215,920 74,923 2,456(8) 293,299
Other . . . . . . . . . . . 321,349 6,990 - 328,339
Long-term debt. . . . . . . 1,386,621 148,458 - 1,535,079
---------- --------- -------- ----------
Total liabilities. . . . . 2,557,804 272,119 6,956 2,836,879
Commitments . . . . . . . . . - 88 - 88
Preferred stock redeemable solely
at the option of subsidiary . . 10,131 - - 10,131
Preferred stock subject to mandatory
redemption requirements. . 25,000 - - 25,000
Common Stock Equity
Common stock Energy East
($.01 par value, 300,000 shares
authorized and 115,878 shares
outstanding as of June 30, 1999) 1,174 - 83(9) 1,257
Common Stock Equity
Common stock Connecticut Energy
($1 par value, 30,000 shares
authorized and 10,388 shares
outstanding as of June 30, 1999) - 10,388 (10,388)(9) -
Capital in excess of par value . . 819,960 123,715 94,342(9) 1,038,017
Retained earnings. . . . . . 754,088 57,317 (57,317) 754,088
Treasury stock, at cost (1,500
shares at June 30, 1999). . (38,997) - - (38,997)
---------- --------- -------- ----------
Total Common Stock Equity. 1,536,225 191,420 26,720 1,754,365
---------- --------- -------- ----------
Total Liabilities and
Shareholders' Equity . . $4,129,160 $463,627 $ 33,676 $4,626,463
=========== ========= ========= ===========
The notes on pages 5 through 7 of this exhibit are an integral part of the pro forma combined
condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Energy East Corporation
Combined Condensed Statement of Income
Giving Effect to the
Connecticut Energy Merger
Twelve Months Ended June 30, 1999
Actual and Pro Forma
(Unaudited)
<S> <C> <C> <C> <C>
Connecticut
Energy Connecticut Energy Merger
East Energy Pro Forma Pro Forma
Actual Actual Adjustments Energy East
- ----------------------------------------------------------------------------------------------
(Thousands, except per share amounts)
Operating Revenues
Sales and services. . . . . $2,475,995 $230,284 - $2,706,279
Operating Expenses
Fuel used in electric generation 199,842 - - 199,842
Electricity purchased . . . 776,077 - - 776,077
Natural gas purchased . . . 171,898 101,489 - 273,387
Other operating expenses. . 353,538 51,803 - 405,341
Maintenance . . . . . . . . 97,329 3,559 - 100,888
Depreciation and amortization. . 688,102 17,714 $6,120(10) 711,936
Other taxes . . . . . . . . 209,862 14,769 - 224,631
Gain on sale of generation assets . . (674,572) - - (674,572)
Write off of Nine Mile Point 2 . 69,930 - - 69,930
---------- -------- -------- -----------
Total Operating Expenses 1,892,006 189,334 6,120 2,087,460
---------- -------- -------- -----------
Operating Income. . . . . . . 583,989 40,950 (6,120) 618,819
Other Income and Deductions . (7,888) (1,125) - (9,013)
Merger-related expenses . . . - 1,537 - 1,537
Interest Charges, Net . . . . 129,534 13,440 - 142,974
Preferred Stock Dividends of
Subsidiary. . . . . . . . . 5,775 - - 5,775
---------- -------- -------- -----------
Income Before Federal Income Taxes 456,568 27,098 (6,120) 477,546
Federal Income Taxes. . . . . 225,355 6,409 - 231,764
---------- -------- -------- -----------
Net Income. . . . . . . . . . $ 231,213 $ 20,689 ($6,120) $ 245,782
=========== ========= ========= ===========
Earnings Per Share, basic
and diluted. . . . . . . $1.88 $1.87
Average Common Shares Outstanding. 123,296 8,310(11) 131,606
Per share amounts and number of average Energy East shares outstanding have been restated to
reflect the two-for-one common stock split effective April 1, 1999.
The notes on pages 5 through 7 of this exhibit are an integral part of the pro forma combined
condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Energy East Corporation
Combined Condensed Statement of Retained Earnings
Giving Effect to the
Connecticut Energy Merger
Twelve Months Ended June 30, 1999
Actual and Pro Forma
(Unaudited)
<S> <C> <C> <C> <C>
Connecticut
Energy Connecticut Energy Merger
East Energy Pro Forma Pro Forma
Actual Actual Adjustments Energy East
- ----------------------------------------------------------------------------------------------
(Thousands)
Balance, beginning of period. $624,936 $51,098 ($51,098) $624,936
Add net income. . . . . . . . 231,213 20,689 (20,689) 231,213
Deduct dividends on common stock . 102,061 13,862 (13,862) 102,061
Deduct change in unearned
compensation and minimum
pension liability . . . . . - (608) 608 -
-------- --------- --------- ---------
Balance, end of period. . . . $754,088 $57,317 ($57,317) $754,088
======== ========= ========= =========
The notes on pages 5 through 7 of this exhibit are an integral part of the pro forma combined
condensed financial statements.
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FIN ANCIAL STATEMENTS
GIVING EFFECT TO THE C ONNECTICUT ENERGY MERGER
Note 1. Unaudited Pro Forma Combined Condensed Financial
Statements.
The unaudited pro forma combined condensed financial
statements as of and for the twelve months ended June 30, 1999,
have been adjusted to give effect to the Connecticut Energy
merger. The unaudited pro forma combined condensed financial
statements reflect preliminary purchase accounting adjustments in
compliance with generally accepted accounting principles.
Estimates relating to the fair value of some assets, liabilities
and other events have been made as more fully described below.
Actual adjustments will be made on the basis of actual assets,
liabilities and other items as of the closing date of the merger
on the basis of appraisals and evaluations. Therefore, actual
amounts may differ from those reflected below.
The unaudited pro forma combined condensed balance sheet and
statement of retained earnings assume that the merger occurred on
June 30, 1999. The unaudited pro forma combined condensed
statement of income for the twelve months ended June 30, 1999
assume that the merger was completed on July 1, 1998 and does not
give effect to the sales of Energy East's coal-fired generation
assets prior to when they occurred in March and May 1999 and the
pending sale of Energy East's interest in nuclear generation
assets.
The pro forma combined condensed financial statements should
be read in conjunction with the consolidated historical financial
statements and the related notes of Energy East and Connecticut
Energy, which are incorporated by reference. The pro forma
statements are for illustrative purposes only. They are not
necessarily indicative of the financial position or operating
results that would have occurred had the sales and the mergers
been completed on July 1, 1998 or June 30, 1999, as assumed
above; nor is the information necessarily indicative of future
financial position or operating results.
Note 2. Accounting Method.
The Connecticut Energy merger will be accounted for as an
acquisition of Connecticut Energy by Energy East under the
purchase method of accounting in accordance with generally
accepted accounting principles. A portion of the purchase price
will be allocated to nonutility assets and liabilities of
Connecticut Energy based on their estimated fair market values at
the date of acquisition. As a regulated utility, the assets and
liabilities of The Southern Connecticut Gas Company will not be
revalued. The difference between the purchase price,
representing fair value, and the recorded amounts will be shown
as goodwill on the balance sheet of Connecticut Energy.
Note 3. Earnings Per Share and Average Shares Outstanding.
The pro forma earnings per share and number of average
shares outstanding have been restated to reflect Energy East s
two-for-one common stock split, effective April 1, 1999, and the
average number of shares that would have been outstanding if the
merger occurred at the beginning of the periods presented
assuming a conversion of half of the Connecticut Energy shares
into 1.60 Energy East shares per Connecticut Energy share. The
following table presents the range of shares that could be issued
based on various potential conversion ratios under the merger
agreement:
Conversion ratio 1.43 1.60 1.82
Number of shares (thousands) 7,427 8,310 9,453
Note 4. Cash Consideration.
Reflects the cash consideration paid to Connecticut Energy
shareholders based on a purchase price per share of $42.00 for
half of the shares outstanding.
Note 5. Other Asset.
Reflects the recognition of an other asset and reduction of
goodwill for the estimated difference between Connecticut
Energy s pension and other postretirement benefit obligations and
the fair value of the respective plan assets.
Note 6. Goodwill.
Reflects the recognition of an amount of goodwill equal to
the excess of the estimated purchase price of $436.3 million over
the estimated net fair value of the assets and liabilities of
Connecticut Energy acquired of $191.4 million, plus estimated
transaction costs of $4.5 million related to the merger, reduced
by the estimated difference between Connecticut Energy s pension
and other postretirement benefit obligations and the fair value
of the respective plan assets.
Note 7. Merger-Related Costs.
Energy East and Connecticut Energy will incur direct
expenses related to the merger, including accounting and
consulting fees. The pro forma adjustments include an estimate
for Energy East s merger-related costs of $4.5 million, which is
included in goodwill. Connecticut Energy expects to incur
approximately $6.9 million of merger-related costs, which it will
expense as incurred. The actual amount of merger-related costs
may differ from the amounts reflected in the unaudited pro forma
combined condensed financial statements.
Note 8. Income Taxes.
Income taxes on the pro forma combined condensed income
statement have been based on the statutory rate and adjusted for
goodwill, which is not tax deductible, and depreciation that is
accounted for differently for tax purposes.
Note 9. Common Stock.
Reflects the Energy East shares to be issued to Connecticut
Energy shareholders in exchange for half of their Connecticut
Energy shares, assuming a conversion ratio of 1.60 Energy East
shares per Connecticut Energy share, and the purchase of half of
their Connecticut Energy shares for cash.
Note 10. Amortization of Goodwill.
Represents the amortization of goodwill, for financial
accounting purposes, over a 40-year period. The goodwill is not
amortizable for tax purposes.
Note 11. Energy East Shares Issued.
Reflects the number of Energy East shares to be issued in
the merger assuming a conversion of half of the Connecticut
Energy shares into 1.60 Energy East shares per Connecticut Energy
share.
