No. 070-09569
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
AMENDMENT NO. 1 TO FORM U-1
APPLICATION/DECLARATION
UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Energy East Corporation, One Canterbury Green, Stamford, Connecticut 06904
CMP Group, Inc., 83 Edison Drive, Augusta, Maine 04336
CTG Resources, Inc., 100 Columbus Boulevard, Hartford, Connecticut 06103
Berkshire Energy Resources, 115 Cheshire Road, Pittsfield, Massachusetts 01201
(Name of company or companies filing this statement and
address of principal executive offices)
Kenneth M. Jasinski Arthur W. Adelberg
Executive Vice President and General Executive Vice President
Counsel CMP Group, Inc.
Energy East Corporation 83 Edison Drive
One Canterbury Green Augusta, Maine 04336
Stamford, Connecticut 06904 Telephone: (207) 623-3521
Telephone: (203) 325-0690
Arthur C. Marquardt Scott S. Robinson
Chairman, President and Chief Executive President and Chief Executive Officer
Officer Berkshire Energy Resources
CTG Resources, Inc. 115 Cheshire Road
100 Columbus Boulevard Pittsfield, Massachusetts 01201
Hartford, Connecticut 06103 Telephone: (413) 442-1511
Telephone: (860) 727-3000
(Names and addresses of agents for service)
Copies to:
Elizabeth A. Moler, Esq. William T. Baker, Jr., Esq.
Adam Wenner, Esq. Thelen Reid & Priest
Vinson & Elkins L.L.P. 40 West 57th Street
The Willard Office Building New York, New York 10019
1455 Pennsylvania Avenue, N.W. Telephone: (212) 603-2106
Washington, D.C. 20004-1008
Telephone: (202) 639-6500
Frank Lee, Esq.
Huber Lawrence & Abell
605 Third Avenue
New York, New York 10158
Telephone: (212) 682-6200
<PAGE>
The Form U-1 Application/Declaration in this proceeding originally filed
with the Securities and Exchange Commission on October 29, 1999 is hereby
amended and restated in its entirety as follows:
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TABLE OF CONTENTS
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ITEM 1. DESCRIPTION OF PROPOSED MERGER 2
A. INTRODUCTION 2
1. General Request 4
2. Overview of the Mergers 5
a. CMP Group Merger 5
b. CTG Resources Merger 5
c. Berkshire Energy Merger 5
B. DESCRIPTION OF THE PARTIES TO THE MERGER 6
1. Energy East 6
a. Public Utility Operations of Energy East 6
b. Non-Public Utility Affiliates of Energy East 9
c. Non-Public Utility Affiliates of Connecticut Energy 12
2. CMP Group 14
a. Public Utility Operations of CMP Group 15
b. Non-Public Utility Affiliates of CMP Group 17
3. CTG Resources 18
a. Public Utility Affiliate of CTG Resources 19
b. Non-Public Utility Affiliates of CTG Resources 19
4. Berkshire Energy 20
a. Public Utility Affiliate of Berkshire Energy 20
b. Non-Public Utility Affiliates of Berkshire Energy 20
C. DESCRIPTION OF THE MERGER 21
1. CMP Group Merger Agreement 21
2. CTG Resources Merger Agreement 22
3. Berkshire Energy Merger Agreement 22
D. MANAGEMENT AND OPERATION OF THE COMPANIES
FOLLOWING THE MERGER 23
ITEM 2. FEES, COMMISSIONS AND EXPENSES 24
ITEM 3. APPLICABLE STATUTORY PROVISIONS 25
A. SECTION 9(A)(2) 27
B. SECTION 10(B) 29
1. Section 10(b)(1) 30
2. Section 10(b)(2) 34
a. Reasonableness of Consideration 34
b. Reasonableness of Fees 39
3. Section 10(b)(3) 42
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C. SECTION 10(C) 44
1. Acquisition Must be Lawful 44
2. Combination and Integration of Electric Utility Operations 46
a. Changes in the Electric Utility Industry 48
b. Restructuring of NEPOOL and NYPP into Open,
Competitive and Coordinated Markets 51
(i) The NYPP and NYISO 53
(ii) NEPOOL and ISO-NE 57
(iii) Coordination between ISO-NE and NYISO 61
(a) Interface transfer capacity 61
(b) Coordination and joint planning by NYSEG
and Central Maine Power through the NYISO
and ISO-NE 63
(iv) Integrating Effects of NYISO and ISO-NE
Transmission Tariffs 65
(v) NYSEG's and Central Maine Power's Transmission
Pricing Proposal Will Provide Additional Integration 66
c. Statutory Standards for Electric Integration
Will Be Satisfied 67
(i) Physical interconnection or capability
of physical interconnection 67
(ii) Coordination of electric operations 71
(iii) Single area or region 74
(iv) Not so large as to impair advantages of localized
management, efficient operation, and the
effectiveness of regulation 75
3. Combination of Gas utility operations 77
a. Section 10(c)(1) 77
(i) Section 8 77
(ii) Section 11 78
b. "ABC" Clauses 79
c. Gas utility integration standards
(Section 10(b)(2)) 84
(i) Section 2(a)(29)(B): "substantial economies
may be effectuated by being operated as a
single coordinated system" 86
(ii) Section 2(a)(29)(B): "a single area or region
in one or more states" 86
(iii) Section 2(a)(29)(B): System size from
perspective of "the advantages of local
management, efficient operation and the
effectiveness of regulation 91
4. Economies and Efficiencies from the Merger (Section 10(c)(2)) 91
a. Corporate Operations 94
b. Administration 94
c. Non-Gas Supply Purchasing Economies 94
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d. Gas Supply 94
e. Additional Expected Benefits 95
5. Retention of Non-Utility Business 96
D. SECTION 10(F) 98
ITEM 4: REGULATORY APPROVALS 98
A. ANTITRUST 98
B. FEDERAL POWER ACT 99
C. ATOMIC ENERGY ACT 99
D. TELECOMMUNICATIONS 99
E. STATE PUBLIC REGULATION 100
ITEM 5: PROCEDURE 101
ITEM 6: EXHIBITS AND FINANCIAL STATEMENTS 101
A. EXHIBITS 101
B. FINANCIAL STATEMENTS 104
ITEM 7: INFORMATION AS TO ENVIRONMENTAL EFFECTS 105
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ITEM 1. DESCRIPTION OF PROPOSED MERGERS
A. INTRODUCTION
This Application/Declaration seeks approvals relating to the proposed
combinations of Energy East Corporation ("Energy East") with CMP Group, Inc.
("CMP Group"), Energy East with CTG Resources, Inc., and Energy East with
Berkshire Energy Resources ("Berkshire Energy") (collectively, the "Companies")
pursuant to which CMP Group, CTG Resources, and Berkshire Energy will each
become a direct subsidiary of Energy East (the proposed combinations are
referred to collectively as the "Merger"). Following the consummation of the
Merger, Energy East will register with the Securities and Exchange Commission
(the "SEC" or "Commission") as a holding company under the Public Utility
Holding Company Act of 1935 (the "Act").(1)
The Act was intended, among other things, to prevent the evils that arise
"when the growth and extension of holding companies bears no relation to the
economy of management and operation or integration and coordination of related
operating properties " In contrast, post-Merger Energy East will exemplify the
growth that promotes economies and coordination of related operating properties
within a single region in a manner consistent not only with the policies of the
Act, but also with the policies of both the Federal Energy Regulatory Commission
("FERC") and with state regulatory initiatives. Moreover, as discussed in
detail below, integration of New York State Electric & Gas Corporation ("NYSEG")
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(1) Prior to completion of the Merger, the Companies expect to file one or more
additional applications-declarations under the Act with respect to ongoing
financing activities and other matters pertaining to Energy East after the
Merger.
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and Central Maine Power Company ("Central Maine Power") as members of adjacent,
highly interconnected and coordinated power pools and independent system
operators ("ISOs") represents a reasoned evolution of the integration
requirements under the Act. Here, through the combination of membership in
highly integrated power pools and ISOs, the instant availability of open access,
non-discriminatory intra- and inter- pool transmission through internet-based
Open Access Same-time Information Systems ("OASIS") sites, the reduction of
"pancaked" transmission charges, and coordinated electric utility operations,
the Merger will increase the efficiency of the competitive markets in the
northeastern United States, thereby "serv[ing] the public interest by tending
toward the economical and efficient development of an integrated public utility
system."
The Merger is expected to produce substantial benefits to the public,
investors and consumers, and meets all applicable standards of the Act. The
Companies believe that the Merger will allow shareholders and consumers to
participate in a larger, financially stronger company that, through a
combination of the capital, management, and technical expertise of each Company,
will be a viable competitor in the rapidly evolving market for energy and energy
services, will be able to achieve increased financial stability and strength,
greater opportunities for earnings growth, reduction of operating costs,
efficiencies of operation, better use of facilities for the benefit of
customers, improved ability to use new technologies, greater retail and
industrial sales diversity, and optimization of their respective portfolios of
gas supply and transportation through joint management. The Companies believe
the Merger will significantly improve the competitive positions of their utility
subsidiaries and create greater opportunities for growth.
The shareholders of CMP Group and CTG Resources approved their respective
mergers with Energy East at meetings held on October 7, 1999 and October 18,
1999, respectively. A special meeting of shareholders, at which the Berkshire
Energy transaction will be submitted to the Berkshire Energy shareholders, will
be held as soon as reasonably practicable. Energy East, CMP Group and CTG
Resources have submitted applications requesting approval of the CMP Group and
CTG Resources transactions and/or related matters to the appropriate state and
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federal regulators. Applications are pending before the Maine Public Utilities
Commission ("MPUC"), the Connecticut Department of Public Utility Control
("DPUC"), the FERC, the Nuclear Regulatory Commission ("NRC"), and the Federal
Communications Commission ("FCC"). Finally, all four Companies have made, or
will make, the required filings with the Antitrust Division of the U.S.
Department of Justice ("DOJ") and the Federal Trade Commission ("FTC") under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act").
See Exhibits D-1 through D-14 and Item 4 below for additional detail regarding
these regulatory approvals. It is anticipated that favorable responses will be
received from these regulators by June 2000.
In order to permit timely consummation of the Merger and the realization of
the substantial benefits it is expected to produce, Energy East requests that
the Commission's review of this Application/Declaration commence and proceed as
expeditiously as practicable, and that the Commission order be issued no later
than June 2000. To the extent that all of the state and other approvals have
not been received by that time, Energy East asks the Commission to condition the
effectiveness of its order upon receipt of all necessary state and other
regulatory approvals.
1. General Request
----------------
Pursuant to Sections 9(a)(2) and 10 of the Act, Energy East hereby requests
authorization and approval of the Commission to acquire, by means of the Merger,
100 percent of the issued and outstanding common shares of each of CTG
Resources, CMP Group, and Berkshire Energy, exclusive of dissenters' shares, if
any. A chart of the proposed corporate structure of Energy East following
consummation of the Merger is attached hereto as Exhibit E-5. Energy East also
hereby requests that the Commission approve:
(i) the operation of Energy East as a combination electric and gas
utility holding company; and
(ii) the retention by Energy East of its non-utility activities,
businesses and investments and the acquisition by Energy East of the
non-utility activities, businesses and investments of CMP Group, CTG
Resources, and Berkshire Energy.
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2. Overview of the Mergers
--------------------------
(a) CMP Group Merger
Pursuant to an Agreement and Plan of Merger, dated as of June 14, 1999 (the
"CMP Group Merger Agreement"), EE Merger Corp., a Maine corporation and a
wholly-owned subsidiary of Energy East, will be merged with and into CMP Group,
with CMP Group being the surviving corporation (the "CMP Group Merger"). Subject
to regulatory and shareholder approval, Energy East will purchase all common
shares of CMP Group, exclusive of dissenters' shares, for $29.50 in cash per
share, for a total cash value of $957 million. Energy East will also assume
approximately $271 million of preferred stock and long-term debt. A copy of the
CMP Group Merger Agreement is incorporated by reference as Exhibit B-2 hereto.
As a result of these transactions, CMP Group will become a direct subsidiary of
Energy East. Energy East will establish a new corporate office in Portland,
Maine.
(b) CTG Resources Merger
Pursuant to an Agreement and Plan of Merger, dated as of June 29, 1999 (the
"CTG Resources Merger Agreement"), CTG Resources will be merged with and into
Oak Merger Co., a Connecticut corporation and a wholly-owned subsidiary of
Energy East, with Oak Merger Co. being the surviving corporation (the "CTG
Resources Merger"). The common shareholders of CTG Resources will receive for
each issued and outstanding share of common stock the right to receive $41.00 in
cash, Energy East common stock or a combination of cash and Energy East common
stock. A copy of the CTG Resources Merger Agreement is incorporated by
reference as Exhibit B-1 hereto. As a result of these transactions, CTG
Resources will become a direct subsidiary of Energy East.
(c) Berkshire Energy Merger
Pursuant to an Agreement and Plan of Merger, dated as of November 9, 1999
(the "Berkshire Energy Merger Agreement"), Mountain Merger LLC, a Massachusetts
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limited liability company and subsidiary of Energy East, will be merged with and
into Berkshire Energy, with Berkshire Energy being the surviving company (the
"Berkshire Energy Merger"). Subject to regulatory and shareholder approval,
Energy East will purchase all common shares of Berkshire Energy for $38.00 in
cash per share, for a total cash value of approximately $96 million. Energy
East will also assume approximately $40.3 million of preferred stock and
long-term debt. A copy of the Berkshire Energy Merger Agreement is filed
herewith as Exhibit B-3. As a result of these transactions, Berkshire Energy
will become a direct subsidiary of Energy East.
B. DESCRIPTION OF THE PARTIES TO THE MERGER
1. Energy East
------------
On May 1, 1998, Energy East became the parent of NYSEG. Energy East
neither owns nor operates any physical properties. 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.(2) Energy East, through its subsidiaries, is an energy
delivery, products and services company with operations in New York,
Connecticut, Massachusetts, Maine, New Hampshire, Vermont and New Jersey. Energy
East 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.
(a) Public Utility Operations of Energy East
New York State Electric & Gas Corporation
-----------------------------------------------
NYSEG, a regulated public utility incorporated under the laws of the State
of New York, is a combination electric and gas utility serving 826,000 electric
customers and 244,000 natural gas customers in upstate New York. NYSEG has
divested substantially all of its generating assets. It retains hydroelectric
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(2) Energy East Corporation, et al., Holding Co. Act Release ("HCAR") No. 26976
-------------------------------
(Feb. 12, 1999).
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facilities with an aggregate capacity of 62 MW, non-utility generation ("NUG")
contracts and contracts pursuant to which the New York Power Authority ("NYPA")
sells power to NYSEG, as well as an 18 percent ownership interest in the Nine
Mile Point Unit 2 nuclear plant ("NM2"). NYSEG has reached an agreement to sell
its share of NM2.(3) The transaction is expected to close in the second quarter
of 2000. NYSEG 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 percent share of NM2 and from
its hydroelectric stations.
NYSEG's service territory, 99 percent 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, New York. The service territory reflects a
diversified economy, including high-tech firms, light industry, colleges and
universities, agriculture and recreational facilities. No customer accounts for
five percent or more of either electric or natural gas revenues. During 1996
through 1998, approximately 84 percent of NYSEG's operating revenue was derived
from electric service with the balance derived from natural gas service.
After the sale of its interest in NM2, NYSEG will be engaged almost
entirely in the transmission and distribution of electricity and the
distribution of natural gas. As of December 31, 1998, NYSEG's electric
transmission system consisted of approximately 4,482 circuit miles of line.
NYSEG's electric distribution system consisted of 33,858 pole-miles of overhead
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(3) NYSEG has contracted to sell its 18 percent interest in NM2 to AmerGen
Energy Corporation. Approval of that sale is pending before the New York Public
Service Commission ("NYPSC"). An application for authorization to transfer
associated jurisdictional facilities filed pursuant to Section 203 of the
Federal Power Act is also pending before the FERC.
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lines and 2,109 miles of underground lines. NYSEG, which is a member of the New
York Power Pool ("NYPP"), has transferred control of its transmission system to
the New York Independent System Operator ("NYISO").(4) The NYISO, an independent
operator of utilities' transmission systems, operates the transmission systems
of all of the public utility systems in New York.(5)
CMP NATURAL GAS, L.L.C.
--------------------------
CMP Natural Gas, L.L.C. ("Maine Gas Co.") was established to furnish
natural gas distribution service, on a non-exclusive basis, in certain areas of
Maine, including, among others, the Bethel, Windham, Augusta, Waterville and
Bangor metropolitan areas, and the coastal area, including Brunswick and Bath.
Maine Gas Co. began to provide service to retail customers in May 1999. Maine
Gas Co. is a joint venture between New England Gas Development Corp., a
wholly-owned subsidiary of Cmp Group, and Energy East Enterprises, Inc., a
wholly-owned subsidiary of Energy East.
CONNECTICUT ENERGY CORPORATION
--------------------------------
On April 23, 1999, Connecticut Energy Corporation ("Connecticut Energy")
and Energy East entered into an agreement and plan of merger. By separate
application dated august 30, 1999, Energy East has requested authorization from
the Commission for Connecticut Energy to merge with and into a wholly-owned
Subsidiary of Energy East. The Commission's ruling on Energy East's August 30,
1999 application is still pending.(6)
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(4) Central Hudson Gas & Electric Corp., et al., 87 F.E.R.C. 61,135 (1999).
----------------------------------------------
(5) A detailed description of the history, purpose, and regulatory authority of
the NYISO appears in Item 3.C.2.(b).(i).
(6) In order not to unduly delay or complicate the instant application, it will
be assumed for purposes of the instant application that the Connecticut Energy
application has been granted, pursuant to the terms described in the August 30,
1999 application. Thus, Connecticut Energy's utility and non-utility affiliates
will be assumed to be, and will be
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Connecticut Energy, an exempt holding company that neither owns nor
operates any physical property, is primarily engaged in the retail distribution
of natural gas through its principal wholly-owned subsidiary, The Southern
Connecticut Gas Company ("Southern Connecticut Gas"). 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 principal
executive offices are located at 855 Main Street, Bridgeport, Connecticut 06604.
Connecticut Energy and its subsidiaries had 480 full-time employees as of
December 31, 1998. Southern Connecticut Gas had 467 employees as of December
31, 1998.
Southern Connecticut Gas
--------------------------
Southern Connecticut Gas, 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 Gas 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 Gas is the sole distributor of natural gas,
other than bottled gas, in its service area.
(b) Non-Public Utility Affiliates of Energy East
Energy East also has a number of direct and indirect subsidiaries that are
not "public utility companies" under the Act. These include Energy East
Enterprises ("Enterprises"), a Maine corporation, XENERGY Enterprises, Inc.
("XENERGY Enterprises"), a Delaware corporation, and Energy East Management
Corporation ("Energy East Management"), 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. It is currently an exempt public utility holding company under the Act by
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order of the Commission dated February 12, 1999. It indirectly holds public
utility assets through its ownership of a controlling interest in Maine Gas Co.,
a gas utility company.
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.
Energy East Management was organized in 1999 and invests the proceeds of the
sale of an affiliate's generation assets. Energy East Management 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.
Enterprises' current direct non-utility subsidiaries are as follows:
New Hampshire Gas Corporation, a New Hampshire corporation, is a
wholly-owned subsidiary of Enterprises and is an energy services company in New
Hampshire specializing in propane air distribution systems.
Southern Vermont Natural Gas Corporation, a Vermont corporation, is a
wholly-owned subsidiary of Enterprises and is currently developing a combined
natural gas supply and distribution project that will include an extension of a
pipeline from New York to Vermont by the Iroquois Gas Transmission System, and
the development of natural gas distribution systems in Vermont.
Seneca Lake Storage, Inc., a New York corporation, is a wholly-owned
subsidiary of Enterprises and proposes to own and operate a gas storage facility
in New York.
XENERGY Enterprises' current direct and indirect subsidiaries are as
follows:
Energy East Solutions, Inc. ("Energy East Solutions"), a Delaware
corporation, is a wholly-owned subsidiary of XENERGY Enterprises and markets
electricity and natural gas to end-users and provides wholesale commodities to
retail electric suppliers in the Northeast.
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(7) See Energy East Corporation, et al., HCAR No. 26976 (Feb. 12, 1999).
----------------------------------
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NYSEG Solutions, Inc., a New York corporation, is a wholly-owned subsidiary
of Energy East Solutions and markets electricity and natural gas to end-users
and provides wholesale commodities to retail electric suppliers in the State of
New York.
South Jersey Energy Solutions, LLC, a Delaware limited liability company,
is a partially-owned subsidiary of Energy East Solutions and was formed to
market retail electricity and energy management services in the mid-Atlantic
region of the United States.
Energy East Solutions, LLC, a Delaware limited liability company, is a
partially-owned subsidiary of Energy East Solutions and CNE Energy Services
Group, Inc. (discussed below) and sells natural gas, fuel oil and other
services, and markets a full range of energy-related planning, financial,
operational and maintenance services to commercial, industrial and municipal
customers in New England.
Energy East Telecommunications, Inc., a Delaware corporation, is a
wholly-owned subsidiary of XENERGY Enterprises and was formed to provide
telecommunications services, including the construction and operation of fiber
optic networks.
Telergy East, LLC, a New York limited liability company, is a
partially-owned subsidiary of Energy East Telecommunications, Inc., and was
formed to construct, own and operate a fiber optic network.
Cayuga Energy, Inc. ("Cayuga"), a Delaware corporation, is a wholly-owned
subsidiary of XENERGY Enterprises and invests in co-generation facilities.
Carthage Energy, LLC, a New York limited liability company, is a
wholly-owned subsidiary of Cayuga and owns a co-generation facility in upstate
New York. It is an exempt wholesale generator as defined in Section 32 of the
Act.
South Glens Falls Energy, LLC, a New York limited liability company, is a
partially-owned subsidiary of Cayuga and owns a co-generation facility in
upstate New York. It is an exempt wholesale generator as defined in Section 32
of the Act.
XENERGY Inc. ("XENERGY"), a Massachusetts corporation, is a wholly-owned
subsidiary of XENERGY Enterprises and is an energy services, information systems
and consulting company that specializes in energy management, conservation
engineering and demand-side management.
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XENERGY Canada, Inc., incorporated in Quebec, Canada, is a wholly-owned
subsidiary of XENERGY and provides software services related to a utility client
management system.
XENERGY International, Inc., a Delaware corporation, is a wholly-owned
subsidiary of XENERGY and is an energy services, information systems and
consulting company that specializes in energy management, conservation
engineering and demand-side management in the United Kingdom and Spain.
KENETECH Energy Management, Inc. ("KENETECH"), a Massachusetts corporation,
is a wholly-owned subsidiary of XENERGY and is an energy services company
specializing in energy management.
KENETECH Energy Management International, Inc. ("KENETECH International"),
a Delaware corporation, is a wholly-owned subsidiary of KENETECH and is an
energy services company specializing in energy management.
KENETECH Energy Management, Limited, a limited company formed in Ontario,
Canada, is a wholly-owned subsidiary of KENETECH International and is an energy
services company specializing in energy management.
KEM 1991, Inc. ("KEM 1991"), a Delaware corporation, is a wholly-owned
subsidiary of KENETECH and is an energy services company specializing in energy
management.
KEM Partners 1991, L.P., a Delaware limited partnership, is an energy
services company specializing in energy management. All of its interests are
owned by KENETECH and KEM 1991.
(c) Non-Public Utility Affiliates of Connecticut Energy.
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 non-utility subsidiaries are Connecticut corporations.
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- - CNE Energy, a wholly-owned subsidiary of Connecticut 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 are: (i) Energy East
Solutions, LLC, a Delaware limited liability company described above; (ii)
Total Peaking Services, LLC, a 50/50 joint venture of CNE Energy and
Conectiv Energy Supply, Inc. ("CES"), which operates a 1.2 billion cubic
foot liquefied natural gas open access storage facility in Milford,
Connecticut; and (iii) Conectiv/CNE Peaking, LLC, a 50/50 joint venture of
CNE Energy and CES, 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. It is anticipated that CNE Energy
will purchase CES' interests in both Total Peaking Services, LLC and
Conectiv/CNE Peaking LLC, with the closing expected to occur on December
15, 1999. CNE Energy will thereafter have a 100 percent interest in these
two companies.
- - CNE Development, a wholly-owned subsidiary of Connecticut Energy, is a
16.67 percent 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 percent 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 Gas) and which is wholly-owned by CNE Venture-Tech.
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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 percent and 15 percent, respectively, of Energy East's
consolidated gross utility revenues. 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 non-utility 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. 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.
2. CMP Group
----------
CMP Group is a holding company by virtue of owning, among others, directly
or indirectly, more than five percent of the voting securities of Central Maine
Power, Maine Electric Power Company, Inc. ("MEPCo"), NORVARCO and Maine Gas Co.,
all public utility companies as defined in the Act. CMP Group 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.(8) CMP Group's
principal utility subsidiary, Central Maine Power is primarily engaged in
purchasing, transmitting, distributing and selling electricity to retail
customers in Maine and to wholesale customers, principally other utilities.
- -----------------
(8) See CMP Group, Inc., et al., HCAR No. 26977 (Feb. 12, 1999).
---------------------------
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<PAGE>
(a) Public Utility Operations of CMP Group
Central Maine Power
---------------------
Central Maine Power is the largest electric utility in Maine and serves
over 533,000 customers in its 11,000 square-mile service area in southern and
central Maine. Central Maine Power had approximately $939 million in
consolidated electric operating revenues in 1998. Central Maine Power is
subject to the regulatory authority of the MPUC and FERC.
Central Maine Power has divested and/or relinquished control over
substantially all of its generating assets and purchase power contracts and now
functions primarily as an electric transmission and distribution utility.
Central Maine Power has sold its hydroelectric, fossil and biomass generating
assets,(9) and has recently reached an agreement to sell one of its two
remaining investments in operating nuclear plants.(10) While Central Maine Power
may retain ownership of some of its nuclear and NUG capacity, it is selling its
entitlements to purchase capacity and energy under the NUG contracts, as well as
its entitlement to energy from its 2.5% interest in the Millstone 3 nuclear
plant, and its entitlement in a firm energy contract with Hydro Quebec. The
sales of generating capacity and entitlements to purchase capacity and energy
under NUG contracts were conducted pursuant to the requirements of Maine's
recently enacted electric utility restructuring legislation and MPUC Rules and
Regulations.(11) As of March 1, 2000, Central Maine Power will not control any
generation resources. Also beginning March 1, 2000, all retail electric
consumers in Maine will have the authority to choose their electric supplier.
Since under Maine law, Central Maine Power would be able to serve only a limited
- -----------------
(9) Central Maine Power sold these assets to a non-affiliated third party, FPL
Energy, a subsidiary of FPL Group.
(10) On October 15, 1999, Central Maine Power, together with the other owners of
Vermont Yankee, announced acceptance of a bid by AmerGen Energy Corporation to
purchase the plant.
(11) 35-A M.R.S.A. S 3204; and Chapt. 307 MPUC Rules and Regulations.
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<PAGE>
number of retail customers and would not be the supplier of last resort, Central
Maine Power has elected not to continue as a retail electric supplier. In the
future, Central Maine Power will be a "wires" only transmission and distribution
utility.
As of December 31, 1998, Central Maine Power's delivery system consisted of
2,293 miles of overhead transmission lines, 19,438 pole-miles of distribution
lines and 1,434 miles of underground submarine cable. Central Maine Power is a
member of the New England Power Pool ("NEPOOL") and has transferred control over
its pool transmission facilities ("PTF") system to ISO New England Inc.
("ISO-NE").(12) It maintains high-voltage connections with other electric
systems at the New Hampshire and New Brunswick, Canada borders.
MEPCo and NORVARCO
--------------------
Central Maine Power currently has two electric utility subsidiaries,
organized and operating almost exclusively in Maine: MEPCo and NORVARCO.
(Central Maine Power, MEPCo and NORVARCO are referred to collectively as the
"CMP Electric Utilities.") MEPCo owns and operates a 345kV transmission
interconnection between the Maine-New Brunswick, Canada international border at
Orient, Maine. Central Maine Power owns a 78.3 percent voting interest in
MEPCo, with the remaining interests owned by two other Maine utilities. Also,
NORVARCO holds a 50 percent general partnership interest in Chester SVC
Partnership, a general partnership which owns a static var compensator located
in Chester, Maine, adjacent to MEPCo's transmission interconnection.
Maine Gas Co.
---------------
Maine Gas Co., a natural gas distribution company, is a joint venture of
New England Gas Development Corporation and Enterprises. New England Gas
Development Corporation, a wholly-owned subsidiary of CMP Group, holds an
approximately 23 percent interest in Maine Gas Co.
- -----------------
(12) New England Power Pool, 79 F.E.R.C. 61,374 (1997). The ISO-NE operates
-------------------------
the transmission systems of all of the public utility system in New England. A
detailed description of the ISO-NE appears in Item 3.C.2.(b).(ii).
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Other Nuclear Interests
-------------------------
Central Maine Power owns a 38 percent voting interest in Maine Yankee
Atomic Power Company, which owns the Maine Yankee nuclear electric generating
plant in Wiscasset, Maine. Maine Yankee's plant was permanently shut down on
August 6, 1997. Central Maine Power also holds (i) a 9.5 percent voting
interest in Yankee Atomic Electric Company, which has permanently shut down its
plant located in Rowe, Massachusetts, and (ii) a six percent voting interest in
Connecticut Yankee Atomic Power Company, which has permanently shut down its
plant in Haddam, Connecticut.
(b) Non-Public Utility Affiliates of CMP Group
CMP Group's non-utility subsidiaries are as follows:
- CNEX (trade name for CMP International Consultants) provides
consulting, planning, training, project management, and information
and research services to foreign and domestic utilities and government
agencies in various aspects of utility operations and utility support
services.
- MaineCom Services ("MaineCom") provides telecommunications services,
including point-to-point connections, private networking, consulting,
private voice and data transport, carrier services, and long-haul
transport. It is subject to regulation by the MPUC with respect to
making available a fiber optics cable for public use in Maine.
- NorthEast Optic Network, Inc. develops, constructs, owns and operates
a fiber optic telecommunications system in New York and New England.
MaineCom owns 37.9 percent of its common stock.
- TeleSmart provides, for utility companies, collections and related
accounts receivable management services and has a division which
collects charged-off accounts.
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<PAGE>
- Central Securities Corporation owns and leases office and service
facilities in Central Maine Power's service territory for the conduct
of Central Maine Power's business. Central Maine Power owns all of the
outstanding common stock of Central Securities.
- Cumberland Securities Corporation also owns and leases office and
service facilities in Central Maine Power's service territory for the
conduct of Central Maine Power's business. Central Maine Power owns
all of the outstanding common stock of Cumberland Securities.
- The Union Water-Power Company ("Union Water") provides utility
construction and support services (On Target division); energy
efficiency performance contracting and energy use and management
services (Combined Energies division); and utility-related real estate
development services, including the brokering of pre-fabricated
housing and financing related thereto (UnionLand Services and
MaineHomeCrafters division). Union Water is a wholly-owned subsidiary
of CMP Group.
For the year ended December 1998, CMP Group's operating revenue on a
consolidated basis was approximately $950,327,000 of which approximately
$938,739,000 was derived from electric operations, and $11,588,000 from other
operations. Consolidated assets of CMP Group and its subsidiaries at December
31, 1998 were approximately $1,077,112,000 in net electric utility property,
plant and equipment; and approximately $1,185,772,000 in other corporate assets.
3. CTG Resources
--------------
CTG Resources is the parent company of Connecticut Natural Gas Corporation
("CNGC"), a regulated local natural gas distribution company, and of CNG Realty
Corp. ("CNGR") and The Energy Network, Inc. ("TEN"), non-utility subsidiaries.
CTG Resources is a holding company by virtue of owning all of the common stock
of CNGC, a public utility company as defined in the Act, which owns and operates
a local natural gas distribution system in the State of Connecticut. CTG
Resources 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.
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(a) Public Utility Affiliate of CTG Resources
Connecticut Natural Gas Corporation
--------------------------------------
CNGC, the regulated subsidiary of CTG Resources, distributes gas to
approximately 143,300 customers in 22 Connecticut communities, principally in
the Hartford-New Britain area and Greenwich. CNGC's gas distribution business
is subject to regulation by the DPUC as to franchises, rates, standards of
service, issuance of securities, safety practices and certain other matters.
Retail sales of gas by CNGC and deliveries of gas owned by others are made
pursuant to rate schedules and contracts filed with and subject to DPUC
approval.
(b) Non-Public Utility Affiliates of CTG Resources
- CNGR, formed in 1977, is a single purpose corporation which owns the
Operating and Administrative Center located on a seven-acre site in
downtown Hartford, Connecticut. CNGR engages in no other business
activity.
- TEN is an unregulated subsidiary of CTG Resources, which was
incorporated in 1982. TEN and its wholly-owned subsidiary, The
Hartford Steam Company ("HSC"), provide district heating and cooling
services to a number of large buildings in Hartford, Connecticut.
- TEN's wholly-owned subsidiary, TEN Transmission, owns CTG Resources'
4.87 percent interest in Iroquois Gas Transmission System.
- TEN's partially-owned subsidiary, Downtown Cogeneration Associates
Limited Partnership, owns and operates a cogeneration facility in
Hartford, Connecticut.
- TEN's other unregulated operating divisions offer energy equipment
rentals, property rentals and financing services and own a 3,000
square foot building in Hartford, Connecticut.
For the fiscal year ended 1998, CTG Resources' operating revenues on a
consolidated basis were approximately $282,748,000, of which approximately
$262,446,000 were derived from gas operations and $20,302,000 were from other
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operations. Consolidated assets of CTG Resources and its subsidiaries at
September 30, 1998 were approximately $294,704,000 in identifiable gas utility
property, plant and equipment; and approximately $164,477,000 in other corporate
assets.
4. Berkshire Energy
-----------------
Berkshire Energy is the parent company of The Berkshire Gas Company
("Berkshire Gas"), a regulated local natural gas distribution company, Berkshire
Propane, Inc. ("Berkshire Propane"), a retail propane company, and Berkshire
Service Solutions, Inc. (formerly Berkshire Energy Marketing, Inc.) ("Service
Solutions"), an energy marketing and energy services business. Berkshire Energy
is a public utility holding company by virtue of its owning all of the common
stock of Berkshire Gas, a public utility company as defined in the Act.
Berkshire is currently exempt from all provisions of the Act, except Section
9(a)(2), under Section 3(a)(2) of the Act and Rule 2 thereunder.
(a) Public Utility Affiliate of Berkshire Energy
The Berkshire Gas Company
----------------------------
Berkshire Gas, the regulated public utility subsidiary of Berkshire Energy,
sells and distributes natural gas to approximately 34,500 retail customers in 19
communities in western Massachusetts. Berkshire Gas operates a natural gas
distribution system comprising some 694 miles of natural gas distribution mains.
Berkshire Gas is subject to regulation by the Massachusetts Department of
Telecommunications and Energy ("MDTE"). Berkshire Gas may be a "natural gas
company" under the Natural Gas Act with respect to certain sales for resale.
Berkshire Gas has secured a "blanket certificate" for such transactions from the
FERC.
(b) Non-Public Utility Affiliates of Berkshire Energy
The non-public utility affiliates of Berkshire Energy are Berkshire Propane
and Service Solutions.
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<PAGE>
- Berkshire Propane provides propane service to more than 6,000
customers in more than 100 communities across a 5,000 square mile area
in western Massachusetts, eastern New York and southern Vermont.
- Service Solutions provides one-stop natural gas services to commercial
and industrial customers. Service Solutions entered into a strategic
alliance with Energy East Solutions, LLC.
For the fiscal year ending June 30, 1999, Berkshire Energy's operating
revenues on a consolidated basis were approximately $50,733,000, of which
approximately $45,772,000 were derived from natural gas operation. Consolidated
assets of Berkshire Energy and its subsidiaries as of June 30, 1999 were
approximately $76,330,000 in identifiable natural gas utility property, plant
and equipment, and approximately $2,155,000 in other corporate assets.
C. DESCRIPTION OF THE MERGER
1. CMP Group Merger Agreement
-----------------------------
On June 14, 1999, CMP Group, Energy East and EE Merger Corp. entered into
the CMP Group Merger Agreement, pursuant to which, EE Merger Corp. will merge
with and into CMP Group, with CMP Group being the surviving corporation and
becoming a wholly-owned subsidiary of Energy East. The CMP Group Merger, which
was unanimously approved by the respective boards of directors of CMP Group,
Energy East and EE Merger Corp., is expected to occur shortly after all of the
conditions to the consummation of the CMP Group Merger, including the receipt of
required regulatory and shareholder approvals, are satisfied.
Under the terms of the CMP Group Merger Agreement, each outstanding share
of CMP Group's common stock, $5.00 par value per share, other than dissenting
shares and any treasury shares or shares owned by CMP Group, Energy East or any
of their subsidiaries, will be converted into the right to receive $29.50 in
cash. Pursuant to the CMP Group Merger Agreement, approximately $957 million in
cash will be paid to holders of shares of CMP Group common stock.
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<PAGE>
2. CTG Resources Merger Agreement
---------------------------------
On June 29, 1999, CTG Resources entered into the CTG Resources Merger
Agreement with Energy East and Oak Merger Co. ("Oak"), pursuant to which CTG
Resources will merge with and into Oak.
Under the terms of the CTG Resources Merger Agreement, each outstanding
share of CTG Resources common stock, other than dissenting shares, will be
converted into the right to receive: (i) $41.00 in cash ("CTG Resources Cash
Consideration"); or (ii) a number of shares of Energy East common stock equal to
the Exchange Ratio; or (iii) the right to receive a combination of cash and
shares of Energy East common stock. The "Exchange Ratio" shall be equal to the
CTG Resources Cash Consideration divided by either: (i) the Energy East share
price if the Energy East share price is equal to or less than $30.13 and equal
to or more than $23.67, (ii) $30.13 if the Energy East share price is greater
than $30.13, in which case the Exchange Ratio will equal 1.3609, or (iii) $23.67
if the Energy East share price is less than $23.67, in which case the Exchange
Ratio will equal 1.7320. The Energy East share price will equal the average of
the closing prices of Energy East common stock as reported in the Wall Street
-----------
Journal, for the 20 trading days immediately preceding the second trading day
- -------
prior to the effective time of the CTG Resources Merger. The aggregate number
of shares of CTG Resources' common stock that is convertible into cash is
limited to 55 percent of the total number of shares of CTG Resources common
stock issued and outstanding as of the effective time of the CTG Resources
Merger.
3. Berkshire Energy Merger Agreement
------------------------------------
On November 9, 1999, Berkshire Energy, Energy East and Mountain Merger LLC
entered into the Berkshire Energy Group Merger Agreement, pursuant to which
Mountain Merger LLC will merge with and into Berkshire Energy, with Berkshire
Energy being the surviving company and becoming a wholly-owned subsidiary of
Energy East. The Berkshire Energy Merger, which was unanimously approved by the
participating members of the board of trustees of Berkshire Energy, the board of
directors of Energy East and the managers of Mountain Merger LLC, is expected to
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occur shortly after all of the conditions to the consummation of the Berkshire
Energy Merger, including the receipt of required regulatory and shareholder
approvals, are satisfied.
Under the terms of the Berkshire Energy Merger Agreement, each outstanding
Berkshire Energy common share, without par value, other than any treasury shares
or shares owned by Berkshire Energy, Energy East or any of their subsidiaries,
will be converted into the right to receive $38.00 in cash. Pursuant to the
Berkshire Energy Merger Agreement, approximately $96 million in cash will be
paid to holders of Berkshire Energy common shares.
D. MANAGEMENT AND OPERATION OF THE COMPANIES FOLLOWING THE MERGER
At the effective date of the CMP Group Merger, David T. Flanagan, the
current President and Chief Executive Officer of CMP Group, and two current
directors of CMP Group will be elected as members of the Board of Directors of
Energy East. At that time, Mr. Flanagan will become President of Energy East
and Chairman, President and Chief Executive Officer of the surviving company
(which will be a subsidiary of Energy East), and Arthur W. Adelberg, who
currently serves as Executive Vice President of CMP Group, will become a Senior
Vice President and the Chief Financial Officer of Energy East. Sara J. Burns,
who currently serves as President of Central Maine Power, will continue serving
as President of Central Maine Power after consummation of the CMP Group Merger.
F. Michael McClain, Vice President, Corporate Development of CMP Group, will
serve as the President of one or more non-utility subsidiaries of Energy East,
Xenergy Enterprises, and/or CMP Group after the CMP Group Merger becomes
effective.
Commencing at the effective date of the CTG Resources Merger, and
continuing until his successor is duly elected, Arthur C. Marquardt will be
President and Chief Executive Officer of the surviving corporation and will hold
other positions in other subsidiary corporations of Energy East as specified in
his employment agreement. One director of CTG Resources will become a director
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of Energy East. The officers of Oak immediately prior to the consummation of
the CTG Resources Merger will be the initial officers of the surviving
corporation (except that Mr. Marquardt will be the President and Chief Executive
Officer of the surviving corporation) and will hold office from the effective
date until their respective successors are duly elected or appointed and
qualified in the manner provided in the certificate of incorporation and by-laws
of the surviving corporation.
At the effective date of the Berkshire Energy Merger, Robert M. Allessio,
the current Vice President of Berkshire Gas, will become President and Chief
Executive Officer of Berkshire Energy (which will be a subsidiary of Energy
East) and of Berkshire Gas. Michael J. Marrone, who currently serves as Vice
President, Treasurer and Chief Financial Officer of Berkshire Gas, will continue
serving as Vice President, Treasurer and Chief Financial Officer of Berkshire
Gas after the Berkshire Energy Merger. Cheryl M. Clark, who currently serves as
Clerk of Berkshire Gas, will continue serving as Clerk of Berkshire Gas after
the Berkshire Energy Merger.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, by the Companies in connection with the Merger, including the
solicitation of proxies, the payment of legal and investment banker fees and
other related matters are estimated as follows:
Commission filing fee for the Registration Statement on Form S-4
in connection with the CTG Resources Merger $ 67,915.
Commission filing fee for the CMP Group Proxy Statement 194,289.
Commission filing fee for the Berkshire Energy Proxy Statement 19,178.
Accountants' fees 550,000.
Legal fees and expenses 6,500,000.
Shareholder communication and proxy solicitation 451,900.
Investment bankers' fees and expenses 22,075,000.
Consulting fees related to the Merger 1,750,000.
Expenses related to integrating the operations of the merged
company and miscellaneous 6,891,718.
TOTAL $38,500,000.
============
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ITEM 3. APPLICABLE STATUTORY PROVISIONS
The following sections of the Act and the Commission's rules thereunder are
or may be directly or indirectly applicable to the proposed transaction:
Section of the Act Transactions to which section or rule is or may be
- ------------------ -----------------------------------------------------------
applicable
----------
9(a)(2), 10 Acquisition indirectly by Energy East of common stock of
public utility subsidiaries of CMP Group, CTG Resources, and
Berkshire Energy.
8, 11(b) Retention by Energy East of its existing retail gas utility
operations; retention by Energy East of non-utility
businesses of Energy East, CMP Group, CTG Resources, and
Berkshire Energy; and operation of Energy East as a
combination electric and gas utility holding company.
To the extent that other sections of the Act are deemed applicable to the
Merger, such sections should be considered to be set forth in this Item 3.
Background
----------
As discussed in detail below, until recently both NYSEG and Central Maine
Power were vertically integrated utilities, and each provided "bundled" sales
service (i.e., energy, capacity, ancillary services, transmission and local
----
distribution, combined to be a single product -- delivered electricity) to
wholesale and retail customers. Prior to its recent divestiture of generating
assets, NYSEG owned approximately 2,557 MW of generating capacity and Central
Maine Power owned approximately 1,070 MW of generating capacity. Also, within
their franchised service areas, both NYSEG and Central Maine Power were granted
the exclusive right to provide electricity to their retail customers.
The historical industry structure of vertically integrated utilities
providing electric service within franchised service areas began to change with
the development of the "generation-only" power business that was mobilized by
the enactment of the Public Utility Regulatory Policies Act of 1978 ("PURPA")
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and the Energy Policy Act of 1992. Also contributing to this change were the
actions of state and federal regulators in attempting to overcome the inherent
incentive for vertically integrated companies to use their transmission and
distribution systems to favor sales from their own (or affiliated) generating
resources or their purchased power contracts, over energy provided by
unaffiliated suppliers. Regulators were concerned that utilities would limit
competition at the generation level, which would otherwise have imposed downward
pressure on prices, to the advantage of customers. As described more fully
below, the policy underlying recent state and federal policy has been to reduce
or eliminate the incentives and opportunities for vertically integrated
utilities to constrain competition, by requiring utilities to divest generation,
to separate "functionally" their merchant functions from their transmission
functions, and to transfer operational control of their transmission systems to
Regional Transmission Organizations ("RTOs"). Many state and federal policy
makers have concluded that competition at the generation level is fostered by
according retail customers the right to obtain "unbundled" electric energy from
a supplier of their choice, and, with respect to retail and wholesale customers,
by requiring utilities to provide open-access, nondiscriminatory transmission
and distribution service over their transmission and distribution systems.
In states in which these types of structural changes have been implemented,
transmission-owning utilities no longer have the ability to dictate which
generation units or purchased power contracts will be dispatched to serve
customer load. Instead, that selection is made through a competitive process,
either in the form of bilateral contracts between the seller and buyer (or
representatives of either) or through an established centralized market or power
exchange. In either case, the operation and dispatch of generation is no longer
performed or controlled by the transmission-owning distribution utility, but
rather by unaffiliated buyers and sellers responding to the laws of supply and
demand in accordance with the policies of an RTO.
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The fundamental changes in the historical structure of the utility industry
have profound effects on the "integration" and operation as a "single
interconnected and coordinated system," as these terms are used in the Act. The
Companies are well aware of the considerable challenge the Commission faces in
applying the Act to an evolving industry structure. Thus, the Companies are
including in this section of the Application/Declaration a detailed description
of the industry restructuring to date in both New York and New England in order
to assist in the Commission's review and to establish the framework for
integration as applied to the Merger.
A. SECTION 9(A)(2)
Section 9(a)(2) of the Act makes it unlawful, without 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." Under the
definition set forth in Section 2(a)(11)(A) of the Act, an "affiliate" of a
specified company means "any person that directly or indirectly owns, controls,
or holds with power to vote, 5 per centum or more of the outstanding voting
securities of such specified company," and "any company 5 per centum or more of
whose outstanding voting securities are owned, controlled, or held with power to
vote, directly or indirectly, by such specified company."
Energy East, CMP Group, CTG Resources, and Berkshire Energy are holding
companies as defined in Section 2(a)(5) of the Act. As a result of the Merger,
Energy East, directly or indirectly, will acquire more than five percent of the
voting securities of the public utility subsidiaries of CMP Group, CTG
Resources, and Berkshire Energy. Energy East will thus become an "affiliate,"
as defined in Section 2(a)(11)(A) of the Act, of the public utility subsidiaries
of CMP Group, CTG Resources, and Berkshire Energy. Accordingly, Energy East
must obtain the approval of the Commission for the Merger under Sections 9(a)(2)
and 10 of the Act. The statutory standards to be considered by the Commission
in evaluating the proposed transaction are set forth in Sections 10(b), 10(c)
and 10(f) of the Act.
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<PAGE>
The Companies believe that the Merger complies with all of the applicable
provisions of Section 10 of the Act and should be approved by the Commission.
Thus:
- the Merger will not create detrimental interlocking relations or
concentration of control;
- the consideration to be paid in the Merger is fair and reasonable;
- the Merger will not result in an unduly complicated capital structure
for the post-Merger Energy East system;
- the Merger is in the public interest and the interests of investors
and consumers;
- the Merger is consistent with Sections 8 and 11 of the Act;
- the Merger tends toward the economical and efficient development of an
integrated public utility system; and
- the Merger will comply with all applicable state laws.
The Commission's approval of this Application/Declaration will facilitate
the creation of a holding company which will be better able to compete in the
rapidly evolving utility industry, and is consistent with the Commission's
precedents for transactions previously approved by the Commission under the Act.
Additionally, the Merger and the requests contained in this
Application/Declaration are consistent with the interpretive recommendations
made by the Division of Investment Management (the "Division") in the report
issued by the Division in June 1995 entitled "The Regulation of Public Utility
Holding Companies" (the "1995 Report"). The Division's overall recommendation
that the Commission "act administratively to modernize and simplify holding
company regulationand minimize regulatory overlap, while protecting the
interests of consumers and investors," is germane to the Commission's review of
this Application/Declaration since, as demonstrated below, the Merger will
benefit both consumers and shareholders of post-Merger Energy East and since the
- -----------------
(13) Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 Report.
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<PAGE>
other federal and state regulatory authorities with jurisdiction over the Merger
are expected to approve the Merger as in the public interest. In addition, as
discussed in more detail in each applicable item below, the specific
recommendations of the Division with regard to utility ownership(14) and
diversification,(15) in particular, are applicable to the Merger.
B. SECTION 10(B)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
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 interests 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 interests of investors or consumers or the
proper functioning of such holding company system.
- -----------------
(14) Among other things, the 1995 Report recommends that the Commission should
apply a more flexible interpretation of the integration requirements under the
Act; interconnection through power pools, reliability councils and wheeling
arrangements can satisfy the physical interconnection requirement of Section
2(a)(29); the geographic requirements of Section 2(a)(29)(A) should be
interpreted flexibly, recognizing technical advances consistent with the
purposes and provisions of the Act; the Commission's analysis should focus on
whether the resulting system will be subject to effective regulation; the
Commission should liberalize its interpretation of the "A-B-C" clauses and
permit combination systems where the affected states agree, and the Commission
should "watchfully defer" to the work of other regulators. 1995 Report at 71-77.
(15) The 1995 Report recommends that, for example, the Commission should
promulgate rules to reduce the regulatory burdens associated with energy-related
diversification and the Commission should adopt a more flexible approach in
considering all other requests to enter into diversified activities. 1995 Report
at 88-90. The recommendations regarding energy-related diversification were
incorporated in Rule 58.
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1. Section 10(b)(1)
-----------------
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system.(16) 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."(17) As discussed below, the Merger will not
create a "huge, complex, and irrational system," but rather will afford the
opportunity to achieve economies of scale and efficiencies which are expected to
benefit investors and consumers.(18)
The Merger 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. The primary objective of Energy
East in the Merger is to become positioned to participate in the growing and
increasingly competitive northeastern United States energy market. The
Applicants believe that their combination provides a unique opportunity for
Energy East, CMP Group, CTG Resources, and Berkshire Energy and their respective
shareholders, customers and employees to participate in the formation of a
competitive energy services provider in the rapidly evolving energy services
business and to share in the benefits of industry restructuring which is already
occurring in New York, Maine, Connecticut, Massachusetts and other states.
- -----------------
(16) American Electric Power Co., 46 S.E.C. 1299, 1309 (1978).
---------------------------
(17) Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700 (1968).
----------------------
(18) American Electric Power Co., 46 S.E.C. at 1307 (1978).
------------------------------
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Size: If approved, the post-Merger Energy East system will serve
----
approximately 1,359,000 electric customers in two states and 579,800 gas
customers in four states. For 1998: (1) the combined assets of post-Merger
Energy East, CMP Group, CTG Resources, and Berkshire Energy would have totaled
approximately $7.5 billion; and (2) combined operating revenues of these
Companies would have totaled approximately $4 billion.
By comparison, there are several registered electric utility holding
companies that are significantly larger than the post-Merger Energy East system.
The following table shows the post-Merger Energy East system's relative size as
compared to other registered systems in terms of assets, operating revenues and
customers.(19)
Total Assets Operating Revenues Electric Customers
System ($ Million) ($ Million) (Thousands)
- ----------- ------------ ------------------ ------------------
Southern $ 36,192 $ 11,403 3,794
Entergy 22,848 11,495 2,495
AEP 19,483 6,346 3,022
GPU 16,288 4,249 2,041
CSW 13,744 5,482 1,752
Energy East 7,475 4,034 1,359
As illustrated by the table above, Energy East will be a small registered
holding company in comparison to other registered holding companies. In
addition, Energy East's operations will not exceed the economies of scale of
current electric generation and transmission technology, or gas transportation
technology, or provide undue power or control to Energy East in the region in
which it will provide service.
- -----------------
(19) Source: U.S. Securities and Exchange Commission, Financial and Corporate
Report, Holding Companies Registered under the Public Utility Holding Company
Act of 1935 as of July 1, 1999 (data provided is as of Dec. 31, 1998).
-31-
<PAGE>
Efficiencies and economies: The Commission has rejected a mechanical size
---------------------------
analysis under Section 10(b)(1) in favor of assessing the size of the resulting
system with reference to the efficiencies and economies that can be achieved
through the integration and coordination of utility operations. More recent
pronouncements of the Commission confirm that size is not determinative,
particularly in light of the improved economies of scale that can be achieved
through a combination.(20)
By virtue of the Merger, post-Merger Energy East will be in a position to
realize the "opportunities for economies of scale, the elimination of duplicate
facilities and activities, the sharing of production capacity and reserves and
generally more efficient operations" described by the Commission in American
--------
Electric Power Co.(21) Among other things, the Merger is expected to yield
- -------------------
significant capital expenditure savings through facilities consolidation,
corporate and administrative programs, non-fuel purchasing economies and
combined gas supply. These expected economies and efficiencies from the combined
utility operations are described in greater detail below.
Competitive Effects: In Northeast Utilities(22) the Commission stated that
------------------- -------------------
"antitrust ramifications of an acquisition must be considered in light of the
fact that public utilities are regulated monopolies and that federal and state
administrative agencies regulate the rates charged consumers." Energy East, CMP
Group, CTG Resources and Berkshire Energy will file Notification and Report
Forms with the DOJ and FTC pursuant to the HSR Act describing the effects of the
Merger on competition in the relevant markets. It is a condition to the
consummation of each of the CMP Group, CTG Resources and Berkshire Energy
Mergers that the applicable waiting periods under the HSR Act shall have expired
or been terminated.
- -----------------
(20) See, e.g., 1995 Report at 73-4; Centerior Energy Corp., HCAR No. 24073
---------------------
(April 29, 1986).
(21) American Elec. Power Co., Inc., 46 S.E.C. 1299, 1309 (1978).
----------------------------------
(22) Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990).
--------------------
-32-
<PAGE>
In addition, the competitive impact of the CMP Group Merger is currently
being considered pursuant to the October 1, 1999 filing of Energy East and CMP
Group with FERC under Section 203 of the Federal Power Act. A detailed
explanation concerning why such merger will not threaten competition in even the
most narrowly drawn geographic and product markets is set forth in the prepared
testimony of Stephen Henderson, an economist and Vice President of PHB Hagler
Bailly, filed with the FERC application. Mr. Henderson's testimony addresses
potential horizontal and vertical market power issues by analyzing not only
Energy East's merger with CMP Group, but also its acquisition of the natural gas
operations of Connecticut Energy and CTG Resources.(23) Mr. Henderson
concludes that no market power concerns are raised by the proposed transactions.
A copy of the FERC application, including Mr. Henderson's prepared testimony as
an attachment, is filed as Exhibit D-1 hereto. It is anticipated that FERC will
rule that the CMP Group Merger will not significantly affect competition in any
relevant market.
The Merger 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 to integrate CMP Group, CTG
Resources and Berkshire Energy into the Energy East system. Furthermore, there
will be continuity of management because, following the Merger, the management
of the regulated utility subsidiaries of CMP Group, CTG Resources and Berkshire
Energy will largely be comprised of their respective current management. In
addition, the CMP Group Merger Agreement provides that the current CMP Group
Board of Directors will serve as an advisory board to Central Maine Power, the
CTG Resources Merger Agreement provides that the current CTG Resources Board of
- -----------------
(23) Energy East and CMP Group intend to amend their FERC application to include
a supplemental affidavit from Mr. Henderson, to account for vertical market
power effects of the acquisition of Berkshire Energy. A copy of the amended FERC
application will be filed as an amendment to Exhibit D-1 to this
Application/Declaration.
-33-
<PAGE>
Directors will serve as an advisory board to the surviving company, and the
Berkshire Energy Merger Agreement provides that the current Berkshire Energy
Board of Trustees will serve as an advisory board to Berkshire Energy. Such
continuity of management oversight will help to assure that the management of
the regulated utility subsidiaries of CMP Group, CTG Resources and Berkshire
Energy remain responsive to local regulation and to other essentially local
interests. For the reasons set forth above, the Merger will not "tend toward
interlocking relations or the concentration of control" of public utility
companies, of a kind or to the extent detrimental to the public interest or the
interests of investors or customers within the meaning of Section 10(b)(1).
2. Section 10(b)(2)
-----------------
(a) Reasonableness of Consideration
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given by Energy East to the holders of CMP Group common
stock, CTG Resources common stock, and Berkshire Energy common shares in
connection with the Merger, including fees and expenses of the Merger, is
reasonable and whether it bears a fair relation to the investment in and earning
capacity of the utility assets underlying the securities being acquired. Market
prices at which securities are traded have always been strong indicators as to
values. As shown in the table below, the most recent quarterly price data, high
and low, for CMP Group, CTG Resources, and Berkshire Energy common shares
provide support for the consideration paid in the Merger.
Comparative Per Share Market Price:
-34-
<PAGE>
- --------------------------------------------------------------------------------
ENERGY EAST*
- --------------------------------------------------------------------------------
PRICE RANGE
- --------------------------------------------------------------------------------
HIGH LOW
-------- --------
1997
First Quarter $12.25 $10.625
Second Quarter $11.25 $10.3125
Third Quarter $13.5938 $10.4063
Fourth Quarter $17.875 $12.875
1998
First Quarter $20.25 $16.5313
Second Quarter $22.0938 $19.4689
Third Quarter $25.6875 $19.9375
Fourth Quarter $29.00 $23.375
1999
First Quarter $28.625 $24.5625
Second Quarter $28.125 $24.75
Third Quarter $27.0625 $22.625
*Per share amounts have been restated to reflect Energy East's two-for-one
common stock split effective April 1, 1999.
- --------------------------------------------------------------------------------
CMP GROUP
- --------------------------------------------------------------------------------
PRICE RANGE
- --------------------------------------------------------------------------------
HIGH LOW
-------- --------
1997
First Quarter $11.625 $10.50
Second Quarter $12.75 $10.00
Third Quarter $13.5625 $12.0625
Fourth Quarter $15.50 $12.875
1998
First Quarter $17.8125 $15.25
Second Quarter $20.375 $17.0625
Third Quarter $20.50 $16.9375
Fourth Quarter $20.00 $16.75
1999
First Quarter $19.5625 $16.25
Second Quarter $26.75 $17.75
Third Quarter $27.00 $26.00
-35-
<PAGE>
- --------------------------------------------------------------------------------
CTG RESOURCES
- --------------------------------------------------------------------------------
PRICE RANGE
- --------------------------------------------------------------------------------
HIGH LOW
-------- --------
1997
First Quarter $25.375 $21.375
Second Quarter $22.25 $20.75
Third Quarter $23.8125 $21.625
Fourth Quarter $26.50 $22.75
1998
First Quarter $26.75 $23.375
Second Quarter $25.9375 $21.9375
Third Quarter $24.50 $22.375
Fourth Quarter $26.3125 $22.625
1999
First Quarter $26.375 $22.25
Second Quarter $36.75 $22.125
Third Quarter $37.188 $34.25
- --------------------------------------------------------------------------------
BERKSHIRE ENERGY
- --------------------------------------------------------------------------------
PRICE RANGE
- --------------------------------------------------------------------------------
HIGH LOW
-------- --------
1997
First Quarter 17-1/2 15-1/4
Second Quarter 16 15
Third Quarter 17-3/8 15-1/4
Fourth Quarter 23-1/2 16-1/4
1998
First Quarter 25-5/8 21-1/2
Second Quarter 24-3/4 21-5/8
Third Quarter 25 19-1/2
Fourth Quarter 24-1/4 20
1999
First Quarter 23-1/8 18-1/2
Second Quarter 23-3/4 16-1/4
Third Quarter 26-7/8 23-1/2
-36-
<PAGE>
On June 14, 1999, the last full trading day before the public announcement
of the execution and delivery of the CMP Group Merger Agreement, the closing
price per share of CMP Group common stock as reported on the NYSE -- Composite
Transaction of CMP Group common stock was $20-1/16. On June 29, 1999, the last
full trading day before the public announcement of the execution and delivery of
the CTG Resources Merger Agreement, the closing price per share of CTG Resources
common stock as reported on the NYSE-- Composite Transaction of CTG Resources
common stock was $35.625. On November 9, 1999, the last full trading day before
the public announcement of the execution and delivery of the Berkshire Energy
Merger Agreement, the closing price per share of Berkshire Energy common shares
as reported by the National Quotation Bureau, Incorporated was $33.
In its determinations as to whether or not a price meets the reasonableness
standard, the Commission has considered whether the price was decided as the
result of arms length negotiations(24) and the opinions of investment bankers,
(25) 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 Merger. The Commission has
previously recognized that when the consideration to be paid in an acquisition
is the result of arms length negotiations between the management of the
companies involved, supported by opinions of financial advisors, there is
- -----------------
(24) In the Matter of American Natural Gas Company, HCAR No. 15620 (Dec. 12,
---------------------------------------------
1966).
(25) Consolidated Natural Gas Company, Holding Co. Act Release No. 25040 (Feb.
----------------------------------
14, 1990).
-37-
<PAGE>
persuasive evidence that the requirements of Section 10(b)(2) have been
satisfied.(26) The agreed-upon level of consideration was the product of
extensive and vigorous arms length negotiations between Energy East and each of
CMP Group, CTG Resources and Berkshire Energy. These negotiations were preceded
by appropriate due diligence, analysis and evaluation of the assets, liabilities
and business prospects of the respective companies. An extensive discussion of
the negotiations that took place in connection with the CMP Group Merger is
found at pages 17-20 of the CMP Group Proxy Statement, incorporated by reference
as Exhibit C-2. An extensive discussion of the negotiations that took place in
connection with the CTG Resources Merger is found at pages 27-32 of the CTG
Resources Proxy Statement/Prospectus, incorporated by reference as Exhibit C-1.
An extensive discussion of the negotiations that took place in connection with
the Berkshire Energy Merger will be set forth in the Berkshire Energy Proxy
Statement, which will be filed as Exhibit C-3.
Investment bankers for CMP Group, CTG Resources, and Berkshire Energy have
reviewed extensive information concerning the CMP Group Merger, the CTG
Resources Merger and the Berkshire Energy Merger, have analyzed the conversion
ratios employing a variety of valuation methodologies, and have opined that the
conversion ratios are fair, from a financial point of view, to the respective
holders of CMP Group common stock, CTG Resources common stock and Berkshire
Energy common shares. The investment bankers' analyses and opinions are
incorporated by reference as Exhibits G-1, G-2 and G-2a. A copy of Warburg
Dillon Read's opinion is attached as Appendix B to the CMP Group Proxy
Statement, incorporated by reference as Exhibit C-2. A copy of PaineWebber's
opinion is attached as Appendix B to the CTG Resources Proxy
Statement/Prospectus, incorporated by reference as Exhibit C-1. A copy of
Tucker Anthony Cleary Gull's ("Tucker Anthony") opinion will be attached as
Appendix B to the Berkshire Energy Proxy Statement, which will be filed as
Exhibit C-3.
- -----------------
(26) Entergy Corporation, et al, HCAR No. 25952 (Dec. 17, 1993); The Southern
----------------------------- ------------
Company, et al., 40 S.E.C. Docket 350 at 352 (Feb. 12, 1988).
- -----------------
-38-
<PAGE>
Finally, Energy East engaged Morgan Stanley Dean Witter and Co. with
respect to the CTG Resources Merger, Goldman Sachs & Co. with respect to the CMP
Merger and Chase Securities, Inc. with respect to the Berkshire Energy Merger.
Each provided a "fairness" opinion regarding these respective transactions to
the Energy East Board of Directors. In light of these opinions and an analysis
of all relevant factors, including the benefits that may be realized as a result
of the Merger, the Companies believe that the conversion ratios fall within the
range of reasonableness, and the consideration to be paid in the CMP Group
Merger, the CTG Resources Merger and the Berkshire Energy Merger bears a fair
relation to the sums invested in, and the earning capacity of, the utility
assets of CMP Group, CTG Resources and Berkshire Energy.
(b) Reasonableness of Fees
The Companies believes that the overall fees, commissions and expenses
incurred and to be incurred in connection with the Merger are reasonable and
fair in light of the size and complexity of the Merger relative to other
transactions and the anticipated benefits of the Merger to the public, investors
and consumers, that they are consistent with recent precedent, and that they
meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application/Declaration, Energy East, CMP
Group, CTG Resources and Berkshire Energy, together, expect to incur a combined
total of approximately $34 million in fees, commissions and expenses in
connection with the Merger, excluding expenses related to integrating the
operations of the merged company. Such fees will be paid on an arms length
basis to third parties and are consistent with fees, commissions and expenses
paid for similar transactions and approved by the Commission as reasonable. For
example, Northeast Utilities alone incurred $46.5 million in fees and expenses
in connection with its acquisition of Public Service of New Hampshire, and
Entergy incurred $38 million in fees in connection with its recent acquisition
of Gulf States Utilities -- which amounts all were approved as reasonable by the
Commission.(27)
- -----------------
(27) See Northeast Utilities, HCAR No. 25548 (June 3, 1992); Entergy Corp.,
-------------------- --------------
HCAR No. 5952 (Dec. 17, 1993).
-39-
<PAGE>
The Companies also believe that the financial advisory fees payable to
their respective investment bankers are fair and reasonable for similar reasons.
Pursuant to its engagement letter, CMP Group paid Warburg Dillon Read $1 million
upon the rendering of Warburg Dillon Read's fairness opinion. In addition,
Warburg Dillon Read received $100,000 upon the execution of the engagement
letter and is receiving a $50,000 quarterly retainer. Upon the approval of the
CMP Group Merger Agreement by shareholders, Warburg Dillon Read received an
additional $1 million. At the completion of the CMP Group Merger, Warburg
Dillon Read will receive a fee equal to 0.6 percent of the aggregate
consideration paid in the CMP Group Merger, which fee is expected to equal
approximately $5.74 million, less the amount of all fees previously paid. CMP
Group has agreed to indemnify Warburg Dillon Read against certain liabilities
under federal securities laws, relating to or arising out of its engagement.
Pursuant to its engagement letter with CTG Resources dated June 25, 1998,
PaineWebber has earned a retention fee of $200,000 and a fee of approximately
$1,742,000 for the rendering of a fairness opinion. In addition, PaineWebber
will receive a fee of approximately $1,642,000 upon completion of the CTG
Resources Merger, and will be reimbursed for certain related expenses.
PaineWebber will not be entitled to any additional fees or compensation in the
event the CTG Resources Merger is not approved or otherwise completed. CTG
Resources also separately agreed to indemnify PaineWebber against certain
liabilities, including liabilities under federal securities laws.
Pursuant to the engagement letter between Berkshire Energy and Tucker
Anthony Cleary Gull, Berkshire Energy paid Tucker Anthony $300,000 upon the
rendering of Tucker Anthony's fairness opinion. In addition, Tucker Anthony
received a $25,000 payment upon the execution of the engagement letter. Upon
-40-
<PAGE>
the approval of the merger agreement by the shareholders of Berkshire Energy,
Tucker Anthony will receive an additional payment of approximately $1.2 million.
Berkshire Energy has agreed to indemnify Tucker Anthony against certain
liabilities under federal securities laws, relating to or arising out of its
engagement.
Pursuant to the engagement letter between Energy East and Goldman Sachs,
Energy East paid Goldman Sachs $2.3 million upon the public announcement of the
CMP Group Merger Agreement. In addition, Goldman Sachs received $2.3 million
upon the approval of the CMP Group Merger Agreement by the shareholders of CMP
Group. Goldman Sachs will receive an additional payment of $2.4 million at the
completion of the CMP Group Merger. Energy East has agreed to indemnify Goldman
Sachs against certain liabilities under federal securities laws, relating to or
arising out of its engagement.
Pursuant to the engagement letter between Energy East and Morgan Stanley
Dean Witter, Energy East paid Morgan Stanley Dean Witter $1.2 million upon the
public announcement of the CTG Resources Merger Agreement. In addition, Morgan
Stanley Dean Witter received $1.2 million upon the approval of the CTG Resources
Merger Agreement by the shareholders of CTG Resources. Morgan Stanley Dean
Witter will receive an additional payment of $1.3 million at the completion of
the CTG Resources Merger. Energy East has agreed to indemnify Morgan Stanley
Dean Witter against certain liabilities under federal securities laws, relating
to or arising out of its engagement.
Pursuant to the engagement letter between Energy East and Chase Securities,
Energy East paid Chase Securities $350,000 upon the public announcement of the
Berkshire Energy Merger Agreement. Energy East has agreed to indemnify Chase
Securities against certain liabilities under federal securities laws, relating
to or arising out of its engagement.
The investment banking fees paid by CMP Group, CTG Resources, Berkshire
Energy, and Energy East are lower than fees paid in other similar transactions
and approved by the Commission as reasonable. The fees reflect the financial
marketplace, in which investment banking firms actively compete with each other
to act as financial advisors to merger partners.
-41-
<PAGE>
3. Section 10(b)(3)
-----------------
Section 10(b)(3) requires the Commission to determine whether the Merger
will unduly complicate Energy East's capital structure or will be detrimental to
the public interest, the interests of investors or consumers or the proper
functioning of Energy East's system.
The Commission has found that an acquisition satisfies this requirement
where the effect of a proposed acquisition on the acquirer's capital structure
is negligible and the equity position is at or above the traditionally
acceptable 30 percent level prescribed by the Commission.(28) The Commission has
approved common equity to total capitalization ratios as low as 27.6 percent.
(29) Under these standards, the proposed combination of Energy East, CMP Group,
CTG Resources and Berkshire Energy will not unduly complicate the capital
structure of the combined system.
Set forth below are summaries of the historical capital structures of
Energy East, CMP Group, CTG Resources, and Berkshire Energy as of June 30, 1999
and the pro forma consolidated capital structure of post-Merger Energy East as
of June 30, 1999:
<TABLE>
<CAPTION>
Energy East, CMP Group and CTG Resources
Historical Consolidated Capital Structures
(Dollars in thousands)
- ----------------------------------------------------------------------------------------
PRE-MERGER CMP BERKSHIRE
ENERGY EAST GROUP CTG RESOURCES ENERGY
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock Equity $ 1,754,365 52.8% $541,478 $ 133,779 $ 37,896
Preferred stock not subject to
mandatory redemption 10,131 .3% 35,528 879 312
Preferred stock subject to
mandatory redemption 25,000 .8% 18,910 -- --
Long-Term Debt 1,535,079 46.1% 124,205 217,516 40,000
- ------------------------------ ------------ ------ -------- ------------- ---------
Total $ 3,324,575 100.0% $720,121 $ 352,174 $ 78,208
</TABLE>
- -----------------
(28) See, e.g., Entergy Corp., 55 S.E.C. 2035 (Dec. 17, 1993); Northeast
--- ---- ------- ---------
Utilities, 47 S.E.C. 1279 (1990).
- ---------
(29) See Northeast, supra.
--- --------- -----
-42-
<PAGE>
Post-Merger Energy East Pro Forma Consolidated Capital Structure
(Dollars in thousands)
(unaudited)
POST-MERGER
ENERGY EAST
Common Stock Equity (incl. additional paid in capital) $1,913,921 43.3%
- ---------------------------------------------------------- -----------------
Preferred stock not subject to mandatory redemption
(of subsidiaries) 46,850 1.1%
Preferred stock subject to mandatory redemption of
subsidiaries) 43,910 1.0%
Long-Term Debt 2,416,800 54.6%
- --------------- -----------------
Total $4,421,481 100.0%
As can be seen from these tables, post-Merger Energy East's pro forma
consolidated equity to total capitalization will be 43.3 percent, which will be
significantly higher than Northeast Utilities' approved 27.6 percent common
equity position and will exceed the traditionally accepted 30 percent level.
The capital structure of post-Merger Energy East will also be substantially
similar to the capital structures approved by the Commission in other orders.
(30)
Protected interests: As set forth more fully in Item 3.C.4 (Efficiencies
--------------------
and Economies from the Merger (Section 10(c)(2)), Item 3.C.2(b)(iii)
(Coordination between ISO-NE and NYISO), and elsewhere in this
Application/Declaration, the Merger is expected to result in economies and will
integrate and improve the efficiency of the Energy East, CMP Group, CTG
Resources and Berkshire Energy utility systems. The Merger will create an
entity poised to respond effectively to the fundamental changes taking place in
the markets for natural gas and electric power and to compete effectively for
consumers' business. The Merger will therefore be in the public interest and
the interests of investors and consumers, and will not be detrimental to the
proper functioning of the resulting holding company system.
- -----------------
(30) See, e.g., Ameren Corporation, HCAR No. 26809 (Dec. 30, 1997); CINergy
--- ---- ------ ----------- -------
Corp., HCAR No. 26934 (Nov. 2, 1998); and Centerior Energy Corp., HCAR No. 24073
- ----- ---------------------
(April 29, 1986).
-43-
<PAGE>
As indicated previously, consummation of the Merger is conditioned upon
receipt not only of the Commission's approval, but also on several state and
other federal regulatory approvals. Those regulatory approvals give additional
assurance that the interests of retail customers are adequately protected.
FERC's approval of the CMP Group Merger will further assure that there is no
significant adverse effect on competition. In sum, because the Merger does not
add any complexity to Energy East's capital structure, is in the interest of
investors and consumers, and is consistent with the public interest, the
requirements of Section 10(b)(3) are met.
C. SECTION 10(C)
Section 10(c) of the Act provides that, notwithstanding the provisions of
Section 10(b), 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.
1. Acquisition Must Be Lawful
-----------------------------
Section 10(c)(1) requires that an acquisition be lawful under Section 8.
Section 8 prohibits registered holding companies from acquiring, owning
interests in or operating both a gas and an electric utility serving
substantially the same area if state law prohibits it. As discussed below, the
Merger does not raise any issue under Section 8. Indeed, Section 8 indicates
that a registered holding company may own both gas and electric utilities where,
as here, the acquisition is subject to approval by the state utility commissions
with jurisdiction over the acquired companies. CMP Group and CTG Resources have
filed applications with the MPUC and the DPUC for approvals to approve their
mergers and they anticipate that such applications will be approved. As
discussed in Item 4 below, MDTE approval of the Berkshire Energy Merger is not
required.
-44-
<PAGE>
Section 10(c)(1) further requires that an acquisition not be detrimental to
carrying out the provisions of Section 11 of the Act. Section 11(a) of the Act
requires the Commission to examine the corporate structure of registered holding
companies to ensure that unnecessary complexities are eliminated and voting
powers are fairly and equitably distributed. As described above, the Merger
will not result in unnecessary complexities or unfair voting powers.
Although Section 11(b)(1) generally requires a registered holding company
system to limit its operations "to a single integrated public utility system,
and to such other businesses as are reasonably incidental, or economically
necessary or appropriate to the operations of such integrated public utility
system," a combination integrated gas and electric system within a registered
holding company is permissible under Section 8.(31) Additionally, Section
11(b)(1) provides that "one or more additional integrated public utility
systems" may be retained if, as here, certain criteria are met. Section 11(b)(2)
directs the Commission "to ensure that the corporate structure or continued
existence of any company in the holding company system does not unduly or
unnecessarily complicate the structure, or unfairly or inequitably distribute
voting power among security holders, of such holding company system."
As detailed below, the Merger will not be detrimental to the carrying out
of the provisions of Section 11. The combination of NYSEG's electric system and
CMP Group's electric operations will result in a single, integrated electric
utility system (the "new Energy East Electric System"). Integration of the new
Energy East Electric System will be facilitated by NYSEG's and Central Maine
Power's memberships in adjacent, highly interconnected and coordinated power
pools and participation in their ISOs, and will be accomplished by the
functioning of the open, competitive markets administered by the interconnected
ISOs. Sellers and purchasers in either ISO's control area may engage in
transactions in the other ISO's control area through readily-accessible,
- -----------------
(31) See, e.g., New Century Energies, Inc., supra.
--- --- --------------------- ---- -----
-45-
<PAGE>
OASIS-based transmission access. Further, the combination of Energy East's
current gas system (i.e., NYSEG's gas operations, Connecticut Energy and Maine
Gas Co.) with the gas operations of CMP Group, CTG Resources and Berkshire
Energy will result in a single, integrated gas utility system with operations in
the same states as the electric system or states adjoining those states (the
"new Energy East Gas System"). The Commission should accordingly find that the
new Energy East Electric System will be the primary integrated public utility
system for purposes of Section 11(b)(1) and the new Energy East Gas System is a
permissible additional system under Section 11(b)(1)A-C.
Furthermore, Section 10(c)(2) requires that the Commission approve a
proposed transaction if it will serve the public interest by tending toward the
economical and efficient development of an integrated public utility system.
This Section 10(c)(2) standard is met where the likely benefits of the
acquisition exceed its likely cost.(32) As discussed below, the Merger will
result in the creation o f an integrated electric utility system and an
additional integrated gas utility system and will produce economies and
efficiencies more than sufficient to satisfy the standards of Section 10(c)(2).
2. Combination and Integration of Electric Utility Operations
---------------------------------------------------------------
Section 2(a)(29)(A) of the Act defines an "integrated public utility
system," as applied to electric utilities, as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a single
interconnected and 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. (emphasis added)
- -----------------
(32) See City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992).
--- ----------------------
-46-
<PAGE>
The Commission has established four standards under the statutory
integration requirement:
(1) The utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) The utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) The system must be confined in its operations to a single area or
region; and
(4) The system must not be 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.
The Commission has traditionally been called upon to evaluate merger
applications that involve the combination of two traditional electric utilities.
That is, the utility applicants have been involved in all three levels or
sectors of utility operations: generation, transmission, and distribution.
Thus, the Commission has evaluated whether the Act's integration standard has
been met when combining the assets of fully integrated utilities. Where, as
here, the applicants are utilities that previously were vertically integrated,
but have become almost entirely engaged in transmission and distribution, the
Commission should, consistent with earlier precedent, find that an integrated
public utility system can be comprised of two or more transmission/distribution
companies.(34)
- -----------------
(33) See , e.g., Environmental Action, Inc. v. Sec, 895 F.2d 1255, 1263 (9th
--- ---- ------------------------------------
Cir. 1990), citing Electric Energy, Inc., 38 S.E.C. 658, 668 (1958).
----------------------
(34) The Commission has previously determined that, without regard to the
combining of operations of generating facilities, transmission facilities, on
their own, can comprise an "integrated public utility system."See In re Sierra
----------------
Pacific Power Company, 40 S.E.C. Docket 103 (Jan. 28, 1988), aff'd sub nom.,
- --------------------- ----- --- ---
Environmental Action, Inc. v. SEC, 895 F.2d 1255 (9th Cir. 1990). As a
- -----------------------------------
consequence the provisions of the Act, such as Section 10(c)(2), that
incorporate or refer to this term must be interpreted so as not to thwart the
Congressional intent.
-47-
<PAGE>
Since the function of transmission and distribution facilities is to
transfer electric energy from points of generation, or point of receipt from
another system, to load, or point of delivery with another system, transmission
facilities in and of themselves can, in appropriate circumstances, constitute an
integrated system and can perform an integrating function. Because of the
contiguous, highly interconnected, and coordinated relationships between the
power pools and ISOs to which NYSEG and Central Maine Power belong, their
transmission and distribution systems are now used, and in the future will
increasingly be used, to accomplish transfers of power between generation and
load within NYPP and NEPOOL and for transfers of power to, and through, both
systems. If the Merger is approved, the Companies will implement their proposal
to reduce transmission charges for transactions involving the NYSEG and Central
Maine systems; that price reduction should result in increased use of the NYSEG
and Central Maine Power transmission facilities and therefore an increased
degree of integration.
(a) Changes in the Electric Utility Industry
This section and the following sections describe the sweeping
structural changes that have taken place in the electric utility industry over
the last two decades. These changes include transformation of the markets at
both the wholesale and retail levels. Both this Commission and FERC have
recognized the significance of the changes. Recent FERC initiatives are likely
to promote the so-called "de-integration" of the industry even further. FERC's
recent RTO NOPR is promoting further regional transmission integration efforts
in order to facilitate even more competitive generation markets.(35)
The concept of a non-vertically integrated, generation-only business
enterprise was introduced with the enactment of PURPA. By the mid-1980's,
non-utility generation had out-paced utility generation additions. Power
marketers, which generally own no generating assets, but purchase and resell
power, also had become prevalent by the early 1990's. The Energy Policy Act of
- -----------------
(35) Notice of Proposed Rulemaking, Regional Transmission Organizations,
------------------------------------------------------------------------
Docket No. RM99-2-000, 87 FERC 61,173 at 33,693 (May 13, 1999) ("RTO NOPR").
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<PAGE>
1992 further contributed to the elimination of vertical integration of electric
utilities by enabling stand-alone generation of any type, with no restriction on
utility ownership or technology, to be exempted from "electric utility company"
status under the Act, and by significantly expanding the FERC's authority to
require utilities to provide non-discriminatory transmission for third-party
wholesale transactions.
In April 1996, in its Order Nos. 888 and 889, the FERC established the
framework for the development of fully competitive wholesale power markets in
the United States. These orders required vertically-integrated utilities
functionally to separate operation of their transmission systems from their
wholesale "merchant" function -- i.e., their role as a generator and seller,
----
and/or reseller of purchased power, to wholesale customers. Order No. 888
required all transmission-owning public utilities to establish open access
non-discriminatory transmission tariffs containing "pro forma" terms and
conditions. Utilities were also required to functionally unbundle wholesale
power services, so that they obtained wholesale transmission services under the
same tariff of general applicability as do unaffiliated third parties. Under
Order No. 889, utilities were required to establish or participate in an OASIS,
through which any eligible customer can obtain information regarding a public
utility's transmission availability and can reserve transmission capacity
through the Internet pursuant to a transparent, non-discriminatory process.
Finally, utilities were required to comply with standards of conduct designed to
prevent employees engaged in wholesale power marketing functions from obtaining
preferential access to pertinent transmission system information.
In summary, PURPA, the Energy Policy Act of 1992, and Order Nos. 888
and 889 transformed the industry to a more competitive structure. Where
previously vertically integrated companies combined generation, transmission and
distribution functions to provide a "bundled" product -- delivered electricity
- -- to retail customers within franchised service areas, under the new
functionally, or operationally, separated industry structure, separate
companies, or separate functional/operational components of companies, perform
the generation, merchant, transmission and distribution functions, with the goal
of fostering competition in the generation sector.
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<PAGE>
Among other things, these structural changes have resulted in the
rapid development of wholesale markets through which load-serving utilities,
retail aggregators, and individual retail customers are able to obtain needed
electricity products. Also, there has been significant growth in the volume of
trading in the wholesale electricity market, from 1.8 million MWh in the first
quarter of 1995 to 513 million MWh in the second quarter of 1998.(36) Actual
separation of utility generation and transmission functions has resulted from
widespread divestiture of generating assets, in some cases required by state
legislatures or state regulatory commissions. As reported in the RTO NOPR,
since August 1997 approximately 50,000 MW of utility generating capacity has
been sold, or is under contract to be sold, and an additional 30,000 MW is
currently for sale; this represents more than 10 percent of all generating
capacity in the United States. FERC reports that 27 utilities have sold all or
some of their generating assets and seven others have assets for sale.
Finally, many state commissions and legislatures have implemented or
are considering open access at the retail level. As of October 1, 1999,
twenty-four states have enacted policies, either through legislation or
administrative action, requiring utilities to offer open access to retail
customers. Where open retail access is provided, retail customers have the
ability to "shop" for their electric power from a power supplier other than
their traditional distribution utility. The distributor is obligated to deliver
the third party power supplies to the customer.
In the early years of the Act, the Commission construed the
integration standard to preclude significant geographic expansion by holding
company systems. However, the Commission has acknowledged that the Act must
"keep pace with changing economic and regulatory climates."., HCAR No. 18368, at
note 52 (April 10, 1974), quoted in Consolidated Natural Gas Co., HCAR No.
---------------------------
35-26512 (April 30, 1996).(37) Thus, the Commission has attempted to "respond
flexibly to the legislative, regulatory, and technological changes that are
transforming the structure and shape of the utility industry." The 1995 Report
states that
- -----------------
(36) RTO NOPR at 33,690.
(37) Union Elec. Co., HCAR No. 18368, at note 52 (April 10, 1974), quoted in
----------------
Consolidated Natural Gas Co., HCAR No. 35-26512 (April 30, 1996).
- ---------------------------
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<PAGE>
The statute recognizes that the application of the integration
standards must be able to adjust in response to changes in "the state
of the art." [T]he Division believes the SEC must respond
realistically to the changes in the utility industry and interpret
more flexibly each piece of the integration equation.(38)
The integration model presented herein represents the state of the utility
industry in 1999, and accordingly should elicit the flexible and realistic
response described in the 1995 Report.
(b) Restructuring of NEPOOL and NYPP into Open, Competitive and
Coordinated Markets
Both NYSEG and Central Maine Power are members of power pools in which
transmission-owning members have turned over operational control of their
transmission assets to ISOs. As indicated earlier, NYSEG is a member of the
NYPP and has transferred control over its transmission facilities to the NYISO;
Central Maine Power is a member of NEPOOL and has transferred control over its
transmission facilities to ISO-NE. As noted by the FERC in its RTO NOPR, the
NYISO and ISO-NE were established on the platform of existing tight power pools
following FERC's encouragement in Order No. 888. NYISO was formed based upon
the NYPP and ISO-NE was formed based upon NEPOOL.
The two ISOs administer competitive, bid-based markets for electric
energy and other electric power products, provide non-discriminatory
transmission service at a single, embedded cost-based rate, and facilitate
transmission planning and expansion on a regional basis. NYISO and ISO-NE are
contiguous along a 500-mile border and are interconnected by eight different
interties with aggregate transfer capability of 1,600 to 2,300 MW, depending on
direction and system conditions. Trade between the two ISOs is significant.
Scheduled energy transfers between NEPOOL and New York were approximately
- -----------------
(38) 1995 Staff Report at 66.
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<PAGE>
7,100,000 MWh per year for the three years ending December 31, 1998. This is
equivalent to the transfer of between NYISO and ISO-NE, of 1,707 MW during every
peak hour of the year.(39) As discussed below, the eight existing interties
between NYPP and NEPOOL provide significant transfer capability between these
control areas.
The two ISOs engage in regular coordinated activities to ensure
reliable interregional operations and to encourage robust competitive markets by
simplifying interregional transactions.(40) Both ISOs operate as non-profit
organizations and include investor-owned utility ("IOU") and non-IOU members,
and both operate centralized power markets. In addition, both perform
congestion management to free up transmission capacity for the most economic
uses of the system. Through these activities, the NYISO and ISO-NE have largely
accomplished the integration function that is the legislative goal of Sections
2(A)(29)(A) and 10(c)(2) and 11(b) of the Act. Furthermore, in their
application to the FERC under Section 203 of the Federal Power Act, the parties
have committed to reduce the effects of rate pancaking between the NYISO and
ISO-NE for transactions that use both NYSEG's and Central Maine Power's
transmission systems. As a result, the Merger will further enhance integration
between the NYISO and ISO-NE with respect to NYSEG and Central Maine Power
beyond that which has already been accomplished by the coordinated activities of
the two ISOs.
Finally, all of the states in which transmission-owning utility
members of the NYISO and ISO-NE are located, with the exception of Vermont, have
established requirements for retail choice. These state initiatives frequently
include a requirement that the utilities divest some or all of their generating
- -----------------
(39) The peak hours of the year for electricity demand are the 16 "on peak"
hours Monday through Friday
(40) For example, when one of the two control areas experiences energy supply or
reserve shortages, the other control area will provide as much energy as
possible to assist its neighbor. On a routine basis, the control areas exchange
energy for economic efficiency reasons. NYPP, NEPOOL and members of both pools,
including NYSEG and Central Maine Power, participate in joint pool and regional
transmission planning and reliability studies.
-52-
<PAGE>
assets. This is designed to mitigate or eliminate the utilities' generation
market power, thus making generation markets more competitive. Central Maine
Power, upon completion of divestiture of its generating assets and power
exchange contracts, will be solely a "wires" company that does not provide, and
has no obligation to provide, electric power to customers.
(i) The NYPP and NYISO
Opinion No. 96-12,(40) issued by the New York
Public Service Commission ("NYPSC"), sets forth the vision and goals for the
future electric regulatory regime. The NYPSC's stated vision includes the
following factors: (1) effective competition in the generation and energy
services sectors; (2) reduced prices resulting in improved economic development
for New York as a whole; (3) increased consumer choice of supplier and service
company; (4) a system operator that treats all participants fairly and ensures
reliable service; (5) a provider of last resort for all consumers and the
continuation of a means to fund necessary public policy programs; (6) ample and
accurate information for consumers to use in making informed decisions; and (7)
the availability of information that permits adequate oversight of the market to
ensure its fair operation.(42)
The NYPSC directed NYSEG (and four other electric utilities) to submit
a rate and restructuring plan consistent with the NYPSC's policy and vision for
increased competition. These plans were to address, at a minimum: (1) the
structure of the utility, both in the short and long term, including a
description of how that structure complies with the NYPSC's vision and, in cases
where divestiture is not proposed, effective mechanisms that adequately address
resulting market power concerns; (2) a schedule for the introduction of retail
access to all of the utility's customers, and a set of unbundled tariffs that is
- -----------------
(41) Case 96-E-0952 - In the Matter of Competitive Opportunities Regarding
--------------------------------------------------------
Electric Service, Opinion No. 96-12, issued May 20, 1996.
- -----------------
(42) Id. at 24.
--
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<PAGE>
consistent with the retail access program; (3) a rate plan to be effective for a
significant portion of the transition; and (4) numerous other issues relating to
strandable costs, load pockets, energy services and public policy costs.(43) On
October 9, 1997, NYSEG filed its plan in the form of an "Agreement Concerning
the Competitive Rate and Restructuring Plan" (the "Agreement"). By orders
issued January 27, 1998 and March 5, 1998, the NYPSC approved the Agreement with
modifications.(44)
The Agreement provides for the continued operation of NYSEG in a
holding company structure and the formation of a competitive generating company
to facilitate a subsequent divestiture of generation assets, and established a
five-year period (the "Price Cap Period"), beginning March 3, 1998, during which
NYSEG will reduce its retail rates. In addition, NYSEG committed to make retail
access available in phases, beginning on August 1, 1999. Retail access became
available to all industrial, commercial, public authority, and residential
customers taking service at standard retail rates. NYSEG also agreed to
unbundle its retail rates over the five year Price Cap period.
NYSEG also committed to divest its coal-fired generation plants and
agreed to sell its interest in the NM2. The sale of its interest in NM2 is
expected to close in the second quarter of 2000. NYSEG agreed to be the
provider of last resort during the Price Cap Period, subject to change by the
NYPSC. As authorized by FERC order,(45) NYSEG's generating company affiliate,
NGE Generation, Inc., sold its 50% interest in the 1,884 MW Homer City coal
plant to an affiliate of Edison Mission Energy Co. NGE Generation sold six
remaining coal units, representing 1,334 MW of capacity, to affiliates of the
AES Corporation.(46) NYSEG subsequently entered into a contract to sell its
- -----------------
(43) Id. at 75-76, 90.
--
(44) Opinion No. 96-12, May 20, 1996, Case 94-E-0952.
(45) New York State Electric & Gas Corp., et al., 86 FERC 61,020 (1999).
-------------------------------------------
(46) New York State Electric & Gas Corp., et al., 86 FERC 62,079 (1999).
-------------------------------------------
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<PAGE>
18% share of the NM2, representing 205 MW, to AmerGen. The only generation
assets or contracts which will remain after that sale are NYSEG's hydroelectric
projects, amounting to 62 MW, its NUG contracts and the contracts pursuant to
which NYSEG purchases power from the NYPA. In sum, NYSEG has completed
divestiture of all of its fossil-fired generation, amounting to approximately
2,500 MW, and is functioning almost exclusively as a transmission/distribution
company engaged exclusively in transmitting electricity from unaffiliated
producers to wholesale and retail customers, located both within New York State
and in adjacent states.
On January 31, 1997, pursuant to the NYPSC'S directive, the
transmission-owning member systems of the NYPP(47) filed a proposal with the
FERC to establish a fully competitive electric market in New York by forming an
ISO and a power exchange. The Member Systems also proposed a joint Open Access
Transmission Tariff ("OATT") to be administered by the ISO. Under this
proposal, operation of the combined transmission systems of the Member Systems
will be turned over to the NYISO, the governance structure of which ensures the
independence of the NYISO board. On December 19, 1997, the Member Systems
submitted a supplemental filing proposing the establishment of an hourly spot
energy market, the implementation of congestion pricing for transmission
services, the creation of transmission congestion contracts and markets for
ancillary services. The Member Systems also sought authorization to engage in
market-based rates for sales of energy into the NYISO administered spot market.
On June 30, 1998, FERC conditionally approved the Member Systems' proposal to
establish the NYISO.(48) Subsequently, on January 27, 1999, FERC conditionally
accepted the NYISO OATT and related market rules, and authorized market-based
rates for energy sales by the Member Systems into the NYISO administered spot
market.(49) The NYISO has now satisfied the conditions under FERC's orders and
has become operational.
- -----------------
(47) Central Hudson Gas & Electric Corp. ("Central Hudson"), Consolidated Edison
Co. of New York, Inc. ("Con Ed"), Long Island Lighting Co. ("LILCO"), NYSEG,
Niagara Mohawk Power Corp. ("Niagara Mohawk"), Orange and Rockland Utilities,
Inc. ("O&R"), Rochester Gas and Electric Corp. ("RG&E"), and NYPA.
(48) Central Hudson Gas & Electric Co., et al., 83 FERC 61,352 (1998).
------------------------------------------------
(49) Central Hudson Gas & Electric Co., et al., 86 FERC 61,062 (1999).
------------------------------------------------
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<PAGE>
The establishment of the NYISO and its concomitant assumption of
operational control of the bulk power transmission system in New York State,
will ensure that all participants in the newly-established competitive market
have access to the transmission system on an open and non-discriminatory basis.
The creation of a competitive market for electricity, coordinated and
administered by the NYISO, will ensure that all sellers and purchasers are able
to use voluntary bids to create a market of energy with substantial liquidity
and to allow the ISO to optimize the efficiency of the spot market for
electricity. The implementation of locational based marginal pricing for
electricity sales and transmission service will ensure that power sold in the
spot market is priced on an economically sound basis, and that the price paid
for transmission service reflects the true economic cost of using the combined
Member Systems' transmission systems.
Finally, in accordance with the requirements of FERC Order No. 888
governing "tight" power pools, transmission customers transmitting power (i)
within New York State, (ii) out of New York State, (iii) into New York State, or
(iv) through New York State, pay only one transmission charge under a "license
plate" rate approach. This is in contrast to the traditional "pancaked" rate
approach where the customer paid a separate transmission charge for the use of
each utility's system. Under the "license plate" approach, only the
transmission charge of the utility system to which power is delivered, or which
is the point of export from the NYISO, is assessed. The elimination of pancaked
transmission rates greatly reduces the cost of transmitting electricity which,
in turn, increases the competition among suppliers to serve wholesale and retail
customers and thus reduces prices.
In summary, the establishment of the NYISO creates a competitive
electricity market in which every generation and every reseller of such power,
can participate in a competitive market. The NYISO administers a bid-based
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<PAGE>
power sales system. Each day, power from sellers submitting the lowest bid will
be selected to serve the aggregate customer load that participates in the
market. The bid approach differs from traditional "economic dispatch" of
generation only in that the seller's offered bid price, rather than its
"cost-of-service," determines the rank in which it is selected to meet load. In
the restructured NYPP and NYISO, every transmission system under the control of
the NYISO will be used to transmit power to meet load from the most competitive
suppliers, whether in state or out-of-state, including to, or through, NYSEG's
and Central Maine Power's systems. Each component of the restructured functions
will be part of an optimally integrated system. In other words, there are no
artificial constraints or electrically isolated subsystems or areas that are not
included in the larger, optimized system.
Consistent with the terms of its OATT, when the NYISO becomes
operational, it will also have the responsibility to facilitate transmission
capacity additions to alleviate transmission constraints which occur during
periods of high demand. As a result, through the creation of a workably
competitive market structure and the "invisible hand" of supply and demand, the
operations of the NYISO establish a fully integrated system for the generation,
transmission and distribution by participants in the markets served by the
NYISO. As discussed below, because of the strong interconnections between
NYPP/NYISO and NEPOOL/ISO-NE, market participants in NEPOOL and ISO-NE are able,
merely by using the Internet-based OASIS, to sell to, or purchase, from buyers
or sellers, respectively, into the NYPP/NYISO and to reserve transmission rights
to consummate such transactions, including transactions to, or through, NYSEG's
and Central Maine Power's systems.
(ii) NEPOOL and ISO-NE
On December 31, 1996, NEPOOL Members filed a comprehensive proposal to
comply with FERC Order No. 888 and to restructure NEPOOL. Among the key
elements of the NEPOOL filing were (1) the formation of ISO-NE, an independent
system operator that would assume operational control of NEPOOL Members'
high-voltage pool-related transmission facilities, (2) a NEPOOL OATT which
replaced "pancaked" rates with a single transmission rate that initially
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<PAGE>
incorporates features of the "license plate" approach, and later transactions to
a single, pool-wide "postage stamp" rate, (3) the creation of a power exchange,
and (4) authorization for participants in NEPOOL to charge market-based rates
for power and ancillary services. FERC conditionally approved the filing and
required further changes. As required, NEPOOL adopted the FERC's pro forma
tariff policies regarding open admission to NEPOOL, with a modification,
concerning the obligations of transmission utilities to determine the need for
new transmission facilities or upgrades of the NEPOOL transmission system.(50)
Under the restructured NEPOOL, any "eligible customer" under the
FERC'S pro forma tariff may, upon compliance with the applicable requirements,
become a member of NEPOOL.(51) A member of NEPOOL may participate fully in the
competitive, integrated market including NEPOOL and adjacent areas connected by
transmission. Operational control over all "Pool Transmission Facilities"
("NEPOOL PTF")(52) has been transferred to ISO-NE, and transmission anywhere on
the integrated NEPOOL PTF network is provided under the ISO-NE administered
OATT. In compliance with Order No. 888, NEPOOL provides for transmission service
to any retail or wholesale customer located within the NEPOOL area, or service
"through" the NEPOOL grid, to an interconnected utility at a single,
- -----------------
(50) New England Power Pool, et al., 83 FERC at 61,045 (1998).
(51) FERC defines an "eligible customer" as: (i) Any electric utility (including
the Transmission Provider and any power marketer), federal power marketing
agency, or any person generating electric energy for sale for resale. Electric
energy sold or produced by such entity may be electric energy produced in the
United States, Canada or Mexico. However, with respect to transmission service
that the FERC is prohibited from ordering by Section 212(h) of the Federal Power
Act, such entity is eligible only if the service is provided pursuant to a state
requirement that the Transmission Provider offer the unbundled transmission
service, or pursuant to a voluntary offer of such service by the Transmission
Provider, (ii) any retail customer taking unbundled transmission service
pursuant to a state requirement that the Transmission Provider offer the
transmission service, or pursuant to a voluntary offer of such service by the
Transmission Provider, is an Eligible Customer under the Tariff.
(52) The NEPOOL PTFs, generally transmission facilities rated 69kV and above,
constitute the bulk transmission system operated by ISO-NE.
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<PAGE>
non-pancaked transmission charge.(53) Thus, transmission from any point on the
NEPOOL PTF grid to another control area, such as the NYISO, is subject to only a
single transmission charge, irrespective of the number of individual utility
transmission systems used to transmit the power to the New York border.
Moreover, under the NEPOOL OATT, retail and wholesale customers are responsible
for payment of transmission charges for use of the PTF. Irrespective of how many
NEPOOL Members' transmission systems are used, there are no additional charges
for use of PTF. Thus, there is no additional charge for power imported from, for
example, the NYISO and delivered to a customer on the NEPOOL PTF system.
NEPOOL and ISO-NE presently operate and administer a bid-based
competitive market for electricity, in which sellers submit bids for any of
seven electric power products and services: energy, ten minute spinning
reserve, automatic generation control, ten minute non-spinning reserve, thirty
minute operating reserve, operating capability, and installed capability. Based
on these bids and on rules reflecting system conditions and constraints, NEPOOL
determines which sellers will be selected to meet the aggregate load and
establishes the market clearing price for those products.
Based on its finding that no market participant in NEPOOL has market
power, the FERC has authorized participants in the NEPOOL market to charge
competitive, market-based rates, which are reflected in sellers' bids. These
bids, in turn, are subject to competitive pressure which prevents excessive
proposals. In addition, ISO-NE monitors the market and identifies patterns of
anomalous conduct, particularly withholding of supply, to ensure the proper
functioning of the market.
- -----------------
(53) The Member Systems of NEPOOL offer service over their non-NEPOOL PTFs,
i.e., non-bulk power transmission facilities that remain under the operational
- ----
control of individual utilities, under Local OATTs administered by the
individual member systems.
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<PAGE>
Under a 1997 State of Maine law restructuring electric utilities in
the State of Maine, Central Maine Power has divested all of its non-nuclear
generating assets. On April 7, 1999, Central Maine Power completed the sale of
its fossil, hydroelectric and biomass generating assets to an affiliate of FPL
Group, Inc. Central Maine Power recently announced the sale of its 4 percent
ownership share in Vermont Yankee to AmerGen, and is in the process of selling
its entitlements to energy from its 2.5 percent interest in Millstone 3 and its
purchased-power contracts with non-utility generators.(54)
In summary, under the restructured NEPOOL and ISO-NE, the high voltage
grids of each transmission-owning utility in New England are combined (as they
were under the prior NEPOOL Agreement) to form a single integrated transmission
system. In contrast to the prior NEPOOL structure, which enabled only utility
members to participate, the restructured NEPOOL allows any seller or buyer to
obtain nondiscriminatory access to the fully integrated NEPOOL transmission
system. Power sellers and purchasers can use this entire system by paying a
single "poolwide" rate, to transmit power through and out of the NEPOOL system,
to a retail or wholesale customer within NEPOOL, or as part of a sale to or
purchase from one of the NEPOOL competitive markets for power described above.
Through this open, transparent structure, every generator located within NEPOOL
(or that can transmit its power to NEPOOL's interfaces at its border) is able to
transmit power to any load within NEPOOL, or, through an interface, to load
outside of NEPOOL, including in NYPP. Included in this category of transactions
are transmission arrangements over the systems of Central Maine Power and NYSEG.
By proposing, following the Merger, to reduce transmission charges for certain
such transactions, Central Maine Power and NYSEG would increase the economic
opportunities for such transactions.
- -----------------
(54) Elsewhere in New England, full customer choice began in Massachusetts on
March 1, 1998; several Massachusetts utilities have divested generation assets.
In Connecticut, as of January 1, 2000, up to 35 percent of peak load of each
rate class in certain municipalities may choose their electric suppliers; there
will be full customer choice in Connecticut by July 1, 2000. In New Hampshire,
government officials expect to begin customer choice in early 2000. In Rhode
Island, customer choice will occur within three months after retail access
becomes available to 40 percent of customers (measured by energy sales) in New
England. Vermont has not yet adopted customer choice.
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<PAGE>
(iii) Coordination between ISO-NE and NYISO
As demonstrated below, NYSEG and Central Maine Power are actively engaged,
and, if the Merger is approved, will be increasingly engaged, in coordinated
activities. These activities include their membership in the NYISO and ISO-NE,
the strong interties, active trading, and coordinated activities of these ISOs,
the active participation by their representatives in inter-ISO working groups,
and their participation in the NPCC. Pursuant to the above-cited precedent,
these coordinated activities provide an additional basis for finding that the
Merger satisfies the integration standard.
(a) Interface transfer capacity
As demonstrated by the Franchise Area Map of Major Utilities in the
Northeast attached as Exhibit E-1, NYISO and ISO-NE are adjacent along the
entire New York State/Vermont/Massachusetts/Connecticut border, which extends
from Canada to the Long Island Sound. The ISOs are interconnected through eight
separate interties: four in Vermont, one in Massachusetts, and three in
Connecticut (including the undersea Long Island Sound Cable). These interties,
referred to as the New York/NEPOOL Interface, consist of (1) a 345 kilovolt
("kV") intertie between Connecticut Power & Light ("CP&L") in NEPOOL and ConEd
in NYPP; (2) a 345 kV intertie between Massachusetts Electric Co. in NEPOOL and
Niagara Mohawk in NYPP; (3) a 230 kV intertie between the New England Electric
System in NEPOOL and Niagara Mohawk in NYPP; (4) a 115 kV intertie between
Vermont Electric Power Company ("Vermont Electric") in NEPOOL and the NYPA in
NYPP; (5) a 115 kV intertie between Vermont Electric in NEPOOL and Niagara
Mohawk in NYPP; (6) an additional 115 kV intertie between Vermont Electric in
NEPOOL and Niagara Mohawk in NYPP; (7) a 69 kV intertie between CP&L in NEPOOL
and Central Hudson in NYPP; and (8) a 138 kV intertie between CP&L in NEPOOL and
LIPA in NYPP.
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The New York/NEPOOL Interface has aggregate transfer capacity --
between 1,600 to 2,300 MW, depending on direction and system conditions.(55) As
noted previously, transfers between NEPOOL and NYPP averaged 7,100,000 MWh per
year over the three years from 1995 to 1998, equal to an average of 1,707 MW of
transfers for every peak hour of the year, and to an average of 810.5 MW of
transfers for all hours of the year.(56) As new generation is added in Maine,
transfer capability increases, and NYSEG and Central Maine Power implement their
transmission pricing proposal, transfers between NYPP and NEPOOL are expected to
increase significantly.
Vermont Electric has proposed to expand the Interface capacity by
constructing a new 230 kV transmission line under Lake Champlain interconnecting
to the NYPA system, which would add 400-500 MW of transfer capability. In
addition to transmission-owning utilities in NYPP and NEPOOL, new entrants have
announced plans to add significant new transmission facilities between NYISO and
ISO-NE. For example, TransEnergie U.S. LTD., a subsidiary of Hydro-Quebec, has
submitted an application to the FERC seeking rate approvals for a high voltage
direct current ("HVDC") transmission interconnection, via 26 miles of cable
underneath Long Island Sound, that would connect the United Illuminating
Company's 345 kV system with LIPA's 138 kV system.(57) This project would
provide fully controllable, bi-directional transfer capability of approximately
600 MW between the control areas of the NYISO and ISO-NE.
- -----------------
(55) Prior to its divestiture of generating assets, the aggregate capacity of
all of NYSEG's fossil generation was 2,366 MW, and Central Maine Power's fossil,
hydroelectric and biomass generation represented approximately 1,070 MW. Thus
the existing NYPP/NEPOOL Interface is capable of transferring virtually all of
the power output of NYSEG's divested fossil plants to Central Maine Power
customers, and more than twice the amount needed for transfers from former
Central Maine Power units to NYSEG customers.
(56) Peak hours are 16 hours Monday for five days a week.
(57) Petition of TransEnergie U.S. LTD. For Order Accepting Tariff For
Transmission Interconnector and Granting Related Authorizations and Waivers,
TransEnergie U.S. LTD.,ER00-1-000 (Oct. 1, 1999)
- ----------------------
-62-
<PAGE>
(b) Coordination and joint planning by NYSEG and Central
Maine Power through the NYISO and ISO-NE
In applying the integration standard, the Commission looks beyond
simply the coordination of the generation and transmission within a system to
the coordination of other activities.(58) In that regard, on August 9, 1999,
ISO-NE and NYISO entered into a memorandum of understanding ("MOU"), in which,
based on their recognition that better coordination among these ISOs "would
result in more robust, competitive markets and facilitate interregional
monitoring." The ISOs agreed to:
- Place a high priority on studying the feasibility of increasing
intertie capacity;
- Identify and address market interface issues to facilitate broader
competitive markets;
- Encourage market participants and others to contribute to the process
of improving competition and interregional coordination, and
- Require staff of the ISOs to report periodically to the ISO CEOs,
market participants and other constituencies on the status and
progress of their joint interregional coordination activities.
The ISOs have established four joint working groups to carry out the
goals of the MOU. The Operations Working Group will develop and implement
procedures and practices which maximize the efficiency of markets while
protecting bulk power system reliability and security. Among other things, this
group will implement uniform procedures for confirming transactions and
schedules between control areas and will establish a uniform procedure for
administering dispatchable contracts.
- -----------------
(58) See, e.g., General Public Utilities Corp., HCAR No. 13116 (Mar. 2, 1956)
--- ---- ------------------------------
(coordination of maintenance and construction equirements); Middle South
-------------
Utilities, Inc., HCAR No. 11782 (March 20, 1953), petition to reopen denied,
- ---------------
HCAR No. 12978 (Sept. 13, 1955), rev'd sub nom.,Louisiana Public Service
----------------------------------------
Comm'n. v. SEC, 235 F. 2d. 167 (5th Cir. 1956), rev'd,353 U.S. 368 (1957),
- -------------- -----
reh'g denied, 354 U.S. 928 (1957) (integration accomplished through an
- -------------
operating committee which makes and keeps records and necessary reports,
coordinates construction programs and provides for all other interrelated
operations involved in the coordination of generation and transmission);
North American Company, HCAR No. 10320 (Dec. 28, 1950) (coordination of future
- -----------------------
power demand, sharing of extensive experience with regard to engineering and
other operating problems, and furnishing of financial aid to the company being
acquired are elements of integration).
-63-
<PAGE>
The Planning Working Group is charged with enhancing the overall
coordination of reliability planning among the three ISOs. It will establish
protocols for coordinating planning activities between the ISOs; establish
technical processes to strengthen coordination between the ISOs' planning and
assessment procedures; and investigate the feasibility of increasing inter-tie
capacity.
The Business Practices Working Group is charged with furthering the
seamless interfaces between the ISOs, minimizing the potential for contract
curtailments, and identifying business practices that promote market
effectiveness and efficiency. It will identify rules or practices that need to
be addressed to enhance seamless markets; develop guidelines to mitigate the
need for Transmission Load Relief by identifying and coordinating regional
redispatch opportunities, and identify and provide consistent information
required to support competitive markets. Finally, the Public Information
Working Group will seek to optimize the information available to market
participants to facilitate multi-regional trading and will focus on using
information technologies to create synergies within the ISOs' on-line trading
systems.
Also, representatives of Central Maine Power and NYSEG presently serve
as members of working groups and committees that address, on a continuing basis,
the issues of coordination between ISO-NE and NYISO. Following the CMP Group
Merger, these representatives will continue to be engaged in these activities.
As representatives of subsidiaries of the same company, Energy East, NYSEG and
Central Maine Power will have an increased focus on the development and
implementation of inter-pool activities, such as enhanced inter-pool
transmission, "loop-flow" coordination, reserve sharing, maximization of
interpool trades, and other activities which enhance the benefits of economic
and efficient coordination for the Energy East electric companies.
-64-
<PAGE>
Finally, both NYSEG and Central Maine Power are members of the
Northeast Power Coordinating Council ("NPCC"). NPCC was established in 1966 to
promote the reliability of the international interconnected bulk electric
systems in Northeastern North America. The NPCC establishes reliability
criteria, coordinates system design and operations, and regularly assesses and
assures compliance with such reliability criteria. The NPCC Membership
Agreement was modified in November 1998 to provide for open, inclusive
membership and fair and non-discriminatory governance. The NPCC task forces
include the Task Force on Coordination of Planning and the Task Force on
Coordination of Operations, both of which are focused on the enhancement of
coordination between members of the NPCC, including NYSEG and Central Maine
Power.
(iv) Integrating effects of NYISO and ISO-NE Transmission Tariffs
With the introduction of non-pancaked transmission charges within the
NYISO and ISO-NE control areas, the historic pattern of appreciable energy
exchanges between the New York and NEPOOL control areas is likely to increase.
This is due to a number of factors, including the elimination of pancaked rates
in the two ISOs; the elimination of pancaked losses; the ease of conducting
transactions over the two ISOs' OASIS sites; the active marketing efforts by the
new generating capacity owners and marketers; the expected construction of new
so-called "merchant plant" generating capacity to serve distant loads; and the
planned increase in New York-NEPOOL interface capacity. The old system of
pancaking rates made transactions using several transmission systems less
economic. Moreover, the old system of multiple transmission providers and OASIS
sites administered by individual utilities, rather than ISOs, was
administratively burdensome. The combination of increased centralized control
within NEPOOL and the New York control areas, decreased pancaking, one-stop
shopping for transmission service, and the direct interconnection of the two
control area operators that administer service over the NYSEG and Central Maine
Power systems will enhance the integration of NYSEG and Central Maine Power.
-65-
<PAGE>
(v) NYSEG's and Central Maine Power's transmission pricing proposal will
provide additional integration
As discussed above, most owners of generating facilities in New York
and New England today do not own transmission or distribution. Under the terms
of the ISO-NE and NYISO transmission tariffs, these companies can reserve
transmission capacity, including, if necessary, across the NEPOOL-NYPP
Interface, and thereby access markets anywhere within NEPOOL or NYPP. The NYISO
has become operational and has control over all transmission facilities in that
State. In New England, in accordance with existing NEPOOL policies, NEPOOL PTFs
are controlled by ISO-NE, while control over lower voltage and other non-NEPOOL
PTF facilities is retained by their utility owner. Access over non-PTF
transmission facilities is available pursuant to each individual utility's open
access transmission tariff. Central Maine Power, for example, provides service
over its non-PTF, consisting primarily of 34.5kV facilities, under its Local
OATT.
As part of their filing with the FERC under Section 203 of the Federal
Power Act, NYSEG and Central Maine Power have developed a proposal that will
further integrate their two transmission systems without disrupting the current
operations of the NYISO and ISO-NE or the carefully constructed ISO tariff
mechanisms that are already in place. To the extent that NYSEG and Central
Maine Power are able to assess charges for transactions that use both of their
transmission systems, the applicants have committed to eliminate the effects of
one of the two system charges, thereby reducing "pancaking" effects for those
transactions. Although control of all New England utilities' PTF, is under the
operational control of ISO-NE, New England utilities, including Central Maine
Power, directly provide transmission service over their non-transferred
facilities, i.e., their non-PTF system, under the terms of their individual
----
OATTs. In the FERC application, the applicants committed that, upon
consummation of the CMP Group Merger, they would eliminate the local
point-to-point transmission charge under Central Maine Power's OATT in
situations where a generator could be assessed charges by both Central Maine
Power and NYSEG with respect to wheeling transactions over both the CMP and
-66-
<PAGE>
NYSEG systems. A more detailed explanation of the proposal is contained in the
FERC application including the joint affidavit of Messrs. Garwood and McKinney.
See Exhibit D-1. Reducing the charges for these types of transmission
arrangements will increase the quantity of economic transactions between sellers
and purchasers with access to the NYSEG and Central Maine Power systems, thus
increasing the degree of integration between these companies. At present, more
than 5,000 MW of new generation capacity has been proposed for development in
Maine, and approximately 1,700 MW of new "merchant" plant capacity is currently
under construction in Maine. Reductions in the cost of transmitting the output
of these plants to markets in New York will inevitably result in greater sales
and increased integration between these two systems and increasing power flows
to and through the two systems.
(c) Statutory Standards For Electric Integration Will Be
Satisfied
As demonstrated below, the Merger satisfies all four of the previously
cited standards under the integration requirement.
(i) Physical interconnection or capability of physical
interconnection
In applying the requirement that the electric generation and/or
transmission and/or distribution facilities comprising the system be "physically
interconnected or capable of physical interconnection," the Commission
historically focused on physical interconnection through facilities that the
parties owned or, by contract, controlled.(59) To date, the Commission has
determined that the interconnection requirement is
- -----------------
(59) See, e.g., Northeast Utilities, HCAR No. 35-25221 (Dec. 21, 1990)
--- ---- --------------------
("Northeast Utilities") at note 85, supplemented, HCAR No. 25273 (March 15,
1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992)
------------- ----------------------
Northeast had the right to use a Vermont Electric line for ten years, with
automatic two-year extensions, subject to termination upon two years notice, in
order to provide power to a Northeast affiliate); Centerior Energy Corp., HCAR
---------------------
No. 35-24073 (April 29, 1986) (Cleveland Electric Illuminating Company and
Toledo Edison Company were connected by a line owned by Ohio Edison. All three
Were members of the Central Area Power Coordination Group ("CAPCO"). The line
connecting Cleveland Electric, Ohio Edison and Toledo was a CAPCO line with
segments owned by each of the three names utilities.); Cities Service Power &
----------------------
Light Co., 14 S.E.C. 28, 53, at note 44 (1943) (two companies in the same
- ----------
holding company system were found to be interconnected where energy was
transmitted between two separated parts of the system over a transmission line
owned by the United States Bureau of Reclamation, under an arrangement which
afforded the system the privilege of using the line).
-67-
<PAGE>
met through memberships in "tight" power pools and ISOs.(60) In 1992, for
example, the Commission approved the merger of UNITIL Corporation with Fitchburg
Gas and Electric Light Company, based on their common membership in NEPOOL(61),
a regional power pool that was the basis for the FERC approved ISO-NE and
associated power exchange. UNITIL and Fitchburg were not connected through
transmission lines that they owned. Rather, as the Commissio noted in its order:
[T]he Companies are indirectly interconnected through
NEPOOL-designated transmission facilities ("PTF") and other
nonaffiliate transmission facilities pursuant to the NEPOOL Agreement
and other separate agreements with nonaffiliate companies.(62)
With respect to the "other separate agreements with nonaffiliate
companies" described above, the Commission explained that Fitchburg obtained
primary transmission service from New England Power Company ("NEPCO") under the
NEPOOL Agreement and through NEPCO's FERC Tariff No. 3, which provided for
non-firm service. The Commission went on to note that Fitchburg was eligible to
use NEPCO's FERC Tariff No. 4(63) should Fitchburg and UNITIL Power conduct more
power sales or swaps.
- -----------------
(60) See, e.g., UNITIL Corp., supra (interconnection through NEPOOL), and
--- ---- ------------- -----
Conectiv, Inc. HCAR No. 35-26832 (Feb. 25, 1998) (interconnection through PJM,
- --------------
Inc.). See also Yankee Atomic Elec. Co., 41 S.E.C. 552, 565 (1955) (authorizing
--------------------------------
various New England companies to acquire interests in a commonly-owned nuclear
power company and finding the interconnection requirement met because the New
England transmission grid already interconnected the companies).
(61) New England Power Pool, 79 FERC 61,374 (1997);New England Power Pool, 83
---------------------- ----------------------
FERC 61,045 (1998).
(62) UNITIL Corp. at 1997 SEC LEXIS 1016, at *12.
-------------
(63) Under FERC Tariff No. 4, Fitchburg would receive firm transmission service.
Amendment No. 11 to Form U-1 of UNITIL Corporation, File No. 70-7628, at 55.
-68-
<PAGE>
In 1998, based on UNITIL, the Commission found that Delmarva Power &
------
Light Company and Atlantic Energy, Inc. met the physical interconnection
requirements of Section 2(a)(29)(A) through their common membership in PJM
Interconnection, LLC ("PJM"), which was a regional power pool and the first
FERC-approved, operational ISO.(64) In both UNITIL and Conectiv, the Commission
------ --------
stated that it was not necessary for the applicant to construct an additional
transmission line interconnecting the affected electric utility companies
"since present transmission arrangements provide adequate service."(65)
The NYSEG and Central Maine Power systems satisfy the requirement that
they be "physically interconnected or capable of physical interconnection"
through their respective memberships in NYPP/NYISO and NEPOOL/ISO-NE and
through the interconnections and trading between NYPP/NYISO and NEPOOL/ISO-NE
described above. A finding of interconnection through membership in directly
interconnected tight power pools and ISOs, such as NYPP/NYISO and NEPOOL, where
market participants, including NYSEG and Central Maine Power, are free to and
frequently do engage in interpool transactions, is consistent with Commission
precedent and the Act's integration standards, particularly in light of the
continued evolution of the electric industry.
As discussed above, any person satisfying the minimal Order No. 888
standards to be an eligible customer may directly reserve transmission capacity
- -----------------
(64) Conectiv, Inc., HCAR No. 35-26832 (Feb. 25, 1998) ("Conectiv").
--------------- --------
(65) UNITIL Corp., HCAR No. 25524 (1992), citing Electric Energy, Inc., 38
----------- --------------------
S.E.C. 658, 669 (1953) (direct interconnection not required in circumstances
which would have resulted in an uneconomic duplication of transmission
facilities); Conectiv, Inc., HCAR No. 35-26832, at 1998 SEC LEXIS 326, at 29,
--------------
note 27.
-69-
<PAGE>
required for a proposed transaction through the NYISO or ISO-NE, or both. If
the customer's request for transmission service cannot be accommodated with
existing transmission capacity or through congestion management procedures,
member utilities under the ISO are obligated to build the necessary transmission
capacity to accommodate the requested transaction under the terms of the ISO's
OATT. Both the NYISO and NE-ISO have extensive planning processes designed to
identify necessary capacity upgrades. The recently signed MOU commits the ISOs
to coordinate their respective planning processes in order to identify and
address market interface issues (such as planning for necessary capacity
additions) with the goal of facilitating broader competitive markets. NYSEG and
Central Maine Power personnel participate extensively in the coordinated
activities of NYISO and ISO-NE and will, after the merger, jointly participate
to achieve benefits for the Energy East System as a whole.
Finally, the above-cited UNITIL and Conectiv holdings are consistent
------ --------
with the recommendation of the 1995 Report that the Commission "adopt a more
flexible interpretation of the geographic and physical integration standards,
with more emphasis on whether an acquisition will be economical and subject to
effective regulation." The 1995 Report further recommended that the Commission
increasingly rely on an acquisition's demonstrated economies and efficiencies,
rather than upon physical interconnection, to meet the integration standard. It
also noted that the Act provides the necessary flexibility for the Commission to
adjust its application of the integration standards in response to changes in
the state of the art, and concluded that it would be a logical extension of
prior orders for the Commission to find that wheeling and other forms of sharing
power (such as reliability councils and proposed regional transmission groups)
also qualify as interconnection. Here, the compliance with this statutory
requirement to keep apace with the industry leads to the conclusion that,
through their participation in highly interconnected and coordinated power
pools, in which access over the interconnected transmission systems of the pool
members is available on an open access, non-discriminatory basis, and in which
there has and will continue to be a significant amount of interpool
transactions, NYSEG and Central Maine Power satisfy the integration standard.
-70-
<PAGE>
(ii) Coordination of electric operations
NYSEG and Central Maine Power
---------------------------------
Section 2(a)(29)(a) further requires that the utility assets, under
normal conditions, may be "economically operated as a single interconnected and
coordinated system." The Commission has interpreted this language as requiring
that, in addition to physical interconnection, "the properties [must] be so
connected and operated that there is coordination among all parts, and that
those parts bear an integral operating relationship to each other."(66) The
Commission must find that "the isolated territories are or can be so operated in
Conjunction with the remainder of the system that central control is available
for the routing of power within the system, North Am. Co.(67) The Commission
-------------
has explained that this language "refers to the physicaloperation of utility
assets as a system in which, among other things, the generation and/or flow of
current within the system may be centrally controlled and allocated as need or
economy directs."(68) In UNITIL, as the Commission observed that with regard to
-------
coordinated operations of an integrated utility system:
Congress did not intend to impose rigid concepts but instead expressly
included flexible considerations to accommodate changes in the
electric utility industry. Thus, the Commission has considered
advances in technology and the particular operating circumstances in
applying the integration standards.(69)
- -----------------
(66) UNITIL Corp., at 1992 SEC LEXIS 1016, at *14, note 31, citing Cities
------------- ------
Service Co., 14 S.E.C. at 55.
- ----------
(67) 11 S.E.C. 194, 242, aff'd, 133 F.2d 148 (2d Cir. 1943), aff'd on
------- --------
constitutional issues, 327 U.S. 686 (1946).
- ---------------------
(68) Id.
---
(69) UNITIL Corp., at 1992 SEC LEXIS 1016, at *15, citing Mississippi Valley
------------- -------------------------
Generating Co., 36 S.E.C. 159,186 (1955), cited in Yankee Atomic Elec. Co., 36
- -------------- ----------------------------------
S.E.C. at 565.
-71-
<PAGE>
The requirement regarding a single interconnected system is intended
to prevent the evils that arise when holding companies are expanded to include
properties the operation of which has no relationship to the other properties,
i.e., to prohibit ownership of properties that are electrically isolated from,
and not operated in coordination with, other utility properties owned by the
holding company. The opposite of that scenario is the case here.
First, as described above, the transmission facilities of NYSEG and
Central Maine Power are physically interconnected through the ISOs which operate
them, and through the NEPOOL/NYPP Interface, which provides transfer capability
of approximately 2,000 MW for transactions between the two ISOs and the electric
companies in the Energy East System. Transactions between the NYPP and NEPOOL
are frequent, amounting to an average of 7,100,000 MWh for years 1995-1998.
Second, power flows over the combined transmission systems will be centrally
directed by the two ISOs, in accordance with reservations for transmission use
made by transmission users, i.e., sellers or purchasers seeking to use one or
----
both systems to accomplish transactions. Simply by accessing the two ISOs via
the Internet, transmission customers can arrange for seamless transmission on
the NYSEG and Central Maine Power systems, including access through the
NEPOOL/NYPP Interface, and thereby transmit power to either system, or, using
"through and out" service, to other interconnected utilities. Finally,
economical operation as an interconnected and coordinated system is enhanced by
the proposal of Energy East and CMP Group to eliminate duplicative transmission
charges for transactions involving the NYSEG and Central Maine Power systems.
Because access between ISO-NE and NYISO is not restricted by any
artificial barriers, each generator that provides power to the transmission
systems of Central Maine Power or NYSEG, and the transmission and distribution
facilities of those companies over which such power flows, are "so connected and
operated that there is coordination among all parts, and that those parts bear
an integral operating relationship to the other."(70) Through
- -----------------
(70) Cities Service Power & Light Co., 14 S.E.C. 28, at 55.
-------------------------------------
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<PAGE>
the economic incentives of the bid process, and the availability of open access
transmission, the most competitive sources of generation, located within ISO-NE,
NYISO, or other areas able to import to these ISOs, are selected to meet load.
Thus, the historical efficiencies achieved through economic dispatch within
NEPOOL and NYPOOL can be exceeded with the combined resources available in both
pools.
The resulting optimization of resource use that occurs through the
combination of the contiguous, mutually-accessible competitive markets in New
York and New England, as enhanced by the elimination of pancaked transmission
rates for transmission facilities controlled by NYSEG and Central Maine Power
and the joint activities of NYSEG and Central Maine Power in electric
transmission and distribution functions, satisfies the requirement that the
resulting system be capable of being economically operated as a single
integrated and coordinated system.
Further, the companies anticipate that the electric operations of NYSEG and
Central Maine Power after the CMP Group Merger will be further coordinated
through joint purchases of electric transmission and distribution equipment,
participation in a joint task force for transmission planning, development and
usage, and a joint task force on electric distribution issues and emergency
planning and unified Energy East activities and participation on the respective
operating and business committees of NYISO and ISO-NE.
Maine Electric Power Company.
-------------------------------
MEPCo owns and operates a 345-kV transmission interconnection between
Wiscasset, Maine and the Maine-New Brunswick international border at Orington,
Maine, where its lines connect with the portion of the interconnection
constructed in the province of New Brunswick, Canada, by The New Brunswick Power
Corporation. Central Maine Power owns 78.3% of MEPCo's common stock. The
remaining voting stock of MEPCo is owned by two other Maine electric utilities,
Bangor Hydro Electric Company and Maine Public Service Company. MEPCo provides
service over its facilities pursuant to a non-discriminatory FERC approved OATT.
Long-term transmission capacity on MEPCo's facilities is fully reserved. MEPCo
is directly connected to Central Maine Power and the two transmission systems
-73-
<PAGE>
are fully integrated; as shown above, Central Maine Power will be a fully
integrated component of the new Energy East Electric System. Therefore, MEPCo
satisfies the Act's requirements for integration of electric utility systems.
NORVARCO
--------
NORVARCO holds a 50% general partnership interest in Chester SVC
Partnership, a general partnership which owns a static var compensator, in
Chester, Maine, adjacent to MEPCo's transmission interconnection. Operation of
the static var compensator helps to ensure the reliable interconnection between
NEPOOL and Canadian utilities (New Brunswick Power and Hydro-Quebec), by
providing voltage control on the Brunswick transmission interconnection that
prevents the loss of the MEPCO line that might otherwise occur following the
loss of the Hydro-Quebec transmission interconnection. Following the CMP Group
Merger, NORVARCO would similarly function as a fully integrated component of the
new Energy East Electric System and thus will satisfy the Act's integration
standard.
(iii) Single area or region
The Commission's third requirement for integration is also satisfied. The
Energy East electric system will operate in a single area or region. The
electric system will operate in upstate New York and central and southern Maine
in the northeast region of the United States. Although the service territories
of NYSEG and CMP do not touch or overlap, they are within the same general
region. The Commission has approved a number of similar combinations of
electric utilities.(71)
The Commission has made clear that the "single area or region" requirement
does not mandate that a system's operations be confined to a small geographic
area or a single state. In considering size, the Commission has consistently
- -----------------
(71) See, e.g., WPS Resources Corp., HCAR No. 26922 (Sept. 28, 1998).
--- ---- -------------------
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<PAGE>
found that utility systems spanning multiple states satisfy the single area or
region requirement of the Act.(72)
It should be noted that in the 1995 Report, the Division has stated that
the evaluation of the "single area or region" portion of the integration
requirement "should be made in light of the effect of technological advances on
the ability to transmit electric energy economically over longer distances, and
other developments in the industry, such as brokers and marketers, that affect
the concept of geographic integration."(73) The 1995 Report also recommends that
primacy be given to "demonstrated economies and efficiencies to satisfy the
statutory integration requirements."(74) As set forth in Item 3.C.4, the Merger
will result in numerous economies and efficiencies for the utilities and, in
turn, their customers. Additionally, as discussed above, given the high level
of interpool transactions and ready transmission access between NEPOOL and NYPP,
and the elimination of rate pancaking, the net effect is a regional northeast
U.S. grid, from both an operational and economic standpoint. By virtue of their
common memberships in the highly interactive NYPP and NEPOOL tight pools, and
their respective ISOs, NYSEG and Central Maine Power will be part of the same
region.
(iv) Not so large as to impair advantages of localized
management, efficient operation, and the effectiveness of regulation
Finally, with respect to the Commission's fourth requirement, the Energy
East system will not be so large as to impair the advantages of localized
management, efficient operations, and the effectiveness of regulation.
Connecticut Energy will maintain its corporate headquarters in Bridgeport,
- -----------------
(72) See, e.g., Entergy, supra, (approving power system covering portions of
--- ---- --------------
four states): Southern Co., HCAR No. 24579 (Feb. 12, 1988); (approving power
-------------
system covering portions of four states); New Century Energies, Inc., HCAR No.
-------------------------
26748 (Aug. 1, 1997) (approving integrated system covering portions of five
states).
(73) 1995 Report at 73.
(74) 1995 Report at 73.
-75-
<PAGE>
Connecticut. After the Merger, Energy East will maintain its principal office
in Stamford, Connecticut, while CMP Group will continue to maintain its
corporate headquarters in Augusta, Maine, CTG Resources will continue to
maintain its corporate headquarters in Hartford, Connecticut, and Berkshire
Energy will continue to maintain its corporate headquarters in Pittsfield,
Massachusetts. The management of post-Merger Energy East will be drawn
primarily from the existing management of Energy East, Connecticut Energy, CMP
Group, CTG Resources, Berkshire Energy, and their subsidiaries.(75) This
structure will preserve all the benefits of localized management that Energy
East, CMP Group, CTG Resources, and Berkshire Energy presently enjoy while
simultaneously allowing for the efficiencies and economies that will derive from
the Merger.
Additionally, the post-Merger Energy East system will not impair the
effectiveness of state regulation. NYSEG, CMP Group's, CTG Resources', and
Berkshire Energy's utility subsidiaries will continue their separate existence
as before and their utility operations will remain subject to the same
regulatory authorities by which they are presently regulated, namely the NYPSC,
MPUC, DPUC, MDTE, the FERC and the NRC. Energy East, CMP Group and CTG
Resources, and Berkshire Energy are working closely with all agencies to the
extent necessary to ensure they are well informed about the Merger, and the
Merger will not be consummated unless all required regulatory approvals are
obtained. Pursuant to the recommendations contained in the 1995 Report this
last factor is significant, as the Division stated therein "where the affected
state and local regulators concur, the [Commission] should interpret the
integration standard flexibly to permit non-traditional systems if the standards
- -----------------
(75) The Commission has found that an acquisition does not impair the advantages
of localized management where the new holding company's "management [would be]
drawn from the present management," (Centerior, supra) or where the acquired
--------- -----
company's management would remain substantially intact. (AEP, supra).
--- -----
-76-
<PAGE>
of the Act are otherwise met,"(76) especially since the Merger will result in a
system similar to the traditional registered holding company system.
The electric operations of NYSEG and Central Maine Power are coordinated
through joint planning with, and for, NYISO and ISO-NE and joint distribution
activities. Given the close coordination of NYISO and ISO-NE, the area
encompassed should be considered a single area or region and given the
maintenance of corporate headquarters in Connecticut, Maine New York and
Massachusetts, and ongoing regulation by various state and federal authorities,
there is no impairment of localized management, efficient operation or effective
regulation.
3. Combination of Gas Utility Operations
-----------------------------------------
(a) Section 10(c)(1)
Energy East's acquisition of the gas operations of CMP Group, CTG Resources
and Berkshire Energy as well as Energy East's retention of NYSEG's, Connecticut
Energy's and Maine Gas Co.'s existing gas operations, is lawful under Section 8
of the Act and would not be detrimental to the carrying out of Section 11 of the
Act.
(i) Section 8
Section 8 of the Act provides that:
[w]henever a State law prohibits, or requires approval or
authorization of, the ownership or operation by a single company of
the utility assets of an electric utility company and a gas utility
company serving substantially the same territory, it shall be unlawful
for a registered holding company, or any subsidiary company thereof
(1) to take any step, without the express approval of the state
commission of such state, which results in its having a direct or
indirect interest in an electric utility company and a gas company
serving substantially the same territory; or (2) if it already has any
such interest, to acquire, without the express approval of the state
commission, any direct or indirect interest in an electric utility
company or gas utility company serving substantially the same
territory as that served by such companies in which it already has an
interest.
- -----------------
(76) 1995 Report at 74.
-77-
<PAGE>
A fair reading of this section indicates that, with the approval of the
relevant state utility commissions, registered holding company systems can
include both integrated electric utility systems and integrated gas utility
systems.
Energy East, as a combination company, is permissible pursuant to the terms
of Section 8 of the Act and is in the public interest. First, the combination
of electric and gas operations in Energy East is lawful under all applicable
state laws and regulations. The Merger will not result in any change in the
provision of gas and electric services of any so-called combination system
within a given state. Energy East, through NYSEG, will continue to provide
electric and gas service in the State of New York and CMP Group, through its
utility subsidiaries, will continue to provide electric service in the State of
Maine. Since New York and Maine both permit combination gas and electric
utilities serving the same area, the Merger does not raise any issue under
Section 8. Moreover, earlier concerns that a holding company such as Energy
East would be able to greatly emphasize one form of energy over the other based
on its own agenda have substantially receded because of the competitive nature
of the energy market, which requires utilities to meet customer demand for
energy in whatever form. Furthermore, state regulators will have sufficient
control over, and are unlikely to approve, a combination company that attempts
to undertake such practices. Indeed, with regard to retail sales of electric
power, Energy East and CMP Group have divested virtually all of their generation
assets, and Central Maine Power and NYSEG have transferred operational control
of their transmission facilities(77) to an ISO, effectively depriving the
utilities (and their holding companies) of both the ability and the incentive to
favor one form of energy over the other.
(ii) Section 11
Even if Section 8 of the Act were not interpreted as generally permitting
the combination of separate gas systems where such combination is approved and
accepted by the relevant state commissions, Sections 10 and 11 of the Act
- -----------------
(77) As noted above, Central Maine Power has retained control of its "non-PFT"
facilities.
-78-
<PAGE>
contain additional provisions that permit the retention by Energy East of its
existing integrated gas system (consisting of the gas operations of NYSEG,
Connecticut Energy and Maine Gas Co.) and the acquisition of the gas operations
of CMP Group, CTG Resources and Berkshire Energy.
Section 10(c)(1) prevents the Commission from approving an acquisition that
"would be detrimental to the carrying out of the provisions of Section 11."
Section 11(b)(1) of the Act generally confines the utility properties of a
registered holding company to a "single integrated public-utility system,"
either gas or electric.
An exception to the requirement of a "single system" is provided in Section
11(b)(1) A-C (the "ABC clauses").(78) A registered holding company may own one
or more additional integrated public utility systems -- i.e., gas as well as
----
electric -- if each system meets the criteria set forth in these clauses. As
discussed below, post-Merger Energy East qualifies under the exception
established pursuant to the ABC clauses to retain the integrated gas system,
comprised of the gas operations of NYSEG, Connecticut Energy, Maine Gas Co., CTG
Resources and Berkshire Energy.
(b) "ABC" Clauses
Section 11(b)(1) of the Act permits a registered holding company to control
one or more additional integrated public utility systems if:
(A) each of such additional systems cannot be operated as an independent
system without the loss of substantial economies which can be secured
by the retention of control by such holding company of such system;
(B) all of such additional systems are located in one state, adjoining
states, or a contiguous foreign country; and
(C) the continued combination of such systems under the control of such
holding company is not so large (considering the state of the art and
the area or region affected) as to impair the advantages of localized
management, efficient operation, or the effectiveness of regulation.
- -----------------
(78) See, generally, NIPSCO Industries, Inc., HCAR No. 26975 (Feb. 10, 1999).
--- --------- ----------------------
-79-
<PAGE>
For the reasons set forth below, a divestiture order would be contrary to
the public interest and Energy East therefore requests that the Commission
authorize retention of Energy East's existing gas operations. Furthermore,
Energy East requests that the Commission authorize Energy East's acquisition of
the gas operations of CMP Group, CTG Resources, and Berkshire Energy.
In the 1995 Report, the Commission Staff recommended that the Commission
"liberalize its interpretation of the 'ABC' clauses."(79) In its recent
decisions in New Century Energies, Inc.,(80) Conectiv, Inc.,(81) and WPL
----------------------------- --------------- ---
Holdings, Inc.,(82) the commission applied the ABC clauses to a proposed
- ---------------
acquisition by a to-be-registered holding company. The Commission reconsidered
and rejected the implicit requirement, in many of its earlier decisions, of
evidence of a severe, even crippling, effect of divestiture upon the separated
system, stating that this approach is outmoded in the contemporary utility
industry, and explained that as a result of the convergence of the gas and
electric industries now under way, separation of gas and electric businesses may
cause the separated entities to be weaker competitors than they would be
together, and that this factor operates to compound the loss of economies
represented by increased costs. The above-cited decisions support a favorable
consideration by the Commission of the instant application/declaration.
Historically, under its previous narrow interpretation of section
11(b)(1)(a), as a guide to determining whether lost economies are "substantial,"
the Commission has given consideration to ratios which measure the projected
- -----------------
(79) 1995 Report at 74.
(80) New Century Energies, Inc., HCAR No. 26749 (1997)
-----------------------------
(81) Conectiv, Inc., HCAR No. 26832 (1998).
---------------
(82) WPL Holdings, Inc., HCAR NO. 26856 (1998).
--------------------
-80-
<PAGE>
loss of economies as a percentage of: (1) total gas operating revenues; (2)
total gas expense or "operating revenue deductions;" (3) gross gas income; and
(4) net gas income or net gas utility operating income. Although the Commission
has declined to draw a bright-line numerical test under section 11(b)(1)(a), it
has indicated that cost increases resulting in a 6.78 percent loss of operating
revenues, a 9.72 percent increase in operating revenue deductions, a 25.44
percent loss of gross income and a 42.46 percent loss of net income would afford
an "impressive basis for finding a loss of substantial economies."(83)
Here, the lost economies that would be experienced if the gas properties of
Energy East (including the Connecticut Energy gas properties), CTG Resources,
CMP Group and Berkshire Energy were to be operated on a stand-alone basis exceed
these numbers, without any increase in benefits to consumers from such
divestiture. Attached to this application as Exhibit J-1 is an "Analysis of the
Economic Impact of a Divestiture of the Gas Operations of Energy East." As
shown in Table I-1 of that analysis, divestiture of the gas business of Energy
East into a stand-alone gas company would result in a 9.6 percent loss of
operating revenue, a 10.2 percent increase in operating revenue deductions; a
147.3 percent loss of gross income, and a 239.3 percent loss of net income.
These figures show that the lost economies associated with the divestiture of
Energy East's gas business are substantial, even under a narrow interpretation
of Section 11(b)(1)(A).
It should be noted that lost economies are typically analyzed with respect
to the divestiture of an existing, and hence operationally integrated, utility.
As a result, a large component of such analyses represents lost economies
resulting from the immediate need to replicate services heretofore performed by
the combination company, the loss of economies of scale relating to physical
plant and office space and purchasing, and other factors. In contrast, when
lost economies are assessed in the context of companies which, at present, are
operating as stand-alone entities, the lost economies equal the foregone savings
- -----------------
(83) Engineers Public Service Co., 12 S.E.C. 41, 59 (1942) (citation omitted).
------------------------------
-81-
<PAGE>
that would have been realized had the Merger taken place. In the latter case,
the lost economies, representing economies associated with the Merger, are not
the dramatic changes that result from separation of ongoing businesses that have
operated long-term on a combined basis, but rather, are economies that could
have been realized over time through the combination of previously unconnected
businesses. By definition, measurement of lost economies associated with
acquisition of currently stand-alone companies is more speculative. Energy
East's divestiture analysis therefore appropriately focuses on the more concrete
lost economies associated with divestiture of the gas division of NYSEG.
As shown in Exhibit J-1, divestiture of the Companies' gas operations would
cause a significant, although difficult to quantify, amount of damage to
post-Merger Energy East's customers and would disrupt plans of its regulators to
create a fluid and efficient total energy marketplace, and set of services.
Likewise, divestiture would interfere with Energy East's ability to compete in
the marketplace. Such costs to customers involve the additional expenses of
doing business with two utilities instead of one (i.e., additional telephone
----
calls for service and billing inquiries, and cost of providing access to meters
and other facilities for two utilities) and costs associated with making the
entities supply information to shareholders and publish the reports required by
the Act. Similarly, increased costs would involve additional duties for the
staffs of the NYPSC, the DPUC, the MPUC and the MDTE as a result of each agency
dealing with one to two additional utilities. These additional duties would
largely be the result of duplicating existing functions, such as separate
requests for approval of financing and rate case requests.
Energy East's competitive position in the market would also suffer from
divestiture of the Companies' gas operations because, as the utility industry
moves toward a complete energy services concept, competitive companies must be
able to offer customers a range of options to meet their energy needs.
Divestiture of gas operations would render Energy East unable to offer its
customers a significant and important option, namely gas services, and could
damage Energy East's long-term competitive potential. As the Commission
recognized in New Century Energies, Inc., in a competitive utility environment,
--------------------------
-82-
<PAGE>
any loss of economies threatens a utility's competitive position, and even a
"small" loss of economies may render a utility vulnerable to significant
erosion of its competitive position.(84)
With respect to Clause B, as the Commission noted in WPL Holdings, Inc., et
----------------------
al.,(85) , "[c]lause B contemplates the location of an additional system in the
- --
same state as the principal system or in adjoining states."(86) Here, Energy
East's principal system (the integrated electric system) will be located in New
York and Maine, and the "additional system" -- the integrated natural gas system
- -- will be located in the same states of New York and Maine and in the adjoining
States of Connecticut and Massachusetts. Hence Clause B of the ABC clauses is
satisfied.
With respect to Clause C, the continued combination of the gas operations
under Energy East is not so large (considering the state of the art and the area
or region affected) as to impair the advantages of localized management. The
gas operations of the four Companies will continue to be the same as they are
today with some 579,800 customers in four states and confined to a relatively
small area.(87) As the Commission has recognized elsewhere, the determinative
consideration under this criterion is not size alone or size in the absolute
sense, either big or small, but size in relation to its effect, if any, on
localized management, efficient operation and effective regulation.(88)
Management currently is and will remain geographically close to gas operations,
thereby preserving the advantages of localized management. From the standpoint
of regulatory effectiveness, each gas operation is organized in a separate
- -----------------
(84) New Century Energies, Inc., HCAR No. 26749, citing 1995 Report at 71.
-----------------------------
See also WPL Holdings, Inc., HCAR No. 26856 (April 14, 1998), citing 1995 Report
- --- ---- ------------------ ------
at 71.
(85) HCAR No. 26856 (April 14, 1998).
(86) Id. at n.44.
--
(87) The relative sizes of the NYSEG, Southern Connecticut Gas, Maine Gas Co.,
CNGC and and Berkshire Gas gas operations are shown on one of the maps contained
in Exhibit E-1.
(88) See, e.g., Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998).
---- --------------
-83-
<PAGE>
corporation by regulatory jurisdiction thus facilitating state regulation.
Finally, as detailed above, the gas operations of the four Companies will
realize additional economies as a result of the Merger. Far from impairing the
advantages of efficient operation, the continued combination of the gas
operations under Energy East will facilitate and enhance the efficiency of gas
operations.
In summary, the gas operations of Maine Gas Co., which are very limited in
size, currently operate as a single, integrated public utility system in central
Maine, and are currently operated jointly with Energy East pursuant to a Joint
Venture agreement. The Merger will not affect that integrated operation. The
addition of CNGC to the Energy East system in the State of Connecticut, where
Southern Connecticut Gas already serves 158,000 customers and which state
adjoins NYSEG's operations, will add 143,300 natural gas customers in
Connecticut to Energy East's existing base of over 244,000 customers. The
addition of Berkshire Gas to the Energy East system will add approximately
34,500 retail customers in western Massachusetts, which state adjoins both New
York and Connecticut. Such additions will bring about the benefits described
above. Energy East should therefore be permitted to retain its existing gas
operations (i.e., NYSEG, Southern Connecticut Gas, and Maine Gas Co.) while
---
being allowed to acquire and retain the natural gas utility assets of CMP Group,
CTG Resources and Berkshire Energy.
(c) Gas utility integration standards (Section 10(b)(2))
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.
-84-
<PAGE>
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.(89)
The combination of Energy East's gas facilities -- NYSEG and Southern
Connecticut Gas -- with the gas facilities of CMP Group (Maine Gas Co.), CTG
Resources (CNGC) and Berkshire Energy (Berkshire Gas) will satisfy the
integration standard set forth in Section 2(a)(29)(B)of the Act for the
following reasons:
- All four gas facilities will share a "common source of supply" and
will be operated as a "single coordinated system." Indeed, pursuant to
a joint venture agreement, NYSEG's gas division and Maine Gas Co. are
already being jointly operated.
- All four gas facilities 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;
- As the two smallest of the combined gas operations, Maine Gas Co. and
Berkshire Gas and the customers of these two gas companies will
particularly benefit from these efficiencies, as well as from the
expertise of NYSEG, Southern Connecticut Gas and CNGC in such areas as
engineering, construction, training, meter service, testing, marketing
and gas transportation; and
- The area or region served by the four gas facilities 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 CMP Group's, CTG Resources' and Berkshire Energy's
utility subsidiaries will largely remain intact after the consummation
of the Merger, and the Maine Gas Co., CNGC and Berkshire Gas gas
systems 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 MPUC,
DPUC and MDTE, respectively.
- -----------------
(89) See In the Matter of Pennzoil Company, HCAR 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 Co., HCAR 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").
-85-
<PAGE>
(i) Section 2(a)(29)(B): "substantial economies may be
effectuated by being operated as a single coordinated system"
The four gas departments will be operated in a coordinated fashion as to
portfolio design and strategy, procurement, storage optimization, price risk
management and contract administration. Energy East, CMP Group, CTG Resources
and Berkshire Energy are in the process of identifying specific components of
their gas portfolios which, through joint management and coordination, will
enable the combined companies to exploit opportunities for savings in the
marketplace.(90)
With regard to natural gas service, Energy East, CMP Group, CTG Resources
and Berkshire Energy gas subsidiaries purchase significant amounts of gas from
the same supply basins in Western Canada and Texas/Louisiana, holding capacity
on the Tennessee, Iroquois and Algonquin pipelines, and contract for storage
services in Pennsylvania and New York. These common portfolio resources may
bring long-term benefits to the Companies' customers. Moreover, as the dynamics
and structure of the natural gas industry continue to change, the marketplace
will create even more options for the Companies to create value through
coordination of their respective gas supply portfolios. For example, demand and
pricing differentials now exist and will continue to occur and, through
coordinated management of their portfolios of physical and contractual assets,
the Companies will be better positioned to take advantage of changing market
conditions.
(ii) Section 2(a)(29)(B): "a single area or region in one or
more states"
After consummation of the Merger, Energy East's gas operations will be
located in a single region -- the northeastern United States. Although the
Energy East, CNGC, Maine Gas Co. and Berkshire Gas retail gas service areas will
be separated by a distance of several hundred miles and, in the case of Maine
- -----------------
(90) See, e.g., Item 3.C.3 Economics and Efficiencies from the Merger (Section
--- ----
10(c)(2)) for information concerning Merger economies and efficiencies.
-86-
<PAGE>
Gas Co., are located in non-contiguous states, such factors by themselves are
not determinative. The Commission has made clear that systems separated by
intervening territories are in the same region because they procure gas from a
"common source of supply."(91)
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 CTG Resources, CMP Group and Berkshire Energy gas
systems included, Energy East's gas utility system will operate as a coordinated
system confined in its operation to a single area or region because all three
systems 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.(92) The Commission has also considered both purchases of
- -----------------
(91) See, e.g., NIPSCO, HCAR No. 26975 (Feb. 10, 1999) (authorizing holding
--- ---- ------
company with operating company in Indiana to acquire a gas utility in
Massachusetts where the gas utilities in each state received significant amounts
of gas from the same supply basin).
(92) See, e.g., In the Matter of Philadelphia Company and Standard Power and
--- ---- --------------------------------------------------------------
Light Co., HCAR No. 8242 (1948) ("most of the gas used by these companies in
- ----------
their operations is obtained from common sources of supply"); Consolidated
------------
Natural Gas Co., HCAR 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).
-87-
<PAGE>
gas from a common pipeline.(93) as well as from different pipelines when the gas
originates from the same gas field.(94) 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 Merger, all four gas facilities will derive
substantially all of their gas from a common source of supply under Section
2(a)(29)(B). NYSEG receives approximately 63 percent of its gas supply from the
Texas and Louisiana Basins and approximately 28.5 percent of its gas supply from
the Western Canadian Sedimentary Basin, which together account for over 91
percent of NYSEG's gas supply. In addition, over 36 percent of NYSEG's total
transportation capacity requirements are carried on the Tennessee, Iroquois,
Algonquin and Texas Eastern pipelines. Southern Connecticut Gas receives
approximately 64 percent of its gas supply from the Texas and Louisiana Basins
and approximately 35 percent of its gas supply from the Western Canadian
Sedimentary Basin, which together account for 99 percent of Southern Connecticut
Gas's gas supply. In addition, nearly all of Southern Connecticut Gas's total
transportation capacity requirements from each of the basins mentioned above are
carried on the Tennessee, Iroquois, Algonquin and Texas Eastern pipelines. With
regard to CTG Resources' gas subsidiary, CNGC, approximately 73 percent of
CNGC's gas supply is received from the Texas and Louisiana basins, and
approximately 26 percent of its gas supply is received from the Western Canadian
Sedimentary Basin, which together account for over 99 percent of CNGC's gas
supply. Approximately 98 percent of CNGC's total transportation capacity
- -----------------
(93) In the Matter of the North American Co., HCAR No. 10320 (1950) (finding
-------------------------------------------
Panhandle Eastern pipeline to be a common source of supply).
(94) See In the Matter of Central Power Company and Northwestern Public Service
---------------------------------------------------------------------------
Co., HCAR 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."
-88-
<PAGE>
requirements are carried on the Tennessee, Iroquois, Algonquin, and Texas
Eastern pipelines. With regard to Maine Gas Co., approximately 100 percent of
Maine Gas Co.'s gas supply is currently received from the Portland Natural Gas
Transmission System ("PNGTS") pipeline, which is interconnected with the
TransCanada Pipeline, carrying Western Canadian Sedimentary Basin gas. When
fully developed, Maine Gas Co. will continue to receive at least 50 percent of
its gas supply from the Western Canadian Sedimentary Basin through the
TransCanada Pipeline and the PNGTS pipeline. With regard to Berkshire Energy's
gas subsidiary, Berkshire Gas, approximately 92 percent of Berkshire Gas' gas
supply is received from the Texas and Louisiana basins, and approximately 3
percent of its gas supply is received from the Western Canadian Sedimentary
Basin, which together account for 95 percent of Berkshire Gas' gas supply. 100
percent of Berkshire Gas' total transportation capacity requirements are carried
on the Tennessee pipeline.
In addition, Sable Island gas supply from offshore Nova Scotia via the
newly constructed Maritimes & Northeast Pipeline will be available to Maine Gas
Co., NYSEG and Berkshire Gas via the Tennessee Gas Pipeline, which connects to
the Maritimes & Northeast Pipeline at Dracut, Massachusetts to provide service
to New England, and to Southern Connecticut Gas and CNGC via the Algonquin Gas
Pipeline, which connects to the Maritimes & Northeast Pipeline at Salem,
Massachusetts to provide service to Massachusetts, New York and Connecticut. It
is anticipated that, as Sable Island is developed, the NYSEG, Southern
Connecticut Gas, CNGC, Maine Gas Co. and Berkshire Gas gas facilities will draw
a growing percentage of supplies from this important new supply basin.
Purchases from and through a common pipeline, as well as purchases from a
common gas field, have been found to satisfy the "common source of supply"
requirement of Section 2(a)(29)(B) of the Act.(95) There is thus substantial
- -----------------
(95) See, e.g., NIPSCO, supra.
--- ---- ------ -----
-89-
<PAGE>
evidence that NYSEG, Southern Connecticut Gas, CNGC, Maine Gas Co. and Berkshire
Gas will share a common source of supply for a significant amount of their
respective gas supplies.
Any determination of the appropriate size of the area or region calls for
consideration of the "state of the art" in the gas industry. In this regard,
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, the
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.(96) Of particular importance has been the development, evolution
and operation of market centers, trading hubs, and pooling areas. Today, trading
activity conducted at market centers and trading hubs play an increasingly vital
role in the overall management of the assets in a gas portfolio (supply,
transportation and storage).
As a result of these developments, coordination of the operations of two
non-contiguous gas companies is no longer dependent solely upon having
contractual capacity on the same interstate pipelines, so long as the two
companies both have access to one or more common market centers or trading hubs.
Importantly, these developments in the state of the art in the gas industry now
allow gas distribution companies operating in a much larger area or region of
the country to realize operating economies and efficiencies from coordinated
operation that were once thought to be achievable only by contiguous or nearly
contiguous gas companies supplied by the same interstate pipelines.(97)
As indicated above, because NYSEG, Southern Connecticut Gas, CNGC, Maine
Gas Co. and Berkshire Gas will potentially share access through their
respective pipeline transporters to industry-recognized market and supply area
hubs, they will have the enhanced ability to physically coordinate and manage
their portfolios of supply, transportation and storage and to support, if
- -----------------
(96) See, e.g., NIPSCO; 1995 Report at 29-31.
--- ---- ------
(97) See, e.g., New Century Energies, Inc., supra.
--- ---- --------------------------- -----
-90-
<PAGE>
necessary, the underlying physical side of various financial derivatives as a
means of managing price volatility.
(iii) Section 2(a)(29)(B): System size from perspective of
"the advantages of local management, efficient operation and the effectiveness
of regulation."
The integrated gas system to be formed by the combination of NYSEG,
Southern Connecticut Gas, CNGC, Maine Gas Co. and Berkshire Gas will not be "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." Although the CNGC, Maine Gas Co. and Berkshire
Gas gas supply personnel will report to an officer of Energy East, and the Maine
Gas Co. supply personnel will report to an officer of Enterprises, CNGC will
retain gas supply personnel in Connecticut, Maine Gas Co. will retain gas supply
personnel in Maine, and Berkshire Gas will retain gas supply personnel in
Massachusetts. Further, the affiliation of these four gas companies is expected
to result in economies and efficiencies, as discussed in more detail below.
Finally, the Merger will not have an adverse effect upon effective
regulation. Following the Merger, each utility will remain subject to
regulation by its current state regulator(s). Accordingly, the Commission
should find that the size requirements of Section 2(a)(29)(B) of the Act are
satisfied.
For all of the above reasons, the combined gas operations of Energy East
(including Southern Connecticut Gas), CTG Resources, CMP Group and Berkshire
Energy will constitute a single integrated gas utility system.
4. Economies and Efficiencies from the Merger (Section 10(c)(2))
--------------------------------------------
As discussed above, Section 10(c)(2) requires that the Commission approve a
proposed transaction if it will serve the public interest by tending toward the
economical and efficient development of an integrated public utility system.
Through the Merger, the Companies will create an entity that is well situated to
-91-
<PAGE>
compete effectively in an increasingly active market. The efficiencies and
economies brought about through the Merger, and described in more detail below,
thereby serve the public interest, as required by Section 10(c)(2) of the Act.
Although many of the anticipated economies and efficiencies will be fully
realizable only in the longer term, they are properly considered in determining
whether the standards of Section 10(c)(2) have been met.(98) Some potential
benefits cannot be precisely estimated; nevertheless they should be considered.
(99) 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.
(100)
The Companies believe that the Merger 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. Although the parties to the Merger have not quantified the
value of the resulting economies and efficiencies, they have identified specific
aspects of their respective businesses, which through joint management and
coordination, should enable the four companies to achieve savings.
The geographical locations of the respective electric energy service
territories of NYSEG and Central Maine Power, which operate in contiguous ISOs,
provide an opportunity to integrate their electric utility operations
efficiently. The combined system can be operated as a single, larger cohesive
system, with virtually no modification needed with respect to existing
transmission facilities. As the structure of the electric utility industry
- -----------------
(98) See American Electric Power Co., 46 SEC 1299, 1320-1321 (1978).
------------------------------
(99) "[S]pecific dollar forecasts of future savings are not necessarily
required; a demonstrated potential for economies will suffice even when these
are not precisely quantifiable." Centerior Energy Corp., HCAR No. 24073 (April
----------------------
29, 1986) (citation omitted); see also In Re Consolidated Edison, Inc., HCAR
--- ---- -------------------------------
No. 2702 (May 13, 1999).
(100) See American Natural Gas Co.,43 S.E.C. 203 at 208 (1966).
-92-
<PAGE>
continues to evolve, the marketplace will create additional opportunities for
the Companies to create value through integrated operations and increased
efficiencies.
The Companies believe that their combination offers significant strategic
and financial benefits to each company and shareholders, as well as to their
respective employees and customers. These benefits include, among others: (i)
maintenance of competitive rates that will improve the combined entity's ability
to meet the challenges of the increasingly competitive environment in both the
electric and gas utility industry, (ii) over time a reduction in operating costs
and expenditures resulting from integration of corporate and administrative
functions, including limiting duplicative capital expenditures for
administrative and customer service programs and information systems, and
savings in areas such as outside legal, audit and consulting fees, (iii) greater
purchasing power for gas supply and for items such as transportation services
and operational goods and services, (iv) enhanced opportunities for expansion
into non-utility businesses, (v) expanded management resources and ability to
select leadership from a larger and more diverse management pool, and (vi) a
financially stronger company that, through the use of the combined capital,
management, and technical expertise of each company, will be able to achieve
greater financial stability and strength and greater opportunities for earnings
growth, reduction of operating costs, efficiencies of operation, better use of
facilities for the benefit of customers, improved ability to use new
technologies, greater retail and industrial sales diversity, improved capability
to compete in wholesale power markets and joint management and optimization of
their respective portfolios of gas supply, transportation and storage assets.
The Applicants believe that over time the Merger will generate efficiencies and
economies which would not be available to the separate companies absent the
Merger and which will enable post-Merger Energy East to continue to be a
low-cost competitor in the marketplace.
The Companies are in the process of identifying additional opportunities
for the merged Company to achieve administrative savings in such areas as
accounting, tax, purchasing, legal, planning, human resources (including
employee benefits plan management), information services, financial services,
and regulatory relations.
-93-
<PAGE>
(a) Corporate Operations
The Companies anticipate Merger-related savings in areas where costs are
relatively fixed and do not vary with an increase or decrease in the number of
customers served. These areas include legal services, finance, sales, support
services, transmission and distribution, customer service, accounting, human
resources and information services.
(b) Administration
Savings will be realized through cost avoidance in those areas where Energy
East, CMP Group, CTG Resources and Berkshire Energy incur many costs for items
which relate to the operation of each company, but which are not directly
attributable to customers. Eight such areas have been identified:
administrative and general overhead; benefits administration; insurance;
shareholder services; advertising; association dues; directors' fees; and
vehicles. Achieving cost savings through greater efficiencies will permit each
of the operating utilities to offer more competitively-priced electric and gas
services and energy-related products and services than would otherwise be
possible.
(c) Non-Gas Supply Purchasing Economies
Savings will be realized through increased order quantities and the
enhanced utilization of inventory for materials and supplies. Currently, Energy
East, CMP Group, CTG Resources and Berkshire Energy independently maintain
separate purchasing departments responsible for maintaining materials and
supplies used by employees at various locations. In addition, all four
companies procure contract services independently. As a direct result of the
combination, savings can be realized through the procurement of both materials
and services, as well as in costs associated with the maintenance of inventory
levels.
(d) Gas Supply
Savings will be realized through the bundling of natural gas purchases in
the form of larger quantities or volumes. It is anticipated that post-Merger
Energy East will be able to take advantage of commodity savings based on higher
total volumes of natural gas acquisition. This results in competitive market
prices for all four Companies.
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<PAGE>
Savings from these sources will be offset by the costs that must be
incurred for activities essential to achieving the savings. The Companies have
formed a Transition Steering Team, which will diligently pursue ways in which to
avoid or minimize such offsetting costs.
(e) Additional Expected Benefits
In addition to the benefits described above, there are other benefits
which, while presently difficult to quantify, are nonetheless substantial.
These other benefits include:
- Increased Scale-- As competition intensifies within the gas and
electric industry, the Companies believe scale will be one dimension
that will contribute to overall business success. Scale has importance
in many areas, including utility operations, product development,
advertising and corporate services. The Merger is expected to improve
the profitability of the combined company by adding approximately
874,800 customers to Energy East's existing customer base and
providing increased economies of scale in all of these areas.
- Competitive Prices and Services-- Sales to industrial, large
commercial and wholesale customers are considered to be at greatest
near-term risk as a result of increased competition in the electric
utility industry. The Merger will enable Energy East to meet the
challenges of the increased competition and will create operating
efficiencies through which Energy East will be able to provide more
competitive prices to customers.
- More Balanced Customer Base-- The Merger will create a larger company
with a more diverse customer base. This should reduce post-Merger
Energy East's exposure to adverse changes in any sector's economic and
competitive conditions.
- Financial Flexibility-- By creating a company with a larger market
capitalization than had been previously experienced by any of the
Companies considered on an individual basis, the Merger should improve
Energy East's overall credit quality and liquidity of the securities
and therefore improve Energy East's ability to fund continued growth.
-95-
<PAGE>
- Regional Platform for Growth-- The combination of Energy East, CMP
Group, CTG Resources, and Berkshire Energy will create a regional
platform for growth in the northeastern United States. Energy East
plans to expand relationships with existing customers and to develop
relationships with new customers in the region. Energy East will use
its combined distribution channels to market a portfolio of
energy-related products throughout the region and will follow regional
relationships to other geographical areas.
For the above stated reasons, the Commission should find that the
integration criteria are satisfied and approve the proposed Merger.
5. Retention of Non-Utility Businesses
--------------------------------------
As a result of the Merger, the non-utility businesses and interests of CMP
Group, CTG Resources and Berkshire Energy will become businesses and interests
of Energy East. Additionally, as a result of the Merger, non-utility assets
held by Energy East, currently an exempt holding company, will become businesses
and interests of post-Merger Energy East, a registered holding company. The
total assets of all non-utility investments of Energy East, CMP Group, CTG
Resources and Berkshire Energy as of June 30, 1999 totaled approximately $330
million. Energy East also had $1 billion of cash and temporary investment
proceeds from the sale of its coal-fired generation assets, that will be used to
complete the mergers and continued common stock repurchases.
Corporate charts showing the subsidiaries, including non-utility
subsidiaries, of Energy East, CMP Group, CTG Resources and Berkshire Energy are
filed as Exhibits E-2 through E-4a. A corporate chart showing the projected
arrangement of these subsidiaries under post-Merger Energy East immediately
after consummation of the Merger is filed as Exhibit E-5.
Section 11(b)(1) generally limits a registered holding company to retain
"such other businesses as are reasonably incidental, or economically necessary
or appropriate, to the operations of [an] integrated public utility system."
Although the Commission has traditionally interpreted this provision to require
an operating or "functional" relationship between the non-utility activity and
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<PAGE>
the system's core non-utility business, in its recent release promulgating Rule
58,(101) the Commission stated that it "has sought to respond to developments in
the industry by expanding its concept of a functional relationship." The
Commission added "that variou s considerations, including developments in the
industry, the Commission's familiarity with the particular non-utility
activities at issue, the absenc of significant risks inherent in the particular
venture, the specific protections provided for consumers and the absence of
objections by the relevant state regulators, made it unnecessary to adhere
rigidly to the types of administrative measures" used in the past. Furthermore,
in the 1995 Report, the SEC Staff recommended that the Commission replace the
use of bright-line limitations with a more flexible standard that would take
into account the risks inherent in the particular venture and the specific
protections provided for consumers.(102) The non-utility business interests that
post-Merger Energy East will directly or indirectly hold all meet the
Commission's standards for retention.
The existing direct and indirect non-utility business interests of
Energy East, CMP Group, CTG Resources and Berkshire Energy fall within the ambit
of newly adopted Rule 58 or are "exempt telecommunications companies" within the
meaning of Section 34 of the Act. Exhibit H-5, filed herewith, contains a
comprehensive listing of all non-utility subsidiaries that Energy East will hold
directly or indirectly and sets forth the basis for retention by Energy East
after the Merger.
Consistent with the Commission's recent decisions in New Century Energies,
---------------------
Inc.,(103) and Conectiv, Inc.,(104) investments made by Energy East, CMP Group,
--------------
- -----------------
(101) Exemption of Acquisition by Registered Public-Utility Holding Companies of
Securities of Non-utility Companies Engaged in Certain Energy-related and
Gas-related Activities, HCAR No. 26667 (Feb. 14, 1997) ("Rule 58 Release").
(102) 1995 Report at 81-87, 91-92.
(103) New Century Energies, Inc., HCAR No. 26748 (Aug. 1, 1997).
-----------------------------
(104) Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998).
---------------
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<PAGE>
CTG Resources, and Berkshire Energy prior to the effective date of the Merger
should not count in the calculation of the 15 percent limit for purposes of Rule
58. All additional investments made by Energy East in energy-related companies
subsequent to the effective date of the Merger would, of course, be included in
the 15 percent test.
D. SECTION 10(F)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect to 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 described in Item 4 of this Application/Declaration, and as evidenced by the
applications before the DPUC and MPUC relating to the Merger, Energy East
intends to comply with all applicable state laws related to the proposed
transaction. MDTE approval of the Berkshire Energy Merger is not required under
Massachusetts law.
ITEM 4. REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals that Energy East
has obtained or expects to obtain in connection with the Merger.
A. ANTITRUST
The HSR Act and the rules and regulations thereunder provide that certain
transactions (including the Merger) may not be consummated until certain
information has been submitted to the DOJ and FTC and the specified HSR Act
waiting period requirements have been satisfied. Energy East, CTG Resources,
CMP Group and Berkshire Energy have submitted, or will submit, Notification and
Report Forms and all required information to the DOJ and FTC and the Merger will
not be consummated unless the applicable waiting period has expired or has been
terminated. The expiration of the HSR Act waiting period does not preclude the
-98-
<PAGE>
DOJ or the FTC from challenging the Merger on antitrust grounds; however, Energy
East believes that the Merger will not violate Federal antitrust laws. If the
Merger is not consummated within twelve months after the expiration or earlier
termination of the initial HSR Act waiting period, Energy East, CTG Resources,
CMP Group and Berkshire Energy would be required to submit new information to
the DOJ and the FTC, and a new HSR Act waiting period would have to expire or be
earlier terminated before the Merger could be consummated.
B. FEDERAL POWER ACT
Section 203 of the Federal Power Act as amended provides that no public
utility shall sell or otherwise dispose of its jurisdictional facilities or
directly or indirectly merge or consolidate such facilities with those of any
other person or acquire any security of any other public utility, without first
having obtained authorization from the FERC. Energy East and CMP Group
submitted a joint application for approval of the CMP Group Merger to the FERC
on October 1, 1999.(105) See Exhibit D-1.
C. ATOMIC ENERGY ACT
Central Maine Power holds an NRC non-operating license with respect to its
2.5% ownership interests in the Millstone No. 3 nuclear unit in Waterford,
Connecticut. The Atomic Energy Act currently provides that a license may not be
transferred or in any manner disposed of, directly or indirectly, to any person
unless the NRC finds that such transfer is in accordance with the Atomic Energy
Act and consents to the transfer. Pursuant to the Atomic Energy Act, Central
Maine Power submitted an application on October 6, 1999 for the consent of the
NRC. See Exhibit D-9.
D. TELECOMMUNICATIONS
Central Maine Power and MEPCo, public utility subsidiaries of CMP Group,
have filed with the FCC for approval of the transfers of certain radio and
microwave licenses. CNGC, the public utility subsidiary of CTG Resources, holds
- -----------------
(105) As noted earlier, Energy East and CMP Group intend to amend their FERC
application to include an analysis of the vertical market power effects of the
Berkshire Energy acquisition.
-99-
<PAGE>
radio station licenses from the FCC with respect to its dispatch center and
certain of its communications equipment and devices. CNGC will apply to the FCC
to approve transfer of the indirect holder of the licenses as a result of the
Merger. The radio license applications previously filed by Central Maine Power
and MEPCo are included as Exhibit D-11. The radio license transfer applications
filed or to be filed by CNGC and Berkshire Gas will be filed by amendment.
E. STATE PUBLIC UTILITY REGULATION
Connecticut: The DPUC has jurisdiction over CNGC and over Central Maine
Power. CNGC is a public service company under Connecticut law because it is a
gas company distributing gas for heat or power within Connecticut. Central
Maine Power is a "public service company" under Connecticut law as a result of
its 2.5 percent Milestone Unit No. 3 ownership interest. Energy East and CTG
Resources have filed a joint application with the DPUC. See Exhibit D-7.
Central Maine Power will file an application with the DPUC, a copy of which will
be submitted to this Commission as Exhibit D-5.
Maine: Under Maine law, the MPUC has jurisdiction over the indirect
transfer of control of Central Maine Power and of CMP Group's other utility
subsidiaries resulting from the CMP Group Merger under a standard that requires
a finding that the merger is consistent with the interests of customers and
shareholders. CMP Group filed with the MPUC for approval of its merger with
Energy East on July 1, 1999. See Exhibit D-3. Under Maine law, the MPUC must
act definitively within 180 days of the date of filing.
Massachusetts: The MDTE has jurisdiction over Berkshire Gas which is a
public utility company under Massachusetts law because it is a natural gas
company distributing natural gas within Massachusetts. However, the MDTE does
not have jurisdiction over the merger between Energy East and Berkshire Energy,
but would have jurisdiction with respect to any rate plan seeking recovery of
merger-related costs from Berkshire Gas ratepayers.
-100-
<PAGE>
ITEM 5. PROCEDURE
The Commission is respectfully requested to issue and publish the requisite
notice under Rule 23 with respect to the filing of this Application as soon as
possible, but in any event not later than December 31, 1999.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Merger. The Division of Investment Management may assist in the preparation of
the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS
A-1 Restated Certificate of Incorporation of Energy East filed in the Office of
the Secretary of State of the State of New York on April 23, 1998 (filed as
Exhibit 4.1 to Energy East's Post-effective Amendment No. 1 to Registration
No. 033-54155, and incorporated herein by reference).
A-2 Certificate of Amendment of the Certificate of Incorporation of Energy East
filed in the Office of the Secretary of State of the State of New York on
April 26, 1999 (filed as Exhibit 3.3 to Energy East's Form 10-Q for the
quarter ended March 31, 1999, File No. 1-14766 and incorporated herein by
reference).
A-3 By-Laws of Energy East as amended April 23, 1999, (filed as Exhibit 3.4 to
Energy East's Form 10-Q for the quarter ended March 31, 1999, File No.
1-14766, and incorporated herein by reference).
A-4 Amended and Restated Certificate of Incorporation of CTG Resources (filed
as Exhibit 3.2 to the Registration Statement on Form S-4 Registration No.
333-16297 and incorporated herein by reference).
A-5 Restated Certificate and Articles of Incorporation of CMP Group (filed in
the office of the Secretary of State of the State of Maine on June 11,
1999, -- File No. 199811590D, and previously filed herewith on Form S-E).
A-6 Declaration of Trust of Berkshire Energy Resources (filed as Exhibit 3.1.1,
to Registration No. 333-46799 and incorporated herein by reference).
-101-
<PAGE>
B-1 Agreement and Plan of Merger between Energy East and CTG Resources (filed
as Exhibit 2.1 to the Registration Statement on Form S-4, Registration No.
333-85333 and incorporated herein by reference).
B-2 Agreement and Plan of Merger between Energy East and CMP Group (filed as
Appendix A to CMP Group's definitive Proxy Statement dated August 30, 1999,
filed with the Commission on September 1, 1999, and incorporated herein by
reference).
B-3 Agreement and Plan of Merger between Energy East and Berkshire Energy (to
be filed by amendment).
C-1 Registration Statement of Energy East on Form S-4, including Proxy
Statement of CTG Resources and Prospectus of Energy East (filed on August
16, 1999, Registration No. 333-85333 and incorporated herein by reference).
C-2 Definitive Proxy Statement of CMP Group dated August 30, 1999 (filed with
the Commission on September 1, 1999 and incorporated herein by reference).
C-3 Definitive Proxy Statement of Berkshire Energy Resources (to be filed by
amendment).
D-1 Application of Energy East Corporation and CMP Group to the FERC under
Section 203 of the FPA, Docket No. EC00-001, dated October 1, 1999
(previously filed).
D-2 Order of the FERC in Docket No. EC00-001 (to be filed by amendment).
D-3 Application of CMP Group, Inc. to the MPUC, Docket No. 99-411 (previously
filed).
D-4 MPUC Order in Docket No. 99-411 (to be filed by amendment).
D-5 Application of CMP Group, Inc. to DPUC (to be filed by amendment).
D-6 DPUC Order (to be filed by amendment).
D-7 Joint Application of Energy East and CTG Resources to the DPUC, Docket No.
99-08 (previously filed).
D-8 DPUC Order in Docket No. 99-08 (to be filed by amendment).
D-9 Application of Central Maine Power to the NRC (previously filed).
D-10 NRC Order (to be filed by amendment).
-102-
<PAGE>
103 D-11 Applications of Central Maine Power and MEPCo (public utility
subsidiaries of CMP Group) to the FCC for indirect transfer of radio and
microwave licenses relating to certain communications equipment.
(previously filed herewith on Form S-E.)
D-12 Application of CNGC (CTG Resources' public utility subsidiary) to the FCC
for transfer of radio licenses (to be filed by amendment).
D-13 Application of Berkshire Gas (public utility subsidiary of Berkshire Energy
Resources) to the FCC for transfer of radio licenses (to be filed by
amendment).
D-14 FCC Order(s) relating to transfer of radio and microwave licenses (to be
filed by amendment).
E-1 Maps for Energy East, CMP Group, CTG Resources, and Berkshire Energy:
Franchise Areas of Major Utilities in the Northeast (previously filed
herewith on Form S-E); Energy East Electric Franchise Areas (post-merger)
(previously filed herewith on Form S-E); and Energy East Natural Gas
Franchise Areas (post-Merger) (filed herewith on Form S-E).
E-2 Energy East corporate chart (filed herewith on Form S-E).
E-3 CMP Group corporate chart. (previously filed on Form S-E.)
E-4 CTG Resources corporate chart. (previously filed on Form S-E.)
E-4a Berkshire Energy corporate chart (filed herewith on Form S-E).
E-5 Energy East (post-Merger) corporate chart. (filed herewith on Form S-E.)
F-1 Preliminary opinion of Huber Lawrence & Abell, counsel to Energy East (to
be filed by amendment).
F-2 Past-tense opinion of Huber Lawrence & Abell, counsel to Energy East (to be
filed by amendment).
G-1 Opinion of Warburg Dillon Read (filed as Appendix B to CMP Group's
Definitive Proxy Statement dated August 30, 1999, and incorporated herein
by reference).
G-2 Opinion of PaineWebber Incorporated (filed as Appendix B to Proxy
Statement/Prospectus included in Registration No. 333-05333, and
incorporated herein by reference).
G-2a Opinion of Tucker Anthony Cleary Gull (to be filed by amendment).
G-3 Financial Data Schedule (filed herewith and titled "Exhibit 27").
-103-
<PAGE>
H-5 Retention of Non-Utility Subsidiaries (filed herewith).
I-1 Proposed Form of Notice (filed herewith).
J-1 Analysis of the Economic Impact of a Divestiture of the Gas Operations of
Energy East (filed herewith).
B. FINANCIAL STATEMENTS
FS-1 Pre-Merger and pro forma combined condensed balance sheet of Energy East as
of June 30, 1999, and pre-Merger and pro forma combined condensed statement
of income and statement of retained earnings of Energy East for the twelve
months ended June 30, 1999 (filed herewith).
FS-2 Balance sheet of CMP Group as of June 30, 1999, and statement of income and
statement of retained earnings of CMP Group for the twelve months ended
June 30, 1999, included in the balance sheet, statement of income and
statement of retained earnings of Energy East (filed herewith as FS -1).
FS-3 Balance sheet of CTG Resources as of June 30, 1999, and statement of income
and statement of retained earnings of CTG Resources for the twelve months
ended June 30, 1999, included in the balance sheet, statement of income and
statement of retained earnings of Energy East (filed herewith as FS -1).
FS-3aBalance sheet of Berkshire Energy as of June 30, 1999, and statement of
income and statement of retained earnings of Berkshire Energy for the
twelve months ended June 30, 1999, included in the balance sheet statement
of income and statement of retained earnings of Energy East (filed herewith
as FS-1).
FS-4 Statements of income and surplus of CMP Group for the fiscal year ended
December 31, 1998, 1997 and 1996 (included in CMP Group's Form 10-K for the
year ended December 31, 1998, File No. 01-0519429 and incorporated herein
by reference).
FS-5 Statements of income and surplus of CTG Resources for the fiscal years
ended September 30, 1998, 1997 and 1996 (included in CTG Resources Form
10-K for the year ended September 30, 1998, File No. 1-12859 and
incorporated herein by reference).
FS-6 Statements of income and surplus of Berkshire Energy for the fiscal years
ended June 30, 1999, 1998 and 1997 (included in Berkshire Energy Resources
Form 10-K for the year ended June 30, 1999, File No. 0-29812 and
incorporated herein by reference).
-104-
<PAGE>
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Merger neither involves a "major federal action" nor "significantly
affect[s] the quality of the human environment" as those terms are used in
Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321
et seq. The only federal actions related to the Merger pertain to the
- -------
Commission's declaration of the effectiveness of CMP Group's Proxy Statement,
Energy East's Registration Statement on Form S-4, and Berkshire Energy's Proxy
Statement, the expiration of the applicable waiting period under the HSR Act,
approval of the application filed by Energy East and CMP Group with the FERC
under the Federal Power Act, approval of the application filed by Central Maine
Power with the NRC under the Atomic Energy Act, approval of the applications
filed by Central Maine Power and MEPCo with the FCC, approval of the
applications with the FCC to be filed by CTGC and by Berkshire Energy, and this
Commission's approval of this Application/Declaration. Consummation of the
Merger will not result in changes in the operations of the Companies that would
have any impact on the environment. No federal agency is preparing an
environmental impact statement with respect to this matter.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this Amendment No. 1 to Form
U-1 Application/Declaration to be signed on their behalf by the undersigned
thereunto duly authorized.
-105-
<PAGE>
Energy East Corporation
December 3, 1999 By: /s/ Kenneth M. Jasinski
-----------------------------------
Kenneth M. Jasinski
Executive Vice President and General Counsel
CMP Group, Inc.
December 3, 1999 By: /s/ Arthur W. Adelberg
-----------------------------------
Arthur W. Adelberg
Executive Vice President
CTG Resources, Inc.
December 3, 1999 By: /s/ Arthur C. Marquardt
-----------------------------------
Arthur C. Marquardt
Chairman, President and Chief Executive Officer
Berkshire Energy Resources
December 3, 1999 By: /s/ Scott S. Robinson
-----------------------------------
Scott S. Robinson
President and Chief Executive Officer
Berkshire Energy
-106-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> OPUR1
<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> 2,432,364 3,643,449
<OTHER-PROPERTY-AND-INVEST> 109,170 200,761
<TOTAL-CURRENT-ASSETS> 1,430,164 1,261,750
<TOTAL-DEFERRED-CHARGES> 0 0
<OTHER-ASSETS> 653,228 2,369,437
<TOTAL-ASSETS> 4,624,926 7,475,397
<COMMON> 1,257 1,318
<CAPITAL-SURPLUS-PAID-IN> 1,038,017 1,197,512
<RETAINED-EARNINGS> 754,088 754,088
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,754,365 1,913,921
25,000 43,910
10,131 46,850
<LONG-TERM-DEBT-NET> 1,535,079 2,416,800
<SHORT-TERM-NOTES> 4,150 112,878
<LONG-TERM-NOTES-PAYABLE> 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,647 25,600
0 0
<CAPITAL-LEASE-OBLIGATIONS> 0 0
<LEASES-CURRENT> 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,292,554 2,915,438
<TOT-CAPITALIZATION-AND-LIAB> 4,624,926 7,475,397
<GROSS-OPERATING-REVENUE> 2,706,279 4,033,840
<INCOME-TAX-EXPENSE> 231,764 290,667
<OTHER-OPERATING-EXPENSES> 405,341 706,667
<TOTAL-OPERATING-EXPENSES> 2,087,574 3,232,198
<OPERATING-INCOME-LOSS> 618,705 801,642
<OTHER-INCOME-NET> 9,013 53,239
<INCOME-BEFORE-INTEREST-EXPEN> 0 0
<TOTAL-INTEREST-EXPENSE> 142,974 258,966
<NET-INCOME> 245,668 294,184
5,775 9,527
<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> 1.87 2.14
<EPS-DILUTED> 1.87 2.14
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT FS-1
ENERGY EAST CORPORATION
COMBINED CONDENSED BALANCE SHEET
GIVING EFFECT TO THE CMP GROUP MERGER,
THE CTG RESOURCES MERGER AND THE BERKSHIRE ENERGY MERGER
AT JUNE 30, 1999
ACTUAL AND PRO FORMA
(UNAUDITED)
Pro Forma
Energy East
and CMP CTG Berkshire Merger
Connecticut Group Resources Energy Pro Forma Pro Forma
Energy Actual Actual Actual Adjustments Energy East
---------- ---------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets (thousands)
Current Assets
Cash and cash equivalents $1,079,671 $ 335,094 $ 36,013 $ 117 ($748,013)(4) $ 702,882
Special deposits 911 911
Accounts receivable, net 165,872 125,754 35,704 7,152 334,482
Other 183,710 13,230 20,411 6,124 223,475
---------- ---------- -------- -------- --------- ----------
Total Current Assets 1,430,164 474,078 92,128 13,393 (748,013) 1,261,750
Utility Plant, at Original Cost 4,545,703 1,332,465 520,743 109,871 6,508,782
Less accumulated depreciation 2,128,834 550,173 189,059 34,075 2,902,141
---------- ---------- -------- -------- --------- ----------
Net utility plant in service 2,416,869 782,292 331,684 75,796 3,606,641
Construction work in progress 15,495 14,823 5,956 534 36,808
---------- ---------- -------- -------- --------- ----------
Total Utility Plant 2,432,364 797,115 337,640 76,330 3,643,449
Other Property and Investments, Net 109,170 72,081 12,476 7,034 200,761
Regulatory Assets 331,344 872,787 6,781 7,628 30,808(5) 1,249,348
Other Assets 72,524 41,529 28,416 1,100 14,244(5) 157,813
Goodwill 249,360 712,916(6)(7) 962,276
---------- ---------- -------- -------- --------- ----------
Total Assets $4,624,926 $2,257,590 $477,441 $105,485 $ 9,955 $7,475,397
========== ========== ======== ======== ========= ==========
<FN>
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>
EXHIBIT FS-1
ENERGY EAST CORPORATION
COMBINED CONDENSED BALANCE SHEET
GIVING EFFECT TO THE CMP GROUP MERGER,
THE CTG RESOURCES MERGER AND THE BERKSHIRE ENERGY MERGER
AT JUNE 30, 1999
ACTUAL AND PRO FORMA
(UNAUDITED)
Pro Forma
Energy East
and CMP CTG Berkshire Merger
Connecticut Group Resources Energy Pro Forma Pro Forma
Energy Actual Actual Actual Adjustments Energy East
---------- --------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Liabilities (thousands)
Current Liabilities
Current portion of long-term debt
and sinking fund requirements $ 3,647 $ 18,716 $ 3,237 $ 25,600
Notes payable and interim financing 4,150 101,628 $ 7,100 112,878
Taxes accrued 308,371 154,386 462,757
Other 255,756 94,180 43,190 5,264 $ 18,500(7) 416,890
---------- --------- -------- -------- -------- ----------
Total Current Liabilities 571,924 368,910 46,427 12,364 18,500 1,018,125
Regulatory Liabilities
Gain on sale of generation assets 520,861 520,861
Other 108,238 70,295 78,840 10,040 8,755(5) 276,168
---------- --------- -------- -------- -------- ----------
Total Regulatory Liabilities 108,238 591,156 78,840 10,040 8,755 797,029
Deferred Income Taxes and
Unamortized Investment
Tax credits 291,762 83,091 5,489(8) 380,342
Other 328,339 494,312 4,873 30,808(5) 858,332
Long-term debt 1,535,079 124,205 217,516 40,000 500,000(9) 2,416,800
---------- --------- -------- -------- -------- ----------
Total Liabilities 2,835,342 1,661,674 342,783 67,277 563,552 5,470,628
Commitments 88 88
Preferred stock redeemable solely
at the option of subsidiary 10,131 35,528 879 312 46,850
Preferred stock subject to mandatory
redemption requirements 25,000 18,910 43,910
Common Stock Equity
Common stock Energy East
($.01 par value, 300,000 shares
authorized and 124,188 shares
outstanding as of June 30, 1999) 1,257 61(10) 1,318
Common stock CMP Group
($5 par value, 80,000 shares
authorized and 32,443 shares
outstanding as of June 30, 1999) 162,213 (162,213)
Common stock CTG Resources
(no par value, 20,000 shares
authorized and 8,648 shares
outstanding as of June 30, 1999)
Common stock Berkshire Energy Resources
(No par value, 10,000 shares
authorized and 2,514 shares
outstanding as of June 30, 1999) 28,596 (28,596)
Capital in excess of par value 1,038,017 286,035 67,448 (193,988)(10)1,197,512
Retained earnings 754,088 94,217 66,841 9,300 (170,358) 754,088
Unearned compensation -
restricted stock awards (510) 510
Treasury stock, at cost (1,500
shares at June 30, 1999) (38,997) (987) 987 (38,997)
---------- ---------- -------- -------- -------- ----------
Total Common Stock Equity 1,754,365 541,478 133,779 37,896 (553,597) 1,913,921
---------- ---------- -------- -------- -------- ----------
Total Liabilities and
Shareholders' Equity $4,624,926 $2,257,590 $477,441 $105,485 $ 9,955 $7,475,397
========== ========== ======== ======== ======== ==========
<FN>
The notes on pages 5 through 7 of this exhibit are an integral part of the pro forma combined condensed
financial statements.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT FS-1
ENERGY EAST CORPORATION
COMBINED CONDENSED STATEMENT OF INCOME
GIVING EFFECT TO THE CMP GROUP MERGER,
THE CTG RESOURCES MERGER AND THE BERKSHIRE ENERGY MERGER
TWELVE MONTHS ENDED JUNE 30, 1999
ACTUAL AND PRO FORMA
(UNAUDITED)
Pro Forma
Energy East
and CMP CTG Berkshire Merger
Connecticut Group Resources Energy Pro Forma Pro Forma
Energy Actual Actual Actual Adjustments Energy East
---------- -------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
Operating Revenues
Sales and services $2,706,279 $993,357 $283,471 $50,733 $4,033,840
Operating Expenses
Fuel used in electricity
generation 199,842 29,124 228,966
Electricity purchased 776,077 456,811 1,232,888
Natural gas purchased 273,387 140,997 22,485 436,869
Other operating expenses 405,341 233,486 54,001 13,839 706,667
Maintenance 100,888 38,671 7,859 598 148,016
Depreciation and amortization 712,050 55,540 20,199 4,437 $17,823(11) 810,049
Other taxes 224,631 26,895 19,512 2,347 273,385
Gain on sale of generation assets (674,572) (674,572)
Writeoff of Nine Mile Point 2 69,930 69,930
---------- -------- -------- -------- ------- ----------
Total Operating Expenses 2,087,574 840,527 242,568 43,706 17,823 3,232,198
---------- -------- -------- -------- ------- ----------
Operating Income 618,705 152,830 40,903 7,027 (17,823) 801,642
Other Income and Deductions (9,013) (39,321) (2,711) (2,194) (53,239)
Merger related expenses 1,537 1,537
Interest Charges, net 142,974 57,068 17,042 4,382 37,500(9) 258,966
Preferred Stock Dividends
of Subsidiary 5,775 3,676 61 15 9,527
---------- -------- -------- -------- ------- ----------
Income Before Federal Income Taxes 477,432 131,407 26,511 4,824 (55,323) 584,851
Federal Income Taxes 231,764 58,169 12,253 1,606 (13,125)(8) 290,667
---------- -------- -------- -------- ------- ----------
Net Income $ 245,668 $ 73,238 $ 14,258 $ 3,218 ($42,198) $ 294,184
========== ======== ======== ======== ======= ==========
Earnings Per Share, basic and
diluted $1.87 $2.14
Average Common Shares Outstanding 131,606 6,107(12) 137,713
<FN>
The notes on pages 5 through 7 of this exhibit are an integral part of the pro forma combined condensed
financial statements.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FS-1
ENERGY EAST CORPORATION
COMBINED CONDENSED STATEMENT OF RETAINED EARNINGS
GIVING EFFECT TO THE CMP GROUP MERGER,
THE CTG RESOURCES MERGER AND THE BERKSHIRE ENERGY MERGER
TWELVE MONTHS ENDED JUNE 30, 1999
ACTUAL AND PRO FORMA
(UNAUDITED)
Pro Forma
Energy East
and CMP CTG Berkshire Merger
Connecticut Group Resources Energy Pro Forma Pro Forma
Energy Actual Actual Actual Adjustments Energy East
-------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $624,936 $50,512 $61,394 $8,911 ($120,817) $624,936
Add net income 231,213 73,238 14,258 3,218 (90,714) 231,213
Add restricted stock plan 9 (9)
Deduct dividends on common stock 102,061 29,199 8,820 2,829 (40,848) 102,061
Deduct reacquired preferred stock 333 (333)
-------- ------- ------- ------- -------- --------
Balance, end of period $754,088 $94,218 $66,841 $9,300 ($170,359) $754,088
======== ======= ======= ======== ======== ========
<FN>
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 FINANCIAL STATEMENTS
GIVING EFFECT TO THE CMP GROUP MERGER,
THE CTG RESOURCES MERGER AND THE BERKSHIRE 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 CMP Group merger, the CTG Resources merger and the Berkshire 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 mergers 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 mergers occurred on June 30, 1999. The
unaudited pro forma combined condensed statement of income for the twelve months
ended June 30, 1999, assumes that the mergers were completed on July 1, 1998 and
does not give effect to the sales of Energy East's coal-fired generation assets
and CMP Group's steam and hydro generation assets prior to when they occurred in
March and May 1999 and April 1999, respectively, 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, CMP Group, CTG Resources and Berkshire 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 CMP Group merger, the CTG Resources merger and the Berkshire Energy
merger will be accounted for as an acquisition of CMP Group, CTG Resources and
Berkshire Energy by Energy East under the purchase method of accounting in
accordance with generally accepted accounting principles. The amount of
goodwill recorded will reflect the excess of the purchase prices over the
estimated net fair value of assets and liabilities of CMP Group's, CTG
Resources's and Berkshire Energy's utility and nonutility businesses at the time
of closing, plus Energy East's estimated transaction cost related to the
mergers. The assets and liabilities of CMP Group's, CTG Resources's and
Berkshire Energy's unregulated subsidiaries will be revalued to fair value,
including an allocation of goodwill to the subsidiaries, if appropriate. The
remaining goodwill will be allocated to Central Maine Power, Connecticut Natural
Gas, and Berkshire Gas Company and will be recorded as an acquisition
adjustment.
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 45% CTG Resources shares into 1.57 Energy East shares
per CTG Resources 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 1.36 1.57 1.73
Number of shares (thousands) 5,296 6,107 6,740
Note 4. Cash Consideration.
This amount reflects the cash consideration paid to CMP Group's
shareholders based on a purchase price per share of $29.50 for all of the CMP
Group shares outstanding, the cash consideration paid to CTG Resources
shareholders based on a purchase price per share of $41.00 for 55% of the CTG
Resources shares outstanding and the cash consideration paid to Berkshire Energy
shareholders based on a purchase price per share of $38.00 for all of the
Berkshire Energy shares outstanding.
Note 5. Regulatory Asset and Related Other Liability, and Other Asset and
Related Regulatory Liability.
This amount reflects the recognition of a regulatory asset and related
other liability, or, an other asset and related regulatory liability for the
estimated difference between CMP Group's, CTG Resources's and Berkshire Energy's
net pension and other postretirement benefit obligations and the previously
recognized asset or liability.
Note 6. Goodwill.
This amount reflects the recognition of an amount of goodwill equal to the
excess of the estimated purchase price of $957 million over the estimated net
fair value of the assets and liabilities of CMP Group acquired of $541.5
million, plus estimated transaction costs of $11 million related to the merger;
an amount of goodwill equal to the excess of the estimated purchase price of
$355 million over the estimated net fair value of the assets and liabilities of
CTG Resources acquired of $134 million, plus estimated transaction costs of $6.5
million related to the merger and an amount of goodwill equal to the excess of
the estimated purchase price of $96 million over the estimated net fair value of
the assets and liabilities of Berkshire Energy acquired of $37.9 million, plus
estimated transaction costs of $1 million related to the merger.
Note 7. Merger-Related Costs.
Energy East, CMP Group, CTG Resources and Bershire Energy will incur direct
expenses related to the merger, including financial advisor, legal and
accounting fees. The pro forma adjustments include an estimate for Energy
East=s merger-related costs of $11 million for the CMP Group merger, $6.5
million for the CTG Resources merger, and $1 million for the Berkshire Energy
merger, which are included in goodwill. CMP Group, CTG Resources and Berkshire
Energy expect to incur approximately $7.5 million, $5.5 million and $2 million,
of merger-related costs, respectively, which they 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.
Note 9. Notes Payable
This amount reflects the issuance of $500 million principal amount of notes
payable with an assumed interest rate of 7.5%, the proceeds of which may be used
to fund the consideration paid to CMP Group shareholders.
Note 10. Common Stock.
This amount reflects the Energy East shares to be issued to CTG Resources
shareholders in exchange for 45% of their CTG Resources shares, assuming a
conversion ratio of 1.57 Energy East
shares per CTG Resources share, and the purchase of 55% of their CTG Resources
shares for cash.
Note 11. Amortization of Goodwill.
This amount represents the amortization of goodwill, for financial
accounting purposes, over a 40-year period. The goodwill is not amortizable for
tax purposes.
Note 12. Energy East Shares Issued.
Reflects the number of Energy East shares to be issued in the merger with
CTG Resources assuming a conversion of 45% of the CTG Resources shares into 1.57
Energy East shares per CTG Resources share.
<PAGE>
Exhibit H-5
Retention of Non-Utility Business
The following is a description of the specific bases under which the
non-utility investments of CMP Group, CTG Resources, Berkshire Energy and Energy
East may be retained in the post-Merger Energy East holding company system:
A. ENERGY CONSERVATION AND DEMAND-SIDE MANAGEMENT SERVICES:
The business activities of the following companies are energy-related
activities within the meaning of Rule 58(b)(1)(i), involving "the rendering of
energy conservation and demand-side management services." Accordingly, the
following interests are retainable under Section 11(b)(1) of the Act.(1)
1. KENETECH Energy Management, Inc. ("KENETECH"), a wholly-owned
subsidiary of XENERGY Inc., which is an energy services company
specializing in energy management;
2. KEM 1991, Inc. ("KEM 1991"), a wholly-owned subsidiary of KENETECH,
which is an energy services company specializing in energy management;
3. KEM Partners 1991, L.P., which is an energy services company
specializing in energy management. All of its interests are owned by
KENETECH and KEM 1991.
B. DEVELOPMENT AND COMMERCIALIZATION OF ELECTROTECHNOLOGIES:
The business activities of the following companies are energy-related
activities within the meaning of Rule 58(b)(1)(ii), involving "the development
and commercialization of electrotechnologies related to energy conservation,
- --------------------
(1)Rule 58 explicitly permits indirect investment in energy-related companies
through project parents. Although Rule 58 was adopted pursuant to
Section 9(c)(3) of the Act, businesses permissible under the rule are retainable
under Section 11. See Michigan Consolidated Gas Co., 44 S.E.C. 361 (1970),
aff'd, 444 F.2d 931 (D.C. Cir. 1971) (Section 9(c)(3) may not be used to
circumvent Section 11).
<PAGE>
storage and conversion, energy efficiency, waste treatment, greenhouse gas
reduction, and similar innovations." See also New Century Energies, HCAR
No. 26748 (Aug. 1, 1997). Accordingly, such companies are retainable under
Section 11(b)(1) of the Act:
1. CNE Venture-Tech, Inc., a wholly-owned subsidiary of Connecticut
Energy, which invests in ventures that produce or market
technologically advanced energy-related products;
2. Nth Power Technologies Fund I, L.P., which invests in companies that
develop, produce and market innovative energy-related products. CNE
Venture-Tech owns a 7.8884 percent limited partnership interest in Nth
Power Technologies Fund I, L.P.;
3. Chester SVC Partnership, which owns a static var compensator located
in Chester, Maine, adjacent to Maine Electric Power Company, Inc.'s
transmission interconnection. NORVARCO, an electric utility subsidiary
of CMP Group, holds a 50 percent general partnership interest in
Chester SVC Partnership.
-2-
<PAGE>
C. BROKERING AND MARKETING OF ENERGY COMMODITIES:
The business activities of the following companies, either directly or
through subsidiaries, are energy-related activities within the meaning of Rule
58(b)(1)(v), involving "the brokering and marketing of energy commodities,
including but not limited to electricity or natural or manufactured gas or other
combustible fuels." See also New Century Energies, Inc. HCAR No. 26784 (Aug. 1,
1997); SEI Holdings, Inc., HCAR No. 26581 (Sept. 26, 1996); Northeast Utilities,
HCAR No. 26654 (Aug. 13, 1996); UNITIL Corp., HCAR No. 26257 (May 31, 1996); New
England Electric System, HCAR No. 26520 (May 23, 1996); and Eastern Utilities
Associates, HCAR No. 26493 (March 14, 1996). Accordingly, the following
interests are retainable under Section 11(b)(1) of the Act:
1. Energy East Solutions, Inc., a wholly-owned subsidiary of XENERGY
Enterprises, which markets electricity and natural gas to end-users
and provides wholesale commodities to retail electric suppliers in the
Northeast;
2. NYSEG Solutions, Inc., a wholly-owned subsidiary of Energy East
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;
3. South Jersey Energy Solutions, LLC, a partially-owned subsidiary of
Energy East Solutions, Inc., which was formed to market retail
electricity and energy management services in the mid-Atlantic region
of the United States;
4. CNE Energy Services Group, Inc. ("CNE Energy"), a wholly-owned
subsidiary of Connecticut Energy, which provides an array of energy
products and services to commercial and industrial customers
throughout New England, both on its own and through participation as a
member of various energy-related limited liability companies;
-3-
<PAGE>
5. Berkshire Service Solutions, Inc., a wholly-owned subsidiary of
Berkshire Energy, which is an energy marketing and natural gas service
provider to commercial and industrial customers;
6. Conectiv/CNE Peaking, L.L.C., a partially-owned subsidiary of CNE
Energy, which provides a firm in-market supply source to assist energy
marketers and local distribution companies in meeting the maximum
demands of their customers by offering firm supplies for peak-shaving
and emergency deliveries;
7. Energy East Solutions, LLC, a subsidiary of Energy East Solutions,
Inc. and CNE Energy, which sells natural gas, fuel oil and other
services, and markets a full range of energy-related planning,
financial, operational and maintenance services to commercial,
industrial and municipal customers in New England. Energy East
Solutions, LLC's financing activities are retainable as described in
Paragraph K below;
D. THERMAL ENERGY PRODUCTS:
The business activities of the following companies (directly or through
subsidiaries) are energy-related activities within the meaning of
Rule 58(b)(1)(vi), involving "the production, conversion, sale and distribution
of thermal energy products, such as process steam, heat, hot water, chilled
water, air conditioning, compressed air and similar products; alternative fuels;
and renewable energy resources; and the servicing of thermal energy facilities."
See also New Century Energies, HCAR No. 26748 (Aug. 1, 1997); Cinergy Corp.,
HCAR No. 26474 (Feb. 20, 1996). Accordingly, these interests are retainable
under Section 11(b)(1) of the Act:
-4-
<PAGE>
1. The Energy Network, Inc. ("TEN"), a wholly-owned subsidiary of CTG
Resources, which provides district heating and cooling services to a
number of large buildings in Hartford, Connecticut. TEN's operating
divisions offer energy equipment rentals and property rentals, which
activities are retainable under Rule 58(b)(1)(iv). TEN's operating
divisions also offer financing services related to such rentals. As
described in Paragraph K below, this is a retainable activity pursuant
to Commission precedent. Another TEN division owns a 3000 square foot
building in Hartford, Connecticut. In prior orders, the Commission has
approved the purchase of real estate which is incidentally related to
the operations of a registered holding company. See UNITIL Corp, et
al., HCAR No. 25524 (April 24, 1992) (Commission noted that UNITIL
Realty Corporation, a subsidiary of the registered holding company,
UNITIL, which acquired real estate to support utility operations,
engaged in activities which are within the confines of the Act). Since
the real estate held by TEN's operating division is substantially
similar to that owned by UNITIL Realty Corporation, it is a retainable
subsidiary under Section 11(b)(1) of the Act;
2. The Hartford Steam Company, a wholly-owned subsidiary of TEN, which
provides district heating and cooling services to a number of large
buildings in Hartford, Connecticut. The Hartford Steam Company also
owns and operates a cogeneration facility that serves Hartford
Hospital, providing both steam and electricity to the hospital, with
excess electricity, if any, sold to the local electric utility. The
Hartford Steam Company's ownership and operation of cogeneration
facilities is a retainable business activity pursuant to
Rule 58(b)(1)(viii);
-5-
<PAGE>
3. New Hampshire Gas Corporation, a wholly-owned subsidiary of Energy
East Enterprises, Inc., which specializes in propane air distribution
systems;
4. Berkshire Propane, a wholly-owned subsidiary of Berkshire Energy,
which provides propane service to approximately 6,000 customers in
western Massachusetts, eastern New York and southern Vermont.
E. TECHNICAL, OPERATIONAL AND MANAGEMENT SERVICES:
The business activities of the following companies, either directly or
through subsidiaries, are energy-related activities within the meaning of Rule
58(b)(1)(vii), involving "the sale of technical, operational, management, and
other similar kinds of services and expertise, developed in the course of
utility operations in such areas as power plant and transmission system
engineering, development, design and rehabilitation; construction; maintenance
and operation; fuel procurement, delivery and management; and environmental
licensing, testing and remediation." Accordingly, these interests are retainable
under Section 11(b)(1) of the Act:
1. XENERGY Inc., a wholly-owned subsidiary of XENERGY Enterprises, Inc.,
which is an energy services, information systems and consulting
company that specializes in energy management, conservation
engineering and demand-side management;
2. The Union Water-Power Company, a wholly-owned subsidiary of CMP Group,
which provides utility construction and support services (On Target
division); energy efficiency performance contracting and energy use
and management services (Combined Energies division); and
utility-related real estate development services, including the
brokering of pre-fabricated housing and financing related thereto
(UnionLand Services and MaineHomeCrafters division). The economic
development activities of Union Land Services and MaineHome Crafters
-6-
<PAGE>
are limited to CMP Group's service territory. The Commission has
previously approved the acquisition of similar interests in economic
development ventures by registered holding companies in their service
territories. See, e.g., WPL Holdings, Inc., HCAR No. 26856 (Apr. 14,
1998) (approving activities related to development, ownership, and
sale of, and asset management services in connection with, affordable
multi-family housing properties, including financing services related
to same); Ameren Corp., HCAR No. 26809 (Dec. 30, 1997) (approving
retainability of subsidiary investing in limited partnership engaged
in providing low-income housing in utility's service area); Georgia
Power Co., HCAR No. 26220 (Jan. 24, 1995) (approving investment in one
or more limited partnerships to invest in low income housing;
acquisition of Section 42 tax credit properties). The Union
Water-Power Company's financing activities are retainabale as
described in Paragraph K below;
3. CMP International Consultants (D/B/A CNEX), a wholly-owned subsidiary
of CMP Group, which provides consulting, planning, training, project
management, and information and research services to foreign and
domestic utilities and government agencies. CNEX's energy-related
business activities performed outside the United States are retainable
as described below in Paragraph L below;
4. TeleSmart, a wholly-owned subsidiary of CMP Group, which provides, for
utility companies, collection and related account receivable
management services and has a division that collects charged-off
accounts;
-7-
<PAGE>
5. CIS Service Bureau, LLC, a wholly-owned subsidiary of CNE
Venture-Tech, which provides access to customer-billing software and
other related services for local distribution and other utility-type
companies.
F. OWNERSHIP AND OPERATION OF QFS:
The business activities of the following companies are energy-related
activities within the meaning of Rule 58(b)(1)(viii), involving "the
development, ownership or operation of >qualifying facilities' . . . , and any
integrated thermal, steam host, or other necessary facility constructed,
developed or acquired primarily to enable the qualifying facility to satisfy the
useful thermal output requirements under PURPA." See also New Century Energies,
Inc., HCAR No. 26748 (Aug. 1, 1997); Entergy Corp., HCAR No. 26322 (June 30,1
995); Southern Co., HCAR No. 26212 (Dec. 30, 1994); Central and South West
Corp., HCAR No. 26156 (Nov. 3, 1994); Central and South West Corp., HCAR No.
26155 (Nov. 2, 1994); and Northeast Utilities, HCAR No. 25977 (Jan. 24, 1994).
Accordingly, the following companies are retainable under Section 11(b)(1) of
the Act:
1. Cayuga Energy, Inc., a wholly-owned subsidiary of XENERGY Enterprises,
which invests in co-generation facilities;
2. Carthage Energy, LLC, a wholly-owned subsidiary of Cayuga Energy,
Inc., which owns a co-generation facility in upstate New York;
3. South Glens Falls Energy, LLC, a partially-owned subsidiary of Cayuga
Energy, Inc., which owns a co-generation facility in upstate New York.
4. Downtown Cogeneration Associates Limited Partnership, a
partially-owned subsidiary of TEN, which owns and operates a
cogeneration facility in Hartford, Connecticut.
-8-
<PAGE>
G. FUEL TRANSPORTATION AND STORAGE:
The business activities of the following companies, either directly or
through subsidiaries, are energy-related activities within the meaning of
Rule 58(b)(1)(ix), involving "the ownership, operation and servicing of fuel
procurement, transportation, handling and storage facilities . . ." Accordingly,
these interests are retainable under Section 11(b)(1) of the Act:
1. Southern Vermont Natural Gas Corporation, a wholly-owned subsidiary of
Energy East Enterprises, Inc., which is currently 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;
2. Seneca Lake Storage, Inc., a wholly-owned subsidiary of Energy East
Enterprises, Inc. which proposes to own and operate a gas storage
facility in New York;
3. CNE Development Corporation, a wholly-owned subsidiary of Connecticut
Energy, which owns a 16.67% equity participant in East Coast Natural
Gas Cooperative, LLC. East Coast purchases and stores spot gas
supplies, provides storage service utilization services and is
involved in bundled sales;
4. Total Peaking Services, LLC, a partially-owned subsidiary of CNE
Energy, which operates a 1.2 billion cubic foot storage facility in
Milford, Connecticut;
5. TEN Transmission Company, a wholly-owned subsidiary of TEN, owns a
4.87 percent interest in the Iroquois Gas Transmission System Limited
Partnership, which operates a natural gas pipeline transporting
Canadian natural gas into the states of New York, Massachusetts and
Connecticut.
-9-
<PAGE>
H. TELECOMMUNICATIONS FACILITIES:
Section 34 of the Act provides an exemption from the requirement of prior
Commission approval the acquisition and retention by a registered holding
company of interests in companies engaged in a broad range of telecommunications
activities and businesses. Section 34 permits ownership of interests in
telecommunications companies engaged exclusively in the business of providing
telecommunications services upon application to the Federal Communications
Commission for a determination of "exempt telecommunications company" status.
The following companies will file for status as exempt telecommunications
companies under Section 34 of the Act prior to consummation of the Merger:
1. Energy East Telecommunications, Inc., a wholly-owned subsidiary of
XENERGY Enterprises, Inc., which provides telecommunications services,
including the construction and operation of fiber optic networks;
2. Telergy East, LLC, a partially-owned subsidiary of Energy East
Telecommunications, Inc., which was formed to construct, own and
operate a fiber optic network;
3. MaineCom Services, a wholly-owned subsidiary of CMP Group, which
provides telecommunications services, including point-to-point
connections, private networking, consulting, private voice and data
transport, carrier services, and long-haul transport;
4. NorthEast Optic Network, Inc., a partially-owned subsidiary of
MaineCom Services, which develops, constructs, owns and operates a
fiber optic telecommunications system in New England and New York.
-10-
<PAGE>
I. REAL ESTATE
In prior orders, the Commission has approved the purchase of real estate
which is incidentally related to the operations of a registered holding company.
See, e.g., Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998); UNITIL Corporation,
HCAR No. 25524 (April 24, 1992). Accordingly, the following companies are
retainable under Section 11(b)(1) of the Act:
1. CNG Realty Corp., a wholly-owned subsidiary of Connecticut Natural
Gas, which owns Connecticut Natural Gas' corporate headquarters
located on a 7-acre site in downtown Hartford, Connecticut;
2. Central Securities Corporation, which owns and leases office and
service facilities in Central Maine Power's service territory for the
conduct of Central Maine Power's business. Central Maine Power owns
all of the outstanding common stock of Central Securities;
3. Cumberland Securities Corporation, which owns and leases office and
service facilities in Central Maine Power's service territory for the
conduct of Central Maine Power's business. Central Maine Power owns
all of the outstanding common stock of Cumberland Securities.
J. NONUTILITY HOLDING COMPANIES:
In addition to Connecticut Energy, CTG Resource, CMP Group, and Berkshire
Energy, which will be exempt holding companies in the post-Merger Energy East
system, post-Merger Energy East will have two other holding company subsidiaries
which are holding companies for subsidiaries engaged in a variety of non-utility
businesses. The following holding companies are retainable because all of their
investments are in companies which are retainable, as outlined above:
-11-
<PAGE>
1. Energy East Enterprises is an exempt public utility holding company
holding New Hampshire Gas Corporation, Southern Vermont Natural Gas
Corporation and Seneca Lake Storage, Inc. (Energy East Enterprises
holds an interest in CMP Natural Gas Co., L.L.C., a natural gas
utility company).
2. XENERGY Enterprises, Inc. is an exempt non-utility holding company
holding XENERGY Inc., Energy East Solutions, Inc., Energy East
Telecommunications, Inc. and Cayuga Energy, Inc. (and, indirectly,
their subsidiaries).
K. FINANCIAL INVESTMENTS
The Commission has approved investments of registered holding companies
where such investments are passive and/or de minimis. See, e.g., WPL Holdings,
Inc., HCAR No.26856 (April 14, 1998) (approving retention of IES Investments,
Inc.); Ameren Corp., HCAR No. 26809 (Dec. 30, 1997) (St. Louis Equity Fund
retainable because of passive investment). The following company is thus
retainable under Commission precedent:
1. Energy East Management Corporation, a wholly-owned subsidiary of
Energy East, invests the proceeds of the sale of an affiliate's
generation assets. These investments are passive.
L. INTERNATIONAL SERVICES
Energy East has certain other direct and indirect subsidiaries that provide
energy-related services outside the United States. While these companies would
otherwise constitute "energy-related companies" pursuant to Rule 58, the
"activities permitted by [Rule 58] are limited to the United States." See
Rule 58, Exemption of Acquisition By Registered Public Utility Holding Companies
of Securities of Nonutility Companies, HCAR No. 26667, n. 146 (Feb. 14, 1997).
The Commission has nonetheless approved registered holding company ownership of
companies that provide energy-related services on an international basis. See,
e.g., Cinergy Corp., HCAR No. 26662 (Feb. 7, 1997) (approving Cinergy Solutions'
marketing of energy-related services on both a domestic and international
basis); Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998) (approving retention by
registered holding company of DCI II, Inc., a Virgin Islands corporation and
wholly-owned foreign sales subsidiary involved in equity investments in
leveraged leases). Accordingly, the following interests are retainable under
Section 11(b)(1) of the Act:
-12-
<PAGE>
1. XENERGY International, Inc., a wholly-owned subsidiary of XENERGY
Inc., which is an energy services information systems and consulting
company that specializes in energy management, conservation
engineering and demand-side management in the United Kingdom and
Spain;
2. KENETECH Energy Management International, Inc. ("KENETECH
International"), a wholly-owned subsidiary of KENETECH, which is an
energy services company specializing in energy management;
3. KENETECH Energy Management, Limited, a wholly-owned subsidiary of
KENETECH International, which is an energy services company
specializing in energy management;
4. XENERGY Canada, Inc., a wholly-owned subsidiary of XENERGY Inc., which
provides software services related to a utility client management
system; M. Other
-13-
<PAGE>
M. OTHER
The special purpose subsidiaries Oak Merger Co. (formed solely for the
purpose of consummating the proposed merger with CTG Resources), EE Merger Corp.
(formed solely for the purpose of consummating the proposed merger with CMP
Group) and Mountain Merger LLC (formed solely for the purpose of consummating
the proposed merger with Berkshire Energy) do not represent current investments
by any of CMP Group, CTG Resources, Berkshire Energy or Energy East and upon
consummation of the Merger will be merged with post-Merger Energy East holding
company subsidiaries, as discussed in Item I.B.1.a of the
Application/Declaration. These subsidiaries have thus been excluded from the
above analysis of non-utility investments.
-14-
<PAGE>
Exhibit I-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 060904-1196 )
_____________________________________)
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, CMP Group, Inc. ("CMP Group"), 83 Edison Dr.,
Augusta, Maine, 04336, a Maine corporation and an exempt public utility holding
company, CTG Resources, Inc. ("CTG Resources"), 100 Columbus Boulevard,
Hartford, Connecticut 06103, a Connecticut corporation and an exempt public
utility holding company, and Berkshire Energy Resources ("Berkshire Energy"),
115 Cheshire Road, Pittsfield, Massachusetts 01201, a Massachusetts business
trust (collectively, "the Applicants"), have filed with this Commission an
application pursuant to the Public Utility Holding Company Act of 1935 ("the
Act"), designating Section 9(a)(2) and Section 10 of the Act as applicable to
the proposed transactions. The Applicants request an order of the Commission
authorizing Energy East to acquire all of the issued and outstanding common
shares of CMP Group, CTG Resources and Berkshire Energy. Pursuant to the
proposed transactions, CMP Group, CTG Resources and Berkshire Energy would
become direct subsidiaries of Energy East and Energy East would become a
registered public utility holding company under the Act. The Applicants also
seek approvals in connection with (i) the operation of Energy East as a
combination electric, gas and utility holding company and (ii) the retention by
Energy East of its non-utility activities, businesses and investments and the
acquisition by Energy East of the non-utility activities, businesses and
investments of CMP Group, CTG Resources and Berkshire Energy.
Energy East currently holds, directly or 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 Gas Co."). NYSEG 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 percent share of the
Nine Mile Point Unit 2 Nuclear Plant ("NM2") and from its hydroelectric
stations, however, NYSEG has agreed to sell its share of NM2 and anticipates
that the sale will be completed by mid-2000. NYSEG serves 826,000 electric
customers and 244,000 natural gas customers in upstate New York. Maine Gas Co.,
a gas utility company, is in the process of constructing a local natural gas
distribution system in certain areas of the State of Maine, and began to provide
service to retail customers in May 1999. Maine Gas Co is a joint venture
between New England Gas Development Corp., a wholly-owned subsidiary of CMP
Group, and Energy East Enterprises, Inc. ("Enterprises") a wholly-owned
subsidiary of Energy East.
<PAGE>
Energy East also has a number of direct and indirect subsidiaries that are
not "public utility companies" under the Act, including Enterprises and XENERGY
Enterprises, Inc. ("XENERGY"). Enterprises is an exempt public utility holding
company that indirectly holds public utility assets through its ownership of an
77 percent interest in Maine Gas Co. Enterprises' non-utility subsidiaries are
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 will include an extension of a pipeline from New York to Vermont by
Iroquois Gas Transmission System, 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 invests in providers of energy and telecommunication services.
XENERGY Enterprises currently holds no public utility assets and is neither a
public utility company nor a holding company under the Act. XENERGY's principal
subsidiaries are 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.
Other current direct non-utility subsidiaries of Energy East are: Energy
East Management Corporation, a Delaware corporation, that invests the proceeds
of the sale of an affiliate's generation assets; Oak Merger Co., a Connecticut
corporation, formed solely for the purpose of consummating the proposed merger
with CTG Resources and which upon consummation of such merger, will change its
name to, and operate under, the name of "CTG Resources, Inc."; EE Merger Corp.,
a Maine corporation, formed solely for the purpose of consummating the proposed
merger with CMP Group; and Mountain Merger LLC, formed solely for the purpose of
consummating the proposed merger with Berkshire Energy.
On April 23, 1999, Connecticut Energy Corporation ("Connecticut Energy")
and Energy East entered into an agreement and plan of merger. By separate
application dated August 30, 1999, Energy East has requested authorization from
the Commission for Connecticut Energy to merge with and into a wholly-owned
subsidiary of Energy East. Connecticut Energy, an exempt holding company that
neither owns nor operates any physical property, is primarily engaged in the
retail distribution of natural gas through its principal wholly-owned
subsidiary, The Southern Connecticut Gas Company ("Southern Connecticut Gas").
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. Southern
Connecticut Gas 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.
<PAGE>
Connecticut Energy also has a number of direct and indirect subsidiaries
that are not "public -utility companies" under the Act., including CNE Energy
Services Group, Inc. ("CNE Energy"), CNE Development Corporation ("CNE
Development") and CNE Venture-Tech, Inc. ("CNE Venture-Tech"). All three of
these non-utility subsidiaries are Connecticut corporations.
CMP Group is a holding company by virtue of owning, directly or indirectly,
more than five percent of the voting securities of Central Maine Power, Maine
Electric Power Company, Inc. ("MEPCO"), NORVARCO and Maine Gas Co, all public
utility companies as defined in the Act. Central Maine Power is the largest
electric utility in Maine and serves approximately 533,000 customers in its
11,000 square-mile service area in southern and central Maine. Central Maine
Power has divested and/or relinquished control over substantially all of its
generating assets and purchase power contracts and now functions as an electric
transmission and distribution utility. Pursuant to Maine electric utility
restructuring legislation, as of March 1, 2000, Central Maine Power will not
control any generation resources and all retail electric consumers in Maine will
be able to choose their electric supplier. Since under Maine law, Central Maine
Power would be able to serve only a limited number of retail customers and would
not be the supplier of last resort, Central Maine Power has elected not to
continue as a retail electric supplier. In the future, Central Maine Power will
be a "wires" only transmission and distribution utility.
Central Maine Power currently has two utility subsidiaries, each of which
is organized and operates almost exclusively in Maine: MEPCo and NORVARCO.
MEPCo owns and operates a 345-kV transmission interconnection between the
Maine-New Brunswick, Canada international border at Orient, Maine. Central
Maine Power owns a 78.3% voting interest in MEPCo, with the remaining interests
owned by two other Maine utilities. NORVARCO holds a 50% general partnership
interest in Chester SVC Partnership, a general partnership which owns a static
var compensator in Chester, Maine, adjacent to MEPCo's transmission
interconnection.
CMP Group holds an approximately 23% interest in Maine Gas Co., the joint
venture with New England Gas Development Corporation and Enterprises.
CMP Group's non-utility subsidiaries include: CNEX (formerly called CMP
International Consultants) which provides consulting, planning, training,
project management, and information and research services to foreign and
domestic utilities and government agencies in various aspects of utility
operations and utility support services; MaineCom Services ("MaineCom") which
develops fiber-optic data service for bulk carriers, provides other
telecommunications services, and holds direct or indirect voting interests in
various entities that are in the business of developing a fiber-optics network
in the Northeast; Northeast Optic Network which develops, constructs, owns and
operates a fiber optic telecommunications system in New York and New England
(Maine-Com. owns 38.5% of its common stock); TelSmart which provides collections
and related accounts receivable management services and has a division which
collects charged-off accounts; Central Securities Corporation which owns and
leases office and service facilities in Central Maine Power's service territory
for the conduct of Central Maine Power's business (Central Maine Power owns all
of the outstanding common stock of Central Securities); Cumberland Securities
Corporation which owns and leases office and service facilities in Central Maine
Power's service territory for the conduct of Central Maine Power's business
(Central Maine Power owns all of the outstanding common stock of Cumberland
Securities); and, The Union Water-Power Company ("Union Water") which provides
utility construction and support services (On Target division), energy
efficiency performance contracting and energy use and management services
(Combined Energies division), and commercial and residential real estate
development services (Union-Land Services and MaineHome Crafters division)
(Union Water is a wholly-owned subsidiary of CMP Group).
<PAGE>
CTG Resources is an exempt public utility holding company that owns
Connecticut Natural Gas Corporation ("CNGC"), a public utility that operates as
a regulated local natural gas distribution company. CNGC distributes gas to
approximately 143,300 customers in 22 Connecticut communities, principally in
the Hartford-New Britain area and in Greenwich. CNGC's gas distribution
business is subject to regulation by the Connecticut Department of Public
Utility Control as to franchises, rates, standards of service, issuance of
securities, safety practices and certain other matters.
CTG Resources' non-public utility subsidiaries include: CNG Realty Corp.
("CNGR"), a single purpose corporation which owns the Operating and
Administrative Center located on a seven-acre site in downtown Hartford,
Connecticut; The Energy Network, Inc ("TEN"), which, through its
wholly-owned subsidiary, The Hartford Steam Company ("HSC"), provides district
heating and cooling services to a number of large buildings in Hartford,
Connecticut; TEN Transmission, a wholly-owned subsidiary of TEN, which owns a
4.87 percent interest in Iroquois Gas Transmission System; and ENI Gas Services,
Inc. ("ENI Gas"), and TEN Services Inc., both wholly-owned subsidiaries of TEN,
which together own 100% of KBC Energy Services, a partnership. TEN's other
unregulated operating divisions offer energy equipment rentals, property rentals
and financing services and own a 3,000 square foot building in Hartford,
Connecticut.
Berkshire Energy is an exempt public utility holding company that owns
Berkshire Gas Company ("Berkshire Gas"), a public utility that operates as a
regulated local natural gas distribution company. Berkshire Gas sells and
distributes natural gas to approximately 34,500 retail customers in 19
communities in western Massachusetts. Berkshire Gas' natural gas distribution
business is subject to the regulation of the Massachusetts Department of
Telecommunications and Energy ("MDTE").
Berkshire Energy's non-utility subsidiaries include: Berkshire Propane,
Inc. ("Berkshire Propane") and Berkshire Service Solutions, Inc. ("Service
Solutions"). Berkshire Propane is a retail propane company providing service to
more than 6,000 customers in 100 communities in western Massachusetts, eastern
New York, and southern Vermont. Service Solutions provides one-stop natural gas
services to commercial and industrial customers.
<PAGE>
The acquisition by Energy East of the common shares of CMP Group
will be effected pursuant to the terms of the Agreement and Plan of Merger
dated June 14, 1999 ("CMP Group Merger Agreement"). Under the terms of the CMP
Group Merger Agreement, each outstanding share of CMP Group's common stock,
$5.00 par value per share, other than dissenting shares and treasury shares or
shares owned by any subsidiary of the CMP Group, Energy East or any subsidiary
of Energy East, will be converted into the right to receive $29.50 in cash.
Approximately $957 million in cash will be paid to holders of shares of CMP
Group common stock.
The acquisition of Energy East of the common shares of CTG Resources will
be effected pursuant to the terms of the Agreement and Plan of Merger dated June
29, 1999 ("CTG Merger Agreement"). Under the terms of the CTG Resources Merger
Agreement, each outstanding share of CTG Resources' common stock, other than
dissenting shares, will be converted into the right to receive (i) $41.00 in
cash or (ii) a number of shares of Energy East common stock equal to the
Exchange Ratio, or (iii) the right to receive a combination of cash and shares
of Energy East common stock. The Exchange Ratio shall be equal to the CTG
Resources cash consideration divided by either (i) the Energy East share price
if the Energy East share price is equal to or less than $30.13 and equal to or
more than $23.67, (ii) $30.13 if the Energy East share price is greater than
$30.13, in which case the Exchange Ration will equal 1.3609, or (iii) $23.67 if
the Energy East share prices is less than $23.67, in which case the Exchange
Ratio will equal 1.7320.
The acquisition by Energy East of the common shares of Berkshire Energy
will be effected pursuant to the terms of the Agreement and Plan of Merger
dated November 9, 1999 ("Berkshire Energy Merger Agreement"). Under the terms
of the Berkshire Energy Merger Agreement, each outstanding Berkshire Energy
common share shall be converted into the right to receive $38.00 in cash.
The shareholders of the CMP Group and CTG Resources approved their
respective mergers with Energy East at meetings held on October 7, 1999 and
October 18, 1999, respectively. Each of the companies has submitted
applications requesting approval of the proposed mergers and/or related matters
to the appropriate state and federal regulators. The Applicants believe that
their combination will provide benefits to the public, investors and consumers,
and that the mergers will meet all applicable standards under the Act.
The combination of NYSEG's electric system and CMP Group's electric
operations will result in a single, integrated electric utility system (the "new
Energy East Electric System"). Integration of the new Energy East Electric
System will be facilitated by NYSEG's and Central Maine's membership in
adjacent, highly interconnected and coordinated power pools (NEPOOL and the New
York Power Pool) and their participation in interconnected independent system
operators ("ISOs") (New York ISO and ISO-New England). This integration will be
accomplished by the functioning of the open, competitive markets administered by
the interconnected ISOs. Sellers and purchasers in either ISO's control area
may engage in transactions in the other ISO's control area through
readily-accessible, OASIS-based transmission access. Further, the combination
of Energy East's current gas system (i.e., NYSEG's gas operations, Connecticut
Energy and Maine Gas Co.) with the gas operations of CMP Group, CTG Resources
and Berkshire Energy will result in a single, integrated gas utility system (the
"new Energy East Gas System"). Accordingly, the Applicants request the
Commission to find that the new Energy East Electric System will be the primary
integrated public utility system for purposes of Section 11(b)(1) and the new
Energy East Gas System is a permissible additional system under Section
11(b)(1)A-C.
<PAGE>
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
<PAGE>
EXHIBIT J-1
ANALYSIS OF THE ECONOMIC IMPACT OF
A DIVESTITURE OF THE
GAS OPERATIONS OF ENERGY EAST CORPORATION
This study was undertaken by the management and staff of Energy East Corporation
with the assistance of PHB Hagler Bailly. The objective of the study is to
quantify the economic impact on shareholders and customers of divesting Energy
East of its natural gas assets and business in New York, Connecticut,
Massachusetts and Maine.
December 3, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
I. EXECUTIVE SUMMARY 1
II. CONCLUSIONS 5
III. SPIN-OFF ASSUMPTIONS 7
IV. GENERAL STUDY ASSUMPTIONS 9
V. NEWGASCO ANALYSIS 11
A. Specific Assumptions 11
B. Organization of NewGasCo 14
C. Annual Cost Increases 18
D. Capital Cost Increases 28
E. Transition Cost Increases 30
F. Additional Lost Economies 31
G. Total Lost Economies 32
VI. OTHER CUSTOMER IMPACTS 34
VII. EFFECT ON REMAINING ELECTRIC CUSTOMERS 35
</TABLE>
<PAGE>
I. EXECUTIVE SUMMARY
Energy East Corporation ("Energy East"), with the assistance of PHB Hagler
Bailly, has conducted this analysis of the economic impact of spinning off
Energy East's natural gas assets and operations on the shareholders and its
customers of Energy East.
This study made several key assumptions:
w This study assumed that Energy East's acquisitions of CTG Resources Inc.
("CTG Resources"), Connecticut Energy Corporation ("Connecticut Energy") and
Berkshire Energy Resources ("Berkshire Energy") were completed and that
Connecticut Natural Gas Company ("CNGC," a subsidiary of CTG Resources),
Southern Connecticut Gas ("Southern Connecticut," a subsidiary of Connecticut
Energy) and Berkshire Gas Company ("Berkshire Gas," a subsidiary of Berkshire
Energy) became operating subsidiaries of Energy East.
w
w This study assumed that Energy East's natural gas business consists of
five operating subsidiaries: the natural gas business associated with NYSEG;
CNGC; Southern Connecticut; Berkshire Gas; and CMP Natural Gas, L.L.C. ("CMP
Natural Gas"), a limited liability company owned by subsidiaries of Energy East
and Central Maine Group, Inc.
w
w This study assumed that, if required, Energy East would spin-off its
natural gas business into a stand-alone gas company, independent of Energy East.
The new company is referred to as "NewGasCo," and would encompass the natural
gas businesses of the relevant segments of NYSEG (currently a combination
electric and gas company), CNGC, Southern Connecticut, Berkshire Gas and CMP
Natural Gas.
w
w This study assumed that CMP Natural Gas would continue in its start-up
state, sharing management and resources from the other NewGasCo segments as
appropriate.
w
w This study assumed the current customer levels and business structure of
the Energy East operating subsidiaries.
w
This study quantifies the increased costs or "lost economies" associated with
divesting the existing Energy East natural gas business from two perspectives:
1) from the position of the shareholder; and 2) from the position of the
customer. The effects on shareholders were calculated by assuming that there
would be no regulatory relief to compensate for the increased costs resulting
from the divestiture of Energy East's natural gas business. The effects on
customers were calculated by assuming that the increased costs resulting from
divestiture would be recovered through regulator-approved rate increases. In
addition to increased rates, customers may also be impacted by other
quantifiable and non-quantifiable costs in the event of divestiture.
1
<PAGE>
Quantification of economic losses was performed in detail for the NYSEG segment
of Energy East's natural gas business. As this study demonstrates, the economic
losses associated with divestiture of the NYSEG segment of Energy East's natural
gas business would be significant. The aggregate effect of the divestiture of
Energy East's natural gas business into NewGasCo would be $30.5 million.
While there would also be losses in the form of foregone savings through
divestiture of Energy East's proposed CNGC, Southern Connecticut and Berkshire
Gas segments, a quantification of the economic losses associated with this
further divestiture was not performed at this time. It is anticipated that
efficiencies and associated savings will be gained as CNGC, Southern Connecticut
and Berkshire Gas are integrated into Energy East. These potential cost savings
translate into lost economies if the acquisitions of CNGC, Southern Connecticut
and Berkshire Gas were not completed. The lost economies associated with the
spin-off of these segments from Energy East are economies that will be realized
over years following integration of CNGC, Southern Connecticut and Berkshire Gas
into Energy East. Experience with various acquisitions and mergers in the
electric, gas and telecommunications industries indicates that related savings
typically are significant.
At a minimum, savings are likely to be realized in the areas of consolidation of
corporate governance functions, shareholder services and other corporate
functions, cost of capital, and uncollectibles. Assuming that Energy East would
be required to spin-off its CNGC, Southern Connecticut and Berkshire Gas
segments subsequent to an approved acquisition, the economic losses associated
with that action would be in addition to the approximately $30.5 million
resulting from the spin-off of the natural gas portion of Energy East's NYSEG
segment.
The projected impacts on the Energy East shareholders of the portion of lost
economies associated with the spin-off of Energy East's NYSEG natural gas
segment is shown in Table I-1. The impact on shareholders assumed that rate
adjustments are not allowed to recover the lost economies and associated income
taxes.
<TABLE>
<CAPTION>
TABLE I-1
ANNUAL SHAREHOLDER IMPACT OF LOST ECONOMIES
===================================================
LOST ECONOMIES AS A PERCENT OF:
- ---------------------------------------------------
<S> <C>
Total Gas Operating Revenues 9.6%
- ------------------------------------------- ------
Total Gas Operating Revenues Deductions 10.2%
- ------------------------------------------- ------
Gross Gas Income 147.3%
- ------------------------------------------- ------
Net Gas Income 239.3%
- ------------------------------------------- ------
</TABLE>
2
<PAGE>
In Table I-1, Total Gas Operating Revenue is the sum of all natural gas revenues
for the 12 months ending December 31, 1998 for Energy East's NYSEG natural gas
segment. Total Gas Operating Revenue Deductions include all purchased gas,
operations and maintenance expenses, administrative and general expenses,
depreciation, interest, taxes other than income taxes, and other income
deductions. Gross Gas Income is the difference between Total Gas Operating
Revenue and Total Gas Operating Revenue Deductions. Net Gas Income is Gross Gas
Income minus income taxes.
Alternatively, assuming that NewGasCo is allowed by state regulators to increase
its rate revenue to recover the lost economies and associated income taxes
through rate increases, the projected impact on customers is shown in Table I-2.
<TABLE>
<CAPTION>
TABLE I-2
ANNUAL GAS CUSTOMER IMPACT OF LOST ECONOMIES
===========================================================
REVENUE
===========================================================
<S> <C>
Pre-Spin-off $305,880,754
- -------------------------------------------- -------------
Post-Spin-off $336,429,508
- -------------------------------------------- -------------
Increase $ 30,548,754
- -------------------------------------------- -------------
Percent Increase 10.0%
============================================ =============
</TABLE>
In addition to the foregoing impacts relating to the natural gas business,
divesting the NYSEG natural gas segment from Energy East would result in a rate
increase of 0.87 percent on Energy East's remaining electric customers
(comprised of NYSEG's current electric business). This impact is primarily due
to: 1) the expense associated with additional electric business unit employees
being required to support functions that previously were provided by employees
jointly for both the electric and gas business units; 2) the expenses associated
with certain fixed costs which were previously allocated between the electric
and gas business units now being borne entirely by the electric business unit;
and 3) the capital cost associated with the transfer of assets, as well as the
acquisition of new assets, into the electric rate base. The analysis of the
impact on the remaining electric customers assumed that the pass-through of lost
economies and associated income taxes was allowed by state regulators. This
impact is shown in Table I-3.
3
<PAGE>
<TABLE>
<CAPTION>
TABLE I-3
ANNUAL ELECTRIC CUSTOMER IMPACT OF LOST ECONOMIES
=======================================================================
<S> <C>
REMAINING NYSEG
RATE REVENUE ELECTRIC CUSTOMERS
=======================================================================
Pre-Spin-off $ 1,519,207,240
- ------------------------------------------------- --------------------
Post-Spin-off $ 1,532,385,532
- ------------------------------------------------- --------------------
Increase $ 13,178,292
- ------------------------------------------------- --------------------
Percent Increase 0.87%
================================================= ====================
</TABLE>
Finally, a significant portion of NYSEG's current customers receive both
electric and natural gas services and pay a single bill. These customers would
incur increased personal costs such as postage on separate envelopes and any
costs associated with writing additional checks to remit payment to two
utilities rather than one. In addition, a non-quantifiable impact involves the
confusion to many customers resulting from doing business with two utilities
instead of one. Increased postage expense to customers is shown in Table I-4.
<TABLE>
<CAPTION>
TABLE I-4
OTHER ANNUAL CUSTOMER IMPACTS
=======================================
<S> <C>
Postage $754,158
============================= ========
</TABLE>
4
<PAGE>
II. CONCLUSIONS
The spin-off of Energy East's natural gas business into a stand-alone company is
estimated to result in a substantial increase in costs. Absent any
regulator-approved relief to recoup these decreased earnings through increases
in rates charged to customers, the immediate effect on the shareholders of
Energy East would be substantial. On the other hand, if the increases in cost
are passed through to customers, customers would experience a significant
increase in the level of rates, with no attendant increase in the level or
quality of service.
The aggregate effect of the divestiture of Energy East's natural gas businesses
into NewGasCo would be approximately $30.5 million for the NYSEG segment of
Energy East's natural gas business alone, as shown in Table I-2. The rate
increase required to provide the level of revenue needed to cover these costs
would amount to approximately 10 percent. Such a rate increase would come at a
time when NewGasCo would be facing the emergence of retail competition and
increased competition in the energy industry. Economic losses would also result
in a revenue requirement increase of $13.2 million to Energy East's remaining
electric business, which if passed on to customers would amount to an increase
of about 0.87%.
In addition to the economic losses associated with the NYSEG segment of Energy
East's natural gas business, it is anticipated that additional economic losses
would be associated with the divestiture of the Energy East's CNGC, Southern
Connecticut and Berkshire Gas segments. Estimates of the economic losses
associated with the CNGC, Southern Connecticut and Berkshire Gas segments of
Energy East's natural gas business have not been quantified at this time. The
lost economies associated with the spin-off of these segments from Energy East
are economies that will be realized over several years following the integration
of CNGC, Southern Connecticut and Berkshire Gas into Energy East. These
potential cost savings translate into lost economies if the acquisition of CNGC,
Southern Connecticut and Berkshire Gas were not completed.
Experience with various acquisitions and mergers in the electric, gas and
telecommunications industries indicates that related savings typically are
significant. Review of aspects of the operations and administration of CNGC,
Southern Connecticut and Berkshire Gas indicate that post-acquisition savings
(and hence economic losses) are likely to be realized in the areas of
consolidation of corporate governance functions, shareholder services and other
corporate functions, cost of capital, and uncollectibles.
The quantified effects of divestiture on the combined natural gas and electric
businesses for Energy East's NYSEG segment alone exceeds $43 million. The
effect of the additional, yet as of the present unquantified, impacts associated
with the CNGC, Southern Connecticut and Berkshire Gas segments of Energy East's
natural gas business will unquestionably increase the total estimate of economic
losses.
Divestiture would not provide any likely benefits to NewGasCo in the form of
operational improvements or regulatory efficiencies. From an operations
perspective, the segments of Energy East's natural gas business will be managed
as independent operating units. Aside from sharing certain common corporate
functions, Energy East plans to continue this local approach following the
acquisition of CNGC, Southern Connecticut and Berkshire Gas. The Connecticut,
Massachusetts and New York Commissions currently regulate these companies and
will continue to do so whether the companies are spun-off or remain part of
Energy East.
5
<PAGE>
Based on the foregoing analysis, spinning-off Energy East's natural gas
businesses would result in significant lost economies, to the detriment of
Energy East's shareholders and/or its gas and electric customers.
6
<PAGE>
III. SPIN-OFF ASSUMPTIONS
This study has applied several key assumptions in determining the lost economies
resulting from Energy East divesting itself of its natural gas business.
A. This study assumed that Energy East's acquisitions of CTG Resources Inc.
("CTG Resources"), Connecticut Energy Corporation ("Connecticut Energy") and
Berkshire Energy Resources ("Berkshire Energy") were completed and that
Connecticut Natural Gas Company ("CNGC," a subsidiary of CTG Resources),
Southern Connecticut Gas ("Southern Connecticut," a subsidiary of Connecticut
Energy) and Berkshire Gas Company ("Berkshire Gas," a subsidiary of Berkshire
Energy) became operating subsidiaries of Energy East.
B. This study assumed that Energy East's natural gas business consists of
five operating subsidiaries: the natural gas business associated with NYSEG;
CNGC; Southern Connecticut; Berkshire Gas; and CMP Natural Gas (a joint venture
between Energy East and Central Maine Power).
C. This study assumed that, if required, Energy East would spin-off its
natural gas business into a stand-alone gas company, independent of Energy East.
The new company is referred to as "NewGasCo," which would encompass the natural
gas businesses of the relevant segments of NYSEG (a combination electric and gas
company), CNGC, Southern Connecticut, Berkshire Gas and CMP Natural Gas.
D. This study assumed the current level of customers and business for Energy
East's operating subsidiaries.
1. NYSEG is a combination electric and gas utility, engaged in: 1) the
purchase, transmission, distribution and sale of electricity; and 2) the
purchase, transmission, distribution, sale and transportation of natural gas.
NYSEG's gas business includes transmission and distribution facilities serving
numerous communities across New York State, encompassing approximately 244,000
residential, commercial and industrial customers. NYSEG's 1998 gas revenues
were about $306 million with associated gas deliveries of about 61,689 thousand
dekatherms. NYSEG's electricity business serves approximately 826,000
residential, commercial and industrial customers in New York.
2. CNGC is a gas utility involved in the purchase, transmission,
distribution, sale and transportation of natural gas. CNGC serves approximately
143,300 residential, commercial and industrial customers in 22 Connecticut
communities, principally in the Hartford-New Britain area and Greenwich. CNGC's
1998 gas revenues were about $262 million with associated gas deliveries of
about 47,725,537 mmBtus.
7
<PAGE>
3. Southern Connecticut is a gas utility involved in the purchase,
transmission, distribution, sale and transportation of natural gas. Southern
Connecticut delivers natural gas to approximately 158,000 customers in 22
communities in southern Connecticut, including the cities of Bridgeport and New
Haven. Southern Connecticut's 1998 gas revenues were about $216 million with
associated gas deliveries of about 32,728 thousand dekatherms.
4. Berkshire Gas is a gas utility engaged in the distribution, sale and
transportation of natural gas for residential, commercial and industrial use.
Berkshire Gas also has an appliance rental division that sells and leases gas
burning equipment. Berkshire Gas serves approximately 34,500 residential,
commercial and industrial customers in 19 communities in western Massachusetts,
including the cities of Pittsfield and North Adams. Berkshire Gas's 1999
revenues were about $45.8 million, with associated gas sales and transportation
of 7,880,066 Mcf.
5. On February 12, 1999 (Release Nos. 35-26976, 70-9369 (1999 SEC LEXIS 312)
and Release Nos. 35-26977, 70-9367 (1999 SEC LEXIS 308)), the Securities and
Exchange Commission approved the participation by subsidiaries of Energy East
and CMP Group, Inc. in CMP Natural Gas. CMP Natural Gas, a start-up gas
business, is currently developing a customer base, and has minimal recorded
revenues and few employees.
8
<PAGE>
IV. GENERAL STUDY ASSUMPTIONS
The assumptions, information and data used in this study are based on industry
expertise and experience of personnel at Energy East and PHB Hagler Bailly. The
Energy East personnel providing input and analyses into this study included
employees with experience in all major aspects of utility operations and
corporate support. Energy East retained PHB Hagler Bailly to assist in
developing this study, relying on the firm's industry experience and
independence as an external party. PHB Hagler Bailly is an economic and
management consulting firm specializing in the energy industry and has expertise
in cost analysis and utility operations. The conclusions of this study
represent the combined and independent inputs and analyses of Energy East
personnel and PHB Hagler Bailly consultants. The general assumptions applied to
develop lost economies follow:
A. The economic losses associated with the spin-off of the NYSEG segment of
Energy East's natural gas operations into NewGasCo were quantified, based on an
analysis of the work functions, facilities, vehicles, information system and
telecommunications, and capital requirements associated with the utility.
B. A comprehensive analysis of the economic losses associated with the CNGC,
Southern Connecticut and Berkshire Gas segments was not performed at this time.
Examples of economic losses associated with the spin-off of the CNGC, Southern
Connecticut and Berkshire Gas segments of Energy East's natural gas operations
were identified in part in the accompanying analysis.
C. The economic losses associated with the spin-off of the CNGC, Southern
Connecticut and Berkshire Gas segments of Energy East's natural gas operations
were assumed to be equal to the savings that will be realized over several years
following the integration of CNGC, Southern Connecticut and Berkshire Gas into
Energy East.
D. Economic losses were developed in dollar amounts and as a percentage of
Total Gas Operating Revenue, Total Gas Operating Revenues Deductions, Gross Gas
Income, and Net Gas Income for the spin-off of NYSEG's natural gas operations.
Depiction of the economic losses as a percentage of aggregate statistics
reflecting the combined NYSEG, CNGC, Southern Connecticut, Berkshire Gas and CMP
Natural Gas segments would provide inaccurate and misleading results.
E. The base case, from which economic losses were measured, used 1998
revenue, cost, employee, customer, asset and other data provided by Energy East.
F. NewGasCo would require the organization, employees, facilities and
infrastructure to ensure that customers receive appropriate levels of service,
that operations be conducted in a safe and reliable fashion, for the company to
plan for the future, and for the company to meet industry and functional
practices regarding corporate and support services.
9
<PAGE>
1. NewGasCo would have the facilities, equipment, materials and supplies,
management and personnel, and information and telecommunications systems to
function on a stand-alone basis.
2. Operating subsidiaries would continue to be managed as independent units.
3. Staffing levels for NewGasCo's field and corporate functions were based
on current levels of efficiency and service quality and at a level appropriate
for a natural gas company of its size.
4. The various business segments of NewGasCo would share resources when
possible, enabling NewGasCo to realize efficiencies in certain functions.
Savings would include consolidation of the Board of Director and governance
function, shareholder service function, as well as certain other common
corporate functions.
G. Costs were developed on a bottom-up basis.
1. Labor costs were determined using the average labor cost for the relevant
job function. The costs of pensions and benefits were then added to the labor
cost based on the loading used by Energy East.
2. Non-labor costs included the costs for information systems,
telecommunications, field facilities, postage and others. Certain functions
were outsourced for the purpose of this analysis when such treatment enhanced
cost efficiencies.
H. All economic losses represent the net effect after the allocations to the
gas business unit from the combined company have been taken into account.
10
<PAGE>
V. NEWGASCO ANALYSIS
The quantification of the impact of a divestiture of the NYSEG segment of Energy
East's natural gas business was conducted by the management and staff of Energy
East and PHB Hagler Bailly. This quantification addressed the impact of a
spin-off of the Energy East's NYSEG segment alone into a stand-alone NewGasCo
comprised of Energy East's NYSEG, CNGC, Southern Connecticut, Berkshire Gas and
CMP Natural Gas segments. Quantification addressed requirements for
organization, staffing levels and labor costs; outside services; buildings and
facilities construction and operations and maintenance; furniture and equipment;
vehicles; information systems; telecommunications networks; and other costs.
A. SPECIFIC ASSUMPTIONS
1. Labor Assumptions:
a. The current organizational structures, business practices and levels of
efficiency were used as the basis for NewGasCo's organization and staffing
levels.
b. Numbers of employees required for NewGasCo were developed using a
bottom-up approach, in which each functional area was reviewed to determine the
nature of the work performed and the level of effort required to support a
stand-alone gas company. Functional managers were interviewed and consulted to
determine the appropriate staffing levels.
c. Meter reading and customer service data, such as reads per day and call
response, were considered to determine the needed staffing levels to read meters
and staff the Call Center for the stand-alone company.
d. Employee benefits were assumed to be similar to the existing levels of
benefits. Pensions and benefits were estimated as a percentage of direct labor
cost. The pension and benefits percentage excluded any over-funding, which
would be credited to the spun-off company on a negotiated basis.
e. Re-negotiation of union contracts was assumed to be minimal.
f. Labor cost increases were determined on a net basis. Labor-related
allocations from the combined utility were deducted from the cost of labor for
NewGasCo.
g. Labor costs were determined using the average labor costs for employees
in each functional area.
11
<PAGE>
2. Board of Director Assumptions: The previously shared Board of Directors
would have to be provided on a stand-alone basis to NewGasCo and to NYSEG's
remaining electric business.
3. Outside Services Assumptions: Requirements for certain outside services
which were conducted jointly on behalf of the combined electric and gas company
would have to be provided on a stand-alone basis to NewGasCo and to NYSEG's
remaining electric business. Examples of these services include the annual
financial audit performed by an independent external auditor, transfer agent
services, certain legal services, safety training, and human resource and
benefit consulting.
4. Building, Facilities and Vehicles Assumptions:
a. Facilities requirements were determined through the analysis of
geographic service areas and levels of staffing. A division approach was adopted
for NewGasCo, following NYSEG's current field organizational structure. One
division was eliminated as no gas customers are located within the bounds of
that division.
b. Field office size was determined by building-up requirements from the
number of employees. Field offices costs also include furniture, garage and
equipment, and parking and paved areas and operations and maintenance costs.
c. Vehicles were determined by building-up requirements of NewGasCo
employees. Specialized gas-related vehicles are already assigned to the gas
businesses. NewGasCo's incremental vehicle needs were comprised of passenger
vehicles and small pick-up trucks.
d. Operations and maintenance costs for facilities and vehicles were based
on the NYSEG rates.
5. Information Systems and Telecommunications Assumptions:
a. NewGasCo would need to procure the information system (IS) capabilities
that it currently receives as part of the combined utility. NewGasCo's
information systems would need to support the requirements associated with
finance and accounting, human resources, payroll, work management, inventory and
purchasing functions, field services, meter reading and customer services.
Historically, utilities have constructed information systems themselves to meet
their unique requirements. For a stand-alone gas business with less than
300,000 customers, IS needs would more efficiently be procured through licensing
agreements associated with software packages. The build-up of NewGasCo's IS
costs were based on lease costs for licensed software packages. Labor costs
associated with maintaining the IS system and supporting IS users were included
in the Labor Cost section of this study. IS costs are net of the related
allocations from the combined utility.
12
<PAGE>
b. NewGasCo would need to develop telecommunications capabilities across its
various locations and between field office and personnel in the field. These
capabilities would include a radio dispatch system that allows communications
between the field and dispatch locations, various data circuits, telephone
service including 800 service and cellular service, yellow page listings, and
internet connectivity. Telecommunications costs are net of the related
allocations from the combined utility.
6. Depreciation Assumptions: Annual depreciation was calculated for
NewGasCo's incremental buildings and facilities, vehicles and capitalized labor,
using NYSEG's depreciation rates. Additionally, depreciation was calculated for
additional assets or transfers of assets to the remaining electric business.
7. Other Cost Assumptions: Other costs included in the determination of the
total annual cost increase included the increased costs of postage and
uncollectibles. Uncollectibles rates for NewGasCo were based on benchmarks for
stand-alone gas companies.
8. Capital Expenditure and Cost Assumptions:
a. NewGasCo's new capital would consist of: 1) the costs associated
NewGasCo's building, facilities, and plant notably field offices, corporate
offices and a call center; 2) vehicle purchases; and 3) capitalized labor.
b. The divestiture of NewGasCo was assumed to be a tax-free spin-off to the
existing shareholders. This would involve the incorporation of NewGasCo,
transfer of gas-related assets to NewGasCo, and distribution of shares to
current shareholders.
c. Capital costs associated with NewGasCo were based on the analysis of the
capital costs of publicly traded companies which are primarily involved in the
business of gas distribution to industrial, commercial and retail customers.
This provides a reasonable estimate of the financial conditions which NewGasCo
would face as an independent business entity.
d. Statutory returns were used in determining capital costs because they
reflect approved regulatory returns. In regulated industries anticipated
investor returns will be guided by regulatory returns.
e. The cost of debt for NewGasCo is based on the current yield for 25-year
debentures for an investment grade corporation, assuming an investment rating
of "BBB+."
13
<PAGE>
f. The spin-off of NewGasCo is based on an asset transfer at the net book
value of the existing gas assets attributable to NYSEG's natural gas business
plus additional capital expenditures.
g. Working capital costs following divestiture are assumed to be the same as
pre-spin-off rates.
9. Transition Cost Assumptions:
a. Transition costs primarily reflect financial transaction costs and
professional fees, such as legal fees.
b. Divestiture of NewGasCo would not require redemption of the existing
NYSEG mortgage or pollution control bonds. The residual capital base in the
remaining electric business would be adequate to satisfy indenture requirements.
c. Divestiture would be structured to avoid material federal or state income
tax events. The future tax obligations of NewGasCo and the remaining electric
business would be based on the stand-alone future tax obligations of the
independent entities and would not be materially effected by the spin-off
itself.
d. Investment banking fees related to debt issuance were estimated to be
approximately 0.875 percent of the total debt amount. Investment banking fees
related to stock issuance were estimated to be 1.5 percent of the total equity
issuance amount.
e. Transaction costs associated with recapitalization were included with
transition costs. These costs were amortized over 25 years and include the
issuance of new debt and common stock for NewGasCo.
B. ORGANIZATION OF NEWGASCO
The organizational structure of NewGasCo reflects the needs of the company in
providing service to its customers, in meeting mandatory legal and regulatory
requirements and in conducting business following industry and generally
accepted business practices. Organizational structure is a primary determinant
of the level of staffing for NewGasCo which, in turn, determines labor costs.
In 1998, NYSEG's electric, gas and combined operations accounted for 3,341
employees. Following divestiture, NewGasCo would no longer be able to share
staff for various corporate and field functions. Considerable organizational
adjustment would be required for NewGasCo, as it would need to ensure that many
of the services previously provided jointly with the electric business are now
provided on a stand-alone basis. These include adjustments to the field
organizations as well as to corporate functions. NYSEG's current structure
provided the basic structure for the NewGasCo organization. In addition,
management representing each of NYSEG's functional areas were consulted for
input concerning the requirements for a stand-alone NewGasCo. Also, experience
with utility benchmarks and industry practices were taken into account.
14
<PAGE>
1. Board of Directors. NewGasCo would require a Board of Directors. The
Board for NewGasCo would be similar in size and composition to the Board
associated with Energy East, which is currently composed of ten Directors.
2. President and Chief Executive Officer. The President and CEO would
report directly to the Board of Directors and would be responsible for
overseeing the entire NewGasCo. The President and CEO would have five direct
reports spanning the following functions: Chief Operating Officer; Chief
Financial Officer; General Counsel; Information Systems; and Human Resources.
3. Chief Operating Officer would report directly to the President and CEO
and would be responsible for the operating activities of NewGasCo, which would
include Corporate Support, Customer Service, Gas Planning and Supply, Field
Operations, and Marketing.
a. Corporate Support includes administering the various contracts for
services provided to the Company, oversight of the garages and transportation
equipment used throughout the Company, managing various facilities and real
estate, supporting licensing applications and coordinating material management.
In 1998, NYSEG had 98 employees in the Corporate Support function (29 hourly and
69 salaried). NewGasCo would include additional support services currently
provided through other NYSEG organizations. These include security, printing
and graphics and mail services. In 1998, NYSEG employed 32 people (10 hourly
and 22 salaried) in these functions. NewGasCo would require 28 employees to
accomplish the Corporate Support function. NYSEG's remaining electric business
would need 124 employees to meet the requirements of this function.
b. Customer Service spans a range of customer-oriented services. In 1998,
the total employees for the Customer Service department were 294 (220 hourly and
74 salaried employees). The largest component of Customer Service is the Call
Center. In 1998, NYSEG's Call Center employed 221 people to answer customer
inquiries, assist with service installations and disconnections, respond to
billing inquiries, and other customer related issues. The majority of Call
Center employees (209) are hourly employees, with the remaining 12 employees
performing supervisory and managerial functions. Customer Service is a critical
component of a utility's relationship with its customers. State regulators have
also developed standards regarding access by customers to the utility for
emergencies and for inquiries. NewGasCo would require 68 Customer Service
employees, 54 of whom would be employed in the Call Center. NYSEG's remaining
stand-alone electric business would need 276 employees to meet electric-only
Customer Service requirements, including 210 employees in the Call Center.
15
<PAGE>
c. Gas Planning and Supply involves the procurement of gas supply, the
selection of financial instruments to hedge gas prices, the control of the
utility's gas infrastructure, the planning for gas infrastructure and
construction, and the gas meter shop. In 1998, NYSEG's gas operation had 90
employees (15 hourly and 75 salaried) involved in these functions. These
employees would be transferred to NewGasCo.
d. Division Operations refers to the construction and customer activities
taking place in the various geographic regions and divisions. NYSEG currently
has segmented its operations into 5 regions covering 13 divisions. Each
division is responsible for connecting and disconnecting customers, reading
meters, constructing facilities and meeting with customers for NYSEG's electric
and gas operations. While some functions, such as specialized construction
activities, are distinctly assigned to either the gas or electric business,
other activities (such as meter reading) are performed jointly for both
businesses. Each division is headed by a manager. The divisions are in turn
overseen by five Regional Managers. In 1998, NYSEG's division operations
employed 2,063 employees, including Regional Managers (1,700 hourly and 363
salaried). Only one division does not have gas customers. Based on the number
of gas customers to be served and the customer density of the geographic area,
NewGasCo would require 522 employees in its divisions. NYSEG's remaining
electric business would require 1,715 employees in its field organization.
e. Marketing and Sales involves the analysis and sales support to address
specific customer needs, and to position NewGasCo to retain and acquire
customers. In 1998, NYSEG's marketing and sales activities related to natural
gas employed 23 people, all of whom were salaried. These employees would be
transferred to NewGasCo.
4. The Chief Financial Officer (CFO) function would be responsible for the
rates and regulatory, controller, treasury, tax, shareholder services, corporate
planning, audit and economic development and public policy functions.
a. Rates and Regulatory involves the development of rates and prices for
natural gas services and the regulatory approval of tariffs, as well as certain
issues associated with billing. In 1998, NYSEG's rates and regulatory
activities related to natural gas employed 19 people, all of whom were salaried.
These employees would be transferred to NewGasCo.
b. The Controller function is responsible for the integrity of the
Company's accounting books and records and for preparing various reports and
filings. In 1998, the Controller function employed 40 people (17 hourly and 23
salaried). The Controller function would have to be replicated in order to
serve two distinct stand-alone companies. NewGasCo would require 10 people to
perform the various controller activities. NYSEG's remaining electric business
would need 35 people to meet its controller requirements.
16
<PAGE>
c. Treasury involves the management of investments, cash and disbursements,
as well as financial planning. In 1998, NYSEG's treasury function employed 35
people (20 hourly and 15 salaried). The treasury function would have to be
replicated in order to serve two distinct stand-alone companies. NewGasCo would
require 5 people to perform the treasury activities. NYSEG's remaining electric
business would need 30 people to meet its treasury requirements.
d. The Tax function involves the preparation of income and property tax
submissions. In 1998, NYSEG's Tax organization employed 14 people (3 hourly and
11 salaried). the Tax function would have to be replicated in order to serve two
distinct stand-alone companies. NewGasCo would require 4 people to perform the
tax activities. NYSEG's remaining electric business would need 12 people to
meet its tax requirements.
e. Shareholder Services involves tracking and maintaining communications
with equity holders and the transfer agency function. NYSEG with Chase Mellon
currently acts as its own transfer agent. In 1998, the Shareholder Services
function employed 7 people (4 hourly and 3 salaried). NewGasCo would require 2
people to perform the Shareholder Services function, who would coordinate with
an outsourced transfer agent. NYSEG's remaining electric business would need 7
people to continue its shareholder services function.
f. Corporate Planning and Budgets involves the analysis and projection of
the Company's actual and budgeted (capital and operations and maintenance)
financial state. This function typically is involved with various special
projects. In 1998, NYSEG employed 32 people (4 hourly and 28 salaried) in this
function. NewGasCo would require 5 people to perform corporate planning and
budgets activities. NYSEG's remaining electric business would need 28 people to
meet this requirement.
g. Audit involves the management and coordination of the annual financial
audit performed by an independent audit firm. The audit function and the
associated certification from the independent audit firm are mandatory for
public companies. In 1998, NYSEG's Audit organization employed 12 people (1
hourly and 11 salaried). NewGasCo would require 4 people to perform audit
activities. NYSEG's remaining electric business would need 11 people to meet
its audit requirements.
h. Economic Development and Public Policy is responsible for area and
business development, coordination with state and regional economic development
programs, as well as the tracking and analysis of regulatory and legislative
initiatives. In 1998, NYSEG's Economic Development and Public Policy
organization employed 24 people, all of whom were salaried. NewGasCo would
require 6 people to perform this function. NYSEG's remaining electric business
would need 21 people to perform the economic development and public policy
function.
17
<PAGE>
5. General Counsel is responsible for all aspects involving legal compliance
and/or risk. This function performs legal services itself and manages
specialized outside counsel. In 1998 NYSEG employed 9 people in Legal Services,
all of whom were salaried. NewGasCo would require 3 legal employees to meet
ongoing legal requirements, but would need to outsource larger and more
specialized cases to outside counsel. NYSEG's remaining electric business would
need 8 people to meet its requirements for legal services.
6. Information Services is responsible for the development and maintenance
of the full range of information systems and telecommunications networks. This
function includes various managers and staff responsible for application
development, infrastructure standards, security, user training, and the
telecommunication network. In 1998 NYSEG employed 125 people in Information
Services (19 hourly and 106 salaried). NewGasCo would require 22 employees in
Information Services. NYSEG's remaining electric business would need 114 people
to meet its information services requirements.
7. Human Resources includes labor relations, organizational development,
training, the development of compensation and benefits plans, ensurance of
compliance with employee-related regulations and maintenance of employee-related
information systems. The size of the Human Resources department is typically
related to the size of the Company. In 1998 NYSEG employed 46 people in Human
Resources, all of whom were salaried. NewGasCo would require 11 employees in
Human Resources. NYSEG's remaining electric business would need 40 people to
meet its human resources requirements.
C. ANNUAL COST INCREASES
The incremental annual costs associated with divesting the NYSEG natural gas
segment of Energy East is shown in Table V-2.
18
<PAGE>
<TABLE>
<CAPTION>
TABLE V-2
ANNUAL COST INCREASES TO GAS COMPANY
=================================================
<S> <C>
Labor Costs $ 9,525,980
- ------------------------------------ -----------
Pension and Benefits $ 3,619,872
- ------------------------------------ -----------
Board of Directors 270,000
- ------------------------------------ -----------
Outside Services $ 2,346,005
-----------
Building and Facilities O&M $ 429,463
-----------
Vehicles and Equipment O&M $ 62,772
-----------
Information Systems $ 2,380,999
-----------
Telecommunications $ 2,532,930
-----------
Depreciation $ 365,037
-----------
Postage $ 563,836
-----------
Uncollectables $ 1,398,969
Total Annual Cost Increase $23,495,863
==================================== ===========
</TABLE>
1. Labor costs represent the largest single cost increase resulting from the
spin-off of NewGasCo.
a. The spin-off of NewGasCo would require the duplication of many job
activities that were jointly provided to both NYSEG's electric and gas
businesses. These jobs fall into five categories:
i. Division Operations involves field activities that were jointly performed
for both the electric and gas businesses. These include meter readers, field
service representatives, customer service representatives, engineering,
construction, energy delivery and various administrative and supervisory
functions. NewGasCo would need to ensure it could perform each of these
functions at a level to ensure continued quality service to its customers. An
analysis of each function was conducted to determine the number and
classifications of employees that would be needed by NewGasCo,. The number of
additional employees needed for NYSEG's remaining electric business was also
determined.
ii. Corporate Functions reflect a range of supporting and administrative
activities. Included in this category are support to operating divisions, the
provision of centralized services across the company, and planning and
management to ensure continuity across the company and compliance with
requirements for the corporation. An analysis of each corporate function was
conducted to determine the number and classifications of employees that would be
needed by NewGasCo, as well as for the NYSEG's remaining electric business.
19
<PAGE>
iii. Call Center is a critical area of centralized support responsible for
interaction with customers in matters of new service, disconnections, billing,
inquiries. The Call Center is also responsible for scheduling appointments with
customers. NewGasCo would have to build a call center, install
telecommunications and customer information system capabilities, and staff the
call center. (The costs associated with facility construction are discussed
under Facilities and Vehicles. The costs associated with telecommunications and
customer information systems are discussed under Information Systems and
Tele-communications.) Staffing requirements alone are considerable. Based on
call center demand and requirements and input from NYSEG's current call center
personnel, a stand-alone NewGasCo call center would require about 54 employees.
A stand-alone call center for NYSEG's remaining electric business would require
about 210 employees.
iv. Gas Supply & Planning refers to the functions associated with planning,
financing and supplying gas across NewGasCo's system. The employees associated
with this function are currently dedicated to Energy East's gas business and
will be transferred to NewGasCo. Therefore no additional employees will be
required to fulfill the requirements associated with this function.
v. Board of Directors were previously shared by NYSEG's electric and gas
businesses. NewGasCo would be required to acquire its own Board. The cost of
NYSEG's current Board would be assigned to the remaining electric business.
b. The number of incremental employees needed by NewGasCo to meet the
business requirements and the associated incremental labor costs are shown in
Table V-3. The incremental labor costs have netted out any allocations made by
the combined utility to the gas business unit. Pensions and benefits were added
to incremental labor cost based on the pension and benefit percentage loading
used by NYSEG.
20
<PAGE>
<TABLE>
<CAPTION>
TABLE V-3
SUMMARY OF INCREMENTAL LABOR COSTS
=======================================================================================
LABOR INCREMENTAL INCREMENTAL PENSION & TOTAL
CATEGORY EMPLOYEES LABOR COST BENEFITS COST
=================================== =========== ============ ========== ===========
<S> <C> <C> <C> <C>
Division Operations 120 $ 6,885,000 $2,616,300 $ 9,501,300
- ----------------------------------- ----------- ------------ ---------- -----------
Corporate Functions 2 220,847 83,922 304,769
Support Services 11 $ 416,134 $ 158,131 $ 547,265
Customer Services (excluding Call
Center) 6 $ 400,026 $ 152,010 $ 552,036
Chief Financial Officer 10 $ 506,084 $ 192,312 $ 698,396
Information Services 5 $ 312,074 $ 118,588 $ 430,662
Human Resources 5 $ 524,983 $ 199,493 $ 724,476
Marketing, Sales and Pricing 0 -- -- --
Economic Development and Policy 2 $ 142,016 $ 53,966 $ 195,982
Shareholder Services 1 $ 49,466 $ 18,797 $ 68,263
Legal 2 $ 139,850 $ 53,143 $ 192,993
- ----------------------------------- ----------- ------------ ---------- -----------
Call Center 3 $ 135,587 $ 51,523 $ 187,110
- ----------------------------------- ----------- ------------ ---------- -----------
Gas Planning & Supply 0 -- -- --
- ----------------------------------- ----------- ------------ ---------- -----------
Board of Directors 9 $ 270,000 -- $ 270,000
Total 176 $ 9,795,982 $3,619,873 $13,415,855
=================================== =========== ============ ========== ===========
</TABLE>
c. NewGasCo's staffing was also benchmarked against other stand-alone gas
companies on the basis of customers per employee, a generally accepted measure
of efficiency. NewGasCo is compared to other gas companies in Table V-4.
21
<PAGE>
<TABLE>
<CAPTION>
TABLE V-4
COMPARISON OF CUSTOMERS PER EMPLOYEE
=====================================================================
NUMBER OF
DISTRIBUTION NUMBER OF CUSTOMERS
GAS UTILITY CUSTOMERS EMPLOYEES PER EMPLOYEE
============================================ ========= ============
<S> <C> <C> <C>
Corning Natural Gas 14,100 72 195.8
- ------------------------------ ------------ --------- ------------
Filmore Gas Company 906 7 129.4
- ------------------------------ ------------ --------- ------------
CTG Resources 140,411 611 229.8
- ------------------------------ ------------ --------- ------------
Yankee Energy Systems 180,476 673 268.2
------------ --------- ------------
Southern Connecticut Gas 148,273 532 278.7
------------ --------- ------------
Washington Gas Light 798,739 2,484 321.6
------------ --------- ------------
Boston Gas 515,218 1,532 336.3
------------ --------- ------------
Piedmont Natural Gas 506,632 1,983 255.5
------------ --------- ------------
NewGasCo 243,000 830 292.8
------------ --------- ------------
NYSEG (estimate) 243,000 663 366.5
=====================================================================
Source: Brown's Directory of North American and
International Gas Companies (1999).
=====================================================================
</TABLE>
d. NYSEG's level of efficiency is comparable with or exceeds most of the
stand-alone companies. As expected, the addition of employees for NewGasCo
lowers the efficiency of the gas company compared with its original position.
NewGasCo's reduced efficiency would also be a result of divisions with few gas
customers and low density, as shown in Table V-5.
22
<PAGE>
<TABLE>
<CAPTION>
TABLE V-5
DIVISION COMPARISON
========================================================
NEWGASCO-NY NUMBER OF NUMBER OF CUSTOMERS
DIVISION METERS EMPLOYEES PER EMPLOYEE
==================== ========= ========= ============
<S> <C> <C> <C>
Brewster 1,004 8 126
- -------------------- --------- --------- ------------
Mechanicville 2,161 12 180
- -------------------- --------- --------- ------------
Plattsburgh 938 9 104
- -------------------- --------- --------- ------------
Geneva 39,451 68 580
--------- --------- ------------
Ithaca 31,831 62 513
--------- --------- ------------
Auburn 20,315 43 472
--------- --------- ------------
Elmira 32,631 58 563
--------- --------- ------------
Binghamton 64,468 100 645
--------- --------- ------------
Oneonta 13,850 50 277
--------- --------- ------------
Liberty 3,093 14 221
--------- --------- ------------
Lockport 30,204 59 512
--------- --------- ------------
Hornell 14,326 34 421
Total 254,272 517* 492
==================== ========= ========= ============
*Excludes 5 Regional Managers who oversee the 12 Field
Divisions.
========================================================
</TABLE>
2. Outside Services refers to the full range of externally provided
services. These services include consulting services, the annual financial
audit, benefits planning, transfer agent services and legal services. NewGasCo
would need to acquire several outside services if it were spun-off from Energy
East. The outside services and the associated costs for these services for
NYSEG were reviewed in terms of the types and extent of services which would be
needed by NewGasCo. The additional costs associated with outside services for
NewGasCo would be $2.3 million.
3. Building and Facilities reflect the incremental operations and
maintenance expenses associated with buildings and facilities needed by
NewGasCo.
a. NewGasCo would need to construct or lease buildings and associated garages
and parking areas for their field operations. NYSEG currently has 13 divisions,
each of which have one or more buildings to house field personnel, division
supervisory and administrative personnel and vehicles. Currently, one facility
in the Binghamton, NY area is dedicated to gas operations, and it is assumed
that this building would be transferred to NewGasCo and used as NewGasCo's
Binghamton division office. Another NYSEG division does not have gas customers,
eliminating the need for a NewGasCo division in that area. Thus, NewGasCo would
have to construct or lease 11 buildings for division operations. NYSEG facility
managers have found that leasing options may not be available in the geographic
locations of the divisions.
23
<PAGE>
b. Corporate offices would also be required for NewGasCo. The size of the
corporate offices were determined based on the number of employees that were
employed in the corporate facilities.
c. NewGasCo would also have to construct a Call Center, involving physical
space and furniture for the Call Center. The Call Center would be located
in NewGasCo's corporate facility. The cost for the Call Center was determined
on the same basis as Corporate Offices.
d. Building costs were determined on a location-by-location basis, using the
number of division employees by job classification as the primary determinant of
facilities requirements. Facility costs included office and computer equipment
and garage equipment. Operations and maintenance costs covering building
maintenance and utility costs were determined based on NYSEG's O&M costs in its
division locations.
e. The incremental cost associated with financing building and facility
construction is included under Capital Costs; the incremental cost associated
with the depreciation of these buildings and facilities is under Depreciation.
f. Building and facility, capitalized equipment and operations and
maintenance costs for these buildings are shown in Table V-6. The incremental
cost to NewGasCo for the operations and maintenance associated with these
buildings and facilities is $429,463 (which is shown on Table V-2).
24
<PAGE>
<TABLE>
<CAPTION>
TABLE V-6
BUILDING CONSTRUCTION AND OPERATING COSTS
========================================================================================================
NEEDED
FACILITY BUILDING SIZE BUILDING AND CAPITALIZED EQUIPMENT OPERATING COSTS
LOCATION (SQ. FT) FACILITY CONSTRUCTION COST COST
================= ============== =========================== ====================== ================
<S> <C> <C> <C> <C>
Corporate Offices 101,600 $ 5,129,256 $ 1,016,000 $ 1,259,953
- ----------------- -------------- --------------------------- ---------------------- ----------------
Call Center 5,940 $ 417,080 $ 135,000 $ 71,476
- ----------------- -------------- --------------------------- ---------------------- ----------------
Brewster 2,272 $ 196,047 $ 44,000 $ 28,559
- ----------------- -------------- --------------------------- ---------------------- ----------------
Mechanicville 3,108 $ 230,003 $ 51,000 $ 25,040
-------------- --------------------------- ---------------------- ----------------
Plattsburgh 2,481 $ 198,724 $ 45,750 $ 24,712
-------------- --------------------------- ---------------------- ----------------
Geneva 14,812 $ 1,222,468 $ 149,000 $ 120,687
-------------- --------------------------- ---------------------- ----------------
Ithaca 13,558 $ 986,295 $ 138,500 $ 40,172
-------------- --------------------------- ---------------------- ----------------
Auburn 9,587 $ 721,599 $ 105,250 $ 73,973
-------------- --------------------------- ---------------------- ----------------
Elmira 12,722 $ 899,420 $ 131,500 $ 94,724
-------------- --------------------------- ---------------------- ----------------
Oneonta 11,050 $ 825,649 $ 117,500 $ 107,950
-------------- --------------------------- ---------------------- ----------------
Liberty 3,526 $ 270,871 $ 54,500 $ 28,002
-------------- --------------------------- ---------------------- ----------------
Lockport 12,931 $ 875,970 $ 133,250 $ 93,133
Hornell 7,706 $ 563,342 $ 89,500 $ 56,913
- ----------------- -------------- --------------------------- ---------------------- ----------------
Total NewGasCo 201,293 $ 12,436,726 $ 2,210,750 $ 2,025,295
================= ============== =========================== ====================== ================
</TABLE>
4. The costs for Vehicles and Equipment refers to the incremental vehicles
that would need to be purchased and maintained to meet the requirements of the
spun-off gas companies. NewGasCo would require the addition of vehicles that
were previously jointly used in NYSEG's division operations. In addition,
several incremental vehicles would be required for corporate personnel.
a. Specialized gas operations vehicles and equipment was already assigned to
NYSEG's gas business unit and it is assumed that these will be transferred to
NewGasCo.
b. Incremental vehicle requirements will be for passenger vehicles and ton
pickup trucks, reflecting usage by meter readers and field service
representatives. The number of vehicles were derived from the job
classification and number of employees.
25
<PAGE>
c. The incremental cost associated with financing vehicle acquisition is
included under Capital Costs; the incremental cost associated with the
depreciation of these vehicles is included under Depreciation.
d. The incremental number of vehicles needed by NewGasCo, as well as the
vehicle acquisition cost and operations and maintenance costs are shown in Table
V-7.
<TABLE>
<CAPTION>
TABLE V-7
INCREMENTAL VEHICLE COST
===============================================================
NUMBER OF
INCREMENTAL VEHICLE INCREMENTAL OPERATING
VEHICLES COST COST
============== =========== ========== ======================
<S> <C> <C> <C>
Binghamton 10 $ 195,000 $ 6,060
Brewster 3 $ 60,000 $ 1,865
- -------------- ----------- ---------- ----------------------
Mechanicville 4 $ 75,000 $ 2,331
- -------------- ----------- ---------- ----------------------
Plattsburgh 5 $ 105,000 $ 3,263
- -------------- ----------- ---------- ----------------------
Geneva 8 $ 150,000 $ 4,661
----------- ---------- ----------------------
Ithaca 5 $ 90,000 $ 2,797
----------- ---------- ----------------------
Auburn 8 $ 165,000 $ 5,127
----------- ---------- ----------------------
Elmira 10 $ 195,000 $ 6,060
----------- ---------- ----------------------
Oneonta 13 $ 255,000 $ 7,924
----------- ---------- ----------------------
Liberty 8 $ 165,000 $ 5,127
----------- ---------- ----------------------
Lockport 7 $ 135,000 $ 4,195
----------- ---------- ----------------------
Hornell 8 $ 150,000 $ 4,661
Corporate 14 $ 280,000 $ 8,701
Total NewGasCo 101 $2,020,000 $ 62,772
============== =========== ========== ======================
</TABLE>
5. Information Systems and Telecommunications reflect the replacement of
infrastructure that were provided by Energy East relating to computing and
connectivity. NewGasCo would have to acquire sufficient information system and
telecommunications capabilities to operate effectively on a stand-alone basis.
26
<PAGE>
a. Information systems capabilities would need to address fundamental
business applications, industry practices and regulatory requirements.
Specialized gas business applications, such as the System Control and Data
Acquisition (SCADA) system are already assigned to NYSEG's gas business and it
is assumed the related hardware and software would be transferred to NewGasCo.
In determining the incremental cost of information systems to NewGasCo,
information systems managers and specialists were consulted for input. The most
efficient cost approach was used. For NewGasCo, this would involve the
licensing of pre-packaged, multi-purpose software as opposed to in-house
development. The licensing costs associated with several software packages
capable of supporting NewGasCo's needs were reviewed. The total incremental
cost for NewGasCos information systems would be about $2.4 million, including
the net effect of allocations from the combined utility.
(i) NewGasCo would need a full suite Enterprise Resource Planning (ERP)
system which would cover its accounting, human resource, payroll, work
management, inventory and purchasing needs.
(ii) A Customer Information System (CIS) would also be required which would
store and allow access to customer records, be integrated with customer billing
and be used extensively by Call Center personnel.
(iii) NewGasCo would also need Field Service Systems and Meter Reading
System software packages.
b. NewGasCo's telecommunications costs involve to the connectivity across
the company and between field operations and dispatch locations.
(i) Radio dispatch system is a critical component of utility operations.
Commercially available mobile communications networks, such as work crew radio
services offered by NexTel, are not available throughout NYSEG's or NewGasCo's
service territory. The cost for radio dispatch for NewGasCo was determined by
reviewing a lease proposal from Motorola for this service. This approach is
considerably more economical than construction of a radio dispatch facility,
which would include tower construction and attachments across New York State.
The annual cost of a leased radio dispatch system covering NewGasCo's service
area would be approximately $2.7 million.
(ii) Access to dialtone, 800 services, cellular service and leasing and
maintenance for telephone systems.
(iii) Various data and supervisory circuits and network supervisions for
NewGasCo.
27
<PAGE>
(iv) Other telephone costs, such as yellow page publishing costs and
internet-related cost.
(v) As a lower volume user than the combined NYSEG, NewGasCo would receive a
reduced discount on various telephone contracts.
(vi) Netting the effect of telecommunications costs being directly charged
to the gas business or charged on an allocated basis, the incremental
telecommunications cost to NewGasCo would be $2,532,930.
6. Depreciation cost increases result from the addition of buildings and
facilities, furniture, computer equipment, vehicles, and garage equipment
required by the stand-alone NewGasCo. Regulatory approved depreciation rates
were applied to each of the asset values to determine annual depreciation costs.
The incremental depreciation for NewGasCo would be about $365,037.
7. Postage cost increases would result from the duplication of bill mailings
associated with NYSEG's current combined gas and electric customers. Postage
costs were calculated using a $.01 volume discount. In 1998, NYSEG had almost
190,000 customers who received both gas and electric service. The increased cost
of postage to NewGasCo would be $563,836.
8. Uncollectibles represents an area of increased costs in a stand-alone gas
company scenario. Benchmark data indicates that uncollectibles are generally
lower for a combined utility than for a stand-alone gas company. NYSEG's
current uncollectible rate for its combined utility is less than one percent.
The level of incremental uncollectible cost was determined through the review of
benchmark data. Uncollectible cost increases are estimated to be $1.4 million.
D. CAPITAL COST INCREASES
The capital cost for the potential spin-off will increase as a result of
increased cost of equity and debt.
1. The cost of equity for NewgasCo will be higher than the current cost of
equity capital for Energy East's natural gas business. This increased cost
reflects the higher risk of operating an independent business. The cost of
equity capital for NewGasCo was estimated by determining the median regulatory
equity cost of comparable publicly-traded stand-alone gas utilities, as reported
by Bloomberg Financial Services.
2. The cost of debt for NewGasCo will also be higher than the cost of debt
of the natural gas business unit under Energy East. NewGasCo is not likely to
finance debt at the same cost as NYSEG. It is assumed that NewGasCo would not
have access to tax exempt pollution control bonds and preferred stock
securities, but will rely on corporate debentures. It was assumed that the
borrowing costs for NewGasCo will be approximately 1.6 percent higher than
for NYSEG.
28
<PAGE>
3. A comparison of the costs of equity, debt and the weighted average cost
of capital (WACC) is shown for Energy East and NewGasCo in Table V-8. The
weighted average cost of capital comparison reflects the net capital cost once
both the effects of leverage and the tax deductibility of interest expense
have been considered.
<TABLE>
<CAPTION>
TABLE V-8
CAPITAL COST COMPARISON
============================================================
NEWGASCO INCREASE
ENERGY EAST (DECREASE)
======================= ============ ========= ==========
<S> <C> <C> <C>
CAPITAL COST COMPONENTS
Cost of Equity 11.20% 11.83% 0.63%
Cost of Debt 6.37% 7.97% 1.60%
WACC PARAMETERS
=======================
Debt Financing 52.80% 52.80% ----
Tax Rate 35.00% 35.00% ----
======================= ============ ========= ==========
WACC 7.47% 8.32% 0.84%
======================= ============ ========= ==========
</TABLE>
4. The total impact of the lost economies due to capital costs is captured
by (1) the increase in the NewGasCo WACC shown above and (2) new equity
and debt financing at NewGasCo's higher cost resulting from the new capital
expenditures discussed in an earlier section. The impact of these two
incremental financial costs is shown in Table V-9. The impact of capital costs
on NewGasCo lost economies is approximately $5.5 million per year, $4 million
of which is attributable to higher capital costs and $1.5 million of which is
attributable to new capital financing requirements.
29
<PAGE>
<TABLE>
<CAPTION>
TABLE V-9
TOTAL CAPITAL COST LOST ECONOMIES
============================================================================
EQUITY DEBT TOTAL COST
======================================= ========== ========== ===========
<S> <C> <C> <C>
Resulting From Increase in Capital Cost $1,412,794 $2,610,129 $ 4,022,922
======================================= ========== ========== ===========
Resulting From New Capital Expenditure $ 988,382 $ 484,230 $ 1,472,613
======================================= ========== ========== ===========
Total $2,401,176 $3,094,359 $ 5,495,535
======================================= ========== ========== ===========
</TABLE>
5. In addition, Energy East's remaining electric business would incur
$509,082 in increased capital costs as a result of the spin-off.
E. TRANSITION COST INCREASES
The divestiture of Energy East's natural gas business into a stand-alone
NewGasCo would be a complex legal and financial undertaking that would involve
substantial transition costs. These costs would include legal and financial
advisory fees, investment banking fees, and the services of independent
accountants, actuaries and other consultants. Transition costs were determined
based on the fee schedules for the professional services identified above, costs
incurred in other divestitures and input from Energy East financial managers.
Total transition costs are estimated at $264,415 per year illustrated in the
Table V-10.
30
<PAGE>
<TABLE>
<CAPTION>
TABLE V-10
TRANSITION COSTS
==============================================
TOTAL COSTS ANNUALIZED
=================== ============ ===========
<S> <C> <C>
Legal Fees $ 750,000 $ 30,000
- ------------------- ------------ -----------
Debt Issuance $ 2,199,582 $ 87,983
- ------------------- ------------ -----------
Stock Issuance $ 3,370,788 $ 134,832
- ------------------- ------------ -----------
Benefits Consulting $ 40,000 $ 1,600
------------ -----------
Consulting Support $ 250,000 $ 10,000
Total $ 6,610,370 $ 264,415
=================== ============ ===========
</TABLE>
F. ADDITIONAL LOST ECONOMIES
In addition to the economic losses associated with the NYSEG segment of Energy
East's natural gas business, additional economic losses associated with the
divestiture of Energy East's CNGC, Southern Connecticut and Berkshire Gas
segments would be likely. However, a quantification of the economic losses
associated with the CNGC, Southern Connecticut and Berkshire Gas segments of
Energy East was not performed at this time. Cost savings associated with the
spin-off of these segments from Energy East likely will be realized over years
following integration of CNGC, Southern Connecticut and Berkshire Gas into
Energy East. These potential cost savings translate into lost economies if the
acquisitions of CNGC, Southern Connecticut and Berkshire Gas were not completed.
Experience with various mergers in the electric, gas and telecommunications
industries indicates that merger-related savings typically can be significant.
NewGasCo is likely to realize savings in the following areas:
1. Corporate governance costs, such as the cost associated with Corporate
Secretaries and certain Board of Director related expenses.
2. Certain corporate functions likely will be consolidated following the
acquisitions of CNGC, Southern Connecticut and Berkshire Gas by Energy East.
These include various financial, accounting, treasury and corporate planning
functions.
3. Shareholder services and transfer agency function will not be required
for multiple entities.
31
<PAGE>
4. Cost of capital savings are anticipated to accrue as CNGC, Southern
Connecticut and Berkshire Gas operations receive equity and debt financing
through Energy East.
5. Uncollectibles cost, as indicated in benchmark data, are greater for
stand-alone gas companies than for combined utilities. Energy East will apply
best industry practices to reduce the uncollectible rates for CNGC, Southern
Connecticut and Berkshire Gas.
6. Operational efficiencies and the associated savings are derived from
several factors, including the degree of operational consolidation and the
deployment of improved practices in areas such as construction, manpower
planning, gas supply, and customer service. Energy East plans to manage CNGC,
Southern Connecticut and Berkshire Gas as independent operating units, which
minimizes efficiency gains caused by operating staff consolidation. However,
Energy East will apply best industry practices to these areas of CNGC, Southern
Connecticut and Berkshire Gas to achieve savings in operating costs.
7. Outside services would be rationalized following the integration of CNGC,
Southern Connecticut and Berkshire Gas into Energy East. These savings include
reductions in certain areas of consulting and legal support.
Savings resulting from the integration of CNGC, Southern Connecticut and
Berkshire Gas into Energy East likely will be achieved over the course of
several years. The full extent of savings is dependent on several factors,
including the size and cost structures of the organizations involved, as well as
the anticipated levels of operational integration. Experience gained from
previous merger and acquisition activities in utilities and telecommunications
in the last several years has indicated that annual cost savings can be
substantial.
Energy East has not quantified the savings associated with the acquisition of
CNGC, Southern Connecticut and Berkshire Gas, and hence the economic losses
associated with the spin-off of these segments. Assuming that Energy East would
be required to spin-off its CNGC, Southern Connecticut and Berkshire Gas
segments subsequent to an approved acquisition, the economic losses associated
with that action would be in addition to the considerable economic losses
resulting from the spin-off of the natural gas portion of Energy East's NYSEG
segment.
G. TOTAL LOST ECONOMIES
Summing the quantified portion of increased annual costs, increased capital
costs and amortized transition costs yields total lost economies of about $29.3
million per year. Recovery of the foregoing lost economies in a general rate
proceeding would also require an increase to recover income taxes associated
with the lost economies. This effect would result from additional income tax
requirements associated with the equity-financed portion of additional assets
and the taxes associated with the incremental equity costs associated with the
asset base transferred from Energy East to NewGasCo. Incremental income taxes
would be $1.2 million. The total quantified impact on the revenue requirements
of NewGasCo would be $30.5 million. This quantified portion reflects only the
economic losses associated with a spin-off of Energy East's existing NYSEG
natural gas segment into a stand-alone company together with Energy East's CNGC,
Southern Connecticut, Berkshire Gas and CMP Natural Gas segments.
32
<PAGE>
VI. OTHER CUSTOMER IMPACTS
In addition to the foregoing lost economies relating to NewGasCo and potentially
its customers, customers of NewGasCo will experience other impacts.
A. Under a spin-off scenario, NYSEG customers who received combined electric
and gas services would have to incur additional costs in check writing and
postage. At year-end 1998, NYSEG provided combined electric and gas service to
190,000 customers. These customers would have to mail two payments to two
separate utilities, at a cost of approximately $754,000.
B. CMP Natural Gas is a start-up venture targeting the greater Portland, ME
market. CMP Natural Gas will provide customers with access to natural gas and an
alternative to other energy providers. By itself, NewGasCo may not be able to
finance the CMP Natural Gas start-up, which would remove CMP Natural Gas from
the Maine market.
C. Several non-quantifiable impacts would also result from the spin-off of
Energy East's natural gas business.
1. Although customer choice is important in the emerging energy market, a
segment of customers prefer to deal with one utility instead of two.
2. Customers will have to provide additional access to meters and other
facilities to two utilities instead of one.
33
<PAGE>
VII. EFFECT ON REMAINING ELECTRIC CUSTOMERS
Divesting Energy East's natural gas businesses will also have an effect on
remaining Energy East business and customers. Specifically, many of the costs
that were shared between NYSEG's gas and electric businesses would have to be
assigned to one business or the other. In most cases, because NYSEG's electric
business is significantly larger than its gas business (approximately 817,000
electric customers at year-end 1998, compared with about 243,000 gas customers),
most of the facilities and infrastructure associated with the jointly provided
services would remain with the electric business. Cost previously allocated to
the gas business would be incurred by the electric business resulting in
increased costs. The increased costs are the result of:
A. Increased labor costs resulting from the elimination of shared job
functions in division operations, corporate services, call center and corporate
governance.
B. Increased outside service costs resulting from the elimination of the
allocation of costs associated with services such as benefits planning and
audit.
C. Increased building and facilities costs as sharing of facilities with the
gas business would be eliminated.
D. Increased vehicles and equipment cost resulting from additional vehicle
purchases required for meter readers and field service representative supporting
the electric business.
E. Increased information systems costs as sharing of IS with the gas
business would be eliminated.
F. Increased telecommunications costs, notably with regard to the
elimination of joint usage of radio dispatch.
G. Increased depreciation costs reflecting the transfer of previously common
assets to the electric business.
H. Increased postage costs since the electric business would be required to
mail individual bills to its customers.
The total increased cost to NYSEG's remaining electric customers is shown in
Table V-11.
34
<PAGE>
<TABLE>
<CAPTION>
TABLE V-11
ANNUAL COST INCREASES TO ELECTRIC BUSINESS
==========================================
<S> <C>
Labor Costs $ 5,401,368
-----------
Pension and Benefits $ 2,052,520
-----------
Outside Services $ 1,257,170
-----------
Building and Facilities Costs $ 1,275,021
-----------
Vehicles and Equipment $ 7,613
-----------
Information Systems $ 1,819,001
-----------
Telecommunications $ 136,981
-----------
Depreciation $ 321,954
-----------
Postage $ 167,469
Capital Costs $ 509,082
Board of Directors $ 30,000
Total $12,978,180
============================= ===========
</TABLE>
Energy East's remaining electric business would also experience an increase in
income taxes of $200,112. Including the income tax impact, the total lost
economies for Energy East's remaining electric business would be $13,178,292.
35
<PAGE>
