No. 070-09569
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
AMENDMENT NO. 2 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:
Adam Wenner, Esq. William T. Baker, Jr., Esq.
Vinson & Elkins L.L.P. Thelen Reid & Priest
The Willard Office Building 40 West 57th Street
1455 Pennsylvania Avenue, N.W. New York, New York 10019
Washington, D.C. 20004-1008 Telephone: (212) 603-2106
Telephone: (202) 639-6500
Frank Lee, Esq.
Huber Lawrence & Abell
605 Third Avenue
New York, New York 10158
Telephone: (212) 682-6200
<PAGE>
This Amendment No. 2 to the Form U-1 of Energy East Corporation, CMP Group,
Inc., CTG Resources, Inc. and Berkshire Energy Resources is being filed to amend
Item 6 by adding the exhibits listed below:
Item 6. EXHIBITS AND FINANCIAL STATEMENTS.
The following exhibits are being filed with this Amendment No. 2 or
incorporated by reference:
NO. DESCRIPTION METHOD OF FILING
B-3 Agreement and Plan of Merger between Energy East and Berkshire Energy
(filed on Form SE).
C-3 Definitive Proxy Statement of Berkshire Energy Resources (filed on
January 12, 2000, and incorporated herein by reference).
D-4 MPUC Order in Docket No. 99-411
D-5 Application of CMP Group, Inc. to DPUC in Docket No. 99-11-31.
D-6 DPUC Order in Docket No. 99-11-31.
D-8 DPUC Order in Docket NO. 99-08-09.
D-12 Application of CNGC (CTG Resources' public utility subsidiary) to the
FCC for transfer of radio licenses (filed on Form SE).
G-2a Opinion of Tucker Anthony Clearly Gull (filed as Appendix B-1 to
Berkshire Energy Resources' Definitive Proxy Statement, and incorporated
herein by reference).
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this Amendment No. 2 to Form
U-1 Application/Declaration to be signed on their behalf by the undersigned
thereunto duly authorized.
Energy East Corporation
February 7, 2000 By: /s/ Kenneth M. Jasinski
-----------------------
Kenneth M. Jasinski
Executive Vice President and General Counsel
CMP Group, Inc.
February 7, 2000 By: /s/ Arthur W. Adelberg
-----------------------
Arthur W. Adelberg
Executive Vice President
CTG Resources, Inc.
February 7, 2000 By: /s/ Arthur C. Marquardt
-----------------------
Arthur C. Marquardt
Chairman, President and Chief Executive Officer
Berkshire Energy Resources
February 7, 2000 By: /s/ Scott S. Robinson
-----------------------
Scott S. Robinson
President and Chief Executive Officer
<PAGE>
STATE OF MAINE Docket No. 99-411
PUBLIC UTILITIES COMMISSION January 7, 2000
CMP GROUP, INC. ET AL ORDER
Request for Approval of Reorganization CORRECTION
And of Affiliated Interest Transactions
The Commission's Order in this case issued on January 4, 2000 contains two
typographical errors. On page 20, first full paragraph beginning on line 12, the
sentence should read: "Long before that, within 5 or 10 years, it may be
impossible to develop any reasonable estimate of merger specific efficiencies."
On page 22, under Section E. Conclusion, line 8 should read: "Therefore, in
any proceeding for CMP following the merger, we will require that the rates
charged customers be at least as low, and service quality at least as high, as
could expected of CMP absent the merger."
These changes have been made to the version of the order included on the
Commission's website, www.state.me.us/mpuc/.
---------------------
Dated at Augusta, Maine, this 7th day of January, 2000.
BY ORDER OF THE COMMISSION
_______________________________
Dennis L. Keschl
Administrative Director
<PAGE>
STATE OF CONNECTICUT Docket No.
DEPARTMENT OF PUBLIC UTILITY CONTROL --------------
APPLICATION OF CENTRAL MAINE POWER COMPANY
CONCERNING ACQUISITION BY ENERGY EAST CORPORATION
I. INTRODUCTION
------------
A. STATEMENT OF APPLICATION
--------------------------
1. Central Maine Power Company ("Central Maine") hereby files this
Application Concerning Acquisition by Energy East Corporation requesting the
authorization of the Connecticut Department of Public Utility Control (the
"Department") under Section 16-43 of the General Statutes of Connecticut ("Conn.
Gen. Stat.") for the indirect acquisition of Central Maine by Energy East
Corporation ("Energy East"). In the proposed transaction (the "Merger"), Energy
East would acquire CMP Group, Inc. ("CMP Group"), the Maine-based holding
company parent of Central Maine, pursuant to the terms of an Agreement and Plan
of Merger by and among CMP Group, Inc., Energy East Corporation and EE Merger
Corp. dated as of June 14, 1999 (the "Merger Agreement"), attached to this
Application as Exhibit 1. After the Merger is completed, CMP Group would be a
wholly-owned subsidiary of Energy East and would continue to be the parent
company of Central Maine.
2. Central Maine is a Maine public utility corporation that provides
electric service only in the State of Maine. Although it provides no retail or
wholesale utility service in the State of Connecticut, Central Maine is a
"foreign electric company" under Conn. Gen. Stat. Section 16-246c that is
subject to the Department's supervision as an "electric company" and a "public
service company," each as defined in Section 16-1 Conn. Gen. Stat., by virtue of
its ownership of a 2.5 percent undivided interest as a tenant in common in the
Millstone No. 3 nuclear unit in Waterford, Connecticut.
<PAGE>
3. Energy East, which has executive offices located at One Canterbury
Green in Stamford, Connecticut, is a New York corporation. It is the holding
company parent of New York State Electric & Gas Corporation ("NYSEG"). Energy
East has announced a strategy of growing selectively its energy distribution
business in the Northeast by investing in electric and gas distribution
businesses in that region. As a means of accomplishing this strategic
objective, Energy East has agreed to mergers with CMP Group, Connecticut Energy
Corporation of Bridgeport, Connecticut ("Connecticut Energy"), CTG Resources,
Inc. of Hartford, Connecticut ("CTG Resources"), and Berkshire Energy Resources
of Pittsfield, Massachusetts ("Berkshire Energy").
B. COMMUNICATIONS/CORRESPONDENCE
-----------------------------
4. All communications and correspondence with respect to this
Application should be addressed or directed to the following three persons:
Arthur W. Adelberg
Executive Vice President
CMP Group, Inc.
83 Edison Drive
Augusta, Maine 04336
Telephone: (207) 623-3521 ext. 2354
Facsimile: (207) 623-5908
Anne M. Pare
Treasurer, Corporate Counsel and Secretary
CMP Group, Inc.
83 Edison Drive
Augusta, Maine 04336
Telephone: (207) 623-3521 ext. 2795
Facsimile: (207) 621-4714
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James E. Rice
Brody, Wilkinson and Ober, P.C.
2507 Post Road
Southport, Connecticut 06490-1259
Telephone: (203) 319-7112
Facsimile: (203) 254-1772
II. DESCRIPTION OF THE MERGER PARTIES
-------------------------------------
A. THE EXISTING CMP GROUP ORGANIZATION
---------------------------------------
5. CMP Group is a Maine corporation whose common stock (32,442,552
shares outstanding) is traded on the New York Stock Exchange. It neither owns
nor operates any physical properties. Central Maine is CMP Group's principal
subsidiary. Since September 1, 1998, CMP Group has owned all of the common
stock of Central Maine. Prior to that date, Central Maine's common stock was
publicly held and was traded on the New York Stock Exchange. The holding
company form of organization under which CMP Group now owns all of Central
Maine's common stock and the common stock of other subsidiaries was approved by
the Department by Order dated August 5, 1998 in Docket No. 98-06-28. The
existing CMP Group organization is as shown on Exhibit 2 attached to this
Application. Central Maine's business and the businesses of CMP Group's other
subsidiaries are described below.
Central Maine and Other CMP Group Utility Businesses
-----------------------------------------------------------
6. Central Maine is primarily engaged in the business of purchasing,
transmitting, distributing and selling electric energy for the benefit of retail
customers in southern and central Maine. It is the largest electric utility in
Maine, serving over 533,000 customers in its 11,000 square mile service area,
which contains most of Maine's industrial and commercial centers and about 78
percent of the State's total population. Central Maine had $939 million in
consolidated electric operating revenues in 1998.
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7. The electric properties of Central Maine form a single integrated
system which is connected at 345 kilovolts and 115 kilovolts with the lines of
Public Service Company of New Hampshire at the southerly end and at 115
kilovolts with Bangor Hydro-Electric Company ("Bangor Hydro") at the northerly
end of Central Maine's system. Central Maine's system is also connected with
the systems of The New Brunswick Power Corporation ("New Brunswick Power") and
Bangor Hydro through the 345-kilovolt interconnection constructed by Maine
Electric Power Company, Inc. ("MEPCO"), a Maine transmission utility in which
Central Maine has a 78.3 percent equity interest and the remaining interests are
owned by Bangor Hydro and Maine Public Service Company.
8. Consistent with the requirements of the 1997 Maine electric utility
restructuring law, under which electric utilities must divest their generating
assets and generation-related business activities by March 1, 2000, on April 7,
1999, Central Maine sold to an affiliate of FPL Group, Inc., the winning bidder
in an auction process, all of its hydroelectric, fossil and biomass generating
assets, totaling 1,185 megawatts of capacity. To meet its service obligation to
its customers, Central Maine is purchasing energy from the plants included in
the sale until March 1, 2000, the date that electric consumers in Maine will be
allowed to choose their electricity supplier. Not included in the sale were
Central Maine's entitlements to capacity and energy from 39 purchased-power
agreements with non-utility generators and power marketers, representing
approximately 450 megawatts, contracts for power from the operating nuclear
facilities in which it has interests (Millstone Unit 3 in Waterford, Connecticut
and the plant owned by Vermont Yankee Nuclear Power Corporation ("Vermont
Yankee") located in Vernon, Vermont, representing approximately 47 megawatts),
and a contract with Hydro-Quebec for up to 127 megawatts.
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9. Central Maine is offering its entitlements to capacity and energy
under these contracts for sale in a separate auction process approved by the
Maine Public Utilities Commission ("Maine PUC") by Orders dated July 22 and
September 10, 1999 in Docket No. 99-349.
10. Central Maine has direct or indirect ownership interests in five
nuclear generating facilities in New England. The largest is a 38 percent
common stock interest in Maine Yankee Atomic Power Company, which owns a nuclear
electric-generating plant in Wiscasset, Maine, that has been permanently shut
down since August 6, 1997. In addition, Central Maine owns a 9.5 percent common
stock interest in Yankee Atomic Electric Company, which has permanently shut
down its plant located in Rowe, Massachusetts, a 6 percent common stock interest
in Connecticut Yankee Atomic Power Company, which has permanently shut down its
plant in Haddam, Connecticut, and a 4 percent common stock interest in Vermont
Yankee. As previously noted, Central Maine has a 2.5 percent direct ownership
interest in the Millstone No. 3 nuclear unit pursuant to a joint ownership
agreement.
11. At September 30, 1999, in addition to 31,211,471 shares of common
stock, $5.00 par value outstanding, all of which were held by CMP Group, Central
Maine had the following debt and preferred equity balances:
Debt Medium-Term Notes: $70,000,000 outstanding principal
----
amount, ($60,000,000 of which matures
no later than June 14, 2000)
Other long-term debt: $96,901,000 outstanding principal
amount (includes $45,929,000 to Finance Authority of Maine for 1994 buyout of
non-utility generation contract, $19,500,000 in Seabrook pollution control
facility notes payable to the New Hampshire Industrial Development Authority,
and lease obligations)
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Preferred 6% Preferred, $100 par value (non-callable) 5,713 shares
---------
3.50% series, $100 par value 220,000 shares
4.60% series, $100 par value 30,000 shares
4.75% series, $100 par value 50,000 shares
5.25% series, $100 par value 50,000 shares
7.999% series, $100 par value 279,100 shares
(includes 180,000 shares redeemed 10/1/99)
12. Central Maine has two electric utility subsidiaries: MEPCO and
NORVARCO, both of which are incorporated and located in Maine. Central Maine
owns 78.3 percent of MEPCO's common stock. NORVARCO is wholly-owned by Central
Maine.
13. MEPCO owns and operates a 345-kilovolt transmission interconnection
between Wiscasset, Maine and the Maine-New Brunswick international border at
Orient, Maine, where its line connects with the portion of the interconnection
constructed in New Brunswick by New Brunswick Power. MEPCO transmits power
between New Brunswick Power and various New England utilities pursuant to
MEPCO's Open Access Transmission Tariff, which has been approved by the Federal
Energy Regulatory Commission ("FERC"). MEPCO also owns and operates certain
equipment, including microwave communication facilities, in connection with the
Hydro-Quebec Phase II ("Phase II") project.
14. NORVARCO is one of two general partners with 50 percent interests
in Chester SVC Partnership ("Chester"), a Maine general partnership that owns a
static var compensator facility (the "SVC Facility") located in Chester, Maine,
adjacent to MEPCO's 345-kilovolt transmission line. The SVC Facility provides
necessary transmission system reinforcements that support the Phase II
transmission line expansion constructed for New England Hydro-Transmission
Corporation in New Hampshire and that allow the Phase II facilities and the
MEPCO transmission line to operate at their maximum capabilities simultaneously.
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15. Neither Central Maine nor any of its public utility subsidiaries
provides retail electric service in the State of Connecticut.
16. Central Maine is subject to the regulatory authority of the Maine
PUC as to retail rates, accounting, service standards, service territory, the
issuance of securities maturing more than one year after the date of issuance,
transactions and other arrangements with affiliates, the acquisition, creation
or divestiture of any entity that holds at least a 10 percent direct or indirect
interest in Central Maine or in which Central Maine holds such an interest,
transfers of utility property, and construction and certification of facilities.
Central Maine is also subject to the jurisdiction of the FERC under the Federal
Power Act for some phases of its business, including accounting, rates relating
to wholesale sales and to interstate transmission, financings with maturities
less than one year from the date of issuance, and certain other matters. The
Maine PUC also regulates MEPCO, NORVARCO and Chester in all respects, except as
to rates and short-term (one year or less) financings, which are regulated by
the FERC.
17. In addition, as a "foreign electric company" by virtue of its
Millstone 3 ownership interest, Central Maine is subject to the jurisdiction of
the Department as to certain matters.
18. Central Maine has two subsidiaries that are engaged in non-electric
business activities that support Central Maine's business. These subsidiaries,
which are wholly-owned by Central Maine and are incorporated in Maine, are as
follows:
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a. Central Securities Corporation owns real estate in Central
Maine's service area, including service buildings and district
offices, that it leases to Central Maine.
b. Cumberland Securities Corporation also owns similar facilities
in other locations in Central Maine's service area that it
leases to Central Maine.
CMP Group's Other Subsidiaries
---------------------------------
19. CMP Group's other subsidiaries and affiliates, as shown on Exhibit
2, are as follows:
a. CMP International Consultants (d/b/a CNEX), a wholly-owned
subsidiary of CMP Group incorporated in Maine, provides
management, planning, consulting and research and information
services to foreign and domestic utilities and government
agencies.
b. 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. MaineCom is a Maine
corporation and is a wholly-owned subsidiary of CMP Group. It
is subject to regulation as a telephone utility by the Maine
PUC with respect to making available a fiber optics cable for
public use in Maine.
c. NorthEast Optic Network, Inc. ("NEON"), a Delaware corporation,
develops, constructs, owns and operates a fiber optic
telecommunications system in New England and New York.
MaineCom owns 37.9 percent (at September 30, 1999) of the
common stock of NEON, which is traded on the NASDAQ.
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<PAGE>
d. New England Gas Development Corporation ("New England Gas"), a
Maine corporation that is a wholly-owned subsidiary of CMP
Group, holds a 20.2 percent interest (at October 1, 1999) in
CMP Natural Gas, L.L.C. ("CMP Natural Gas").
e. CMP Natural Gas, which is a Maine limited liability company, is
a joint venture with Energy East Enterprises, Inc., a
wholly-owned subsidiary of Energy East, that was formed to
construct, own and operate a natural gas distribution system to
serve certain areas of Maine that do not have gas service.
CMP Natural Gas began providing service to customers in May
1999.(1) CMP Natural Gas is subject in all respects to
regulation by the Maine PUC as a gas utility.
f. TeleSmart provides collections and other accounts receivable
management services for utility clients. It is a Maine
corporation and a wholly-owned subsidiary of CMP Group.
g. The Union Water-Power Company ("Union Water") provides utility
construction and support services through its On Target
division; energy efficiency performance contracting and energy
use and management services through its Combined Energies
division; and commercial and residential real estate
development services through its UnionLand Services and
MaineHomeCrafters divisions. Union Water, which is a Maine
corporation, is wholly-owned by CMP Group.
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1. If the Merger is completed, CMP Natural Gas will become a wholly-owned
corporate subsidiary of Energy East Enterprises, and New England Gas will cease
to exist.
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<PAGE>
20. Additional information concerning the businesses, properties and
finances of CMP Group and Central Maine, including financial statements, can be
found in the combined Annual Report on Form 10-K of CMP Group and Central Maine
for the fiscal year ended December 31, 1998, attached to this Application as
Exhibit 3; the combined Summary Annual Report to shareholders of CMP Group and
Central Maine for 1998, attached hereto as Exhibit 4; the combined Quarterly
Report on Form 10-Q of CMP Group and Central Maine for the quarter ended June
30, 1999, attached hereto as Exhibit 5; and the combined Quarterly Report on
Form 10-Q of CMP Group and Central Maine for the quarter ended September 30,
1999, attached hereto as Exhibit 6.
B. ENERGY EAST
------------
21. Energy East, which has executive offices at One Canterbury Green,
P.O. Box 1196, Stamford, Connecticut 06904, is the holding company parent of
NYSEG and of other, non-utility subsidiaries. Through its subsidiaries, Energy
East is an energy delivery, products and services company with operations in New
York, Massachusetts, Maine, New Hampshire, Vermont and New Jersey.
22. NYSEG, Energy East's principal subsidiary, is a public utility
company engaged in purchasing, transmitting and distributing electricity, and
purchasing, transporting and distributing natural gas. NYSEG also generates
electricity from its 18 percent share of a nuclear station (Nine Mile Point 2,
located in the State of New York), which it has agreed to sell, and its
hydroelectric stations (with an aggregate capacity of 62 megawatts), and has
non-utility generation contracts. Through an affiliate, NYSEG completed the
sale of its coal-fired generating assets in May 1999 for after-tax proceeds of
$1.3 billion. Its 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 and has an area of approximately 19,900 square miles. NYSEG
serves approximately 826,000 electric customers and 244,000 natural gas
customers.
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23. Energy East's non-utility subsidiaries include XENERGY Enterprises,
Inc., which invests in providers of energy and telecommunications services, and
Energy East Enterprises, Inc., which owns natural gas and propane air
distribution companies outside of the State of New York, including a 79.8
percent interest (at October 1, 1999) in CMP Natural Gas. The merger agreement
between Energy East and Connecticut Energy provides that the corporate
headquarters of these two Energy East subsidiaries will be located in
Connecticut after the Energy East-Connecticut Energy merger is completed.
24. On April 23, 1999, Energy East agreed to a merger with Connecticut
Energy, in which Connecticut Energy would become a wholly-owned subsidiary of
Energy East. Connecticut Energy is a public utility holding company that owns
The Southern Connecticut Gas Company, a local gas distribution company serving
approximately 160,000 customers in Connecticut. On July 22, 1999, Energy East
and Connecticut Energy filed a Joint Application for Approval of a Change of
Control with the Department in Docket No. 99-07-20.
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<PAGE>
25. On June 29, 1999, Energy East agreed to a merger with CTG
Resources, in which CTG Resources would become a wholly-owned subsidiary of
Energy East. One of CTG Resources' subsidiaries is Connecticut Natural Gas
Corporation, which sells and distributes natural gas to approximately 142,000
customers principally in greater Hartford and Greenwich, Connecticut. On August
11, 1999, Energy East and CTG Resources filed a Joint Application for Approval
of a Change of Control with the Department in Docket
No. 99-08-09.
26. On November 10, 1999, Energy East announced the proposed
acquisition of Berkshire Energy, in which Berkshire Energy would become a
wholly-owned subsidiary of Energy East. Berkshire Energy's principal
subsidiaries, Berkshire Gas Company, Berkshire Propane, Inc., and Berkshire
Service Solutions, serve approximately 40,000 customers in western
Massachusetts, southern Vermont and eastern New York. As is the case with the
other proposed Energy East mergers, the acquisition of Berkshire Energy is
conditioned upon regulatory and shareholder approvals.
27. The proposed organizational structure of Energy East after the
Merger and the acquisitions of Connecticut Energy and CTG Resources is shown on
Exhibit 7 to this Application. Additional information about the businesses,
properties and finances of Energy East, including financial statements, can be
found in its Annual Report on Form 10-K for the fiscal year ended December 31,
1998, attached to this Application as Exhibit 8; its Quarterly Report on Form
10-Q for the quarter ended June 30, 1999, attached hereto as Exhibit 9; and its
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, attached
hereto as Exhibit 10.
C. EE MERGER CORP.
-----------------
28. EE Merger Corp., whose address is c/o Energy East Corporation, One
Canterbury Green, P.O. Box 1196, Stamford, Connecticut 06904, is a Maine
corporation formed by Energy East solely for the purpose of completing the
Merger with CMP Group. In the Merger, EE Merger Corp. will merge with and into
CMP Group, with CMP Group being the surviving corporation and EE Merger Corp.
ceasing to exist.
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III. DESCRIPTION OF AND REASONS FOR THE MERGER
-----------------------------------------------
A. GENERAL DESCRIPTION OF THE MERGER
-------------------------------------
29. The Merger Agreement provides that EE Merger Corp. will merge with
and into CMP Group. CMP Group will be the surviving company and will continue
to conduct its businesses as a direct, wholly-owned subsidiary of Energy East.
In the Merger, each outstanding share of CMP Group common stock (other than
shares held by shareholders who have properly asserted dissenters' rights under
Maine law) will be converted into the right to receive $29.50 in cash, without
interest. The total value of the consideration that shareholders will receive
in the Merger, based on 32,442,552 shares outstanding, is $957 million in cash.
Energy East anticipates funding the Merger consideration with a combination of
the proceeds from the sale of generation assets, internally generated funds and
the issuance of long-term debt.
30. The completion of the Merger is subject to a number of conditions
contained in the Merger Agreement, including obtaining required regulatory
approvals and the approval of CMP Group's shareholders. On October 7, 1999, CMP
Group's shareholders approved the Merger at a special meeting of shareholders
held for that purpose. A copy of the Proxy Statement that was sent to
shareholders for the special meeting is attached to this Application as Exhibit
11. In addition, a copy of the Joint Proxy Statement for the 1999 Joint Annual
Meetings of the Shareholders of CMP Group and Central Maine is attached hereto
as Exhibit 12.
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31. Central Maine has filed applications for approval of the Merger
and/or certain transactions related to the Merger as follows:
a. the Maine PUC on July 1, 1999, which is attached to this
Application as Exhibit 13; and
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b. the Nuclear Regulatory Commission ("NRC") on October 6, 1999,
which is attached to this Application as Exhibit 14 (for
consent to the indirect transfer of Central Maine's NRC
non-operating license with respect to its 2.5 percent Millstone
3 interest); and
c. the Federal Communications Commission in October 1999 (for
approval of the indirect transfer of radio and microwave
licenses relating to communications facilities. At the same
time, MEPCO also filed an application with the Federal
Communications Commission for approval of the indirect transfer
of microwave licenses relating to communications facilities).
32. CMP Group and Energy East filed a joint application for approval of
the Merger and/or certain Merger-related transactions with the FERC on October
1, 1999. In addition, Energy East must obtain the approval of the Securities
and Exchange Commission ("SEC") under the Public Utility Holding Company Act of
1935, as amended, for which an application was filed on October 29, 1999. In
November 1999, CMP Group and Energy East filed required notifications of the
Merger with the Antitrust Division of the United States Department of Justice
and with the Federal Trade Commission.
33. The Merger will occur as soon as possible after CMP Group and
Energy East satisfy all of the conditions in the Merger Agreement. At this
time, CMP Group and Energy East anticipate that the Merger would be completed in
the middle of the year 2000.
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B. REASONS FOR THE MERGER
-------------------------
34. Over the past several years, the electric utility industry has been
affected by regulatory and market changes resulting from adoption of the Energy
Policy Act of 1992, decisions of the FERC including Orders 888 and 889 issued in
April 1996 mandating open access to transmission services, and in Maine in
particular, enactment of the new electric utility restructuring law, which will
limit Central Maine primarily to the transmission and distribution of
electricity beginning on March 1, 2000. In addition, expanding energy options
for consumers, due in part to the deregulation of the natural gas industry, have
also created competitive challenges for electric utilities. The novel
challenges and related opportunities presented by the new environment have
caused CMP Group to conduct an ongoing, comprehensive assessment of its business
strategies, its direction and focus, and its structure for continuing to provide
regulated utility service in the most efficient and competitive fashion for
Maine customers and for taking advantage of new business opportunities.
35. The CMP Group Board of Directors and management believe that the
Merger will benefit the combined company and its customers and employees in a
manner that CMP Group could not achieve on its own. As a result of the Merger,
CMP Group and Energy East will advance the companies' strategic approach of
increased size that is necessary for success in the new competitive energy
marketplace, as their combined resources will permit them to grow selectively
their energy distribution businesses in the northeastern United States. In
addition, the CMP Group Board believes that the Merger is in the best interests
of CMP Group's shareholders because it offers a significant premium over the
historical trading price of CMP Group's common stock.
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36. As competition increases in both the electric and natural gas
distribution industries, scale will be one factor that will contribute to
overall business success. CMP Group believes that the combined company's larger
size can be expected to produce economies of scale in utility operations and
support services that were diminished for CMP Group when Central Maine sold its
generating assets. Further, benefits will include CMP Group and Central Maine
having access to management skills and experience of other entities in the
Energy East family of companies in order to meet the challenges of the
deregulated energy marketplace. Likewise, those entities will have the benefit
of the combined companies' collective management experience and their best
practices. In addition, by creating an enterprise with a larger market
capitalization than CMP Group's market capitalization, 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. In this
respect, the Merger will help ensure that Central Maine is part of a financially
sound enterprise and able to continue offering reliable service. For additional
information concerning economies of scale and related matters, please see the
Direct Testimony of Kenneth Gordon, attached to the application of CMP Group and
Central Maine to the Maine PUC in Docket No. 99-411 filed as Exhibit 13 to this
Application.
37. In addition to its commitment to economic growth and consumer
choice demonstrated by its investment in natural gas and electric distribution
businesses in the Northeast and its participation in state regulatory processes
to acquire the necessary approvals to go forward, Energy East brings other
important attributes to the Merger. These attributes include a management team
that works smoothly with CMP Group management; a record of good regulatory
relations in New York; experience in implementing retail access, which has been
in effect in New York since August 1, 1999; a commitment to customer service and
efficiency; and a willingness to maintain continuity of existing CMP Group and
Central Maine management.
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38. Additional factors considered by the CMP Group Board in reaching
its decision to approve the Merger Agreement at its meeting on June 14, 1999 are
discussed in the Proxy Statement for the October 7, 1999 special meeting of
shareholders (Exhibit 11 at pages 19-20). The certified resolutions of the CMP
Group Board of Directors approving the Merger Agreement and authorizing the
transactions contemplated therein are attached to this Application as Exhibit
15.
IV. REASONS FOR APPROVAL OF THE MERGER
---------------------------------------
39. As of the effective date of the Merger, CMP Group will be a
wholly-owned subsidiary of Energy East and will continue as the non-operating
holding company parent of Central Maine, with all of Central Maine's common
stock outstanding being held by CMP Group. Following the Merger, Central Maine's
core utility business will continue to be the principal business focus of the
CMP Group holding company system and of efforts to operate a financially sound
and growing business whose objective will be to provide service effectively and
efficiently. Maintenance and improvement in the quality of Central Maine's
service will continue to be top priorities. Central Maine will not provide
electric service in Connecticut after the completion of the Merger, but, in
connection with its 2.5 percent ownership interest in Millstone 3, will continue
to be a "foreign electric company" subject to the ongoing jurisdiction of the
Department. The merger will not have any effect on Central Maine's Millstone 3
interest.
-18-
<PAGE>
40. After the Merger becomes effective, all transmission and
distribution plant owned or used by Central Maine in its electric utility
business will remain assets of Central Maine. Central Maine will continue to
finance its business operations by issuing its own debt and preferred equity
securities (subject to obtaining necessary regulatory approvals). The proceeds
of securities issuances by Central Maine will be used exclusively for Central
Maine's electric utility business.
41. After the Merger, Central Maine will continue to hold its existing
interests in all of its electric utility affiliates, including MEPCO, NORVARCO
and Chester, and its nuclear interests. Central Maine and its electric utility
affiliates will continue to be regulated by the Maine PUC and the FERC in all
respects. As operating utilities, they will be subject to regulation with
respect to rates, securities issuances, transactions with affiliates,
accounting, customer service, asset transfers and other matters, as described in
Paragraph 16 above. In connection with its Millstone 3 interest, Central Maine
will also continue to be a "foreign electric company" subject to the ongoing
jurisdiction of the Department. The Merger will not in any way impair the
ability of any regulator to protect the public interest in connection with the
utility operations of Central Maine or its utility affiliates. Central Maine
will also continue to hold all of the stock of Central Securities Corporation
and Cumberland Securities Corporation after the Merger.
-19-
<PAGE>
42. Obligations of Central Maine relating to its electric utility
business will be retained by Central Maine, unaffected by the Merger. These
obligations include Central Maine's share of decommissioning costs relating to
its nuclear interests. Because the Maine restructuring law mandates the
recovery of nuclear plant decommissioning costs established by federal law, rule
or order through transmission and distribution utility rates and charges, the
proposed Merger will not affect the ability of Central Maine to provide the
funds necessary to pay for its pro-rata share of costs for the decontamination
and decommissioning of Millstone Unit 3. Section 3209 of the 1997 Maine
electric utility restructuring law requires the Maine PUC to include
"decommissioning expenses associated with a nuclear unit" in Central Maine's
rates "[a]s required by federal law, rule or order." Central Maine includes in
its transmission and distribution ("T & D") revenue requirement the
decommissioning trust fund payments for Millstone Unit 3. The Maine PUC, in a
March 19, 1999 Order in Docket No. 97-580, agreed that the Maine Legislature
explicitly authorized decommissioning charges to be passed on to customers in
Central Maine's service territory through transmission and distribution rates.
The Maine PUC held:
Prudent and reasonable decommissioning costs are legitimate costs
of operating (or having operated) a nuclear power plant. As such,
the prudent and reasonable expenses should be recovered from T&D
ratepayers as stranded costs. The bulk of the decommissioning
expenses are for plants that are regulated by FERC, and
consequently FERC will decide the prudence and reasonableness of
those decommissioning expenses.
Order at 101 (Docket No. 97-580, March 19, 1999).
- -------------------------
3. 35-A Maine Revised Statutes Annotated Section 3209.
4. Relative to FERC review, Central Maine, as an owner of equity interests in
"Yankee" corporations that own the Vermont Yankee, Yankee Rowe, Haddam Neck and
Maine Yankee nuclear power plants, is obligated for its pro-rata share of
Decommissioning funding for these plants under existing purchased power
agreements. For retail ratemaking, the Maine PUC has traditionally relied on
the Department's decommissioning reviews to set decommissioning funding
requirements for Millstone Unit 3 rather than conducting its own review.
-20-
<PAGE>
43. The proposed Merger will have no adverse impact on the ownership or
operation of Millstone Unit 3. Central Maine's ownership of its existing 2.5
percent undivided interest in Millstone Unit 3 will not be changed by the
Merger, there will be no change in the manner in which Central Maine obtains
funds to support its obligations with respect to Millstone Unit 3, and there
will be no change in the management, operational, technical or financial
qualifications of the other Millstone Unit 3 owners and licensees, including the
operating licensee, resulting from the Merger.
44. The Merger has been structured to protect the interests of
consumers and other local interests. Planned continuity of current management
will help to assure that the management of Central Maine remains responsive to
local regulation in both Maine and Connecticut and other local interests. In
this regard, Sara J. Burns, Central Maine's current President, will remain the
President of Central Maine upon completion of the Merger. After the Merger, the
size of the Central Maine Board of Directors will be reduced from thirteen to
approximately five members, including the President of Central Maine and
officers of CMP Group and Energy East. The Merger Agreement calls for an
advisory board consisting of the current directors of Central Maine. This
advisory board would advise Central Maine's directors and management on various
matters, including community relations, customer service, economic development,
employee development and relations, and other matters as requested by the
Central Maine Board.
45. After the Merger, David T. Flanagan, CMP Group's current President
and Chief Executive Officer, will serve as Chairman, President and Chief
Executive Officer of CMP Group and as President of Energy East. In addition,
Mr. Flanagan and two members of the current CMP Group Board of Directors will be
elected as members of the Board of Directors of Energy East. CMP Group's
current Executive Vice President,
Arthur W. Adelberg, will also become a Senior Vice President and the Chief
Financial Officer of Energy East.
-21-
<PAGE>
V. CONCLUSION
----------
46. Central Maine does not provide retail or wholesale service in
Connecticut and will not provide any such service after the Merger is completed.
After the Merger, Central Maine will continue to be regulated in all respects by
the Maine PUC and the FERC. In addition, in connection with its Millstone 3
interest, Central Maine will continue to be a "foreign electric company" subject
to the ongoing jurisdiction of the Department. Other regulators, including the
Maine PUC, which is expected to conclude its proceeding and render a decision in
December 1999, the SEC and the FERC, are in the process of comprehensively
reviewing the Merger. The Merger will not have any adverse effect on Central
Maine's interest in Millstone Unit 3 and on Central Maine's ability to pay its
share of Millstone 3 expenses, including decommissioning costs, and, in any
event, the NRC will review those matters. For these reasons, Central Maine
respectfully requests that the Department review Central Maine's Application on
a limited and expedited basis and grant its approval of this Application.
Respectfully submitted,
------------------------
Arthur W. Adelberg
Executive Vice President
CMP Group, Inc.
83 Edison Drive
Augusta, Maine 04336
Telephone: (207) 623-3521 ext. 2354
Fax: (207) 623-5908
-22-
<PAGE>
------------------------
Anne M. Pare
Treasurer, Corporate Counsel and Secretary
CMP Group, Inc.
83 Edison Drive
Augusta, Maine 04336
Telephone: (207) 623-3521 ext. 2795
Fax: (207) 621-4714
------------------------
James E. Rice
Brody, Wilkinson and Ober, P.C.
2507 Post Road
Southport, Connecticut 06490-1259
Telephone: (203) 319-7112
Fax: (203) 254-1772
DATED: November 30, 1999
-23-
<PAGE>
STATE OF CONNECTICUT
DEPARTMENT OF PUBLIC UTILITY CONTROL
TEN FRANKLIN SQUARE
NEW BRITAIN, CT 06051
DOCKET NO. 99-11-3199-11-31 APPLICATION OF CENTRAL MAINE POWER COMPANY
CONCERNING ACQUISITION BY ENERGY EAST
CORPORATION APPLICATION OF CENTRAL MAINE POWER
COMPANY CONCERNING ACQUISITION BY ENERGY EAST
CORPORATION
January 12, 2000
By the following Commissioners:
Jack R. Goldberg
John W. Betkoski, III
Glenn Arthur
DECISION
--------
<PAGE>
DECISION
--------
I. INTRODUCTION
A. APPLICANT'S PROPOSAL
By application dated November 30, 1999 (Application), Central Maine Power
Company (Central Maine or Company) requests that the Department of Public
Utility Control (Department) approve the indirect acquisition of Central Maine
by Energy East Corporation (Energy East), pursuant to S16-43 of the General
Statutes of Connecticut (Conn. Gen. Stat.). By virtue of its 2.5% ownership
interest in Millstone Unit No. 3, Central Maine is an electric company and
public service company for all purposes of Title 16 of Conn. Gen. Stat.,
pursuant to Conn. Gen. Stat. S246c(c).
B. CONDUCT OF THE PROCEEDING
There is no statutory requirement for a hearing and none was held.
C. PARTIES AND INTERVENORS
Central Maine Power Company, 83 Edison Drive, Augusta, Maine 04336; and the
Office of Consumer Counsel, Ten Franklin Square, New Britain, Connecticut 06051,
were recognized as Parties to this proceeding.
II. APPLICANT'S EVIDENCE
Central Maine is requesting the Department's approval for the indirect
acquisition of Central Maine by Energy East pursuant to Conn. Gen. Stat. S16-43
(Merger). Application, p. 1. In the Merger, Energy East would acquire CMP
Group, Inc. (CMP), the Maine-based holding company parent of Central Maine.
After the Merger is completed, CMP would be the wholly-owned subsidiary of
Energy East and would continue to be the parent company of Central Maine. Id.
--
It is expected that the Merger would be completed in the middle of the year
2000. Application, p. 15.
Central Maine is a Maine public utility corporation that provides electric
service only in the state of Maine. Application, p. 1. It is primarily engaged
in the business of purchasing, transmitting, distributing and selling electric
energy serving more than 533,000 customers in southern and central Maine.
Application, p. 3. The Company presently owns a 2.5% undivided interest as a
tenant-in-common in Millstone Unit No. 3, a nuclear generating unit in the town
of Waterford, Connecticut. Application, p. 1. Pursuant to the provisions of
Conn. Gen. Stat. S16-246c(c), Central Maine constitutes a public service company
within the meaning of Conn. Gen. Stat. S16-1 by virtue of its ownership of an
interest in a utility facility in the state of Connecticut.
Energy East is a public holding company organized under the laws of the
State of New York. Application, pp. 2 and 10. It is the holding company parent
of New York State Electric & Gas Corporation and of other non-utility
subsidiaries. Through its subsidiaries, Energy East is an energy delivery,
products and services company with operations in New York, Massachusetts, Maine,
New Hampshire, Vermont and New Jersey and offices in New York and Connecticut.
Id.
- --
<PAGE>
Docket No. 99-11-31 Page 2
CMP is a public holding company headquartered in Augusta, Maine.
Application, p. 3. CMP owns all of the common stock of Central Maine and the
former non-utility subsidiaries of Central Maine. CMP neither owns nor operates
any physical properties. Central Maine is CMP's principal subsidiary. Id.
--
Obligations of Central Maine relating to its electric utility business will
be retained by Central Maine, unaffected by the Merger. Application, p. 19.
These obligations include Central Maine's share of decommissioning relating to
its nuclear interests. Because the Maine restructuring law mandates the
recovery of nuclear plant decommissioning costs established by federal law, rule
or order through transmission and distribution utility rates and charges, the
proposed Merger will not affect the ability of Central Maine to provide the
funds necessary to pay for its pro-rata share of costs for the decontamination
and decommissioning of Millstone Unit No. 3. Id.
--
Neither Central Maine nor any of its public utility subsidiaries provides
retail electric service in Connecticut. Application, p. 7. Central Maine is
subject to the regulatory authority of the Maine Public Utilities Commission
(Maine PUC) and to the jurisdiction of the Federal Energy Regulatory Commission
(FERC), and the Securities and Exchange Commission (SEC). Id. The Maine PUC
--
is expected to conclude its proceeding and render a decision by the end of
December 1999. Application, p. 21.
Enclosed with the Application is a copy of the Petition for Approval of
Reorganization and Affiliated Interest Transactions filed with the Maine PUC
dated July 1, 1999. In addition, copies of the annual reports and SEC filings
for each company involved in the proposed merger transaction were included in
this filing.
III. DEPARTMENT ANALYSIS
Central Maine is a foreign electric company as defined by Conn. Gen. Stat.
S16-246c. Central Maine constitutes an electric company and public service
company within the meaning of Conn. Gen. Stat. S16-1 by virtue of its minority
interest in Millstone Unit No. 3, a nuclear generating asset located in
Waterford, Connecticut. Pursuant to Conn. Gen. Stat. S16-43, Department
approval is required for a public service company to "merge, consolidate or make
common stock with any other company." Because this proposed transaction
involves the merger of CMP by Energy East, Department approval is required for
the Merger.
The Department has reviewed the Application and supporting exhibits, and
finds that the Merger will not adversely affect electric service in Connecticut.
Central Maine has no ratepayers in Connecticut and is regulated by the
jurisdiction of Maine, where it is domiciled. In addition, the Merger will not
have any adverse effect on Central Maine's minority interest in Millstone Unit
No. 3 or on Central Maine's ability to pay its share of Millstone Unit No. 3
decommissioning costs. The Merger would have no detrimental effect on
Connecticut ratepayers. Therefore, under Conn. Gen. Stat. S16-43, the
Department approves the request for the indirect acquisition of Central Maine by
Energy East, subject to compliance with all requirements of the SEC, FERC and
Maine PUC, which intends to exercise authority over the proposed merger.
<PAGE>
Docket No. 99-11-31 Page 3
IV. FINDINGS OF FACT
1. Central Maine has a 2.5% undivided interest as a tenant-in-common in
Millstone Unit No. 3, a nuclear generating unit in the town of
Waterford, Connecticut.
2. Central Maine constitutes an electric company and public service company
pursuant to Conn. Gen. Stat. S16-43.
3. Central Maine is a Maine public utility corporation that provides
electric service only in the state of Maine.
4. CMP is the Maine-based holding company parent of Central Maine.
5. Central Maine has no ratepayers in Connecticut.
V. CONCLUSION AND ORDER
A. CONCLUSION
Pursuant to Conn. Gen. Stat. S16-43, the Department approves Central
Maine's request for the indirect acquisition of Central Maine by Energy East.
The Merger would have no adverse impact on electric service or ratepayers in
Connecticut. The Department's approval is subject to Central Maine's compliance
with all the requirements of FERC, SEC and the Maine PUC, which intends to
exercise authority over the proposed transaction.
B. ORDER
1. Central Maine shall file with the Department any decisions issued by the
Maine PUC that are subject of the instant docket within 30 days after
each decision becomes available.
<PAGE>
DOCKET NO. 99-11-31 APPLICATION OF CENTRAL MAINE POWER COMPANY CONCERNING
ACQUISITION BY ENERGY EAST CORPORATION
This Decision is adopted by the following Commissioners:
Jack R. Goldberg
John W. Betkoski, III
Glenn Arthur
CERTIFICATE OF SERVICE
----------------------
The foregoing is a true and correct copy of the Decision issued by the
Department of Public Utility Control, State of Connecticut, and was forwarded by
Certified Mail to all parties of record in this proceeding on the date
indicated.
/s/ Louise E. Rickard January 14, 2000
--------------------- ------------------
Louise E. Rickard Date
Acting Executive Secretary
Department of Public Utility Control
<PAGE>
STATE OF CONNECTICUT
DEPARTMENT OF PUBLIC UTILITY CONTROL
TEN FRANKLIN SQUARE
NEW BRITAIN, CT 06051
DOCKET NO. 99-08-0999-08-09 JOINT APPLICATION OF ENERGY EAST CORPORATION AND
CTG RESOURCES, INC. FOR APPROVAL OF A CHANGE OF
CONTROL JOINT APPLICATION OF ENERGY EAST
CORPORATION AND CTG RESOURCES, INC. FOR APPROVAL
OF A CHANGE OF CONTROL
January 19, 2000
By the following Commissioners:
Glenn Arthur
Jack R. Goldberg
Linda Kelly Arnold
DECISION
--------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Summary. . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. Background of the Proceeding . . . . . . . . . . . . . . . 1
C. Conduct of the Proceeding. . . . . . . . . . . . . . . . . 1
D. Parties and Intervenors. . . . . . . . . . . . . . . . . . 2
E. Public Comment . . . . . . . . . . . . . . . . . . . . . . 2
II. APPLICANTS' EVIDENCE. . . . . . . . . . . . . . . . . . . . . 2
A. Description of Energy East Corporation . . . . . . . . . . 2
B. Description of CTG Resources, Inc. and Its Subsidiaries. . 3
1. Connecticut Natural Gas Corporation . . . . . . . . . . 3
2. The Energy Network, Inc.. . . . . . . . . . . . . . . . 3
C. Description of the Transaction . . . . . . . . . . . . . . 4
1. Merger Transaction. . . . . . . . . . . . . . . . . . . 4
2. Valuation Methodology and Value . . . . . . . . . . . . 5
D. Financial, Technological and Managerial Criteria . . . . . 7
1. Pro Forma Financials. . . . . . . . . . . . . . . . . . 7
2. Dividend Payments . . . . . . . . . . . . . . . . . . . 9
III. DEPARTMENT ANALYSIS . . . . . . . . . . . . . . . . . . . . . 9
A. Financial Suitability of Energy East . . . . . . . . . . . 10
B. Technological and Managerial Suitability of Energy East. . 11
C. Safe, Adequate and Reliable Service. . . . . . . . . . . . 12
D. Transaction Negotiations and Price . . . . . . . . . . . . 14
E. Goodwill and Acquisition Premium . . . . . . . . . . . . . 15
F. Transaction Costs. . . . . . . . . . . . . . . . . . . . . 17
G. Competitive Market Issues. . . . . . . . . . . . . . . . . 18
H. Accounting Issues and Synergies. . . . . . . . . . . . . . 19
I. Rate Plan Alternative. . . . . . . . . . . . . . . . . . . 20
IV. FINDINGS OF FACT. . . . . . . . . . . . . . . . . . . . . . . 20
V. CONCLUSION AND ORDERS . . . . . . . . . . . . . . . . . . . . 22
A. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . 22
B. Orders . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
<PAGE>
DECISION
I. INTRODUCTION
A. SUMMARY
In this Decision, pursuant to S 16-47 of the General Statutes of
Connecticut and Sections 16-1-65A and 16-1-65B of the Regulations of Connecticut
State Agencies, the Department of Public Utility Control approves the joint
application of Energy East Corporation to acquire control of the CTG Resources,
Inc. The Connecticut Natural Gas Corporation is a subsidiary of CTG Resources,
Inc. The Department found that Energy East Corporation has the financial,
technological and managerial suitability and responsibility to control a public
service company. In addition, Energy East Corporation is found to be able to
provide safe, adequate and reliable service to the public through the public
utilities' plant, equipment and manner of operation.
B. BACKGROUND OF THE PROCEEDING
By joint application dated August 11, 1999 (Application), filed with the
Department of Public Utility Control (Department) pursuant to S16-47 of the
General Statutes of Connecticut (Conn Gen. Stat) and SS16-1-65A and 16-1-65B of
the Regulations of Connecticut State Agencies (Conn. Agencies Regs.), Energy
East Corporation (EEC or Energy East) and CTG Resources, Inc. (CTG; jointly,
Applicants) requested that the Department approve the change of control of CTG
to EEC (Merger). According to the Application, the proposed change of control
transaction is structured as a merger of Oak Merger Co. (OMC) and CTG. CTG
would merge into Oak Merger Co. with Oak Merger Co. being the surviving company.
Oak Merger Co. would be renamed CTG Resources, Inc., and would continue to
conduct utility operations as a direct, wholly-owned, first tier subsidiary of
EEC with Connecticut Natural Gas Corporation (CNG) becoming an indirect,
wholly-owned subsidiary of EEC after the merger is completed. The transaction
would not be a merger of public service companies. Application, p. 4.
C. CONDUCT OF THE PROCEEDING
By Notice of Hearing dated August 30, 1999, and pursuant to Conn. Gen. Stat
S16-47, a public hearing was held in this matter on September 10, 1999, at the
Department's offices, Ten Franklin Square, New Britain, Connecticut. The
hearing continued at the same location on October 21, 22, and November 16, 1999,
at which time it was closed.
The Department issued a draft Decision in this matter on January 5, 2000.
All parties were provided an opportunity to file written exceptions to and
present oral arguments on the draft Decision.
<PAGE>
Docket No. 99-08-09 Page 2
D. PARTIES AND INTERVENORS
The Department recognized Energy East Corporation, P.O. Box 1196, Stamford,
Connecticut 06904-1196; CTG Resources, Inc. and Connecticut Natural Gas
Corporation, P.O. Box 1500, Hartford, Connecticut 06144-1500; and the Office of
Consumer Counsel, Ten Franklin Square, New Britain, Connecticut 06051, as
parties to the proceeding. The Connecticut Independent Utility Workers Local
12924 requested and was granted intervenor status.
E. PUBLIC COMMENT
There were no written or oral comments from the public regarding this
merger.
II. APPLICANTS' EVIDENCE
A. DESCRIPTION OF ENERGY EAST CORPORATION
Energy East, a New York corporation, is an exempt public utility holding
company under the Public Utilities Holding Act of 1935 (PUHCA). Energy East was
formed in 1997 as part of a comprehensive regulatory restructuring plan for New
York State Electric and Gas (NYSEG) and became the parent of NYSEG on May 1,
1998. Energy East is an energy delivery, products and services holding company
with subsidiary operations in New York, Massachusetts, Maine, New Hampshire,
Vermont and New Jersey, and has corporate offices in New York and, since June
1999, in Stamford, Connecticut. Energy East's nonutility subsidiaries include
Xenergy Enterprises, Inc. and Energy East Enterprises, Inc., which invest in
energy ventures and are providers of energy and telecommunications services. As
a holding company, Energy East neither owns nor operates any physical
properties. Application, pp. 8-10.
Energy East's principal subsidiary, NYSEG, is a public utility company
engaged primarily in purchasing, transmitting/transporting and distributing
electricity and natural gas. As part of its corporate strategy of exiting the
base load power generation business, it recently completed a divestiture of all
of its coal-fired electric generation facilities. Additionally, NYSEG recently
agreed to sell its 18% non-operating interest in the Nine Mile Point 2 nuclear
plant located in Oswego, New York. This transaction is expected to close early
in 2000. NYSEG's service territory, 99% of which is located outside the
corporate limits of cities, is in the central, eastern and western parts of the
state of New York. NYSEG serves approximately 817,000 electric and 243,000
natural gas customers. During 1996 through 1998, approximately 84% of NYSEG's
operating revenues were derived from electric service with the balance derived
from natural gas service. Application, p. 9.
Energy East also announced a merger with CMP Group, Inc., the Maine-based
parent company of Central Maine Power Company (Central Maine). Upon final
approval of that merger, Energy East would gain control of Central Maine, which
serves 530,000 electric customers in central and southern Maine. The
transaction values CMP Group common equity at approximately $957 million and
includes the assumption of $271 million in preferred stock and long-term debt.
Application, pp. 10-11.
<PAGE>
Docket No. 99-08-09 Page 3
In the Decision dated December 16, 1999, in Docket No. 99-07-20, Joint
-----
Application of Energy East Corporation and Connecticut Energy Corporation for
----------------------------------------------------------------------------
Approval of Change of Control, the Department approved Energy East's merger with
---------------------------
Connecticut Energy Corporation (CEC). In that merger, Energy East gained
control of The Southern Connecticut Gas Company (SCG), which serves
approximately 158,000 customers in 22 municipalities in Connecticut. The
transaction values CEC common equity at approximately $436 million and includes
the assumption of $150 million in long-term debt. The Applicants stated that
the merger with CEC would have no adverse effect on Energy East's merger with
CTG. EEC's consolidated 1998 adjusted revenues were $2,499,418,000, with a net
income of $194,205,000. Application, p. 10.
B. DESCRIPTION OF CTG RESOURCES, INC. AND ITS SUBSIDIARIES
CTG, a Connecticut corporation, is an exempt public utility holding company
from the registration requirement of PUHCA, and as such, neither owns nor
operates any significant physical properties. CTG has two direct, wholly-owned
subsidiaries, CNG and The Energy Network (TEN), whose operations are described
below. CTG is engaged, through its subsidiaries, in retail marketing of natural
gas and steam and chilled water in Connecticut. CTG's operating revenues
totaled approximately $282,748,000 for the fiscal year ended September 30, 1998,
with a consolidated net income for the same period of $15,135,000. Application,
pp. 11-12.
1. CONNECTICUT NATURAL GAS CORPORATION
CNG, a Connecticut public service company wholly-owned by CTG, is primarily
engaged in the retail distribution of natural gas for residential, commercial,
and industrial uses and the transportation of natural gas for commercial and
industrial uses. CNG's predecessor, The Hartford City Gas Light Company
(renamed The Hartford Gas Company in 1927), was originally incorporated in
Connecticut in 1848. CNG was formed in 1968 as a result of the merger of The
New Britain Gas Light Company with The Hartford Gas Company. In 1974, The
Greenwich Gas Company was merged into CNG. CNG serves approximately 143,000
customers in Connecticut. It has one subsidiary, CNG Realty Corp., which owns
CNG's operating and administrative center in Hartford, which is leased to CNG.
Application, p. 11.
2. THE ENERGY NETWORK, INC.
The unregulated businesses of CTG are conducted through TEN and its
wholly-owned subsidiaries, The Hartford Steam Company (HSC), Ten Transmission
Company (TEN Transmission), ENI Gas Services, Inc. (ENI Gas), and TEN Gas
Services, Inc. (TEN Gas). TEN and HSC provide district heating and cooling
services to many buildings and complexes in Hartford. TEN also offers energy
equipment rentals to residential customers. TEN Transmission holds CTG's 4.87%
share in the Iroquois Pipeline. TEN Gas and ENI Gas formerly owned a natural
gas marketer, but have sold the assets of that company and are winding down
their businesses. Application, pp. 11-12.
<PAGE>
Docket No. 99-08-09 Page 4
C. DESCRIPTION OF THE TRANSACTION
1. MERGER TRANSACTION
On June 29, 1999, the Applicants proposed a Merger Agreement whereby CTG
would merge with EEC. Under the Merger, CTG would merge into OMC with OMC being
the surviving company. OMC would then be renamed CTG Resources, Inc. and would
continue to conduct utility operations, as a direct, wholly-owned subsidiary of
EEC after the merger is completed. Application, p. 4; Exhibit 1, p. 1 and
Exhibit 2, p. 28; Tr. 10/22/99, pp. 326-332. As a result of the Merger, CTG
would become a wholly-owned subsidiary of EEC and CNG would become an indirect,
wholly owned subsidiary of EEC.
On August 26, 1999, CTG mailed a copy of the Proxy Statement/Prospectus to
its shareholders of record as of August 23, 1999. Application, Exhibit 2. The
Proxy Statement publicized the Merger to investors and CTG's shareholders and
contained a Notice of Special Meeting of Shareholders to be Held on October 18,
-------------------------------------------------------------------
1999. The purpose of the Special Meeting was to obtain shareholder approval for
- ----
the Merger. Application, Exhibit 2.
A copy of the Merger Agreement was filed with the Application as Exhibit 1
and was updated in Exhibit 2, the Definitive Proxy Statement. EEC agreed to
acquire all the regulated and unregulated subsidiaries of CTG. Upon completion
of the proposed Merger, EEC would own 100% of CTG common equity and CTG would
cease to be a public company with shareholders. EEC states that at the
effective time of the merger, each outstanding share of CTG common stock would
be converted into the right to receive (1) $41 in cash, or (2) a number of EEC
common stock based upon an established Exchange Ratio, or (3) a combination of
cash and EEC common stock depending on the share price of CTG.(1) The total
transaction would comprise 55% cash and 45% stock. To the extent that cash or
EEC stock elections were over-subscribed, CTG distributions to shareholders
would be pro-rated. Application, pp. 16-17. Overall, the total value of the
transaction to CTG's shareholders would be $354.6 million, which would consist
of approximately $195 million in cash and approximately $160 million in common
equity exchange. Application, Exhibit 2, pp. 1, 28 and 46; Exhibit 3, p. 8;
Response to Interrogatory GA-61. The expected date of completion for the
proposed transaction is mid-year of 2000. Response to Interrogatory GA-67.
- -----------------------------
1. $41 divided by: (1) the EEC share price if the price is equal to or less
than $30.13 or greater than $23.67, (2) $30.13 if EEC's share price is greater
than $30.13, in which the Exchange Ratio equals 1.3609, or (3) $23.67 if EEC is
less than $23.67, in which the Exchange Ratio equal 1.7320. Overall, the
Exchange Ratio may range between 1.3609 and 1.7320 depending on EEC share price
at the completion of the merger transaction. EEC's share price will be
calculated as the average closing price for EEC as reported in the Wall Street
Journal for the 20 days immediately preceding the second trading day prior to
the effective merger date. Application, p. 17; Response to Interrogatory GA-44.
<PAGE>
Docket No. 99-08-09 Page 5
EEC indicated that the Merger would not affect the Department's ability to
regulate the operations of CNG. As part of the negotiated transaction, EEC
would continue to employ CNG's current management, including the President and
Chief Executive Officer, in Hartford. Application, p. 5; Response to
Interrogatory GA-49. EEC would honor union contracts through their current
negotiated date of December of 2001 and indicated that no employee layoffs are
planned. Responses to Interrogatories GA-24 and GA-56; Tr. 10/22/99, pp.
333-342 and 407-408. EEC states that it has experience in work force retraining
through its NYSEG affiliate. Tr. 10/22/99, pp. 339-342. EEC would more than
double the current annual charitable contributions of $180,000 to $500,000,
which ratepayers would not fund. EEC also intends to maintain CTG's Board of
Directors (Board) as an Advisory Board responsible for local community issues.
Application, pp. 5 and 25; Responses to Interrogatories GA-1, GA-3 and GA-10;
Tr. 10/20/99, pp. 170-177.
EEC indicated that it would account for the merger through the Purchase
Method of Accounting (Purchase Method), which creates goodwill on the acquired
company's balance sheet. The goodwill amount is equal to the difference between
the purchase price, representing the fair market value of CTG, and recorded book
value of CTG, representing CTG's historical cost. Application, Exhibit 2, p. 43
and Exhibit 3, p. 7; Response to Interrogatory GA-52. Based upon CTG's June 30,
1999, Securities and Exchange Commission (SEC) Form 10-Q, EEC would acquire CTG
for approximately 2.65 times its book value.(2) Application, Exhibit 3, p. 8 and
Exhibit 7, p. 2. The Company indicated that EEC's negotiated purchase price for
CTG is in line with prices other Local Distribution Companies (LDC) are
obtaining in the market place based upon the analysis performed by PaineWebber,
Inc (PaineWebber). Marquardt PFT, p. 3; Response to Interrogatory GA-62; Tr.
10/22/99, pp. 291-294.
2. VALUATION METHODOLOGY AND VALUE
On or about June 25, 1998, CTG engaged PaineWebber to provide financial
advisory services and to act as financial advisor in connection with a possible
business combination. PaineWebber's services included making presentations to
CTG's Board regarding utility mergers, providing advice to senior management
regarding strategic alternatives such as a possible business combination, as
well as providing a financial opinion as to whether or not this proposed merger
consideration was fair to CTG's shareholders. Application, Exhibit 2, pp. 29,
31 and 36. PaineWebber recommended that from a financial point of view, the
merger is fair to CTG's shareholders. This conclusion was based upon limiting
assumptions and its review of the Company's financial reports, forecasts, and
discussions with CTG's senior management. Application, Exhibit 2, pp. 36 and
B-1; Response to Interrogatory GA-78.
PaineWebber performed several financial analyses, discussed below,
utilizing publicly available data and financial forecasts provided by CTG's
management to render its opinion. These data include: Selected Comparable
Public Company Analysis (Company Comparables), Comparable Mergers and
Acquisitions Analysis, Discounted Cash Flow Analysis, Premiums Paid Analysis and
Pro forma Merger Analysis. Application Exhibit 2, pp. 38-42; Tr. 11/3/99, pp.
440-458.
- -----------------------------
2. Price over Book Value equals purchase price divided by book value of CTG
(i.e., 2.65 = $354.6 million/$134 million.) Application, Exhibit 3, p. 8.
<PAGE>
Docket No. 99-08-09 Page 6
PaineWebber's Company Comparables compared selected historical and
projected financial, operating and stock market performance data of CTG and EEC
to separate peer groups of comparable companies (i.e., a peer group of companies
for CTG and for EEC). The comparable companies were selected based upon
criteria including size, profitability, total revenue, growth and credit rating.
PaineWebber believes that the Company Comparables analysis indicates that most
of the valuation multiples for CTG and EEC implied by the merger are within the
range of multiples PaineWebber calculated for the selected comparable companies.
(3) Application, Exhibit 2, pp. 39 and 40; Responses to Interrogatories to GA-70
(revised) and 71; Tr. 11/3/99, pp. 444-447.
PaineWebber's Selected Comparable Mergers and Acquisition's Analysis
calculated a range of multiples of total enterprise value to various measures of
a target company's value.(4) PaineWebber feels the comparable transaction
analysis indicates that most of the valuation multiples implied by the CTG
merger are within the range of multiples it calculated for the selected
comparable transactions.(5) APPLICATION, EXHIBIT 2, P. 41; RESPONSE TO
INTERROGATORY GA-72; TR. 11/3/99, PP. 442-444.
PAINEWEBBER'S DISCOUNTED CASH FLOW ANALYSIS (DCF) DISCOUNTED THE PRESENT
VALUE OF CTG'S UNLEVERED AFTER-TAX CASH FLOWS PROJECTED OVER A FIVE-YEAR PERIOD
AND ADDED A TERMINAL VALUE. BASED UPON EBITDA AND EBIT MULTIPLES, PAINEWEBBER
BELIEVES THAT THE CTG MERGER IS WITHIN THE RANGE OF ACCEPTABLE MULTIPLES IMPLIED
BY THE COMPARABLES ANALYSIS. APPLICATION, EXHIBIT 2, P. 41; RESPONSES TO
INTERROGATORIES GA-73 AND GA-74; LATE FILED EXHIBIT NO. 9; TR. 11/3/99, PP.
452-453.
PaineWebber's Premiums Paid Analysis shows that CTG's implied stock price
premium was much higher than the average purchase price premium per share for
105 publicly-disclosed merger transactions that were announced prior to CTG's
public announcement. Application, Exhibit 2, p. 41; Response to Interrogatory
GA-75. Lastly, PaineWebber's pro forma merger analysis indicated that the
merger would result in dilution to EEC's Earnings Per Share (EPS) and accrete to
its cash flow from operations. Application, Exhibit 2, p. 42; Responses to
Interrogatories GA-68 and GA-76; Late Filed Exhibit No. 2; Tr. 10/20/99, pp.
157-159; Tr. 10/22/99, pp. 417-419; Tr. 11/16/99, pp. 665-669.
- -----------------------------
3. PaineWebber calculated the following comparable company valuation multiples:
(1) Latest 12 month prior to the announcement of the transaction, earnings
before interest, taxes, depreciation and amortization (LTM EBITDA); (2) LTM
earnings before interest, taxes and depreciation (EBIT); (3) LTM Net Income;
(4) Projected fiscal year 1999 EPS; (5) Projected fiscal year 2000 EPS; (6)
LTM Cash Flow from Operations (CFO); and (7) Book Value of Equity.
Application, Exhibit 2, pp. 38 and 39. PaineWebber's analysis indicates that
CTG's book value of equity multiple is 1.62x and 2.12x dated 5/28/99 and
6/25/99, respectively, while the comparables companies' range is 1.38x to
2.08x. Application, Exhibit 2, p. 39. The analysis also indicates that EEC's
book value of equity multiple is 2.01x dated 6/25/99 while the comparables
companies' range is 1.36x to 2.33x. Application, Exhibit 2, p. 40. This
analysis also indicates that EEC's projected fiscal years 1999 Earnings Per
Share (EPS), is 15.1x while the comparables companies' range is 12.6x to
15.0x. Application, Exhibit 2, p. 40.
4. PaineWebber calculated the following comparable transaction valuation
multiples: (1) LTM EBITDA; (2) LTM EBIT; (3) total customers; (4) LTM Net
Income; (5) LTM Cash Flow from Operations (CFO); and (6) Book Value of
Equity. Application, Exhibit 2, pp. 40 and 41. PaineWebber selected 13
comparable mergers and acquisitions including Northeast Utilities/Yankee
Energy System, Inc., Energy East/Connecticut Energy, Eastern
Enterprises/Colonial Gas Company and NIPSCO Industries, Inc./Bay State Gas
Company. Application, Exhibit 2, p. 40.
5. PaineWebber's analysis indicates that CTG's total customers multiple is
$3,912 while the comparables transaction range is $879 to $3,798.
Application, Exhibit 2, p. 41.
<PAGE>
Docket No. 99-08-09 Page 7
D. FINANCIAL, TECHNOLOGICAL AND MANAGERIAL CRITERIA
EEC believes that it possesses the financial, technological and managerial
ability to acquire CTG and to operate its regulated subsidiary CNG. Applicant
Brief, pp. 9-13. Acting through its largest subsidiary, NYSEG, the Company
states it has a fully experienced and capable staff that has made numerous
regulatory filings before the New York Commission. Application, pp. 1 and 19;
Responses to Interrogatories GA-31 and GA-35. EEC believes that the proposed
merger would have a positive impact on CTG's customers and employees. EEC
states that it is committed to introducing an innovative, new approach to
ratemaking in Connecticut. Application, pp. 1-2; Response to Interrogatory
GA-42. EEC indicates its competence is supported by its strong financial
position. EEC provided its latest financial statements for the years 1998 and
1999.(6) Application, p. 18 and Exhibits 11-15. Additionally, CTG provided its
latest audited and unaudited financial statements for CTG and CNG for the years
1998 and 1999. Application, Exhibits 4-7, pp. 18, and 20-22, and 27.(7) CTG also
provided pro forma analyses incorporating its proposed acquisition into EEC's
financial statements. Application, Exhibit 2, pp. 74-91; Late Filed Exhibit No.
6; Tr. 11/16/99, pp. 687-690.
1. PRO FORMA FINANCIALS
EEC believes that it has the ability to acquire CTG without significantly
affecting its financial flexibility based upon the pro forma analyses performed
by PaineWebber. CTG believes that the PaineWebber analysis indicates that its
acquisition by EEC would not change its consolidated pro forma capital structure
and leading financial credit ratios from premerger status. Additionally, CNG's
capital structure and leading financial credit ratios would not change from
their premerger status. Application, Exhibits 19-20, 24-25; Responses to
Interrogatories, GA-59 and GA-60; Late Filed Exhibit No. 6; Tr. 10/22/99, pp.
297-304, 306; Tr. 11/16/99, pp. 687-689. CNG does not expect its credit rating
or business risk to change as a result of the Merger. Responses to
Interrogatory GA-4 and GA-6; Tr. 10/20/99, pp. 187-188 and 194-199.
The table below provides the pro forma impact of the acquisition to EEC,
CTG and CNG on an individual and combined basis.
- -----------------------------
6. EEC provided balance sheets, income statements and the statement of cash
flows from the following financial statements: SEC Form 10-K dated December
31, 1998; SEC Forms 10-Q dated March 31, 1999, and June 30, 1999; SEC Form
8-K dated April 23, 1999; and the 1998 Annual Report to its shareholders
valued at December 31, 1998.
7. CTG provided balance sheet, income statements and the statement of cash
flows from the following financial statements: SEC Forms 10-K dated
September 30, 1998, and June 29, 1999; SEC Forms 10-Q dated December 31,
1998, March 31, 1999, and June 30, 1999; the 1998 Annual Report to its
shareholders valued at December 31, 1998. CTG provided the following
financial statements on behalf of CNG: CNG Audited Financial statements
dated September 30, 1998; CNG Annual Report to CT DPUC dated September 30,
1998 (i.e., FERC Form No. 2).
<PAGE>
Docket No. 99-08-09 Page 8
<TABLE>
<CAPTION>
FINANCIAL RATIO BEFORE MERGER AFTER MERGER
------------------------------------- --------------------------------
CNG
EEC CTG CNG EEC/CTG Combined (a) Only (b)
-------------- ------------- ------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Interest Coverage
(Pre tax). . . . . . 3.88 2.61 3.53 3.70 2.89 3.53
- -------------------- -------------- ------------- ------ -------- ------------ --------
Interest Coverage
(After tax). . . . . 2.78 1.95 2.35 2.64 2.12 2.35
- -------------------- -------------- ------------- ------ -------- ------------ --------
Fixed Charge
Coverage (Pre tax) . 3.60 2.59 3.49 3.46 2.70 3.49
- -------------------- -------------- ------------- ------ -------- ------------ --------
Fixed Charge
Coverage (After tax) 2.58 1.94 2.32 2.47 1.99 2.32
- -------------------- -------------- ------------- ------ -------- ------------ --------
Cash Flow
Coverage . . . . . . 3.21 1.70 2.34 3.03 2.09 2.34
- -------------------- -------------- ------------- ------ -------- ------------ --------
Total Debt to
Total Equity . . . . 89.5% 165.0% 102.5% 94.1% 124.6% 102.5%
- -------------------- -------------- ------------- ------ -------- ------------ --------
Total Debt to
Total Capital. . . . 46.7% 62.1% 50.5% 48.0% 54.3% 50.5%
- -------------------- -------------- ------------- ------ -------- ------------ --------
<FN>
Notes:
(a) Reflects the performance of EEC combined with CTG, CEC, and Central Maine Power
Group.
(b) Indicates the postmerger performance of CNG on a stand-alone basis.
</TABLE>
Source: Late Filed Exhibit No. 6.
EEC states that CNG would be operated as a separate LDC subsidiary of CTG,
and would maintain its own separate capital structure for ratemaking purposes
after the proposed merger is completed. CNG would continue to perform its own
long-term debt financing based upon its own credit rating. Presently, there is
no change planned to CNG's debt level. EEC does not expect to establish a
formal intercompany borrowing arrangement with CNG except for a possible
short-term liquidity facility, if cost effective. Response to Interrogatory
GA-8; Tr. 10/20/99, pp. 200-202; 206 and 207.
EEC indicates that goodwill would not be incorporated into CNG's ratemaking
capital structure for the purpose of calculating the weighted average cost of
capital (WACC). Consequently, the Company's ratemaking capital structure will
not change as a result of the Merger. Response to Interrogatory GA-9; Tr.
10/20/99, pp. 231-232. The table below depicts CNG's capital structure both
before and after the proposed merger.
<TABLE>
<CAPTION>
COMPONENT BALANCE ($000) PERCENT COST WEIGHTED COST
- -------------------- --------------- -------- ------ --------------
<S> <C> <C> <C> <C>
Short-term debt. . . 0 0% 6.35% 0%
- -------------------- --------------- -------- ------ --------------
Long-term debt . . . 137,000 49% 8.05% 3.93%
- -------------------- --------------- -------- ------ --------------
Preferred Stock. . . 879 0% 6.93% 0.02%
- -------------------- --------------- -------- ------ --------------
Common Equity. . . . 142,704 51% 10.76% 5.47%
- -------------------- --------------- -------- ------ --------------
Total Capitalization $ 280,583 9.42%
- -------------------- --------------- --------------
</TABLE>
Source: Response to Interrogatory GA-9.
<PAGE>
Docket No. 99-08-09 Page 9
Recently, NYSEG received a credit rating upgrade by Moody's Investors
Service (Moody's) from Baa1 to A3 and an upgrade of its senior secured debt by
Standard and Poor's from BBB+ to A. Application, p. 19. Both Fitch IBCA and
Moody's confirmed NYSEG's credit rating following the Merger announcement with
CTG., and Moody's confirmed NYSEG's A3 for NYSEG's senior secured debt on June
30, 1999. Late Filed Exhibit No. 5.(8) Tr. 10/22/99, pp. 295-297. Furthermore,
Moody affirmed CNG's A3 senior unsecured debt rating on June 30, 1999. Late
Filed Exhibit No. 5. EEC believes its financial health is strong based upon
NYSEG's credit rating upgrade. Application, p. 19.
Overall, EEC believes that the Merger has been structured such that CTG
would be able to maintain its autonomy from EEC's other subsidiaries and
insulate CNG from these entities. For example, EEC states that it would
maintain a separate capital structure for CTG and CNG. Additionally, the
organizational structure would provide for separate lines of responsibility and
separate management. EEC believes that retaining local management is another
means to provide autonomy for the different operating subsidiaries. Tr.
10/22/99, pp. 280-281. Since CNG would operate as a separate subsidiary, its
financial risk and credit ratings are not expected to change. Response to
Interrogatory GA-27.
2. DIVIDEND PAYMENTS
Currently, CNG pays up to 90% of its earnings dividends to CTG in
accordance with the provisions of the Decision dated November 27, 1996, in
Docket No. 96-09-10, Application of Connecticut Natural Gas Corporation and CTG
----------------------------------------------------------
Resources, Inc. for Approval of Reorganization and Formation of a Holding
- --------------------------------------------------------------------------------
Company. CTG's unregulated subsidiary, TEN is required to pay 100% of its
- -------
earnings to CTG as dividends. EEC does not propose to change the Department's
requirement limiting CNG's dividend payment. Currently, CNG's earnings are
substantially higher than TEN's. Consequently, CNG provides funding for the
majority of CTG's shareholder dividends, but it is expected that TEN's earnings
will increase over the next few years as its unregulated activities are expected
to increase. Responses to Interrogatories GA-19 through GA-23 and GA-25; Tr.
10/22/99, pp. 259-275, 372-374. EEC indicates that the only dividend transfer
change that would occur is that CTG's earnings cash flow from its subsidiaries
would flow to EEC. Although the dividend transferring arrangement has not been
formalized, EEC states that this arrangement would be very similar to the
current process CTG utilizes. EEC indicates that capital would be allocated
back to the subsidiaries to ensure that public utility responsibilities are met.
Tr. 10/22/99, p. 262.
III. DEPARTMENT ANALYSIS
Pursuant to Conn. Gen. Stat. SS16-47(a) and 16-47(d), the Department
regulates the control and acquisition of a public service company. The
Department takes into consideration the following guidelines in its evaluation
of a proposed buyer's suitability to own a local gas distribution company:
- -----------------------------
8. Fitch IBCA affirmed NYSEG's A- credit rating on November 5, 1999
<PAGE>
Docket No. 99-08-09 Page 10
In each proceeding on a written application submitted under said subsection (b)
or (c), the department shall, in a manner which treats all parties to the
proceeding on an equal basis, take into consideration (1) the financial,
technological and managerial suitability and responsibility of the applicant,
(2) the ability of the gas, electric, electric distribution, water, telephone or
community antenna television company or holding company which is the subject of
the application to provide safe, adequate and reliable service to the public
through the company's plant, equipment and manner of operation if the
application were to be approved.
Conn. Gen. Stat. S16-47(d)
Specifically, the Department must determine the suitability of the proposed
buyer. The buyer must have the level of experience and technological expertise
to enable it to assume the ownership and management and exert control over the
company to be purchased. The acquiring company must be able to provide adequate
service to the customers of purchased company.
OCC expressed concern that there is no defined relationship between Energy
East and its affiliates, nor does Energy East plan to define that relationship
in the future. Further, it cannot be determined if there is sufficient
protection against cross-subsidization of the parent and the non-regulated
entities by the monopoly regulated entity. Larkin PFT, p. 23. Therefore, the
OCC believes that this Application should be denied based upon its contention
that competition would be reduced and the Applicants do not have a definitive
affiliated transaction agreement. OCC Brief, pp. 2, 5, 14-16 and 23-25.
A. FINANCIAL SUITABILITY OF ENERGY EAST
EEC stated that its total operating revenues in 1998 were $2.5 billion, up
15% from the 1997 level of $2.17 billion. Net income was $194 million in 1998,
up 11% from $175 million in 1997. Assets were valued at $4.9 billion, as of the
end of 1998. Earnings per share were also up to $1.50 in 1998, an increase of
18% compared to earnings per share of $1.29 in 1997. Additionally, NYSEG's
successful auction of its coal-fired generation facilities resulted in
significant gains that eliminated stranded costs, including nuclear costs.
NYSEG's nuclear operating risk and the risk of increasing decommissioning costs
would also be eliminated as a result of the recently announced sale of NYSEG's
18% ownership in the Nine Mile 2 nuclear facility to AmerGen. Application, pp.
18-19.
In evaluating the appropriateness of the Merger, the Department must
determine if the applicant possesses the financial resources to ensure that CNG
would be able to implement any future capital improvements and ensure future
regulatory compliance under EEC's stewardship. The Department reviewed the pro
forma impact of the proposed merger on EEC's and CNG's capital structure and on
the leading financial ratios of both entities and finds that the proposed merger
should not change these significantly. (See Section II. D. 1). The Department
finds NYSEG's recent credit upgrade and the postmerger confirmation of the
upgrade as an indicator of EEC's financial health. The Department believes the
proposed acquisition should not pose a hindrance to EEC's and CNG's future
financial flexibility.
<PAGE>
Docket No. 99-08-09 Page 11
Overall, the Department believes EEC is in a strong financial position that
makes it well suited to acquire CTG based upon its recent credit upgrade and the
significant cash infusion from its sale of generating assets. Based on the
record in this proceeding, the Department finds that EEC has the financial
suitability to acquire and control CTG and to provide adequate service to CNG's
customers.
B. TECHNOLOGICAL AND MANAGERIAL SUITABILITY OF ENERGY EAST
To determine the technological and managerial suitability and
responsibility of Energy East to exercise control over CTG and CNG, the
Department considered the operation of Energy East's largest subsidiary, NYSEG.
The NYSEG electrical system presently provides open access transmission and
distribution to large commercial and industrial customers. As of August 1,
1999, all customers are able to choose their own electrical supplier and have
the transmission and distribution service provided by NYSEG. The natural gas
system has provided transportation services for large commercial and industrial
customers since 1986 and for all customers since 1996. At the present time,
approximately 38% of the throughput of the gas system is third-party gas, i.e.,
gas purchased by customers from someone other than NYSEG and transported by
NYSEG from the city gate to the end user. Bonner PFT, p. 3.
The Applicants indicated that, as of year 1998, NYSEG gas system consisted
of 55 miles of high-pressure pipeline, 400 miles of transmission pipeline, 4,000
miles of main, 3,200 of services and 1,199 regulator stations. NYSEG receives
its gas at 85 separate delivery points and continues to add new delivery points
each year as it expands its service territory. In the past four years NYSEG has
instituted service to 25 new franchise areas in the state of New York. Bonner
PFT, p. 3.
The Applicants also indicated that NYSEG has a restructuring agreement with
the New York Public Service Commission that provides the framework for the
affiliate rules, cost allocations and code of conduct. Applicants' Brief, p.
18. In addition, NYSEG's accounting procedures manual specifies the manner for
avoiding any risk of preferences, discrimination or subsidies with respect to
the regulated and non-regulated affiliates. There has been no violation of
these affiliate and cost accounting rules nor has any evidence been introduced
that asserts anything but proper compliance by Energy East and its affiliates.
Applicants' Brief, p. 18.
NYSEG operates its gas operations based on an operation manual that meets
and exceeds the safety code requirements of New York State and the U.S.
Department of Transportation, and that it responds to reports of gas leaks
within 60 minutes or less 99.8% of the time. NYSEG operates its own
meter-testing lab with state-of-the-art equipment and has a gas training
department. The gas business unit of NYSEG holds firm transportation on 11
pipelines and has contracted for storage on three pipelines. NYSEG also owns
and operates the only high deliverability salt storage field in the Northeast,
located at Seneca Lake New York. Id.; Application, Exhibit 2.
--
<PAGE>
Docket No. 99-08-09 Page 12
The Department believes that Energy East has operated NYSEG safely and
effectively. Its access to the supply of firm gas on 11 pipe lines, storage on
three pipe lines, along with its access to its salt storage field, will benefit
ratepayers by diversifying the existing gas supply. CTG and CNG will remain
subject to the orders in Docket No. 96-09-10, Application of the Connecticut
------------------------------
natural Gas Corporation and CTG Resources, Inc. for Approval of Reorganization
- --------------------------------------------------------------------------------
and Formation of a Holding Company, dated November 27, 1996. EEC stated that
- -------------------------------------
its subsidiary, NYSEG, would lend its managerial talent and efficiency to the
merged company. CNG would continue to work as an autonomous operating unit
within the Energy East enterprise yet have the benefit of the larger pool of
managerial talent for strategic leadership of the enterprise and operating
subsidiaries. Response to Interrogatories GA-42 and GA-48.
The Department believes that the managerial expertise and gas industry
acumen of Energy East officers make them excellent candidates as partners in
this Merger. Based on the above-cited record, the Department finds that Energy
East has the technological and managerial suitability to acquire control of CTG.
Further, the Department is pleased that EEC would retain the services of several
of CNG's top managerial level employees and would honor union contracts through
their current negotiated date of December 2001. Although EEC has indicated that
no employee layoffs are planned, the Department is concerned about the non-union
and managerial employees not covered by a negotiated employment agreement. The
Department urges EEC to make every effort to avoid involuntary employee
reductions using attrition and work force retraining.
C. SAFE, ADEQUATE AND RELIABLE SERVICE
During the course of this proceeding, the Applicants testified about their
plans to improve and enhance customer service following the merger. These
improvements would result from utilization of the Applicants' best operational
practices such as call center operations and customer service improvements,
including the upgrading of equipment and products and service offerings.
Response to Interrogatory CA-1.
CNG's customers would have access to NYSEG's monitoring systems such as its
Overall Customer Satisfaction Index (OCSI) for managing and measuring customer
service operations. The major categories of OCSI include Customer Satisfaction
as measured by a survey of customers who have recently contacted the Company and
Call Center Responsiveness that indicates how long a customer waits in queue.
Another category is Service Call Responsiveness that includes a four-hour
appointment window to respond to service calls. Response to Interrogatory
CA-12b. Additionally, NYSEG's Service Quality Performance Mechanism gauges
customer service performance regarding customer satisfaction, call center and
service call responsiveness. However, the Applicants have not determined how
and when they would implement OCSI, NYSEG's Call Center Responsiveness
practices, and Service Quality Performance Mechanism. Response to Interrogatory
CA-12a. Additionally, an independent survey entitled "Customers Discuss NYSEG"
rates customer satisfaction. Response to Interrogatory CA-4. It has not been
determined what best NYSEG customer service practices CNG would use to ensure a
better quality of service and quicker Company responses. Response to
Interrogatory CA-1.
The Applicants stated that CNG customers would benefit from NYSEG's
centralized call center that features advanced call center operations and
information technology. Response to Interrogatory CA-5a. By implementing
NYSEG's operational best practices to meet the needs of CNG's customers, CNG
would be equipped to address concerns more thoroughly and expeditiously.
Application, p. 21. However, no assessment regarding the application of NYSEG's
operations and technology to CNG's customer service operations has taken place
to date nor has evidence been entered into the record to substantiate these
expectations. Response to Interrogatory CA-5c. The Applicants indicated that
the implementation of NYSEG's technology has resulted in it obtaining the lowest
customer complaint rate of any utility in the state of New York and an 85%
customer satisfaction rating. Application, p. 21. NYSEG also offers customers
the option to use the Internet for gas pricing information. Response to
Interrogatory CA-5a.
<PAGE>
Docket No. 99-08-09 Page 13
The Department reviewed the Applicants' responses to interrogatories
regarding customer service practices and its policies and procedures. The
Department finds that the Applicants' customer service practices and policies
and procedures are adequate and allow for the efficient and timely handling of
customer complaints and inquiries. CNG will be directed to submit to the
Department, for review and approval, any proposed changes to its billing format,
customer service policies and procedures at least 10 business days prior to
implementation.
OCC believes that the Applicants have been unable to point to any tangible
and identifiable benefits that ratepayers would receive. OCC states that the
Applicants have demonstrated that regardless of what happens to ratepayers,
corporate officers and managers would benefit substantially as a result of this
Merger. OCC argues that this is not a valid reason for allowing public service
companies in Connecticut to be acquired or merged into other companies.
Further, OCC takes the position that there are no compelling benefits to
ratepayers that would require the Department to approve the merger. OCC Brief,
pp. 26-29.
Throughout the proceedings, the Applicants responded to interrogatories and
offered testimony regarding the benefits to be derived from the merger.
However, the Applicants only made reference to plans for implementing their best
customer service practices that would create such benefits as reduced response
time to customer inquiries and complaints. Additionally, the Applicants offered
no listing of what the best customer service practices are and in what time
frame they would be implemented. No evidence was entered into the record to
support the conclusion that the benefits would occur. The Department is
concerned that the Applicants have not attempted to quantify customer service
benefits to ratepayers at this time. Therefore, the Department will require
that the Applicants file a report that identifies and quantifies realized and
potential customer service benefits.
Energy East plans to manage CNG as an autonomous operating company enabling
local CNG management to continue to make business decisions. Response to
Interrogatory CA-11b. CNG would continue to be headquartered in Hartford and
its management and operations would remain under local control. Energy East
stated that it has no intentions of changing the location of CNG's headquarters,
management, or operations. Rude Testimony, p. 8. Customer service business
decisions made by CNG would be executed as they have been in the past. CNG
would not eliminate the present process by which the Department addresses
customer inquiries and disputes. CNG indicated that it will review and
investigate disputes and forward its findings to the Department.
<PAGE>
Docket No. 99-08-09 Page 14
D. TRANSACTION NEGOTIATIONS AND PRICE
As discussed in Section II.C.2, CTG obtained the services of PaineWebber to
determine its value and establish whether the proposed transaction was fair to
its shareholders from a financial point of view. EEC's agreement with CTG
indicates that the total value of the transaction to CTG's shareholders is
$354.6 million, which represents approximately 2.65 times CTG's book value.
Based upon PaineWebber's analysis, CTG is confident that the negotiated purchase
price is fair to its shareholders.
The Department reviewed the analyses performed by PaineWebber and
determines that the methodologies it employed are consistent with financial
techniques utilized in company valuation. The table below provides a summary of
PaineWebber's analytical results:
<TABLE>
<CAPTION>
ANALYTICAL TECHNIQUES RANGE INDICATED INDICATED RESULTS
- --------------------------------------------------- ------------------- -------------------
<S> <C> <C>
CTG Comparables Analysis-
Book Value of Equity (a). . . . . . . . . . . . . . 1.38x to 2.08x 1.62x and 2.12x (b)
- --------------------------------------------------- ------------------- -------------------
EEC Comparables Analysis-
Book Value of Equity (a). . . . . . . . . . . . . . 1.36x to 2.33x 2.01x (c)
- --------------------------------------------------- ------------------- -------------------
CTG Comparables Mergers and Acquisitions Analysis-
Book Value of Equity. . . . . . . . . . . . . . . . 1.06 x to 3.08x 2.60x
- --------------------------------------------------- ------------------- -------------------
CTG DCF Analysis-EBITDA . . . . . . . . . . . . . . 6.50x to 8.50x 8.6x
- --------------------------------------------------- ------------------- -------------------
CTG DCF Analysis-EBIT . . . . . . . . . . . . . . . 10.00x to12.00x 12.6x
- --------------------------------------------------- ------------------- -------------------
Premiums Paid Analysis
One Day . . . . . . . . . . . . . . . . . . . . . . 30.6% and 26.9% (d) 60.4%
- --------------------------------------------------- ------------------- -------------------
Premiums Paid Analysis
One Week. . . . . . . . . . . . . . . . . . . . . . 36.6% and 31.7% 60.4%
- --------------------------------------------------- ------------------- -------------------
Premiums Paid Analysis
One Month . . . . . . . . . . . . . . . . . . . . . 45.5% and 36.9% 70.4%
- --------------------------------------------------- ------------------- -------------------
Pro forma Merger Analysis . . . . . . . . . . . . . NA NA
- --------------------------------------------------- ------------------- -------------------
<FN>
Notes:
a. The Comparables Analysis for CTG and EEC provides the Book Value of Equity analysis as
an example of the analyses preformed.
b. CTG Comparables Analysis is dated 5/28/99 and 6/25/99, respectively.
c. EEC Comparables Analysis is dated 6/25/99.
d. Premiums Paid Analyses range provides mean and median purchase price per share
premiums paid compared to CTG's closing stock price prior to the Merger
announcement.
</TABLE>
Source: Application, Exhibit 2, pp. 38-42.
The Department finds that the CTG Comparables Analysis clearly shows that
the ratio of purchase price to book value for CTG is slightly above the
indicated range (i.e., 2.12x vs. 2.08x upper end of the range). The DCF
Analyses, based upon EBITDA and EBIT, also show the transaction is somewhat
higher than the indicated ranges. Similarly, the Premiums Paid Analysis show
that CTG's closing stock price earned a substantial premium subsequent to the
public announcement of the Merger as compared to the 105 non-financial merger
transactions reviewed. Lastly, PaineWebber concluded that based upon its Pro
Forma Merger Analysis, the Merger would dilute EEC's EPS and increase its cash
flow. These results clearly show the Merger would benefit EEC shareholders
through enhanced earnings and cash flow.
<PAGE>
Docket No. 99-08-09 Page 15
The Department finds that based upon the above table and analyses that CTG
is in the upper end of analytical ranges developed by PaineWebber. The
Department believes that CTG negotiated a very good deal for its shareholders
and that the negotiated share price of $41 is well within the range of
reasonableness. However, the Department finds that the higher negotiated share
price yields a larger amount of goodwill and a high acquisition premium.(9) The
Department believes that that CTG's superior negotiations for its shareholders
should not translate into additional costs to be borne by ratepayers. See
Section III. F. below.
E. GOODWILL AND ACQUISITION PREMIUM
Under GAAP accounting standards, there are two ways to account for a
merger, (1) the Purchase Method, and (2) the Pooling of Interest Method (Pooling
Method)(10). EEC indicated that the Merger must be accounted for under the
Purchase Method, since it violates several of the 12 conditions that must be met
to qualify under the Pooling of Interests method of accounting or Pooling
Method. Consequently, the transaction includes goodwill of approximately $227.3
million for CTG, which is calculated, as follows:
<TABLE>
<CAPTION>
<S> <C>
($000)
---------
Purchase Price. . . . . . . . . . . . $354,600
Transaction Costs . . . . . . . . . . 6,500
---------
Total Transaction Cost (a). . . . . . $361,100
CNG Subsidiary-Book Value . . . . . . $122,200
Non-utility Subsidiaries--Book Value. 11,600
---------
Total CTG--Book Value (b) . . . . . . $133,800
Total Goodwill (a) less (b) . . . . . $227,300
---------
</TABLE>
Source: Response to Interrogatory GA-54; Late Filed Exhibit No. 3, p. 3;
Tr. 10/22/99, pp. 322-324.
- -----------------------------
9. Goodwill is the excess of the cost of a business acquisition accounted for
by the purchase method of accounting over the fair value of its net assets.
Acquisition premium is the difference between the cost of the utility plant
and its original cost less the utility plant's depreciation, depletion and
amortization. Late Filed Exhibit No. 3, pp. 5 and 6.
10. The Pooling Method has 12 specific conditions that are classified into
three broad categories: attributes of the combining companies, conditions
relating to the exchange and absence of planned transactions. To qualify
for the Pooling Method all 12 conditions must be met. For instance, EEC
indicate that one of the criteria is that no more than 10% of the common
stock of the acquired company may be purchased for cash. In this case, EEC
is purchasing 55% of CTG's common stock with cash. Consequently, the Pooling
Method is not acceptable. Response to Interrogatory GA-52; Tr. 11/16/99, pp.
669 -673; Late Filed Exhibit No. 3, Attachment D.
<PAGE>
Docket No. 99-08-09 Page 16
Based upon the present asset allocation of CTG between CNG and the Non-utility
Subsidiaries (NUS), 91.33% or $207.6 million of the goodwill would be allocated
to CNG with 8.67% or $19.707 million to NUS.
The Applicants state that the $227.3 million is an estimate and does not
require that a journal entry be made to consummate the Merger. However, upon
completion of the Merger, EEC believes that under GAAP, it is required to
reflect the goodwill on the books of CNG and NUS. According to EEC, the steps
to account for a Purchase Method business combination are as follows:
1. Determine purchase price.
2. Determine the transaction costs.
3. Identify all assets acquired and liabilities assumed for each subsidiary.
4. Value those assets acquired at fair value.
5. Value those liabilities assumed at present value of the amounts expected to
be paid.
6. Determine the amount of goodwill, if any.
7. Allocate remaining goodwill to utility subsidiary.
Late Filed Exhibit No. 3, p. 2.
EEC plans on having an independent consultant conduct a fair market value
assessment in accordance with GAAP to determine the fair market value of CNG's
and NUS's assets and liabilities. The consultant's study would be conducted at
or near the closing date of the transaction. Once the consultant's study is
completed, EEC would revalue the assets and liabilities of CTG to fair market
value, determine the amount of goodwill, if any, and then allocate the goodwill
to its subsidiaries, CNG and NUS. Consequently, the actual amount of goodwill
allocable to CNG would not be determined until the closing date. Responses to
Interrogatories GA-9 and GA-29; Tr. 10/20/99, pp. 211-220; Tr. 10/22/99, pp.
255-258; Tr. 11/16/99, pp. 673-680; Late Filed Exhibit No. 3. Based upon the
advice of Arthur Andersen, LLP and Price Waterhouse Coopers, (Auditors), the
Applicants believe that the difference between net assets purchased and the cost
to the purchaser must be recorded in Account 114 of the Department's Uniform
System of Accounts (USA).(11) Response to Interrogatory GA-9; Late Filed Exhibit
No. 3, pp. 3 and 4; Tr. 10/22/99, pp. 254-255, 391-392.
CNG indicates that the goodwill should be amortized over a 40-year period
based upon GAAP standards. Response to Interrogatory GA-52. CNG did not
request that the amortization of the goodwill be included in the rate base for
the purpose of establishing customer rates. However, the Applicants have
indicated that they believe the goodwill amortization should be included in
calculating net income and in determining rate of return on equity (ROE) in the
proposed earnings sharing mechanism for CNG's next rate case. Response to
Interrogatory GA-9; Late Filed Exhibit No. 3.
- -----------------------------
11. The auditors are Arthur Andersen, LLP for EEC and Price Waterhouse Coopers,
LLP for CTGR. Comfort Letters from both Auditors indicate that nothing has
come to their attention to preclude the proposed merger transaction. Late
Filed Exhibit No. 4.
<PAGE>
Docket No. 99-08-09 Page 17
OCC believes CNG should not be permitted to add the acquisition premium to
rate base or to amortize the goodwill expense as an above-the-line expense in
CNG's forthcoming rate case. Furthermore OCC indicates it would be unfair for
ratepayers to pay for any of the costs associated with the proposed merger. OCC
Brief, p. 21.
The Department reserves the right, in a future proceeding, to make a
decision on the acquisition premium and goodwill amortization of the $207.6
million expected to be placed on CNG's books since the revaluation has not
occurred. The Department notes that historically it has not allowed recovery of
purchase price premiums and goodwill adjustments to rate base. Therefore, the
Department advises the Applicants that proceeding with this transaction with the
expectation that the Department will approve the Company's acquisition premium
recovery as described in this proceeding is speculative at best.
F. TRANSACTION COSTS
The current estimate for EEC and CTG's total transaction costs for the
proposed merger is below.
EEC Transaction Fees
- ----------------------
Legal Fees $1.6 million
Financial Advisor 3.7
Printing and Filing Fees 0.2
Accounting Fees 0.1
Bonuses 0.4
Other consulting and merger
related costs 0.5
- --------------------------- ------------
Total Current Estimate $6.5 million
Source: Responses to Interrogatories GA-46 and GA-54.
CTG Transaction Fees
- ----------------------
Investment Banking Fees $3.475 million
Legal Fees 0.700
Accounting Fees 0.160
Restricted and Performance Stock 0.800
Printing, Filing and Solicitation 0.145
Fees and Refinancing Costs 0.170
Out of Pocket 0.050
- --------------------------------- --------------
Total Current Estimate $ 5.5 million
Source: Response to Interrogatory OCC-14.
<PAGE>
Docket No. 99-08-09 Page 18
The Applicants state that the investment banker fees are based upon the
schedule incorporated in the PaineWebber contract with CTG. The restricted
stock and performance stock awards are based on the number of shares that are
estimated to vest at the time of closing. All other costs are based on the
information available at the time the proxy was filed with the SEC. Response to
Interrogatory OCC-14. Through the end of August 1999, CTG has incurred
approximately $2.6 million of transaction costs related to investment banking
fees, SEC filing fees, legal fees and accounting fees. CNG would not seek
recovery of the transaction costs from ratepayers. Responses to Interrogatories
GA-63 and OCC-7.
EEC's $6.5 million transaction costs are incorporated into the calculation
of the goodwill/acquisition premium described in Section III. F. The Department
concurs with CNG's position that the transaction costs should not be recovered
from ratepayers. The Department will address the acquisition premium and
goodwill issues in a future CNG ratecase.
G. COMPETITIVE MARKET ISSUES
OCC's witness, Dr. John Wilson, asserts that the proposed merger would
reduce competition in the state. Wilson PFT, pp. 4-7; Tr. 11/3/99, pp. 485-487,
500 and 501. Dr. Wilson indicates that combined CTG and CEC would have more than
60% of natural gas service in Connecticut. Wilson PFT, p. 6. Dr. Wilson
conducted a Herfindahl-Hirschman Index (HHI) study, which is the U.S. Justice
Department and Federal Trade Commission (DOJ/FTC) recommended measure for market
concentration that results from a merger. The HHI is computed by summing the
squares of each firm's percentage of market share. This conclusion was reached
by calculating a postmerger HHI showing an increase of approximately 2,000
points resulting in a postmerger HHI of more than 5,000. Wilson PFT, pp. 7, 17
and 18; Tr. 11/3/99, pp. 491-496 and 503-505. According to Dr. Wilson, the
DOJ/FTC's Merger Guidelines presume that a merger that results in a postmerger
of HHI greater than 1800 and increases HHI by more than 100 would create or
enhance market power. Wilson PFT, p. 8; Exhibit JWW-1; Late Filed Exhibit No.
11; Tr. 11/3/99, pp. 498-499.
OCC's witness also conducted a regression analysis to determine whether
increasing firm size would lead to greater efficiency and lower costs.(12) Dr.
Wilson found that larger utilities do not necessarily produce efficiencies.
Also, a larger utility holding company structure is less efficient than a
smaller company if per unit costs is the measure of efficiency. Wilson PFT, pp.
26 and 27; Exhibit JWW-2; Late Filed Exhibit No. 12; Tr. 11/16/99, pp. 636-653
and 656.
Based upon the HHI and regression analyses, OCC concludes that the Merger
results in an unacceptable level of gas market concentration by EEC as the
parent. OCC Brief, p. 7. OCC believes that the Merger is anticompetitive and
that the Department should deny it unless the merged company and its affiliates
(i.e., both CNG and SCG) are ordered to exit the gas merchant business in
Connecticut. Wilson PFT, pp. 30-32; Tr. 11/16/99, pp. 626-632; OCC Brief, p. 7.
- -----------------------------
12. The regression equation is defined as: per-unit costs = a + b x retail sales
+ c x holding company + d x wholesale sales, where per-unit costs is total
expenses/total MWh sales; retail sales equal total electric sales excluding
sales for resale (MWh); holding company indicates whether or not a utility
is part of a holding company; wholesale sales equals total sales for resale;
and total expenses equal total operating expense in accordance with FERC
Form 1, page 114, line 23.
<PAGE>
Docket No. 99-08-09 Page 19
The Department has reviewed OCC's contention that the proposed merger would
increase market concentration based upon postmerger HHI. HHI is typically used
as a means to measure the level of increased market concentration after a merger
for non-regulated industries. However, the Department does not believe HHI is
useful in determining market concentration in a regulated industry, which is by
definition, highly concentrated. The Department also reviewed the OCC witness'
regression analysis and finds that it is not conclusive regarding the contention
that holding companies have higher costs.(13) Relative to transportation, CNG,
as well as SCG and Yankee Gas Services (YGS), each has a legal monopoly in its
own franchise area. Each would maintain its exclusive franchise area and each
would continue to be regulated by the Department post merger. In addition,
transportation tariffs will still need approval by the Department.
As for the gas commodity, there is currently competition in the commercial
and industrial markets pursuant to Docket No. 97-07-11, DPUC Investigation into
-----------------------
Issues Associated with the Unbundling of Natural Gas Services by Connecticut
- --------------------------------------------------------------------------------
Local Distribution Companies, dated July 23, 1998; and Docket No. 95-02-07,
- ------------------------------
Application of the Connecticut Natural Gas Corporation for A Rate Increase,
- -------------------------------------------------------------------------------
dated March 17, 1999. Currently, there are 62 natural gas sellers or marketers
registered with the Department to do business in the state. Regarding
residential gas service, there is currently no unbundled service available. As
such, residential service is a legal monopoly subject to the Department's
approval of all tariffs. Due to these factors, the Department believes this
merger will have little effect on competition.
H. ACCOUNTING ISSUES AND SYNERGIES
OCC recommends that the Merger be denied as presented for the following
reasons: (1) the Applicants should be required to show a cost/benefit analysis
and indicate how potential cost savings/synergies would be shared between the
ratepayers and shareholders; (2) the Applicants should be required to enter a
definitive affiliated transaction agreement, and (3) the CNG to CTG dividend
policy should not be changed.(14) Larkin PFT, p. 31; Tr. 11/16/99, pp. 698-704
and 714-721.
- -----------------------------
13. The regression equation's R-squared is 0.1303, indicating that only 13.03%
of the variability in per unit costs is explained by the regression equation
as a whole. Although the t-statistics of the regression model's coefficient
terms are all significant at the 95% level, the R-squared is very low
indicating the regression equation provides a poor explanatory relationship
between per-unit costs and the holding company variable. Wilson PFT, Exhibit
JWW-2; Late Filed Exhibit No. 12; Tr. 11/16/99, pp. 643-656.
14. OCC's witness recommends that the Department require EEC to comply with the
NARUC Guidelines for Cost Allocations and Affiliate Transaction as a
condition of the Merger. Late Filed Exhibit No. 14; Tr. 11/16/99, pp.
723-725.4
<PAGE>
Docket No. 99-08-09 Page 20
The Department issued numerous interrogatories and conducted extensive
cross-examination regarding potential Merger benefits. Response to
Interrogatory GA-48; Tr. 10/22/99, pp. 342-355. The Applicants stated that
Merger benefits to ratepayers cannot be quantified because studies that would
examine potential cost savings, tax savings, reduction in capital needs and
managerial efficiency have not been performed since the Merger is viewed as a
strategic opportunity. Responses to Interrogatories GA-43, GA-48, and GA-50;
Tr. 10/22/99, pp. 309-312 and 343-345. EEC indicates that synergies of
approximately 5% of non-fuel Operation and Maintenance expense (O&M) are common
based upon its discussions with investment bankers. Response to Interrogatory
GA-47; Tr. 10/22/99, pp. 350-352; Applicants' Brief, p. 20. Although EEC
indicates it would not hire consultants to perform synergy studies, it would
review the best operating practices and implement these. Tr. 10/22/99, p. 346.
EEC believes that management performance and not the consultant's studies
provide synergies. Consequently, EEC's management is responsible for the Merger
success or failure. Tr. 10/22/99, pp. 345-349.
The Department is concerned that the Company's claim of Merger benefits has
not been quantified at this time. The Department concurs with OCC and believes
ratepayers should benefit from synergies that accrue from the Merger. The
Department will require the Applicants to identify and quantify the potential
costs and benefits from the Merger and provide a proposed sharing of the
benefits in CNG's next rate case.
The Department has also reviewed the cost allocation and affiliate
transaction issue. Both CNG and NYSEG have formal Cost Accounting Manuals (CAM)
and Codes of Conduct (COC). Responses to Interrogatories GA-15; GA-12, GA-13,
GA-16 and GA-17. EEC is an exempt holding company under the Public Utility
Holding Company Act PUHCA, and it is not required to comply with PUCHA
regulations covering affiliate transactions. EEC indicates that if its holding
company exemption is withdrawn, it would comply with PUHCA standards. Responses
to Interrogatories GA-11 and GA-77. The Department believes the Merger would
overlay an additional parent-subsidiary transaction level for CNG. Based upon
the record, the Department will require EEC and CTG to adopt procedures for
affiliate transactions. The Department recommends that the Company refer to the
NARUC Guidelines for Cost Allocations and Affiliate Transactions, when
developing the procedures.
I. RATE PLAN ALTERNATIVE
The Rate Plan Alternative (RPA) was described but not requested in the
instant proceeding. The Department defers its ruling on this issue to the
Decision in Docket No. 99-09-03, Application of Connecticut Natural Gas
------------------------------------------
Corporation for a Rate Increase.
---------------------------
IV. FINDINGS OF FACT
1. EEC is an exempt public utility holding company under PUHCA. CNG is a
public service company pursuant to Conn. Gen. Stat. S16-1.
2. EEC is a non-operating holding company existing under the laws of the
State of New York and has corporate offices in New York and Stamford,
Connecticut.
- -----------------------------
15. The CAM defines the cost allocation policies with their respective parent
companies and the COC provides controls and programs to ensure transactions
between regulated and unregulated subsidiaries are conducted at arms-length.
<PAGE>
Docket No. 99-08-09 Page 21
3. EEC was formed in 1997 and became the parent of NYSEG on May 1, 1998.
4. NYSEG is a regulated subsidiary of EEC whose primary income is derived
from NYSEG.
5. EEC, acting through NYSEG, serves approximately 243,000 LDC gas customers
in New York.
6. CTG is a holding company pursuant to Conn. Gen. Stat. S16-47
7. CNG, formed in 1968, is the regulated gas subsidiary of CTG, whose
primary income is derived from CNG.
8. CTG, acting through CNG, serves approximately 143,000 customers in
Connecticut, has extensive experience in the LDC gas industry, and has
made numerous regulatory filings before the Department.
9. EEC has agreed to acquire all of CTG's assets and liabilities through a
merger agreement dated June 29, 1999.
10. Upon completion of the merger agreement, CTG would become a wholly-owned
subsidiary of EEC and CNG would become an indirect, wholly owned
subsidiary of EEC.
11. The merger agreement is valued at $354.6 million, consisting of
approximately $195 million in cash and approximately $160 million common
equity exchange.
12. The expected date of completion for the proposed transaction is mid-year
of 2000.
13. EEC would retain the services of several CTG top managerial level
employees and would honor union contracts through their current
negotiated date of December 2001.
14. EEC would continue to employ CNG's current management, including the
President and CEO in Hartford.
15. CTG's Board of Directors would be retained as an Advisory Board.
16. The Advisory Board would allocate $500,000 in annual charitable
contributions, which ratepayers would not fund.
17. The Merger would be accounted for through the Purchase Method of
Accounting, which creates goodwill on the acquiring company's balance
sheet.
18. On or about June 25, 1999, CTG engaged PaineWebber to provide financial
advisory services in connection with a possible merger.
19. PaineWebber recommends that the Merger is fair to CTG's shareholders.
<PAGE>
Docket No. 99-08-09 Page 22
20. PaineWebber performed several financial analyses including: Selected
Comparables Public Company Analysis, Comparables Mergers and
Acquisitions Analysis, Discounted Cash Flow Analysis, Premiums Paid
Analysis, and Pro forma Mergers Analysis.
21. The Applicants proposed no changes to CNG's customer service policies
and practices.
22. The Applicants provided few specifics regarding the non-financial,
customer service benefits that CNG customers would receive following the
merger.
23. EEC, through its affiliate NYSEG, has made numerous regulatory filings
before the New York Public Service Commission.
24. CNG would continue to perform its own long-term debt financing.
25. NYSEG received a credit rating upgrade by Moody's from Baa1 to A3 and
upgrade of its senior secured debt by Standard and Poor's from BBB+ to A.
26. Moody's affirmed NYSEG's A3 credit rating and CNG's A3 senior unsecured
debt rating following the proposed merger announcement with CTG.
27. There is no change planned to CNG's debt level and no intercompany
borrowing arrangements are planned between CNG and EEC.
28. Both Auditors' Comfort Letters indicate that nothing has come to their
attention to preclude the proposed merger transaction.
29. EEC expects to allocate approximately $207.6 million in goodwill to
CNG's books based upon GAAP standards.
30. CNG did not request the goodwill to be included in rate base for the
purpose of establishing customer rates.
31. CTG would not seek recovery of transaction costs, which are expected to
total $5.5 million, from CNG's ratepayers,
V. CONCLUSION AND ORDERS
A. CONCLUSION
Based on the record in this proceeding, the Department hereby approves the
acquisition of control of CTG Resources, Inc. by Energy East Corporation subject
to the orders below. The Department also concludes that the merged entity: 1)
will have the financial, technological, and managerial suitability and
responsibility to provide service; 2) will possess the ability to provide safe,
adequate and reliable service to the public through the public service company's
plant, equipment and manner of operations; 3) will maintain the adequate and
local accessibility to management and operations; 4) will increase the level of
community investment through increased charitable contributions, 5) will
maintain, and where economically justified, expand the gas infrastructure, and
6) will provide open, nondiscriminatory access to qualified gas suppliers. This
approval is granted subject to the Applicants receipt of all required approvals
from federal regulatory agencies.
<PAGE>
Docket No. 99-08-09 Page 23
B. ORDERS
For the following Orders, please submit an original and 12 copies of the
requested material identified by Docket number, Title, and Order Number to the
Executive Secretary.
1. Beginning January 19, 2000, and going forward, Energy East Corporation
shall file with the Department, SEC Forms 10Q, 10K, 8K, quarterly
stockholders report, and annual stockholders reports when available.
2. Beginning January 19, 2000, and going forward, CNG shall submit to the
Department any changes to its billing format, customer service policies
and procedures at least 10 business days prior to implementation.
3. Commencing June 30, 2000, and quarterly thereafter, CNG shall submit
reports to the Department regarding the total number of complaints,
broken down by complaint type, reported to CNG by its customers.
4. No later than June 30, 2000, EEC and CTG shall propose to the Department
for approval, procedures for cost allocations and affiliate transactions
to guide EEC's transactions with CTG.
5. No later than September 30, 2000, the Applicants shall notify the
Department as to whether the Merger has or has not taken place and if so,
that no material modifications were made to the terms and conditions of
the Agreement.
6. No later than September 30, 2000, if the Merger takes place, the
Applicants shall provide the Department with copies of all closing
documents. If the Merger does not take place, the Applicants shall
provide an explanation as to why it did not.
7. No later than September 30, 2000, the Applicants shall provide the
Department with copies of all journal entries showing the change of
control.
8. No later than September 30, 2000, the Applicants shall provide the
Department with an exhibit showing the actual expenses, broken down by
type, incurred by all parties for this Merger together with journal
entries.
9. No later than September 30, 2000, CTG shall provide the Department with a
copy of the Certificate of Merger filed with the Secretary of the State.
10. No later than October 1, 2000, CNG shall submit a report that identifies
and quantifies ratepayer benefits, including customer service benefits,
either achieved or expected to be achieved by the merger. The report
shall include expense savings and infrastructure investments.
<PAGE>
Docket No. 99-08-09 Page 24
11. When available, the Applicants shall file with the Department the
Decision from the SEC regarding the Merger.
12. CNG shall file with the Department any modifications to current cost
allocation policies resulting from this Merger that affect CNG.
13. CNG shall maintain a rolling three-year written record of complaints
received from its customers. The record shall include the name, address,
telephone number, account number, nature of the complaint, and
description of how it was resolved.
<PAGE>
DOCKET NO. 99-08-09 JOINT APPLICATION OF ENERGY EAST CORPORATION AND CTG
RESOURCES, INC. FOR APPROVAL OF A CHANGE OF CONTROL
This Decision is adopted by the following Commissioners:
Glenn Arthur
Jack R. Goldberg
Linda Kelly Arnold
CERTIFICATE OF SERVICE
----------------------
The foregoing is a true and correct copy of the Decision issued by the
Department of Public Utility Control, State of Connecticut, and was forwarded by
Certified Mail to all parties of record in this proceeding on the date
indicated.
/s/ Louise E. Rickard January 19, 2000
--------------------- ----------------
Louise E. Rickard Date
Acting Executive Secretary
Department of Public Utility Control
