(As filed April 28, 2000)
File No. 70-9609
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
on
FORM U-1/A
APPLICATION/DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Energy East Corporation
New York State Electric & Gas Corporation
Energy East Enterprises, Inc.
Maine Natural Gas, L.L.C.
One Canterbury Green
Stamford, CT 06904
CMP Group, Inc.
Central Maine Power Company
Maine Electric Power Company, Inc.
NORVARCO
83 Edison Drive
Augusta, ME 04336
Connecticut Energy Corporation
The Southern Connecticut Gas Company
855 Main Street
Bridgeport, CT 06604
CTG Resources, Inc.
Connecticut Natural Gas Corporation
100 Columbus Boulevard
Hartford, CT 06103
Berkshire Energy Resources
The Berkshire Gas Company
115 Cheshire Road
Pittsfield, MA 01201
(Names of companies filing this statement and
addresses of principal executive offices)
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Energy East Corporation 1
(Name of top registered holding company parent)
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Kenneth M. Jasinski Arthur W. Adelberg
Executive Vice President Executive Vice President and
and General Counsel Chief Financial Officer
Energy East Corporation CMP Group, Inc.
One Canterbury Green 83 Edison Drive
Stamford, Connecticut 06904 Augusta, Maine 04336
Arthur C. Marquardt Scott S. Robinson
Chairman, President and President and Chief Executive Officer
Chief Executive Officer Berkshire Energy Resources
CTG Resources, Inc. 115 Chesire Road
100 Columbus Boulevard Pittsfield, Massachusetts 01201
Hartford, Connecticut 06103
(Names and addresses of agents for service)
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The Commission is requested to send copies of all notices,
orders and communications in connection with this
Application/Declaration to:
William T. Baker, Jr., Esq. Adam Wenner, Esq.
J. Michael Parish, Esq. Vinson & Elkins, L.L.P.
Thelen Reid & Priest LLP 1455 Pennsylvania Avenue, N.W.
40 West 57th Street Washington, D.C. 20004-1008
New York, New York 10019
Frank Lee, Esq.
Huber Lawrence & Abell
605 Third Avenue
New York, New York 10158
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1 Energy East will register following the consummation of its proposed
combinations with CMP Group, Inc., CTG Resources, Inc. and Berkshire Energy
Resources.
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TABLE OF CONTENTS
Item 1. Description of Proposed Transaction.................................1
1.1. Introduction...............................................1
1.2. Description of Energy East and its Subsidiaries............1
1.3. Capital Structure of Energy East...........................3
1.4. Summary of Requested Approvals.............................4
1.5. Use of Proceeds............................................6
1.6. Description of Proposed Financing Program..................7
1.7. Guaranties................................................13
1.8. Hedging Transactions......................................14
1.9. Changes in Capital Stock of Subsidiaries..................15
1.10. Financing Subsidiaries....................................16
1.11. Intermediate Subsidiaries.................................16
1.12. Investments in Energy-Related Assets......................19
1.13. Sales of Services and Goods Among Nonutility Subsidiaries
of Energy East............................................20
1.14. Activities of Rule 58 Subsidiaries Within and Outside
the United States.........................................21
1.15. Payment of Dividends Out of Capital and Unearned Surplus..22
1.16. Tax Allocation Agreement..................................25
1.17. Certificates of Notification..............................27
Item 2. Fees, Commissions and Expenses.....................................28
Item 3. Applicable Statutory Provisions....................................28
3.1. General...................................................28
3.2. Compliance with Rules 53 and 54...........................28
Item 4. Regulatory Approvals...............................................29
Item 5. Procedure..........................................................30
Item 6. Exhibits and Financial Statements..................................30
Item 7. Information as to Environmental Effects............................32
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The Application/Declaration filed in this proceeding on January 10,
2000, is hereby amended and restated in its entirety to read as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
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1.1. Introduction. Energy East Corporation ("Energy East") is a New
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York corporation and public utility holding company exempt from all provisions
of the Public Utility Holding Company Act of 1935, as amended (the "Act"),
except Section 9(a)(2), by order issued under Section 3(a)(1).2 Energy East has
filed an Application/Declaration on Form U-1 (File No. 70-09569) (the "Merger
U-1 Application"), pursuant to Sections 9 and 10 and other applicable provisions
of the Act seeking approval to acquire all of the issued and outstanding common
shares of:
o CMP Group, Inc. ("CMP Group"), a Maine corporation and public
utility holding company exempt from all provisions of the Act, except
Section 9(a)(2), by order issued under Section 3(a)(1);3
o CTG Resources, Inc. ("CTG Resources"), a Connecticut corporation
and public utility holding company exempt from all provisions of the
Act, except Section 9(a)(2), pursuant to Section 3(a)(1) of the Act
and Rule 2 thereunder; and
o Berkshire Energy Resources ("Berkshire"), a Massachusetts
business trust and public utility holding company exempt from all
provisions of the Act, except Section 9(a)(2), pursuant to Section
3(a)(1) of the Act and Rule 2 thereunder.
Energy East is proposing to acquire the common shares of: CMP Group for cash
(the "CMP Merger"); CTG Resources for cash, Energy East Common Stock or a
combination of cash and Energy East Common Stock (the "CTG Merger"); and
Berkshire for cash (the "Berkshire Merger," and collectively with the CMP Merger
and the CTG Merger, the "Mergers"). A more complete description of the Mergers
and the transactions contemplated in connection with the Mergers is contained in
the Merger U-1 Application, which descriptions are hereby incorporated by
reference herein. Upon consummation of the CMP, CTG and Berkshire Mergers,
Energy East intends to register as a holding company pursuant to Section 5 of
the Act.
This Application/Declaration seeks authorization and approval of the
Commission with respect to ongoing financing activities of Energy East and its
subsidiaries, intrasystem extensions of credit, the creation, acquisition or
sale of nonutility subsidiaries, the payment of dividends out of capital and
unearned surplus and other related matters pertaining to Energy East and its
subsidiaries.
1.2. Description of Energy East and its Subsidiaries. Upon completion
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of the Mergers, Energy East will own, directly or indirectly, interests in the
following eight public utility companies, each of which will be wholly-owned by
companies within the Energy East system, unless otherwise indicated:
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2 Energy East Corp., et al., Holding Company Act Release No. 27128 (Feb. 2,
2000).
3 CMP Group, Inc., et al., Holding Company Act Release No. 35-26977 (February
12, 1999).
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o New York State Electric & Gas Corporation ("NYSEG"), a New York
corporation and a wholly-owned direct subsidiary of Energy East, which
purchases, transmits and distributes electricity and purchases,
transports and distributes natural gas in parts of New York;
o The Southern Connecticut Gas Company ("Southern Connecticut
Gas"), a Connecticut corporation and a wholly-owned subsidiary of
Connecticut Energy Corporation ("Connecticut Energy"), which is
engaged in the retail distribution and transportation of natural gas
in parts of Connecticut;
o Maine Natural Gas, L.L.C. (formerly CMP Natural Gas, L.L.C.)
("Maine Natural Gas"), a Maine limited liability company, which
distributes gas in Maine and which is a joint venture between New
England Gas Development Corp. (holding a 19% interest), a wholly-owned
subsidiary of CMP Group, and Energy East Enterprises, Inc. ("Energy
East Enterprises"), a Maine corporation (holding an 81% interest), a
wholly-owned subsidiary of Energy East and a public utility holding
company exempt from all provisions of the Act except Section 9(a)(2),
by order issued under Section 3(a)(1);
o Central Maine Power Company ("Central Maine Power"), a Maine
corporation, the common stock of which is wholly-owned by CMP Group,
which is primarily engaged in purchasing, transmitting and
distributing electricity in Maine;
o Maine Electric Power Company, Inc. ("MEPCo"), a Maine
corporation, which owns and operates a 345kV transmission
interconnection between the Maine - New Brunswick, Canada
international border at Orient, Maine - Central Maine Power presently
owns a 78.3% voting interest in MEPCo with the remaining interests
owned by two other Maine utilities;
o NORVARCO, a Maine corporation, which holds a 50% general
partnership interest in Chester SVC Partnership, a general partnership
which owns a static var compensator located in Chester, Maine,
adjacent to MEPCo's transmission interconnection - NORVARCO is
presently a wholly-owned subsidiary of Central Maine Power;
o Connecticut Natural Gas Corporation ("Connecticut Natural Gas"),
a Connecticut corporation and a wholly-owned subsidiary of CTG
Resources, which is primarily engaged in the retail distribution and
transportation of natural gas to parts of Connecticut; and
o The Berkshire Gas Company ("Berkshire Gas"), a Massachusetts
corporation and a wholly-owned subsidiary of Berkshire, which is
engaged in the sale and distribution of natural gas in western
Massachusetts.
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Collectively, the eight subsidiaries referenced above are referred to
herein as the "Utility Subsidiaries." Together, the Utility Subsidiaries provide
electric service to approximately 1.4 million wholesale, retail and industrial
electric customers in parts of New York and Maine, and gas service to
approximately 600,000 residential, commercial, agricultural and industrial
customers, in Maine, Connecticut, Massachusetts and New York.
As explained in the Merger U-1 Application, Connecticut Energy (which
Energy East acquired on February 8, 2000), CMP Group, CTG Resources and
Berkshire will remain in existence as first tier public utility holding company
subsidiaries of Energy East following the Mergers. In addition, as described
above Energy East currently owns Energy East Enterprises which is a public
utility holding company by virtue of the 81% interest it holds in Maine Natural
Gas. These companies are referred to herein as the "Intermediate Holding
Companies."
Upon completion of the Mergers, Energy East will also own interests in
three companies owning nuclear power plants, all of which have been permanently
shut down; namely, Maine Yankee Atomic Power Company, which has permanently shut
down its nuclear electric generating plant located in Wiscasset, Maine, Yankee
Atomic Electric Company, which has permanently shut down its plant located in
Rowe, Massachusetts, and Connecticut Yankee Atomic Power Company, which has
permanently shut down its plant in Haddam, Connecticut.
Upon completion of the Mergers, Energy East will also directly own, or
own an indirect interest in, approximately 41 other subsidiary companies that
are not public utility companies under the Act. Such entities are collectively
referred to herein as the "Nonutility Subsidiaries." More complete descriptions
of all of the Utility Subsidiaries and Nonutility Subsidiaries may be found in
the Merger U-1 Application, which descriptions are incorporated herein by
reference, together with the corporate chart of Energy East and its Subsidiaries
after the Mergers, filed as Exhibit E-5 to Amendment No. 1 to the Merger U-1
Application.
Among the Nonutility Subsidiaries is Energy East Management
Corporation ("EE Management"), a Delaware corporation and wholly-owned
subsidiary of Energy East, the present business of which is to manage the
investment of the net proceeds from the sale of the coal-fired generation assets
by one of Energy East's other subsidiaries. It is anticipated that in connection
with the Mergers, EE Management will assume the role of providing management,
administrative and corporate support services to the companies within the Energy
East system. A separate Application/Declaration on Form U-1 will be filed with
the Commission by Energy East in connection with EE Management assuming such
responsibilities.
Collectively, the Utility Subsidiaries, the Intermediate Holding
Companies and the Nonutility Subsidiaries are referred to herein as the
"Subsidiaries." The term "Subsidiaries" shall also include entities that become
subsidiaries of Energy East after the consummation of the Mergers.
1.3. Capital Structure of Energy East. Energy East is authorized under
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its Restated Certificate of Incorporation, as amended (see Exhibits A-1 and A-2
hereto), to issue 300,000,000 shares of Common Stock, par value $.01 per share
("Common Stock") and 10,000,000 shares of preferred stock, par value $.01 per
share ("Preferred Stock"). Immediately following the CTG Merger, Energy East
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expects that it will have issued and outstanding approximately 120,000,000
shares of Common Stock.4 Energy East has not issued any Preferred Stock and will
not issue any Preferred Stock in connection with the Mergers. The cash portion
of the consideration to be paid in the Mergers will be financed in part by the
issuance of approximately $500 million of unsecured debt ("Acquisition Debt").
The terms and conditions of the Acquisition Debt have not been negotiated as of
the time of this filing. However, it is expected that the Acquisition Debt will
have maturities of up to 30 years. Immediately after the Mergers, it is
projected that common equity as a percentage of the pro forma consolidated
capitalization of Energy East and Subsidiaries (including short-term debt) will
be approximately 39%.
1.4. Summary of Requested Approvals. Energy East and the Subsidiaries
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hereby request approval for a program of external financing, credit support
arrangements, and other related proposals for the period commencing on the
effective date of an order issued pursuant to this filing and ending March 31,
2003 ("Authorization Period"),5 as follows:
(i) Energy East requests authority to issue Common Stock to
shareholders of CTG Resources in connection with the CTG Merger. In addition,
Energy East requests authority to maintain in place the Acquisition Debt and to
refinance such Acquisition Debt.
(ii) Energy East requests authority to issue and sell from time to
time during the Authorization Period Common Stock, Preferred Stock, and
unsecured debentures having maturities of up to 50 years (the "Debentures") in
an aggregate amount not to exceed $2.5 billion, and unsecured short-term
indebtedness having maturities of one year or less (hereinafter, "Short-term
Debt") in an aggregate principal amount at any time outstanding not to exceed
$750 million, provided that the aggregate principal amount of all indebtedness
of Energy East at any time outstanding (including Acquisition Debt, Debentures
and Short-term Debt), shall not exceed $1.5 billion (the "Energy East Debt
Limitation").
(iii) The Utility Subsidiaries and Intermediate Holding Companies
request authority to issue, sell and have outstanding at any one time during the
Authorization Period debt securities with maturities of one year or less in the
following aggregate principal amounts:
Utility Subsidiaries Aggregate Principal Amount
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NYSEG $275,000,000
Maine Natural Gas 50,000,000
Central Maine Power 150,000,000
MEPCo 30,000,000
NORVARCO 30,000,000
Southern Connecticut Gas 100,000,000
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4 The exact number of shares of Common Stock which will be issued in the CTG
Merger will depend upon the number of shares of CTG Resources common stock
outstanding on the date of the CTG Merger and the exchange ratio on such
date.
5 As indicated in Item 1.15.1 below, the requested authorization period for
the dividend relief requested is for the duration of the goodwill
amortization period described therein.
4
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Connecticut Natural Gas 100,000,000
Berkshire Gas 50,000,000
Intermediate Holding Company Aggregate Principal Amount
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CMP Group $ 30,000,000
Connecticut Energy 30,000,000
CTG Resources 30,000,000
Berkshire 30,000,000
Energy East Enterprises 30,000,000
(iv) To the extent that such transactions are not exempt under Rule
52(b), the Nonutility Subsidiaries request authority to issue and sell from time
to time during the Authorization Period debt and equity securities in order to
finance their operations and future nonutility investments, provided that such
future investments are exempt under the Act or rules thereunder or have been
authorized in a separate proceeding.
(v) Energy East requests authority to provide guaranties and other
forms of credit support ("Energy East Guaranties") with respect to the
securities or other obligations of its Subsidiaries in an aggregate principal or
nominal amount not to exceed $1 billion at any one time outstanding.
(vi) Nonutility Subsidiaries request authority to provide guaranties
and other forms of credit support ("Nonutility Subsidiary Guaranties") with
respect to obligations of other Nonutility Subsidiaries in an aggregate
principal or nominal amount not to exceed $700 million at any one time
outstanding, exclusive of any guaranties that are exempt pursuant to Rule 45(b)
and Rule 52. In addition, each of the Intermediate Holding Companies request
authority to provide guaranties and other forms of credit support to or on
behalf of their respective Subsidiaries up to the following aggregate principal
or nominal amounts:
Intermediate Holding Company Aggregate Principal Amount
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CMP Group $30,000,000
Connecticut Energy 30,000,000
CTG Resources 30,000,000
Berkshire 30,000,000
Energy East Enterprises 30,000,000
(vii) Energy East and, to the extent not exempt under Rule 52, the
Subsidiaries request authority to enter into hedging transactions ("Interest
Rate Hedges") with respect to outstanding indebtedness of such companies in
order to manage and minimize interest rate costs. Such companies also request
authority to enter into hedging transactions ("Anticipatory Hedges") with
respect to anticipatory debt issuances in order to lock-in current interest
rates and/or manage interest rate risk exposure.
(viii) Energy East, on behalf of the Subsidiaries, requests
authorization to change any wholly-owned Subsidiary's authorized capitalization.
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(ix) Energy East and the Subsidiaries request authority to acquire the
equity securities of one or more special-purpose subsidiaries ("Financing
Subsidiaries") organized solely to facilitate a financing and to guaranty the
securities issued by such Financing Subsidiaries, to the extent not exempt
pursuant to Rule 45(b) and Rule 52.
(x) Energy East requests authority to acquire, directly or indirectly,
the equity securities of one or more intermediate subsidiaries ("Intermediate
Subsidiaries") organized exclusively for the purpose of acquiring, financing,
and holding the securities of one or more existing or future Nonutility
Subsidiaries, including but not limited to "exempt wholesale generators"
("EWGs"), as defined in Section 32 of the Act, "foreign utility companies"
("FUCOs"), as defined in Section 33 of the Act, companies engaged or formed to
engage in activities permitted by Rule 58 ("Rule 58 Subsidiaries"), or "exempt
telecommunications companies" ("ETCs"), as defined in Section 34 of the Act,
provided that the Intermediate Subsidiaries may also provide management,
administrative, project development, and operating services to such entities.
(xi) Nonutility Subsidiaries request authority to invest up to $700
million in certain types of nonutility energy-related assets ("Energy-Related
Assets") that are incidental to energy marketing activities of such companies,
or the capital stock of companies substantially all of whose physical assets
consist of such Energy-Related Assets.
(xii) As permitted by Rule 87(b)(1), Nonutility Subsidiaries may from
time to time provide services and sell goods to each other. To the extent not
exempt pursuant to Rule 90(d), such companies request authority to perform such
services and to sell such goods to each other at fair market prices, without
regard to "cost," as determined in accordance with Rules 90 and 91, subject to
certain limitations that are noted below.
(xiii) Energy East requests authority on behalf of any current and
future Rule 58 Subsidiaries to engage in certain categories of activities
permitted thereunder both within and outside the United States.
(xiv) Energy East, the Intermediate Holding Companies and their
respective Subsidiaries request authority to pay dividends out of capital and
unearned surplus, subject to certain limitations.
(xv) Energy East requests approval for an agreement among Energy East
and the Subsidiaries to allocate consolidated income tax liabilities.
1.5. USE OF PROCEEDS. The proceeds from the financings authorized by
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the Commission pursuant to this Application/Declaration will be used for general
corporate purposes, including (i) financing, in part, investments by and capital
expenditures of Energy East and its Subsidiaries, including, without limitation,
the funding of future investments in EWGs, FUCOs, Rule 58 Subsidiaries, and
ETCs, (ii) the repayment, redemption, refunding or purchase by Energy East or
any Subsidiary of any of its own securities pursuant to Rule 42, and (iii)
financing working capital requirements of Energy East and its Subsidiaries.
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The Applicants represent that no financing proceeds will be used to
acquire the securities of, or other interests in, any company unless such
acquisition has been approved by the Commission in this proceeding or in a
separate proceeding or in accordance with an available exemption under the Act
or rules thereunder, including Sections 32 and 33 and Rule 58. Energy East
states that the aggregate amount of proceeds of financing and Energy East
Guaranties approved by the Commission in this proceeding used to fund
investments in EWGs and FUCOs will not, when added to Energy East's "aggregate
investment" (as defined in Rule 53) in all such entities at any point in time,
exceed 50% of Energy East's "consolidated retained earnings" (also as defined in
Rule 53). Further, Energy East represents that proceeds of financing and Energy
East Guaranties and Nonutility Subsidiary Guaranties utilized to fund
investments in Rule 58 Subsidiaries will be subject to the limitations of that
rule. Energy East further represents that it will not seek to recover through
higher rates of any of the Utility Subsidiaries losses attributable to any
operations of its Nonutility Subsidiaries.
1.6. DESCRIPTION OF PROPOSED FINANCING PROGRAM.
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1.6.1. Energy East External Financing. Energy East requests authority
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to issue and sell from time to time during the Authorization Period Common
Stock, Preferred Stock, and Debentures in an aggregate amount not to exceed $2.5
billion, and up to $750 million of Short-term Debt at any time outstanding,
subject to the following terms and conditions:
(a) Common Stock. Energy East requests authorization to issue and
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sell Common Stock from time to time during the Authorization Period, either
through underwritten public offerings, in private placements, pursuant to its
dividend reinvestment plan and stock-based management incentive and employee
benefit plans or in exchange for securities or assets being acquired from other
companies. Energy East may issue and sell Common Stock or options, warrants, or
other stock purchase rights that are exercisable for Common Stock and issue
Common Stock upon the exercise of such options, warrants, or other stock
purchase rights. Energy East may also buy back shares of Common Stock during the
Authorization Period in accordance with Rule 42.
Energy East may issue and sell Common Stock pursuant to underwriting
agreements of a type generally standard in the industry. Public distributions
may be pursuant to private negotiation with underwriters, dealers or agents, as
discussed below, or effected through competitive bidding among underwriters. In
addition, sales may be made through private placements or other non-public
offerings to one or more persons. All such Common Stock sales will be at rates
or prices and under conditions negotiated or based upon, or otherwise determined
by, competitive capital markets.
Specifically, Energy East may issue and sell Common Stock through
underwriters or dealers, through agents, or directly to a limited number of
purchasers or a single purchaser. If underwriters are used in the sale of Common
Stock, such securities may be acquired by the underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. Common Stock may be offered to the public either
through underwriting syndicates (which may be represented by a managing
underwriter or underwriters designated by Energy East) or directly by one or
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more underwriters acting alone. Common Stock may be sold directly by Energy East
or through agents designated by Energy East from time to time. If dealers are
utilized in the sale of Common Stock, Energy East will sell such securities to
the dealers, as principals. Any dealer may then resell such Common Stock to the
public at varying prices to be determined by such dealer at the time of resale.
If Common Stock is being sold in an underwritten offering, Energy East may grant
the underwriters thereof a "green shoe" option permitting the purchase from
Energy East at the same price additional shares then being offered solely for
the purpose of covering over-allotments.
Energy East, CMP Group and CTG Resources currently have in effect the
stock based plans listed in Exhibit I, which authorize grants of such companies'
common stock, stock options and other stock-based awards to eligible employees
and directors. Energy East may issue shares of its Common Stock under the
authorization and within the limitations set forth herein in order to satisfy
any of its obligations and the obligations of CMP Group and CTG Resources under
all such plans and under plans adopted after the effective time of the Mergers
which replace any plans listed in Exhibit I. Shares of Common Stock for use
under the common stock plans may either be newly issued shares, treasury shares
or shares purchased in the open market. Energy East will make open-market
purchases of Common Stock in accordance with the terms of or in connection with
the operation of the stock plans pursuant to Rule 42. Energy East also requests
authorization to issue and/or sell shares of Common Stock pursuant to these
existing stock plans and similar plans or plan funding arrangements hereafter
adopted, and to engage in other sales of its treasury shares for general
business purposes, without any additional prior Commission order. Stock
transactions of this variety would be treated the same as other stock
transactions permitted pursuant to this Application/Declaration.
Energy East also has a dividend reinvestment plan under which shares
of its Common Stock may be issued to shareholders reinvesting cash dividends
and/or making optional cash investments to purchase additional shares of Common
Stock. Shares of Common Stock for use under the dividend reinvestment plan may
be either newly issued shares, treasury shares, or shares purchased on the open
market. Energy East hereby seeks authority for the issuance and sale of its
shares in accordance with its dividend reinvestment plan under the authorization
and within the limitations set forth herein.
Under Rule 58 and Section 34 of the Act, Energy East is authorized to
acquire securities of companies engaged in "energy-related" businesses, as
described in Rule 58, and ETCs. Such acquisitions may involve the exchange of
parent company stock for securities of the company being acquired in order to
provide the seller with certain tax advantages. These transactions would be
individually negotiated. The Energy East Common Stock to be exchanged in such
transactions may be purchased on the open market pursuant to Rule 42, or may be
original issue or treasury shares. Original issue stock or treasury shares may
be registered under the Securities Act of 1933, as amended (the "1933 Act"), or
issued pursuant to any exemption from the registration requirements of the 1933
Act.
The ability to offer stock as consideration in an acquisition could
make a transaction more economical for Energy East as well as for the seller of
the business. Therefore, Energy East requests authorization to issue Common
Stock in consideration for an acquisition by Energy East or a Nonutility
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Subsidiary of securities or assets of a business, the acquisition of which has
been approved by the Commission in this proceeding (see Item 1.12, below) or is
exempt under the Act or the rules thereunder (specifically, Rule 58).6 The
Energy East Common Stock would be valued at market value based upon the closing
price on the day before closing of the sale or based upon average high or low
prices for a period prior to the closing of the sale as negotiated by the
parties. From the perspective of the Commission, the use of stock as
consideration valued at market value is no different than a sale of Common Stock
on the open market and the use of proceeds to acquire securities, the
acquisition of which is otherwise authorized or exempt.
(b) Preferred Stock. Energy East also proposes to issue and sell
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Preferred Stock during the Authorization Period. The dividends payable on any
series of Preferred Stock, as well as all other terms and conditions and any
associated placement, underwriting or selling agent fees, commissions and
discounts, if any, will be established by negotiation or competitive bidding and
reflected in the applicable purchase agreement or underwriting agreement setting
forth such terms; provided, however, that the dividend rate on any series of
Preferred Stock will not exceed the rate generally obtainable at the time of
issuance for preferred securities having the same or reasonably similar terms
and conditions issued by utility holding companies of reasonably comparable
credit quality, as determined by competitive capital markets.
Energy East contemplates that the Preferred Stock would be issued and
sold directly to one or more purchasers in privately-negotiated transactions or
to one or more investment banking or underwriting firms or other entities who
would resell the Preferred Stock either without registration under the 1933 Act
in reliance upon one or more applicable exemptions from registration thereunder,
or to the public either (i) through underwriters selected by negotiation or
competitive bidding or (ii) through selling agents acting either as agent or as
principal for resale to the public either directly or through dealers.
(c) Short-term Debt. The aggregate principal amount of Short-term
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Debt of Energy East at any time outstanding during the Authorization Period
shall not exceed $750 million in aggregate principal amount, subject to the
Energy East Debt Limitation. The effective cost of money on Short-term Debt
authorized in this proceeding will not exceed the competitive market rates
available at the time of issuance to companies with comparable credit ratings
with respect to debt having similar maturities.
To provide financing for general corporate purposes, to meet refunding
obligations, other working capital requirements and construction spending until
long-term financing can be obtained, Energy East may sell commercial paper, from
time to time, in established commercial paper markets. Such commercial paper
would typically be sold to dealers at the discount rate per annum prevailing at
the date of issuance for commercial paper of comparable quality and maturities
sold to commercial paper dealers generally. It is expected that the dealers
acquiring commercial paper from Energy East will reoffer such paper at a
discount to corporate and institutional investors. It is anticipated that Energy
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6 The Commission has previously approved the issuance of common stock as
consideration for the acquisition of a new business in an exempt
transaction or transaction approved in a separate proceeding. See e.g.,
SCANA Corp., Holding Co. Act Release No. 27137 (Feb. 14, 2000).
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East's commercial paper will be reoffered to investors such as commercial banks,
insurance companies, pension funds, investment trusts, foundations, colleges and
universities, finance companies and nonfinancial corporations.
Energy East also may establish bank lines in an aggregate principal
amount not to exceed the aforementioned $750 million. Loans under these lines
will have maturities not more than one year from the date of each borrowing.
Energy East may engage in other types of short-term financing generally
available to borrowers with comparable credit ratings as it may deem appropriate
in light of its needs and market conditions at the time of issuance.
(d) Debentures. Energy East requests authorization to issue and
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sell from time to time during the Authorization Period Debentures in one or more
series, subject to the Energy East Debt Limitation. The Debentures (a) may be
convertible into any other securities of Energy East, (b) will have maturities
ranging from one to 50 years, (c) may be subject to optional and/or mandatory
redemption, in whole or in part, at par or at various premiums above the
principal amount thereof, (d) may be entitled to mandatory or optional sinking
fund provisions, (e) may provide for reset of the coupon pursuant to a
remarketing arrangement, and (f) may be called from existing investors by a
third party. In addition, Energy East may have the right from time to time to
defer the payment of interest on the Debentures of one or more series (which may
be fixed or floating or "multi-modal" debentures, i.e., debentures where the
interest is periodically reset for each reset period). The Debentures will be
issued under an indenture (the "Indenture") to be entered into between Energy
East and a national bank, as trustee (the "Trustee," including any successor
trustee appointed pursuant to the Indenture).
Energy East contemplates that the Debentures would be issued and sold
directly to one or more purchasers in privately-negotiated transactions or to
one or more investment banking or underwriting firms or other entities which
would resell the Debentures either without registration under the 1933 Act in
reliance upon one or more applicable exemptions from registration thereunder, or
to the public either (i) through underwriters selected by negotiation or
competitive bidding or (ii) through selling agents acting either as agent or as
principal for resale to the public either directly or through dealers.
The maturity dates, interest rates, redemption and sinking fund
provisions and conversion features, if any, with respect to the Debentures of a
particular series, as well as any associated placement, underwriting or selling
agent fees, commissions and discounts, if any, will be established by
negotiation or competitive bidding and reflected in a purchase agreement or
underwriting agreement setting forth such terms; provided, however, that Energy
East will not issue and sell any Debentures at interest rates in excess of those
generally obtainable at the time of pricing or repricing of such Debentures for
securities having the same or reasonably similar maturities and having
reasonably similar terms, conditions and features issued by utility companies or
utility holding companies of the same or reasonably comparable credit quality,
as determined by the competitive capital markets.
Finally, Energy East undertakes that without further Commission
authorization it will not issue any Debentures that are not at the time of
original issuance rated at least investment grade by a nationally recognized
statistical rating organization.
10
<PAGE>
(e) Other Securities. In addition to the specific securities for
----------------
which authorization is sought herein, Energy East may also find it necessary or
desirable in order to minimize financing costs or to obtain new capital under
then existing market conditions to issue and sell other types of securities from
time to time during the Authorization Period. Energy East requests that the
Commission reserve jurisdiction over the issuance of additional types of
securities and the amount thereof. Energy East also undertakes to file a
post-effective amendment in this proceeding which will describe the general
terms of each such security and the amount thereof to be issued and request a
supplemental order of the Commission authorizing the issuance thereof by Energy
East.
1.6.2. Utility Subsidiary Financing. The issue and sale of most
----------------------------
securities by the Utility Subsidiaries will be exempt from the preapproval
requirements of Sections 6(a) and 7 of the Act pursuant to Rule 52(a), as most
securities offerings by a Utility Subsidiary must be approved by the state
utility commission with jurisdiction over such utility. However, certain
financings by the Utility Subsidiaries for which authorization is requested
herein may be outside the scope of the Rule 52 exemption because they will not
be subject to state commission approval. Specifically, the approval of the
Public Service Commission of the State of New York ("NYPSC") is not required for
the issuance by NYSEG of indebtedness with maturities of one year or less. The
Connecticut Department of Public Utility Control ("DPUC") has jurisdiction over
the issuance of securities by Southern Connecticut Gas and Connecticut Natural
Gas, other than indebtedness with maturities of one year or less. The Maine
Public Utilities Commission ("MPUC") has jurisdiction over the issuance of
securities by CMP Natural Gas, Central Maine Power, MEPCo and NORVARCO, other
than indebtedness one year or less. The Massachusetts Department of
Telecommunications and Energy ("MDTE") has jurisdiction over the issuance of
securities by Berkshire Gas, other than indebtedness with maturities of one year
or less.
Accordingly, the Utility Subsidiaries request authorization herein to
maintain outstanding certain indebtedness and to issue and sell the following
securities during the Authorization Period:
(a) Short-term Debt of the Utility Subsidiaries. The Utility
-------------------------------------------
Subsidiaries request authority to issue and sell from time to time during the
Authorization Period debt and securities, to the extent they are not otherwise
exempt pursuant to Rule 52(a), with maturities of one year or less, up to the
following aggregate principal amounts:
Utility Subsidiaries Aggregate Principal Amount
-------------------- --------------------------
NYSEG $275,000,000
Maine Natural Gas 50,000,000
Central Maine Power 150,000,000
MEPCo ... 30,000,000
NORVARCO 30,000,000
Southern Connecticut Gas 100,000,000
Connecticut Natural Gas 100,000,000
Berkshire Gas 50,000,000
11
<PAGE>
Subject to such limitations, the Utility Subsidiaries may engage in short-term
financing as they may deem appropriate in light of their needs and market
conditions at the time of issuance. Such short-term financing could include,
without limitation, commercial paper sold in established commercial paper
markets in a manner similar to Energy East, bank lines and debt securities
issued under their respective indentures and note PROGRAMS. The obligations
incurred in connection with any such short-term financing will bear interest at
a rate which is not greater than 300 basis points over LIBOR.
(b) Other Securities. The Utility Subsidiaries may also issue and
----------------
sell other types of securities to non-associate purchasers which do not qualify
for exemption under Rule 52 but which are considered appropriate during the
Authorization Period. The Utility Subsidiaries request that the Commission
reserve jurisdiction over the issuance of such additional types of securities
and the amounts thereof. They also undertake to cause a post-effective amendment
to be filed in this proceeding which will describe the general terms of each
such security and the amounts thereof and request a supplemental order of the
Commission authorizing the issuance thereof by the subject Utility Subsidiary.
1.6.3. Short-term Debt of Intermediate Holding Companies. Each of the
-------------------------------------------------
Intermediate Holding Companies requests authority to issue, sell and have
outstanding at any one time during the Authorization Period debt securities with
maturities of one year or less in the following aggregate principal amounts:
Intermediate Holding Company Aggregate Principal Amount
---------------------------- --------------------------
CMP Group $30,000,000
Connecticut Energy 30,000,000
CTG Resources 30,000,000
Berkshire 30,000,000
Energy East Enterprises 30,000,000
Subject to such limitations, the Intermediate Holding Companies may engage in
short-term financing as they may deem appropriate in light of their needs and
market conditions at the time of issuance. Such short-term financing could
include, without limitation, commercial paper sold in established commercial
paper markets in a manner similar to Energy East, bank lines and debt securities
issued under their respective indentures and note programs. The obligations
incurred in connection with any such short-term financing will bear interest at
a rate which is not greater than 300 basis points over LIBOR. In addition, none
of the Intermediate Holding Companies will issue any indebtedness in
contravention of any pre-existing orders of any state utility commission.
1.6.4. Nonutility Subsidiary Financing. Energy East, through its
-------------------------------
Nonutility Subsidiaries, is engaged in and expects to continue to be active in
the development and expansion of its existing energy-related, telecommunications
or otherwise functionally related, nonutility businesses, which include,
principally, fuel transportation and storage, propane distribution, energy
brokering and marketing, energy management and demand side services, district
heating and cooling, and investments in EWGs, ETCs and "qualifying facilities."
12
<PAGE>
In order to finance investments in such competitive businesses, it will be
necessary for the Nonutility Subsidiaries to have the ability to engage in
financing transactions which are commonly accepted for such types of
investments. It is believed that, in almost all cases, such financings will be
exempt from prior Commission authorization pursuant to Rule 52(b). It is
requested that the Commission reserve jurisdiction over the issuance by any
Nonutility Subsidiary of any other securities with respect to which the
exemption under Rule 52(b) would not apply. Energy East undertakes to cause a
post-effective amendment to be filed in this proceeding which will describe the
general terms of each such non-exempt security and the amounts thereof and
request a supplemental order of the Commission authorizing the issuance thereof.
In order to be exempt under Rule 52(b), any loans by Energy East to a
Nonutility Subsidiary or by one Nonutility Subsidiary to another must have
interest rates and maturities that are designed to parallel the lending
company's effective cost of capital. However, in the limited circumstances where
the Nonutility Subsidiary making the borrowing is not wholly-owned by Energy
East, directly or indirectly, authority is requested under the Act for Energy
East or a Nonutility Subsidiary, as the case may be, to make such loans to such
subsidiaries at interest rates and maturities designed to provide a return to
the lending company of not less than its effective cost of capital.7 If such
loans are made to a Nonutility Subsidiary, such company will not sell any
services to any associate Nonutility Subsidiary unless such company falls within
one of the categories of companies to which goods and services may be sold on a
basis other than "at cost," as described below in Item 1.13. Furthermore, in the
event any such loans are made, Energy East will include in the next certificate
filed pursuant to Rule 24 in this proceeding substantially the same information
as that required on Form U-6B-2 with respect to each such transaction.
1.7. GUARANTIES.
-----------
1.7.1. Energy East Guaranties. Energy East requests authorization to
----------------------
enter into guaranties, obtain letters of credit, enter into expense agreements
or otherwise provide credit support to or on behalf of Subsidiaries
(collectively, "Energy East Guaranties") as may be appropriate to enable such
Subsidiaries to operate in the ordinary course of business, in an aggregate
principal amount not to exceed $1 billion outstanding at any one time, provided
however, that the amount of any Energy East Guaranties in respect of obligations
of any EWG, FUCO, or Rule 58 Subsidiary shall also be subject to the limitations
of Rule 53(a)(1) or Rule 58(a)(1), as applicable. Energy East may charge each
Subsidiary a fee for each guaranty provided on its behalf that is not greater
than the cost, if any, of obtaining the liquidity necessary to perform the
guaranty (for example, bank line commitment fees or letter of credit fees, plus
other transactional expenses).
1.7.2. Nonutility Subsidiary Guaranties. In addition to the guaranties
--------------------------------
that may be provided by Energy East, as described above, Nonutility Subsidiaries
request authorization to enter into guaranties, obtain letters of credit, enter
- ------------------------
7 The Commission has granted similar authority to another registered holding
company. See Entergy Corporation, et al., Holding Co. Act Release No. 27039
(June 22, 1999).
13
<PAGE>
into expense agreements or otherwise provide credit support to or on behalf of
other Nonutility Subsidiaries (collectively, "Nonutility Subsidiary Guaranties")
in an aggregate principal amount not to exceed $700 million outstanding at any
one time, exclusive of any guaranties and other forms of credit support that are
exempt pursuant to Rule 45(b) and Rule 52, provided however, that the amount of
any Nonutility Subsidiary Guaranties in respect of obligations of any Rule 58
Subsidiary shall also be subject to the limitations of Rule 58(a)(1). The
Nonutility Subsidiary providing any such credit support may charge its associate
company a fee for each guaranty provided on its behalf determined in the same
manner as specified above.
1.7.3. Intermediate Holding Company Guaranties. Each Intermediate
---------------------------------------
Holding Company requests authorization to enter into guaranties, obtain letters
of credit, enter into expense agreements or otherwise provide credit support to
or on behalf of their respective subsidiary companies (collectively, the
"Intermediate Holding Company Guaranties") as may be appropriate to enable such
companies to operate in the ordinary course of business, in an aggregate
principal amount not to exceed $30 million outstanding at any one time, provided
however, that the amount of any Intermediate Holding Company Subsidiary
Guaranties in respect of obligations of any Rule 58 Subsidiary shall also be
subject to the limitations of Rule Rule 58(a)(1). The Intermediate Holding
Companies may charge their subsidiaries a fee for each guaranty provided on its
behalf determined in the same manner as specified above. The Intermediate
Holding Companies will not issue any guaranties in contravention of any orders
of any state utility commission.
1.8. HEDGING TRANSACTIONS.
--------------------
1.8.1. Interest Rate Hedges. Energy East, and to the extent not exempt
--------------------
pursuant to Rule 52, the Subsidiaries, request authorization to enter into
interest rate hedging transactions with respect to outstanding indebtedness
("Interest Rate Hedges"), subject to certain limitations and restrictions, in
order to reduce or manage interest rate costs. Interest Rate Hedges would only
be entered into with counterparties ("Approved Counterparties") whose senior
debt ratings, or the senior debt ratings of the parent companies of the
counterparties, as published by Standard and Poor's, are equal to or greater
than BBB, or an equivalent rating from Moody's Investors Service, Fitch Investor
Service or Duff and Phelps.
Interest Rate Hedges will involve the use of financial instruments
commonly used in today's capital markets, such as interest rate swaps, caps,
collars, floors, and structured notes (i.e., a debt instrument in which the
principal and/or interest payments are indirectly linked to the value of an
underlying asset or index), or transactions involving the purchase or sale,
including short sales, of U.S. Treasury obligations. The transactions would be
for fixed periods and stated notional amounts. In no case will the notional
principal amount of any interest rate swap exceed that of the underlying debt
instrument and related interest rate exposure. Thus, Energy East and its
Subsidiaries will not engage in speculative transactions. Fees, commissions and
other amounts payable to the counterparty or exchange (excluding, however, the
swap or option payments) in connection with an Interest Rate Hedge will not
exceed those generally obtainable in competitive markets for parties of
comparable credit quality.
14
<PAGE>
1.8.2. Anticipatory Hedges. In addition, Energy East and the
-------------------
Subsidiaries request authorization to enter into interest rate hedging
transactions with respect to anticipated debt offerings (the "Anticipatory
Hedges"), subject to certain limitations and restrictions. Such Anticipatory
Hedges would only be entered into with Approved Counterparties, and would be
utilized to fix and/or limit the interest rate risk associated with any new
issuance through (i) a forward sale of exchange-traded U.S. Treasury futures
contracts, U.S. Treasury obligations and/or a forward swap (each a "Forward
Sale"), (ii) the purchase of put options on U.S. Treasury obligations (a "Put
Options Purchase"), (iii) a Put Options Purchase in combination with the sale of
call options on U.S. Treasury obligations (a "Zero Cost Collar "), (iv)
transactions involving the purchase or sale, including short sales, of U.S.
Treasury obligations, or (v) some combination of a Forward Sale, Put Options
Purchase, Zero Cost Collar and/or other derivative or cash transactions,
including, but not limited to structured notes, caps and collars, appropriate
for the Anticipatory Hedges.
Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades")
with brokers through the opening of futures and/or options positions traded on
the Chicago Board of Trade ("CBOT"), the opening of over-the-counter positions
with one or more counterparties ("Off-Exchange Trades"), or a combination of
On-Exchange Trades and Off-Exchange Trades. Energy East or a Subsidiary will
determine the optimal structure of each Anticipatory Hedge transaction at the
time of execution. Energy East or a Subsidiary may decide to lock in interest
rates and/or limit its exposure to interest rate increases. All open positions
under Anticipatory Hedges will be closed on or prior to the date of the new
issuance and neither Energy East nor any Subsidiary will, at any time, take
possession or make delivery of the underlying U.S. Treasury Securities.
The Applicants will comply with the then existing financial disclosure
requirements of the Financial Accounting Standards Board associated with all
Interest Rate Hedges and Anticipatory Hedges.8
1.9. CHANGES IN CAPITAL STOCK OF SUBSIDIARIES. The portion of an
----------------------------------------
individual Subsidiary's aggregate financing to be effected through the sale of
stock to Energy East or other intermediate parent company during the
Authorization Period pursuant to Rule 52 and/or pursuant to an order issued in
this proceeding cannot be ascertained at this time. It may happen that the
proposed sale of capital securities may in some cases exceed the then authorized
capital stock of such Subsidiary. In addition, the Subsidiary may choose to use
capital stock with no par value. Also, a wholly-owned Subsidiary may wish to
engage in a reverse stock split to reduce franchise taxes. As needed to
accommodate such proposed transactions and to provide for future issues, request
is made for authority to change any such wholly-owned Subsidiary's authorized
capital stock capitalization by an amount deemed appropriate by Energy East or
other intermediate parent company in the instant case. A Subsidiary would be
- ------------------------
8 The proposed terms and conditions of the Interest Rate Hedges and
Anticipatory Hedges are substantially the same as the Commission has
approved in other cases. See New Century Energies, Inc., et al., Holding
Co. Act Release No. 27000 (April 7, 1999); and Ameren Corp., et al.,
Holding Co. Act Release No. 27053 (July 23, 1999).
15
<PAGE>
able to change the par value, or change between par value and no-par stock,
without additional Commission approval. Any such action by a Utility Subsidiary
would be subject to and would only be taken upon the receipt of any necessary
approvals by the state commission in the state or states where the Utility
Subsidiary is incorporated and doing business.9
1.10. FINANCING SUBSIDIARIES. Energy East and the Subsidiaries request
----------------------
authority to acquire, directly or indirectly, the equity securities of one or
more corporations, trusts, partnerships or other entities (hereinafter,
"Financing Subsidiaries") created specifically for the purpose of facilitating
the financing of the authorized and exempt activities (including exempt and
authorized acquisitions) of such companies through the issuance of long-term
debt or equity securities, including but not limited to monthly income preferred
securities, to third parties and the transfer of the proceeds of such financings
by such Financing Subsidiaries to Energy East or to a Subsidiary, as the case
may be. Energy East may, if required, guaranty or enter into expense agreements
in respect of the obligations of any Financing Subsidiary which it organizes.
The Subsidiaries may also provide guaranties and enter into expense agreements,
if required, on behalf of any Financing Subsidiaries which they organize
pursuant to Rules 45(b)(7) and 52, as applicable. If the direct parent company
of a Financing Subsidiary is authorized in this proceeding or any subsequent
proceeding to issue long-term debt or similar types of equity securities, then
the amount of such securities issued by that Financing Subsidiary would count
against the limitation applicable to its parent for those securities. In such
cases, however, the guaranty by the parent of that security issued by its
Financing Subsidiary would not be counted against the limitations on Energy East
Guaranties or Intermediate Holding Company Guaranties or Nonutility Subsidiary
Guaranties, as the case may be, set forth in Item 1.7.1, 1.7.2 or 1.7.3, above.
In other cases, in which the parent company is not authorized herein or in a
subsequent proceeding to issue similar types of securities, the amount of any
guaranty not exempt pursuant to Rules 45(b)(7) and 52 that is entered into by
the parent company with respect to securities issued by its Financing Subsidiary
would be counted against the limitation on Energy East Guaranties, Intermediate
Holding Company Guaranties or Nonutility Subsidiary Guaranties, as the case may
be. Energy East requests that the Commission reserve jurisdiction over any
transfer of proceeds of financing by any Financing Subsidiary to Energy East
pending completion of the record.10
1.11. INTERMEDIATE SUBSIDIARIES. Energy East requests authorization to
-------------------------
acquire, directly or indirectly, the securities of one or more Intermediate
Subsidiaries, which would be organized exclusively for the purpose of acquiring,
holding and/or financing the acquisition of the securities of or other interest
in one or more EWGs or FUCOs, Rule 58 Subsidiaries, ETCs or other Nonutility
Subsidiaries (as authorized in this proceeding or in a separate proceeding),
- ------------------------
9 The Commission has granted similar approvals to other registered holding
companies. See Conectiv, Inc., Holding Co. Act Release No. 26833 (Feb. 26,
1998); and New Century Energies, Inc., Holding Co. Act Release No. 26750
(Aug. 1, 1997).
10 The Commission has previously authorized registered holding companies and
their subsidiaries to create financing subsidiaries, subject to
substantially the same terms and conditions. See New Century Energies,
Inc., et al., Holding Co. Act Release No. 27000 (April 7, 1999); and Ameren
Corp., et al., Holding Co. Act Release No. 27053 (July 23, 1999).
16
<PAGE>
provided that Intermediate Subsidiaries may also engage in development
activities ("Development Activities") and administrative activities
("Administrative Activities"), as described below, relating to such
subsidiaries. To the extent such transactions are not exempt from the Act or
otherwise authorized or permitted by rule, regulation or order of the Commission
issued thereunder, Energy East requests authority for Intermediate Subsidiaries
to provide management, administrative, project development and operating
services to such entities. Such services may be rendered at fair market prices
to the extent they qualify for any of the exceptions from the "at cost" standard
requested in Item 1.13, below.
Development Activities will be limited to due diligence and design
review; market studies; preliminary engineering; site inspection; preparation of
bid proposals, including, in connection therewith, posting of bid bonds;
application for required permits and/or regulatory approvals; acquisition of
site options and options on other necessary rights; negotiation and execution of
contractual commitments with owners of existing facilities, equipment vendors,
construction firms, power purchasers, thermal "hosts," fuel suppliers and other
project contractors; negotiation of financing commitments with lenders and other
third-party investors; and such other preliminary activities as may be required
in connection with the purchase, acquisition, financing or construction of
facilities or the acquisition of securities of or interests in new businesses.
Intermediate Subsidiaries request authority to expend up to $100 million during
the Authorization Period on all such Development Activities. Administrative
Activities will include ongoing personnel, accounting, engineering, legal,
financial, and other support activities necessary to manage Energy East's
investments in Nonutility Subsidiaries.
There are several legal and business reasons for the use of
special-purpose intermediate companies in connection with making investments in
EWGs and FUCOs, Rule 58 Subsidiaries, ETCs and other non-exempt Nonutility
Subsidiaries. For example, the formation and acquisition of special-purpose
subsidiaries is often necessary or desirable to facilitate financing the
acquisition and ownership of a FUCO, an EWG or another nonutility enterprise.
Furthermore, the laws of some foreign countries may require that the bidder in a
privatization program be organized in that country. In such cases, it may be
necessary to form a foreign subsidiary as the entity (or participant in the
entity) that submits the bid or other proposal.
An Intermediate Subsidiary may be organized, among other things, (1)
in order to facilitate the making of bids or proposals to develop or acquire an
interest in any EWG or FUCO, Rule 58 Subsidiary, ETC or other non-exempt
Nonutility Subsidiary; (2) after the award of such a bid proposal, in order to
facilitate closing on the purchase or financing of such acquired company; (3) at
any time subsequent to the consummation of an acquisition of an interest in any
such company in order, among other things, to effect an adjustment in the
respective ownership interests in such business held by Energy East and
non-affiliated investors; (4) to facilitate the sale of ownership interests in
one or more acquired nonutility companies; (5) to comply with applicable laws of
foreign jurisdictions limiting or otherwise relating to the ownership of
domestic companies by foreign nationals; (6) as a part of tax planning in order
to limit Energy East's exposure to state, U.S. and foreign taxes; (7) to further
insulate Energy East and the Utility Subsidiaries from operational or other
business risks that may be associated with investments in nonutility companies;
or (8) for other lawful business purposes.
17
<PAGE>
Investments in Intermediate Subsidiaries or New Subsidiaries may take
the form of any combination of the following: (1) purchases of capital shares,
partnership interests, member interests in limited liability companies, trust
certificates or other forms of equity interests; (2) capital contributions; (3)
open account advances with or without interest; (4) loans; and (5) guaranties
issued, provided or arranged in respect of the securities or other obligations
of any Intermediate Subsidiaries or New Subsidiaries. Funds for any direct or
indirect investment in any Intermediate Subsidiaries or New Subsidiaries will be
derived from (1) financings authorized in this proceeding; (2) any appropriate
future debt or equity securities issuance authorization obtained by Energy East
from the Commission; and (3) other available cash resources, including proceeds
of securities sales by a Nonutility Subsidiary pursuant to Rule 52. To the
extent that Energy East provides funds or guaranties directly or indirectly to
an Intermediate Subsidiary which are used for the purpose of making an
investment in any EWG or FUCO or a Rule 58 Subsidiary, the amount of such funds
or guaranties will be included in Energy East's "aggregate investment" in such
entities, as calculated in accordance with Rule 53 or Rule 58, as applicable.11
Energy East may determine from time to time to consolidate or
otherwise reorganize all or any part of its direct and indirect ownership
interests in Nonutility Subsidiaries, and the activities and functions related
to such investments, under one or more Intermediate Subsidiaries. To effect any
such consolidation or other reorganization, Energy East may wish to either
contribute the equity securities of one Nonutility Subsidiary to another
Nonutility Subsidiary or sell (or cause a Nonutility Subsidiary to sell) the
equity securities of one Nonutility Subsidiary to another one. To the extent
that these transactions are not otherwise exempt under the Act or Rules
thereunder,12 Energy East hereby requests authorization under the Act to
consolidate or otherwise reorganize under one or more direct or indirect
Intermediate Subsidiaries, Energy East's ownership interests in existing and
future Nonutility Subsidiaries.13 Such transactions may take the form of a
Nonutility Subsidiary selling, contributing or transferring the equity
securities of a subsidiary as a dividend to an Intermediate Subsidiary, and
Intermediate Subsidiaries acquiring, directly or indirectly, the equity
securities of such companies, either by purchase or by receipt of a dividend.
The purchasing Nonutility Subsidiary in any transaction structured as an
intrasystem sale of equity securities may execute and deliver its promissory
note evidencing all or a portion of the consideration given. Each transaction
would be carried out in compliance with all applicable U.S. or foreign laws and
accounting requirements, and any transaction structured as a sale would be
carried out for a consideration equal to the book value of the equity securities
- ------------------------
11 The Commission has previously authorized registered holding companies to
organize intermediate subsidiary companies to acquire and hold various
nonutility subsidiaries, and for such intermediate companies to provide
administrative and development services to such subsidiaries. See New
Century Energies, Inc., et al., Holding Co. Act Release No. 27000 (April 7,
1999); Entergy Corporation, et al., Holding Co. Act Release No. 27039 (June
22, 1999); and Ameren Corp., et al., Holding Co. Act Release No. 27053
(July 23, 1999).
12 Sections 12(c), 32(g), 33(c)(1) and 34(d) and Rules 43(b), 45(b), 46(a) and
58, as applicable, may exempt many of the transactions described in this
paragraph.
13 The Commission has granted similar authority to other registered holding
companies. See Entergy Corporation, et al., Holding Co. Act Release No.
27039 (June 22, 1999), Columbia Energy Group, et al., Holding Co. Act
Release No. 27099 (November 5, 1999).
18
<PAGE>
being sold. Energy East will report each such transaction in the next quarterly
certificate filed pursuant to Rule 24 in this proceeding, as described below.
1.12. INVESTMENTS IN ENERGY-RELATED ASSETS. Nonutility Subsidiaries
------------------------------------
request authority to acquire or construct in one or more transactions from time
to time during the Authorization Period, nonutility energy assets in the United
States, including, without limitation, natural gas production, gathering,
processing, storage and transportation facilities and equipment, liquid oil
reserves and storage facilities, and associated facilities (collectively,
"Energy-Related Assets"), that would be incidental to the energy marketing,
brokering and trading operations of Energy East's Subsidiaries.14 Nonutility
Subsidiaries request authorization to invest up to $500 million (the "Investment
Limitation") during the Authorization Period in such Energy-Related Assets or in
the equity securities of existing or new companies substantially all of whose
physical properties consist or will consist of such Energy-Related Assets.15
Such Energy-Related Assets (or equity securities of companies owning
Energy-Related Assets) may be acquired for cash or in exchange for Common Stock
or other securities of Energy East or a Nonutility Subsidiary of Energy East, or
any combination of the foregoing. If Common Stock of Energy East is used as
consideration in connection with any such acquisition, the market value thereof
on the date of issuance will be counted against the requested Investment
Limitation. The stated amount or principal amount of any other securities issued
as consideration in any such transaction will also be counted against the
Investment Limitation. Under no circumstances will any Nonutility Subsidiary
acquire, directly or indirectly, any assets or properties the ownership or
operation of which would cause such company to be considered an "electric
utility company" or "gas utility company" as defined under the Act.
As this Commission has recognized in American Electric Power Company,
Inc., et al., 68 SEC Docket 1251 (November 2, 1998) and SEI Holdings, Inc., 62
SEC Docket 2493 (September 26, 1996) and other decisions, a successful marketer
of energy commodities must be able to control some level of physical assets that
are incidental and reasonably necessary in its day-to-day operations. For
example, gas marketers today must be able to offer their customers a variety of
value-added, or "bundled," services, such as gas storage and processing, that
the interstate pipelines offered prior to FERC Order 636.16 In order to provide
such value-added services, many of the leading gas marketers have invested in
production, gathering, processing, and storage capacity at or near the principal
gas producing areas and hubs and market centers in the U.S. Similarly, in order
to compete with both interstate pipelines and local distribution companies for
industrial and electric utility sales, marketers must have the flexibility to
- ------------------------
14 Currently, Energy East's electric power and gas marketing operations are
conducted through Energy East Solutions, Inc. and NYSEG Solutions Inc.
15 Companies whose physical properties consist of Energy-Related Assets may
also be currently engaged in energy (gas or electric or both) marketing
activities. To the extent necessary, applicants request authorization to
continue such activities in the event they acquire such companies.
16 See FERC Order 636, FERC Stats. & Regs.P. 30,939, "Pipeline Service
Obligations and Revisions to Regulations Governing Self-Implementing
Transportation; and Regulation of Natural Gas Pipelines After Partial
Wellhead Decontrol," 57 Fed. Reg. 13,270 (April 16, 1992).
19
<PAGE>
acquire or construct such supply facilities. In fact, most of the larger energy
marketers today own, directly or through affiliates, substantial physical assets
of the type described herein.
The acquisition of production, gathering, processing, and storage
capacity provide energy marketers the opportunity to hedge the price of future
supplies of natural gas against changes in demand brought about due to weather,
increased usage requirements by end use customers, or other volatility imposed
by the market. Storage and pipeline assets allow energy marketers to "bank" low
cost supplies for use during periods of high volatility or take advantage of
differential price spreads between different markets. Energy marketers with
strong and balanced physical asset portfolios are able to originate tolling or
reverse tolling of gas and electric commodities, whereby the payment is made in
one or the other commodity. The integration of production, gathering, and
storage assets offer energy marketers the opportunity to provide either gas or
electric products and services to energy users, at their discretion, depending
on user requirements and needs. Finally, the physical assets underlying an
energy marketer's balance sheet may provide substantial credit support for the
financial transactions undertaken by the marketer.
Energy East may add to the existing base of nonutility,
marketing-related, assets held by its subsidiaries as and when market conditions
warrant, whether through acquisitions of specific assets or groups of assets
that are offered for sale, or by acquiring existing companies (for example,
other gas marketing companies which own significant physical assets in the areas
of gas production, processing, storage, and transportation).
1.13. SALES OF SERVICES AND GOODS AMONG NONUTILITY SUBSIDIARIES OF
------------------------------------------------------------
ENERGY EAST. Energy East's Nonutility Subsidiaries request authorization to
- -----------
provide services and sell goods to each other at fair market prices determined
without regard to cost, and therefore request an exemption (to the extent that
Rule 90(d) does not apply) pursuant to Section 13(b) from the cost standards of
Rules 90 and 91 as applicable to such transactions, in any case in which the
Nonutility Subsidiary purchasing such goods or services is:
(i) A FUCO or foreign EWG which derives no part of its income, directly or
indirectly, from the generation, transmission, or distribution of electric
energy for sale within the United States;
(ii) An EWG which sells electricity at market-based rates which have been
approved by the Federal Energy Regulatory Commission ("FERC"), provided that the
purchaser is not one of the Utility Subsidiaries;
(iii) A "qualifying facility" ("QF") within the meaning of the Public Utility
Regulatory Policies Act of 1978, as amended ("PURPA") that sells electricity
exclusively (a) at rates negotiated at arms'-length to one or more industrial or
commercial customers purchasing such electricity for their own use and not for
resale, and/or (ii) to an electric utility company (other than a Utility
Subsidiary) at the purchaser's "avoided cost" as determined in accordance with
the regulations under PURPA;
20
<PAGE>
(iv) A domestic EWG or QF that sells electricity at rates based upon its
cost of service, as approved by FERC or any state public utility commission
having jurisdiction, provided that the purchaser thereof is not one of the
Utility Subsidiaries; or
(v) A Rule 58 Subsidiary or any other Nonutility Subsidiary that (a) is
partially-owned by Energy East, provided that the ultimate purchaser of such
goods or services is not a Utility Subsidiary or EE Management (or any other
entity that Energy East may form whose activities and operations are primarily
related to the provision of goods and services to the Utility Subsidiaries or EE
Management), (b) is engaged solely in the business of developing, owning,
operating and/or providing services or goods to Nonutility Subsidiaries
described in clauses (i) through (iv) immediately above, or (c) does not derive,
directly or indirectly, any material part of its income from sources within the
United States and is not a public-utility company operating within the United
States.17
1.14. ACTIVITIES OF RULE 58 SUBSIDIARIES WITHIN AND OUTSIDE THE UNITED
----------------------------------------------------------------
STATES. Energy East, on behalf of any current or future Rule 58 Subsidiaries,
- ------
requests authority to engage in business activities permitted by Rule 58 both
within and outside the United States. Such activities may include:
(i) the brokering and marketing of electricity, natural gas and other
energy commodities ("Energy Marketing");
(ii) energy management services ("Energy Management Services"), including
the marketing, sale, installation, operation and maintenance of various products
and services related to energy management and demand-side management, including
energy and efficiency audits; facility design and process control and
enhancements; construction, installation, testing, sales and maintenance of (and
training client personnel to operate) energy conservation equipment; design,
implementation, monitoring and evaluation of energy conservation programs;
development and review of architectural, structural and engineering drawings for
energy efficiencies, design and specification of energy consuming equipment; and
general advice on programs; the design, construction, installation, testing,
sales and maintenance of new and retrofit heating, ventilating, and air
conditioning ("HVAC"), electrical and power systems, alarm and warning systems,
motors, pumps, lighting, water, water-purification and plumbing systems, and
related structures, in connection with energy-related needs; and the provision
of services and products designed to prevent, control, or mitigate adverse
effects of power disturbances on a customer's electrical systems; and
(iii) engineering, consulting and other technical support services
("Consulting Services") with respect to energy-related businesses, as well as
for individuals. Such Consulting Services would include technology assessments,
power factor correction and harmonics mitigation analysis, meter reading and
repair, rate schedule design and analysis, environmental services, engineering
- ------------------------
17 The five circumstances in which market based pricing would be allowed are
substantially the same as those approved by the Commission in other cases.
See Entergy Corporation, et al., Holding Co. Act Release No. 27039 (June
22, 1999); Ameren Corp., et al. , Holding Co. Act Release No. 27053 (July
23, 1999); and Interstate Energy Corporation, Holding Co. Act Release No.
27069 (August 26, 1999).
21
<PAGE>
services, billing services (including consolidation billing and bill
disaggregation tools), risk management services, communications systems,
information systems/data processing, system planning, strategic planning,
finance, feasibility studies, and other similar services.
Energy East requests that the Commission (i) reserve jurisdiction over
Energy Marketing activities outside the United States and Canada pending
completion of the record in this proceeding18 (ii) authorize Energy East and its
direct and indirect subsidiaries to provide Energy Management Services and
Consulting Services anywhere outside the United States,19 and (iii) reserve
jurisdiction over other activities of Rule 58 Subsidiaries outside the United
States, pending completion of the record.
1.15. PAYMENT OF DIVIDENDS OUT OF CAPITAL AND UNEARNED SURPLUS.
--------------------------------------------------------
1.15.1. Payment of Dividends by Energy East, the Intermediate
-----------------------------------------------------
Holding Companies and the Utility Subsidiaries. As a result of the application
- ----------------------------------------------
of the purchase method of accounting, the Mergers have created (in the case of
the Connecticut Energy Merger, which has closed) and will create (in the case of
the other Mergers) a substantial amount of goodwill, the difference between the
aggregate fair values of all identifiable tangible and intangible assets, and
the total consideration to be paid and the fair values of the liabilities
assumed in the transactions. In accordance with the Commission's Staff
Accounting Bulletin No. 54, Topic 5J ("Staff Accounting Bulletin"), the
goodwill, which is reflected in the pro forma consolidated financial statements
of Energy East, has been and will be "pushed down" and reflected as additional
paid-in-capital in the financial statements of the subsidiaries of Connecticut
Energy, CMP Group, CTG Resources, and Berkshire. Importantly, the pre-merger
retained earnings of each of these companies, which has been or will be
eliminated in the Mergers, will not be reflected in Energy East's retained
earnings. Moreover, the amortization of this goodwill will decrease net income,
and, therefore, decrease retained earnings, the traditional source of dividend
payments of Energy East, the Intermediate Holding Companies and their respective
subsidiaries.
In the aggregate, an estimated $1.0 billion of the purchase price in
the four Mergers may be allocated to goodwill and amortized by the Utility
Subsidiaries over a 40-year period, as follows: Connecticut Energy ($285
million); CMP Group ($425 million); CTG Resources ($230 million); and Berkshire
($60 million). The amortization of goodwill, on a consolidated basis, is
estimated to be as much as $25 million per year.
- ------------------------
18 See Southern Energy, Inc., Holding Co. Act Rel. No. 27020 (May 13, 1999)
(supplemental order amending prior order to permit registered holding
company subsidiary to engage in power and gas marketing activities in
Canada and reserving jurisdiction over such activities outside the United
States and Canada); Interstate Energy Corporation, Holding Co. Act Release
No. 27069 (August 26, 1999).
19 The Commission has heretofore authorized nonutility subsidiaries of a
registered holding company to sell similarly-defined energy management
services and technical consulting services to customers both within and
outside the United States. See Columbia Energy Group, et al., Holding Co.
Act Release No. 26498 (March 25, 1996); and Cinergy Corp., Holding Co. Act
Release No. 26662 (February 7, 1997); and Interstate Energy Corporation,
Holding Co. Act Release No. 27069 (August 26, 1999).
22
<PAGE>
Energy East and the Intermediate Holding Companies and their
respective Utility Subsidiaries request authorization to pay dividends out of
capital and unearned surplus in an amount up to the retained earnings of such
companies prior to the Mergers. In addition, after the Mergers are completed,
each of these companies requests authorization to pay dividends out of earnings
before amortization of goodwill ("Gross Earnings"). Such authorization is
requested for the duration of the goodwill amortization period. 20
Section 12(c) of the Act and Rule 46 thereunder generally prohibit the
payment of dividends out of "capital or unearned surplus" except pursuant to an
order of the Commission. The legislative history explains that this provision
was intended to "prevent the milking of operating companies in the interest of
the controlling holding company groups." See S. Rep. No. 621, 74th Cong., 1st
Sess. p. 34 (1935).21 In determining whether to permit a registered holding
company to pay dividends out of capital surplus, the Commission considers
various factors, including: (i) the asset value of the company in relation to
its capitalization, (ii) the company's prior earnings, (iii) the company's
current earnings in relation to the proposed dividend, and (iv) the company's
projected cash position after payment of a dividend. See Eastern Utilities
Associates, Holding Co. Act Release No. 25330 (June 13, 1991) ("EUA"), and cases
cited therein. Further, the payment of the dividend must be "appropriate in the
public interest." Id., citing Commonwealth & Southern Corporation, 13 S.E.C.
489, 492 (1943).
In support of their request, Applicants assert that each of the
standards of Section 12(c) of the Act enunciated in the EUA case are satisfied:
(i) After the Mergers, and giving effect to the pushdown of goodwill,
Energy East's common equity as a percentage of total consolidated capitalization
is estimated to be approximately 39%, substantially in excess of the traditional
levels of equity capitalization that the Commission has authorized for other
registered holding company systems. Energy East commits to maintain its
capitalization at or above 30% common equity on a consolidated basis.
(ii) Energy East and the Intermediate Holding Companies and their
respective Utility Subsidiaries have a favorable history of prior earnings and
long record of consistent dividend payments.22
- ------------------------
20 The Commission recently granted substantially identical dividend relief to
another new registered holding company. See National Grid Group plc, et
al., Holding Co. Act Release No. 27154 (Mar. 15, 2000).
21 Compare Section 305(a) of the Federal Power Act.
22 In recent years, Energy East's net income and dividends have been:
Year Net Income ($ millions) Dividends Paid ($ millions)
---------------------------------------------------------------------
1996 $169 $100
1997 $175 $ 95
1998 $194 $100
1999 $219 $ 99
23
<PAGE>
(iii) The Applicants expect that the cash flow of Energy East and the
Intermediate Subsidiaries and their respective Utility Subsidiaries after the
Mergers will not differ significantly from cash flow prior thereto and that
Gross Earnings of such companies, therefore, should remain stable after the
Mergers.
(iv) The requested dividend payments are in the public interest. Energy
East is in sound financial condition as indicated by its sound capitalization
ratios. The expectations of continued strong financial condition should allow it
to continue to access the capital markets to finance its operations and growth.
In addition, the dividend payments are consistent with investor
interests because they allow the capital structure of Energy East to be adjusted
to more appropriate levels of debt and equity. Lastly, a prohibition on dividend
payments out of additional paid-in-capital would impair the ability of Energy
East to service the Acquisition Debt incurred in connection with the Mergers.
Energy East and each of the Intermediate Holding Companies and Utility
Subsidiaries represents that it will not declare or pay any dividend out of
capital or unearned surplus in contravention of any law restricting the payment
of dividends. In this regard, it should be noted that all U.S. jurisdictions
limit to one extent or another the authority of corporations to make dividend
distributions to shareholders. Most state corporation statutes contain either or
both an equity insolvency test or some type of balance sheet test. Energy East
and each of the Intermediate Holding Companies and Utility Subsidiaries also
will comply with the terms of any credit agreements and indentures that restrict
the amount and timing of distributions to shareholders.
1.15.2. Payment of Dividends by Nonutility Subsidiaries. Energy East
-----------------------------------------------
also requests authorization, on behalf of itself and each of its current and
future non-exempt Nonutility Subsidiaries, that such companies be permitted to
pay dividends with respect to the securities of such companies, from time to
time through the Authorization Period, out of capital and unearned surplus.23
Energy East anticipates that there may be situations in which it or
one or more Nonutility Subsidiaries will have unrestricted cash available for
distribution in excess of any such company's current and retained earnings. In
such situations, the declaration and payment of a dividend would have to be
charged, in whole or in part, to capital or unearned surplus. As an example, if
an Intermediate Subsidiary of Energy East were to purchase all of the stock of
an EWG or FUCO and, following such acquisition, the EWG or FUCO incurs
non-recourse borrowings, some or all of the proceeds of which are distributed to
the Intermediate Subsidiary as a reduction in the amount invested in the EWG or
FUCO (i.e., return of capital), the Intermediate Subsidiary (assuming it has no
- ------------------------
23 The Commission has granted similar approvals to other registered holding
companies. See Entergy Corporation, et al., Holding Co. Act Release No.
27039 (June 22, 1999); and Interstate Energy Corporation, et al., Holding
Co. Act Release No. 27069 (August 26, 1999).
24
<PAGE>
earnings) could not, without the Commission's approval, in turn distribute such
cash to Energy East or its immediate parent.24
Similarly, using the same example, if an Intermediate Subsidiary,
following its acquisition of all of the stock of an EWG or FUCO, were to sell
part of that stock to a third party for cash, the Intermediate Subsidiary would
again have substantial unrestricted cash available for distribution, but
(assuming no profit on the sale of the stock) would not have current earnings
and therefore could not, without the Commission's approval, declare and pay a
dividend to its parent out of such cash proceeds.
Further, there may be periods during which unrestricted cash available
for distribution by a Nonutility Subsidiary exceeds current and retained
earnings due to the difference between accelerated depreciation allowed for tax
purposes, which may generate significant amounts of distributable cash, and
depreciation methods required to be used in determining book income.
Finally, even under circumstances in which a Nonutility Subsidiary has
sufficient earnings, and therefore may declare and pay a dividend to its
immediate parent, such immediate parent may have negative retained earnings,
even after receipt of the dividend, due to losses from other operations. In this
instance, cash would be trapped at a subsidiary level where there is no current
need for it.
Energy East, on behalf of each current and future non-exempt
Nonutility Subsidiary represents that it will not declare or pay any dividend
out of capital or unearned surplus in contravention of any law restricting the
payment of dividends. Energy East also states that its subsidiaries will comply
with the terms of any credit agreements and indentures that restrict the amount
and timing of distributions to shareholders.
1.16. TAX ALLOCATION AGREEMENT. The Applicants ask the Commission to approve
------------------------
an agreement for the allocation of consolidated tax among Energy East and the
Subsidiaries (the "Tax Allocation Agreement"). Approval is necessary because the
proposed Tax Allocation Agreement may provide for the retention by Energy East
of certain payments for tax losses incurred from time to time, rather than the
allocation of such losses to Subsidiaries without payment as would otherwise be
required by Rule 45(c)(5).25
Provisions in a tax allocation agreement between a registered holding
company and its subsidiaries must comply with Section 12 of the Act and Rule 45
thereunder. Rule 45(a) of the Act generally prohibits any registered holding
company or subsidiary company from, directly or indirectly, lending or in any
manner extending its credit to or indemnifying, or making any donation or
capital contribution to, any company in the same holding company system, except
- ------------------------
24 The same problem would arise where an Intermediate Subsidiary is
over-capitalized in anticipation of a bid which is ultimately unsuccessful.
In such a case, Energy East would normally desire a return of some or all
of the funds invested.
25 The Commission recently granted substantially identical relief to another
new registered holding company. See National Grid Group plc, Holding Co.
Act Release No. 27154 (Mar. 15, 2000).
25
<PAGE>
pursuant to a Commission order. Rule 45(c) provides, however, that no approval
is required for a tax allocation agreement between eligible associate companies
in a registered holding company system which "provides for allocation among such
associate companies of the liabilities and benefits arising from such
consolidated tax return for each tax year in a manner not inconsistent with" the
conditions of the rule. Of interest here, Rule 45(c)(5) provides that:
[t]he agreement may, instead of excluding members as provided in
paragraph (c)(4), include all members of the group in the tax
allocation, recognizing negative corporate taxable income or a
negative corporate tax, according to the allocation method chosen. An
agreement under this paragraph shall provide that those associate
companies with a positive allocation will pay the amount allocated and
those subsidiary companies with a negative allocation will receive
current payment of their corporate tax credits. The agreement shall
provide a method for apportioning such payments, and for carrying over
uncompensated benefits, if the consolidated loss is too large to be
used in full. Such method may assign priorities to specified kinds of
benefits. (Emphasis added).
Under the rule, only "subsidiary companies," as opposed to "associate
companies" (which includes the holding company in a holding company system), are
entitled to be paid for corporate tax credits. However, if a tax allocation
agreement does not fully comply with the provisions of Rule 45(c), it may
nonetheless be approved by the Commission under Section 12(b) and Rule 45(a).
In connection with the 1981 amendments to Rule 45, the Commission
explained that the distinction between "associate companies" and "subsidiary
companies" represented a policy decision to preclude the holding company from
sharing in consolidated return savings. The Commission noted that exploitation
of utility companies by holding companies through the misallocation of
consolidated tax return benefits was among the abuses examined in the
investigations underlying the enactment of the Act.26 It must be noted, however,
that the result in Rule 45(c)(5) is not dictated by the statute and, as the
Commission has recognized, there is discretion on the part of the agency to
approve tax allocation agreements that do not, by their terms, comply with Rule
45(c) -- so long as the policies and provisions of the Act are otherwise
satisfied. In this matter, where the holding company is seeking only to receive
payment for tax losses that have been generated by it, the proposed arrangement
will not give rise to the types of problems (e.g., upstream loans) that the Act
was intended to address.27
As a result of the Mergers, Energy East or its finance subsidiary will
be creating tax deductions chiefly in the form of deductions for interest
expense on the Acquisition Debt that are non-recourse to the Subsidiaries. As a
result, Energy East should retain the benefits of those tax credits.
Accordingly, the Applicants request that the Commission approve the Tax
Allocation Agreement which will be filed by amendment as Exhibit B.
- ------------------------
26 See Holding Co. Act Release No. 21968 (March 25, 1981), citing Sen. Doc.
92, Part 72A, 70th Congress, 1st Sess. at 477-482.
27 See e.g., Section 12(a) of the Act.
26
<PAGE>
1.17. CERTIFICATES OF NOTIFICATION. It is proposed that, with respect to
----------------------------
Energy East, the reporting system of the 1933 Act and the 1934 Act be integrated
with the reporting system under the Act. This would eliminate duplication of
filings with the Commission that cover essentially the same subject matters,
resulting in a reduction of expense for both the Commission and Energy East. To
effect such integration, the portion of the 1933 Act and 1934 Act reports
containing or reflecting disclosures of transactions occurring pursuant to the
authorization granted in this proceeding would be incorporated by reference into
this proceeding through Rule 24 certificates of notification. The certificates
would also contain all other information required by Rule 24, including the
certification that each transaction being reported on had been carried out in
accordance with the terms and conditions of and for the purposes represented in
this Application/Declaration. Such certificates of notification would be filed
within 60 days after the end of each of the first three calendar quarters, and
90 days after the end of the last calendar quarter, in which transactions occur.
The Rule 24 certificates will contain the following information for
the reporting period:
(a) The sales of any Common Stock or Preferred Securities by
Energy East and the purchase price per share and the market price per share at
the date of the agreement of sale;
(b) The total number of shares of Common Stock issued or issuable
under options granted during the quarter under Energy East's employee benefit
plans and dividend reinvestment plan or otherwise, including any plans hereafter
adopted;
(c) If Common Stock has been transferred to a seller of
securities of a company or assets being acquired, the number of shares so
issued, the value per share and whether the shares are restricted to the
acquiror;
(d) The name of the guarantor and of the beneficiary of any
guarantied note, Energy East Guaranty, Intermediate Holding Company Guaranty or
Nonutility Subsidiary Guaranty issued during the quarter, and the amount, terms
and purpose of the guaranty;
(e) The amount and terms of any Debentures issued during the
quarter;
(f) The amount and terms of any financings consummated by any
Nonutility Subsidiary during the quarter that are not exempt under Rule 52;
(g) The notional amount and principal terms of any Interest Rate
Hedge or Anticipatory Hedge entered into during the quarter and the identity of
the parties to such instruments;
(h) The name, parent company, and amount invested in any
Intermediate Subsidiary or New Subsidiary or Financing Subsidiary during the
quarter;
(i) A list of Form U-6B-2 statements filed with the Commission
during the quarter, including the name of the filing entity and the date of the
filing;
27
<PAGE>
(j) The amount and terms of any short-term debt issued by Energy
East during the quarter;
(k) The amount and terms of any short-term debt issued by any
Utility Subsidiary during the quarter;
(l) The amount and terms of any short-term debt issued by any
Intermediate Holding Company during the quarter;
(m) Consolidated balance sheets as of the end of the quarter, and
separate balance sheets as of the end of the quarter for each company, including
Energy East, that has engaged in financing transactions during the QUARTER.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
------------------------------
The fees, commissions and expenses incurred or to be incurred in
connection with this Application/Declaration are estimated at $25,000. The above
fees do not include any underwriting fees or other expenses incurred in
consummating financings covered hereby. It is estimated that such fees and
expenses will not exceed 5% of the proceeds from any such financings.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
-------------------------------
3.1. GENERAL. Sections 6(a) and 7 of the Act are applicable to the issuance
-------
and sale of Common Stock, Preferred Stock, Short-term Debt and Debentures by and
to the issuance and sale of securities by the Subsidiaries that are not exempt
under Rule 52. In addition, Sections 6(a) and 7 of the Act are applicable to
Interest Rate Hedges, except to the extent that they may be exempt under Rule
52, and to Anticipatory Hedges. Section 12(b) of the Act and Rule 45(a) are
applicable to the issuance of Energy East Guaranties, Nonutility Subsidiary
Guaranties and the Intermediate Holding Companies Guaranties to the extent not
exempt under Rules 45(b) and 52. Sections 9(a)(1) and 10 of the Act are also
applicable to (i) Energy East's or any Nonutility Subsidiary's or
anyIntermediate Holding Company's acquisition of the equity securities of any
Financing Subsidiary, (ii) the acquisition of securities of Intermediate
Subsidiaries, (iii) the acquisition of Energy-Related Assets or the securities
of companies substantially all of whose assets consist of Energy-Related Assets,
and, (iv) the activities of Rule 58 Subsidiaries within and outside the United
States. Section 12(c) of the Act and Rule 46 are applicable to the payment of
dividends from capital and unearned surplus by Energy East and the Subsidiaries.
Section 13(b) of the Act and Rules 80 - 92 are applicable to the performance of
services and sale of goods among Nonutility Subsidiaries, but may be exempt from
the requirements thereof in some cases pursuant to Rules 87(b)(1), 90(d) and 92,
as applicable. Section 12(b) of the Act and Rule 45(c) are applicable to the
proposed Tax Allocation Agreement.
3.2. COMPLIANCE WITH RULES 53 AND 54. The transactions proposed herein are
-------------------------------
also subject to Rules 53 and 54. Under Rule 53(a), the Commission shall not make
certain specified findings under Sections 7 and 12 in connection with a proposal
by a holding company to issue securities for the purpose of acquiring the
securities of or other interest in an EWG, or to guaranty the securities of an
28
<PAGE>
EWG, if each of the conditions in paragraphs (a)(1) through (a)(4) thereof are
met, provided that none of the conditions specified in paragraphs (b)(1) through
(b)(3) of Rule 53 exists. Rule 54 provides that the Commission shall not
consider the effect of the capitalization or earnings of subsidiaries of a
registered holding company that are EWGs or FUCOs in determining whether to
approve other transactions if Rule 53(a), (b) and (c) are satisfied. These
standards are met.
Rule 53(a)(1): Immediately following the Mergers, Energy East's
"aggregate investment" in EWGs and FUCOs will be approximately $20 million, or
approximately 2.6% of Energy East's "consolidated retained earnings" at December
31, 1999 (approximately $783 million).
Rule 53(a)(2): Energy East will maintain books and records enabling it
to identify investments in and earnings from each EWG and FUCO in which it
directly or indirectly acquires and holds an interest. Energy East will cause
each domestic EWG in which it acquires and holds an interest, and each foreign
EWG and FUCO that is a majority-owned subsidiary, to maintain its books and
records and prepare its financial statements in conformity with U.S. generally
accepted accounting principles ("GAAP"). All of such books and records and
financial statements will be made available to the Commission, in English, upon
request.
Rule 53(a)(3): No more than 2% of the employees of the Utility
Subsidiaries will, at any one time, directly or indirectly, render services to
EWGs and FUCOs.
Rule 53(a)(4): Energy East will submit a copy of the
Application/Declaration in this proceeding and each amendment thereto, and will
submit copies of any Rule 24 certificates required hereunder, as well as a copy
of Energy East's Form U5S, to each of the public service commissions having
jurisdiction over the retail rates of the Utility Subsidiaries.
In addition, Energy East states that the provisions of Rule 53(a) are
not made inapplicable to the authorization herein requested by reason of the
occurrence or continuance of any of the circumstances specified in Rule 53(b).
Rule 53(c) is inapplicable by its terms.
ITEM 4. REGULATORY APPROVALS.
--------------------
NYPSC has jurisdiction over the issuance of securities by NYSEG, other
than indebtedness with maturities of one year or less. DPUC has jurisdiction
over the issuance of securities by Southern Connecticut Gas and Connecticut
Natural Gas, other than indebtedness with maturities of one year or less. MPUC
has jurisdiction over the issuance of securities by Maine Natural Gas, Central
Maine Power, MEPCo and NORVARCO other than indebtedness of up to one year. MDTE
has jurisdiction over the issuance of securities by Berkshire Gas other than
indebtedness with maturities of one year or less.
Except as stated above, no state commission, and no federal
commission, other than the Commission, has jurisdiction over the proposed
transactions.
29
<PAGE>
ITEM 5. PROCEDURE.
---------
The Commission is requested to publish a notice under Rule 23 with
respect to the filing of this Application or Declaration as soon as practicable.
The Applicants request that the Commission's Order be issued as soon as the
rules allow, and that there should not be a 30-day waiting period between
issuance of the Commission's order and the date on which the order is to become
effective. The Applicants hereby waive a recommended decision by a hearing
officer or any other responsible officer of the Commission and consents that the
Division of Investment Management may assist in the preparation of the
Commission's decision and/or order, unless the Division opposes the matters
proposed herein.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
---------------------------------
A. EXHIBITS.
--------
A-1 Restated Certificate of Incorporation of Energy East filed
in the Office of the Secretary of State of the State of New
York on April 23, 1998 (filed as Exhibit 4.1 to Energy
East's Post-effective Amendment No. 1 to Registration No.
033-54155 and incorporated herein by reference).
A-2 Certificate of Amendment of the Certificate of Incorporation
of Energy East filed in the Office of the Secretary of State
of the State of New York on April 26, 1999 (filed as Exhibit
3.3 to Energy East's Form 10-Q for the quarter ended March
31, 1999, File No. 1-14766 and incorporated herein by
reference).
A-3 By-Laws of Energy East as amended April 23, 1999 (filed as
Exhibit 3.4 to Energy East's Form 10-Q for the quarter ended
March 31, 1999, File No. 1-14766, and incorporated herein by
reference).
A-4 Amended and Restated Certificate of Incorporation of CMP
Group (filed in the Office of the Secretary of State of the
State of Maine on June 11, 1999, File No. 199811590D, and
previously filed on Form S-E and incorporated herein by
reference).
A-5 Amended and Restated Certificate of Incorporation of CTG
Resources (filed as Exhibit 3.2 to the Registration
Statement on Form S-4 in File No. 333-16297 and incorporated
herein by reference).
A-6 Declaration of Trust of Berkshire Energy Resources (filed in
Exhibit 3.1.1, to the Registration Statement on Form S-4 in
File No. 333-46799 and incorporated herein by reference).
B Form of Tax Allocation Agreement.
F Opinion of Counsel (to be filed by amendment).
30
<PAGE>
G Financial Data Schedule (filed as Exhibit G-3 and titled
"Exhibit 27" to Energy East's Amendment No. 1 to the
Application/Declaration on Form U-1, File No. 070-09569, and
incorporated herein by reference).
H Proposed Form of Federal Register Notice (previously filed).
I Descriptions of dividend reinvestment plan and stock-based
compensation and employee benefit plans (to be filed by
amendment).
J-1 Actual cash flow data for fiscal years 1997 - 1999 for
Energy East consolidated and for the Intermediate Holding
Companies and certain Utility Subsidiaries and pro forma
cash flow data for fiscal years 2000 - 2002 for Energy East
and certain Utility Subsidiaries (filed confidentially
pursuant to Rule 104).
J-2 Actual capitalization ratios at fiscal year end 1997 -1999
for Energy East consolidated and for the Intermediate
Holding Companies and certain Utility Subsidiaries and pro
forma capitalization ratios at fiscal year end 2000 - 2002
for Energy East consolidated and certain Utility
Subsidiaries (filed confidentially pursuant to Rule 104).
B. FINANCIAL STATEMENTS.
--------------------
FS-1 Pre-Merger and pro forma combined condensed balance sheet of
Energy East as of September 30, 1999, and pre-Merger and pro
forma combined condensed statement of income and statement
of retained earnings of Energy East for the twelve months
ended September 30, 1999 (filed as Exhibit FS-1 to Energy
East's Amendment No. 4 to Application/Declaration on Form
U-1, File No. 70-9569 and incorporated herein by reference).
FS-2 Balance Sheet of CMP Group as of September 30, 1999, and
statement of income and statement of retained earnings of
CMP Group for the twelve months ended September 30, 1999,
included in the balance sheet, statement of income and
statement of retained earnings of Energy East (filed in
FS-1).
FS-3 Balance Sheet of CTG Resources as of September30, 1999, and
statement of income and statement of retained earnings of
CTG Resources for the twelve months ended September 30,
1999, included in the balance sheet, statement of income and
statement of retained earnings of Energy East (filed in
FS-1).
FS-4 Balance Sheet of Connecticut Energy as of September 30,
1999, and statement of income and surplus of Connecticut
Energy for the twelve months ended September 30, 1999
(included in Connecticut Energy's Form 10-K for the year
31
<PAGE>
ended September 30, 1999, File No. 001-08369 and
incorporated herein by reference).
FS-5 Balance Sheet of Berkshire as of September 30, 1999, and
statement of income and statement of retained earnings of
Berkshire for the twelve months ended September 30, 1999,
included in the balance sheet, statement of income and
statement of retained earnings of Energy East (filed in
FS-1).
FS-6 Statements of income and surplus of CMP Group for the fiscal
year ended December 31, 1999, 1998, and 1997 (included in
CMP Group's Form 10-K for the year ended December 31, 1999,
File No. 001-14786 and incorporated herein by reference).
FS-7 Statements of income and surplus of CTG Resources for the
fiscal year ended September 30, 1999, 1998, and 1997
(included in CTG Resource's Form 10-K for the year ended
September 30, 1999, File No. 1-12859 and incorporated herein
by reference).
FS-8 Statements of income and surplus of Connecticut Energy for
the fiscal year ended September 30, 1999, 1998, and 1997
(included in Connecticut Energy's Form 10-K for the year
ended September 30, 1999, File No. 001-08369 and
incorporated herein by reference).
FS-9 Statements of income and surplus of Berkshire Energy for the
fiscal year ended June 30, 1999, 1998, and 1997 (included in
Berkshire's Form 10-K for the year ended June 30, 1999, File
No. 0-29812 and incorporated herein by reference).
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
---------------------------------------
None of the matters that are the subject of this
Application/Declaration involve a "major federal action" nor do they
"significantly affect the quality of the human environment" as those terms are
used in section 102(2)(C) of the National Environmental Policy Act. The
transaction that is the subject of this Application/Declaration will not result
in changes in the operation of the Applicants that will have an impact on the
environment. The applicants are not aware of any federal agency that has
prepared or is preparing an environmental impact statement with respect to the
transactions that are the subject of this Application/Declaration.
32
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, each of the undersigned companies has duly caused this
Application/Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
ENERGY EAST CORPORATION NEW YORK STATE ELECTRIC & GAS
CORPORATION
/s/ Robert D. Kump /s/ Robert D. Kump
- ---------------------------------- ----------------------------------
Name: Robert D. Kump Name: Robert D. Kump
Title: Vice President & Treasurer Title: Treasurer
MAINE NATURAL GAS, L.L.C. CMP GROUP, INC.
/s/ Tim D. Kelley /s/ Arthur W. Adelberg
- ---------------------------------- ----------------------------------
Name: Tim D. Kelley Name: Arthur W. Adelberg
Title: President & CEO Title: Executive Vice President
& CFO
CENTRAL MAINE POWER COMPANY MAINE ELECTRIC POWER COMPANY
/s/ Sara J. Burns /s/ Sara J. Burns
- ---------------------------------- ----------------------------------
Name: Sara J. Burns Name: Sara J. Burns
Title: President Title: President
NORVARCO CONNECTICUT ENERGY CORPORATION
/s/ Arthur W. Adelberg /s/ Robert D. Kump
- ---------------------------------- ----------------------------------
Name: Arthur W. Adelberg Name: Robert D. Kump
Title: President Title: Vice President
33
<PAGE>
THE SOUTHERN CONNECTICUT GAS COMPANY CTG RESOURCES, INC.
/s/ Sam Bowlby /s/ James P. Bolduc
- ---------------------------------- ----------------------------------
Name: Sam Bowlby Name: James P. Bolduc
Title: V.P., General Counsel & Secretary Title: Executive Vice President
& C.F.O.
CONNECTICUT NATURAL GAS CORPORATION BERKSHIRE ENERGY RESOURCES
/s/ James P. Bolduc /s/ Scott S. Robinson
- ---------------------------------- ----------------------------------
Name: James P. Bolduc Name: Scott S. Robinson
Title: Executive Vice President & C.F.O. Title: President & CEO
THE BERKSHIRE GAS COMPANY ENERGY EAST ENTERPRISES, INC.
/s/ Scott S. Robinson /s/ Robert D. Kump
- ---------------------------------- ----------------------------------
Name: Scott S. Robinson. Name: Robert D. Kump
Title: Chief Executive Officer Title: Treasurer
Date: April 28, 2000
34
Exhibit B
ENERGY EAST CORPORATION
Tax Sharing Agreement
THIS AGREEMENT, made and entered into as of the 1st day of May, 1998,
by and among ENERGY EAST CORPORATION, a New York corporation having an office
for the transaction of business in Albany, New York ("EEC"), and such
subsidiaries of EEC as execute this Agreement at anytime.
WITNESSETH:
----------
WHEREAS, EEC is or will be a registered holding company under the
Public Utility Holding Company Act of 1935 ("Act");
WHEREAS, Rule 45(c) has been adopted by the Securities and Exchange
Commission with the intention of providing methods of allocating current income
taxes by a registered holding company and its subsidiaries, and this Agreement
is intended to comply with Rule 45(c);
WHEREAS, EEC and its subsidiaries (herein EEC and its subsidiaries are
referred to collectively as the "Group" and individually as a "Member") have
elected to file consolidated Federal income tax returns pursuant to Chapter 6 of
the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder;
WHEREAS, New York State Electric & Gas Corporation ("NYSEG") and NGE
Generation, Inc. ("NGE Generation") are two of the Members;
<PAGE>
-2-
WHEREAS, the Members desire to set forth their agreement as to how the
Members shall share, with respect to any such consolidated Federal income tax
return, the consolidated Federal income tax liability (determined before taking
into account the business credit ("BC") under Section 38 of the Code and the
minimum tax credit ("MTC") under Section 53 of the Code) (such before BC and MTC
tax liability is referred to herein as "FIT") and the consolidated Federal
environmental tax liability ("FET"), should such tax exist;
WHEREAS, the Members desire to set forth their agreement as to how any
Member whose inclusion in the Group results in a reduction in the FIT or FET of
the Group or an increase in the BCs or MTCs utilized by the Group shall be
compensated;
WHEREAS, the Members desire to set forth their agreement as to how the
Members shall share any tax liability that may be incurred with respect to any
consolidated non-Federal tax return that may be filed for purposes of any tax
that is imposed by any state, local or other jurisdiction;
WHEREAS, the Members desire to set forth their agreement as to how any
Member whose inclusion in any such consolidated non-Federal tax return results
in a reduction in tax or an increase in any applicable tax credit that is
utilized on such consolidated non-Federal tax return shall be compensated; and
<PAGE>
-3-
WHEREAS, this Agreement is intended to reflect an election by the
Group to allocate tax liability among the members under the method described in
Regulations sections 1.1552-1(a)(2) and 1.1502-33(d)(3);
NOW, THEREFORE, in consideration of the above premises and other good
and valuable consideration received by each party hereto, the parties hereto
agree as follows.
1. Each party hereto, by virtue of its membership in the Group, agrees
to participate in the annual filing of a consolidated Federal income tax return.
2. With respect to each such return, there shall be apportioned to
each Member a part of the Group's FIT and a part of the Group's FET and there
shall be allocated a part of the BCs utilized by the Group and a part of the
MTCs utilized by the Group.
3. The Group's regular tax ("RT") and alternative minimum tax ("AMT")
with respect to such a return shall be separately apportioned to each member as
follows:
(a) First, determine the Group's FIT by using the "RT"
calculation or the "AMT" calculation, whichever is applicable for the
Group.
(b) Next, determine each Member's separate FIT by using the RT
<PAGE>
-4-
calculation or the AMT calculation, whichever is used in Section 3(a),
above.
(c) Next, determine the Group's FIT by (i) using the RT
calculation or the AMT calculation, whichever is used in Section 3(a),
above, and (ii) excluding all Members ("Section 3 Members") of the
Group for which the calculation in Section 3(b), above, did not result
in a positive FIT.
(d) Next, apportion the amount determined pursuant to Section
3(c), above, among the Members that are not Section 3 Members pro rata
based upon each's separate FIT determined pursuant to Section 3(b),
above.
(e) Next, determine the amount by which (i) the amount determined
pursuant to Section 3(c), above, exceeds (ii) the amount determined
pursuant to Section 3(a), above.
(f) Finally, apportion the amount determined pursuant to Section
3(e), above, among the Section 3 Members pro rata based upon each's
"Contribution Amount". For this purpose, a Section 3 Member's
"Contribution Amount" is equal to the amount, if any, by which (i) the
Group's FIT, determined (A) by using the RT calculation or the AMT
<PAGE>
-5-
calculation, whichever is used in Section 3(a), above, and (B) by not
including the Section 3 Member in the Group, exceeds (ii) the amount
determined pursuant to Section 3(a), above.
In calculating FIT pursuant to Sections 3(a) and 3(f), above, if the calculation
results in a carryforward or carryback of any item of deduction that results in
a tax savings for a taxable year other than the taxable year for which the
calculation is being made, such savings shall be treated as a negative FIT for
the taxable year for which the calculation is being made. However, not
withstanding any provision of this Agreement that may be to the contrary, in the
case of tax savings that results from the carryforward of any item of deduction,
no payment shall be made pursuant to Section 8, below, and Section 13 below,
until the tax savings is actually realized by the Group. A Member's separate FIT
shall be calculated as if the Member, for the taxable year for which the
calculation is being made and all other relevant taxable years, were not a
member of an affiliated group of corporations for purposes of the Code, except
that any "net operating loss" as defined in Section 172(c) of the Code (and any
"alternative tax net operating loss" for purposes of Section 56(d) of the Code)
that ever has been taken into account in calculating the Group's FIT shall be
disregarded.
4. Each Member's apportioned share of the Group's FET with respect to
such a return shall be determined as follows:
(a) First, determine the Group's FET.
<PAGE>
-6-
(b) Next, determine each Member's separate FET.
(c) Next, determine the Group's FET by excluding any Member (a
"Section 4 Member") of the Group that, for purposes of calculating its
separate FET, did not have a positive "modified alternative minimum
taxable income" as defined in Section 59A(b) of the Code.
(d) Next, apportion the amount determined pursuant to Section
4(c), above, among the Members that are not Section 4 Members pro rata
based upon each's separate FET determined pursuant to Section 4(b),
above.
(e) Next, determine the amount by which (i) the amount determined
pursuant to Section 4(c), above, exceeds (ii) the amount determined
pursuant to Section 4(a), above.
(f) Finally, apportion the amount determined pursuant to Section
4(e), above, among the Section 4 Members pro rata based upon each's
"Contribution Amount". For this purpose, a Section 4 Member's
"Contribution Amount" is equal to the amount, if any, by which (i) the
Group's FET, determined by not including the Section 4 Member in the
Group, exceeds (ii) the amount determined pursuant to Section 4(a),
above.
<PAGE>
-7-
A Member's separate FET shall be calculated as if the Member, for the taxable
year for which the calculation is being made and all other relevant taxable
years, were not a member of an affiliated group of corporations for purposes of
the Code, except that any "alternative tax net operating loss" for purposes of
Section 56(d) of the Code that ever has been taken into account in calculating
the Group's FET shall be disregarded.
5. Each Member's allocated share of the BCs utilized by the Group
(including any additional amount of BCs that, pursuant to Section 9(e), below,
is deemed to be utilized) with respect to such a return shall be determined as
follows:
(a) First, assign all not previously used BCs that have been
generated by Members to vintage years based upon the taxable years in
which they have been generated.
(b) Next, determine to which vintage years the BCs that the Group
uses, or is deemed to use, on such return ("Used BCs") belong by
deeming the Used BCs to consist first of the oldest vintage of BCs,
then of the next oldest vintage of BCs and so on until all of the Used
BCs have been deemed to belong to a vintage of BCs.
(c) Finally, allocate the Used BCs to those Members of the Group
that generated BCs during the vintage years determined pursuant to
<PAGE>
-8-
Section 5(b), above. There shall be allocated to each such Member an
amount that is equal to the total amount of the BCs that were
generated by the Member in the vintage years so determined.
Notwithstanding the previous sentence, if, pursuant to Section 5(b),
above, a lesser amount of Used BCs is deemed to belong to a vintage
year than the amount of BCs that, pursuant to Section 5(a), above,
have been assigned to that vintage year, as to that vintage year there
shall be allocated to a Member that generated BCs in that vintage year
a pro rata amount of the Used BCs that are deemed to belong to that
vintage year, which pro rata amount shall be based upon the ratio that
the amount of BCs that were generated by the Member in that vintage
year and not previously used bears to the amount of BCs that, pursuant
to Section 5(a), above, have been assigned to that vintage year.
For purposes of this Section 5, in determining the research credit ("R&DC")
under Section 41 of the Code that has been generated by a particular Member, the
following rules shall apply.
(d) First, determine the R&DC generated by the Group.
(e) Next, determine the R&DC that would have been generated by
each Member if, for the taxable year for which the calculation is
<PAGE>
-9-
being made and all other relevant taxable years, the Member were not a
member of an affiliated group of corporations for purposes of the
Code.
(f) The amount of the R&DC generated by each Member shall be
deemed to be the product of (i) the amount determined for the Group
pursuant to Section 5(d), above, multiplied by (ii) a fraction (A) the
numerator of which is the amount determined for the Member pursuant to
Section 5(e), above, and (B) the denominator of which is the sum of
the amounts determined for all the Members pursuant to Section 5(e),
above.
6. Each Member's allocated share of the MTCs utilized by the Group
(including any additional amount of MTCs that, pursuant to Section 10(e), below,
is deemed to be utilized) with respect to such a return shall be determined as
follows:
(a) First, assign all not previously used MTCs that have been
generated by Members to vintage years based upon the taxable years in
which they have been generated.
(b) Next, determine to which vintage years the MTCs that the
Group uses, or is deemed to use, on such return ("Used MTCs") belong
by deeming the Used MTCs to consist first of the oldest vintage of
<PAGE>
-10-
MTCs, then of the next oldest vintage of MTCs and so on until all of
the Used MTCs have been deemed to belong to a vintage of MTCs.
(c) Finally, allocate the Used MTCs to those Members of the Group
that generated MTCs during the vintage years determined pursuant to
Section 6(b), above. There shall be allocated to each such Member an
amount that is equal to the total amount of the MTCs that were
generated by the Member in the vintage years so determined.
Notwithstanding the previous sentence, if, pursuant to Section 6(b),
above, a lesser amount of Used MTCs is deemed to belong to a vintage
year than the amount of MTCs that, pursuant to Section 6(a), above,
have been assigned to that vintage year, as to that vintage year there
shall be allocated to a Member that generated MTCs in that vintage
year a pro rata amount of the Used MTCs that are deemed to belong to
that vintage year, which pro rata amount shall be based upon the ratio
that the amount of MTCs that were generated by the Member in that
vintage year and not previously used bears to the amount of MTCs that,
pursuant to Section 6(a), above, have been assigned to that vintage
year.
7. Those Members (other than EEC) that are apportioned a share
<PAGE>
-11-
pursuant to either Section 3(d), above, or Section 4(d), above, shall make, with
respect to such a return, a cash payment to EEC equal to any such apportioned
amount.
8. EEC shall make, with respect to such a return, a cash payment to
those Members (other than EEC) that are apportioned a share pursuant to Section
3(f), above, equal to the share apportioned. However, the cash payment required
by the previous sentence shall be reduced by the amount (the "Reduction
Amount"), if any, determined as follows:
(a) First, determine the Group's total cash tax liability with
respect to such return without regard to the Group's FET.
(b) Next, determine the Group's total cash tax liability with
respect to such return (i) without regard to the Group's FET and (ii)
by excluding all items of income and deduction of Members ("Section 8
Members") of the Group that, based solely on the first sentence of
this Section 8, would be entitled to a cash payment.
(c) Next, determine the amount, if any, by which (i) the amount
determined pursuant to Section 8(b), above, exceeds (ii) the amount
determined pursuant to Section 8(a), above.
(d) Next, apportion the amount determined pursuant to Section
<PAGE>
-12-
8(c), above, among the Section 8 Members pro rata based upon each's
"Contribution Amount". For this purpose, a Section 8 Member's
"Contribution Amount" is equal to the amount, if any, by which (i) the
Group's total cash tax liability with respect to such return
determined (A) without regard to the Group's FET and (B) by not
including the Section 8 Member in the Group exceeds (ii) the amount
determined pursuant to 8(a), above.
(e) Finally, for each Section 8 Member, determine the amount by
which (i) the amount of the share apportioned to the Section 8 Member
pursuant to Section 3(f), above, exceeds (ii) the amount determined
pursuant to Section 8(d), above. The amount determined pursuant to the
previous sentence is the Reduction Amount.
In calculating the Group's total cash liability pursuant to Sections 8(a) and
8(d), above, if the calculation results in a carryforward or carryback of any
item of deduction that results in a cash tax savings for a taxable year other
than the taxable year for which the calculation is being made, such savings
shall be treated as a negative cash tax liability for the taxable year for which
the calculation is being made.
9. If, with respect to such a return, any Section 8 Member has a
positive Reduction Amount, the BC carryforwards and carrybacks of the Members
shall be adjusted as set forth in this Section 9.
<PAGE>
-13-
(a) First, determine what would have been the amount of BCs
actually used on the return if the Group's total cash tax liability
had been determined pursuant to Section 8(b), above.
(b) Next, determine the amount (the "Reallocated BC Amount") by
which (i) the amount determined pursuant to Section 9(a), above,
exceeds (ii) the amount of BCs actually used on the return.
(c) Next, apportion the Reallocated BC Amount among those Section
8 Members that have positive Reduction Amounts pro rata based upon
each's Reduction Amount.
(d) Next, deem any Reallocated BC Amount that is apportioned to a
Section 8 Member pursuant to Section 9(c), above, to be a BC that was
generated by that Section 8 Member for purposes of applying Section 5,
above, to any other consolidated Federal income tax return that is
filed by the Group. For purposes of so applying Section 5, (i) all BCs
that are attributable to Reallocated BC Amounts shall be assigned to
vintage years based upon the taxable years to which the Reallocated BC
Amounts relate and (ii) the vintage years to which they are assigned
<PAGE>
-14-
shall be deemed to be more recent than the vintage years of any BCs
that are not attributable to Reallocated BC Amounts.
(e) Finally, for purposes of applying Section 5, above, deem the
Reallocated BC Amount to be an additional amount of BCs that is
utilized by the Group.
10. If, with respect to such a return, any Section 8 Member has a
positive Reduction Amount, the MTC carryforwards of the Members shall be
adjusted as set forth in this Section 10.
(a) First, determine what would have been the amount of MTCs
actually used on the return if the Group's total cash tax liability
had been determined pursuant to Section 8(b), above.
(b) Next, determine the amount (the "Reallocated MTC Amount") by
which (i) the amount determined pursuant to Section 10(a), above,
exceeds (ii) the amount of MTCs actually used on the return.
(c) Next, apportion the Reallocated MTC Amount among those
Section 8 Members that have positive Reduction Amounts pro rata based
upon each's Reduction Amount.
(d) Next, deem any Reallocated MTC Amount that is apportioned to
a Section 8 Member pursuant to Section 10(c), above, to be a MTC that
<PAGE>
-15-
was generated by that Section 8 Member for purposes of applying
Section 6, above, to any other consolidated Federal income tax return
that is filed by the Group. For purposes of so applying Section 6, (i)
all MTCs that are attributable to Reallocated MTC Amounts shall be
assigned to vintage years based upon the taxable years to which the
Reallocated MTC Amounts relate and (ii) the vintage years to which
they are assigned shall be deemed to be more recent than the vintage
years of any MTCs that are not attributable to Reallocated MTC
Amounts.
(e) Finally, for purposes of applying Section 6, above, deem the
Reallocated MTC Amount to be an additional amount of MTCs that is
utilized by the Group.
11. EEC shall make, with respect to such a return, a cash payment to
those Members (other than EEC) that are apportioned or allocated a share
pursuant to either Section 4(f), above, Section 5(c), above, or Section 6(c),
above, equal to any such apportioned or allocated amount.
12. Notwithstanding any provision of this Agreement that may be to the
contrary, (i) any cash payment that, but for this Section 12, would be made by
NGE Generation to EEC shall instead be made by NYSEG to EEC, and (ii) any cash
payment that, but for this Section 12, would be made by EEC to NGE Generation
shall instead be made by EEC to NYSEG.
<PAGE>
-16-
13. Any cash payments that are required pursuant to Section 7, above,
Section 8, above, Section 11, above, or Section 12, above, shall be made at such
times throughout the year as the related tax payments (or refunds) are made to
(or received from) the Internal Revenue Service.
14. In the case of any consolidated non-Federal tax return that may be
filed for purposes of any tax that is imposed by any state, local or other
jurisdiction, any tax liability that is incurred shall be shared by the Members
that are included in such consolidated non-Federal tax return on a basis that is
analogous to how such Members would share FIT under this Agreement in the case
of the filing of a consolidated Federal income tax return solely by the Members
that are included in such consolidated non-Federal tax return.
15. If the inclusion of a Member in any such consolidated non-Federal
tax return results in a reduction in tax or an increase in any applicable tax
credit that is utilized on such consolidated non-Federal tax return, that Member
shall be compensated on a basis that is analogous to how that Member would be
compensated under this Agreement in the case of the filing of a consolidated
Federal income tax return solely by the Members that are included in such
consolidated non-Federal tax return.
16. This Agreement may be amended only by a written instrument that is
executed by all the Members.
<PAGE>
-17-
17. This Agreement may be executed in several counterparts, each of
which shall be an original and all of which shall constitute but one and the
same instrument.
18. This Agreement contains the entire understanding and agreement of
the Members as to the subject matter hereof and this Agreement shall completely
and fully supersede all other prior understandings or agreements, both written
and oral, between and among the Members.
19. This Agreement is intended solely for the benefit of the parties
hereto. Nothing in this Agreement shall be construed to create any duty to,
standard of care with reference to, or any liability to, any person not a party
to this Agreement.
20. If any paragraph, phrase, provision or portion of this Agreement
shall for any reason be adjudged to be illegal or unenforceable by a court of
competent jurisdiction or regulatory agency, such paragraph, phrase, provision
or portion so adjudged shall be deemed separate, distinct and independent, and
the remainder of this Agreement shall be and remain in full force and effect and
shall not be rendered illegal, unenforceable or otherwise affected by such
adjudication.
IN WITNESS WHEREOF, the Members have caused this Agreement to be
executed by their proper officers thereunto duly authorized as of the date first
above written.
<PAGE>
-18-
ENERGY EAST CORPORATION
By:
------------------------------------
NEW YORK STATE ELECTRIC & GAS
CORPORATION
By:
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NGE GENERATION, INC.
By:
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By:
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By:
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By:
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<PAGE>
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By:
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By:
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