(As filed June 16, 2000)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
APPLICATION/DECLARATION
under
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
KeySpan Corporation, on behalf of Eastern Enterprises, on behalf of
Itself And its Subsidiaries Itself and its Subsidiaries
One MetroTech Center 9 Riverside Road
Brooklyn, New York 11201 Weston, Massachusetts 02493
ENERGYNORTH, INC., on behalf of
Itself and its Subsidiaries
1260 Elm Street
P.O Box 329
Manchester, New Hampshire 03105
______________________________________________________________
(Name of companies filing this statement and addresses of
principal executive offices)
KeySpan Corporation
----------------------------------------------
(Name of top registered holding company parent of each applicant)
Steven L. Zelkowitz L. William Law, Jr., Esq.
Senior Vice President Senior Vice President
and General Counsel and General Counsel
KeySpan Corporation Eastern Enterprises
One MetroTech Center 9 Riverside Road
Brooklyn, New York 11201 Weston, Massachusetts 02493
Michelle L. Chicoine
Executive Vice President
EnergyNorth, Inc.
1260 Elm Street
Manchester, New Hampshire 03101
___________________________________________________
(Name and address of agent for service)
The Commission is also requested to send
copies of any communications in connection with
this matter to:
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Kenneth M. Simon, Esq. Andrew F. MacDonald, Esq.
Laura V. Szabo, Esq. Thelen Reid & Priest LLP
Dickstein Shapiro Morin 701 Pennsylvania Avenue, NW
& Oshinsky LLP Suite 800
2101 L Street, NW Washington, D.C. 2004
Washington, D.C. 20037
Richard A. Samuels, Esq.
McLane, Graf, Raulerson & Middleton P.A.
900 Elm Street
P.O. Box 326
Manchester, New Hampshire 03105
<PAGE>
TABLE OF CONTENTS
Item 1. Description of the Proposed Transaction.............................1
A. Introduction and General Request......................................1
1. Introduction.....................................................1
2. Description of KeySpan and its Subsidiaries......................2
3. General Request..................................................4
B. Parameters for Financing and Refinancing Authorizations...............7
C. Description of Proposed Financing Program.............................9
1. KeySpan External Financings......................................9
a. Common Stock....................................................12
b. Preferred Stock.................................................13
c. Long-Term Debt..................................................13
d. Short Term Debt.................................................14
2. Guarantees......................................................14
3. Authorization and Operation of the Money Pools..................14
4. Hedging Transactions............................................17
a. Interest Rate Hedges............................................17
b. Anticipatory Hedges.............................................17
5. Stock-Based, Open Enrollment and Dividend Reinvestment Plans....18
a. KeySpan........................................................18
b. The Houston Exploration Company................................19
c. MyHomeKey......................................................20
6. Utility Subsidiary Financings...................................21
7. Intermediate Holding Company Financing..........................22
8. Nonutility Subsidiary Financings................................22
9. EWG/FUCO-related Financings.....................................23
10. Other Securities................................................26
11. Changes in Capital Stock of Subsidiaries........................27
12. Financing Subsidiaries..........................................27
13. Intermediate Subsidiaries and New Subsidiaries..................28
14. Payment of Dividends out of Capital or Unearned Surplus.........30
a. Eastern and EnergyNorth.........................................30
b. Payment of Dividends by Nonutility Subsidiaries.................35
D. Intrasystem Provision and Goods and Services.........................36
1. Establishment of Service Company and Approval of Service Agreement36
2. Nonutility Subsidiaries' Provision of Goods And Services..........41
a. Continuation of Certain Existing Arrangements..................41
b. Other Sales and Service Contracts Among Nonutility Subsidiaries43
E. Tax Allocation Agreement.............................................44
F. Filing of Certificates of Notification...............................46
Item 2 Fees, Commissions and Expenses....................................46
Item 3 Applicable Statutory Provisions...................................46
A. General............................................................46
B. Compliance with Rules 53 and 54....................................47
Item 4 Regulatory Approvals..............................................47
Item 5 Procedure.........................................................49
Item 6 Exhibits and Financial Statements.................................49
A. Exhibits...........................................................49
B. Financial Statements...............................................50
i
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Item 7 Information as to Environmental Effects...........................51
<PAGE>
FORM U-1
APPLICATION/DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Item 1. Description of the Proposed Transaction
A. Introduction and General Request
1. Introduction
KeySpan Corporation ("KeySpan") is a New York corporation and
public utility holding company currently exempt from registration under the
Public Utility Holding Company Act of 1935 , as amended (the "Act") pursuant to
Section 3(a)(1) of the Act. KeySpan has previously filed an
Application/Declaration on Form U-1 (File No. 70-09641) with the Securities and
Exchange Commission (the "Commission") under Sections 9 and 10 and other
applicable provisions of the Act ("Merger Application") seeking approval for its
proposed acquisition for cash of all of the issued and outstanding common shares
of Eastern Enterprises ("Eastern") (hereafter referred to as the "Transaction").
Eastern is a Massachusetts business trust and public utility holding company
exempt from registration under the Act pursuant to Section 3(a)(1) of the Act.
Upon consummation of the Transaction, Eastern will become a direct, wholly-owned
subsidiary of KeySpan and KeySpan will register with the Commission as a holding
company pursuant to Section 5 of the Act. A more complete description of the
Transaction and the transactions contemplated in connection therewith is
contained in the Merger Application, which descriptions are hereby incorporated
by reference herein.
As also described in the Merger Application, Eastern filed an
application/declaration with the Commission ("Eastern/EnergyNorth Application")
requesting authorization pursuant to Sections 9 and 10 of the Act to acquire all
the issued and outstanding common stock of EnergyNorth, Inc. ("EnergyNorth,"
hereafter referred to as the "ENI Transaction"). (See File No. 70-9605).
EnergyNorth is an exempt holding company pursuant to Section 3(a)(1) of the Act.
If the Commission approves the ENI Transaction, upon consummation of the
transaction, EnergyNorth will become a direct subsidiary of Eastern, and,
therefore, an indirect subsidiary of KeySpan through consummation of the
Transaction. For purposes of this Application/ Declaration, KeySpan has assumed
that the ENI Transaction will be approved concurrently with the Transaction.
Accordingly, this Application/Declaration addresses approvals which would be
necessary if
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KeySpan indirectly acquires EnergyNorth through its acquisition of Eastern.1 The
Transaction and the ENI Transaction are sometimes collectively referred to
herein as the "Mergers."
2. Description of KeySpan and its Subsidiaries
Upon completion of the Transaction, KeySpan will own, directly or
indirectly, interests in the following seven public utility companies, each of
which will be either direct or indirect wholly-owned subsidiaries of KeySpan:
o The Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery New
York ("KED NY"), a New York corporation which distributes natural
gas at retail to residential, commercial and industrial customers
in the New York City Boroughs of Brooklyn, Staten Island and
Queens. KeySpan Energy Corporation ("KEC"), a New York
corporation and direct, wholly-owned subsidiary of KeySpan,
directly owns all of KED NY's issued and outstanding common
stock.
o KeySpan Gas East Corporation d/b/a KeySpan Energy Delivery Long
Island ("KED LI"), a New York corporation and direct,
wholly-owned subsidiary of KeySpan, which distributes natural gas
at retail to customers in New York State located in the counties
of Nassau and Suffolk on Long Island and the Rockaway Peninsula
in Queens County.
o KeySpan Generation LLC ("KeySpan Generation"), a New York limited
liability company and direct, wholly-owned subsidiary of KeySpan,
which owns and operates electric generation capacity located on
Long Island which is sold at wholesale to the Long Island Power
Authority.
o Boston Gas Company ("Boston Gas"), a Massachusetts corporation
and direct, wholly-owned subsidiary of Eastern, which distributes
natural gas to customers located in Boston and 73 other cities
and towns throughout eastern and central Massachusetts.
o Essex Gas Company ("Essex Gas"), a Massachusetts corporation and
direct, wholly-owned subsidiary of Eastern,
___________________
1 However, as noted in the Merger Application, KeySpan's request for approval of
the Transaction is not contingent on Commission approval of the ENI Transaction
and if such transaction is not approved, KeySpan nevertheless requests that the
Commission approve the Transaction without giving effect to Eastern's
acquisition of EnergyNorth. The same request applies to this
Application/Declaration with respect to the ENI Transaction.
2
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which distributes natural gas to customers in 17 cities and towns
in an area of eastern Massachusetts that is contiguous to Boston
Gas's service territory.
o Colonial Gas Company ("Colonial Gas"), a Massachusetts
corporation and direct, wholly-owned subsidiary of Eastern, which
distributes natural gas to customers located in northeastern
Massachusetts and on Cape Cod.
o EnergyNorth Natural Gas, Inc. ("ENGI"), a New Hampshire
corporation and direct, wholly-owned subsidiary of EnergyNorth,
which distributes natural gas to residential, commercial and
industrial customers in 27 cities and towns located in southern
and central New Hampshire, and the City of Berlin located in
northern New Hampshire.
Collectively, the seven utility subsidiaries referenced above are referred
to herein as the "Utility Subsidiaries." Together, the Utility Subsidiaries
serve approximately 2.4 million retail gas customers located in New York,
Massachusetts and New Hampshire and provide electric service to one customer,
the Long Island Power Authority, which provides retail electric service to
approximately 1.1 million customers located on Long Island, New York. More
complete descriptions of the Utility Subsidiaries may be found in the Merger
Application, which descriptions are incorporated herein by reference.
As explained in the Merger Application, following consummation of the
Mergers, KeySpan Energy Corporation ("KEC"), Eastern and EnergyNorth will remain
in existence as first tier public utility holding company subsidiaries of
KeySpan; however, EnergyNorth's existence will only be temporary; it will be
eliminated as soon as practicable after the Mergers are completed. KEC, Eastern
and EnergyNorth are collectively referred to herein as the "Intermediate Holding
Companies."
Upon completion of the Mergers, KeySpan will also directly or indirectly
own all of the nonutility subsidiaries and investments owned by KeySpan, Eastern
and EnergyNorth. Such entities are collectively referred to herein as the
"Nonutility Subsidiaries." More complete descriptions of the Nonutility
Subsidiaries may be found in the Merger Application, which descriptions are
incorporated herein by reference. The term "Nonutility Subsidiaries," as used in
this Application/Declaration, shall also mean any direct or indirect nonutility
subsidiary acquired or formed by KeySpan after the effective date of the Mergers
that has been approved by the Commission in this proceeding, in a separate
proceeding, or in a transaction that is exempt under the Act or the rules
thereunder.
Among the Nonutility Subsidiaries are KeySpan Corporate Services LLC
("KCS") and KeySpan Utility Services LLC ("KUS"), each a wholly-owned direct
subsidiary of KeySpan. KeySpan anticipates creating an additional wholly-owned
Nonutility Subsidiary to provide general engineering services to the companies
within the KeySpan System ("KENG," collectively referred to herein with KCS and
KUS as the
3
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"Service Companies"). The Service Companies are or will be wholly-owned direct
subsidiaries of KeySpan which will provide management, administrative,
engineering and other corporate support services to the companies within the
KeySpan system. Item 1.D. of this Application/Declaration describes the Service
Companies more fully and sets forth a request for the Commission's approval of
these companies as service companies pursuant to Rule 88(b) of the Commission's
regulations promulgated pursuant to the Act.2
Collectively, the Utility Subsidiaries, the Intermediate Holding Companies
and the Nonutility Subsidiaries are referred to herein as the "Subsidiaries."
(The corporate charts of KeySpan and its Subsidiaries immediately after the
Mergers are completed are filed as Exhibit E-4 to the Merger Application and
incorporated herein by reference.) The term "Subsidiaries" shall also include
entities that become subsidiaries of KeySpan after consummation of the
Transaction.
3. General Request
This Application/Declaration is being filed in connection with the Merger
Application and seeks the Commission's authorization and approval, upon
consummation of the Transaction and KeySpan's registration as a holding company
under Section 5 of the Act, with respect to a program of external financing,
credit support arrangements, and other related proposals for KeySpan, Eastern,
EnergyNorth and their respective Subsidiaries (the "KeySpan System") for the
period commencing on the date the Mergers are completed and continuing for a
period of 3 years from such date ("Authorization Period") as follows:3
a. KeySpan requests authorization to issue and sell through the
Authorization Period up to $1.5 billion of additional securities
at any time outstanding and to issue additional guarantees and
other forms of credit support in an aggregate amount of $2.0
billion at any time outstanding in addition to any such
securities, guarantees and credit support outstanding or existing
as of the date the Mergers are completed.
b. KeySpan requests that the Commission approve the issuance of
shares of common stock or the reissuance of shares of common
stock held in treasury under dividend reinvestment and
stock-based management incentive and employee benefit plans.
_____________________
2 17 C.F.R.ss.250.88(b).
3 KeySpan requests that the Commission review and rule on this
Application/Declaration contemporaneously with the Merger Application.
4
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c. The Utility Subsidiaries request authority to maintain existing
and issue, sell and have outstanding at any one time during the
Authorization Period new debt securities with maturities of one
year or less up to the amount specified below.
d. KeySpan and, to the extent not exempt under Rule 52, the
Subsidiaries, request authority to maintain existing and enter
into additional hedging transactions 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 with respect to anticipatory debt
issuances in order to lock-in current interest rates and/or
manage interest rate risk exposure.
e. KeySpan, on behalf of the Subsidiaries, requests authorization to
change any wholly-owned Subsidiary's authorized capital stock
capitalization.
f. KeySpan and the Subsidiaries request authority to acquire the
equity securities of one or more special-purpose subsidiaries
organized solely to facilitate a financing and to guaranty the
securities issued by such Financing Subsidiaries (as defined in
Item I.C.8 below), to the extent not exempt pursuant to Rule
45(b) and Rule 52.
g. KeySpan requests authority to acquire, directly or indirectly,
the equity securities of (a) 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, and (b) one or more new
subsidiaries ("New Subsidiaries") organized exclusively for the
purpose of engaging in any business or activity in which any of
the Nonutility Subsidiaries of KeySpan are engaged at the
effective time of the Transaction.
h. KeySpan requests authority for certain of its Subsidiaries to
continue to provide certain services to certain Subsidiaries.
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i. 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.
j. KeySpan and the Subsidiaries request authority to pay dividends
out of capital and unearned surplus, subject to certain
limitations and for authorization for KeySpan and the
Subsidiaries to acquire, retire, or redeem the securities that
they have issued to any associate company, any affiliate, or any
affiliate of an associate company.
k. KeySpan requests approval for an agreement among KeySpan and the
Subsidiaries to allocate consolidated income tax attributes.
l. KeySpan requests authorization for itself and each of its
Subsidiaries to maintain in effect all existing credit
facilities, guarantees and equity and debt financing arrangements
and to maintain outstanding all indebtedness and similar
obligations created thereunder as of the date of the completion
of the Mergers (including, without limitation, any credit
facilities, equity or debt financing arrangements, indebtedness
or similar obligations incurred in connection with or to finance
the Mergers) and to amend, renew, extend, supplement and/or
replace any of such credit facilities, guarantees, equity or debt
financing arrangements, indebtedness or similar obligations up to
the aggregate dollar amounts specified below, provided that no
such amendment, renewal, extension, supplement and/or replacement
(individually and collectively, a "Refinancing") which is
effected following completion of the Mergers shall provide for an
increase in the aggregate amount of indebtedness incurred or for
a final maturity date which is beyond the parameters for
financing and refinancing authorization specified below in Item I
B unless the Commission shall otherwise approve or unless such
Refinancing shall not require Commission approval under
applicable provisions of the Act and rules and regulations
promulgated thereunder.
The requested authority will give KeySpan and its Subsidiaries the
flexibility to respond quickly and efficiently to their financing needs and to
changes in market conditions to the benefit of customers and shareholders.
Approval of this Application/Declaration is consistent with existing Commission
precedent, both for newly registered holding company
6
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systems4 and for holding company systems that have been registered for a longer
period of time.5
B. Parameters for Financing and Refinancing Authorizations
Authorization is requested herein to engage in certain financing
transactions during the Authorization Period for which the specific terms and
conditions are not yet known, and which may not be covered by Rule 52 of the
Commission's regulations, without further prior approval of the Commission. The
following general terms will be applicable where appropriate to the financing
transactions requested to be authorized hereby and entered into after the
Transaction is consummated:
1. Maintenance of Equity Ratio. During the Authorization Period
KeySpan's (and each Utility Subsidiary's) common equity (as
reflected in KeySpan's Forms 10-K or Forms 10-Q filed with the
Commission pursuant to the 1934 Act) will be at least 30% of
their consolidated capitalization, as adjusted to reflect
subsequent events that affect capitalization.
2. Investment Grade Debt. KeySpan commits that any long-term debt
issued by it to unaffiliated parties pursuant to the authority
requested hereby and not exempt under Rule 52 will be rated or
will meet the qualifications for being rated investment grade by
a nationally recognized statistical rating organization (as that
term is used in Rule 15c3-1(c)2(vi)(F) under the 1934 Act).
3. Effective Cost of Money on Borrowings. The effective cost of
money on long-term debt financings authorized by this
Application/Declaration will not exceed 500 basis points over the
interest rate borne by comparable term U.S. Treasury securities
and the effective cost of money on short-term debt financings
authorized by this Application/Declaration will not exceed 500
basis points over the London interbank offer rate (LIBOR).
___________________
4 See, e.g., National Grid, Holding Co. Act Release No. 27154 (March 15, 2000);
Scana Corporation, Holding Co. Act Release No. 27135 (February 14, 2000);
Dominion Resources, Inc., Holding Co. Act Release No. 27112 (December 15, 1999);
Conectiv, Inc., Holding Co. Act Release No. Release No. 26833 (Feb. 26,1998);
New Century Energies, Inc., Holding Co. Act Release No. 26750 (Aug. 1, 1997).
5 See, e.g., The Columbia Gas System, Inc., Holding Co. Act Release No. 26634
(December 23, 1996); Gulf States Utilities Co., Holding Co. Act Release No.
26451 (January 16, 1996).
7
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4. Effective Cost of Money on Other Approved Securities. The
effective cost of money on preferred stock and other fixed income
oriented securities will not exceed 500 basis points over LIBOR.
5. Maturity of Debt. The maturity of authorized indebtedness will
not exceed 50 years.
6. Issuance Expenses. The underwriting fees, commissions and other
similar remuneration paid in connection with the non-competitive
issue, sale or distribution of a security pursuant to this
Application/Declaration will not exceed an amount or percentage
of the principal or total amount of the security being issued
that would be charged to or paid by other companies with a
similar credit rating and credit profile in a comparable
arm's-length credit or financing transaction with an unaffiliated
person.
7. EWG and FUCO Investments. KeySpan's "aggregate investment" in
exempt wholesale generators ("EWGs") and foreign utility
companies ("FUCOs"), as defined in Rule 53 under the Act, (a)
will not exceed 100% of the aggregate consolidated retained
earnings of KeySpan, Eastern and EnergyNorth without giving
effect to any accounting adjustments required in connection with
the Mergers, and (b) will not exceed 250% of the aggregate
consolidated retained earnings of KeySpan, Eastern and
EnergyNorth if such accounting adjustments are given effect.
8. Use of Proceeds. The proceeds from the financings authorized by
the Commission pursuant to this Application/Declaration will be
used for lawful corporate purposes, including (i) financing, in
part, investments by and capital expenditures of KeySpan 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
KeySpan or any Subsidiary of any of its own securities pursuant
to Rule 42, and (iii) financing working capital requirements of
KeySpan and its Subsidiaries.
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 of the Act and Rule 58.6
___________________
6 17 C.F.R.ss.250.58.
8
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KeySpan states that the aggregate amount of proceeds of financing and KeySpan
Guarantees approved by the Commission in this proceeding used to fund
investments in EWGs and FUCOs will not, when added to KeySpan's "aggregate
investment" (as defined in Rule 53) in all such entities at any point in time,
exceed 100% of KeySpan's "consolidated retained earnings" without giving effect
to any accounting adjustments required in connection with the Mergers, or, if
effect is given to such accounting adjustments, will not exceed 250%. Further,
KeySpan represents that proceeds of financing and KeySpan Guarantees (as defined
below) and Nonutility Subsidiary Guarantees (as defined below) utilized to fund
investments in Rule 58 Subsidiaries will be subject to the limitations of that
rule. KeySpan 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.
C. Description of Proposed Financing Program
KeySpan and its Subsidiaries hereby request authorization to
engage in the transactions set forth herein during the Authorization Period.
1. KeySpan External Financings
KeySpan is, and prior to the closing of the Mergers KeySpan will
continue to be, a holding company exempt from the registration requirements of
the Act and, thus, is not now, and until the closing of the Mergers will not be,
subject to Sections 6(a) and 7 of the 1935 Act.
Shareholders of Eastern will, in connection with the Transaction,
be given $64.00 in cash, subject to adjustment as more fully described in the
Merger Application, in exchange for each share of Eastern common stock held.
Shareholders of EnergyNorth will, in connection with the ENI Transaction, be
given $61.13 in cash, subject to adjustment as more fully described in the
Merger Application, in exchange for each share of EnergyNorth common stock held.
The incurrence of indebtedness to obtain the approximately $2.2 billion of cash
necessary to, among other things, make payments to Eastern and EnergyNorth
shareholders in exchange for their shares of common stock in connection with the
Mergers does not require Commission approval under the Act. KeySpan anticipates
that such cash will initially be obtained through the issuance of commercial
paper under an expanded KeySpan commercial paper program backed by a combination
of short-term and long-term credit facilities similar to the types of credit
facilities that KeySpan currently has in place and other short-term credit
facilities. The effective cost of this short-term financing to KeySpan will not
exceed 500 basis points over comparable term LIBOR.
After closing of the Mergers, KeySpan anticipates replacing a
significant portion of the commercial paper (and some or all of the initial
short-term acquisition financing) with proceeds from the issuance of debt,
preferred and/or convertible securities. As a result
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of the acquisition financing, KeySpan's consolidated capital structure will
approximate 65%-70% debt and preferred securities and 30%-35% common equity.
Exhibit FS-1 hereto contains the unaudited pro forma combined consolidated
balance sheet of KeySpan and its Subsidiaries showing the reported condition of
KeySpan for the twelve month period ended December 31, 1999, the reported
condition for Eastern and EnergyNorth for the twelve month period ended December
31, 1999, the pro forma adjustments necessary to account for the Mergers and the
pro forma balance sheet for the combined company for the same period.
Table No. 1 below sets forth a summary of the historical capital
structures of KeySpan, Eastern and EnergyNorth at December 31, 1999, and the pro
forma consolidated capital structure of KeySpan, as the parent holding company
of the combined KeySpan-System, at December 31, 1999.
<TABLE>
<CAPTION>
Table No. 1
KeySpan, Eastern and EnergyNorth Historical Capital Structures
--------------------------------------------------------------
(Dollar amounts in millions) (as reported)
<S> <C> <C> <C> <C> <C> <C>
KeySpan % of Total Eastern % of Total EnergyNorth % of Total
------- ---------- ------- ---------- ----------- ----------
Common Equity $2,715 57.6% $755 57.5% $53 46.6%
Preferred Securities 84 1.8% 26 2.0% --- --%
Debt (inc. short term) 1,913 40.6% 532 40.5% 60 53.4%
Total: $4,712 100.0% $1,313 100.0% $113 100.0%
</TABLE>
<TABLE>
<CAPTION>
KeySpan Pro Forma Consolidated Capital Structure
(Dollar amounts in millions) (unaudited)
<S> <C> <C>
Amount % of Total
Common Equity $2,734 37.0%
Preferred Securities 111 1.5%
Debt (inc. short term) 4,542 61.5%
Total: $7,387 100.0%
</TABLE>
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Aside from the financing required in connection with the Mergers,
KeySpan, has, consistent with applicable law and KeySpan's normal business
practice and in order to make reasonable provision for the anticipated financing
needs of itself and its Subsidiaries, entered into a number of credit facilities
with outside lenders, issued debt securities and guaranteed or otherwise
supported the obligations of its Subsidiaries. These credit facilities and other
financing arrangements are described in Exhibit C.
In entering into the agreements relating to the Mergers and
seeking to combine their companies, KeySpan and Eastern recognize that
successful integration of their operations and activities cannot be achieved
overnight. KeySpan and Eastern have established an Integration Team to oversee
the process of integrating their companies but, for both practical and legal
reasons, this integration cannot be fully implemented until after the receipt of
required regulatory approvals and the actual closing of the Mergers. Moreover,
any requirement that might be imposed on KeySpan to the effect that, upon
closing of the Mergers, KeySpan and its Subsidiaries must replace their existing
financing and credit arrangements with new financing and credit arrangements
typical of those historically employed by existing registered systems would (i)
impose substantial economic costs on the companies and (ii) cause substantial
disruption to their ongoing business activities as the companies, their
investors and the financial markets seek to understand such new arrangements.
Such a requirement would, in view of ongoing liberalization of the regulation
under the Act generally applicable to financings by registered holding
companies, undermine the interests of the companies and the interests of their
investors and consumers and would, therefore, be detrimental to the public
interest and the interests of investors and consumers. Thus, for a period of
time following the closing of the Mergers, KeySpan and the Subsidiaries are
seeking to maintain their existing financing arrangements and other commitments
and to continue to carry on their newly combined business without undue
interruption. Consequently, KeySpan requests that the Commission authorize
KeySpan and the Subsidiaries, during the Authorization Period, to continue to
finance their operations in the same manner as prior to closing of the Mergers
all as more specifically described herein. In that connection, KeySpan commits
that from and after the consummation of the Mergers and for the duration of the
Authorization Period, KeySpan, as the registered holding company parent of the
combined consolidated KeySpan System, will maintain and will cause each of its
Utility Subsidiaries to maintain at least 30% common equity in its respective
capital structure. Exhibit FS-1 hereto illustrates that, on a pro forma basis at
December 31, 1999, KeySpan would, after giving effect to the Mergers, have 37%
common equity in its capital structure.
KeySpan hereby requests Commission authorization to maintain in
effect the financing arrangements described above and in Exhibit C, as well as
any additional financing arrangements and any Refinancings entered into prior to
completion of the Mergers.7 KeySpan further requests Commission authorization,
during the Authorization
_____________________
7 With respect to existing promissory notes reflected in Exhibit C, KeySpan may
be required under certain circumstances to obtain letters of credit to support
its obligations under such notes. Accordingly, KeySpan
(footnote continued on next page)
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Period, to effect a Refinancing of financing arrangements entered into by
KeySpan prior to completion of the Mergers and which remain in effect on the
date the Mergers are completed; provided that any such Refinancings that are
effected following completion of the Mergers will be done in compliance with the
parameters for financing and refinancing authorization described in Section B
above. KeySpan further requests authorization to enter into additional financing
arrangements and to issue additional equity, debt and convertible securities
aggregating not more than $1.5 billion at any one time outstanding during the
Authorization Period. Such securities could include, but would not necessarily
be limited to, common stock, preferred stock, options, warrants, long- and
short-term debt (including commercial paper), convertible securities,
subordinated debt, bank borrowings and securities with call or put options.
KeySpan may also issue guarantees and enter into interest rate swaps and hedges
as described below. The total of all outstanding securities issued by KeySpan
under the Refinancing authority herein requested together with the additional
equity and debt financing authority herein requested shall not exceed $5.1
billion during the Authorization Period.
a. Common Stock
KeySpan requests authorization to issue and sell common stock from
time to time during the Authorization Period, either through underwritten public
offerings, in private placements or in exchange for securities or assets being
acquired from other companies. KeySpan 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. KeySpan may also buy back shares of common stock
or options during the Authorization Period in accordance with Rule 42.
Under Rule 58 and Section 34 of the Act, KeySpan is authorized to
acquire securities of companies engaged in "energy-related" businesses, as
described in Rule 58, as well as ETCs. Historically, similar acquisitions have
occasionally involved 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 are individually negotiated. The KeySpan 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 KeySpan as well as for the seller
of the business. Therefore, KeySpan requests authorization to issue common stock
in consideration for an
______________________
requests that the approval of existing debt requested herein include approval to
obtain such required letters of credit.
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acquisition by KeySpan or a Nonutility Subsidiary of securities or assets of a
business, the acquisition of which has been approved by the Commission in this
proceeding or is exempt under the Act or the rules thereunder. The KeySpan
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
KeySpan may issue additional preferred stock from time to time
during the Authorization Period. Preferred stock or other types of preferred or
equity-linked securities may be issued in one or more series with such rights,
preferences, and priorities as may be designated in the instrument creating each
such series, as determined by KeySpan's board of directors. The dividend rate on
any series of preferred stock or other preferred securities will not exceed at
the time of issuance 500 basis points over LIBOR. Dividends or distributions on
preferred stock or other preferred securities will be made periodically and to
the extent funds are legally available for such purpose, but may be made subject
to terms which allow the issuer to defer dividend payments for specified
periods. Preferred stock or other preferred securities may be convertible or
exchangeable into shares of common stock.
c. Long-Term Debt
KeySpan proposes to issue additional long-term debt in accordance
with the conditions described in Item 1.B above. Any long-term debt security
would have the maturity, interest rate(s) or methods of determining the same,
terms of payment of interest, redemption provisions, sinking fund terms and
other terms and conditions as KeySpan may determine at the time of issuance and
may be comprised of medium-term notes under an indenture (the "KeySpan
Indenture") or institutional debt. The request for authorization for KeySpan to
issue long-term debt securities is consistent with authorization that the
Commission has granted to other registered holding companies. See Columbia
Energy Group, Holding Co. Act Release No. 27035 (June 8, 1999).8
d. Short Term Debt
KeySpan requests authorization to issue additional short-term debt
including, but not limited to, institutional borrowings, commercial paper
(including back-up short-
______________________
8 See also; Cinergy Corp., Holding Co. Act Release No. 26909 (Aug. 21, 1998)
(authorizing the issuance of up to $400 million of unsecured debt securities);
Conectiv, Inc., Holding Co. Act Release No. 26921 (Sept. 28, 1998) (authorizing
issuance of up to $250 million of debentures); and Dominion Resources, Inc.,
Holding Co. Act Release No. 27112 (Dec. 15, 1999) (authorizing the issuance of
debt securities by the registered holding company, including the refinancing of
$4.5 billion of acquisition indebtedness).
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<PAGE>
term credit facilities) and bid notes. Issuance of short-term debt will be in
accordance with the conditions described in Item 1.B above. Proceeds of any
short-term debt issuance may be used to refund pre-Mergers short-term debt and
Mergers-related debt, and to provide financing for general corporate purposes,
working capital requirements and Subsidiary capital expenditures until long-term
financing can be obtained.
2. Guarantees
KeySpan requests authorization to maintain in effect and to amend,
renew, extend and/or replace any and all of its existing guarantees, letters of
credit, expense agreements and other forms of credit support ("Guarantees") with
respect to the obligations of the Subsidiaries or which may hereafter be entered
into or given prior to the completion of the Mergers. KeySpan currently has
approximately $1.3 billion in Guarantees outstanding which are expected to
remain in place following the Mergers. Details of such Guarantees are included
in Exhibit C.
KeySpan requests further authorization to enter into additional
Guarantees with respect to the obligations of the Subsidiaries as may be
appropriate or necessary to enable such companies to carry on in the ordinary
course of their respective businesses in an aggregate principal amount not to
exceed $2.0 billion outstanding at any one time (not taking into account
obligations exempt under Rule 45). The limit on Guarantees is separate from the
limit on KeySpan's external financing.
3. Authorization and Operation of the Money Pools
KeySpan and the Subsidiaries request authorization to establish
the KeySpan System money pool ("Money Pool"). The Utility Subsidiaries, to the
extent not exempted by Rule 52, also request authorization to make unsecured
short-term borrowings from the Money Pool, to contribute surplus funds to the
Money Pool, and to lend and extend credit to (and acquire promissory notes from)
one another through the Money Pool. KeySpan requests authorization to contribute
surplus funds and to lend and extend credit to the Money Pool. It is anticipated
that all Utility Subsidiaries will participate in the Money Pool. However, the
participation of KED NY and KED LI will be limited to borrowing from the Money
Pool only. EWGs, FUCOs and ETCs will not participate in the Money Pool in any
manner.
KeySpan believes that the cost of the proposed borrowings through
the Money Pool will generally be more favorable to the Subsidiaries than the
comparable cost of external short-term borrowings, and the yield to the
Subsidiaries contributing available funds to the Money Pool will generally be
higher than the typical yield on short-term investments.
KeySpan proposes that the Money Pool would make short-term funds
available for short-term loans to the Subsidiaries from time to time from the
following sources: (1) surplus funds in the treasuries of the Subsidiaries, (2)
surplus funds in the treasuries of
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KeySpan and the Intermediate Holding Companies, and (3) proceeds from bank
borrowings by Money Pool participants or the sale of commercial paper by KeySpan
or the Subsidiaries for loan to the Money Pool ("External Funds"). Funds would
be made available from such sources in such order as KCS, as administrator of
the Money Pool, may determine would result in a lower cost of borrowing,
consistent with the individual borrowing needs and financial standing of the
companies providing funds to the pool.
The determination of whether a Money Pool participant at any time
has surplus funds to lend to the Money Pool or shall lend funds to the Money
Pool would be made by such participant's chief financial officer or treasurer,
or by a designee thereof, on the basis of cash flow projections and other
relevant factors, in such participant's sole discretion. See Exhibit H for a
copy of the Form of Money Pool Agreement.
Money Pool borrowers would borrow pro rata from each company that
lends, in the proportion that the total amount loaned by each such lending
company bears to the total amount then loaned through the Money Pool. On any day
when more than one fund source (e.g., surplus treasury funds of KeySpan and
other Money Pool participants ("Internal Funds") and External Funds), with
different rates of interest, is used to fund loans through the Money Pool, each
borrower would borrow pro rata from each such fund source in the Money Pool in
the same proportion that the amount of funds provided by that fund source bears
to the total amount of short-term funds available to the Money Pool.
Money Pool borrowings would require authorization by the
borrower's chief financial officer or treasurer, or by a designee thereof. No
party would be required to effect a borrowing through the Money Pool if it is
determined that it could (and had authority to) effect a borrowing at lower cost
directly from banks or through the sale of its own commercial paper. No loans
through the Money Pool would be made to, and no borrowings through the Money
Pool would be made by, KeySpan or the Intermediate Holding Companies. No
Subsidiary that is an EWG, FUCO or ETC will borrow from the Money Pool.
The cost of compensating balances, if any, and fees paid to banks
to maintain credit lines and accounts by Money Pool participants lending
External Funds to the Money Pool would initially be paid by the participant
maintaining such line. A portion of such costs -- or all of such costs in the
event a Money Pool participant establishes a line of credit solely for purposes
of lending any External Funds obtained thereby into the Money Pool -- would be
allocated every month to the companies borrowing such External Funds through the
Money Pool in proportion to their respective daily outstanding borrowings of
such External Funds.
If only Internal Funds make up the funds available in the Money
Pool, the interest rate applicable and payable to or by Subsidiaries for all
loans of such Internal Funds will be the rates for high-grade unsecured 30-day
commercial paper sold through dealers by major corporations as quoted in The
Wall Street Journal.
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<PAGE>
If only External Funds comprise the funds available in the Money
Pool, the interest rate applicable to loans of such External Funds would be
equal to the lending company's cost for such External Funds (or, if more than
one Money Pool participant had made available External Funds on such day, the
applicable interest rate would be a composite rate equal to the weighted average
of the cost incurred by the respective Money Pool participants for such External
Funds).
In cases where both Internal Funds and External Funds are
concurrently borrowed through the Money Pool, the rate applicable to all loans
comprised of such "blended" funds would be a composite rate equal to the
weighted average of (a) the cost of all Internal Funds contributed by Money Pool
participants (as determined pursuant to the second-preceding paragraph above)
and (b) the cost of all such External Funds (as determined pursuant to the
immediately preceding paragraph above). In circumstances where Internal Funds
and External Funds are available for loans through the Money Pool, loans may be
made exclusively from Internal Funds or External Funds, rather than from a
"blend" of such funds, to the extent it is expected that such loans would result
in a lower cost of borrowings.
Funds not required by the Money Pool to make loans (with the
exception of funds required to satisfy the Money Pool's liquidity requirements)
would ordinarily be invested in one or more short-term investments, including:
(i) interest-bearing accounts with banks; (ii) obligations issued or guaranteed
by the U.S. government and/or its agencies and instrumentalities, including
obligations under repurchase agreements; (iii) obligations issued or guaranteed
by any state or political subdivision thereof, provided that such obligations
are rated not less than "A" by a nationally recognized rating agency; (iv)
commercial paper rated not less than "A-1" or "P-1" or their equivalent by a
nationally recognized rating agency; (v) money market funds; (vi) bank
certificates of deposit, (vii) Eurodollar funds; and (viii) such other
investments as are permitted by Section 9(c) of the Act and Rule 40 thereunder.
The interest income and investment income earned on loans and
investments of surplus funds would be allocated among the participants in the
Money Pool in accordance with the proportion each participant's contribution of
funds bears to the total amount of funds in the Money Pool and the cost of funds
provided to the Money Pool by such participant.
Each Subsidiary receiving a loan through the Money Pool would be
required to repay the principal amount of such loan, together with all interest
accrued thereon, on demand and in any event not later than one year after the
date of such loan. All loans made through the Money Pool may be prepaid by the
borrower without premium or penalty.
Operation of the Money Pool, including record keeping and
coordination of loans, will be handled by KCS under the authority of the
appropriate officers of the participating companies. KCS will administer the
Money Pool on an "at cost" basis.
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4. Hedging Transactions
a. Interest Rate Hedges
KeySpan requests authorization to continue existing, and enter
into additional, 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 or Fitch IBCA.
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. 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.
b. Anticipatory Hedges
KeySpan requests authorization to continue existing, and enter
into additional 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. KeySpan or a
Subsidiary will determine the optimal structure of each Anticipatory Hedge
transaction at the time of execution. KeySpan or a Subsidiary
17
<PAGE>
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 KeySpan nor any Subsidiary
will, at any time, take possession or make delivery of the underlying U.S.
Treasury Securities.
KeySpan will comply with the then existing financial disclosure
requirements of the Financial Accounting Standards Board associated with hedging
transactions.9
5. Stock-Based, Open Enrollment and Dividend Reinvestment Plans
a. KeySpan
KeySpan requests authorization to issue and sell its common stock
from time to time during the Authorization Period, either pursuant to its
Investor Program, an open enrollment and dividend reinvestment plan and its Long
Term Performance Incentive Compensation Plan, and a stock-based management
incentive plan and its 401K Plan employee benefit plans or in exchange for
securities or assets being acquired from other companies.
KeySpan, Eastern, and EnergyNorth currently have in effect the
stock based plans described in Exhibit B, which authorize grants of such
companies' common stock, stock options and other stock-based awards to eligible
employees, directors and consultants. Because KeySpan will directly or
indirectly be acquiring all of Eastern's and EnergyNorth's common stock,
following consummation of the Mergers, Eastern and EnergyNorth's stock plans
will cease to operate and may be assumed by KeySpan. However, KeySpan may issue
shares of its Common Stock under the authorization and within the limitations
set forth herein in order to satisfy the obligations of Eastern and EnergyNorth
under all such plans and under plans adopted after the effective time of the
Mergers which replace any plans listed in Exhibit B. 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. KeySpan 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 42.10 KeySpan 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
___________________
9 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); Ameren Corp., et al., Holding Co. Act Release No. 27053 (July 23,
1999).
10 17 C.F.R.ss.250.42.
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transactions of this variety would be treated the same as other stock
transactions permitted pursuant to this Application/Declaration.
KeySpan also has an Investor Program, an open enrollment and
dividend reinvestment plan under which shares of its Common Stock may be issued
directly to individuals and existing shareholders who may also elect to reinvest
their cash dividends and/or make optional cash investments to purchase
additional shares of Common Stock. Shares of Common Stock for use under the open
enrollment and dividend reinvestment plan may be either newly issued shares,
treasury shares, or shares purchased on the open market. KeySpan hereby seeks
authority for the issuance and sale of its shares in accordance with its open
enrollment and dividend reinvestment plan under the authorization and within the
limitations set forth herein.
As of April 30, 2000, the following approximate number of shares
were issued and outstanding under the KeySpan plans described above: 5,326,000
shares under KeySpan's open enrollment and divided reinvestment plan; 581,250
shares under KeySpan's employee stock purchase plan; and 3,671,900 shares under
KeySpan's 401K plans. In addition, as of such date, approximately 7,863,800
options to purchase shares of KeySpan's common stock have been issued under
KeySpan's stock-based management incentive plan.
b. The Houston Exploration Company
KeySpan, through a wholly-owned Subsidiary, holds a 70% interest
in The Houston Exploration Company ("Houston Exploration"). Houston Exploration,
is a publicly held Delaware corporation. It is engaged in the exploration,
development and acquisition of domestic natural gas and oil properties.
KeySpan requests authorization during the Authorization Period for
Houston Exploration to issue securities pursuant to the stock plans described
below.
1996 Stock Option Plan. At the completion of an initial public
offering in September 1996, Houston Exploration adopted the 1996 Stock Option
Plan, which allowed it to grant options not to exceed 10% of the shares of
Houston Exploration's common stock outstanding from time to time. Options
granted under the 1996 Stock Option Plan expire 10 years from the grant date and
vest in one-fifth increments on each of the first five anniversaries of the
grant date. During 1997, the 1996 Stock Option Plan was amended to allow option
grants to non-employee directors of the company. Options granted to non-employee
directors vest on the date of grant and are non-qualified. As of December 31,
1999, substantially all options currently authorized under the 1996 Stock Option
Plan had been granted, of which 979,330 of the options granted are incentive
stock options ("ISOs") and the balance of 1,354,608 are non-qualified stock
options ("NQSOs").
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1999 Stock Option Plan. On October 26, 1999, Houston Exploration
adopted the 1999 Non-Qualified Stock Option Plan (the "1999 Stock Option Plan").
Under the 1999 Stock Option Plan, 400,000 options were authorized of which
111,800 options were granted during 1999. All options under the 1999 Stock
Option Plan are non-qualified, expire 10 years from the grant date and vest in
one-fifth increments on each of the first five anniversaries of the grant date,
with the exception of options granted to non-employee directors which vest on
the date of grant.
c. MyHomeKey
KeySpan, through its wholly-owned Subsidiary, KeySpan MHK, Inc.
("KMHK"), is an investor in MyHomeKey.com, Inc. ("MHK"). MHK was formed to
establish and maintain an Internet-based website offering certain energy and
home-related goods and services.11 At April 18, 2000, KMHK owned an approximate
18.2% beneficial interest in MHK (calculated on a fully diluted basis assuming
the conversion of all issued and outstanding convertible preferred stock of MHK
and the exercise of all outstanding stock options).
MHK currently maintains a Stock Plan (the "MHK Stock Plan") in
which employees, directors and consultants of MHK may participate. The MHK Stock
Plan is administered by a committee comprised of outside MHK directors. The
following types of awards may be granted under the MHK Stock Plan: incentive
stock options, nonstatutory stock options and stock purchase rights. Incentive
stock options, which are intended to qualify as incentive stock options under
the Internal Revenue Code, may only be granted to employees. Nonstatutory stock
options and stock purchase rights may be granted to employees and directors of
MHK, as well as service providers to the company. Incentive stock options and
nonstatutory stock options may be granted to eligible participants subject to
terms and conditions established by the committee. The exercise price of an
option must be at least 100% of the fair market value of MHK common stock on the
date that the option is granted (or 85%, in the case of a nonstatutory stock
option granted to a service provider who is neither an employee nor the
beneficial owner of more than 10% of the voting securities of MHK). Stock
purchase rights consist of the award of shares of MHK common stock which are
subject to certain conditions. Recipients are prohibited from selling or
transferring restricted stock awarded in the form of stock purchase rights until
the restrictions stated in the award agreement are satisfied, and the company
reserves the rights to repurchase such restricted stock on the terms and
conditions stated in the award agreement. In addition to MHK's rights to
repurchase shares of its common stock issued pursuant to the MHK Stock Plan,
shares of common stock which have been issued to its senior management (or
reserved for issuance pursuant to the exercise of an option granted to one of
MHK's directors (the "Director's Option")), are also subject to certain
repurchase rights of the company upon such individuals' termination of
employment or association with the company.
Authorization is requested from the Commission for MHK to issue
and sell, and to repurchase, from time to time pursuant to the MHK Stock Plan
and the Director's
________________________
11 A full description of MHK is contained in the Merger Application and is
incorporated herein by reference.
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Option shares of its common stock or options or other stock purchase rights and
to repurchase shares of MHK's common stock held by senior management upon such
individuals' termination of employment or association with the company.
6. Utility Subsidiary Financings
KeySpan's Utility Subsidiaries may finance a portion of their
operations on a stand-alone basis and independent of any credit support from
KeySpan and may also enter into Interest Rate Hedges subject to the same terms
and conditions as those described above relating to KeySpan. Most financings
undertaken by the Utility Subsidiaries are subject to the jurisdiction of the
Public Service Commission of the State of New York ("NYPSC"), the Massachusetts
Department of Telecommunications and Energy ("MDTE") or the New Hampshire Public
Utility Commission ("NHPUC"), as the case may be, each of which has regulatory
jurisdiction over certain of the Utility Subsidiaries; therefore, the issue and
sale of most securities by the Utility Subsidiaries will be exempt from the
pre-approval 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, (1) NYPSC is not required for the issuance by KED NY, KED LI and
KeySpan Generation of indebtedness with maturities of one year or less, (2) the
approval of the MDTE is not required for the issuance by Boston Gas, Colonial
Gas, and Essex Gas of indebtedness with maturities of one year or less and (3)
the approval of the NHPUC is not required for the issuance by ENGI of
indebtedness with maturities of one year or less which in the aggregate do not
exceed 10% of the net utility plant.
To the extent no exemption therefor is provided under Rule 52,
authority is requested for the Utility Subsidiaries to (1) continue in effect
the credit facilities set forth in Exhibit D after completion of the Mergers and
to amend, renew, extend and/or replace such credit facilities (2) enter into
Interest Rate Hedges subject to the same terms and conditions as those described
above relating to KeySpan and (3) issue and sell from time to time during the
Authorization Period additional debt securities with maturities of one year or
less, up to the following aggregate principal amounts:
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Utility Subsidiaries Aggregate Principal Amount ($ millions)
-------------------- ---------------------------------------
KED NY $250
KED LI 185
KeySpan Generation 50
Boston Gas 150
Colonial Gas 75
Essex Gas 20
ENGI 35
------
$765
Any other future financings undertaken by the Utility Subsidiaries
will be undertaken in compliance with applicable laws, rules and regulations
including, after completion of the Mergers, the Act and Rule 52.
7. Intermediate Holding Company Financing
KeySpan anticipates that the Intermediate Holding Companies could
serve as pass-through financing entities, facilitating the financing of the
KeySpan System by transferring funds from KeySpan to the subsidiaries of the
Intermediate Holding Companies and, to the extent that such service as a
financing conduit would result in the issuance or sale of securities by the
Intermediate Holding Companies, KeySpan and the Intermediate Holding Companies
request authority for each of the Intermediate Holding Companies to issue and
sell securities to their respective immediate parent company for the purpose of
funding the operations of their respective subsidiaries. All such securities
issued by the Intermediate Holding Companies will meet the requirements of Rule
52(b). In no event would the Intermediate Holding Companies issue or sell
securities to third parties or borrow or receive any extension of credit from a
Subsidiary.
8. Nonutility Subsidiary Financings
As noted on Exhibit E hereto, certain Nonutility Subsidiaries have
financing arrangements in place that are expected to remain in place following
consummation of the Mergers. Certain guarantees in favor of a direct or indirect
Nonutility Subsidiary issued by another Subsidiary may be replaced by KeySpan
guarantees as described below. In addition, the Merger Application contemplates,
and KeySpan expects that the order permitting the Merger Application to become
effective will authorize the formation or retention of other Nonutility
Subsidiaries named herein which do not currently have outstanding debt. It is
expected that future financing by all such Nonutility Subsidiaries following
completion of the Mergers will be made pursuant to the terms of, and exempt
under, Rule 52.
MHK, a Nonutility Subsidiary, may issue and sell common stock in
an initial public offering for purposes of raising capital to finance the
business activities contemplated by its current business plan. KeySpan believes
that such an initial public offering is exempt
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from prior Commission authorization pursuant to Rule 52(b). However, to the
extent the exemption may not apply, authorization is hereby requested during the
Authorization Period for MHK to issue and sell its common stock in an
underwritten public offering pursuant to underwriting agreements of types
generally standard in the industry, at rates or price and under conditions
negotiated or based upon, or otherwise determined by, competitive capital.
9. EWG/FUCO-related Financings
Today, KeySpan holds investments in the following EWG's and FUCO's:
Entity Investment ($ millions)
------ -----------------------
KeySpan-Ravenswood, Inc. (EWG) $633
Phoenix Natural Gs Limited (FUCO) 52
FINSA Energeticos, S. de R.L. de C.V. (FUCO) 2
-------
$687
KeySpan's retained earnings at December 31, 1999 of $457 million
reflect the effects of the transactions consummated on May 28, 1998 between the
Long Island Power Authority ("LIPA"), Long Island Lighting Company ("LILCO") and
KEC. Pursuant to the transaction with LIPA and following the acquisition of KEC,
KeySpan became the successor to LILCO for accounting purposes. As a result, the
retained earnings of KEC at May 28, 1998, amounting to $472 million, were not
carried forward into KeySpan. The Mergers will be accounted for under the
purchase method of accounting and therefore (as described in greater detail
below), will result in the elimination of the retained earnings of Eastern and
Energy North and the related "push down" of goodwill will result in the
elimination of the retained earnings of Eastern's and EnergyNorth's
subsidiaries. As a result of all of these transactions, the consolidated
retained earnings of the KeySpan System after giving effect to the Mergers will
be artificially deflated and will understate the financial strength and
condition of the KeySpan System. Accordingly, KeySpan requests that, for
purposes of the Act and the rules and regulations promulgated thereunder, the
Commission disregard any accounting adjustments required in connection with the
Mergers which have the effect of eliminating the retained earnings of Eastern
and EnergyNorth or any of their respective subsidiaries. Not giving effect to
merger-related adjustments, the combined retained earnings of KeySpan, Eastern
and EnergyNorth at December 31, 1999 was approximately $957 million. KeySpan
does not request such relief with respect to other historical accounting
adjustments.
Without giving effect to any accounting adjustments required by
the Mergers which have the effect of eliminating the retained earnings of
Eastern and EnergyNorth and their respective subsidiaries, on a combined
consolidated pro forma basis, KeySpan will have an aggregate investment of 72%
of its retained earnings in EWGs and FUCOs as of the date the Mergers are
completed. All of these investments were entered into in accordance with all
applicable laws and regulations prior to the time that KeySpan has
23
<PAGE>
become subject to registration as a holding company under the Act and, thus,
KeySpan should not be penalized for having and holding these investments.
Accordingly, KeySpan requests that these investments be grandfathered for
purposes of Rule 53 and be excluded from any calculation under or required by
Rule 53. Alternatively, KeySpan requests Commission authorization to invest up
to 100% of its consolidated retained earnings without giving effect to the
accounting adjustments required by the Mergers in EWGs and FUCOs, or 250% of the
aggregate consolidated retained earnings of KeySpan, Eastern and EnergyNorth if
such accounting adjustments are given effect. Such authorization would be
consistent with the policies underlying the Act in view of the representations
and commitments made by KeySpan below as well as the treatment the Commission
has afforded to similarly situated newly registered companies.12
The Commission has found the standards of the Act satisfied in
connection with requests by a number of U.S. registered holding companies to
exceed the so-called "50 percent limit" under Rule 53.13 In each of those
matters, the applicant sought relief from the safe-harbor requirements of Rule
53(a)(1) to allow investments in an amount equal to the applicant's consolidated
retained earnings. The Commission found that the applicants in each matter had
demonstrated successfully, through the use of certain financial indicators, that
investing in EWGs and FUCOs in an amount not to exceed their consolidated
retained earnings would not have a substantial adverse impact on the financial
integrity of the holding company system. KeySpan asserts that stringent project
review procedures as well as the comparison of the financial measures and
indicators discussed below, demonstrate that the financial integrity of the
KeySpan System is superior to or substantially similar to the financial
integrity of the applicants in matters in which the Commission has previously
granted exceptions to the safe harbor requirements of Rule 53.
KeySpan has in place a number of project review procedures in
order to evaluate various EWG or FUCO investments. Investments are evaluated
against a number of investment criteria including (i) economic viability of the
project, (ii) political and regulatory risk, and (iii) strategic fit within the
KeySpan System.
Economic Viability of the Project. Analysis of the economic
viability of the project includes an analysis of the overall industry
environment in which the project will operate (i.e., progress towards
privatization and/or restructuring, depending on
______________________
12 See also National Grid, Holding Co. Act Release No. 27154 (March 15, 2000)
(SEC permitted registered holding company to have investments in FUCOs up to
250% of aggregate consolidated retained earnings).
13 Southern Co., Holding Co. Act Release No. 26501 (April 1, 1996); Central and
South West Corporation, Holding Co. Act Release No. 26653 (Jan. 24. 1997). See
also GPU, Inc., Holding Co. Act Release No. 26779 (Nov. 17, 1997); Cinergy
Corp., Holding Co. Act Release No. 26848 (March 23, 1998); American Electric
Power Company, - Holding Co. Act Release No. 26864 (April 27, 1998); New Century
Energies, Holding Co. Act Release No. 26982 (Feb. 26, 1999); The National Grid
Group plc, Holding Co. Act Release No. 27154 (Mar. 15, 2000).
24
<PAGE>
where the project is located), the ability of the project to produce
electricity at or below long-run marginal costs in the competitive
region and the credit worthiness of potential power purchasers and
other project counterparties.
Political and Regulatory Risk. Analysis of political and
regulatory risks involves careful review of changing political and
regulatory regimes as well as long-term economic stability in the
region. This analysis is a critical component of KeySpan's investment
review as each of the 50 states and the U.S. Congress consider utility
industry restructuring and has always been a threshold level review in
the analysis of non-U.S. investments. The analysis also includes review
of permitting and environmental risks as well as legal risk associated
with the ability to enforce contracts relating to the project and its
financing.
Strategic Fit. Finally, KeySpan is particularly sensitive to
ensuring that its independent energy investments contribute to KeySpan
overall strategic growth plan building upon KeySpan's strengths and
resources to achieve broad corporate objectives within budgeting and
expenditure guidelines. Thus, each potential investment must be
reviewed and approved by a number of managers, senior officers and the
Board of Directors within the KeySpan system who focus their review not
only on the questions of whether a particular project satisfies
KeySpan's investment criteria and is reasonably anticipated to generate
earnings commensurate with risk, but also on the question of whether
the project is likely to aid in achieving KeySpan's long-term overall
strategic objectives.
Additionally, the soundness of KeySpan's financial structure
and the lack of risk to utility consumers is demonstrated by the following:
o KeySpan's commitment to maintain the common stock equity
ratios of it and its Utility Subsidiaries at a minimum of
30%; and
o KeySpan's commitment to maintain its long-term debt rating
at an investment grade level.
Moreover, under Rule 53(c)(2), KeySpan must also demonstrate
that the proposed use of financing proceeds to invest in FUCOs will not
have an "adverse impact" on any of the Utility Subsidiaries, their
respective customers, or on the ability of the State commissions having
jurisdiction over one or more such utility subsidiaries to protect such
public utility companies or such customers.
The conclusion that the customers of the Utility Subsidiaries
will not be adversely impacted by increased levels of investment is
well-supported by the following:
(a) All of KeySpan's investments in EWGs and FUCOs will be
segregated from the Utility Subsidiaries. None of the Utility Subsidiaries will
provide financing for, extend credit to, or sell or pledge its assets directly
or indirectly to any EWG or FUCO in which KeySpan owns any interest. KeySpan
further commits not to seek recovery in the retail rates of any Utility
Subsidiary for any failed investment in, or inadequate returns from, an EWG or
FUCO investment.
25
<PAGE>
(b) Investments in EWGs and FUCOs will not have any negative
impact on the ability of the Utility Subsidiaries to fund operations and growth.
The Utility Subsidiaries currently have financial facilities in place that are
adequate to support their operations. These facilities will continue subsequent
to the Mergers. The expectation of continued strong credit ratings by the
Utility Subsidiaries should allow them to continue to access the capital markets
to finance their operations and growth.
(c) KeySpan will comply with the requirements of Rule 53(a)(3)
regarding the limitation on the use of the Utility Subsidiaries' employees in
connection with providing services to FUCOs. It is contemplated that project
development, management and home office support functions for the projects will
be largely performed by KeySpan through its subsidiary companies, and by outside
consultants (e.g., engineers, investment advisors, accountants and attorneys)
engaged by KeySpan. On a going-forward basis, KeySpan also will comply with Rule
53(a)(4) regarding the provision of EWG and FUCO related information to every
federal, state and local regulator having jurisdiction over the retail rates, as
applicable, of the Utility Subsidiaries.
(d) KeySpan believes that the NYPSC, MDTE and NHPUC are able
to protect utility customers within their respective states.
(e) In addition, KeySpan will provide the information required
by Form U5S to permit the Commission to monitor the effect of KeySpan's EWG and
FUCO investments on KeySpan's financial condition.
For the foregoing reasons and to enable KeySpan to compete
effectively in the independent generation market, KeySpan hereby requests
authorization, following completion of the Mergers and for purposes of Rule 53,
to invest up to 100% of its consolidated retained earnings, without giving
effect to any accounting adjustments required in connection with the Mergers, in
EWGs and FUCOs. The EWGs and FUCOs may be held, and the investments may be made,
directly, or indirectly through intermediate companies, partnerships or other
corporate entities.
10. Other Securities
Any of KeySpan, the Utility Subsidiaries or the Nonutility
Subsidiaries may also issue and sell other types of securities to non-affiliated
purchasers which do not qualify for an exemption under Rule 52 but which are
considered appropriate during the Authorization Period. Each such entity
requests 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 entity.
11. Changes in Capital Stock of Subsidiaries
26
<PAGE>
The portion of an individual Subsidiary's aggregate financing to
be effected through the sale of stock to KeySpan or other intermediate parent
companies 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 wholly-owned
Subsidiary's authorized capital stock capitalization by an amount deemed
appropriate by KeySpan or other intermediate parent companies. A Subsidiary
would be 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.14 In addition, as stated
above, each of the Utility Subsidiaries will maintain, during the Authorization
Period, a common equity ratio of at least 30% of total capital.
12. Financing Subsidiaries
Authority is sought for KeySpan and the Subsidiaries to organize new
corporations, trusts, partnerships or other entities created for the purpose of
facilitating financings through their issuance to third parties of income
preferred securities or other securities authorized hereby or issued pursuant to
an applicable exemption. Request is also made for these financing entities to
issue such securities to third parties in the event such issuances are not
exempt under Rule 52. Additionally, request is made for authorization with
respect to (i) the issuance of debentures or other evidences of indebtedness by
any of the Subsidiaries to a financing entity in return for the proceeds of the
financing, (ii) the acquisition by any of the Subsidiaries of voting interests
or equity securities issued by the financing entity to establish any such
Subsidiary's ownership of the financing entity (the equity portion of the entity
generally being created through a capital contribution or the purchase of equity
securities, ranging from 1 to 3 percent of the capitalization of the financing
entity) and (iii) the guarantee by KeySpan of such financing entity's
obligations in connection therewith. Each of the Subsidiaries also requests
authorization to enter into an expense agreement with its respective financing
entity, pursuant to which it would agree to pay all expenses of such entity. Any
amounts issued by such financing entities to third parties pursuant to this
authorization will be included in the overall external financing limitation
authorized herein for the immediate parent of such financing entity. However,
the underlying intra-system mirror debt and parent guarantee shall not be so
included. The
_____________________
14 The Commission has granted similar approvals to other registered holding
companies. See Conectiv, Inc., Holding Co. Act Release No. 26833 (Feb. 26,
1998); New Century Energies, Inc., Holding Co. Act Release No. 26750 (Aug. 1,
1997).
27
<PAGE>
authorization sought herein with respect to financing entities is substantially
the same as that given to The Southern Company, Holding Co. Act Release No.
27134 (February 9, 2000).
13. Intermediate Subsidiaries and New Subsidiaries
KeySpan 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), provided that
Intermediate Subsidiaries may also engage in development activities and
administrative activities 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, KeySpan 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.E, below. In
addition, KeySpan requests authorization to acquire, directly or indirectly, the
securities of one or more New Subsidiaries, which would be organized exclusively
for the purpose of engaging in one or more of the activities in which any of
KeySpan's existing Nonutility Subsidiaries is engaged at the effective time of
the Transaction.
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 KeySpan 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 KeySpan's exposure to state, U.S. and foreign taxes;
28
<PAGE>
(7) to further insulate KeySpan 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.
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) guarantees 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 KeySpan 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 KeySpan provides funds or guarantees 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 guarantees will be included in KeySpan's "aggregate investment" in
such entities, as calculated in accordance with Rule 53 or Rule 58, as
applicable.15
KeySpan 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, KeySpan 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. To the extent that
these transactions are not otherwise exempt under the Act or Rules thereunder,16
KeySpan hereby requests authorization under the Act to consolidate or otherwise
reorganize under one or more direct or indirect Intermediate Subsidiaries,
KeySpan's ownership interests in existing and future Nonutility Subsidiaries.17
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
_________________________
15 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);
Ameren Corp., et al., Holding Co. Act Release No. 27053 (July 23, 1999).
16 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.
17 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).
29
<PAGE>
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 being sold. KeySpan will report each such transaction in the
next quarterly certificate filed pursuant to Rule 24 in this proceeding, as
described below
14. Payment of Dividends out of Capital or Unearned Surplus
a. Eastern and EnergyNorth
As a result of the application of the purchase method of
accounting to the Mergers, the current retained earnings of Eastern and
EnergyNorth will be recharacterized as additional paid-in-capital. Further, the
Mergers will give rise to a substantial level of goodwill, the difference
between the aggregate fair values of all identifiable tangible and intangible
(non-goodwill) assets on the one hand, and the total consideration to be paid
for Eastern and EnergyNorth, respectively, and the fair value of the liabilities
assumed, on the other. In accordance with the Commission's Staff Accounting
Bulletin No. 54, Topic 5J ("Staff Accounting Bulletin"), the goodwill will be
"pushed down" to Eastern, EnergyNorth and their respective subsidiary companies
and reflected as additional paid-in-capital in their financial statements. The
effect of this accounting practice would be to leave such entities with no
retained earnings, the traditional source of dividend payments but,
nevertheless, significant equity levels on their balance sheets. KeySpan
requests authorization to pay dividends out of the additional paid-in-capital
accounts of Eastern, EnergyNorth and their respective subsidiaries up to the
amount of their retained earnings immediately prior to the Mergers and out of
earnings before the amortization of the goodwill thereafter.
In purchase accounting, the total value of the acquisition, which
must be assigned to Eastern's assets and EnergyNorth's assets, is the total
consideration to be paid for Eastern and EnergyNorth, respectively, plus the
fair value of all liabilities assumed in the acquisition. Generally, goodwill is
the residual balance of the total value remaining after fair values have been
assigned to all of Eastern's identifiable assets (both tangible and intangible
assets). Accordingly, the excess of the purchase consideration over the fair
market value of the acquired assets of Eastern will be assigned to goodwill for
generally accepted accounting purposes.
As indicated in the Staff Accounting Bulletin, registrants that
have substantially all (generally defined as in excess of 95%) of their common
stock acquired by a third party, in a business combination accounted for under
the purchase method, should reflect the push-down of goodwill in the
registrant's post-acquisition financial statements. For any post-acquisition
reporting of the consolidated Eastern financial statements, push down
30
<PAGE>
accounting will be reflected in those statements and the full amount of goodwill
associated with the Mergers will be reflected.
As a result of the push down of the goodwill, the common equity
balances of Eastern, EnergyNorth and their respective subsidiaries are
effectively reset as if they were new companies, because a new basis of
accounting has been pushed down to the entities. Accordingly, retained earnings
are eliminated. Immediately following this accounting treatment, the only
components with a recorded value would be:
o Common stock - which would continue to reflect the par value
of the common stock issued.
o Paid-in-capital - which would reflect a value consistent
with total common shareholders' equity minus the par value
recorded in the common stock line.
In other words, the resulting common shareholders' equity will
equal the total consideration paid for the entity.
Based on Eastern's and EnergyNorth's financial statements for the
12 month period ended December, 31, 1999, the application of this accounting
principle to the Mergers will result in following adjustments to Eastern's and
EnergyNorth's books:
<TABLE>
<CAPTION>
EASTERN
<S> <C> <C> <C> <C>
$'000 1999 Adjustments 1 Adjustments 2 Restated
---- ------------- ------------- --------
Common Stock 27,131 (27,131) 0
Paid-in-capital 244,449 510,181 974,360 1,728,990
Retained earnings 483,710 (483,710) 0
Accumulated (77) 77 0
Comprehensive
Income, net
Treasury Stock (583) 583 0 0
Total equity 754,630 0 974,360 1,728,990
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
ENERGY NORTH
<S> <C> <C> <C> <C>
$'000 1999 Adjustments 1 Adjustments 2 Restated
---- ------------- ------------- --------
Common Stock 3,323 (3,323) 0
Paid-in-capital 32,643 19,988 167,998 220,629
Retained earnings 16,665 (16,665) 0
Total equity 52,631 0 167,998 220,629
</TABLE>
Adjustments 1 -- Capital accounts are restated as Paid-in-Capital.
Adjustments 2 -- Goodwill is added to Paid-in-Capital.
The push down of the net assets at fair market value also has an
impact on the net income of Eastern, EnergyNorth and their respective
Subsidiaries. The net assets include an acquisition adjustment that will be
amortized over 40 years. For example, Eastern's and EnergyNorth's net income
will be reduced by the amount of the amortization. Eastern's net income of $55.1
million in 1999 would be reduced by a goodwill amortization of $24.4 million.
The resulting net income after amortization would be $30.7 million. Similarly,
EnergyNorth's net income of $4.0 million in 1999 would be reduced by a goodwill
amortization of $4.2 million. The resulting net loss after amortization would be
$0.2 million.
Section 12 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." S. Rep. No. 621, 74th Cong., 1st Sess.
34 (1935).18 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.19
In support of its request, KeySpan asserts that each of the standards
of Section 12(c) of the Act enunciated in the EUA case are satisfied:
(i) After consummation of the Mergers, and giving effect to the push
down of goodwill, common equity as a percentage of total
capitalization of each of
______________________
18 Compare Section 305(a) of the Federal Power Act.
19 See Eastern Utilities Associates, Holding Co. Act Release No. 25330 (June 13,
1991) ("EUA"), and The National Grid Group plc, Holding Co. Act Release No.
27154 (Mar. 15, 2000). 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).
32
<PAGE>
the Utility Subsidiaries will be at least 30%. KeySpan's
commitment to maintain the capitalization of it and each Utility
Subsidiary at or above 30% common equity on a consolidated basis
should result in a capital structure consistent with industry
norms. KeySpan represents and covenants that each of Eastern and
EnergyNorth will, following closing of the Transaction, have no
independent obligations or liabilities and will serve only as a
pass through entity for financing and cash flow between KeySpan
and the respective Subsidiaries of Eastern and EnergyNorth.
(ii) Eastern and EnergyNorth and their respective Subsidiaries have a
favorable history of prior earnings and a long record of
consistent dividend payments.20
(iii) KeySpan anticipates that it and the Subsidiaries' respective
cash flow after consummation of the Mergers will not differ
significantly from their pre-Mergers cash flow and, therefore,
that earnings before the amortization of goodwill ("Gross
Earnings") should remain stable post-Mergers. KeySpan believes
that dividends paid out of future earnings will continue to
reflect a dividend payout ratio of between 68% and 80% of Gross
Earnings, based on a rolling 3-year average. KeySpan represents
and covenants that each of Eastern and EnergyNorth will,
following closing of the Transaction, have no independent
obligations or liabilities and will serve only as a pass through
entity for financing and cash flow between KeySpan and the
respective Subsidiaries of Eastern and EnergyNorth.
(iv) The projected cash position of Eastern, EnergyNorth and their
respective Subsidiaries' after consummation of the Mergers will
be adequate to meet the obligations of each company. The
amortization of goodwill is a non-cash expense that will not
affect the cash flow of any of such companies, and each of such
companies is forecast to have sufficient cash to pay dividends in
the amounts contemplated.
(v) The proposed dividend payments are in the public interest. Each
of Eastern, EnergyNorth and their respective Utility Subsidiaries
are in sound financial condition.
___________________
20 In recent years, Eastern's and EnergyNorth's net income and dividends have
been:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year Eastern Eastern EnergyNorth EnergyNorth Dividends
Net Income * Dividends Paid Net Income** Paid**
($ thousands) ($ thousands) ($ thousands) ($ thousands)
1997 55,916 35,255 6,518 4,054
1998 50,828 35,653 5,378 4,300
1999 55,093 39,801 4,537 4,548
</TABLE>
* excludes extraordinary items and accounting change
** represents amounts for the twelve month periods ended September 30th
33
<PAGE>
In addition, the dividend payments are consistent with
investor interests because they allow the capital structure of Eastern
to be adjusted to more appropriate levels of debt and equity. Moreover,
a prohibition on dividend payments out of additional paid-in-capital
would impair the ability of KeySpan to service the acquisition debt
incurred in connection with the Mergers.21 Lastly, it is important to
note that in no case would dividends be paid by any Utility Subsidiary
of Eastern and EnergyNorth if the common stock equity as a percentage
of total capitalization of such subsidiary is or would be as a result
of such payment below 30% for each such subsidiary. This restriction
protects the interests of investors, consumers and the general public
in soundly capitalized public utility companies.
b. Payment of Dividends by Nonutility Subsidiaries
KeySpan also requests authorization, on behalf of 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, provided they may do so in accordance with applicable laws, and to
acquire, retire or redeem securities that they have issued to any associate
company, any affiliate, or any affiliate of an associate company.22
KeySpan anticipates that there may be situations in which 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 KeySpan 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
earnings) could not, without the Commission's approval, in turn distribute such
cash to KeySpan or its immediate parent.23
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
_____________________
21 See SCANA Corporation, Holding Co. Act Release No. 27137 (Feb. 14, 2000).
22 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).
23 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, KeySpan would normally desire a return of some or all of the funds
invested.
34
<PAGE>
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.
There may also 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.
D. Intrasystem Provision and Goods and Services
1. Establishment of Service Company and Approval of Service Agreements
As an exempt holding company, KeySpan and its existing two Service
Companies (i.e., KCS and KUS) provide comprehensive services to their affiliates
and subsidiaries. KeySpan also intends to have an additional service company,
KENG to provide engineering and surveying services to KeySpan's subsidiaries.24
Each of the Service Companies provides, or will provide, a distinct set of
services to its client companies. KCS will provide a variety of traditional
corporate and administrative services to KeySpan and its subsidiaries. In
contrast, the only services that KUS will provide are (a) gas and electric
transmission and distribution systems planning, (b) marketing (planning,
administration and support), (c) gas supply planning and procurement, (d)
research, development and demonstration, and (e) meter repair operations. KUS
will only provides these services to KED NY, KED LI, KeySpan Generation, KeySpan
Electric Services LLC and KeySpan Energy Trading Services LLC. KENG will provide
engineering and surveying services primarily to KeySpan's utility subsidiaries
as well as KeySpan Electric Services LLC and LIPA. There will be no overlap in
the services provided by the Service Companies and, as discussed below, because
of the requirements of the NYPSC and the New York State Education Law, the
services offered by KUS and KENG must be provided by separate companies in order
to protect the public.
As a condition of the NYPSC's approval in 1998 of the formation of
KeySpan as an unregulated utility holding company, the NYPSC required KeySpan to
form separate
_____________________
24 KeySpan anticipates acquiring KENG which would be a New York grandfathered
engineering and surveying corporation, in order to permit the provision of
centralized engineering and surveying services.
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service companies (i.e., KCS and KUS) in order to provide the services noted
above.25 Specifically, the NYPSC requires that KeySpan have a separate service
company that provides certain services only to the jurisdictional New York
utilities and their successors. As stated above, KCS provides the traditional
corporate administrative services to KeySpan and its Subsidiaries. However,
consistent with the NYPSC requirements, KUS was established to provide the
services that the NYPSC mandated to be supplied by a separate affiliate. This
separation provides the NYPSC with protections against cross subsidization and
simplifies accounting and ratemaking.
With respect to engineering and surveying services, the New York
State Education Law permits engineers and surveyors to conduct business in the
form of a joint enterprise, partnership, professional service corporation or a
professional service limited liability company; however, such businesses may not
be under the ownership of a corporation such as KeySpan. Moreover, the New York
State Education Law permits engineering and surveying services to be provided
under the ownership of a corporation such as KeySpan, only if it is either, (i)
a grandfathered corporation, or (ii) a public service corporation which renders
engineering services to such corporation in connection with its lines and
property which are subject to the supervision with respect to safety and
security thereof by the public service commission of New York or other federal
regulatory body. KENG will be a grandfathered corporation thereby enabling the
centralized provision of engineering and surveying services.
KeySpan believes that the combination of three holding company
systems can best be achieved over time by (i) giving the systems a chance to
effectively transition to integrated arrangements that conform with requirements
under the Act and (ii) providing the combined system with an opportunity to
determine the most efficient manner of centralization based on experience. In
addition, the combined system will operate under state regulatory constraints
previously imposed on KeySpan as an exempt holding company. Accordingly, KeySpan
is requesting authorization from the Commission for approval of certain interim
measures relating to service arrangements within the combined registered holding
company system, discussed more fully below, to assist in the transition period.
As noted below, KeySpan intends to fully implement an arrangement for the system
wide provision of services that conforms to the Commission's traditional
precedent by the end of the proposed transition period.
In order to ensure that the transition to a combined system
proceeds smoothly and in compliance with applicable law and regulations,
KeySpan, for the reasons stated below, proposes that (i) the Commission approve
the three subsidiary Service Companies pursuant to Section 13(b) and Rule 88,26
and (ii) permit the holding company system to
____________________
25 Case 97-M-0567.
26 17 C.F.R.ss.250.88(b). The Commission has permitted other registered holding
companies to have more than one service company. For example, GPU Service
Company has at least three service companies. See General Public Utilities
Corporation, Holding Co. Act Rel. No. 26463 (Jan. 26, 1996); General Public
(footnote continued on next page)
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operate in accordance with the interim measures described below until January 1,
2001 so that the KeySpan system can effectively transition to full
implementation of its proposed service company plan.
Interim Measures. Currently, general corporate services are
directly assigned to client companies whenever possible. In other cases, broad
based allocation formulas are used reflecting payroll, revenue and plant or
assets in order to assign costs to benefiting entities. As appropriate, these
allocations are made between both regulated and non-regulated entities,
depending on the services provided. Beginning in 2001, a new integrated
financial suite of systems will be installed at which time the new proposed
allocation procedures described below will be implemented.
Service Companies' Plan. Beginning in 2001, the Service Companies
will have fully implemented the objective of offering to provide a variety of
administrative, management and/or support services to KeySpan and the applicable
Subsidiaries in accordance with the respective service agreement attached hereto
as Exhibit G-1 ("KCS Service Agreement"), KUS service agreement ("KUS Service
Agreement") attached hereto as Exhibit G-2, and KENG service agreement ("KENG
Service Agreement) attached hereto as Exhibit G-3. KeySpan requests that the
Commission approve the forms of the KUS Service Agreement, KCS Service Agreement
and KENG Service Agreement (collectively, the "Service Agreements").
As described in greater detail in the KCS Agreement, the services
KCS will offer to provide to KeySpan and its Subsidiaries include, but are not
limited to, accounting; tax; auditing; treasury and finance services; risk
management; financial planning; investor relations and shareholder services;
information technology, communications and computer services; legal and
regulatory; corporate secretary functions; human resources; environmental
services; strategic planning and corporate performance; customer services and
communications and customer strategy; materials management and purchasing;
facilities management; fleet management; security; corporate affairs; and,
executive and administrative. Essentially all of KCS's services will be provided
to KeySpan and its Subsidiaries. In addition, the majority27 of services will be
provided to the Utility Subsidiaries and KeySpan Electric Services LLC. KCS may
provide corporate administrative services to non-affiliates when resources are
available; however, KCS expects these to be a small percentage of the overall
services it provides.
______________________
Utilities Corporation, Holding Co. Act Rel. No. 21708 (Sept. 5, 1980); General
Public Utilities Corporation, Holding Co. Act Rel. No. 17112 (April 29, 1971).
27Current financial information would not approximate the percentage of services
provided to affiliates in the future. Estimates may be available closer to the
closing date.
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KCS will consist of approximately 3,605 employees. In addition to
the 1,746 existing KCS employees, 28 approximately 1,849 employees from KEC KED
NY, Boston Gas, Colonial Gas, ENGI, Eastern Enterprises and Essex Gas who
currently perform corporate administrative functions will be transferred to KCS.
These very same employees who perform corporate administrative functions today
will continue to provide these services from KCS to KeySpan and its Subsidiaries
in the future.
In accordance with the KUS Service Agreement and as described more
fully therein, KUS will provide to KED NY, KED LI, KeySpan Generation, KeySpan
Electric Services LLC and KeySpan Energy Trading Services LLC the following
services: gas and electric transmission and distribution systems planning,
research, development and demonstration, fuel management, marketing and sales,
and meter operations. KUS will consist of approximately 525 employees. In
addition to the 319 existing KUS employees,29 approximately 237 employees from
KED NY, KED LI and KeySpan Energy Trading Services, LLC who currently perform
primarily the same functions will be transferred to KUS. Finally, approximately
31 KUS employees will be transferred to KENG. As discussed above, KUS may only
provide services to KeySpan affiliates as approved by the NYPSC.
Pursuant to the KENG Service Agreement, KENG will offer to provide
the following services to affiliates: advise and assist in the study, planning,
engineering, maintenance and construction of energy plant facilities, gas
systems and electric systems; advise, assist and manage the planning,
engineering (including maps and records) and construction operations of client
companies; develop and administer quality assurance programs; and, develop
long-range operational programs and advise and assist coordination of such
programs. KENG will also provide surveying services. KENG will consist of
approximately 231 employees. These employees will be transferred from KED NY,
Boston Gas Company, KeySpan Generation, KES and KUS and are personnel who
currently perform or assist in providing engineering and surveying functions.
Initially, KENG will provide services primarily to KeySpan's New York Utility
Subsidiaries (i.e., KED NY, KED LI, KeySpan-Ravenswood, Inc. and KeySpan
Generation LLC) as well as KeySpan Ravenswood, Inc. and LIPA. KENG may
eventually provide engineering and surveying services to non-affiliates when
resources are available; however, KENG expects these to be a small percentage of
the overall services it provides.
Exhibit M hereto summarizes the anticipated approximate total number of
employees of each Service Company, as well as the approximate number of
employees expected to be transferred to such Service Companies from each
Subsidiary. It should be noted that the employees responsible for performing the
day to day operation and
____________________
28Virtually all existing KCS employees were former employees of the Long Island
Lighting Company.
29 Virtually all existing KUS employees were former employees of the Long Island
Lighting Company.
38
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maintenance of the Utility Subsidiaries (e.g., gas design and construction
employees, supervisors, gas system operations personnel, power plant managers
and operating engineers) will not be transferred to the Service Companies and
will remain in the respective Utility Subsidiary.
In accordance with the Service Agreements, each of KCS, KUS and KENG
will directly assign or allocate by activity, project, program, work order or
other appropriate basis the services they each provide to their respective
client companies. Costs of services will be accumulated in accounts and directly
assigned if possible or allocated as necessary to the appropriate associate
company in accordance with the guidelines set forth in Exhibit I of the
respective Service Agreements. Each of KCS', KUS' and KENG's accounting and cost
allocation methods and procedures have been structured so as to comply with the
Commission's standards for service companies in registered holding company
systems and they will use the "Uniform System of Accounts for Mutual Service
Companies" established by the Commission for holding company systems. As
compensation for services, the Services Agreements provide for the client
companies to pay for services at cost in compliance with Commission rules.
No change in the organization of either of the Service Companies, the
type and character of the companies to be serviced, the methods of allocating
cost to associate companies, or the scope or character of the services to be
rendered subject to Section 13 of the Act, or any rule, regulation or order
thereunder, shall be made unless and until the applicable Service Company shall
first have given the Commission written notice of the proposed change not less
than 60 days prior to the proposed effectiveness of any such change. If, upon
the receipt of any such notice, the Commission shall notify such Service Company
within the 60 day period that a question exists as to whether the proposed
change is consistent with the provisions of Section 13 of the Act, or of any
rule, regulation or order thereunder, then the proposed change shall not become
effective unless and until such Service Company shall have filed with the
Commission an appropriate declaration regarding such proposed change and the
Commission shall have permitted such declaration to become effective.
Rule 88(b) provides that "[a] finding by the commission that a
subsidiary company of a registered holding company . . . is so organized and
conducted, or is to be conducted, as to meet the requirements of Section 13(b)
of the Act with respect to reasonable assurance of efficient and economical
performance of services or construction or sale of goods for the benefit of
associate companies, at cost fairly and equitably allocated among them (or as
permitted by [Rule 90], will be made only pursuant to a declaration filed with
the Commission on Form U-13-1, as specified in the instructions for that form,
by such company or the persons proposing to organize it." Notwithstanding the
foregoing language, the Commission has on at least three recent occasions made
findings under
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Section 13(b) based on information set forth in an application on Form U-1,
without requiring the formal filing on a Form U-13-1.30
In this application, KeySpan has submitted substantially the same
application information as would have been submitted in a Form U-13-1.
Accordingly, it is submitted that it is appropriate to find that the Service
Companies will be so organized and shall be so conducted as to meet the
requirements of Section 13(b), and that the filing of a Form U-13-1 is
unnecessary, or alternatively, that this Application/Declaration should be
deemed to constitute a filing on Form U-13-1 for purposes of Rule 88.
2. Nonutility Subsidiaries' Provision of Goods And Services
a. Continuation of Certain Existing Arrangements
Certain Nonutility Subsidiaries provide a variety of services to
other Nonutility and Utility Subsidiaries. The following Subsidiaries provide
services under existing agreements which are not cost based and it is unclear
whether they squarely fall within any statutory or administrative exemption
under the Act. After the Transaction is consummated, it is contemplated that
they will continue to provide the services described below to associate
companies on competitive terms under the existing agreements or new agreements
that may be entered into from time to time. To the extent needed and for the
reasons state below, KeySpan requests an exemption pursuant to Section 13(a) of
the Act to permit these ongoing and similar future arrangements after the
Transaction is completed.
Northeast Gas Markets LLC ("NEGM"). NEGM is a wholly owned
subsidiary of KeySpan which provides contract administrative services to Alberta
Northeast Gas Limited ("ANE") and Boundary Gas Inc. ("BGI") pursuant to
longstanding Management Services Agreements between NEGM and ANE and BGI,
respectively. KeySpan indirectly owns partial interests in ANE and BGI. Each of
ANE and BGI purchase Canadian natural gas and resell it to local distribution
companies in the northeast United States, including Utility Subsidiaries of
KeySpan, Eastern and EnergyNorth. The provision of contract administrative
services by NEGM to ANE and BGI is permissible because both the service provider
and the two clients are non-utilities, neither of which are public utility
holding companies, fiscal or financing agencies of holding companies, or
investment companies or investment trusts.31. As noted below, KeySpan has
requested authorization for the continuation of all such arrangements for the
intra-company sale of goods, services and construction among affiliated
non-utility companies. Similarly, the provision of the NEGM services is not
subject to the cost standards of Rules 90 and 91 (18 C.F.R ss.ss.250.90,
______________________
30 Scana, supra; WPL Holdings, Inc., Holding Co. Act Rel. No. 26856 (April 14,
1998); Dominion, supra.
31 See Rule 87(b)(1), 18 C.F.R.ss.250.87(b)(1)
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250.91), since neither ANE nor Boundary is in the business of selling goods,
services or construction to affiliates or companies that directly or indirectly
control investment companies or investment trusts.32 Rather, the only sales made
by ANE and BGI are sales of natural gas, which is not a "good."33
However, to the extent that NEGM's provision of contract
administrative services to ANE and BGI may not be exempt pursuant to Rule
91(d)(1), KeySpan requests an exemption pursuant to Section 13(b) from the cost
standards of Rules 90 and 91. An exemption is appropriate because the provision
of the services is federally regulated and because both ANE and BGI sell gas to
non-affiliated utilities on exactly the same terms and conditions on which gas
is sold to affiliated utilities. With respect to federal regulation, both the
ANE and BGI natural gas sales arrangements and the pass-through of NEGM's
contract administration fees are regulated at the federal level. Neither ANE nor
BGI is authorized to sell gas at market based rates; rather, in both cases the
rates to be charged are limited to those authorized by the Department of Energy,
Office of Fossil Energy (in the case of ANE) and/or the Federal Energy
Regulatory Commission (in the case of BGI). The DOE and FERC have specifically
approved, and maintain jurisdiction over, the component of the ANE and BGI sales
rates which reflect the fees charged by NEGM for its contract administration
services. Moreover, in addition to the gas sales by ANE and BGI to the
affiliated gas utilities, ANE sells gas to ten, and BGI sells gas to nine, other
non-affiliated utilities on exactly the same terms and conditions, pursuant to
substantively identical contracts. Thus, the majority of both the ANE and BGI
purchasers are non-affiliated companies whose transactions with ANE and BGI are
entirely arms-length. The costs of the services provided by NEGM and passed
through to the gas utility affiliates will in all cases be identical to those
passed through to the non-affiliated third party customers.
Transgas, Inc. ("Transgas"). Transgas is a wholly owned
non-utility subsidiary of Eastern. It is in the business of trucking liquefied
natural gas ("LNG") for, inter alia, various gas utilities located in the U.S.
Northeast, including Eastern's three gas utility subsidiaries and ENGI. The
provision of these transportation services should not be subject to the cost
standards of Rules 90 and 91 because they should fall within the Rule 81
exemption. Specifically, they are "transportation . . . the sale of which is
normally subject to public regulation" and "comparable services . . . . are
offered to customers other than associate companies on terms which are
comparable."34 Transgas operates pursuant to an operating certificate originally
issued by the Interstate Commerce Commission under regulations now administered
by DOT's Federal Highway Administration.35 In addition, Transgas is subject to a
wide variety of other DOT regulations governing the payment of transportation
charges, including invoicing and billing procedures, the extension of credit
______________________
32 See Rule 91(d)(1).
33 See 15 U.S.C.ss.79b(a)(2); 17 C.F.R.ss.250.80(b).
34 18 C.F.R.ss.250.81.
35 See 49 C.F.R. Part 365.
41
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to customers, and the processing, investigation and disposition of overcharges,
duplicate payments and overcollection charges.36 Transgas is also regulated by
the DOT pursuant to 49 C.F.R., Parts 107 and 171 et. seq. and Part 397 as a
transporter of hazardous substances. Moreover, Transgas is transported gas which
is not a "good" within the meaning of the Commission's regulations.
In addition, Transgas provides LNG transportation services to many
other, non-affiliated customers on substantially the same terms and conditions
on which service is provided to the affiliated utilities. While Transgas
provided service to its affiliates, Boston Gas, Colonial Gas and Essex Gas, and
ENGI during 1999, during that same period it provided service to approximately
40 non-affiliated customers. Thus, KeySpan submits that the Transgas services
should be exempt from Rules 90 and 91 pursuant to Rule 81, but requests, to the
extent that Rule 81 may not be applicable, an exemption from Section 13(b) to
permit these ongoing and similar future arrangements after the Transaction is
consummated.
b. Other Sales and Service Contracts Among Nonutility Subsidiaries
KeySpan'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
___________________
36 See 49 C.F.R. Part 377.
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cost"as determined in accordance with the regulations under
PURPA;
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, ETC or any other Nonutility Subsidiary
that (a) is wholly or partially-owned by KeySpan, provided
that the ultimate purchaser of such goods or services is not
a Utility Subsidiary or Service Company (or any other entity
that KeySpan may form whose activities and operations are
primarily related to the provision of goods and services to
the Utility Subsidiaries or Service Companies), (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.37
E. Tax Allocation Agreement
The Applicants request the Commission's approval of an agreement
for the allocation of consolidated tax among KeySpan and the Subsidiaries (the
"Tax Allocation Agreement"). Approval is necessary because the proposed Tax
Allocation Agreement may provide for the retention by KeySpan of certain
payments for tax losses that it has incurred, rather than the allocation of such
losses to Subsidiaries without payment as would otherwise be required by Rule
45(c)(5).
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
_____________________
37 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
New Century Energies Inc., Holding Co. Act Rel No. 35-2700 (Apr. 7 1999);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).
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holding company system, except 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. 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.38 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.39
______________________
38 See Holding Co. Act Release No. 21968 (March 35, 1981), citing Sen. Doc. 92,
Part 72A, 70th Congress, 1st Sess. At 477-482.
39 See, e.g., Section 12(a) of the Act.
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Accordingly, KeySpan request that the Commission approve the Tax
Allocation Agreement to be filed hereto as Exhibit F.
F. Filing of Certificates of Notification
It is proposed that, with respect to KeySpan, 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 KeySpan. 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.
Item 2 Fees, Commissions and Expenses
The fees, commissions and expenses incurred or to be incurred in
connection with this Application/Declaration are set forth in Exhibit I hereto.
The 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
A. General
Sections 6(a) and 7 of the Act are applicable to the issuance and
sale of KeySpan's securities and the 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 intra-system financings and the issuance of KeySpan
guarantees, Nonutility Subsidiary guarantees and the Intermediate Holding
Company guarantees 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) KeySpan's or any Nonutility
Subsidiary's or any Intermediate Holding Company's acquisition of the equity
securities of any Financing Subsidiary, and (ii) the acquisition of securities
of Intermediate Subsidiaries. Section 12(c) of the Act and Rule 46 are
applicable to the payment of dividends from capital and unearned surplus by
KeySpan and the Subsidiaries. Section 13(b) of the Act and Rules 80 - 92 are
applicable to the performance of services and sale of
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goods among Nonutility Subsidiaries, unless such performance is exempt from the
requirements thereof 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.
To the extent that the proposed transactions are considered by the
Commission to require authorization, exemption or approval under any section of
the Act or the rules and regulations other than those set forth above, request
for such authorization, exemption or approval is hereby made.
B. Compliance with Rules 53 and 54
The transactions proposed herein are also subject to Rules 53 and
54.40 For the reasons stated in Item I.C.9 above, KeySpan and its Subsidiaries
satisfy the requirements under Rule 53(c) to issue securities for the purpose of
acquiring the securities of or other interest in an EWG, or to guarantee the
securities of an EWG. 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.
Item 4 Regulatory Approvals
The NYPSC has jurisdiction over KED NY, KED LI,
KeySpan-Ravenswood, Inc., and KeySpan Generation. KeySpan New York and KeySpan
LI are subject to the NYPSC's full jurisdiction as New York utilities.
KeySpan-Ravenswood, Inc. and KeySpan Generation are New York utilities but only
subject to the NYPSC's lightened regulatory regime. In addition, the wholesale
rates KeySpan-Ravenswood, Inc. and KeySpan Generation LLC charge are regulated
by the FERC.
Pursuant to New York Public Service Law ("PSL") section 69, the
NYPSC has jurisdiction over the issuance of stocks, bonds, notes or other
evidences of indebtedness payable at periods of more than 12 months by utilities
subject to its jurisdiction. In addition, PSL Section 110 provides the NYPSC
with jurisdiction over the transactions between utilities subject to its
jurisdiction and their affiliates and addresses the requirements to file certain
affiliate contracts with the NYPSC and to charge prices that do not exceed
reasonable costs for those services. Furthermore, in NYPSC Case 97-M-0567, the
NYPSC also approved a code of conduct for KeySpan which was designed to
implement a number of customer protections relating to: (1) affiliate
transactions and cost allocation; (2) personnel allocations and transfers; (3)
access to books and records; (4) maintenance of the financial integrity; (5)
diversion of management attention and potential conflicts of interest; (6)
anti-competitive concerns; and (7) maintenance of customer
______________________
40 17 C.F.R.ss.ss.250.53 and 54.
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service. Therefore, certain of the transactions contemplated in this Application
with respect to KeySpan's New York utilities may require NYPSC prior approval.
The MDTE has jurisdiction over the issuance of securities by
Boston Gas, Colonial Gas, and Essex Gas other than indebtedness with maturities
of one year or less. The NHPUC has jurisdiction over the issuance of securities
by ENGI, other than indebtedness with maturities of one year or less. In
addition, Massachusetts General Laws chapter 164, Section 76A grants the MDTE
general supervisory authority over the transactions between the utilities it
regulates and their affiliates. The MDTE's regulations, 220 CMR 12.00, set forth
"Standards of Conduct for Distribution Companies and Their Affiliates" which
describe the type of transactions that may occur between utilities and their
affiliates and the pricing of those transactions. Therefore, certain of the
transactions contemplated under this Application with respect to the
Massachusetts utilities may require prior MDTE approval.
The NHPUC has general jurisdiction over contracts or arrangements
between utilities and affiliated entities where the consideration exceeds $500.
All affiliate contracts or arrangements must be filed with the Commission within
ten days of their execution. RSA 366:3. Contracts and arrangements between
utilities and affiliated entities are subject to investigation by the Commission
for reasonableness. RSA 366:5. The NHPUC has jurisdiction over the issuance and
sale of utility stock, bonds, notes and other evidence of indebtedness payable
in more than 12 months. RSA 369:1, et seq. Pursuant to rules adopted by the
NHPUC, New Hampshire utilities must seek approval of the commission to issue or
renew short-term notes, bonds or other evidence of indebtedness payable in less
than 12 months if the short-term debt exceeds 10% of the utility's net fixed
plant. RSA 369:7 and N.H. Admin. R., Puc 507.08 (rule applicable to gas
service). Therefore, certain of the transactions contemplated under this
Application with respect to ENGI may require prior NHPUC approval.
Except as stated above, no state or federal regulatory agency
other than the Commission under the Act has jurisdiction over the proposed
transactions.
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Item 5 Procedure
The Commission is respectfully requested to issue and publish the
requisite notice under Rule 23, with respect to the filing of this
Application/Declaration as soon as practicable.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of these
proposed transactions. The Division of Investment Management may assist in the
preparation of the Commission's decision, unless the Division opposes the
proposals contained herein. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Item 6 Exhibits and Financial Statements
A. Exhibits
A-1 Articles of Incorporation of KeySpan.
(Incorporated herein by reference to Exhibit 3.1
to KeySpan's Form 10-Q for the quarter ended June
30, 1999, File No. 1-14161)
A-2 By-Laws of KeySpan as in effect on September 10,
1998. (Filed as Exhibit 3.1 to KeySpan's Form
8-K/A, Amendment No. 2, filed on September 29,
1998 File No. 1-14161 and incorporated by
reference herein)
A-3 Declaration of Trust of Eastern, dated as of July
18, 1929, as amended through April 27, 1989.
(Incorporated herein by reference to Exhibit 3.1
to Eastern's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1989, File No. 1-2297)
A-4 By-Laws of Eastern, as amended through February
24, 1999. (Incorporated herein by reference to
Exhibit 2.3 to Eastern's Annual Report on Form
10-K for the year ended December 31, 1998, File
No. 1-2297)
A-5 Articles of Incorporation of EnergyNorth as
amended, as amended February 22, 1996
(Incorporated herein by reference to Exhibit 3.1
to EnergyNorth's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996, File No.
1-11441)
A-6 By-Laws of EnergyNorth, as amended through
February 3, 1999. (Incorporated herein by
reference to Exhibit 4 to Energy North's Post
Effective Amendment No. 2 to Registration
Statement on Form S-3, dated November 21, 1996 in
File No. 33-58127)
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B KeySpan, Eastern and EnergyNorth Dividend
Reinvestment Plan and Stock Based Compensation and
Employee Benefit Plan
C KeySpan Corporation Financing Arrangements (as of
June 1, 2000)
D Utility Subsidiary Financing Arrangements (as of
June 1, 2000)
E Nonutility Subsidiary Financing Arrangements (as
of June 1, 2000)
F Form of Tax Allocation Agreement (To be filed by
amendment)
G-1 Form of Service Agreement for KeySpan Corporation
Services LLC]
G-2 Form of Service Agreement for KeySpan Utility
Services LLC
G-3 Form of Service Agreement for KENG
H Form of Money Pool Agreement (to be filed by
amendment)
I Fees (To be filed by amendment)
J Opinion of Counsel. (To be filed by amendment)
K Financial Data Schedule
L Proposed Form of Notice
M Number of Service Company
B. Financial Statements
FS-1 KeySpan Unaudited Pro Forma Condensed Consolidated
Balance Sheet, Statement of Income and Related
Notes as of December 31, 1999.
FS-2 KeySpan Consolidated Balance Sheet as of December
31, 1999. (Incorporated herein by reference to
Exhibit H-1 of KeySpan's Form U-1/A
Application/Declaration under the Act with respect
to the KeySpan/Eastern Transaction filed with the
Commission on June 15, 2000, File No. 70-9641)
FS-3 KeySpan Consolidated Statement of Income for the
twelve months ended December 31, 1999.
(Incorporated herein by reference to Exhibit H-1
of KeySpan's Form U-1/A Application/Declaration
under the Act with respect to the KeySpan/Eastern
Transaction filed with the Commission on June 15,
2000, File No. 70-9641)
FS-4 Eastern Consolidated Balance Sheet as of December
31, 1999. (Incorporated herein by reference to
Exhibit H-2 of KeySpan's Form
49
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U-1/A Application/Declaration under the Act with
respect to the KeySpan/Eastern Transaction filed
with the Commission on June 15, 2000, File No.
70-9641)
FS-5 Eastern Consolidated Statement of Income for the
twelve months ended December 31, 1999.
(Incorporated herein by reference to Exhibit H-2
of KeySpan's Form U-1/A Application/Declaration
under the Act with respect to the KeySpan/Eastern
Transaction filed with the Commission on June 15,
2000, File No. 70-9641)
FS-6 EnergyNorth Consolidated Balance Sheet as of
September 30, 1999. (Incorporated herein by
reference to Exhibit H-3 of KeySpan's Form U-1/A
Application/Declaration under the Act with respect
to the KeySpan/Eastern Transaction filed with the
Commission on June 15, 2000, File No. 70-9641)
FS-7 EnergyNorth Consolidated Statement of Income for
the twelve months ended September 30, 1999.
(Incorporated herein by reference to Exhibit H-3
of KeySpan's Form U-1/A Application/Declaration
under the Act with respect to the KeySpan/Eastern
Transaction filed with the Commission on June 15,
2000, File No. 70-9641)
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 human development" as those terms are used
in section 102 (2)(c) of the National Environmental Policy Act. The matters that
are the subject of this Application/Declaration will not result in changes in
the operation of KeySpan or its subsidiaries that will have an impact on the
environment. KeySpan is not aware of any federal agency that has prepared or is
preparing an environmental impact statement with respect to the transaction.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company
Act of 1935, the undersigned company has duly caused this statement to be signed
on its behalf by the undersigned officer thereunto duly authorized.
KEYSPAN CORPORATION
----------------------------
Steven Zelkowitz
Senior Vice President and General
Counsel
EASTERN ENTERPRISES
---------------------------
L. William Law, Jr.
Senior Vice President and General
Counsel
ENERGYNORTH, Inc.
------------------------
Michelle L. Chicoine
Executive Vice President
51
