File No. 70-09699
(As filed November 8, 2000)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4 ON FORM U-1/A
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
KeySpan Corporation Eastern Enterprises
ACJ Acquisition LLC
Brooklyn Union Gas Company
and its subsidiary companies EE Acquisition Company, Inc.
KeySpan Energy Corporation EEG Acquisition Company, Inc.
and its subsidiary companies
KeySpan Electric Services LLC Eastern Associated Securities Corp.
KeySpan Exploration & Production LLC Eastern Energy Systems Corp.
KeySpan Technologies Inc. Eastern Rivermoor Company, Inc.
KeySpan MHK, Inc. and its subsidiary Eastern Urban Services, Inc.
companies Mystic Steamship Corporation
One MetroTech Center PCC Land Company, Inc.
Brooklyn, New York 11201 Philadelphia Coke Co., Inc.
KeySpan Gas East Corporation Water Products Group Incorporated
KeySpan Generation LLC Western Associated Energy Corp.
KeySpan Corporate Services LLC 9 Riverside Road
KeySpan Utility Services LLC Weston, Massachusetts 02493
Marquez Development Corp. Boston Gas Company and its
Island Energy Services Company, Inc. subsidiary companies
LILCO Energy Systems, Inc. Essex Gas Company and its subsidiary
175 East Old Country Road companies
Hicksville, New York 11801 Colonial Gas Company and its
KeySpan-Ravenswood Inc. subsidiary companies
KeySpan-Ravenswood Services Corp. One Beacon Street
38-54 Vernon Boulevard Boston, Massachusetts 02108
Long Island City, New York 11101 Midland Enterprises Inc., and its
KeySpan Services, Inc., and its subsidiary companies
subsidiary companies 300 Pike Street
Octagon 10 Office Building Cincinnati, Ohio 45202
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1719 Route 10, Suite 108 ServicEdge Partners, Inc.
Parsippany, New Jersey 07054 AMR Data Corporation
KeySpan Energy Trading Services LLC 62 Second Avenue
100 East Old Country Road Burlington, Massachusetts 01803
Hicksville, New York 11801
KeySpan Energy Supply LLC ENERGYNORTH, INC.
14-04 111th Street EnergyNorth Natural Gas, Inc.
College Point, New York 11356 Broken Bridge Corporation
EnergyNorth Realty, Inc.
1260 Elm Street
P.O. Box 329
Manchester, New Hampshire 03105
EnergyNorth Propane, Inc.
75 Regional Drive
Concord, New Hampshire 03301
ENI Mechanicals, Inc. and its
subsidiary companies
25 Depot Street
Manchester, Massachusetts 03101
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(Name of companies filing this statement and addresses
of principal executive offices)
KeySpan Corporation
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(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
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(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
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TABLE OF CONTENTS
Item 1. Description of the Proposed Transaction............................ 3
A. Introduction and General Request..................................... 3
1. Introduction.................................................... 3
2. Description of KeySpan and its Subsidiaries..................... 4
3. General Request................................................. 6
B. Parameters for Financing and Refinancing Authorizations.............. 9
C. Description of Proposed Financing Program............................ 11
1. KeySpan External Financings..................................... 12
a. Common Stock.................................................... 16
b. Preferred Stock................................................. 17
c. Long-Term Debt.................................................. 17
d. Short Term Debt................................................. 18
2. Guarantees...................................................... 19
3. Authorization and Operation of the Money Pools.................. 19
4. Hedging Transactions............................................ 24
a. Interest Rate Hedges............................................ 24
b. Anticipatory Hedges............................................. 25
5. Stock-Based, Open Enrollment and Dividend Reinvestment Plans.... 25
a. KeySpan........................................................ 25
b. The Houston Exploration Company................................ 27
c. MyHomeKey...................................................... 27
6. Utility Subsidiary Financings................................... 29
7. Intermediate Holding Company Financing.......................... 30
8. Nonutility Subsidiary Financings................................ 30
9. EWG/FUCO-related Financings..................................... 31
10. Changes in Capital Stock of Subsidiaries........................ 37
11. Financing Subsidiaries.......................................... 37
12. Intermediate Subsidiaries and New Subsidiaries.................. 38
13. Payment of Dividends out of Capital or Unearned Surplus......... 40
a. Eastern and EnergyNorth......................................... 40
b. Payment of Dividends by Nonutility Subsidiaries................. 45
14. Foreign Gas-Related Investments................................. 46
D. Intrasystem Provision and Goods and Services......................... 46
1. Establishment of Service Company and Approval of Service Agreements 46
2. Nonutility Subsidiaries' Provision of Goods And Services........... 53
a. Continuation of Certain Existing Arrangements.................. 53
b. Other Sales and Service Contracts Among Nonutility Subsidiaries 56
E. Tax Allocation Agreement............................................. 57
F. Filing of Certificates of Notification............................... 59
Item 2 Fees, Commissions and Expenses.................................... 60
Item 3 Applicable Statutory Provisions................................... 61
A. General............................................................ 61
B. Compliance with Rules 53 and 54.................................... 61
Item 4 Regulatory Approvals.............................................. 61
Item 5 Procedure......................................................... 63
Item 6 Exhibits and Financial Statements................................. 63
A. Exhibits........................................................... 63
B. Financial Statements............................................... 65
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Item 7 Information as to Environmental Effects........................... 66
2
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AMENDMENT NO. 4 TO
APPLICATION/DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
This pre-effective Amendment No. 4 amends and restates the Form U-1
Application/Declaration, as amended, in this proceeding as follows:
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 as amended (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 ("LIPA").
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,
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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.
4
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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, LIPA,2 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, 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."3
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
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2 LIPA is a corporate municipal instrumentality of the State of New York.
3 As described above, the Intermediate Holding Companies (i.e., each of KEC,
Eastern and EnergyNorth) are currently exempt public utility holding companies.
In the Merger Application, KeySpan has requested that the Commission confirm
that each of the Intermediate Holding Companies will continue to be exempt
holding companies under Section 3(a)(1) of the Act after the Mergers are
consummated.
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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, the name of which is expected to be KeySpan
Engineering & Survey Inc. (hereinafter referred to as "KENG," collectively
referred to herein with KCS and KUS as the "Service Companies").4 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.5
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. Attached hereto as Exhibits N-1, N-2 and
N-3 are the lists of KeySpan's, Eastern's and EnergyNorth's, existing direct and
indirect Subsidiaries.
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 until
December 31, 2003 ("Authorization Period") as follows:6
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4 Either prior to its registration as a holding company, or shortly thereafter,
KeySpan intends to acquire a company called Montrose Surveying Co., Inc., whose
name, immediately upon closing on the acquisition, will be changed to KENG and
thus be KENG. The cost of such acquisition will be approximately $525,000.
KeySpan requests that the Commission permit its acquisition of KENG to be
utilized as a service company as described herein.
5 17 C.F.R.ss.250.88(b).
6 KeySpan requests that the Commission review and issue an order on this
Application/Declaration contemporaneously with the Merger Application.
6
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a. KeySpan requests, subject to an aggregate amount of $5.1
billion, authorization to (i) maintain existing financings,
and (ii) issue and sell through the Authorization Period up
to $1.5 billion of additional securities at any time
outstanding. Also, KeySpan requests authorization 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.
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 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
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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.
h. KeySpan requests Commission authorization to invest up to
250% of its consolidated retained earnings in EWGs and
FUCOs.
i. KeySpan requests authority for certain of its Subsidiaries
to continue to provide certain services to certain
Subsidiaries.
j. 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.
k. KeySpan and the Subsidiaries request authority to pay
dividends out of capital and unearned surplus as well as
paid-in-capital with respect to certain Subsidiaries,
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.
l. KeySpan requests approval for an agreement among KeySpan and
the Subsidiaries to allocate consolidated income tax
attributes.
m. 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
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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.
n. KeySpan requests authority for its existing Nonutility
Subsidiaries currently engaged directly or indirectly in
certain activities under Section 2(b) of the Gas Related
Activities Act of 1990 ("GRAA") to increase their
investments in existing partially owned GRAA Canadian
Subsidiaries pending completion of the record.
o. KeySpan requests authority to establish and operate a
Utility Money Pool and a Nonutility Money Pool, each as
defined and described in Item I.C.3 of this
Application/Declaration.
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 systems7 and for holding
company systems that have been registered for a longer period of time.8
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 common equity will be at least 30% of its consolidated
capitalization, and
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7 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).
8 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).
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each Utility Subsidiary's common equity will be at least 30% of its
capitalization.
2. Investment Grade Debt. KeySpan commits that any long-term debt issued
by it to unaffiliated parties pursuant to the authority requested
hereby 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).9
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. 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 EWGs and
FUCOs, as defined in Rule 53 under the Act, in an amount equal to 250%
of the consolidated retained earnings of KeySpan after giving effect
to the accounting adjustments required in connection with the Mergers.
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9 For example, debt which may not be rated could consist of private placement
arrangements for which a rating is not required.
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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) refinancing acquisition debt
for the Mergers, (ii) 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, (iii) the repayment, redemption, refunding or
purchase by KeySpan or any Subsidiary of any of its own securities
pursuant to Rule 42, and (iv) 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 58.10 KeySpan states that the aggregate amount of
proceeds of financing and KeySpan Guarantees (as defined below) 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 250% of KeySpan's "consolidated
retained earnings" (as defined in Rule 53) after giving effect to any accounting
adjustments required in connection with the Mergers. 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.
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10 17 C.F.R.ss.250.58.
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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.11 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 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 consolidated condensed balance sheet of KeySpan
and its Subsidiaries showing the reported condition of KeySpan at June 30, 2000,
the reported condition for Eastern and EnergyNorth at June 30, 2000, 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 June 30, 2000, and the pro
forma consolidated capital structure of KeySpan, as the parent holding company
of the combined KeySpan-
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11 KeySpan has developed the $2.2 billion necessary for the acquisition
financing of the Mergers based on the following: (a) $1.77 billion for the
acquisition of Eastern; (b) $205 million for EnergyNorth; and (c) $235 million
for closing costs and other related transaction expenses associate with the
closing of the Mergers.
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System, at June 30, 2000.
<TABLE>
<CAPTION>
Table No. 1
KeySpan, Eastern and EnergyNorth Historical Capital Structures
(Dollar amounts in thousands) (unaudited)
KeySpan % of Total Eastern % of Total EnergyNorth % of Total
------- ---------- ------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Common Equity $2,790,222 53.2% $770,841 54.7% $54,071 45.5%
Preferred Securities 84,339 1.6% 21,438 1.5% --- --%
Debt12 (inc. short term) 2,374,858 45.2% 617,188 43.8% 64,666 54.5%
Total: $5,249,419 100.0% $1,409,467 100.0% $118,737 100.0%
</TABLE>
<TABLE>
<CAPTION>
KeySpan Pro Forma Consolidated Capital Structure
(Dollar amounts in thousands) (unaudited)
Amount % of Total
------ ----------
<S> <C> <C>
Common Equity $2,809,128 35.1%
Preferred Securities 105,777 1.3%
Debt (inc. short term) 5,096,612 63.6%
Total: $8,011,517 100.0%
</TABLE>
Table 2 below shows the pro forma capital structure at June 30, 2000
of each of KeySpan, Eastern and EnergyNorth after giving effect to the Mergers:
----------
12 Includes current maturities, commercial paper and gas inventories.
13
<PAGE>
<TABLE>
<CAPTION>
Table No. 2
KeySpan, Eastern and EnergyNorth Pro Forma Capital Structures
(Dollar amounts in thousands) (unaudited)
KeySpan Eastern EnergyNorth Subtotal Adjustment Adjustment Proforma
1 2
<S> <C> <C> <C> <C> <C> <C>
Common Stock 1,339 27,173 3,323 31,835 (27,173) (3,323) 1,339
Paid-in-capital 2,984,597 246,382 32,643 3,263,622 (229,994) (30,125) 3,003,503
Retained Earnings 528,082 497,942 18,105 1,044,129 (497,942) (18,105) 528,082
Accumulated
Comprehensive
Income, net (1,716) (73) 0 (1,789) 73 (1,716)
Treasury Stock (722,080) (583) 0 (722,663) 583 (722,080
------------- ------------- ----------------- -------------- --------------- --------------- --------------
Total Equity 2,790,222 770,841 54,071 3,615,134 (754,454) (51,553) 2,809,127
------------- ------------- ----------------- -------------- --------------- --------------- --------------
Preferred Stock 84,339 21,438 0 105,777 105,777
------------- ------------- ----------------- -------------- --------------- --------------- --------------
Long Term Debt 2,112,377 503,168 45,274 2,660,819 1,477,433 172,567 4,310,819
Current Maturities 0 6,746 849 7,595 7,595
Gas Inventory 0 33,567 4,413 37,980 37,980
Financing
Commercial Paper 262,481 73,707 14,130 350,318 344,368 45,532 740,218
------------- ------------- ----------------- -------------- --------------- --------------- --------------
Total Debt 2,374,858 617,188 64,666 3,056,712 1,821,801 218,099 5,096,612
------------- ------------- ----------------- -------------- --------------- --------------- --------------
Total Capitalization 5,249,419 1,409,467 118,737 6,777,623 1,067,348 166,546 8,011,517
------------- ------------- ----------------- -------------- --------------- --------------- --------------
</TABLE>
Adjustment 1 = Record Purchase of Eastern
Adjustment 2 = Record Purchase of EnergyNorth
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
14
<PAGE>
and other financing arrangements are described in Exhibit C.13 (Exhibit P hereto
contains a summary of KeySpan's existing long-term debt.)
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
June 30, 2000, KeySpan would, after giving effect to the Mergers, have 35.1%
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.14 KeySpan further requests Commission authorization,
during the Authorization
----------
13 KeySpan estimates its existing financings to be approximately
$1.4 billion, which is comprised of the promissory notes, preferred stock and
credit facilities described under the heading of Debt Obligations in Exhibit C.
14 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)
15
<PAGE>
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 (i.e., incremental to existing financings or any refinancings
thereof) and to issue additional equity, debt and convertible securities
aggregating not more than $1.5 billion ("Additional Financing Amount") at any
one time outstanding during the Authorization Period.15 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 Financing Amount authority herein requested shall
not exceed $5.1 billion during the Authorization Period.16
a. Common Stock
KeySpan requests authorization to issue and sell common stock from
time to time during the Authorization Period subject to the Additional Financing
Amount, either through underwritten public offerings, in private placements or
in exchange for securities or assets being acquired from other companies
provided that the Commission has authorized the acquisition of equity securities
or assets in a separate proceeding or the acquisition is exempt under the Act or
rules of the Commission.17 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
----------
requests that the approval of existing debt requested herein include approval to
obtain such required letters of credit.
15 The Additional Financing Amount was developed based on the following
assumptions: (i) an estimated $365 million to replace preferred stock redeemed
in June 2000; (ii) an estimated $500 million for forecasted financings related
to the requirements of the gas and electric systems and generation expansion
investments; (iii) an estimated $540 million for potential investments in energy
related investments; and (iv) an estimated $100 million for contingencies.
16 The aggregate amount of $5.1 billion was derived by adding together the
amounts described above for the merger financing, existing financings and
Additional Financing Amount.
17 Authority to issue securities under stock based benefit plans is addressed in
Item 1.C.5 below.
16
<PAGE>
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 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.
The proceeds from the sale of KeySpan's common stock will be used as
set forth in number 8 of the financing parameters described in Item 1.B above.
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 financing parameters 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 various types of
17
<PAGE>
debt securities to be issued under an indenture to be entered into between
KeySpan and The Chase Manhattan Bank, as trustee (the "KeySpan Indenture"). Any
securities issued either pursuant to an exemption from the registration
requirements under the 1933 Act or under the KeySpan Indenture will be unsecured
and unsubordinated obligations of KeySpan and will rank equally with all other
unsecured and unsubordinated debt of KeySpan. The KeySpan Indenture will provide
for the issuance from time to time of debt securities (either through
underwriters, dealers, agents or directly to purchasers by KeySpan) in unlimited
dollar amounts and an unlimited number of series. In addition, the KeySpan
Indenture will contain all provisions required by the Trust Indenture Act of
1939, as amended, including, but not limited to, provisions governing KeySpan's
ability to (i) mortgage, pledge or otherwise subject its assets or property to
certain types of liens; (ii) consolidate with or merge into any other entity or
transfer or lease substantially all of its assets or property to any person; and
(iii) terminate its obligations under the KeySpan Indenture with respect to the
debt securities. In addition, the long-term debt securities (1) will have
maturities ranging from one to fifty years, (2) will bear interest at a rate not
to exceed at the time of issuance 500 basis points over the yield to maturity of
a U.S. Treasury security having a remaining term equal to the term of the
long-term debt, (3) may be subject to optional and/or mandatory redemption, in
whole or in part, at par or at various premiums above its principal amount, (4)
may be entitled to mandatory or optional sinking fund provisions, and (5) may
provide for reset of the coupon under a remarketing arrangement. 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).18
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-term credit facilities) and bid notes. Issuance of
short-term debt will be in accordance with the financing parameters described in
Item 1.B above including the commitment that short-term debt financings
authorized by this Application/Declaration will not exceed 500 basis points over
the London interbank offer rate (LIBOR). 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. Short-term debt will be unsecured.
----------
18 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).
18
<PAGE>
Currently, KeySpan is issuing commercial paper to accredited investors
(as such term is defined in the 1933 Act). Such issuances of commercial paper
are exempt from registration under the 1933 Act pursuant to Section 4(2)
thereof. It is anticipated that future issuances of commercial paper will
similarly be exempt from registration under the 1933 Act.
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 $2 billion in Guarantees outstanding which are expected to remain
in place following the Mergers. Details of such Guarantees are included in
Exhibit C and a summary of such Guarantees is set forth in Exhibit P.19
KeySpan requests further authorization to enter into additional
Guarantees (i.e., in addition to the existing Guarantees), subject to the
appropriate financing parameters described in Item 1.B above, 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). KeySpan
intends to charge each subsidiary a fee for each Guarantee provided on its
behalf that is not greater than the cost, if any, of obtaining the liquidity
necessary to perform the Guarantee (e.g., bank line commitment fees or letter of
credit fees, plus other transactional expenses) for the period of time the
Guarantee remains outstanding. The limit on Guarantees is separate from the
limit on KeySpan's requested overall $5.1 billion cap on external financings.
3. Authorization and Operation of the Money Pools
KeySpan and the Utility Subsidiaries request authorization to
establish the KeySpan System utility money pool (" Utility Money Pool"), and the
Utility Subsidiaries also request authorization to make unsecured short-term
borrowings from the Utility Money Pool, to contribute surplus funds to the
Utility Money Pool, and to lend and extend credit to (and acquire promissory
notes from) one another through the Utility Money Pool. KED NY and KED LI will
be limited to borrowing from the Utility Money Pool only.
In addition, KeySpan and the remaining Subsidiaries, all of which are
Nonutility Subsidiaries, hereby request authorization to establish the
non-utility money pool
----------
19 These Guarantees include both payment and performance guarantees.
19
<PAGE>
("Nonutility Money Pool"). The Nonutility Money Pool activities of all of the
Nonutility Subsidiaries are exempt from the prior approval requirements of the
Act under Rule 52.
KeySpan requests authorization to contribute surplus funds and to lend
and extend credit to (a) the Utility Subsidiaries through the Utility Money Pool
and (b) the Nonutility Subsidiaries through the Nonutility Money Pool.
KeySpan believes that the cost of the proposed borrowings through the
two money pools will generally be more favorable to the respective participants
than the comparable cost of external short-term borrowings, and the yield to the
respective participants contributing available funds to the respective money
pools will generally be higher than the typical yield on short-term investments.
i. Utility Money Pool
Under the proposed term of the Utility Money Pool, short-term funds
would be available for short-term loans to the Utility Subsidiaries from time to
time from the following sources: (1) surplus funds in the treasuries of the
Utility Money Pool participants other than KeySpan, (2) surplus funds in the
treasuries of KeySpan and the Intermediate Holding Companies, and (3) proceeds
from bank borrowings by Utility Money Pool participants or the sale of
commercial paper by KeySpan or the Utility Subsidiaries for loan to the Utility
Money Pool ("External Funds"). Funds would be made available from such sources
in such order as KCS, as administrator of the Utility 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 Utility Money Pool participant at any
time has surplus funds to lend to the Utility Money Pool or shall lend funds to
the Utility 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-1 for a copy of the Form of Utility Money Pool Agreement.
As discussed in more detail below, a separate Nonutility Money Pool
will be established by KeySpan with certain Nonutility Subsidiary companies of
KeySpan.20 Funds made available by KeySpan for loans through the money pools
will be made available first for loans through the Utility Money Pool and
thereafter for loans through the Nonutility Money Pool.
Utility Money Pool participants that borrow 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 Utility
Money Pool. On any
----------
20 Such other subsidiaries consist of each of the Nonutility Subsidiaries
including KeySpan Corporate Services.
20
<PAGE>
day when more than one fund source (e.g., surplus treasury funds of KeySpan and
other Utility Money Pool participants ("Internal Funds") and External Funds),
with different rates of interest, is used to fund loans through the Utility
Money Pool, each borrower would borrow pro rata from each such fund source in
the Utility 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 Utility Money Pool.
Borrowings from the Utility Money Pool 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 Utility 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 Utility Money Pool would be made to, and no borrowings
through the Utility Money Pool would be made by, KeySpan or the Intermediate
Holding Companies.
The cost of compensating balances, if any, and fees paid to banks to
maintain credit lines and accounts by Utility Money Pool participants lending
External Funds to the Utility 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 Utility Money Pool participant establishes a line of credit
solely for purposes of lending any External Funds obtained thereby into the
Utility Money Pool -- would be allocated every month to the companies borrowing
such External Funds through the Utility 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 Utility
Money Pool, the interest rate applicable and payable to or by the participants
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.
If only External Funds comprise the funds available in the Utility
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 Utility 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 Utility Money Pool
participants for such External Funds).
In cases where both Internal Funds and External Funds are
concurrently borrowed through the Utility 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 Utility
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 Utility
Money Pool, loans may be made exclusively from Internal Funds or External Funds,
21
<PAGE>
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 Utility Money Pool to make loans (with the
exception of funds required to satisfy the Utility 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
Utility Money Pool in accordance with the proportion each participant's
contribution of funds bears to the total amount of funds in the Utility Money
Pool and the cost of funds provided to the Utility Money Pool by such
participant.
Each participant receiving a loan through the Utility 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. The borrower without premium or penalty may prepay
all loans made through the Utility Money Pool.
ii. Nonutility Money Pool
The Nonutility Money Pool will be operated on the same terms and
conditions as the Utility Money Pool, except that KeySpan funds made available
to the Money Pools will be made available to the Utility Money Pool first and
thereafter to the Nonutility Money Pool. No loans through the Nonutility Money
Pool would be made to, and no borrowings through the Nonutility Money Pool would
be made by, KeySpan and the Intermediate Holding Companies. See Exhibit H-2 for
a copy of the form of Nonutility Money Pool Agreement. All contributions to, and
borrowings from, the Nonutility Money Pool are exempt pursuant to the terms of
Rule 52 under the Act,21 except contributions and
----------
21 They are exempt under Rule 52(b) because the Nonutility companies
participating are not holding companies, public utility companies, investment
companies or fiscal or financing agencies of KeySpan. The securities issued
pursuant to the Nonutility Money Pool are solely for the purpose of financing
the existing business of the respective Nonutility Subsidiary and the interest
rates and maturity dates of the debt securities issued are designed to parallel
the effective cost of capital of the associate companies participating and
issuances of debt to an energy related company under the Nonutility Money Pool
arrangements will comply with the Rule 58 provision set forth in Rule 52(b).
22
<PAGE>
extensions of credit by KeySpan, authorization for which is hereby requested.
KeySpan shall undertake to file a post-effective amendment in this proceeding
seeking approval to add any additional Nonutility Subsidiary to borrow from the
Nonutility Money Pool. KeySpan requests that, without further authorization of
the Commission, other current or future Nonutility Subsidiaries may participate
in the Nonutility Money Pool as lenders but not as borrowers. Funds not required
by the Nonutility Money Pool to make loans (with the exception of funds required
to satisfy the Nonutility 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.
KeySpan requests that the Commission reserve jurisdiction over the formation of
the Nonutility Money Pool. In addition, KeySpan requests the Commission to
reserve jurisdiction over the participation of the Nonutility Subsidiaries
described in the Merger Application to which KeySpan has requested that the
Commission reserve jurisdiction over with respect to retainability under Section
11(b) of the Act.
iii. Other Contributions to Money Pools
KeySpan and the Utility Subsidiaries may contribute funds from the
issuance of short-term debt as authorized above to the Utility Money Pool.
KeySpan may contribute funds from the issuance of short-term debt to the
Nonutility Money Pool and the Nonutility Subsidiaries may contribute funds from
the issuance of short-term debt to the Nonutility Money Pool.
iv. Operation of the Money Pools and Administrative Matters
Operations of the Utility Money Pool and the Nonutility 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 Utility Money Pool and the Nonutility Money Pool on an "at
cost" basis and will maintain separate records for each money pool. Surplus
funds of the Utility Money Pool and the Nonutility Money Pool may be combined in
common short-term investments, but separate records of such funds shall be
maintained by KCS as administrator of the pools, and interest thereon shall be
separately allocated, on a daily basis, to each money pool in accordance with
the proportion that the amount of each money pool's surplus funds bears to the
total amount of surplus funds available for investment from both money pools.
v. Use of Proceeds
23
<PAGE>
Proceeds of any short-term borrowings by the participants may be used
by each such participant (i) for the interim financing of its construction and
capital expenditure programs; (ii) for its working capital needs; (iii) for the
repayment, redemption or refinancing of its debt and preferred stock; (iv) to
meet unexpected contingencies, payment and timing differences, and cash
requirements; and (v) to otherwise finance its own business and for other lawful
general corporate purposes. KED NY may borrow up to $250 million at any one time
outstanding from the Utility Money Pool, KED LI may borrow up to $185 million at
any one time outstanding from the Utility Money Pool, KeySpan Generation may
borrow up to $50 million at any one time outstanding from the Utility Money
Pool, Boston Gas may borrow up to $150 million at any one time outstanding from
the Utility Money Pool, Colonial Gas may borrow up to $75 million at any one
time outstanding from the Utility Money Pool, Essex Gas may borrow up to $20
million at any one time outstanding from the Utility Money Pool, ENGI may borrow
up to $35 million at any one time outstanding from the Utility Money Pool. The
use of proceeds from the financings would be limited to use in the operations of
the respective businesses in which such Subsidiaries are already authorized to
engage. The authorization sought herein is substantially the same as that given
to New Century Energies, Inc., Holding Co. Act Release No. 26750 (Aug. 1, 1997),
Conectiv, Holding Co. Act Release No. 26833 (Feb. 26, 1998), and Scana
Corporation, Holding Co. Act Release No. 27135 (February 14, 2000).
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.
24
<PAGE>
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 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 represents that the Interest Rate Hedges and the Anticipatory
Hedges will qualify for hedge accounting treatment under generally accepted
accounting principles (GAAP). KeySpan will comply with the then existing
financial disclosure requirements of the Financial Accounting Standards Board
associated with hedging transactions.22
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 and subject to the Additional
Financing Amount, 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
----------
22 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).
25
<PAGE>
management incentive plan and its 401K Plan employee benefit plans or in
exchange for securities or assets being acquired from other companies.23
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 42.24 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 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 June 30, 2000, the following approximate number of shares were
issued and outstanding under the KeySpan plans described above: 5,378,000 shares
under KeySpan's open enrollment and divided reinvestment plan; 578,000 shares
under KeySpan's employee stock purchase plan; and 3,785,000 shares under
KeySpan's 401K plans. In addition, as of such date, approximately 7,844,000
options to purchase shares of
----------
23 The proceeds from the sale of such stock will be used as described in number
8 of the financing parameters described above in Item 1.B.
24 17 C.F.R.ss.250.42.
26
<PAGE>
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 up to the amount currently authorized under the plans as 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. Currently, 2,833,276
options are authorized for issuance under the 1996 Stock Option Plan.
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").
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.25 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
----------
25 A full description of MHK is contained in the Merger Application and is
incorporated herein by reference.
27
<PAGE>
and outstanding convertible preferred stock of MHK and the exercise of all
outstanding stock options).26
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). Each option
granted under the MHK Stock Plan has a term of not more than 10 years from the
date of grant (or 5 years in the case of an incentive stock option granted to an
optionee who owns more than 10% of the voting securities of the company or any
parent or subsidiary). 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. At August 31, 2000, the total
number of shares of common stock of MHK authorized for issuance to employees,
directors and consultants under the MHK Stock Plan, the Director's Option and
such senior management arrangements is 7,440,000 shares, of which 6,338,000
shares have been issued or are subject to outstanding options.
During the Authorization Period, authorization is requested from the
Commission for MHK to issue and sell up to the limit of its currently authorized
amount as described above, and to repurchase, from time to time pursuant to the
MHK Stock Plan and the Director's 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.27
----------
26 On November 3, 2000, MHK filed an application with the Federal Communication
Commission for ETC status.
27 We believe that as an ETC, MHK's security issuances are exempt from the Act's
prior approval requirements and the stock plan would otherwise be exempt under
Rule 52(b), therefore, KeySpan requests such authorization for MHK's stock plan
only to the extent that its prior authorization is not exempt under Section 34
of the Act or Rule 52(b).
28
<PAGE>
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 approval 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 (a
summary of such existing debt is set forth in Exhibit P) 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 and in accordance with the applicable
financing parameters described in Item 1.B above:
29
<PAGE>
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.
30
<PAGE>
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.28 KeySpan believes that
such an initial public offering is exempt 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 EWGs and FUCOs:
Entity Investment ($ millions)
------ -----------------------
KeySpan-Ravenswood, Inc. (EWG) $632.5
Phoenix Natural Gas Limited (FUCO) 56.5
FINSA Energeticos, S. de R.L. de C.V. (FUCO) 1.4
-------
$690.4
During the Authorization Period, KeySpan requests Commission
authorization to invest an amount equal to 250% of its consolidated retained
earnings after giving effect to the accounting adjustments required by the
Mergers in EWGs and FUCOs. On a pro forma basis at June 30, 1999, Keyspan's
retained earnings are approximately $528 million after giving effect to the
accounting adjustments required by the Mergers. 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.29
KeySpan estimates that it will have an aggregate investment of
approximately 130% of its retained earnings in EWGs and FUCOs as of the date the
Mergers are completed.30 In addition, KeySpan currently has plans to invest in
two additional EWGs which would be approximately 97% of retained earnings.31 All
of the current actual
----------
28 At this time it is not yet known how many shares of MHK's common stock might
be issued in any initial public offering.
29 See 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).
30 KeySpan's current EWG and FUCO investments consist of KeySpan-Ravenswood,
Phoenix and FINSA as described above.
31 Potential EWG investments that are expected to occur at some point after
KeySpan registers consist of an additional 250 MW expansion of generation
located at the site of KeySpan-Ravenswood, Inc., KeySpan's existing EWG, as well
as development of a 250 MW gas-fired combined cycle plant on Long Island. These
(footnote continued on next page)
31
<PAGE>
investments, as well as the identified planned investments, were entered into in
accordance with all applicable laws and regulations prior to the time that
KeySpan has become subject to registration as a holding company under the Act
and, thus, KeySpan should not be penalized for having and holding or planning
these investments. KeySpan is requesting authority to invest an amount equal to
250% of its retained earnings in EWGs and FUCOs which is comprised of 227.5% to
account for its currently existing and planned investments plus an additional
22.5% for flexibility with respect to potential future investments.
KeySpan notes that retained earnings at June 30, 2000, of
approximately $528 million reflect the effects of the transactions consummated
on May 28, 1998 between 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. Moreover, 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
EnergyNorth 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. Not giving effect to merger-related
adjustments, the combined retained earnings of KeySpan, Eastern and EnergyNorth
at June 30, 2000 was approximately $ 1.044 billion. Therefore, 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 66% of its retained earnings in EWGs and
FUCOs as of the date the Mergers are completed.
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 53.32 In each of those
matters, the applicant sought relief from
----------
potential EWG investments are still in the feasibility stage. KeySpan has filed
an application with the New York State Public Service Commission for approval to
build a new 250 MW cogeneration facility at the site of the Ravenswood facility.
KeySpan's potential investment. KeySpan is continuing to evaluate the electric
needs on Long Island and may, if economic circumstances and energy needs so
warrant, proceed with strategies to add additional electric capacity on Long
Island.
32 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).
32
<PAGE>
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
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. The economic
viability analysis also examines construction risk, commercial
risk and financial risk and appropriate methods by which to
mitigate these risks such as through offtake contracts,
construction contracts with appropriate levels of milestone dates
and liquidated damages provisions applicable to the contract, and
non-recourse financing.
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. With respect
to foreign investments, KeySpan's review also includes analysis of
the economic stability of the country, the government's commitment
to private energy business, the extent to which there is a free
market economy and the development of a local banking system, the
legal and regulatory framework for private investment in electric
or gas facilities, the local business support for long-term
investment of private capital, currency conversion and
repatriation, and mitigating risk in appropriate cases by
partnering with other entities.
Strategic Fit. Finally, KeySpan is particularly sensitive to
ensuring that its independent energy investments contribute to
KeySpan's overall strategic growth plan building upon KeySpan's
strengths and resources to achieve broad corporate objectives
within budgeting and expenditure guidelines. Moreover,
33
<PAGE>
KeySpan focuses its development efforts to technologies/industries
with which it has existing competencies such as electric
generation and the transmission and distribution of electricity
and gas. 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.33
It is also worth noting that aggregate investment (as defined in Rule
53(a)) in EWGs and FUCOs in amounts up to 250% of its consolidated retained
earnings ($528 million as of June 30, 2000) would still represent a relatively
small commitment of KeySpan's capital for a company of its size based on various
financial ratios as of June 30, 2000. For example, investments of this amount
would be equal to only 16.6% of KeySpan's total capitalization, 20.9% of
consolidated net utility plant, 11.5% of total consolidated assets, and 29.2% of
the market value of KeySpan's outstanding common stock as of June 30, 2000. The
following chart shows how KeySpan's percentages compare to the percentages of
the following companies using the same measurements when they each received
Commission orders relieving them from the Rule 53(a)(1) safe harbor requirements
so that they could invest up to 100% of their respective consolidated retained
earnings in EWGs and FUCOs: The Southern Company ("Southern");34 Central and
South West Corporation ("CSW");35 GPU Inc. ("GPU");36 Cinergy Corporation
----------
33 KeySpan's credit rating is currently A- by Standard & Poor' and A3 by
Moody's.
34 See Southern Co., Holding Co. Act Release No. 26501 (April 1, 1996).
35 See Central and South West Corporation, Holding Co. Act Release No. 26653
(Jan. 24. 1997).
36 See GPU, Inc., Holding Co. Act Release No. 26779 (Nov. 17, 1997).
34
<PAGE>
("Cinergy");37 American Electric Power Company ("AEP");38 and New Century
Energies, Inc. ("NCE").39
<TABLE>
<CAPTION>
Investments in EWGs and FUCOs (assuming equal to 100% of
consolidated retained earnings) as a percentage of:
Company Consolidated Consolidated Net Total Consolidated Market Value of
Capitalization Utility Plant Assets Outstanding Common
Stock
-------------------------- ----------------------- ---------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
Southern 16.3% 15.4% 11.0% 20.4%
CSW 23.0% 23.0% 14.0% 31.0%
GPU 24.9% 34.2% 19.4% 49.8%
Cinergy 16.0% 16.0% 11.0% 19.0%
AEP 16.0% 13.8% 9.8% 18.5%
NCE 15.5% 12.9% 9.8% 13.5%
Average of the above 18.6% 19.2% 12.5% 25.4%
</TABLE>
This comparison verifies that an aggregate investment of up to 250% of
KeySpan's consolidated retained earnings would involve a relatively small
commitment of capital for a company of KeySpan's size. Also, in every category,
KeySpan's percentage is below at least two of the companies and either slightly
above the other companies or not more than 5 percentage points above the average
in those categories in which KeySpan's percentages are greater than the average.
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.
----------
37 See Cinergy Corp., Holding Co. Act Release No. 26848 (March 23, 1998).
38 See American Electric Power Company, Holding Co. Act Release No. 26864 (April
27, 1998).
39 See New Century Energies, Holding Co. Act Release No. 26982 (Feb. 26, 1999)
(hereafter referred to as the "NCE Order"). The data for the chart below was
obtained from the application/declaration filed by NCE upon which the NCE Order
is based.
35
<PAGE>
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.
(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.
(f) Moreover, the NYPSC permits KeySpan to invest up to 50% of
its capital in non-utility investments.40
Finally, none of the three conditions described in Rule 53 (b) exist.
Specifically, (1) there has been no bankruptcy of any KeySpan Subsidiaries; (2)
KeySpan's average consolidated retained earnings for the previous four
quarters41 has not decreased by
----------
40 Case 97-M-0567, Opinion and Order Adopting Terms of Settlement Subject to
Conditions and Changes, Opinion No. 98-9 (April 14, 1998) at p. 28 of Appendix
A.
41 The previous four quarters referenced above are the four quarters ended
September 30, 2000.
36
<PAGE>
10% from the average for the four quarters preceding that period; and (3) in the
past fiscal year, KeySpan has not reported operating losses attributable to its
direct or indirect investments in EWGs or FUCOs which exceeded 5% of its
consolidated retained earnings.
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
amounts equal to 250% of its consolidated retained earnings 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. Changes in Capital Stock of Subsidiaries
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.42 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.
11. 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
----------
42 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).
37
<PAGE>
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 (both payment and performance) 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 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).
12. 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 to EWGs, FUCOs or Rule 58 Subsidiaries 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.43
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
----------
43 Affiliate transactions involving ETCs are exempt from the Commission's
jurisdiction pursuant to Section 34 of the Act.
38
<PAGE>
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; (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 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. Funds for any direct or indirect investment in any
Intermediate 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
issues guarantees directly or indirectly to support the obligations of an
Intermediate Subsidiary which are incurred 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.44
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,
----------
44 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).
39
<PAGE>
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,45 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.46 Such transactions may take the form of a Nonutility
Subsidiary selling, contributing or transferring the equity securities of a
subsidiary as a dividend to an Intermediate Subsidiary, and Intermediate
Subsidiaries acquiring, directly or indirectly, the equity securities of such
companies, either by purchase or by receipt of a dividend. The purchasing
Nonutility Subsidiary in any transaction structured as an intrasystem sale of
equity securities may execute and deliver its promissory note evidencing all or
a portion of the consideration given. Each transaction would be carried out in
compliance with all applicable U.S. or foreign laws and accounting requirements,
and any transaction structured as a sale would be carried out for a
consideration equal to the book value of the equity securities being sold.
KeySpan will report each such transaction in the next quarterly certificate
filed pursuant to Rule 24 in this proceeding, as described below
13. 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 Midland Enterprises, Inc., ("Midland") and Transgas, Inc. ("Transgas")
----------
45 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.
46 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).
40
<PAGE>
each of which are Nonutility subsidiaries of Eastern,47 up to the amount of
their retained earnings balance 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 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.
----------
47 Midland, through its wholly-owned subsidiaries, is primarily engaged in the
operation of a fleet of towboats, tugboats and barges, principally on the Ohio
River and Mississippi River and their tributaries, the Gulf Intracoastal
Waterway and the Gulf of Mexico, transporting dry bulk commodities. Through
other subsidiaries, Midland also performs repair work on marine equipment,
operates a rail-to-barge coal dumping terminal, a phosphate chemical fertilizer
terminal and cargo transfer facilities, and provides refueling and barge
fleeting services. In the Merger Application, KeySpan has recognized that
Midland's activities do not satisfy the standard for retention by a registered
holding company under Section 11(b)(1) of the Act and has requested that any
order the Commission may issue in that proceeding which approves the Transaction
but requires KeySpan to divest of Midland permit KeySpan to take the appropriate
actions to effect the sale of its interest in Midland, its subsidiaries and
assets within three years after the Transaction is consummated. Transgas is an
energy trading company described more fully in Item 1.D.2.a. below.
41
<PAGE>
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 June 30, 2000, the application of this accounting principle
to the Mergers will result in goodwill of approximately $1.2 billion which will
result in following adjustments to Eastern's, and EnergyNorth's books:
<TABLE>
<CAPTION>
EASTERN
-------
$'000 6/30/00 Adjustments 1 Adjustments 2 Restated
------- ------------- ------------- --------
<S> <C> <C> <C> <C>
Common Stock 27,173 (27,173) 0
Paid-in-capital 246,382 524,459 1,067,347 1,838,188
Retained earnings 497,942 (497,942) 0
Accumulated (73) 73 0
Comprehensive
Income, net
Treasury Stock (583) 583 0 0
Total equity 770,841 0 1,067,347 1,838,188
</TABLE>
<TABLE>
<CAPTION>
ENERGY NORTH
$'000 6/30/00 Adjustments 1 Adjustments 2 Restated
------- ------------- ------------- --------
<S> <C> <C> <C> <C>
Common Stock 3,323 (3,323) 0
Paid-in-capital 32,643 21,428 166,546 220,617
Retained earnings 18,105 (18,105) 0
Total equity 54,071 0 166,546 220,617
</TABLE>
Adjustments 1 -- Capital accounts are restated as Paid-in-Capital.
Adjustments 2 -- Goodwill is added to Paid-in-Capital.
The pushdown of the estimated $1.2 billion of goodwill described above is
expected to be pushed down further to Boston Gas, Colonial Gas, Essex Gas
(collectively, the "Massachusetts Utilities"), ENGI and Midland as follows:
approximately $900 million to the Massachusetts Utilities (i.e., $700 million to
Boston Gas, $100 million to Colonial Gas and $100 million to Essex Gas);
approximately $100 million to Midland;48 and
----------
48 The amount of goodwill allocated to each of Eastern's subsidiaries was based
primarily on market valuation data provided by KeySpan's investment bankers, J.
P. Morgan. The combined range of enterprise valuations for Eastern and
EnergyNorth was in the range of $2.2-$2.5 billion. The range of enterprise
values for the Midland's barge business was between $370-$465 million. The $100
million of goodwill assigned to Midland fits comfortably within this range and
is line with its current projected fair value.
42
<PAGE>
approximately $150 million to ENGI. KeySpan notes, however, that the numbers
described above on the pushdown of goodwill are being developed in connection
with discussions with its investment bankers and are subject to finalization
after closing of the Mergers.
The push down of the net assets at fair market value also has an
impact on the net income of Eastern, EnergyNorth, and Midland. 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 $64.6 million for the twelve months
ended June 30, 2000 would be reduced by a goodwill amortization of $26.7
million. The resulting net income after amortization would be $37.9 million.
Similarly, EnergyNorth's net income of $2.9 million for the twelve months ended
June 30, 2000 would be reduced by a goodwill amortization of $4.2 million. The
resulting net loss after amortization would be $1.3 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).49 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.50
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 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.
----------
49 Compare Section 305(a) of the Federal Power Act.
50 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).
43
<PAGE>
(ii) Eastern and EnergyNorth and their respective Subsidiaries
have a favorable history of prior earnings and a long record
of consistent dividend payments.51
(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.
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.52
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
----------
51 In recent years, Eastern's and EnergyNorth's net income and dividends have
been:
<TABLE>
<CAPTION>
Year Eastern Eastern EnergyNorth EnergyNorth
Net Income * Dividends Paid Net Income** Dividends Paid**
($ thousands) ($ thousands) ($ thousands) ($ thousands)
<S> <C> <C> <C> <C>
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
52 See SCANA Corporation, Holding Co. Act Release No. 27137 (Feb. 14, 2000).
44
<PAGE>
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,53 provided, however, that
without further approval of the Commission, no Nonutility Subsidiary will
declare or pay any dividend out of capital or unearned surplus if such
Nonutility Subsidiary derives a material part of its revenues from the sale of
goods, services or natural gas to a Utility Subsidiary.
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.54
Similarly, using the same example, if an Intermediate Subsidiary,
following its acquisition of all of the stock of an EWG or FUCO, were to sell
part of that stock to a third party for cash, the Intermediate Subsidiary would
again have substantial unrestricted cash available for distribution, but
(assuming no profit on the sale of the stock) would not have current earnings
and therefore could not, without the Commission's approval, declare and pay a
dividend to its parent out of such cash proceeds.
----------
53 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).
54 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.
45
<PAGE>
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.
14. Foreign Gas-Related Investments
KeySpan currently holds interests in Nonutility Subsidiaries which
directly or indirectly engage in activities in Canada which involve the supply
of natural gas, including exploration, development, production, marketing,
manufacture, or other similar activities within the meaning of Section 2(b) of
the Gas Related Activities Act of 1990 ("GRAA").55 In view of the increasingly
global nature of the energy business, it is both necessary and appropriate for
KeySpan and its subsidiaries to apply, on an international basis, the gas
expertise they have gained in their domestic activities. KeySpan expects that it
may expand its investments in companies engaged in Canadian GRAA activities.
Consistent with Commission precedent, KeySpan requests the Commission to reserve
jurisdiction over KeySpan's request for its existing Nonutility Subsidiaries
currently engaged directly or indirectly in Canadian GRAA activities to increase
their investments in existing partially owned GRAA Canadian Subsidiaries pending
completion of the record.56
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
----------
55 The Merger Application fully describes the KeySpan Subsidiaries engaged in
GRAA activities and such descriptions are incorporated herein by reference.
56 See Columbia Energy Group, Holding Co. Act Rel. No. 35-27055 (1999); Columbia
Energy Group, Holding Co. Act Rel. No. 35-26820 (1998). The Commission has
determined that GRAA is not limited to activities within the United States and
has authorized investments in foreign gas- related projects. See id.
46
<PAGE>
and surveying services to KeySpan's subsidiaries.57 Each of the Service
Companies provides, or will provide, a distinct set of services to its client
companies. LIPA will be the only non-associate company to which the Service
Companies will provide services. 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 ("RD&D"), and (e) meter repair
operations. KUS will only provide these services to KED NY, KED LI, KeySpan
Generation, KeySpan Electric Services LLC ("KES")58 and KeySpan Energy Trading
Services LLC (collectively the "New York Subsidiaries").59 KENG will provide
engineering and surveying services primarily to KeySpan's utility subsidiaries
as well as KES 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.60
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 service companies (i.e., KCS and KUS) in order to provide the
services noted above.61
----------
57 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.
58 Pursuant to a contract with LIPA, KES provides day-to-day operation and
maintenance services and construction maintenance services to LIPA for LIPA's
nuclear generation and transmission and distribution facilities located on Long
Island, New York. The services KES provides to LIPA include performance of
routine and emergency facility additions and improvements, customer connections
and disconnections, construction of new facilities, supervision of routine and
major capital improvements, preparation of proposed budgets and monitoring LIPA
approved capital and operating budgets, load and energy forecasts, long range
and short range system and strategic plans, management and repair modification
activities associated with public work projects and emergency response
activities for events affecting LIPA.
59 KeySpan Energy Trading Services LLC ("KETS") is a broker of electricity and
gas on behalf of LIPA. Specifically, the services provided by KETS include
energy supply portfolio management, risk management and associated
administration and billing, and, as agent for LIPA, KETS is responsible for (a)
the purchase from third parties of additional capacity and energy that LIPA
needs to serve its customers, (b) the off-system sale of LIPA's energy which it
does not require to meet the needs of its system customers, and (c) fuel
procurement, delivery, storage and management to meet LIPA's obligations to
provide fuel to its electricity supplier to generate power to provide LIPA for
its retail and wholesale customers.
60 The affiliate transactions contemplated by the Service Companies' proposed
agreements do not require approval from the NYPSC, MDTE or NHPUC. However, as
described in Item 4 below, the affiliate contracts are subject to certain state
notice filings.
61 Case 97-M-0567, Opinion and Order Adopting Terms of Settlement Subject to
Conditions and Changes, Opinion No. 98-9 (April 14, 1998).
47
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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.62 However, consistent
with the NYPSC requirements, KUS was established to provide the services that
the NYPSC mandated to be supplied by a separate affiliate.63 This separation
provides the NYPSC with protections against cross subsidization and simplifies
accounting and ratemaking. KeySpan requests that the Commission reserve
jurisdiction over the use of KCS and KUS as separate service companies and
KeySpan commits to file a post-effective amendment by March 31, 2002, setting
forth the justification as to why KeySpan should be allowed to continue to
maintain these separate service companies.
With respect to engineering and surveying services, Title VIII,
Article 145 of the New York Education Law ("Education Law") permits engineers
and land surveyors to conduct business only in the form of a sole practitioner,
partnership, joint enterprise or professional service corporation.64
Notwithstanding the Education Law, Article XII of the New York Limited Liability
Company Law ("LLCL") permits engineers and land surveyors to conduct business in
the form of a professional service limited liability company.65 The New York
Business Corporation Law ("BCL") and the LLCL restrict the shareholders,
members, directors and officers of these entities that provide professional
services to the professionals authorized to provide those professional
services;66 e.g., any of these entities that provide engineering must restrict
their shareholders, members, directors and officers to being engineers.
Therefore, a general business corporation such as KeySpan and an entity whose
shareholders, members, directors and officers are not limited to members of one
profession, again such as KeySpan, cannot conduct the business of engineering or
surveying in New York State -- with the following two exceptions. The Education
Law does permit engineering and/or surveying services to be provided under the
ownership of a corporation such as KeySpan if it is either by (i) a
"grandfathered" engineering or land
-----------
62 KCS will also provide services to Eastern, EnergyNorth and their respective
subsidiaries.
63 Because the NYPSC restricts KUS to providing its service only to the New York
Subsidiaries, each of Boston Gas, Colonial Gas, Essex Gas and ENGI will provide
the KUS type services to themselves respectively and not receive them from KUS
unless the NYPSC removes the restriction. The inability of KUS to provide its
services to the Massachusetts Utilities and ENGI will not adversely affect
coordination of an integrated gas system with the New York gas utilities. For
example, the KUS type services of gas distribution system planning and metering
repair are local activities which are more efficiently handled at the local
utility level by the Massachusetts Utilities and ENGI instead of by KENG which
is in New York. Similarly, the gas marketing type KUS services are more
effectively handled locally by the Massachusetts Utilities and ENGI as they will
be marketing their services to customers located in their service territories
where their respective brand names are recognized by local customers. Finally,
with respect to RD&D services, there will be no loss of coordination if KUS
cannot provide such services to the Massachusetts Utilities and ENGI, because
those utilities do not do internal RD&D and all RD&D expenditures are funded
through their Gas Research Institute surcharge.
64 Education Lawss.7209(4).
65 LLCLss.1203(a).
66 BCLss.1503 and LLCLss.1203(a).
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surveying corporation, or (ii) a public service corporation that provides its
own engineering or surveying services. The commonly referred to "grandfathered"
engineering or land surveying corporations are general business corporations
that have been lawfully practicing engineering or land surveying and were
organized and existing under the laws of the State of New York on April 15, 1935
and have existed continuously thereafter.67 With respect to a public service
corporation, Education Law ss.7208(l) permits an officer or employee of a public
service corporation to practice engineering or land surveying to such
corporation when it is in connection with its lines and property which are
subject to the supervision of the public service commission of New York or other
federal regulatory body with respect to safety and security thereof.
Since the Education Law restricts a public service corporation from
providing any engineering or survey services to third parties including
affiliates, the only KeySpan entity that may provide either engineering or a
survey service to the KeySpan Subsidiaries that are not public service
corporations (i.e., other than KEDLI, KEDNY, KeySpan Generation LLC and
KeySpan-Ravenswood, Inc.) would be a "grandfathered" company such as KENG, thus,
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 88,68 and (ii)
permit the holding company system to operate in accordance with the interim
measures described below until January 1, 2001 so
----------
67 Educ. Lawss.7209(6).
68 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
Utilities Corporation, Holding Co. Act Rel. No. 21708 (Sept. 5, 1980); General
Public Utilities Corporation, Holding Co. Act Rel. No. 17112 (April 29, 1971).
49
<PAGE>
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-3.69 KeySpan requests that the
Commission approve the forms of the KUS Service Agreement, KCS Service Agreement
and KENG Service Agreement (collectively, the "Service Agreements"). Exhibits
G-4, G-5 and G-6, respectively, contain the policies and procedures that each of
KCS, KUS and KENG will use to implement their service agreements. KeySpan
requests that the Commission reserve jurisdiction over the allocation
methodologies proposed in the service agreements of the Service Companies and
the Service Companies commit to file post-effective amendments by March 31,
2002,
----------
69 At that time the capitalization of each of the Service Companies will be
comprised of no more than 10% equity with the balance being debt. The level of
equity capitalization used to support each of the Service Companies' operations
is appropriate for three reasons: (1) it allows KeySpan to establish ownership
and control over the companies; (2) it is used to finance the fixed assets of
the companies such as office equipment, and; (3) it allows the Service Companies
to make a fair contribution to the cost of KeySpan's consolidated capital
structure which includes both debt and equity. Moreover, this highly leveraged
capital structure is appropriate for companies, such as the Service Companies,
which have a fairly predictable revenue profile. The use of a significant amount
of debt capital also minimizes the cost of capital component included in the
Service Companies' service billings to associate companies as contrasted to a
capital structure with a greater proportion of generally higher-cost equity.
KeySpan expects to adjust the maturity and terms of the debt component of each
of the Service Companies' capitalization from time to time as necessary to
appropriately match their respective debt to their working capital needs and
asset structure. The return on common equity applied to the 10% equity
capitalization of each Service Company is 10.35% based on the implicit return
recognized by the NYPSC in its approval of the Long Island Lighting Company's
cost of service rate setting in Case No. 97-M-0567. The NYPSC, in that
proceeding, issued an order (Opinion No. 98-9) effective 2/5/98 approving the
settlement of parties to the merger of The Brooklyn Union Gas Company and the
Long Island Lighting Company. The overall debt cost rate will be developed based
on a weighted average of long- and short-term debt utilized to finance a Service
Company's long-term assets and short term working capital requirements. The
interest expense allocated to the Service Companies' client companies will
include an amortization of debt premium/discount and expenses (DD&E). The
overall debt rate to be applied to the 90% debt ratio would currently be
approximately 7.25%.
50
<PAGE>
providing an analysis of the reasons justifying a continuation of the use of
such allocation methodologies.
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. All of KCS's services will be provided to KeySpan
and its Subsidiaries. In addition, the majority70 of services will be provided
to the Utility Subsidiaries and KES.
KCS will consist of approximately 3,605 employees. In addition to the
1,746 existing KCS employees, 71 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,72 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
----------
70 Current financial information would not approximate the percentage of
services provided to affiliates in the future. Estimates may be available closer
to the closing date.
71 Virtually all existing KCS employees were former employees of the Long Island
Lighting Company.
72 Virtually all existing KUS employees were former employees of the Long Island
Lighting Company.
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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 375 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.
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 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 Section 13(b) of the
Act and Commission Rules 90 and 91.73 Moreover, each of KCS, KUS and KENG will
file the annual report required by the Commission pursuant to Rule 94 on Form
U-13-60. KeySpan requests that for the U-13-60 which must be filed in May 2001,
for the months of November and December 2000, the Service Companies only be
required to file abbreviated information consisting of a description of the
companies to which they provided services and the services, the dollar amounts
of such services, a list of the unaffiliated entities from which the Service
Companies obtained services as well as a description of the types of services
and the dollar amounts, and balance sheets and income statements of the Service
Companies.
----------
73 KeySpan understands that Rule 90(d)(1) does not apply to the prices the
Service Companies may charge to its associated companies.
52
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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 Section 13(b) based on information set forth in an application on
Form U-1, without requiring the formal filing on a Form U-13-1.74
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
-----------
74 Scana, supra; WPL Holdings, Inc., Holding Co. Act Rel. No. 26856 (April 14,
1998); Dominion, supra.
53
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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 subsidiary of KeySpan
which provides contract administrative services to Alberta Northeast Gas Limited
("ANE") and Boundary Gas Inc. ("BGI") pursuant to longstanding management
services arrangements.75 Each of ANE and BGI purchase Canadian natural gas and
resell it to numerous local distribution companies in the northeast United
States, including several Utility Subsidiaries of KeySpan, Eastern and
EnergyNorth76 KeySpan indirectly owns partial interests in ANE and BGI.77
Neither ANE nor Boundary are permitted to operate at a profit or loss;
rather all of their costs are charged to their customers on an "as-billed"
basis.78 NEGM's charges, which are billed to ANE and BGI on a mills per Mcf
basis, represent "a unit amount to recover actual costs associated with
administering the [ANE and BGI] transactions[s]."79 ANE and BGI recover NEGM's
charges from all of their customers on the exact same basis, as ANE and BGI are
mere "administrative conduit[s]" or "shell[s]" for their
----------
75 The BGI management services arrangement commenced in 1984; the ANE management
services arrangement commenced in 1991.
76 Twelve local distribution companies that are not affiliated with KeySpan hold
entitlements to 56.43% of the gas sold by ANE. Five existing or proposed KeySpan
affiliates hold the remaining entitlements. 72.6% percent of the ownership
interests in ANE are held by six gas utility companies that are not affiliated
with KeySpan. Two existing or proposed KeySpan gas utility subsidiaries own the
remaining 27.4% interests in ANE. Nine gas utility companies that are not
affiliated with KeySpan hold entitlements to 42.62% of the gas sold by BGI. Five
existing or proposed KeySpan gas utility affiliates hold the remaining
entitlements. Ownership interests in BGI are proportionate to the gas
entitlements.
77 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. Rule 87(b)(1), 18 C.F.R. ss.250.87(b)(1).
78 Brooklyn Union Gas Co., 1 FEP. 70,280 at p. 71,200, confirmed 1 FEP. 70,370
(1990), reh'g denied, 1 FEP. 70,400 (1991); Boundary Gas, Inc. 40 FERCP. 61,088,
1987 FERC Lexis 1439, Slip op. at 20-21 (1987).
79 Boundary Gas, Inc., 40 FERCP. 61,088, 1987 FERC Lexis 1439, Slip op. at 20
(1987).
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customers "direct" purchases of gas from Canadian suppliers.80 Sales from ANE
and BGI to KeySpan affiliates are not subject to the cost standards of Rules 90
and 91 (18 C.F.R. ss.ss.250.90, 250.91) because the only sales made by ANE and
BGI are sales of natural gas, which is not a "good."81
NEGM's provision of contract administrative services to ANE and BGI
should also not be subject to the cost standards of Rules 90 and 91, which may
be inconsistent with "as-billed" unit-based charges for NEGM's services that are
essential to the structure of the ANE and BGI transactions. Two of the
Commission's rules support an exemption in these circumstances: (i) the rates
charged by NEGM to ANE and BGI, through the gas purchase agreements between ANE
and BGI and their customers, are subject to public regulation of the type
contemplated in Rule 81, 18 C.F.R. ss. 250.81 and (ii) the charges for NEGM's
services, as incorporated into ANE's and BGI's rates, are exactly the same for
the real "direct purchasers" of the Canadian gas, including numerous
non-affiliate customers of ANE and BGI, as contemplated in Rule 90(d)(1)(iii),
18 C.F.R. ss. 250.90(d)(1)(iii).
With respect to federal regulation, both ANE's and BGI's natural gas
sales arrangements, including NEGM's contract administration costs as a
specifically identified charge, 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)82 and/or the Federal Energy
Regulatory Commission (in the case of BGI).83 The DOE and FERC have approved,
and maintain jurisdiction over, the component of the ANE and BGI sales rates
which reflect NEGM's charges for its contract administration services.
Furthermore, NEGM, under its contracts with ANE and BGI, cannot and will not
charge costs to ANE and BGI that are not permitted by federal regulators to be
recovered from the customers of ANE and BGI.
Additionally, ANE sells gas to twelve, and BGI sells gas to nine,
other non-affiliated utilities on exactly the same terms and conditions,
pursuant to substantively identical contracts. Thus, the great majority of both
the ANE and BGI purchasers are non-affiliated companies. As noted above, the
agencies which regulate the sales of ANE and BGI, recognize such customers as
the true "direct purchasers" of the Canadian gas,
----------
80 Boundary Gas Inc., 40 FERCP. 61,047, 1987 WL 117,381 at 3 (1987); see
Brooklyn Union Gas Co., 1 FEP. 70,280 at p. 71,200.
81 See 15 U.S.C.ss.79b(a)(2); 17 C.F.R.ss.250.80(b).
82 Brooklyn Union Gas Co., 1 FEP. 70,280, confirmed 1 FEP. 70,370 (1990), reh'g
denied, 1 FEP. 70,400 (1991).
83 See Boundary Gas, Inc., 26 FERCP. 61,114 (1984); Boundary Gas, Inc., 40
FERCP. 61,047, reh'g denied, 40 FERCP. 61,302 (1987); Boundary Gas, Inc., 40
FERCP. 61,088 (1987).
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including NEGM's contract administration services.84 Since the per Mcf costs of
the services provided by NEGM and charged to its true "direct customers" will in
all cases be identical, whether the customer is an affiliate or not, the
transaction should be considered to comply with the requirements of Rule
90(d)(1)(iii), 18 C.F.R. ss. 250.90(d)(1)(iii).
KeySpan requests that the Commission grant interim approval of NEGM's
provision of contract services to ANE and BGI, as described above, for a period
of twelve(12) months after the date of the Commission's order on this
Application/Declaration. By June 30, 2001, KeySpan will file a post-effective
amendment requesting approval of such arrangements beyond the twelve (12) month
period and if such approval is denied, ANE and BGI will comply with the
applicable Commission cost rules after the twelve month period expires.
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 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
----------
84 Boundary Gas, Inc., 40 FERCP. 61,047, 1987 WL 117,381 at 3 (1987); see
Brooklyn Union Gas Co., 1 FEP. 70,280 at p. 71,200.
56
<PAGE>
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 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.85
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 in connection with acquisition debt
related to the Mergers, 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
----------
85 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).
57
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from, directly or indirectly, lending or in any manner extending its credit to
or indemnifying, or making any donation or capital contribution to, any company
in the same holding company system, except 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.86 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, in the limited and
discrete circumstances where the losses were incurred in connection with the
acquisition debt related to the Mergers only, the proposed
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86 See Holding Co. Act Release No. 21968 (March 35, 1981), citing Sen. Doc. 92,
Part 72A, 70th Congress, 1st Sess. At 477-482.
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arrangement will not give rise to the types of problems (e.g., upstream loans)
that the Act was intended to address.87
Accordingly, KeySpan request that the Commission approve the Tax
Allocation Agreement to be filed hereto as Exhibit F-1. KeySpan requests that
the Commission reserve jurisdiction over the implementation of the Tax
Allocation Agreement until such time as the matter can be more fully considered
by the Commission. Until such time, KeySpan has attached a copy of an interim
Tax Allocation Agreement among KeySpan and its Subsidiaries as Exhibit F-2 which
shall govern the parties after the effective time of the Mergers until such
approval of the Tax Allocation Agreement attached as Exhibit F-1.
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. The
Rule 24 certificates will contain the following information for the reporting
period:
(1) The sales of any common stock and the purchase price per share and
the market price per share at the date of the agreement of sale;
(2) The total number of shares of common stock issued or issuable
under options granted during the quarter under employee benefit plans or
dividend reinvestment plans;
(3) If KeySpan common stock has been transferred to a seller of
securities of a company being acquired, the number of shares so issued, the
value per share and whether the shares are restricted to the acquiror;
(4) The amount and terms of any long-term debt, preferred stock or
short-term debt, issued directly or indirectly by KeySpan or a Utility
Subsidiary during the quarter;
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87 See, e.g., Section 12(a) of the Act. In National Grid, Holding Co. Act
Release No. 27154 (March 15, 2000), the Commission approved a tax allocation
agreement which permitted a registered holding company to retain tax losses
incurred in connection with acquisition-related debt.
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(5) The market-to-book ratio of KeySpan's common stock;
(6) The amount and terms of any financings consummated by any
Nonutility Subsidiary during the quarter that are not exempt under rule 52;
(7) The name of the guarantor and of the beneficiary of any KeySpan
Guarantee or Nonutility Subsidiary Guarantee issued during the quarter, and the
amount, terms and purpose of the guarantee;
(8) The notional amount and principal terms of any Interest Rate Hedge
or Anticipatory Hedge entered into during the quarter and the identity of the
parties to such instruments;
(9) The name, parent company, and amount invested in any new
Intermediate Subsidiary or Financing Subsidiary during the quarter;
(10) A list of Form U-6B-2 statements filed with the Commission during
the quarter, including the name of the filing entity and the date of the filing;
(11) Consolidated balance sheets as of the end of the quarter, and
separate balance sheets as of the end of the quarter for each company, including
KeySpan, that has engaged in jurisdictional financing transactions during the
quarter;
(12) A computation in accordance with rule 53(a) setting forth
KeySpan's "aggregate investment" in all EWGs and FUCOs, its "consolidated
retained earnings" and a calculation of the amount remaining under the requested
EWG/FUCO authority;
(13) A table showing, as of the end of the quarter, the dollar and
percentage components of the capital structure of KeySpan on a consolidated
basis and each Utility Subsidiary; and
(14) A retained earnings analysis of KeySpan on a consolidated basis,
each Intermediate Holding Company and each Utility Subsidiary detailing gross
earnings, goodwill amortization, dividends paid out of each capital account, and
the resulting capital account balances at the end of the quarter.
Item 2 Fees, Commissions and Expenses
The fees, commissions and expenses incurred or to be incurred in
connection with this Application/Declaration are 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. KeySpan
requests that the Commission reserve jurisdiction over the fees, commissions and
expenses to be set forth in Exhibit I hereto and KeySpan commits to file a
post-effective amendment by November 30, 2000, setting forth such information
for approval.
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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 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.
Sections 32 and 33 and Rule 53 are applicable to EWG and FUCO investments. Rules
93 and 94 are applicable to the Service Companies.
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
54.88 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
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88 17 C.F.R.ss.ss.250.53 and 54.
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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. Specifically, PSL Section 110.3 requires that
management, construction, engineering, or similar contracts with affiliates must
be filed with the NYPSC, for notice purposes, before service begins; however,
prior NYPSC approval is not required. Furthermore, in NYPSC Case 97M0567, 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)
anticompetitive concerns; and (7) maintenance of customer service. Moreover,
NYPSC Case 97-M-0567 requires that non-tariffed goods or services provided
between a gas utility and its affiliate (other than another utility or service
company) must be pursuant to a contract which must be filed, for notice
purposes, within 5 days of its execution. 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. Pursuant to Mass. 220 CMR,
Section 12.04(4), non-tariffed transactions between gas distribution companies
and other affiliates involved in competitive services must be filed annually.
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 NHPUC, for notice
purposes, within ten days of
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their execution. RSA 366:3. Contracts and arrangements between utilities and
affiliated entities are subject to investigation by the NHPUC 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.
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)
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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)
B KeySpan, Eastern and EnergyNorth Dividend Reinvestment Plan
and Stock Based Compensation and Employee Benefit Plan
(Previously filed)
C KeySpan Corporation Financing Arrangements (as of September
30, 2000) (Previously filed)
D Utility Subsidiary Financing Arrangements (as of September
30, 2000) (Previously filed)
E Nonutility Subsidiary Financing Arrangements (as of
September 30, 2000) (Previously filed)
F-1 Form of Tax Allocation Agreement (Previously Filed)
F-2 Form of Interim Tax Allocation Agreement (Previously filed)
G-1 Form of Service Agreement for KeySpan Corporation Services
LLC (Previously filed)
G-2 Form of Service Agreement for KeySpan Utility Services LLC
(Previously filed)
G-3 Form of Service Agreement for KENG (Previously filed)
G-4 KCS's Policies and Procedures (Previously filed)
G-5 KUS's Policies and Procedures (Previously filed)
G-6 KENG's Policies and Procedures (Previously filed)
H-1 Form of Utility Money Pool Agreement. (Previously Filed)
H-2 Form of Nonutility Money Pool Agreement. (Previously Filed)
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I Fees (To be filed by post-effective amendment)
J Opinion of Counsel. (Previously Filed)
K Financial Data Schedule (Previously filed)
L Proposed Form of Notice (Previously Filed)
M Number of Service Company Employees (Previously filed)
N-1 List of KeySpan's Direct and Indirect Subsidiaries
(Previously filed)
N-2 List of Eastern's Direct and Indirect Subsidiaries
N-3 List of EnergyNorth's Direct and Indirect Subsidiaries
O Earnings History of EWG and FUCOs (Previously filed)
P Summary of Guarantees and Debt (Previously filed)
B. Financial Statements
FS-1 KeySpan Unaudited Pro Forma Consolidated Condensed Balance
Sheet, Statement of Income and Related Notes for the twelve
(12) month period ended June 30, 2000. (Previously filed)
FS-2 KeySpan Consolidated Balance Sheet as of June 30, 2000.
(Incorporated herein by reference to KeySpan's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000
filed with the Commission on August 10, 2000, File No.
001-141611)
FS-3 KeySpan Consolidated Statement of Income for the three and
six months ended June 30, 2000. (Incorporated herein by
reference to KeySpan's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000 filed with the Commission on
August 10, 2000, File No. 001-14161)
FS-4 Eastern Consolidated Balance Sheet as of June 30, 2000.
(Incorporated herein by reference to Eastern's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000,
filed with the Commission on July 21, 2000, File No.
001-22973)
FS-5 Eastern Consolidated Statement of Income for the six months
ended June 30, 2000. (Incorporated herein by reference to
Eastern's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, filed with the Commission on July 21,
2000, File No. 001-22973)
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FS-6 EnergyNorth Consolidated Balance Sheet as of June 30, 200.
(Incorporated herein by reference to EnergyNorth's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000,
filed with the Commission on August 8, 2000, File No.
001-11441)
FS-7 EnergyNorth Consolidated Statement of Income for the six
months ended June 30, 2000. (Incorporated herein by
reference to EnergyNorth's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000, filed with the Commission
on August 8, 2000, File No. 001-11441)
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
/s/
------------------------------
Steven Zelkowitz
Senior Vice President and General
Counsel
EASTERN ENTERPRISES
/s/
------------------------------
L. William Law, Jr.
Senior Vice President and General
Counsel
ENERGYNORTH, Inc.
/s/
------------------------------
Michelle L. Chicoine
Executive Vice President
67
