(As filed March 6, 2000)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
APPLICATION/DECLARATION
under
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
KeySpan Corporation
ACJ Acquisition LLC
One Metrotech Center
Brooklyn, New York 11201
______________________________________________________________________________
(Name of companies filing this statement and addresses of principal
executive offices)
None
______________________________________________________________________________
(Name of top registered holding company parent of each applicant)
Steven L. Zelkowitz
Senior Vice President and General Counsel
KeySpan Corporation
One MetroTech Center
Brooklyn, New York 11201
______________________________________________________________________________
(Name and address of agent for service)
The Commission is also requested to send
copies of any communications in connection with
this matter to:
Kenneth M. Simon, Esq. L. William Law, Jr., Esq.
Laura V. Szabo, Esq. Senior Vice President and General Counsel
Dickstein Shapiro Morin Eastern Enterprises
& Oshinsky LLP 9 Riverside Road
2101 L Street, NW Weston, Massachusetts 02493
Washington, D.C. 20037
Andrew F. MacDonald, Esq.
Thelen Reid & Priest LLP
701 Pennsylvania Avenue, NW
Suite 800
Washington, D.C. 20004
<PAGE>
Table of Contents
Item 1. Description of Proposed Transaction.........................1
A. Introduction...................................................1
1. General Request.............................................2
2. Overview of the Transaction.................................3
B. Description of the Parties to the Transaction..................4
1. General Description.........................................4
a. KeySpan and its Subsidiaries................................4
i. KeySpan and ACJ..........................................4
ii The New York Utilities...................................6
iii. KeySpan's Non-Utility Subsidiaries....................7
b. Eastern and its Subsidiaries................................7
i. Eastern..................................................7
ii The Massachusetts Utilities..............................8
iii. Eastern's Non-Utility Subsidiaries....................9
c. Energy North and its Subsidiaries..........................10
i. ENGI....................................................11
ii EnergyNorth's Non-Utility Subsidiaries..................11
C. Description of the Transaction................................12
1. Background and Negotiations Leading to the Proposed
Transaction................................................12
2. Merger Agreement...........................................13
D. Management and Operations of KeySpan Following the
Transaction...................................................14
Item 2. Fees, Commissions and Expenses.............................14
Item 3. Applicable Statutory Provisions............................15
A. Approval of the Transaction...................................15
1. Section 10(b)(1)...........................................16
a. Interlocking Relationships.................................16
b. Concentration of Control...................................17
2. Section 10 (b) (2).........................................19
a. Fairness of Consideration..................................20
b. Reasonableness of Fees.....................................20
3. Section 10 (b) (3).........................................21
a. Capital Structure..........................................21
b. Protected Interests........................................22
4. Section 10 (c) (1).........................................22
a. Section 8 Analysis.........................................23
b. Section 11 Analysis........................................23
i. Capital and Corporate Structure.........................23
ii Integrated Public Utility Holding Company System........24
iii. Retention of Non-Utility Businesses..................27
5. Section 10 (c) (2).........................................41
i. Single Area or Region Requirement.......................42
ii Economies and Efficiencies..............................44
iii. Size and Local Requirements..........................46
6. Section 10 (f).............................................47
B. Section 3(a)(1) Holding Company Exemption.....................47
<PAGE>
Item 4. Regulatory Approvals.......................................47
A. Antitrust.....................................................47
B. State Public Utility Regulation...............................48
Item 5. Procedure:.................................................49
Item 6. Exhibits and Financial Statements..........................49
A. Exhibits......................................................49
B. Financial Statements..........................................51
Item 7. Information as to Environmental Effects:...................52
<PAGE>
APPLICATION/DECLARATION UNDER
SECTIONS 9, 10, AND 11 OF THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Item 1. Description of Proposed Transaction
A. Introduction
This Application/Declaration seeks approval pursuant to Sections
9(a)(2) and 10 of the Public Utility Holding Company Act of 1935 (the "Act") for
the proposed acquisition by KeySpan Corporation ("KeySpan") and ACJ Acquisition
LLC ("ACJ"), a direct wholly-owned subsidiary of KeySpan, of Eastern Enterprises
("Eastern"), pursuant to which Eastern will become a direct, wholly-owned
subsidiary of KeySpan (the "Transaction"). Following the consummation of the
Transaction, KeySpan will register with the Securities and Exchange Commission
(the "Commission") as a holding company under the Act.1
The Transaction is expected to produce substantial benefits to the
public, investors and consumers. Among other things, KeySpan and Eastern believe
that the Transaction will allow shareholders to participate in a larger,
financially stronger company, that, through a combination of the equity,
management, human resources and technical expertise of each company, they will
be able to achieve increased financial stability and strength, greater
opportunities for earnings, reduction of operating costs, efficiencies of
operation, better use of facilities for the benefit of customers, improved
ability to use new technologies, and greater retail and industrial sales
diversity. In this regard, KeySpan and Eastern believe that synergies created by
the Transaction will generate substantial cost savings. KeySpan and Eastern have
estimated the dollar value of certain initial synergies resulting from the
Transaction to be approximately $24 to $29 million, phased in over a two year
period. Moreover, KeySpan believes that the combined companies will be in a
better position to compete in the restructured and competitive energy industry
with other industry participants than they would be acting alone. Upon
consummation of the Transaction (and giving effect to Eastern's acquisition of
EnergyNorth, Inc. ("EnergyNorth"), as discussed below, KeySpan and Eastern
together, through their public utility company subsidiaries, will serve
approximately 2.4 million retail gas customers and
_______________
1 KeySpan will file a separate application/declaration(s) with the Commission
for authorizations to engage in certain activities once the Transaction is
consummated and KeySpan registers as a holding company under the Act ("Omnibus
Application") including authorizations pursuant to Section 13 of the Act and
Rule 88 for service companies . KeySpan requests that the Commission review and
rule on the Omnibus Application(s) contemporaneously with this
Application/Declaration.
2
<PAGE>
provide electric service to one customer, the Long Island Power Authority
("LIPA"), which provides retail electric service to approximately 1.1 million
customers.
1. General Request
Pursuant to Sections 9(a)(2) and 10 of the Act, KeySpan and ACJ hereby
request authorization and approval of the Commission to acquire, by means of the
Transaction, all of the issued and outstanding common stock of Eastern and,
indirectly, all of the common stock of Eastern's utility subsidiaries described
below. Following completion of the Transaction, KeySpan will register as a
holding company pursuant to Section 5 of the Act. Accordingly, KeySpan also
requests Commission approval for the retention by KeySpan of the existing
businesses, investments and non-utility activities of KeySpan and Eastern.
On January 5, 2000, Eastern filed an application/declaration with the
Commission ("Eastern/EnergyNorth Application") requesting authorization pursuant
to Sections 9(a)(2) and 10 of the Act to acquire all the issued and outstanding
common stock of EnergyNorth (hereafter referred to as the "ENI Transaction").
(See File No. 70-9605) Both Eastern and EnergyNorth are exempt holding companies
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 an indirect acquisition by KeySpan and ACJ of
EnergyNorth through their acquisition of Eastern. However, KeySpan and ACJ'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.
In the Eastern/EnergyNorth Application/Declaration, Eastern and
EnergyNorth have requested that the Commission find that each will continue to
be exempt holding companies under Section 3(a)(1) of the Act. KeySpan requests
that, to the extent the Commission grants Eastern and EnergyNorth exemptions
under Section 3(a)(1), the Commission confirm that Eastern and EnergyNorth will
continue to qualify for exemptions under Section 3(a)(1) following the
consummation of the Transaction and KeySpan's registration as a holding
company.2
Likewise, KeySpan requests the Commission's confirmation that KeySpan
Energy Corporation ("KEC"), a direct, wholly-owned subsidiary of KeySpan, will
continue to be
______________
2 As discussed more fully in Item 3.A.4.b.i of this Application/Declaration,
EnergyNorth will be eliminated as an intermediary holding company as soon as
practicable after consummation of the Transaction.
2
<PAGE>
an exempt holding company under Section 3(a)(1) of the Act following
consummation of the Transaction. KEC is a holding company which directly owns
100% of the outstanding voting securities of The Brooklyn Union Gas Company
("Brooklyn Union"), a gas utility company which operates gas distribution
facilities, and sells gas at retail, within the state of New York. KEC is
currently an exempt holding company under Section 3(a)(1) of the Act and Rule 2.
2. Overview of the Transaction
Pursuant to the Agreement and Plan of Merger dated as of November 4,
1999, as modified by Amendment No. 1 dated January 26, 2000 (the "Merger
Agreement"), KeySpan, through ACJ, will acquire all of the issued and
outstanding common stock of Eastern in an all-cash transaction. A copy of the
Merger Agreement is provided as Exhibit B hereto. The Transaction contemplates
that ACJ, a Massachusetts limited liability company and a direct wholly-owned
subsidiary of KeySpan, will be merged into Eastern with Eastern being the
surviving entity in the merger. Eastern will become a direct wholly-owned
subsidiary of KeySpan and KeySpan will register as a holding company under
Section 5 of the Act. An organizational chart of the KeySpan holding company
system following consummation of the Transaction is attached hereto as Exhibit
E-4.
Upon consummation of the Transaction, the common stockholders of
Eastern will receive $64.00 in cash, without interest, for each share of common
stock held (other than shares in respect of which appraisal rights have been
perfected), plus an additional $0.006 per share ("Additional Amount") for each
day the Transaction has not closed after the later of (a) August 4, 2000 or (b)
ninety days after the New Hampshire Public Utilities Commission ("NHPUC") gives
final regulatory approval to the ENI Transaction.3 Shares of Eastern common
stock held by KeySpan, ACJ or any other wholly owned subsidiary of KeySpan will
be cancelled when the Transaction is consummated.4
KeySpan anticipates that it will pay approximately $1.7 billion dollars
to acquire Eastern's common stock. KeySpan expects to finance the acquisition
price by initially
______________________
3 However, the aggregate Additional Amount will be reduced by the aggregate
amount of any per share increase in any dividend actually paid that is
attributable to any period in which the Additional Amount accrues.
4 In the ENI Transaction, Eastern will acquire all of the issued and outstanding
common stock of EnergyNorth pursuant to an Agreement and Plan of Reorganization
dated as of July 14, 1999, as amended by Amendment No. 1 dated as of November 4,
1999 (the "ENI Merger Agreement"). As more fully described in the
Eastern/EnergyNorth Application, the ENI Merger Agreement sets forth the terms
of the ENI Transaction. If, as is expected, the ENI Transaction and the
KeySpan's acquisition of Eastern through the Transaction close
contemporaneously, Merger Sub (a wholly-owned subsidiary of Eastern) will be
merged into EnergyNorth, with EnergyNorth as the surviving corporation and a
direct, wholly-owned subsidiary of Eastern.
3
<PAGE>
obtaining short-term financing (e.g., bridge loans or commercial paper) and
replacing a significant portion of such debt with long-term financing as soon as
possible after consummation of the Transaction.
The Transaction requires approval by Eastern's shareholders, who are
scheduled to vote on the Transaction at Eastern's annual meeting to be held on
April 26, 2000. Eastern will file with the Commission a Proxy Statement to
solicit the shareholders' votes. Eastern's Proxy Statement is incorporated by
reference as Exhibit C. In addition, the Transaction requires (i) approval of
the NHPUC for the indirect acquisition by KeySpan and ACJ of EnergyNorth through
their acquisition of Eastern,5 and (ii) clearance by the Antitrust Division of
the U.S. Department of Justice (the "DOJ") and the Federal Trade Commission (the
"FTC") under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"). (See Item 4 below for additional detail regarding these
regulatory approvals.) Apart from the approvals of the Commission under the Act,
the foregoing approvals are the only regulatory approvals required for the
Transaction. In order to permit timely consummation of the Transaction and the
realization of the substantial benefits it is expected to produce, KeySpan
requests that the Commission commence and proceed with its review of this
Application/Declaration as expeditiously as practicable.
B. Description of the Parties to the Transaction
1. General Description
a. KeySpan and its Subsidiaries
i. KeySpan and ACJ
KeySpan. KeySpan is a diversified public utility holding company
currently exempt from registration under the Act pursuant to Section 3(a)(1) of
the Act6 and Rule 2 of the Commission's regulations promulgated under the Act.7
On May 28, 1998, KeySpan
____________________
5 If the NHPUC does not approve the ENI Transaction, no state regulatory
approvals would be required for the Transaction. Therefore, KeySpan requests
that if the NHPUC disapproves the ENI Transaction, the Commission nevertheless
approve the Transaction in the absence of Eastern's proposed acquisition of
EnergyNorth.
6 KeySpan originally obtained its exemption by order of the Commission dated May
15, 1998. BL Holding Corp., Holding Co. Act Rel. No. 26875.
7 17 C.F.R. Section 250.2.
4
<PAGE>
became the holding company of three public utility companies: Brooklyn Union,8
KeySpan Gas East Corporation d/b/a Brooklyn Union of Long Island ("KeySpan Gas
East") and KeySpan Generation LLC ("KeySpan Generation") (collectively, the "New
York Utilities").9 As further described below, the New York Utilities provide
gas or electric service to customers located in New York City and on Long
Island, New York. Together, Brooklyn Union and KeySpan Gas East distribute
natural gas to approximately 1.6 million retail customers. KeySpan Generation
sells electricity and capacity at wholesale to one customer (which is a state
agency that resells the energy at retail). KeySpan's non-utility subsidiaries
are engaged in a variety of non-utility energy related businesses which are
described more fully in Item 1.B.1.a(iii) below. An organizational chart of
KeySpan's current subsidiaries is attached as Exhibit E-2 hereto.
KeySpan's principal office is at One MetroTech Center, Brooklyn, New
York. KeySpan's common stock is publicly traded on the New York Stock Exchange
and Pacific Stock Exchange under the symbol "KSE."
For the year ended December 31, 1999, KeySpan reported operating
revenues of $3 billion of which $1.8 billion (or approximately 59%) were derived
from regulated sales of gas and gas transportation, and $861.6 million (or
approximately 29%) were derived from electric operations. For the year ended
December 31, 1999, operating income of $ 482.2 million and net income of $258.6
million. At December 31, 1999, KeySpan had consolidated assets of $6.7 billion,
including net property and equipment of $4.2 billion. At December 31, 1999,
KeySpan had issued and outstanding 133.9 million shares of common stock, par
value $0.01 per share. More detailed information concerning KeySpan and its
subsidiaries will be contained in KeySpan's Annual Report on Form 10-K for the
year ended December 31, 1999, a copy of which KeySpan will file as an amendment
to this Application/Declaration as soon as practicable after it is filed with
the Commission.
ACJ. ACJ is a wholly owned subsidiary of KeySpan. It has been formed
solely to serve as the acquisition vehicle of Eastern. At the time the
Transaction is consummated, ACJ will be merged out of existence with the
surviving entity being Eastern.
__________________
8 Brooklyn Union is an indirect subsidiary of KeySpan. Brooklyn Union is
directly owned by KEC which, as noted above, is a direct, wholly-owned
subsidiary of KeySpan. Like KeySpan, KEC is a utility holding company exempt
from regulation by the Commission under the Act (except for 9(a)(2) thereof)
pursuant to Section 3(a)(1) of the Act and Rule 2 thereunder.
9 In BL Holding, supra, the Commission approved the transactions by which
KeySpan (i) acquired Long Island Lighting Company's ("LILCO") non-nuclear
electric generating facilities, gas distribution operations and common plant;
and (ii) acquired KEC, the parent company of Brooklyn Union. KeySpan Gas East
(which owns the former LILCO gas assets) and KeySpan Generation (owner of the
former LILCO non-nuclear generation assets) are direct, wholly-owned
subsidiaries of KeySpan.
5
<PAGE>
ii. The New York Utilities
The New York Gas Utilities: Brooklyn Union and KeySpan Gas East.
Brooklyn Union and KeySpan Gas East (the "New York Gas Utilities") are both New
York corporations and gas utility companies regulated by the New York Public
Service Commission ("NYPSC") as to rates, corporate, financial, operational,
reliability, safety and other matters, and affiliate transactions.
Brooklyn Union distributes natural gas at retail to approximately 1.1
million residential, commercial and industrial customers in the New York City
Boroughs of Brooklyn, Staten Island and Queens. It has been in the gas business
for over 100 years. Brooklyn Union's properties consist primarily of natural gas
distribution systems and related facilities and local offices. Brooklyn Union
has approximately 3,909 miles of gas mains and 1,600,000 Mcf of liquefied
natural gas ("LNG") storage capacity.
KeySpan Gas East distributes natural gas at retail to approximately
500,000 customers located on Long Island, New York in Nassau and Suffolk
counties and the Rockaway Peninsula in Queens County. Although KeySpan Gas East
has been owned by KeySpan since 1998, through previous owners, it has been in
the gas business for over 90 years. KeySpan Gas East's properties consist
primarily of natural gas distribution systems and related facilities and local
offices. KeySpan Gas East has approximately 6,491 miles of gas mains and 600,000
Mcf of LNG storage capacity.
Together, the facilities of Brooklyn Union and KeySpan Gas East
consist of approximately 10,400 miles of gas mains and more than 960,000 service
connections, all in Brooklyn, Staten Island, Queens and Nassau and Suffolk
counties. In 1999, the New York Gas Utilities had total gas and transportation
sales of 330.4 billion cubic feet ("Bcf") of gas. Most of the gas delivered on
the systems of the New York Gas Utilities is derived from sources outside of the
northeast United States, primarily the producing areas of Texas and Louisiana.
Gas is delivered by interstate pipelines pursuant to long-term contracts at
rates approved by the Federal Energy Regulatory Commission ("FERC"). Brooklyn
Union and KeySpan Gas East each currently have firm transportation agreements
with Tennessee Gas Pipeline Company ("Tennessee"), TransContinental Gas Pipe
Line Company ("Transco"), Texas Eastern Transmission Company ("TETCO") and
Iroquois Gas Transmission System, L.P. ("Iroquois"). Brooklyn Union and KeySpan
Gas East buy gas from gas producers in Texas and Louisiana as well as from
Canadian suppliers.
KeySpan Generation. KeySpan Generation is a New York limited liability
company which owns and operates approximately 4,032 megawatts ("MW") of electric
generation capacity located on Long Island ("KeySpan Generation Facilities").
The KeySpan Generation Facilities consist of approximately 53 oil and gas-fired
generating
6
<PAGE>
facilities located throughout Long Island. All of the capacity from the KeySpan
Generation Facilities is sold at wholesale to LIPA pursuant to a 15 year power
supply agreement entered into in June 1997 and effective as of May 1998 at
contractual, cost-of-service based rates approved by the FERC.10 LIPA provides
electricity to approximately 1 million customers on Long Island. KeySpan
Generation does not own any electric transmission or distribution facilities
other than limited facilities necessary to interconnect its generating
facilities with LIPA's transmission and distribution system. KeySpan Generation
is a public utility under the Federal Power Act subject to the jurisdiction of
the FERC. KeySpan Generation is also a New York utility subject to regulation by
the NYPSC as an "electric corporation" with respect to financial, corporate,
reliability and safety matters and affiliate transactions..
iii. KeySpan's Non-Utility Subsidiaries
KeySpan has sixteen (16) direct, wholly-owned subsidiaries which,
either directly or indirectly through their subsidiaries, engage in non-utility
businesses.11 The businesses of each of these companies and their subsidiaries
are described in greater detail in Exhibit E-5 attached hereto and Item
3.A.4.b.iii of this Application/Declaration.
Together, at December 31, 1999, KeySpan's non-utility subsidiaries and
investments constituted approximately 48% of the consolidated assets of KeySpan
and its subsidiaries, 15% of consolidated income and 25% of consolidated net
revenues.
b. Eastern and its Subsidiaries
i. Eastern
Eastern is a Massachusetts voluntary association. It is a public
utility holding company exempt from registration under the Act pursuant to
Section 3(a)(1) of the Act.12 Eastern conducts all of its business activities
through its operating subsidiaries. Eastern currently owns all of the
outstanding common stock of three gas utility companies
___________________
10 LIPA is a New York state public authority.
11 KeySpan's 16 direct non-utility subsidiaries are as follows: KEC, KeySpan
Operating Services LLC; KeySpan Exploration and Production, LLC; KeySpan
Corporate Services LLC; KeySpan Utility Services LLC; KeySpan Electric Services
LLC; KeySpan Energy Trading Services LLC; Marquez Development Corporation;
Island Energy Services Company, Inc.; LILCO Energy Systems Inc.;
KeySpan-Ravenswood Inc.; KeySpan-Ravenswood Services Corp.; KeySpan Energy
Supply, LLC; KeySpan Services Inc.; Honeoye Storage Corporation and, KeySpan
Technologies Inc. In addition, KeySpan's gas utility subsidiary, Brooklyn Union,
owns all or part interests in three (3) subsidiaries that are engaged in
non-utility businesses.
12 See Eastern Enterprises, Holding Co. Act Release No. 27059 (August 12, 1999).
7
<PAGE>
operating exclusively within Massachusetts: Boston Gas Company ("Boston Gas"),
Colonial Gas Company ("Colonial Gas") and Essex Gas Company ("Essex Gas")
(collectively referred to herein as the "Massachusetts Utilities"). The
Massachusetts Utilities are described in greater detail below. Eastern has four
(4) wholly-owned, material non-utility subsidiaries: Midland Enterprises, Inc.
("Midland"), Transgas Inc. ("Transgas"), AMR Data Corporation ("AMR") and
ServicEdge Partners, Inc. (ServicEdge"). As described in more detail below, the
principal non-utility activities of Eastern's subsidiaries are water barging
activities, including the hauling of fuel and other cargo; transporting by truck
LNG and propane; providing meters and meter reading services to municipal
utilities; and, providing heating, ventilation and air conditioning services. An
organizational chart of Eastern and its current subsidiaries is attached hereto
as Exhibit E-3.
For the year ended December 31, 1998, Eastern reported gross revenues
of $935,264,000, of which $667,106,000 (or approximately 71%) were derived from
regulated sales of gas and gas transportation, operating earnings of
$100,405,000, and earnings before extraordinary items of $50,828,000.13 At
December 31, 1998, Eastern had consolidated assets of $1,518,370,000, including
net property and equipment of $975,749,000. On an unaudited adjusted basis, to
take into account financial results of Colonial Gas, which Eastern acquired in
August 1999, Eastern would have had $1,118,357,000 in gross revenues, including
$835,000,000, or 75% of the total, from regulated gas sales and gas
transportation. At September 30, 1999, Eastern had adjusted combined total
assets of $1,908,495,000, including adjusted net property and equipment of
$1,269,101,000.14 At December 31, 1999, Eastern had issued and outstanding
27,114,198 shares of common stock, par value $1.00 per share. Eastern's shares
are listed for trading on the New York, Boston and Pacific Stock Exchanges;
however, they will be delisted and cease to be publicly traded after
consummation of the Transaction. More detailed information concerning Eastern
and its subsidiaries is contained in the Annual Report on Form 10-K for the year
ended December 31, 1998, a copy of which is incorporated by reference as Exhibit
H-2.15
ii. The Massachusetts Utilities
The Massachusetts Utilities are organized under the laws of the
Commonwealth of Massachusetts. They are Massachusetts public utilities subject
to regulation by the
________________
13 The source for the numbers contained in this paragraph are the
Eastern/EnergyNorth Application.
14 The financial presentation is on an unaudited, adjusted, basis to include the
effect of the acquisition of Colonial Gas, as if the acquisition had occurred
January 1, 1998.
15 As soon as practicable after Eastern files its Annual Report on Form 10-K
with the Commission for the year ended December 31, 1999, KeySpan will file an
amendment to this Application/Incorporating Eastern's Form 10-K by reference as
an exhibit.
8
<PAGE>
Massachusetts Department of Telecommunications and Energy ("MDTE") as to retail
rates, transportation rates, affiliate transactions, securities issuances and
other matters. Together, the Massachusetts Utilities serve approximately 735,000
retail gas customers. Each of the utilities is described below.
Boston Gas. Boston Gas, a regulated utility, distributes natural gas
to approximately 541,000 customers located in Boston and 73 other cities and
towns throughout eastern and central Massachusetts. Boston Gas has been
wholly-owned by Eastern since 1929 and has been in the gas business for 177
years, making it the second oldest gas company in the United States.
Essex Gas. Essex Gas, a regulated utility, distributes natural gas to
approximately 44,000 customers in 17 cities and towns in an area of eastern
Massachusetts that is contiguous to Boston Gas's service territory. Essex Gas
has been in business for 146 years and was acquired by Eastern in September
1998.16
Colonial Gas. Colonial Gas, a regulated utility, distributes natural
gas to approximately 158,000 customers in 24 communities located in northeastern
Massachusetts (contiguous to Boston Gas's service territory) and on Cape Cod.
Colonial Gas has been in business for 150 years. Eastern completed its
acquisition of Colonial Gas on August 31, 1999.
The facilities of the Massachusetts Utilities together consist of
approximately 10,900 miles of mains and 610,000 service connections, all in
Massachusetts, and LNG storage facilities located in Dorchester, Lynn, Salem,
Haverhill, Tewksbury and South Yarmouth, Massachusetts. In 1998, the three
companies delivered a total of 165 billion cubic feet ("Bcf") of gas, including
gas sold on a "bundled" basis to retail customers and gas delivered to
transportation-only customers. Gas is delivered to the Massachusetts Utilities
by interstate pipelines pursuant to long-term contracts at rates approved by the
FERC. The Massachusetts Utilities currently have firm transportation agreements
with Tennessee, TETCO, Algonquin Gas Transmission Company ("Algonquin") and
Iroquois.17 The Massachusetts Utilities purchase gas from producers in Texas,
Louisiana and Canada.
iii. Eastern's Non-Utility Subsidiaries
Eastern's principal non-utility subsidiaries are as follows:
Midland. Midland is primarily engaged, through wholly-owned
subsidiaries, in the operation of a fleet of towboats, tugboats and barges,
principally on the Ohio River and
____________________
16 See Eastern Enterprises, Holding Co. Act Release No. 26923 (September 30,
1998).
17 TETCO and Algonquin are both subsidiaries of Duke Energy Gas Transmission
("Duke Energy").
9
<PAGE>
Mississippi River and their tributaries, the Gulf Intracoastal Waterway and the
Gulf of Mexico. Midland has been operating on the nation's inland waterways
since 1925 and transports dry bulk commodities, a major portion of which is
coal. 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.
Transgas. Transgas (a direct subsidiary of Colonial Gas) is an
unregulated energy trucking company, which provides over-the-road transportation
of LNG, propane and other commodities. Transgas is the nation's largest
over-the-road transporter of LNG.
ServicEdge. ServicEdge offers heating, ventilation and air
conditioning services, primarily to residential customers in eastern
Massachusetts.
AMR. AMR provides customized metering equipment and performs automated
meter reading services to municipal utilities.
Together, at December 31, 1998, Eastern's non-utility subsidiaries and
investments constituted approximately 23 % of the consolidated assets of Eastern
and its subsidiaries, 11% of consolidated operating income and 29% of
consolidated revenues.
c. Energy North and its Subsidiaries
If the ENI Transaction is consummated, EnergyNorth will be a direct,
wholly-owned subsidiary of Eastern. EnergyNorth, a New Hampshire corporation,
owns all of the issued and outstanding common stock of one gas utility company:
EnergyNorth Natural Gas, Inc. ("ENGI"). EnergyNorth's material non-utility
subsidiaries are principally engaged in installing and servicing commercial
heating, ventilation and air conditioning equipment and distributing propane.
ENGI and the non-utility subsidiaries are more fully described below. An
organizational chart of EnergyNorth and its subsidiaries is attached hereto as
Exhibit E-3.
For the fiscal year ended September 30, 1999, EnergyNorth reported
consolidated operating revenues of $119,172,000, of which $76,617,000 (or 64%)
represented regulated gas sales and transportation, operating income of
$9,621,000, and net income of $4,537,000. At September 30, 1999, EnergyNorth had
$168,325,000 in total assets, including net utility plant of $113,730,000. As of
December 17, 1999, EnergyNorth had issued and outstanding 3,322,903 shares of
common stock, par value $1.00 per share. Its shares are listed and traded on the
New York Stock Exchange; however, they will be delisted and cease to be publicly
traded upon the consummation of the ENI Transaction. More detailed information
concerning EnergyNorth and its subsidiaries is contained in the Annual Report on
Form 10-K for the fiscal year ended September 30, 1999, a copy of which is
incorporated by reference as Exhibit H-3.
10
<PAGE>
i. ENGI
ENGI is a New Hampshire corporation and a gas utility company
operating exclusively within New Hampshire. It distributes natural gas to
approximately 73,000 residential, commercial and industrial customers in 28
cities and towns in an area covering approximately 922 square miles and having a
total population of approximately 482,000. ENGI's service area is located in
southern and central New Hampshire, with the exception of the City of Berlin,
which is located in northern New Hampshire. ENGI owns approximately 1,113 miles
of distribution mains and 700 miles of service connections. ENGI's service area
in New Hampshire is contiguous to Colonial Gas's service area in Massachusetts
and is within 30 to 85 miles of the greater Boston area. As a public utility
under the laws of the State of New Hampshire, ENGI is subject to the regulatory
supervision of the NHPUC as to gas sales, transportation rates, securities
issuances and other matters.
Like the Massachusetts Utilities, ENGI purchases most of its gas from
sources outside New England (chiefly the producing areas of Texas and
Louisiana). All of the pipeline gas delivered to ENGI's principal system in
southern and central New Hampshire is transported on the Tennessee pipeline
system. ENGI also purchases gas from Canadian sources, which is delivered by
Iroquois to Tennessee for ultimate delivery to ENGI and by Portland Natural Gas
Transmission System.
ii. EnergyNorth's Non-Utility Subsidiaries
EnergyNorth's principal non-utility subsidiaries are as follows:
EnergyNorth Propane, Inc. ("ENPI"). ENPI sells propane to
approximately 15,800 customers in more than 150 communities located primarily
within a 50-mile radius of Concord, New Hampshire. Propane distribution does not
require a regulatory franchise in New Hampshire. ENPI operates from separate
headquarters and plant facilities that it owns in Concord, New Hampshire and has
distribution centers in Bedford and Gilford, New Hampshire. Propane is
transported in bulk supply by trucks to and from ENPI's distribution centers.
ENPI owns a 49% interest in VGS Propane, LLC (VGSP), a joint venture with
Northern New England Gas Corporation, which owns the other 51%. VGSP is a
Vermont limited liability company which provides propane service to
approximately 10,000 customers in the state of Vermont. In August 1999, ENGI
exercised an option to offer to sell its interest in VGSP to Northern New
England Gas Corporation. This transaction is expected to close in early 2000.
ENI Mechanicals, Inc. ("ENM"). ENM owns all of the outstanding stock
of Northern Peabody, Inc.("NPI") and Granite State Plumbing and Heating, Inc.
("GSPH"). NPI and GSPH are mechanical contractors engaged in the design,
construction and service of plumbing, heating, ventilation, air conditioning and
process
11
<PAGE>
piping systems. They serve commercial, industrial and institutional customers in
northern and central New England. NPI and GSPH operate from separate
headquarters and facilities located in Manchester, New Hampshire and Goffstown,
New Hampshire, respectively.
Together, at December 31,1999, EnergyNorth's non-utility subsidiaries
and investments constituted approximately 12.7% of the consolidated assets of
EnergyNorth and its subsidiaries, and 36.5% of consolidated revenues.
C. Description of the Transaction
1. Background and Negotiations Leading to the Proposed Transaction
During the past several years, Eastern's board of trustees has
regularly reviewed and evaluated Eastern's long-term objectives and strategy,
particularly in light of the energy industry's trend toward deregulation and
consolidation. In July 1999, Eastern's board and management decided to explore
alternatives to enhance shareholder value including a strategic combination with
another company.
Since its creation in 1998, KeySpan has considered a variety of
acquisitions and strategic alternatives to enable it to compete more effectively
in the deregulated energy industry. The acquisition of regional gas and/or
electric companies were among the strategic alternatives considered by KeySpan's
management consistent with KeySpan's strategic plans and possible acquisition
candidates were reviewed by KeySpan's board of directors. The board encouraged
management's investigation of strategic options including a possible acquisition
of Eastern.
In September of 1999, Eastern's financial advisor, Salomon Smith
Barney, identified a number of potential strategic partners, including KeySpan,
and contacted them to determine their initial interests in engaging in a
strategic transaction with Eastern. On October 13, 1999, Salomon Smith Barney
reported to Eastern's board that a number of companies, including KeySpan, had
submitted non-binding indicative bids. During the month of October, KeySpan and
other companies conducted due diligence reviews of Eastern's business. On
November 1, 1999, Salomon Smith Barney reported to the Eastern board that two
companies, one of which was KeySpan, had provided binding offers to acquire
Eastern at prices significantly higher than those previously offered. The board
instructed management to begin negotiations with KeySpan and the other bidder on
a merger agreement.
Eastern then entered into intensive negotiations with KeySpan and the
other bidder. On November 3, 1999, Salomon Smith Barney reported to the Eastern
board that KeySpan and Eastern had reached agreement on all outstanding price
and non-price terms, and that although the price offered by the other bidder was
comparable to KeySpan's
12
<PAGE>
proposal, discussions with the other bidder had not resulted in acceptable
resolution of other important terms. Salomon Smith Barney also told the board
that since November 1, 1999, another company had submitted a binding offer but
at a price below that offered by KeySpan and the other bidder. On November 4,
1999, KeySpan and Eastern signed the Merger Agreement. A more fulsome
description of the events leading up to the execution of the Merger Agreement
and the Transaction is contained in Eastern's Proxy which is incorporated by
reference as Exhibit C hereto.
The merger of KeySpan and Eastern (including EnergyNorth) will result
in an integrated natural gas utility serving approximately 2.4 million retail
gas customers located in three (3) contiguous states. In addition, KeySpan will
continue to serve one wholesale electric customer in New York. The companies
believe that by combining resources they will be well positioned to succeed in
an increasingly competitive energy marketplace, particularly in the northeastern
United States. The companies expect that the Transaction will result in greater
shareholder value than either company could achieve on its own. KeySpan and
Eastern believe that the increased size and scope of the combined operation will
improve their opportunities for expansion and ability to offer a broad line of
energy products. Further, the companies are geographically compatible because
they are located in contiguous states. Moreover, the characteristics of their
respective service territories are similar, consisting of both mature, densely
populated urban centers and suburbs. These facts provide them with an excellent
ability to share resources and achieve synergies in the increasingly competitive
northeast sector of the country. For example, much of the service territories of
the New York Gas Utilities and the Massachusetts Utilities have low saturations
of gas heating for residential and small commercial customers. The combined
companies, based on increased size and scope, could utilize common resources to
promote increased use of natural gas through oil-to-gas conversions and more
effectively compete as suppliers in such developing markets where no gas service
currently exists.
2. Merger Agreement
The Merger Agreement provides for Eastern to be merged with and into
ACJ with Eastern being the surviving entity. Eastern will then become a
wholly-owned direct subsidiary of KeySpan and KeySpan will register as a holding
company under Section 5 of the Act. KeySpan will acquire all of Eastern's common
stock in an all cash transaction. Shares held by Eastern, KeySpan, or any of
KeySpan's wholly-owned subsidiaries will be cancelled in the Transaction. The
closing of the Transaction will occur on the second business day immediately
following the satisfaction or waiver of the conditions to the Transaction unless
Eastern and KeySpan mutually agree to another time.
Treatment of Eastern Shareholders: As a result of the Transaction,
Eastern shareholders will receive $64.00 in cash, without interest, for each
share of Eastern common stock, unless the shareholder is entitled to and has
perfected its dissenters' appraisal rights. Eastern shareholders will receive an
additional $0.006 per share ("Additional Amount") for each day the Transaction
has not closed after the later of (a)
13
<PAGE>
August 4, 2000 or (b) ninety days after the New Hampshire Public Utilities
Commission ("NHPUC") gives final regulatory approval to the ENI Transaction,
though the aggregate Additional Amount will be reduced by the aggregate amount
of any per share increase in any dividend actually paid that is attributable to
any period in which the Additional Amount accrues.
Closing Conditions: The Transaction is subject to customary closing
conditions, including receipt of all required regulatory approvals, such as
approval by the Commission under the Act.
Tax Consequences: The receipt of the consideration by Eastern
shareholders for each share of Eastern common stock will be a taxable
transaction for federal income tax purposes. Each holder's gain or loss per
share of Eastern common stock will be equal to the difference between the
holder's tax basis in that particular share of the Eastern common stock and the
amount of cash received therefor. Such gain or loss generally will be a capital
gain or loss assuming the Eastern common stock is held as a capital asset at the
time of the Transaction.
Accounting Treatment: The Transaction will be accounted for as a
purchase for accounting and financial reporting purposes.
D. Management and Operations of KeySpan Following the Transaction
Following consummation of the Transaction, KeySpan will be the direct
parent company of Eastern. KeySpan's board of directors will be composed of 15
members. Robert Catell will remain as the Chief Executive Officer and Chairman
of the Board of Directors of KeySpan. J. Atwood Ives, the current Chief
Executive Officer of Eastern, will be elected to KeySpan's board of directors.
The main corporate headquarters and principal executive offices of the combined
company will remain in Brooklyn, New York; however, Eastern will maintain
offices in the Boston area and EnergyNorth will maintain offices in New
Hampshire.
Item 2. Fees, Commissions and Expenses
The estimated fees, commissions and expenses in connection with the
proposed Transaction are set forth in Exhibit I hereto.
14
<PAGE>
Item 3. Applicable Statutory Provisions
The following sections of the Act and the Commissions rules thereunder
are or may be applicable to the proposed Transaction:
Section of the Act Transactions to which Section is or may be applicable
------------------ -----------------------------------------------------
3(a)(1) Confirmation that Eastern, EnergyNorth and KEC will
continue to be exempt holding companies under the Act
5 Registration of KeySpan as a holding company following
the consummation of the Transaction
8, 9(a)(2), 10 Acquisition by KeySpan of common stock of Eastern
11(b) Retention by KeySpan of (i) its electric utility
operations (i.e., KeySpan Generation) and (ii) the
non-utility businesses of KeySpan, Eastern and
EnergyNorth
To the extent that other sections of the Act and the Commission's
rules thereunder are or may be applicable to the Transaction, such sections and
rules should be considered to be set forth in this Item 3.
A. Approval of the Transaction.
Section 9(a)(2) provides in pertinent part that:
Unless the acquisition has been approved by the Commission under
section 10, it shall be unlawful . . . for any person. . . to
acquire, directly or indirectly, any security of any public
utility company, if such person is an affiliate, under clause (A)
of paragraph 11 of subsection (a) of section 2, of such company
and of any other public utility or holding company, or will by
virtue of such acquisition become such an affiliate.
For purposes of section 9(a)(2), an "affiliate" of a specified company is any
person that directly or indirectly owns, controls, or holds with power to vote
5% or more of the outstanding voting securities of such specified company.
KeySpan already owns, directly or
15
<PAGE>
indirectly, 100% of the common stock of the New York Utilities, which are public
utility companies within the meaning of Section 2(a)(5) of the Act. Accordingly,
the Transaction requires approval pursuant to Section 9(a)(2) because it
contemplates that KeySpan will indirectly acquire 100% of the common stock of
the Massachusetts Utilities and ENGI, each of which are public utility companies
as defined in the Act.
Section 10 of the Act sets forth the statutory standards that the
Commission must consider in evaluating an acquisition which requires Section
9(a)(2) approval. As demonstrated below, the Transaction complies with all of
the applicable provisions of Section 10 of the Act and should be approved by the
Commission. Accordingly,
o the Transaction will not tend towards interlocking relations or
the concentration of control of public utility companies of a
kind or to an extent detrimental to the public interest or the
interest of investors or consumers (Section 10(b)(1) of the
Act);
o the consideration to be paid in the Transaction is fair and
reasonable (Section 10(b)(2) of the Act);
o the Transaction will not result in an unduly complicated capital
structure for the KeySpan-Eastern combined system and will not
be detrimental to the public interest or the interest of
investors or consumers (Section 10(b)(3) of the Act);
o the Transaction is not unlawful under Section 8 and is not
detrimental to the carrying out of Section 11 of the Act
(Section 10(c)(1) of the Act); o the Transaction tends towards
the economical and efficient development of an integrated public
utility system (Section 10(c)(2) of the Act); and
o the Transaction will be consummated in compliance with all
applicable state laws (Section 10(f) of the Act).
1. Section 10(b)(1)
a. Interlocking Relationships
By its nature, any merger results in new links between theretofore
unrelated companies. However, these links are not the types of interlocking
relationships targeted by
16
<PAGE>
Section 10(b)(1), which was primarily aimed at preventing business combinations
unrelated to operating synergies.18
The Merger Agreement provides for the board of directors of KeySpan to
be composed of members from the boards of both KeySpan and Eastern. This is
necessary to integrate Eastern fully into the KeySpan system and will therefore
be in the public interest and the interests of investors and consumers. Forging
such relations is beneficial to the protected interests under the Act and thus
is not prohibited by Section 10(b)(1) and is consistent with the composition of
other boards for holding companies registered under the Act.
b. Concentration of Control
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system.19 In applying Section
10(b)(1) to utility acquisitions, the Commission must determine whether the
acquisition will create "the type of structures and combinations at which the
Act was specifically directed."20 As discussed below, the Transaction will not
create a "huge, complex and irrational system," but rather will afford the
opportunity to achieve economies of scale and efficiencies that are expected to
benefit investors and consumers.21
Size: If approved, the KeySpan system will provide gas distribution
service to approximately 2.4 million residential, commercial and industrial
customers located in New York, New Hampshire and Massachusetts as well as
wholesale electric service to one customer, LIPA, in Nassau and Suffolk counties
and the Rockaway Peninsula of Queens County, New York. The combined assets and
revenues of KeySpan and Eastern (including EnergyNorth) will be less than, those
of Dominion Resources, Inc. ("Dominion"), a combination registered holding
company recently approved by the Commission.22 Dominion's acquisition of
Consolidated Natural Gas Company resulted in a combined gas and electric utility
holding company system serving nearly 4 million retail customers in five
___________________
18 Northeast Utilities, 50 SEC 427,443(1990), as modified, 50 SEC 511 (1991),
aff'd sub nom., City of Holyoke Gas & Electric Dept. v. SEC, 972 F.2d 358 (D.C.
Cir. 1992) ("interlocking relationships are necessary to integrate [the two
merging entities]").
19 American Electric Power Co., 46 SEC 1299, 1309 (1978).
20 Vermont Yankee Nuclear Corp., 43 SEC 693, 700 (1968).
21 American Electric Power Co., 46 SEC at 1307 (1978).
22 KeySpan will file with the Commission, as an amendment to this
Application/Declaration, the financial data on KeySpan and Eastern's combined
assets and utility revenues.
17
<PAGE>
(5) states, including approximately 2 million gas retail customers, and total
consolidated assets of $29.059 billion and revenues of $8.8 billion.23
Efficiencies and Economies: As noted above, the Commission has
rejected a mechanical size analysis under Section 10(b)(1) in favor of assessing
the size of the resulting system with reference to the efficiencies and
economies that can be achieved through the integration and coordination of
utility operations.24 The Commission has concluded that size is not
determinative. In Centerior Energy Corp.,25 the Commission stated flatly that a
"determination of whether to prohibit enlargement of a system by acquisition is
to be made on the basis of all the circumstances, not on the basis of size
alone." In addition, the SEC Division of Investment Management ("Division")
recommended in its 1995 report on the Regulation of Public Utility Holding
Companies (the "1995 Report") that the Commission approach its analysis on
merger and acquisition transactions in a flexible manner with emphasis on
whether the proposed transaction would create an entity subject to effective
regulation and would be beneficial to shareholders and customers as opposed to
focusing on rigid, mechanical tests.26
By virtue of the Transaction, the combined companies will be in a
position to realize the substantial opportunities to become an effective
competitor in a rapidly deregulating and increasingly competitive energy market
that neither KeySpan nor Eastern, acting alone, would be in a position to
achieve. Among other things, the Transaction is expected to yield significant
capital expenditure and operating cost savings through consolidation of
facilities and corporate and administrative functions, non-gas purchasing
economies and the coordinated management of gas supply. The combination of
KeySpan and Eastern offers the same type of synergies and efficiencies sought by
the applicants (both exempt and registered companies) in NIPSCO Industries,
Inc.,27 TUC Holding Company,28 WPL Holdings, Inc.,29 and New Century Energies,
Inc.30 These expected economies and efficiencies from the combined operations of
KeySpan and Eastern are projected to result in annual net savings of $24 to $29
million, phased in over a two year period. Additional synergies from the
combination of the utility operations of both companies are described in greater
detail in Item 3.A.5.ii below.
_______________________
23 Dominion Resources, Holding Co. Act Release No. 27113 (December 15, 1999).
24 American Electric Power, supra,. at 1309.
25 Centerior Energy Corp., 49 SEC 472 at 475 (April 29, 1986).
26 1995 Report at 73-4.
27 Holding Co. Act Release No. 26975 (February 10, 1999).
28 Holding Co. Act Release No. 26749 (August 1, 1997).
29 Holding Co. Act Release No. 26856 (April 14, 1998).
30 Holding Co. Act Release No. 26748 (August 1, 1997).
18
<PAGE>
After the Transaction is consummated, the retail gas utility company
operations of KeySpan, Eastern and EnergyNorth will continue to be fully subject
to the jurisdiction of the state regulators in the states in which such
operations are conducted (i.e., New York, Massachusetts and New Hampshire,
respectively). KeySpan's electric utility company, KeySpan Generation, will also
remain subject to the same NYPSC and FERC regulation that applied prior to the
merger. Therefore, completion of the Transaction will not affect current state
regulation of the combined companies' utility operations.
Competitive Effects: As the Commission stated in Northeast
Utilities,31 the "antitrust ramifications of an acquisition must be considered
in light of the fact that the public utilities are regulated monopolies and that
federal and state administrative agencies regulate the rates charged consumers."
KeySpan and Eastern will file Notification and Report Forms with the DOJ and FTC
pursuant to the HSR Act describing the effects of the Transaction on competition
in the relevant market. It is a condition to the consummation of the Transaction
that the applicable waiting periods under the HSR Act shall have expired or been
terminated. In the past, the Commission has largely relied on, or "watchfully
deferred" to,32 the determination of other regulators with respect to
anti-competitive considerations and has declined to reconsider issues of size
and market power that have been considered by other federal antitrust
regulators.33
In sum, for the reasons set forth above, the Transaction will not
"tend toward interlocking relations or the concentration of control" of public
utility companies, of a kind or to the extent detrimental to the public interest
or the interests of investors or consumers within the meaning of Section 10
(b)(1), and the Commission may justifiably rely on the DOJ/FTC's review of the
Transaction with respect to anti-competitive issues.
2. Section 10 (b) (2)
Section 10(b)(2) requires the Commission to determine whether the
consideration to be paid by KeySpan to the holders of Eastern's common stock in
connection with the Transaction, including all fees commissions and other
remuneration, is reasonable and whether it bears a fair relation to the
investment in and earning capacity of the utility assets underlying the
securities being acquired. The Commission has recognized that when the
consideration to be paid in a proposed transaction is the result of arm's-
___________________
31 Northeast Utilities, 50 SEC 427 (Dec. 21, 1990).
32 See City of Holyoke Gas &Electric Dept., supra.
33 WPL Holdings, Inc., et al., Holding Co. Act Release No. 26856 (April 14,
1998), aff'd sub nom., Madison Gas and Electric Company v. SEC (D.C. Cir. 1999);
New Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997).
19
<PAGE>
length negotiations, and supported by opinions of financial advisors, there is
persuasive evidence that Section 10(b)(2) is satisfied.34
For the reasons set forth below, the Transaction satisfies the
requirements of Section 10(b)(2).
a. Fairness of Consideration
The consideration for the Transaction is the result of a competitive
process and substantial arm's-length negotiations between KeySpan and Eastern.
The negotiations were preceded by KeySpan's extensive due diligence, analysis
and evaluation of the assets, liabilities and business prospects of the combined
companies. See "Background of the Merger" of Eastern's Proxy Statement in
Exhibit C hereto.
In addition, nationally recognized investment bankers for each of
KeySpan and Eastern reviewed extensive information concerning the companies and
analyzed the Transaction consideration employing several valuation
methodologies. KeySpan's financial advisor was JP Morgan Securities, Inc. ("JP
Morgan") and it has provided a "fairness" opinion to KeySpan's Board of
Directors with respect to the consideration to be paid in the Transaction.
Salomon Smith Barney has also rendered an opinion to Eastern that the
Transaction consideration is fair from a financial point of view to Eastern's
common stockholders. JP Morgan's opinion is attached hereto as Exhibit G-1 and
Salomon Smith Barney's opinion is incorporated by reference as Exhibit G-2.
b. Reasonableness of Fees
KeySpan believes that the overall fees, commissions and expenses
incurred and to be incurred in connection with the Transaction are (i)
reasonable and fair in light of the size and complexity of the Transaction
relative to other similar transactions and the anticipated benefits of the
Transaction to the public, investors and consumers, (ii) consistent with recent
precedent and (iii) meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application/Declaration, KeySpan and
Eastern together expect to incur a combined total of approximately $ 8 million
in fees, commission and expenses in connection with the Transaction. KeySpan
believes that the estimated fees and expenses in this matter bear a fair
relation to the value of the combined company and the strategic benefits to be
achieved by the Transaction and that the fees and expenses are fair and
reasonable in light of the size and complexity of the Transaction.35 Based on a
_____________________
34 See Entergy Corp., et al., 51 SEC 869 (December 17, 1993); The Southern Co.,
et al. Holding Co. Act Release No. 24579 (February 12, 1988); Ohio Power Co., 44
S.E.C. 340, 346 (1970).
35 See Northeast Utilities, Holding Co. Act Release No. 25548 (June 3, 1992),
modified on other grounds, Holding Co. Act Release No. 25550 (June 4, 1992).
20
<PAGE>
price for Eastern's common stock at $64.00 per share, the Transaction price is
valued at approximately $1.7 billion. The total estimated fees and expenses of
$8 million represent less than 1% of the value of the consideration to be paid
to the Eastern shareholders. This percentage is consistent with percentages
previously approved by the Commission.36
3. Section 10 (b) (3)
Section 10 (b) (3) requires the Commission to determine whether the
Transaction will unduly complicate KeySpan's capital structure or will be
detrimental to the public interest, the interest of investors or consumers or
the proper functioning of KeySpan's system.
a. Capital Structure
The Commission has found that an acquisition satisfies the Section
10(b)(3) analysis where the effect of a proposed acquisition on the acquirer's
capital structure is negligible and the equity position is at or above the
traditionally acceptable 30% level prescribed by the Commission.37 Under these
standards, KeySpan's proposed acquisition of Eastern will not unduly complicate
the capital structure of the combined system. Set forth below are summaries of
the historical capital structures of KeySpan, Eastern and EnergyNorth as of
December 31, 1999.
_____________________
36 See, e.g., Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993)
(fees and expenses represented approximately 1.7% of the consideration paid to
the shareholders of Gulf State Utilities); Northeast Utilities, Holding Co. Act
Release No. 325548 (June 3, 1992) (fees and expenses represented approximately
2% of the assets to be required).
37 See, e.g., Entergy Corp., 55 S.E.C. 2035 (Dec. 17, 1993); Northeast
Utilities, 47 S.E.C. 1279 (1990).
21
<PAGE>
KeySpan, Eastern and EnergyNorth
Pre-Transaction Historical December 31, 1998 Consolidated Capital Structures
(Dollars in thousands)
KeySpan Eastern EnergyNorth
Common Shareholders Equity $ 2,715,025 $ 754,630 $ 52,631
Preferred Stock not subject
to mandatory redemption
84,339 ------- -------
Preferred Stock subject to
mandatory redemption
363,000 ------- -------
Debt 1,682,702 515,232 46,481
Total $ 4,845,066 $ 1,269,862 $ 98,264
KeySpan's consolidated equity to total capitalization ratio after the
consummation of the Transaction will exceed the traditionally accepted 30%
level.
b. Protected Interests
As set forth more fully in the discussion of the standards of Section
10(c)(2) in Item 3.A.5. below, the Transaction will create opportunities for
KeySpan and Eastern to achieve substantial cost savings and synergies, and will
integrate and improve the efficiency of the KeySpan and Eastern utility systems.
The Transaction will therefore be in the public interest and the interest of
investors and consumers, and will not be detrimental to the proper functioning
of the resulting holding company system.
4. Section 10 (c) (1)
Section 10 (c)(1) of the Act prohibits the Commission from approving
an acquisition under Section 9(a) of the Act if such acquisition is unlawful
under Section 8 of the Act or is detrimental to the carrying out of Section 11
of the Act. As demonstrated below, the Transaction is not unlawful under Section
8 nor will it be detrimental to the enforcement of the provisions under Section
11 of the Act.
22
<PAGE>
a. Section 8 Analysis
Section 8 prohibits registered holding companies from acquiring,
owning interests in, or operating both a gas and an electric utility serving
substantially the same area if prohibited under state law. The Transaction
involves KeySpan's indirect acquisition of the Massachusetts Utilities and ENGI
which are exclusively gas utility companies. Accordingly, the Transaction does
not raise any issue under Section 8 since it does not involve an acquisition in
which the newly acquired gas companies will be serving the same areas of any
affiliated electric utility company.38
b. Section 11 Analysis
Section 10(c)(1) of the Act requires that an acquisition not be
detrimental to carrying out the provisions of Section 11. For the reasons set
forth below, the Transaction meets the requirements of Section 10(c)(1).
i. Capital and Corporate Structure
Section 11(a) of the Act requires the Commission to examine the
corporate structure of registered holding companies to ensure that unnecessary
complexities are eliminated and voting power is fairly and equitably
distributed. As described above in Item 3.A.3.a of this Application/Declaration,
the Transaction will not result in unnecessary complexities or unfair
distribution of voting powers.
Section 11(b)(2) directs the Commission to
ensure that the corporate structure or continued
existence of any company in the holding company
system does not unduly or unnecessarily complicate
the structure, or unfairly or inequitably
distribute voting power among security holders, of
such holding company system. In carrying out the
provisions of this paragraph the Commission shall
require each registered holding company (and any
company in the same holding company system with
such holding company) to take such action as the
Commission may find necessary in order that such
holding company shall
_________________
38 KeySpan currently owns two gas utility companies (Brooklyn Union and KeySpan
Gas East) and one electric utility company (KeySpan Generation) which are all
located in New York. In 1998, KeySpan's acquisition of the companies was
approved by the Commission, in BL Holdings, supra, and the NYPSC. The service
territories of the Massachusetts Utilities and ENGI will not overlap with the
areas served by KeySpan Generation.
23
<PAGE>
cease to be a holding company with respect to each
of its subsidiary companies which itself has a
subsidiary company which is a holding company.
After the Transaction is consummated, there will be two tiers of
holding companies between ENGI and KeySpan (i.e., ENGI's parent, EnergyNorth,
will be a subsidiary of Eastern, a holding company, which will be a direct
subsidiary of KeySpan). This structure raises two issues under Section 11(b)(2):
whether EnergyNorth's existence will complicate the structure of KeySpan's
holding company system after the Transaction is consummated; and, whether the
Transaction will result in an unfair or inequitable distribution of voting power
among the security holders of the holding company system. As discussed below,
EnergyNorth's existence does not raise the complexities Section 11(b)(2) seeks
to address. Moreover, as soon as reasonably practicable after the consummation
of the Transaction, KeySpan intends to eliminate EnergyNorth as an intermediary
holding company so that ENGI will become a direct utility subsidary company of
Eastern.
EnergyNorth's continued existence is necessary to ensure a smooth
transition toward the coordination of ENGI's operations with those of the
Massachusetts Utilities and the New York Gas Utilities. Because KeySpan will
indirectly own all of the outstanding common stock of Eastern and EnergyNorth,
the continued existence of EnergyNorth during a transitional period raises no
concern over any undue complexities in the holding company structure or a risk
of unfair or inequitable distribution of voting power within the holding company
system.39 Therefore, KeySpan requests that the Commission permit the continued
existence of EnergyNorth following the consummation of the Transaction.40
ii. Integrated Public Utility Holding Company System
Section 11(b)(1) generally requires a registered holding company
system to limit its operations "to a single integrated public utility system,
and to such other businesses as are reasonably incidental, or economically
necessary or appropriate to the operation of such integrated public utility
system." Ordinarily, the single system can provide either electric or
__________________
39 KeySpan will issue debt to acquire Eastern and, like acquisitions recently
approved by the Commission which resulted in newly registered holding companies,
such debt is consistent with that permitted under Section 7(c)(2)(A) of the Act
for such acquisitions. SCANA Corporation, Holding Company Act. Release No. 27133
(February 9, 2000); Dominion Resources, Holding Co. Act Release No. 27113
(December. 15, 1999).
40 The Commission has the ability to exercise its reasonable discretion to
permit a "great grandparent" holding company structure when the specifics of the
transaction do not raise the concerns Section 11(b)(2) was intended to address.
See, e.g., West Penn Railways Co., Holding Co. Act Release No. 953 (January 3,
1938) (expressly authorizing the continued existence of an intermediate holding
company); West Texas Utilities Co., Holding Co. Act Release No. 4068 (January
25, 1943) (reserving jurisdiction under Section 11(b)(2) in connection with a
transaction which would result in the a "great grandparent" holding company).
24
<PAGE>
gas service, however, Section 11(b)(1) (A-C) of the Act (the "ABC Clauses")
provides an exception to the "single system" requirement and permits a
registered holding company to own one or more additional integrated public
utility systems (e.g., both gas and electric) if the criteria of the ABC Clauses
are met.
As described more fully in Item 3.A.5.i below, the principal utility
system of the combined companies, comprised of the gas operations conducted by
Brooklyn Union and KeySpan Gas East and Eastern's gas operations (i.e., the
Massachusetts Utilities and ENGI), satisfy the requirements for a single
integrated gas utility system. Moreover, as set forth below, retention is
permissible of (a) KeySpan Generation because it qualifies as an additional
electric system under the ABC Clauses, and (b) the non-utility businesses of
KeySpan, Eastern and EnergyNorth because they satisfy standards for retention
under Section 11(b)(1) of the Act.
(1) Retention of Electric Operations:
The ABC Clauses under Section 11 (b)(1) permit the retention of
additional integrated public-utility systems if the Commission finds the
following:
(a) each of the additional systems cannot be operated as an
independent system without the loss of substantial economies
which can be secured by the retention of control by such
holding company of such system;
(b) all of the additional systems are located in one state,
in adjoining states or in a contiguous foreign country; and
(c) the continued combination of such systems is not so
large (considering the state of the art and the area or
region affected) as to impair the advantages of localized
management, efficient operation or the effectiveness of
operation.
Historically, the Commission considered the question of whether a
registered holding company could retain a separate system by applying a strict
standard that required a showing of a loss of substantial economies before
retention would be permitted.41 Under the Commission's previous narrow
interpretation of Section 11(b)(1)(A), when considering whether to permit
primarily electric utility holding companies to keep their gas assets, the
Commission, as a guide to determining whether lost economies are substantial,
gave consideration to four ratios which measure the projected loss of economies
as a percentage
_____________________
41 See New England Electric System, 41 S.E.C. 888 (1964).
25
<PAGE>
of: (1) total gas operating revenues; (2) total gas expense or "operating gas
revenue deductions"; (3) gross gas income; and (4) net gas income or net gas
utility operating income. Although the Commission has declined to draw a
bright-line numerical test under Section 11(b)(1)(A), it has indicated that cost
increases resulting in a 6.78% loss of operating revenues, a 9.72% increase in
operating revenue deductions, a 25.44% loss of gross income and a 42.46% loss of
net income would afford an "impressive basis for finding a loss of substantial
economies."42
However, in its 1995 Report, the Division recommended that the
Commission "liberalize its interpretation of the `A-B-C' clauses."43
Accordingly, the Commission has explicitly rejected a rigid interpretation of
the requirements of the ABC Clauses in a number of recent decisions in which it
has approved newly formed combined utility registered holding company systems.44
In these cases, the Commission has found that, due to the convergence of the
energy and gas industries, retention of an additional system is desirable where
separation of the gas business from the electric business could cause the
divested entities to be weaker competitors.45 Thus, even a small loss of
economies could be harmful to each entity's competitive position if they were
required to separate.46
The Commission's review of the Transaction and its retention of
KeySpan Generation under the ABC Clauses should be evaluated based on its more
recent precedent and policy advocating a more flexible approach to combined
electric and gas systems. If KeySpan Generation were divested, KeySpan would
lose (i) its ability to economically meet its current power supply obligations
to LIPA; and (ii) the potential competitive benefits of a combined electric and
gas company in the emerging converged energy market because the loss of its
electric assets would hamper its future ability to provide customers with a full
range of energy options.
Nevertheless, even under the Commission's more stringent historical
analysis, KeySpan Generation would experience significant lost economies if
operated on a stand
______________________
42 See Engineers Public Service Co., 12 SEC 41, 59 (1942). Recently, in Ameren,
Conectiv, New Century and WPL Holdings, the Commission permitted the applicants
to retain their additional gas systems because the ratios set forth in their
severance studies exceeded the Commission guidelines.
43 1995 Report at 74.
44 See, e.g., SCANA, supra; New Century Energies, Inc., Holding Co. Act Release
No. 26748, 1997 SEC LEXIS 1583 (1997); Conectiv, Inc., Holding Co. Act Release
No. 26832 (February 25, 1998), 1998 SEC LEXIS 326 (1998); WPL Holdings, Inc.,
Holding Co. Act Release No. 26856 (April 14, 1998), 1998 SEC LEXIS 676 (1998);
Conectiv, supra; Dominion Resources, Holding Co. Act Release No. 27113 (Dec. 15,
1999).
45 See New Century, supra, 1997 SEC LEXIS 1583, *50.
46 WPL Holdings, supra, 1998 SEC LEXIS 676, *61.
26
<PAGE>
alone basis without any increase in benefits to consumers.47 Attached to this
Application/Declaration as Exhibit J is an "Analysis of the Economic Impact of
Divestiture of the Electric Operations of KeySpan Generation LLC" hereafter
referred to as the Retention Study. As demonstrated in the Retention Study, if
KeySpan Generation were divested and forced to operate on a stand alone basis,
it would result total lost economies of $17.4 million, increased operation and
maintenance expenses of 16.4%, a 60.8% loss of gross income (pre-tax net
income), and a 48.3% loss of net electric income. Here, the lost economies that
would be experienced if the electric facilities were to be operated on a stand
alone basis exceed the Commission's guidelines even under a narrow
interpretation of the Section 11(b)(1)(A).
Clause (B) of Section 11(b)(1) is met because the electric operations
of KeySpan Generation are located in one state (New York). KeySpan Generation
will be in the same state as the New York Gas Utilities which are part of
KeySpan's proposed principal integrated gas system.
With respect to clause (C) of Section 11(b)(1), KeySpan Generation's
continued electric operations under KeySpan are not so large (considering the
state of art and the area or region affected) as to impair the advantages of
localized management, efficient operation or the effectiveness of regulation.
KeySpan Generation's electric system is confined to a relatively small area
(i.e., Long Island). Moreover, management currently is, and will remain after
the Transaction, in the New York city metropolitan area, thereby preserving the
advantages of localized management. The Transaction will have no impact on
effective regulation because KeySpan Generation will remain subject to the
jurisdiction of the FERC and the NYPSC. Finally, as discussed above, the
electric operations enjoy substantial economies as part of the KeySpan system
and should realize additional economies after the Transaction.
iii. Retention of Non-Utility Businesses
Section 11(b)(1) permits a registered holding company to retain
non-utility businesses which are reasonably incidental or economically
necessary, or appropriate and not detrimental to the proper functioning of the
holding company systems. Although the Commission has traditionally interpreted
this provision to require an operating or
______________________
47 By way of background, KeySpan Gas East and KeySpan Generation have a long
historical relationship because their gas and electric assets were originally
owned and operated by LILCO on an integrated basis. When KeySpan acquired the
assets in 1998, they were transferred into the separate companies. Ten out of
eleven of KeySpan Generation's steam generating plants are capable of burning
gas to generate electricity. In BL Holdings, supra, the Commission approved
KeySpan's acquisition of KeySpan Gas East and KeySpan Generation and found de
facto integration of the separate gas and electric systems based on factors such
as their shared physical interconnections and common gas sources and
administrative coordination.
27
<PAGE>
functional relationship48 between the non-utility activity and the system's core
non-utility business, in its release promulgating Rule 58,49 the Commission
stated that it "has sought to respond to developments in the industry by
expanding its concept of a functional relationship." The Commission concluded in
the Rule 58 Release "that various considerations, including developments in the
industry, the Commission's familiarity with the particular non-utility
activities at issue, the absence of significant risks inherent in the particular
venture, the specific protections provided for consumers and the absence of
objections by the relevant state regulators, made it unnecessary to adhere
rigidly to the types of administrative measures" used in the past. Furthermore,
in the 1995 Report, the Commission's staff recommended that the Commission
replace the use of bright-line limitations with a more flexible standard that
would take into account the risks inherent in the particular venture and the
specific protections provided for consumers.50
Registered holding companies and their subsidiaries are permitted to
invest in energy related companies, as defined under the Commission's Rule
58(b)(1), without prior Commission approval under the Act if the aggregate
investment in all such energy related companies does not exceed the greater of
$50 million or 15% of the consolidated capitalization of the registered holding
company. However, the Commission has disregarded existing investments in these
types of activities, for purposes of calculating the dollar limitation upon
investments in energy related companies, which were made by a holding company
prior to its registration under the Act.51
Rule 58(b)(2) permits gas registered holding companies to invest
in gas related companies without the Commission's prior approval and such
activities are not subject to any dollar limitation. A gas registered holding
company, for purposes of Rule 58, is defined as a holding company that is
registered solely by reason of ownership of voting securities of gas utility
companies or a subsidiary company thereof.52 A gas related company is a company
that derives, or will derive, substantially all of its revenues from one or more
_________________
48 Michigan Consolidated Gas. Co., 44 SEC 361 (1970), affd. Michigan
Consolidated Gas Company v. SEC, 444 F.2d 913 (1970).
49 Exemption of Acquisition by Registered Public-Utility Holding Companies of
Securities of Nonutility Companies Engaged in Certain Energy-Related and
Gas-Related Activities, Holding Co. Act Release No. 26667 (February 14, 1997)
("Rule 58 Release").
50 1995 Report at 81-87, 91-92
51 See, e.g., Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25,
1998); see also Ameren Corporation, Holding Co. Act Release No. 26809 (December
39, 1997). The Commission reached this conclusion in previous orders because the
companies involved in the mergers were not previously subject to the Section
11(b)(1) restrictions on non-utility investments which apply only to registered
holding companies.
52 Because KeySpan will register solely by reason of its acquisition of gas
utility companies (i.e., the Massachusetts Utilities and ENGI), it qualifies for
the exemptions related to ownership of gas related companies under Rule 58.
28
<PAGE>
activities permitted under the Gas Related Activities Act ("GRAA").53 Rule
58(b)(2)(i) and Section 2(a) of the GRAA apply to activities related to the
transportation and storage of natural gas; Rule 58(b)(2)(ii) and Section 2(b) of
the GRAA apply to activities related to the supply of natural gas. The "GRAA
does not impose any geographic boundaries within which a gas registered system
may engage in the listed activities."54 Thus, the GRAA permits registered gas
utility holding companies to own companies engaged in international gas related
activities.55
KeySpan is presently a holding company exempt from registration under
the Act, as are Eastern and EnergyNorth. As exempt holding companies, each has
been free to invest in a variety of non-utility businesses and activities
without the need to obtain prior Commission approval under Section 9(a) of the
Act. The companies' non-utility investments have been successful overall, have
resulted in tangible benefits to their respective shareholders, and have been
undertaken in compliance with applicable state laws and regulations in a manner
to minimize risks to the ratepayers of their respective utilities. Except as
discussed in Item 3.b.iii.4 below, the non-utility business interests that
KeySpan will hold, directly or indirectly, after the consummation of the
Transaction meet the Commission's standards for retention. The following is a
description of the specific bases under which the existing non-utility
investments of KeySpan, Eastern and EnergyNorth may be retained pursuant to
Section 11(b)(1).56
(1) KeySpan's Non-Utility Subsidiaries
The business activities of the following companies are energy related
activities within the meaning of Rule 58 (b)(1)(iv):
o KeySpan Technologies Inc. is involved in procuring new
technologies, such as fuel cells that use gas, to market to
its customers.
The following companies engage in energy marketing and brokering and,
thus, are energy related companies within the meaning of Rule 58 (b)(1)(v):
____________________
53 Pub. L. No. 101-527, 104 Stat. 2810 (November 15, 1990), codified as a note
to Section 11 of the Act.
54 Consolidated Natural Gas Company, Holding Co. Act Release No. 26595 (October
25, 1996).
55 Id.
56 KeySpan Corporate Services LLC, a direct subsidiary of KeySpan provides
corporate administrative services to KeySpan and its subsidiaries. KeySpan
Utility Services LLC, also a direct subsidiary of KeySpan, provides gas and
electric transmission and distribution system planning and marketing services,
procurement of goods and services, research and development, meter repair
operations and corporate administrative services to KeySpan's subsidiary.
KeySpan will request the requisite service company approvals for KeySpan
Corporate Services LLC and KeySpan Utility Services LLC in the separate Omnibus
Application.
29
<PAGE>
o KeySpan Energy Services, Inc. is a gas and retail
electricity marketer.
o KeySpan Energy Trading Services LLC is a broker of
electricity and gas.57
o KeySpan Energy Supply, LLC engages in energy marketing and
brokering activities.
The business activities of the following companies are energy
related activities similar to those permitted under Rule 58 (b)(1)(vii):
o KeySpan Energy Construction, LLC provides electric field
services which include the installation, maintenance and
replacement of electric transmission and distribution
equipment to affiliates and nonaffiliates.
o KeySpan Electric Services LLC provides day-to-day operation
and maintenance services and construction management
services to LIPA for its electric transmission and
distribution system.
o KeySpan-Ravenswood Services Corporation ("KRS") is primarily
engaged in providing day-to-day operation and maintenance
services for generation facilities owned by its EWG
affiliate, KeySpan-Ravenswood, Inc.58
The business activities of the following companies, either directly or
through subsidiaries, are gas related activities within the meaning of Rule 58
(b)(2)(i), involving the transportation and storage of natural gas:
o Honeoye Storage Corporation, owns an underground gas storage
facility.
_____________________
57 This company also engages in energy supply portfolio management and risk
management which falls under Rule 58 (b)(1)(i).
58 KRS also provides small amounts of electricity to The Consolidated Edison
Company of New York, Inc. ("Con Edison"), which is an energy marketing activity
within the meaning of Rule 58 (b)(1)(v). In addition, KRS also provides day to
day operation and maintenance services to Con Edison for its steam distribution
plant located in New York adjacent to the EWG's facilities. Although KRS does
not own the steam plant, the services are similar to the thermal energy
activities described in Rule 58 (b)(1)(vi).
30
<PAGE>
o Cross Bay Pipeline Company, LLC, is involved in the
development of the Cross Bay Pipeline, a proposed interstate
pipeline that would be subject to FERC jurisdiction.
o Each of LILCO Energy Systems Inc. and North East
Transmission Co., Inc., are general partners in the Iroquois
Gas Transmission System, L.P. ("Iroquois"). Iroquois is a
FERC regulated natural gas pipeline. Iroquois' wholly owned
subsidiary, Iroquois Pipeline Operating Company, operates
Iroquois' pipeline.59
o Adrian Associates owns a natural gas storage field.
The business activities of the following companies, either
directly or through subsidiaries, qualify as gas related activities within the
meaning of Rule 58 (b)(2)(ii), involving the supply of natural gas:
o Alberta Northeast Gas, Ltd. ("Alberta Northeast") exports
and markets natural gas from Canada and resells it for
delivery to utilities in the northeast United States.60
o Northeast Gas Markets, LLC ("Northeast"), provides natural
gas procurement, management and marketing services.61
o Boundary Gas, Inc. ("Boundary"), imports and markets natural
gas from Canada and resells it for delivery to utilities in
the northeast United States.62
The following company is engaged in international gas related
activities that fall under Section 2(a) of the GRAA:
o Premier Transco Limited, which is a natural gas pipeline
company owning and operating facilities in the United
Kingdom.
___________________
59 Iroquois will continue to qualify for an exemption under 17 C.F.R. ss.250.16.
After consummation of the Transaction, no more than 50% of the voting interests
in Iroquois will be held by a registered holding company.
60 Alberta Northeast's gas marketing activities also qualify it as an energy
related company under 17 C.F.R. Section 250.58(2)(b)(1)(v).
61 Northeast's gas marketing activities also qualify it as an energy related
company under 17 C.F.R. Section 250.58(2)(b)(1)(v).
62 Boundary's gas marketing activities also qualify it as an energy related
company under 17 C.F.R. Section 250.58(2)(b)(1)(v).
31
<PAGE>
The activities of the following companies engage in international gas
related activities under Section 2(b) of the GRAA:
o GMS Facilities Limited. owns two natural gas processing
plants and associated gathering systems in western Canada.
o Gulf Midstream Services Partnership owns 12 natural gas
processing plants and associated gathering facilities and is
also involved in natural gas liquids fractionation, storage,
transportation and marketing in western Canada.63
o Gulf Midstream Services Limited markets natural gas liquids
and is the agent for, and is engaged in, the operation of
the gas processing plants and associated gathering
facilities of GMS Facilities Limited and Gulf Midstream
Services Partnership.
o KeySpan Energy Canada Ltd. owns an interest in The Taylor
Gas Liquids Partnership ("Taylor "). Taylor owns an interest
in a natural gas liquids and extraction plant in western
Canada.
The Commission has authorized registered holding companies to own
businesses involved in the exploration, ownership, development and acquisition
of natural gas and oil properties.64 Additionally, the activities of such
companies which relate to natural gas, are gas related activities under Section
2 of the GRAA. Since the following companies are substantially similar to those
approved by the Commission, they are retainable under the Act:
o The Houston Exploration Company ("Houston Exploration") is
engaged in the exploration, development and acquisition of
domestic gas and oil properties. It also owns associated
gathering systems and is engaged in small scale marketing,
supplying, transportation and storage. Houston Exploration's
wholly-owned subsidiary, Seneca-Upshur Petroleum, Inc., also
owns interests in oil and gas properties.
o KeySpan Exploration and Production, LLC is part of a joint
venture that owns certain properties for offshore gas and
oil exploration and development.
____________________
63 The storage and transportation activities fall within Section 2(a) of the
GRAA.
64 WPL Holdings Inc., Holding Co. Act Release No. 26856 (April 14, 1998); New
Century Energies, Inc., Holding Co. Act Release No. 26748 (August 1, 1997); New
England Energy Inc., Holding Co. Act Release No. 23988 (January 13, 1986).
32
<PAGE>
o KeySpan Natural Fuels, LLC owns interests in onshore wells
of Houston Exploration that produce oil and gas..
o Solex Production Limited owns and is developing a producing
oil field.
The Commission has also permitted registered holding companies to
own non-utility businesses that design, construct, install, maintain and service
new and retrofit heating, ventilating, and air conditioning, electrical and
power systems, motors, pumps, lighting, water and plumbing systems, and related
structures.65 The following non-utility subsidiaries of KeySpan are similar to
those approved by the Commission in Cinergy:
o Fritze KeySpan, LLC designs, builds, installs and services
heating, ventilating, and airconditioning systems.
o KeySpan Plumbing Solutions, Inc. provides plumbing and
maintenance services.
o KeySpan Energy Management, Inc. installs and constructs
power supply, heating, ventilation66 and air conditioning
systems and burners and boilers.
o R.D. Mortman, LLC installs and services burners and boilers
and designs, builds, installs and services heating,
ventilation and air conditioning systems.
o Delta KeySpan, Inc. designs, builds, installs and services
heating, ventilating and central air conditioning systems.
o KeySpan Energy Solutions, LLC provides service and
maintenance for heating equipment, water heaters, central
air conditioners and gas
___________________
65 Cinergy Corp., Holding Co. Act Release No. 26662 (February 7, 1997); See also
Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25, 1998).
66 KeySpan Energy Management, Inc. may also engage in activities similar to its
subsidiaries, KeySpan Engineering Associates, Inc. and R.D. Mortman, LLC. Such
activities have been approved by the Commission in previous orders.
33
<PAGE>
appliances. It also offers safety products and services to
gas consumers.67
o Fourth Avenue Enterprise Piping Corp. is engaged in
providing maintenance and installation of boilers and
heating, ventilation and air conditioning systems.
o Active Conditioning Corp. is engaged in maintenance and
installation of boilers and heating, ventilation and air
conditioning systems.
o WDF, Inc. provides mechanical contracting services to
commercial and industrial customers. The mechanical
contracting services include the design, construction,
alternation, maintenance and repair of plumbing and heating,
air conditioning and ventilation systems.
o Roy Kay, Inc. provides mechanical and general contracting
services to commercial customers. Roy Kay, Inc. installs and
renovates heating, ventilation and air conditioning systems,
as well as oil and gas boilers and burners. Its services
include the installation of all piping equipment, as well as
the design and fabrication of piping and sheet metal
incidental to its mechanical contracting services.
o Roy Kay Electrical Company engages in electrical contracting
services including upgrading the wiring and power supply of
building for commercial and industrial customers.
The Commission has authorized registered holding companies to retain
businesses engaged in safety products and services, including such products as
smoke and fire detectors and fire extinguishers.68 Since the following company
is substantially similar to Consolidated, it should be retainable under the Act:
o Roy Kay Mechanical, Inc., engages in the installation and
renovation of sprinkler systems and fire suppression
systems. Its also engages in related piping fabrication.
____________________
67 The gas appliance and safety products and services are substantially similar
to activities the Commission has allowed a registered holding company subsidiary
to engage in. Consolidated Natural Gas Co., Holding Co. Act Release No. 26757
(August 27, 1997) (authorizing the sale and installation of energy related
appliances, products to promote safe energy use, and safety inspection and
repair services); see also The Columbia Gas System, Inc., Holding Co. Act
Release No. 26498 (March 25, 1996).
68 Consolidated Natural Gas Co., Holding Co. Act Release No. 26757 (August 27,
1997).
34
<PAGE>
The Commission has allowed registered holding companies to own
subsidiaries engaged in telecommunication activities.69 The activities of the
following company are substantially similar to those approved by the Commission
in Southern Co.:
o KeySpan Communications Corp., owns a fiber optic network
which is used by affiliates and nonaffiliates.
In prior orders, the Commission has permitted registered holding
companies to invest in businesses that engage in engineering services.70 The
activities of the following company are substantially similar to those approved
by the Commission in New Century:
o KeySpan Engineering Associates, Inc., reviews and recommends
the power supply needs of its large commercial, industrial
and institutional customers and designs efficient, new power
supply systems, such as cogeneration facilities.
The Commission has approved registered holding company investments in
companies involved in fuel and fuel-related interests,71 including the ownership
of mines.72 The following business is retainable by KeySpan because it is
substantially similar to the types of businesses approved by the Commission in
System Fuels, Inc.:
o Marquez Development Corporation owns an inactive uranium
mine and mill which are in the process of being dismantled.
The Commission has previously authorized registered holding companies
to retain and acquire companies engaged in consulting and engineering
services.73 In WPL, the Commission permitted the retention of non-utility
companies that provided a wide
____________________
69 Southern Co., Holding Co. Act Release No. 26211 (December 30, 1994)
(authorizing investment in a company that would design, construct, finance and
operate a wireless communications system to serve the needs of the registered
holding company system and regional nonassociates.); see also Appalachian Power
Co., Holding Co. Act Release No. 24772 (December 9 , 1988) (lease of fiber optic
system).
70 New Century Energies, Inc, Holding Co. Act Release No. 26748 (August 1,
1997). (authorizing ownership of a subsidiary engaged in general engineering,
development, design, procurement, construction and other related services). See
also Central and South West Services, Inc., Holding Co. Act Release No. 26280
(April 26, 1995) (allowing investment in a subsidiary the would provide
engineering and construction services to nonassociates).
71 North American Co., 11 SEC 194 (1942), aff'd, 133 F. 2d 148 (2d Cir. 1943,
aff'd on constitutional issues, 327 U.S. 686 (1946); See also 1995 Report at 82.
72 System Fuels, Inc. Holding Co. Act Release No. 20441 (March 9, 1978)
(authorizing a uranium exploration program to assure an adequate supply of
uranium) see also 1995 Report at 83.
73 WPL Holdings, Inc. Holding Co. Act Release No. 26856 (April 14, 1998);
Central and South West Services, Holding Co. Act Release No. 26898 (July 21,
1998).
35
<PAGE>
range of environmental consulting and engineering services, such as management
services for solid waste management, hazardous waste management, industrial
health safety, strategic environmental management services and facility and
process design. In Central, the Commission approved a registered holding
company's ownership of a company engaged in engineering and environmental
services relating to consulting and design engineering, environmental and
occupational health permitting, and environmental and occupational health
management systems. The Commission should permit KeySpan's retention of the
following company whose activities are similar to those approved in Central and
WPL Holdings.
o Paulus, Sokolowski & Sartor, Inc. is engaged in engineering and
consulting services relating to design and permitting. The
services include mechanical, electrical, civil, structural,
sanitary, geotechnical and architectural design and permitting,
licensing and environmental compliance for large commercial
customers such as corporate offices, hotels, laboratories,
warehouses, pharmaceutical companies and power plants.
Registered holding companies are permitted to acquire and own, without
obtaining prior Commission approval, both exempt wholesale generators ("EWGs")
pursuant to Section 32 of the Act74 and foreign utility companies pursuant to
Section 33 of the Act ("FUCOs").75 Accordingly, KeySpan can maintain its
ownership interests in the following companies:
o KeySpan - Ravenswood, Inc. which is an EWG.
o Phoenix Natural Gas Limited which is a FUCO.
o FINSA Energeticos, S. de R.L. de C.V. which is a FUCO.
The Commission has authorized registered holding companies to retain
non-utility businesses engaged directly or indirectly engaged in the development
of power generation projects76 and EWG project development.77 KeySpan may retain
the following
_____________________
74 15 U.S.C. Section 79z-5a(h).
75 15 U.S.C. Section 79z-5b(c).
76 Central and Southwest Corp., Holding Co. Act Release No. 25162 (September 28,
1990) (authorizing Central and Southwest Corp. to conduct preliminary studies
of, to investigate, to research, to develop, to consult with respect to, and to
agree to construct, such construction subject to further Commission
authorization, QFs, qualifying small power production facilities and independent
power facilities ("IPPs"), except no need to consult with respect to IPPs);
Energy Initiatives, Inc., Holding Co. Act Release No. 25876 (September 7, 1993)
(authorizing the acquisition of an ownership interest in a non-affiliate engaged
in the business of developing, owning and operating co-generation and
independent power generation projects).
77 American Corp., Holding Co. Act Release No. 27053 (July 23, 1999)
(authorizing the acquisition of securities of 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 EWG's); see
also Cinergy Corp., Holding Co. Act Release No. 26984 (March 1, 1999).
36
<PAGE>
company because it is substantially similar to those approved by the Commission
for investment by registered holding companies:
o GTM Energy, LLC is a joint venture engaged in the development of
an electric generation power project, which may become an EWG.
KeySpan owns interests in the following companies which are inactive:
o GEI Timna
o Island Energy Services Company
o GEI Development Corp.
In addition to the companies discussed above, KeySpan has several
other subsidiaries which are holding companies of subsidiaries engaged in a
variety of businesses. The following holding companies are retainable because
all of their investments are in companies which are retainable as outlined
above:
o KeySpan North East Ventures, Inc. which owns a 90% interest in
Northeast Gas Markets, LLC.
o KeySpan Energy Development Corporation which owns interests in
the following: Honeoye Storage Corporation; KeySpan
International Corporation; GEI Timna, Inc.; KeySpan Cross Bay,
LLC; KeySpan Midstream LLC; GTM Energy LLC; Adrian Associates;
and Solex Production Limited.
o KeySpan International Corporation which owns KeySpan CI Ltd. and
KeySpan CI II, Ltd. KeySpan CI Ltd. holds interests in Phoenix
Natural Gas Limited and Premier Transco Limited. KeySpan CI II,
Ltd., through its wholly owned subsidiary, Grupo KeySpan S. R.L.
de C.V., holds an interest in FINSA Energeticos, S. de R.L. de
C.V.
o KeySpan Cross Bay, LLC which owns an interest in Cross Bay
Pipeline Company, LLC.
o KeySpan Midstream, LLC which indirectly owns interests in GMS
Facilities Limited., Gulf Midstream Services Limited, Gulf
Midstream Services Partnership and KeySpan Energy Canada, Ltd.
37
<PAGE>
o THEC Holdings Corp. which holds an interest in The Houston
Exploration Company.
o KeySpan Operating ServicesLLC, which owns an interest in KeySpan
Energy Construction, LLC.
o KeySpan Services, Inc. which is the holding company for KeySpan
Communications Corp., KeySpan Energy Management, Inc. (which
owns KeySpan Engineering Associates, Inc. and R.D. Mortman,
LLC), KeySpan Energy Services Inc., KeySpan Energy Solutions,
LLC (which owns KeySpan Plumbing Solutions, Inc.), Fritze
KeySpan, LLC, Delta KeySpan, Inc., Paulus, Sokolowski & Sartor,
Inc., WDF, Inc., RoyKay, Inc., Roy Kay Electrical Company, Roy
Kay Mechanical, Inc., Fourth Avenue Enterprise Piping Corp. and
Active Conditioning Corp.
(2) Eastern's Non-Utility Subsidiaries
The following non-utility subsidiaries of Eastern are similar to those
approved by the Commission in Cinergy:
o ServicEdge Partners, Inc. which installs and services heating,
ventilation and air conditioning equipment.
The business activities of the following companies are gas related
activities within the meaning of Section 2(a) of the GRAA and Rule 58 (b)(2)(i),
involving the transportation and storage of natural gas:
o LNG Storage, Inc. (a subsidiary of Essex Gas Company) holds
title to LNG storage facilities.
o Massachusetts LNG Storage Incorporated (a subsidiary of Boston
Gas Company) holds title to LNG storage facilities.
The business activities of the following companies are gas related
activities within the meaning of Section 2(b) of the GRAA and Rule 58
(b)(2)(ii), relating to the supply of natural or manufactured gas:
o Transgas, Inc., which provides over-the-road transportation of
liquefied natural gas, propane and similar commodities.78
The following subsidiaries are engaged in real estate activities
similar to those approved by the Commission in UNITIL Corporation:79
___________________
78 See Consolidated Natural Gas Company, et al., Holding Co. Act Release No.
26363 (August 28, 1995).
79 Holding Co. Act Release No. 25524 (Apr. 24, 1992).
38
<PAGE>
o Eastern Rivermoor Company, Inc. holds title to real estate used
by Boston Gas Company in its operations (e.g., for service
centers, garages, etc.).
o PCC Land Company, Inc. holds title to real property in
Pennsylvania that was the site of a coke plant operated by
Philadelphia Coke Co., Inc.
The Commission has permitted registered holding companies to make and
retain investments that are passive and/or de minimis in civic, charitable, and
economic development ventures, including investments in venture capital
partnerships, that are important to the responsibilities of good corporate
citizenship.80 The following subsidiaries of Eastern hold substantially similar
types of investments:
o Eastern Enterprises Foundation makes charitable contributions.
o Eastern Urban Services, Inc., beginning in the 1960s, invested
in a number of limited partnerships which acquired,
rehabilitated and operated existing low-income housing projects
for which Federal financing was available. Only one of these
partnerships, Amiff Housing Associates, continues to operate.
AMR Data Corporation provides customized metering equipment and
performs automated meter reading services for municipal utilities. These
activities are substantially similar to those approved by the Commission in
other cases.81
The following direct and indirect subsidiaries of Eastern and
EnergyNorth are inactive and have no material assets:
o EE-AEM Marketing Company, Inc.
o Boston Gas Services, Inc.
o Eastern Energy Systems Corp.
o Eastern Associated Capital Corp., which was formed to hold make
passive investments.
o Eastern Associated Securities Corp. which was formed to hold
investment securities
_________________
80 See WPL Holdings, Holding Co. Act Release No. 26856 (April 14, 1998); Ameren
Corporation, Holding Co. Act Release No. 26809 (December 30, 1997).
81 See New Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1,
1997); Central and South West Corp., Holding Co. Act Release No. 26250 (March
14, 1995); and Appalachian Power Co., Holding Co. Act Release No. 26639 (January
2, 1997).
39
<PAGE>
o Mystic Steamship Corporation
o Philadelphia Coke Co., Inc.
o Water Products Group Incorporated
o Western Associated Energy Corp.
o CGI Transport Ltd. (an indirect subsidiary of Colonial Gas
Company)
o Colonial Energy (an indirect subsidiary of Colonial Gas Company)
o Northern Energy Company, Inc (a subsidiary of Essex Gas Company)
(3) EnergyNorth's Non-Utility Subsidiaries
The following non-utility subsidiaries of EnergyNorth are similar
to those approved by the Commission in Cinergy, supra:
o EnergyNorth Mechanicals, Inc. holds all of the stock Northern
Peabody, Inc. and Granite State Plumbing & Heating, Inc. (see
below).
o Northern Peabody, Inc., designs, installs and services
commercial and industrial plumbing, heating, ventilation and air
conditioning equipment, and process piping systems.
o Granite State Plumbing & Heating, Inc. designs, installs and
services commercial and industrial plumbing, heating,
ventilation and air conditioning equipment, and process piping
systems.
EnergyNorth Propane, Inc., distributes propane in bulk containers, an
activity permitted under Rule 58(b)(1)(v).
The following subsidiaries of EnergyNorth are engaged in real estate
activities similar to those approved by the Commission in UNITIL Corporation:
o Broken Bridge Corporation owns undeveloped real estate.
o EnergyNorth Realty, Inc., owns and leases a corporate
headquarters building to associate companies.
The following direct and indirect subsidiaries of EnergyNorth are
inactive and have no material assets:
40
<PAGE>
o ENI Resources, Inc., which was formed by EnergyNorth to
participate in gas and electricity marketing joint ventures. (4)
Midland
Eastern's predominant non-utility subsidiary, Midland,82 is engaged,
through wholly owned subsidiaries, in activities which KeySpan recognizes do not
satisfy the standard for retention by a registered gas utility holding company
under Section 11(b)(1) of the Act. Midland's activities primarily consist of
operating a fleet of towboats, tugboats and barges which transport a variety of
commodities including stone, grain, sand, scrap, coal, steel, coke; performing
repair work on marine equipment; operating coal dumping and other river
terminals and a ship loading terminal for phosphate rock; and provide refueling
and barge fleeting services.83 KeySpan requests that any order that the
Commission issues which approves the Transaction but requires KeySpan to divest
of Midland pursuant to Section 11(b)(1) of the Act permits KeySpan to take the
appropriate actions to effect the sale of all of its interests in Midland, its
subsidiaries and assets, within three years after the Transaction is
consummated.
5. Section 10 (c) (2)
Section 10(c)(2) of the Act requires the Commission to find that a
proposed transaction will serve the public interest by tending towards the
economical and efficient development of an integrated public utility system. An
"integrated public utility system" is defined in Section 2(a)(29) to mean:
(B) As applied to gas utility companies, a system consisting of one or
more gas utility companies which are so located and related that
substantial economies may be effected by being operated as a single
coordinated system confined in its operations to a single area or
region, in one or more States, not so large as to impair (considering
the state of the art and the area or region affected) the advantages
of
______________________
82 Midland files annual and other periodic reports with the Commission pursuant
to Section 12(g) of the Securities Exchange Act of 1934. See File No. 2-39895.
83 The principal operations of Midland (specifically, ORCO) were acquired by
Eastern (then known as Eastern Gas and Fuel Associates) in 1961 as part of a
business combination in which the former shareholders of ORCO acquired
approximately 15% of Eastern's common stock in exchange for the stock of ORCO.
"New" Midland was subsequently formed by Eastern to serve as a holding company
for ORCO and other related entities. Although certain aspects of the transaction
were approved by the Commission, the Commission specifically noted its lack of
jurisdiction over Eastern's acquisition of the stock of ORCO inasmuch as Eastern
had been granted an exemption pursuant to Section 3(a)(1) of the Act some years
earlier. See Midland Enterprises Inc., et al., Holding Co. Act Release No. 14486
(July 25, 1961). Thus, the Commission has not previously considered the
affiliation between Eastern and Midland in light of the retention standards of
Section 11(b)(1), which, by its terms, applies only to registered holding
companies.
41
<PAGE>
localized management, efficient operation, and the effectiveness of
regulation, Provided, that gas utility companies deriving natural gas
from a common source of supply may be deemed to be included in a
single area or region.
For the reasons stated below, the Transaction meets the Section
10(c)(2) requirements. The gas utility operations of KeySpan and Eastern, after
the closing of the Transaction, will constitute a coordinated gas utility system
within the meaning of Section 2(a)(29).84 Through the Transaction, the companies
will produce qualitative and quantitative economies and efficiencies and become
an entity well suited to compete effectively.
i. Single Area or Region Requirement
The operations of the combined gas systems of the New York Gas
Utilities, the Massachusetts Utilities and ENGI will be confined to "a single
area or region" as required by Section 2(a)(29)(B). The combined systems will
operate in the three contiguous states of New York, Massachusetts and New
Hampshire. The distance from the New York City area to Boston is about 200
miles. By contrast, other registered public utility holding company systems,
such as Columbia and CNG, which both extend from Tidewater Virginia to western
Ohio, are spread over a much larger area. Consolidated Natural Gas, et. al, HCAR
25040 (2/14/90); The Columbia Gas System, Inc., HCAR #22155 (8/20/81). Moreover,
utilities in the New York and Boston areas share the same challenges of being
distant from gas producing areas and near the end of the nation's gas
transportation systems. New York, Massachusetts and southern New Hampshire are
part of the Northeast United States, an area generally recognized as a single
region of the country, particularly in the energy industry.85
In addition, the Section 2(a)(29)(B) requirement that a combined gas
system confine its operations to "a single area or region" may be deemed
satisfied when gas utilities derive natural gas from a common source of supply.
In a number of recent decisions, the Commission has determined that even
acquisitions involving geographically
_____________________
84 As discussed in Item 3.A.4.b.(ii) above, KeySpan's retention of the electric
operations of KeySpan Generation is permissible under the ABC clauses as an
additional system and will tend toward the economic and efficient development of
KeySpan's proposed holding company system through shared economies and
efficiencies.
85 The Commission has recognized in certain contexts that it is reasonable to
consider New York and New England together a single region of the country. See
Eastern Utilities Associates, Holding Co. Act Release No. 26232, 1995 SEC LEXIS
395 (February 15, 1995) ; Eastern Utilities Associates, Holding Co. Act Release
No. 25636, 1992 SEC LEXIS 2343 (September 17, 1992); Northeast Utilities,
Holding Co. Act Release No. Release No. 25114, 1990 SEC LEXIS 2720 (July 27,
1990).
42
<PAGE>
dispersed gas systems meet the "single area or region" statutory test when those
systems acquire gas from common sources.86
The Commission has found that "[t]he concept of a `common source of
supply' is susceptible of a different understanding today than in 1935, when the
`single area or region' was generally defined in terms of the pipeline delivery
points (i.e., the city-gate) where the local distribution companies purchased
their gas."87 The Commission's inquiry now focuses upon whether the proposed
combined utilities purchase substantial quantities of gas produced in the same
supply basins and upon whether there is sufficient transportation capacity
available to assure economical and reliable delivery.88 In this regard, the
Commission also looks at whether the systems are served by common pipelines, and
has recognized that, in today's gas market, purchases of gas from the same
basins are facilitated by the development of market centers, hubs and pooling
points.89
The gas portfolios of the New York Gas Utilities, the Massachusetts
Utilities and ENGI substantially overlap with respect to sources of supply. All
of the utilities derive large portions of their total gas requirements from two
primary areas: the New York Gas Utilities, the Massachusetts Utilities and ENGI
derive 63.2%, 91.1% and 90%, respectively, from the supply basins in the U.S.
Gulf Coast.90 The New York Gas Utilities purchase 36.7% of their gas supplies
from the Western Canada Sedimentary Basin, which is also a source of supply for
the Massachusetts Utilities (3.6%) and ENGI (8.8%). KeySpan and Eastern's gas
utilities also utilize common gas transportation pipelines. The New York Gas
Utilities, the Massachusetts Utilities and ENGI hold significant portions of
their firm transportation capacity on Tennessee (20.2%, 24.4% and 93.8%,
respectively), Iroquois (10.1%, 8.9% and 5.0%, respectively) and Duke Energy's
pipelines, TETCO and Algonquin (the New York Gas Utilities hold 23% on TETCO and
the Massachusetts Utilities hold 25.8% on TETCO and 35.1% on Algonquin).
Furthermore, the New York Utilities, the Massachusetts Utilities and ENGI all
have access to the Leidy, Pennsylvania trading hub at a point at which the
pipelines on which they hold transportation capacity intersect.
The commonality of supply sources and transporters of KeySpan and
Eastern's gas utilities is comparable to that found to constitute "common source
of supply" in recent Commission cases. For example, in NIPSCO, the Commission
found that the two
__________________
86 See, e.g., NIPSCO Industries, Inc., 69 S.E.C. Docket 245, 1999WL 61423
(S.E.C.) (1999) ("NIPSCO") (systems in Indiana and Massachusetts); Sempra
Energy, 69 S.E.C. Docket 104, 1999 WL 38638 (S.E.C.) (1999) ("Sempra") (systems
in California and North Carolina); MCN Corporation, 62 S.E.C. Docket 2379, 1996
WL 529043 (S.E.C.) 1996 ("MCN") (systems in Michigan and Missouri).
87 NIPSCO at WL 61423, *8; see also Sempra at WL 38638, *6.
88 Id.
89 NIPSCO at WL 61423, *8.
90 The U.S. Gulf Coast producing areas are comprised of Texas, Louisiana and
Mississippi.
43
<PAGE>
proposed combined gas systems derived gas from common supply sources based on
the facts that (i) the NIPSCO and Bay State gas utilities derived, respectively,
89% and 40% of their total gas requirements from the same Texas and Louisiana
supply basins and (ii) each system had contracted with Tennessee for a
significant portion (36% and 27%, respectively) of total firm transportation
capacity. The Commission also observed that while the systems had only one
pipeline in common, pipelines on which they held capacity intersect at, and
form, industry-recognized trading hubs. Moreover, in NIPSCO, the gas utilities
were located in non-contiguous states of Indiana and Massachusetts while the
proposed combined gas companies in Sempra were in California and North Carolina.
91 In contrast, the systems proposed to be combined here are located in
contiguous states in a generally recognized region. For that reason and because
of the substantial commonality of supply and transportation sources among the
New York Gas Utilities, the Massachusetts Utilities and ENGI, the combination of
KeySpan's and Eastern's gas utilities satisfies the "single area or region"
requirement under Section 2(a)(29)(B).
ii. Economies and Efficiencies
The combined operations of KeySpan and Eastern will achieve
substantial economies. Although many of the anticipated economies and
efficiencies will be fully realizable only in the longer term, they are properly
considered in determining that the Section 10(c)(2) criteria have been met.92
The Commission has also recognized that while some potential benefits cannot be
precisely estimated, they are nevertheless entitled to consideration.93
(1) Coordination of Gas Operations
Coordination of the operations of the gas supply departments of the
New York Gas Utilities and the Massachusetts Utilities (and ENGI) will,
consistent with the limitations imposed on the New York Gas Utilities by reason
of the "two county" rule of
______________________
91 The Commission specifically ruled that the distances between the systems to
be combined in those cases did not contravene the policy of the Act against
"scatteration" - the ownership of widely dispersed utility properties which do
not lend themselves to efficient operation - noting that the acquiring system is
required to maintain an integrated gas system. NIPSCO at WL 61423, *8; Sempra at
WL 38638, *6. Here, as noted above, the gas systems of KeySpan, Eastern and ENGI
are located in the contiguous states of New York, Massachusetts and New
Hampshire. Because they are not widely dispersed like in NIPSCO and Sempra,
there is no possibility they the combination could contravene the policy of the
Act against "scatteration."
92 See American Electric Power Co., 46 S.E.C. 1299, 1320-1321 (1978).
93 Centerior Energy Corp., 49 S.E.C. at 480 ("[s]pecific dollar forecasts of
future savings are not necessarily required; demonstrated potential for
economies will suffice even when these are not precisely quantifiable."); see
also Energy East Corp., Holding Co. Act Release No. 26976 (Feb. 12, 1999)
(authorizing acquisition based on strategic benefits and potential but presently
unquantifiable savings).
44
<PAGE>
Section 103 of the Internal Revenue Code, be achieved through joint and
coordinated management of the gas supply function for all of the gas utilities
to be owned by the combined companies. By 2002, all of the gas assets owned by
the New York Gas Utilities and the Massachusetts Utilities (including ENGI) will
be operated and managed jointly by a single entity and a joint strategy will be
pursued for the gas supply portfolios of both utility systems (including ENGI).
For the period ending October 31, 2002, each of the Massachusetts Utilities is
party to an asset management agreement with El Paso Energy Marketing Company
("El Paso") pursuant to which the majority of the Massachusetts Utilities' gas
supply assets upstream of the city gate are managed by El Paso. The El Paso
asset management agreement will be amended to cover the gas supply assets of
ENGI as well. The gas asset management arrangements which currently cover the
gas supply assets of the New York Gas Utilities are being replaced with a single
arrangement that will terminate March 31, 2002. Following termination of those
agreements, there will be significant opportunities for the two systems to
realize substantial synergies. The gas supply portfolios (including firm supply,
transportation and storage assets) of the New York Gas Utilities and the
Massachusetts Utilities (including ENGI) will be jointly managed in a
coordinated way, thereby providing a greater degree of diversity and operational
flexibility. This will enable the two systems to achieve greater efficiencies
through asset optimization in order to enhance opportunities to minimize gas
costs as well as to generate additional value. For example, as a result of the
increased diversity of the combined portfolios, the combined companies will have
increased price arbitrage opportunities to maximize revenues.
In addition, the joint company will be able to maximize the benefits
of deregulation. Depending on how the various state unbundled transportation
programs evolve, the combined companies will have greater opportunities to
maximize efficiencies to reduce gas costs as they decontract assets previously
contracted for to provide bundled sales service. Also, the flexibility and
reliability of the unbundled transportation and balancing services that the
combined companies provide to the firm transportation customers will be further
enhanced by the increased diversity and operational flexibility offered by the
combined portfolios. Furthermore, there will be new opportunities to provide
products and services in the deregulated market that will yield additional value
through the combined utility assets.
Even in the interim period between consummation of the Transaction and
2002, when the asset management agreements terminate, there may be opportunities
to achieve modest synergies to generate value and realize gas cost savings with
those gas assets that are excluded from the two asset management agreements.
Finally, both the New York Gas Utilities and the Massachusetts
Utilities rely on the Altra Gas Management System, using the same products
acquired from the same vendor. The systems currently employed by the New York
Gas Utilities and the Massachusetts Utilities will be integrated, enhancing the
ability to coordinate the gas supply functions of all of the utilities of both
companies (including ENGI).
45
<PAGE>
(2) Other Efficiencies and Economies
Based on preliminary estimates, the Transaction is expected to result
in annual savings of $24-29 million, phased in over a two year period. This is
equal to 2.2 to 2.8% of annual gas utility operating expenses. The bulk of the
savings would occur as a result of employee reductions, which are expected to
result in savings of approximately $15 million as a result of the consolidation
of corporate and administrative functions and the elimination of approximately
200 full time positions. Another $2-4 million would be saved as a result of the
consolidation of corporate facilities, including control rooms and the IT data
center. A net savings of $4 to $7 million would be experienced as a result of
reductions in duplicate functions including shareholder services, outside
director expenses, and services of legal, financial and investment
professionals, insurance, information services, etc. Approximately $200,000 is
expected to be saved in non-fuel purchasing economies as a result of increased
purchasing power. In addition, reductions in employee benefit costs such as
pensions, post-employment benefits and other employee benefit related economies
are expected to generate between $2.5 and $3 million in savings.
In addition, the Transaction would produce approximately $5 to $7
million in avoided development costs for information systems and software
applications. The information technology in use at KeySpan and Eastern is
largely compatible. There are opportunities in the short run to consolidate a
data center as well as to consolidate the applications portfolios of the two
systems. In the long run, there is a potential for significant staff reductions.
KeySpan and Eastern are also in the process of identifying additional
opportunities for the merged companies to achieve additional administrative
savings in such areas as accounting, tax, purchasing, legal, planning, human
resources, information services, financial services and regulatory relations.
iii. Size and Local Requirements
As demonstrated above, the combined system will not be "so large" as
to contravene the statutory standards with respect to localized management,
efficient operations and the effectiveness of regulation. Each of the KeySpan,
Eastern and ENGI utilities will maintain offices and operational functions in
the state in which it provides services. There will be a substantial local
executive presence in Boston, including several officers of Boston Gas who will
be retained to manage the operations of the Massachusetts Utilities and ENGI.
The Transaction will result in substantial economies and efficiencies, as
discussed immediately above. Finally, each of the New York Utilities, the
Massachusetts Utilities and ENGI will remain subject to regulation by its
respective state regulators in New York, Massachusetts and New Hampshire.
46
<PAGE>
6. Section 10 (f)
Section 10 (f) prohibits the Commission from approving the Transaction
unless the Commission is satisfied that the consummation of the Transaction will
comply with applicable state laws. As described in Item 4 of this Application,
and as evidenced by the application before the NHPUC, KeySpan intends to comply
with all applicable state laws related to the proposed Transaction.
B. Section 3(a)(1) Holding Company Exemption
After completion of the Transaction, KeySpan will have three
subsidiaries which will be holding companies. KeySpan requests that the
Commission confirm that they will each continue to be exempt holding companies
under Section 3(a)(1) of the Act. These exemptions, however, will have no effect
on the status of these companies as "subsidiary companies" of KeySpan once it
registers as a holding company.
KEC will continue to qualify for a Section 3(a)(1) exemption after
consummation of the Transaction. It is a New York corporation and will continue
to directly own all of the common stock of Brooklyn Union, which is also a New
York corporation operating exclusively in New York.
Eastern and EnergyNorth have each requested a Section 3(a)(1)
exemption in the Eastern/EnergyNorth Application. KeySpan requests that to the
extent the Commission grants them such exemptions in that proceeding, it confirm
that those exemptions will continue after the Transaction.
Item 4. Regulatory Approvals
Set forth below is a summary of the regulatory approvals that KeySpan
and Eastern have obtained or expect to obtain in connection with the Transaction
in addition to the Commission approvals required under the Act.
A. Antitrust
The HSR Act and the rules and regulations thereunder provide that
certain transactions (including the Transaction) may not be consummated until
certain information has been submitted to the DOJ and FTC and specified HSR Act
waiting period requirements have been satisfied. KeySpan and Eastern will submit
Notification and Report Forms and all required information to the DOJ and FTC
and the Transaction will
47
<PAGE>
not be consummated unless the applicable waiting period has expired or has been
terminated. Eastern and EnergyNorth will also submit Notification and Report
Forms and all required information to the DOJ and FTC with respect to the ENI
Transaction which will not be consummated unless the applicable waiting period
has expired or has been terminated.
The expiration of the HSR Act waiting period does not preclude the
Antitrust Division of the FTC from challenging the Transaction on antitrust
grounds; however, KeySpan believes that the Transaction will not violate Federal
antitrust laws. If the Transaction is not consummated within twelve months after
the expiration or earlier termination of the initial HSR waiting period, KeySpan
and Eastern would be required to submit new information to the DOJ and FTC, and
a new HSR waiting period would have to expire or be earlier terminated before
the Transaction could be consummated.
B. State Public Utility Regulation
New Hampshire
ENGI, EnergyNorth's wholly-owned subsidiary, is a New Hampshire public
utility subject to the jurisdiction of the NHPUC. Under the applicable statutes,
the NHPUC must determine that Eastern's acquisition of EnergyNorth, and
KeySpan's indirect acquisition through its acquisition of Eastern, will not have
an adverse affect on the rates, terms, service, or operations of ENGI and is
lawful, proper and in the public interest. On December 3, 1999, KeySpan, Eastern
and EnergyNorth filed a joint application with the NHPUC which requests approval
for Eastern's direct, and KeySpan's indirect, acquisition of EnergyNorth. See
Exhibit D-1.
New York
The New York Utilities, wholly-owned subsidiaries of KeySpan, are
subject to the NYPSC's jurisdiction. The NYPSC does not have statutory
jurisdiction over the Transaction.94
Massachusetts
The Massachusetts Utilities, wholly-owned subsidiaries of Eastern, are
subject to MDTE jurisdiction. The MDTE does not have statutory jurisdiction over
the Transaction.95
_____________________
94 KeySpan notes that immediately after the Transaction was publicly announced,
it informed high level officials at the NYPSC about the Transaction and since
that time neither the NYPSC or its staff has expressed to KeySpan any concern
about the Transaction or its effect on rates, regulation or competition in New
York. Additionally, the NYPSC does not have statutory jurisdiction over the
Transaction.
95 Immediately after the Transaction was publicly announced, KeySpan informed
high level officials at the MDTE about the Transaction. Neither the MDTE nor its
staff has expressed to KeySpan, since that time, any concern about the
Transaction or its effect on rates, regulation or competition in Massachusetts.
Moreover, the MDTE does not have statutory jurisdiction over the Transaction.
48
<PAGE>
Item 5. Procedure:
The Commission is respectfully requested to issue and publish, as soon
as practible, the requisite notice under Rule 23, with respect to the filing of
this Application/Declaration.
It is submitted that a recommend decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Transaction. 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 Certificate of Organization of ACJ as in effect on
November 3, 1999
A-4 Operating Agreement of ACJ as in effect on November 16,
1999
A-5 Declaration of Trust of Eastern, dated as of July 18,
1929, as amended through April 27, 1989. (Incorporated
herein by reference to Exhibit 3.1 to Eastern's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1989, File No. 1-2297)
A-6 By-Laws of Eastern, as amended through February 24,
1999. (Incorporated herein by reference to Exhibit 2.3
to Eastern's Annual
49
<PAGE>
Report on Form 10-K for the year ended December 31,
1998, File No. 1-2297)
A-7 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-8 By-Laws of EnergyNorth, 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)
B Agreement and Plan of Merger by and Among Eastern,
KeySpan and ACJ dated November 4, 1999, as amended by
Amendment No. 1 dated January 26, 2000. (Incorporated
herein by reference as Appendix A to Exhibit C below)
C Proxy Statement of Eastern in connection with the
Transaction to be distributed to the shareholders in
connection with the annual meeting. (To be filed by
amendment)
D-1 Joint Petition of EnergyNorth, Eastern and KeySpan
filed with the NHPUC dated December 3, 1999
D-2 Order of the NHPUC (To be filed by amendment)
E-1 Map of Combined Service Territories of KeySpan,
Eastern and ENGI. (Filed in paper format on Form SE)
E-2 Pre-Transaction Organizational Chart of KeySpan and
Subsidiaries. (Filed in paper format on Form SE)
E-3 Pre-Transaction Organizational Chart of Eastern and
Subsidiaries and EnergyNorth and Subsidiaries.
(Incorporated herein by reference to Exhibits I-1 and
I-2 Eastern's Form U-1 Application/Declaration under
the Act with respect to the Eastern/EnergyNorth
Transaction filed with the Commission on January 5,
2000, as amended by Form U-1/A on February 3, 2000,
File No. 70-9605)
E-4 Post-Transaction Organizational Chart of KeySpan and
Subsidiaries. (Filed in paper format on Form SE)
E-5 Description of KeySpan's Non-Utility Subsidiaries.
F-1 Opinion of Counsel. (To be filed by amendment)
F-2 Past Tense Opinion of Counsel. (To be filed pursuant
to Rule 24)
50
<PAGE>
G-1 Opinion of JP Morgan
G-2 Opinion of Salomon Smith Barney (Included in Exhibit
C)
G-3 Financial Data Schedule
H-1 Reserved
H-2 Annual report of Eastern on Form 10-K for the year
ended December 31, 1998 (Filed with the Commission on
[March 5, 1999], File No. 12297 and incorporated by
reference herein)
H-3 Annual report of EnergyNorth on Form 10-K for the
fiscal year ended September 30, 1999 (Filed with the
Commission on [December 17, 1999, File No. 1-11441
and incorporated by reference herein)
I Schedule of Estimated Fees, Commissions and Expenses
J Analysis of the Economic Impact of Divestiture of
KeySpan Generation
K Proposed Form of Notice
B. Financial Statements
FS-1 KeySpan Unaudited Pro Forma Condensed Consolidated
Balance Sheets as of December 31, 1999 (To be filed
by amendment)
FS-2 KeySpan Unaudited Pro Forma Condensed Consolidated
Statements of Income as of December 31, 1999 (To be
filed by amendment)
FS-3 Notes to KeySpan Unaudited Pro Forma Condensed
Consolidated Financial Statements as of December 31,
1999 (To be filed by amendment)
FS-4 KeySpan Consolidated Balance Sheet as of December 31,
1999 (To be filed by amendment)
FS-5 KeySpan Consolidated Statement of Income for the
twelve months ended December 31, 1999 (To be filed by
Amendment)
FS-6 Eastern Consolidated Balance Sheet as of December 31,
1999 (To be filed by Amendment)
FS-7 Eastern Consolidated Statement of Income for the
twelve months ended December 31, 1999 (To be filed by
Amendment)
51
<PAGE>
FS-8 EnergyNorth Consolidated Balance Sheet as of
September 30, 1999 (Included in Exhibit H-3)
FS-9 EnergyNorth Consolidated Statement of Income for the
twelve months ended September 30, 1999 (Included in
Exhibit H-3) Item 7. Information as to Environmental
Effects:
The Transaction does not involve a "major federal action" nor will it
"significantly affect the quality of the human environment" as those terms are
used in section 102(2)(C) of the National Environmental Policy Act. The only
federal actions related to the Transaction pertain to the expiration of the
waiting period under the HSR Act and the other approvals and actions described
in Item 4 of this Application/Declaration. Consummation of the Transaction will
not result in changes in the operation of KeySpan, Eastern or their 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.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this statement to be singed on
its behalf by the undersigned officer thereunto duly authorized.
KEYSPAN CORPORATION
/s/ Steven Zelkowitz
--------------------
Steven Zelkowitz
Senior Vice President and General
Counsel
ACJ ACQUISITION LLC
--------------------
/s/ Steven Zelkowitz
Steven Zelkowitz
Manager
CERTIFICATE OF ORGANIZATION
OF
ACJ Acquisition LLC
Pursuant to the Massachusetts Limited Liability Company Act (the
"Act"), the undersigned hereby forms a limited liability company with the
following terms:
1. Federal Employer Identification Number. As of the date hereof, ACJ
Acquisition LLC has applied for, but not yet received, a Federal employer
identification number.
2. Name. The name of the limited liability company is ACJ Acquisition LLC
(the "LLC").
3. Office of the LLC. The address of the office of the LLC is c/o C T
Corporation System, 2 Oliver Street, Boston, Massachusetts 02109.
4. Business of LLC. The general character of the LLC is to engage in the
energy production and distribution business. The business of the LLC shall
include participation in such activities as are related or incidental to the
above and any other lawful business, trade, purpose or activity permitted under
the Act.
5. Name and Address of Resident Agent. The resident agent of the LLC in the
Commonwealth of Massachusetts for service of process is C T Corporation System,
2 Oliver Street, Boston, Massachusetts 02109.
6. Names and Addresses of the Managers. The Managers of the LLC and their
business addresses are as follows:
Frederick Lowther Steve Zelkowitz
KeySpan Corporation KeySpan Corporation
1 MetroTech Center 1 MetroTech Center
Brooklyn, NY 11201 Brooklyn, NY 11201
7. Persons Authorized to Convey Title. Frederick Lowther and Steve
Zelkowitz are each authorized to execute, acknowledge, deliver and record any
recordable instrument purporting to effect an interest of real property of the
LLC under Section 66 of the Act.
IN WITNESS WHEREOF, the undersigned hereby affirms under the penalties of
perjury that the facts stated herein are true as of the 3rd day of November,
1999.
/s/ Michael L. Manning
----------------------
Michael L. Manning
<PAGE>
ACJ ACQUISITION LLC
Operating Agreement
This Operating Agreement of ACJ Acquisition LLC (the "Company") is made
as of November 16, 1999, by and between the persons identified as the Managers
and the Sole Member on Schedule A attached hereto (such persons and their
respective successors in office or in interest being hereinafter referred to
individually as a "Manager" or "Member" or collectively as the "Managers" or
"Members").
WHEREAS, the Company was formed as a limited liability company under
the Massachusetts Limited Liability Company Act (as amended from time to time,
the "Act") on November 3, 1999; and
WHEREAS, the Managers and the Sole Member wish to set out fully their
respective rights, obligations and duties regarding the Company and its assets
and liabilities.
NOW, THEREFORE in consideration of the mutual covenants expressed
herein, the parties hereby agree as follows:
ARTICLE 1 - Organization and Powers
1.1 Organization. The Company has been formed by the filing of its
Certificate of Organization with the Massachusetts Secretary of State pursuant
to the Act. The Certificate of Organization may be restated by the Managers as
provided in the Act or amended by the Managers to change the address of the
office of the Company in Massachusetts and the name and address of its resident
agent in Massachusetts or to make corrections required by the Act. Other
additions to or amendments of the Certificate of Organization shall be
authorized by the Members as provided in Section 2.5. The Certificate of
Organization, as so amended from time to time, is referred to herein as the
"Certificate." The Managers shall deliver a copy of the Certificate and any
amendment thereto to any Member who so requests.
1.2 Purposes and Powers. The principal business activity and purpose of the
Company shall initially be to engage in financial advisory, financial
intermediary, merchant banking, and leasing and mortgage banking and mortgage
brokerage activities and to engage in any business related thereto or useful in
connection therewith. However, the business and purposes of the Company shall
not be limited to its initial principal business activity and, unless the
Members otherwise determine, the Company shall have authority to engage in any
other lawful business, trade, purpose or activity permitted by the Act, and it
shall possess and may exercise all of the powers and privileges granted by the
Act and any powers incidental thereto, so far as such powers and privileges are
necessary or convenient to the conduct,
1
<PAGE>
promotion or attainment of the business, purposes or activities of the Company,
including without limitation the following powers:
(1) to conduct its business and operations in any state, territory or
possession of the United States or in any foreign country or jurisdiction;
(2) to purchase, receive, take, lease or otherwise acquire, own, hold,
improve, maintain, use or otherwise deal in and with, sell, convey, lease,
exchange, transfer or otherwise dispose of, mortgage, pledge, encumber or create
a security interest in all or any of its real or personal property, or any
interest therein, wherever situated;
(3) to borrow or lend money or obtain or extend credit and other
financial accommodations, to invest and invest its funds in any type of security
or obligation of or interest in any public, private of governmental entity, and
to give and receive interests in real and personal property as security for the
payment of funds so borrowed, loaned or invested;
(4) to make contracts, including contracts of insurance, incur
liabilities and give guaranties, whether or not such guaranties are in
furtherance of the business and purposes of the Company, including without
limitation guaranties of obligations of other persons who are interested in the
Company or in whom the Company has an interest;
(5) to appoint one or more Managers of the Company, to employ of
officers, employees, agents and other persons, to fix the compensation and
define the duties and obligations of such personnel, to establish and carry out
retirement, incentive and benefit plans for such personnel and to indemnify such
personnel to the extent permitted by this Agreement and the Act;
(6) to make donations irrespective of benefit to the Company for the
public welfare or for community, charitable, religious, educational, scientific,
civic or similar purposes; and
(7) to institute, prosecute and defend any legal action or arbitration
proceeding involving the Company, and to pay, adjust, compromise, settle or
refer to arbitration any claim by or against the Company or any of its assets.
1.3 Principal Place of Business. The principal office and place of business
of the Company shall initially be c/o CT Corporation System, 2 Oliver Street,
Boston, Massachusetts 02109. After giving notice to the Members, the Managers
may change the principal office or place of business of the Company at any time
and may cause the Company to establish other offices or places of business.
2
<PAGE>
1.4 Fiscal Year. The fiscal year of the Company shall end on December 31 in
each year.
1.5 Qualification in other Jurisdictions. The Managers shall cause the
Company to be qualified or registered under applicable laws of any jurisdiction
in which the Company transacts business and shall be authorized to execute,
deliver and file any certificates and documents necessary to effect such
qualification or registration, including without limitation the appointment of
agents for service of process in such jurisdictions.
ARTICLE 2 - Members
2.1 Members. The initial Member of the Company and its address shall be
listed on Schedule A and such Schedule shall be amended from time to time by the
Managers to reflect the withdrawal of the initial Member or the admission of new
or additional Members pursuant to this Agreement. Schedule A shall set forth the
percentage interest which each Member holds in the profits and losses of the
Company (the "Membership Interests"). The Members shall constitute a single
class or group of Members of the Company for all purposes of the Act, unless
otherwise explicitly provided herein. The Managers shall notify the Members of
changes in Schedule A, which shall constitute the record list of the Members for
all purposes of this Agreement.
2.2 Admission of New Members. Additional persons may be admitted to the
Company as Members and may participate in the profits, losses, distributions,
allocations and capital contributions of the Company upon such terms as are
established by the Managers, which may include the establishment of classes or
groups of one or more Members having different relative rights, powers and
duties, or the right to vote as a separate class or group on specified matters,
by amendment of this Agreement under Section 10.4. Existing Members shall have
no preemptive or similar right to subscribe to the purchase of new membership
interests in the Company.
2.3 Meetings of Members.
(1) Meetings of Members may be called for any proper purpose at any
time by the Managers or the holders of a majority of the Membership Interests.
The Managers or the Members calling the meeting shall determine the date, time
and place of each meeting of Members, and written notice thereof shall be given
by the Managers to each Member not less than seven days or more than 60 days
prior to the date of the meeting. Notice shall be sent to Members of record on
the date when the meeting is called. The business of each meeting of Members
shall be limited to the purposes described in the notice. A written waiver of
notice, executed before or after a meeting by a Member or its authorized
attorney and delivered to the Managers, shall be deemed equivalent to notice of
the meeting.
3
<PAGE>
(2) Persons holding a majority of the Membership Interests shall
constitute a quorum for the transaction of any business at a meeting of Members.
Members may attend a meeting in person or by proxy. Members may also participate
in a meeting by means of conference telephone or similar communications
equipment that permits all Members present to hear each other. If less than a
quorum of the Members is present, the meeting may be adjourned by the chairman
to a later date, time and place, and the meeting may be held as adjourned
without further notice. When an adjourned meeting is reconvened, any business
may be transacted that might have been transacted at the original meeting.
(3) A chairman selected by the Managers shall preside at all meetings
of the Members unless the Members elect from the Membership a chairman of the
meeting. The chairman shall determine the order of business and the procedures
to be followed at each meeting of Members.
2.4 Action Without a Meeting. There is no requirement that the Members hold
a meeting in order to take action on any matter. Any action required or
permitted to be taken by the Members may be taken without a meeting if one or
more written consents to such action shall be signed by Members who hold the
Membership Interests or other interest in the Company required to approve the
action being taken. Such written consents shall be delivered to the Managers at
the principal office of the Company and unless otherwise specified shall be
effective on the date when the first consent is so delivered. The Managers shall
give prompt notice to all Members who did not consent to any action taken by
written consent of Members without a meeting.
2.5 Voting Rights. Unless otherwise required by the Act or this Agreement,
all actions, approvals and consents to be taken or given by the Members under
the Act, this Agreement or otherwise shall require the affirmative vote or
written consent of Members holding a majority of the Membership Interests.
2.6 Limitation of Liability of Members. Except as otherwise provided in the
Act, no Member of the Company shall be obligated personally for any debt,
obligation or liability of the Company or of any other Member, whether arising
in contract, tort or otherwise, solely by reason of being a Member of the
Company. Except as otherwise provided in the Act, by law or expressly in this
Agreement, no Member shall have any fiduciary or other duty to another Member
with respect to the business and affairs of the Company, and no Member shall be
liable to the Company or any other Member for acting in good faith reliance upon
the provisions of this Agreement. Subject to Section 7.2, no Member shall have
any responsibility to restore any negative balance in its Capital Account (as
defined in Section 6.1) or to contribute to or in respect of the liabilities or
obligations of the Company or return distributions made by the Company except as
required by the Act or other applicable law; provided, however, that Members are
responsible for their failure to make required Contributions under Section 6.2.
The failure of the Company to observe any formalities or
4
<PAGE>
requirements relating to the exercise of its powers or the management of its
business or affairs under this Agreement or the Act shall not be grounds for
making its Members or Managers responsible for the liabilities of the Company.
2.7 Authority. Unless specifically authored by the Managers, no Member that
is not a Manager shall be an agent of the Company or have any right, power or
authority to act for or to bind the Company or to undertake or assume any
obligation or responsibility of the Company or of any other Member.
2.8 No Right to Withdraw. No Member shall have any right to resign or
withdraw from the Company without the consent of the other Members or to receive
any distribution or the repayment of its capital contribution except as provided
in Section 7.2 and Article IX upon dissolution and liquidation of the Company.
No Member shall have any right to have the fair value of its Membership Interest
in the Company appraised and paid out upon the resignation or withdrawal of such
Member or any other circumstances.
2.9 Rights to Information. Members shall have the right to receive from the
Managers upon request a copy of the Certificate and of this Agreement, as
amended from time to time, and such other information regarding the Company as
is required by the Act, subject to reasonable conditions and standards
established by the Managers, as permitted by the Act, which may include without
limitation withholding or restricting the use of confidential information.
ARTICLE 3 - Management
3.1 Managers. Frederick Lowther and Steve Zelkowitz shall be the initial
Managers of the Company. The names and addresses of the Managers shall be listed
on Schedule A and such Schedule shall be amended from time to time by the
Managers to reflect the resignation or removal of Managers or the appointment of
new or additional Managers pursuant to this Agreement.
3.2 Qualification. Each Manager shall devote such time to the business and
affairs of the Company as is reasonably necessary for the performance of such
Manager's duties, but shall not be required to devote full time to the
performance of such duties and may delegate its responsibilities as provided in
Section 3.3. A Manager need not be a Member.
3.3 Powers and Duties of the Managers. The business and affairs of the
Company shall be managed under the direction of the Managers, who shall have and
may exercise on behalf of the Company all of its rights, powers, duties and
responsibilities under Section 1.2 or as provided by law, including without
limitation the right and authority:
5
<PAGE>
(1) to manage the business and affairs of the Company and for this
purpose to employ, retain or appoint any of officers, employees, consultants,
agents, brokers, professionals or other persons in any capacity for such
compensation and on such terms as the Managers deem necessary or desirable and
to delegate to such persons such of their duties and responsibilities as the
Managers shall determine;
(2) to enter into, execute, deliver, acknowledge, make, modify,
supplement or amend any documents or instruments in the name of the Company;
(3) to borrow money or otherwise obtain credit and other financial
accommodations on behalf of the Company on a secured or unsecured basis as
provided in Section 1 .2(c), and to perform or cause to be performed all of the
Company's obligations in respect of its indebtedness and any mortgage, lien or
security interest securing such indebtedness; and
(4) to make elections and prepare and file returns regarding any
federal, state or local tax obligations of the Company.
Unless otherwise provided in this Agreement, any action taken by a Manager,
and the signature of a Manager on any agreement, contract, instrument or other
document on behalf of the Company, shall be sufficient to bind the Company and
shall conclusively evidence the authority of that Manager and the Company with
respect thereto.
3.4 Tax Matters Partner. The Member so designated by the Managers from time
to time shall serve as the "Tax Matters Partner" of the Company for purposes of
Section 623l(a)(7) of the Internal Revenge Code of 1986 as amended (the "Code"),
with power to manage and represent the Company in any administrative proceeding
of the Internal Reverie Service. The initial Tax Matters Partner of the Company
shall be KeySpan Corporation.
3.5 Reliance by Third Parties. Any person dealing with the Company, the
Managers or any Member may rely upon a certificate signed by any Manager as to
(i) the identity of any Manager or Member; (ii) any factual matters relevant to
the affairs of the Company, (iii) the persons who are authorized to execute and
deliver any document on behalf of the Company; or (iv) any action taken or
omitted by the Company, the Managers or any Member.
3.6 Resignation and Removal. Any Manager may resign upon at least 60 days'
notice to the Members and the other Managers (unless notice is waived by them).
Any Manager may be removed at any time with or without cause by the Members.
3.7 Meetings and Action of Managers. Unless otherwise determined by the
Members or Managers, all action to be taken by the Managers shall be taken by
majority vote or written consent of a majority of the Managers then in office.
There is no requirement that
6
<PAGE>
the Managers hold a meeting in order to take action on any matter. Meetings of
the Managers may be called by any Manager. If action is to be taken at a meeting
of the Managers, notice of the time, date and place of the meeting shall be
given to each Manager by an officer or the Manager calling the meeting by
personal delivery, telephone or fax sent to the business or home address of each
Manager at least 24 hours in advance of the meeting, or by written notice mailed
to each Manager at either such address at least 72 hours in advance of the
meeting; however, no notice need be given to a Manager who waives notice before
or after the meeting, or who attends the meeting without protesting at or before
its commencement the inadequacy of notice to him or her. Managers may also
attend a meeting in person or by proxy, and they may also participate in a
meeting by means of conference telephone or similar communications equipment
that permits all Managers present to hear each other. A chairman selected by the
Managers shall preside at all meetings of the Managers. The chairman shall
determine the order of business and the procedures to be followed at each
meeting of the Managers.
3.8 Limitation of Liability of Manager. No Manager shall be obligated
personally for any debt, obligation or liability of the Company or of any
Member, whether arising in contract, tort or otherwise, solely by reason of
being or acting as Manager of the Company. No Manager shall be personally liable
to the Company or to its Members for breach of any fiduciary or other duty that
does not involve (i) a breach of the duty of loyalty to the Company or its
Members, (ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or (iii) a transaction from which the
Manager derived an improper personal benefit.
ARTICLE 4 - Indemnification
4.1 Definitions. For purposes of this Article:
"Manager" includes (i) a person serving as a Manager or an officer of the
Company or in a similar executive capacity appointed by the Managers and
exercising rights and duties delegated by the Managers, (ii) a person serving at
the request of the Company as a director, Manager, officer, employee or other
agent of another organization, and (iii) any person who formerly served in any
of the foregoing capacities;
"expenses" means all expenses, including attorneys' fees and disbursements,
actually and reasonably incurred in defense of a proceeding or in seeking
indemnification under this Article, and except for proceedings by or in the
right of the Company or alleging that a Manager received an improper personal
benefit, any judgments, awards, fines, penalties and reasonable amounts paid in
settlement of a proceeding; and
7
<PAGE>
"proceeding" means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, and any
claim which could be the subject of a proceeding.
4.2 Right to Indemnification. Except as limited by law and subject to the
provisions of this Article, the Company shall indemnify each of its Managers
against all expenses incurred by them in connection with any proceeding in which
a Manager is involved as a result of serving in such capacity, except that no
indemnification shall be provided for a Manager regarding any matter as to which
it shall be finally determined that such Manager did not act in good faith and
in the reasonable belief that its action was in the best interests of the
Company. Subject to the foregoing limitations, such indemnification may be
provided by the Company with respect to a proceeding in which it is claimed that
a Manager received an improper personal benefit by reason of its position,
regardless of whether the claim arises out of the Manager's service in such
capacity, except for matters as to which it is finally determined that an
improper personal benefit was received by the Manager.
4.3 Award of Indemnification. The determination of whether the Company is
authorized to indemnify a Manager hereunder and any award of indemnification
shall be made in each instance (a) by a majority of the Managers who are not
parties to the proceeding in question, (b) by independent legal counsel
appointed by the Managers or the Members or (c) by the holders of a majority of
the Membership Interests of the Members who are not parties to the proceeding in
question. The Company shall be obliged to pay indemnification applied for by a
Manager unless there is an adverse determination (as provided above) within
forty-five (45) days after the application. If indemnification is denied, the
applicant may seek an independent determination of its right to indemnification
by a court, and in such event, the Company shall have the burden of proving that
the applicant was ineligible for indemnification under this Article.
Notwithstanding the foregoing, in the case of a proceeding by or in the right of
the Company in which a Manager is adjudged liable to the Company,
indemnification hereunder shall be provided to such Manager only upon a
determination by a court having jurisdiction that in view of all the
circumstances of the case, such Manager is fairly and reasonably entitled to
indemnification for such expenses as the court shall deem proper.
4.4 Successful Defense. Notwithstanding any contrary provisions of this
Article, if a Manager has been wholly successful on the merits in the defense of
any proceeding in which it was involved by reason of its position as Manager or
as a result of serving in such capacity (including termination of investigative
or other proceedings without a finding of fault on the part of the Manager), the
Manager shall be indemnified by the Company against all expenses incurred by the
Manager in connection therewith.
4.5 Advance Payments. Except as limited by law, expenses incurred by a
Manager in defending any proceeding, including a proceeding by or in the right
of the Company, shall be paid by the Company to the Manager in advance of final
disposition of the proceeding upon
8
<PAGE>
receipt of its written undertaking to repay such amount if the Manager is
determined pursuant to this Article or adjudicated to be ineligible for
indemnification, which undertaking shall be an unlimited general obligation but
need not be secured and may be accepted without regard to the financial ability
of the Manager to make repayment; provided, however, that no such advance
payment of expenses shall be made if it is determined pursuant to Section 4.3 of
this Article on the basis of the circumstances known at the time (without
further investigation) that the Manager is ineligible for indemnification.
4.6 Insurance. The Company shall have power to purchase and maintain
insurance on behalf of any Manager, officer, agent or employee against any
liability or cost incurred by such person in any such capacity or arising out of
its status as such, whether or not the Company would have power to indemnify
against such liability or cost.
4.7 Heirs and Personal Representatives. The indemnification provided by
this Article shall inure to the benefit of the heirs and personal
representatives of each Manager.
4.8 Non-Exclusivity. The provisions of this Article shall not be construed
to limit the power of the Company to indemnify its Managers, Members, officers,
employees or agents to the full extent permitted by law or to enter into
specific agreements, commitments or arrangements for indemnification permitted
by law. The absence of any express provision for indemnification herein shall
not limit any right of indemnification existing independently of this Article.
4.9 Amendment. The provisions of this Article may be amended or repealed in
accordance with Section 10.4; however, no amendment or repeal of such provisions
that adversely affects the rights of a Manager under this Article with respect
to its acts or omissions at any time prior to such amendment or repeal shall
apply to such Manager without its consent.
[ARTICLE I - Conflicts of Interest
4.10 Transactions with Interested Persons. Unless entered into in bad
faith, no contract or transaction between the Company and one or more of its
Managers or Members, or between the Company and any other corporation,
partnership, association or other organization in which one or more of its
Managers or Members have a financial interest or are directors, partners,
Managers or officers, shall be voidable solely for this reason or solely because
such Manager or Member was present or participated in the authorization of such
contract or transaction if:
(1) the material facts as to the relationship or interest of such
Manager or Member and as to the contract or transaction were disclosed or known
to the other Managers
9
<PAGE>
(if any) or Members and the contract or transaction was authorized by the
disinterested Managers (if any) or Members; or
(2) the contract or transaction was fair to the Company as of the time
it was authorized, approved or ratified by the disinterested Managers (if any)
or Members; and no Manager or Member interested in such contract or transaction,
because of such interest, shall be considered to be in breach of this Agreement
or liable to the Company, any Manager or Member, or any other person or
organization for any loss or expense incurred by reason of such contract or
transaction be accountable for any gain or profit realized from such contract or
transaction.]
ARTICLE 5 - Capital Accounts and Contributions
5.1 Capital Accounts.
(1) There shall be established on the books of the Company a separate
capital account (a "Capital Account") for each Member.
(2) The Capital Account of each Member (regardless of the time or
manner in which such Member's interest was acquired) shall be maintained in
accordance with the rules of Section 704(b) of the Internal Revenue Code of
1986, as amended, from time to time (the "Code"), and Treasury Regulation
Section 1.704-l(b)(2)(iv). Adjustments shall be made to the Capital Accounts for
distributions and allocations as required by the rules of Section 704(b) of the
Code and the Treasury Regulations thereunder.
(3) If there is a transfer of all or a part of an interest in the
Company by a Member, the Capital Account of the transferor that is attributable
to the transferred interest shall carry over to the transferee of such Member.
(4) Subject to Section 7.2, notwithstanding any other provision
contained herein to the contrary, no Member shall be required to restore any
negative balance in its Capital Account.
5.2 Contributions. Each Member shall make the contributions to the capital
of the Company (herein "Contributions") specified on Schedule A. All
Contributions shall be paid in cash unless otherwise specified on Schedule A or
agreed to by the Members. Except as set forth on Schedule A, no Member or
Manager shall be entitled or required to make any contribution to the capital of
the Company; however, the Company may borrow from its Members as well as from
banks or other lending institutions to finance its working capital or the
acquisition of assets upon such terms and conditions as shall be approved by the
Managers, and any such borrowing from Members shall not be considered
Contributions or reflected in their Capital Accounts. The value of all non-cash
Contributions made by Members shall be set
10
<PAGE>
forth on Schedule A. No Member shall be entitled to any interest or compensation
with respect to its Contribution or any services rendered on behalf of the
Company except as specifically provided in this Agreement or approved by the
Managers. No Member shall have any liability for the repayment of the
Contribution of any other Member and each Member shall look only to the assets
of the Company for return of its Contribution.
ARTICLE 6 - Profits Losses and Distributions
6.1 Profits. Losses and Distributions
(1) All profits and losses arising from the normal course of business
operations or otherwise and all cash available for distribution from whatever
source, commencing with the date of this Agreement, shall be allocated or
distributed to the Members according to their Membership Interests.
(2) All profits and losses allocated to the Members shall be credited
or charged, as the case may be, to their Capital Accounts. The terms "profits"
and "losses" as used in this Agreement shall mean income and losses, and each
item of income, gain, loss, deduction or credit entering into the computation
thereof, as determined in accordance with the accounting methods followed by the
Company and computed in a manner consistent with Treasury Regulation Section
1.704-l(b)(2)(iv). Profits and losses for Federal income tax purposes shall be
allocated in the same manner as profits and losses for purposes of this Article
VII, except as provided in Section 7.3(a).
6.2 Distributions Upon Dissolution.
(1) Upon dissolution and termination, after payment of, or adequate
provision for, the debts and obligations of the Company, the remaining assets of
the Company (or the proceeds of sales or other dispositions in liquidation of
the Company assets, as may be determined by the remaining or surviving
Member(s)) shall be distributed to the Members in accordance with the positive
balances in their Capital Accounts after taking into account all Capital Account
adjustments for the Company taxable year. In the event that a Member has a
negative balance in his Capital Account following the liquidation of the Company
or his interest in the Company after taking into account all Capital Account
adjustments for the Company taxable year in which the liquidation occurs, such
Member shall pay to the Company in cash an amount equal to the deficit balance
in the Capital Account of such Member.
(2) With respect to assets distributed in kind to the Members in
liquidation or otherwise, (i) any unrealized appreciation or unrealized
depreciation in the values of such assets shall be deemed to be profits and
losses realized by the Company immediately prior to the liquidation or other
distribution event; and (ii) such profits and losses shall be allocated to the
Members and credited or charged to their Capital Accounts, and any property so
11
<PAGE>
distributed shall be treated as a distribution of an amount in cash equal to the
excess of such fair market value over the outstanding principal balance of and
accrued interest on any debt by which the property is encumbered. For the
purposes of this Section 7.2(b), "unrealized appreciation" or "unrealized
depreciation" shall mean the difference between the fair market value of such
assets, taking into account the fair market value of the associated financing
but subject to Section 770l (g) of the Code, and the Company's basis in such
assets as determined under Treasury Regulation Section 1.704-l(b). This Section
7.2(b) is merely intended to provide a rule for allocating unrealized gains and
losses upon liquidation or other distribution event, and nothing contained in
this Section 7.2(b) or elsewhere in this Agreement is intended to treat or cause
such distributions to be treated as sales for value. The fair market value of
such assets shall be determined by an appraiser to be selected by the Manager
with the Consent of the Members.
6.3 Special Provisions.
Notwithstanding the foregoing provisions in this Article VII:
(1) Income, gain, loss and deduction with respect to Company property
which has a variation between its basis computed in accordance with Treasury
Regulation Section 1.704-(b) and its basis computed for Federal income tax
purposes shall be shared among Members so as to take account of the variation in
a manner consistent with the principles of Section 704(c) of the Code and
Treasury Regulation Section 1.704-3.
(2) Section 704 of the Code and the Treasury Regulations issued
thereunder, including but not limited to the provisions of such regulations
addressing qualified income offset provisions, minimum gain charge back
requirements and allocations of deductions attributable to nonrecourse debt and
partner nonrecourse debt, are hereby incorporated by reference into this
Agreement.
6.4 Distribution of Assets in Kind. No Member shall have the right to
require any distribution of any assets of the Company to be made in cash or in
kind. If the Managers determine to distribute assets of the Company in kind,
such assets shall be distributed on the basis of their fair market value as
determined by the Managers. Any Member entitled to any interest in such assets
shall, unless otherwise determined by the Managers, receive separate assets of
the Company, and not an interest as tenant-in-common with other Members so
entitled in each asset being distributed. Distributions in kind need not be made
on a pro-rata basis but may be made on any basis which the Managers determine to
be reasonable under the circumstances.
ARTICLE 7 - Transfers of Interests
7.1 Transfer of a Member's Membership Interest.
12
<PAGE>
(1) Except as set forth in the first sentence of Section 8.2, no Member may
sell, assign, give, pledge, hypothecate, encumber or otherwise transfer,
including, without limitation, any assignment or transfer by operation of law or
by order of court, such Member's Membership Interest in the Company or any part
thereof, or in all or any part of the assets of the Company, without a prior
written consent of a majority of the Managers and in accordance with the terms
of Section 8. l(b). The granting or denying of such consent shall be in the
Managers' absolute discretion. Any attempted sale, transfer, assignment, pledge
or other disposition in contravention of the provisions of this section shall be
void and ineffectual and shall not bind, or be recognized, by the Company.
(2) After obtaining a prior written consent of a majority of the Managers,
but before any Membership Interest or any part thereof may be sold, assigned,
gifted, pledged, hypothecated, encumbered or otherwise transferred, including
transfer by operation of law or by order of court, the Member holding such
Membership Interest proposing such sale or transfer (the "Transferor") shall
first give written notice thereof to other Members at least sixty (60) days
prior to the proposed date of transfer (the "Transfer Date") stating the
proposed transferee, the Membership Interest proposed to be transferred, the
purchase price, if any, and the terms of the proposed transaction. The Members
receiving such notice (the "Purchasing Members") shall thereupon have the
option, but not the obligation, to acquire all, but not less than all, of the
Membership Interest proposed to be sold or transferred by the Transferor for the
Purchase Price determined pursuant to Section 8.1 (d) (the "Purchase Price").
Within thirty (30) days after the giving of such notice by the Transferor, each
Purchasing Member shall give written notice ("Purchase Notice") to the
Transferor stating whether or not he or she elects to exercise the option to
purchase and a date and time (the "Closing Date") for the consummation of the
purchase not less than sixty (60) or more than ninety (90) days after the giving
of the Purchase Notice. If two (2) or more Purchasing Members desire to purchase
the Membership Interest proposed to be sold or transferred, then, in the absence
of an agreement between or among them, each such Purchasing Member shall
purchase the Membership Interest proposed to be sold or transferred in the
proportion that his or her Membership Interest bears to the total Membership
Interests of all the Purchasing Members who desire to so purchase. Failure by a
Purchasing Member to deliver a Purchase Notice within the time period allowed
shall be deemed an election by such Purchasing Member not to exercise such
option. If the Purchase Price is determined by appraisal as set forth in Section
8.1(d)(ii), a Purchasing Member may rescind his or her election to purchase by
written notice to the Transferor given within ten (10) days after being notified
of the determination of the appraisers.
(3) If the Purchasing Members waive in writing their option to purchase or
fail to exercise their right to purchase within the time period allowed, the
Transferor may transfer such Membership Interest at any time during the 60-day
period after the termination of such time period, but only upon the terms and to
the transferee stated in its notice delivered
13
<PAGE>
pursuant to subsection (b). After such Membership Interest is so transferred, or
if the transfer is not consummated within such period the Membership Interest
shall again become subject to the terms of this Agreement.
(4) The Purchase Price shall be determined as follows:
(1) In the case of a proposed sale or transfer under paragraph
(b) to a third party in a bona fide transaction for fair
value payable in cash or the equivalent currently or in
future installments, the Purchase Price for such Membership
Interests shall be the value offered by such third party
payable upon the same terms.
(2) In all other cases, including without limitation a proposed
transfer or other disposition not constituting a sale
described in subsection (i), the Purchase Price shall be
the fair market value of the Membership Interest being
purchased as of the last day of the month immediately prior
to the month during which the transferor gave his or her
notice. "Fair market value" as of any date shall mean the
cash price obtainable in an arm's-length sale between an
informed and willing buyer (under no compulsion to
purchase) and an informed and willing seller (under no
compulsion to sell) of the Membership Interest, based upon
the going concern value of the Company, taking into account
any minority or non-control discount. If the parties are
unable to agree upon the fair market value, such fair
market value shall be determined by appraisal as follows:
Either party may require appraisal by giving written notice
to the other party and appointing an independent appraiser.
The other party shall deliver a written notice appointing
an independent appraiser within fifteen (15) days after
receipt of the notice from the other. The two appraisers so
appointed, or if only one appraiser is appointed, that
appraiser, shall promptly seek to determine the fair market
value. If the two appraisers cannot agree within thirty
(30) days of their appointment, a third independent
appraiser shall be chosen within ten (10) days thereafter
by the mutual consent of such first two appraisers or, if
such first two appraisers fail to agree upon the
appointment of a third appraiser, such appointment shall be
made by the Boston office of the American Arbitration
Association, or any organization successor thereto, and
shall be a disinterested person qualified in the valuation
of business enterprises engaged in the same or similar
lines of business as the Company. The three appraisers
shall
14
<PAGE>
make the determination in accordance with the rules of the
American Arbitration Association or any such successor then
in effect, and such determination shall be binding and
conclusive on the parties. Each party shall pay the costs
of its own appraiser and shall share equally in the costs,
if any, of a third appraiser and any other costs of
arbitration, excluding their own costs.
7.2 Death or Incompetence of a Member. If a Member dies, such Member's
executor, administrator, or trustee, or, if he or she is adjudicated
incompetent, such Member's guardian, or, if it is a corporation, trust, limited
liability company or partnership and is dissolved, the liquidator, shall
automatically become an assignee (the "Assignee") of the Membership Interest of
the deceased, incompetent, or dissolved Member. The Assignee may receive
distributions and shall have all the rights of a Member for the purpose of
settling or managing such deceased or incompetent Member's estate, but shall not
be a Member and shall not have the power to vote such Member's Membership
Interest. The Assignee shall also have such power as the decedent, incompetent
or dissolved entity possessed to: (1) assign all or any part of the Member's
Membership Interest subject to Section 8.1; and (2) to satisfy conditions
precedent to the assignment of the Membership Interest set forth in Section 8.1.
7.3 Admission of Member; Effect of Transfer.
(1) In no event may any person obtaining a Membership Interest in the
Company by assignment, transfer, pledge or other means from an existing Member
be admitted as a successor Member without the affirmative vote or written
consent of Members of the Membership Interests exclusive in each case of the
Member whose Membership Interest is being transferred.
(2) If the transferee is admitted as a Member or is already a Member,
the Member transferring its Membership Interest shall be relieved of liability
with respect to the transferred Membership Interest arising or accruing under
this Agreement on or after the effective date of the transfer, unless the
transferor affirmatively assumes such liability; provided, however, that the
transferor shall not be relieved of any liability for prior distributions and
unpaid contributions unless the transferee affirmatively assumes such
liabilities.
(3) Any person who acquires in any manner a Membership Interest or any
part thereof in the Company, whether or not such person has accepted and assumed
in writing the terms and provisions of this Agreement or been admitted as a
Member, shall be deemed by the acquisition of such Membership Interest to have
agreed to be subject to and bound by all of the provisions of this Agreement
with respect to such Membership Interest, including without limitation, the
provisions hereof with respect to any subsequent transfer of such Membership
Interest.
15
<PAGE>
ARTICLE 8 - Dissolution Liquidation and Termination
8.1 Dissolution. The Company shall dissolve and its affairs shall be wound
up upon the first -------------------- to occur of the following:
(1) the written consent of the Members;
(2) the entry of a decree of judicial dissolution under Section 44 of
the Act; or
(3) The consolidation or merger of the Company in which it is not the
resulting or surviving entity.
Notwithstanding the provisions of Section 43(4) of the Act, the death,
insanity, retirement, resignation, expulsion, bankruptcy or dissolution of a
Member shall not result in dissolution of the Company.
8.2 Liquidation. Upon dissolution of the Company, the Managers shall act as
its liquidating trustees or the Managers may appoint one or more Managers or
Members as liquidating trustee. The liquidating trustees shall proceed
diligently to liquidate the Company and wind up its affairs and shall dispose of
the assets of the Company as provided in Section 7.2 hereof. Until final
distribution, the liquidating trustees may continue to operate the business and
properties of the Company with all of the power and authority of the Managers.
As promptly as possible after dissolution and again after final liquidation, the
liquidating trustees shall cause an accounting by the accounting firm then
serving the Company of the Company's assets, liabilities, operations and
liquidating distributions to be given to the Members.
8.3 Certificate of Cancellation. Upon completion of the distribution of
Company assets as provided herein, the Company shall be terminated, and the
Managers (or such other person or persons as the Act may require or permit)
shall file a Certificate of Cancellation with the Secretary of State of
Massachusetts under the Act, cancel any other filings made pursuant to Sections
1.1, 1.3 and 1.5 and take such other actions as may be necessary to terminate
the existence of the Company.
ARTICLE 9 - General Provisions
9.1 Offset. Whenever the Company is obligated to make a distribution or
payment to any Member, any amounts that Member owes the Company may be deducted
from said distribution or payment by the Managers.
16
<PAGE>
9.2 Notices. Except as expressly set forth to the contrary in this
Agreement, all notices, requests, or consents required or permitted to be given
under this Agreement must be in writing and shall be deemed to have been
properly given if sent by registered or certified mail, postage prepaid, by
commercial overnight courier, by facsimile or if delivered in hand to Members at
their addresses on Schedule A, or such other address as a Member may specify by
notice to the Managers and to the Company or the Managers at the address of the
principal office of the Company specified in Section l .3. Whenever any notice
is required to be given by law, the Certificate or this Agreement, a written
waiver thereof, signed by the person entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of such
notice.
9.3 Entire Agreement; Binding Effect. This Agreement constitutes the entire
agreement of the Members and the Managers relating to the Company and supersedes
all prior oral or written agreements or understandings with respect to the
Company. This Agreement is binding on and inures to the benefit of the parties
and their respective successors, permitted assigns and legal representatives.
9.4 Amendment or Modification. Except as specifically provided herein, this
Agreement may be amended or modified from time to time only by a written
instrument signed by Members holding a majority of the Membership Interests.
9.5 Governing Law; Severability. This Agreement is governed by and shall be
construed in accordance with the law of The Commonwealth of Massachusetts,
exclusive of its conflict-of-laws principles. In the event of a conflict between
the provisions of this Agreement and any provision of the Certificate or the
Act, the applicable provision of this Agreement shall control, to the extent
permitted by law. If any provision of this Agreement or the application thereof
to any person or circumstance is held invalid or unenforceable to any extent,
the remainder of this Agreement and the application of that provision shall be
enforced to the fullest extent permitted by law.
9.6 Further Assurances. In connection with this Agreement and the
transactions contemplated hereby, each Member shall execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions, as requested by the Managers.
9.7 Waiver of Certain Rights. Each Member irrevocably waives any right it
may have to maintain any action for dissolution of the Company or for partition
of the property of the Company. The failure of any Member to insist upon strict
performance of a covenant hereunder or of any obligation hereunder, irrespective
of the length of time for which such failure continues, shall not be a waiver of
such Member's right to demand strict compliance herewith in the future. No
consent or waiver, express or implied, to or of any breach
17
<PAGE>
or default in the performance of any obligation hereunder shall constitute a
consent or waiver to or of any other breach or default in the performance of the
same or any other obligation hereunder.
9.8 Third-Party Beneficiaries. The provisions of this Agreement are not
intended to be for the benefit of any creditor or other person to whom any debts
or obligations are owed by, or who may have any claim against, the Company or
any of its Members or Managers, except for Members or Managers in their
capacities as such. Notwithstanding any contrary provision of this Agreement, no
such creditor or person shall obtain any rights under this Agreement or shall,
by reason of this Agreement, be permitted to make any claim against the Company
or any Member or Manager.
9.9 Interpretation. For the purposes of this Agreement, terms not defined
in this Agreement shall be defined as provided in the Act; and all nouns,
pronouns and verbs used in this Agreement shall be construed as masculine,
feminine, neuter, singular, or plural, whichever shall be applicable. Titles or
captions of Articles and Sections contained in this Agreement are inserted as a
matter of convenience and for reference, and in no way define, limit, extend or
describe the scope of this Agreement or the intent of any provision hereof.
9.10 Counterparts. This Agreement may be executed in any number of
counterparts with the same effect as if all parties had signed the same
document, and all counterparts shall be construed together and shall constitute
the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date set forth above.
MANAGERS:
Frederick Lowther
Steve Zelkowitz
MEMBERS:
KeySpan Corporation
18
<PAGE>
ACJ Acquisition LLC
Schedule A
MANAGERS
Name and Address
of Manager
Frederick Lowther Steve Zelkowitz
KeySpan Corporation Keyspan Corporation
1 MetroTech Center 1 MetroTech Center
Brooklyn, NY 11201 Brooklyn, NY 11201
MEMBERS
Name and Address
of Member Contribution Membership Interest
KeySpan Corporation $100.00 100%
1 MetroTech Center
Brooklyn, NY 11201
STATE OF NEW HAMPSHIRE
BEFORE THE
NEW HAMPSHIRE PUBLIC UTILITIES COMMISSION
DG 99-______
Re: EnergyNorth Natural Gas, Inc.
Petition for Approval of the Acquisition of EnergyNorth Natural Gas, Inc.,
by Eastern Enterprises and KeySpan Corporation
----------------------------------------------
Eastern Enterprises ("Eastern"), KeySpan Corporation ("KeySpan"),
EnergyNorth, Inc. ("EnergyNorth") and EnergyNorth Natural Gas, Inc. ("ENGI")
(together, the "Joint Petitioners") hereby file this petition requesting that
the New Hampshire Public Utilities Commission (the "Commission"), pursuant to
the provisions of RSA 369:8,II and RSA 374:33, approve: (1) the acquisition by
Eastern of EnergyNorth, the parent company of ENGI, which will be accomplished
through the merger of EnergyNorth and EE Acquisition Company ("Merger Sub"), a
wholly owned subsidiary of Eastern; and (2) the indirect acquisition of
EnergyNorth by KeySpan, which will be accomplished through the simultaneous
merger of Eastern and ACJ Acquisition LLC ("ACJ"), a subsidiary of KeySpan.
As described below, and as supported in detail by the prefiled written
testimony submitted on behalf of the Joint Petitioners, the transactions
described above will result in "no net harm" to the customers of ENGI, and
therefore, the proposed transactions meet the public-interest standard embodied
in RSA 369:8,II and RSA 374:33. In support thereof, the Joint Petitioners state
the following:
1. EnergyNorth is a New Hampshire corporation with a principal place of
business in Manchester, New Hampshire. EnergyNorth is the owner of 100
percent of the
<PAGE>
-2-
common stock of ENGI, EnergyNorth Propane, Inc., ENI Mechanicals, Inc. and
EnergyNorth Realty, Inc.
2. Eastern is a Massachusetts business trust established and existing under a
Declaration of Trust dated July 18, 1929, as amended, with a principal
place of business in Weston, Massachusetts. Eastern is a holding company
that owns 100 percent of the common stock of Boston Gas Company, Colonial
Gas Company and Essex Gas Company, which are local distribution companies
serving a total of 735,000 natural gas customers in Massachusetts. Eastern
also owns and operates several unregulated business enterprises.
3. KeySpan is a New York corporation with a principal place of business in
Brooklyn, New York. KeySpan is a holding company that owns 100 percent of
the common stock of two local distribution companies serving a total of 1.6
million natural gas customers in New York, New York and Long Island, New
York, under the name of The Brooklyn Union Gas Company and KeySpan Gas East
Corporation d/b/a Brooklyn Union Company of Long Island (collectively, the
"Brooklyn Union Companies"). KeySpan also owns and operates other regulated
electric generation companies in the state of New York, as well as several
unregulated business enterprises.
4. ENGI is a New Hampshire corporation and a public utility as defined in RSA
362:2, with a principal place of business in Manchester, New Hampshire.
ENGI is the largest natural gas utility in New Hampshire serving
approximately 72,000 customers in 28 cities and towns in the southern and
central part of New Hampshire and the City of Berlin in the northern part
of the state.
<PAGE>
-3-
5. On July 14, 1999, Eastern and EnergyNorth entered into an Agreement and
Plan of Reorganization (the "EnergyNorth Merger Agreement") that provides
for the creation of Merger Sub and the subsequent merger of EnergyNorth
with and into Merger Sub, subject to the necessary approvals of government
regulatory authorities having jurisdiction. On November 4, 1999, KeySpan
and Eastern entered into an Agreement and Plan of Merger (the "Eastern
Merger Agreement") that provides for the creation of ACJ as a subsidiary of
KeySpan and the subsequent merger of ACJ with and into Eastern, subject to
the necessary approvals of government regulatory authorities having
jurisdiction.
6. On November 4, 1999, in conjunction with the execution of the Eastern
Merger Agreement, Eastern and EnergyNorth amended the EnergyNorth Merger
Agreement (the "EnergyNorth Amendment") to provide for the merger of Merger
Sub with and into EnergyNorth, subject to the necessary approvals of
government regulatory authorities having jurisdiction and of the
shareholders of the respective companies. If such approvals are obtained,
these agreements would result in EnergyNorth becoming a direct, wholly
owned subsidiary of Eastern and, simultaneously, an indirect subsidiary of
KeySpan. A copy of the EnergyNorth Merger Agreement and the EnergyNorth
Amendment (together, the "Amended EnergyNorth Merger Agreement") is
appended to the prefiled testimony of Walter J. Flaherty as Attachments
WJF-1 and WJF-2, respectively. A copy of the Eastern Merger Agreement is
appended thereto as Attachment WJF-3.
<PAGE>
-4-
7. The Amended EnergyNorth Merger Agreement sets forth the following actions
that, in conjunction with the Eastern Merger Agreement, will result in
EnergyNorth becoming an indirect subsidiary of KeySpan:
(a) EnergyNorth's stockholders will vote on the approval of the merger of
EnergyNorth with Merger Sub.
(b) Upon receipt of the necessary regulatory approvals and the filing of
the Articles of Merger, Merger Sub will be merged with and into
EnergyNorth in accordance with the laws of the State of New Hampshire
(the "Reverse Merger"). This type of merger is known as a "reverse
triangular merger" for tax and reorganization purposes. EnergyNorth
will be the surviving corporation and will continue to operate as
"EnergyNorth, Inc." under the laws of the State of New Hampshire.
(c) As set forth in the Amended EnergyNorth Merger Agreement, each
outstanding share of EnergyNorth common stock will be extinguished and
automatically converted into the right to receive $61.13 in cash. This
conversion will be a taxable event to the shareholders of EnergyNorth.
(d) Upon the completion of the Reverse Merger, EnergyNorth will become a
wholly owned subsidiary of Eastern. As set forth above, pursuant to
the Eastern Merger Agreement, ACJ will thereupon be merged with and
into Eastern. As a result, Eastern, and indirectly, EnergyNorth and
ENGI, will become subsidiaries of KeySpan.
8. In the event that the Eastern Merger Agreement with KeySpan terminates or
expires, then the merger of EnergyNorth with and into Merger Sub will be
accomplished in
<PAGE>
accordance with the Amended EnergyNorth Merger Agreement, under the
following terms:
(a) EnergyNorth will be merged with and into Merger Sub with Merger Sub as
the surviving corporation operating as "EnergyNorth, Inc.," under the
laws of the State of New Hampshire (the "Forward Merger"). This type
of merger is known as a "forward triangular merger" for tax and
reorganization purposes.
(b) Each outstanding share of EnergyNorth common stock will be
extinguished and automatically converted into the right to receive at
the effective time of the Forward Merger one of the following: (i) the
per-share cash amount of $47.00; (ii) a number of shares of Eastern
common stock, $1.00 par value, pursuant to an exchange ratio
determined at the time of the transaction in accordance with the terms
of the Amended EnergyNorth Merger Agreement; or (iii) a combination of
cash and shares of Eastern.
(c) The holders of EnergyNorth common stock are permitted to indicate the
preferred form of payment for their shares subject to the limitation
that 50.1 percent of EnergyNorth shares will be exchanged for shares
of Eastern common stock with the remaining EnergyNorth shares to be
exchanged for cash. In order to ensure that the merger qualifies as a
tax-free reorganization, shareholder elections would be subject to the
further limitation that, in no event, would the total value of Eastern
shares so exchanged fall below 45 percent of the aggregate
consideration used to complete the transaction.
(d) The completion of the Forward Merger will cause EnergyNorth, and its
subsidiary ENGI, to become wholly owned subsidiaries of Eastern.
<PAGE>
-6-
10. Consummation of the merger between EnergyNorth and Merger Sub is subject to
certain conditions, which include regulatory approval by the Commission, as
set forth in Article 6 of the Amended EnergyNorth Merger Agreement.
Accordingly, Article 6.1(b) specifies that, with regard to rates and the
recovery of costs associated with the merger (including the acquisition
premium and transaction and integration costs), the Commission's approval
is required upon terms and conditions that are not less favorable than
those set forth by the Commission in Re: Northern Utilities, Inc., Docket
No. DF 98-040, Order No. 22,983 (1998) ("Northern Utilities").
11. In Northern Utilities, the Commission approved a stipulation between the
parties that granted the right to request recovery of merger-related costs
in a future proceeding on the condition that the benefits of the merger to
customers are demonstrated to equal or exceed such costs. Northern
Utilities at 4, 7. In approving the stipulation, the Commission ruled that
customers would not be harmed as a result of the merger because, among
other things, the conditions set forth therein: (1) required Northern to
substantiate savings resulting from the merger before seeking to include
any part of the acquisition premium in rates; and (2) deferred a
determination regarding capital structure issues until the time of any such
request. Id. at 7.
12. In New England Electric System, DE 99-035, Order No. 23,308 (1999) ("New
England Electric"), the Commission stated that the mandate in RSA 369:8,
which requires that mergers will "not adversely affect the rates, terms,
service, or operation of the public utility within the state" embodies the
same standard reflected in RSA 374:33, which authorizes the Commission to
approve mergers that are "lawful, proper and in the public interest." New
England Electric, slip op. at 16. Thus, proposed
<PAGE>
-7-
mergers must meet a "no net harm" test in order to be approved by the
Commission. Id. The Commission stated that, in -- applying the no net harm
test, it must "assess the benefits and risks of the proposed merger and
determine what the overall effect on the public interest will be, giving
the transaction . . . approval if the effect is at worst neutral from the
public interest perspective." Id. Accordingly, the Commission's standard
will be met where an applicant for approval of a -- merger demonstrates
that customers would be no worse off with the merger than without the
merger. Id. at 17.
13. Pursuant to the Commission's findings in Northern Utilities and New England
Electric, the Joint Petitioners file herewith a merger proposal that meets
and exceeds the Commission's no net harm standard. Specifically, the Joint
Petitioners propose: (1) to provide customers with immediate gas-cost
savings through a 2.2 percent burner-tip price reduction; (2) to work with
the Commission to develop a mechanism for identifying and quantifying other
cost savings that are achievable only as a direct result of the merger; and
(3) to have the opportunity to request, in a future proceeding before the
Commission, the recovery of merger-related costs required to accomplish the
transaction if such costs are demonstrated to be offset by merger-related
savings.
14. The proposed transactions and the expected benefits are discussed in detail
in the accompanying testimony of Walter J. Flaherty, Executive Vice
President and Chief Financial Officer of Eastern, Michelle L. Chicoine,
Executive Vice President of EnergyNorth and President and Chief Operating
Officer of ENGI, Joseph F. Bodanza, Senior Vice President, Treasurer and
Chief Financial Officer of Boston Gas, William R. Luthern, Vice President
of Gas Resources for Boston Gas and Craig G. Matthews, President and Chief
Operating Officer of KeySpan.
<PAGE>
-8-
15. As discussed in the testimony of William R. Luthern, ENGI's customers will
benefit substantially from increased supply options and enhanced purchasing
power as a result of the mergers described above. The ability to dispatch
across Eastern's combined distribution system will increase flexibility,
enable the optimization of existing gas-supply resources, encourage and
facilitate more efficient purchasing capability and secure the ability to
exercise broader system control. The expanded supply portfolio will also
increase the overall reliability of ENGI's distribution system. These
benefits will result in an immediate 2.2 percent burner-tip rate reduction
for customers of ENGI. As described below, the potential for additional
cost reductions resulting from KeySpan's acquisition of Eastern is
addressed in the testimony of Craig G. Matthews.
16. As discussed in the testimony of Michelle L. Chicoine and Joseph F.
Bodanza, the merger will result in the creation of economies of scale and
the elimination of redundant resources, thereby producing operations and
maintenance expense cost savings that could not be achieved in the absence
of the merger. In addition, as a result of the merger, Eastern will be able
to extend certain resources of Boston Gas Company to ENGI, including
information-systems technology and customer-service enhancements, allowing
ENGI to avoid substantial investment in similar systems, which would be
required in the absence of the merger. Moreover, Eastern's ability to
achieve these and other cost reductions is enhanced because the service
territory of ENGI is contiguous with the service territory of Colonial Gas
Company (a gas distribution subsidiary of Eastern).
<PAGE>
-9-
17. As discussed in the testimony of Walter J. Flaherty, approval of the merger
in accordance with the terms of Northern Utilities will provide ENGI with
the opportunity to request, in the future, recovery of merger-related costs
upon a finding by the Commission that identified and quantified cost
savings resulting from the merger warrant such recovery. Because the
recovery of merger-related costs through merger-related savings would leave
ENGI's customers no worse off with the merger than without, the merger will
result in "no net harm" to ENGI's customers. In fact, as described in the
supporting testimony filed with this petition, the merger will provide
numerous benefits to ENGI's customers, including an immediate reduction in
burner-tip prices and future efficiencies that will result in long-term
cost savings and service-quality improvements for customers. Thus, the
overall effect of the proposed merger will directly benefit customers.
18. As described in the testimony of Craig G. Matthews, Eastern's merger with
KeySpan will cause EnergyNorth to become an indirect subsidiary of KeySpan.
KeySpan's acquisition of Eastern, however, will not diminish any commitment
advanced by Eastern with regard to the effect of the merger on the rates,
terms, service and operations of ENGI. KeySpan is similarly committed to
continued investment in ENGI's distribution system, continued support of
community interests and to maintaining a local presence to provide safe,
reliable and cost-effective service to ENGI customers. Moreover, Eastern's
merger with KeySpan may present the opportunity to achieve incremental cost
savings and enhancements to reliability and customer service beyond those
identified and provided by Eastern. Because KeySpan's merger with Eastern
will have no effect on the rates, terms, service and
<PAGE>
-10-
operations of ENGI, KeySpan's indirect acquisition of EnergyNorth will
result in no net harm to ENGI's customers.
19. As further described in the testimonies of Messrs. Matthews and Flaherty,
the Joint Petitioners seek approval of the acquisition of ENGI both
directly and indirectly by Eastern and KeySpan, respectively. However, the
KeySpan-Eastern merger is not contingent upon the Eastern-EnergyNorth
transaction, and therefore, the Commission's decision in this proceeding
would affect only EnergyNorth's participation in the transaction and would
not affect KeySpan's acquisition of Eastern.
WHEREFORE, the Joint Petitioners respectfully request that the Commission:
a. Determine that the proposed acquisition of EnergyNorth by Eastern,
which will be accomplished through the merger of EnergyNorth and
Merger Sub, and that the terms thereof will result in "no net harm" to
ENGI's customers;
b. Determine that the proposed acquisition of EnergyNorth by KeySpan
through its acquisition of Eastern, which will be accomplished through
the merger of Eastern and ACJ, and that the terms thereof will result
in "no net harm" to ENGI's customers;
c. Approve the above-described transactions as filed in accordance with
RSA 369:8,II(b)(2), or, alternatively, RSA 374:33;
d. Determine that the ENGI may, in a future proceeding before the
Commission, request the recovery of merger-related costs if it is able
to substantiate that merger-related savings meet or exceed such costs,
consistent with the Commission's findings in Northern Utilities; and
<PAGE>
-11-
e. Issue such other and further orders as may be necessary and just and
reasonable.
Respectfully submitted,
JOINT PETITIONERS:
EASTERN ENTERPRISES
KEYSPAN CORPORATION
ENERGYNORTH, INC.
ENERGYNORTH NATURAL GAS, INC.
By Their Attorneys,
-----------------------------------
Steven V. Camerino, Esq.
McLane, Graf, Raulerson & Middleton, P.A.
15 North Main Street
Concord, New Hampshire 03301
(603) 226-0400
-----------------------------------
Robert J. Keegan, Esq.
Robert N. Werlin, Esq.
Cheryl M. Kimball, Esq.
Keegan, Werlin & Pabian, LLP
21 Custom House Street
Boston, Massachusetts 02110
(617) 951-1400
and
<PAGE>
-12-
EASTERN ENTERPRISES
By its Attorney,
-----------------------------------
L. William Law, Jr., Esq.
Senior Vice President and General Counsel
Eastern Enterprises
9 Riverside Road
Weston, Massachusetts 02193
(781) 647-2300
and
KEYSPAN CORPORATION
By its Attorneys
-----------------------------------
James C. Hood, Esq.
Robert L. Dewees, Jr., Esq.
Nixon Peabody LLP
889 Elm Street
Manchester, New Hampshire 03101
(603) 628-4000
-----------------------------------
Frederick M. Lowther, Esq.
General Counsel
Steven L. Zelkowitz, Esq.
Senior Vice President and
Deputy General Counsel
Richard A. Visconti, Esq.
Assistant General Counsel
KeySpan Corporation
One MetroTech Center
Brooklyn, New York 11201-3851
(718) 403-2132
Dated: December 3, 1999
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 1
STATE OF NEW HAMPSHIRE
PUBLIC UTILITIES COMMISSION
Testimony of Walter J. Flaherty
I. INTRODUCTION
Q. Please state your name and business address.
A. My name is Walter J. Flaherty. My business address is 9 Riverside Road,
Weston, Massachusetts 02493.
Q. By whom are you employed, and in what capacity?
A. I am Executive Vice President and Chief Financial Officer of Eastern
Enterprises ("Eastern"). I am also a Director of Boston Gas Company
("Boston Gas"), Colonial Gas Company ("Colonial Gas") and Essex Gas
Company ("Essex Gas").
Q. Have you previously testified before any regulatory commission?
A. Yes. Prior to joining Eastern in 1991, I was Senior Vice President of
Administration at Boston Gas. As an officer and employee of Boston Gas,
I testified in numerous proceedings before the Massachusetts Department
of Telecommunications and Energy (the "Department"). Most recently, I
testified before the Department in Eastern-Essex Acquisition, D.T.E.
98-27 (1998) and Eastern-Colonial Acquisition, D.T.E. 98-128 (1999).
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 2
Q. What is the purpose of your testimony?
A. The purpose of my testimony is to describe various aspects of the
proposed acquisition by Eastern of EnergyNorth, Inc. ("EnergyNorth")
and its principal operating subsidiary EnergyNorth Natural Gas, Inc.
("ENGI") and of Eastern by KeySpan Corporation ("KeySpan").
Specifically, my testimony provides: (i) a background description of
Eastern; (ii) Eastern's rationale for the acquisition of EnergyNorth
and for the merger with KeySpan and the benefits that will accrue to
customers; (iii) a description of the transaction with EnergyNorth, as
set forth in the Agreement and Plan of Reorganization (the "EnergyNorth
Merger Agreement") dated July 14, 1999, and amended on November 4, 1999
(collectively, the "Amended EnergyNorth Merger Agreement"); and (iv) a
summary of the required regulatory approvals necessary to effect the
merger. A copy of the EnergyNorth Merger Agreement and the EnergyNorth
Amendment are appended hereto as Attachments WJF-1 and WJF-2,
respectively.
II. BACKGROUND OF EASTERN ENTERPRISES
Q. Please describe the background and operations of Eastern Enterprises.
A. Eastern is an unincorporated voluntary association (commonly referred
to as a "Massachusetts business trust") established and existing under
a Declaration of Trust dated July 18, 1929, as amended. Eastern's
principal subsidiaries are Boston Gas, Colonial Gas, Essex Gas and
Midland Enterprises, Inc. ("Midland").
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 3
Eastern's gas distribution companies consist of Boston Gas, Colonial
Gas and Essex Gas. In total, Eastern's gas distribution companies serve
approximately 735,000 customers in Massachusetts. Boston Gas is engaged
in the transportation and sale of natural gas to approximately 535,000
residential, commercial and industrial customers in Boston,
Massachusetts and 73 other communities in eastern and central
Massachusetts. Boston Gas has been in business for 175 years and is the
second oldest gas company in the United States. Since 1929, all of the
common stock of Boston Gas has been owned by Eastern.
Colonial Gas was organized in 1849 under the laws of the Commonwealth
of Massachusetts and currently operates in 24 municipalities located
northwest of Boston and on Cape Cod. Colonial's service area is
approximately 622 square miles in size and, of its approximately
155,000 customers, roughly 90 percent are residential accounts.
Colonial Gas became a wholly owned subsidiary of Eastern on August 31,
1999.
Essex Gas was organized in 1853 under the laws of the Commonwealth of
Massachusetts and currently operates in the cities of Haverhill,
Newburyport and Amesbury, as well as 14 other municipalities covering
an area of approximately 280 square miles. The service territory of
Essex Gas is primarily composed of residential communities with a
number of small commercial and diversified light industrial businesses.
In this service area, Essex Gas sells natural gas to
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 4
approximately 45,000 customers. Essex Gas became a wholly owned
subsidiary of Eastern on September 30, 1998.
Eastern's unregulated businesses include Midland, Transgas, Inc.
("Transgas"), ServicEdge Partners, Inc. ("ServicEdge") and AMR Data
Corporation ("AMR Data"). Midland transports coal and other dry bulk
commodities on the Ohio and Mississippi Rivers and their tributaries,
the Gulf Intracoastal Waterway and the Gulf of Mexico using a fleet of
about 2,400 barges and 87 towboats. Transgas, acquired as part of
Eastern's merger with Colonial Gas, is the leading transporter of
liquefied natural gas supplies in New England. During 1997, Eastern
also formed two new subsidiaries to take advantage of opportunities
being created by the restructuring of the energy industry. ServicEdge
is a fuel-neutral, full-service provider of heating, ventilation and
air-conditioning products and services and AMR Data provides meter
services primarily to municipal electric, gas and water utilities
throughout the Northeast.
Eastern has formed Merger Sub as a New Hampshire corporation and gas
company under RSA 293-A. Merger Sub is a wholly owned subsidiary of
Eastern created for the specific purpose of effecting the transaction
contemplated by the merger, as described below.
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 5
Q. Please provide an overview of Eastern's planned merger with KeySpan
Corporation.
A. On November 4, 1999, Eastern and KeySpan Corporation ("KeySpan")
entered into an Agreement and Plan of Merger (the "Eastern Merger
Agreement") under which KeySpan will acquire all of the common stock of
Eastern for $64.00 per share in cash. The Eastern Merger Agreement is
appended hereto as Attachment WJF-3. As described below, Eastern's
merger with KeySpan is conditioned upon the approval of Eastern's
shareholders and the Securities and Exchange Commission ("SEC"). In
addition, the indirect acquisition of ENGI by KeySpan requires the
approval of the New Hampshire Public Utilities Commission (the
"Commission"), however, the merger between Eastern and KeySpan is not
contingent upon that approval.
III. THE RATIONALE FOR THE ACQUISITION OF ENERGYNORTH
Q. In general, what are the benefits that mergers and acquisitions can
provide to utility customers?
A. Utility mergers and acquisitions have the potential to produce
substantial benefits to customers in the form of operational synergies
and cost savings that reduce customer rates and/or slow the growth of
such rates. These cost savings are generally not achievable in the
absence of a merger or other types of business combination because such
savings are typically attained as a result of integrating various
corporate, administrative and field functions, re-optimizing energy
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 6
resources and taking advantage of economies of scale, improved
financial strength, operational diversity, and other related
opportunities that help to reduce the cost of providing utility
service. Eastern's recent acquisitions of Colonial Gas and Essex Gas
support this analysis in that customers of both companies are currently
receiving the benefit of burner-tip price reductions to reflect gas
cost savings achieved through the mergers, as well as long-term,
base-rate freezes. Specifically, Boston Gas, Colonial Gas and Essex Gas
recently announced gas price reductions for residential customers of
4.72, 7.75, and 4.15 percent, respectively, for the 1999/2000 heating
season resulting primarily from merger-related savings.
Q. What is the duration of these benefits to customers?
A. The customer benefits that are created, i.e., lower costs, improved
efficiency, and better service, are direct and permanent. Although
transaction and other "up-front" costs have been incurred to achieve
these customer benefits, the magnitude and permanence of these benefits
have produced value for customers that far outweigh the associated
one-time costs.
Q. What factors played a role in the decision by KeySpan and Eastern to
enter into a business combination with EnergyNorth?
A. As competition intensifies and gas distribution companies fully
unbundle at the local level, the keys to success are increasing gas
throughput, improving productivity, controlling costs and providing
quality customer service. The value of Eastern's investment in its gas
operations, and in turn, KeySpan's investment in
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 7
Eastern, is maintained and potentially enhanced as long as we are able
to achieve those objectives. Fortunately, New England is experiencing
above-average growth rates for natural gas. At the same time, however,
size and scale are critical to achieving the necessary productivity and
cost efficiencies to support growth initiatives, as is investment in
new technology and infrastructure. Because utilities, in general, are
characterized by a high level of fixed costs, the ability to spread
those fixed costs over a larger base of customers and/or unit
throughput to reduce prices and enhance competitiveness is critical.
Eastern pursued a business combination with EnergyNorth because ENGI is
a well-managed growth company operating in an economically dynamic
region, just north of the service territories of Eastern's
Massachusetts-based gas distribution companies. As a result, the
increased size and scope of the combined organization will enable
Eastern to provide enhanced, cost-effective customer service, maintain
its competitive position in the marketplace and capitalize on the
above-average growth opportunities for natural gas. Both Eastern and
KeySpan believe that ENGI will be an integral element of their overall
operations following the merger. As a result, the proposed combination
with EnergyNorth represents a win-win situation for customers and
shareholders.
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 8
Q. What customer benefits do Eastern and KeySpan envision will result from
the proposed acquisition of EnergyNorth?
A. It is my understanding that, pursuant to RSA 369:8,II and RSA 374:33,
KeySpan and Eastern must demonstrate that the merger with EnergyNorth,
as provided for by the terms of the Amended EnergyNorth Merger
Agreement, will result in no net harm for the customers of ENGI. As
proposed herein, the merger of EnergyNorth with KeySpan and Eastern
meets and exceeds that test. KeySpan and Eastern believe that
substantial benefits for customers can and will be achieved and have
structured the transaction with EnergyNorth so as to provide ENGI
customers with both near- and long-term benefits.
Significant benefits will be available to customers because the merger
presents unique opportunities to ENGI for achieving economies of scale
by operating as a sister company to Boston Gas, Essex Gas and Colonial
Gas, the latter of which has a service territory that is contiguous to
ENGI's service territory in southern New Hampshire and The Brooklyn
Union Gas Company and KeySpan Gas East Corporation d/b/a Brooklyn Union
of Long Island. As a result of the merger, customers of ENGI will
benefit substantially from increased supply options and enhanced
purchasing power. The ability to dispatch across the combined
distribution systems will increase flexibility, enable the optimization
of existing gas-supply resources, encourage and facilitate more
efficient purchasing capability and facilitate the exercise of broader
system control. The expanded supply portfolio
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 9
will also increase overall reliability in all service territories.
These gas supply synergies are described in detail in the testimony of
Mr. Luthern.
In addition, Eastern and KeySpan have made substantial investments in
information technology that may be extended to the operations of ENGI
to enhance its ability to serve customers in a cost-effective and
responsive manner. For example, Boston Gas has developed a Broker
Management System (the "BMS") to administer its customer-choice
program, as well as that of Colonial Gas and Essex Gas. As a result of
the merger, the BMS will be available to ENGI, which will allow ENGI to
avoid significant costs that would be associated with procuring and
implementing a similar system on a stand-alone basis. An analysis of
the information technology investment that ENGI would have incurred in
the absence of the merger is set forth in the testimony of Michelle L.
Chicoine.
The merger with EnergyNorth also presents an opportunity to realize
cost savings as a result of reduced operations and maintenance
expenses, i.e., corporate, administrative and operational expenses.
These opportunities are discussed in greater detail in the testimony of
Mr. Bodanza. In short, the proposed merger with EnergyNorth will allow
Eastern and KeySpan to leverage their existing investments to capture
synergies that exist between the distribution systems and to transform
such efficiency gains into cost savings, lower rates and a more
flexible and reliable distribution system for ENGI's customers.
Significantly, the breadth
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 10
and magnitude of these benefits would be unavailable at a reasonable
cost to ENGI customers in the absence of the merger.
IV. DESCRIPTION OF THE ACQUISITION PROCESS
Q. Please summarize the terms of the Amended EnergyNorth Merger Agreement
and the function of Merger Sub.
A. Pursuant to the terms of the Amended EnergyNorth Merger Agreement, set
forth in Attachments WJF-1 and WJF-2, Eastern has created and
incorporated Merger Sub as a wholly owned subsidiary under New
Hampshire law. Under the Amended EnergyNorth Merger Agreement, Merger
Sub will merge with and into EnergyNorth, such that EnergyNorth will be
the surviving corporation, continuing as a subsidiary of Eastern and
KeySpan under the name of "EnergyNorth, Inc." Each share of EnergyNorth
common stock will be cancelled and extinguished and automatically
converted into the right to receive at the effective time of the
merger, $61.13 in cash.
In the event that the Eastern Merger Agreement expires or terminates,
the final value received by EnergyNorth shareholders would not be
determined until closing since it will be a function of shareholder
elections of cash, shares of Eastern stock or a combination of both, as
well as the price of Eastern stock during a ten-day period prior to
closing. Shareholder elections are subject to the limitation that 50.1
percent of EnergyNorth shares will be exchanged for shares of Eastern
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 11
common stock with the remaining EnergyNorth shares to be exchanged for
cash. In order to ensure that the merger qualifies as a tax-free
reorganization, shareholder elections would be subject to the further
limitation that, in no event, would the total value of Eastern shares
so exchanged fall below 45 percent of the aggregate consideration used
to complete the transaction. As detailed below, the actual number of
Eastern shares to be issued would be adjusted through an exchange
ratio.
Q. How was the structure of the EnergyNorth/Eastern merger transaction
affected by Eastern's planned merger with KeySpan?
A. The merger transaction established in the Amended EnergyNorth Merger
Agreement was structured to meet the requirements of a tax-free
reorganization under Section 368(a) of the Internal Revenue Service
Code. In a tax-free reorganization, no gain or loss would be recognized
at the corporate level by EnergyNorth, Eastern or Merger Sub as a
result of the merger, and no gain or loss would be recognized by the
individual shareholders of EnergyNorth on the exchange of their shares
for shares of Eastern common stock. Shareholders who received a
combination of cash and Eastern stock would recognize a gain for tax
purposes in an amount equal to the lesser of the cash received or the
total gain realized in the merger.
Pursuant to the terms of the Eastern Merger Agreement, KeySpan will
purchase 100 percent of the issued and outstanding common stock of
Eastern at $64 per
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 12
share in cash. Assuming the EnergyNorth transaction with Eastern would
have closed prior to its merger with Keyspan, Eastern would have
delivered a combination of cash and Eastern stock to EnergyNorth
shareholders in accordance with its merger agreement. However, the two
transactions would likely have been treated for tax purposes as
integrated steps in a single transaction, and therefore, the
EnergyNorth merger would be deemed a taxable event and would produce
tax liability for both EnergyNorth and its shareholders. In view of
Eastern's pending agreement with KeySpan, Eastern and EnergyNorth
agreed to restructure their original agreement to accommodate the
provisions of the Eastern Merger Agreement.
Q. What is the nature of the investment required to attain the benefits
associated with this acquisition?
A. As described in greater detail in the testimony of Mr. Bodanza, the
investment required to obtain the benefits associated with Eastern's
acquisition of EnergyNorth is represented by three categories of
merger-related costs: (1) costs incurred to achieve the synergies that
will ultimately reduce the cost of ENGI's operations; (2) the
transaction costs incurred in developing, executing and obtaining the
necessary agreements and approvals for the merger; and (3) the cost to
Eastern's shareholders for the acquisition, i.e., the premium over book
value received by EnergyNorth shareholders. As described by Mr.
Bodanza, transaction costs and merger-integration costs in this case
are estimated to be $22.2 million.
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 13
Q. What will be the acquisition premium that results from this transaction?
A. The acquisition premium is calculated by taking the difference between
ENGI's book value per share at closing and the purchase price of $61.13
per share, and multiplying this difference by the number shares of
EnergyNorth common stock issued and outstanding as of the closing.
Using EnergyNorth's book value as of June 30, 1999, and a total of
3,319,712 issued and outstanding shares, a premium of $147 million will
be paid, including $23 million for the portion of the acquisition
premium attributable to EnergyNorth's non-utility affiliates, based on
a fair market valuation. Excluding transaction and integration costs,
an up-front acquisition premium of approximately $124 million will be
paid to accomplish the acquisition of EnergyNorth's regulated
gas-distribution business.
In calculating the impact of the payment of the acquisition premium on
earnings, an important consideration is that the transaction must be
recorded on the books of the acquired companies using purchase
accounting, and therefore, the acquisition premium for ENGI will be
amortized over 40 years as an annual non-tax-deductible charge to
earnings of approximately $3.1 million. In order to achieve after-tax
earnings sufficient to recover the amortized amount, it is necessary to
"gross-up" the $3.1 million charge by a tax factor of 1.6722. On a
gross-up basis, synergies of approximately $5.2 million would need to
be retained annually by
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 14
shareholders to offset the negative impact of these costs on the
earnings of the post-merger company.
Q. What is the rationale for the purchase price of $61.13 per share as set
forth in the Amended EnergyNorth Merger Agreement?
A. Eastern and EnergyNorth renegotiated the terms of their July 14, 1999
merger agreement in order to accommodate the terms of the Eastern
Merger Agreement, which converted the transaction to an all-cash
transaction. Attachment WJF-4 presents the calculation and outcome of
the renegotiated agreement with regard to the per-share purchase price,
as described below.
In order to consummate the merger transaction under the terms of the
original merger agreement entered into by Eastern and EnergyNorth on
July 14, 1999, each share of EnergyNorth common stock would be
converted into a combination of cash and shares of Eastern common stock
in accordance with an exchange ratio. The original merger agreement
established a floating exchange ratio to ensure that EnergyNorth
shareholders would receive a value of $47.00 per share, if the value of
Eastern's shares ranged from $36.00 to $44.00 at closing. Pursuant to
section 1.6(a)(i) of the original merger agreement, the exchange ratio
would be established by dividing the per share cash amount of $47.00 by
the market value of Eastern's common stock, based upon the average
market price of Eastern shares during a specified ten-day period prior
to closing.
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 15
Thus, if the average market value of Eastern's shares were to fall
between $36.00 and $44.00 per share during the relevant period prior to
closing, shares of EnergyNorth common stock would be exchanged for a
number of shares of Eastern common stock pursuant to an exchange ratio
ranging from 1.30556 to 1.06818, which would adjust to produce a value
of $47.00 per share for EnergyNorth shareholders. In the event that the
market value of Eastern's shares was less than $36.00 per share, the
exchange ratio would be fixed at 1.30556, and in the event that the
market value of Eastern's shares was greater than $44.00 per share, the
exchange ratio would be fixed at 1.06818. Because the exchange ratio is
fixed at $36.00 and $44.00 per share, the value received by EnergyNorth
shareholders could be greater or less than $47.00, if the market value
of Eastern's stock were to be above $44.00 or below $36.00 on average
ten days prior to closing.
On November 4, 1999, Eastern announced that it had reached an agreement
with KeySpan under which KeySpan would purchase all of the issued and
outstanding common stock of Eastern at $64.00 per share in cash.
Consequently, by virtue of the exchange ratio provisions set forth in
the original Eastern/EnergyNorth merger agreement, EnergyNorth
shareholders would receive 1.06818 shares of Eastern common stock in
exchange for each share of EnergyNorth common stock, or $57.70 per
share (assuming 49.9 percent of the outstanding shares of EnergyNorth
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 16
common stock would be exchanged for cash and the remainder exchanged
for shares of Eastern common stock). As a result of Eastern's agreement
with KeySpan, EnergyNorth's merger would no longer qualify as a
tax-free reorganization. Thus, in renegotiating the original merger
agreement to accommodate Eastern's pending arrangement with KeySpan,
EnergyNorth sought additional compensation, in part, for the tax
liability that shareholders would now incur as a result of the
transaction with KeySpan.
The negotiation of this and other issues resulted in an agreement to
set the per-share cash consideration at a value equal to that produced
using the exchange ratio of 1.175, which would have applied had the
value of Eastern's common stock remained at the mid-point of the collar
range of $36.00 to $44.00 per share, i.e., at $40.00 per share. As a
result, EnergyNorth shareholders will receive $61.13 per share, which
equals $64.00 per share times the exchange ratio of 1.175 (calculated
using the assumption that no more than 49.9 percent of the
consideration would have been paid in cash absent the KeySpan
transaction).
Q. Is ENGI seeking recovery of the merger-related costs at this time?
A. ENGI is not seeking recovery of merger-related costs in this filing.
ENGI will seek recovery of merger-related costs in the future only to
the extent that it is able to demonstrate that such costs are offset by
the savings achieved as a result of the merger. It is our understanding
that this is consistent with the Commission's
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 17
approach in another gas-utility merger case, i.e., Re: Northern
Utilities, Inc., Docket No. DF 98-040, Order No. 22,983 (1998)
("Northern Utilities"), where the Commission approved a settlement that
required the petitioners to substantiate any savings to customers
resulting from the merger before affording the acquisition premium
ratemaking treatment. Although approved as a condition to settlement,
the Commission's rulings in the Northern Utilities case provided
important guidance to the Joint Petitioners in structuring the proposed
merger.
Specifically, in agreeing to a plan of merger with EnergyNorth, Eastern
carefully evaluated the opportunities for achieving efficiencies and
cost savings in coordinating and integrating the operations of ENGI
with those of its other gas distribution operations. Thus, the price
agreed to by Eastern, and subsequently by KeySpan, is a function of the
synergies that would be available as a result of the merger to offset
the costs incurred in effecting the merger. Eastern and KeySpan have
pursued the merger with EnergyNorth based on the Commission's
willingness to approve a settlement that allowed a reasonable
opportunity to recover merger-related costs, where merger-related
savings could be substantiated to support such recovery.
Accordingly, in this proceeding, Eastern and KeySpan seek only a ruling
by the Commission that approval of the merger is without prejudice to
ENGI's right to request recovery of merger-related costs, in a future
proceeding, and to have the
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 18
reasonable opportunity to recover such costs, if ENGI demonstrates to
the Commission's satisfaction that merger-related savings equal or
exceed those costs. Eastern and KeySpan are aware that the Commission
is concerned that the identification and quantification of
merger-related savings in a future proceeding would be difficult to
accomplish, and that in any such proceeding, the Commission may be at a
disadvantage with regard to available data relating to the attainment
of such savings. Therefore, Eastern and KeySpan will commit to working
with the Staff of the Commission and the Office of the Consumer
Advocate to establish a mechanism for measuring cost savings that could
be used to offset merger-related costs. Such a mechanism would
facilitate a demonstration of the extent to which cost savings have
been achieved as a result of the merger.
Q. Is consummation of the merger between Eastern and EnergyNorth
contingent upon the approval of the Commission in the manner described
above?
A. Yes. Article 6.1(b) of the Amended EnergyNorth Merger Agreement
provides that, with regard to rates and the recovery of costs
associated with the merger (including the acquisition premium and
transaction and integration costs), the Commission's approval is
required upon terms and conditions that are no less favorable than
those set forth by the Commission pursuant to Northern Utilities.
Accordingly, Eastern and KeySpan will not move forward with the
EnergyNorth merger without the Commission's approval of their proposal
to have a reasonable
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 19
opportunity to recover merger-related costs if merger-related savings
are demonstrated to equal or exceed those costs.
As a policy matter, we believe that industry consolidation through
mergers and acquisitions should be encouraged where such consolidation
will lower the cost of utility service for customers. Our proposal will
achieve this result for ENGI's customers. In fact, KeySpan and
EnergyNorth are uniquely positioned to provide significant and lasting
benefits to customers given the proximity of our systems to
EnergyNorth, as well as the ability of Eastern and KeySpan to achieve
synergies and avoid technology investments on ENGI's system. At the
same time, substantial costs, including the acquisition premium, must
be incurred by shareholders to effect such a transaction. Without
regulatory recognition that acquisition costs are incurred to effect a
transaction that will ultimately provide significant cost savings and
other benefits for customers, shareholders will not put their capital
at risk to effect such a transaction.
In order to achieve the cost savings generated by the merger, it is
necessary for the Commission to recognize that there is a direct
connection between the benefits realized and the investment necessary
to generate those benefits. An appropriate regulatory policy that
aligns customer, company and shareholder interests will encourage
cost-effective mergers and acquisitions by preserving shareholder
investment and by making customers the primary beneficiaries of the
available cost
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 20
savings. Thus, it is extremely important that the Commission allow, in
some reasonable manner, an opportunity for the recovery of the
investment that was necessary to obtain real and lasting benefits for
ENGI customers.
Q. In summary, how does the merger proposal set forth by the Joint
Petitioners result in no net harm to customers?
A. The Joint Petitioners' merger proposal will result in no net harm to
customers for the following reasons: (1) the continued corporate
existence of ENGI, including the maintenance of separate books and
records, will facilitate the Commission's continued review and
oversight of ENGI and its operations in New Hampshire; (2) a Local
Advisory Board comprised of not less than five members, to be chaired
by Robert R. Giordano, will be established following the merger to
provide counsel to Eastern and KeySpan; (3) the structure of ENGI's
operations will not change as a result of the merger; (4) no
determination is sought in this proceeding regarding the capital
structure to be used in any future proceeding; and (5) the Joint
Petitioners will be required to substantiate savings resulting from the
merger before seeking consideration of merger-related cost recovery in
a future proceeding.
Moreover, the Joint Petitioners propose: (1) to provide customers with
immediate gas-cost savings estimated to produce a 2.2 percent
burner-tip price reduction; and (2) to develop with the Commission a
mechanism for identifying and quantifying
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 21
other cost savings achievable only as a result of the merger. Because
Eastern would, in a future proceeding, request that the Commission
allow recovery of merger-related costs only through savings
demonstrated to result from the merger, such recovery would not cause
rates to be any higher for customers than what they would have been
without the merger. At the same time, ENGI's customers will receive the
benefit of a burner-tip price reduction achieved as a result of
gas-supply synergies. Thus, the proposed merger results in net benefits
to customers, and therefore, meets and exceeds the Commission's no net
harm standard.
Q. Specifically, how will the merger affect the corporate structure of
ENGI or the Commission's jurisdiction over its operations?
A. The structure of ENGI's operations will not change as a result of the
merger and the Commission's jurisdiction with respect to the company's
operations will remain unaltered. ENGI, will continue to operate as a
New Hampshire corporation subject to the Commission's full regulatory
authority. Thus, the Commission's jurisdiction over rates, service and
other matters of ENGI, will not be affected by the merger.
Following the merger, EnergyNorth's headquarters will remain in
Manchester, New Hampshire and the terms of all collective bargaining
agreements will be fulfilled. Eastern has also committed to maintain
charitable contributions to communities served by EnergyNorth and a
level of involvement in community
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 22
activities as carried on in recent years by EnergyNorth. In addition,
Eastern will establish a local advisory board consisting of not less
than five members, to be chaired by Robert R. Giordano, for a period of
at least three years following the merger. Membership on the advisory
board will be offered to all current members of the Board of Directors
of EnergyNorth who are residents of the State of New Hampshire. This
will provide Eastern and KeySpan with access to the advice and counsel
of EnergyNorth's directors for at least three years following the
merger. As addressed in the testimony of Craig G. Matthews, none of
these commitments will change as a result of Eastern's merger with
KeySpan.
V. REGULATORY APPROVALS REQUIRED
Q. What regulatory approvals are required for completion of the merger?
A. In addition to the Commission's approval of the acquisition of
EnergyNorth, Eastern must obtain the approval of the Securities and
Exchange Commission for the acquisition by Eastern of the common stock
of EnergyNorth pursuant to the Public Utility Holding Company Act of
1935. In addition, under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, the merger is subject to expiration of a waiting period
(30 days, subject to an extension), during which the Federal Trade
Commission and the United States Department of Justice may review any
antitrust issues that are raised by the merger. The regulatory
approvals that are required for
<PAGE>
Joint Petitioners
DG 99-
Witness: Flaherty
December 3, 1999
Page 23
completion of KeySpan's acquisition of Eastern are discussed in the
testimony of Craig G. Matthews.
Q. What are the specific approvals requested of the Commission?
A. Eastern and KeySpan request that the Commission:
(1) Accept their representation pursuant to RSA 369:8,II, or rule
under RSA 374:33, that the merger between Merger Sub and
EnergyNorth, as provided for by the terms of the Amended
EnergyNorth Merger Agreement, meets the Commission's no net
harm test for determining that the merger is consistent with
the public interest; and
(2) Rule that such approval is without prejudice to ENGI's right
to request recovery of merger-related costs, in a future
proceeding, and the reasonable opportunity to recover such
costs, to the extent that substantiated merger-related savings
meet or exceed such costs.
Q. Does this conclude your testimony?
A. Yes, it does.
<PAGE>
<TABLE>
<CAPTION>
Attachment WJF-4
<S> <C> <C> <C>
Price Paid Per EnergyNorth Share 47.00
Percentage Cash 49.90%
-----
Cash To Be Received per EnergyNorth Share 23.45
Easter Price per Share at Midpoint of Collar Range 40.00
Exchange Ratio at Midpoint of Collar Range (47/40) 1.17500
Percentage Stock 50.10%
-----
Nunmber of Eastern Shares To Be Received per EnergyNorth Share 0.58868
Eastern Share Price under Eastern/KeySpan Merger Agreement 64.00
-----
Value of Eastern Shares post Eastern/Keyspan Merger 37.68
-----
Cash Value per EnergyNorth Share 61.13
-----
-----
</TABLE>
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 1
STATE OF NEW HAMPSHIRE
PUBLIC UTILITIES COMMISSION
Testimony of Joseph F. Bodanza
I. INTRODUCTION
Q. Please state your name and business address. A. My name is Joseph F.
Bodanza. My business address is One Beacon Street, Boston,
Massachusetts 02109.
Q. By whom are you employed and in what capacity?
A. I am Senior Vice President and Treasurer of Eastern Enterprises'
("Eastern") local distribution company operations in Massachusetts. I
am responsible for the financial, accounting, treasury,
governmental/state regulatory and public affairs, pricing and rates, as
well as the design, implementation and maintenance of information and
communications systems. I am also a director of Boston Gas Company
("Boston Gas"), Colonial Gas Company ("Colonial") and Essex Gas Company
("Essex Gas")
Q. Have you previously testified before any regulatory commission?
A. Yes. As an officer and employee of Boston Gas for over 27 years, I have
testified in numerous proceedings before the Massachusetts Department
of Telecommunications and Energy (the "Department"). Most recently, I
testified
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 2
before the Department in Eastern-Essex Acquisition, D.T.E. 98-27 (1998)
and Eastern-Colonial Acquisition, D.T.E. 98-128 (1999).
Q. Are you familiar with the proposed acquisition of EnergyNorth, Inc. by
Eastern Enterprises?
A. Yes. Eastern and KeySpan Corporation ("KeySpan") have requested that I
evaluate and analyze the operations of EnergyNorth, Inc.
("EnergyNorth") and its principal operating subsidiary, EnergyNorth
Natural Gas, Inc. ("ENGI"). In that regard, I have analyzed the
opportunities to achieve efficiencies in the operations of ENGI through
coordination and integration with the operations of Eastern's gas
distribution subsidiaries, Boston Gas, Colonial Gas and Essex Gas. I am
also working with KeySpan to perform a similar analysis for the purpose
of identifying further opportunities for cost savings as a result of
KeySpan's acquisition of Eastern's operations.
Q. What is the purpose of your testimony?
A. The purpose of my testimony is: (i) to review the benefits and costs
associated with the proposed merger; and (ii) to describe how the
proposed merger meets and exceeds the "no net harm" test.
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 3
II. DISCUSSION OF COSTS AND BENEFITS
Q. Would you review the overall benefits of the merger to ENGI customers
and shareholders?
A. Eastern's strategy in pursuing a business combination with EnergyNorth
is to build upon its core gas distribution operations in order to
create economies of scale that will enable it to increase gas
throughput, improve productivity, control costs and enhance service
quality for customers. In achieving these objectives, Eastern will be
in a position to provide significant benefits to ENGI's customers and
EnergyNorth's shareholders. The benefits that will be created for
ENGI's customers as a result of Eastern's acquisition of EnergyNorth,
and in turn, KeySpan's acquisition of Eastern, include lower costs,
improved efficiency and enhanced customer service. These customer
benefits will be direct and permanent. For instance, in developing the
merger plan, we have determined that we can provide an immediate 2.2
percent reduction in the total burner-tip price of gas currently paid
by ENGI's customers.
In addition, as a result of the merger, employees of ENGI will have
access to employment opportunities within a larger, more diversified
organization and will experience a more dynamic working environment. In
that regard, Eastern has hosted informational sessions and job fairs to
make employees aware of employment opportunities within Eastern's
organization. This process has worked
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 4
well in bringing employees of Colonial Gas and Essex Gas into Eastern's
organization.
Lastly, the proposed merger will provide EnergyNorth's shareholders,
many of whom are New Hampshire residents and ENGI customers, with fair
value for their ownership interest.
Q. How do KeySpan and Eastern plan to achieve a burner-tip price reduction
to customers of ENGI of approximately 2.2 percent?
A. As described in the testimony of Mr. Luthern, we have identified cost
savings for ENGI's customers of approximately $2.0 million that will
result from the attainment of synergies and efficiencies in the gas
supply function. Based on total weather-normalized gas revenues of
approximately $90.5 million, the price reduction provided to ENGI's
customers will be approximately 2.2 percent. All gas-cost related
savings will be reflected in ENGI's Cost of Gas ("CoG") rates.
Q. On what basis have you determined that cost savings of approximately
$2.0 million will be attained as a result of synergies in the gas
supply function?
A. We have determined that gas cost savings will be achieved through the
coordination and integration of the gas supply resources of ENGI with
those of Eastern's other gas distribution operations. Such joint
planning will increase supply options, result in the more efficient use
of existing resources, and generate savings from an enhanced purchasing
power. Mr. Luthern has reviewed the gas-
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 5
resource portfolio and gas-supply operations of ENGI to identify and
quantify potential synergies and has determined that approximately $2.0
million in gas cost savings will be attainable in the first year
following the merger. These types of savings are detailed in Mr.
Luthern's testimony and, in our experience, are likely to represent the
minimum level of gas-cost savings available as a result of the merger.
Moreover, as addressed in the testimony of Craig G. Matthews, the
potential to achieve additional synergies may be increased as a result
of Eastern's planned merger with KeySpan.
Q. Have Eastern's mergers with Colonial Gas and Essex Gas produced similar
gas-cost savings for customers?
A. Eastern's mergers with Colonial Gas and Essex Gas have produced
significant and immediate cost savings for customers. Specifically,
just after the merger with Eastern, Essex Gas customers received the
benefit of a 5 percent reduction in their burner-tip price as a result
of the release of long-haul pipeline capacity on the Tennessee Gas
Pipeline and the renegotiation of certain commodity contracts, which
were initiatives that would not have been available to Essex Gas in the
absence of the merger. Similarly, Colonial Gas customers will receive a
2.2 percent burner-tip price reduction in the first full year following
the merger resulting from the release of redundant capacity and other
gas-supply initiatives made possible by the merger with Eastern. In
addition, as a result of the
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 6
consolidation of the resource portfolios of the three companies, Boston
Gas has negotiated substantial changes to the overall portfolio that
have produced savings over and above those projected in the merger
filings approved by the Department.
Furthermore, on October 15, 1999, the Department approved a petition by
Boston Gas, Colonial Gas and Essex Gas to enter into a
portfolio-management arrangement with El Paso Energy Marketing Company,
a wholesale marketer, which will manage the combined upstream
transportation capacity resources of the companies for a three-year
period commencing November 1, 1999. Because of the economies of scale
inherent in the combined portfolio, the companies were able to secure
significant value for the management rights, which are being passed on
to customers of all three companies. Thus, the combination of projected
merger savings, additional savings resulting from the portfolio
restructuring and the cost reductions that will occur as a result of
the portfolio-management arrangement will provide significant benefits
to customers.
It is Eastern's objective to achieve the same types of cost savings for
the customers of ENGI by incorporating the gas-supply resources of ENGI
into the combined portfolio of Eastern's gas distribution operations.
Moreover, additional savings opportunities may be available as a result
of Eastern's planned merger with KeySpan.
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 7
Q. Have you considered the potential for any cost savings that could be
realized through operational efficiencies?
A. Yes. Prior to reaching agreement with EnergyNorth on a plan of merger,
Eastern commenced a process to evaluate integration opportunities
between ENGI and its existing gas distribution companies, Boston Gas,
Colonial Gas and Essex Gas. A similar process was undertaken by KeySpan
in evaluating a potential business combination with Eastern. In fact,
Eastern's willingness to pay a price in excess of book value to
accomplish the merger was based on its assessment that cost savings
could be achieved to offset the investment required to effect the
transaction, and that such investment would reduce costs for customers
over the long term.
Since entering into the plan of merger with EnergyNorth, Eastern has
undertaken a more comprehensive process to analyze integration
opportunities and KeySpan will commence a similar process to analyze
and identify, to the extent possible, additional integration
opportunities stemming from its merger with Eastern. The objective of
these efforts is, and will continue to be, to define and implement the
business processes for the companies to operate with the utmost
efficiency. We expect that, over time, the significantly larger scale
of Eastern's operations, both in financial and operational terms, would
be an important factor in enhancing the efficiency and reliability of
the combined distribution system. Eastern's planned
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 8
merger with KeySpan will only add to Eastern's ability to achieve
operational efficiencies and economies of scale, which ultimately will
lower costs to customers.
Q. Have you quantified the potential near-term cost savings that could be
realized through operations and maintenance efficiencies?
A. As a result of the merger, ENGI will be able to achieve cost reductions
in the corporate and administrative areas through the elimination of
redundant job functions. Specifically, the proposed merger will provide
an opportunity to consolidate finance, accounting, information
services, marketing, human resources, public and shareholder relations
and gas supply activities. We estimate that such consolidation will
result in the reduction of 62 positions, including 47 management and 15
non-management positions. We further estimate that the direct wage and
salary cost reductions associated with these positions is approximately
$3.3 million annually. We also estimate that the elimination of
employee benefits associated with these positions would produce
approximately $900,000 of additional annual cost savings.
Moreover, the integration of corporate and administrative functions is
expected to reduce non-labor costs by approximately $1.5 million
annually through the consolidation of overlapping or duplicative
programs and expenditures relating to insurance, employee benefits
administration, audit and consulting fees, shareholder services,
information-systems expenses, advertising, vehicle expense, legal fees
and
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 9
banking and financing costs. Such cost savings will be available only
because of the merger and the resulting ability to coordinate certain
corporate governance activities that are common to the operations of
ENGI and Eastern's gas distribution operations. Therefore, in total, we
estimate that operations and maintenance ("O&M") expense savings of
$5.7 million annually are potentially attainable in the near term as a
result of the acquisition of ENGI. Although not quantified as yet,
incremental savings of a similar nature may be available as a result of
Eastern's merger with KeySpan.
In addition, the information technology employed by Eastern and KeySpan
will provide an important tool for increasing the efficiency of ENGI's
operations. Both organizations have made significant investments in
information technology, including software applications, hardware and
infrastructure, which will be extended to the operations of ENGI as a
result of the merger. These investments have enhanced customer service,
improved productivity and enabled the implementation of comprehensive
customer-choice programs. Combining the information processing needs of
ENGI with the gas distribution operations of Eastern and KeySpan will
enable EnergyNorth to avoid incurring duplicate expenditures. ENGI will
be able to avoid planned development and/or modification of a number of
systems, including: (1) software to automate the dispatch function; (2)
an enterprise level reporting and data warehousing system to
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 10
enhance management reporting; (3) an upgrade of the telephone system
and call center; (4) an upgrade of the infrastructure to accommodate
internet/intranet applications; (5) software for payroll/human resource
functions; (6) software and conversion costs to automate the mapping
functions; (7) development and implementation of disaster-recovery
capability; (8) modifications to existing customer information-system
and gas-supply systems to expand the customer choice program; and (9)
replacement of the customer-information system. As described in detail
in the testimony of Ms. Chicoine, ENGI would have incurred costs of
approximately $4.3 million on a stand-alone basis to implement and/or
modify these necessary systems.
Q. What factors may affect the attainment of cost savings in the gas
distribution operation of ENGI?
A. The attainment of efficiencies in ENGI's gas distribution operation
hinges upon the successful implementation of a merger-integration
process to manage the coordination and integration of various
functional areas. The primary objective of this process is to determine
the appropriate level of integration of systems, support services,
customer inquiry and accounting, collection and billing-related
services necessary to provide cost-effective service, while producing
labor and non-labor cost savings. However, it is difficult to predict
how successful and comprehensive the integration of certain elements of
ENGI's operations with those of Eastern's
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 11
gas distribution operations will be, and therefore, there are some
uncertainties involved in achieving these cost reductions
As discussed above, we have estimated that approximately $5.7 million
in annual O&M synergies will be available as a result of the merger to
offset the cost of the merger incurred by shareholders. Given the
uncertainties associated with the attainment of O&M synergies, however,
Eastern and KeySpan are assuming the risk of achieving recovery of the
costs incurred to effect the merger.
Q. What is Eastern's plan for maintaining the operations of ENGI following
the merger?
A. As indicated in the testimony of Mr. Flaherty, ENGI will operate as a
sister company to Boston Gas, Colonial Gas and Essex Gas following the
merger with Eastern, and to The Brooklyn Union Gas Company and KeySpan
Gas East Corporation d/b/a Brooklyn Union of Long Island following
Eastern's merger with KeySpan. As Eastern has done in the mergers with
Colonial Gas and Essex Gas, Eastern will maintain the headquarters of
ENGI, which are currently housed in Manchester, New Hampshire, as well
as various field operations currently operated by ENGI. Moreover,
KeySpan and Eastern are committed to continuing the level of investment
required to maintain and extend the distribution system of ENGI.
Pursuant to the merger agreement, Eastern will establish a five-member
Local Advisory Board to provide input into the operations of ENGI.
Moreover, as
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 12
addressed in the testimony of Craig G. Matthews, Eastern's commitments
with regard to the operations of ENGI following the merger will be
affirmed by KeySpan following the merger.
Q. Are there costs associated with achieving the merger benefits for ENGI
customers?
A. Eastern and KeySpan will incur the following merger-related costs in
order to accomplish the transaction: (1) merger integration costs
incurred to achieve the synergies that will ultimately reduce the cost
of ENGI's operations; (2) transaction costs related to the completion
of the merger transaction; and (3) the acquisition premium, which will
be recorded as goodwill on the books of ENGI in accordance with
Generally Accepted Accounting Principles ("GAAP").
Q. Please describe each of these cost categories in more detail.
A. The first category of costs are those necessary to ensure the
successful and timely integration of ENGI's operations into those of
Eastern's and KeySpan's gas distribution operations. These costs
include employee separation costs incurred to reduce redundant
positions, systems conversion and consolidation costs required for
efficient operations, customer and employee communication costs and
similar costs necessary to support the merger-integration process. An
itemization of these costs totaling $14.4 million is set forth in
Attachment JFB-1.
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 13
The second category of costs relating to the transaction involves
expenses incurred in completing the merger. These non-tax-deductible
costs involve investment banking fees, legal and regulatory expenses,
accounting fees, filing fees and miscellaneous expenses. An itemization
of these costs totaling $7.8 million is set forth in Attachment JFB-2.
The third category of merger costs relates to the acquisition premium
required to make available the lower rates and cost savings that result
from the merger. The acquisition premium is discussed in detail in Mr.
Flaherty's testimony and is estimated to total approximately $124
million for EnergyNorth's regulated gas operations. The acquisition
premium is a necessary investment because it results in the creation of
a more efficient operation that will produce cost-saving opportunities
and lower rates to customers. The payment of an acquisition premium,
however, has an unavoidable impact on the earnings of the acquiring
company.
In a purchase-accounting transaction, the acquisition premium is
recorded on the books of the acquired company and amortized as a direct
charge to earnings. Because the acquisition of ENGI requires the use of
purchase accounting, the acquisition premium will be recorded on the
books of ENGI and amortized as a $3.1 million annual charge to earnings
over a 40-year period. This charge to
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 14
earnings is not tax deductible, and therefore, it is necessary to
"gross-up" this amount by a tax factor of 1.6722 to achieve after-tax
earnings sufficient to cover this cost and to reimburse shareholders
for their investment. On a gross-up basis, cost savings and synergies
of approximately $5.2 million annually over the 40-year amortization
period must be realized to offset the impact of this cost on earnings,
as set forth in Attachment JFB-3. As indicated in Attachment JFB-4,
merger-integration costs and transactions costs would be amortized for
ratemaking purposes over a ten-year period.
Q. Is ENGI seeking to recover these merger-related costs in this filing?
A. As discussed above, Eastern and KeySpan are incurring the costs to
complete the transaction with EnergyNorth in order to attain economies
of scale within the gas distribution operations, which will ultimately
reduce costs for ENGI's customers. Notwithstanding this fact, ENGI will
seek recovery of the remaining unamortized balance of these costs in a
future proceeding only to the extent that it can demonstrate that such
costs are offset by the savings achieved as a result of the merger.
Accordingly, in this proceeding, Eastern and KeySpan seek a ruling by
the Commission that any determination made with regard to the approval
of the merger is without prejudice to ENGI's right to request such
recovery in a future proceeding, where it is demonstrated that
merger-related savings will equal or exceed those costs. It is my
understanding that this is consistent with the
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 15
Commission's approach in another gas-utility merger case, Re: Northern
Utilities, Docket No. DF 98-040, Order No. 22,983 (1998).
Eastern and KeySpan recognize that the Commission is concerned that the
identification and quantification of merger-related savings in a future
proceeding will be difficult to accomplish, and that in any such
proceeding, the Commission may be at a disadvantage with regard to
available data relating to the attainment of merger savings. Therefore,
Eastern and KeySpan propose to work with the Staff of the Commission
and the Office of the Consumer Advocate ("OCA") to establish a
mechanism for measuring cost savings that could be used to offset
merger-related costs. This mechanism would serve as a proxy for the
cost to serve that would exist in the absence of the merger, and
therefore, would facilitate a demonstration of the extent to which cost
savings have been achieved as a result of the merger. To the extent
that ENGI seeks recovery of merger-related costs in the future, the
Commission would have a mechanism in place for determining the level of
savings available as a result of the merger. In Eastern-Colonial
Acquisition, D.T.E. 98-128 (1999), Eastern proposed, and the Department
approved, a mechanism of this type to measure savings for cost recovery
purposes. This, or a similar mechanism, may address the concerns raised
in New Hampshire with regard to the identification and quantification
of merger-related savings, and we look
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 16
forward to working with the Commission and the OCA to develop a
workable solution for these concerns.
Q. What rationale do you have for seeking recovery of the acquisition
costs to the extent that such costs are offset by demonstrated
merger-related savings?
A. KeySpan, Eastern and ENGI strongly believe that there are substantial
synergies and cost savings that will result from the merger. That
belief, in fact, serves as the primary motivating factor for the
shareholder investment in this proposal. Eastern is uniquely situated
to provide ENGI's customers with substantial benefits because the
service territories of ENGI and Colonial Gas (Merrimack Valley
Division) are geographically contiguous and because ENGI's corporate
and administrative functions can be coordinated and integrated with
those of Boston Gas. At the same time, as discussed above and in the
testimony of Mr. Flaherty, there are substantial costs associated with
accomplishing this transaction. In order to effect the transaction and
to attain the resultant benefits for customers, shareholders must make
a substantial investment with the expectation that there will be a
reasonable opportunity to recover merger-related costs. Thus, the
customer benefits available as a result of the merger are possible only
if the Commission recognizes that there is a direct linkage between
these benefits and the investment necessary to bring them about and
provides a reasonable opportunity for shareholders to recover the costs
of the acquisition. In the absence of a regulatory policy that
recognizes, in
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 17
some equitable manner, that such costs are a necessary component of a
transaction that will ultimately result in substantial cost savings for
customers, shareholders will not put their capital at risk to
accomplish the transaction.
III. THE MERGER'S CONSISTENCY WITH THE PUBLIC INTEREST STANDARD
Q. Is the merger consistent with the "no net harm" test applied by the
Commission when reviewing merger transactions?
A. Yes. The proposed merger meets and exceeds the no net harm test
articulated by the Commission. In New England Electric, the Commission
stated that the mandate in RSA 369:8 that the merger will "not
adversely affect the rates, terms, service, or operation of the public
utility within the state" is the same inquiry made under RSA 374:33,
which authorizes the Commission to approve mergers that are "lawful,
proper and in the public interest." New England Electric System, DE
99-035, Order No. 23,308 (1999), slip op. at 16. Thus, proposed mergers
must meet a "no net harm" test in order to be approved by the
Commission. Id. The Commission stated that, in applying the no net harm
test, it must "assess the benefits and risks of the proposed merger and
determine what the overall effect on the public interest will be,
giving the transaction . . . approval if the effect is at worst neutral
from the public interest perspective." Id. at 16-17. Accordingly, the
Commission's standard will be met where an applicant for approval of a
merger
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 18
demonstrates that customers would be no worse off with the merger than
without the merger.
As discussed above, Eastern and KeySpan propose: (1) to provide
customers with immediate gas-cost savings through a 2.2 percent
burner-tip price reduction; (2) to develop with the Commission a
mechanism for identifying and quantifying other cost savings achievable
only as a result of the merger; and (3) to be allowed the opportunity
to seek, in the future, recovery of merger-related costs required to
accomplish the transaction only to the extent that such costs are
demonstrated to be offset by merger-related savings. Because Eastern
will have the opportunity to recover costs only through savings
demonstrated to result from the merger, the recovery of such costs in a
future proceeding will not cause rates to be any higher for customers
than what they would have been in the absence of the merger. At the
same time, ENGI's customers will receive the benefit of a burner-tip
price reduction achieved as a result of gas-supply synergies. Thus, the
proposed merger results in net benefits to customers, and therefore,
meets and exceeds the Commission's no net harm standard.
As indicated in the testimony of Walter J. Flaherty, approval of the
merger in accordance with the terms of Northern Utilities will provide
KeySpan and Eastern with a reasonable opportunity to recover
merger-related costs only upon a showing to the Commission that
identified and quantified cost savings resulting
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 19
from the merger warrant such recovery. As further indicated by Mr.
Flaherty, consummation of the merger is expressly contingent upon the
Commission's approval upon terms and conditions that, with regard to
rates and the recovery of costs associated with the merger (including
the acquisition premium and transaction and integration costs), are no
less favorable than those set forth by the Commission pursuant to
Northern Utilities.
Q. What impact will the merger have on the quality of service to ENGI's
customers?
A. Eastern and KeySpan are committed to maintaining the high level of
service quality and reliability provided by ENGI. Moreover, because the
service territories of Colonial Gas and ENGI are contiguous, ENGI's
system can be operated more efficiently when coordinated with Eastern's
overall operations. ENGI will be able to rely on the resources of
Boston Gas, including its information technology infrastructure and
customer service experience to enhance the quality of service to ENGI's
customers. For instance, Boston Gas will be able to replace ENGI's
manual service-dispatch system with a computer-aided dispatch system,
which will allow ENGI to be more responsive to customer needs, while
increasing the productivity of the work-force and reducing labor costs.
Thus, the proposed merger will not adversely affect the quality of
service experienced by ENGI's customers, and is likely to result in an
augmented level of service quality because of the resources that will
be available to the combined companies.
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 20
Q. What impact will the proposed merger have on competition within the gas
industry?
A. The acquisition of EnergyNorth will facilitate greater competition in
the gas industry in two significant respects. ENGI currently provides
transportation service to approximately 100 customers who have chosen
to take gas service from a competitive supplier. In order to increase
access to competitive alternatives, ENGI is participating in a
collaborative (the "NH Collaborative") to consider unbundling issues
and is operating under the belief that natural gas distribution
companies will be expanding their customer choice programs in the
not-too-distant future. The NH Collaborative is currently considering
the adoption of standardized terms and conditions for service that are
based on similar terms and conditions developed by the Massachusetts
Gas Unbundling Collaborative, in which Boston Gas, Colonial Gas and
Essex Gas have been full participants. Since Boston Gas, Colonial Gas
and Essex Gas will be implementing the standardized terms and
conditions in the spring of 2000, Eastern is well positioned and
prepared to implement similar terms and conditions on the ENGI system
in a prompt, effective manner and at minimal expense.
Second, by combining the resource portfolios of ENGI with that of
Eastern's gas distribution operations, ENGI will be in a better
position to minimize transition costs and to streamline and standardize
systems for third-party gas marketers in its service area. Eastern
anticipates using the Broker Management System developed
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 21
by Boston Gas to conduct transactions with marketers in the EnergyNorth
service territory. Thus, competitive suppliers who serve customers in
both Massachusetts and New Hampshire will have the benefit of being
able to communicate with Eastern's gas distribution operations on a
standardized basis, which should lower transaction costs for those
marketers.
Q. What are the societal costs and benefits produced by the merger?
A. On balance, the overall result of the merger will be a more efficient
use of combined resources and lower gas prices to consumers, which
should provide the impetus for economic development gains in ENGI's
service territory. Societal costs resulting from the elimination of
redundant positions are expected to be minimal in this case because of
Eastern's commitment to maintain a presence in the community and to
undertake all reasonable efforts to provide any employees who may be
displaced with access to employee placement programs.
Q. What impact will the merger have on economic development in ENGI's
service territory?
A. As stated earlier, upon consummation of the merger, delivered gas
prices for ENGI's customers will be reduced by 2.2 percent. Thus, as a
result of the merger, customers will experience lower, and more stable,
prices both in the near and long term. The savings in gas bills for
customers will benefit the local economy, and therefore, should have a
positive effect on economic development within ENGI's
<PAGE>
Joint Petitioners
DG 99-
Witness: Bodanza
December 3, 1999
Page 22
service territory. Given New Hampshire's location at the end of the
interstate pipeline network, utility consolidation may be the only
significant means of reducing energy costs, which will help to maintain
the competitiveness of New Hampshire's industrial concerns.
Q. Are there any other reasonable and cost-effective ways for ENGI to
achieve the merger benefits previously discussed without being acquired
by Eastern and KeySpan?
A. Smaller companies generally do not have the ability to capture the
economies of scale and/or scope that are derived from more expansive
operations. ENGI's relatively small size prevents it from attaining
economies of scale and from realizing the attendant savings that result
from such economies. Potential elimination of redundant facilities and
resources, together with a gas supply plan coordinated with the KeySpan
and Eastern gas distribution operations will permit ENGI to obtain the
advantages of such economies for its customers.
Q. Based on your knowledge of ENGI and the area it serves, is the proposed
merger consistent with the public interest?
A. Yes, for all of the reasons stated above, and in consideration of the
customer benefits resulting from gas-supply synergies, the merger is
consistent with the public interest, as required by RSA 369:8,II and
RSA 374:33.
Q. Does this conclude your testimony?
A. Yes, it does.
<PAGE>
ATTACHMENT JFB-1
Estimated Costs to Achieve Synergies
($000)
EXPENSE ITEM COST
- ----------------------------------------------------------------------
(1) Employee Retention Agreements $650
(2) Change in Control Agreements 8,632
(3) Employee Separation Costs 3,528
(4) Systems Conversion Costs 1,378
(5) Communication Expense 200
Total Estimated Cost to Achieve Synergies $14,388
-------
<PAGE>
Attachment JFB-2
Summary of Transaction Costs To
Complete the Merger
($000)
EXPENSE ITEM COST
- ---------------------------------------------------------------------------
(1) Investment Banking Fees $3,775
(2) Legal and Regulatory 1,200
(3) Accounting Fees 125
(4) Filing 210
(5) Other 160
------
$5,470
Less: Transaction Costs Allocated to Non-Regulated Holdings(1) $804
------
Transaction Costs Attributable To EnergyNorth Natural Gas, Inc. $4,666
Gross-Up Factor for Taxes(2) 1.6722
------
Total Transaction Costs $7,802
======
(1) Per Attachment JFB-[x], $29.9 million, or 14.7 percent, of the purchase
price is allocable to the non-regulated businesses of EnergyNorth, Inc.
(2) The transaction costs to complete the merger are non-tax deductible.
<PAGE>
<TABLE>
<CAPTION>
Attachment JFB-3
Acquisition Premium Costs
($000)
<S> <C> <C>
Offering Price Per Share 61.13
Shares Outstanding @ 6/30/89 3,319,712
Total Purchase Price $202,934
Less: Fair Market Value of Non-Regulated Holdings 29,877
----------------
Adjusted Purchase Price - EnergyNorth Natural Gas, Inc. $173,057
Total Book Value $56,081
Less: Book Value of Non-Regulated Holdings 6,782
----------------
Adjusted Book Value - EnergyNorth Natural Gas, Inc. 49,299
------
Acquisition Premium - EnergyNorth Natural Gas, Inc. $123,758
Acquisition Premium Amortization Period 40 Years
Annual Acquisition Premium Amortization $3,094
Gross-Up Factor for Taxes1 1.6722
Total Cost of Acquisition Premium $5,174
======
1 The annual amortized acquisition premium is non-tax deductible.
</TABLE>
<PAGE>
Attachment JFB-4
Annual Amortized Acquisition Costs
($Millions)
Years 1-10 Years 11- 40
Annual Amortization of Costs
Necessary to Achieve Synergies $1.4 $0.0
Annual Amortization of Transaction
Costs to Complete the Merger $0.8 $0.0
Annual Amortization of the
Acquisition Premium $5.2 $5.2
----------- -----------
Annual Amortization of Acquisition
Costs $7.4 $5.2
----------- -----------
----------- -----------
<PAGE>
Joint Petitioners
DG 99-
Witness: Chicoine
December 3, 1999
Page 1
STATE OF NEW HAMPSHIRE
PUBLIC UTILITIES COMMISSION
Testimony of Michelle L. Chicoine
I. INTRODUCTION
Q. Please state your name and business address.
A. My name is Michelle L. Chicoine. My business address is 1260 Elm
Street, Manchester, New Hampshire 03105.
Q. By whom are you employed, and in what capacity?
A. I am Executive Vice President and a Director of EnergyNorth, Inc.
("EnergyNorth") and President, Director and Chief Operating Officer of
EnergyNorth Natural Gas, Inc. ("ENGI").
Q. Have you previously testified in proceedings before the Commission?
A. Yes, I have testified before the Commission on behalf of ENGI in
numerous proceedings involving rate issues, cost-of-gas adjustments,
gas industry unbundling and environmental remediation and cost recovery
matters.
Q. What is the purpose of your testimony in this proceeding?
The purpose of my testimony is to: (i) describe EnergyNorth and the
decision to merge EnergyNorth with Eastern Enterprises ("Eastern") and
KeySpan Corporation ("KeySpan"); (ii) describe the benefits available
as a result of
<PAGE>
Joint Petitioners
DG 99-
Witness: Chicoine
December 3, 1999
Page 2
the merger; and (3) endorse the representation by KeySpan, Eastern and
EnergyNorth in this case that the rates, terms, service and operations
of ENGI will not be adversely affected by the merger and that the
merger will result in no net harm to customers.
II. THE DECISION TO MERGE ENERGYNORTH WITH EASTERN
Q. Please provide a brief description of EnergyNorth.
A. EnergyNorth is an exempt public utility holding company headquartered
in Manchester, New Hampshire. EnergyNorth's principal operating
subsidiaries include ENGI, a local gas distribution company regulated
by the New Hampshire Public Utilities Commission (the "Commission"),
EnergyNorth Propane, Inc., an unregulated retail distributor of propane
and ENI Mechanicals, Inc., which consists of two mechanical contracting
companies engaged in the design, construction and service of heating,
ventilating, air conditioning and process-piping systems. EnergyNorth
was organized in 1982 in accordance with New Hampshire state law in
order to provide for the combination of Gas Service, Inc. and
Manchester Gas Company. In 1985, EnergyNorth acquired the Concord
Natural Gas Company, which was consolidated with EnergyNorth's existing
operations to form ENGI.
ENGI currently distributes natural gas to approximately 72,000
customers representing more than 75 percent of natural gas customers in
New Hampshire. ENGI's service territory encompasses over 900 square
miles in 28 cities and towns, including Nashua, Manchester and Concord,
New Hampshire.
<PAGE>
Joint Petitioners
DG 99-
Witness: Chicoine
December 3, 1999
Page 3
Q. Please explain why EnergyNorth decided to pursue a merger at this time?
A. Over the past several years, EnergyNorth's Board of Directors (the
"Board") and the management of EnergyNorth have followed developments
in the gas utility industry with a particular focus on changes in
regulatory policies. These changes motivated EnergyNorth to consider
carefully the impact of industry restructuring initiatives in
formulating its future business strategy. With the unbundling of
electric and gas services, the implementation of customer choice
programs, and the evolution of more competitive energy markets, it
became increasingly clear to EnergyNorth that its relatively small size
and limited resources would restrict its future business opportunities
and make it difficult to improve significantly the efficiency of its
operations on a stand-alone basis. Although EnergyNorth has
successfully controlled ENGI's costs, further cost reductions of
significance would be available only through the creation of economies
of scale and/or scope in its operations. Moreover, the Board recognized
that the synergies and operational efficiencies that could result from
a business combination with a larger utility would be valued by
potential merger partners, and therefore, would produce value for
shareholders in any such transaction. As a result of this analysis, the
Board, in conjunction with EnergyNorth management, concluded that it
should further investigate the benefits for customers and shareholders
that could potentially result from a business combination with a larger
utility.
<PAGE>
Joint Petitioners
DG 99-
Witness: Chicoine
December 3, 1999
Page 4
Q. Why did EnergyNorth decide to enter into a business combination with
Eastern?
A. After discussion with several parties, direct negotiations resulted in
Eastern making the proposal that is embodied in the Merger Agreement,
as amended. Of particular significance to EnergyNorth was the scale and
proximity of Eastern's gas distribution operations. The size of
Eastern's gas distribution operations and the fact that Colonial Gas, a
subsidiary of Eastern, operates in a service territory that is
contiguous to the southernmost portion of ENGI's service territory,
create significant potential for ENGI to achieve operational synergies,
associated cost reductions and enhanced customer service. EnergyNorth
was also aware that Eastern was in the process of evaluating
opportunities for further expansion of its gas distribution operations
to reduce the overall costs associated with providing gas service to
customers, which had the potential to result in further cost reductions
to ENGI's customers.
The Board, in conjunction with EnergyNorth management, determined that
Eastern's proposal offered ENGI's customers and shareholders the best
possible overall benefits compared to those of all other interested
parties. The Board and ENGI management have since determined that
Eastern's plan of merger with KeySpan would encompass those benefits
and provide customers and shareholders with value over and above that
available under the arrangement with Eastern.
<PAGE>
Joint Petitioners
DG 99-
Witness: Chicoine
December 3, 1999
Page 5
III. BENEFITS OF THE MERGER AVAILABLE TO ENGI CUSTOMERS
Q. What are the benefits of the merger for ENGI's customers, employees and
shareholders?
A. The merger of EnergyNorth with Eastern will provide significant
benefits for customers and shareholders. Although I believe that ENGI
is viewed, both within the industry and within its service territory,
as a well-managed utility providing quality service to its customers,
the merger presents opportunities for ENGI to achieve economies of
scale by operating as a sister company to Boston Gas, Colonial Gas,
Essex Gas and The Brooklyn Union Gas Company and KeySpan Gas East
Corporation d/b/a The Brooklyn Union Gas Company of Long Island
(collectively, the "Brooklyn Union Companies"). These economies of
scale will produce benefits for customers that would not be available
in the absence of the merger. For example, as a result of the merger,
ENGI's customers will receive a significant reduction in the burner-tip
price of gas, as well as other benefits over time, as the merged
companies are able to gain efficiencies in the provision of services.
Specifically, ENGI's customers will be the beneficiaries of an
immediate 2.2 percent reduction in their burner-tip prices. As
mentioned above, these savings are possible only as a direct result of
the acquisition because of the ability to capture potential gas cost
savings through the coordination of the gas planning, acquisition and
dispatch activities of ENGI and the existing gas distribution
operations of Eastern and KeySpan.
<PAGE>
Joint Petitioners
DG 99-
Witness: Chicoine
December 3, 1999
Page 6
In addition, the merger will provide ENGI with access to resource and
infrastructure alternatives that would be prohibitively expensive for
ENGI to pursue on a stand-alone basis. For example, ENGI will be able
to take advantage of the significant investment that Boston Gas and the
Brooklyn Union Companies have made in information technology, such as
the systems required to implement a comprehensive customer choice
program or to handle customer-service inquiries more efficiently. ENGI
will also have increased access to capital markets, which will enable
investments in system infrastructure at a lower cost. Thus, the
proposed merger is in the best interest of ENGI customers.
Lastly, the proposed merger will provide EnergyNorth's shareholders,
many of whom are New Hampshire residents and ENGI customers, with fair
value for their ownership interest.
Q. What are some examples of systems investments that would have been
required absent the merger?
A. Appended hereto as Attachment MLC-1, is a list of the particular
systems that ENGI planned to invest in, prior to reaching a plan of
merger with Eastern and KeySpan. ENGI determined that investment in
such systems was required based, in part, on a study performed by
Arthur Andersen LLP that was subsequently updated as part of an
internal information-systems plan. Based on that analysis, ENGI would
have incurred investment costs of over $4.3 million to develop,
implement and/or modify information systems and infrastructure absent
the
<PAGE>
Joint Petitioners
DG 99-
Witness: Chicoine
December 3, 1999
Page 7
merger, such as: (1) software to automate the dispatch function; (2) an
enterprise level reporting and data warehousing system to enhance
management reporting; (3) an upgrade of the telephone system and call
center; (4) an upgrade of the infrastructure to accommodate
internet/intranet applications; (5) software for payroll/human resource
functions; (6) software and conversion costs to automate the mapping
functions; (7) development and implementation of disaster-recovery
capability; (8) modifications to existing customer information-system
and gas-supply systems to expand the customer choice program; and (9)
replacement of the customer-information system.
For example, Boston Gas has developed its own Broker Management System
(the "BMS") in order to administer its customer-choice program on a
multi-company basis, i.e., for all of Eastern's operating subsidiaries.
Because of the merger, ENGI will have the opportunity to utilize the
BMS developed by Boston Gas rather than incurring the significant cost
of procuring and implementing a similar system on its own.
Similarly, ENGI's dispatch and customer-service center is currently
operated on a manual basis. ENGI has, over time, evaluated the cost
that would be associated with the implementation of a computer-aided
dispatch system and has determined that significant investment would be
required in order to obtain, implement and install such a system.
However, as a result of the merger, ENGI will have access to this
technology, as well as an array of other information systems that will
<PAGE>
Joint Petitioners
DG 99-
Witness: Chicoine
December 3, 1999
Page 8
increase efficiency and enhance customer service with minimal
infrastructure investment by ENGI. In fact, EnergyNorth views the
avoidance of technology investments to be a significant benefit
resulting from the merger.
Q. Would it be possible for ENGI to achieve these savings in the absence
of the acquisition of EnergyNorth by Eastern?
A. As I have indicated, ENGI has been, and continues to be, dedicated to
reducing its costs in all areas in order to provide its customers with
reliable gas sales and transportation services at the lowest possible
price. However, there are limitations on the ability of a company of
ENGI's size to capture the high level of savings that would be
available through a merger with a larger entity. In this case, Boston
Gas' technology investments can be extended to the operations of ENGI
and Eastern's gas distribution service territory is contiguous with our
service territory; therefore, the potential for achieving reductions in
the cost of the combined operations is substantial. As described in Mr.
Bodanza's testimony, the acquisition will create economies of scale and
synergies that present the opportunity for immediate cost reductions,
and ultimately, long-term benefits to customers in the form of lower
prices.
Q. What affect would a failure to approve the proposed merger have on the
customers of ENGI?
A. Were the proposed merger not to receive approval, ENGI's customers
would not obtain the immediate 2.2 percent price reduction that would
otherwise take effect upon approval of the merger. In addition, ENGI
would lose the opportunity to
<PAGE>
Joint Petitioners
DG 99-
Witness: Chicoine
December 3, 1999
Page 9
combine its operations with those of a much larger organization that is
uniquely situated to coordinate its operations with those of ENGI.
Because the service territories of ENGI and Colonial Gas are
contiguous, and because Boston Gas is in a position to extend important
resources such as its advanced information systems technology to our
operations, the proposed merger with Eastern and KeySpan will not
adversely affect the rates, terms, service or operations of ENGI, and
instead will offer significant near and long-term benefits for
customers.
Q. Does this conclude your testimony?
A. Yes, it does.
<PAGE>
Attachment MLC-1
Information Technology Investments on Stand-Alone Basis
SYSTEM INVESTMENT REQUIRED
- --------------------------------------------------------------------------------
(1) Automate Dispatch Function $50,000
(2) Management Reporting System 75,000
(3) Upgrade of Telephone System/Call Center 400,000
(4) Internet/Intranet Infrastructure 150,000
(5) Payroll/Human Resources Software 125,000
(6) Automate Mapping Function 400,000
(7) Disaster Recovery Capability 30,000
(8) Expand Customer Choice Program 120,000
(9) Replace Customer Information System 3,000,000
---------
Total Information Technology Investments on Stand-Alone Basis $4,350,000
==========
<PAGE>
Joint Petitioners
DG 99-
Witness: Luthern
December 3, 1999
Page 1
STATE OF NEW HAMPSHIRE
PUBLIC UTILITIES COMMISSION
Testimony of William R. Luthern
I. INTRODUCTION
Q. Please state your name and business address.
A. My name is William R. Luthern. My business address is One Beacon
Street, Boston, Massachusetts 02109.
Q. By whom are you employed and in what capacity?
A. I am Vice President of Gas Resources for Boston Gas Company ("Boston
Gas"). In my current position, I am responsible for the planning,
acquisition and marketing of the gas supply resources for Boston Gas,
Colonial Gas Company ("Colonial"), and Essex Gas Company ("Essex"). In
addition, I am responsible for all state and federal regulatory matters
relating to gas supply, planning and acquisition.
Q. Have you previously testified in regulatory proceedings?
A. Yes, I have testified in a number of proceedings before the
Massachusetts Department of Telecommunications and Energy (the
"Department"), the Federal Energy Regulatory Commission and the
Canadian National Energy Board (the "NEB"). Most recently, I testified
before the Department in Eastern-Essex
<PAGE>
Joint Petitioners
DG 99-
Witness: Luthern
December 3, 1999
Page 2
Acquisition, D.T.E. 98-27 (1998) and Eastern-Colonial Acquisition,
D.T.E. 98-128 (1999) and before the NEB in Imperial Oil Resources, Ltd
and Boston Gas Company, GH-1-99 (1999).
Q. What is the purpose of your testimony?
A. The purpose of my testimony is to describe the benefits of the gas
supply synergies resulting from the acquisition of EnergyNorth, Inc. by
Eastern Enterprises ("Eastern"), the parent company of Boston Gas,
Colonial Gas and Essex Gas, and to explain how these efficiencies will
be attained so as to reduce future gas supply costs for EnergyNorth
Natural Gas, Inc. ("ENGI") customers.
II. EFFECT OF MERGER ON GAS SUPPLY PLANNING AND THE POTENTIAL FOR REDUCED
GAS COSTS
Q. Will the proposed acquisition create the opportunity for synergies
associated with gas supply planning and procurement for ENGI's
customers?
A. Yes, the acquisition will facilitate the development of more efficient
gas supply resources for ENGI. Re-optimization of ENGI's portfolio will
be possible as a result of the coordination of the gas supply planning
and acquisition efforts of Boston Gas, Colonial Gas and Essex Gas. Such
coordination will create the opportunity to use more efficiently the
resources of these four companies and allow ENGI's customers to benefit
from the economies of scale gained through the aggregation of supply
resources. The opportunity to capture such synergies will be enhanced
because the service territories of Colonial Gas and ENGI's system are
geographically contiguous, and Boston Gas, Colonial Gas, Essex Gas and
ENGI
<PAGE>
Joint Petitioners
DG 99-
Witness: Luthern
December 3, 1999
Page 3
are connected through the Tennessee Gas Pipeline Company ("Tennessee").
Moreover, as addressed in the testimony of Craig G. Matthews, the
potential to achieve additional synergies may be increased as a result
of Eastern's planned merger with KeySpan Corporation ("KeySpan").
Q. Please provide a brief description of ENGI's current supply portfolio.
A. ENGI receives all of its pipeline deliveries through the Tennessee
pipeline. A summary of the portfolio of resources held by ENGI to meet
its requirements is set forth in Attachment WRL-1. ENGI currently has
long-haul transportation contracts with Tennessee for 21,596 dekatherms
("Dth") per day. In addition, ENGI holds several short-haul
transportation contracts totaling 28,115 Dth per day to deliver
underground storage volumes. ENGI purchases its commodity requirements
under several domestic arrangements to meets its sendout and storage
refill requirements, as well as under contracts with three Canadian
suppliers. Such Canadian volumes are delivered from the Canadian border
under domestic transportation agreements with Tennessee, the Iroquois
Gas Transmission System and Portland Natural Gas Transmission System,
totaling 8,122 Dth per day.
EnergyNorth operates several liquefied natural gas ("LNG") and
propane-air facilities with a total storage capacity of 126,252 Dth to
meet peak-shaving requirements on a system-wide basis. To supplement
its own peak-shaving
<PAGE>
Joint Petitioners
DG 99-
Witness: Luthern
December 3, 1999
Page 4
capacity, ENGI has contracts with Distrigas of Massachusetts
Corporation ("DOMAC") and El Paso Energy Marketing Company, for the
provision of peaking supplies totaling 23,000 Dth per day.
Q. Are you familiar with the manner in which ENGI's upstream pipeline and
storage volumes are delivered to ENGI's city gates?
A. Yes. Boston Gas, Colonial Gas and Essex Gas subscribe to similar
services on the Tennessee pipeline as ENGI, and therefore, transport
long-haul domestic supplies, short-haul storage supplies and Canadian
supplies under the same basic rate schedules as ENGI.
Q. On what basis did you determine that it was possible to capture gas
supply synergies for the two systems?
A. As a first step, I reviewed the gas supply portfolio of ENGI to
determine the maximum daily quantity, annual delivery limitations, and
termination dates of each contract. I also reviewed ENGI's gas sendout
requirements and each of its contracts to determine which contracts, if
any, could be reduced or displaced as a result of the ability to
coordinate ENGI's gas supply portfolio with that of Boston Gas,
Colonial Gas and Essex Gas. In order to determine which resources could
be reduced or eliminated through the coordination of the ENGI resource
portfolio with that of Boston Gas, Colonial Gas and Essex Gas, we
analyzed the use of Boston Gas, Colonial Gas and Essex Gas resources,
with and without ENGI's operations. Specifically, a dispatch analysis
was performed using Boston Gas,
<PAGE>
Joint Petitioners
DG 99-
Witness: Luthern
December 3, 1999
Page 5
Colonial Gas and Essex Gas resources to meet their system requirements,
in isolation, and a dispatch analysis of ENGI's resources to meet ENGI
system requirements. Finally, we performed a dispatch analysis using
all resources to meet the combined systems' aggregate load. This
analysis allowed us to determine the most efficient resource mix to
meet total combined load requirements. This analysis also allowed us to
identify whether incremental levels of Boston Gas, Colonial Gas and
Essex Gas resources could or would be utilized to substitute for
certain resources in the ENGI portfolio, and whether ENGI's resources
could displace certain elements in Boston Gas, Colonial Gas and Essex
Gas portfolios with the savings credited back to ENGI's customers.
Q. Have you been able to identify and quantify potential gas cost savings
as a result of that analysis?
A. Yes. Based on my review of ENGI's resource portfolio and gas
requirements, several cost-saving measures are available, which are
illustrated in Attachment WRL-2. For example, implementation of
combined asset-management initiatives in conjunction with Boston Gas,
Colonial Gas and Essex Gas has the potential to produce annual cost
savings to ENGI's customers of approximately $800,000. I also estimate
that approximately $850,000 in savings would be available annually
through the combined dispatch of the gas supply portfolios, which would
allow ENGI to avoid certain pipeline peaking services, as well as
approximately
<PAGE>
Joint Petitioners
DG 99-
Witness: Luthern
December 3, 1999
Page 6
$200,000 in annual costs associated with the renegotiation of various
underground storage arrangements.
As indicated in Attachment WRL-2, I estimate that additional savings
will be available as a result of reduced gas commodity expenses and
further restructuring of upstream pipeline services. I estimate that
these additional savings would initially amount to roughly $162,500
annually. Significantly, the initial savings that we have identified
would not be available in the absence of the merger because these
savings stem from the ability to eliminate resources that are redundant
only as a result of the combined management of the combined resource
portfolio, and from the ability to roll ENGI's resource portfolio into
the asset-management arrangement that Boston Gas, Colonial Gas and
Essex Gas have established with El Paso.
Q. Will the effort to attain gas-supply cost reductions negatively affect
the overall reliability of ENGI's gas service?
A. Any gas-supply synergies that we achieve as a result of the proposed
merger of Eastern and EnergyNorth will be produced through the
coordination and integration of ENGI's resource portfolio with that of
Boston Gas, Colonial Gas and Essex Gas, and not simply from the
reduction or elimination of resources necessary to meet ENGI system
requirements. In assembling a resource portfolio, a local distribution
company may rely on resources that are necessary to meet system
requirements on a stand-alone basis, but that may be redundant with
similar
<PAGE>
Joint Petitioners
DG 99-
Witness: Luthern
December 3, 1999
Page 7
resources on other distribution systems. By coordinating the ENGI
portfolio with that of Eastern's gas distribution operations, these
resources may be eliminated without jeopardizing the reliability of the
resource portfolio. In fact, as a result of the merger, ENGI will have
access to the broader set of resources that constitute the combined
portfolios of Boston Gas, Colonial Gas and Essex Gas. At this time, we
have not identified any other synergies than those illustrated in
Attachment WRL-2 that could be achieved without affecting our ability
to meet ENGI's system requirements. However, it is our experience with
the Colonial Gas and Essex Gas mergers that, as integration efforts
proceed and experience is gained with the combined portfolio,
additional gas-supply synergies may be identified and achieved. We also
anticipate that additional cost savings may be available as a result of
coordination with the gas distribution operations of KeySpan.
Q. What are the total gas supply savings that you estimate would be
attainable and how do those savings compare to ENGI's burner-tip
prices?
A. I estimate that gas cost savings of $2.0 million annually will be
achieved by the 2000/01 heating season, which will escalate to $2.3
million annually by the 2003/04 heating season. As calculated in the
testimony of Mr. Bodanza, the $2.0 million in annual savings represents
a 2.2 percent reduction in the burner-tip prices of ENGI's customers.
Q. How will ENGI customers be assured that they will receive the benefit
of gas-cost savings now, and in the future, should the Commission
approve the proposed merger?
<PAGE>
Joint Petitioners
DG 99-
Witness: Luthern
December 3, 1999
Page 8
A. The gas-supply synergies achieved as a result of the coordination of
the resource portfolios of ENGI and Boston Gas, Colonial Gas and Essex
Gas will be attained through a series of cost-saving measures. As set
forth in Attachment WRL-2, we have identified the type of cost-saving
measures that we believe can be achieved in the near future and we
anticipate that additional gas-cost savings may be achievable over
time. The costs associated with gas-supply resources are recovered from
customers through the Cost of Gas ("COG") factor. Because the COG
factor functions as a pass-through mechanism, any gas-cost savings
achieved now, or in the future, would be passed through to customers
through the normal operation of the COG factor. In our experience with
the Colonial Gas and Essex Gas mergers, customers have received the
benefit of substantial gas-cost savings in excess of those projected as
part of the merger filing, and are currently enjoying the benefit of
those reduced costs through the COG factor.
Q. Will coordination of ENGI's resource portfolio with that of Boston Gas,
Colonial Gas and Essex Gas have any effect on competition?
A. We believe that the consolidation of the gas supply and dispatch
operations will actually facilitate the move to an unbundled
environment because of two factors. First, the coordination of the
Boston Gas, Colonial Gas, Essex Gas and ENGI resource portfolios
provides a unique opportunity to consolidate and reoptimize the
portfolios, which will create a more flexible and less costly mix of
resources for assignment to migrating customers. Second, as discussed
by Mr. Bodanza, ENGI
<PAGE>
Joint Petitioners
DG 99-
Witness: Luthern
December 3, 1999
Page 9
has not yet developed its information-systems technology to accommodate
system-wide service by third-party competitive suppliers. As a result
of the merger, ENGI will be able to minimize the cost of this
undertaking by taking advantage of the Broker Management System
developed by Boston Gas. More importantly, competitive suppliers will
be able to transact business using standardized communications
protocols across all four service territories, which should minimize
transaction costs for competitive suppliers. In that regard, the merger
will facilitate ENGI's transition to an unbundled environment for the
benefit of those customers and competitive suppliers who are interested
in serving customers on ENGI's system.
Q. Does this complete your testimony?
A. Yes, it does.
<PAGE>
<TABLE>
<CAPTION>
Attachment WRL-1
Summary of Portfolio Resources
<S> <C>
RESOURCE TYPE Dekatherms/Day
Interstate Pipeline Transportation
Tennessee Gas Pipeline Company - Long Haul 21,596
Tennessee Gas Pipeline Company - Short Haul 28,115
Tennessee Gas Pipeline Company - Seasonal 23,000
Iroquois Gas Transmission Systems )
Tennessee Gas Pipeline Company ) Transport of Canadian
Portland Natural Gas Transmission System ) 8,122
-----
TOTAL PIPELINE TRANSPORTATION 80,833
Propane Peak-Shaving Capacity 50,400
Liquefied Natural Gas Peak-Shaving Capacity 18,000
------
TOTAL PEAK-SHAVING CAPACITY 68,400
TOTAL PEAK-DAY DELIVERABILITY 149,233
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Attachment WRL-2
Gas Supply Cost-Saving Measures
<S> <C> <C> <C> <C>
MEASURE 2000/01 2001/02 2002/03 2003/04
- --------------------------------------------------------- -- ----------------- -- ------------------ -- ------------------
Gas Commodity Cost Reductions $162,500 $162,500 $162,500 $162,500
Implementation of Combined
Asset Management Initiatives $800,000 $800,000 $800,000 $800,000
Cost Reduction in Pipeline
Peaking Services $850,000 $850,000 $850,000 $850,000
Renegotiation of Underground
Storage Services $200,000 $200,000 $200,000 $200,000
Conversion of 2000 Dth/d of
TGP Long Haul to 151-day
City-gate Services $250,000
- --------------------------------------------------------- -- ----------------- -- ------------------ -- ------------------
TOTAL GAS COST SAVINGS $2,012,500 $2,012,500 $2,012,500 $2,262,500
</TABLE>
<PAGE>
Joint Petitioners
DG 99-
Witness: Matthews
December 3, 1999
Page 1
STATE OF NEW HAMPSHIRE
PUBLIC UTILITIES COMMISSION
Testimony of Craig G. Matthews
I. INTRODUCTION
Q. Please state your name and business address.
A. My name is Craig G. Matthews. My business address is One MetroTech
Center, Brooklyn, New York, 11209.
Q. By whom are you employed, and in what capacity?
A. I am President and Chief Operating Officer of KeySpan Corporation
("KeySpan") and its largest operating subsidiary, The Brooklyn Union
Gas Company ("Brooklyn Union"). I am also a Director of Brooklyn Union.
Q. Have you previously testified before any regulatory commission?
A. Yes. I have testified before the New York State Public Service
Commission in several proceedings involving a number of issues,
including rate and accounting issues and corporate organization
matters.
Q. What is the purpose of your testimony?
A. The purpose of my testimony is to describe various aspects of the
proposed acquisition by KeySpan of Eastern Enterprises ("Eastern"), and
indirectly, EnergyNorth, Inc. ("EnergyNorth") and its principal
operating subsidiary
<PAGE>
Joint Petitioners
DG 99-
Witness: Matthews
December 3, 1999
Page 2
EnergyNorth Natural Gas, Inc. ("ENGI"). Specifically, my testimony
provides: (i) a background description of KeySpan; (ii) KeySpan's
rationale for the acquisition of Eastern, and indirectly of
EnergyNorth; (iii) the impact of KeySpan's planned merger with Eastern
on the commitments advanced by Eastern in this proceeding with regard
to the operations of ENGI; and (iv) a summary of the required
regulatory approvals necessary to effect the merger of KeySpan and
Eastern.
II. BACKGROUND OF KEYSPAN CORPORATION
Q. Please describe the background and operations of KeySpan.
A. KeySpan is a New York corporation headquartered in Brooklyn, New York.
KeySpan is a holding company that owns 100 percent of the common stock
of two local distribution companies serving a total of 1.6 million
natural gas customers in New York City (Brooklyn Union) and Long Island
(through KeySpan Gas East Corporation d/b/a Brooklyn Union of Long
Island). KeySpan was formed in 1998, when the parent company of
Brooklyn Union combined with the natural gas local distribution and
electric generating businesses that had been divested by Long Island
Lighting Company.
KeySpan is a multi-faceted energy company primarily focused on serving
the growing downstream markets in the Northeast. KeySpan's business
enterprises consist of five business units, including its gas
distribution operations. In addition
<PAGE>
Joint Petitioners
DG 99-
Witness: Matthews
December 3, 1999
Page 3
to the gas distribution operations, KeySpan's business units include
electric services, energy-related services, gas exploration and
production and energy-related investments.
Specifically, KeySpan's electric services business units own and
operate more than 6,168 megawatts of electric generation on Long
Island, New York and in New York City. In addition, KeySpan manages the
transmission and distribution of electricity to more than one million
electric customers on Long Island, under a contract with the Long
Island Power Authority.
KeySpan's energy-related services business unit includes KeySpan Energy
Services, an unregulated retail marketing affiliate that buys and sells
gas and electricity and provides related services to residential,
commercial and industrial customers throughout the Northeast. KeySpan
Energy Solutions provides service and maintenance for heating
equipment, water heaters, central air conditioners and gas appliances.
In addition, KeySpan Energy Management designs and operates energy
systems of large-scale residential, commercial and industrial
facilities and provides services to customers ranging from engineering
to operations. Most of the contracts serviced by KeySpan Energy
Management include long-term operations, maintenance, financing and
fuel supply arrangements.
<PAGE>
Joint Petitioners
DG 99-
Witness: Matthews
December 3, 1999
Page 4
KeySpan currently owns 64 percent of The Houston Exploration Company, a
public company (NYSE), which is engaged in the exploration, development
and acquisition of natural gas and oil properties. The company has
offshore properties in the Gulf of Mexico, as well as onshore
properties in Texas and West Virginia. The remaining 36 percent of The
Houston Exploration Company is publicly held.
KeySpan's energy-related investments business unit is involved in a
wide range of unregulated project development efforts, both
domestically and internationally. KeySpan's investments include a 20
percent share in the Iroquois Gas Transmission System and numerous
other investments related primarily to gas pipeline and distribution
assets in the United Kingdom and midstream gas processing assets in
Canada.
KeySpan has stated publicly that it is reviewing its non-core
businesses, such as The Houston Exploration Company and its
international investments in order to maintain a strong focus on its
core downstream businesses.
Q. Please provide an overview of KeySpan's planned merger with Eastern and
EnergyNorth.
A. On November 4, 1999, KeySpan, Eastern and ACJ Acquisition LLC ("ACJ")
entered into an Agreement and Plan of Merger (the "Eastern Merger
Agreement") under which KeySpan will acquire all of the common stock of
Eastern for $64.00 per share in cash. As described below, KeySpan's
merger with Eastern is
<PAGE>
Joint Petitioners
DG 99-
Witness: Matthews
December 3, 1999
Page 5
conditioned upon the approval of Eastern's shareholders and the
approval of the Securities and Exchange Commission ("SEC") of: (1)
KeySpan's acquisition of the common stock of Eastern; and (2) KeySpan's
application to become a registered holding company under the Public
Utilities Holding Company Act of 1935 ("PUHCA"). KeySpan's indirect
acquisition of EnergyNorth and ENGI requires the approval of the New
Hampshire Public Utilities Commission (the "Commission"), but KeySpan's
acquisition of Eastern is not conditioned upon that approval.
As set forth in the testimony of Walter J. Flaherty, upon receipt of
the necessary regulatory approvals, EE Acquisition Company ("Merger
Sub"), a wholly owned subsidiary of Eastern, will be merged with and
into EnergyNorth in accordance with the laws of the State of New
Hampshire. EnergyNorth will be the surviving corporation and will
continue to operate as "EnergyNorth, Inc." under the laws of the State
of New Hampshire. In order to accomplish the merger, each share of
EnergyNorth common stock will be extinguished and automatically
converted into the right to receive $61.13 in cash. This conversion
will be a taxable event to the shareholders of EnergyNorth. Upon the
completion of the merger transaction, EnergyNorth will become a wholly
owned subsidiary of Eastern.
Simultaneously, ACJ, a subsidiary of KeySpan, will be merged with and
into Eastern in a merger structure referred to as a "reverse triangular
merger" for tax
<PAGE>
Joint Petitioners
DG 99-
Witness: Matthews
December 3, 1999
Page 6
and reorganization purposes. In order to accomplish the merger, each
share of Eastern common stock will be extinguished and automatically
converted into the right to receive $64.00 in cash. As a result,
Eastern, and indirectly, EnergyNorth and ENGI, will become subsidiaries
of KeySpan.
III. THE RATIONALE FOR THE ACQUISITION OF EASTERN
Q. Please describe KeySpan's business strategy with regard to mergers and
acquisitions?
A. As the owner of two natural gas local distribution companies, KeySpan
has a long history and considerable experience in operating businesses
that are very similar to the gas distribution businesses of Eastern and
EnergyNorth. KeySpan's gas companies have aggressively pursued the
expansion of their gas service and have recently jointly proposed to
the New York State Public Service Commission an innovative and
aggressive approach for accelerating customer participation in the gas
commodity service marketplace. Both of these efforts are aimed at
increasing customer choice for energy services. KeySpan perceives that
similar efforts in the service territories of Eastern and EnergyNorth
would contribute to the growth in the use of gas on those systems and
encourage customer choice. KeySpan believes that its service territory
and the service territories of Eastern and EnergyNorth are similar
markets and are subject to similar regulatory climates that are focused
on steering the industry through a transformation to increased gas
commodity service competition and increased customer choice. With this,
KeySpan anticipates
<PAGE>
Joint Petitioners
DG 99-
Witness: Matthews
December 3, 1999
Page 7
opportunities for synergies while continuing the high level of
commitment, in which KeySpan takes great pride, to system reliability,
customer service, community involvement and development, and a
productive diverse work force.
Q. What specific factors played a role in KeySpan's decision to enter
into a business combination with Eastern, and indirectly, with
EnergyNorth and ENGI?
A. We have identified potential synergies from KeySpan's acquisition of
Eastern that may arise from increased efficiencies in the combined gas
supply function and the integration of certain other administrative
functions. Although we have not yet specifically identified additional
synergies that would arise from KeySpan's acquisition of Eastern, it is
our judgment that synergies may be achieved in those same areas.
KeySpan's acquisition of Eastern may provide other benefits as well.
KeySpan's commitment to economic development in its franchised gas
service territories is longstanding and widely acknowledged. A visit to
downtown Brooklyn demonstrates the economic renaissance that has
occurred over the last decade, stimulated in large part by the efforts
of Brooklyn Union. Brooklyn Union of Long Island also has been quite
active in promoting economic development in its service territory and
has increased that involvement since its merger into KeySpan. Brooklyn
Union has special-area development rates in New York City and
<PAGE>
Joint Petitioners
DG 99-
Witness: Matthews
December 3, 1999
Page 8
Brooklyn Union of Long Island recently began to offer area-development
rates as well.
KeySpan, in addition to its cooperative work with local municipalities,
devotes considerable resources of employee volunteers and charitable
donations to day-to-day involvement with local not-for-profit agencies
that are key to developing the social and economic infrastructure of
the communities within its service territories. It has found that these
efforts redound to the benefit of customers and shareholders through
community economic growth and will extend this approach to its
involvement in the Massachusetts and New Hampshire communities served
by Eastern and EnergyNorth.
IV. IMPACT OF THE KEYSPAN/EASTERN MERGER ON ENERGYNORTH TRANSACTION
Q. Is the KeySpan merger with Eastern contingent upon the Commission's
approval of the indirect acquisition by KeySpan of EnergyNorth and
ENGI?
A. No. KeySpan is seeking the Commission's approval of its indirect
acquisition of ENGI. However, KeySpan's acquisition of Eastern is not
dependent on Eastern's acquisition of EnergyNorth. Therefore, the
termination of Eastern's acquisition of EnergyNorth, whether based on
Commission rejection of the proposed merger or other reasons, will not
affect the consummation of the KeySpan acquisition of Eastern.
<PAGE>
Joint Petitioners
DG 99-
Witness: Matthews
December 3, 1999
Page 9
Q. Will KeySpan's indirect acquisition of ENGI affect the corporate
structure of ENGI or the Commission's jurisdiction over its operations?
A. The structure of ENGI's operations will not change as a result of the
merger and the Commission's jurisdiction with respect to the company's
operations will remain unaltered. ENGI, will continue to operate as a
New Hampshire corporation subject to the Commission's full regulatory
authority. Thus, the Commission's jurisdiction over rates, service and
other matters of ENGI, will not be affected by the merger.
Following the merger, EnergyNorth's headquarters will remain in
Manchester, New Hampshire and the terms of all collective bargaining
agreements will be fulfilled. KeySpan and Eastern will maintain
EnergyNorth's commitment of charitable contributions to communities
served by the company and a level of involvement in community
activities as carried on in recent years. In addition, KeySpan and
Eastern will establish a local advisory board consisting of not less
than five members, to be chaired by Robert R. Giordano, for a period of
at least three years following the merger. Membership on the advisory
board will be offered to all current members of the Board of Directors
of EnergyNorth who are residents of the State of New Hampshire. This
will provide Eastern and KeySpan with access to the advice and counsel
of EnergyNorth's directors for at least three years following the
merger and provide important continuity by retaining the
<PAGE>
Joint Petitioners
DG 99-
Witness: Matthews
December 3, 1999
Page 10
services of individuals having a longstanding commitment to
EnergyNorth, ENGI and the communities they serve.
V. REGULATORY APPROVALS REQUIRED
Q. What regulatory approvals are required for completion of the merger?
A. As discussed above, KeySpan's indirect acquisition of EnergyNorth and
ENGI requires the Commission's approval. Pursuant to the provisions of
PUHCA, as well as the terms of the Eastern Merger Agreement, the SEC
must approve KeySpan's acquisition of the common stock of Eastern and
KeySpan's application to become a registered holding company. In
addition, pursuant to the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, the merger is subject to expiration of a waiting period (30
days, subject to an extension) during which the Federal Trade
Commission and the United States Department of Justice may review any
antitrust issues that are raised by the merger.
Q. Does this conclude your testimony?
A. Yes, it does.
Exhibit E-5
KeySpan's Non-Utility Subsidiaries
KeySpan is a diversified energy holding company which, through its
direct and indirect subsidiaries, engages in energy related businesses. KeySpan
engages in its non-utility activities through sixteen (16) direct non-utility
subsidiaries which are as follows: KeySpan Energy Corporation; KeySpan Operating
Services LLC; KeySpan Exploration and Production, LLC; KeySpan Corporate
Services LLC; KeySpan Utility Services LLC; KeySpan Electric Services LLC;
KeySpan Energy Trading Services LLC; Marquez Development Corporation; Island
Energy Services Company, Inc.; LILCO Energy Systems Inc.; KeySpan-Ravenswood
Inc.; KeySpan-Ravenswood Services Corp.; KeySpan Energy Supply, LLC; KeySpan
Services, Inc.; Honeoye Storage Corporation; and, KeySpan Technologies Inc.. In
addition, KeySpan's gas utility subsidiary, Brooklyn Union, owns all or part
interests in three (3) subsidiaries that are engaged in non-utility businesses.
The following is a description of the activities of KeySpan's direct
and indirect non-utility subsidiaries.
1. KeySpan Energy Corporation ("KEC")
KEC, a New York corporation, is a holding company for a variety of
energy related businesses which are conducted through its five (5) direct,
non-utility subsidiaries (KeySpan North East Ventures, Inc., KeySpan Energy
Development Corporation, THEC Holdings Corp., KeySpan Natural Fuels, LLC ("KNF")
and GEI Development Corp. ("GEI") and indirectly through Brooklyn Union's
non-utility subsidiaries.1 Their non-utility businesses are described below.
KeySpan North East Ventures, Inc. ("KNEV"). KNEV, a Delaware
corporation, holds a 90% ownership interest in Northeast Gas Markets, LLC.
Northeast Gas Markets, LLC, a Delaware limited liability company, provides
natural gas procurement, management and marketing services to clients located in
the northeastern part of the United States.
_______________________
1 Brooklyn Union is a utility subsidiary of KEC.
<PAGE>
KeySpan Energy Development Corporation ("KEDC"). KEDC, a Delaware
corporation, is a development company, and a holding company for companies,
engaged in international and domestic non-utility activities. KEDC's primary
activities, both directly and through its eight (8) direct subsidiaries, are the
development, ownership and operation of market area natural gas pipelines and
storage facilities located in the United States.; and, investments in companies
which develop, own and/or operate non-utility generation plants, gas processing
plants and gathering systems, liquid natural gas processing facilities, foreign
utility companies ("FUCOs") under Section 33 of the Public Utility Holding
Company Act of 1935 (the "Act"), natural gas pipelines, and oil fields located
in certain areas of Europe, Canada, or Latin America. As further described
below, KEDC's direct subsidiaries are GTM Energy, LLC ("GTM"); Honeoye Storage
Corporation ("Honeoye"), KeySpan International Corporation ("KeySpan
International"), GEI Timna, Inc. ("GEI Timna"), KeySpan Cross Bay, LLC ("KeySpan
Cross Bay"), KeySpan Midstream, LLC ("KeySpan Midstream"), Solex Production
Limited ("Solex") and Adrian Associates ("Adrian").
o KEDC owns a 50% ownership interest in GTM, a Delaware limited
liability company. GTM is a joint venture engaged in the development
of an electric generation project in the City of New York, which may
obtain exempt wholesale generator status under Section 32 of the Act
("EWGs").
o KEDC owns 28.8% of the outstanding common stock of Honeoye.2
Honeoye, a New York corporation, owns an underground gas storage
facility in Ontario County, New York consisting of 28
injection/withdrawal wells, 12 observation wells, 19 miles of field
gathering lines, compressor units totaling 2700 and 10.5 miles of
transmission pipeline connecting the facilities to the Tennessee Gas
Pipeline gas transmission system. Honeoye provides up to 40.8
billion cubic feet (BCF) of storage service to New York and New
England area gas distribution companies.
o KeySpan International, a Delaware corporation, is a holding company
for investments in gas distribution, transportation and electric
projects in selected developing markets in Europe and Latin America.
As described below, KeySpan International has two (2) direct,
wholly-owned subsidiaries, KeySpan CI Ltd. and KeySpan CI II Ltd.,
which directly or indirectly hold interests in the foreign
operations.
__________________
2 KeySpan also directly holds a 23.33% interest in Honeoye.
2
<PAGE>
o KeySpan CI Ltd., a Cayman Island corporation, directly holds a
24.5% ownership interest in Phoenix Natural Gas Limited
("Phoenix"), a natural gas distribution system located in
Northern Ireland. Phoenix is a FUCO. KeySpan CI also holds a 50%
interest in Premier Transco Limited ("Premier"), which is a
natural gas transportation pipeline company owning and operating
pipeline facilities spanning the Irish Sea between southwest
Scotland and Northern Ireland.3
o KeySpan CI II, Ltd., a Cayman Island corporation, through its
wholly owned subsidiary, Grupo KeySpan S. de R.L. de C.V., holds
a 50% interest in FINSA Energeticos, S. de R.L. de C.V.
("FINSA"). FINSA is a Mexican company and a FUCO which owns a
small gas distribution company in Mexico. It is also involved in
the development of generation and gas pipeline projects in
Mexico.
o GEI Timna, a Delaware corporation, was formed to develop an Israeli
power project. GEI Timna is inactive and owns no assets. It is currently
in the process of winding up its business and it will be dissolved as
soon as practicable.
o KeySpan Cross Bay, a Delaware limited liability company, owns a 25%
interest in the Cross Bay Pipeline Company, LLC ("Cross Bay"). Cross Bay
is involved in the development of the Cross Bay pipeline, a proposed
interstate pipeline that would be subject to the Federal Energy
Regulatory Commission ("FERC") jurisdiction and which will transport gas
from two existing interstate pipelines located in New Jersey to
customers located in New York City and Long Island.
o KeySpan Midstream, a Delaware limited liability company, indirectly
holds, through several wholly-owned subsidiaries, (i) an approximate 50%
interest in each of GMS Facilities Limited. ("GMF"), Gulf Midstream
Services Limited ("GMS"), and Gulf Midstream Services Partnership
("GMSP") (collectively, the "Canadian Companies") and (ii) a 100%
interest in KeySpan Energy Canada, Ltd. ("KeySpan Canada").4
___________________
3 KeySpan CI, Ltd. directly holds a 24.5% interest in Premier and a 25.5%
indirect interest through its wholly-owned subsidiary named KeySpan (UK)
Limited, a corporation organized under the laws of the United Kingdom.
4 A chain of intermediary companies has been established for the purpose of
holding interests in the Canadian Companies and KeySpan Canada. KeySpan
Midstream and KEDC together own 100% of KeySpan
3
<PAGE>
o GMF, a Canadian corporation, owns two natural gas processing plants
and associated gathering systems in western Canada.
o GMS, a Canadian corporation, markets natural gas liquids and is the
agent for, and is engaged in, the operation of the gas processing
plants and associated gathering facilities of GMF and GMSP.
o GMSP, a Canadian general partnership, owns 12 natural gas processing
plants and associated gathering facilities and is also involved in
natural gas liquids fractionation, storage, transportation and
marketing in western Canada.
o KeySpan Canada, a Canadian corporation, owns an interest in the
Taylor Gas Liquids Partnership ("Taylor"). Taylor owns an interest
in the Younger NGL Extraction Plant (the "Younger Plant") in western
Canada which is a natural gas liquids and extraction facility.
KeySpan Canada's partnership interest entitles it to a fluctuating
percentage of cash distributions from the limited partnership's cash
flow depending on the amount of production from the Younger Plant in
excess of 8,000 bbl/day and the capital funding of the plant.
o Solex, a Canadian corporation, owns the Nipisi oil field located in
western Canada. Solex is developing the field and has begun producing
and selling oil.
o KEDC holds an 18.6% interest in Adrian Associates, a New York
partnership, which owns a gas storage facility in Steuben, New York.
THEC Holdings Corp. ("THEC"). THEC Holdings Corp., a Delaware
corporation, holds a 64% interest in The Houston Exploration Company ("Houston
Exploration"). Houston Exploration, a Delaware corporation, is engaged in the
_______________________________________________
CI Midstream Ltd., a Cayman Island corporation, which in turn is the sole
shareholder of KeySpan Luxembourg S.A.R.L. ("KS Luxembourg"). KS Luxembourg, a
Luxembourg limited liability company, and its wholly-owned subsidiary, Nicodama
Beheer V.B.V. (a Netherlands company), hold all of the issued and outstanding
shares of KeySpan Energy Development Co. (Nova Scotia) ("KeySpan Nova Scotia").
KS Luxembourg also owns 100% of KS Midstream Finance Co. (Nova Scotia) which has
extended credit to KeySpan Nova Scotia. KeySpan Nova Scotia directly owns a 50%
interest in each of the Canadian Companies, 100% of KeySpan Canada, and a 37%
interest in the Paddle River gas processing plant located in western Canada.
4
<PAGE>
exploration, development and acquisition of domestic natural gas and oil
properties. Houston Exploration also owns associated gathering systems and
exploration and drilling equipment and is engaged in small scale marketing,
supplying, transportation and storage. The company has offshore properties in
the Gulf of Mexico and onshore properties in Texas, Louisiana and West Virginia.
Houston Exploration also owns 100% of Seneca-Upshur Petroleum, Inc. ("Seneca"),
a Delaware corporation, which is a general partner in a group of limited
partnerships which own oil and gas properties in West Virginia. Houston
Exploration manages, operates and drills the wells for Seneca.
KeySpan Natural Fuels, LLC. ("KNF"), a Delaware limited liability
company, owns certain interests in onshore producing wells of Houston
Exploration that produce oil and gas from non-conventional fuel sources, such as
oil being produced from shale and tar sands and natural gas being produced from
geopressured brine, Dluonion shale, coal seams and tight sand formations.
Houston Exploration manages and administers the daily operation of these
properties.
GEI Development Corp. ("GEI"). GEI, is the successor company to, and
holds the outstanding obligations of, Gas Energy Inc. and Gas Energy
Cogeneration Inc., which owned interests in several QFs. The QF interests were
sold to Calpine Corporation in December 1997. GEI is currently in the process of
winding down its business affairs and will be dissolved as soon as practicable.
Brooklyn Union Subsidiaries. Brooklyn Union has three (3) direct,
wholly-owned subsidiaries which are engaged either directly or through
subsidiaries in the following non-utility activities businesses: partial
ownership interests in a gas transportation pipeline regulated by the FERC; and
partial ownership interests in companies which imports and markets Canadian
natural gas. The Brooklyn Union's subsidiaries are as follows.
o North East Transmission Co., Inc., (a Delaware corporation and a
wholly-owned Brooklyn Union subsidiary) holds a 18.4% general
partner interest in the Iroquois Gas Transmission System, L.P.
("Iroquois"). Iroquois is a FERC regulated natural gas pipeline
which transports natural gas from Canada to the Northeast United
States. Iroquois has a wholly owned subsidiary, Iroquois Pipeline
Operating Company, which operates the Iroquois' pipeline.
o Brooklyn Union holds a 32.4% interest in Boundary Gas Inc., a
Delaware corporation, which imports and markets Canadian natural
gas, for delivery through the facilities of U.S. pipeline companies,
to utilities located in the northeastern part of the United States,
including Brooklyn Union.
5
<PAGE>
o Alberta Northeast Gas, Ltd. ("Alberta"). Alberta is a Canadian
corporation which exports and markets natural gas, for delivery
through the Iroquois pipeline, to utilities located in the Northeast
part of the United States, including Brooklyn Union.
2. KeySpan Electric Services LLC ("KES")
KES is a New York limited liability company which, pursuant to a
contract, provides day-to-day operation and maintenance services and
construction management services to the Long Island Lighting Company d/b/a LIPA
("LIPA") for LIPA's transmission and distribution facilities located on Long
Island, New York. KeySpan Electric's services are subject to the overall
direction of LIPA and LIPA maintains control over major decisions.5
3. KeySpan Operating Services LLC ("KOS")
KOS, a New York limited liability company, holds a 51% interest in
KeySpan Energy Construction, LLC. ("KeySpan Construction"). KeySpan Construction
provides electric field services to affiliated and unaffiliated electric
utilities and other energy related companies located in the New York
metropolitan area. Such field services include the installation, maintenance and
replacement of electric transmission and distribution equipment.
4. KeySpan Exploration and Production, LLC ("KEP")
KEP, a Delaware limited liability company, is part of a joint venture
with The Houston Exploration Company to conduct offshore gas and oil exploration
and development in the Gulf of Mexico consisting of drilling undeveloped
offshore leases. The offshore leases are owned 55% by Houston Exploration and
45% by KEP.
______________________
5 KES is not an electric utility company under PUHCA. See BL Holding Corp.,
Holding Co. Act Release No. 26875 at 5 fn. 8 (May 15, 1998).
6
<PAGE>
5. KeySpan Corporate Services LLC ("KCS")
KCS, a New York limited liability company, provides corporate
administrative services including financial, legal and tax services to KeySpan
and its subsidiaries and affiliates.
6. KeySpan Utility Services LLC ("KUS")
KUS, a New York limited liability company, provides the following
services to LIPA and various KeySpan subsidiaries, including Brooklyn Union and
KeySpan Gas East: gas and electric transmission and distribution system
planning; marketing services; procurement of goods and services; research and
development services; meter repair operations; and corporate administrative
services.
7. KeySpan Energy Trading Services LLC ("KETS")
KETS, a New York limited liability company, is a broker of electricity
and gas which is responsible for all energy supply services on behalf of LIPA,
KeySpan Gas East and Brooklyn Union. The services provided by KETS include
energy supply portfolio management, risk management and associated
administration and billing. On behalf of LIPA, KETS is responsible for (a) the
purchase from third parties of additional capacity and energy that LIPA needs to
serve its customers, and (b) the off-system sale of LIPA's energy which it does
not require to meet the needs of its system customers.
8. Marquez Development Corporation ("MDC")
KeySpan owns a 75% interest in Marquez Development Corp. ("Marquez")
which owns an inactive uranium mill and mine in New Mexico, however, the uranium
was never mined. Marquez's facilities are currently in the process of being
dismantled.6
____________________
6 The interest in Marquez was originally purchased by LILCO in the 1970's as a
potential fuel supply source for its nuclear generation facilities. KeySpan
acquired the Marquez interest as part of its acquisition in 1998 of certain of
LILCO's generation and gas assets.
7
<PAGE>
9. Island Energy Services Company, Inc. ("Island Energy")
KeySpan owns a 70% interest in Island Energy, a New York corporation.
Island Energy is an inactive company which owns no assets.
10. LILCO Energy Systems Inc. ("LES")
LILCO Energy Systems, Inc., a New York corporation, holds a 1% general
partner interest in Iroquois.7
11. KeySpan-Ravenswood, Inc. ("KeySpan-Ravenswood")
KeySpan - Ravenswood, Inc., a New York corporation, is an exempt
wholesale generator ("EWG") pursuant to Section 32 of the Act.
Keyspan-Ravenswood owns and/or leases and operates an approximate 2,168 megawatt
electric generating facility located in Queens, New York ("Ravenswood
Facility"). It sells energy and capacity at wholesale in the New York market.
12. KeySpan-Ravenwood Services Corp. ("KRS")
KRS, a New York corporation, is primarily engaged in providing
day-to-day operation and maintenance services to KeySpan-Ravenswood for the
Ravenswood Facility, subject to KeySpan-Ravenswood's overall direction and
control. KRS also provides small amounts of electricity to The Consolidated
Edison Company of New York, Inc. ("Con Edison") and provides day to day
operation and maintenance services to Con Edison for its steam plant located at
the site of the Ravenswood Facility. KRS does not own any electric or steam
facilities.
____________________
7 Collectively, KeySpan indirectly holds a 19.4% interest in Iroquois through
LILCO's 1% interest and, as described above, North East Transmission Co.'s 18.4%
general partnership interest.
8
<PAGE>
13. KeySpan Energy Supply, LLC ("KE")
KE, a Delaware limited liability company, is engaged in energy
marketing and brokering activities. It purchases gas and electricity as agent
for customers of KeySpan Energy Services, Inc. and KeySpan Energy Management,
Inc. KE also purchases the fuel supply for KRS as an agent and manages the
bidding of KeySpan-Ravenswood's power sales through New York electricity market
administered by the New York Independent System Operator.
14. KeySpan Services Inc. ("KSI")
KSI, a Delaware corporation, is a holding company of thirteen(13)
wholly-owned, direct subsidiaries which are engaged in: the ownership of
telecommunication equipment; the design and development of energy plants for
large industrial and institutional customers; the installation and maintenance
of heating and central air-conditioning systems; providing a wide range of
appliances services for residential customers and small business customers;
providing plumbing and engineering services; and marketing gas and retail
electricity.
o KeySpan Communications Corp. ("KCC"), a New York corporation,
owns a 350-mile fiber optic network on Long Island and in New
York City. KCC constructs and operates fiber optic networks and
transportation facilities. Currently, KCC's fiber optic network
serves several carriers under long and short term leases. The
fiber optic network also serves the telecommunications needs of
KeySpan Energy and its subsidiaries.
o KeySpan Energy Management, Inc. ("KEMI") is the holding company
of two wholly-owned subsidiaries which are engaged in the design
and operation of energy systems for large-scale residential and
commercial facilities, and provide energy-related services to
clients in the New York metropolitan area. Energy related
services include: the review of existing utility needs (i.e.,
electric, power supply and heating, ventilation, and air
conditioning ("HVAC") systems); the design and recommendation of
new efficient systems; and the installation and construction of
power supply and HVAC systems, boilers and burners. The
subsidiaries are (i) KeySpan
9
<PAGE>
Engineering Associates, Inc., which is a New York professional
engineering corporation that reviews and recommends the power
supply needs of its large commercial, industrial and
institutional customers and designs efficient, new power supply
systems, such as cogeneration facilities.; and (ii) R.D.
Mortman, LLC which installs and services burners and boilers and
designs, builds, installs and services HVAC systems.
o KeySpan Energy Services, Inc., a Delaware corporation, is a gas
and retail electricity marketer.8 It buys and sells gas to
residential, commercial and industrial customers located in the
Northeastern United States.
o KeySpan Energy Solutions, LLC ("KeySpan Solutions"), a New York
limited liability company, provides service and maintenance for
heating equipment, water heaters, central air conditioners and
gas appliances and offers safety products and services to gas
consumers. The safety products and services include: safety
inspections and repair services; energy assessment and energy
related safety checks, such as carbon monoxide and faulty
equipment wiring; products to promote safe energy use, increase
energy efficiency or provide energy related information, such as
carbon monoxide, smoke and fire detectors and fire
extinguishers. KeySpan Solutions also wholly owns the following
subsidiaries:
o KeySpan Plumbing Solutions, Inc., a New York corporation,
provides plumbing maintenance and services to customers in
the New York Metropolitan area.
o Fritze KeySpan, LLC, a Delaware limited liability company,
designs, builds, installs and services HVAC systems for
commercial and residential customers in North and Central
New Jersey.
o Delta KeySpan, Inc., a Delaware corporation, designs, builds and
installs HVAC systems primarily for commercial customers in
Rhode Island and the New England region.
___________________________
8 It sells electricity to a limited number of retail customers.
10
<PAGE>
o Active Conditioning Corp., a New Jersey corporation, is engaged
in installing and maintaining boilers and HVAC systems.
o Fourth Avenue Enterprise Piping Corp., a New York corporation is
engaged in installing and maintaining boilers and HVAC systems.
o Paulus, Sokolowski & Sartor, Inc. ("PSS"), a New Jersey
corporation, is engaged in engineering and consulting services
to companies located primarily in New York, New Jersey and
Florida. PSS's design services include mechanical, electrical,
civil, structural, sanitary, geotechnical and architectural. It
also engages in permitting, licensing and environmental
compliance. PSS's clients consist of large and industrial
customers, such as corporate offices, hotels, laboratories,
warehouses, pharmaceutical companies and power plants.
o WDF, Inc., a New York corporation, provides mechanical
contracting services to large scale commercial and industrial
customers in the New York area. Its services are primarily the
design, construction, alteration, maintenance and repair of
plumbing and HVAC systems.
o Roy Kay, Inc. ("RKI"), a New Jersey corporation, is engaged in
mechanical and general contracting services to commercial
customers. RKI installs and renovates HVAC systems, as well as
oil and gas burners. Its services include the installation of
all piping equipment, as well as the design and fabrication of
piping and sheet metal for its mechanical contracting services.
o Roy Kay Electrical Company ("RK Electrical") is a New Jersey
corporation that is licensed to perform electrical contracting
work both in New York and New Jersey. RK Electrical's services
include installing and upgrading the wiring and power supply of
buildings for commercial and industrial customers.
o Roy Kay Mechanical, Inc. ("RK Mechanical") is engaged in the
installation and renovation of sprinkler systems and fire
suppression systems in New York and New Jersey. Its services
include piping fabrication for its systems for commercial and
industrial customers.
11
<PAGE>
15. KeySpan Technologies Inc. ("KT")
KT is New York corporation involved in procuring new technologies,
such as fuel cells that utilize natural gas, to market to its customers.
February 18, 2000
The Board of Directors
KeySpan Corporation
One Metrotech Center
Brooklyn, New York 11201-3850
Ladies and Gentlemen:
You have requested our opinion, as of October 27, 1999, as to the fairness, from
a financial point of view, to KeySpan Corporation (the "Company") of the
consideration proposed to be paid by the Company in connection with the proposed
merger (the "Merger") of the Company with Eastern Enterprises (the "Seller").
Pursuant to the Agreement and Plan of Merger, dated as of November 4, 1999 (the
"Agreement"), between the Company and the Seller, the Seller will become a
wholly-owned subsidiary of the Company, and the Company will pay for each share
of Common Stock, par value $1.00 per share, of the Seller consideration equal to
$64.00 per share in cash.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) certain
publicly available information concerning the business of the Seller and of
certain other companies engaged in businesses comparable to those of the Seller,
and the reported market prices for certain other companies' securities deemed
comparable; (iii) publicly available terms of certain transactions involving
companies comparable to the Seller and the consideration received for such
companies; (iv) historical market prices of the common stock of the Seller; (v)
the audited financial statements of the Company and the Seller for the fiscal
year ended December 31, 1998, and the unaudited financial statements of the
Company and the Seller for the period ended September 30, 1999; (vi) certain
internal financial analyses and forecasts prepared by the Company and the Seller
and their respective managements; and (vii) the terms of other business
combinations that we deemed relevant.
In addition, we have held discussions with certain members of the management of
the Company and the Seller with respect to certain aspects of the Merger, the
past and current business operations of the Company and the Seller, the
financial condition and future prospects and operations of the Company and the
Seller, the effects of the Merger on the financial condition and future
prospects of the Company, the expected combination benefits ("Synergies") to be
achieved through the merger, the expected regulatory treatment of such Synergies
and certain other matters we believed necessary or appropriate to our inquiry.
We have reviewed such other financial studies and analyses and considered such
other information as we deemed appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was discussed
<PAGE>
-2-
with us or furnished to us by the Company and the Seller or otherwise reviewed
by us, and we have not assumed any responsibility or liability therefor. We have
not conducted any valuation or appraisal of any assets or liabilities, nor have
any such valuations or appraisals been provided to us. In relying on financial
analyses and forecasts provided to us, we have assumed that they have been
reasonably prepared based on assumptions reflecting the best currently available
estimates and judgments by the respective managements of the Company and the
Seller as to the expected future results of operations and financial condition
of the Company and the Seller to which such analyses or forecasts relate. We
have also assumed that the other transactions contemplated by the Agreement will
be consummated as described in the Agreement. We have relied as to all legal
matters relevant to rendering our opinion upon the advice of counsel.
Our opinion is based on economic, market and other conditions as in effect on,
and the information made available to us as of October 27, 1999. It should be
understood that this opinion does not reflect subsequent developments and/or
changes in economic, market and other conditions subsequent to October 27, 1999.
We do not have any obligation to update, revise, or reaffirm this opinion.
We have acted as financial advisor to the Company with respect to the proposed
Merger and will receive a fee from the Company for our services. We will also
receive an additional fee if the proposed Merger is consummated. In the ordinary
course of their businesses, J.P. Morgan Securities Inc. and its affiliates may
actively trade the debt and equity securities of the Company or the Seller for
their own account or for the accounts of customers and, accordingly, they may at
any time hold long or short positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of October
27, 1999 that the consideration to be paid by the Company in the proposed Merger
is fair, from a financial point of view, to the Company.
This letter is provided to the Board of Directors of the Company in connection
with and for the purposes of its evaluation of the Merger. This opinion may not
be disclosed, referred to, or communicated (in whole or in part) to any third
party for any purpose whatsoever except with our prior written consent in each
instance. This opinion may be reproduced in full in any proxy or information
statement mailed to stockholders of the Company but may not otherwise be
disclosed publicly in any manner without our prior written approval and must be
treated as confidential.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ James R. Elliott III .
-------------------------------
Name: James R. Elliott III
Title: Managing Director
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001062379
<NAME> KeySpan Corporation
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,112,437
<OTHER-PROPERTY-AND-INVEST> 325,929
<TOTAL-CURRENT-ASSETS> 992,979
<TOTAL-DEFERRED-CHARGES> 926,535
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,357,880
<COMMON> 1,342
<CAPITAL-SURPLUS-PAID-IN> 2,259,158
<RETAINED-EARNINGS> 441,398
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,701,898
363,000
84,359
<LONG-TERM-DEBT-NET> 1,663,040
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 103,950
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,440,633
<TOT-CAPITALIZATION-AND-LIAB> 6,357,880
<GROSS-OPERATING-REVENUE> 538,469
<INCOME-TAX-EXPENSE> 5,540
<OTHER-OPERATING-EXPENSES> 501,686
<TOTAL-OPERATING-EXPENSES> 507,226
<OPERATING-INCOME-LOSS> 31,243
<OTHER-INCOME-NET> 4,434
<INCOME-BEFORE-INTEREST-EXPEN> 35,677
<TOTAL-INTEREST-EXPENSE> 26,661
<NET-INCOME> 9,016
8,688
<EARNINGS-AVAILABLE-FOR-COMM> 328
<COMMON-STOCK-DIVIDENDS> 57,692
<TOTAL-INTEREST-ON-BONDS> 27,338
<CASH-FLOW-OPERATIONS> 43,136
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
Exhibit I
Schedule of Estimated Fees and Expenses in Connection with the Proposed
Transaction
(In Thousands)
Investment Banking Fees $6,100
Legal and Regulatory $1,400
Accounting fees $ 131
Miscellaneous $ 500
TOTAL $8,131
EXHIBIT J
Analysis of the Economic Impact of a Divestiture of the
Electric Operations of KeySpan Generation, LLC
I. Executive Summary
KeySpan Corporation, d/b/a KeySpan Energy ("KeySpan") has prepared this analysis
in order to quantify the economic impact on shareholders and customers of a
spin-off, into a separate, stand-alone entity, of KeySpan's electric generation
business which is conducted through its wholly-owned subsidiary, KeySpan
Generation, LLC ("KeySpan Generation", or the "Company"). KeySpan Generation
owns and operates an aggregate of 53 steam and internal combustion electric
generating units located throughout Long Island having a total capacity of
approximately 4032 megawatts. The Company provides electric capacity, energy
conversion, and ancillary services to the Long Island Power Authority ("LIPA"),
the corporate municipal instrumentality providing retail electric service to
Long Island, pursuant to a Power Supply Agreement dated as of June 26, 1997 and
effective May 28, 1998 (the "Power Supply Agreement" or "PSA") and approved by
the Federal Energy Regulatory Commission ("FERC").1 This study analyzes and
shows the additional costs and inefficiencies the Company would incur if
operated as an electric generation business independent from other KeySpan
businesses. This assessment is based on the current operating structure of
KeySpan's holding company system as well as knowledge of the staffing
requirements of other electric utilities based on benchmarking data supplied by
Mercer Management Consulting, Inc. ("Mercer").
____________________
1 On May 28, 1998, LIPA purchased the electric transmission and distribution
system of the Long Island Lighting Company ("LILCO") for the purposes of
reducing retail electric rates by acquiring all of the outstanding common
stock of LILCO for $2.5 billion in cash and assuming certain liabilities of
the company including approximately $3.4 billion in debt. Immediately prior
to the acquisition, all of LILCO's assets employed in the conduct of its gas
distribution and non-nuclear generation businesses,
1
<PAGE>
The effects on shareholders were calculated based on the increased costs from
divestiture assuming no regulatory nor contract rate relief to recover these
additional costs. The effects on customers were calculated assuming recovery of
additional costs from LIPA under a modified PSA. This study attempts to quantify
many of the direct increases in the cost of labor, facilities, information
technology resources, and financing that would be experienced in the event of a
spin-off of the Company. In addition to such direct costs, the Company's
generation business obtains a number of indirect benefits as part of KeySpan's
holding company system which are difficult to quantify and would be lost in the
event of divestiture. These indirect lost economies, such as the procurement of
equipment, are discussed in the body of this report. Furthermore, KeySpan
Generation's contractual obligations to LIPA place significant restrictions on
the disposition and operation of the Company's assets and resources. These
restrictions would complicate a divestiture and are discussed in more detail in
this report.
Shareholder Perspective
Our analysis indicates that a divestiture of KeySpan Generation into a
stand-alone company would result in increased operating expenses primarily due
to higher labor and overhead costs for the stand-alone company. The total annual
impact of lost economies is estimated to be approximately $17.4 million.
Incremental staffing requirements would total 84 full-time management and staff
positions. The estimated total incremental labor costs are expected to be $9.1
million annually. The other $8.3 million in incremental costs are due to
insurance and external auditing costs, spin-off transaction costs, and costs
__________________
and all common assets used by LILCO in the operation and management of these
businesses, were sold to KeySpan. The non-nuclear generation assets were then
transferred to the Company by KeySpan.
2
<PAGE>
to replace and/or duplicate information systems hardware and software. The
estimated effects on the Company are shown in Table 1 below.
In Table 1, lost economies represent the additional costs, excluding income
taxes, for the Company, assuming operation as a stand-alone entity. Total
Revenues reflect the electric operating revenues for the Company for the 12
months ended December 31, 1999. Total Expenses include all operation and
maintenance (O&M) expenses, depreciation, taxes other than income taxes, and
interest expense.2 Gross Income is the difference between Total Revenues and
Total Expenses excluding income taxes. Net Income is equal to Gross Income less
income taxes. Rate Base refers to the book capitalization at December 31, 1999.
<TABLE>
<CAPTION>
Table 1
KeySpan Generation
Annual Effects of Lost Economies on Shareholders
($000's)
<S> <C>
-------------------------------------- ------------------------------
Total Lost Economies $17,374
--------------------------------------- ------------------------------
Lost Economies as a percent of:
--------------------------------------- ------------------------------
Total Revenues 5.5%
---------------------------------------- -------------------------------
O&M Expenses 16.4%
---------------------------------------- -------------------------------
Total Expenses 6.0%
---------------------------------------- ------------------------------
Gross Income 60.8%
---------------------------------------- -------------------------------
Net Income 48.3%
---------------------------------------- -------------------------------
In absence of rate relief
---------------------------------------- -------------------------------
Estimated return on rate base 5.6%
---------------------------------------- --------------------------------
Estimated return on equity 4.7%
---------------------------------------- ---------------------------------
</TABLE>
___________________
2 Except for fuel handling costs, no fuel expenses are reported in O&M or Total
Expenses. Fuel is not a Company expense because LIPA purchases and pays for fuel
needed by the Company to generate the electricity provided to LIPA under the
PSA.
3
<PAGE>
Customer Perspective
Assuming the Company was allowed to recover the increased costs of stand-alone
operations including related income taxes pursuant to the PSA, and the increased
costs were passed on by LIPA to its ratepayers, the projected effect on the over
one million retail electric customers of Long Island is as follows:
<TABLE>
<CAPTION>
Table 2
Annual Effects of Lost Economies on LIPA's Retail Electric Customers
($000's)
<S> <C>
Rate Revenue
--------------------------------------- ---------------------------
Pre-Spin-Off $303,161
--------------------------------------- ---------------------------
Post-Spin-Off $320,535
--------------------------------------- ---------------------------
Dollar Increase $17,374
---------------------------------------- ---------------------------
Percent Rate Increase 5.7%
--------------------------------------- ---------------------------
</TABLE>
Conclusion
The economies that KeySpan Generation realizes from KeySpan's consolidated
administration and management of its electric and gas operations provide
significant benefits to customers and shareholders. The centralized management
provided by KeySpan allows the Company to realize economies of scale in the
procurement of equipment, various technical and administrative services, and
financing. Spinning the business off into a stand-alone company would likely
result in substantial cost increases and significant earnings decreases absent
regulatory and contract rate relief. Without a rate adjustment, which under the
terms of the PSA may not occur prior to June 1, 2003, without LIPA's and FERC's
approval, such increased costs would be borne by the shareholders of KeySpan
Generation. As a result, the spin-off would have significant negative impacts on
shareholders.
4
<PAGE>
The increased costs from divestiture, whether or not they are recoverable via
the PSA, are unlikely to result in an increased level and quality of service
above that currently provided to LIPA. Nevertheless, the estimated rate increase
required to recover lost economies is 5.8%. This increase would make the
stand-alone company less competitive at a time when competition in the energy
industry is rapidly increasing due to state and federal restructuring efforts in
both the electric and gas industries.
Based on the foregoing, KeySpan Generation's operations as a stand-alone entity
would adversely affect both KeySpan's shareholders and LIPA's one million plus
retail electric customers. Therefore, it is in the best interest of shareholders
and ratepayers to permit KeySpan to retain KeySpan Generation. Furthermore,
since LIPA now owns the electric transmission and distribution system on Long
Island and entered into various management and power supply agreements with
KeySpan subsidiaries for the purpose of reducing electric rates on Long Island,
it is unlikely that LIPA would approve of a divestiture of KeySpan Generation
that could result in higher rates for its customers. In fact, the generation
rates currently being charged by the Company under the PSA include annual
credits totaling $173 million over a ten year period to reflect anticipated
costs savings that were forecasted to result from the merger and consolidation
of LILCO's common and administrative assets and functions with those of KeySpan.
5
<PAGE>
II. Analytical Approach and Study Assumptions
A. Overview
To estimate the increased costs due to a divestiture of KeySpan Generation, an
organizational assessment of the Company was performed as it exists today; first
on its own, and then as part of the larger KeySpan organization. To assess where
additional costs would be incurred as a result of a divestiture, the areas and
functions which are currently being provided fully or partially by various
KeySpan service company affiliates (the "Service Companies"), were examined.
Given that the Company would be operating on a stand-alone basis and would need
to either perform these functions on its own or outsource these
responsibilities, an estimate was made of the additional costs that would be
incurred as a result of transferring the functions provided by the parent and
the Service Companies to the stand-alone entity.
In performing this assessment, each area, department, or function was
incorporated into the stand-alone Company to ensure that the current level of
service being provided to LIPA is maintained. The increased costs were then
estimated by comparing the incremental costs of stand-alone operations with the
allocated charges from the parent and the Service Companies. While divestiture
would likely impact the costs of many departments and business units within
KeySpan Generation, the study does not assume additional cost increases in areas
outside of the functional and administrative departments provided by the parent
and the Service Companies. The study does, however, attempt to quantify the
increased shareholder-related costs associated with independent corporate
existence.
6
<PAGE>
The analysis of lost economies presented herein is based on the organizational
structure of KeySpan that existed at year-end 1999. Under this structure,
executive management, and common, administrative and general functions have been
consolidated and streamlined to achieve economies of scale, and are provided to
KeySpan's regulated and non-regulated businesses by the parent and the Service
Companies. Functions performed under this consolidated arrangement include
executive management, human resources, information systems and technology,
accounting, payroll, financial reporting, customer relations, public and
governmental relations, facilities and vehicle management, financial and
strategic planning, treasury services, insurance and risk management, legal
services, and investor relations.
In evaluating the impact of a divestiture of KeySpan Generation, various
assumptions were made based on the current operating structure and relationships
between KeySpan and each of its subsidiaries and information obtained from
Mercer, a firm which provides benchmarking data on U.S. energy company staffing
levels by function and size. A discussion of the key assumptions used to
estimate the lost economies is provided below.
B. Spin-Off Assumptions
The study assumes that KeySpan Generation will be divested as a separate
stand-alone entity. Once divested, this entity would operate as an independent,
publicly held, and regulated company. It would have all necessary management
personnel, along with all facilities, equipment, materials and supplies,
required to operate as a stand-alone, regulated electric generation company.
7
<PAGE>
1. Staffing and Labor Costs
For the purpose of determining incremental staffing requirements for the
stand-alone company, a sufficient number of employees were assumed to be
added to ensure that LIPA continued to receive the present level and
quality of service, and that the direct employees of the Company continue
to utilize many of the same systems and processes in daily operations. The
labor cost estimates for additional support staff are based upon
assessments of straight-time, incentive compensation, and pension and
benefit costs for current holding and service company employees and
industry benchmarking data. Given the continuing tightness in the labor
markets, the levels of incentive compensation for executive staff included
in this study may not be reflective of the current compensation packages
required to retain quality management in executive positions.
Although KeySpan Generation benefits from the centralized procurement of
employee benefits provided by a service company, for purposes of this
study, it was assumed that benefit levels and costs would remain unchanged
in the stand-alone organization. In addition, the study assumes that labor
costs for the direct employees of the generation company are not expected
to change as well.
The specific cost figures for additional support staff labor costs are
based on average salary figures from the parent and the Service Companies,
utility benchmarking data provided by Mercer, and KeySpan's experience in
generation company management. A benefits-cost adder was then applied,
which was developed based on 1999 benefit costs as a percentage of total
wages and salaries for the parent and its Service Companies. Estimates of
the portion of increased labor expenses that are likely to be capitalized
are based on the percentage of allocated common and administrative labor
expenses that were capitalized by the Company in 1999.
8
<PAGE>
2. Engineering Expenses
For the most part, engineering services and associated expenses are
provided to KeySpan Generation by company employees on a dedicated, direct
charge basis. Therefore, it was assumed that such employees currently
providing these services would be transferred to KeySpan Generation as part
of the divestiture and thus, result in no incremental costs or lost
economies.
3. Capital Expenditures
The majority of increased capital expenditures are most likely to arise
from increased capitalized support staff labor expenses, higher procurement
costs due to losses in purchasing efficiencies, and the need to separate,
duplicate, and replace various information systems previously provided on a
centralized basis. These incremental information systems costs include
computer hardware, software, and systems applications for centralized
functions within the Service Companies (e.g., financial, accounting, and
human resources, etc.) which must be performed independently in the
stand-alone company.
9
<PAGE>
4. Transition/Transaction Costs
The divestiture of KeySpan Generation and the creation of a stand-alone
utility would be a complex legal and financial transaction that would incur
significant transition costs. There would be costs for issuance of new
equity securities. Other transaction costs include legal and financial
advisory fees, fees for independent accountants, actuaries, investment
bankers, transfer taxes, and title insurance fees. As discussed above,
KeySpan Generation would incur significant costs to either purchase,
duplicate, or replace many of the information systems provided by KeySpan.
KeySpan Generation would experience significant costs for hiring and
training the 84 additional staff required for stand-alone operations.
5. Other Shareholder Costs
The divestiture of KeySpan Generation would create a new independent,
publicly traded company. As a result, KeySpan Generation would be
responsible for shareholder-related costs including the issuance of annual
reports and proxy statements, external reporting to the Securities and
Exchange Commission, annual shareholder meeting, and other
investor-relations expenses.
6. Cost Pass Through
In estimating the impacts of additional costs on LIPA's customers, it was
assumed that full pass through of the increased costs would be allowed in
FERC rate proceedings and contract prices negotiated with LIPA beginning in
2004, the sixth year of the PSA.
10
<PAGE>
7. Third-Party Contracts
All existing contracts between KeySpan Generation and third parties are
assumed to continue in the spun-off company.
III. Functions of the Service Companies
While each company currently exists as a wholly-owned subsidiary within the
KeySpan organization, certain business functions are provided on a
consolidated basis to each subsidiary by the Service Companies. The Service
Companies are an integral part of KeySpan and serve to centralize certain
administrative and operational functions in an effort to achieve better
organizational efficiencies. The Service Companies provide certain common
corporate administrative services to KeySpan Generation including human
resources planning and administration; accounting, finance and treasury
services; insurance and risk management; regulatory and governmental
relations; corporate communications and external relations; information
systems and technology; materials management and procurement; legal
services; corporate and strategic planning; internal auditing; billing and
payment processing; budget administration; security services; fleet
services; building design and maintenance; and management of
affiliate-owned or leased buildings.
Through this centralized administration, the costs of such functions are
shared among the KeySpan companies through direct and indirect cost
allocation. Due to economies of scale, each company benefits from receiving
these services at a lower cost than if it provided them on its own.
11
<PAGE>
IV. Analysis of Lost Economies from Divestiture on KeySpan Generation
Overview
KeySpan Generation owns and operates an aggregate of 53 steam and internal
combustion electric generating units located throughout Long Island having
a total capacity of approximately 4032 MW. KeySpan Generation and KeySpan
Gas East Corporation, an affiliate that provides gas service to
approximately 500,000 retail customers on Long Island, have a long
historical relationship because their gas and electric assets were
originally owned and operated by LILCO on an integrated basis. When KeySpan
acquired these assets in 1998, they were transferred into the separate
companies. Substantially all the employees of LILCO were also transferred
to KeySpan and its affiliates in order to maintain and enhance efficiencies
of operations. Currently, ten out of eleven of KeySpan Generation's steam
generating plants are capable of burning gas to generate electricity.
KeySpan Generation provides electric capacity, energy conversion, and
ancillary services to LIPA pursuant to the PSA. Under the terms of the PSA,
LIPA has the option of electing to "ramp-down" the capacity it purchases
from KeySpan Generation beginning in 2005, year seven of the PSA. In years
seven through ten of the PSA, if LIPA elects to ramp-down, KeySpan
Generation is entitled to receive payment for 100% of the present value of
the capacity charges otherwise payable over the remaining term of the PSA.
In years 11 through 15 of the PSA, if LIPA elects to ramp-down, capacity
charges otherwise payable by LIPA will be reduced. Capacity released in
accordance with the ramp-down provisions of the PSA may be used by KeySpan
Generation to bid on new LIPA capacity requirements or to bid on
12
<PAGE>
LIPA's capacity requirements to replace other ramped-down capacity. If
KeySpan Generation continues to operate the ramped-down capacity, the PSA
requires it to use reasonable efforts to market the capacity and energy
from the ramped-down capacity and to share any profits with LIPA. In
addition, pursuant to the terms of the Generation Purchase Right Agreement,
entered into in June 1997 and effective May 1998, (the "GPRA"), LIPA has an
exclusive one year option to purchase all outstanding membership interests
in KeySpan Generation beginning May 28, 2001. The GPRA also provides that
until such option expires, all or any part of KeySpan Generation's
membership interests may not be sold or transferred to non-affiliates
without LIPA's prior consent. Therefore, a divestiture of KeySpan
Generation without LIPA's consent would violate the terms of the GPRA and
subject the Company and KeySpan to liability for breach of the GPRA. The
amount of such potential liability cannot be quantified. Accordingly, the
significant increase in costs that would be occasioned by a divestiture of
KeySpan Generation would adversely affect its ability to compete in the
long-term and could further result in the payment of damages for violating
the provisions of the GPRA.
As a subsidiary of KeySpan, many administrative and operational functions
are performed for KeySpan Generation by the Service Companies. Thus, the
majority of increased costs from divestiture result from the need to
replace service-company related personnel and resources with staff directly
employed or hired by KeySpan Generation.
13
<PAGE>
Organizational and Staffing Impact
Currently, KeySpan Generation has approximately 940 direct employees. If
KeySpan Generation were spun-off from KeySpan's system as a stand-alone
entity, it would need to expand its organizational structure to add the
executive, administrative, and operational staff to perform the functions
it currently receives from the parent and the Service Companies. Based on
our analysis, it is estimated that a total of 268 additional
service-related personnel would be needed for KeySpan Generation to operate
as a stand-alone company. Of the 268 employees, 184 employees are currently
allocated to KeySpan Generation by the parent and the Service Companies.
Therefore, a total of 84 employees would be considered incremental.
KeySpan Generation's organizational structure as of December 31, 1999 was
used as a pattern for developing the new stand-alone organization. To
support a stand-alone corporate structure, an additional staff of 84
employees would be required to perform service company related functions.
Table 3 provides a breakdown of the incremental additions by executive
position. The new areas and their relationship to the December 31, 1999
KeySpan Generation organizational structure are summarized in Table 3 and
the discussion below.
14
<PAGE>
Table 3
Summary of Staffing Requirements at KeySpan Generation
Total Incremental
Executive & Staff Positions Employees
CEO & secretary 2
Chief Operating Officer 1
VP of Operations & staff 8
Chief Information Officer & staff 27
Chief Financial Officer & secretary 2
VP of Finance and Treasurer & staff 8
Controller & staff 23
Dir. Investor Relations & staff 2
Dir. of Corporate Planning 1
VP/General Counsel & secretary 2
Dir. of External Affairs & Policy Dev. 1
VP of Human Resources & staff 7
----------
Total 84
Board of Directors
The Board of Directors is assumed to consist of 6 directors (2 inside and 4
outside) based on the size and scope of KeySpan Generation.
Chief Executive Officer (CEO): The CEO position would report to KeySpan
Generation's Board of Directors. The CEO would be responsible for representing
the corporation to LIPA, the financial community, regulators and the public.
This position would have reporting relationships with the new executives and
staff added as a result of the divestiture.
Chief Operating Officer (COO): The COO would report directly to the CEO and
would be responsible for the overall operating activities of the company. The
COO position would oversee the work of two vice presidents: the Vice President
of Operations and the Chief Information Officer.
15
<PAGE>
Vice President (VP) of Operations would oversee the mailroom, reproduction,
purchasing, facilities management, and materials management functions, as well
as the real estate function, and the 8 additional staff (including the VP)
required to perform these activities.
Chief Information Officer (CIO) would be responsible for the information
technology needs of KeySpan Generation. This position would oversee all
information systems, communication systems, data processing, application
development, and software and hardware procurement within the KeySpan Generation
organization. Approximately, 27 staff positions (including the VP) would be
added to support the information technology needs of KeySpan Generation as a
stand-alone company.
Chief Financial Officer (CFO): The Chief Financial Officer would report directly
to the CEO and would be responsible for corporate finance, treasury, risk
management, accounting, internal auditing, investor relations, and corporate
planning. The CFO would oversee the work of the VP of Finance and Treasury, the
Controller, and two directors: the Director of Investor Relations and the
Director of Corporate Planning.
VP of Finance and Treasury position would incorporate the role of Treasurer and
corporate finance, including risk management, claims, and financial systems.
This position would be in charge of all financing, both debt and equity for the
new corporate entity. Approximately 8 (including the VP) new positions would be
needed in this organization.
16
<PAGE>
Controller would assume the accounting-related functions currently directed by
KeySpan's Controller. The Controller would oversee all accounting, transaction
processing, internal auditing, external reporting, and tax functions of the
Company. An additional 23 (including the Controller) management and staff
positions would be required to support these accounting and processing services.
Director of Investor Relations would handle all financial corporate
communications and would be in charge of producing the Annual Report and
organizing the annual stockholder meetings. An additional 2 (including the
Director) positions would be required to support these services.
Director of Corporate Planning would be responsible for strategic and financial
planning and budgeting. Except for the director, no incremental positions would
be required to support these services.
VP/General Counsel and Secretary would report directly to the CEO and would be
responsible for overseeing legal affairs, government affairs, and corporate
communications. The General Counsel and Secretary would also be responsible for
all corporate legal matters, environmental compliance, SEC compliance,
litigation, state and federal regulatory matters, labor and benefit legal
matters, contracts and corporate governance. The General Counsel and Secretary
would oversee all legal services procured from outside attorneys. A new director
position under the General Counsel would be created to consolidate the external
affairs, corporate affairs, corporate communications, and policy development
work of KeySpan Generation. The Director of
17
<PAGE>
External Affairs and Policy Development would report to the General Counsel and
Secretary. Except for the VP/General Counsel, the Director of External Affairs
and Policy Development, and a secretarial position, no other additional staff
would be required in this organization.
VP of Human Resources: The VP of Human Resources would report directly to the
CEO and would be responsible for compensation, benefits, staffing, labor
relations, training, employee relations, organizational planning & design, and
health & safety services. Three director positions would be created to head up
these areas: the director of compensation and benefits; the director of labor
and employee relations; and the director of employee staffing, training &
development, who would also be responsible for organization planning & design,
and health & safety services. The spin-off of KeySpan Generation would require
an additional staff of 7 (including the VP) within the Human Resources function.
Facilities Impact
If KeySpan Generation were to spin-off from KeySpan, a new office location would
be required to accommodate 268 management and administrative personnel. It is
estimated that approximately 36,600 sq. ft. would be required based on 137 sq.
ft. per employee. The estimated cost for this space is $1,097,417 per year.
However, when compared with the current allocation of $368,142 for lease
expenses to KeySpan Generation from the Service Companies, the net effect on
KeySpan Generation is an increase of $729,275 in annual lease expenses.
18
<PAGE>
Information Technology - Non-labor/Outside Services
KeySpan Generation would experience significant non-labor cost increases as a
result of the need to assume full responsibility for the information technology
functions currently provided by the Service Companies. The additional
labor-related costs have already been incorporated into the labor cost figures
reflected above. Many of these non-labor costs would be one-time transition
costs for the replacement and duplication of central systems currently operated
and maintained by the Service Companies. These systems, which would be separated
and/or duplicated for KeySpan Generation, include the following: employee and
human resources, payroll, purchasing, inventory, project accounting, general
ledger, accounts receivable, budgeting, and fixed asset accounting. The costs to
separate, replace, and duplicate all these systems are estimated to be
approximately $21 million. Assuming the systems are depreciated on the same
basis as that used by KeySpan, the annual depreciation costs would be $2.1
million. While the majority of these information technology related costs would
be one-time transition costs, annual maintenance and lease costs (which have not
been factored into the projected expense calculation) are expected to be higher
for the stand-alone company. Currently, KeySpan outsources a portion of its
computer help desk function, however, it is uncertain whether KeySpan Generation
would be able to continue this arrangement on a stand-alone basis at its current
cost. In addition, KeySpan Generation would lose the opportunity to jointly
develop new applications and share the cost of those applications with other
corporate entities.
19
<PAGE>
Transition/Transaction Costs
The divestiture of KeySpan Generation and the creation of a stand-alone utility
would be a complex legal and financial transaction that would result in
significant transition costs. The costs for issuance of new equity securities
are based on standard fees for similar transactions by other utilities. Other
transaction costs include legal and financial advisory fees, fees for
independent accountants, actuaries, investment bankers, and transfer tax, and
title insurance fees. As discussed above, KeySpan Generation would incur
significant costs to either purchase, duplicate, or replace many of the
information systems provided by the Service Companies. KeySpan Generation would
experience significant costs for hiring and training the 84 additional staff
required for stand-alone operations. The costs associated with hiring and
training were estimated to be 10% of a new hire's first year salary. Table 4
sets forth the transition/transaction costs that would be applicable in a
spin-off of KeySpan Generation.
<TABLE>
<CAPTION>
Table 4
Summary of Transition/Transaction Costs for KeySpan Generation LLC
($000's)
<S> <C>
-------------------------------------- -----------------------------
Category Total Fees
-------------------------------------- -----------------------------
Transaction Costs $2,000
-------------------------------------- -----------------------------
Legal fees $2,847
--------------------------------------- -----------------------------
Investment Bankers $2,488
--------------------------------------- -----------------------------
Accountants $150
--------------------------------------- -----------------------------
Hiring/Training $1,501
--------------------------------------- -----------------------------
Transfer Taxes $6,157
--------------------------------------- -----------------------------
Title Insurance $1,092
--------------------------------------- -----------------------------
Total Costs $ 16,234
--------------------------------------- -----------------------------
Annual Amortization (10 years) $1,623
--------------------------------------- -----------------------------
</TABLE>
20
<PAGE>
Summary of Impacts for KeySpan Generation Spin-Off
The study illustrates that a spin-off of KeySpan Generation into a stand-alone
company would require an additional 84 full-time management and staff positions.
Based on the assumptions set forth in Section II and the staffing requirements
outlined in Table 3, the annual cost increase if KeySpan Generation were
spun-off into a stand-alone entity is estimated to be approximately $17.4
million. The categories of cost increases are set forth in Tables 5, 6 and 7
below.
<TABLE>
<CAPTION>
Table 5
Summary of Lost Economies for KeySpan Generation
($000's)
<S> <C>
-------------------------------------- -----------------------------
Cost Category Annual Increase
------------------------------------- ------------------------------
Labor O&M $9,106
-------------------------------------- -----------------------------
Board of Directors' Fees $80
--------------------------------------- ------------------------------
Facilities Expense $729
--------------------------------------- ------------------------------
Amortization of IT Replacement $2,100
Costs
--------------------------------------- -------------------------------
Financing Costs on IT Investment $1,389
--------------------------------------- -------------------------------
Amortization of Transaction Costs $1,623
---------------------------------------- -------------------------------
Transaction Expense Financing $1,074
Costs
---------------------------------------- -------------------------------
Other Shareholder Expenses ($26)
---------------------------------------- -------------------------------
Insurance Costs $1,299
---------------------------------------- -------------------------------
Total Lost Economies $17, 374
</TABLE>
21
<PAGE>
Table 6
KeySpan Generation
Annual Effects of Lost Economies on Shareholders
($000's)
-------------------------------------- ------------------------------
Total Lost Economies $17,374
--------------------------------------- ------------------------------
Lost Economies as a percent of:
--------------------------------------- ------------------------------
Total Revenues 5.5%
---------------------------------------- -------------------------------
O&M Expenses 16.4%
---------------------------------------- -------------------------------
Total Expenses 6.0%
---------------------------------------- ------------------------------
Gross Income 60.8%
---------------------------------------- -------------------------------
Net Income 48.3%
---------------------------------------- -------------------------------
In absence of rate relief
---------------------------------------- -------------------------------
Estimated return on rate base 5.6%
---------------------------------------- --------------------------------
Estimated return on equity 4.7%
----------------------------------------- --------------------------------
Table 7
Analysis of Customer Impacts of Lost Economies for KeySpan Generation
($000's)
-------------------------------------- ------------------------------
Rate Revenue
--------------------------------------- ------------------------------
Pre-Spin-Off $303,161
--------------------------------------- ------------------------------
Post-Spin-Off $320,535
--------------------------------------- -------------------------------
Dollar Increase $17,374
---------------------------------------- -------------------------------
Percent Rate Increase 5.7%
--------------------------------------- -------------------------------
Exhibit K
Proposed Form of Notice
SECURITIES AND EXCHANGE COMMISSION
(RELEASE NO. 35- )
FILING UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
March 6, 2000
KeySpan Corporation ("KeySpan"), One MetroTech Center, Brooklyn, New
York 11201, a New York corporation and currently a public utility holding
company exempt from registration under the Act (except for Section 9(a)(2)
thereof) pursuant to Section 3(A)(1) of the Act and Rule 2 thereunder, ACJ
Acquisition LLC ("ACJ"), a direct wholly-owned subsidiary of KeySpan, and
Eastern Enterprises ("Eastern"), 9 Riverside Road, Weston, Massachusetts 02493,
a Massachusetts voluntary association and a public utility holding company
exempt from regulation under the Act (except for Section 9(a)(2) thereof)
pursuant to Section 3(a)(1) of the Act and Rule 2 thereunder, have jointly filed
an application-declaration under sections 9(a)(2) and 10 of the Act.
The application-declaration seeks approvals relating to the proposed
acquisition, pursuant to which Eastern will become a direct, wholly-owned
subsidiary of KeySpan (the "Transaction"). Specifically, KeySpan and ACJ request
authorization and approval of the Commission to acquire, by means of the
Transaction, all of the issued and outstanding common stock of Eastern and,
indirectly, all of the common stock of Eastern's utility companies. Following
completion of the Transaction, KeySpan will register as a holding company
pursuant to Section 5 of the Act. KeySpan also requests Commission approval for
the retention by KeySpan of the existing businesses, investments and non-utility
activities of KeySpan and Eastern under Section 11(b).
On January 5, 2000, Eastern filed an application/declaration with the
Commission ("Eastern/EnergyNorth Application") requesting authorization pursuant
to Sections 9(a)(2) 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"). If the Commission approves the ENI Transaction, EnergyNorth
will become a direct subsidiary of Eastern, and, therefore, an indirect
subsidiary of KeySpan through consummation of the Transaction. In the
Eastern/EnergyNorth Application, Eastern and EnergyNorth have requested that the
Commission find that each will continue to be exempt holding companies under
Section 3(a)(1) of the Act. KeySpan requests that to the extent that the
Commission grants Eastern and EnergyNorth exemptions under Section 3(a)(1), the
Commission confirm that Eastern and EnergyNorth will continue to qualify for
exemptions under Section 3(a)(1) following the consummation of the Transaction
and KeySpan's registration as a holding company.
<PAGE>
Likewise, KeySpan requests the Commission's confirmation that KeySpan
Energy Corporation ("KEC"), a direct, wholly-owned subsidiary of KeySpan, will
continue to be an exempt holding company under Section 3(a)(1) of the Act
following consummation of the Transaction. KEC is a holding company which
directly owns 100% of the outstanding voting securities of The Brooklyn Union
Gas Company ("Brooklyn Union"), a gas utility company which operates gas
distribution facilities, and sells gas at retail, within the state of New York.
KEC is currently an exempt holding company under Section 3(a)(1) of the Act and
Rule 2.
Pursuant to the Agreement and Plan of Merger dated November 4, 1999, as
modified by Amendment No.1 dated January 26, 2000 (the "Merger Agreement"),
KeySpan, through ACJ, will acquire all of the issued and outstanding common
stock of Eastern in an all-cash transaction. The Merger Agreement provides for
Eastern to be merged with and into ACJ with Eastern being the surviving entity.
Eastern will then become a wholly, owned direct subsidiary of KeySpan. Shares
held by Eastern, KeySpan, or any of KeySpan's wholly-owned subsidiaries will be
cancelled in the Transaction.
According to the Merger Agreement, Eastern shareholders will receive
$64.00 in cash, without interest, for each share of Eastern common stock, unless
the shareholder is entitled to and has perfected its dissenters' appraisal
rights. Eastern shareholders will receive an additional $0.006 per share
("Additional Amount") for each day the Transaction has not closed after the
later of (a) August 4, 2000 or (b) ninety days after the New Hampshire Public
Utilities Commission ("NHPUC") gives final regulatory approval to the
Eastern/EnergyNorth Transaction, though the aggregate Additional Amount will be
reduced by the aggregate amount of any per share increase in any dividend
actually paid that is attributable to any period in which the Additional Amount
accrues.
KeySpan is a diversified public utility holding company which owns
three public utility companies: Brooklyn Union, KeySpan Gas East Corporation
d/b/a Brooklyn Union of Long Island ("KeySpan Gas East") and KeySpan Generation,
LLC ("KeySpan Generation"). Together, Brooklyn Union and KeySpan Gas East
distribute natural gas to approximately 1.6 million retail customers. KeySpan
Generation sells electricity and capacity at wholesale to one customer, the Long
Island Power Authority (which is a state agency that resells the energy at
retail).
KeySpan has sixteen (16) direct non-utility subsidiaries which, either
directly or indirectly, engage in energy related business. The non-utility
subsidiaries are as follows: KeySpan Energy Corporation; KeySpan Operating
Services LLC; KeySpan Exploration and Production LLC; KeySpan Corporate Services
LLC; KeySpan Utility Services LLC; KeySpan Electric Services LLC; KeySpan Energy
Trading Services LLC; Marquez Development Corporation; Island Energy Services
Company, Inc.; LILCO Energy Systems Inc.; KeySpan-Ravenswood Inc.;
KeySpan-Ravenswood Services Corp.; KeySpan Energy Supply LLC; KeySpan Services,
Inc.; Honeoye Storage Corporation; and, KeySpan
2
<PAGE>
Technologies LLC. In addition, KeySpan's gas utility subsidiary, Brooklyn Union,
owns all or part interests in three (3) subsidiaries that are engaged in
non-utility businesses.
For the year ended December 31, 1999, KeySpan reported operating
revenues of $3.0 billion of which $1.8 billion (or approximately 59%) were
derived from regulated sales of gas and gas transportation, and $861.6 million
(or approximately 29%) were derived from electric operations. In the year ended
December 31, 1999, KeySpan had an operating income of $482.2 million and net
income of $258.6 million. At December 31, 1999, KeySpan had consolidated assets
of $6.7 billion, including net property and equipment of $4.2 billion. At
December 31, 1999, KeySpan had issued and outstanding 133.9 million shares of
common stock, par value $0.01 per share. KeySpan's common stock is publicly
traded on the New York Stock Exchange and the Pacific Stock Exchange.
Eastern conducts all of its business activities through its operating
subsidiaries. Eastern currently owns all of the outstanding common stock of
three gas utility companies operating exclusively within Massachusetts: Boston
Gas Company, Colonial Gas Company and Essex Gas Company (collectively referred
to herein as the "Massachusetts Utilities"). Together, the Massachusetts
Utilities serve approximately 734,000 retail gas customers. Eastern has four (4)
wholly-owned, material non-utility subsidiaries: Midland Enterprises, Inc.,
Transgas Inc., AMR Data Corporation and ServicEdge Partners, Inc. The principal
non-utility activities of Eastern's subsidiaries are water barging activities,
including the hauling of fuel and other cargo; transporting by truck LNG and
propane; providing meters and meter reading services to municipal utilities;
and, providing heating, ventilation and air conditioning services.
For the year ended December 31, 1998, Eastern reported gross revenues
of $935,264,000, of which $667,106,000 (or approximately 71%) were derived from
regulated sales of gas and gas transportation, operating earnings of
$100,405,000, and earnings before extraordinary items of $50,828,000. At
December 31, 1998, Eastern had consolidated assets of $1,518,370,000, including
net property and equipment of $975,749,000. On an unaudited adjusted basis, to
take into account financial results of Colonial Gas, which Eastern acquired in
August 1999, Eastern would have had $1,118,357,000 in gross revenues, including
$835,000,000, or 75% of the total, from regulated gas sales and gas
transportation. At September 30, 1999, Eastern had adjusted combined total
assets of $1,908,495,000, including adjusted net property and equipment of
$1,269,101,000.1 At December 31, 1999, Eastern had issued and outstanding
27,114,198 shares of common stock, par value $1.00 per share. Eastern's shares
are listed for trading on the New York, Boston and Pacific Stock Exchanges;
however, they will be delisted and cease to be publicly traded after
consummation of the Transaction.
3
_______________________
1 The financial presentation is on an unaudited, adjusted, basis to include the
effect of the acquisition of Colonial Gas Company, as if the acquisition had
occurred January 1, 1998.
<PAGE>
If the Eastern/EnergyNorth Transaction is consummated, EnergyNorth will
be a direct, wholly-owned subsidiary of Eastern. EnergyNorth, a New Hampshire
corporation, owns all of the issued and outstanding common stock of one gas
utility company: EnergyNorth Natural Gas, Inc ("ENGI"). ENGI distributes natural
gas to approximately 72,000 residential, commercial and industrial customers in
27 cities and towns located in southern and central New Hampshire, including
Nashua, Manchester, Concord and Laconia.
EnergyNorth's material non-utility subsidiaries are principally engaged
in installing and servicing commercial heating, ventilation and air conditioning
equipment and distributing propane.
For the fiscal year ended September 30, 1999, EnergyNorth reported
consolidated operating revenues of $119,172,000, of which $76,617,000 (or 64%)
represented regulated gas sales and transportation, operating income of
$9,621,000, and net income of $4,537,000. At September 30, 1999, EnergyNorth had
$168,325,000 in total assets, including net utility plant of $113,730,000. As of
December 17, 1999, EnergyNorth had issued and outstanding 3,322,903 shares of
common stock, par value $1.00 per share. Its shares are listed and traded on the
New York Stock Exchange, however, they will be delisted and cease to be publicly
traded upon the consummation of the Eastern/EnergyNorth Transaction.
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
4
