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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
---------------------
NEW YORK STATE ELECTRIC & GAS CORPORATION
(NAME OF SUBJECT COMPANY)
NEW YORK STATE ELECTRIC & GAS CORPORATION
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, PAR VALUE $6.66 2/3 PER SHARE
(TITLE OF CLASS OF SECURITIES)
------------------------------
649840105
(CUSIP NUMBER OF CLASS OF SECURITIES)
------------------------------
DANIEL W. FARLEY, ESQ.
VICE PRESIDENT AND SECRETARY
NEW YORK STATE ELECTRIC & GAS CORPORATION
ITHACA-DRYDEN ROAD
P.O. BOX 3200
ITHACA, NEW YORK 14852-3200
(607) 347-2506
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON
AUTHORIZED TO RECEIVE NOTICE AND COMMUNICATIONS
ON BEHALF OF THE PERSON(S) FILING STATEMENT)
------------------------------
COPY TO:
SETH A. KAPLAN, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019
(212) 403-1000
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This Amendment No. 1 (this "Amendment No. 1") amends and supplements the
Solicitation/ Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9")
filed with the Securities and Exchange Commission on July 30, 1997 by New York
State Electric & Gas Corporation, a New York corporation (the "Company"),
relating to the offer by CE Electric (NY), Inc., a New York corporation ("CENY")
and a wholly owned subsidiary of CalEnergy Company, Inc., a Delaware corporation
("CalEnergy"), to purchase 6,540,670 shares of outstanding Common Stock, par
value $6.66 2/3 per share, at $24.50 per share. Capitalized terms used but not
defined herein have their respective meanings set forth in the Schedule 14D-9.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
Item 8 is hereby amended as follows:
The section captioned "Litigation" is hereby deleted in its entirety and
replaced with the following:
LITIGATION. On July 30, 1997, the Company commenced an action against
CalEnergy and CENY in the United States District Court for the Southern District
of New York. The action seeks preliminary and permanent injunctive relief
against the Stake-Out Tender Offer and planned takeover attempt of the Company
by CalEnergy and CENY, on the grounds, among other things, that CalEnergy has
breached and continues to violate the Confidentiality Agreement and that the
defendants' tender offer materials contain misleading and inadequate
disclosures, thereby violating the federal securities laws. In addition, the
Company seeks an order divesting any and all securities of the Company acquired
by CalEnergy and its affiliates while in possession of such confidential
information.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<S> <C>
Exhibit
35 -- Complaint in NEW YORK STATE ELECTRIC & GAS CORPORATION V. CALENERGY COMPANY,
INC., ET AL. (U.S. District Court, Southern District of New York).
Exhibit
36 -- Letter to the Employees of the Company, dated July 30, 1997, relating to the
recommendation of the Board of Directors of the Company with respect to the
Stake-Out Tender Offer.
Exhibit
37 -- Letter to the Managers of the Company, relating to the recommendation of the
Board of Directors of the Company with respect to the Stake-Out Tender Offer.
Exhibit
38 -- Audio Script prepared for Wesley W. von Schack, relating to the
recommendation of the Board of Directors of the Company with respect to the
Stake-Out Tender Offer.
Exhibit
39 -- Letter to Retired Employees of the Company, dated July 30, 1997, relating to
the recommendation of the Board of Directors of the Company with respect to the
Stake-Out Tender Offer.
Exhibit
40 -- Audio Script prepared for the Company's Customer Call Center.
Exhibit
41 -- Advertisement run Thursday, July 31, 1997 in selected newspapers within the
Company's service territory.
</TABLE>
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EXHIBIT 35
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
NEW YORK STATE ELECTRIC & :
GAS CORPORATION, :
:
Plaintiff, :
:
-against- : 97 Civ.
:
CALENERGY COMPANY, INC., :
CE ELECTRIC (NY), INC., :
:
Defendants. :
:
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COMPLAINT
---------
Plaintiff New York State Electric & Gas Corporation ("NYSEG") alleges,
upon knowledge as to itself and its own acts, and otherwise upon information and
belief, as follows:
NATURE OF THE ACTION
--------------------
1. This action seeks injunctive relief against the unlawful conduct of
defendant CalEnergy Company, Inc. ("CalEnergy") in connection with its plan to
acquire control of NYSEG, a New York public utility serving customers in parts
of Eastern, Central and Western New York State.
2. On July 15, 1997, CalEnergy announced that its wholly-owned
subsidiary, defendant CE Electric (NY), Inc., was launching a tender offer (the
"Tender Offer") for 6,540,670
<PAGE>
shares of NYSEG common stock. This Tender Offer was set at an amount calculated
to bring CalEnergy's holdings of NYSEG's outstanding common stock to 9.9% --
according to CalEnergy's Offer to Purchase, the maximum amount it was permitted
by law to acquire without regulatory approval. (The July 18, 1997 Offer to
Purchase and CalEnergy's Schedule 14D-1 without other exhibits is annexed hereto
as Exhibit A.) CalEnergy stated both to the press and in the Offer to Purchase
itself that the Tender Offer was its first step toward the intended acquisition
of 100% of NYSEG's outstanding common stock, and CalEnergy already in early July
began purchasing shares of NYSEG in the market in furtherance of the takeover
plan. The Tender Offer is set to expire on August 14, 1997, at which time
CalEnergy can purchase shares unless its offer is extended and it agrees to
forebear from the purchase of shares until some specified future date.
3. As alleged more fully below, in determining to embark upon
CalEnergy's plan to gain control of NYSEG and in the implementation of that
plan, CalEnergy has improperly used confidential information provided to
CalEnergy by NYSEG in the Spring of 1997 in connection with the negotiation of a
potential joint venture between NYSEG and CalEnergy. CalEnergy's improper use
of NYSEG's confidential information violates (among other things) express
contractual restrictions set forth in a confidentiality agreement entered into
by CalEnergy and NYSEG in the course of such joint venture negotiations (the
"Confidentiality Agreement", annexed hereto, with certain redactions, as Exhibit
B).
4. In addition, the Tender Offer is being made on the basis of
inadequate and misleading disclosures, in violation of Sections 14(d) and 14(e)
of the Securities Exchange Act of
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1934 (the "Exchange Act") and the rules and regulations thereunder. For
example, the Offer to Purchase fails to disclose that CalEnergy has significant
conflicts of interest vis-a-vis NYSEG stemming from NYSEG's 1990 forced entry
into an agreement (the "Saranac Agreement") to purchase power for 15 years
beginning in 1994 from the "Saranac Plant," an energy cogeneration facility
located in Plattsburgh, New York, which is owned by a partnership now controlled
by CalEnergy.
5. The Saranac Agreement, which NYSEG was forced to enter into by the
New York Public Service Commission ("NYPSC") in purported implementation of
federal energy policy, is extremely onerous for NYSEG. Presently, the Saranac
Agreement requires NYSEG to purchase power from Saranac at a rate of 7.3 cents
per kilowatt hour -- more than triple the current average market rate of 2 cents
per kilowatt hour. And the Saranac Agreement contains escalation clauses over
its 15-year term which could result in NYSEG paying as much as 12 cents per
kilowatt hour -- six times the current market rates. In 1997 alone, NYSEG will
have to pay approximately $145 million pursuant to the Saranac Agreement --
approximately $105 million above current market rates.
6. Yet CalEnergy nowhere discloses in its Offer to Purchase the
conflict of interest it would have (if it gains substantial control or influence
over NYSEG) due to the Saranac Agreement, or the impact this conflict of
interest may have on CalEnergy's ability to obtain the required approvals from
the regulatory agencies which must approve the acquisition of NYSEG
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that CalEnergy seeks. Nor does CalEnergy disclose what (if anything) would be
its plans, if it gains control or influence over NYSEG, with respect to
modifying the terms and conditions of the Saranac Agreement.
PARTIES
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7. Plaintiff NYSEG is a New York corporation organized in 1852, with
its principal executive offices in Ithaca, New York. NYSEG's principal business
is generating, purchasing, transmitting and distributing electricity and natural
gas. NYSEG's service territory is in the central, eastern and western parts of
the State of New York, including Binghamton, Elmira, and Ithaca. NYSEG serves
approximately 808,000 electric customers and 238,000 natural gas customers.
8. Defendant CalEnergy is a Delaware corporation with its principal
executive offices in Omaha, Nebraska. CalEnergy was incorporated in 1971 as the
California Energy Company, and changed to its present name in 1994. Until its
recent takeover of Northern Electric plc, a company engaged in the supply and
distribution of electricity in northeast England, CalEnergy was not in the
electricity distribution business. CalEnergy even today has no experience in
gas distribution.
9. Defendant CE Electric (NY), Inc. is a New York corporation and a
wholly-owned subsidiary of CalEnergy.
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JURISDICTION AND VENUE
----------------------
10. This action is brought to enjoin and restrain violations of
Sections 14(d) and 14(e) of the Exchange Act (15 U.S.C. Sections 78n(d) and
78n(e)) and the SEC rules and regulations promulgated thereunder, including 17
C.F.R. Section 240.14d-1, as well as CalEnergy's breaches of the
Confidentiality Agreement and of their fiduciary duties.
11. Subject matter jurisdiction over this action is conferred on this
Court by the Exchange Act (15 U.S.C. Section 78aa), 28 U.S.C. Section 1331 and
28 U.S.C. Section 1332, as well as principles of supplemental jurisdiction
under 28 U.S.C. Section 1367. The amount in controversy exceeds $75,000
exclusive of interest and costs.
12. The Confidentiality Agreement entered into by the parties (Section
12) provides for jurisdiction and venue in the Southern District of New York
over any action brought to enforce or otherwise relating to the Confidentiality
Agreement.
13. Venue is proper in the Southern District of New York pursuant to
the Exchange Act (15 U.S.C. Section 78aa), Section 12 of the Confidentiality
Agreement entered into by the parties, and 28 U.S.C. Section 1391.
BACKGROUND FACTS PERTINENT TO ALL CLAIMS
----------------------------------------
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14. The Saranac Plant is owned and operated by a limited partnership
of which the general partner is Saranac Energy Company, Inc. ("Saranac"), a
wholly-owned indirect subsidiary of defendant CalEnergy.
15. In 1990, NYSEG was required by the New York Public Service
Commission to enter into the Saranac Agreement. The Saranac Agreement obligates
NYSEG to purchase all of the electricity produced at the Saranac Plant for a 15
year period which began in 1994 and ends in 2009.
16. Under the formula for calculating price in the Saranac Agreement,
NYSEG is presently required to pay 7.3 cents per kilowatt hour, a rate more than
triple the current appropriate market rate of only 2 cents per kilowatt hour.
And, pursuant to the terms of the contract, the rate could eventually reach as
high as 12 cents per kilowatt hour -- more than six times current market rates.
In 1997, NYSEG will have to pay about $145 million pursuant to the Saranac
Agreement -- approximately $105 million of which represents a windfall above
current market rates for Saranac. And the total payments NYSEG will be required
to make over the life of the Saranac Agreement is now expected to exceed market
rates by $1.7 billion.
17. In early 1995, NYSEG commenced a proceeding before the Federal
Energy Regulatory Commission ("FERC") directed (inter alia) at obtaining relief
from the Saranac Agreement. To date, NYSEG has been unsuccessful in obtaining
any such relief either from FERC or from a federal appellate court asked to
review FERC's failure to act. However, as CalEnergy and
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<PAGE>
Saranac well know, NYSEG intends to pursue all avenues open to it to obtain
administrative and/or judicial relief from the Saranac Agreement. Notably, in a
filing submitted in the foregoing FERC proceeding, the NYPSC itself set forth
that "[t]housands of . . . NYSEG customers are in dire economic straits due, in
part, to the effect of . . . Saranac's prices on NYSEG's rates."
18. NYSEG believes that a major source of any rate reductions that
CalEnergy may proffer if it gains control of NYSEG will stem from a proposed
restructuring of the Saranac Agreement. However, this is not disclosed in the
Offer to Purchase. Moreover, CalEnergy's apparent posture -- that it will
renegotiate the Saranac Agreement with NYSEG only if and when it succeeds in
its Tender Offer -- is unconscionable and represents a strong reason to regard
CalEnergy as an inappropriate steward of the public trust with respect to
NYSEG's business.
19. Even if CalEnergy fails in achieving its primary goal of acquiring
100% of NYSEG's common stock, as a 9.9% shareholder of NYSEG (as a result of the
Tender Offer, if successful), CalEnergy would be placed in a position where it
could attempt to exert influence over NYSEG with respect to any potential
renegotiation or restructuring of the Saranac Agreement. CalEnergy's position
as the main beneficiary of the Saranac Agreement is in patent conflict with any
position it might gain as a substantial NYSEG shareholder through the Tender
Offer.
20. NYSEG's stock price has been artificially depressed for a period
of time due in principal part to the adverse effects of the Saranac Agreement
(and another similar agreement), as
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<PAGE>
well as the substantial market uncertainty generated by the NYPSC's "Opinion and
Order Regarding Competitive Opportunities for Electric Service" (Opinion No.
96-12) and various open issues between NYSEG and NYPSC. CalEnergy seeks by its
Tender Offer and takeover plan to capitalize on the artificially low price of
NYSEG stock.
CLAIMS FOR RELIEF
COUNT I
(asserted against defendant CalEnergy only)
BREACH OF CONFIDENTIALITY AGREEMENT
AND MISUSE OF CONFIDENTIAL INFORMATION
21. Plaintiff hereby repeats and realleges each and every allegation
of paragraphs 1 through 20 as if fully set forth herein.
22. In or about early 1997, an upstate New York manufacturing concern
(the "Potential Gas Customer") expressed to CalEnergy an interest in converting
to natural gas for its day-to-day operations. In or before mid-April, after
looking into the matter to the best of its ability, CalEnergy concluded that it
would be unable to develop a satisfactory solution for the Potential Gas
Customer.
23. On or about April 14, 1997, J. Douglas Divine, CalEnergy's Vice
President for Strategic Planning, contacted NYSEG in an attempt to enlist
NYSEG's help with this project. Divine explained that CalEnergy was approaching
NYSEG as a potential partner for this project
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<PAGE>
(the "Gas Joint Venture") because NYSEG had success in building gas pipelines
and in obtaining local gas franchises in the Plattsburgh area.
24. Ensuing discussions between NYSEG and CalEnergy led the parties,
on or about May 6, 1997, to enter into the Confidentiality Agreement annexed
hereto (with redactions) as Exhibit B. The Confidentiality Agreement provides
(among other things) that neither party can use information furnished to it by
the other (whether before or after the Agreement's execution) "for any purpose
other than in connection with the evaluation of the [Gas Joint Venture] or
transactions associated therewith."
25. NYSEG spent considerable time on the Gas Joint Venture, and had
many contacts with CalEnergy concerning the same, in the two months following
CalEnergy's initial approach to NYSEG. During that period, NYSEG furnished a
good deal of information to CalEnergy that was, and is, protected by the
Confidentiality Agreement (the "Confidential Gas-Venture Information").
26. The Confidential Gas-Venture Information was very helpful to
CalEnergy with respect to its initial objective of coming up with a way to
satisfy the needs of the Potential Gas Customer, while at the same time
generating an attractive economic return to CalEnergy. In addition, the
Confidential Gas-Venture Information disclosed to CalEnergy important NYSEG
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ideas for extension of the Gas Joint Venture into potentially lucrative areas
not previously considered by CalEnergy.
27. The Confidential Gas-Venture Information led CalEnergy to
conclude, in or about early June 1997: (a) that NYSEG's gas business had
significant growth potential; (b) that NYSEG's Gas Venture ideas, if
implemented, would accord CalEnergy the flexibility to greatly curtail
operations at the Saranac Plant -- or to close the plant down altogether --and
redeploy its assets elsewhere (adjusting the Saranac Agreement accordingly); and
(c) that, in major part because of the facts set forth in subparagraphs (a) and
(b) of this paragraph, NYSEG was a very attractive candidate for acquisition by
CalEnergy.
28. On or about June 5, in furtherance of its new-found -- but still
quite secret -- interest in a NYSEG takeover, CalEnergy cancelled an important
meeting that both CalEnergy and NYSEG were to have had on June 10 with the
Potential Gas Customer. CalEnergy's proclaimed excuse for the cancellation was
the need to have a full joint-venture agreement -- not merely a confidentiality
agreement -- in place with NYSEG before meeting with the Customer. When the
meeting had been set up only a few days earlier (on or about May 30), however,
CalEnergy had made no mention of the need for any such agreement as a meeting
pre-condition (or otherwise); indeed, there had been no prior mention whatever
by CalEnergy of any such agreement or the need for one.
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29. Never suspecting what was really afoot, NYSEG proceeded to draft a
Memorandum of Understanding respecting the Gas Joint Venture. NYSEG forwarded
its "MOU" draft to CalEnergy on or about June 9, but had to wait a full week
before receiving CalEnergy's "MOU" counterdraft on June 16. Although NYSEG
responded with a new "MOU" draft only two days later, on June 18, it was met
with "radio silence." About 9 days later (i.e., on or about June 27), NYSEG
made inquiry of CalEnergy about the delay; the CalEnergy spokesman assured NYSEG
that the only reason for the delay was the temporary unavailability of Divine.
30. In all likelihood, Divine had in fact been "unavailable" to work
on the Gas Venture MOU in mid-to-late June because, as Vice President for
Strategic Planning, Divine had been busily engaged at the time in the planning
of the hostile takeover CalEnergy has since launched against NYSEG. And the
Confidential Gas-Venture Information was of key importance in Divine's and
CalEnergy's formulation of that strategic move.
31. Shortly after the CalEnergy reassurances to NYSEG described in
paragraph 29 above, Wesley von Schack, the Chief Executive Officer of NYSEG, was
contacted by a CalEnergy representative in an attempt to set up a meeting
between von Schack and David Sokol, the Chief Executive Officer of CalEnergy.
The CalEnergy representative did not inform von Schack of the purpose of the
meeting, and von Schack thought that the meeting with Sokol might focus upon (i)
the potential joint venture for the Gas Customer (or other possible joint
ventures); and/or (ii)
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potential renegotiation of the Saranac Agreement. Instead, when the meeting
took place on July 10, CalEnergy (through Sokol) finally revealed its purpose to
effect an unsolicited takeover of NYSEG.
32. The Confidential Gas-Venture Information permitted CalEnergy to
see that, with the benefit of NYSEG's input, it can have great flexibility with
respect to the Saranac facility, and that it would be highly advantageous to
CalEnergy for it to be the principal owner both of Saranac and NYSEG. The
Tender Offer and CalEnergy's plan ultimately to effect a 100% takeover of NYSEG
are directly the product of CalEnergy's misuse of such information, in violation
of the Confidentiality Agreement.
33. The Tender Offer is also directly or indirectly the product of
certain additional confidential information (the "Additional Confidential
Information"), specifically including NYSEG's long-term market forecasts of its
energy prices. This Additional Confidential Information is highly sensitive and
would greatly injure NYSEG if it were disclosed.
34. By reason of the foregoing, CalEnergy has materially breached the
Confidentiality Agreement, and the Tender Offer and CalEnergy's takeover plan
are the unlawful products of that breach and of the misuse of both the
Confidential Gas-Venture Information and the Additional Confidential
Information.
35. NYSEG has no adequate remedy at law and will suffer irreparable
injury absent the intervention of this Court.
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COUNT II
(asserted against defendant CalEnergy only)
BREACH OF FIDUCIARY DUTY
36. Plaintiff repeats and realleges each and every allegation of
paragraphs 1 through 35 as if fully set forth herein.
37. In the course of their discussions concerning the Gas Venture,
NYSEG and CalEnergy knowingly reposed trust and confidence in each other. In
reliance thereon, NYSEG disclosed to CalEnergy the Confidential Gas Venture
Information.
38. By reason of the relationship of trust and confidence between
NYSEG and CalEnergy, CalEnergy owed fiduciary obligations to NYSEG independent
of any contractual obligations under the Confidentiality Agreement. Those
obligations included, without limitation, an obligation not to misuse NYSEG's
Confidential Gas-Venture Information, or otherwise take action, to NYSEG's
detriment, and to deal fairly, honestly and in good faith with NYSEG. In
providing the Confidential Gas-Venture Information to CalEnergy, NYSEG assumed
CalEnergy would honor its fiduciary obligations.
39. CalEnergy has breached its fiduciary obligations to NYSEG by:
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(a) pursuing an acquisition of NYSEG through CE Electric (NY), Inc.
for its own gain and in complete disregard of the best interests of NYSEG;
(b) misusing NYSEG's Confidential Gas-Venture Information for
CalEnergy's own gain and to the detriment of NYSEG; and
(c) concealing CalEnergy's true intentions and plans with respect to
NYSEG.
40. Unless enjoined, CalEnergy will continue to breach its fiduciary
obligations owed to NYSEG.
41. NYSEG has no adequate remedy at law and will suffer irreparable
injury absent the intervention of this Court.
COUNT III
(asserted against both defendants)
VIOLATIONS OF FEDERAL SECURITIES LAWS
42. Plaintiff repeats and realleges each and every allegation of
paragraphs 1 through 41 as if fully set forth herein.
43. As alleged in paragraphs 44 through 85 below, defendants have (i)
failed to disclose in the Offer to Purchase and Schedule 14D-1 information
required to be disclosed therein pursuant to the terms of the Schedule 14D-1
requirements and SEC rules and regulations, (ii)
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made materially false and misleading statements, and (iii) falsely and
misleadingly omitted to state numerous facts necessary to make statements made
by defendants not misleading.
A. DEFENDANTS' FAILURE TO DISCLOSE FACTS
CONCERNING A MATERIAL CONFLICT OF INTEREST
BETWEEN CALENERGY AND NYSEG.
44. The Offer to Purchase makes the following general statements
concerning CalEnergy's ownership of a general partnership interest in, and
operation of, the Saranac plant:
CalEnergy, through its subsidiaries, owns a general partnership
interest in and operates an environmentally advanced 240MW gas-fired
generating plant in Plattsburgh, New York, which has a long-term power
sales agreement with [NYSEG], and maintains an office in Plattsburgh.
CalEnergy. . . . has an office in upstate New York and, through its
subsidiaries, operates an environmentally advanced, 240 MW gas-fired
generating plant in Plattsburgh, which generates power sufficient to
supply 100,000 homes.
45. Contrary to, inter alia, the requirements of Schedule 14D-1 Items
10(a) and 10(f) and Section 14(e) of the Exchange Act, the Offer to Purchase
fails to disclose:
(i) the existence of a material conflict in interest between
CalEnergy and NYSEG with respect to the Saranac Agreement;
(ii) any information concerning the terms of the Saranac Agreement,
including the nature and magnitude of present and future
payments made or to be made by NYSEG to Saranac pursuant to
the Saranac Agreement, which
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information must be disclosed so that, among other things,
NYSEG shareholders may assess the magnitude of CalEnergy's
conflict of interest;
(iii) whether defendants have plans for dealing with CalEnergy's
conflict of interest, and, if so, what such plans are;
(iv) whether defendants have plans for how the Saranac Agreement
will be dealt with and, if so, what those plans are;
(v) the basis for the statements of CalEnergy's Chairman, David
Sokol, in a July 15, 1997 conference call with certain
securities industry personnel, that CalEnergy "anticipate[s]
the opportunity to resolve those issues [involving independent
power purchase contracts, including the Saranac Agreement]
favorably";
(vi) who will benefit from this anticipated "favorable" resolution
and what the amount of such benefit will be;
(vii) the financial benefit to CalEnergy of divesting or closing
down the Saranac plant, steps which CalEnergy's Sokol stated
on July 10, 1997 to Wesley von Schack of NYSEG that CalEnergy
planned to effect if CalEnergy acquired NYSEG;
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(viii) the potential impact of Mr. Sokol's admission that it is
economically feasible to divest or close down the Saranac
plant on NYSEG's legal challenges to the Saranac Agreement
(which, as alleged above, had been imposed on NYSEG over its
strenuous objections) should CalEnergy not succeed in
acquiring NYSEG; and
(ix) the impact on CalEnergy's financial condition if NYSEG's legal
challenges to the Saranac Agreement are successful.
46. The Saranac Agreement is material to the business, operations and
financial condition of NYSEG. Among other things, as alleged above
(PARAPARA 14-19), under the Saranac Agreement imposed upon NYSEG, NYSEG was
required in 1996 to pay approximately $105 million per year in excess of the
market value for power produced by the Saranac Plant. This over-payment equaled
approximately 38% of NYSEG's 1996 pre-tax income and if this over-payment had
been eliminated in 1996 NYSEG could have reduced 1996 electric rates to its
customers by approximately 6.8%.
47. The undisclosed facts concerning the conflict of interest between
CalEnergy and NYSEG would be material to NYSEG shareholders in determining
whether to tender into the 9.9% Tender Offer, whether to sell into the open
market, or whether to maintain their shareholdings and neither tender nor sell
at this time. Among other things, such facts bear upon a share-
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holder's evaluation of the likelihood of CalEnergy securing regulatory approvals
and the integrity of CalEnergy's management.
48. Since (i) CalEnergy owns the general partnership interest in, and
operates, the Saranac Plant; (ii) executives of CalEnergy including its Chairman
David Sokol, have actively focused upon the Saranac Agreement (including having
had discussions concerning Saranac with executives of NYSEG) and (iii)
CalEnergy's Sokol made the statements during the July 15, 1997 conference call
and July 10, 1997 meeting alleged above, CalEnergy executives have knowledge of
the facts and issues concerning the material conflict of interest between
CalEnergy and NYSEG described above and similarly know that such matters were
not disclosed in the Offer to Purchase.
B. DEFENDANTS' FAILURE TO DISCLOSE MATERIAL FACTS
CONCERNING OBSTACLES TO REGULATORY APPROVALS.
49. The Offer to Purchase states that "[t]he Subsequent Offer will be
subject to a number of conditions . . . including the receipt of all required
regulatory approvals" (p. 15) but contains only very brief, general descriptions
of the regulatory approvals that are required (SEE pp. 21-22). And CalEnergy
affirmatively asserts in other sections of the Offer to Purchase
- that "CalEnergy welcomes the various initiatives of the Governor's
office, the New York legislature and the New York Public Service
Commission to introduce full competition to New York's energy market"
(p. S-8),
- that CalEnergy "anticipate[s] ... working closely with the New York
Public Service Commission to provide rate reductions for all NYSEG
customers following the proposed merger" (p. 14),
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- that "CalEnergy fully expects that it will be able to work closely
with the New York Public Service Commission to implement rate
reductions for all [NYSEG's] customers" (p. S-8),
- that "CalEnergy welcomes the deregulation of the New York electric
market" (p. 14), and
- that "CalEnergy believes that its proposed business combination would
yield many benefits for [NYSEG's] customers and employees and the
State of New York" (p. S-8).
By these affirmative statements, CalEnergy seeks to convey the impression that
its philosophy is consistent with the philosophy of the NYPSC and will be a
positive factor in obtaining the required approvals.
50. However, CalEnergy has failed to disclose the existence of, and
the material facts concerning, significant obstacles to obtaining the required
regulatory approvals. These obstacles include:
(a) The conflict of interest which would be posed by CalEnergy's
ownership of an interest in NYSEG vis-a-vis CalEnergy's Saranac subsidiary's
interest as a general partner in, and operator of, the Saranac Plant and
CalEnergy's receipt of significant benefits from the Saranac Plant's
above-market price sales of electric power to NYSEG, as alleged in detail above;
(b) Pending litigation against CalEnergy. CalEnergy affirmatively
asserts in its Offer to Purchase that "CalEnergy is not a party to any material
pending legal proceedings" (p.
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S-9), a statement which is false. On June 9, 1997, just over one month before
CalEnergy launched its offer for NYSEG shares, CalEnergy was named as a
defendant in a lawsuit brought by a major California utility, Southern
California Edison Company ("SCE"), which had been forced by federal and state
regulatory rules to purchase electric energy from independently owned
geothermal electric generating facilities in which CalEnergy had interests.
SCE is suing CalEnergy (and others) for damages and seeking termination of
the contracts at issue on the grounds that, in breach of contractual
obligations to SCE, these generating facilities had routinely vented
poisonous gases into the atmosphere in order to relieve a buildup of such
gases which had caused the generators to trip, stopping the production of the
electricity being sold by the generating facilities to SCE at above-market
prices. CalEnergy is alleged in this suit to be the alter-ego of various
parties with interests in these generating facilities, to be the operator of
certain of the generating facilities and to be administering the contracts
for certain of the generating facilities. If true, the allegations by SCE
could (i) bear unfavorably on the integrity of CalEnergy's management, (ii)
adversely impact CalEnergy's ability to get regulatory approvals, and (iii)
adversely impact the financial viability of CalEnergy and its ability to
raise the almost $2 billion required to acquire 100% of NYSEG's shares since
CalEnergy may be required to pay damages to SCE and the above-market price
contracts with regard to the facilities at issue in the SCE litigation may be
terminated. NYSEG shareholders are entitled to full disclosure of the fact
of this litigation as well as the material facts bearing upon the claims made
by SCE so that NYSEG shareholders can make their own evaluation concerning
the impact of the SCE suit and the underlying facts in that suit on
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CalEnergy's ability to get regulatory approvals and to finance the acquisition
of 100% of NYSEG's shares.
(c) Excessive debt and leverage. Statements concerning CalEnergy's
financing plans made by CalEnergy's Sokol in a July 15, 1997 conference call
with securities industry personnel and in statements reported in local
newspapers (SEE articles in 7/22/97 Ithaca Journal and 7/22/97 Binghamton Press
& Sun-Bulletin) indicate that CalEnergy contemplates employing a greater degree
of financial leverage (I.E. debt vs. equity capital) than NYSEG currently does,
including employing "leverage upon leverage" whereby not only is leverage
employed at the NYSEG level, but leverage is also employed at corporate levels
above the NYSEG level which magnifies the effect of that leverage. NYSEG
shareholders are entitled to full disclosure of the particulars of CalEnergy's
plan for financing the acquisition of NYSEG's shares so they can assess the
feasibility of obtaining regulatory approval for an acquisition entailing
whatever financial structure and leverage (or leverage upon leverage) that
CalEnergy intends to propose to regulators.
51. The undisclosed material facts concerning obstacles to obtaining
the required regulatory approvals set forth above would be material to NYSEG's
shareholders in determining whether to tender into the 9.9% offer, whether to
sell into the open market or whether to maintain their shareholdings and neither
tender nor sell at this time. Among other things, these undisclosed facts bear
upon a shareholder's evaluation of the likelihood of CalEnergy securing
regulatory
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approvals for its desired 100% acquisition of the shares of NYSEG as to which
defendants have portrayed their 9.9% offer as the first step.
52. CalEnergy executives had knowledge of the conflict of interest
problem for the reasons set forth previously; CalEnergy executives had knowledge
of the SCE suit because CalEnergy is named in that suit as a defendant; and in
light of the statements made by CalEnergy's Sokol (as alleged above) it is
reasonable to infer that CalEnergy has knowledge of material information
concerning CalEnergy's plans for employing financial leverage which are not
disclosed in the Offer to Purchase.
C. DEFENDANTS' FAILURE TO DISCLOSE THE LACK OF REQUIRED REGULATORY, FINANCING
AND OPERATIONAL PLANS OR, IF SUCH PLANS EXIST, THE TERMS THEREOF
53. Because regulatory approvals are required for CalEnergy to acquire
NYSEG, CalEnergy will be required to submit to the federal and state regulatory
bodies involved detailed regulatory plans (including its plans to comply with
PSC Opinion 96-12 with regard to enhancing competition in the electric market),
detailed financing plans and detailed operational plans, including plans for
rate structures. However, there is no disclosure in the Offer to Purchase of
the particulars of any such regulatory, financing or operational plans. Nor is
there any disclosure in the Offer to Purchase of whether or not such plans
currently exist.
54. Information concerning the lack of required regulatory, financing,
and operational plans or, if such plans exist, the terms thereof, would be
material to NYSEG's shareholders
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in determining whether to tender into the 9.9% offer, whether to sell into the
open market or whether to maintain their shareholdings and neither tender nor
sell at this time. If CalEnergy does not presently have the detailed
regulatory, financing and operational plans required to be submitted in order to
obtain regulatory approvals, NYSEG shareholders should be told that fact because
it bears importantly on both the feasibility of CalEnergy actually proceeding to
obtain regulatory approvals as well as the likely timeframe for securing those
approvals. Alternatively, if such detailed regulatory, financing and
operational plans do exist, the material facts concerning such plans should be
described in the Offer to Purchase so NYSEG shareholders can evaluate for
themselves the likelihood that such plans will be accepted by the regulators who
must approve the proposed acquisition.
55. The misleading nature of the Offer to Purchase concerning
CalEnergy's regulatory, financing and operational plans (or lack thereof) is
compounded in this regard because CalEnergy's Sokol has asserted in statements
reported in local newspapers that CalEnergy contemplates a 10% reduction in
rates upon its acquisition of NYSEG (SEE articles in 7/22/97 Ithaca Journal and
7/22/97 Binghamton Press & Sun-Bulletin), statements which (if true) suggest
that CalEnergy has developed some plans of some sort and which (if false) would
evidence further public misrepresentations by CalEnergy.
56. CalEnergy is uniquely in a position to know whether it has the
required regulatory, financing and operational plans and, if so, the terms
thereof.
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D. DEFENDANTS' FAILURE TO DISCLOSE FULL AND COMPLETE INFORMATION REGARDING THE
TERMS AND CONDITIONS OF, AND THE FEASIBILITY OF CALENERGY PROCURING, THE
REQUIRED FINANCING FOR CALENERGY'S DESIRED ACQUISITION OF A 100% INTEREST
IN NYSEG.
57. Defendants assert that their investment bankers "have delivered to
CalEnergy fully underwritten offers to provide . . . the full amount of
financing for the Subsequent Offer" (I.E., an offer to acquire the remaining
90.1% of NYSEG's outstanding shares) "at a price up to $27.50 per Share" (Offer
to Purchase p. 2; SEE ALSO p. 14). However, defendants take the position that,
although their professed intention is to acquire 100% of the shares of NYSEG and
the initial 9.9% offer is a first step in that direction, defendants need only
disclose information with regard to their source of funds for the initial 9.9%
share purchase, which they state will be provided from CalEnergy's "cash on
hand". Offer to Purchase Section 13 p. 19. Consequently, the Offer to
Purchase provides no information with regard to the terms and conditions of the
supposed "fully underwritten offers to provide . . . the full amount of
financing" for the acquisition of 100% of NYSEG's shares or how CalEnergy
expects to be able to support debt financing of that magnitude.
58. Because defendants have portrayed their 9.9% offer as the first
step in the acquisition of 100% of the shares of NYSEG, the terms and conditions
of any financing commitments for, and the feasibility of CalEnergy actually
being able to obtain, the approximately $1.9 billion required to consummate the
purchase of 100% of the shares of NYSEG is material to NYSEG's shareholders in
determining whether to tender into the 9.9% offer, whether to sell into the open
market or whether to maintain their shareholdings and neither tender nor sell at
this time.
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Among other things, the terms and conditions of, and the feasibility of
CalEnergy procuring, the required financing for the acquisition of 100% of the
shares of NYSEG bears upon a shareholder's evaluation of the likelihood of
CalEnergy securing regulatory approvals and the likelihood that CalEnergy would
be able to afford to pay $27.50 per share in cash, as CalEnergy claims it is
prepared to do (Offer to Purchase pp. 2, 14, 16).
59. Furthermore, although the Offer to Purchase implies that the
Subsequent Offer for the remaining 90.1% of NYSEG shares will be for $27.50 per
share cash (pp. 2, 14, 16), CalEnergy also has crafted the Offer to Purchase so
as to create a record that it can later point to as reserving the right to pay
the consideration for the balance of NYSEG's shares in securities, rather than
cash, and/or to pay consideration with a value less than $27.50 (SEE, E.G.,
Offer to Purchase p. 15). Thus, from the perspective of a NYSEG shareholder who
must assess whether he or she wishes to promote CalEnergy's takeover plans by
tendering into CalEnergy's 9.9% offer, such shareholder must assess the
potential value and desirability of a subsequent offer in the form of CalEnergy
securities as well as the potential for a subsequent offer price of less than
$27.50 per share. Information concerning CalEnergy's financial viability and
prospects and the integrity of CalEnergy's management is material for these
purposes as well.
60. Among the matters relating to the terms and conditions of, and the
feasibility of CalEnergy procuring, financing for the approximately $1.9 billion
purchase price for 100% of
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NYSEG, and as to which CalEnergy provides no information in the Offer to
Purchase, are the following:
(a) Where will CalEnergy obtain the money to pay the debt service on
the new acquisition debt? CalEnergy's Sokol has made statements reported
in local newspapers that "NYSEG's rate payers will NOT pay ANY of the debt"
CalEnergy takes on to acquire 100% of the shares of NYSEG (SEE, E.G.
articles in the July 22, 1997 Ithaca Journal and the July 22,1997
Binghamton Press & Sun-Bulletin) (emphasis added), a "fact" nowhere
disclosed in the Offer to Purchase.
(b) What is the amount of the new debt which CalEnergy apparently
contemplates issuing (information nowhere disclosed in the Offer to
Purchase) and how does that amount compare to the amount of CalEnergy's
existing $953 million of long term debt?
(c) What is the anticipated debt service on this new debt
(information nowhere disclosed in the Offer to Purchase) and how will the
debt service on this new debt compare to CalEnergy's total net income from
all sources ($92 million in 1996)?
(d) Does CalEnergy actually intend to finance its acquisition of
NYSEG without relying upon dividends from NYSEG to pay off the acquisition
debt?
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(e) What is CalEnergy's existing bond rating (information nowhere
disclosed in the Offer to Purchase)? According to Moody's and Standard &
Poors, CalEnergy's existing bond ratings are NONinvestment grade, a fact
that is not disclosed in the Offer to Purchase.
(f) CalEnergy's Sokol stated in a July 15, 1997 conference call with
certain securities industry personnel that CalEnergy may seek to sell $500
million in equity to finance the acquisition of NYSEG and CalEnergy's Sokol
has also made statements reported in local newspapers that CalEnergy may
issue more stock to help pay for the cost of acquiring NYSEG shares (SEE
7/22/97 Binghamton Press & Sun-Bulletin article), but the Offer to Purchase
provides no information as to how CalEnergy would raise $500 million
through an equity offering or what dilutive impact such an issuance of new
CalEnergy equity would have on CalEnergy's per share earnings (once one
factors in the additional new debt service payments) and CalEnergy's per
share price.
(g) Mr. Sokol has made statements reported in local newspapers that
CalEnergy contemplates effecting a 10% reduction in NYSEG's electric rates
upon acquiring NYSEG (SEE, E.G., articles in 7/22/97 Ithaca Journal and
7/22/97 Binghamton Press & Sun-Bulletin), which (based on 1996 data) would
reduce NYSEG's revenues by approximately $155 million and reduce NYSEG's
after-tax net income by approximately $96.3 million, roughly equivalent to
the approximately $99.6 million in dividends paid to common shareholders in
1996 by NYSEG. The Offer to Purchase does not address whether, in fact,
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CalEnergy does plan to lower rates by 10%, and, if so, how that would
impact on the feasibility of CalEnergy's using dividend distributions from
NYSEG to pay its acquisition debt service, even if CalEnergy wished to use
distributions from NYSEG for that purpose.
(h) What will be the financial impact upon CalEnergy and its ability
to finance the acquisition of 100% of NYSEG of divesting at least portions
of its interests in certain of its current independent generating
facilities? CalEnergy states such divestitures "may be required in order
to maintain the qualifying facility status (under the Public Utility
Regulatory Policy Act of 1978)" of any remaining independent generating
facilities following CalEnergy's acquisition of more than 9.9% of NYSEG
(SEE Offer to Purchase p. 22), yet defendants disclose no information
concerning which facilities will have to be divested, what the current
profit contribution of those facilities is and what will be the magnitude
of the financial impact upon CalEnergy of making such divestitures.
(i) What are the expiration dates of CalEnergy's above-market
contracts for electricity produced by its independent generating facilities
and what are the contributions to CalEnergy's net income from such
contracts? Information in CalEnergy's Form 10-K filing for 1996 suggests
the fixed-price or other favorable price period of one of these contracts
expired in 1996, that the fixed-price or other favorable price period of
certain others of these contracts may have expiration dates as early as
August 1997 and that above-market contracts of this nature provide a
significant proportion of CalEnergy's earnings. To assess the impact on
CalEnergy's financial condition of the expiration of such
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contracts or the fixed-price period of such contracts, CalEnergy must
provide year-by-year information as to such expirations and their impact on
CalEnergy's earnings. In addition, as discussed more fully above in
PARA 50, CalEnergy is the subject of litigation seeking to terminate
certain of such contracts. However, none of this information is disclosed
in the Offer to Purchase.
61. CalEnergy is uniquely in a position to have knowledge or
information relating to the terms and conditions of, and the feasibility of
procuring, the potential financing for the approximately $1.9 billion purchase
price for 100% of NYSEG. CalEnergy is likewise uniquely in a position to have
knowledge of the other information omitted from the Offer to Purchase concerning
its financial position.
E. CONTRARY TO CALENERGY'S REPEATED ASSERTIONS THAT IT WELCOMES "FULL
COMPETITION" IN THE ELECTRICAL ENERGY MARKET, CALENERGY HAS
SUBSTANTIAL INTERESTS IN CONTINUED ANTICOMPETITIVE REGULATORY
PRACTICES PURSUANT TO ITS SUBSTANTIAL PURPA CONTRACTS WHICH ARE
MATERIAL TO ITS FINANCIAL CONDITION AND WHICH ARE NOT DISCLOSED
IN THE OFFER TO PURCHASE.
62. The Offer to Purchase repeatedly seeks to portray CalEnergy as
being an advocate of competition and deregulation in the electric market and
asserts that accordingly CalEnergy will be able to work closely with the NYPSC
which has launched initiatives to introduce greater competition in New York's
energy market. Thus, for example, the Offer to Purchase states:
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- - "CalEnergy welcomes the deregulation of the New York electric market
and views increased competition as positive and beneficial to rate
payers and the larger New York community alike. We would expect to
bring a helpful competitive focus to NYSEG's transition to such an
environment and in meeting the competitive challenges which it faces"
(p. 14);
- - "CalEnergy . . . traces its roots to the introduction of the
competitive electric generation industry within the United States and
has expanded and thrived in the competitive marketplace, both within
the U.S. and internationally" (p. 14);
- - "We anticipate . . . working closely with the New York Public Service
Commission to provide rate reductions for all NYSEG customers
following the proposed merger" (p. 14);
- - "CalEnergy welcomes the various initiatives of the Governor's office,
of the New York legislature and the New York Public Service Commission
to introduce full competition to New York's energy market. CalEnergy
fully expects that it will be able to work closely with the New York
Public Service Commission to implement rate reductions for all the
Company's customers" (p. S-8).
63. However, in truth and in fact CalEnergy has been from its
inception, and remains today, highly dependent for its profitability upon
regulatory rules which have forced utilities to enter into contracts benefiting
generating facilities owned or operated by CalEnergy or its affiliates, such as,
among others, the Saranac Agreement whereby NYSEG is significantly overcharged
for electricity. The Offer to Purchase discussion of "Certain Information
Concerning . . . CalEnergy" references only in a very general way CalEnergy's
ownership and operation of independent power production facilities (SEE Section
9 at pp. 11-12) and does not disclose (i) CalEnergy's dependence upon continued
regulation or the continuation in effect of contracts imposed by regulation to
maintain the current level of profitability of many of such facilities and (ii)
that the contracts awarded pursuant to PURPA provide a significant portion of
CalEnergy's
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profits. In addition, the Offer to Purchase contains only an oblique statement
that "certain partial dispositions may be required in order to maintain the
qualifying facility status (under the Public Utility Regulatory Policy Act of
1978) of certain of CalEnergy's independent generating facilities following its
acquisition of more than 9.9% of [NYSEG]" (p. 22), a statement which in no way
identifies, describes or quantifies the importance to CalEnergy of its
continuing to receive the benefit of continued regulation perpetuating its
favorable PURPA contracts.
64. Information concerning the magnitude of CalEnergy's substantial
interests in PURPA contracts would be material to NYSEG's shareholders in
determining whether to tender into the 9.9% offer, whether to sell into the open
market or whether to maintain their shareholdings and neither tender nor sell at
this time. Among other things, information on these matters bears upon the
validity of CalEnergy's efforts to portray itself as an advocate of competition
and deregulation as that may be relevant to a shareholder's evaluation of the
likelihood of CalEnergy securing regulatory approvals, and information on these
matters also bears upon the feasibility of CalEnergy financing an acquisition of
100% of the shares of NYSEG at a price of $27.50 per share in cash.
65. The material facts concerning CalEnergy's substantial interests in
PURPA contracts are uniquely within the knowledge of CalEnergy.
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F. DEFENDANTS' FAILURE TO DISCLOSE THE ADVERSE
CONSEQUENCES TO NYSEG OF CALENERGY
ACQUIRING THE 9.9% STAKE IT INITIALLY SEEKS.
66. The Offer to Purchase makes no disclosure of the potential adverse
consequences to NYSEG and its shareholders other than CalEnergy of CalEnergy's
purchase of 9.9% of NYSEG's shares pursuant to the Offer to Purchase. These
material adverse consequences include:
(i) The potential for CalEnergy to utilize a 9.9% share position to
exert pressure upon NYSEG in relation to NYSEG's litigation or
negotiation efforts to modify the onerous terms of the Saranac
Agreement pursuant to which CalEnergy's Saranac subsidiary has been
profiting at the expense of NYSEG shareholders and ratepayers.
(ii) Under current law, with 9.9% of NYSEG's shares, CalEnergy will as a
practical matter be in a position to block strategic options for
enhancing shareholder value, such as a stock-for-stock pooling of
interests merger, which CalEnergy with 9.9% of NYSEG's shares could
block if even just one-tenth of 1% of the other shareholders of
NYSEG joined with CalEnergy, irrespective of how advantageous to
the shareholders of NYSEG other than CalEnergy such a
stock-for-stock pooling of interests merger might be.
(iii) The potential for CalEnergy to utilize a 9.9% share position to
exert pressure upon NYSEG in relation to other strategic options
for enhancing shareholder value as to
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which CalEnergy's own interests may diverge from the interests of
other NYSEG shareholders. Among other things, if NYSEG were to
pursue any kind of transaction that would require the approval
under New York law and NYSEG's Charter and By-laws of the holders
of two-thirds of the outstanding shares of common stock NYSEG, if
CalEnergy were the owner of 9.9% of the outstanding common stock of
NYSEG, NYSEG would need to obtain the approval of 74% of the shares
of common stock not owned by CalEnergy in order to pursue such
transaction.
67. The foregoing material adverse consequences of CalEnergy
purchasing 9.9% of NYSEG's shares pursuant to the Offer to Purchase would be
material to NYSEG shareholders in determining whether to tender into the 9.9%
offer, whether to sell into the open market or whether to maintain their
shareholdings and neither tender nor sell at this time.
68. Based on the facts alleged above in this Complaint, including but
not limited to the personal involvement of CalEnergy executives in discussions
relating to the Saranac Agreement and CalEnergy's professed desire to obtain
control of NYSEG, it is reasonable to infer that defendants have knowledge of
the potential material adverse consequences to shareholders of NYSEG other than
CalEnergy of CalEnergy's purchase of 9.9% of NYSEG's shares.
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G. CALENERGY'S REPRESENTATIONS CONCERNING CALENERGY'S
ABILITY TO OBTAIN CONTROL OF THE NYSEG BOARD THROUGH
REMOVAL OF THE BOARD BY MEANS OF A CONSENT SOLICITATION
OR PROXY CONTEST ARE MISLEADING.
69. In a conference call with certain securities industry personnel on
July 15, 1997, CalEnergy's Sokol represented that under NYSEG's charter and
by-laws "only a majority" vote by means of a consent solicitation or proxy
contest is required "to remove the [NYSEG] board" and that CalEnergy's "lawyers
don't believe" that there is anything under New York State law that would
prevent CalEnergy from doing this.
70. However, New York Business Corporation Law Section 706(c)(1)
expressly provides that "[i]n the case of a corporation having cumulative
voting" (such as NYSEG) "no director may be removed when the votes cast against
his removal would be sufficient to elect him if voted cumulatively at an
election at which the same total number of votes were cast and the entire board,
or the entire class of directors of which he is a member, were then being
elected". Thus, Mr. Sokol's statement that CalEnergy could by majority vote
through a consent solicitation or proxy contest remove NYSEG's directors and
that there is nothing in New York law which would prevent this is simply untrue.
71. The Offer to Purchase is likewise misleading in referring to the
alleged potential of CalEnergy "to take actions to remove and replace the
current Board of Directors either through a consent solicitation or through a
proxy contest" if the current board of directors of
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NYSEG refuses to negotiate with CalEnergy (Offer to Purchase pp. 2, 16) without
in any way referring to or discussing the consequences of BCL Section
706(c)(1).
72. The true facts concerning whether (as CalEnergy's Sokol has
expressly claimed and as the Offer to Purchase implies) CalEnergy can remove the
NYSEG board by a majority vote by means of a consent solicitation or proxy
contest would be material to NYSEG shareholders in determining whether to tender
into the 9.9% offer, whether to sell into the open market or whether to maintain
their shareholdings and neither tender nor sell at this time. Among other
things, this information would affect a shareholder's evaluation of the
likelihood that CalEnergy would in fact proceed to consummate the acquisition of
100% of the shares of NYSEG and the potential time frame for such an acquisition
were CalEnergy in fact to proceed.
73. Since CalEnergy's Sokol has by his own admission consulted counsel
concerning the issue, it is reasonable to infer that CalEnergy executives have
been made aware of New York Business Corporation Law Section 706(c)(1) and the
terms of that provision.
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H. DEFENDANTS' FAILURE TO DISCLOSE CALENERGY'S IMPROPER USE OF CONFIDENTIAL
INFORMATION AND THE DISCUSSIONS BETWEEN NYSEG AND CALENERGY WITH RESPECT
TO THE SARANAC AGREEMENT AND THE PIPELINE JOINT VENTURE.
74. The Offer to Purchase is completely silent with regard to the
Saranac Agreement, discussions between NYSEG and CalEnergy with respect to the
Saranac Agreement and discussions with respect to the potential pipeline joint
venture, even though disclosure of all of these matters was required pursuant to
Schedule 14D-1 Items 10(a) and 10(f) as well as Section 14(e) of the Exchange
Act.
75. The material facts concerning CalEnergy's improper use of
confidential information and the discussions between NYSEG and CalEnergy with
respect to the Saranac Agreement and pipeline joint venture would be material to
NYSEG shareholders in determining whether to tender into the 9.9% offer, whether
to sell into the open market, or whether to maintain their shareholdings and
neither tender nor sell at this time. Among other things, such matters bear
upon a shareholder's evaluation of the integrity of CalEnergy's management and
the likelihood of CalEnergy securing regulatory approvals.
76. CalEnergy executives have knowledge of their improper use of
confidential information and of the discussions between NYSEG and CalEnergy with
respect to the Saranac Agreement and the pipeline joint venture because
CalEnergy executives participated personally in such matters.
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I. MISREPRESENTATION OF CALENERGY'S PRE-OFFER DISCUSSIONS WITH NYSEG.
77. The Offer to Purchase presents in Section 10 (at pp. 12-15) a
misleading portrayal of the discussions between representatives of CalEnergy and
NYSEG which immediately preceded the Offer to Purchase being announced by
CalEnergy. Among the misstatements and misrepresentations made in Section 10 is
the misleading omission of the fact that at the July 10, 1997 meeting Mr. Sokol
stated that he would keep management in place and would be willing to offer Mr.
von Schack a management contract or consulting arrangement; and that Mr. Sokol
further commented that he did not intend to run the combined companies
indefinitely and that Mr. von Schack might assume that role.
78. The true facts concerning CalEnergy's pre-offer discussions with
NYSEG would be material to NYSEG shareholders in determining whether to tender
into the 9.9% offer, whether to sell on the market, or whether to maintain their
shareholdings and neither tender nor sell at this time. Among other things,
such matters bear upon a shareholder's evaluation of the integrity of
CalEnergy's management and the likelihood of CalEnergy securing regulatory
approvals.
79. CalEnergy has knowledge of the matters omitted because CalEnergy's
Sokol personally participated in the July 10, 1997 meeting referenced in the
Offer to Purchase.
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J. DEFENDANTS' FAILURE TO DISCLOSE THE CONSEQUENCES OF ANY IMPEDIMENTS TO
CALENERGY REINCORPORATING IN NEW YORK.
80. The Offer to Purchase states that CalEnergy intends to
reincorporate in New York (SEE Offer to Purchase pp. 14 S-8), but does not
disclose: (i) the purpose of such reincorporation in New York, or (ii) whether
the purpose of such reincorporation in New York is to evade the need for
CalEnergy to register as a public utility holding company under the Public
Utility Holding Company Act of 1935, as amended. Nor do defendants disclose the
facts concerning the steps CalEnergy must take in order to change its state of
incorporation, such as whether a vote of CalEnergy shareholders is required and,
if so, (i) whether certain CalEnergy shareholders have objected in the past to
CalEnergy's acquisition strategies as being imprudent and ill advised, and (ii)
whether Kiewit Energy Company, the beneficial holder of 31.35% of CalEnergy's
common stock, has agreed to support the efforts of CalEnergy's management to
acquire NYSEG.
81. The facts with regard to the purpose for CalEnergy's
reincorporation in New York, and the steps CalEnergy must take in order to
change its state of incorporation, would be material to NYSEG shareholders in
determining whether to tender into the 9.9% offer, whether to sell into the open
market or whether to maintain their shareholdings and neither tender nor sell at
this time. Among other things, such matters bear upon a shareholder's
evaluation of the likelihood of CalEnergy securing regulatory approvals and the
likelihood that CalEnergy will in fact be able to proceed with its planned
acquisition.
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82. Since CalEnergy executives have set forth in the Offer to Purchase
that CalEnergy intends to incorporate in New York, it is reasonable to infer
that they know the true purpose of such reincorporation and are familiar with
the steps CalEnergy must take in order to accomplish such change in its state of
incorporation. Further, in view of their positions with CalEnergy, it is
reasonable to infer that senior CalEnergy executives are familiar with the
positions of other shareholders of CalEnergy, including the position of Kiewit
Energy Company.
* * *
83. By reason the foregoing, defendants have violated and, unless
enjoined, will continue to violate, Section 14(d) of the Exchange Act and the
rules and regulations promulgated thereunder.
84. Defendants' foregoing materially false and misleading statements
and omissions constitute a fraudulent, manipulative, or deceptive act or
practice, and therefore are in violation of Section 14(e) of the Exchange Act
and the rules and regulations promulgated thereunder. Such unlawful acts or
practices will continue unless enjoined.
85. NYSEG's shareholders need adequate information to decide what to
do with respect to their shares: (1) do they want to sell their shares on the
open market?; (2) do they want to tender their shares pursuant to the Tender
Offer?; or (3) do they want to continue to hold their
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NYSEG shares? NYSEG shareholders are unable to make an informed decision at
this time, given CalEnergy's inadequate and misleading disclosures as set forth
above.
86. NYSEG has no adequate remedy at law and will suffer irreparable
injury absent the intervention of this Court in that, among other things, NYSEG
will suffer the consequences described above at PARAPARA 66-68 if CalEnergy
acquires the 9.9% stake it initially seeks through the Tender Offer.
WHEREFORE:
I. Plaintiff demands judgment against defendant CalEnergy on Count I
as follows:
A. Preliminarily and permanently enjoining defendant CalEnergy, its
directors, officers, employees, agents, affiliates, subsidiaries, and all other
persons acting in concert with or on behalf of any of them, directly or
indirectly, from:
1. Using or disclosing confidential information received from or
concerning NYSEG for any purpose, including in connection with any effort
to acquire control of NYSEG;
2. Taking any further action to pursue the Tender Offer or any other
steps in furtherance of a takeover of NYSEG;
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3. Otherwise using or attempting to use any NYSEG security for the
purpose of advancing the interests of CalEnergy or any subsidiary or
affiliate thereof, including but not limited to with respect to any
interest under the Saranac Agreement;
4. Voting, in person or by proxy, any NYSEG security;
5. Exercising or attempting to exercise any influence upon the
management of NYSEG, including but not limited to with respect to the
Saranac Agreement;
6. Taking any other steps in furtherance of any plan to acquire NYSEG
or to obtain control of the Board of Directors of NYSEG.
B. Requiring CalEnergy and its affiliates and subsidiaries to divest
of any and all NYSEG securities acquired while CalEnergy was in possession of
confidential information of NYSEG.
C. Granting plaintiff NYSEG such other and further relief as this
Court may deem just and proper.
D. Granting plaintiff NYSEG its costs and disbursements of this
action, including its attorney's fees.
-41-
<PAGE>
II. Plaintiff demands judgment against defendant CalEnergy on Count II
as follows:
A. Preliminarily and permanently enjoining defendant CalEnergy, its
directors, officers, employees, agents, affiliates, subsidiaries, and all other
persons acting in concert with or on behalf of any of them, directly or
indirectly, from:
1. Using or disclosing confidential information received from or
concerning NYSEG for any purpose, including in connection with any effort
to acquire control of NYSEG;
2. Taking any further action to pursue the Tender Offer or any other
steps in furtherance of a takeover of NYSEG;
3. Otherwise using or attempting to use any NYSEG security for the
purpose of advancing the interests of CalEnergy or any subsidiary or
affiliate thereof, including but not limited to with respect to any
interest under the Saranac Agreement;
4. Voting, in person or by proxy, any NYSEG security;
5. Exercising or attempting to exercise any influence upon the
management of NYSEG, including but not limited to with respect to the
Saranac Agreement;
-42-
<PAGE>
6. Taking any other steps in furtherance of any plan to acquire NYSEG
or to obtain control of the Board of Directors of NYSEG.
B. Requiring CalEnergy and its affiliates and subsidiaries to divest
of any and all NYSEG securities acquired while CalEnergy was in possession of
confidential information of NYSEG.
C. Granting plaintiff NYSEG such other and further relief as this
Court may deem just and proper.
D. Granting plaintiff NYSEG its costs and disbursements of this
action, including its attorney's fees.
III. Plaintiff demands judgment against defendants on Count III as
follows:
A. Ordering that defendants make appropriate disclosures to correct
the unlawful misleading disclosures and omissions heretofore made in their
public filings, and preliminarily and permanently enjoining defendants from
purchasing any NYSEG shares or making any tender offer for NYSEG shares or
taking any further action to pursue the Tender Offer or any other steps in
furtherance of a takeover of NYSEG unless and until such disclosures are made
and for an appropriate period following such disclosures to allow full
dissemination of such disclosures to the marketplace and to NYSEG shareholders.
-43-
<PAGE>
B. Granting plaintiff NYSEG such other and further relief as this
Court may deem just and proper.
C. Granting plaintiff NYSEG its costs and disbursements.
Dated: New York, New York
July 30, 1997
WACHTELL, LIPTON, ROSEN & KATZ
By: /s/ Barbara Robbins
------------------------
Douglas S. Liebhafsky
(DL 6457)
Peter C. Hein
(PH 5279)
Barbara Robbins
(BR 7242)
Attorneys for Plaintiff
New York State Electric & Gas
Corporation
-44-
<PAGE>
EXHIBIT 36
WESLEY W. VON SCHACK
[NYSEG LOGO] CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
July 30, 1997
Dear NYSEG Colleague:
Today we announced that our Company's Board of Directors has unanimously
determined that CalEnergy's unsolicited takeover is not in the best interests of
the Company or its stakeholders, including our shareholders, customers, and
employees. The Board intends to take all actions necessary to protect these
interests.
The Board reached its decisions after careful analysis of a number of factors.
These include 1. concerns about CalEnergy's operating experience; 2. the
complete absence of any regulatory plan; 3. the offer is financially inadequate;
and 4. CalEnergy is attempting to exploit the artificial depression of NYSEG's
stock price.
In that regard, the Board noted that NYSEG has reached an agreement in principle
with the New York State Public Service Commission which is an important
milestone in putting an end to much uncertainty. We believe this agreement will
be beneficial to NYSEG's customers, shareholders and communities.
As a public utility, we are stewards for a special public trust. We take very
seriously our obligation to ensure the adequate, safe and reliable transmission
and distribution of energy to every home, business, school and hospital in the
communities we share.
With the best record of any utility in the State as measured by lowest consumer
complaints and high marks from our customers on reliability and service, we have
a long and proud history of fulfilling our duties faithfully and being a leading
corporate citizen in our communities. Our programs in the areas of economic
development, community support, philanthropy, low-income assistance, and
volunteerism are among the most outstanding in the country.
CalEnergy has given us no basis for concluding that it is an appropriate party
to assume the duties we have fulfilled since before the turn of the century.
CalEnergy's six month, long-distance ownership of an electric distribution
system in England and complete lack of experience in operating a natural gas
distribution system is hardly reassuring.
CalEnergy no doubt employs a number of hard-working and talented people -- just
as we do. But it is not telling the whole story about competition. Many
analysts have pointed out that one of the key factors behind CalEnergy's revenue
growth has been its government-mandated, above-market, energy purchase
agreements under which utilities, such as NYSEG, are compelled to subsidize
independent power producers, such as CalEnergy. Few companies in America have
benefitted from government regulation as much as CalEnergy.
<PAGE>
As you know, it is our customers who are bearing the burden of these contracts,
the largest of which is with CalEnergy's subsidiary, Saranac Power Partners.
This contract costs NYSEG customers well in excess of $100 million annually in
payments above market value. In fact, payments under these contracts represent
the largest element of NYSEG's electric rate structure, exceeded only by taxes.
CalEnergy steadfastly refuses to engage in serious discussions with us to
restructure these contracts. CalEnergy can't do any more than NYSEG to reduce
electric prices except renegotiate the unfair prices it charges our customers.
By contrast, NYSEG is working hard to bring prices down. Following many months
of negotiation, we announced today an agreement with the New York Public Service
Commission (PSC) Staff on a plan that freezes prices under a hard five-year
price cap and encourages economic development. The aggregate value of the
revenue concessions is nearly $600 million. This agreement will now be
presented to all the interested parties and an Administrative Law Judge, who is
expected to issue a recommended decision by the end of October. Under the plan:
- - NYSEG, whose electric rates have not increased since 1995, will forego
previously announced price increases for residential and commercial
customers totaling 6% that were scheduled to become effective in August of
1996 and 1997. These prices will be frozen through July 31, 2002;
- - Rates for certain large-use industrial and commercial customers will be
reduced by 5% each year for the next five years;
- - A retail choice program will proceed, under which all customers will be
permitted to buy electricity in a competitive marketplace by August 1,
1999;
- - An extension of the current natural gas settlement through July 31, 2002.
This will freeze prices which are already among the lowest in the
northeast; and
- - NYSEG will separate its fossil-fuel generation into an unregulated
subsidiary. The fossil generating units will be subject to an auction
process in which the Company can participate. Value achieved as a result
of the auction process will also benefit customers.
In addition to the above, there is the potential to reduce prices another 9%
since the Company intends to pass back to customers savings from renegotiation
of nonutility generator contracts and the passage of securitization legislation.
Furthermore, if the legislature approves the replacement of the gross receipts
tax with a "profits-based tax" electric prices may be reduced another 3.1%. The
combined affect of all these actions will be a reduction in average electric
prices of approximately 20% from previously authorized levels.
If preparing for competition is the issue, NYSEG is well down this road, as
well. We have already demonstrated our ability to thrive in a competitive
natural gas environment, an area in which CalEnergy has no experience
whatsoever. Even with 40 competitors, our natural gas business had its best
year ever in 1996 with deliveries, revenues and earnings all at record levels,
and we have some of the lowest and most competitive prices in the Northeast.
<PAGE>
CalEnergy is the problem, not the solution. We will continue to operate our
business in the best interests of all our stakeholders.
CalEnergy has engaged in a set of tactics, including its stake-out tender offer
for 9.9% of our stock and a massive PR and ad campaign, designed to put pressure
on our Board and to mislead the financial markets and our customers, employees
and communities into believing that a change in control of NYSEG is imminent.
But, for all the smoke and mirrors CalEnergy has attempted to conjure, in
reality it has not even begun to put a real offer on the table.
We are commencing litigation alleging CalEnergy's misuse of NYSEG's confidential
information in violation of a confidentiality agreement and failure to disclose
highly material information regarding its takeover attempt, as well as its
failure to disclose major obstacles that would substantially delay, and could
prevent, CalEnergy from proceeding on a hostile basis with any takeover attempt.
If CalEnergy persists, this is likely to be a lengthy battle for control.
Please try not to be distracted. Our best strategy is to continue to provide
our customers with the highest levels of energy safety, service and reliability.
I want to personally thank you for your hard work and support. We will continue
to keep you informed of key developments.
Sincerely,
/s/ Wesley W. von Schack
<PAGE>
EXHIBIT 37
WESLEY W. VON SCHACK
[NYSEG LOGO] CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
TO NYSEG Managers:
Today, our Board of Directors responded to CalEnergy. I wanted to make sure you
were thoroughly apprised and in a position to communicate with the employees and
customers for whom you are responsible. Attached are copies of our press
release and letter to employees, as well as talking points you should use to
communicate with employees and customers.
To summarize, the Board unanimously determined that CalEnergy's unsolicited
takeover is not in the best interests of the Company or its stakeholders,
including shareholders, customers, and employees. The Board intends to take all
actions necessary to protect these interests.
The Board reached its decisions after careful analysis of a number of factors.
These include 1. concerns about CalEnergy's operating experience; 2. the
complete absence of any regulatory plan; 3. the offer is financially inadequate;
and 4. CalEnergy is attempting to exploit the artificial depression of NYSEG's
stock price.
In that regard, the Board noted that NYSEG has reached an agreement in principle
with the New York State Public Service Commission which is an important
milestone in putting an end to much uncertainty. We believe this agreement will
be beneficial to NYSEG's customers, shareholders and communities.
Previously, pending the Board's decision, NYSEG was constrained in how it could
respond. Beginning today, we are at liberty to fully inform all constituents
with an interest in NYSEG about the significant concerns the Board has about
CalEnergy's hostile takeover proposal.
For one thing, it is NYSEG, not CalEnergy, that is working hard to bring prices
down. Following many months of negotiation, we announced today an agreement
with the New York Public Service Commission (PSC) Staff on a plan that freezes
prices under a hard five-year price cap and encourages economic development.
The aggregate value of the revenue concessions is nearly $600 million. This
agreement will now be presented to all the interested parties and an
Administrative Law Judge, who is expected to issue a recommended decision by the
end of October.
If preparing for competition is the issue, NYSEG is also well down this road.
We have already demonstrated our ability to thrive in a competitive natural gas
environment.
CalEnergy no doubt employs a number of hard-working and talented people -- just
as we do. But it is not telling the whole story about competition. Many
analysts have pointed out that one of the key factors behind CalEnergy's revenue
growth has been its government-mandated, above-market, energy purchase
agreements under which utilities, such as NYSEG, are compelled to subsidize
independent power producers, such as CalEnergy. As you know, our largest such
contract is with CalEnergy's
<PAGE>
subsidiary, Saranac Power Partners, and costs NYSEG customers well in excess of
$100 million annually in payments above market value. Few companies in America
have benefitted from government regulation as much as CalEnergy. And CalEnergy
can't do any more than NYSEG to reduce electric prices except renegotiate the
unfair prices it charges our customers.
CalEnergy is the problem, not the solution. We will continue to operate our
business in the best interests of all our stakeholders.
CalEnergy has engaged in a set of tactics, including its stake-out tender offer
for 9.9% of our stock and a massive PR and ad campaign, designed to put pressure
on our Board and to mislead the financial markets and our customers, employees
and communities into believing that a change in control of NYSEG is imminent.
But, for all the smoke and mirrors CalEnergy has attempted to conjure, in
reality it has not even begun to put a real offer on the table.
We are commencing litigation alleging CalEnergy's misuse of NYSEG's confidential
information in violation of a confidentiality agreement and failure to disclose
highly material information regarding its takeover attempt, as well as its
failure to disclose major obstacles that would substantially delay, and could
prevent, CalEnergy from proceeding on a hostile basis with any takeover attempt.
If CalEnergy persists, this is likely to be a lengthy battle for control.
Please try to keep your people focused on the job at hand. Our best strategy is
to continue to provide our customers with the highest levels of safety, service
and reliability.
I want to personally thank you for your hard work and support and will continue
to keep you informed of key developments.
Sincerely,
/s/ Wesley W. von Schack
<PAGE>
EXHIBIT 38
7/30; 2:30 a.m.
WVS 800-LINE AUDIO SCRIPT
This morning our Board of Directors unanimously recommended that shareholders
reject CalEnergy's unsolicited takeover proposal. This unanimous decision
followed a lengthy and careful process conducted by the Board, senior management
and an experienced team of expert advisors.
As you know from my statements over the past week or so, until now we have been
legally constrained from communicating our thoughts with you to the extent I
would like. I appreciate the understanding and patience you have shown during
what must be a difficult time for you.
Now that the Board has expressed a formal view of the CalEnergy offer, we will
be able to be somewhat more forthcoming with information--though lots of strict
legal rules still apply.
Among the areas we are at liberty to discuss are the reasons the Board felt the
CalEnergy proposal is not in the best interests of NYSEG, our employees, our
shareholders, our customers, and the communities of which we are an integral
part.
These factors are too lengthy to cover on the telephone. Accordingly, you
should receive soon, if you haven't already, a note that covers our position in
greater detail.
As you well know, a public utility is not just another business. While often
taken for granted, the fact is that what we provide is essential to the lives
and the well-being of everyone we serve.
<PAGE>
We are stewards of a special public trust. We take very seriously our
obligation to ensure the safe and reliable transmission and distribution of
energy to every home, business, school and hospital in the communities we serve.
We have much to be proud of. We have the lowest number of consumer complaints
in the state and consistently receive high marks from our customers on
reliability and service. We have a long history of fulfilling our duties
faithfully. Our programs in the areas of economic development, community
support, philanthropy, low-income assistance, and volunteerism are among the
most outstanding in the country.
Based upon our careful review of CalEnergy's history and experience, we have
concerns about that company's fitness to operate our systems. CalEnergy no
doubt employs a number of fine, hard-working people. But handing our
responsibilities over to a company that thinks it knows our business better than
we do based on a six-month, long-distance ownership of an electric distribution
system in England and complete lack of experience in operating a natural gas
distribution system would be irresponsible.
I look forward to communicating with you further as events unfold.
Thank you and keep up the good work!
2
<PAGE>
EXHIBIT 39
WESLEY W. VON SCHACK
[NYSEG LOGO] CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
July 30, 1997
Dear NYSEG Colleague:
As you have probably seen in the news, a Nebraska-based company called
CalEnergy, with its only utility operation being an electric company it acquired
six months ago in the United Kingdom, is seeking to acquire New York State
Electric & Gas Corporation.
We wanted you to know that NYSEG's Board of Directors has unanimously determined
that CalEnergy's takeover is not in the best interests of the Company or its
stakeholders, including shareholders, customers, and employees. The Board
intends to take all actions necessary to protect these interests.
The Board reached its decisions after careful analysis of a number of factors.
These include 1. concerns about CalEnergy's operating experience; 2. the
complete absence of any regulatory plan; 3. the offer is financially inadequate;
and 4. CalEnergy is attempting to exploit the artificial depression of NYSEG's
stock price.
In that regard, the Board noted that NYSEG has reached an agreement in principle
with the New York State Public Service Commission which is an important
milestone in putting an end to much uncertainty. We believe this agreement will
be beneficial to NYSEG's customers, shareholders and communities.
As a public utility, NYSEG is a steward for a special public trust. We take
very seriously our obligation to ensure the adequate, safe and reliable
transmission and distribution of energy to every home, business, school and
hospital in the communities we serve. As a measure of our performance, we enjoy
the best record of any utility in the state for our low number of consumer
complaints and high marks from our customers for reliability and service. Our
programs in the areas of economic development, community support, philanthropy,
low-income assistance, and volunteerism are among the most outstanding in the
country
By contrast, CalEnergy has provided scant evidence that it is an appropriate
party to assume the duties we have fulfilled since before the turn of the
century. Its six-month, long-distance ownership of an electric distribution
system in England and complete lack of experience in operating a natural gas
distribution system is hardly reassuring.
Previously, pending the Board's decision, NYSEG was constrained in how it could
respond. Today, we are at liberty to fully inform all constituents with an
interest in NYSEG about the significant concerns the Board has about CalEnergy's
hostile takeover proposal.
<PAGE>
- - For one, it is NYSEG, not CalEnergy, that is working hard to bring prices
down. Following many months of negotiation, we announced today an
agreement with the New York Public Service Commission (PSC) Staff on a plan
that freezes prices under a hard five-year price cap and encourages
economic development. The aggregate value of the revenue concessions is
nearly $600 million. This agreement will now be presented to all the
interested parties and an Administrative Law Judge, who is expected to
issue a recommended decision by the end of October.
- - If preparing for competition is the issue, NYSEG is also well down this
road. We have clearly demonstrated our ability to thrive in a competitive
natural gas environment with some of the lowest and most competitive prices
in the Northeast.
CalEnergy no doubt employs a number of hard-working and talented people -- just
as we do. But it is not telling the whole story about competition. Many
analysts have pointed out that one of the key factors behind CalEnergy's revenue
growth has been its government-mandated, above-market, energy purchase
agreements under which utilities, such as NYSEG, are compelled to subsidize
independent power producers, such as CalEnergy. Few companies in America have
benefitted from government regulation as much as CalEnergy.
It is our customers who are bearing the burden of these contracts, the largest
of which is with CalEnergy's subsidiary, Saranac Power Partners. This contract
costs NYSEG customers well in excess of $100 million annually in payments above
market value, and CalEnergy steadfastly refuses to engage in serious discussions
with us to restructure these contracts. CalEnergy can't do any more than NYSEG
to reduce electric prices except renegotiate the unfair prices it charges our
customers.
CalEnergy is the problem, not the solution. We will continue to operate our
business in the best interests of all our stakeholders.
CalEnergy has engaged in a set of tactics, including its stake-out tender offer
for 9.9% of our stock and a massive PR and ad campaign, designed to put pressure
on our Board and to mislead the financial markets and our customers, employees
and communities into believing that a change in control of NYSEG is imminent.
But, for all the smoke and mirrors CalEnergy has attempted to conjure, in
reality it has not even begun to put a real offer on the table.
We are commencing litigation alleging CalEnergy's misuse of NYSEG's confidential
information in violation of a confidentiality agreement and failure to disclose
highly material information regarding its takeover attempt, as well as its
failure to disclose major obstacles that would substantially delay, and could
prevent, CalEnergy from proceeding on a hostile basis with any takeover attempt.
If you have any questions, please feel free to contact our Human Resources
Information Center at 1(888) NYSEG HR (1 (888) 697-3447).
On behalf of the entire NYSEG organization, I want to thank you for your past
and continuing support.
Sincerely,
/s/ Wesley W. von Schack
<PAGE>
EXHIBIT 40
7/30; 1:30 a.m.
CUSTOMER CALL CENTER AUDIO SCRIPT
A Nebraska-based company called CalEnergy, which acquired its only utility about
six months ago in a hostile takeover of a company in England, now want to take
over NYSEG.
After careful consideration, the NYSEG Board of Directors has unanimously
recommended that shareholders reject CalEnergy's unsolicited takeover proposal.
The Board reached its conclusion after careful analysis of a number of factors.
These include, among other things, the view of the Board and its financial
advisors that the offer is financially inadequate; the Board's serious concerns
about CalEnergy's inexperience and fitness to run NYSEG's electric and natural
gas distribution networks; and CalEnergy's failure to file a specific rate plan
detailing the rates it would charge NYSEG customers.
CalEnergy may continue its hostile takeover attempt despite the decision of
NYSEG's board. To prevail, however, CalEnergy must persuade several regulatory
agencies, including the New York Public Service Commission, that its takeover of
NYSEG is in the public interest. We strongly believe the CalEnergy takeover
attempt is not in the public interest.
Thank you for your interest in NYSEG.
<PAGE>
EXHIBIT 41
AN ELECTRIC UTILITY
IS NO PLACE TO
GET YOUR FEET WET
As a public utility, NYSEG is responsible for a special public trust. It is
our obligation to provide safe, adequate and reliable electric and natural
gas service to every home, business, school and hospital in the communities
we serve.
We take that obligation very seriously and have been working to fulfill it
every day since before the turn of the century. We take great pride from
serving our customers and over the life of our company, we have earned a
reputation for safety, superior service and reliability.
Now a company from Nebraska called CalEnergy says that because they bought
an electric company in England six months ago, they know how to do better.
Maybe it's different in England, but in upstate New York, owning a company
and operating it are two very different things.
With virtually no experience providing electric power, and none whatsoever
with the more difficult distribution of natural gas, we fail to see how a
hostile CalEnergy takeover would serve the interests of our customers,
employees or the public at large.
If CalEnergy wants to try its hand at the electric and gas businesses,
that's up to them. We just don't think NYSEG customers should have to pay
the cost--or suffer the consequences--of their efforts.
[NYSEG LOGO]
SHAPING ENERGY ENVIRONMENTS
