File No. 70-10298
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM U-1
APPLICATION/DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Energy East Corporation Connecticut Energy Corporation
Energy East Enterprises, Inc. The Southern Connecticut Gas Company
Maine Natural Gas Corporation 855 Main Street
Energy East Capital Trust I Bridgeport, CT 06604
P.O. Box 12904
Albany, NY 12212-2904 CTG Resources, Inc.
Connecticut Natural Gas Corporation
RGS Energy Group, Inc. 10 State House Square
New York State Electric & Gas Corporation Hartford, CT 06144-1500
Rochester Gas and Electric Corporation
89 East Avenue Berkshire Energy Resources
Rochester, NY 14649-0001 The Berkshire Gas Company
115 Cheshire Road
CMP Group, Inc. Pittsfield, MA 01201
Central Maine Power Company
Maine Electric Power Company, Inc.
NORVARCO
83 Edison Drive
Augusta, ME 04336
(Names of companies filing this statement and
addresses of principal executive offices)
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Energy East Corporation
(Name of top registered holding company parent)
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Kenneth M. Jasinski
Executive Vice President
and Chief Financial Officer
Energy East Corporation
52 Farm View Drive
New Gloucester, ME 04260
Telephone: (207) 688-6300
(Names and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications to:
Robert D. Kump Markian Melnyk
Vice President, Controller & Chief Sonia Mendonca
Accounting Officer LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Energy East Corporation 1875 Connecticut Avenue NW
52 Farm View Drive Suite 1200
New Gloucester, ME 04260 Washington DC 20009
Telephone: (207) 688-4302 Telephone (202) 986-8000
Table of Contents
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION...............................1
1.1 INTRODUCTION.............................................1
1.2 REQUESTED AUTHORIZATION..................................6
1.3 DESCRIPTION OF PROPOSED FINANCING PROGRAM...............12
1.4 CERTIFICATES OF NOTIFICATION............................35
ITEM 2. FEES, COMMISSIONS AND EXPENSES...................................36
ITEM 3. APPLICABLE STATUTORY PROVISIONS..................................36
3.1 GENERAL.................................................36
3.2 COMPLIANCE WITH RULES 53 AND 54.........................37
ITEM 4. REGULATORY APPROVALS.............................................37
ITEM 5. PROCEDURE........................................................38
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS................................38
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS..........................40
i
On April 6, 2005, Energy East Corporation filed this Application-
Declaration ("Application") in SEC File No. 70-10298. This Amendment No. 1
restates the Application in its entirety, except for exhibits previously filed.
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
1.1 INTRODUCTION
This Application seeks authorizations under the Public Utility Holding
Company Act of 1935 ("Act" or "1935 Act") relating to the financing of Energy
East Corporation ("Energy East"), a New York corporation, and a registered
holding company under the Act, and its associated companies.
1.1.1. Description of Energy East and Its Subsidiaries/1
1. Energy East
Energy East is currently a registered public utility holding company,
and directly neither owns nor operates any physical properties. Through its
subsidiaries, Energy East is an energy services and delivery company with
operations in New York, Connecticut, Massachusetts, Maine and New Hampshire
serving approximately 1.8 million electricity customers and 900,000 natural gas
customers. Energy East has corporate offices in New York and Maine. Energy
East's common stock is publicly traded on the New York Stock Exchange under the
symbol "EAS." On May 1, 1998, Energy East became the parent of New York State
Electric & Gas Corporation ("NYSEG")./2 On February 8, 2000, Energy East became
the parent of Connecticut Energy Corporation ("Connecticut Energy"),/3 and on
September 1, 2000, Energy East became the parent of CMP Group, Inc. ("CMP
Group"), CTG Resources, Inc. ("CTG Resources") and Berkshire Energy Resources
("Berkshire Energy")./4 On June 28, 2002, Energy East became the parent of RGS
Energy Group, Inc. ("RGS").
For the year ended December 31, 2004, Energy East reported
consolidated gross revenues, operating income and net income of $4.8 billion,
$750 million, and $238 million. As of December 31, 2004, Energy East had total
consolidated assets of $10.8 billion, and an equity market capitalization of
approximately $3.9 billion. Energy East and its Subsidiaries employ
approximately 6,100 employees.
2. Public Utility Operations of Energy East
As described below, Energy East holds direct or indirect interests in
nine public utility companies (collectively, the "Utility Subsidiaries"), each
of which is wholly owned by companies within the Energy East system unless
otherwise noted:
_________________________
1/ The term "Subsidiaries" includes all of Energy East's Utility Subsidiaries,
Intermediate Holding Companies and Nonutility Subsidiaries, which are further
defined below.
2/ Energy East Corp., et al., HCAR No. 35-26834 (Mar. 4, 1998).
3/ Energy East Corp., et al., HCAR No. 35-27128 (Feb. 2, 2000).
4/ Energy East Corp., et al., HCAR No. 35-27224 (Aug. 31, 2000).
(1) NYSEG, a New York corporation and a wholly-owned subsidiary of
RGS, which purchases, transmits and distributes electricity and natural gas in
parts of New York;
(2) Rochester Gas and Electric Corporation ("RG&E"), a New York
corporation and a wholly-owned subsidiary of RGS, which generates, purchases,
transmits and distributes electricity and purchases, transports and distributes
natural gas in parts of New York;
(3) The Southern Connecticut Gas Company ("Southern Connecticut Gas"),
a Connecticut corporation and a wholly-owned subsidiary of Connecticut Energy,
which is primarily engaged in the retail distribution and transportation of
natural gas in parts of Connecticut;
(4) Connecticut Natural Gas Corporation ("Connecticut Natural Gas"), a
Connecticut corporation and a wholly-owned subsidiary of CTG Resources, which is
primarily engaged in the retail distribution and transportation of natural gas
to parts of Connecticut;
(5) The Berkshire Gas Company ("Berkshire Gas"), a Massachusetts
corporation and a wholly-owned subsidiary of Berkshire Energy, which is
primarily engaged in the retail distribution and transportation of natural gas
to parts of Massachusetts;
(6) Central Maine Power Company ("Central Maine"), a Maine corporation
and a public utility holding company exempt from all provisions of the Act
except Section 9(a)(2), by order issued under Section 3(a)(1),/5 the common
stock of which is wholly-owned by CMP Group and which is primarily engaged in
purchasing, transmitting and distributing electricity in Maine;
(7) Maine Natural Gas Corporation ("Maine Natural Gas"), a Maine
corporation which distributes natural gas in Maine and which is a wholly-owned
subsidiary of Energy East Enterprises, Inc. ("Energy East Enterprises"), a Maine
corporation, a wholly-owned subsidiary of Energy East and a public utility
holding company exempt from all provisions of the Act except Section 9(a)(2), by
order issued under Section 3(a)(1);
(8) Maine Electric Power Company, Inc. ("MEPCo"), a Maine corporation,
which owns and operates a 345kV transmission interconnection between the Maine -
New Brunswick, Canada international border at Orient, Maine. Central Maine
presently owns a 78.3% voting interest in MEPCo with the remaining interests
owned by two other Maine utilities; and
(9) NORVARCO, a Maine corporation, which holds a 50% general
partnership interest in Chester SVC Partnership ("Chester"), a general
partnership which owns a static var compensator located in Chester, Maine,
adjacent to MEPCo's transmission interconnection./6 NORVARCO is a wholly-owned
subsidiary of Central Maine.
3. Nonutility Subsidiaries of Energy East
Energy East also has a number of direct and indirect subsidiaries that
are not "public utility companies" under the Act (the "Nonutility
Subsidiaries"). With certain minor
________________________
5/ Central Maine Power Company, et al., Holding Co. Act Release No. 26903 (Aug.
7, 1998).
6/ Chester is a public utility under the Act.
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exceptions, the Commission determined that these non-utility interests could be
retained by Energy East following its registration as a public utility holding
company./7
Energy East's direct Nonutility Subsidiaries include:
(1) RGS, the parent of NYSEG and RG&E;
(2) Berkshire Energy, the parent of Berkshire Gas;
(3) CMP Group, the parent of Central Maine, MEPCo, and NORVARCO;
(4) Connecticut Energy, the parent of Southern Connecticut Gas;
(5) CTG Resources, the parent of Connecticut Natural Gas;
(6) The Energy Network, Inc., whose subsidiaries focus on peaking
generation and the retail marketing of electricity and natural gas;
(7) Energy East Enterprises, the parent of Maine Natural Gas and New
Hampshire Gas, and is developing gas storage in upstate New York through a
wholly-owned subsidiary, Seneca Lake Storage Inc.;
(8) Energy East Management Corporation and Utility Shared Services
Corporation, each of which are Commission authorized service companies for the
Energy East holding company system which own no public utility assets;
(9) Energy East Capital Trust I, a statutory business trust formed for
the purpose of issuing trust preferred securities;
(10) TEN Companies, Inc., which owns and manages a district heating
and cooling network in Hartford, Connecticut and owns an interest in the
Iroquois Gas Transmission System;
(11) CNE Energy Services Group, which has an interest in two small
natural gas pipelines that serve power plants in Connecticut and also leases a
liquefied natural gas plant that provides peaking gas in the Northeast and has
an equity interest in an energy technology venture partnership;
(12) The Union Water-Power Company, which provides energy services
throughout New England and New York State;
(13) Energy East Telecommunications, which owns fiber optic lines in
central New York that it leases to retail communications companies.
____________________
7/ The Commission had retained jurisdiction pending completion of the record
over certain non-utility interests currently owned by RGS. Energy East Corp., et
al., HCAR No. 35-27546 (June 27, 2002). In a post-effective amendment filed on
March 16, 2005 (SEC File No. 70-9901), Energy East completed the record with
respect to this matter.
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(14) MaineCom Services, which owns fiber optic lines and provides
telecommunications services in Maine; and
(15) Energetix, Inc. and NYSEG Solutions, Inc., which market
electricity and natural gas services throughout upstate and central New York.
RGS, Berkshire Energy, CMP Group, Central Maine, Connecticut Energy,
CTG Resources and Energy East Enterprises are all public utility holding
companies exempt from all provisions of the Act except Section 9(a)(2)./8 These
companies are also referred to collectively as the "Intermediate Holding
Companies."
1.1.2. Capital Structure Of Energy East
Energy East is authorized under its Restated Certificate of
Incorporation, as amended, to issue 300,000,000 shares of common stock, par
value $.01 per share and 10,000,000 shares of preferred stock, par value $.01
per share. At December 31, 2004, Energy East had issued and outstanding
147,118,329 shares of common stock. Energy East's shares are listed on the New
York Stock Exchange.
Energy East's consolidated capitalization (including short-term debt)
at March 31, 2005 was as follows:
Book Value Percentage of Total
(millions) (%)
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Common Stock Equity* 2,832 41
Preferred Stock 47 1
Long-Term Debt 3,771 55
Short-Term Debt** 182 3
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Total 6,832 100.0%
* Including minority interests.
** Including current portion of long-term debt.
Energy East's senior unsecured debt is currently rated BBB by Standard
& Poor's Inc. ("S&P"), Baa2 by Moody's Investor Service ("Moody's") and BBB by
Fitch. To the extent it is rated, the senior unsecured debt of the Utility
Subsidiaries is rated as follows:
__________________
8/ CMP Group and Central Maine are exempt under Section 3(a)(1) by order.
Central Maine Power Co., Holding Company Act Release No. 26903 (Aug. 7, 1998).
But see Energy East Corp., Holding Company Act Release No. 27224 (Aug. 31, 2000)
(exempting Central Maine under Section 3(a)(2)). CTG Resources, Berkshire
Energy, Connecticut Energy, EE Enterprises are exempt by order under Section
3(a)(1). Energy East Corp., Holding Company Act Release No. 27224 (Aug. 31,
2000). RGS is exempt by order under Section 3(a)(1). Energy East Corporation, et
al., Holding Company Act Release No. 27546 (June 27, 2002).
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------------------------- ----------------- ------------------- ---------------
S&P Moody's Fitch
------------------------- ----------------- ------------------- ---------------
Central Maine BBB+ A3 A-
------------------------- ----------------- ------------------- ---------------
NYSEG BBB+ Baa1 BBB+
------------------------- ----------------- ------------------- ---------------
RG&E BBB Baa1 BBB
------------------------- ----------------- ------------------- ---------------
Connecticut Natural BBB+ A3 A-
Gas
------------------------- ----------------- ------------------- ---------------
Southern Connecticut N/A N/A A-
Gas
------------------------- ----------------- ------------------- ---------------
The Intermediate Holding Companies do not currently have external
debt.
1.1.3. Current Financing Authorization
On September 12, 2000, the Securities and Exchange Commission (the
"SEC" or "Commission") issued an order (the "Financing Order") authorizing (1)
ongoing financing activities of Energy East and its Subsidiaries; (2)
intrasystem extensions of credit; (3) the creation, acquisition or sale of
non-utility subsidiaries; (4) the payment of dividends out of capital and
unearned surplus; and (5) other related matters pertaining to Energy East and
its Subsidiaries./9
On January 28, 2003 the Commission issued its first supplemental order
("Supplemental Order I") authorizing modifications to the Financing Order, among
other things, to reflect the acquisition of RGS by Energy East and the inclusion
of RGS and its subsidiaries as new direct and indirect Subsidiaries of Energy
East, releasing jurisdiction over a tax allocation agreement and reserving
jurisdiction over (i) the brokering and marketing of electricity, natural gas
and other energy commodities activities outside of the United State and Canada;
(ii) other activities of companies engaged or formed to engage in activities
permitted by rule 58 outside the United States, and (iii) the use of certain
investment grade criteria in the issuance of certain securities./10 The
Supplemental Order I also extended the authorization period contemplated in the
Financing Order until September 30, 2005.
Finally, on January 29, 2004 the Commission issued its second
supplemental order ("Supplemental Order II") releasing jurisdiction over the use
of certain investment grade criteria in the issuance of certain securities./11
Except for issuances of common stock, no guarantees or other securities may be
issued in reliance upon such authorization unless (1) the security to be issued,
if rated, is rated investment grade; (2) all outstanding securities of the
issuer that are rated, are rated investment grade; and (3) all outstanding
securities of Energy East
_____________________
9/ Energy East Corp., et al., Holding Co. Act Release No. 35-27228 (Sept. 12,
2000).
10/ Energy East Corp. et al., Holding Co. Act Release No. 27643 (Jan. 28, 2003).
11/ Energy East Corp. et al., Holding Co. Act Release No. 27794 (Jan. 29, 2004).
5
that are rated, are rated investment grade (collectively, "Investment Grade
Ratings Criteria")./12 The Commission reserved jurisdiction over the issuance
of any securities that are rated below investment grade and over the issuance of
any guarantee or other security at any time that the Investment Grade Ratings
Criteria are not satisfied.
1.1.4. Requested Authorization
This Application seeks to extend the authority granted in the
Financing Order and Supplemental Orders I and II to Energy East and its
Subsidiaries (collectively "Applicants"), as modified herein, for an
authorization period beginning on the date of the issuance of the Commission's
order granting this Application and extending through September 30, 2008
("Authorization Period"). The current financing authorization expires on
September 30, 2005. Applicants also seek authorization to continue to retain
certain Intermediate Holding Companies as more fully discussed below.
Applicants request that the Commission's order granting this
Application shall not impose any obligations or requirements on Applicants that
shall survive the effective date of the repeal of the Act.
Approval of this Application is consistent with existing Commission
precedent. The Commission's authorization of this Application will give the
Applicants flexibility that will allow them to respond quickly and efficiently
to their financing needs and to changes in market conditions. To ensure that
Energy East and its Subsidiaries are able to meet liquidity and working capital
requirements, the Applicants respectfully request that notice of this filing
under Rule 23 be published as soon as possible and that an order be issued as
soon as possible after expiration of the notice period. Delay beyond such date
could result in increased capital costs and undue difficulty in financing the
working capital requirements of Energy East and its Subsidiaries.
1.2 REQUESTED AUTHORIZATION
1.2.1. Summary of Requested Authorization
o Energy East requests authority to issue and sell common stock,
preferred stock, and long-term debt having maturities of up to 50
years in an aggregate amount issued and outstanding during the
Authorization Period not to exceed $3.9 billion, and unsecured
short-term indebtedness having maturities of up to one year in an
aggregate principal amount issued and outstanding during the
Authorization Period not to exceed $750 million, provided that the
aggregate principal amount of all indebtedness of Energy East issued
and outstanding during the Authorization Period shall not exceed $2.3
billion (See Section 1.3.1 below).
___________________
12/ For purposes of this provision, a security will be deemed to be rated
"investment grade" if it is rated investment grade by at least one "nationally
recognized statistical rating organization," as such term is used in paragraphs
(c)(2)(vi)(E), (F) and (H) of rule 15c3-1 under the Securities Exchange Act of
1934.
6
o The Utility Subsidiaries request authority to issue and sell debt
securities with maturities of up to one year in the following
aggregate principal amounts at any one time outstanding during the
Authorization Period (See Section 1.3.2 below):
Utility Subsidiaries Aggregate Principal
Amount ($)
---------------------------------------------------------------
NYSEG 275,000,000
Maine Natural Gas 50,000,000
Central Maine 150,000,000
MEPCo 30,000,000
NORVARCO 30,000,000
Southern Connecticut Gas 125,000,000
Connecticut Natural Gas 125,000,000
Berkshire Gas 50,000,000
RG&E 200,000,000
o Connecticut Energy and Berkshire Energy, request authority to issue up
to $25 million and $10 million, respectively, of unsecured debt with
maturities up to 1 year under new or existing bank credit facilities
at any one time outstanding through the Authorization Period (See
Section 1.3.3 below).
o RGS requests authority to issue and sell unsecured debt securities
with maturities of up to one year in an aggregate principal amount of
$100 million at any one time outstanding through the Authorization
Period (See Section 1.3.3 below).
o Energy East requests authority to continue to retain CMP Group, CTG
Resources, Berkshire Energy, Connecticut Energy and Energy East
Enterprises, on a permanent basis (See Section 1.3.4 below).
o To the extent that such transactions are not exempt under Rule 52(b),
the Nonutility Subsidiaries request authority to issue and sell from
time to time during the Authorization Period debt and equity
securities to finance their operations and future nonutility
investments, provided that such future investments are exempt under
the Act or rules thereunder or have been authorized in a separate
proceeding (See Section 1.3.5 below).
o Energy East requests authority to provide guaranties and other forms
of credit support ("Energy East Guaranties") with respect to the
securities or other obligations of its subsidiaries in an aggregate
principal or nominal amount not to exceed $1 billion issued and
outstanding at any one time during the Authorization Period (See
Section 1.3.6.1 below).
o Nonutility Subsidiaries request authorization to provide guaranties
and other forms of credit support ("Nonutility Subsidiary Guaranties")
with respect to
7
obligations of other Nonutility Subsidiaries in an aggregate principal
or nominal amount not to exceed $750 million issued and at any one
time outstanding during the Authorization Period, in addition to any
guaranties that are exempt pursuant to Rule 45(b) and Rule 52 (See
Section 1.3.6.2 below).
o CTG Resources and RGS request authority to provide guaranties and
other forms of credit support with respect to obligations of their
subsidiaries in an aggregate principal or nominal amount not to exceed
$105 million, and $100 million, respectively, issued and at any one
time outstanding during the Authorization Period (See Section 1.3.6.3
below).
o Energy East and, to the extent not exempt under Rule 52, its
subsidiaries request authority to enter into hedging transactions with
respect to outstanding indebtedness of such companies in order to
manage and minimize interest rate costs. Such companies also request
authority to enter into hedging transactions with respect to
anticipated debt issuances in order to lock-in current interest rates
and/or manage interest rate risk exposure (See Section 1.3.7 below).
o Energy East, on behalf of the Subsidiaries, requests authorization to
change any wholly-owned Subsidiary's authorized capitalization (See
Section 1.3.8 below).
o Energy East and the Subsidiaries (other than Intermediate Holding
Companies) request authority to acquire the equity securities of one
or more special-purpose subsidiaries ("Financing Subsidiaries")
organized solely to facilitate a financing and to guaranty the
securities issued by such Financing Subsidiaries, to the extent not
exempt pursuant to Rule 45(b) and Rule 52 (See Section 1.3.9 below).
o Energy East requests authority to acquire, directly or indirectly, the
equity securities of one or more intermediate subsidiaries
("Intermediate Subsidiaries") organized exclusively for the purpose of
acquiring, financing, and holding the securities of one or more
existing or future Nonutility Subsidiaries, including but not limited
to "exempt wholesale generators" ("EWGs"), as defined in Section 32 of
the Act, "foreign utility companies" ("FUCOs"), as defined in Section
33 of the Act, companies engaged or formed to engage in activities
permitted by Rule 58 ("Rule 58 Subsidiaries"), or "exempt
telecommunications companies" ("ETCs"), as defined in Section 34 of
the Act, provided that the Intermediate Subsidiaries may also provide
management, administrative, project development, and operating
services to such entities (See Section 1.3.10 below).
o Nonutility Subsidiaries request authority to invest up to $500 million
in certain types of nonutility energy-related assets ("Energy-Related
Assets") that are incidental to energy marketing activities of such
companies, or the capital stock of companies substantially all of
whose physical assets consist of such Energy-Related Assets (See
Section 1.3.11 below).
o As permitted by Rule 87(b)(1), Nonutility Subsidiaries may from time
to time provide services and sell goods to each other. To the extent
not exempt pursuant
8
to Rule 90(d), such companies request authority to perform such
services and to sell such goods to each other at fair market prices,
without regard to "cost," as determined in accordance with Rules 90
and 91, subject to certain limitations that are noted below (See
Section 1.3.12 below).
o Energy East, on behalf of any current or future Rule 58 Subsidiaries,
requests authority to engage in business activities permitted by Rule
58 both within and outside the United States (See Section 1.3.13
below).
o Energy East, the Intermediate Holding Companies (other than Energy
East Enterprises) and Central Maine, Southern Connecticut Gas,
Connecticut Natural Gas and Berkshire Gas request authority to pay
dividends out of capital and unearned surplus, subject to certain
limitations (See Section 1.3.14 below)./13
1.2.2. General Terms and Conditions of Financing
Authorization is requested herein to engage in financing transactions
during the Authorization Period for which the specific terms and conditions are
not at this time known, and which may not be exempt under Rule 52, without
further prior approval by the Commission. The following general terms will be
applicable where appropriate to the proposed external financing activities
requested to be authorized hereby (including, without limitation, securities
issued for the purpose of refinancing or refunding outstanding securities of the
issuer):/14
The effective cost of capital for long-term debt, preferred stock,
preferred securities, and equity-linked securities issued by Energy East, the
Utility Subsidiaries and the Nonutility Subsidiaries based upon the
authorization granted by the Commission pursuant to this Application will not
exceed competitive market rates available at the time of issuance for securities
having the same or reasonably similar terms and conditions issued by similar
companies of reasonably comparable credit quality; provided that in no event
will the effective cost of capital on (i) any such long-term debt securities
exceed at the time of issuance 500 basis points over comparable term U.S.
Treasury securities or other government benchmark for the currency concerned
("Treasury Securities"); or (ii) any such short-term debt securities exceed at
the time of issuance 300 basis points over LIBOR./15 The dividend and
distribution rate on any series of preferred stock, preferred securities or
equity-linked securities will not exceed at the time of issuance 700 basis
points over Treasury Securities. Applicants request that the Commission reserve
jurisdiction over issuances of long-term debt, short-term debt, preferred stock,
preferred securities and equity-linked securities by Energy East, the Utility
Subsidiaries and the Nonutility Subsidiaries, other than transactions exempt
under the Act or any rule thereunder, where the cost of capital is in excess of
the limits stated above but is not more than competitive market rates available
at the time of issuance for securities having the same or
___________________
13/ By order dated December 16, 2004, Holding Co. Act Release No. 27925, the
Commission authorized RG&E to pay dividends out of capital and unearned surplus,
subject to certain conditions.
14/ The Commission has previously authorized financing transactions subject to
these same general parameters. See SCANA Corporation, Holding Co. Act Release
No. 27649 (Feb. 12, 2003).
15/ LIBOR refers to the London Interbank Offered Rate, the rate that the most
creditworthy international banks dealing in Eurodollars charge each other for
large loans.
9
reasonably similar terms and conditions issued by similar companies of
reasonably comparable credit quality, until the record is complete with regard
to such issuances.
The maturity of long-term debt will be more than one year but not
longer than 50 years after the issuance thereof. Preferred securities and
equity-linked securities will be redeemed no later than 50 years after the
issuance thereof, unless converted into common stock; however, preferred stock
issued directly by Energy East may be perpetual in duration. Short-term debt
will have a maturity of up to one year.
The underwriting fees, commissions or other similar remuneration paid
in connection with the non-competitive issue, sale or distribution of securities
pursuant to this Application (not including any original issue discount) will
not exceed 5% of the principal or total amount of the securities being issued.
Energy East will maintain common stock equity/16 as a percentage of
total consolidated capitalization,/17 as shown in its most recent quarterly
balance sheet of at least 30%./18 Each Utility Subsidiary and Intermediate
Holding Company on an individual basis (except NORVARCO),/19 will maintain
common stock equity of at least 30% of total capitalization as shown in each
company's most recent quarterly balance sheet.
With respect to the securities issuance authority proposed in this
application: (a) within four business days after the occurrence of a Ratings
Event,/20 Applicants will notify the Commission of its occurrence (by means of
a letter, via fax, email or overnight mail to the Office of Public Utility
Regulation); and (b) within 30 days after the occurrence of a Ratings Event,
Applicants will submit a post-effective amendment to the Application explaining
the material facts and circumstances relating to that Ratings Event (including
the basis on which, taking into account the interests of investors, consumers
and the public as well as other applicable criteria under the Act, it remains
appropriate for Applicant(s) to issue the securities for which authorization has
been requested in this Application, so long as Applicant(s) continue to comply
with the other applicable terms and conditions specified in the Commission's
order authorizing the transactions requested in this Application). Furthermore,
no securities authorized as a result of this Application other than common
stock, or short-term debt to fund the Utility
________________________
16/ Common stock equity includes common stock (i.e., amounts received equal to
the par or stated value of the common stock), additional paid in capital,
retained earnings and minority interests.
17/ Applicants would calculate the common stock equity to total capitalization
ratio as follows: common stock equity (as defined in the immediately preceding
footnote)/(common stock equity + preferred stock + gross debt). Gross debt is
the sum of long-term debt, short-term debt and current maturities.
18/ Energy East will in any event be authorized to issue common stock
(including pursuant to stock-based plans maintained for shareholders, employees
and management) to the extent authorized herein.
19/ NORVARCO holds a 50% general partnership interest in Chester, a
single-purpose financing entity formed to own a static var compensator related
to the New England Power Pool (NEPOOL)/Hydro Quebec Phase II transmission line.
NORVARCO should not be subject to the 30% equity standard because it is wholly
capitalized with debt to minimize the cost of the transmission facility to the
users of the transmission line.
20/ A "Ratings Event" will occur if, during the Authorization Period, (i) any
security issued by Applicants upon original issuance, if rated, is rated below
investment grade; or (ii) any outstanding security of Applicants that is rated
is downgraded below investment grade. For purposes of this provision, a security
will be deemed to be rated "investment grade" if it is rated investment grade by
at least one nationally recognized statistical rating organization, as that term
is used in paragraphs (c)(2)(vi)(E), (F) and (H) of rule 15c3-1 under the 1934
Act.
10
Subsidiaries,/21 will be issued following the 60th day after a Ratings Event if
the downgraded rating(s) has or have not been upgraded to investment grade.
Applicants request that the Commission reserve jurisdiction over the issuance of
any securities (other than common stock or short-term debt to fund the Utility
Subsidiaries) that Applicants are prohibited from issuing following the 60th day
after a Ratings Event until the record is complete with regard to such issuance.
No security will be issued pursuant to the authorization sought herein
after the last day of the Authorization Period, provided that securities
issuable or deliverable upon exercise or conversion of, or in exchange for,
securities which were issued during the Authorization Period, may be issued or
delivered subsequent to the end of the Authorization Period.
1.2.3. Use of Proceeds
The financing proceeds will be used for general corporate purposes,
including: (1) financing investments by and capital expenditures of Energy East
and its Subsidiaries, including, the funding of future investments in exempt
wholesale generators, as defined in section 32 of the Act, ("EWGs"), foreign
utility companies, as defined in section 33 of the Act, ("FUCOs"), companies
engaged or formed to engage in activities permitted by Rule 58 ("Rule 58
Subsidiaries"), and exempt telecommunications companies ("ETCs"), (2) the
repayment, redemption, refunding or purchase by Energy East or any Subsidiary of
any of its own securities; and (3) financing working capital requirements of
Energy East and its Subsidiaries. Energy East represents that no financing
proceeds will be used to acquire the securities of, or other interests in, any
company unless such acquisition has been approved by the Commission in this
proceeding or in a separate proceeding or in accordance with an available
exemption under the Act or rules thereunder, including Sections 32 and 33 and
Rule 58.
Energy East states that the aggregate amount of the proceeds of any
financing and Energy East guaranties approved by the Commission in this
proceeding that are used to fund investments in "exempt wholesale generators" as
defined in Section 32 of the Act ("EWGs") and "foreign utility companies" as
defined in Section 33 of the Act ("FUCOs") will not, when added to Energy East's
"aggregate investment" (as defined in Rule 53) in all such entities at any point
in time, exceed 50% of Energy East's "consolidated retained earnings" (also as
defined in Rule 53). Furthermore, Energy East represents that the proceeds of
any financing and Energy East Guaranties and Nonutility Subsidiary Guaranties
utilized to fund investments in Rule 58 Subsidiaries will be subject to the
limitations of that rule.
_____________________
21/ Energy East does not have a system money pool to aggregate the surplus cash
of subsidiaries and to lend funds to subsidiaries with short-term capital needs.
Securities issued to fund money pool transactions are typically excepted from
the investment grade financing condition. See, e.g., Black Hills Corp., Holding
Co. Act Release No. 27931 (December 28, 2004). The Utility Subsidiaries rely on
short-term borrowings, generally from banks, commercial paper and securities
sold to direct and indirect parent companies to satisfy short-term capital
requirements. It is important to prevent a liquidity event caused by the Utility
Subsidiaries inability to access short-term capital at a time when the
investment grade standard cannot be satisfied, that the investment grade
standard not apply to short-term debt issued to fund the Utility Subsidiaries.
11
1.3 DESCRIPTION OF PROPOSED FINANCING PROGRAM
1.3.1. Energy East External Financing
Energy East requests authorization to issue and sell the following
securities: common stock, preferred stock, preferred securities, equity-linked
securities, options, warrants, purchase contracts, units (consisting of one or
more purchase contracts, warrants, debt securities, shares of preferred stock,
shares of common stock or any combination of such securities), long-term debt,
subordinated debt, bank borrowings, securities with call or put options, and
securities convertible into any of these securities./22 The aggregate amount of
new financing obtained by Energy East during the Authorization Period (exclusive
of short-term debt), through the issuance of securities, in each case valued at
the time of issuance, shall not exceed $3.9 billion outstanding at any one time
("Energy East External Limit"),/23 provided that securities issued for purposes
of refunding or replacing other outstanding securities where Energy East's
capitalization is not increased from that in place on December 31, 2004 as a
result thereof shall not be counted against this limitation./24 In addition,
Energy East requests authority to issue and sell from time to time, directly or
indirectly through one or more financing subsidiaries, short-term debt,
including commercial paper and bank borrowings, in an aggregate principal amount
at any time outstanding during the Authorization Period not to exceed $750
million ("Energy East Short-term Limit"), provided that securities issued for
purposes of refunding or replacing other outstanding short-term debt securities
where Energy East's capitalization is not increased as a result thereof shall
not be counted against this limitation.
All securities issued by Energy East in accordance with the
authorization requested herein, including, without limitation, securities issued
for the purpose of refunding or retiring outstanding securities, will comply
with the applicable parameters set forth above. Further, the aggregate principal
amount of all indebtedness of Energy East issued and outstanding during the
Authorization Period pursuant to the Commission's authorization of this
Application shall not exceed $2.3 billion (the "Energy East Debt Limitation").
Energy East contemplates that such securities would be issued and sold
directly to one or more purchasers in privately-negotiated transactions or to
one or more investment banking or underwriting firms or other entities who would
resell such securities without registration under the Securities Act of 1933, as
amended ("1933 Act") in reliance upon one or more applicable exemptions from
registration thereunder, or to the public either (i) through underwriters
selected by negotiation or competitive bidding or (ii) through selling agents
acting either as agent or as principal for resale to the public either directly
or through dealers. If
_______________________
22/ Any convertible or equity-linked securities would be convertible into or
linked only to common stock, preferred securities or unsecured debt securities
that Energy East is otherwise authorized to issue directly or indirectly through
a financing entity on behalf of Energy East. The Commission has previously
authorized registered holding companies to issue and sell equity-linked
securities. See Exelon Corp., Holding Co. Act Release No. 27830 (Apr. 1, 2004);
Ameren Corporation, Holding Co. Act Release No. 27449 (Oct. 5, 2001) and
American Electric Power Company, Inc., Holding Co. Act Release No. 27517 (Apr.
11, 2002).
23/ Because the limit applies only to securities issued and outstanding during
the Authorization Period, when a security is issued during the Authorization
Period and later redeemed or retired during the Authorization Period, the
aggregate amount issued and outstanding under the limit is reduced and
additional financing capacity under the limit is made available.
24/ Any refunding or replacement of securities where capitalization is not
increased as a result thereof will be through the issuance of securities of the
type authorized in this Application.
12
underwriters are used, such securities will be acquired by the underwriters for
their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. Such securities may
be offered to the public either through underwriting syndicates (which may be
represented by a managing underwriter or underwriters designated by Energy East)
or directly by one or more underwriters acting alone, or may be sold directly by
Energy East or through agents designated by Energy East from time to time. If
dealers are utilized, Energy East will sell such securities to the dealers, as
principals. Any dealer may then resell such securities to the public at varying
prices to be determined by such dealer at the time of resale. If common stock is
being sold in an underwritten offering, Energy East may grant the underwriters
thereof a "green shoe" option permitting the purchase from Energy East at the
same price additional shares then being offered solely for the purpose of
covering over-allotments.
1. Common Stock
Energy East may issue and sell common stock, or options, warrants or
other stock purchase rights exercisable for common stock, pursuant to
underwriting agreements of a type generally standard in the industry. Public
distributions may be pursuant to private negotiation with underwriters, dealers
or agents, or effected through competitive bidding among underwriters. In
addition, sales may be made through private placements or other non-public
offerings to one or more persons. All such common stock sales will be at rates
or prices and under conditions negotiated or based upon, or otherwise determined
by, competitive capital markets. Energy East may also issue common stock or
options, warrants or other stock purchase rights exercisable for common stock in
public or privately-negotiated transactions as consideration for the equity
securities or assets of other companies, provided that the acquisition of any
such equity securities or assets has been authorized in a separate proceeding or
is exempt under the Act or the rules thereunder (e.g., Rule 58)./25
Energy East also proposes to issue common stock and/or purchase shares
of its common stock (either currently or under forward contracts) in the open
market for purposes of (i) reissuing such shares at a later date pursuant to
stock-based plans which are maintained for stockholders, employees and
nonemployee directors or (ii) managing its capital structure. Energy East may
make open-market purchases of common stock in accordance with the terms of, or
in connection with, the operation of the plans, or as part of a program to
repurchase its securities generally. Stock repurchases would be conducted
through open market transactions and could include the acquisition at
arms'-length of Energy East common stock from institutional investors that may
have an affiliate interest in Energy East.
Energy East currently has in effect certain stock based plans which
authorize grants of its common stock, stock options and other stock-based awards
to eligible employees and directors. Energy East may issue shares of its common
stock under the authorization and within the limitations set forth herein in
order to satisfy any of its obligations under all such plans and under plans
which replace any plans currently in effect. Energy East requests
______________________
25/ Energy East will value the equity issued in such circumstances in
accordance with the agreement negotiated between the purchaser and the seller.
The Commission has previously approved the issuance of common stock as
consideration for the acquisition of a new business in an exempt transaction or
transaction that has been approved in a separate proceeding. See e.g., SCANA
Corporation, Holding Co. Act Release No. 27137 (Feb. 14, 2000).
13
authorization to issue and/or sell shares of common stock pursuant to these
existing and hereafter adopted stock plans and employee or director plans
without any additional prior Commission order. The market value at the time of
issuance of stock issued pursuant to stock-based compensation programs would
count against the Energy East External Limit. Energy East common stock issued
pursuant to an option would count against the Energy East External Limit at such
time, if any, that the option is exercised.
Energy East also has a dividend reinvestment plan under which shares
of its common stock may be issued to shareholders reinvesting cash dividends
and/or making optional cash investments to purchase additional shares of common
stock. Energy East hereby seeks authority for the issuance and sale of its
shares in accordance with its dividend reinvestment plan under the authorization
and within the limitations set forth herein.
Energy East proposes to issue shares of its common stock under the
authorization and within the limitations set forth herein in order to satisfy
its obligations under each of these existing stock-based plans, as they may be
amended or extended, and similar plans or plan funding arrangements hereafter
adopted without any additional Commission order. Shares of common stock issued
under these plans may either be newly issued shares, treasury shares or shares
purchased in the open market. The market value of newly issued shares will be
counted against the Energy East External Limit.
2. Preferred Stock, Preferred Securities and Equity-linked
Securities
Energy East also proposes to issue and sell preferred stock directly
and/or issue, indirectly through one or more financing subsidiaries, other forms
of preferred securities (including, without limitation, trust preferred
securities or monthly income preferred securities). Preferred stock and other
forms of preferred securities may be issued in one or more series with such
rights, preferences, and priorities as may be designated in the instrument
creating each such series, as determined by Energy East's board of directors,
and may be convertible or exchangeable into shares of Energy East common stock
or unsecured indebtedness. Dividends or distributions on such securities will be
made periodically and to the extent funds are legally available for such
purpose, but may be made subject to terms which allow the issuer to defer
dividend payments for specified periods. Energy East may also issue and sell
equity-linked securities in the form of stock purchase units, which combine a
security with a fixed obligation (e.g., preferred stock or debt) with a stock
purchase contract that is exercisable (either mandatorily or at the option of
the holder)./26 The dividend or distribution rates, interest rates, redemption
and sinking fund provisions, conversion features, if any, and maturity dates
with respect to the preferred stock or other types of preferred securities and
equity-linked securities of a particular series, as well as any associated
placement, underwriting or selling agent fees, commissions and discounts, if
any, will be established by Energy East's board of directors, negotiation or
competitive bidding.
Energy East contemplates that the preferred stock would be issued and
sold directly to one or more purchasers in privately-negotiated transactions or
to one or more
________________________
26/ Any convertible or equity-linked securities would be convertible into or
linked only to common stock, preferred securities or unsecured debt securities
that Energy East is otherwise authorized to issue directly or indirectly through
a financing entity on behalf of Energy East.
14
investment banking or underwriting firms or other entities who would resell the
preferred stock either without registration under the 1933 Act in reliance upon
one or more applicable exemptions from registration thereunder, or to the public
either (i) through underwriters selected by negotiation or competitive bidding
or (ii) through selling agents acting either as agent or as principal for resale
to the public either directly or through dealers.
3. Long-term Debt
Long-term debt would be unsecured and may be issued directly through a
public or private placement or indirectly through one or more financing
subsidiaries, in the form of notes, convertible notes, medium-term notes or
debentures under one or more indentures or long-term indebtedness under
agreements with banks or other institutional lenders. The maturity dates,
interest rates, redemption and sinking fund provisions and conversion features,
if any, with respect to the long-term debt of a particular series, as well as
any associated placement, underwriting or selling agent fees, commissions and
discounts, if any, will be established by negotiation or competitive bidding at
the time of issuance./27
Energy East also requests authorization to issue and sell from time to
time during the Authorization Period debentures in one or more series, subject
to the Energy East Debt Limitation. The debentures (a) may be convertible into
any other securities of Energy East, (b) will have maturities ranging from one
to 50 years, (c) may be subject to optional and/or mandatory redemption, in
whole or in part, at par or at various premiums above the principal amount
thereof, (d) may be entitled to mandatory or optional sinking fund provisions,
(e) may provide for reset of the coupon pursuant to a remarketing arrangement,
and (f) may be called from existing investors by a third party. The debentures
will be issued under an indenture (the "Indenture") to be entered into between
Energy East and a national bank, as trustee (the "Trustee," including any
successor trustee appointed pursuant to the Indenture).
Energy East contemplates that the debentures would be issued and sold
directly to one or more purchasers in privately-negotiated transactions or to
one or more investment banking or underwriting firms or other entities which
would resell the debentures either without registration under the 1933 Act in
reliance upon one or more applicable exemptions from registration thereunder, or
to the public either (i) through underwriters selected by negotiation or
competitive bidding or (ii) through selling agents acting either as agent or as
principal for resale to the public either directly or through dealers.
The maturity dates, interest rates, redemption and sinking fund
provisions and conversion features, if any, with respect to the debentures of a
particular series, as well as any associated placement, underwriting or selling
agent fees, commissions and discounts, if any, will be established by
negotiation or competitive bidding and reflected in a purchase agreement or
underwriting agreement setting forth such terms; provided, however, that
debentures issued by Energy East shall be subject to the financing parameters
set forth in section 1.2.2 above.
______________________
27/ Any convertible debt issued by Energy East would be convertible only into
common stock, preferred securities or unsecured debt securities that Energy East
is otherwise authorized to issue directly or indirectly through a financing
entity on behalf of Energy East.
15
4. Short-term Debt
Energy East proposes to issue and sell from time to time, directly or
indirectly through one or more financing subsidiaries, unsecured short-term
debt, in the form of commercial paper, notes issued to banks and other
institutional lenders, and other forms of short-term indebtedness, in an
aggregate principal amount at any time outstanding during the Authorization
Period not to exceed the Energy East Short-term Limit. Unused borrowing capacity
under a credit facility would not count towards the Energy East Short-term
Limit. Short-term borrowings under credit lines will have maturities of a year
or less from the date of each borrowing.
Commercial paper issued under any commercial paper facility would be
sold, directly or indirectly through one or more financing subsidiaries, in
established U.S. or European commercial paper markets. Such commercial paper
would typically be sold to dealers at the discount rate per annum prevailing at
the date of issuance for commercial paper of comparable quality and maturities
sold to commercial paper dealers generally. It is expected that the dealers
acquiring such commercial paper would reoffer it at a discount to corporate,
institutional and, with respect to European commercial paper, individual
investors. It is anticipated that such commercial paper would be reoffered to
investors such as commercial banks, insurance companies, pension funds,
investment trusts, foundations, colleges and universities, finance companies and
nonfinancial corporations.
Energy East also may establish bank lines in an aggregate principal
amount not to exceed the aforementioned Energy East Short-term Limit. While the
agreements may be for periods of three to five years or more, loans under these
bank credit lines are expected to have maturities not more than one year from
the date of each borrowing. Energy East may engage in other types of short-term
debt financing generally available to borrowers with comparable credit ratings
as it may deem appropriate in light of its needs and market conditions at the
time of issuance.
1.3.2. Utility Subsidiary Financing
The issue and sale of most securities by the Utility Subsidiaries will
be exempt from the pre-approval requirements of Sections 6(a) and 7 of the Act
pursuant to Rule 52(a), as most securities offerings by a Utility Subsidiary
must be approved by the state utility commission with jurisdiction over such
utility. However, certain financings by the Utility Subsidiaries for which
authorization is requested herein may be outside the scope of the Rule 52
exemption because they will not be subject to state commission approval.
Specifically, the approval of the Public Service Commission of the State of New
York ("NYPSC") is not required for the issuance by NYSEG and RGE of indebtedness
with maturities of one year or less. The Connecticut Department of Public
Utility Control ("DPUC") has jurisdiction over the issuance of securities by
Southern Connecticut Gas and Connecticut Natural Gas, other than indebtedness
with maturities of less than one year. The Maine Public Utilities Commission
("MPUC") has jurisdiction over the issuance of securities by CMP Group, Maine
Natural Gas, Central Maine, MEPCo and NORVARCO, other than indebtedness with
maturities of one year or less. The Massachusetts Department of
Telecommunications and Energy ("MDTE") has jurisdiction over the issuance of
securities by Berkshire Gas, other than indebtedness with maturities of less
than one year.
16
Accordingly, the Utility Subsidiaries request authorization to issue
and sell from time to time during the Authorization Period, directly or
indirectly through one or more financing subsidiaries, unsecured short-term
debt, in the form of commercial paper, notes issued to banks and other
institutional lenders, and other forms of short-term indebtedness/28 to the
extent they are not otherwise exempt pursuant to Rule 52(a), with maturities of
one year or less, up to the following aggregate principal amounts:
Utility Subsidiaries Aggregate Principal Amount
NYSEG $275,000,000
Maine Natural Gas 50,000,000
Central Maine 150,000,000
MEPCo 30,000,000
NORVARCO 30,000,000
Southern Connecticut Gas 125,000,000
Connecticut Natural Gas 125,000,000
Berkshire Gas 50,000,000
RG&E 200,000,000
1.3.3. Short-Term Debt of Intermediate Holding Companies
Two of the Intermediate Holding Companies, Connecticut Energy and
Berkshire Energy, historically have had short-term debt outstanding under bank
credit facilities although no debt securities issued to non-system companies are
currently outstanding. Connecticut Energy and Berkshire Energy request authority
to issue, sell and have outstanding at any one time during the Authorization
Period unsecured short-term debt to Energy East or to third party lenders under
credit facilities in amounts at any one time outstanding not to exceed $25
million and $10 million, respectively. This request is consistent with
authorization previously granted by the Commission in the Financing Order.
In addition, RGS requests authority to issue, sell and have
outstanding at any one time during the Authorization Period unsecured short-term
debt securities with maturities of one year or less in the aggregate principal
amount of $100 million. Subject to such limitations and pursuant to the terms
and conditions set forth herein, RGS may engage in short-term financing as it
may deem appropriate in light of its needs and market conditions at the time of
issuance. Such short-term financing could include, without limitation,
commercial paper sold in established commercial paper markets in a manner
similar to Energy East, bank lines, debt securities issued under indentures, or
note programs. In addition, RGS will not issue any indebtedness in contravention
of any pre-existing orders of any state utility commission. This request also is
consistent with authorization previously granted by the Commission in
Supplemental Order I.
The Intermediate Holding Companies also request authorization to issue
and sell their securities to Energy East and to acquire the securities of their
direct or indirect subsidiaries for the purpose of financing the current or
future authorized or permitted businesses of such subsidiaries.
_____________________
28/ For example, Central Maine's borrowings are secured by an unperfected lien
on receivables. The Utility Subsidiaries request the flexibility to issue
short-term debt secured by their accounts receivable.
17
1.3.4. Retention of Intermediate Holding Companies
In Energy East Corp. et al., Holding Co. Act Release No. 27224 (Aug.
31, 2000) ("Merger Order"), the Commission authorized Energy East to maintain
CMP Group, CTG Resources, Berkshire Energy, Connecticut Energy and Energy East
Enterprises as intermediate holding companies for a period of up to five years
after the consummation of Energy East's acquisition of such companies./29 The
Commission also authorized Energy East to request an order extending such
five-year period if necessary. In this Application, Energy East requests that
the Commission extend the authorization to maintain these companies within the
Energy East system on a permanent basis.
Section 11(b)(2) of the Act requires 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." Section
11(b)(2) also directs regulated companies "to take such action as the Commission
shall find necessary in order that such holding company shall 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," in other words, to
eliminate "great-grandfather" holding companies. As indicated in the
organizational chart below, the only Intermediate Holding Company "which itself
has a subsidiary company which is a holding company" is CMP Group. Therefore,
the provisions of Section 11(b)(2) are not triggered by Energy East's ownership
of CTG Resources, Berkshire Energy, Connecticut Energy and Energy East
Enterprises.
_______________
| |
| Energy East |
| Corporation |
|_______________|
_________________________________________|__________________________________________________
| | | | | |
_______|______ ______|______ ______|______ ______|______ _____|_____ ______|______
| | | | | | | | | | | |
| RGS Energy | | Connecticut | | CMP Group, | | CTG | | Berkshire | | Energy East |
| Group, Inc. | | Energy | | Inc. | | Resources, | | Energy | | Enterprises,|
| 3(a)(1) | | Corporation | | 3(a)(1) | | Inc. | | Resources | | Inc. |
|______________| | 3(a)(1) | |_____________| | 3(a)(1) | | 3(a)(1) | | 3(a)(1) |
_______|_______ |_____________| | |_____________| |___________| |_____________|
______|______ ______|______ _______|______ ________|______ _______|______ _______|_______ _____________
| | | | | | | | | | | | | |
| New York | | Rochester | | The Southern | | Central Maine | | Connecticut | | The Berkshire | | Maine |
| State | | Gas and | | Connecticut | | Power Company | | Natural Gas | | Gas Company | | Natural Gas |
| Electric & | | Electric | | Gas Company | | 3(a)(1) | | Corporation | | | | Corporation |
| Gas | | Corporation | |______________| |_______________| |_____________| |_______________| |_____________|
| Corporation | |_____________| |
|_____________| _______|_______
________|_______ _____|____
| | | |
| Maine | | |
| Electric Power | | NORVARCO |
| Company, Inc. | | |
|________________| |__________|
_____|_____
| |
| Chester |
| SVC |
|Partnership|
|___________|
__________________
29/ The acquisition was consummated on September 1, 2000.
18
CTG Resources, Berkshire Energy, Connecticut Energy and Energy East
Enterprises should be viewed, for purposes of Section 11(b)(2) of the Act, as
indistinguishable from RGS. In an order dated June 27, 2002, Holding Co. Act
Release No. 27546, the Commission reviewed the corporate structure of Energy
East under Section 11(b)(2) that would result from Energy East's acquisition of
RGS. The Commission observed that Section 11(b)(2) was intended to eliminate the
pyramiding of holding company groups - the interposition of one or more holding
companies between the uppermost holding company and the operating companies -
and the issuance, at each level of the structure, of different classes of debt
or stock with unequal voting rights. The Commission reasoned, however, that the
interposition of RGS between Energy East and NYSEG and RG&E would not lead to
such abuses.
We do not believe, however, that the continued existence of
RGS as an intermediate holding company will unduly complicate
Energy East's capital structure or implicate the abuses that
section 11(b)(2) of the Act was intended to prevent.
Applicants assert that providing a corporate organization that
puts the New York utility operations under one corporate roof
will provide for management focus on the issues that are
unique to that state, thus enabling better integration and
efficient development of the business. In addition, Applicants
represent that RGS' continued existence will preserve certain
structural and financial benefits that have already been
achieved by RGS, and will help to preserve favorable tax
attributes that would be lost if such continued existence were
eliminated.
The same reasons also support the retention of CTG Resources,
Berkshire Energy, Connecticut Energy and Energy East Enterprises under section
11(b)(2). The retention of such companies does not implicate the abuses that
section 11(b)(2) was designed to address.
Although CMP Group does have a subsidiary which itself is a holding
company and therefore the Commission is directed by the Act to review that
structure, a careful analysis indicates that the retention of CMP Group also
does not implicate the abuses that section 11(b)(2) was designed to address. CMP
Group is the parent of Central Maine, which is itself a public utility. As a
public utility, Central Maine is regulated by the Maine Public Utilities
Commission and the Federal Energy Regulatory Commission. Central Maine is a
holding company with respect to two partially-owned special purpose
subsidiaries: MEPCo, and, indirectly, Chester, a subsidiary of NORVARCO. These
utility subsidiaries were organized to own specific transmission facilities in
Maine jointly with unaffiliated public utilities. Central Maine and its utility
subsidiaries were not established and are not currently maintained as a device
to further the unfair distribution of voting control or an unnecessarily
complicated capital structure. Given Central Maine's primary role as a public
utility company it is appropriate to view CMP Group in the same light as CTG
Resources, Berkshire Energy, Connecticut Energy and Energy East Enterprises./30
As the Commission found in the Merger Order, it is not necessary to
require the elimination of Energy East's Intermediate Holding Companies to
ensure that the corporate
__________________
30/ Under 35-A M.R.S.A. ss.708, Energy East would need the authorization of the
Maine Public Utilities Commission to effect a restructuring that would result in
the elimination of CMP Group.
19
structure of the post-merger Energy East system or continued existence of any
system company "does not unduly or unnecessarily complicate the structure" of
the Energy East system. These companies do not serve as a means to diffuse
control and rather would be maintained for the purpose of helping Energy East
capture economic efficiencies that might otherwise be lost.
The same efficiencies and benefits that motivated Energy East's
initial request to maintain these companies and that support the Commission's
decision to authorize the retention of RGS continue to exist today. For example,
the continued existence of each company will contribute to shareholder value and
to the effective local regulation of the operating utility subsidiaries. During
merger discussions between Energy East and CMP Group, CTG Resources, Connecticut
Energy and Berkshire Energy, it became apparent that maintaining a local
presence with separate operations and management in each of the affected
jurisdictions would be a critical issue in gaining the support of the state
public service commissions. It was also apparent that the state commissions were
very sensitive to, and needed to ensure, the separation of regulated and
non-utility activities within each of the companies. In gaining approval of
these mergers, Energy East adopted a corporate structure model which
incorporates the intermediate holding companies. This structure preserves local
name recognition, operations and supervision, yet allows efficiencies to be
captured. It also provides maximum separation of utility and non-utility
ventures, insulating each utility from any potential economic impact associated
with Energy East's other businesses. Further, the costs associated with
maintaining these companies continue to be minimal.
The Intermediate Holding Companies do not have operational functions
and they simply serve as conduits between Energy East and Energy East's public
utility subsidiaries with respect to financing and dividends. Importantly, with
the exception of short-term debt and guarantees on behalf of their subsidiaries,
the Intermediate Holding Companies are not used for external financing purposes,
to make acquisitions, or to perform service, sales or construction
contracts./31
The continued existence of these holding companies also will help to
preserve favorable tax attributes that would be lost if they were eliminated. In
particular, the Intermediate Holding Companies provide flexibility with respect
to the filing of state tax returns./32 Exhibit E hereto (submitted under a
request for confidential treatment) provides further information about the role
of the Intermediate Holding Companies in this regard.
For all these reasons, the Commission should permit Energy East to
continue to retain CMP Group, CTG Resources, Berkshire Energy, Connecticut
Energy and Energy East Enterprises, on a permanent basis, consistent with its
prior decisions permitting the continued existence of intermediate holding
companies in registered holding company systems in order to
___________________
31/ CMP Group does not issue securities to parties outside of the Energy East
group to finance its subsidiaries.
32/ In addition to these structural and regulatory benefits, the continued
existence of CTG Resources will also preserve the benefits associated with
certain existing financing arrangements. Specifically, Ten Companies, Inc., a
wholly-owned non-utility subsidiary of CTG Resources, currently has
approximately $40 million of private placement bonds outstanding that are
supported by CTG Resources under the terms of a Forward Equity Purchase
Agreement. The elimination of CTG Resources would constitute an event of default
under the notes and the holders would have the right to "put" the bonds to the
issuer at a large (approximately $5 million) make-whole premium.
20
achieve economic and tax efficiencies that would not otherwise be achievable in
the absence of such arrangements./33
1.3.5. Nonutility Subsidiary Financing
Energy East, through its Nonutility Subsidiaries, is engaged in and
expects to continue to engage in energy-related, telecommunications or otherwise
functionally related, nonutility businesses, which include, principally, fuel
transportation and storage, energy marketing, energy management and demand side
services, district heating and cooling, and investments in EWGs, ETCs and
"qualifying facilities." To finance investments in such competitive businesses,
it will be necessary for the Nonutility Subsidiaries to have the ability to
engage in financing transactions which are commonly accepted for such types of
investments. It is believed that, in almost all cases, such financings will be
exempt from prior Commission authorization pursuant to Rule 52(b).
To be exempt under Rule 52(b), any loans by Energy East to a
Nonutility Subsidiary or by one Nonutility Subsidiary to another must have
interest rates and maturities that are designed to parallel the lending
company's effective cost of capital. However, in the limited circumstances where
the borrowing Nonutility Subsidiary is not wholly-owned by Energy East/34
directly or indirectly, authority is requested under the Act for Energy East or
a Nonutility Subsidiary, as the case may be, to make such loans to such
subsidiaries at interest rates and maturities designed to provide a return to
the lending company of not less than its effective cost of capital./35 If such
loans are made to a Nonutility Subsidiary, such company will not sell any
services to any associate Nonutility Subsidiary unless the associated purchaser
falls within one of the categories of companies to which goods and services may
be sold on a basis other than "at cost."/36
_________________________
33/ See Energy East Corp., et al., Holding Co. Act Release No. 27546 (June 27,
2002) (Authorizing the retention of RGS on a permanent basis); and Ameren Corp.
et al., Holding Co. Act Release No. 27645 (Jan. 29, 2003) (Authorizing the
continued existence of a secondary holding company, CILCORP, "for the indefinite
future," because, among other things, to eliminate the secondary holding company
as a subsidiary, Ameren would either have to prepay outstanding debt or,
alternatively, assume the debt by means of a merger or otherwise. The prepayment
alternative would significantly increase the cost of debt. The assumption of the
debt would result in undesirable restrictions on future issuances by Ameren.
Conversely, leaving the existing debt in place would not negatively affect the
capital structure of Ameren's utility subsidiaries or be detrimental to
investors).
34/ Energy East's current less than wholly-owned Nonutility Subsidiaries are:
PEI Power II, LLC and South Glens Falls Energy, LLC.
35/ See Entergy Corporation, et al., Holding Co. Act Release No. 27039 (June
22, 1999).
36/ Such companies include:
(i) A FUCO or foreign EWG which derives no part of its income, directly
or indirectly, from the generation, transmission, or distribution of electric
energy for sale within the United States;
(ii) An EWG which sells electricity at market-based rates which have
been approved by the Federal Energy Regulatory Commission ("FERC"), provided
that the purchaser is not one of the Utility Subsidiaries;
(iii) A "qualifying facility" ("QF") within the meaning of the Public
Utility Regulatory Policies Act of 1978, as amended ("PURPA") that sells
electricity exclusively (a) at rates negotiated at arms'-length to one or more
industrial or commercial customers purchasing such electricity for their own use
and not for resale, and/or (ii) to an electric utility company (other than a
Utility Subsidiary) at the purchaser's "avoided cost" as determined in
accordance with the regulations under PURPA;
(iv) A domestic EWG or QF that sells electricity at rates based upon
its cost of service, as approved by FERC or any state public utility commission
having jurisdiction, provided that the purchaser thereof is not one of the
Utility Subsidiaries; or
21
1.3.6. Guaranties
1. Energy East Guaranties.
Energy East requests authorization to enter into guaranties, obtain
letters of credit, enter into expense agreements or otherwise provide credit
support to or on behalf of Subsidiaries (collectively, "Energy East Guaranties")
as may be appropriate to enable such Subsidiaries to operate in the ordinary
course of business, in an aggregate principal amount not to exceed $1 billion
issued and outstanding at any one time during the Authorization Period, provided
however, that the amount of any Energy East Guaranties in respect of obligations
of any EWG, FUCO, or Rule 58 Subsidiary shall also be subject to the limitations
of Rule 53(a)(1) or Rule 58(a)(1), as applicable. Energy East may charge each
Subsidiary a fee for each guaranty provided on its behalf that is not greater
than the cost, if any, of obtaining the liquidity necessary to perform the
guaranty (for example, bank line commitment fees or letter of credit fees, plus
other transactional expenses).
2. Nonutility Subsidiary Guaranties.
In addition to the guaranties that may be provided by Energy East, as
described above, Nonutility Subsidiaries request authorization to enter into
guaranties, obtain letters of credit, enter into expense agreements or otherwise
provide credit support to or on behalf of other Nonutility Subsidiaries
(collectively, "Nonutility Subsidiary Guaranties") in an aggregate principal
amount not to exceed $750 million issued and outstanding at any one time during
the Authorization Period, exclusive of any guaranties and other forms of credit
support that are exempt pursuant to Rule 45(b) and Rule 52, provided that the
amount of any Nonutility Subsidiary Guaranties in respect of obligations of any
Rule 58 Subsidiary shall also be subject to the limitations of Rule 58(a)(1).
The Nonutility Subsidiary providing this credit support proposes to charge each
Subsidiary a fee for each guarantee provided on its behalf that is not greater
than the cost, if any, of obtaining the liquidity necessary to perform the
guaranty.
Guarantee authority for CTG Resources and RGS is requested separately
under Item 3, below.
3. Intermediate Holding Company Guaranties.
CTG Resources, an Intermediate Holding Company, has provided
guaranties and other forms of credit support on behalf of its subsidiaries.
Specifically, CTG Resources has guaranteed $40 million of promissory notes
issued by a non-utility subsidiary, TEN Companies, Inc. ("TEN"), that will
mature in 2009 ($25 million) and 2010 ($15 million). CTG Resources has also
provided guaranties totaling approximately $40.7 million for other financial and
contractual obligations of TEN. These include letters of credit totaling $25.7
million backing
______________________________________________________________________________
(v) A Rule 58 Subsidiary or any other Nonutility Subsidiary that (a) is
partially-owned by Energy East, provided that the ultimate purchaser of such
goods or services is not a Utility Subsidiary or EE Management (or any other
entity that Energy East may form whose activities and operations are primarily
related to the provision of goods and services to the Utility Subsidiaries or EE
Management), (b) is engaged solely in the business of developing, owning,
operating and/or providing services or goods to Nonutility Subsidiaries
described in clauses (i) through (iv) immediately above, or (c) does not derive,
directly or indirectly, any material part of its income from sources within the
United States and is not a public-utility company operating within the United
States.
22
development authority bonds and other similar contractual obligations of TEN
that expire at various times not later than 2025. CTG Resources requests
authorization to maintain and replace as necessary these guaranties and other
forms of credit support (the "CTG Resources Guaranties") during the
Authorization Period and thereafter for so long as the underlying obligations of
any subsidiary shall remain outstanding in an aggregate amount not to exceed
$100 million. This request would merely extend the authorization granted by the
Commission with respect to these guarantees and credit support in the Financing
Order.
In addition, RGS requests authorization to enter into guaranties,
obtain letters of credit, enter into expense agreements or otherwise provide
credit support to or on behalf of its subsidiary companies (the "RGS
Guaranties") as may be appropriate to enable such companies to operate in the
ordinary course of business, in an aggregate principal amount not to exceed $100
million at any one time outstanding during the Authorization Period. This
request would extend the authorization previously granted by the Commission in
Supplemental Order I.
The amount of CTG Resources Guaranties and RGS Guaranties would not
count against the limit applied to Nonutility Subsidiary Guaranties. The amount
of any guaranties in respect of obligations of any Rule 58 Subsidiary shall also
be subject to the limitations of Rule 58(a)(1). Each guarantor may charge its
subsidiaries a fee for each guaranty or other form of credit support provided on
its behalf that is not greater than the cost, if any, of obtaining the liquidity
necessary to perform under the obligation (for example, bank line commitment
fees or letter of credit fees, plus other transactional expenses).
1.3.7. Hedging Transactions.
Energy East proposes to enter into, perform, purchase and sell
financial instruments intended to manage the volatility of currencies and
interest rates, including but not limited to currency and interest rate swaps,
caps, floors, collars and forward agreements or any other similar agreements
("Hedging Instruments"). Energy East would employ Hedging Instruments as a means
of prudently managing the risk associated with any of its outstanding or
anticipated debt by, for example, synthetically (i) converting variable rate
debt to fixed rate debt, (ii) converting fixed rate debt to variable rate debt,
(iii) limiting the impact of changes in interest rates resulting from variable
rate debt and (iv) providing an option to enter into interest rate swap
transactions in future periods for planned issuances of debt securities.
Energy East proposes to enter into Hedging Instruments with respect to
anticipated debt offerings ("Anticipatory Hedges"), to fix and/or limit the
interest rate or currency exchange rate risk associated with any new issuance.
In addition to the use of Hedging Instruments, Anticipatory Hedges may include
(i) a forward sale of exchange-traded Government Securities/37 futures
contracts, Government Securities and/or a forward swap (each a "Forward Sale"),
(ii) the purchase of put options on Government Securities (a "Put Options
Purchase"), (iii) a Put Options Purchase in combination with the sale of call
options on Government Securities (a "Zero Cost Collar"), (iv) transactions
involving the purchase or sale, including short sales, of Government Securities,
or (v) some combination of a Forward Sale, Put Options Purchase, Zero Cost
Collar and/or other derivative or cash transactions, including, but not limited
_____________________
37/ Government Securities would include U.S. Treasury obligations or the
appropriate government benchmark security for the currency involved in the
hedge.
23
to structured notes, caps and collars, appropriate for the Anticipatory Hedges.
Energy East may seek to hedge its exposure to currency fluctuations through
currency swaps or options and forward exchange or similar transactions.
Hedging Instruments and instruments used to effect Anticipatory Hedges
will be executed on-exchange ("On-Exchange Trades") with brokers through the
opening of futures and/or options positions, the opening of over-the-counter
positions with one or more counterparties ("Off-Exchange Trades"), or a
combination of On-Exchange Trades and Off-Exchange Trades. Energy East will
determine the optimal structure of each transaction at the time of execution.
Off-Exchange Trades would be entered into only with Intermediate Companies or
with counterparties whose senior debt ratings are investment grade as determined
by Standard & Poor's, Moody's Investors Service, Inc. or Fitch IBCA, Inc.
("Approved Counterparties").
The Utility Subsidiaries, to the extent such securities are not exempt
under Rule 52(a), also propose to enter into Hedging Instruments with
third-party Approved Counterparties, but not other Energy East System companies,
on the same terms generally applicable to Energy East./38 The Utility
Subsidiaries expect to use such authority principally to hedge external debt.
Energy East maintains a central treasury department whose activities
are governed by policies and guidelines approved by the Board of Directors, with
regular reviews and monitoring by a standing committee of the Board. The
treasury department operates as a service center rather than as a profit center
and is subject to internal and external audit. Treasury activities are managed
in a non-speculative manner and all transactions in Hedging Instruments would be
matched to an underlying business purpose. Consequently, Energy East and the
Utility Subsidiaries would not enter into transactions in Hedging Instruments
for speculative purposes or to finance businesses that are not permitted,
authorized or exempt under the Act. Energy East will qualify transactions in
Hedging Instruments for hedge-accounting treatment under generally accepted
accounting principles ("GAAP") in the US. No gain or loss on a Hedging
Instrument entered into by Energy East or associated tax effects, will be
allocated to the Utility Subsidiaries, regardless of the accounting treatment
accorded to the transaction and consequently, the Utility Subsidiaries would not
be adversely affected by such transactions./39
1.3.8. Changes in Capital Stock of Subsidiaries.
The portion of an individual Subsidiary's aggregate financing to be
effected through the sale of stock to Energy East or other intermediate parent
company during the Authorization Period pursuant to Rule 52 and/or pursuant to
an order issued in this proceeding cannot be ascertained at this time. It may
happen that the proposed sale of capital securities may in some cases exceed the
then authorized capital stock of such Subsidiary. In addition, the Subsidiary
may choose to use capital stock with no par value. Also, a wholly-owned
Subsidiary
________________________
38/ The terms applicable to Hedging Instruments entered into by the Utility
Subsidiaries differ from those applicable to Energy East in the following way.
To the extent a Utility Subsidiary incurs a gain or loss on a Hedging Instrument
that it has entered into to hedge a currency or interest rate risk associated
with a security that such Utility Subsidiary has issued, the gain or loss would
be attributed to the Utility Subsidiary.
39/ The proposed terms and conditions of the hedging transactions are
substantially the same as the Commission has approved in other cases. See New
Century Energies, Inc., et al., Holding Co. Act Release No. 27000 (Apr. 7,
1999); and Ameren Corp., et al., Holding Co. Act Release No. 27053 (July 23,
1999).
24
may wish to engage in a reverse stock split to reduce franchise taxes. As needed
to accommodate such proposed transactions and to provide for future issues,
request is made for authority to change any such wholly-owned Subsidiary's
authorized capital stock capitalization by an amount deemed appropriate by
Energy East or other intermediate parent company in the instant case. A
Subsidiary would be able to change the par value, or change between par value
and no-par stock, without additional Commission approval. Any such action by a
Utility Subsidiary would be subject to and would only be taken upon the receipt
of any necessary approvals by the state commission in the state or states where
the Utility Subsidiary is incorporated and doing business./40
1.3.9. Financing Subsidiaries.
Energy East and the Subsidiaries (other than Intermediate Holding
Companies) request authority to acquire, directly or indirectly, the equity
securities of one or more corporations, trusts, partnerships or other entities
(hereinafter, "Financing Subsidiaries") created specifically for the purpose of
facilitating the financing of the authorized and exempt activities (including
exempt and authorized acquisitions) of such companies through the issuance of
long-term debt or equity securities, including but not limited to monthly income
preferred securities, to third parties./41 Any Financing Subsidiary may loan,
dividend or otherwise transfer the proceeds of such financings to its parent or
to other Subsidiaries, provided, however, that a Financing Subsidiary of a
Utility Subsidiary will dividend, loan or transfer proceeds of financing only to
such Utility Subsidiary. Energy East may, if required, guaranty or enter into
expense agreements in respect of the obligations of any Financing Subsidiary
which it organizes. The Subsidiaries may also provide guaranties and enter into
expense agreements, if required, on behalf of any Financing Subsidiaries which
they organize pursuant to Rules 45(b)(7) and 52, as applicable. The amount of
securities issued by a Financing Subsidiary would count against the limitation
applicable to its parent for such securities, as if the parent company had
issued such securities directly. In such cases, however, the guaranty by the
parent of the security issued by its Financing Subsidiary would not be counted
against the limitations on Energy East Guaranties, CTG Resources or RGS
Guaranties, or Nonutility Subsidiary Guaranties, as the case may be.
1.3.10. Intermediate Subsidiaries.
Energy East requests authorization to acquire, directly or indirectly,
the securities of one or more Intermediate Subsidiaries, which would be
organized exclusively for the purpose of acquiring, holding and/or financing the
acquisition of the securities of or other interest in one or more EWGs or FUCOs,
Rule 58 Subsidiaries, ETCs or other Nonutility Subsidiaries (as authorized by
the Commission or permitted under the Act), provided that Intermediate
Subsidiaries may also engage in development activities ("Development
Activities") and administrative activities ("Administrative Activities"), as
described below, relating to such
____________________
40/ The Commission has granted similar approvals to other registered holding
companies. See Conectiv, Inc., Holding Co. Act Release No. 26833 (Feb. 26,
1998); and New Century Energies, Inc., Holding Co. Act Release No. 26750 (Aug.
1, 1997).
41/ The Commission has previously authorized registered holding companies and
their subsidiaries to create financing subsidiaries, subject to substantially
the same terms and conditions. See New Century Energies, Inc., et al., Holding
Co. Act Release No. 27000 (April 7, 1999); Ameren Corp., et al., Holding Co. Act
Release No. 27053 (July 23, 1999); and The Southern Company, Holding Co. Act
Release No. 27134 (Feb. 9, 2000).
25
subsidiaries. To the extent such transactions are not exempt from the Act or
otherwise authorized or permitted by rule, regulation or order of the Commission
issued thereunder, Energy East requests authority for Intermediate Subsidiaries
to provide management, administrative, project development and operating
services to such entities. Such services may be rendered at fair market prices
to the extent they qualify for any of the exceptions from the "at cost" standard
requested below.
Development Activities will be limited to due diligence and design
review; market studies; preliminary engineering; site inspection; preparation of
bid proposals, including, in connection therewith, posting of bid bonds;
application for required permits and/or regulatory approvals; acquisition of
site options and options on other necessary rights; negotiation and execution of
contractual commitments with owners of existing facilities, equipment vendors,
construction firms, power purchasers, thermal "hosts," fuel suppliers and other
project contractors; negotiation of financing commitments with lenders and other
third-party investors; and such other preliminary activities as may be required
in connection with the purchase, acquisition, financing or construction of
facilities or the acquisition of securities of or interests in new businesses.
Intermediate Subsidiaries request authority to expend up to $100 million during
the Authorization Period on all such Development Activities.
Administrative Activities will include ongoing personnel, accounting,
engineering, legal, financial, and other support activities necessary to manage
Energy East's investments in Nonutility Subsidiaries.
There are several legal and business reasons for the use of
special-purpose intermediate companies in connection with making investments in
EWGs and FUCOs, Rule 58 Subsidiaries, ETCs and other Nonutility Subsidiaries.
For example, the formation and acquisition of special-purpose subsidiaries is
often necessary or desirable to facilitate financing the acquisition and
ownership of a FUCO, an EWG or another nonutility enterprise. Furthermore, the
laws of some foreign countries may require that the bidder in a privatization
program be organized in that country. In such cases, it may be necessary to form
a foreign subsidiary as the entity (or participant in the entity) that submits
the bid or other proposal.
An Intermediate Subsidiary may be organized, among other things, (1)
to facilitate the making of bids or proposals to develop or acquire an interest
in any EWG or FUCO, Rule 58 Subsidiary, ETC or other Nonutility Subsidiary; (2)
after the award of such a bid proposal, in order to facilitate closing on the
purchase or financing of such acquired company; (3) at any time subsequent to
the consummation of an acquisition of an interest in any such company in order,
among other things, to effect an adjustment in the respective ownership
interests in such business held by Energy East and non-affiliated investors; (4)
to facilitate the sale of ownership interests in one or more acquired nonutility
companies; (5) to comply with applicable laws of foreign jurisdictions limiting
or otherwise relating to the ownership of domestic companies by foreign
nationals; (6) as a part of tax planning in order to limit Energy East's
exposure to state, U.S. and foreign taxes; (7) to further insulate Energy East
and the Utility Subsidiaries from operational or other business risks that may
be associated with investments in nonutility companies; or (8) for other lawful
business purposes.
26
Investments in Intermediate Subsidiaries may take the form of any
combination of the following: (1) purchases of capital shares, partnership
interests, member interests in limited liability companies, trust certificates
or other forms of equity interests; (2) capital contributions; (3) open account
advances with or without interest; (4) loans; and (5) guaranties issued,
provided or arranged in respect of the securities or other obligations of any
Intermediate Subsidiaries or New Subsidiaries. Funds for any direct or indirect
investment in any Intermediate Subsidiaries or New Subsidiaries will be derived
from (1) financings authorized in this proceeding; (2) any appropriate future
debt or equity securities issuance authorization obtained by Energy East from
the Commission; and (3) other available cash resources, including proceeds of
securities sales by a Nonutility Subsidiary pursuant to Rule 52. To the extent
that Energy East provides funds or guaranties directly or indirectly to an
Intermediate Subsidiary which are used for the purpose of making an investment
in any EWG or FUCO or a Rule 58 Subsidiary, the amount of such funds or
guaranties will be included in Energy East's "aggregate investment" in such
entities, as calculated in accordance with Rule 53 or Rule 58, as
applicable./42
Energy East may determine from time to time to consolidate or
otherwise reorganize all or any part of its direct and indirect ownership
interests in Nonutility Subsidiaries, and the activities and functions related
to such investments, under a company, including one or more Intermediate
Subsidiaries. To effect any such consolidation or other reorganization, Energy
East may wish to either contribute the equity securities of one Nonutility
Subsidiary to another company or sell (or cause a Nonutility Subsidiary to sell)
the equity securities of one Nonutility Subsidiary to another company. To the
extent that these transactions are not otherwise exempt under the Act or Rules
thereunder,/43 Energy East hereby requests authorization under the Act to
consolidate or otherwise reorganize under one or more direct or indirect
subsidiaries, Energy East's ownership interests in existing and future
Nonutility Subsidiaries./44 Such transactions may take the form of a sale,
contribution or transfer of the securities of a Nonutility Subsidiary as a
dividend to a company and the acquisition by such company of such securities
either by purchase or by receipt of a dividend. The purchasing company in any
transaction structured as an intrasystem sale of equity securities may execute
and deliver its promissory note evidencing all or a portion of the consideration
given. Each transaction would be carried out in compliance with all applicable
U.S. or foreign laws and accounting requirements, and any transaction structured
as a sale would be carried out for a consideration equal to the book value of
the equity securities being sold. Energy East will report each such transaction
in the next quarterly certificate filed pursuant to Rule 24 in this proceeding,
as described below.
____________________
42/ The Commission has previously authorized registered holding companies to
organize intermediate subsidiary companies to acquire and hold various
nonutility subsidiaries, and for such intermediate companies to provide
administrative and development services to such subsidiaries. See New Century
Energies, Inc., et al., Holding Co. Act Release No. 27000 (April 7, 1999);
Entergy Corp., et al., Holding Co. Act Release No. 27039 (June 22, 1999); and
Ameren Corp., et al., Holding Co. Act Release No. 27053 (July 23, 1999).
43/ Sections 12(c), 32(g), 33(c)(1) and 34(d) and Rules 43(b), 45(b), 46(a) and
58, as applicable, may exempt many of the transactions described in this
paragraph.
44/ The Commission has granted similar authority to other registered holding
companies. See Entergy Corp., et al., Holding Co. Act Release No. 27039 (June
22, 1999), Columbia Energy Group, et al., Holding Co. Act Release No. 27099
(November 5, 1999).
27
1.3.11. Investments In Energy-Related Assets.
Nonutility Subsidiaries request authority to acquire or construct in
one or more transactions from time to time during the Authorization Period,
nonutility energy assets in the United States, including, without limitation,
natural gas production, gathering, processing, storage and transportation
facilities and equipment, liquid oil reserves and storage facilities, and
associated facilities (collectively, "Energy-Related Assets"), that would be
incidental to the energy marketing, brokering and trading operations of Energy
East's Subsidiaries./45 Nonutility Subsidiaries request authorization to invest
up to $500 million (the "Investment Limitation") during the Authorization Period
in such Energy-Related Assets or in the equity securities of existing or new
companies substantially all of whose physical properties consist or will consist
of such Energy-Related Assets./46 Such Energy-Related Assets (or equity
securities of companies owning Energy-Related Assets) may be acquired for cash
or in exchange for Common Stock or other securities of Energy East or a
Nonutility Subsidiary of Energy East, or any combination of the foregoing. If
Common Stock of Energy East is used as consideration in connection with any such
acquisition, the market value thereof on the date of issuance will be counted
against the requested Investment Limitation. The stated amount or principal
amount of any other securities issued as consideration in any such transaction
will also be counted against the Investment Limitation. Under no circumstances
will any Nonutility Subsidiary acquire, directly or indirectly, any assets or
properties the ownership or operation of which would cause such company to be
considered an "electric utility company" or "gas utility company" as defined
under the Act.
As this Commission has recognized in American Electric Power Company,
Inc., et al., 68 SEC Docket 1251 (November 2, 1998) and SEI Holdings, Inc., 62
SEC Docket 2493 (September 26, 1996) and other decisions, a successful marketer
of energy commodities must be able to control some level of physical assets that
are incidental and reasonably necessary in its day-to-day operations. For
example, gas marketers today must be able to offer their customers a variety of
value-added, or "bundled," services, such as gas storage and processing, that
the interstate pipelines offered prior to FERC Order 636./47 In order to
provide such value-added services, many of the leading gas marketers have
invested in production, gathering, processing, and storage capacity at or near
the principal gas producing areas and hubs and market centers in the U.S.
Similarly, to compete with both interstate pipelines and local distribution
companies for industrial and electric utility sales, marketers must have the
flexibility to acquire or construct such supply facilities. In fact, most of the
larger energy marketers today own, directly or through affiliates, substantial
physical assets of the type described herein.
The acquisition of production, gathering, processing, and storage
capacity provide energy marketers the opportunity to hedge the price of future
supplies of natural gas against changes in demand brought about due to weather,
increased usage requirements by end use
______________________
45/ Currently, Energy East's electric power and gas marketing operations are
conducted through Energy East Solutions, Inc., NYSEG Solutions Inc., The
Hartford Steam Company, Energetix, Inc. and PEI Power II LLC.
46/ Companies whose physical properties consist of Energy-Related Assets may
also be currently engaged in energy (gas or electric or both) marketing
activities. To the extent necessary, applicants request authorization to
continue such activities in the event they acquire such companies.
47/ See FERC Order 636, FERC Stats. & Regs. P. 30,939, "Pipeline Service
Obligations and Revisions to Regulations Governing Self-Implementing
Transportation; and Regulation of Natural Gas Pipelines After Partial Wellhead
Decontrol," 57 Fed. Reg. 13,270 (April 16, 1992).
28
customers, or other volatility imposed by the market. Storage and pipeline
assets allow energy marketers to "bank" low cost supplies for use during periods
of high volatility or take advantage of differential price spreads between
different markets. Energy marketers with strong and balanced physical asset
portfolios are able to originate tolling or reverse tolling of gas and electric
commodities, whereby the payment is made in one or the other commodity. The
integration of production, gathering, and storage assets offer energy marketers
the opportunity to provide either gas or electric products and services to
energy users, at their discretion, depending on user requirements and needs.
Finally, the physical assets underlying an energy marketer's balance sheet may
provide substantial credit support for the financial transactions undertaken by
the marketer.
Energy East may add to the existing base of nonutility,
marketing-related assets held by its subsidiaries as and when market conditions
warrant, whether through acquisitions of specific assets or groups of assets
that are offered for sale, or by acquiring existing companies (for example,
other gas marketing companies which own significant physical assets in the areas
of gas production, processing, storage, and transportation).
1.3.12. Sales of Services and Goods among Nonutility Subsidiaries of
Energy East.
Energy East's Nonutility Subsidiaries request authorization to provide
services and sell goods to each other at fair market prices determined without
regard to cost, and therefore request an exemption (to the extent that Rule
90(d) does not apply) pursuant to Section 13(b) from the cost standards of Rules
90 and 91 as applicable to such transactions, in any case in which the
Nonutility Subsidiary purchasing such goods or services is:
o A FUCO or foreign EWG which derives no part of its income, directly or
indirectly, from the generation, transmission, or distribution of
electric energy for sale within the United States;
o An EWG which sells electricity at market-based rates which have been
approved by the Federal Energy Regulatory Commission ("FERC"),
provided that the purchaser is not one of the Utility Subsidiaries;
o A "qualifying facility" ("QF") within the meaning of the Public
Utility Regulatory Policies Act of 1978, as amended ("PURPA") that
sells electricity exclusively (i) at rates negotiated at arms'-length
to one or more industrial or commercial customers purchasing such
electricity for their own use and not for resale, and/or (ii) to an
electric utility company (other than a Utility Subsidiary) at the
purchaser's "avoided cost" as determined in accordance with the
regulations under PURPA;
o A domestic EWG or QF that sells electricity at rates based upon its
cost of service, as approved by FERC or any state public utility
commission having jurisdiction, provided that the purchaser thereof is
not one of the Utility Subsidiaries; or
o A Rule 58 Subsidiary or any other Nonutility Subsidiary that (a) is
partially-owned by Energy East, provided that the ultimate purchaser
of such goods or services is not a Utility Subsidiary service company
(or any other entity that Energy East may form whose activities and
operations are primarily related to the
29
provision of goods and services to the Utility Subsidiaries), (b) is
engaged solely in the business of developing, owning, operating and/or
providing services or goods to Nonutility Subsidiaries described
above, or (c) does not derive, directly or indirectly, any material
part of its income from sources within the United States and is not a
public-utility company operating within the United States./48
1.3.13. Activities of Rule 58 Subsidiaries within and Outside the
United States.
Energy East, on behalf of any current or future Rule 58 Subsidiaries,
requests authority to engage in business activities permitted by Rule 58 both
within and outside the United States such as:
o the brokering and marketing of electricity, natural gas and other
energy commodities ("Energy Marketing");
o energy management services ("Energy Management Services"), including
the marketing, sale, installation, operation and maintenance of
various products and services related to energy management and
demand-side management, including energy and efficiency audits;
facility design and process control and enhancements; construction,
installation, testing, sales and maintenance of (and training client
personnel to operate) energy conservation equipment; design,
implementation, monitoring and evaluation of energy conservation
programs; development and review of architectural, structural and
engineering drawings for energy efficiencies, design and specification
of energy consuming equipment; and general advice on programs; the
design, construction, installation, testing, sales and maintenance of
new and retrofit heating, ventilating, and air conditioning ("HVAC"),
electrical and power systems, alarm and warning systems, motors,
pumps, lighting, water, water-purification and plumbing systems, and
related structures, in connection with energy-related needs; and the
provision of services and products designed to prevent, control, or
mitigate adverse effects of power disturbances on a customer's
electrical systems; and
o engineering, consulting and other technical support services
("Consulting Services") with respect to energy-related businesses, as
well as for individuals. Such Consulting Services would include
technology assessments, power factor correction and harmonics
mitigation analysis, meter reading and repair, rate schedule design
and analysis, environmental services, engineering services, billing
services (including consolidation billing and bill disaggregation
tools), risk management services, communications systems, information
systems/data processing, system planning, strategic planning, finance,
feasibility studies, and other similar services.
Those investments would count against the Rule 58 limit.
The Commission authorized such activities in the Financing Order,
except with respect to the following activities which were subject to a
reservation of jurisdiction: (i) Energy
_____________________
48/ The five circumstances in which market based pricing would be allowed are
substantially the same as those approved by the Commission in other cases. See
Entergy Corp., et al., Holding Co. Act Release No. 27039 (June 22, 1999); Ameren
Corp., et al., Holding Co. Act Release No. 27053 (July 23, 1999); and Interstate
Energy Corp., Holding Co. Act Release No. 27069 (August 26, 1999).
30
Marketing activities outside the United States and Canada,/49 (ii) the
provision of Energy Management Services and Consulting Services anywhere outside
the United States,/50 and (iii) other activities of Rule 58 Subsidiaries
outside the United States, pending completion of the record. Energy East
requests that the Commission continue to reserve jurisdiction over these
activities until the record is complete with respect thereto.
1.3.14. Payment of Dividends
1. Payment of Dividends by Energy East, the Intermediate Holding
Companies and the Utility Subsidiaries.
In Supplemental Order I, the Commission authorized RGS to pay
dividends out of capital and unearned surplus in an amount equal to its retained
earnings prior to the RGS merger with Energy East. In addition, RGS and its
subsidiaries were granted authorization to pay dividends out of earnings before
any amortization of intangibles recognized as a result of the merger with Energy
East, and any impairment of either goodwill or other intangibles recognized as a
result of such merger. By order dated December 16, 2004, Holding Co. Act Release
No. 27925, the Commission authorized RG&E to pay dividends out of capital and
unearned surplus, subject to certain conditions.
In the Financing Order, the Commission authorized Energy East, the
Intermediate Holding Companies (other than Energy East Enterprises), Central
Maine, Southern Connecticut Gas, Connecticut Natural Gas and Berkshire Gas to
pay dividends out of capital and unearned surplus up to the retained earnings of
these companies prior to their merger with Energy East. In addition, each of the
companies was authorized to pay dividends out of earnings before the
amortization of goodwill, for the duration of the goodwill amortization period.
Under U.S. GAAP, goodwill is no longer amortized, but instead evaluated
periodically and, if impaired, it is written down by the amount of the
impairment.
Energy East, the Intermediate Holding Companies (other than Energy
East Enterprises), and Central Maine, Southern Connecticut Gas, Connecticut
Natural Gas and Berkshire Gas now request that the Commission extend the
authorization previously granted under the Financing Order and the Supplemental
Order I. To be consistent with current accounting practice, such companies
propose during the Authorization Period: (i) to pay dividends out of capital and
unearned surplus in an amount equal to retained earnings prior to their
respective mergers with Energy East, and (ii) to pay dividends out of earnings
before any amortization of intangibles recognized as a result of their
respective mergers, and any
____________________
49/ See Southern Energy, Inc., Holding Co. Act Rel. No. 27020 (May 13, 1999)
(supplemental order amending prior order to permit registered holding company
subsidiary to engage in power and gas marketing activities in Canada and
reserving jurisdiction over such activities outside the United States and
Canada); Interstate Energy Corp., Holding Co. Act Release No. 27069 (August 26,
1999).
50/ The Commission has heretofore authorized nonutility subsidiaries of a
registered holding company to sell similarly-defined energy management services
and technical consulting services to customers both within and outside the
United States. See Columbia Energy Group, et al., Holding Co. Act Release No.
26498 (March 25, 1996); and Cinergy Corp., Holding Co. Act Release No. 26662
(February 7, 1997); and Interstate Energy Corp., Holding Co. Act Release No.
27069 (August 26, 1999).
31
impairment of either goodwill or other intangibles recognized as a result of the
merger ("Gross Earnings")./51
Although not a frequent occurrence, companies in the Energy East group
have found it appropriate to pay dividends out of capital from time to time.
Most recently, as authorized by the December 16, 2004 order noted above, RG&E
paid a dividend out of capital in the amount of $75 million, funded by the
proceeds of the Ginna nuclear generating plant sale. The dividend was used by
Energy East to retire outstanding debt. Central Maine paid a $190 million
dividend out of capital in September, 2000, that also was used by Energy East to
reduce debt. These examples illustrate that authority to pay dividends out of
capital may be a sound tool for the effective management of the capital
structure of the Energy East holding company system. Where, as in this case, the
Utility Subsidiaries would not pay dividends out of capital if such payments
would reduce equity levels to below 30%, or such higher levels required by state
utility commission regulation, the requested dividend authority is not adverse
to the interests of investors or consumers and should be authorized. Exhibit D
shows the equity levels, the retained earnings position and the dividend payout
history of each company requesting dividend relief herein.
The requested dividend relief is an important tool for managing
capital structures and it helps to prevent excessive equity levels. A state
commission may rule, for example, that it is not necessary or appropriate for
the utility to have as much equity in its capital structure as at the current
time. The response of the state commission could be to reduce the amount of
equity that will earn an equity return. In such cases, it would be contrary to
the interests of investors to maintain the higher level of equity and
appropriate to reduce equity levels through dividends to the level on which
earnings may accrue. In other cases, the sale of assets gives rise to surplus
capital and authorization to pay dividends out of capital is necessary to
re-balance the capital structure of that company. Finally, periodic goodwill
impairment tests may result in a goodwill impairment charge that would reduce
retained earnings. Such a non-cash charge does not affect operating cash flows
and in such cases it still may be appropriate to pay a dividend out of capital.
Section 12(c) of the Act and Rule 46 thereunder generally prohibit the
payment of dividends out of "capital or unearned surplus" except pursuant to an
order of the Commission. The legislative history explains that this provision
was intended to "prevent the milking of operating companies in the interest of
the controlling holding company groups. " See S.Rep. No. 621, 74th Cong., 1st
Sess. p. 34 (1935)./52 In determining whether to permit a registered holding
company to pay dividends out of capital surplus, the Commission considers
various factors, including: (i) the asset value of the company in relation to
its capitalization, (ii) the company's prior earnings, (iii) the company's
current earnings in relation to the proposed dividend, and (iv) the company's
projected cash position after payment of a dividend. See Eastern Utilities
Associates, Holding Co. Act Release No. 25330 (June 13, 1991) ("EUA"), and cases
cited therein. Further, the payment of the dividend must be "appropriate in the
public interest." Id., citing Commonwealth & Southern Corporation, 13 S.E.C.
489, 492 (1943).
___________________
51/ The Commission has granted substantially identical dividend relief to
National Grid Group plc in Holding Co. Act Release No. 27154 (Mar. 15, 2000).
52/ Compare Section 305(a) of the Federal Power Act.
32
In support of their request, Applicants assert that each of the
standards of Section 12(c) of the Act enunciated in the EUA case are satisfied:
(i) Energy East's common equity as a percentage of total consolidated
capitalization is approximately 39%, substantially in excess of the 30% level
that the Commission has traditionally required for other registered holding
company systems. Energy East commits to maintain its capitalization throughout
the Authorization Period at or above 30% common equity on a consolidated basis
and to maintain the capitalization of the Utility Subsidiaries (other than
NORVARCO and Chester SVC Partnership) and the Intermediate Holding Companies
throughout the Authorization Period at or above 30% common equity.
(ii) Energy East, the Intermediate Holding Companies (other than Energy East
Enterprises), Central Maine, Southern Connecticut Gas, Connecticut Natural Gas
and Berkshire Gas have a favorable history of prior earnings and long record of
consistent dividend payments. See Exhibit D, which illustrates the earnings and
dividend history, and the current equity level of each company requesting relief
in this section.
(iii) The Applicants expect that the cash flow of Energy East and the
Intermediate Holding Companies (other than Energy East Enterprises) and Central
Maine, Southern Connecticut Gas, Connecticut Natural Gas and Berkshire Gas will
remain relatively stable and that Gross Earnings of such companies, therefore,
should remain stable during the course of the Authorization Period and provide
ample capital resources to support utility operations.
(iv) The requested dividend payments are in the public interest. Energy East,
the Intermediate Holding Companies (other than Energy East Enterprises), Central
Maine, Southern Connecticut Gas, Connecticut Natural Gas and Berkshire Gas are
in sound financial condition as indicated by their sound capitalization ratios.
The expectations of continued strong financial condition should allow these
companies to continue to finance operations and growth.
(v) In addition, the dividend payments are consistent with investor interests
because they allow the capital structure of Energy East, the Intermediate
Holding Companies (other than Energy East Enterprises), Central Maine, Southern
Connecticut Gas, Connecticut Natural Gas and Berkshire Gas to be adjusted to
more appropriate levels of debt and equity. Lastly, a prohibition on dividend
payments out of additional paid-in-capital may unnecessarily impair the ability
of Energy East to service debt incurred in connection with financing the
mergers.
Energy East, the Intermediate Holding Companies and the Utility
Subsidiaries represent that they will not declare or pay any dividend out of
capital or unearned surplus in contravention of any law restricting the payment
of dividends. In this regard, it should be noted that all U.S. jurisdictions
limit to some extent the authority of corporations to make dividend
distributions to shareholders. Most state corporation statutes contain either or
both an equity insolvency test or some type of balance sheet test. Energy East,
the Intermediate Holding Companies and the Utility Subsidiaries also will comply
with the terms of any credit agreements and indentures that restrict the amount
and timing of distributions to shareholders.
33
2. Payment of Dividends by Certain Nonutility Subsidiaries.
Energy East requests authorization, on behalf of its current and
future Nonutility Subsidiaries, permitting such companies to pay dividends with
respect to the securities of such companies, or to redeem such securities
(collectively, a "Dividend"), from time to time through the Authorization
Period, out of capital and unearned surplus./53
Energy East anticipates that there may be situations in which one or
more Nonutility Subsidiaries will have unrestricted cash available for
distribution in excess of any such company's current and retained earnings. In
such situations, the declaration and payment of a Dividend would have to be
charged, in whole or in part, to capital or unearned surplus. As an example, if
an Intermediate Subsidiary of Energy East were to purchase all of the stock of
an EWG or FUCO and, following such acquisition, the EWG or FUCO incurs
non-recourse borrowings, some or all of the proceeds of which are distributed to
the Intermediate Subsidiary as a reduction in the amount invested in the EWG or
FUCO (i.e., return of capital), the Intermediate Subsidiary (assuming it has no
earnings) could not, without the Commission's approval, in turn distribute such
cash to Energy East or its immediate parent./54
Similarly, using the same example, if an Intermediate Subsidiary,
following its acquisition of all of the stock of an EWG or FUCO, were to sell
part of that stock to a third party for cash, the Intermediate Subsidiary would
again have substantial unrestricted cash available for distribution, but
(assuming no profit on the sale of the stock) would not have current earnings
and therefore could not, without the Commission's approval, declare and pay a
Dividend to its parent out of such cash proceeds. Further, there may be periods
during which unrestricted cash available for distribution by a Nonutility
Subsidiary exceeds current and retained earnings due to the difference between
accelerated depreciation allowed for tax purposes, which may generate
significant amounts of distributable cash, and depreciation methods required to
be used in determining book income.
Finally, even under circumstances in which a Nonutility Subsidiary has
sufficient earnings, and therefore may declare and pay a Dividend to its
immediate parent, such immediate parent may have negative retained earnings,
even after receipt of the Dividend, due to losses from other operations. In this
instance, cash would be trapped at a subsidiary level where there is no current
need for it.
Energy East, on behalf of its Nonutility Subsidiaries, represents that
such companies will not declare or pay any Dividend out of capital and unearned
surplus, except as permitted under the corporate law and state or national law
applicable in the jurisdiction where each company is organized and the terms of
any credit agreements and indentures that restrict the amount and timing of
distributions to shareholders. In addition, none of such companies will
___________________
53/ The Commission has granted similar approvals to other registered holding
companies. See Entergy Corp., et al., Holding Co. Act Release No. 27039 (June
22, 1999); and Interstate Energy Corp., et al., Holding Co. Act Release No.
27069 (August 26, 1999).
54/ The same problem would arise where an Intermediate Subsidiary is
over-capitalized in anticipation of a bid which is ultimately unsuccessful. In
such a case, Energy East would normally desire a return of some or all of the
funds invested.
34
declare or pay any Dividend out of capital or unearned surplus unless it: (i)
has received excess cash as a result of the sale of some or all of its assets;
(ii) has engaged in a restructuring or reorganization; and/or (iii) is returning
capital to an associate company.
1.4 CERTIFICATES OF NOTIFICATION
Energy East will continue to file certificates under Rule 24 with the
Commission within 60 days after the end of each of the first three calendar
quarters, and 90 days after the end of the last calendar quarter that contain
the following information for the reporting period:
1. The sales of common stock, preferred securities or equity-linked securities
by Energy East, and the purchase price per share and the market price per
share at the date of the agreement of sale which shall also separately show
the amount issued during the reporting period, for each type of issued
securities (common stock, preferred securities or equity-linked
securities).
2. If Energy East common stock has been transferred to a seller as
consideration for the assets or securities of a company being acquired, the
number of shares so issued, the value per share and whether the shares are
restricted in the hands of the acquirer.
3. The amount of guarantees issued during the reporting period by Energy East,
the name of the beneficiary of the guarantee and the terms and purpose of
the guarantee.
4. The amount and terms of any Energy East indebtedness issued during the
reporting period which shall also separately show the amount of
indebtedness issued during the Authorization Period.
5. Energy East's "aggregate investment," as defined under Rule 53, in EWGs and
FUCOs as of the end of the reporting period in dollars and as a percentage
of Energy East's consolidated retained earnings, a calculation of the
amount remaining under the EWG/FUCO investment authorization, and a
description of significant EWG/FUCO investments during the reporting
period.
6. A list of the securities issued by the Intermediate Holding Companies
during the reporting period, including principal amount, interest rate,
term, number of shares and aggregate proceeds, as applicable, with the
acquiring company identified.
7. The amount and terms of any short-term debt issued by any Utility
Subsidiary.
8. The amount of any Dividends paid out of capital and unearned surplus by any
of the Nonutility Subsidiaries or Intermediate Holding Companies,
identifying the paying and receiving company.
9. A table showing, as of the end of the reporting period, the dollar and
percentage components of the capital structures of the Utility
Subsidiaries.
10. If any consolidated company is a Variable Interest Entity ("VIE"), as that
term is used in FASB Interpretation 46R, Consolidation of Variable Interest
Entities, Energy East will provide a description of the nature, purpose,
size and activities of the VIE.
35
11. In the event Energy East or its Nonutility Subsidiaries make loans to
Nonutility Subsidiaries that are not wholly owned by Energy East, directly
or indirectly, Energy East will include in the Rule 24 certificate
substantially the same information as that required on Form U-6B-2 with
respect to each transaction.
In addition, the Rule 24 certificates filed within ninety days after
Energy East files its consolidated federal income tax return will contain the
following information for the reporting period:
12. The amount of any tax credit or loss carryover generated by Energy East
during the preceding taxable year as a result of interest expense on
Acquisition Debt and Previous Acquisition Debt;
13. A description of how the income tax credit and/or income tax liability was
calculated and allocated to all companies included in the consolidated tax
return, showing all of Energy East's interest costs and any assumptions
used in the calculations; and
14. A statement that the allocation of tax credits and liabilities was
conducted in accordance with the Tax Allocation Agreement in effect and
filed as an exhibit.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses incurred or to be incurred in
connection with this amended Application are estimated at $35,000. The above
fees do not include any underwriting fees or other expenses incurred in
consummating financings covered hereby. Such fees and expenses will not exceed
5% of the proceeds from any such financings.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
3.1 GENERAL
Sections 6(a) and 7 of the Act are applicable to the issuance and sale
of common stock, preferred stock, short-term debt and long-term debt by Energy
East and to the issuance and sale of securities by the Subsidiaries that are not
exempt under Rule 52. In addition, Sections 6(a) and 7 of the Act are applicable
to Interest Rate Hedges and Anticipatory Hedges, except to the extent that they
may be exempt under Rule 52. Section 12(b) of the Act and Rule 45(a) are
applicable to the issuance of guaranties to the extent not exempt under Rules
45(b) and 52. Sections 9(a)(1) and 10 of the Act are also applicable to (i)
Energy East's or any Nonutility Subsidiary's or any Intermediate Holding
Company's acquisition of the equity securities of any Financing Subsidiary, (ii)
the acquisition of securities of Intermediate Subsidiaries, (iii) the
acquisition of Energy-Related Assets or the securities of companies
substantially all of whose assets consist of Energy-Related Assets, and (vi) the
activities of Rule 58 Subsidiaries within and outside the United States. Section
12(c) of the Act and Rule 46 are applicable to the payment of dividends from
capital and unearned surplus by Energy East and the Subsidiaries. Section 13(b)
of the Act and Rules 80 - 92 are applicable to the performance of services and
sale of goods among Nonutility Subsidiaries, which may be exempt from the
requirements thereof in some cases pursuant to Rules 87(b)(1), 90(d) and 92, as
applicable. Sections 32 and 33 of the Act are
36
also applicable to the extent proceeds from the financings authorized hereby
are used to finance investments in FUCOs and EWGs.
3.2 COMPLIANCE WITH RULES 53 AND 54
The transactions proposed herein are also subject to Rules 53 and 54.
Under Rule 53(a), the Commission shall not make certain specified findings under
Sections 7 and 12 in connection with a proposal by a holding company to issue
securities of or other interest in an EWG, or to guaranty the securities of an
EWG, if each of the conditions in paragraphs (a)(1) through (a)(4) thereof are
met, provided that none of the conditions specified in paragraphs (b)(1) through
(b)(3) of Rule 53 exists. Rule 54 provides that the Commission shall not
consider the effect of the capitalization or earnings of subsidiaries of a
registered holding company that are EWGs or FUCOs in determining whether to
approve other transactions if Rule 53(a), (b) and (c) are satisfied. These
standards are met.
Rule 53(a)(1): As of December 31, 2004, Energy East's "aggregate
investment" in EWGs and FUCOs is approximately $21.1 million, or approximately
2% of Energy East's "consolidated retained earnings" at December 31, 2004
(approximately $1.2 billion).
Rule 53(a)(2): Energy East will maintain books and records enabling it
to identify investments in and earnings from each EWG and FUCO in which it
directly or indirectly acquires and holds an interest. Energy East will cause
each domestic EWG in which it acquires and holds an interest, and each foreign
EWG and FUCO that is a majority-owned subsidiary, to maintain its books and
records and prepare its financial statements in conformity with U.S. generally
accepted accounting principles. All of such books and records and financial
statements will be made available to the Commission, in English, upon request.
Rule 53(a)(3): No more than 2% of the employees of the Utility
Subsidiaries will, at any one time, directly or indirectly, render services to
EWGs or FUCOs.
Rule 53(a)(4): Energy East will submit a copy of the Application in
this proceeding and each amendment thereto, and will submit copies of any Rule
24 certificates required hereunder, as well as a copy of Energy East's Form U5S,
to each of the public service commissions having jurisdiction over the retail
rates of the Utility Subsidiaries.
In addition, Energy East states that the provisions of Rule 53(a) are
not made inapplicable to the authorization herein requested by reason of the
occurrence or continuance of any of the circumstances specified in Rule 53(b).
Rule 53(c) is inapplicable by its terms.
To the extent that other sections of the Act are deemed applicable to
the transactions proposed herein, such sections should be considered to be set
forth in this Item 3.
ITEM 4. REGULATORY APPROVALS
The New York State Public Service Commission has jurisdiction over the
issuance of securities by RG&E and NYSEG, other than indebtedness with
maturities of one year or less. The Connecticut Department of Public Utility
Control has jurisdiction over the issuance of securities by Southern Connecticut
Gas and Connecticut Natural Gas, other than
37
indebtedness with maturities of less than one year. The Maine Public Utilities
Commission has jurisdiction over the issuance of securities by Maine Natural
Gas, Central Maine, MEPCo and NORVARCO, other than indebtedness of one year or
less. The Massachusetts Department of Telecommunications and Energy has
jurisdiction over the issuance of securities by Berkshire Gas, other than
indebtedness with maturities of less than one year.
Except as stated above, no state commission, and no federal
commission, other than the Commission, has jurisdiction over the proposed
transactions.
ITEM 5. PROCEDURE
The Commission is requested to publish a notice under Rule 23 with
respect to the filing of this Application as soon as practicable. The Applicants
request that the Commission's order be issued as soon as possible thereafter,
and in any event not later than September 15, 2005, and that there should not be
a 30-day waiting period between issuance of the Commission's supplemental order
and the date on which the supplemental order is to become effective. The
Applicants hereby waive a recommended decision by a hearing officer or any other
responsible officer of the Commission and consent that the Division of
Investment Management may assist in the preparation of the Commission's decision
and/or order, unless the Division opposes the matters proposed herein.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS
A Opinion of counsel (previously filed).
B Past-tense opinion of counsel.*
C Proposed form of Federal Register notice (previously filed).
D Earnings and dividend history of selected companies (confidential treatment
requested).
E Intermediate Holding Company tax benefits (previously filed) (confidential
treatment requested).
B. FINANCIAL STATEMENTS
FS-1 Energy East and Utility Subsidiaries capitalization tables and
statements of cash flows on a current and projected basis for the
duration of the Authorization Period (previously filed) (confidential
treatment requested).
FS-2(a) Consolidated financial statements of Energy East Corporation: balance
sheet as of December 31, 2004, and statement of income and statement of
retained earnings for the twelve months ended December 31, 2004
(included in Energy East's Form 10-K for the year ended December 31,
2004, File No. 1-14766, filed March 14, 2005, and incorporated herein by
reference).
38
FS-2(b) Consolidated financial statements of Energy East Corporation: balance
sheet as of March 31, 2005, and statement of income and statement of
retained earnings for the three months ended March 31, 2005 (included in
Energy East's Form 10-Q for the three months ended March 31, 2005, File
No. 1-14766, filed May 6, 2005, and incorporated herein by reference).
FS-3(a) Financial statements of Rochester Gas and Electric Corporation: balance
sheet as of December 31, 2004, and statement of income and statement of
retained earnings for the twelve months ended December 31, 2004
(included in RG&E's Form 10-K for the year ended December 31, 2004, File
No. 1-672, filed March 14, 2005, and incorporated herein by reference).
FS-3(b) Financial statements of Rochester Gas and Electric Corporation: balance
sheet as of March 31, 2005, and statement of income and statement of
retained earnings for the three months ended March 31, 2005 (included in
RG&E's Form 10-Q for the three months ended March 31, 2005, File No.
1-672, filed May 6, 2005, and incorporated herein by reference).
FS-4 Financial statements of New York State Electric & Gas Corporation:
balance sheet as of December 31, 2004, and statement of income and
statement of retained earnings for the twelve months ended December 31,
2004 (included in NYSEG's Form 10-K for the year ended December 31,
2004, File No. 1-3103-2, filed March 14, 2005, and incorporated herein
by reference).
FS-5 Financial statements of The Southern Connecticut Gas Company: balance
sheet as of December 31, 2004, and statement of income and statement of
retained earnings for the twelve months ended December 31, 2004.
FS-6 Financial statements of Connecticut Natural Gas Corporation: balance
sheet as of December 31, 2004, and statement of income and statement of
retained earnings for the twelve months ended December 31, 2004.
FS-7 Financial statements of The Berkshire Gas Company: balance sheet as of
December 31, 2004, and statement of income and statement of retained
earnings for the twelve months ended December 31, 2004.
FS-8 Financial statements of Maine Natural Gas Corporation: balance sheet as
of December 31, 2004, and statement of income and statement of retained
earnings for the twelve months ended December 31, 2004.
FS-9(a) Financial statements of Central Maine Power Company: balance sheet as of
December 31, 2004, and statement of income and statement of retained
earnings for the twelve months ended December 31, 2004 (included in
Central Maine Power's Form 10-K for the year ended December 31, 2004,
File No. 1-5139, filed March 14, 2005, and incorporated herein by
reference).
FS-9(b) Financial statements of Central Maine Power Company: balance sheet as of
March 31, 2005, and statement of income and statement of retained
earnings for the three months
39
ended March 31, 2005 (included in Central Maine Power Company's Form
10-Q for the three months ended March 31, 2005, File No. 1-5139, filed
May 6, 2005, and incorporated herein by reference).
FS-10 Financial statements of Maine Electric Power Company, Inc.: balance
sheet as of December 31, 2004, and statement of income and statement of
retained earnings for the twelve months ended December 31, 2004.
FS-11 Financial statements of NORVARCO: balance sheet as of December 31, 2004,
and statement of income and statement of retained earnings for the
twelve months ended December 31, 2004. (confidential treatment
requested)
* To be filed by amendment.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
None of the matters that are the subject of this Application involve a
"major federal action" nor "significantly affect[s] the quality of the human
environment" as those terms are used in Section 102(2)(C) of the National
Environmental Policy Act, 42 U.S.C. Sec. 4321 et seq. None of the matters that
are the subject of this Application will result in changes in the operations of
the Applicants that would have any impact on the environment. No federal agency
is preparing an environmental impact statement with respect to this matter.
40
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, each of the undersigned companies has duly caused this Application to be
signed on their behalf by the undersigned thereunto duly authorized.
Date: August 8, 2005
ENERGY EAST CORPORATION NEW YORK STATE ELECTRIC & GAS
RGS ENERGY GROUP, INC. CORPORATION
CMP GROUP, INC. ROCHESTER GAS AND ELECTRIC
CONNECTICUT ENERGY CORPORATION CORPORATION
CTG RESOURCES, INC.
BERKSHIRE ENERGY RESOURCES
ENERGY EAST ENTERPRISES, INC.
ENERGY EAST CAPITAL TRUST I /s/ Joseph J. Syta
---------------------
/s/ Robert D. Kump Name: Joseph J. Syta
---------------------- Title: Vice President, Controller & Treasurer
Name: Robert D. Kump
Title: Vice President, Controller & Chief
Accounting Officer - Energy East Corporation
Vice President, Controller & Secretary -
RGS Energy Group, Inc., Connecticut Energy
Corporation, CTG Resources, Inc., Berkshire
Energy Resources
Vice President, Controller and Clerk-
CMP Group, Inc.
Treasurer & Clerk - Energy East
Enterprises, Inc.
Administrative Trustee - Energy East
Capital Trust I
CONNECTICUT NATURAL GAS CORPORATION CENTRAL MAINE POWER COMPANY
THE SOUTHERN CONNECTICUT GAS COMPANY MAINE ELECTRIC POWER COMPANY
MAINE NATURAL GAS CORPORATION NORVARCO
/s/ Robert M. Allessio
------------------------- /s/ Sara J. Burns
Name: Robert M. Allessio ----------------------
Title: President and Chief Executive Officer- Name: Sara J. Burns
Connecticut Natural Gas Corporation, Title: President and Chief Executive Officer-
The Southern Connecticut Gas Company Central Maine Power Company
President- Maine Natural Gas Corporation President- Maine Electric Power
Company, Norvarco
THE BERKSHIRE GAS COMPANY
/s/ Karen L. Zink
------------------------
Name: Karen L. Zink
Title: President, Treasurer & Chief Operating
Officer
41
LIST OF EXHIBITS AND FINANCIAL STATEMENTS
Exhibit. D Earnings and dividend history of selected companies
(confidential treatment requested).
FS-2(a) Consolidated financial statements of Energy East
Corporation: balance sheet as of December 31, 2004, and
statement of income and statement of retained earnings for
the twelve months ended December 31, 2004 (included in
Energy East's Form 10-K for the year ended December 31,
2004, File No. 1-14766, filed March 14, 2005, and
incorporated herein by reference).
FS-2(b) Consolidated financial statements of Energy East
Corporation: balance sheet as of March 31, 2005, and
statement of income and statement of retained earnings for
the three months ended March 31, 2005 (included in Energy
East's Form 10-Q for the three months ended March 31, 2005,
File No. 1-14766, filed May 6, 2005, and incorporated herein
by reference).
FS-3(a) Financial statements of Rochester Gas and Electric
Corporation: balance sheet as of December 31, 2004, and
statement of income and statement of retained earnings for
the twelve months ended December 31, 2004 (included in
RG&E's Form 10-K for the year ended December 31, 2004, File
No. 1-672, filed March 14, 2005, and incorporated herein by
reference).
FS-3(b) Financial statements of Rochester Gas and Electric
Corporation: balance sheet as of March 31, 2005, and
statement of income and statement of retained earnings for
the three months ended March 31, 2005 (included in RG&E's
Form 10-Q for the three months ended March 31, 2005, File
No. 1-672, filed May 6, 2005, and incorporated herein by
reference).
FS-4 Financial statements of New York State Electric & Gas
Corporation: balance sheet as of December 31, 2004, and
statement of income and statement of retained earnings for
the twelve months ended December 31, 2004 (included in
NYSEG's Form 10-K for the year ended December 31, 2004, File
No. 1-3103-2, filed March 14, 2005, and incorporated herein
by reference).
FS-5 Financial statements of The Southern Connecticut Gas
Company: balance sheet as of December 31, 2004, and
statement of income and statement of retained earnings for
the twelve months ended December 31, 2004.
FS-6 Financial statements of Connecticut Natural Gas Corporation:
balance sheet as of December 31, 2004, and statement of
income and statement of retained earnings for the twelve
months ended December 31, 2004.
42
FS-7 Financial statements of The Berkshire Gas Company: balance
sheet as of December 31, 2004, and statement of income and
statement of retained earnings for the twelve months ended
December 31, 2004.
FS-8 Financial statements of Maine Natural Gas Corporation:
balance sheet as of December 31, 2004, and statement of
income and statement of retained earnings for the twelve
months ended December 31, 2004.
FS-9(a) Financial statements of Central Maine Power Company: balance
sheet as of December 31, 2004, and statement of income and
statement of retained earnings for the twelve months ended
December 31, 2004 (included in Central Maine Power's Form
10-K for the year ended December 31, 2004, File No. 1-5139,
filed March 14, 2005, and incorporated herein by reference).
FS-9(b) Financial statements of Central Maine Power Company: balance
sheet as of March 31, 2005, and statement of income and
statement of retained earnings for the three months ended
March 31, 2005 (included in Central Maine Power Company's
Form 10-Q for the three months ended March 31, 2005, File
No. 1-5139, filed May 6, 2005, and incorporated herein by
reference).
FS-10 Financial statements of Maine Electric Power Company, Inc.:
balance sheet as of December 31, 2004, and statement of
income and statement of retained earnings for the twelve
months ended December 31, 2004.
FS-11 Financial statements of NORVARCO: balance sheet as of
December 31, 2004, and statement of income and statement of
retained earnings for the twelve months ended December 31,
2004. (confidential treatment requested)
43