[Federal Register Volume 65, Number 190 (Friday, September 29, 2000)]
[Notices]
[Pages 58578-58583]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24975]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 35-27234]


Filings Under the Public Utility Holding Company Act of 1935, as 
Amended (``Act'')

September 21, 2000.
    Notice is hereby given that the following filing(s) has/have been 
made with the Commission pursuant to provisions of the Act and rules 
promulgated under the Act. All interested persons are referred to the 
application(s) and/or declaration(s) for complete statements of the 
proposed transaction(s) summarized below. The application(s) and/or 
declaration(s) and any amendment(s) is/are available for public 
inspection through the Commission's Branch of Public Reference.
    Interested persons wishing to comment or request a hearing on the 
application(s) and/or declaration(s) should submit their views in 
writing by October 16, 2000, to the Secretary, Securities and Exchange 
Commission, Washington, D.C. 20549-0609, and serve a copy on the 
relevant applicant(s) and/or declarant(s) at the address(es) specified 
below. Proof of service (by affidavit or, in the case of an attorney at 
law, by certificate) should be filed with the request. Any request for 
hearing should identify specifically the issues of facts or law that 
are disputed. A person who so requests will be notified of any hearing, 
if ordered, and will receive a copy of any notice or order issued in 
the matter. After October 16, 2000, the application(s) and/or 
declaration(s), as filed or as amended, may be granted and/or permitted 
to become effective.

KeySpan Corporation, et al. (70-9699)

    KeySpan Corporation(``KeySpan''), a combination gas and electric 
utility holding company claiming exemption from registration under 
section 3(a)(1) of the Act by rule 2, located at One MetroTech Center, 
Brooklyn, New York 11201; KeySpan's utility subsidiaries: The Brooklyn 
Union Gas Company d/b/a/ KeySpan Energy Delivery New York (``KeySpan 
New York''), located at One MetroTech Center, Brooklyn, New York 11201; 
KeySpan Gas East Corporation d/b/a/ KeySpan Energy Delivery Long Island 
(``KeySpan Long Island''); and KeySpan Generation LLC (``KeySpan 
Generation''), each located at 175 East Old Country Road, Hicksville, 
New York 11801; KeySpan's direct nonutility subsidiaries: ACJ 
Acquisition LLC (``ACJ''); KeySpan Energy Corporation; KeySpan 
Operating Services LLC; KeySpan Exploration & Production LLC; KeySpan 
Technologies Inc.; KeySpan MHK, Inc., all located at One MetroTech 
Center, Brooklyn, New York 11201; KeySpan Corporate Services LLC 
(``KCS''); KeySpan Utility Services LLC (``KUS''); Marquez Development 
Corp; Island Energy Services Company, Inc.; LILCO Energy Systems, Inc., 
all located at 175 East Old Country Road, Hicksville, New York 11801; 
KeySpan-Ravenswood Inc.; KeySpan-Ravenswood Services Corp., each 
located at 38-54 Vernon Boulevard, Long Island City, New York 11101; 
KeySpan Services, Inc., located at Octagon 10 Office Building, 1719 
Route 10, Suite 108, Parsippany, New Jersey 07054; KeySpan Energy 
Trading Services LLC, located at 100 East Old Country Road, Hicksville, 
New York 11801; and KeySpan Energy Supply LLC, located at 14-04 111th 
Street, College Point, New York 11356; and their respective nonutility 
subsidiaries; Eastern Enterprises (``Eastern''), a gas utility holding 
company claiming exemption from registration under section 3(a)(1) of 
the Act by rule 2, located at 9 Riverside Road, Weston, Massachusetts 
02493; Eastern's gas utility subsidiaries: Boston Gas Company (``Boston 
Gas''); Essex Gas Company (``Essex Gas''); and Colonial Gas Company 
(``Colonial Gas''), all located at One Beacon Street, Boston, 
Massachusetts 02108; Eastern's direct nonutility subsidiaries: Boston 
Gas Services, Inc.; EE-AEM Company, Inc.; EE Acquisition Company, Inc.; 
EEG Acquisition Company, Inc.; Eastern Associated Capital Corp.; 
Eastern Associated Securities Corp.; Eastern Energy Systems Corp.; 
Eastern Rivermoor Company, Inc.; Eastern Urban Services, Inc.; Mystic 
Steamship Corporation; PCC Land Company, Inc.; Philadelphia Coke Co., 
Inc.; Water Products Group Incorporated; Western Associated Energy 
Corp., all located at 9 Riverside Road, Weston Massachusetts 02493; 
Midland Enterprises Inc., located at 300 Pike Street, Cincinnati, Ohio 
45202; ServicEdge Partners, Inc.; and AMR Data Corporation, each 
located at 62 Second Avenue, Burlington, Massachusetts 01803; and their 
respective subsidiaries; and EnergyNorth, Inc. (``EnergyNorth''), a gas 
utility holding company claiming exemption from registration under 
section 3(a)(1) of the Act by rule 2, located at 1260 Elm Street, P.O. 
Box 329, Manchester, New Hampshire 03105; EnergyNorth's gas utility 
subsidiary, EnergyNorth Natural Gas, Inc. (``ENGI''), also located at 
1260 Elm Street, P.O. Box 329, Manchester, New Hampshire 03105; 
EnergyNorth's direct nonutility subsidiaries: Broken Bridge 
Corporation; EnergyNorth Realty, Inc., each located at 1260 Elm Street, 
P.O. Box 329, Manchester, New Hampshire 03105; EnergyNorth Propane, 
Inc., Located at 75 Regional Drive, Concord, New Hampshire 03301; and 
EnergyNorth Mechanicals, Inc., located at 25 Depot Street, Manchester, 
Massachusetts 03101; and their respective subsidiaries (together, 
``Applicants'') ,\1\ have filed an application-declaration under 
sections 6(a), 7, 9(a)(1), 10, 12(b), 12(c), 13(b), 32, and 33 of the 
Act, and rules 45, 46, 53, 54, and 80-92 under the Act.
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    \1\ The indirect nonutility subsidiaries of KeySpan, Eastern, 
and EnergyNorth are set forth in the application-declaration 
previously filed by KeySpan and ACJ seeking approvals relating to 
KeySpan's proposed acquisition of Eastern (``Merger U-1'').
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    In the Merger U-1, KeySpan and its subsidiary, ACJ, seek approvals 
relating to the proposed acquisition by KeySpan of all of the issued 
and outstanding common stock of Eastern (``Merger'').\2\ A notice of 
the Merger U-1 was issued on July 18, 2000 (HCAR No. 27201). Eastern 
also has previously filed an application-declaration with the 
Commission under the Act seeking approvals relating to the proposed 
acquisition (``Eastern/EnergyNorth Merger U-1'') by Eastern of all of 
the outstanding common shares of EnergyNorth (``Eastern/EnergyNorth 
Merger''). A notice of the Eastern/EnergyNorth Merger U-1 was issued on 
July 18, 2000 (HCAR No. 27201). For purposes of this application-
declaration, KeySpan has assumed that the Eastern/EnergyNorth Merger 
will be approved concurrently with the Merger. However, KeySpan states 
that its request for approval of the Merger is not contingent on 
Commission approval of the Eastern/EnergyNorth Merger, and further 
states that the same request applies to this application-
declaration.\3\
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    \2\ KeySpan requests that the Commission review and rule on this 
application-declaration contemporaneously with the Merger U-1.
    \3\ The Merger and the Eastern/EnergyNorth Merger are referred 
to in this notice collectively as ``Mergers.''
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    Following the consummation of the Mergers, KeySpan will have seven 
utility subsidiaries: KeySpan New York; KeySpan Long Island; KeySpan 
Generation; Boston Gas; Essex Gas; Colonial Gas; and ENGI 
(collectively,

[[Page 58579]]

``Utility Subsidiaries''). In addition, KeySpan states that KeySpan 
Energy Corporation (``KEC''), Eastern and EnergyNorth (collectively, 
``Intermediate Holding Companies'') will remain in existence after the 
Mergers as first tier public utility holding company subsidiaries of 
KeySpan.\4\
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    \4\ However, KeySpan states that EnergyNorth will be eliminated 
as an intermediate holding company as soon as practicable after the 
Merger is completed.
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    Each of the entities that will be directly and indirectly owned 
subsidiaries of KeySpan upon consummation of the transactions described 
in the Merger U-1 is referred to individually as a ``Subsidiary'' and 
collectively as ``Subsidiaries.'' \5\ All of KeySpan's direct and 
indirect Subsidiaries, other than the Utility Subsidiaries and the 
Intermediate Holding Companies, shall be referred to as ``Nonutility 
Subsidiaries.''
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    \5\ Applicants state that the terms ``Subsidiaries'' shall also 
include entities that become subsidiaries of KeySpan after 
consummation of the Merger.
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    Applicants propose to enter into, or to maintain, numerous types of 
financing transactions to meet KeySpan's capital requirements 
immediately following the Mergers and to plan future financing. 
Applicants request authorization to engage in the proposed financing 
transactions for the period beginning with the effective date of the 
Commission's Order in this matter and continuing for a period of three 
years from the date of that Order (``Authorization Period''). In 
addition, Applicants request the Commission to authorize various 
proposed intrasystem transactions. Applicants further request that the 
Commission reserve jurisdiction over certain proposed investments in 
nonutility businesses, as described below.
    Financings by each Applicant will be subject to the following 
conditions (``Financing Conditions''): (1) during the Authorization 
Period, KeySpan's common equity will be at least 30% of its 
consolidated capitalization, and each Utility Subsidiary's common 
equity will be at least 30% of its capitalization; (2) any long-term 
debt issued to KeySpan to unaffiliated parties under the authority 
requested in this application-declaration will be rated or will meet 
the qualifications for being rated investment grade by a nationally 
recognized statistical rating organization; (3) the effective cost of 
money on long-term debt financings will not exceed 500 basis points 
over comparable term U.S. Treasury securities and the effective cost of 
money on short-term debt financings will not exceed 500 basis points 
over the comparable term London Interbank Offered Rate (``LIBOR''); (4) 
the effective cost of money on preferred stock and other fixed-income 
oriented securities will not exceed 500 basis points over LIBOR; (5) 
the maturity of indebtedness will not exceed 50 years; (6) the 
underwriting fees, commissions, and other similar remuneration paid in 
connection with the non-competitive issue, sale ordistribution of a 
security will not exceed an amount or percentage of the principal or 
total amount of the security being issued that would be charged to 
other companies with a similar credit rating and credit profile in a 
comparable arm's-length transaction; and (7) KeySpan's ``aggregate 
investment'' in exempt wholesale generator (``EWGs'') and foreign 
utility companies (``FUCOs''), as that term is defined in rule 53 under 
the Act, will not exceed an amount equal to 250% of the consolidated 
retained earnings of KeySpan after giving effect to the accounting 
adjustments required in connection with the Mergers.
    The proceeds from the financings proposed in this application-
declaration will be used for lawful corporate purposes, including: (1) 
Financing investments by and capital expenditures of KeySpan and its 
Subsidiaries; (2) the repayment, redemption, refunding or purchase by 
KeySpan or any Subsidiary of any of its own securities under rule 42 
under the Act; and (3) financing working capital requirements of 
KeySpan and its Subsidiaries.

I. Existing Financing Arrangements

    KeySpan requests Commission authorization to maintain in effect 
through the Authorization Period all existing financing arrangements of 
KeySpan and its Subsidiaries as of the date of the completion of the 
Mergers,\6\ as well as any additional financing arrangements entered 
into before completion of the Mergers,\7\ and to amend, renew, extend, 
supplement and/or replace these arrangements (``Refinancings''). Any 
Refinancing that occurs after completion of the Mergers and that is 
subject to Commission approval under the Act will comply with the 
Financing Conditions and, absent prior Commission approval, will not: 
(1) Provide for an increase in the aggregate amount of indebtedness 
incurred; or (2) provide for a final maturity date that is beyond the 
Authorization Period.\8\ The total of all outstanding securities issued 
by KeySpan under any Refinancing, together with the additional equity 
and debt financing authority requested by KeySpan in this application-
declaration, will not exceed $5.1 billion during the Authorization 
Period.\9\
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    \6\ KeySpan estimates its existing financings, which consist of 
promissory notes, preferred stock, and credit facilities, to be 
approximately $1.4 billion. The Utility Subsidiaries presently have 
approximately $1.8 billion of debt, preferred stock, and capital 
leases. The Nonutility Subsidiaries presently have outstanding debt 
and capital leases totaling approximately $550 million.
    \7\ KeySpan's additional financing arrangements before 
completion of the Merger will include approximately $2.2 billion 
necessary for acquisition financing related to the Mergers (``Merger 
Financing'').
    \8\ KeySpan states that, under certain circumstances, it may be 
required to support its obligations under existing promissory notes 
by obtaining letters of credit. Accordingly, KeySpan also seeks 
Commission approval to obtain any letters of credit required under 
these notes.
    \9\ KeySpan states that it developed the aggregate amount of 
$5.1 billion by adding together the amount required for Merger 
Financing (approximately $2.2 billion), the amount of its existing 
financing (approximately $1.4 billion), and the amount of its 
proposed additional financing ($1.5 billion).
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II. KeySpan External Financing

A. Common and Preferred Stock
    KeySpan proposes, through the Authorization Period, to issue common 
stock and preferred stock in amounts that, when combined with KeySpan's 
proposed additional debt and convertible securities described below, 
will not exceed $1.5 billion outstanding at any one time (``Additional 
Financing Amount'').\10\ All common stock sales by KeySpan will be 
through underwritten public offerings, in private placements or in 
exchange for securities or assets being acquired from other companies, 
provided that the Commission has authorized the acquisition of these 
equity securities or assets in a separate proceeding, or that 
acquisition is exempt under the Act or the rules under the Act.\11\ 
Preferred stock or other types of preferred or equity-linked securities 
may be issued by KeySpan in one or more series with rights, 
preferences, and priorities to be designated by KeySpan's board of 
directors. The divided rate on any series of preferred securities 
issued by KeySpan under this authority would comply with the Financing 
Conditions.
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    \10\ This aggregate amount does not include any existing 
financing or Refinancing described in Section I of this notice.
    \11\ KeySpan also seeks authority to issue common stock in 
consideration for an acquisition by KeySpan or a Nonutility 
Subsidiary of securities or assets of a business, the acquisition of 
which has been approved by the Commission in this proceeding or is 
exempt under the Act of the rules under the Act.
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B. Debt Financings
    KeySpan proposes to issue long-term and short-term debt during the 
Authorization Period in amounts that, when combined with the equity

[[Page 58580]]

financings described above, will not exceed $1.5 billion outstanding at 
any one time. The long-term debt securities would comply with the 
Financing Conditions and may include various types of debt securities 
to be issued under an indenture to be entered into between KeySpan and 
the Chase Manhattan Bank, as trustee (``KeySpan Indenture''). KeySpan 
states that any securities issued under the KeySpan Indenture, or under 
an exemption from the registration requirements of the Securities Act 
of 1933, as amended (``1933 Act''), will be unsecured and 
unsubordinated obligations and will rank equally with all other 
unsecured and unsubordinated debt of KeySpan.\12\
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    \12\ KeySpan states that maturity, interest rates, redemption 
provisions, sinking fund terms, and other terms of the proposed 
long-term debt securities, medium-term notes, and institutional debt 
would be determined by KeySpan at the time of issuance.
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    KeySpan's proposed additional short-term debt would include, but 
would not be limited to, institutional borrowings, commercial paper 
(including back-up short-term credit facilities), and bid notes. 
KeySpan states that the proposed short-term debt will be unsecured and 
will be issued in accordance with the Financing Conditions.\13\ KeySpan 
states that it may use the proceeds of any short-term debt issuance to 
refund pre-Merger short-term debt and Merger-related debt, and to 
provide financing for general corporate purposes, working capital 
requirements, and Subsidiary capital expenditures until long-term 
financing can be obtained.
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    \13\ KeySpan states that it presently issues commercial paper to 
accredited investors, as that term is defined in the 1933 Act, and 
that such issuances are exempt under section 4(2) of the 1933 Act. 
KeySpan anticipates that future issuances of commercial paper also 
will be exempt under the 1933 Act.
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C. Guarantees
    Following the Mergers, KeySpan requests authority during the 
Authorization Period to enter into guarantees, letters of credit, 
expense agreements and other forms of credit support (``Guarantees'') 
with respect to the payment and performance obligations of the 
Subsidiaries in an aggregate principal amount not to exceed $2 billion 
outstanding at any one time, not including obligations exempt in 
accordance with rule 45 under the Act. KeySpan states that this limit 
on the aggregate principal amount of Guarantees is separate from the 
amount applicable to its proposed debt and equity financing, and is in 
addition to its existing Guarantees.\14\ KeySpan further seeks 
authority to maintain in effect and to amend, renew, extend, and/or 
replace all Guarantees existing at the time of the Mergers.
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    \14\ KeySpan currently has approximately $1.3 billion in 
Guarantees outstanding, which are expected to remain in place 
following the Merger.
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III. Subsidiary Financing

A. Utility and Nonutility Subsidiaries
    The Utility Subsidiaries request authority to issue and sell, 
during the Authorization Period, additional debt securities with 
maturities of one year or less, up to the following aggregate principal 
amounts (``Additional Utility Subsidiary Financing Amounts'') and in 
accordance with the Financing Conditions:

------------------------------------------------------------------------
                                                              Aggregate
                                                              principal
                     Utility subsidiary                       amount ($
                                                              millions)
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KeySpan New York...........................................         $250
KeySpan Long Island........................................          185
KeySpan Generation.........................................           50
Boston Gas.................................................          150
Colonial Gas...............................................           75
Essex Gas..................................................           20
ENGI.......................................................           35
                                                            ------------
    Total..................................................          765
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B. Special-Purpose Subsidiaries
    The Applicants seek Commission approval to acquire the equity 
securities of one or more special-purpose subsidiaries (``Financing 
Subsidiaries'') organized solely to facilitate a financing. Applicants 
seek authority for these Financing Subsidiaries to issue to third 
parties income preferred securities or other securities to the extent 
not exempt under the Act.\15\ In addition, authority is requested for: 
(1) The issuance of debentures or other evidences of indebtedness by 
any of the Subsidiaries to a Financing Subsidiary in return for the 
proceeds of the financing; (2) the acquisition by any of the 
Subsidiaries of voting interests or equity securities issued by a 
Financing Subsidiary to establish the Subsidiary's ownership of the 
Financing Subsidiary; and (3) the guaranty by KeySpan of a Financing 
Subsidiary's payment and performance obligations. Each of the 
Subsidiaries also requests authority to enter into an expense agreement 
with its respective Financing Subsidiary, under which it would agree to 
pay all expenses of the Financing Subsidiary.
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    \15\ Any amounts issued to third parties by these Financing 
Subsidiaries under this authorization will be included in the 
overall financing limitation applicable to the immediate parent of 
that Financing Subsidiary. However, the underlying intrasystem 
mirror debt and parent guaranty shall not be included in that 
limitation.
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    KeySpan and its Subsidiaries also seek authority to invest in one 
or more Subsidiaries (``Intermediate Subsidiaries'') that 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, as defined in sections 32 and 33, respectively, 
of the Act, ``energy-related'' companies as defined in rule 58 under 
the Act (``Rule 58 Subsidiaries''), exempt telecommunications companies 
within the meaning of section 34 of the Act (``ETCs''), or other 
Nonutility Subsidiaries authorized by order of the Commission. KeySpan 
states that Intermediate Subsidiaries also may engage in development 
and administrative activities relating to these EWGs, FUCOs, Rule 58 
Subsidiaries, and other Nonutility Subsidiaries, and requests authority 
for Intermediate Subsidiaries to provide management, administrative, 
and other services to these entities.\16\
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    \16\ Applicants state that these services may be rendered at 
fair market prices to the extent that they qualify for any 
exceptions from the ``at cost'' standards of the Act requested by 
KeySpan in this application-declaration.
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    KeySpan further requests that the Commission reserve jurisdiction 
over the acquisition, directly or indirectly, of the securities of one 
or more new Subsidiaries (``New Subsidiaries''), pending completion of 
the record. These New Subsidiaries would be organized exclusively for 
the purpose of engaging in one or more of the activities in which any 
of KeySpan's existing Nonutility Subsidiaries is engaged at the 
effective time of the Mergers.
    Investments in Intermediate Subsidiaries of New Subsidiaries may 
take the form of any combination of the following: (1) Purchase of 
capital shares, partnership interests, member interests in limited 
liability companies, trust certificates or other forms of equity 
interests; (2) capital contributions; (3) open account advances with or 
without interest; (4) loans; and (5) guarantees issued, provided or 
arranged in respect of the securities or other obligations of any 
Intermediate Subsidiaries or New Subsidiaries. In addition, KeySpan 
requests authority to consolidate or otherwise reorganize its ownership 
interests in existing and future Nonutility Subsidiaries under one or 
more direct or indirect Intermediate 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 from the Commission; and (3) other available 
cash resources, including proceeds of securities sales by

[[Page 58581]]

a Nonutility Subsidiary under rule 52. To the extent that KeySpan 
provides funds or issues guarantees directly or indirectly to support 
the obligations of an Intermediate Subsidiary which are incurred for 
the purpose of making an investment in any EWG or FUCO or a Rule 58 
Subsidiary, the amount of these funds or guarantees will be included in 
KeySpan's ``aggregate investment'' in those entities, as calculated in 
accordance with rule 53 or rule 58 under the Act, as applicable.

IV. EWG and FUCO Financing

    Following the Mergers, KeySpan seeks authority to finance the 
acquisition of EWGs and FUCOs, either directly or indirectly through 
intermediate companies, partnerships or other corporate entities during 
the Authorization Period. KeySpan further requests that the Commission 
authorize KeySpan to invest up to an amount equal to 250% of the 
consolidated retained earnings of KeySpan in EWGs and FUCOs. Applicants 
state that KeySpan's aggregate investment in EWGs and FUCOs as of 
September 11, 2000 was approximately $690 million, and that KeySpan 
will have an aggregate investment of 130.74% of its retained earnings 
in EWGs and FUCOs as of the date the Merger is completed.\17\ KeySpan 
further states that it currently plans to invest in two additional EWGs 
and that this investment, if consummated, would bring KeySpan's total 
aggregate investment to 227.5% of retained earnings.
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    \17\ KeySpan's consolidated retained earnings as of June 30, 
2000 totaled approximately $528 million, which reflects the effects 
of an earlier merger consummated on May 28, 1999. KeySpan's pro 
forma combined consolidated retained earnings after giving effect to 
the Mergers will be substantially the same.
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V. Other Proposed Financing Transactions

A. KeySpan System Money Pools
    KeySpan and the Utility Subsidiaries propose to establish a utility 
money pool (``Utility Money Pool''). The Utility Subsidiaries also 
request authorization to make unsecured short-term borrowings from the 
Utility Money Pool, contribute surplus funds to the Utility Money Pool, 
and lend and extend credit to (and acquire promissory notes from) one 
another through the Utility Money Pool. KeySpan may invest in, but not 
borrow from, the Money Pool.\18\ Each of the Utility Subsidiaries may 
borrow from the Utility Money Pool up to its respective Additional 
Utility Subsidiary Financing Amount at any one time outstanding.
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    \18\ KeySpan New York and KeySpan Long Island will be limited to 
borrowing from the Money Pool only.
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    In addition, KeySpan and the Nonutility Subsidiaries request 
authorization to establish a nonutility money pool (``Nonutility Money 
Pool,'' and collectively, ``Money Pools''). Applicants state that rule 
52 exempts the Nonutility Money Pool activities of the Nonutility 
Subsidiaries from the Act's prior approval requirements.
    KeySpan requests authority to contribute surplus funds and to lend 
and extend credit to: (1) The Utility Subsidiaries through the Utility 
Money Pool; and (2) the Nonutility Subsidiaries through the Nonutility 
Money Pool. Funds made available by KeySpan for loans through the Money 
Pools will be made available first for loans through the Utility Money 
Pool and then for loans through the Nonutility Money Pool.
    Funds not required by the Utility Money Pool to make loans (with 
the exception of funds required to satisfy the Utility Money Pool's 
liquidity requirements) would ordinarily be invested in one or more 
short-term investments, including: (1) Interest-bearing accounts with 
banks; (2) obligations issued or guaranteed by the U.S. government and/
or its agencies and instrumentalities, including obligations under 
repurchase agreements; (3) obligations issued or guaranteed by any 
state or political subdivision, provided that the obligations are rated 
not less than ``A'' by a nationally recognized rating agency; (4) 
commercial paper rated not less than ``A-1'' or ``P-1'' or their 
equivalent by a nationally recognized rating agency; (5) money market 
funds; (6) bank certificates of deposit; (7) Eurodollar funds; and (8) 
other investments that are permitted by section 9(c) of the Act and 
rule 40 under the Act.
    KCS will administer the Money Pool on a ``at cost'' basis and will 
maintain separate records for each money pool Surplus funds of the 
Money Pools may be combined in common short-term investments, but KCS 
will maintain separate records of these funds. Applicants request that 
the Commission reserve jurisdiction over the participation by future 
companies formed or acquired by KeySpan in the relevant money pool, 
until a specific post-effective amendment is filed that names the 
Subsidiary to be added as a participant in that money pool.
B. Hedging Transactions
    KeySpan and, to the extent not exempt under rule 52, the 
Subsidiaries request authority to continue existing, and to enter into 
additional interest rate hedging transactions with respect to existing 
indebtedness (``Interest Rate Hedges''), subject to certain limitations 
and restrictions, in order to reduce or manage interest rate costs. 
Applicants state the Interest Rate Hedges would involve the use of 
financial instruments commonly used in today's capital markets, 
including interest rate sways, caps, collars, floors, and structured 
notes, or transactions involving the purchase or sale, including short 
sales, of U.S. Treasury obligations.
    In addition, the Applicants request authority to continue existing, 
and to enter into additional interest rate hedging transactions with 
respect to anticipated debt offerings, subject to certain limitations 
and restrictions (``Anticipatory Hedges''). Anticipatory Hedges would 
be utilized to fix and/or limit the interest rate risk associated with 
any new issuance through the use of various derivative or cash 
transactions, including, but not limited to, structured notes, caps and 
collars.
C. Changes in Capital Stock of Subsidiaries and Payment of Dividends 
Out of Capital or Unearned Surplus
    Applicants request authority to change the terms of any wholly 
owned Subsidiary's authorized capital stock capitalization by an amount 
deemed appropriate by KeySpan or other immediate parent company. This 
authority would allow a Subsidiary to change the par value, or change 
between par and no-par stock, without additional Commission approval. 
Any action by a Utility Subsidiary would be subject to and would only 
be taken upon receipt of necessary approvals by the state commission in 
the state or states where the Utility Subsidiary is incorporated and 
doing business.
    The Applicants will account for the Mergers using the purchase 
method of accounting. Under this method of accounting, the Mergers will 
give rise to a substantial level of goodwill which, in accordance with 
the Commission's Staff Accounting Bulletin No. 54, Topic 5J (``Staff 
Accounting Bulletin''), will be ``pushed down'' to Eastern, 
EnergyNorth, and their respective subsidiaries and reflected as 
additional paid-in capital in their financial statements. In addition, 
as a result of the push-down of the goodwill, the retained earnings of 
Eastern and EnergyNorth and their subsidiaries will be effectively set 
to zero as if they were new companies, with the balance being reflected 
in paid-in capital. Accordingly, the Applicants request authorization 
to pay dividends out of the additional paid-in capital accounts of 
Eastern, EnergyNorth, Midland

[[Page 58582]]

Enterprises, Inc. (``Midland''), and Transgas, Inc. 
(``Transgas''),\19\, up to the amount of their respective retained 
earnings immediately prior to the Mergers and out of earnings before 
the amortization of the goodwill after the Mergers.
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    \19\ Midland and Transgas are nonutility subsidiaries of 
Eastern.
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    Applicants state that there may be situations in which one or more 
Nonutility Subsidiaries will have unrestricted cash available for 
distribution in excess of current and retained earnings. Accordingly, 
Applicants propose that the direct and indirect Nonutility Subsidiaries 
be permitted to pay dividends from time to time out of capital and 
unearned surplus through the Authorization Period, to the extent 
permitted under applicable laws, and to acquire, retire and redeem 
securities that the Nonutility Subsidiaries have issued to any 
associate company, any affiliate, or any affiliate of an associate 
company. Without further approval of the Commission, no Nonutility 
Subsidiary will declare or pay any dividend out of capital or unearned 
surplus if that Nonutility Subsidiary derives any material part of its 
revenues from the sale of goods, services, electricity or natural gas 
to any of the Utility Subsidiaries.
D. Foreign Gas Related Investments
    KeySpan states that it currently holds interests in Nonutility 
Subsidiaries that directly or indirectly engage in activities in Canada 
which involve the supply of natural gas, including exploration, 
development, production, marketing, or other activities within the 
meaning of the Gas Related Activities Act of 1990 (``GRAA''). KeySpan 
expects that it may expand its investments in companies engaged in 
Canadian GRAA activities (``GRAA Canadian Subsidiaries''). Therefore, 
Applicants request that the Commission reserve jurisdiction over 
additional investments by existing Nonutility Subsidiaries in existing 
partially owned GRAA Canadian Subsidiaries.

VI. Benefit and Dividend Reinvestment Plans

    KeySpan seeks authorization to issue and sell its common stock from 
time to time, during the Authorization Period and subject to the 
Additional Financing Amount, under its benefit plans and dividend 
reinvestment plan. \20\ Shares of KeySpan common stock for use under 
these plans may be either newly issued shares, treasury shares, or 
shares purchased in the open market.
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    \20\ Following the Mergers, Eastern's and EnergyNorth's stock 
plans will cease to operate and may be assumed by KeySpan. However, 
KeySpan may issue shares of its common stock under the authorization 
sought in this application-declaration in order to satisfy the 
obligations of Eastern and EnergyNorth under all these discontinued 
plans. Therefore, KeySpan also requests authority to issue and/or to 
sell shares of its common stock for this purpose.
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    Applicants also seek authority for The Houston Exploration Company 
(``Houston Exploration''), a wholly owned subsidiary of KeySpan, to 
issue securities under its 1996 and 1999 Stock Option Plans from time 
to time during the Authorization Period. Options granted under Houston 
Exploration's 1996 Stock Option Plan may not exceed 10% of the shares 
of Houston Exploration's common stock outstanding from time to 
time.\21\ Under the 1999 Stock Option Plan, 400,000 options were 
authorized of which 111,800 options were granted during 1999. 
Applicants further request authorization for KeySpan's indirect 
subsidiary, MyHomeKey.com, Inc. (``MHK''),\22\ to issue and sell, and 
to repurchase, from time to time during the Authorization Period under 
certain existing stock plans, shares of MHK's common stock or options 
or other stock purchase rights.\23\
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    \21\ As of December 31, 1999, substantially all options 
currently authorized under the 1996 Stock Option Plan had been 
granted.
    \22\ MHK was formed to establish and maintain an Internet-based 
website offering certain energy and home-related goods and services. 
As of April 18, 2000, KeySpan owned an approximate 18.2% beneficial 
interest in MHK through KeySpan's wholly owned subsidiary, KeySpan 
MHK Inc. MHK also expects to issue and sell common stock in an 
initial public offering for purposes of raising capital to finance 
the business activities contemplated by its current business plan.
    \23\ Under its existing stock plan, MHK may issue incentive 
stock options, nonstatutory stock options and stock purchase rights 
to participating employees, directors and consultants. Shares of 
MHK's common stock also have been reserved for issuance under an 
option granted to one of MHK's directors.
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VII. Tax Allocation Agreement

    Applicants request approval of an agreement for the allocation of 
consolidated tax among KeySpan and its subsidiaries following the 
Merger (``Tax Allocation Agreement''). KeySpan states that the Tax 
Allocation Agreement is subject to approval by the Commission under the 
Act because it provides for the retention by KeySpan of certain 
payments for tax losses that KeySpan has incurred in connection with 
acquisition-related debt related to the Mergers.

VIII. Affiliate Transactions

A. Subsidiary Service Companies
    KeySpan request that the Commission approve two existing subsidiary 
service companies, KCS and KUS, and one additional service company, 
KeySpan Engineering & Survey Inc. (``KENG''), as subsidiary service 
companies in accordance with rule 88(b) under the Act (collectively, 
``Service Companies'') \24\ Applicants state that each of these three 
Service Companies would provide a distinct set of services to its 
affiliate companies.\25\ KCS would provide traditional corporate and 
administrative services to KeySpan and the Subsidiaries. KUS would 
provide only limited services to five Subsidiaries.\26\ KENG would 
provide engineering and surveying services primarily to the Utility 
Subsidiaries as well as to KeySpan's direct nonutility subsidiary KES, 
and to the Long Island Power Authority (``LIPA'').\27\
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    \24\ In addition, KeySpan requests that the Commission find that 
this application is deemed to constitute a filing on Form U-13-1 for 
purposes of rule 88 under the Act, or, alternatively, that the 
filing of a Form U-13-1 is not necessary under the Act.
    \25\ KeySpan states that, because of certain requirements of the 
New York Public Service Commission (``NYUPSC'') and the New York 
State Education Law, the services offered by KUS and KENG must be 
provided by separate entities in order to protect the public.
    \26\ As a result of certain restrictions imposed by the NYPSC, 
KUS will provide gas and electric transmission and distribution 
systems planning, marketing, gas supply planning and procurement, 
research and development, and meter repair operations, to only the 
following Subsidiaries: KeySpan New York; KeySpan Long Island; 
KeySpan Generation; KeySpan Electric Services LLC (``KESquo;); and 
KeySpan Energy Trading Services LLC. Each of Boston Gas, Colonial 
Gas, Essex Gas, and ENGI will provide these types of services to 
themselves respectively and will not receive them from KUS.
    \27\ LIPA is a corporate municipal instrumentality of the State 
of New York that purchases the electric generation capacity of 
KeySpan Generation at wholesale. KES provides certain operation, 
maintenance, and construction maintenance services to LIPA.
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    Each of KCS, KUS, adn KENG propose to enter into separate service 
agreements (``Service Agreements'') with some or all of KeySpan and its 
Subsidiaries, each of which has been structured to comply with the 
accounting and cost allocation requirements of section 13 of the Act 
and the Commission's rules under the Act. Under each of the Service 
Agreements, charges for services provided to client companies would be 
at cost, in compliance with rules 90 and 91 under the Act.
    KCS and KUS each propose to add to their respective existing 
employee rosters by transferring personnel for the current rosters of 
certain Intermediate Holding Companies, Utility

[[Page 58583]]

Subsidiaries, and other Subsidiaries. KENG would be staffed by 
transferring certain existing personnel from KUS. The capitalization of 
each of KCS, KUS, and KENG would consist of no more than 10% equity.
    In order to allow time to develop all required systems, Applicants 
seek authority to delay the full implementation of its proposed service 
company plan until January 1, 2001. During the period between 
completion of the Merger and that date, KeySpan states that it would 
use certain interim measures for allocating costs and assigning 
services within the combined registered holding company system.
B. Other Affiliate Transactions
    Applicants request authority for the Nonutility subsidiaries to 
provide certain construction, goods or services a fair market value, 
under certain circumstances, to any nonutility associate company in the 
KeySpan system. In addition, certain Nonutility Subsidiaries of KeySpan 
currently participate in certain transactions with affiliates at rates 
that may exceed cost under existing arrangements. KeySpan requests an 
interim exemption from the cost standards of rules 90 and 91 under the 
Act to allow these Nonutility Subsidiaries to continue participating in 
these arrangements for a period of not longer than 12 months following 
the date of the Commission's order in this matte. Specifically, KeySpan 
requests this interim approval for Northeast Gas Markets LLC, a wholly 
owned nonutility subsidiary of KeySpan, to continue to provide contract 
administrative services at market rates to two nonutility affiliate 
companies, Alberta Northeast Gas Limited and Boundary Gas Inc., for the 
specified 12-month period: KeySpan also requests an exemption from the 
cost standards of rules 90 and 91 under the Act to allow another 
Nonutility Subsidiary, Transgas, Inc., to continue providing gas 
transportation services to the Utility Subsidiaries to the extent that 
these services are not exempt under rule 81.

    For the Commission by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-24975 Filed 9-28-00; 8:45 am]
BILLING CODE 8010-01-M