You're viewing Docket Item 21.4 from the case CONSOLIDATED EDISON COMPANY OF NEW YORK, INC. & SUBSIDIARIES v. USA. View the full docket and case details.

Download this document:




Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 1 of 52

EXHIBIT C-l

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 2 of 52

Date: November 20. 1997

To:

Robert Stelben
Hyman Schoenblum

From:

Brian DePlautt

He:

Consolidated Edison Development. Inc~
EZH Lease

The following is an update regarding certain accounting and tax aspects of the
EZH transaction.

(1) Tax Risk Letter

Shearman & Sterling is finalizing the Tax Risk Letter. which wil outlne ,the major
tax risks in the 467 structure, and hopes to have it to us by Thursday, November
20. or Friday November 21.

The critical path on this item is: (a): the completion and turnaround of the tax
partner's final comments to the existing draft letter.

(2) Tax Change Letter

Shearman & Sterting is finalizing the Tax Change Letter, which wil'

outlne the
retroactive or prospective nature of historical changes in leveraged lease tax
regulations, and hopes to have it to us by Thursday, November 20, or Friday~
November 21.

The critical paths on this item are: (a) the completion of the legislative history
research on one of the 'changes and (b) the completion and turnaround of the tax

partnets comments

to the existinQ draft letter.

Shearman has indicated that they would like to reserve the right to delay delivery
to us of one of these two letters beyond the target delivery dates in the event
they are required to fight fires on other fronts.

, (3) Arthur Ande'rson Accounting Letter

Arthur Anderson rAAft) has prepared a draft'accunting letter and is the process

, of drafting an added paragraph to the letter. The added paragraph is said to

address what the accounting treatment would be, starting in year 21, in'the event
that EZH did not exercise its Fixed Purchase Option ("FPO") in year 20.

US03450

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 3 of 52

The critical paths on this item are: (a) AA:s review of the clarifcations of the
transaction structure provided to it last night. (b) the drafting by the partner of the
added paragraph that deals with what happens in the event EZH does not
exercise the FPO and (c ) the conceptualization of the specific accounting e,~tries
that would be required in the event the proposed phase two treatment were to be

implemented. --' _. -- '

AA has indicated that it wil seek to provide us with verbal direction with respect
to the resolution of these issues on Thursday November 20, subject to ti,me
constraints at the parter level, with a letter to follow as soon, as possible. We
Gontinue to reiterate to AA the immediate urgency of our desire for the resolution
of these issues and the receipt of their letter.

cc: MJ McCartney

J. Freilch
C. Muoio

U503451

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 4 of 52

EXHIBIT C-2

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 5 of 52

Date: November 21, 1997

To: Mary Jane McCartney

From:

Re:

Brian DePlautt

Consolidated Edison Development, Inc.
EZH Lease
Status Update

The following is the current status on some of the issues on the EZH Lease:

(1) Accounting

We anticipate receiving the latest draft of the Arthur Andersen accunting letter
Monday morning and will distribute it to PW and internally when we receive it.

We have delivered writte~ responses to all of PW's questions and are awaiting
their questions.

We have requested Jim Dewey to contact Leo Naughton of PW. Leo is a former
tax partner at Shearman & Sterling and employee of the US Treasury who is
heading up ,8 lease advisory business at PW which represents Lessors in 467
lease out. transactions. Leo and his team recently make a proposals to
lease in ¡lease out transactions
to CEO to invest in, or (b) to provide CEO with buy side lease advisory services
in support of CEO's pursuit ofthese transactions. '

CEO to either: (a) represent lessors bringing 467

lease in I

To the extent that Leo's group is actively involved on both the buy and sell side
of these transactions it is' possible that he may be able to provide some insight to
the audit side of PW regarding the way in which the partcipants in the 467 lease
market account for these transactions. ,Leo is awaiting Jlms' call.

(2) Internal Legal

We have retained Can Edison's legal departent to read the project documents
and to help prepare the legal deliva-rabies. on the transaction such as
Incumbency Certficates etc. The primary point of contact is Andrew Scher who
have dèlivered all of the
available project agreements to' him as well as the Project Briefing

Memorandum. '

was a tax specialist. prior to joining Con' Edison. We

U503452

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 6 of 52

(3) Tax History Letter

Shearman & Sterling has delivered their tax history letter to us which reviews the
history of tax law and code changes relating to leveraged leases.,. The, letter
covers research for the period 1985 to the present and is available for
distribution to any interested parties. We have distributed this letter to the Can
Edison attorney who is helping us with Legal Services.

(4 ) Tax Risk Letter

Shearman & Sterling has delivered their tax risk letter to us and it is in
conformance with the conversations and meetings we have had with them in the
this letter to the Con Edison attorney who is helping

past. We have distributed

us with Legal Services.

cc: J. Freilich
R. Stelben
H. Schoenblum
C. Muoio

U503453

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 7 of 52

EXHIBIT C-3

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 8 of 52

13. RISK ANALYSIS

RISK

MITGA nON

ESTIMATED REMAINING
RISK LEVEL

Poliical and Regulatory
Expropriation

Political Violence

Change in Law

Currency
InconvertibilityfT ransfer

Devaluation

Financing
Debt Availability

Interest Rate Changes

Technology
Existing Plant

(a) AA rated Country
(b) Equity exposure defeased
by (i) AA Bank UC and (ii)
Treasury securities
(a) AA rated Country
(b )Equity' exposure defeased by
(i) AA Bank UC and
(ii)
Treasury securites
(a) AA rated Countr
(b) Equity exposure defeased
by (i) M Bank LC and (ii)
Treasury securities
(c) EZH takes all focal country
change in law risk

(a) AM rated Country
(b) Currently fully convertible
(c) No negative history
(a) All payments payable in US
Dollars
(b) Sublease payments
supported by (i) AA Bank UC
and defeased by (ii) Treasury
securities. both denominated in
US Dollars

Bank debt will close on the
same day the Head Lease and
Sublease close (together the
.Closing Date").
Interest rates will be fixed on
. the Closing Date

(1) Newly constructed plant
(2) Over 500 units of the Frame
E installed.
(3) Satisfactory engineering
report from Duke Engineering to
be received prior to closing.

Low

Low

Low

Low

Low

Low

Low

low

47

U501594

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 9 of 52

New Plants
Stranded Assets

-

pressures

Not applicable
Upcoing regulations
(Dutch
Electricity Act, and EU Directive
on open border competition in
electicity) could expose EZH to
competitive
from
EDF, VEBA and others selling
at be/ow fully loaded costs.
Mitigations of this risk are (a)
consolidation
the Dutch
Genco's in a larger, stronger
firm, (b) fully defeased nature of
EZH Obligations which transfer
credit risk from EZH to M

of

Construction Risk
EPC Contractor Guarantees

Use of proven technologies -CT

Banks and Treasury secrities.

Plant is complete and operating

GE E Frame family (7E and 9E)
has an installed fleet of over
500 units worldwide.

- ABB condensing steam turbine

Use of proven technologies
STG
Use of proven tecnologies - Stork Ketels waste heat boiler is
HRSG
Use of proven technologies
C02 boiler

is standard technology.

Fixed price EPC contract
Heat Rate

Plant Operations
Operations & Maintenance

Force Majeure

Fuel
Availability

standard technology

- Stor Ketels C02 boiler is an
open item.
This technology,
and the design,
construction
and operation needs
to be
reviewed in the due dilgence
process.
Plant is complete and operating
Risk is held by EZH

Risk is held by EZH

Risk is he/d by EZH

Risk is held by EZH

Low

nla

Low

Low

low

Open

nla
Low

Low

low

low

48

U501595

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 10 of 52

Price Fluctuations

Risk is held by EZH

EZH Performance
Sublease Rent - Project Debt
Portion

Sublease Rent - Equity Portion

Fixed Price Option Payment

Early Termination Amounts

by

(8) Secured
Ihe Debl
Defeasance Deposit,
invested
in M Bank deposit, pledged to
lender bank.
(a) Secured by the Investor
Defeasance Deposit,
invested
in Treasury securities.
(a) Secured by the Investor
Defeasance Deposit,
invested
in Treasury securities
(a) Secured by the combination
of (b) M Bank UC and (b)
Investor Defeasance Deposit,
invested in Treasury secrities,

Dutch taxes
Change in Dutch tax law

Full indemnity from EZH

Legal opinion is expected to be
a .should" ( 60 - 90%)

US taes
Headlease Is not a true lease,
and Sublease is a true lease,

hence CEO is deemed the
purchaser of the asset, and

CEO is forced to depreiate the
plant straight line over 47 yrs

Low

Low

Low

Low

low

Low

Low

Headlease is a true lease, and
Sublease is not a tre lease,

Legal opinion is expected to be
a .should" (80 -90% )

low

hence
deemed 8 loan, and

equity

investment

is

CED is not allowed to deduct
Headlease rent, and is deemed,
to receive interest income from
Sublessee

Headlease Is
leaseback,

a disqualified

Legal opinion is expected to be
a "reason~d should" (80 - 85%)

Low

hence, Constant rental accruals
required on headlease. and

deductions are back loaded

49

U501596

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 11 of 52

put

Sublease
disregarded, both leases are a .should" ( 80 - 90%)
considered one lease,

renewal

is Legal opinion is expected to be

Low

hence, Sublease rentleiielization
required. and

ceo is
Sublease rental income.

forced

to

frontload

third part

Medium

Environmental
Existing Plant

New Plant

labor
Inadequate Skils
Unrest

Worst Case Scenario
Total Project Collapse

Tauw

Mileu

'(1 )
Netherlands engineer report.
(2) Full Indemnity from EZH
(1 )
Netherlands engineer report
(2) Full Indemnity from EZH

Tauw

Milieu

b.v.

b.II..

Risk is held by EZH
Risk is held by EZH

Project structure collapses and
Trust draws on Bank UC. Debt
Defeasance
Treasury
securites
of

payment
landing debt and equity

and

for

outs

all
transaction costs.

to

467 Regs are finalized prior to EZH pays
close and transaction fails
close
Accounting
Headlease will not pass
FASB 13
leases.

the
leveraged

test

for

firms

Industry practice

survey
(a)
from Cornerstone indicates the
following
consistently
close trnsactions similar to the
EZH transaction including (1)
PSRC,
(3)
Nynex, (4) Ameritech, (5) Banc
One. and (6) Bank of New York.

(2) Ouquense

Low

Low

Low

low
Low

Low

50

U801597

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 12 of 52

EXHIBIT C-4

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 13 of 52

"'\

leasing White Paper

Executive Summary

One element of a diversified investment portolio for Con Edison is the relatively low risk and
attractive return profie of leases. This paper describes sale-Ieasebacks, identifies major
risks and benefis, and details a recmmended investment.

Investments of this type would be accunted for as leveraged leases, allowing for front-
generate after tax yields of between 15% and 25% over their lives,

loaded earnings, and

after taking accunt of typical capital strcture and debt costs.

The earnings come from a combination of lease payments and tax deductions. Con Edison,
with its high tax rate and large taxable income position. is in a particularly favorable position
to take advantage of such a program.

What is a sale-leaseback?

In its most basic form, a sale-Ieaseba~ is ,the purchase of an asset and the subsequent
leaseback of that asset to the seller under a long term lease agreement. Under a so-clled
.Ie~eraged lease", the investor uses non-recourse debt to reduce the equity needed to
purchase the asset.

Since its inception in 196, the leveraged leasing market has continually developed new
variations on this basic theme to accmmodate increasingly complex accunting and tax
laws and regulations. The latest of these variations are the .Iease-Ieaseback. structures in
which an asset is leased (instead of purchased) and the leaseho,ld rights derived from that
lease are then leased back to the initial owner of the facility. Lease-leaseback structures
have been developed to optimize the benefis that can be derived by the utiity and the
investor in these transactions.

What kind of lease structures wil be considered?

Under the proposed investment program, investments wil be considered in both sale-
leasebacks and lease-Ieasebacks, depending on prevailng market conditions.

Because the specific transaction currently under consideration by CEO is a lease-leaseback
we wil use this type of structure in our example of a typical transaction.

How would a typical transaction work?

In a typicallease-leaseback transaction, a special purpose subsidiary owned by an investor,
in this case CEO,would establish a trst. On the closing date, CEO would invest equity in
the trust and the trust would borrow non-recourse debt for the project. Concurrently the trust
would enter into a lease agreement with a utility under which the trust would lease an asset,
for example a power plant, from the utilty for 44 years. The trust would, at the same time,
lease the plant back to the utilty for 20 years, after which the trust would have a number of
options, described below. The initial 20 year term of the leaseback has been chosen to

CE 012018

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 14 of 52

qptimize the benefits aVøiiable to both the utilty and the investor. A 44 year leaseback
would not qualif for the tax treatment that CED and the foreign utility seek.

On the closing date of the lease, the utility would establish, for the benefi of CEO, (a) a trust
accunt containing U.S. Treasury securities and (b) an irrevocable bank letter of credit from
a bank rated AA or better, both in amounts that, when combined, fully secure the obligations
of the utilty to CED. In the event the utilty were to fail to make the payments due to CED
under the lease, CEO could take the U.S. Treasury securities and draw on the letter of credit
to satisfy any shortalls.

At the end of the initial 20 year lease, the utiity would have the option to purchase the plant
at a pre-agreed fixed price. If the utiliy did purchase the plant at this time, the transaction
would be completed. If the utility did not purchase the plant at the end of year 20, the trust
would have the option to either (a) lease the plant to a third party for the remaining 24 years
of the lease, (b) use the plant itself, or (c ) require the utilty to re-lease the plant for an
additional 17 years at prices that would assure CEO of its expected return,

Responsibility for the condition of the plant would rest with the utilty during the initial tem of
the lease, and with the third party during a subsequent lease. During the remaining seven
years under the lease, CEO could either use the plant itself or lease the plant to third parties
and in doing so obtain additional revenue. The base case economics assume no revenue
for this period. At the end of the 44 year lease CEO would be required to return the plant to
the utility.

How would CEO derive its return under a sale-leaseback?

Under a typical

lease-leaseback structure an investots earnings are generated by applying

a constant rate of return to a declining investment balance accrding to lease aCcunting
rules established by the Financial Accunting Standards Board. As the investment balance
declines so do'the eamings and hence the earnings are front-loaded.

The following c1art de,tails the earnings profile for the first 10 years of a typical

leaseback

lease-

Year
(U.S$)
1997
1998
1999
2000
2001
2002
,2003
2004
200.5,
2000

Investment

43,047,734

Eam!ngs

353,054
4,154,042
3,961,165
,3,748,210-
3,512,950
3,252,891
2,965,245
-2,646~897
2,294,361
1,903,735

CE 012019

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 15 of 52

The following graph details the earnings for a typicallease-Ieas,eback.

NET INCME FROM LEASING

7,00,00

6,00,00

5,00,00
- .,00,00
0)::
3,00,00

2,00,00

1 ,00,00

o

~ ~ ~ ~ m~ ~ ~ ~ ~ N ~ ~ ~ ~ ~ ~ ~ ~ ~ ; ~ ~

YEAR

llil\ l.Mi I

The transactions conternplated will be structured in such a way that CEO will obtain the
same yields and rates of return regardless of whether the utiity exercises its purchase option
at the end of year 20 or is required to re-lease the plant for an additional 17 years.

Do we have a specifc trnsaction in mind?

CEO's strategy wil be ,to invest in transactions in conjunction with experienced market
participants, to concentrate on assets familar to Can Edison and to deal with utilties in
countries with high credit ratings.

gas-fired combined cycle power plant,

CEO is currently pursuing the potential investrnent of $43 milion in a recently commissioned
the RoCa3 plant, located near the city of Rotterdam in

the Netherlands. The plaRt. owned by EZH. one of the four regulated generation utilties in
the Netherlands, is currently undergoing engineering, environmental, and valuation reviews
by our consultants, and has, recently been inspected by internal personneL.

We are pursuing this investment opportunity in conjunction with an experienced and
knowledgeable lease investor, Bank One Leasing Inc. Bank One and CEO have retained
Shearman & Sterling for tax and legal advice, and, among others, Duke Engineering for
engineering reviews, Tauw Mileu, a well-respected Dutch environmental firm, for an
environmental assessment and Deloitte & Touche for valuation assessments of the plant.

The transaction is anticipated to generate over $4 milion in earnings during 1998 and is
expected to' generate an after tax yield of 19.7%, assuming that CEO's investment is 50%
equity/50% debt.

CE 012020

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 16 of 52

, What are major benefits frorn these transactions to the investor?

(1) Highly Predictable Earnings

The earnings from these transactions are highly predictable because each of the cash
inflows and outfows to the transaction is contractually agreed to on the closing date and
because the utility's lease obligations are fully secured by the U.S. Treasuries and the bank
letter of credit.

(2) Front Loaded Earnings

Because the transactions wil be afforded leveraged lease accunting treatment under
Financial Accunting Standards Board rules, the earnings profie for these transactions is
"front-loaded' and hence provides more earnings in the early years of the transaction than in
the latter years of the transaction.

(3) Good to Excellent Investment Yields

After tax yields on leasing projects are anticipated to range from a good 15% to an excellent
25% depending on the type of lease structure utilized and the leverage applied. For

example, under the initial

lease investment contemplated the return of 19.7% assumes a

relatively conservative leverage rate of 50%. Measurement of after tax yields, assuming a
theoretical case in which the corporation has no debt (the so called Kall equity return-) range
from 9.0% to 12.3%.

(4) Economic Value

Because of the utilty payment protection structures and the low probabilty of losses derived
from adverse tax actions, the risk adjusted rates of return exceed the required rates of return
for these investments.

(5) Strategic Value ,of Leasing

Participation in these transactions affords CED the opportunity to more fully understand the
legal, regulatory, comrnercial and tax environment of the countries in which the leased
assets are located. This in~epth understanding can provide the basis for better informed
decisions regarding potential investrnent and partnering opportunities as the utilty
infrastructures in these highly developed countries are opened to investments from external
sources.

What are major benefits from these transactions to the utilty?

In entering into these transactions, the utilty is able, at I!ttle or no perceived risk to itself, to
obtain (a) up to 1.00% long term financing for a plant, (b) interest rates that may be lower
than those available from domestic credit sources and (c) front-ed loaded funding benefis,
while maintaining operating control of the plant. In the case of the, investment contemplated
by CEO, the benefit to the utility is about 6.9% of the asset value. or $10.3 milion.

CE 012021

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 17 of 52

'r- .

What are the major risks from these transactions to the investor?

(1) Utiity Credit Risks

Perhaps the greatest risk to the trust is the risk that the utilty wil default on its obligation to
pay rent during the lease tenn, In order to minimize this risk the trust wil require that the
utilitys lease obligations be fully secured by a combination of U.S. Treasury securities and
letters of credit issued by banks with S&P ratings of AA or above. In the event the utilty fails
to make the lease rent payments due, the investor can use the Treasuries and the proceeds
from the letter of credit to return its capital and to provide it with its expected yield.

(2) Foreign Country Tax Risks

Another major risk implicit in the transaction is the risk that the tax laws or regulations of the
country in which the asset is located change in a way that would result in lower returns to the
trust, and hence the investor. Investments under the proposed program would be structured
so that the risks associated with foreign country tax law changes would be fully borne by the
utility,

(3) Pending U.S. Tax Regulations

Pending tax regulations, if enacted, could significantly reduce the tax benefit to be derived
by investors in lease-leaseback transactions such as the investment under consideration by
CEO, as described above.

If. the pending regulations are published prior to the closing date, CED wil defer the
contemplated iiivestment pending a restructuring of the transaction.

(4) U.S. Tax Audits

It is anticipate,d thc;t,' the transactions will be

to the structure' by the IRS under 'current re ulations diffcult to su ort or Iiti a e

strctured in ways that will make any challenges

advising on leveraged iease transactions.

ur tax counsel, is very

In the worst casè tax scenario, a Claim would be liigated and won in tax court by the IRS. In
this case, financial analysis indicates a 100% return of CEO's capital and a return on capital
of 2.4% over the lease term.

CE 012022

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 18 of 52

. .,' ,"'. ' (5)

Country Risks

The proposed investrnent program wil target investments in developed anq highly rated
countries. The initial proposed investment under the program will be in the AM-rated
Netherlands. Potential downstream opportunities include transactions in the Netherlands,
Switzerland, Australia, Germany and the United States.' The contemplated transactions will
be fully denominated in U.S. dollars and wil have no foreign exchange risks.

' ,

(6) ,Limited liquidity

Investments in the assets contemplated under the proposed investment program are
designed to generate earnings and cash flow over extended periods of time. While these
investments do not cany the liqUidity of publicly-traded securities, they can be sold if
necessary, although most likely at a discount to then-crrent book value. The economics of
these investment structures typically drive most investors to continue to maintain the
investments on their books through their scheduled terms. The proposed investment
program contemplates holding these investments accrdingly.

Is anyone else doing these transactions?

Leasing investment programs form an integral part of the earnings and investment profies of
a wide range of companies, inclUding electric and gas utilities and holding companies such
as Public Service Enterprise Group, Duquesne light, Edison International, Southern
Company, Cilcorp, and Southern Indiana Gas; telephone companies such as A TT,
NynexlBellAtlantic, Ameritech, and US West; banks such as, Bank of New York, First
Chicago, Nationsbank, Bank One, and First Chicago; various insurance companies, as well
as industrial corporations such as Philp Morris, Pitney Bowes, Chrysler Corporation, Dana
Corporation and General Electric.

What

are we

requesting approval to do?

Approval is requested to initiate a leasing investment program and

investments as are deemed reasonable by the Board of Directors of CEO, within the capital
allocations made to CEO from time to time by the Board of Direcors of the hOlding company.

'to make such

One of the requirements the market

the order of $190 millon. To provide for the necessary'net worth requirement as well as to
provide for funds tornake'the equity investments, management also requests that'it be given
the authority to make additional investments in CED sufcient to satis'fy the net worth
requirements.

,imposes is that investors haye a substantial net worth, in

CE 012023

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 19 of 52

EXHIBIT C-5

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 20 of 52

From: Windows/admin/Brian
Sent: 2/9/1998 6:46:48 PM (Eastern Time)
To: 'Mary Jane McCartney'
CC: 'Chuck Muoio'
Attachments: ENECO WHITE PAPER 4.DOC
Subj ect: ENECO Whi te Paper

The following is the ENE

CO White Paper with

of this White Paper is an attachment of the White Paper which should show the
graph.

the changes requested. At the end

Leasing Whi te Paper
(ENECO 4)

OVerview

This Leasing Whi te Paper will provide the reader with the following

information: (1) a swnary review of a recent lease investment made by
Consolidated Edison Development, Inc. (UCED'), (2) a swnary review of a new
lease investment CEO is pursuing, and (3) a general background on leasing.

(1) Sumary Review of Recent Lease Investment

CED has participated in one lease-leaseback transaction to date. In Decemer
1997 CED invested $43. 5mm for a $150mm undivided interest in the EZH RoCa3
combined cycle power plant located in the Netherlands. The following is a
sumary of that transaction:

Project Name: EZH RoCa3
Project Country: The Netherlands
Country Credit Rating: AM
Project Assets: 220MW gas-fired combined cycle power plant
Project Location; Rotterda, the Netherlands
Total Project Cost: $316mm
CEO Portion of Total Cost: $15Om
CEO Equi ty Amount: $43. Smm
Co-investor: Banc One Leasing Corpration
Security for CEO Equity: US Treasury securities plus

Letter of credit from AA rated bank

CEO Yield to term: 18+% (assuming a 50%/50% debt/equity)

(2) Sumary Review of a Potential New Lease Investment

CED is currently pursuing the potential investment of approximately $43 million
in a portion of the natural gas and hot water distribution network pre~ently
owned and operated by N. V. ENECO. ENECO is a regulated electric, gas and
therml distribution utility with a service territory which includes the cities
of Rotterda and The Hague in the southern portion of the Netherlands. ENECO
is rated AA with a "stable" outlook by Standard & Poors.

CEO's market entry strategy is to invest in transactions in conjunction wi th
experienced market participants, to concentrate on assets familiar to Con
Edison and to deal with utilities in countries with high credit ratings. CEO is
pursuing this investment opportunity in conjunction with two experienced and

CE 011957

recommended investmen t .

--- ~- - -- - -------.--, -.._.. -........'" """JV'" ....Ol\i: ciIiU ut:ne.i i l:S, ana aei;aiis a

Investments of this type would be accounted for as leveraged leases, allowing

for front-loaded earnings, and generate after tax yields of between 10% and 25%
over their lives, after taking account of typical capital structure and debt
costs.

The earnings in these transactions come from a combination of lease payments
and tax deductions. Con Edison, wi th its high tax rate and large taxable
income position, is in a particularly favorable position to take advntage of
such a program.

What is a sale-leaseback?

In its most basic form, a sale-leaseback is the purchase of an asset and the

subsequent leaseback of that asset to the seller under a long term lease

I'r: ".I oII1U!O

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 21 of 52

agreement. Under a so-called "leveraged lease," the investor uses non-recourse
debt to reduce the equi ty needed to purchase the asset.

Since its inception in 1964, the leveraged leasing market has continually

developed new variations on this basic theme to accommodate increasingly
complex accounting and tax laws and regulations. The latest of these
variations are the "lease-leaseback" structures in which an asset is leased
(instead of purchased) and the leasehold rights derived from that lease are
then leased back to the ini tial owner of the facility. Lease-leaseback
structures have been developed to optimize the benefits that can be derived by
the utility (lessee) and the investor in these transactions.

What kind of lease structures will be considered?

Under the proposed investment program, investments will be considered in both
sale-leasebacks and lease-leasebacks, depending on prevailing market condi tions.

Because the specific transaction currently under consideration by CEO is a
lease-leaseback we will use this type of structure in our example of a typical
transaction.

How would a typical transaction work?

In a typical lease-leaseback transaction, a special purpse subsidiary owned

by an investor, in this case CEO, would establish a trust. On the closing
date, CEO would invest eqity in the trust and the trust would borrow
non-recourse det for the transaction. Concurrently the trust would enter into
a lease agreement with a utility under which the trust would lease an asset,
for example a gas and hot water distribution system, from the utility for 42
years. The trust would, at the same time, lease the system back to the utili ty
for 23 years, after which the trust would have a numr of options, described
below. The initial 23 year term of the leaseback has been chosen to optimize
the benefits available to both the utility and the investor. A 42-year
leaseback would qualify for the tax treatment that CEO and the foreign utility
seek.

On the closing date of the lease, the utility would establish, for the benefit

of CEO, (a) a trust account containing U. S Treasury securi ties and (b) an
irrevocable bank letter of credit from a bank rated AA or better, both in
amounts that, when combined, fully secure the obligations of the utility to
CEO. In the event the utility were to fail to make the payments due to CEO
under the lease, CEO could take the U. S. Treasury securi ties and draw on the
letter of credit to satisfy any shortfalls.

At the end of the initial 23 year lease, the utility would have the option to

purchase the system at a pre-agreed fixed price ~ If the utility did purchase
the system at this time, the transaction would be completed. If the utility
did not purchase the system at the end of year 23, the trust would have the
option to either (a) lease the system to a third party for the remining 19
years of the lease, (b) use the system itself, or (c) require the utility to
re-lease the system for an additional 12 years at prices that would assure CEO
of its expected return.

Responsibility for the condition of the system would rest with the utility
during the initial term of the lease, and with the third party or the utili ty

CE 011959

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 22 of 52

during a subsequent lease. During the remining 7 years under the lease, CEO
could either use the system itself, return the system to the utility or lease
the system to third parties and in doing so obtain addi tional revenue. The
base case economics assume no revenue for this period. At the end of the
42-year lease CEO would be required to return the system to the utility.

How would CEO derive its return under a lease-leaseback?

Under a typical lease-leasebck structure an investor's earnings are generated

by applying a constant rate of return to a declining investment balance
according to lease accounting rules established by the Financial Accounting
Standards Board. As the investment balance declines so do the earnings and
hence the earnings are front-loaded. The following schedule details the
earnings profile for the first 10 years of a typical lease-leaseback

($MM) Earnings ($MM)

Year
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

Investment
42.9 2.3
2.4
2.3
2.2
2.1
2.0

1. 8

1. 7

1.6
1.4

The following chart details the earnings for a typical lease-leaseback

It is anticipated that transactions will be structured such that CEO will
obtain approximately the same earnings regardless of whether the utility
exercises its purchase option or not.

What are major benefits from these transactions to the investor?

1. Highly Predictale Earnings

The earnings from these transactions are highly predictable because each of the
cash inflows and outflows to the transaction are contractually agreed to on the
closing date and because, in the event of a utility payment default, the trust
can take the U. S. Treasuries and draw on the bank letter of credi t .

2. Fron t Loaded Earnings

Because the transactions will be afforded leveraged lease accounting treatment
under Financial Accounting Standards Board rules, the earnings profile for
these transactions is "front-loaded' and hence provides more earnings in the
early years of the transaction than in the latter years of the transaction.

3. Good to Excellent Investment Yields

After tax yields on leasing projects are anticipated to range from a good 10%

CE 011960

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 23 of 52

to an excellent 25% depending on the type of lease structure utilized and the
leverage applied. For example, under the initial lease investment contemplated
the return of 12.5% assumes a relatively conservative leverage rate of 50%.
Measurement of after tax yields, assuming a theoretical case in which the
corporation has no debt (the so called ~all equity return") typically range
from 8. 5% to 12.5%.

4. Economic Value

Because of the utility payment protection structures and the relatively low
probabili ty of losses derived from adverse tax actions, the risk adjusted rates
of return exceed the required rates of return for these investments.

5. strategic Value of Leasing

Participation in these transactions affords CEO the opportunity to more fully
understand the legal, regulatory, commercial and tax environment of the
countries in which the leased assets are located. This in-depth understanding
can provide the basis for better informed decisions regarding potential
investment and partnering opportunities as the utility infrastructures in these
highly developed countries are opened to investments from external sources.

What are major benefi ts from these transactions to the utility?
In entering into these transactions, the utility is able, at Ii ttle or no
perceived risk to itself, to obtain (a) up to 100% long term financing for a
system, (b) interest rates that may be lower than those available from domestic
credit sources and (c) front-end loaded funding benefits, while maintaining
operating control of the system. In the case of the investment contemplated by
CEO, the net cash benefit to the utility is approximately 3% of the value of
the leased asset, or approximately $8.5 million.

What are the major risks from these transactions to the' investor?

1. Utility Credit Risks

Perhaps the greatest risk to the trust is the risk that the utility will
defaùlt on its obligation to pay rent during the lease term. In order to
minimize this risk the trust will require that the utility's lease obligations
be fully secured by a combination of U. S. Treasury securities and letters of
credt issued by banks with S&P ratings of AA or above. In the event the
utili ty fails to make the lease rent payments due, the investor can use the
Treasuries and the proceeds from the letter of credit to return its capital and
to provide it wi th its expected yield.

2. Foreign Country Tax Risks

Another major risk implicit in the transaction is the risk that the tax laws or
regulations of the country in which the asset is located change in a way that
would result in lower returns to the trust, and hence the investor.
Investments under the proposed program would be structured so that the risks
associated with foreign country tax law changes would be fully borne by the
utility.

CE 011961

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 24 of 52

3. Pending U. S. Tax Regulations

Pending tax regulations, if enacted, could significantly reduce the tax benefit
to be derived by investors in lease-leaseback transactions such as the
investment under consideration by CED, as described abve.

i _ ---------==//~
I ~ J~

It is anticipated that the transactions will be structured in ways that will
make any challenges to the structure by the IRS under current regulations

If the pending regulations are published prior to the closing date, CED will
defer the contemplated investment pending a restructuring of the transaction.

4. U. S. Tax Audi ts

II rl'fiCU1~ to sU(!rt or litigate by the IRS.

counsel is very exprienced in negotiating and advising on l~rag~~e;:
transactions.
In a downside tax scenario a claim would be li tigated and won in tax court by
the IRS. In this case, financial analysis indicates a return of CEO's capital
with a return on CEO's capital of 2.4% over the lease term.

5. Country Risks

The proposed investment program will target investments in developed and highly
rated countries. The initial proposed investment under the program will be in
the AA-rated Netherlands. Potential downstream opportunities incl de
transactions in the Netherlands, Switzerland, Australia,' Germny an the United
States. The contemplated transactions will be fully denominated in U.S.
dollars.

6 . Limi ted Liquidi ty

Investments in the assets contemplated under the proposed investment program
are designed to generate earnings and cash flow over extended periods of time.
While these investments do not carry the liquidity of publicly-traded

securities, they can be sold if necessary, although most likely at a discount
to then-current book value. The economics of these investment structures
typically drive most investors to continue to maintain the investments on their
books through their scheduled terms. The proposed investment program
contemplates holding these investments accordingly.

Is anyone else doing these transactions?

Leasing investment programs form' an integral part of the earnings and

investment profiles of a wide range of companies, including affiliates of
electric and gas utili ties and holding companies such as Public Service
Electric and Gas, Duquesne Light, Edison International, Southern Company,

CE 011962

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 25 of 52

Cilcorp, and Sou thern Indiana Gas; telephone companies such as ATT, Nyex/Sell
Atiantic, Ameritech, and US West; banks such as Bank of New York, First
Chicago, Nationsbank, Bank One, and First Chicago; various insurance companies,
as well as industrial corporations such as Philip Morris, Pitney Bowes,
Chrysier Corporation, Dana Corporation and Generai Eiectric.

CE 011963

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 26 of 52

EXHIBIT C-6

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 27 of 52

""

,-Æ. ii~ì-; ~JPT'~fr"L,.~;t1 .it.tr-jJ;0S1;1t,';..a.";',;¡,.~~.'" ::~\ \ 0''!"7't\'~'.fl~t"'' It ~r~~ ~'i:r';J"''')'ï. i.t-r'!.'~)i.~¡;;t":~i:,t",l"A', ¡ r.1.'~.~'('i~ \', ~;:"" ''''__~ '~hi:f."'\i~
l~I,~i,t:_t.lh~~¡:.~ r l r;. r.~.l. ê: ~ ,'r ~,~~. ~ .i." /~\ü'~I~\1").1 :d.'~\-~ ~:l: ~_.",l, "0''' .E~,ì\~:;;('~-:r!(~";.~r~~.:':f¡i...t;..:Jf~'t~ _tr"t:',y.i.":~1i\t"t;.7;r!~ \"t:i"J,~;,q-~::;;.i.l;
From: Brian DePlautt
Sent: Friday. December 12,19979:31 PM
To: 'Mary Jane McCartney'

Cc: 'Joan Freilich'; 'Paul Kinkel'; 'Robert Stelben'; 'H SCHOEN
Irwin'; 'John Perkins'; 'James Tam': 'Andy Scher' --- ' ... -- ,
Subject: EZH LEASE UPDATE

BLUM'; 'Chuck Muoio'; 'Peter

The following is a status update on the EZH lease transaction.

(1) Rumors continue to circulate in the market that final' 467 Regulations may be
issued sometime next week. The proposed Regulations state that the
Regulations would be final on the day following the day in which the Regulations
were published in the Federal Register. Hence if the Regulations were published
in the Federal Register on Monday December 15, lease agreements entered into
on Tuesday Oecember 16 would be subject to the, new regulations, but lease
agreements entered into on Monday December 15 would not be subject to the
Regulations.

(2) The parties working on the EZH transaction, including EZH, Bank One, Can
Edison, White & Case, Shearman & Sterling, Capstar and Cornerstone have
agreed to attempt to accelerate the original closing schedule, which envisioned a
closing on' Thursday December 18. The parties are now attempting to be ready
to achieve a closing, if necessary, sometime during the evening of Monday
December 15. It is not yet certain that this accelerated closing date can be
achieved.

(3) Meetings are scheduled for this weekend to attempt to ,resolve the open
transaction issues and to document the resolution of those issues.

(4) Revisions to the current version of the pricing proforma, which now includes
the sublease loan structure, wil be taking place over the weekend and on
Monday Oècember 15. It is possible that changing prlcíng parameters, including
changing market interest rates, may continue to put pressure on the economics
of the transaction and could require CEL to increase its lease investment amount
in order to maintain its target yield of 12.25%. Any investment increases would
have the effect of earning 12.25%' (unlevered) on a larger base. Preliminary
pricing indications are that potential increases in the lease investment amount
could range from $.5mm to $1.5mm. The ceo Board approval allows for an
additional investment of up to $4.3mm.

(5) Consolidated Edison Leasing, Inc. ("CEL") was established on Thursday
December 11, 1997 and a board meeting was held on Friday December 12 in
which Chl,ck Muoio, Brian OePlautt and Mike Madia were named as directors,
Andy Scher was named as corporät~ secrtary and corporate resolutions

U507047

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 28 of 52

~

authorizing the EZH Lease Investment, the establishment of bank accounts and
associated actions were passed.

(6) On Friday December 12 GEL signed a Trust Agreement with Wilmington
Trust Company for the establishment of ROCA FACILITY TRUST. .NO. 2.
Wilmington Trust Company is attempting to have bank accounts established for
the this trust by Monday December 15. The purpose of these bank accunts is
to receive the eEL investment transfer scheduled for Monday December 15.

(7) It is anticipated that the lease investment amount wil be transferred to the
ROCA FACILITY TRUST NO.2. bank accunt on Monday December 15. It has
been determined that the transaction expenses wil be paid directly by GEL to '
the invoicing parties in the weeks following the closing date

(8) GEL is working with Citibank to establish a bank accunt by Monday
Oecember 15 in order to include this bank account name and number in the
closing documents.

(9) eEL has advised Treasury of the Monday December 15 closing target and
has requested that they make available for transfer the investment funds on that
date. Treasury is standing by to make the transfer, ~ubject to their receipt of a
valid GOI and the bank accunt'information (scheduled to be received from
Wilmington Trust Company on Monday December 15).

(10) On Monday December 15, a GOI request wil be circulated requesting that
the required investment amount be transferred to the newly established ROCA
TRUST NO.2 bank accunt at Wilmington Trust. This GOI wil be supported by
copies of the CEI, CEO and eEL Board of Directors resolutions. On Monday
eEL will need to determine who is the appropriate part to sign this GOI.

J

U507048

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 29 of 52

EXHIBIT C-7

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 30 of 52

leasing White Paper

(ENECO 4)

Overview

This Leasing White Paper wil provide the reader with the following
information: (1) a summary review of a recent lease investment made by
Consolidated Edison Development, Inc. ("CEO'), (2) a summary review of a new
lease investment CEO is pursuing, and (3) a general background on leasing.

(1) Summary Review of Recent Lease Investment

CED has participated in one lease-leaseback transaction to date. In
December of 1997 CED invested $43.5mm for a $150mm undivided interest in
the EZH RoCa3 combined cycle power plant located in the Netherlands. The
following is a summary of that transaction:

Project Name:
Project Country:
Country Credit Rating:
Project Assets:
Project Location;
Total Project Cost:
CEO Portion of Total Cost:
CEO Equity Amount:
Co-investor:
Security for CEO Equity:

CEO Yield to term:

EZH RoCa3
The Netherlands
AA
220MW gas-fired combined cycle power plant
Rotterdam, the Netherlands
$316mm
$150mm
$43.5mm
Banc One Leasing Corporation
US Treasury securities plus
Letter of credit from AA rated bank
18+% (assuming a 50%/50% debUequity)

(2) Summary Review of a Potential New Lease Investment

CED is currently pursuing the potential investment of approximately $43
millon in a portion of the natural gas and hot water distribution network presently
owned and operated by N.V. ENECO. ENECO is a regulated electric, gas and
thermal distribution utility with a service territory which includes the cities of
Rotterdam and The Hague in the southern portion of the Netherlands. ENECO

is rated AA with a "stable" outlook

by Standard & Poors.

CEO's market entry strategy is to invest in transactions in conjunction with
experienced market participants, to concentrate on assets familiar to Con Edison
and to deal with utilities in countries with high credit ratings. CEO is pursuing
this investment opportunity in conjunction with two experienced and
knowledgeable lease investors, Banc One Leasing Corporation ("Banc One")

CE 011965

PF008265

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 31 of 52

and Public Service Resources Corporation ("PSRC"), an affiliate of Public
Service Electric and Gas. Banc One, PSRC and CEO have retained Hunton &
Williams for tax and legal advice, and, among others, Duke Engineering for
engineering reviews, Tauw Milieu, a well-respected Dutch environmental firm, for
an environmental assessment and Deloitte & Touche for a valuation assessment
of the system.

The transaction is anticipated to generate approximately $2.3 millon in
earnings during 1998 and is expected to generate an after tax yield of
approximately 12,5% assuming that CEO's investment is 50% equity/50% debt.

CEO is currently performing due diligence on this potential transaction
and is negotiating with ENECO in an attempt to reach agreement on the terms
and conditions of the various contracts required for the investment. Preliminary
indications are that this process could conclude with a go/no-go investment
decision by CEO as early as late February 1998.

Project Name:
Project Country:
Country Credit Rating:
Project Assets:
Project Location:
Total Project Cost:
CEO Portion of Total Cost:
CED Equity Amount:
Co-investors:

Security for CEO Equity:

CEO Yield to term:

ENECO
The Netherlands
AM
Natural gas and hot water distribution network
Rotterdam and The Hague, the Netherlands
$810mm
$285mm
$43.5mm
Banc One Leasing Corporation
Public Service Resource Corporation
US Treasury securities plus
Letter of credit from AA rated bank
12.5+% (assuming a 50%/50% debUequily)

(3~ General Background on Leasing

Executive Summary

One element of a diversified investment portolio for Can Edison is the relatively
low risk and attractive return profile of leases. This paper describes sale-
leasebacks, identifies major risks and benefits, and details a recommended
investment.

Investments of this type would be accounted for as leveraged leases,
allowing for front-loaded earnings, and generate after tax yields of between 10%
over their lives, after taking account of typical capital structure and

and 25%

debt costs.

2

CE 011966

PF008266

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 32 of 52

The earnings in these transactions come from a combination of lease
payments and tax deductions. Con Edison, with its high tax rate and large
taxable income position, is in a particularly favorable position to take advantage
of such a program. "

What is a sale-leaseback?

In its most basic form, a sale-leaseback is the purchase of an asset and
the subsequent leaseback of that asset to the seller under a long term lease
agreement. Under a so-clled "leveraged lease," the investor uses non-
recourse debt to reduce the equity needed to purchase the asset.

Since its inception in 1964, the leveraged leasing market has continually
developed new variations on this basic theme to accommodate increasingly
complex accunting and tax laws and regulations, The latest of these variations
are the "lease-leaseback" structures in which an asset is leased (instead of
purchased) and the leasehold rights derived from that lease are then leased
back to the initial owner of the facilty. Lease-leaseback structures have been
developed to optimize the benefits that can be derived by the utilty (lessee) and
the investor in these transactions.

What kind of lease structures wil be considered?

Under the proposed investment program, investments will be considered
in both sale-Ieasebacks and lease-Ieasebacks, depending on prevailng market
conditions.

Because the specific transaction currently under consideration by CEO is
a lease-leaseback we will use this type of structure in our example of a typical
transaction,

How would a typical trnsaction work?

In a typical lease-leaseback transaction, a special purpose subsidiary
owned by an investor, in this case CEO, would establish a trust. On the closing
date, CED would invest equity in the trust and the trust would borrow non-
recourse debt for the transaction. Concurrently the trust would enter into a lease
agreement with a utility under which the trust would lease an asset, for example
a gas and hot water distribution system, from the utility for 42 years. The trust
would, at the same time, lease the system back to the utiity for 23 years, after
which the trust would have a number of options, deSCioed below. The initial 23
year term of the leaseback has been chosen to optimize the benefits available to
both the utility and the investor. A 42-year leaseback would qualify for the tax
treatment that CEO and the foreign utility seek.

3

CE 011967

PF008267

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 33 of 52

On the closing date of the lease, the utility would establish, for the benefit
of CEO, (a) a trust accunt containing U.S Treasury securities and (b) an
irrevocble bank letter of credit from a bank rated AA or better, both in amounts
that, when combined, fully secure the obligations of the utilty to CEO. In the
event the utility were to fail to make the payments due to CEO under the lease,
CEO could take the U.S. Treasury securities and draw on the letter of credit to
satisfy any shortalls.

At the end of the initial 23 year lease, the utility would have the option to
purchase the system at a pre-agreed fixed price, If the utilty did purchase the
system at this time, the transaction would be completed. If the utility did not
purchase the system at the end of year 23, the trust would have the option to
either (a) lease the system to a third party for the remaining 19 years of the
lease, (b) use the system itself, or (c) require the utility to re-lease the system for
an additional 12 years at prices that would assure CEO of its expected return.

Responsibility for the condition of the system would rest with the utility
during the initial term of the lease, and with the third party or the utility during a
subsequent lease. During the remaining 7 years under the lease, CEO could
either use the system itself, return the system to the utility or lease the system to
third parties and in doing so obtain additional revenue, The base case
economics assume no revenue for this period. At the end of the 42-year lease
CEO would be required to return the system to the utility,

How would ceo derive its return under a lease-leaseback?

Under a typical lease-leaseback structure an investor's earnings are
generated by applying a constant rate of return to a declining investment
balance accrding to lease accounting rules established by the Financial
Accunting Standards Board. As the investment balance declines so do the
earnings and hence the earnings are front-loaded. The following schedule

lease-leaseback

details the earnings profile for the first 10 years of a typical

Year

1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

Investment

($MM)
42.9

Earnings
($MM)

2.3
2.4
2.3
2.2
2.1
2.0
1.8
1.7
1.6
1.4

4-

CE 011968

PF008268

Case 1:06-cv-00305-MBH Document 21-5 Filed 04/03/2007 Page 34 of 52

The following chart details the earnings for a typical

lease-leaseback

GAAP EARNINGS PROFILE

.. 2,000,000

4,00,000 ~~~~ ~~m-~t!!l~m~;.:~~~f.r:a
~r'~:~:~î,mmT. t "¡',-I'i ...... .... '~1i!""-'.f"l tHL-'~" ~..~
1i';~~...t .~~'~:TIË~~ ::::-~::~~rfr::::~~; tf~~~~~
: j ~:;; .~i;"'. . '1~:.:'.'1: 1.. ..:~;l~:E'.. : '~i' i n.,: '!:' l.l1
,i Ill: i i .1..; 1'1' .1 c .. ,...);j¡;' , 'I 'L'.....".&