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Case 1:06-cv-00305-MBH Document 48 Filed 09/22/2007 Page 1 of 101

IN THE UNITED STATES COURT OF FEDERAL CLAIMS

CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC. & SUBSIDIARIES,

Plaintiff,

v.

THE UNITED STATES OF AMERICA,

Defendant.

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Case No.: 06-305 T

Hon. Marian Blank Horn

STIPULATION REGARDING UNDISPUTED FACTS

Plaintiff, Consolidated Edison Company of New York, Inc. (“Con Edison NY”) and

Subsidiaries, and defendant, the United States of America, by their undersigned counsel, hereby

stipulate to the following statements solely for purposes of this litigation. For purposes of this

stipulation, terms such as lease, sublease, rent, loan, debt, proceeds, purchase, transfer and sale

are used for the convenience of the Court, and do not indicate that defendant respects them as

such. Similarly, for purposes of this stipulation, the term LILO is used for the convenience of

the Court, and do not indicate that plaintiff respects it as such. Capitalized terms that are not

defined in this Stipulation are defined in Appendix A to the Participation Agreement dated as of

December 15, 1997 among N.V. Electriciteitsbedrijf Zuid-Holland (“EZH”), Consolidated

Edison Leasing, Inc. (“CEL”), and the other parties named therein (the “Participation

Agreement”), unless otherwise indicated. The parties agree that all exhibits identified in this

Stipulation are accepted as authentic. All copies shall be considered electronic reproductions of

the original and shall be treated as if they were originals as defined in Fed. R. Evid. 1001(4).

All evidentiary objections to the statements of facts and/or exhibits set out within this

Stipulation are waived unless expressly reserved. Headings have been provided for convenience

Case 1:06-cv-00305-MBH Document 48 Filed 09/22/2007 Page 2 of 101

and reference. The headings are not stipulations of fact. The parties reserve all rights to amend

any paragraphs herein that are a result of scriveners’ error, or that the parties agree do not reflect

the intentions of the parties with respect that particular paragraph. Exhibits referenced herein

appear in the Joint Exhibit List.

I.

Con Edison NY

STIPULATION

1.

The transaction that is the subject of this dispute, defined in paragraph 58 below

and discussed throughout this Stipulation of Facts, was effected by the execution of the

transaction documents, including but not limited to the Operative Documents. The transaction

documents that were included in the transaction closing binders are attached as Exhibits 1-103,

corresponding to Tabs 1-103 in such binders. (PF000007-2865).

2.

In its 1997 annual report, Con Edison NY stated that it is one of the nation’s

largest publicly held energy companies (PF004876), listing approximately $14.7 billion in assets

on its consolidated balance sheet as of December 31, 1997. (PF004906). It is a regulated public

utility that was organized under the laws of the State of New York on November 10, 1884.

(PF004876). In its 1997 annual report, Con Edison NY stated that it transmitted and delivered

electric service and delivered natural gas to customers in New York City and most of

Westchester County, New York, and supplies steam to approximately 2,000 buildings in

Manhattan. (PF004876). The 1997 annual report of Con Edison NY 1997 is attached as Exhibit

__ (PF004875-930, PF326744-99 (color)).

3.

Prior to January 1, 1998, Con Edison NY was a widely held and publicly traded

company on the New York Stock Exchange. (PF004876) Con Edison NY’s 1998 Annual

Report provides that as a result of a reorganization on January 1, 1998, Con Edison NY has since

2

Case 1:06-cv-00305-MBH Document 48 Filed 09/22/2007 Page 3 of 101

become a wholly-owned subsidiary of Consolidated Edison, Inc. (“CEI”). (PF004957). Like

Con Edison NY before it, CEI is widely held and publicly traded on the New York Stock

Exchange. The annual report of CEI for 1998 is attached as Exhibit __. (PF004931; see also

SEC Form U-3A-2, PF009976).

4.

Prior to its deregulation, Con Edison NY offered electric service in a “bundled”

format, i.e., it owned and operated the generation plants that produced electricity as well as the

transmission and distribution systems that delivered the electricity to its customers. (See

PF004897; PF007735). In its 1998 Annual Report CEI stated that, prior to its deregulation, Con

Edison NY owned gas-fired, oil-fired, and nuclear-powered plants with a total electric-

generating capacity of 8,300 megawatts (“MW”). (PF004987).

II.

The Deregulation of Con Edison NY’s Energy Business

5.

The New York Public Service Commission (“PSC”) is responsible for regulating

the power industry in the State of New York. Prior to deregulating certain aspects of Con Edison

NY’s business, all of its operations were subject to regulation by the PSC.

6.

Beginning in March 1993, the PSC took a number of steps to develop a

competitive electric industry in the state of New York. (PF007750). This process commenced

with the PSC’s initiation of a proceeding entitled “Proceeding On Motion Of The Commission

To Address Competitive Opportunities Available To Customers Of Electric And Gas Service

And Develop Criteria For Utility Responses” (the “Competitive Opportunities Proceeding”).

(PF007821 n.2).

7.

The stated purpose of the Competitive Opportunities Proceeding was to evaluate

“ways the [electric service] industry could be restructured” due to the “increasing competitive

options” available to consumers. (PF007750).

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8.

The Competitive Opportunities Proceeding was divided into two phases. Phase I

was designed to discuss, investigate, and address the issues involved in moving toward a

competitive marketplace. The objective of Phase II, commencing in August 1994, was to

“identify regulatory and rate-making practices that will assist in the transition to a more

competitive industry while increasing efficiency and maintaining safety, environmental,

affordability, and service quality goals.” The PSC encouraged electric utilities and other

interested parties to “work collaboratively toward the development of a set of principles to guide

the transition toward a more competitive electric marketplace” noting that the “[i]ssues set for

examination include those related to the establishment of fully efficient wholesale markets for

electricity, as well as pricing reforms necessary to reflect those efficiencies in retail rates.”

The PSC’s August 1994 Order initiating Phase II is attached as Exhibit __. (PF007708-12).

9.

Phase II of the process culminated with a May 1996 PSC Opinion stating the

PSC’s vision for the electric utility industry and ordering Con Edison and certain other major

electric utilities in New York State to file plans describing how they would restructure their

operations to bring about a competitive marketplace for, among other things, electric generation.

The Opinion “strongly encouraged” the utilities to sell their generating plants to unregulated

entities so as to facilitate the development of a competitive marketplace. The May 1996 PSC

Opinion also invited utilities to propose the corporate structures, including unregulated

subsidiaries, that would further the PSC’s restructuring goals. The May 1996 PSC Opinion is

attached as Exhibit __. (PF007735).

III.

Con Edison NY’s Response to Deregulation

A.

10.

The Planning and Environmental Committee

The Planning and Environmental Committee of the Board of Trustees of Con

Edison NY would review plans for Con Edison NY’s future actions, including Con Edison NY’s

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Case 1:06-cv-00305-MBH Document 48 Filed 09/22/2007 Page 5 of 101

response to the deregulation process, provide advice and consent to the management of Con

Edison NY regarding such plans, and submit recommendations to the Board of Trustees of Con

Edison NY regarding such plans.

11. Minutes of the Planning and Environmental Committee indicate that it studied the

deregulation process in other jurisdictions. (PF007562, PF007564)

12. Minutes of the Planning and Environmental Committee of the Board of Trustees

of Con Edison NY relating to the deregulation process and Con Edison NY’s plans in response

are attached as follows:

July 26, 1994
April 25, 1995
May 23, 1995
June 27, 1995
September 26, 1995
November 28, 1995
March 26, 1996
June 25, 1996
January 28, 1997
March 25, 1997
June 24, 1997

PF007535
PF007543
PF007559
PF007592
PF007645
PF007653
PF007671
PF007679
PF007687
PF007693
PF007701

13.

Reports from the Planning and Environmental Committee to the Board of

Trustees of Con Edison NY dated August 23, 1994, May 23, 1995, July 25, 1995, October 24,

1995, December 19, 1995, April 23, 1996, July 23, 1996, January 28, 1997, April 22, 1997, and

July 22, 1997 are attached as Exhibits __ through __. (PF007538, PF007553, PF007596,

PF007648, PF007656, PF007674, PF007682, PF007687, PF007696, PF007705). The minutes of

the meetings of the Planning and Environmental Committee do not reflect discussions of leasing

transactions or leasing opportunities.

B.

14.

The Formation of Consolidated Edison Development, Inc.

A memorandum dated April 20, 1995, advising the Con Edison NY Board of

Trustees of management's intention to petition the Public Service Commission for a blanket

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Case 1:06-cv-00305-MBH Document 48 Filed 09/22/2007 Page 6 of 101

authorization to invest funds in unregulated subsidiaries, which in turn would be authorized to

make investments in lower-tier subsidiaries is attached as Exhibit __. (PF007549)

15. Minutes of the May 23, 1995 Con Edison NY Board of Trustees meeting

discussing management’s intention to petition the PSC for an authorization to invest funds in

unregulated subsidiaries are attached as Exhibit ___. (PF289242, PF289255). The minutes do

not reflect a discussion of leasing transactions.

16.

On May 2, 1995, Con Edison NY requested permission from the PSC to invest up

to 5% (approximately $504 million) of its consolidated capital in unregulated subsidiaries

identified on Exhibit I to the May 2, 1995 Request. An incomplete copy of the May 2, 1995

request, without Exhibit I, is attached as Exhibit _, PF005000-38.1 The request does not include

a discussion of leasing transactions.

17.

On July 12, 1996, the PSC issued an order (the “July 12, 1996 Order”) which

deferred action on Con Edison NY’s May 2, 1995 request, but granted Con Edison NY authority

to invest up to $50 million in unregulated subsidiaries which would invest in two of the three

requested projects: the investment and/or participation in energy infrastructure projects, and the

marketing of technical services. The PSC stated that “[t]he business opportunities that Con

Edison is considering for the projects that are the subject of this Order are largely international.”

While the PSC noted that the energy infrastructure project investments “may be made through

development companies, investment funds, joint ventures and other vehicles” the PSC stated that

“Con Edison’s proposal to invest in international (domestic and foreign) energy infrastructure

projects would for the most part be as an investor through established funds.” In accordance

with the PSC’s plan to encourage divestiture of public utility-owned electric generation plants,

1

Plaintiff has been unable to locate a copy of the document that included Exhibit I.

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the PSC prohibited Con Edison NY from “having a controlling interest in any fund that owns

New York State energy projects, and from making direct investment in any New York State

energy project.” The July 12, 1996 Order is attached as Exhibit __. (PF004645, PF005135).

The July 12, 1996 Order did not address the specific Transaction at issue in this case.

18.

An internal Con Edison NY memorandum dated September 18, 1996, seeking

approval from the Con Edison NY Board of Trustees to form and to invest up to $50 million in a

wholly-owned subsidiary to invest in energy infrastructure development projects and to market

technical services worldwide is attached as Exhibit __. (PF004361). The memo did not address

the specific Transaction at issue in this case.

19.

On October 18, 1996, Con Edison NY formed a new subsidiary, Gramercy

Development, Inc., (“GDI”) to carry out the investments set forth in the September 18, 1996

memorandum. (Gramercy Board Minutes Oct 28, 1996, PF009556; Certificate of Incorporation,

PF009567). On September 24, 1997, GDI changed its name to Consolidated Edison

Development, Inc. (“CED”). (CED Board Minutes, PF009501; Certificate of Name Change,

PF005514).

20.

As of December 15, 1997, Con Edison NY owned 100% of the outstanding stock

of CED. (SEC Form U-3A-2, PF009976-83, at PF009978).

C.

21.

Con Edison NY’s Settlement with the PSC

On October 1, 1996, Con Edison NY filed a response to the PSC’s May 20, 1996

Order. This response included a rate and restructuring plan and also included a petition to adopt

a holding company structure. Con Edison NY’s restructuring plan proposed an approach to a

competitive electric generation market that included, among other things, divestiture of its

generating plants, a plan for retail competition, and a corporate reorganization into a holding

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company structure. The proposed holding company structure would allow Con Edison to form

unregulated subsidiaries whose investment decisions would no longer require prior PSC

approval. Con Edison NY’s plan is attached as Exhibit __. (PF005146, PF005308). The

restructuring plan does not reflect a discussion of leasing transactions.

22.

In September 1997, the PSC and Con Edison NY ultimately agreed on a

restructuring plan that was embodied in an Amended and Restructured Agreement and

Settlement (the “Settlement,” attached as Exhibit __, PF005061-124). Upon approval of the

Settlement, the July 12, 1996 Order (attached as Exhibit __, PF005125-34) no longer applied to

Con Edison NY. The Settlement included, among other things, (i) a new rate plan during the

period of the transition to competition, (ii) a commitment by Con Edison NY to divest at least

50% of its New York City electric generating fossil fueled MW capacity plants by year end 2002

to unregulated third parties so as to help implement a fully competitive market for electric

generation, and (iii) authorization for Con Edison NY to form a holding company whose

subsidiaries would consist of Con Edison NY and several unregulated subsidiaries, including

Con Edison Development. The Settlement did not address the specific Transaction at issue in

this case.

23.

The Settlement permitted the new holding company to invest up to 5% of its

consolidated capital in unregulated subsidiaries. (PF005117).

24.

The minutes of the December 12, 1997 joint meeting of the Board of Directors of

CEI and the Board of Trustees of Con Edison NY provide that the shareholders of Con Edison

NY approved the formation of CEI on December 12, 1997. The minutes are attached as Exhibit

__ (PF264988-5007). As part of the transition to a holding company structure, Con Edison NY

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and CED, as well as several other unregulated subsidiaries of Con Edison NY, became

subsidiaries of CEI on January 1, 1998. (1997 Annual Report, PF004878.)

25.

CEI’s 1998 Annual Report states that by March 2, 1999, pursuant to the

Settlement with the PSC, Con Edison NY had sold almost 6,300 MW of its approximately 8,300

MW of electric generation assets for an aggregate price of $1.8 billion, and that completion of

these sales will result in an estimated net after-tax gain of $384 million (1998 Annual Report,

Exhibit __, PF004931-96 at PF004987). In 2000, Con Edison NY contracted to sell its nuclear-

generating facilities, with electric generating capacity of approximately 1000 megawatts, for an

aggregate price of $504.5 million, not including fuel and other adjustments, which transaction

closed in 2001. (CEI 2002 10-K, Exhibit __, PF271882-2122 at PF272046). In 2001, Con

Edison NY sold approximately 1,480 MW additional electric generating assets. (Exhibit __ at

PF272046). The remaining electric generating assets owned by Con Edison NY are held in

connection with, and are ancillary to, its steam generation business. (CEI notes to consolidated

financial statements, Exhibit __, PF274689-735, at PF274712).

D.

26.

Con Edison NY’s Other Unregulated Subsidiaries

Con Edison NY formed other unregulated subsidiaries in conjunction with its

decision to enter into unregulated businesses:

27.

Consolidated Edison Solutions, Inc., formerly ProMark Energy, Inc., was formed

to provide electricity and natural gas to commercial and residential customers in the Northeast.

(Annual Report 1997, PF004875, PF004896)

28.

Consolidated Edison Energy, Inc. was formed to market specialized energy

capacity and risk management services to wholesale customers in the Northeast and mid-Atlantic

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states. (Annual Report 1997, PF004875, PF004891, ConEdison Energy Business Plan Executive

Overview Oct. 27, 1997, PF004891, PF004735)

29.

Consolidated Edison Communications, Inc. was formed to build and manage

communication networks. (SEC Form S-4 filed Oct. 1997, PF009984, PF009986)

IV.

CED’s Business Plans

30.

GDI’s initial business plan, for 1997, is attached hereto as Exhibit _ (PF004560-

644). The Executive Summary of this Business Plan, which sets forth, among other things, an

overview of Objectives, Strategy and Projections is at pages 1 through 11 of the Business Plan.

(PF004563-73).

31.

The following minutes of meetings of the CED board of directors are identified:

10/28/1996
1/3/1997
1/30/1997
3/10/1997
5/22/1997
5/29/1997
6/20/1997
7/23/1997
8/27/1997
9/25/1997
10/20/1997
10/29/1997
11/24/1997
12/15/1997
12/18/1997
1/29/1998
2/26/1998
3/25/1998
4/30/1998
5/29/1998
7/1/1998
9/25/1998
10/29/1998
11/25/1998
12/15/1998 (unsigned)
12/16/1998
1/27/1999

PF009556-563
PF009590-PF009593
PF009594-PF009597
PF009598-PF009602
PF009603-PF009604
PF009605-08
PF009609
PF009612-14
PF009615-17
PF009501-04
CON-046-1588-1590
PF009505-06
PF009507-09
PF009510-12
PF009513-PF009516
PF269311-14
PF009521-26
PF009527-530
PF009531-35
PF009536-39
PF009540-PF009543
PF009544-47
PF009548-PF009551
PF009552-PF009555
PF009346-47
PF029930-2993138
PF022821-23
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3/3/1999
4/14/1999
5/12/1999
6/25/1999
7/14/1999
8/11/1999 (draft)
8/11/1999
9/15/1999
10/13/1999
11/171999
1/12/2000
2/9/2000
3/8/2000

PF029892-PF029894
PF030745-PF030748
PF030793-PF030795
CON-020-2241-2245
CON-067-0128 to 0131
CON-067-0139 to 0143
PF325493-496
PF325498-500
PF325502-04
PF283703-706
PF291736-39
PF291726-731
PF291721-24

32.

The following reports to the CEI Board of Trustees are identified:

2/1998
3/1998
4/1998
5/1998
6/1998
7/1998
8/1998
9/1998
10/1998
11/1998
1/1999
2/1999
3/1999
4/1999
5/1999

PF020123-24
PF273872-PF273874
PF289115-PF289116
PF273866-PF273871
PF273860-PF273865
PF006295-PF006300
PF272718-PF272723
CON-074-0203-0210
CON-067-0929-0934
PF272772-PF272777
PF271467-271469
PF273982-84
PF273990-94
PF271516-521
PF272724-PF272730

33.

The following weekly reports of CED are identified:

7/10/1998
7/24/1998
7/31/1998
8/7/1998
8/27/1998
9/4/1998
9/11/1998
9/25/1998
10/2/1998
10/9/1998

PF274120-125
PF079875-879
PF082596-597
PF082594-595
PF079790-791
PF082582-584
PF079774-775
PF082576-577
PF082570-573
PF082574-575

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10/16/1998
10/30/1998
11/7/1998
11/13/1998
12/11/1998
12/18/1998
12/31/1998
1/8/1999
1/9/1999
1/15/1999
1/29/1999
2/5/1999
2/12/1999
2/26/1999
3/5/1999
3/12/1999
3/26/1999
4/16/1999
4/30/1999
5/7/1999
5/28/1999
6/4/1999
6/11/1999
6/18/1999
6/22/1999
7/9/1999
7/19/1999

PF082557-558
PF077389-391
CON-067-1989-1990
PF082551-552
PF082479-481
PF082489-491
PF082497-498
PF082512-514
PF082509-511
PF082502-503
PF082506-508
CON-020-2532-2536
PF274073-076
PF271558-559
PF274098-101
PF274093-097
PF082532-535
PF082471-472
PF274054-057
PF274102-104
PF082536-538
PF082525-26
PF082515-517
PF082521-522
PF083356-358
PF074291-292
PF074259-260

34.

Presentations, business plans, and other similar material describing CED’s

anticipated business plans during the 1997-1999 time period includes, but is not limited to, the

following documents:

PF003022
PF004186
PF004189
PF004223
PF004244 (undated)
PF004250
PF004288
PF004324
PF004366
PF004416
PF004426

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PF004445
PF004525
PF004758
PF004778 (unsigned)
PF005511
PF006438
PF010721
PF012414
PF012474
PF012449
PF250103

35.

In March 1997, CED entered into an agreement with International Energy

Partners, L.P. (“IEP”). IEP had a portfolio of international energy infrastructure investment

opportunities that it was pursuing. Pursuant to this agreement, CED was given preferred rights

to participate in certain investment opportunities identified by IEP. The Limited Liability

Company Agreement of IEP Global Development, LLC, between CED and IEP is attached as

Exhibit __. (PF009825)

36.

The minutes of the June 20, 1997 meeting of the CED Board of Directors provide

that the CED Board authorized a capital commitment of $5 million in Project Finance Fund III,

LP, a fund sponsored by Energy Investors Fund (“EIF”). (6/20/1997 GDI Board Meeting

Minutes, PF009609-11). Project Finance III utilized the funds received from CED and other

equity investors to invest in energy and infrastructure projects worldwide. (Project Finance Fund

III, L.P. Limited Partnership Agreement (PF263838-911), § 1.03 (PF263844), Schedule A

(PF263910)).

37.

An undated internal GDI presentation regarding IEP, including a list of potential

international projects, is attached as Exhibit __. (PF004426-44).

38.

An early joint venture between CED and IEP was a minority ownership

investment in a relatively small power facility (40 megawatts) in Eastern Guatemala, generally

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known as Generadora Electrica del Norte, Limitada (“Genor”). CED indirectly acquired an

approximate 44% ownership interest in Genor through its investment in Energy Finance Partners

of Central America, (“EFPCA”) with IEP and others; the remaining 51% was owned by local

investors. (GENOR Participation Agreement, CON-003-2388 to CON-003-2450; Consolidated

Edison Development Summary of Investments December 2000 (PF099377-99, see PF09377-80).

According to a January 7, 1999 internal CED year in review presentation, attached hereto as

Exhibit ___, CED had both an ownership and management role in the Genor facility. (PF250103-

22, at PF250106).

39.

In 1997 and 1998, CED considered purchasing an ownership interest in Empresa

Electrica de Guatemala, S.A. (“EEGSA”), Guatemala’s largest distribution utility serving over

500,000 customers in Guatemala City and surrounding areas. A copy of the Briefing Paper dated

June 2, 1998 pertaining to the Privatization of Empresa Electrica de Guatemala, S.A., is attached

as Exhibit___. (PF247000) In connection with the privatization of EEGSA, CED requested

authorization to bid in a consortium with Enron and Union Fenosa for at least 80% of EEGSA’s

shares. A copy of Near-Term Investment Strategy and Privatization of Empresa Electrica de

Guatemala, S.A., July 21, 1998 is attached as Exhibit ____. (PF286626, PF286627).

40.

The January 7, 1999 year in review presentation also provided that CED was

forced to withdraw from the consortium when CEI would not approve CED’s participation in a

bid of over $400 million for EEGSA. (PF250108-09).

41.

A June 18, 1997 presentation provides that GDI considered acquiring a portion of

EGASA-EGESUR’s generating assets, together with a consortium of other investors, in

connection with EGASA’s privatization. The presentation also provided that EGASA was a

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Peruvian utility that could produce 305 MW of power. A copy of the presentation “Gramercy

Development Inc., June 18, 1997” is attached as Exhibit ___. (PF012414, PF012423).

42.

A June 6, 1997 memorandum provides that GDI, decided not to pursue the

EGASA-EGESUR bid because (a) the project may have required a larger equity investment than

GDI was prepared to commit to the project; (b) resources at IEP were being drawn away to the

detriment of other projects; (c) anticipated bid price higher than originally contemplated would

be necessary; and (d) EIF (see paragraph 36 above) resource constraints. (CON-060-0792

through -0794).

43.

In 1997, GDI considered making an investment in a cogeneration project at Arun

Aromatik in Indonesia through IEP. A memorandum provided to CED by IEP provides that the

capacity to serve the Aromatik complex did not exist. (Memo IEP provided to GDI, PF004426;

CED presentation entitled 1998 Business Plan, dated October 1997, PF004525). The April 30,

1998 Minutes of the Board of Directors of CED provides that at some IEP shifted its focus to

projects in the Philippines due to problems with the Indonesian economy. (April 30, 1999 CED

Board Minutes, PF009531, PF009534).

44.

IEP shifted focus away from the project at Arun Aromatik in early 1998 due to

problems with the Indonesian economy. (April 30, 1999 CED Board Minutes, PF009531,

PF009534).

45.

July 27, 1998 materials provided to the CED Board of Directors discussed an

investment in three industrial cogeneration projects that were in the advanced stages of

development by a Philippine engineering company, Integrated Utility Corporation (“IUC”). The

materials indicate that IUC had provided engineering services to Coca-Cola in the Philippines for

years, and had contracts to install cogeneration systems at a Coca-Cola plant, as well as similar

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systems for Nissin Biscuits and Arcya Glass. The materials assumed that CED fund 60% of the

contracts for the installation. A copy of the Business Development Report on the proposed

transaction with IUC is attached as Exhibit ___. (PF249290, PF249301).

46.

As part of the Sale and Redemption Agreement entered into with IEP on February

26, 1999, CED assigned its interests in the IUC project to IEP. (PF009792-824).

47.

Volume I of a document entitled CEPALCO Investment Recommendation, dated

September 23, 1998 provides that, CED considered making an investment in Cagayan Electric

Power & Light Company (“CEPALCO”), an energy distribution company and the Philippines’

fourth largest electrical utility. CEPALCO was interested in raising $11 million to $12 million

by selling convertible preferred stock which would convert to a 25 percent ownership position in

CEPALCO. CED considered purchasing at least $6.8 million of these preferred shares

(convertible to 15 percent of CEPALCO). The Investment recommendation also provides that

this transaction could stand alone, as the first the first part of CED’s Anchor and Cluster strategy

in the Philippines. In addition, specific potential follow-on investments in the Philippines were

listed.. A copy of Volume I of the CEPALCO Investment Recommendation dated September

23, 1998 is attached as Exhibit ___. (PF241914, at PF241917).

48.

A CED year in review presentation for 1998 provides that the CEPALCO

acquisition was discontinued following the conclusion by CED that, although the project was a

viable investment, “the Asian Crisis presented too much risk for CED to invest in the

Philippines.” (PF250103, PF250111).

49.

A July 24, 1998 document included as part of the CED Board of Directors

Meeting materials dated July 30, 1998, provides that in 1998, CED participated in a project in

China named Jiangsu Transmission & Distribution Planning and that as part of this project, CED

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consulted and trained local engineers in distribution reliability practices used by the Con Edison

group and identified energy losses on the distribution system. A copy of the CED Board of

Directors Meeting materials dated July 30, 1998 is attached as Exhibit ___. (PF249290)

50.

A CED document dated September 3, 1998 indicates that the Jiangsu

Transmission & Distribution Planning project was completed in August 1998. (PF010756,

PF010758; PF249338, PF249341).

V.

CED’s Review of Leasing Investments

51.

CED began discussions with Cornerstone Financial Advisors L.P.

(“Cornerstone”) to provide advice concerning leasing investments in approximately May 1997.

(PF013051).

52.

A document entitled “Cornerstone Financial Advisors Limited Partnership

Organization Description,” was provided to GDI. It is attached as Exhibit _ (PF013052-62).

53.

Cornerstone gave a presentation to GDI on May 21, 1997, concerning leasing. A

copy of the outline of that presentation is attached as Exhibit _ (PF013041-45).

54.

The board minutes for the CED Board of Directors Meeting held May 29, 1997,

reflect that CED began to consider leasing investments on or before May 29, 1997. (PF009605-

09).

55.

CED retained Cornerstone to provide financial services in connection with the

Transaction. A copy of the October 21, 1997 fully executed engagement letter signed by Rob

Holzman of Cornerstone and Brian DePlautt of CED is attached as Exhibit _ (PF004016-17).

56.

CED also retained Cornerstone to provide financial services in connection with

CED’s review of other lease-leaseback transactions. These transactions included a lease-

leaseback transaction involving an electric generation facility in The Netherlands, referred to as

the EPON transaction (Exhibit _, PF015186-88); a lease-leaseback transaction involving gas

17

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distribution assets in The Netherlands owned by ENECO (Exhibit _, CFA00079); a lease-

leaseback transaction involving gas distribution assets in The Netherlands owned by MEGA

(Exhibit _, PF010598-99); and a lease-leaseback transaction involving gas distribution assets in

The Netherlands owned by NUON (Exhibit _, PF028189-90).

(a)

(b)

(c)

(d)

As of August 22, 1997, CED had prepared a briefing memorandum
pertaining to a potential lease-leaseback transaction with EPON involving
a gas fired, combined cycle power plant (Exhibit _, PF0015872-925,
Briefing Memorandum; PF009617, Aug. 27, 1997 CED Bd. Min.) but in
late 1997, CED decided to not pursue the EPON transaction (Exhibit_,
Nov. 24, 1997 CED Bd. Minutes, PF009509).

As of September 30, 1997, CED had prepared a draft briefing
memorandum on a potential lease-leaseback transaction with ENECO
involving natural gas distribution assets. (Exhibit _, CFA06242-96, fax
from DePlautt to Cornerstone sending draft memorandum; Exhibit _,
CFA13324, Summary of Transaction from Cornerstone to CED). CED
also prepared a White Paper pertaining to the ENECO transaction. (White
Paper, PF015594) CED submitted a proposal on the ENECO transaction,
which was accepted on or about October 22, 1997. (Exhibit _, CFA00633-
50, commitment letter; Exhibit _, CFA06502-12, accepted proposal).
CED ultimately withdrew from the transaction in February 1998. (Exhibit
_, 2/26/98 CED Bd. Min., PF009525) A CED memorandum discussing
reasons for the withdrawal is attached as Exhibit _(PF015582-83 and
PF011612).

As of September 19, 1998, CED had prepared a draft briefing
memorandum on a potential lease-leaseback transaction with MEGA
involving natural gas assets. (Exhibit _, 9/10/98 draft briefing
memorandum PF082600-70; see Exhibit _, 9/3/98 draft briefing
memorandum, PF015699-765). CED submitted a proposal to MEGA on
or about October 7, 1998. (Exhibit _, CFA13811-18). CED’s proposal
was not accepted. (Exhibit _, PF008274).

CED prepared a briefing memorandum as well as other documents
pertaining to a potential lease-leaseback transaction with NUON involving
natural gas distribution assets. (Exhibit _, PF029956-82 (vol. 1);
PF029984-30079 (vol. 2); PF030081-253 (vol. 3); Exhibit ___, PF_____
white paper; Investment Recommendation, PF026751). CED submitted a
proposal, which was accepted. (10/27/98 Bid, PF023221-34; 12/10/98
Updated Bid, PF036709-11; 2/12/98 Acceptance, PF025865-78). CED
closed the transaction with NUON pursuant to documents dated as of
May 18, 1999. (E.g., NUON Participation Agreement, PF023404-717;
CED February 2000 Business Plan, PF070412, PF070427).

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VI.

EZH and the RoCa3 Facility

57.

On August 25, 1997 Cornerstone notified CED of the possibility of entering into a

leveraged lease with EZH of a new power generation facility (the “RoCa3 Facility”) located near

Rotterdam, The Netherlands. (Exhibit _, Holzman notes, CFA15388-92 at CFA15391-92).

58.

CEL Trust and EZH entered into the transaction (the “Transaction”) that is the

subject of this action, pursuant to the documents identified in paragraph 1, on December 15,

1997. The Transaction involved a lease of an undivided interest in the RoCa3 Facility to CEL

Trust pursuant to a Lease Agreement and a shorter term sublease of this undivided interest in the

RoCa3 Facility from CEL Trust to EZH pursuant to a Sublease Agreement, among other

agreements, and therefore is sometimes referred to as a lease-in, lease-out or “LILO” transaction,

or lease/lease-back transaction.2

A.

59.

EZH’s Historical Business

N.V. Electriciteitsbedrijf Zuid-Holland (“EZH”) was, on December 15, 1997, an

energy company that owned, among other things, several energy generating facilities in The

Netherlands. Ex. __, PF_ (EZH 1997 Annual Report).

60.

According to correspondence from EZH, the RoCa3 facility opened for

commercial operation in 1996, with commercial delivery of heat commencing on January 1,

1996, commercial delivery of electricity commencing on May 1, 1996 and supply of CO2

commencing on July 1, 1996 (PF007229-40).

61.

An EZH document entitled “Innovation for the B Triangle” provides that EZH has

been responsible for the coordination and transport of electrical energy in the southern

Netherlands since 1941. The document also provides that in 1987, EZH began producing heat

Banc One Leasing Corp. (“Banc One”) and EZH also entered into a lease/lease-back,

2
involving the remaining undivided interest in the Facility as of December 15, 1997. See Exhibit
_ (PF_).

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and electricity, which EZH supplied to distribution companies which in turn delivered the

electricity and heat to the customers, and that the addition of the RoCa3 Facility in June 1996

allowed EZH to produce and provide carbon dioxide to horticulture operators. A copy of

“Innovation for the B Triangle” is attached as Exhibit _, PF000002-__, at PF000006.

62.

A page from EZH’s corporate website entitled “EZH 24 Hours A Day” updated as

of August 4, 1997, provides that EZH was one of four national power generating companies in

The Netherlands. A copy of “EZH 24 Hours A Day” is attached as Exhibit ___, PF003003-04.

63.

Pursuant to section 7(a) of the Participation Agreement, EZH represented that as

of December 15, 1997, EZH was a public limited liability company with its registered seat in

The Hague, duly authorized to do business in The Netherlands. (PF000056).

64.

An online version of EZH’s 1996 Annual Report provides that the net generating

capacity of EZH’s power stations rose from 2,381 MW in 1995 to 2,601 MW in 1996. This

version of EZH’s 1996 Annual Report further provides that this 220 MW(e) increase was due to

the RoCa3 Facility coming into operation in June 1996. The RoCa3 Facility got its name

because it is located between Rotterdam and Capelle aan de IJssel and it is the third power

generating facility at this location. (PF002872, PF002879).

65.

EZH’s 1997 Annual Report states that the net generating capacity of EZH’s

power stations fell from 2,601 MW in 1996 to 2,281 MW in 1997. A copy of the EZH 1997

Annual Report is attached as Exhibit __. (EZH 1997 Annual Report, PF003501, PF003509).

66.

EZH’s 1997 Annual Report that in 1997, various municipalities owned the issued

capital stock of EZH as follows: Province of South Holland (15%), and the Municipalities of

Delft (9%), Dordrecht (16%), Leiden (12%), The Hague (15%), and Rotterdam (28%). The

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remaining 5% was owned by EZH. A copy of the EZH 1997 Annual Report is attached as

Exhibit _, PF003501-29 at PF003523.

67.

Internal EZH documents discussing the Transaction are attached as Exhibit _,

PF265081-PF265111 (Dutch, and English translation).

68.

Other documents regarding EZH not otherwise identified herein are attached as:

PF003057-62
PF003063-81
PF003441-68

B.

69.

EZH’s Ownership Changes

EZH’s 1999 Annual Report provides that on July 16, 1999 (after the transaction at

issue in this case closed), EZH shareholders entered into a stock purchase agreement with

PreussenElektra AG pursuant to which EZH shareholders agreed to sell their stock in EZH to

PreussenElektra AG. PreussenElektra AG was a German utility and a subsidiary of the German

VEBA group. A copy of EZH’s 1999 Annual Report is attached as Exhibit _, PF007980-8046,

at PF007992.

70.

On July 20, 1999 EZH sent a letter to CED stating that the EZH shareholders and

PreussenElektra had reached an agreement, in principle, for the purchase and sale of the EZH

shares. A copy of the July 20, 1999 letter from EZH to CED is attached as Exhibit ___.

(PF017438).

71.

By letter dated September 15, 2000, EZH advised CED that in January 2000,

PreussenElektra acquired 100 percent ownership of EZH. The letter also provided that in June

2000, VEBA AG and VIAG AG merged to form E.ON AG, a German company the shares of

which were listed on both the Frankfurt and New York stock exchanges, in 2000. The letter also

provided that E.ON Energie AG, a wholly-owned subsidiary of E.ON AG, acquired the shares of

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EZH as part of the merger. A copy of a September 15, 2000 letter from EZH to CED is attached

as Exhibit __. (PF017425-26).

72.

By letter dated December 11, 2000, E.ON Benelux Generation N.V. informed

CED that EZH had changed its name to E.ON Benelux Generation N.V. A copy of a December

11, 2000 letter from E.ON Benelux Generation N.V. is attached as Exhibit ___. (PF009625)

C.

73.

The RoCa3 Facility

The RoCa3 Facility is located in an industrial area in the southwestern region of

The Netherlands, on the border between Rotterdam and Capelle aan den IJssel, constituting the

third unit alongside two previously built units. (See “Innovation in the B Triangle,” PF000002).

The generating unit at RoCa3 is a gas fired combined heat and power (“CHP”) plant that supplies

electrical and thermal energy and carbon dioxide (the “Unit”). (PF000002).

74.

A document provided by EZH (PF006262-92), Exhibit _ hereto), and included

behind Schedule 7(t) of the Participation Agreement (PF000245-74) provides that the RoCa3

Facility, including the Common Facilities and the Network, includes among other things the

electric-generating Unit, the Common Facilities, the Cooling Water Station, the Cooling Water

Channel, the Network, and the Facility Personal Property.

(a)

(b)

(c)

Appendix A of the Participation Agreement defines the Unit as the gas-
fired, electric generating unit known as RoCa3 having a rated capacity of
220 net megawatts, all as more fully described in Section 7(t) to the
Participation Agreement, and any and all Modifications thereto and Parts
thereof. (PF000200).

Appendix A and Schedule 7(t) of the Participation Agreement define the
Common Facilities as the gas receiving station, the pump room, the office
building, which includes the control room, and certain parking spaces.
(PF000151, PF000272).

Appendix A of the Participation Agreement defines the Cooling Water
Station as the cooling water station owned by EZH pursuant to the
Transfer Deed and described more fully in Schedule 7(t) to the
Participation Agreement, and any and all Modifications thereto and Parts

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thereof. (PF000152). Documents provided by EZH in correspondence to
Shearman & Sterling indicate that the Cooling Water Station is located at
the River Hollandsche IJssel, noting that the inlet station and pump station
of the Cooling Water Station are utilized for cooling. These same EZH
documents indicate that the Cooling Water Station is located about five
kilometers from the Unit. (PF006262-92; Participation Agreement § 7(t),
PF000271).

Appendix A and Schedule 7(t) of the Participation Agreement define the
Cooling Water Channel as the cooling water pipes leading from the
Cooling Water Station to the Unit and vice versa as well as from the
Cooling Water Station to the River Hollandsche IJssel and vice versa.
(PF000152, PF000271).

Appendix A of the Participation Agreement defines the Network as the
pipelines from and to the Unit for the delivery of heat and CO2 containing
gas to Energie Delfland NV including the control systems and
communication cables thereto, all as more fully described in Schedule 7(t)
to the Participation Agreement, and any and all Modifications thereto and
Parts thereof. (PF000172).

Appendix A of the Participation Agreement defines the Facility Personal
Property as all movable property which forms or will form part of the
Facility. (PF000160).

(d)

(e)

(f)

VII.

The EZH Transaction

75.

Cornerstone, on behalf of CED and Banc One Leasing Corp. (“Banc One”),

submitted a proposal to EZH to enter into a lease/lease-back of the RoCa3 Facility on September

26, 1997. This proposal letter is attached as Exhibit ___. (PF006085). This proposal was not

executed by EZH.

76.

On October 21, 1997, CED sent a proposal directly to EZH to make an equity

investment in the lease/leaseback of the RoCa3 Facility. This proposal was accepted by EZH on

October 22, 1997. This fully executed proposal along with fax cover sheets transmitting the

proposal is attached as Exhibit ___. (PF003239-46).

77.

CED’s October 21, 1997 proposal provided that it was subject to (a) participation

of lenders on terms acceptable to CED; (b) issuance of necessary approvals within CED; (c)

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receipt of satisfactory opinions (including a tax opinion) and accounting determinations; (d)

satisfactory third-party expert letters and reports concerning (i) the reasonableness of the interest

rate on the third part non-recourse loan, the debt defeasance and related matters, (ii) insurance

matters, (iii) environmental matters, (iv) an engineering report, and (v) an appraisal report; and

(e) negotiation of documentation mutually acceptable to EZH and CED. (PF003241, PF003242).

78.

A.

79.

CED retained a number of consultants in connection with the RoCa3 Transaction.

Duke Engineering

A document entitled “EZH-RoCa CHP Power Station Unit No. 3 Due Diligence

Report, Revision 0” prepared by Duke Engineering & Services (“Duke Engineering”) addresses

several topics concerning an engineering review of the RoCa3 Facility. The document indicates

that Duke Engineering made site visits on October 16-17, 1997 and November 11, 1997 to

inspect the RoCa3 Facility, interview key plant personnel, and review plant documents. This

document indicates that the principal individuals from Duke Engineering involved in the matters

discussed in the document were Richard K. Radini, Gerald F. Foley, Luis C. Gonzalez and

Anthony DeCristofaro. (PF001851). This document is attached as Exhibit __ (PF001831-2103,

at PF001851).3

80.

Section 3(l) of the Participation Agreement provides that the closing of the EZH

transaction was contingent upon CED receiving a satisfactory report from Duke Engineering.

(PF000043).

3
The parties do not agree whether this is the final Duke Engineering Report in connection
with the RoCa3 Facility or whether a final Duke Engineering Report was ever delivered to CED.

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B.

81.

Tauw Milieu

A document entitled Due Diligence Environmental, Safety and Health Report4,

which was sent to CED by Tauw Milieu by letter dated January 14, 1998, addresses several

topics concerning an environmental, health, and safety assessment of the RoCa3 Facility.

[According to section 2.3.2 of the document, Tauw performed on-site inspections on October 7,

1997 and October 23, 1997, interviewed EZH personnel, and reviewed applicable environmental

laws and regulations in conducting its review. (PF002135).] According to section 2.1 of the

document, Hans Nieuwenhuis was the project manager in connection with the production of this

document. This document is attached as Exhibit __ (PF002105-370).

82.

Section 3(m) of the Participation Agreement provides that the closing of the EZH

transaction was contingent upon CED receiving a satisfactory report from Tauw Milieu.

(PF000043).

C.

83.

Deloitte & Touche

A document entitled “Appraisal Report, RoCa3 Electric Generating Facility” (the

“Appraisal”), dated 12/15/97 and provided to CED by Deloitte & Touche LLP (“Deloitte”),

addresses an appraisal of the RoCa3 Facility and aspects of the Transaction. The Appraisal

indicates that the principal individuals from Deloitte & Touche on the engagement were Richard

K. Ellsworth, George P. Revock, and Steven Liu. (PF001617-25). A copy of the Appraisal is

attached as Exhibit __. (PF001530-787).

4
The United States has not yet had an opportunity to depose Mr. Nieuwenhuis, but will be
allowed to do so prior to Mr. Nieuwenhuis testifying at trial. Therefore, the United States cannot
at this time stipulate to many of the facts surrounding Tauw’s involvement other than that the
document identified above was prepared and appears to reflect evaluations conducted by Tauw
in connection with the RoCa3 facility.

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D.

84.

Accounting Matters

Cornerstone engaged Arthur Andersen, for the benefit of CED, to prepare a report

regarding the accounting treatment for a hypothetical lease transaction. Exhibit _ is a copy of the

Arthur Andersen Report (PF005873-78), and Exhibits _, _, _ (PF008521-27; PF005970-975;

PF008531-37) are drafts thereof. Exhibit _ (PF021828-31) is a copy of the hypothetical lease

transaction.

85.

PriceWaterhouse prepared a report concerning the accounting treatment of the

Transaction. Exhibit _ (PF005664-67) is a copy of the PriceWaterhouse report.

E.

86.

Legal Matters

The law firm of Loeff Claeys Verbeke issued an opinion concerning, among other

things, the effect of the choice of law provisions contained in the Operative Documents, whether

a Dutch court would enforce the Operative Documents, and whether the security agreements

created valid and enforceable security rights under Dutch law in favor of the respective parties to

the Operative Documents. (Loeff Claeys Verbeke opinion dated 12/15/97, PF266588,

PF266592).

87.

The law firm of Shearman & Sterling offered tax and other legal advice in

connection with the Transaction. Documents entitled “Cross-Border Equipment Leasing

Investor Tax Risks,” dated 11/20/97, PF030848-55 and “Amendments to the Code and the

Treasury Regulations Impact on Leveraged Lease Financing Transactions,” dated 11/20/97,

PF030812-19. A copy of the final tax opinion from the law firm of Shearman & Sterling

pertaining to the Transaction, provided to CED on February 18, 1998, is attached as Exhibit __

(PF015503).

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F.

88.

Cornerstone Financial Advisors

Cornerstone prepared computerized pricing runs to reflect, among other things,

the anticipated cash flows and of the EZH Transaction. Cornerstone sent what it referred to as

the final versions of the pricing runs to CED on or about March 12-13, 1998. These pricing runs,

and a cover letter accompanying same, are attached as Exhibits __, PF08899, PF008983,

PF008984, PF009069.

89.

Documents pertaining to Cornerstone’s role as advisor to CED include:

CFA00014-16; CFA00017-20; CFA04008-10; CFA04392-420; CFA06716-18; CFA06720-23;

CFA06724-28; PF011704-31; CFA00009-10; CFA00021-23; CFA00026; PF027522-28;

CFA00034-37; CFA00054-69.

90.

Cornerstone assisted CED in understanding how leveraged leases are treated for

financial accounting purposes. (e.g., Exhibit _, CFA15388-92).

91.

Cornerstone, in connection with the Transaction, requested information regarding

EZH’s creditworthiness. Correspondence regarding EZH’s creditworthiness is attached as

Exhibits:

PF003584-85
PF005524

92.

An October 30, 1997 memo from Rob Holzman states that “EZH and Capstar

have arranged for a site visit at the EZH RoCa3 facility on Tuesday, November 11, 1997.” The

memo listed a team of individuals who “have indicated that they plan on attending all or some of

the Tuesday due diligence.” The individuals listed were:

Rob Holzman – Cornerstone
Mark DeTrempe – Cornerstone
Brian DePlautt – CED
Harold Morrison – CED
Woody Flowers – Shearman & Sterling
Dan Kiely – Shearman & Sterling

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Rich Radini – Duke Engineering
Rick Ellsworth – Deloitte & Touche
Femke Bierman – Loeff Claeys Verbeke
Hans Nieuwenhuis – Tauw Milieu

The memo is attached as Exhibit _ (PF005914-15). A facsimile from Capstar Partners further
describing the site visit is attached hereto as Exhibit __, US08256-62. CED’s next site visit
occurred in November 2005. A copy of an inspection report discussing the November 2005 site
visit is attached hereto as Exhibit __ (PF020551-66).

G.

93.

EZH’s Representations, Warranties and Covenants

Section 11(d)(viii) of the Participation Agreement required that EZH deliver to

the Trustee, CEL and HBU the Survey, and any amendment thereto, prepared in connection with

the execution and registration of the Building Right Deed. (PF000088). Section 11(d)(ix) of the

Participation Agreement required EZH to, within 14 days after the Closing Date, deliver to the

Trustee, CEL and HBU a certified extract from the Rotterdam land registry showing the Building

Right Deed, the Channel Building Right Deed, the Transfer Deed, the Network Deeds, the First

Priority Mortgage and the Notarial Deed of Establishment have been duly filed and recorded.

(PF000088).

VIII. CED Approval Process for the EZH Transaction

94.

On October 28, 1997, CED made a presentation to the Con Edison NY Board of

Trustees concerning its business plan and to request an additional $100 million investment in

CED to support tax advantaged leasing investments. The vote on this request was postponed

until a later date. (Exhibit __, PF 007512).

95.

CED employees (or others on their behalf) produced documents for the use of

CED and CEI management in considering the Transaction or issues related to the Transaction,

including but not limited to the following:

(a)

A two-volume Project Briefing Memorandum, dated October 23, 1997.

Volume One of the Project Briefing Memorandum contained information

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on The Netherlands, EZH, the RoCa3 Facility, the Dutch electric industry,

the due diligence process, the accounting for the transaction, and the

benefits and risks of entering into the Transaction. Volume Two

contained certain background documents, such as EZH’s annual report.

Volume One and Volume Two of the Project Briefing Memorandum are

attached as Exhibits __ and __, respectively. (PF003759-838, PF003840-

4004).

(b)

A document entitled “Leasing White Paper” which discusses the

characteristics of lease-leaseback transactions generally, as well as the

potential RoCa3 transaction specifically, was prepared in November and

December 1997. This final Leasing White Paper, which was provided to

the Board of Trustees of CEI, is attached as Exhibit _ (PF015866-71).

(c)

Attached as Exhibits are draft Leasing White Papers: PF015618-625;

PF015626-633; PF015634-641; PF015642-48; PF015649-655; PF015656-

662; PF015663-670; PF015673-75.

(d)

An Investment Recommendation which was submitted to CED’s Board of

Directors in conjunction with resolutions authorizing the investment in the

RoCa3 Facility. A copy of the memorandum submitting the Investment

Recommendation to