Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 1 of 105
IN THE UNITED STATES COURT OF FEDERAL CLAIMS
CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC. & SUBSIDIARIES,
THE UNITED STATES OF AMERICA,
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 52 Filed 09/26/2007 Page 2 of 105
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.
Con Edison NY
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. (PF000030-2865; PF015504-08; PF266588-603;
see also Exhibit 104, Index of Closing Documents, PF000007-15; Exhibit 105, Closing
In its 1997 annual report, Con Edison NY stated that it is one of the nation’s
largest publicly held energy companies (Exhibit 106, PF004876), listing approximately $14.7
billion in assets on its consolidated balance sheet as of December 31, 1997. (Exhibit 106,
PF004906). It is a regulated public utility that was organized under the laws of the State of New
York on November 10, 1884. (Exhibit 106, 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. (Exhibit 106, PF004876). The 1997 annual report
of Con Edison NY 1997 is attached as Exhibit 106, PF004875-930; Exhibit 107, PF326744-99
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 3 of 105
Prior to January 1, 1998, Con Edison NY was a widely held and publicly traded
company on the New York Stock Exchange. (Exhibit 106, 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 become a wholly-owned subsidiary of Consolidated Edison, Inc. (“CEI”). (Exhibit
108, 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 108.
(PF004931; see also Exhibit 109, SEC Form U-3A-2, PF009976).
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 Exhibit
106, PF004897; Exhibit 299, 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”). (Exhibit 106, PF004987).
The Deregulation of Con Edison NY’s Energy Business
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.
Beginning in March 1993, the PSC took a number of steps to develop a
competitive electric industry in the state of New York. (Exhibit 109, 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”). (Exhibit 109, PF007821 n.2).
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 4 of 105
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. (Exhibit 109, PF007750).
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 110. (PF007708-12).
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 299. (PF007735).
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 5 of 105
Con Edison NY’s Response to Deregulation
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
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. (Exhibit 111, 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
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 123 through 132. (PF007538, PF007553, PF007596,
PF007648, PF007656, PF007674, PF007682, PF007687, PF007696, PF007705). The minutes of
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 6 of 105
the meetings of the Planning and Environmental Committee do not reflect discussions of leasing
transactions or leasing opportunities.
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
authorization to invest funds in unregulated subsidiaries, which in turn would be authorized to
make investments in lower-tier subsidiaries is attached as Exhibit 133. (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 134. (PF289242, PF289255). The minutes do
not reflect a discussion of leasing transactions.
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 135, PF005000-38.1 The request does not
include a discussion of leasing transactions.
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.”
Plaintiff has been unable to locate a copy of the document that included Exhibit I.
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 7 of 105
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,
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.” (Exhibit 136, July 12, 1996 Order, PF004645; Exhibit 137, PF005135). The
July 12, 1996 Order did not address the specific Transaction at issue in this case.
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 138. (PF004361). The memo did not
address the specific Transaction at issue in this case.
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. (Exhibit 141, Gramercy Board Minutes Oct 28, 1996, PF009556; Exhibit 142,
Certificate of Incorporation, PF009567). On September 24, 1997, GDI changed its name to
Consolidated Edison Development, Inc. (“CED”). (Exhibit 140, CED Board Minutes, PF009501;
Exhibit 139, Resolution re Name Change, PF009621).
As of December 15, 1997, Con Edison NY owned 100% of the outstanding stock
of CED. (Exhibit 109, SEC Form U-3A-2, PF009976-83, at PF009978).
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 8 of 105
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
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. (Exhibit 143, PF005146; Exhibit 144, PF005308). The restructuring plan does not
reflect a discussion of leasing transactions.
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 (Exhibit 145, PF005061-124). Upon approval of the Settlement, the July 12, 1996
Order (Exhibit 145, 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.
The Settlement permitted the new holding company to invest up to 5% of its
consolidated capital in unregulated subsidiaries. (Exhibit 145, PF005117).
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 9 of 105
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
147 (PF264988-5007). As part of the transition to a holding company structure, Con Edison NY
and CED, as well as several other unregulated subsidiaries of Con Edison NY, became
subsidiaries of CEI on January 1, 1998. (Exhibit 106, 1997 Annual Report, at PF004878.)
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 (Exhibit 108, 1998
Annual Report, at PF004987). In 2000, Con Edison NY contracted to sell its nuclear-generating
facilities, with electric generating capacity of approximately 1000 MW, for an aggregate price of
$504.5 million, not including fuel and other adjustments, which transaction closed in 2001. (CEI
2002 10-K, Exhibit 148, PF271882-2122, at PF272046). In 2001, Con Edison NY sold
approximately 1,480 MW additional electric generating assets. (Exhibit 148 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 149, PF274689-735, at PF274712).
Con Edison NY’s Other Unregulated Subsidiaries
Con Edison NY formed other unregulated subsidiaries in conjunction with its
decision to enter into unregulated businesses:
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 10 of 105
Consolidated Edison Solutions, Inc., formerly ProMark Energy, Inc., was formed
to provide electricity and natural gas to commercial and residential customers in the Northeast.
(Exhibit 106, Annual Report 1997, PF004875, PF004896).
Consolidated Edison Energy, Inc. was formed to market specialized energy
capacity and risk management services to wholesale customers in the Northeast and mid-Atlantic
states. (Exhibit 106, Annual Report 1997, PF004875, PF004891; Exhibit 150, ConEdison
Energy Business Plan Executive Overview Oct. 27, 1997, PF004735).
Consolidated Edison Communications, Inc. was formed to build and manage
communication networks. (Exhibit 151, SEC Form S-4 filed Oct. 1997, PF009984, PF009986).
CED’s Business Plans
GDI’s initial business plan, for 1997, is attached hereto as Exhibit 136,
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. (Exhibit 136, PF004563-73).
The following minutes of meetings of the CED board of directors are identified:
CON-046-1588 to 1590
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 11 of 105
CON-020-2241 to 2245
CON-067-0128 to 0131
CON-067-0139 to 0143
The following reports to the CEI Board of Trustees are identified:
CON-074-0203 to 0210
CON-067-0929 to 0934
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 12 of 105
The following weekly reports of CED are identified:
CON-067-1989 to 1990
CON-020-2532 to 2536
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
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 13 of 105
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 263. (PF009825)
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”). (Exhibit 170, 6/20/1997 GDI Board
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 14 of 105
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. (Exhibit 391,
Project Finance Fund III, L.P. Limited Partnership Agreement (PF263838-911), § 1.03
(PF263844), Schedule A (PF263910)).
An undated internal GDI presentation regarding IEP, including a list of potential
international projects, is attached as Exhibit 251. (PF004426-44).
An early joint venture between CED and IEP was a minority ownership
investment in a relatively small power facility (40 MW) in Eastern Guatemala, generally 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. (Exhibit 265, GENOR Participation Agreement, CON-003-2388 to CON-003-
2450; Consolidated Edison Development Summary of Investments December 2000 (Exhibit 264,
PF099377-99, see PF099377-80). According to a January 7, 1999 internal CED year in review
presentation, attached hereto as Exhibit 262, CED had both an ownership and management role
in the Genor facility. (PF250103-22, at PF250106).
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 266. (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
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 15 of 105
shares. A copy of Near-Term Investment Strategy and Privatization of Empresa Electrica de
Guatemala, S.A., July 21, 1998 is attached as Exhibit 267. (PF286626, PF286627).
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. (Exhibit 262, PF250108-09).
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
Peruvian utility that could produce 305 MW of power. A copy of the presentation “Gramercy
Development Inc., June 18, 1997” is attached as Exhibit 259. (PF012414, PF012423).
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. (Exhibit 268, CON-
060-0792 through -0794).
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. (Exhibit 251, Memo IEP provided to GDI,
PF004426; Exhibit 253, 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.
(Exhibit 159, April 30, 1999 CED Board Minutes, PF009531, PF009534).
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 16 of 105
IEP shifted focus away from the project at Arun Aromatik in early 1998 due to
problems with the Indonesian economy. (Exhibit 159, April 30, 1999 CED Board Minutes,
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
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 269. (PF249290, PF249301).
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. (Exhibit 270, PF009792-824).
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
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 17 of 105
listed.. A copy of Volume I of the CEPALCO Investment Recommendation dated September
23, 1998 is attached as Exhibit 271. (PF241914, at PF241917).
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.” (Exhibit 262, PF250103, PF250111).
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
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 269. (PF249290)
A CED document dated September 3, 1998 indicates that the Jiangsu
Transmission & Distribution Planning project was completed in August 1998. (Exhibit 272,
PF010756, PF010758; Exhibit 273, PF249338, PF249341).
CED’s Review of Leasing Investments
CED began discussions with Cornerstone Financial Advisors L.P.
(“Cornerstone”) to provide advice concerning leasing investments in approximately May 1997.
(Exhibit 274, PF013051).
A document entitled “Cornerstone Financial Advisors Limited Partnership
Organization Description,” was provided to GDI. It is attached as Exhibit 275 (PF013052-62).
Cornerstone gave a presentation to GDI on May 21, 1997, concerning leasing. A
copy of the outline of that presentation is attached as Exhibit 276 (PF013041-45).
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 18 of 105
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. (Exhibit 169,
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 277 (PF004016-17).
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 280, PF015186-88); a lease-leaseback transaction involving gas
distribution assets in The Netherlands owned by ENECO (Exhibit 278, CFA00079); a lease-
leaseback transaction involving gas distribution assets in The Netherlands owned by MEGA
(Exhibit 279, PF010598-99); and a lease-leaseback transaction involving gas distribution assets
in The Netherlands owned by NUON (Exhibit 281, PF028189-90).
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 300, Briefing
Memorandum, PF0015872-925; Exhibit 299, Aug. 27, 1997 CED Bd.
Min., PF009617) but in late 1997, CED decided to not pursue the EPON
transaction (Exhibit 154, 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 304, fax from DePlautt
to Cornerstone sending draft memorandum, CFA06242-96; Exhibit 306,
Summary of Transaction from Cornerstone to CED, CFA13324). CED
also prepared a White Paper pertaining to the ENECO transaction.
(Exhibit 307, White Paper, PF015594) CED submitted a proposal on the
ENECO transaction, which was accepted on or about October 22, 1997.
(Exhibit 303, CFA00633-50, commitment letter; Exhibit 305, CFA06502-
12, accepted proposal). CED ultimately withdrew from the transaction in
February 1998. (Exhibit 157, 2/26/98 CED Bd. Min., PF009525) A CED
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 19 of 105
memorandum discussing reasons for the withdrawal. (Exhibit 302,
PF015582-83 and Exhibit 301, 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 310, 9/10/98 draft briefing
memorandum PF082600-70; see Exhibit 309, 9/3/98 draft briefing
memorandum, PF015699-765). CED submitted a proposal to MEGA on
or about October 7, 1998. (Exhibit 311, CFA13811-18). CED’s proposal
was not accepted. (Exhibit 308, 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 316, PF029956-82 (vol. 1);
Exhibit 317, PF029984-30079 (vol. 2); Exhibit 318, PF030081-253 (vol.
3); Exhibit 428, PF039643-49, white paper; Exhibit 315, Investment
Recommendation, PF026751). CED submitted a proposal, which was
accepted. (Exhibit 312, 10/27/98 Bid, PF023221-34; Exhibit 319,
12/10/98 Updated Bid, PF036709-11; Exhibit 314, 2/12/98 Acceptance,
PF025865-78). CED closed the transaction with NUON pursuant to
documents dated as of May 18, 1999. (E.g., Exhibit 313, NUON
Participation Agreement, PF023404-717; Exhibit 320, CED February
2000 Business Plan, PF070412, PF070427).
EZH and the RoCa3 Facility
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 282, Holzman notes, CFA15388-92 at CFA15391-92).
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
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 20 of 105
agreements, and therefore is sometimes referred to as a lease-in, lease-out or “LILO” transaction,
or lease/lease-back transaction.2
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. 287, PF003501 (EZH 1997 Annual Report).
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 (Exhibit 283, PF007229-40).
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
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 430, PF000002-06, at PF000006.
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 284, PF003003-04.
Banc One Leasing Corp. (“Banc One”) and EZH also entered into a lease/lease-back,
involving the remaining undivided interest in the Facility as of December 15, 1997. See Exhibit
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 21 of 105
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. (Exhibit 1, PF000056).
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. (Exhibit 285, PF002872; Exhibit 286, PF002879).
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. (Exhibit 287, EZH 1997
Annual Report, PF003501, PF003509).
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
remaining 5% was owned by EZH. A copy of the EZH 1997 Annual Report is attached as
Exhibit 287, PF003501-29 at PF003523.
Internal EZH documents discussing the Transaction are attached as Exhibit 288,
PF265081-PF265111 (Dutch, and English translation).
Other documents regarding EZH not otherwise identified herein are attached as:
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 22 of 105
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 292, PF007980-
8046, at PF007992.
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 293.
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
EZH as part of the merger. A copy of a September 15, 2000 letter from EZH to CED is attached
as Exhibit 294. (PF017425-26).
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 295. (PF009625)
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 23 of 105
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 Exhibit 283, “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”). (Exhibit 283,
A document provided by EZH (PF006262-92, Exhibit 296 hereto), and included
behind Schedule 7(t) of the Participation Agreement (Exhibit 1, 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.
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 MW, all as more fully described in Section 7(t) to the Participation
Agreement, and any and all Modifications thereto and Parts thereof.
(Exhibit 1, 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.
(Exhibit 1, 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
thereof. (Exhibit 1, 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. (Exhibit 296,
PF006262-92; Exhibit 1, Participation Agreement § 7(t), PF000271).
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 24 of 105
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.
(Exhibit 1, 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. (Exhibit 1, 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. (Exhibit 1, PF000160).
The EZH Transaction
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 297. (PF006085). This proposal was not
executed by EZH.
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 298. (PF003239-46).
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)
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
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 25 of 105
(e) negotiation of documentation mutually acceptable to EZH and CED. (Exhibit 298,
CED retained a number of consultants in connection with the RoCa3 Transaction.
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 52 (PF001830-2103,
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.
(Exhibit 1 at PF000043).
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
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.
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.
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 26 of 105
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 53 (PF002105-370).
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. (Exhibit
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. (Exhibit 46, PF001617-25). A copy of the
Appraisal is attached as Exhibit 46. (PF001530-787).
Cornerstone engaged Arthur Andersen, for the benefit of CED, to prepare a report
regarding the accounting treatment for a hypothetical lease transaction. Exhibit 321 is a copy of
the Arthur Andersen Report (PF005873-78), and Exhibits 130, 322, 323 (PF008521-27;
PF005970-975; PF008531-37) are drafts thereof. Exhibit 324 (PF021828-31) is a copy of the
hypothetical lease transaction.
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 27 of 105
PriceWaterhouse prepared a report concerning the accounting treatment of the
Transaction. Exhibit 325 (PF005664-67) is a copy of the PriceWaterhouse report.
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. (Exhibit 326, Loeff Claeys Verbeke opinion dated 12/15/97,
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 (Exhibit 329) and “Amendments to the Code
and the Treasury Regulations Impact on Leveraged Lease Financing Transactions,” dated
11/20/97, PF030812-19 (Exhibit 328). 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 86, PF015503.
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 330, PF08899; Exhibit 331,
PF008983; Exhibit 332, PF008984; Exhibit 333, PF009069.
Case 1:06-cv-00305-MBH Document 52 Filed 09/26/2007 Page 28 of 105
Documents pertaining to Cornerstone’s role as advisor to CED include: Exhibit
335, CFA00014-16; Exhibit 336, CFA00017-20; Exhibit 341, CFA04008-10; Exhibit 342,
CFA04392-420; Exhibit 343, CFA06716-18; Exhibit 344, CFA06720-23; Exhibit 345,
CFA06724-28; Exhibit 346, PF011704-31; Exhibit 334, CFA00009-10; Exhibit 337, CFA00021-
23; Exhibit 338, CFA00026; Exhibit 347, PF027522-28; Exhibit 339, CFA00034-37; Exhibit
Cornerstone assisted CED in understanding how leveraged leases are treated for
financial accounting purposes. (e.g., Exhibit 282, CFA15388-92).
Cornerstone, in connection with the Transaction, requested information regarding
EZH’s creditworthiness. Correspondence regarding EZH’s creditworthiness is attached as
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
Rich Radini – Duke Engineering
Rick Ellsworth &n