Free Stipulation - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS CONSOLIDATED EDISON COMPANY OF NEW YORK, INC. & SUBSIDIARIES, Plaintiff, v. THE UNITED STATES OF AMERICA, Defendant. ) ) ) ) ) ) ) ) ) )

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. The parties acknowledge that the Court can and may make factual findings premised on these stipulations and that these findings may have preclusive effect beyond 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 does not indicate that the form implied by those terms will be respected. Whether or not the form of the below described transaction will be respected is one of the issues to be decided by the Court. Similarly, for purposes of this stipulation, the term LILO is used for the convenience of the Court. Use of this term does not indicate that the legal consequences that the IRS attaches to that term (i.e., denial of certain tax benefits) will be applied to the transaction at issue; this is an issue to be decided by the Court. 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

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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 and reference. The headings are not stipulations of fact. Exhibits referenced herein appear in the parties' Joint Exhibit List. STIPULATION I. Con Edison NY 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. (bates 1-2867; see also Exhibit 104, Index of Closing Documents, bates 2868-2876; Exhibit 105, Closing Memorandum, bates 2877-2890). 2. In its 1997 annual report, Con Edison NY stated that it is one of the nation's

largest publicly held energy companies (Exhibit 106, bates 2892), listing approximately $14.7 billion in assets on its consolidated balance sheet as of December 31, 1997. (Exhibit 106, bates 2922). It is a regulated public utility that was organized under the laws of the State of New York on November 10, 1884. (Exhibit 106, bates 2892). 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, bates 2892). The 1997 annual report

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of Con Edison NY 1997 is attached as Exhibit 106, bates 2891-2946; Exhibit 107, bates 29473002 (color). 3. Prior to January 1, 1998, Con Edison NY was a widely held and publicly traded

company on the New York Stock Exchange. (Exhibit 106, bates 2892) 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, bates 3029). 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. (bates 3003; see also Exhibit 109, SEC Form U-3A-2, bates 3069). 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 Exhibit 106, bates 2913; Exhibit 299, bates 5834). 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, bates 3059). 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. (Exhibit 109, bates 5849). 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

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Gas Service And Develop Criteria For Utility Responses" (the "Competitive Opportunities Proceeding"). (Exhibit 109, bates 5920 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. (Exhibit 109, bates 5849). 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 110. (bates 3077-3081). 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

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subsidiaries, that would further the PSC's restructuring goals. The May 1996 PSC Opinion is attached as Exhibit 299. (bates 5834). 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 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, bates 3082, bates 3084) 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 13. bates 3101 bates 3104 bates 3110 bates 3113 bates 3116 bates 3119 bates 3122 bates 3125 bates 3128 bates 3130 bates 3133 Exhibit 112 Exhibit 113 Exhibit 114 Exhibit 115 Exhibit 116 Exhibit 117 Exhibit 118 Exhibit 119 Exhibit 120 Exhibit 121 Exhibit 122

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. (bates 3137, bates 3139, bates 3146,

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bates 3147, bates 3150, bates 3153, bates 3156, bates 3128, bates 3166, bates 3169). 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 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. (bates 3172) 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. (bates 3175, bates 3188). 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 135, bates 3192-3230.1 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
1

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

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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, 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." July 12, 1996 Order, Exhibit 137, bates 3317). 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 138. (bates 3328). 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. (Exhibit 141, Gramercy Board Minutes Oct 28, 1996, bates 3337; Exhibit 142, Certificate of Incorporation, bates 3345). On September 24, 1997, GDI changed its name to Consolidated Edison Development, Inc. ("CED"). (Exhibit 140, CED Board Minutes, bates 3333; Exhibit 139, Resolution re Name Change, bates 3332). 20. As of December 15, 1997, Con Edison NY owned 100% of the outstanding stock

of CED. (Exhibit 109, SEC Form U-3A-2, bates 3069-3076, at bates 3071).

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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 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, bates 3346; Exhibit 144, bates 3508). 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 (Exhibit 145, bates 3698-3761). Upon approval of the Settlement, the July 12, 1996 Order (Exhibit 145, bates 3762-3771) 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. (Exhibit 145, bates 3754).

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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 357 (bates 7516-37). 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 bates 2894.) 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 (Exhibit 108, 1998 Annual Report, at bates 3059). 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, bates 3800-4040, at bates 3964). In 2001, Con Edison NY sold approximately 1,480 MW additional electric generating assets. (Exhibit 148 at bates 3964). 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, bates 4041-4087, at bates 4064). 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:

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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. (Exhibit 106, Annual Report 1997, bates 2891, bates 2912). 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 states. (Exhibit 106, Annual Report 1997, bates 2891, bates 2907; Exhibit 150, ConEdison Energy Business Plan Executive Overview Oct. 27, 1997, bates 4092). 29. Consolidated Edison Communications, Inc. was formed to build and manage

communication networks. (Exhibit 151, SEC Form S-4 filed Oct. 1997, bates 4112, bates 4114). IV. CED's Business Plans 30. GDI's initial business plan, for 1997, is attached hereto as Exhibit 136, bates

3232-3316. 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, bates 3235-3245). 31. 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 The following minutes of meetings of the CED board of directors are identified: bates 3337-3344 bates 4173-4176 bates 4177-4180 bates 4181-4185 bates 4186-4187 bates 4188-4191 bates 4192 bates 4195-4197 bates 4198-4200 bates 3333-3336 bates 4255-4257 bates 4126-4127 bates 4128-4130 bates 4131-4133 bates 4134-4137 bates 4223-4226 bates 4138-4143 Exhibit 141 Exhibit 165 Exhibit 166 Exhibit 167 Exhibit 168 Exhibit 169 Exhibit 170 Exhibit 171 Exhibit 172 Exhibit 140 Exhibit 186 Exhibit 153 Exhibit 154 Exhibit 155 Exhibit 156 Exhibit 178 Exhibit 157

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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 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 11/17/1999 1/12/2000 2/9/2000 3/8/2000 32. 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

bates 4144-4147 bates 4148-4152 bates 4153-4156 bates 4157-4160 bates 4161-4164 bates 4165-4168 bates 4169-4172 bates 4124-4125 bates 4207-4215 bates 4201-4203 bates 4204-4206 bates 4216-4219 bates 4220-4222 bates 8597-8601 bates 4258-4261 bates 4262-4266 bates 4245-4248 bates 4249-4251 bates 4252-4254 bates 4227-4230 bates 4241-4244 bates 4235-4240 bates 4231-4234

Exhibit 158 Exhibit 159 Exhibit 160 Exhibit 161 Exhibit 162 Exhibit 163 Exhibit 164 Exhibit 152 Exhibit 175 Exhibit 173 Exhibit 174 Exhibit 176 Exhibit 177 Exhibit 429 Exhibit 187 Exhibit 188 Exhibit 183 Exhibit 184 Exhibit 185 Exhibit 179 Exhibit 182 Exhibit 181 Exhibit 180

The following reports to the CEI Board of Trustees are identified: bates 4273-4274 bates 4315-4317 bates 4327-4328 bates 4309-4314 bates 4303-4308 bates 4267-4272 bates 4284-4289 bates 4335-4342 bates 4329-4334 bates 4297-4302 bates 4275-4277 bates 4318-4320 bates 4321-4325 bates 4278-4283 bates 4290-4296 Exhibit 190 Exhibit 198 Exhibit 201 Exhibit 197 Exhibit 196 Exhibit 189 Exhibit 193 Exhibit 203 Exhibit 202 Exhibit 195 Exhibit 191 Exhibit 199 Exhibit 200 Exhibit 192 Exhibit 194

33. 7/10/1998

The following weekly reports of CED are identified: bates 4440-4445 Exhibit 238

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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 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

bates 4354-4358 bates 4413-4414 bates 4411-4412 bates 4352-4353 bates 4408-4410 bates 4350-4351 bates 4406-4407 bates 4400-4403 bates 4404-4405 bates 4398-4399 bates 4347-4349 bates 4451-4452 bates 4396-4397 bates 4368-4370 bates 4365-4367 bates 4361-4362 bates 4379-4381 bates 4376-4378 bates 4371-4372 bates 4373-4375 bates 4446-4450 bates 4424-4427 bates 4418-4419 bates 4433-4436 bates 4428-4432 bates 4389-4392 bates 4359-4360 bates 4420-4423 bates 4437-4439 bates 4393-4395 bates 4387-4388 bates 4382-4384 bates 4385-4386 bates 4415-4417 bates 4345-4346 bates 4343-4344

Exhibit 209 Exhibit 230 Exhibit 229 Exhibit 208 Exhibit 228 Exhibit 207 Exhibit 227 Exhibit 225 Exhibit 226 Exhibit 224 Exhibit 206 Exhibit 240 Exhibit 223 Exhibit 213 Exhibit 212 Exhibit 211 Exhibit 217 Exhibit 216 Exhibit 214 Exhibit 215 Exhibit 239 Exhibit 234 Exhibit 232 Exhibit 236 Exhibit 235 Exhibit 221 Exhibit 210 Exhibit 233 Exhibit 237 Exhibit 222 Exhibit 220 Exhibit 218 Exhibit 219 Exhibit 231 Exhibit 205 Exhibit 204

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: bates 4453 bates 4470 Exhibit 241 Exhibit 242

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bates 4473 bates 4507 bates 4528 (undated) bates 4534 bates 4572 bates 4608 bates 4631 bates 4674 bates 4684 bates 4703 bates 4747 bates 4781 bates 4801 (unsigned) bates 4804 bates 4807 bates 4859 bates 4893 bates 4948 bates 4927 bates 4966 bates 7051 bates 7426 bates 7577 bates 7719 bates 7741 bates 8003

Exhibit 243 Exhibit 244 Exhibit 245 Exhibit 246 Exhibit 247 Exhibit 248 Exhibit 249 Exhibit 250 Exhibit 251 Exhibit 252 Exhibit 253 Exhibit 254 Exhibit 255 Exhibit 256 Exhibit 257 Exhibit 258 Exhibit 259 Exhibit 261 Exhibit 260 Exhibit 262 Exhibit 327 Exhibit 348 Exhibit 360 Exhibit 374 Exhibit 375 Exhibit 387

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 263. (bates 4986) 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"). (Exhibit 170, 6/20/1997 GDI Board

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Meeting Minutes, bates 4192-4194). 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 (bates 8030-8103), § 1.03 (bates 8036), Schedule A (bates 8102)). 37. An undated internal GDI presentation regarding IEP, including a list of potential

international projects, is attached as Exhibit 251. (bates 4684-4702). 38. 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, bates 5160 to bates 5222; Consolidated Edison Development Summary of Investments December 2000 (Exhibit 264, bates 5137-5159, see bates 5137-5140). 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. (bates 4966- 4985, at bates 4969). 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 266. (bates 5223) 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

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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. (bates 5250, bates 5251). 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. (Exhibit 262, bates 4971-72). 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 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. (bates 4893, bates 4902). 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. (Exhibit 268, bates 5253 through 5255). 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. (Exhibit 251, Memo IEP provided to GDI, bates 4684; Exhibit 253, CED presentation entitled 1998 Business Plan, dated October 1997, bates 4747). 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, bates 4148, bates 4151).

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44.

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, bates 4148, bates 4151). 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 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. (bates 5256, bates 5267). 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. (Exhibit 270, bates 5280-5312). 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

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listed.. A copy of Volume I of the CEPALCO Investment Recommendation dated September 23, 1998 is attached as Exhibit 271. (bates 5313, at bates 5316). 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." (Exhibit 262, bates 4966, bates 4974). 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 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. (bates 5256) 50. A CED document dated September 3, 1998 indicates that the Jiangsu

Transmission & Distribution Planning project was completed in August 1998. (Exhibit 272, bates 5332, bates 5334; Exhibit 273, bates 5384, bates 5387). 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. (Exhibit 274, bates 5398). 52. A document entitled "Cornerstone Financial Advisors Limited Partnership

Organization Description," was provided to GDI. It is attached as Exhibit 275 (bates 53995409). 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 276 (bates 5410-5414).

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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. (Exhibit 169, bates 4188-4192). 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 277 (bates 5415-16). 56. CED also retained Cornerstone to provide financial services in connection with

CED's review of other lease-leaseback transactions. These transactions included a leaseleaseback transaction involving an electric generation facility in The Netherlands, referred to as the EPON transaction (Exhibit 280, bates 5481-83); a lease-leaseback transaction involving gas distribution assets in The Netherlands owned by ENECO (Exhibit 278, bates 5417); a leaseleaseback transaction involving gas distribution assets in The Netherlands owned by MEGA (Exhibit 279, bates 5477-78); and a lease-leaseback transaction involving gas distribution assets in The Netherlands owned by NUON (Exhibit 281, bates 5485-86). (a) 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, bates 5930-83; Exhibit 299, Aug. 27, 1997 CED Bd. Min., bates 4200) but in late 1997, CED decided to not pursue the EPON transaction (Exhibit 154, Nov. 24, 1997 CED Bd. Minutes, bates 4130). 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, bates 6116-70; Exhibit 306, Summary of Transaction from Cornerstone to CED, bates 6182). CED also prepared a White Paper pertaining to the ENECO transaction. (Exhibit 307, White Paper, bates 6183) CED submitted a proposal on the ENECO transaction, which was accepted on or about October 22, 1997. (Exhibit 303, bates 6098-6115, commitment letter; Exhibit 305, bates 6171-6181, accepted proposal). CED ultimately withdrew from the transaction in February 1998. (Exhibit 157, 2/26/98 CED Bd. Min., bates

(b)

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4142) A CED memorandum discussing reasons for the withdrawal. (Exhibit 302, bates 6096-97 and Exhibit 301, bates 6005). (c) 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 bates 6259-6329; see Exhibit 309, 9/3/98 draft briefing memorandum, bates 6192-6258). CED submitted a proposal to MEGA on or about October 7, 1998. (Exhibit 311, bates 6330-37). CED's proposal was not accepted. (Exhibit 308, bates 6191). 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, bates 6685-6711 (vol. 1); Exhibit 317, bates 6712-6807 (vol. 2); Exhibit 318, bates 6808-6980 (vol. 3); Exhibit 428, bates 8590-96, white paper; Exhibit 315, Investment Recommendation, bates 6680). CED submitted a proposal, which was accepted. (Exhibit 312, 10/27/98 Bid, bates 6338-51; Exhibit 319, 12/10/98 Updated Bid, bates 6981-83; Exhibit 314, 2/12/98 Acceptance, bates 6666-79). CED closed the transaction with NUON pursuant to documents dated as of May 18, 1999. (E.g., Exhibit 313, NUON Participation Agreement, bates 6352-6665; Exhibit 320, CED February 2000 Business Plan, bates 6984, bates 6999).

(d)

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 282, Holzman notes, bates 5487-91 at bates 5490-91). 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

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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. 287, bates 5607 (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 (Exhibit 283, bates 5492-94). 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 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, bates 8602-06, at bates 8606. 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 284, bates 5561-62.

2

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 402 (bates 8143).

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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. (Exhibit 1, bates 27). 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. (Exhibit 285, bates 5568; Exhibit 286, bates 5575). 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. (Exhibit 287, EZH 1997 Annual Report, bates 5607, bates 5615). 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 remaining 5% was owned by EZH. A copy of the EZH 1997 Annual Report is attached as Exhibit 287, bates 5607-35 at bates 5629. 67. Internal EZH documents discussing the Transaction are attached as Exhibit 288,

bates 5636-5666 (Dutch, and English translation). 68. Other documents regarding EZH not otherwise identified herein are attached as: Exhibit 289 Exhibit 290 Exhibit 291

bates 5668-73 bates 5674-92 bates 5693-5720

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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 292, bates 5721-787, at bates 5733. 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 293. (bates 5788). 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 EZH as part of the merger. A copy of a September 15, 2000 letter from EZH to CED is attached as Exhibit 294. (bates 5789-90). 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 295. (bates 5791)

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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 Exhibit 430, "Innovation in the B Triangle," bates 8602). 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 430, bates 8602). 74. A document provided by EZH (bates 5792-5822, Exhibit 296 hereto), and

included behind Schedule 7(t) of the Participation Agreement (Exhibit 1, bates 216-245) 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) Appendix A of the Participation Agreement defines the Unit as the gasfired, 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, bates 171). 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, bates 122, bates 243). 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, bates 123). 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, bates 5792-5822; Exhibit 1, Participation Agreement § 7(t), bates 242).

(b)

(c)

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(d)

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, bates 123, bates 242). 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, bates 143). 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, bates 131).

(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 297. (bates 5823). 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 298. (bates 5826-33). 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) 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

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(e) negotiation of documentation mutually acceptable to EZH and CED. (Exhibit 298, bates 5828, bates 5829). 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. (bates 1822). This document is attached as Exhibit 52 (bates 1801-2074, at bates 1822).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. (Exhibit 1 at bates 14).

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. (bates 2106). 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 (bates 2076-2341). 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. (Exhibit 1, bates 14). 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. (Exhibit 46, bates 1588-1596). A copy of the Appraisal is attached as Exhibit 46. (bates 1501-1758).

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 321 is a copy of the Arthur Andersen Report (bates 7007-12), and Exhibits 130, 322, 323 (bates 3159-65; bates 7014-19; bates 7020-26) are drafts thereof. Exhibit 324 (bates 7027-30) is a copy of the hypothetical lease transaction. 85. PriceWaterhouse prepared a report concerning the accounting treatment of the

Transaction. Exhibit 325 (bates 7031-34) 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. (Exhibit 326, Loeff Claeys Verbeke opinion dated 12/15/97, bates 7035-50). 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, bates 7062-69 (Exhibit 329) and "Amendments to the Code and the Treasury Regulations Impact on Leveraged Lease Financing Transactions," dated 11/20/97, bates 7054-61 (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, bates 2754.

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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 330, bates 7070; Exhibit 331, bates 7154; Exhibit 332, bates 7155; Exhibit 333, bates 7240. 89. Documents pertaining to Cornerstone's role as advisor to CED include: Exhibit

335, bates 7320-22; Exhibit 336, bates 7323-26; Exhibit 341, bates 7351-53; Exhibit 342, bates 7354-82; Exhibit 343, bates 7383-85; Exhibit 344, bates 7386-89; Exhibit 345, bates 7390-94; Exhibit 346, bates 7395-418.4; Exhibit 334, bates 7318-19; Exhibit 337, bates 7327-29; Exhibit 338, bates 7330; Exhibit 347, bates 7419-25; Exhibit 339, bates 7331-34; Exhibit 340, bates 7335-50. 90. Cornerstone assisted CED in understanding how leveraged leases are treated for

financial accounting purposes. (e.g., Exhibit 282, bates 5487-91). 91. Cornerstone, in connection with the Transaction, requested information regarding

EZH's creditworthiness. Correspondence regarding EZH's creditworthiness is attached as Exhibits: bates 7467-7467.1 bates 7468 92. Exhibit 349 Exhibit 350

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:

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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 ­ Deloitte & Touche Femke Bierman ­ Loeff Claeys Verbeke Hans Nieuwenhuis ­ Tauw Milieu The memo is attached as Exhibit 351 (bates 7469-70). A facsimile from Capstar Partners further describing the site visit is attached hereto as Exhibit 353, bates 7487-93. 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 352 (bates 7471-86). 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. (Exhibit 1, bates 59). 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. (Exhibit 1, bates 59). 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 354, bates 7494).

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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 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 375 and 376, respectively. (bates 7612-91, bates 7768-7932). (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 377 (bates 7933-38). (c) Attached as Exhibits are draft Leasing White Papers: Exhibit 378, bates 7939-46; Exhibit 379, bates 7947-54; Exhibit 380, bates 7955-62; Exhibit 381, bates 7963-69; Exhibit 383, Bates 7976-82; Exhibit 384, bates 798389; Exhibit 385, bates 7990-97; Exhibit 386, bates 8000-02. (d) An Investment Recommendation which was submitted to CED's Board of Directors in conjunction with resolutions authorizing the investment in the

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RoCa3 Facility. A copy of the memorandum submitting the Investment Recommendation to the CED Board of Directors is attached as Exhibit 382 (bates 7970-75). (e) (f) A Project Fact Sheet is attached as Exhibit 388 (bates 8020). The September 25, 1997 Board Minutes of [CED] are attached as Exhibit 140 (bates 3333-36). (g) An October 23, 1997, memorandum and board resolution are attached as Exhibit 389 (bates 8022-27). (h) An October 23, 1997 memorandum is attached as Exhibit 390 (bates 802829). (i) An October 27, 1997 memorandum is attached as Exhibit 382. (bates 7970). (j) The Investment Recommendation and board resolution are attached as Exhibit 382 (bates 7971-75). (k) The October 28, 1997 Board of Trustees Minutes are attached as Exhibit 354 (bates 7494). (l) The October 23, 1997 CED memo with the notation "Memorandum dated 10/23/97 was not approved by the Board on 10/28/97" is attached as Exhibit 392 (bates 8104). (m) The October 29, 1997 CED Board Minutes are attached as Exhibit 393 (bates 8107). (n) The November 24, 1997 CED Board Minutes are attached as Exhibit 394. (bates 8109)

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(o)

A November 25, 1997 memorandum is attached as Exhibit 395 (bates 8112)

(p)

A December 9, 1997 memorandum is attached as Exhibit 146. (bates 3772)

(q)

Investment Recommendation and board resolution are attached as Exhibit 396. (bates 3773)

(r)

A December 9, 1997 memorandum with attached resolution and leasing white paper are attached as Exhibit 397. (bates 8118)

(s)

A December 10, 1997 Investment Recommendation and Board of Directors resolution are attached as Exhibit 398. (bates 8126)

96.

On December 10, 1997, the CED Board authorized the investment and

participation in the EZH RoCa3 project subject to CEI approval and the provision of the necessary funds. The Certificate of the Secretary of CED certifying this board resolution is attached as Exhibit 355. (bates 7514). 97. The executed approval of the EZH RoCa3 project by the CED Board of Directors

was conditioned upon (a) a 10% or better after-tax yield as calculated for accounting and financial reporting purposes; (b) the amount committed to the project not exceeding $47.4 million; (c) an engineering study regarding the condition of the facility; and (d) a satisfactory environmental study. Exhibit 355, bates 7514. 98. On December 12, 1997, the CEI Board of Directors held a board meeting and

authorized an additional $100 million investment in CED to support tax advantaged leasing investments. The Certificate of CEI certifying this board resolution is attached as Exhibit 356. (bates 7515) The December 12, 1997 Board Minutes are attached as Exhibit 357. (bates 7516)

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A copy of the December 9, 1997 memo requesting additional investment with the notation "Consolidated Edison Co. of New York Inc. Board of Trustee Approved Dec. 12, 1997" is attached as Exhibit 358. (bates 7550) 99. Consolidated Edison Leasing, Inc. ("CEL") was organized in the State of

Delaware on December 11, 1997 as a wholly owned subsidiary of CED. (Exhibit 67, Certificate of Incorporation, bates 2612-14; Exhibit 361, December 12, 1997 CEL Board Minutes, bates 7603-08). CEL was incorporated as a special purpose company for the purpose of serving as the grantor in the RoCa Facility Trust No. 2 (February 5, 1999 Weekly Report of CED, bates 7576, Exhibit 359). 100. On December 12, 1997, the CEL Board of Directors held the first meeting of the

Board and passed a resolution authorizing investment and participation in the EZH RoCa3 project. (Exhibit 361, bates 7603-08). The Board noted that the EZH RoCa3 project had already been approved by the boards of directors of CED and CEI. An undated Certificate of the Secretary of CEL certifying this board resolution is attached as Exhibit 399. (bates 8133-34). 101. On December 15, 1997, CEL held a special meeting of the Board and adopted

revised resolutions that could be provided to EZH without disclosing the limits as to the total amount that could be invested and the minimum return to the company with respect to the Transaction which were originally set forth in the December 12, 1997 resolution. The December 15, 1997 Board Minutes are attached as Exhibit 362 (bates 7609-11). The revised resolution is attached as Exhibit 67 (bates 2620). IX. The EZH Transaction 102. As of December 12, 1997, CEL entered into a Trust Agreement with Wilmington

Trust Company (the "Trustee"), under which the Trustee agreed to act as trustee of a trust, RoCa

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Facility Trust No. 2, for the benefit of CEL (the "CEL Trust") in connection with the Transaction. (Exhibit 6, Trust Agreement, bates 581) 103. CEL formed the special purpose CEL Trust to enter into the Lease Agreement and

Sublease Agreement as well as other agreements that were involved in the Transaction. (Exhibit 363, Briefing Memorandum at bates 7644; Exhibit 364, PWC auditor memorandum, bates 769296). The role of the trust has no effect on the tax treatment of the Transaction. For federal income tax purposes, CEL is required to report, and does report, the income and expenses of the CEL Trust as if they were CEL's own income and expenses. 104. As of December 15, 1997, EZH and CEL, directly or through the CEL Trust,

entered into the Transaction, along with other third parties, by executing a series of agreements including, among others: (1) the Participation Agreement; (2) the Lease Agreement; (3) the Lease Certificate of Acceptance; (4) the Sublease Agreement; (5) the Sublease Certificate of Acceptance; (6) the Loan and Security Agreement; (7) the Sublessee Loan Agreement, (8) the Tax Indemnity Agreement; (9) the IJssel Agreement; (10) the Rotte Agreement; (11) the Sublease Deposit, Pledge and Repledge Agreement; (12) the Sublessee Pledge and Security Agreement; (13) the Custody Agreement; (14) the Facility Operating Agreement; (15) the Common Facilities Use Agreement; (16) the Facility Support Agreement; and (17) the Access Agreement. (Exhibit 1, Participation Agreement section 3(a), bates 11-12; section 4(a), bates 17; section 5(a), bates 23). 105. Additionally, the Transaction was conditioned on the receipt of a number of

documents satisfactory to CEL, HBU and EZH, including contemporaneous reports of consultants and legal opinions in all relevant jurisdictions. (Exhibit 1, Participation Agreement section 3(b), bates 12-13; section 4(b), bates 17-19; section 5(a), bates 23-24).

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106.

Section 21 of the Participation Agreement provides that the amount of the

Transaction Expenses, as defined in the Participation Agreement, was arrived at by taking a fixed portion, in this case 2%, of the value of the Undivided Interest. (Exhibit 1, bates 106). Section 21 of the Participation Agreement also provides that if Transaction Expenses in actuality exceeded the 2% amount, those excess costs would be borne by EZH. (Exhibit 1, bates 106). In this case the amount of Transaction Expenses resulting from this formula was $3,000,000.00. Section 21 of the Participation Agreement, in conjunction with Appendix A thereto, also provided that to the extent actual Transaction Expenses were less than the 2% amount, the Trust was responsible for Additional Transaction Expenses, i.e. expenses of representatives of EZH in preparation of the Operative Documents, up to the 2% amount. (Exhibit 1, bates 106; bates 116). CED incurred additional expenses in connection with entering into the Transaction, that were not included within the Transaction Expenses, such as the fees charged by Cornerstone and PriceWaterhouse. A. 107. EZH's Representations, Warranties and Covenants Section 7 of the Participation Agreement contains representations and warranties

set forth as follows (Exhibit 1, bates 27-38): (a) EZH is a public limited liability company duly authorized to do business in The Netherlands and is authorized to perform its obligations under the Transaction Documents. (b) The execution of the Transaction has been authorized by EZH and all necessary approvals and consents have been obtained.

Case 1:06-cv-00305-MBH

Document 57

Filed 10/03/2007

Page 36 of 104

(c)

The execution of the Operative Documents by EZH will not constitute a default under or result in the creation of any Lien (other than pursuant to the Operative Documents).

(d)

The execution of the Operative Documents by EZH does not require any governmental approvals or consents, other than those already obtained or otherwise set forth in section 7(d) of the Participation Agreement.

(e)

The Transaction Documents, when executed and delivered, will constitute legal, valid, and binding obligations of EZH, enforceable against EZH.

(f)

EZH is not in default of any agreement, which d