Exhibit M-1
Form of
Federal and State Income Tax
Allocation Agreement
Between Scotia Holdings Incorporated (U.S.)
And Certain U.S.-Organized Emera Associate Companies
Emera U.S.- Organized Group
Income Tax Allocation Agreement
This agreement, made as of _________, 2001 among Emera US Holdings Inc., a
Delaware corporation ("US Group Parent"), BHE Holdings Inc., a Delaware
corporation, Bangor Hydro-Electric Company, a Maine corporation, Bangor Var Co.
Inc., a Maine corporation, Bangor Energy Resale Inc., a Maine corporation,
CareTaker, Inc., a Maine corporation, Bangor Fiber Co. Inc., a Maine
corporation, Bangor Line Co., a Maine corporation, The Pleasant River Gulf
Improvement Co., a Maine corporation, The Sebois Dam Co., a Maine corporation,
East Branch Improvement Co., a Maine corporation, ▇▇▇▇▇▇▇'▇ Falls Cam Co., a
Maine corporation, and The ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ & Dam Improvement Co., a Maine
corporation (each, including US Group Parent, a "Member"). The Members, with the
exception of US Group Parent, are referred to as "Affiliates." The Affiliates
and US Group Parent, collectively, are sometimes referred to as the "Group."
US Group Parent owns directly or indirectly at least 80% of the issued an
outstanding shares of each class of voting common stock of each of the
Affiliates and at least 80% of the total value of the stock of each of the
Affiliates. Each of the Members is a member of an affiliated group within the
meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the
"Code"), of which US Group Parent is the common parent; and the Group intends to
file a consolidated income tax return.
The Members agree to allocate tax liability as follows:
I. Allocation shall be made in accordance with Treasury Regulation Sections
1.1552-1(a)(1) and 1.1502-33(d)(3).
A. General Rule
Step 1 - The federal consolidated tax liability of the Group (not including
any liability for alternative minimum tax) shall be apportioned among the
Members of the Group in the ratio that each Member's separate taxable income
bears to the sum of the separate taxable incomes of all Members having taxable
income.
Step 2 - An additional liability amount will be allocated to Members of the
Group equal to 100% of the excess of the Member's separate tax liability over
the consolidated tax liability of the Group allocated to the Member under Step
1.
Step 3 - The total of the amounts allocated under Step 2 is credited
pursuant to a consistent method to those Members of the Group who had losses,
credits or other net tax benefits included in the consolidated return, (referred
to as "corporate tax benefits") as follows, except that for the purposes of this
Step 3, US Group Parent and/or Acquisition Co. No. 1 shall be deemed to have
corporate tax benefits only with regard to that portion of its losses, credits
or other tax benefits that arise from taking into account items attributable to
debt incurred by US Group Parent to finance the acquisition of BHE.
(a) If all corporate tax benefits reduce the amount of tax due in the
consolidated return of the Group, each Member of the Group having corporate tax
benefits will be allocated the value thereof. The value of net operating losses
shall generally be determined by applying the then current corporate income tax
rate to the amount of the loss, and the value of a credit shall generally equal
100% of the credit utilized.
(b) If the total of the corporate tax benefits is greater than the total
reduction in the consolidated tax of the Group, then the benefits arising from
the inclusion of negative taxable incomes in the consolidated return shall be
recognized and paid prior to the benefits arising from credits or other
benefits.
(c) If the corporate tax benefits attributable to Members of the Group with
negative taxable incomes are not absorbed in the consolidated return, the
benefit allocated to each such Member of the Group shall be in proportion to
their respective negative taxable incomes.
(d) If the corporate tax benefits attributable to credits or other net tax
benefits are not fully applied in the consolidated return of the Group, the
benefits arising from credits shall be recognized and paid prior to the benefits
arising from other benefits.
(e) If the corporate tax benefits attributable to Members of the Group with
credits are not absorbed in the consolidated return of the Group, the benefit
allocated to each Member company shall be in proportion to their respective
credits.
(f) If the corporate tax benefits attributable to Members of the Group with
other benefits are not absorbed in the consolidated return of the Group, the
benefit allocated to each Member company shall be in proportion to their
respective other benefits.
Step 4 - If the total consolidated tax liability results in an alternative
minimum tax ("AMT") liability, as imposed by Internal Revenue Code section
55(a), then any consolidated AMT will be allocated to the Members of the Group
based upon their proportionate amounts of separate alternative minimum tax.
Step 5 - If the total consolidated return liability results in consolidated
minimum tax credit utilization, the consolidated minimum tax credit shall be
tentatively allocated to each company participating in the consolidated return
in an amount equal to the lesser of (1) each company's separate Minimum Tax
Credit Carryforward or (2) the excess of such company's allocated regular tax
over its separate alternative minimum tax ("AMT"). Minimum Tax Credit
Carryforward for this purpose is the sum of the annual amounts of consolidated
AMT allocated to a company in prior years less the sum of the consolidated
minimum tax credits allocated to that company in prior years. If the total of
such tentative allocations exceeds the consolidated minimum tax credit utilized
in the current taxable year, then the difference between the total of the
tentative allocations and the consolidated minimum tax credit utilized for the
taxable year shall be allocated as a negative amount to each company in
proportion to that company's tentative allocation to the combined total of all
such amounts. If the total of the tentative allocations is less than the
consolidated minimum tax credit utilized, the difference between the
consolidated minimum tax credit utilization and the total of the tentative
allocations shall be allocated to each company in proportion to that company's
remaining Minimum Tax Credit Carryforward to the combined total of such
carryforwards. The consolidated minimum tax credit allocated to each company for
the taxable year will equal the sum of the amounts allocated in the two step
computation.
Step 6 - Under no circumstances shall the amount of tax or other liability
allocated to a Member under this Agreement exceed its separate tax liability.
Step 7 - Reimbursement - Each Member of the Group shall pay its apportioned
share of the consolidated tax liability (including its apportioned share of
consolidated alternative minimum tax) along with any additional amount
determined under Step 2 to US Group Parent on the dates directed by US Group
Parent. Within 30 days of each quarterly payment date for estimated taxes or
such later date specified by US Group Parent, each Member of the Group shall pay
to US Group Parent an estimate of the amounts due to US Group Parent under Steps
1 and 2 above. Shortly after receiving payment from the Members, US Group Parent
shall pay the consolidated tax to the relevant taxing jurisdiction and
distribute an estimate of the amounts due under Step 3 to appropriate Members of
the Group. Any amounts paid in any year shall reduce the final amounts payable
as set forth above, and any balance due shall be promptly refunded.
B. State Income Taxes
The current state consolidated corporate tax liabilities for those states
in which consolidated returns are filed shall be allocated as contemplated by
Rule 45(c), as follows:
Step 1 - To each Member operating in the state there shall be allocated the
income tax effects of the Member's state taxable losses (on a separate company
basis), any state tax credits and the material effects of any other features of
the state tax code applicable to a particular Member including its carryover
amounts to the extent that the above described effects are utilized in the
consolidated state return in the taxable year.
Step 2 - To each Member operating in the state that generates state taxable
income, there shall be allocated income tax expense by first increasing the
state consolidated current income tax liability by the sum of the tax effects
allocated in Step 1 above. The total shall then be allocated among those Members
incurring an income tax expense based on the ratio of that Member's separate
company state income tax to the sum of the separate company state income tax of
all Members incurring state income tax expense.
Step 3 - Nonetheless, if for any Member there is an excess of allocated
liability (pursuant to Steps 1 and 2) over the liability on a separate company
basis, such excess shall be allocated among the Members with net state tax
benefits. Such excess shall be allocated to all such Members based on the ratio
of their separate company net tax benefits to the sum of income tax benefits of
all Members which were allocated such benefits. The allocation of such excess
tax shall have the effect of reducing the income tax benefits of those Members
but in no case shall such allocation result in reducing such tax benefits below
zero for any Member that realizes a net taxable loss on a separate company
basis.
C. Unused Corporate Tax Benefits
A Member of the Group that is entitled to payment for a corporate tax
benefit, but does not receive such payment because of the rules in Step 3 shall
retain such right for the future to the extent that such benefit can be applied
against the consolidated tax liability. Uncompensated corporate tax benefits
arising from negative taxable income shall have priority over the benefits
attributable to excess tax credits.
D. Tax Adjustments
In the event of any adjustments to the tax returns of any of the Members of
the Group filed (by reason of an amended return, a claim for refund or an audit
by the Internal Revenue Service), the liability, if any, of each of the Members
of the Group under Section A shall be redetermined to give effect to any such
adjustment as if it had been made as part of the original computation of tax
liability, and payments between US Group Parent and the appropriate Members of
the Group shall be made within 120 days after any such payments are made or
refunds are received, or, in the case of contested proceedings, within 120 days
after a final determination of the contest. Interest and penalties, if any,
attributable to such an adjustment shall be paid by each Member of the Group to
US Group Parent in proportion to the increase in such Member's separate return
tax liability computed under Section A of this Agreement that is required to be
paid to US Group Parent. In any situation in which the Group's tax liability is
adjusted by a revenue agent's report or a court settlement and an item-by-item
modification is not made, the Group shall consult its accountants for assistance
in determining a fair allocation of the adjusted liability.
II. Subsidiaries of Affiliates
If at any time, any Member acquires or creates one or more subsidiary
corporations that are includible corporations of the Group, they shall be
subject to this Agreement and all references to the Affiliates herein shall be
interpreted to include such subsidiaries as a group.
III. Successors
This Agreement shall be binding on and inure to the benefit of any
successor, by merger, acquisition of assets or otherwise, to any of the parties
hereto (including but not limited to any successor of US Group Parent or any of
the Affiliates succeeding to the tax attributes of such corporation under
Section 381 of the Code) to the same extent as if such successor had been an
original party to this Agreement.
IV. Termination Clause
This Agreement shall apply to the taxable year ending __________, and
subsequent taxable years, unless all of the members of the Group agree in
writing to terminate the Agreement prior to the end of the taxable year.
Notwithstanding any termination, this Agreement shall continue in effect with
respect to any payment or refunds due for all taxable periods prior to
termination.
IN WITNESS WHEREOF, the duly authorized representatives of the parties have
set their hands this ____ day of _______________.
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