Document:

EX-4.2

 Exhibit 4.2 

Execution Version 

REGISTRATION RIGHTS AGREEMENT 

by and among 
 Alta Mesa
Holdings, LP, 
 Alta Mesa Finance Services Corp., 

the Guarantors party hereto, 

and 
 Wells Fargo
Securities, LLC, 
 as representative of the Initial Purchasers 

Dated as of December 8, 2016 

 REGISTRATION RIGHTS AGREEMENT 

This Registration Rights Agreement (this “Agreement”) is made and entered into as of December 8, 2016, by and among Alta
Mesa Holdings, LP, a Texas limited partnership (the “Company”), Alta Mesa Finance Services Corp., a Delaware corporation (“FinCo,” and together with the Company, the “Issuers”), the entities listed
as signatory guarantors hereto (collectively, the “Guarantors”), and Wells Fargo Securities, LLC, as the representative of the initial purchasers listed on Schedule I to the Purchase Agreement (each an “Initial
Purchaser” and, collectively, the “Initial Purchasers”), each of whom has agreed to purchase the Issuers’ 7.875% Senior Notes due 2024 (the “Notes”), fully and unconditionally guaranteed by the
Guarantors (the “Guarantees”) pursuant to the Purchase Agreement (as defined below). The Notes and the Guarantees attached thereto are herein collectively referred to as the “Securities.” 

This Agreement is made pursuant to the Purchase Agreement, dated December 2, 2016 (the “Purchase Agreement”), by and
among the Issuers, the Guarantors and the Initial Purchasers (i) for the benefit of the Initial Purchasers and (ii) for the benefit of the holders from time to time of Transfer Restricted Securities, including the Initial Purchasers. In
order to induce the Initial Purchasers to purchase the Securities, the Issuers have agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial
Purchasers, as set forth in Section 6(k) of the Purchase Agreement. 
 The parties hereby agree as follows: 

SECTION 1. Definitions. 

As used in this Agreement, the following capitalized terms shall have the following meanings: 

Additional Interest: As defined in Section 5 hereof. 

Advice: As defined in Section 6(c) hereof. 

Affiliate. As defined in Rule 144 promulgated by the Commission. 

Agreement: As defined in the preamble hereto. 

Broker-Dealer: Any broker or dealer registered under the Exchange Act. 

Business Day: Any day other than a Saturday, Sunday or U.S. federal holiday or a day on which banking institutions or trust companies
located in New York, New York are authorized or obligated to be closed. 
 Closing Date: The date of this Agreement. 

Commission: The Securities and Exchange Commission. 

Company: As defined in the preamble hereto. 

 Consummate: A registered Exchange Offer shall be deemed “Consummated” for
purposes of this Agreement upon the occurrence of (i) the filing and effectiveness under the Securities Act of the Exchange Offer Registration Statement relating to the Exchange Securities to be issued in the Exchange Offer, (ii) the
maintenance of such Registration Statement being continuously effective and the keeping of the Exchange Offer open for a period not less than the minimum period required pursuant to Section 3(b) hereof, and (iii) the delivery by the
Issuers to the Registrar under the Indenture of Exchange Securities in the same aggregate principal amount as the aggregate principal amount of Transfer Restricted Securities that were tendered by Holders thereof pursuant to the Exchange Offer. 

Controlling Person: As defined in Section 8(a) hereof. 

Exchange Act: The Securities Exchange Act of 1934, as amended. 

Exchange Date: As defined in Section 3(a) hereto. 

Exchange Offer: The registration by the Issuers under the Securities Act of the Exchange Securities pursuant to a Registration
Statement pursuant to which the Issuers offer the Holders of all outstanding Transfer Restricted Securities the opportunity to exchange all such outstanding Transfer Restricted Securities held by such Holders for Exchange Securities in an aggregate
principal amount equal to the aggregate principal amount of the Transfer Restricted Securities tendered in such exchange offer by such Holders with terms that are identical in all respects to the Transfer Restricted Securities (except that Exchange
Securities will not contain terms with respect to any increase in annual interest rate as described herein and the transfer restrictions). 

Exchange Offer Registration Statement: The Registration Statement relating to the Exchange Offer, including the related Prospectus.

 Exchange Securities: The 7.875% Senior Notes due 2024, of the same series under the Indenture as the Transfer Restricted
Securities, including the Guarantees, to be offered to Holders in exchange for Transfer Restricted Securities pursuant to this Agreement. 

FinCo.: As defined in the preamble hereto. 

FINRA: Financial Industry Regulatory Authority, Inc. 

Guarantees: As defined in the preamble hereto. 

Guarantors: As defined in the preamble hereto. 

Holders: As defined in Section 2(b) hereof. 

Indemnified Holder: As defined in Section 8(a) hereof. 

Indenture: The Indenture, dated as of December 8, 2016, by and among the Issuers, the Guarantors and U.S. Bank National
Association, as trustee (the “Trustee”), pursuant to which the Securities are to be issued, as such Indenture is amended or supplemented from time to time in accordance with the terms thereof. 

  
 2 

 Initial Placement: The issuance and sale by the Issuers of the Securities to the Initial
Purchasers pursuant to the Purchase Agreement. 
 Initial Purchasers: As defined in the preamble hereto. 

Initial Securities: The Securities issued and sold by the Issuers to the Initial Purchasers pursuant to the Purchase Agreement on the
Closing Date. 
 Issuers: As defined in the preamble hereto. 

Notes: As defined in the preamble hereto. 

Person: An individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political
subdivision thereof. 
 Prospectus: The prospectus included in a Registration Statement, as amended or supplemented by any prospectus
supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. 

Purchase Agreement: As defined in the preamble hereto. 

Registration Actions: As defined in Section 4(c) hereof. 

Registration Default: As defined in Section 5 hereof. 

Registration Statement: Any registration statement of the Issuers relating to (a) an offering of Exchange Securities pursuant to
an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, which is filed pursuant to the provisions of this Agreement, in each case, including the Prospectus included
therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. 

Securities: As defined in the preamble hereto. 

Securities Act: The Securities Act of 1933, as amended. 

Shelf Filing Deadline: As defined in Section 4(a) hereof. 

Shelf Registration Statement: As defined in Section 4(a) hereof. 

Suspension Period: As defined in Section 4(c) hereof. 

Transfer Restricted Securities: The Securities; provided that the Securities shall cease to be Transfer Restricted Securities on
the earliest to occur of (i) the date on which a Registration Statement with respect to such Securities has become effective under the Securities Act and such Securities have been exchanged and are entitled to be resold to the public by the
Holder thereof without complying with the prospectus delivery requirements of the Securities Act, or such Security has been disposed of pursuant to such Registration Statement, (ii) if a Shelf Registration Statement is required to be filed in
accordance with Section 4 hereof, the expiration of the period set forth in the final sentence of Section 4(a), (iii) the date upon which such Security is sold 

  
 3 

 
pursuant to Rule 144 under circumstances in which any legend borne by such Security relating to restrictions on the transferability thereof, under the Securities Act or otherwise, is removed, or
the restrictive CUSIP number is redesignated as non-restrictive by the Issuer or pursuant to the Indenture or (iv) the date on which such Securities cease to be outstanding. 

Trust Indenture Act: The Trust Indenture Act of 1939, as amended. 

Underwritten Registration or Underwritten Offering: A registration in which securities of the Issuers are sold to an underwriter
for reoffering to the public. 
 SECTION 2. Securities Subject to This Agreement. 

(a) Transfer Restricted Securities. The securities entitled to the benefits of this Agreement are the Transfer Restricted Securities.

 (b) Holders of Transfer Restricted Securities. A Person is deemed to be a holder of Transfer Restricted Securities (each, a
“Holder”) whenever such Person owns Transfer Restricted Securities. 
 SECTION 3. Registered Exchange Offer. 

(a) Unless the Exchange Offer shall not be permissible under applicable law or Commission policy (after the procedures set forth in
Section 6(a) hereof have been complied with), or there are no Transfer Restricted Securities outstanding, the Issuers and the Guarantors shall (i) cause to be filed with the Commission an Exchange Offer Registration Statement,
(ii) use their commercially reasonable efforts to cause such Exchange Offer Registration Statement to be declared effective, (iii) in connection with the foregoing, (A) file all pre-effective amendments to such Exchange Offer
Registration Statement as may be necessary in order to cause such Exchange Offer Registration Statement to become effective, (B) if applicable, file a post-effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A
under the Securities Act and (C) use their commercially reasonable efforts to cause all necessary filings in connection with the registration and qualification of the Exchange Securities to be made under the state securities or blue sky laws of
such jurisdictions to permit Consummation of the Exchange Offer; provided, however, that none of the Issuers or the Guarantors shall be required to (x) qualify as a foreign corporation or as a dealer in securities in any jurisdiction
where it would not otherwise be required to qualify but for this Section 3(a) or (y) take any action which would subject it to general service of process or taxation in any such jurisdiction where it is not then so subject and
(iv) upon the effectiveness of such Exchange Offer Registration Statement, commence the Exchange Offer. Each of the Issuers and the Guarantors shall use their commercially reasonable efforts to Consummate the Exchange Offer not later than 360
days following the Closing Date (or if such 360th day is not a Business Day, the next succeeding Business Day) (the “Exchange Date”). The Exchange Offer Registration Statement shall be on the appropriate form permitting registration
of the Exchange Securities to be offered in exchange for the Transfer Restricted Securities and to permit resales of Transfer Restricted Securities held by Broker-Dealers as contemplated by Section 3(c) hereof. 

(b) The Issuers and the Guarantors shall use their commercially reasonable efforts to cause the Exchange Offer Registration Statement to be
effective continuously and shall keep the 

  
 4 

 
Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that
in no event shall such period be less than 20 Business Days after the date notice of the Exchange Offer is mailed to the Holders; provided, further, that such period shall be extended by the number of days in any Suspension Period. The
Issuers shall cause the Exchange Offer to comply in all material respects with all applicable federal and state securities laws. No securities other than the Exchange Securities shall be included in the Exchange Offer Registration Statement. The
Issuers shall use their commercially reasonable efforts to cause the Exchange Offer to be Consummated by the Exchange Date. 
 (c) The
Issuers shall indicate in a “Plan of Distribution” section contained in the Prospectus forming a part of the Exchange Offer Registration Statement that any Broker-Dealer who holds Transfer Restricted Securities that were acquired for its
own account as a result of market-making activities or other trading activities (other than Transfer Restricted Securities acquired directly from the Issuers), may exchange such Transfer Restricted Securities pursuant to the Exchange Offer; however,
such Broker-Dealer may be deemed to be an “underwriter” within the meaning of the Securities Act and must, therefore, deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of the Exchange
Securities received by such Broker-Dealer in the Exchange Offer, which prospectus delivery requirement may be satisfied by the delivery by such Broker-Dealer of the Prospectus contained in the Exchange Offer Registration Statement. Such “Plan
of Distribution” section shall also contain all other information with respect to such resales by Broker-Dealers that the Commission may require in order to permit such resales pursuant thereto, but such “Plan of Distribution” shall
not name any such Broker-Dealer or disclose the amount of Transfer Restricted Securities held by any such Broker-Dealer except to the extent required by the Commission as a result of a change in policy after the date of this Agreement. 

The Issuers and the Guarantors shall use their commercially reasonable efforts to keep the Exchange Offer Registration Statement continuously
effective, supplemented and amended as required by the provisions of Section 6(c) hereof to the extent necessary to ensure that it is available for resales of Transfer Restricted Securities acquired by Broker-Dealers for their own accounts as a
result of market-making activities or other trading activities, and to ensure that it conforms in all material respects with the requirements of this Agreement, the Securities Act and the policies, rules and regulations of the Commission as
announced from time to time, for a period ending on the earlier of (i) one year from the date on which the Exchange Offer Registration Statement is declared effective and (ii) the date on which a Broker-Dealer is no longer required to
deliver a prospectus in connection with market-making or other trading activities. 
 The Issuers shall provide sufficient copies of the
latest version of such Prospectus to Broker-Dealers promptly upon request at any time during such one year (or shorter as provided in the foregoing sentence) period in order to facilitate such resales. 

SECTION 4. Shelf Registration. 

(a) Shelf Registration. If (i) the Issuers are not required to file an Exchange Offer Registration Statement or to consummate the
Exchange Offer solely because the Exchange Offer is not permitted by applicable law or Commission policy (after the procedures set forth in 

  
 5 

 
Section 6(a) hereof have been complied with), (ii) for any reason the Exchange Offer is not Consummated by the Exchange Date, or (iii) prior to the Exchange Date: (A) the
Initial Purchasers request from the Issuers with respect to Transfer Restricted Securities held by them not eligible to be exchanged for Exchange Securities in the Exchange Offer, (B) with respect to any Holder of Transfer Restricted Securities
such Holder notifies the Issuers that (i) such Holder is prohibited by applicable law or Commission policy from participating in the Exchange Offer, (ii) such Holder may not resell the Exchange Securities acquired by it in the Exchange
Offer to the public without delivering a prospectus and that the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder, or (iii) such Holder is a Broker-Dealer and
holds Transfer Restricted Securities acquired directly from the Issuers or one of their affiliates or (C) in the case of any Initial Purchaser, such Initial Purchaser notifies the Issuers it will not receive Exchange Securities in exchange for
Transfer Restricted Securities constituting any portion of such Initial Purchaser’s unsold allotment, the Issuers and the Guarantors shall: 

(x) use their commercially reasonable efforts to cause to be filed a shelf registration statement pursuant to Rule 415 under
the Securities Act, which may be an amendment to the Exchange Offer Registration Statement (in either event, the “Shelf Registration Statement”), on or prior to the 45th day after the date on which the Issuers receive such notice
from a Holder of Transfer Restricted Securities or an Initial Purchaser (such date being the “Shelf Filing Deadline”), which Shelf Registration Statement shall provide for resales of all Transfer Restricted Securities the Holders of
which shall have provided the information required pursuant to Section 4(b) hereof; and 
 (y) use their commercially
reasonable efforts to cause such Shelf Registration Statement to be declared effective as promptly as practicable, but no later than (A) 120 days (or if such 120th day is not a Business Day the next succeeding Business Day), or (B) 180
days if the Shelf Registration Statement is reviewed by the Commission (or if such 180th day is not a Business Day, the next succeeding Business Day), after such time such obligation to file first arises; provided that the Issuers and the
Guarantors shall not be required to cause such Shelf Registration Statement to be declared effective earlier than the 360th day following the Closing Date (or if such 360th day is not a Business Day, the next succeeding Business Day). 

Each of the Issuers and the Guarantors shall use their commercially reasonable efforts to keep such Shelf Registration Statement continuously
effective, supplemented and amended as required by the provisions of Sections 6(b) and (c) hereof to the extent necessary to ensure that it is available for resales of Transfer Restricted Securities by the Holders of such Securities entitled to
the benefit of this Section 4(a), and to ensure that it conforms in all material respects with the requirements of this Agreement, the Securities Act and the policies, rules and regulations of the Commission as announced from time to time, from
the date on which the Shelf Registration Statement is declared effective by the Commission until the expiration of the one-year period referred to in Rule 144 applicable to securities held by non-affiliates under the Securities Act (or shorter
period that will terminate when all the Transfer Restricted Securities covered by such Shelf Registration Statement have been sold pursuant to such Shelf Registration Statement. 

(b) Provision by Holders of Certain Information in Connection with the Shelf Registration Statement. No Holder of Transfer Restricted
Securities may include any of its 

  
 6 

 
Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Issuers in writing, within 10 Business Days after
receipt of a request therefor, such information as the Issuers may reasonably request for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. Each Holder as to which any Shelf
Registration Statement is being effected agrees to furnish promptly to the Issuers all information required to be disclosed in order to make the information previously furnished to the Issuers by such Holder not materially misleading. 

(c) Suspension. Notwithstanding anything to the contrary and subject to the limitation set forth in the next succeeding paragraph, at
any time after the effectiveness of the Shelf Registration Statement, the Issuers and the Guarantors shall be entitled to suspend their obligation to file any amendment to the Shelf Registration Statement, furnish any supplement or amendment to a
Prospectus included in the Shelf Registration Statement, make any other filing with the Commission, cause the Shelf Registration Statement or other filing with the Commission to remain effective or take any similar action (collectively,
“Registration Actions”) upon (A) the issuance by the Commission of a stop order suspending the effectiveness of the Shelf Registration Statement or the initiation of proceedings with respect to the Shelf Registration Statement
under Section 8(d) or 8(e) of the Securities Act, (B) the occurrence of any event or the existence of any fact as a result of which the Shelf Registration Statement would or shall contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the statements therein not misleading, or the related Prospectus would or shall contain any untrue statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or (C) the occurrence or existence of any corporate development that, in the good faith determination of
the board of directors of the general partner of the Company, makes it appropriate to postpone or suspend the availability of the Shelf Registration Statement and the related Prospectus. Upon the occurrence of any of the conditions described in
clause (A), (B) or (C) above, the Issuers shall give prompt notice (a “Suspension Notice”) thereof to the Holders. Upon the termination of such condition, the Issuers shall give prompt notice thereof to the Holders and
shall promptly proceed with all Registration Actions that were suspended pursuant to this paragraph. 
 The Issuers may only suspend
Registration Actions pursuant to the preceding paragraph for one or more periods (each, a “Suspension Period”) not to exceed, in the aggregate, (x) forty-five (45) days in any three month period or (y) ninety
(90) days in any twelve month period. Any Suspension Period will not alter the obligations of the Issuers to pay Additional Interest under the circumstances set forth in Section 5 hereof, if applicable. Each Suspension Period shall be
deemed to begin on the date the relevant Suspension Notice is given to the Holders and shall be deemed to end on the earlier to occur of (1) the date on which the Issuers give the Holders a notice that the Suspension Period has terminated and
(2) the date on which the number of days during which a Suspension Period has been in effect exceeds, in the aggregate, (x) forty-five (45) days in any three month period or (y) ninety (90) days in any twelve month period.

 SECTION 5. Additional Interest. 

If (i) the Exchange Offer has not been Consummated on or prior to the date specified for such consummation in this Agreement,
(ii) any Shelf Registration Statement, if required hereby, 

  
 7 

 
has not been declared effective by the Commission on or prior to the date specified for such effectiveness in this Agreement or (iii) any Registration Statement required by this Agreement
has been declared effective but ceases to be effective at any time at which it is required to be effective under this Agreement (other than during a Suspension Period), as applicable (each such event referred to in clauses (i) through (iii), a
“Registration Default”), the Issuers hereby agree that the interest rate borne by the Transfer Restricted Securities shall be increased by 1.00% per annum following the occurrence of any Registration Default (such increase,
“Additional Interest”). Following the cure of all Registration Defaults relating to the particular Transfer Restricted Securities the interest rate borne by the relevant Transfer Restricted Securities will be reduced to the original
interest rate borne by such Transfer Restricted Securities; provided, however, that, if after any such reduction in interest rate, a different Registration Default occurs, the interest rate borne by the relevant Transfer Restricted
Securities shall again be increased pursuant to the foregoing provisions. 
 Notwithstanding the foregoing, (i) the amount of
Additional Interest pursuant to this Section 5 shall not increase because more than one Registration Default has occurred and is continuing and (ii) a Holder of Transfer Restricted Securities who is not entitled to the benefits of the
Shelf Registration Statement shall not be entitled to Additional Interest with respect to a Registration Default that pertains to the Shelf Registration Statement. 

All accrued Additional Interest shall be payable to the Holders entitled thereto, in the manner provided for the payment of interest in the
Indenture, as more fully set forth in the Indenture and the Securities. All obligations of the Issuers and the Guarantors set forth in the preceding paragraph that are outstanding with respect to any Transfer Restricted Security at the time such
security ceases to be a Transfer Restricted Security shall survive until such time as all such obligations with respect to such security shall have been satisfied in full. 

SECTION 6. Registration Procedures. 

(a) Exchange Offer Registration Statement. In connection with the Exchange Offer, the Issuers and the Guarantors shall comply with all
of the provisions of Section 6(c) hereof, shall use their commercially reasonable efforts to effect such exchange to permit the sale of Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution
thereof set forth in the Registration Statement. As a condition to its participation in the Exchange Offer pursuant to the terms of this Agreement, each Holder of Transfer Restricted Securities shall furnish, upon the request of the Issuers, prior
to the Consummation thereof, a written representation to the Issuers (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an affiliate of any of the
Issuers, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any Person to participate in, a distribution of the Exchange Securities to be issued in the Exchange Offer and (C) it is
acquiring the Exchange Securities in its ordinary course of business. In addition, all such Holders of Transfer Restricted Securities shall otherwise cooperate in the Issuers’ preparations for the Exchange Offer. Each Holder hereby acknowledges
and agrees that any Broker-Dealer and any such Holder using the Exchange Offer to participate in a distribution of the securities to be acquired in the Exchange Offer (1) could not under Commission policy as in effect on the date of this
Agreement rely on the position of the Commission enunciated in Morgan Stanley and Co., Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the

  
 8 

 
Commission’s letter to Shearman & Sterling dated July 2, 1993, and similar no-action letters (which may include any no-action letter obtained pursuant to clause
(i) above), and (2) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction and that such a secondary resale transaction should be covered by an
effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K if the resales are of Exchange Securities obtained by such Holder in exchange for Transfer
Restricted Securities acquired by such Holder directly from the Issuers. 
 (b) Shelf Registration Statement. If required pursuant to
Section 4, in connection with the Shelf Registration Statement, each of the Issuers and the Guarantors shall comply with all the provisions of Section 6(c) hereof and shall use its commercially reasonable efforts to effect such
registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof set forth in such Shelf Registration Statement, and pursuant thereto each of the Issuers and
the Guarantors will as promptly as practicable prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Securities Act, which form shall be available for the sale of the Transfer
Restricted Securities in accordance with the intended method or methods of distribution thereof set forth in such Shelf Registration Statement. 

(c) General Provisions. Except as otherwise provided herein, in connection with any Registration Statement and any Prospectus required
by this Agreement to permit the sale or resale of Transfer Restricted Securities (including, without limitation, any Registration Statement and the related Prospectus required to permit resales of Transfer Restricted Securities by Broker-Dealers),
each of the Issuers and the Guarantors shall: 
 (i) use its commercially reasonable efforts to keep such Registration
Statement continuously effective and provide all requisite financial statements and oil and gas reserve information for the period specified in Section 3 or 4 hereof, as applicable; upon the occurrence of any event that would cause any such
Registration Statement or the Prospectus contained therein (A) to contain a material misstatement or omission or (B) not to be effective and usable for re-sale of Transfer Restricted Securities during the period required by this Agreement,
the Issuers shall file as promptly as practicable an appropriate amendment to such Registration Statement, in the case of clause (A), correcting any such misstatement or omission, and, in the case of either clause (A) or (B), use their
commercially reasonable efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purpose(s) as soon as practicable thereafter; 

(ii) prepare and file with the Commission such amendments and post-effective amendments to the applicable Registration
Statement as may be necessary to keep the Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, as applicable, or such shorter period as will terminate when all Transfer Restricted Securities covered by
such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act, and to comply fully with the applicable
provisions of Rules 424 and 430A under the Securities Act in a 

  
 9 

 
timely manner; and comply in all material respects with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the
applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; 

(iii) advise the underwriter(s), if any, and selling Holders as promptly as practicable and, if requested by such Persons, to
confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any Registration Statement or any post-effective amendment thereto, when the same has become
effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement under the Securities Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or
the initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or
supplement thereto, or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein (with respect to the
Prospectus, in light of the circumstances under which they were made) not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or blue sky laws, each of the Issuers and the Guarantors shall use its commercially
reasonable efforts to obtain the withdrawal or lifting of such order at the earliest practicable time; 
 (iv) in the case of
a Shelf Registration Statement or if a Prospectus is required to be delivered by any Broker-Dealer in the case of an Exchange Offer, furnish without charge to each of the Initial Purchasers, each selling Holder named in any Registration Statement,
and each of the underwriter(s), if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all
documents incorporated by reference after the initial filing of such Registration Statement), and permit one legal counsel to the Initial Purchasers and such Holders and underwriter(s), if any, with an opportunity to review and comment upon any such
Registration Statement or Prospectus (including all such documents incorporated by reference) at least five (5) Business Days prior to their filing with the Commission and upon all amendments and supplements thereto such lesser period prior to
their filing with the Commission as shall be reasonable and appropriate under the circumstances, and the Issuers shall not file any documents to which such legal counsel to the Initial Purchasers and such Holders and underwriter(s), if any,
reasonably objects in writing (it being agreed that such writing may for this purpose be in electronic format). Notwithstanding the foregoing, the Issuers shall not be required to take any actions under this Section 6(c)(iv)

  
 10 

 
that are not, in the reasonable opinion of counsel for the Issuers, in compliance with applicable law or to include any disclosure which at the time would have an adverse effect on the business
or operations of the Issuers and/or their subsidiaries, as determined in good faith by the Issuers; 
 (v) in the case of a
Shelf Registration Statement or if a Prospectus is required to be delivered by any Broker-Dealer in the case of an Exchange Offer, make available at reasonable times for inspection by the Initial Purchasers, the managing underwriter(s), if any,
participating in any disposition pursuant to such Registration Statement and one firm of legal counsel or accountant retained by such Initial Purchasers or any of the underwriter(s), all financial and other records, pertinent corporate documents and
properties of each of the Issuers and the Guarantors reasonably requested by any such Persons and cause the Issuers’ and the Guarantors’ officers, directors and employees to supply all information reasonably requested by any such Holder,
underwriter, attorney or accountant in connection with such Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness and to participate in meetings with investors to the extent
reasonably requested by the managing underwriter(s), if any; 
 (vi) if requested by any selling Holders or the
underwriter(s), if any, promptly incorporate in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such selling Holders and underwriter(s), if any, may reasonably request
to have included therein, including, without limitation, information relating to the “Plan of Distribution” of the Transfer Restricted Securities, information with respect to the principal amount of Transfer Restricted Securities being
sold to such underwriter(s), the purchase price being paid therefor and any other terms of the offering of the Transfer Restricted Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective
amendment as soon as practicable after the Issuers are notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; 

(vii) use its commercially reasonable efforts to cause the Transfer Restricted Securities covered by the Registration Statement
to be rated with the appropriate rating agencies, if so requested by the Holders of a majority in aggregate principal amount of Securities covered thereby or the underwriter(s), if any; 

(viii) in the case of a Shelf Registration Statement, furnish to each selling Holder and each of the underwriter(s), if any,
without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including financial statements and schedules (without documents incorporated by reference therein or exhibits
thereto, unless requested); 
 (ix) deliver to (A) in the case of an Exchange Offer, each Broker-Dealer who submits a
written request to the Issuers and (ii) in the case of a Shelf Registration Statement, each selling Holder and each of the underwriter(s), if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any
amendment or supplement thereto as such Persons reasonably may request; each of the 

  
 11 

 
Issuers and the Guarantors hereby consents to the use of the Prospectus and any amendment or supplement thereto by each of the selling Holders and each of the underwriter(s), if any, in
connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto; 

(x) in the case of a Shelf Registration Statement, enter into such agreements (including an underwriting agreement), and make
such customary representations and warranties, and take all such other customary and appropriate actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any Shelf
Registration Statement contemplated by this Agreement, all to such extent as may be reasonably requested by any Holder of Transfer Restricted Securities or underwriter in connection with any sale or resale pursuant to any Shelf Registration
Statement contemplated by this Agreement; and whether or not an underwriting agreement is entered into and whether or not the registration is an Underwritten Registration, each of the Issuers and the Guarantors shall: 

(A) to the extent reasonably requested, furnish to each Initial Purchaser, each selling Holder and each underwriter, if any, in
such substance and scope as they may reasonably request and as are customarily made by issuers to underwriters in primary underwritten offerings, upon the effectiveness of the Shelf Registration Statement: 

(1) a certificate, dated the date of effectiveness of the Shelf Registration Statement signed by (y) the President or any
Vice President and (z) a principal financial or accounting officer of each of the Issuers and the Guarantors, confirming, as of the date thereof, the matters set forth in paragraphs (g) and (h) of Section 6 of the Purchase
Agreement and such other matters as such parties may reasonably request; 
 (2) an opinion of counsel for the Issuers and
the Guarantors, covering substantially the subject matter of the opinion delivered pursuant to Section 6(a) of the Purchase Agreement, dated the date of effectiveness of the Shelf Registration Statement; and 

(3) a customary comfort letter, dated the date of effectiveness of the Shelf Registration Statement, from the Issuers’
independent accountants, in the customary form and covering matters of the type customarily requested to be covered in comfort letters by underwriters in connection with primary underwritten offerings, and covering or affirming the matters set forth
in the comfort letters delivered pursuant to Section 6(c) of the Purchase Agreement 
 (4) a reserve report
confirmation letter, dated the date of effectiveness of the Shelf Registration Statement, from the Issuers’ independent petroleum engineer, in the customary form and covering matters of the type customarily requested to be covered in reserve
report confirmation letters by underwriters in connection with primary underwritten offerings, and covering or affirming the matters set forth in the comfort letters delivered pursuant to Section 6(d) of the Purchase Agreement; 

  
 12 

 (B) set forth in full or incorporate by reference in the underwriting agreement,
if any, the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section; and 

(C) deliver such other documents and certificates as may be reasonably requested by such parties and as are customarily
delivered in similar offerings to evidence compliance with Section 6(c)(x)(A) hereof and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Issuers or any of the Guarantors pursuant to
this Section 6(c)(x), if any. 
 If at any time the representations and warranties of the Issuers and the Guarantors contemplated by
the certificate furnished pursuant to Section 6(c)(x)(A)(1) hereof cease to be true and correct, the Issuers or the Guarantors shall so advise the Initial Purchasers and the underwriter(s), if any, and each selling Holder promptly and, if
requested by such Persons, shall confirm such advice in writing; 
 (xi) in the case of a Shelf Registration Statement, prior
to any public offering of Transfer Restricted Securities, use its commercially reasonable efforts to cooperate with the selling Holders, the underwriter(s), if any, and their respective counsel in connection with the registration and qualification
of the Transfer Restricted Securities under the state securities or blue sky laws of such jurisdictions as the selling Holders or underwriter(s), if any, may reasonably request in writing by the time the Shelf Registration Statement is declared
effective by the Commission, and use its commercially reasonable efforts to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the Shelf
Registration Statement; provided, however, that none of the Issuers nor the Guarantors shall be required to register or qualify as a foreign corporation where it is not then so qualified or to take any action that would subject it to the
service of process in suits or to taxation in any jurisdiction where it is not then so subject; 
 (xii) issue, upon the
request of any Holder of Transfer Restricted Securities covered by the Exchange Offer Registration Statement, Exchange Securities having an aggregate principal amount equal to the aggregate principal amount of Transfer Restricted Securities
surrendered to the Issuers by such Holder in exchange therefor or being sold by such Holder; such Exchange Securities to be registered in the name of such Holder or in the name of the purchaser(s) of such Securities, as the case may be; in return,
the Transfer Restricted Securities held by such Holder, if in certificated form, shall be surrendered to the Issuers for cancellation; 

(xiii) cooperate with the selling Holders and the underwriter(s), if any, to facilitate the timely preparation and delivery of
certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and enable such 

  
 13 

 
Transfer Restricted Securities to be in such denominations and registered in such names as the Holders or the underwriter(s), if any, may request at least three Business Days prior to any sale of
Transfer Restricted Securities made by such Holders or underwriter(s); 
 (xiv) use its commercially reasonable efforts to
cause the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriter(s), if
any, to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in Section 6(c)(xi) hereof; 

(xv) if any fact or event contemplated by Section 6(c)(iii)(D) hereof shall exist or have occurred, use its commercially
reasonable efforts to prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the
purchasers of Transfer Restricted Securities, the Prospectus will not contain at the time of such delivery any untrue statement of any material fact or omit to state any material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; 
 (xvi) provide a CUSIP number for all Securities not later
than the effective date of the Registration Statement covering such Securities and provide the Trustee under the Indenture with printed certificates for such Securities which are in a form eligible for deposit with the Depository Trust Company and
take all other action necessary to ensure that all such Securities are eligible for deposit with the Depository Trust Company; 

(xvii) reasonably cooperate and assist in any filings required to be made with FINRA and in the performance of any due
diligence investigation by any underwriter (including any “qualified independent underwriter”) that is required to be retained in accordance with the rules and regulations of FINRA; 

(xviii) otherwise use its commercially reasonable efforts to comply in all material respects with all applicable rules and
regulations of the Commission, and make generally available to its security holders, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 under the Securities Act (which need not be audited) for the
twelve-month period (A) commencing at the end of any fiscal quarter in which Transfer Restricted Securities are sold to underwriters in a firm commitment or best efforts Underwritten Offering or (B) if not sold to underwriters in such an
offering, beginning with the first month of the Issuers’ first fiscal quarter commencing after the effective date of the Registration Statement; 

(xix) cause the Indenture to be qualified under the Trust Indenture Act not later than the effective date of the first
Registration Statement required by this Agreement, and, in connection therewith, cooperate with the Trustee and the Holders of Securities to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance
with the terms of the Trust Indenture Act; and to execute and use its commercially reasonable efforts to cause the Trustee to execute, all documents that may be required to effect such changes and all other forms and documents required to be filed
with the Commission to enable such Indenture to be so qualified in a timely manner; and 

  
 14 

 (xx) in the case of a Shelf Registration Statement, cause all Securities covered
by the Registration Statement to be listed on each securities exchange or automated quotation system on which similar securities issued by Issuers are then listed if reasonably requested by the Holders of a majority in aggregate principal amount of
Securities or the managing underwriter(s), if any. 
 Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt
of any notice from the Issuers of (i) the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof or (ii) the commencement of a Suspension Period, such Holder will forthwith discontinue disposition of Transfer
Restricted Securities pursuant to the applicable Registration Statement until such Holder’s receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof, or until it is advised in writing (the
“Advice”) by the Issuers that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus. If so directed by the Issuers, each
Holder will deliver to the Issuers (at the Issuers’ expense) all copies, other than permanent file copies then in such Holder’s possession, of the Prospectus covering such Transfer Restricted Securities that was current at the time of
receipt of such notice. In the event the Issuers shall give any such notice, the time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by the number of days
during the period from and including the date of the giving of such notice pursuant to Section 6(c)(iii)(D) or Section 4(c), as the case may be, hereof to and including the date when each selling Holder covered by such Registration
Statement shall have received the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof or shall have received the Advice. 

SECTION 7. Registration Expenses. 

(a) All expenses incident to the Issuers’ and the Guarantor’s performance of or compliance with this Agreement will be borne by the
Issuers and the Guarantors, jointly and severally, regardless of whether a Registration Statement becomes effective, including, without limitation: (i) all registration and filing fees and expenses (including filings made by any Initial
Purchaser or Holder with FINRA (and, if applicable, the fees and expenses of any “qualified independent underwriter” and its counsel that may be required by the rules and regulations of FINRA)); (ii) all fees and expenses of
compliance with federal securities and state securities or blue sky laws; (iii) all expenses of printing (including printing certificates for the Exchange Securities to be issued in the Exchange Offer and printing of Prospectuses), messenger
and delivery services and telephone; (iv) all fees and disbursements of counsel for the Issuers and the Guarantors and, subject to Section 7(b) hereof, the Holders of Transfer Restricted Securities; (v) all application and filing fees
in connection with listing the Exchange Securities on a securities exchange or automated quotation system pursuant to the requirements thereof; and (vi) all fees and disbursements of independent certified public accountants of the Issuers and
the Guarantors (including the expenses of any special audit and comfort letters required by or incident to such performance). 

  
 15 

 Each of the Issuers and the Guarantors will, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Issuers or the
Guarantors. 
 (b) In connection with any Shelf Registration Statement, the Issuers and the Guarantors, jointly and severally, will reimburse
the Initial Purchasers and the Holders of Transfer Restricted Securities being registered pursuant to the Shelf Registration Statement, as applicable, for the reasonable and documented fees and disbursements of not more than one counsel, who shall
be Vinson & Elkins L.L.P. or such other counsel as may be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit such Shelf Registration Statement is being prepared. 

Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such
Holder’s Transfer Restricted Securities pursuant to a Shelf Registration Statement. 
 SECTION 8. Indemnification. 

(a) The Issuers and the Guarantors, jointly and severally, agree to indemnify and hold harmless (i) each Holder and (ii) each Person,
if any, who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) any Holder (any of the Persons referred to in this clause (ii) being hereinafter referred to as a “controlling
person”) and (iii) the officers, directors and employees of any Holder (any Person referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an “Indemnified Holder”) from and against any and
all losses, claims, damages, liabilities, judgments, actions and expenses (including, without limitation, and as incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing, settling, compromising, paying or defending any
claim or action, or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the reasonable and documented out-of-pocket fees and expenses of outside counsel to any Indemnified Holder), joint or several,
directly or indirectly caused by, related to, based upon, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (or any amendment or supplement
thereto), or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided,
however, that the indemnification provided for in this Section 8 does not apply to any loss, claim, damage, liability or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission that is
made in reliance upon and in conformity with information furnished in writing to the Issuers or Guarantors by any Holder or any underwriter, expressly for use therein. This indemnity agreement shall be in addition to any liability which the Issuers
or any of the Guarantors may otherwise have. 
 In case any action or proceeding (including any governmental or regulatory investigation or proceeding)
shall be brought or asserted against any of the Indemnified Holders with respect to which indemnity may be sought against the Issuers or the Guarantors, such Indemnified Holder (or the Indemnified Holder controlled by such controlling person) shall
promptly notify the 

  
 16 

 
Issuers and the Guarantors in writing; provided, however, that the failure to give such notice shall not relieve any of the Issuers or the Guarantors of its obligations pursuant to this
Agreement to the extent it is not materially prejudiced as a result of such failure. If such Indemnified Holder is entitled to indemnification under this Section 8 with respect to any action or proceeding brought by a third party, the Issuers
and the Guarantors shall be entitled to assume the defense of any such action or proceeding with counsel reasonably satisfactory to such Indemnified Holder. Upon assumption by the Issuers and the Guarantors of the defense of any such action or
proceeding, such Indemnified Holder shall have the right to participate in such action or proceeding and to retain its own counsel but the Issuers and the Guarantors shall not be liable for any legal fees and expenses of other counsel subsequently
incurred by the Indemnified Holder in connection with the defense thereof unless (i) the Issuers and the Guarantors have agreed to pay such fees and expenses, (ii) the Issuers and the Guarantors shall have failed to employ counsel
reasonably satisfactory to such Indemnified Holder in a timely manner or (iii) such Indemnified Holder shall have been advised by counsel that there are actual or potential conflicting interests between the Issuers, the Guarantors and the
Indemnified Holder, including situations in which there are one or more legal defenses available to the Indemnified Holder that are inconsistent with or additional to those available to the Issuers and the Guarantors; provided, however, that
the Issuers and the Guarantors shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for such Indemnified Holders. The Issuers and the Guarantors shall not consent to the terms of any compromise or settlement of
any action defended by the Issuers and the Guarantors in accordance with the foregoing without the prior written consent of the Indemnified Holder unless such compromise or settlement (i) includes an unconditional release of the Indemnified
Holder from all liability arising out of such action, claim, litigation or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of the Indemnified Holder. The Issuers
and the Guarantors shall not be required to indemnify the Indemnified Holders under this Section 8 for any amount paid or payable by the Indemnified Holders in connection with the settlement of any action, proceeding or investigation without
the written consent of the Issuers and the Guarantors, which consent shall not be unreasonably withheld. 
 (b) Each Holder of Transfer
Restricted Securities agrees, severally and not jointly, to indemnify and hold harmless the Issuers, the Guarantors and their respective directors, officers of the Issuers and the Guarantors who sign a Registration Statement, and any Person
controlling (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) the Issuers or any of the Guarantors, and the respective officers, directors and employees, representatives and agents of each such
Person, to the same extent as the foregoing indemnity from the Issuers and the Guarantors to each of the Indemnified Holders, but only with respect to claims and actions based on information furnished in writing by such Holder expressly for use in
any Registration Statement. In case any action or proceeding shall be brought against the Issuers, the Guarantors or their respective directors or officers or any such controlling person in respect of which indemnity may be sought against a Holder
of Transfer Restricted Securities, such Holder shall have the rights and duties given the Issuers and the Guarantors, and the Issuers, the Guarantors, their respective directors and officers and any such controlling person shall have the rights and
duties given to each Holder by the preceding paragraph. 

  
 17 

 (c) If the indemnification provided for in this Section 8 is unavailable to an indemnified
party under Section 8(a) or (b) hereof (other than by reason of exceptions provided in those Sections) in respect of any losses, claims, damages, liabilities, judgments, actions or expenses referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative benefits received by the Issuers and the Guarantors, on the one hand, and the Holders, on the other hand, from the Initial Placement (which in the case of the Issuers and the Guarantors shall be deemed to be equal to the total
gross proceeds to the Issuers and the Guarantors from the Initial Placement), the amount of Additional Interest which did not become payable as a result of the filing of the Registration Statement resulting in such losses, claims, damages,
liabilities, judgments actions or expenses, and such Registration Statement, or if such allocation is not permitted by applicable law, the relative fault of the Issuers and the Guarantors, on the one hand, and the Holders, on the other hand, in
connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Issuers, on the one hand, and of the Indemnified
Holder, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the
Issuers or any of the Guarantors, on the one hand, or the Indemnified Holders, on the other hand, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 8(a) hereof, any legal or
other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. 
 The Issuers,
the Guarantors and each Holder of Transfer Restricted Securities agree that it would not be just and equitable if contribution pursuant to this Section 8(c) were determined by pro rata allocation (even if the Holders were treated as one entity
for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or expenses referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, none of the Holders (and the related Indemnified Holders) shall be required to contribute, in the aggregate, any amount in
excess of the amount by which the total discount received by such Holder with respect to the Initial Securities exceeds the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent
misrepresentation. The Holders’ obligations to contribute pursuant to this Section 8(c) are several in proportion to the respective principal amount of Initial Securities held by each of the Holders hereunder and not joint. 

  
 18 

 SECTION 9. Rule 144A. 

Each of the Issuers and the Guarantors hereby agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding, to
make available to any Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities from such Holder or beneficial owner, the information
required by Rule 144A(d)(4) under the Securities Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A under the Securities Act. 

SECTION 10. Participation in Underwritten Registrations. 

No Holder may participate in any Underwritten Registration hereunder unless such Holder (a) agrees to sell such Holder’s Transfer
Restricted Securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all reasonable questionnaires, powers of attorney, indemnities,
underwriting agreements, lock-up letters and other documents required under the terms of such underwriting arrangements. 
 SECTION 11.
Selection of Underwriters. 
 The Holders of Transfer Restricted Securities covered by the Shelf Registration Statement who desire to
do so may sell such Transfer Restricted Securities in an Underwritten Offering. In any such Underwritten Offering, the investment banker(s) and managing underwriter(s) that will administer such offering will be selected by the Holders of a majority
in aggregate principal amount of the Transfer Restricted Securities included in such offering; provided, however, that such investment banker(s) and managing underwriter(s) must be reasonably satisfactory to the Issuers. 

SECTION 12. Miscellaneous. 

(a) Remedies. Each of the Issuers, the Guarantors and the Initial Purchasers hereby agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agree to waive the defense in any action for specific performance that a remedy at law would be adequate. 

(b) No Inconsistent Agreements. Each of the Issuers and the Guarantors will not on or after the date of this Agreement enter into any
agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and
are not inconsistent with the rights granted to the holders of an Issuer’s or any of the Guarantors’ securities under any agreement in effect on the date hereof. 

(c) Adjustments Affecting the Securities. The Issuers will not take any action, or permit any change to occur, with respect to the
Securities that would materially and adversely affect the ability of the Holders to Consummate any Exchange Offer. 
 (d) Amendments and
Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless the Issuers have (i) in the case of Section 5 hereof
and this Section 12(d)(i), obtained the written consent of Holders of all outstanding Transfer 

  
 19 

 
Restricted Securities and (ii) in the case of all other provisions hereof, obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted
Securities (excluding any Transfer Restricted Securities held by the Issuers or their respective Affiliates). Notwithstanding the foregoing, a waiver or consent or departure from the provisions hereof that relates exclusively to the rights of
Holders whose securities are being tendered pursuant to the Exchange Offer and that does not affect directly or indirectly the rights of other Holders whose securities are not being tendered pursuant to such Exchange Offer may be given by the
Holders of a majority of the outstanding principal amount of Transfer Restricted Securities being tendered or registered; provided, however, that, with respect to any matter that directly or indirectly affects the rights of any Initial
Purchaser hereunder, the Issuers shall obtain the written consent of each such Initial Purchaser with respect to which such amendment, qualification, supplement, waiver, consent or departure is to be effective. 

(e) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: 

(i) if to a Holder, at the address set forth on the records of the Trustee under the Indenture, with a copy to the Trustee
under the Indenture; and 
 (ii) if to the Issuers or the Guarantors: 

Alta Mesa Holdings, LP 

15021 Katy Freeway, Suite 400 

Houston, Texas 77094 

Attention: Harlan H. Chappelle 

Telephone: 281-530-0991 

Internet electronic mail: hchappelle@altamesa.net 

(iii) with a copy to (which shall not constitute notice or service of process pursuant to this Agreement): 

Haynes & Boone L.L.P. 

1221 McKinney, Suite 2100 

Houston, Texas 77010 

Facsimile: (713) 236-5557 

Attention: William B. Nelson 

Internet electronic mail: bill.nelson@haynesboone.com 

All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five
Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight
delivery. 

  
 20 

 Copies of all such notices, demands or other communications shall be concurrently delivered by
the Person giving the same to the Trustee at the address specified in the Indenture. 
 (f) Successors and Assigns. This Agreement
shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without limitation, and without the need for an express assignment, subsequent Holders of Transfer Restricted Securities; provided,
however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign acquired Transfer Restricted Securities from such Holder. Nothing herein shall
be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Securities in violation of the terms of the Purchase Agreement or the Indenture. 

(g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 

(h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning
hereof. 
 (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO THE CONFLICTS OF LAW RULES THEREOF. 
 (j) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein
shall not be affected or impaired thereby. 
 (k) Entire Agreement. This Agreement is intended by the parties as a final expression of
their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other
than those set forth or referred to herein with respect to the registration rights granted by the Issuers with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with
respect to such subject matter. 
 [The remainder of this page intentionally left blank.] 

  
 21 

 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

  

			
	ALTA MESA HOLDINGS, LP
		
	By:	 	 Alta Mesa Holdings GP, LLC,
 as
general partner

		
	By:	 	/s/ Harlan H. Chappelle
		 	      Harlan H. Chappelle

     Chief Executive Officer

  

			
	ALTA MESA FINANCE SERVICES CORP.
		
	By:	 	/s/ Harlan H. Chappelle
		 	      Harlan H. Chappelle

     Chief Executive Officer

 [Signature Page to Registration Rights Agreement] 

 
	
	GUARANTORS:
	
	 ARI DEVELOPMENT, LLC

ALTA MESA GP, LLC

ALTA MESA ACQUISITION SUB, LLC

ALABAMA ENERGY RESOURCES LLC

ALTA MESA ENERGY LLC

AM IDAHO LLC

AM MICHIGAN LLC

AMH ENERGY NEW MEXICO, LLC

CAIRN ENERGY USA, LLC

LOUISIANA ONSHORE PROPERTIES LLC

TEA ENERGY SERVICES, LLC

THE MERIDIAN PRODUCTION, LLC

THE MERIDIAN RESOURCE, LLC

THE MERIDIAN RESOURCE & EXPLORATION LLC

TMR DRILLING, LLC

VIRGINIA OIL AND GAS, LLC

  

			
	Each by:	 	/s/ Harlan H. Chappelle
		 	 Harlan H. Chappelle
 Its Chief Executive
Officer

 [Signature Page to Registration Rights Agreement] 

 
	
	GUARANTORS (cont’d.):
	
	 ARANSAS RESOURCES, L.P.

BUCKEYE PRODUCTION COMPANY, LP

LOUISIANA EXPLORATION & ACQUISITIONS, LP

NAVASOTA RESOURCES, LTD., LLP

NUECES RESOURCES, LP

OKLAHOMA ENERGY ACQUISITIONS, LP

TEXAS ENERGY ACQUISITIONS, LP

GALVESTON BAY RESOURCES, LP

PETRO ACQUISITIONS, LP

PETRO OPERATING COMPANY, LP

ALTA MESA SERVICES, LP

  

			
	Each by: Alta Mesa GP, LLC
		
	        By:	 	/s/ Harlan H. Chappelle
		 	     Harlan H. Chappelle

    Chief Executive Officer

 [Signature Page to Registration Rights Agreement] 

 The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first
above written: 
  

					
	 WELLS FARGO SECURITIES, LLC

Acting severally on behalf of themselves and as representative of the several Initial Purchasers

		
	By:	 	/s/ Jared Newberry
			
		 	Name:	 	Jared Newberry
			
		 	Title:	 	Vice President

 [Signature Page to Registration Rights Agreement]Exhibit

Exhibit 10.1

	
			
	 
	STATE OF CONNECTICUT
	 

PUBLIC UTILITIES REGULATORY AUTHORITY
TEN FRANKLIN SQUARE
NEW BRITAIN, CT 06051

	
		
	DOCKET NO. 16-07-0916-07-09
	APPLICATION OF CONNECTICUT WATER SERVICE, INC. AND THE HERITAGE VILLAGE WATER COMPANY FOR APPROVAL OF CHANGE OF CONTROLAPPLICATION OF CONNECTICUT WATER SERVICE, INC. AND THE HERITAGE VILLAGE WATER COMPANY FOR APPROVAL OF CHANGE OF CONTROL

December 5, 2016

By the following Commissioners:

	
	
	John W. Betkoski, III

	Michael A. Caron

	 

	 

	 

	Lead Staff: M. Szul

	Legal Advisor: T. Caruso

DECISION

TABLE OF CONTENTS

I.INTRODUCTION    1
A.Summary    1
B.Applicants’ Proposal    1
C.Conduct of the Proceeding    2
D.Parties and Intervenors    2
E.Public Comment    3
II.Authority ANALYSIS    3
A.The Town of Southbury Right of First Refusal    3
B.Pomperaug River Watershed Coalition, Southbury and CWS Meetings    4
C.Engineering    5
1.Current Status of HVWC    5
2.Current Status of CWS    6
3.Capital Improvements to HVWC    7
4.Non-Revenue Water    8
5.Rules and Regulations of the Heritage Village Water Company    8
D.Rate Impact of Acquisition    9
E.Purchase Price, Stock for Stock Merger and Acquisition Premium    10
1.Financial Suitability and Responsibility    13
F.CWS Suitability to Acquire HVWC    18
1.Financial, Technological and Managerial Suitability    18
2.Safe, adequate and reliable service to the public    18
3.Summary    19
G.Section 16-47 Request For Change of Control    19
H.Customer Service    19
III.Findings of Fact    20
IV.Conclusion and Orders    24
A.Conclusion    24
B.Orders    24

	
			
	Docket No. 16-07-09
	 
	Page 1

DECISION

I.INTRODUCTION

A.    SUMMARY

In this Decision, the Public Utilities Regulatory Authority approves the Heritage Village Water Company and Connecticut Water Service, Inc. request for approval of a change of control of the Heritage Village Water Company.  The Public Utilities Regulatory Authority approves a purchase price of $20.9 million, which reflects $16.1 million in a stock for stock merger and $4.8 million in debt of Heritage Village Water Company.  After the transaction, the Heritage Village Water Company will become a direct, wholly-owned subsidiary of Connecticut Water Service, Inc.   

B.    APPLICANTS’ PROPOSAL

Pursuant to §16-47 of the General Statutes of Connecticut (Conn. Gen. Stat.), Connecticut Water Service, Inc. (CWS or Company) and the Heritage Village Water Company (HVWC or Heritage together, the Applicants) filed on July 7, 2016, a joint application (Application) with the Public Utilities Regulatory Authority (Authority or PURA), requesting approval of a change of control of HVWC via a stock for stock exchange in which CWS will acquire 100% of the issued and outstanding common shares of HVWC, in accordance with an Agreement and Plan of Merger (Agreement) dated May 10, 2016.  HVWC will maintain its current name and will become a sister company to the Connecticut Water Company (CWC) and the Maine Water Company, and become a wholly-owned subsidiary of CWS.  The acquisition of HVWC will be executed through a stock for stock merger transaction valued at approximately $16.1 million.  The acquisition reflects a total enterprise value of approximately $20.9 million, including the assumption by CWS of approximately $4.8 million debt of HVWC.  The acquisition will not affect the rates or service for any of HVWC customers until Heritage files its next general rate increase.  Application, pp. 2, 3 and 4.  The Rules and Regulations of the Heritage Village Water Company will not change as they were approved in the Authority’s April 29, 2015, Decision in Docket No. 14-11-07, Application of Heritage Village Water Company to Amend Rate Schedules (2015 Rate Decision).  Tr. 9/16/16, pp. 90 and 91.  The distribution system is approximately 50 years old and the existing mains are not expected to need replacement in the immediate future.  Tr. 9/16/16, pp. 83, 84 and 88 – 90.  Thus, the Water Infrastructure and Conservation Adjustment (WICA) program will not be introduced to HVWC’s distribution system.  

CWS is a holding company as defined in Conn. Gen. Stat. §16-47.  CWC is a public service company, as defined by Conn. Gen. Stat. §16-1(a)(3) and HVWC is a water company, as defined by Conn. Gen. Stat. §16-1(a)(6).  HVWC is a regulated water company under the Authority’s jurisdiction.  Application, pp. 6, 11 and 12.  Upon completion of the merger, HVWC customers will remain customers of Heritage.  Application, p. 4.

HVWC will remain subject to the Authority’s jurisdiction post acquisition and it will continue to provide safe, adequate and reliable service to the public through its plant, 

	
			
	Docket No. 16-07-09
	 
	Page 2

equipment and way of operations.  The change of control is in the public interest because it will provide benefits to both CWS’ subsidiaries, the CWC’s and HVWC’s customers, will increase the reliability and adequacy of water service, reduce costs through economies of scale, operating expenses and improve customer service.  Application, p. 2.

C.    CONDUCT OF THE PROCEEDING

By Notice of Inspection dated August 25, 2016, the Authority scheduled an inspection on September 29, 2016.  By Notice of Rescheduled Inspection dated August 31, 2016, the inspection was moved to September 8, 2016, but this inspection was canceled.  By second Notice of Rescheduled Inspection dated September 1, 2016, the inspection was conducted on September 15, 2016, of the Heritage Village Water and Wastewater plants and facilities.

By Notice of Hearing dated September 7, 2016, the Authority held an evidentiary hearing on September 16, 2016, at the PURA offices, Ten Franklin Square, New Britain, CT.  A hearing for public comment only was held on September 27, 2016, in the Sarah Cooke Hall Activities Building, 11 Heritage Way, Southbury, Connecticut and continued at 6:00 p.m. that day in the Southbury Town Hall 501 Main Street South, Southbury, Connecticut.  The Authority scheduled continued evidentiary hearings on September 27 and 30, 2016, at its offices.  By Notice of Canceled Hearing dated September 26, 2016, these hearings were canceled.  A Late Filed Exhibit hearing scheduled for October 14, 2016, was cancelled on October 13, 2016.  

By Notice of Close of Hearing dated November 14, 2016, the Authority closed the record in this proceeding.

On November 22, 2016, the Authority issued a proposed final draft Decision in this matter.  All Parties and Intervenors were provided the opportunity to submit written exceptions and to present oral arguments on the proposed final draft Decision.

		
	D.
	PARTIES AND INTERVENORS 

The Public Utilities Regulatory Authority recognized Connecticut Water Service, Inc., 93 West Main Street, Clinton, CT 06413; The Town of Southbury, 501 Main Street South, Southbury, CT 06488; The Heritage Village Water Company, 465 Heritage Road, Southbury, CT, 16488; the Office of Consumer Counsel; Ten Franklin Square, New Britain, CT 06051-2655; and the Commissioner of the Department of Energy and Environmental Protection, 79 Elm Street, Hartford, CT 06106, as Parties to the proceeding. 

Heritage Village Master Association and Pomperaug River Watershed Coalition were designated as Intervenors.

		
	E.
	PUBLIC COMMENT

	
			
	Docket No. 16-07-09
	 
	Page 3

By letter dated August 10, 2016, the Authority requested CWS to submit a draft Customer Notice pursuant the requirements of Conn. Gen. Stat. §16‐19(a) to be sent to HVWC customers.  The Authority required the Customer Notice to contain the date, time and location of all scheduled hearings, as well as information regarding the potential billing impact on current Heritage customers if the proposed acquisition were approved.  CWS filed its Customer Notice with the Authority on August 23, 2016, thus was subsequently approved on September 7, 2016.

During the two public hearings on September 27, 2016, approximately 110 people attended.  Of this total, 11 people provided comments.

Most customers that spoke were not opposed to the Application, but expressed concern regarding water supply and drought situations.  Some customers questioned the possibility of individual meters and water conservation.  Tr. 9/27/16, pp. 21 and 22, 32-37.  The Pomperaug River Watershed Coalition (PRWC) a nonprofit organization for the purpose of safeguarding water resources within the 90 square mile Pomperaug River watershed, discussed concerns associated with relying on the Pomperaug aquifer.  PRWC requested that the Authority consider four current issues affecting the aquifer as well as the planning of future use of the watershed.  These issues included the planned construction of the Towantic power plant in Oxford that could potentially require large quantities of water; the CWS interconnection with HVWC that has the potential to minimize current HVWC demands from the Towantic facility as well as providing water to the HVWC system during periods of critical stream flow and ground water levels; current water conservation plans, such as metering non-metered accounts as well as offering new customer incentives to reduce water demands and groundwater and stream flow concerns affecting the watershed.  Tr. 9/27/16, pp. 72 and 73.

The Authority also received five letters regarding the Application.  The letters focused on water quality, the ongoing drought, water conservation and possible future rate increases.

II.    AUTHORITY ANALYSIS

A.    THE TOWN OF SOUTHBURY RIGHT OF FIRST REFUSAL

The 1969 Connecticut Special Acts No. 110 (Special Act) created and incorporated the HVWC as a specially chartered Connecticut corporation.  The Special Act stated that should HVWC receive a bona fide offer for its sale which it intends to accept, it shall give notice to the Town of Southbury (Southbury).  Southbury may, within 90 days, after receipt of that notice, exercise its right to purchase HVWC on the same terms and conditions as the pending CWS transaction.  Therefore, Southbury was granted Right of First Refusal to purchase HVWC.  Southbury Petition dated July 7, 2016, Exhibit A.

Southbury received notice of the transaction on May 10, 2016, which started the statutory 90-day right of first refusal period.  CWS Response to Motion No. 1.  Southbury requested an extension of time and on August 5, 2016, the Superior Court for the Judicial District of Waterbury entered an Order granting Southbury an extension of time until 

	
			
	Docket No. 16-07-09
	 
	Page 4

November 14, 2016, by which to exercise the right of first refusal.  As of November 16, 2016, HVWC has received no offer from Southbury.  Heritage letter dated November 16, 2016.

The transaction between the Applicants is structured as a non cash transaction.  The HVWC’s shareholders will exchange shares of their stock for CWS’ stock worth approximately $16.1 million.  CWS will also assume HVWC’s debt of approximately $4.8 million worth.  After the merger, HVWC charter provisions will remain intact.  The surviving corporation will be HVWC which will become a direct, wholly-owned subsidiary of CWS.  Application, Exhibit A.2, p. 3. 

Southbury also indicated its interest in protecting and preserving of the Pomperaug River Water Basin as HVWC is authorized to construct, repair, maintain and use reservoirs, drilled wells construct canals or aqueducts or pipes as be necessary.  Southbury Petition dated July 21, 2016, pp. 2 and 3, Motion No. 1.  Southbury had right of first refusal.  Those rights lapsed when Southbury failed to exercise them within the allowable timeframe.  Heritage letter dated November 16, 2016.  

		
	B.
	POMPERAUG RIVER WATERSHED COALITION, SOUTHBURY AND CWS MEETINGS

The PRWC is concerned with the Pomperaug River water basin resources because the Pomperaug River and its major tributaries, the Nonnewaug and Weekeepeemee Rivers, are not supporting aquatic life due to low stream flows.  The low stream flow might be severe in times of drought.  The PRWC acknowledged that existing issues are beyond the control of HVWC and CWS but believed they should be discussed during the acquisition process.  Therefore, PRWC arranged meetings to discuss the Pomperaug River as a water resource, water customers’ needs, water planning action, and existing interconnection at Judd Road in western Middlebury, customers’ water demands on the Pomperaug River, the Towantic Power Plant in Oxford (TPPO) and its water demands, water conservation and water use reduction program.  These issues require more discussion; therefore, CWS will continue to meet with the PRWC and Southbury.  The PRWC and CWS stated that these meetings have been informative and have advanced the process of fulfilling groundwater and stream flow protection planning strategies.  PRWC Letter dated September 15, 2016; Tr. 9/16/16, pp. 79-81.

The PRWC requested that the Authority identify water conservation among Heritage and revise emergency contingency plan (ECP).  PRWC Written Exceptions, p. 2.  The updated water supply plan (WSP) requires the company to include water conservation as well as ECP.  The Authority will review those issues in the HVWC’s updated WSP.  The PRWC also requested that the Authority order CWS to meet with PRWC and Southbury at least quarterly during the first year of operation and to provide PRWC the opportunity to collaborate on the development of a long-term operation plan that seeks to mitigate the impacts on the Pomperaug River while meeting the public water supply needs of HVWC and CWC customers.  The PRWC also requested that HVWC develop an agreement that will define the TPPO water needs.  Id. The Authority finds that those issues have been discussed during PRWC, Southbury and CWS meetings and will continue to be discussed 

	
			
	Docket No. 16-07-09
	 
	Page 5

in future meetings.  Tr. 9/16/16, pp. 79-81.  Therefore, the Authority deems that PRWC’s request for an order to not be necessary.  

The PRWC also requested that the Authority recognize the critical importance of the HVWC’s wastewater system operation.  Although the wastewater system is not discussed in this Decision, PURA recognizes its importance to the environment.  CWS has knowledge of HVWC’s systems and its operations and is currently maintaining Heritage operations and will continue to manage the wastewater system after acquisition.  As a current operator of the HVWC system, CWS proved its understanding of complex water and wastewater operations and regulations.  Therefore, the Authority is of the opinion that CWS will continue to provide safe, adequate and reliable services for the HVWC water and wastewater operations.  

		
	C.
	ENGINEERING 

1.    Current Status of HVWC

HVWC is located in Southbury, CT.  Application, Exhibit A.1, p. 4.  HVWC construction started in late 1960 and was completed around 1977.  Tr. 9/16/16, pp. 83 and 84.  HVWC provides water service to the towns of Southbury, Middlebury and Oxford.  The HVWC system serves currently 4,844 water customers and 3,040 wastewater customers with net utility plan of $28.1 million.  Application, Exhibit A.1, p. 4; Exhibit EWT-1.  Currently, of 4,844 water customers 2,392 are metered service customers.  Response to Interrogatory EN-5.  HVWC’s water and wastewater system is managed by CWC’s professional manager.  Application, Exhibit D, p. 306; Response to Interrogatory EN–21; Tr. 9/16/16, pp. 91-93.  HVWC’s distribution system consists of over 421,968 feet, (about 80 miles) of transmission and distribution water mains, ranging in size from 2-inch to 16-inch of transite, cast and ductile iron, polyvinyl chloride (PVC), permastran (fiber glass) and copper K pipe.  Response to Interrogatory EN-3, Exhibit EN-3, p. 6.

Currently the HVWC water system has an available water supply of 2.54 million gallons per day (mgd), which includes 0.5 mgd supply from the existing interconnection between HVWC and CWC.  Application, Exhibit A.3, p. 6.  The water distribution system is supplied by five active wells from the Pomperaug Aquifer located within the Heritage Village Country Club in Heritage Village.  The total well field pumping capacity, of the five active wells is 1,810 gallons per minute (gpm) (2.606 mgd).  Department of Energy and Environmental Protection’s (DEEP) Diversion Registration authorizes the HVWC to divert up to 2.052 mgd from its wells.  Response to Interrogatory EN-17.  The maximum daily demand (MDD) water production between 2011 through 2015 fluctuated between 1,663,485 gpd – 1,879,823 gpd.  The highest MDD of 1,879,823 gpd was in 2011 and the lowest MDD of 1,663,485 gpd was in 2014.  Response to Interrogatory EN-19.  The water system has one inactive well which is considered an emergency well with an estimated yield of 225 gpm (0.324 mgd).  The water is chemically treated and has four chemical pumps, three in use and one spare.  Response to Interrogatory EN‐3, Exhibit EN-3, pp. 2 and 3.  

	
			
	Docket No. 16-07-09
	 
	Page 6

To supply water to high elevation service areas, the HVWC uses three pump stations: East Hill, Peck Lane and Church Road.  The East Hill and the Peck Lane pump stations have four pumps each.  The Church Road station has two pumps.  The HVWC also has three generators.  The system has two water storage tanks located in Heritage Village and in Middlebury.  The Heritage Village tank serves low pressure zone customers and the Middlebury tank serves high pressure zone customers.  Response to Interrogatory EN‐3, Exhibit EN-3, pp. 4 and 5.  

The HVWC received an Order, DWS13‐130-024, from the Department of Public Health (DPH) for overdosed chemical at the Heritage Water Treatment Plan.  The chemical overdose caused a burning sensation on the customer’s skin.  Response to Interrogatory EN-8, DPH Order dated March 25, 2013, p. 2.  The HVWC resolved the problem and the DPH Order was closed on September 12, 2013.  Response to Interrogatory EN‐8, DPH letter dated September 12, 2013.  The HVWC also received a Notice of Violation (NOV), from the DEEP on March 5, 2014, for violating Section 22a‐430-3(k) and Section 430-3(k)(4) of the Regulations of Connecticut state Agencies (Conn. Agencies Regs.).  The NOV was issued for sewage bypasses and collection system maintenance.  HVWC resolved the issue and the NOV was closed on May 8, 2014.  Response to Interrogatory EN-8, DEEP Closure Letter dated May 8, 2014.  HVWC is currently in compliance with all required regulations.  Response to Interrogatory EN-16.  HVWC conducted cross connection surveys in 2013, 2014 and 2015, pursuant to the Regulations of Connecticut State Agencies (Conn. Agencies Regs.) Section 19-13 B102(f)(2) that meets the requirements of those regulations.  Response to Interrogatory EN-4. 

The HVWC has an interconnection with the CWC Naugatuck Water Supply System at Judd Road in western Middlebury.  The DEEP’s General Diversion Permit and the DPH’s Sale of Excess Water Permit authorizes a transfer up to 0.5 mgd water from CWC to HVWC.  Application, Exhibit A.3, p. 6; Response to Interrogatory EN-17, Section 3.1 Interconnections; Tr. 9/16/16, pp. 23 and 24.  CWS is aware of the systems' needs.  Response to Interrogatory EN-21.  CWC has been providing operations and other support services to the HVWC system for more than a decade.  In 2015, HVWC paid a $237,296 management fee to CWC for the operation of the system.  Application, HVWC 2015 Annual Report, p. 306, line 7.  After the change of control, the management fee will be eliminated and HVWC will be assessed the cost of CWS staff time.  Tr. 9/16/16, pp. 91-93.  

2.    Current Status of CWS

CWS is the parent company of CWC. CWC has a long record of providing high quality drinking water service to families and communities to approximately 92,000 customers in 56 towns across Connecticut.  CWC is largely made up of small and medium size water systems.  CWS had total assets of $745.241 million and operating revenues of $15.052 million as of June 30, 2016.  Application, Exhibit E, pp. 47 and 48; Responses to Updated Interrogatories FI-8 and FI-34.  Since 1986, CWS has acquired 58 small water systems serving a total of approximately 14,000 customers.  Application, Exhibit A.1, p. 7.  Currently, CWS has 192 employees and is the largest domestically based, investor‐owned water company in Connecticut.  Application, Exhibit A.1, p. 3.  

	
			
	Docket No. 16-07-09
	 
	Page 7

The transaction will permit CWS to better integrate its existing water supply resources and future conservation plan.  CWS is committed to continue working with Southbury and PRWC to manage the HVWC water resources, including ways to promote water conservation among Heritage customers.  Specifically, it will perform a study with Southbury and PRWC of the interactions of water system operations and the Pomperaug River and to develop a long term operations plan to mitigate impacts on the Pomperaug, while meeting the public water supply needs of CWC and HVWC customers.  CWS will also work with TPPO on an agreement to address TPPO water needs and will include the ECP in its updated WSP.   

3.    Capital Improvements to HVWC

The HVWC water system is approximately 50-year old.  In the past five years, HVWC made many improvements to its water and wastewater systems and invested $529,516 in the water system alone.  Response to Interrogatory EN-9, HVWC, Water Division Table.  The water system is in good condition and no improvements are scheduled for the next year.  Response to Interrogatory EN-10.  CWS does not plan to introduce a WICA program in the HVWC due to low main breaks history.  Tr. 9/16/16, pp. 87-89.  

The HVWC’s five-year improvement schedule consisted of an update to its water supply plan for $18,000; well rehabilitation for $25,000 and storage tanks inspections which was currently completed.  The results of the inspection are discussed below.

The Heritage Village tank and the Middlebury tank were inspected in 2016.  The next inspection for both tanks should be completed in 2021.  The Heritage Village tank requires the following improvements to meet current sanitary requirements: 

		
	1.
	Extend roof hatch neck a minimum 4-inch above the tank roof and install a new cover.

		
	2.
	Add a rubber duckbill check valve to the end of the pipe.  

		
	3.
	Repair a steel roof vent coating.

		
	4.
	Apply a water proof treatment to the entire roof.   

Similarly, the Middlebury tank needs new roof hatches replaced with either modern rain-proof Bilco hatches or with raised steel hatch necks and covers.  Late Filed Exhibit No. 7.

Based on the above, the Authority will require CWS to provide a schedule for these repairs.

The HVWC submitted its 20-year improvement schedule which contains well rehabilitation and/or replacement, new source of supply, additional atmospheric storage or looping of the water main in Oxford, transmission, pumping, emergency power generation, storage and treatment improvements and the replacement of smaller diameter water mains.  These improvements will be completed as needed.  The HVWC has not submitted and estimate cost for these improvements, except $500,000 for additional atmospheric storage or looping of the water main in Oxford.  HVWC also submitted the 

	
			
	Docket No. 16-07-09
	 
	Page 8

50-year improvement schedule proposing similar projects to those contained in the 20-year improvement schedule.  Response to Interrogatory EN-12.  The Authority agrees with the proposed improvement schedule.   

Based on MDD and available water supply, the HVWC has enough water capacity for the next five years.  However, due to the population growth, the Authority noticed that CWS will be required an additional water supply source in the next 20 years. 

The wastewater system was completely upgraded with a total cost of $11,898,266. Response to Interrogatory EN-9, HVWC, Sewer Division Table.  Therefore, no major improvements are required.

4.    Non-Revenue Water

Non-revenue water (NRW) is the difference between the volume of water produced or purchased by a company and the volume of water delivered to its customers.  NRW losses may be due to theft and illegal connections, water used at unmetered connections, fire hydrant usage, overflowing tanks and leakage within the distribution system.  A company can reduce NRW by implementing leakage management techniques and main replacement programs.

At a minimum, 85% of the water produced by a water system be used to supply its customers.  Therefore, the Authority requires that a water system should not have more than 15% NRW, which is the National Association of Regulatory Utility Commissioners accepted guidelines.  It is important that all water companies continue to initiate supply and demand management techniques to curtail high NRW levels.  

The HVWC provided NRW percentages for 2011, 2012, 2013, 2014 and 2015 as shown below:

	
						
	Description
Thousands of Gallons (TG)
	

2011
	

2012
	

2013
	

2014
	

2015

	Water Production (TG)
	362,548
	370,574
	374,962
	376,761
	379,817

	Water Revenue (TG)
	332,290
	345,871
	342,052
	339,081
	339,725

	 
	 
	 
	 
	 
	 

	% of NRW
	8%
	7%
	9%
	10%
	11%

Late Filed Exhibit No. 8.

The NRW level of the HVWC water system has been below the Authority’s 15% for the last five years.  Also, HVWC has experienced a low number of main breaks over the same time period: 2011 – 1, 2012 – 0, 2013 – 1, 2014 – 3 and 2015 -1.  Those have also contributed to low NRW.  Late Filed Exhibit No. 8.  The Authority expects CWS to continue to monitor and maintain the required NRW levels.  

5.    Rules and Regulations of the Heritage Village Water Company

	
			
	Docket No. 16-07-09
	 
	Page 9

The current HVWC’s Rules and Regulations will not change as they will remain the same for Heritage’s customers after the acquisition.   

		
	D.
	RATE IMPACT OF ACQUISITION 

Post-acquisition CWC and the HVWC will remain stand‐alone entities under CWS.  The Company is not proposing any changes to the rates or any conditions to the water or sewer service for the HVWC at this time.  The HVWC will retain its existing water and sewer rates that were approved by the Authority in the 2015 Rate Decision.  The HVWC will continue to file its rate applications as a stand-alone entity unless or until, it is merged into CWC.  Furthermore, as long as CWC and HVWC remain separate companies, each company respective cost of service study will only be submitted when filing rate applications.  Westbrook PFT, p. 3; Response to Interrogatory RA-1.

As of year ended December 31, 2015, income from the HVWC’s Water and Sewer Divisions were $1,817,132 and $1,714,788, respectively.  The HVWC currently has 2,392 metered customers and 2,452 flat rate customers for a total of 4,844 water customers, plus 3,040 sewer customers.  CWC’s operating revenue for fiscal year 2015 was $78.8 million.  CWC is the largest domestically based, investor-owned water company in Connecticut serving nearly 92,000 customers.  Responses to Interrogatories RA-5 and EN-5; Thornburg PFT, p. 3; Tr. 9/26/16, pp. 28-30.

The HVWC does not have a WICA program and CWS stated that at this time is does not have enough information to determine if a WICA program would be beneficial or necessary for HVWC to institute.  Therefore, the HVWC would not be assessing a WICA surcharge/surcredit immediately after the acquisition.  Going forward, the HVWC’s Revenue Adjustment Mechanism (RAM) and Earning Sharing Mechanism (ESM) filings will be submitted based on CWS’ existing audited accounting methods to comply with Orders No. 10 and 11 from the 2015 Rate Decision that pertained to the RAM and ESM.  Since CWC will continue to be a separate subsidiary of CWS, CWC’s WICA, RAM and ESM will only be charged to its own customers.  Application, Benoit PFT, pp. 6 and 7; Response to Interrogatory RA-1.

CWC and the HVWC have an existing water interconnection agreement that was installed under a Supply, Installation and Service Agreement on December 3, 2008 in Middlebury, Connecticut.  The interconnection agreement specified that CWC is allowed to supply a daily rate of water of 0.5 mgd from CWC to the HVWC under the diversion and sale of excess water permits issued by the DEEP and the DPH.  This agreement does not provide any take or pay provisions.  Using the existing interconnection will have no immediate impact on HVWC customers’ rates post-acquisition as there is no request to change rates in the Application.  CWC’s current rate structure includes a Sales for Resale rate, which is charged to HVWC for any water that it purchases from CWC.  The Sales for Resale rate is equal to its commercial rate in CWC’s Main Division.  CWC will account for those revenues both pre-merger and post-merger as it currently does for Sales for Resale.  CWC stated that the current interconnection agreement does not need to be modified or altered as both CWC and the HVWC will remain companies that are parties to the 

	
			
	Docket No. 16-07-09
	 
	Page 10

agreement.  If CWC and the HVWC merged together, the Sales for Resale rate would be eliminated.  Response to Interrogatory RA-4 and Exhibit RA-4; Tr. 9/26/16, pp. 25 and 26.

CWS stated that this transaction is a win/win situation for all stakeholders.  In the long run, CWC and CWS can serve customers at a cost that is lower than the HVWC cost if it were to continue to operating as a stand-alone entity.  The HVWC customers will benefit due to decreased cost of operations and merger synergies.  Certain costs are expected to be lower, over time, as a result of this transaction.  Current operating costs are expected to be lower, such as current contractual obligations from CWS’ non-regulated subsidiary, New England Water Utility Services (NEWUS).  Costs from some of those services will now be captured through an allocation of corporate costs from CWC without any profit margin found in the unregulated operations.  Additional savings may be found in parent company management fees currently provided by Heritage Development Corporation.  CWS stated that it would track synergy savings post-merger, and present a clear, transparent approach to the sharing of savings next time it seeks to modify the rates of the HVWC.  Application, Benoit PFT, p. 5; Response to Interrogatory RA-1.

Based on the information provided above, the Authority finds, from a rates perspective, that the merger is in the best interest of HVWC, CWS and CWC.

		
	E.
	PURCHASE PRICE, STOCK FOR STOCK MERGER AND ACQUISITION PREMIUM

The purchase price of $16,115,760 was determined through a negotiation process between CWS and the HVWC.  Response to Interrogatory FI-39; Tr. 9/16/16, p. 53.  To effectuate this change of control, the acquisition of the HVWC will be executed through a stock for stock merger transaction.  In a stock for stock merger, the acquiring company being CWS proposes to the target firm, HVWC, a payment of a certain number of its equity shares in exchange for all of the target company’s shares.  If the target company accepts the offer, which includes a specified exchange ratio, the acquiring company issues certificates to the target firm’s shareholders, entitling them to trade in their current shares for rights to acquire a pro rata number of the acquiring firm’s shares.  The acquiring firm issues new shares that add to its total number of shares outstanding to provide shares for all the target firm’s shares that are being converted.

The parameters of the CWS/HVWC stock for stock merger are set by the exchange ratio.  The exchange ratio is the relative number of new shares that will be given to existing shareholders of a company that has been acquired or merged with another.  In the CWS/HVWC stock for stock merger, the exchange ratio is determined as follows:

		
	1.
	If the CWS share price is equal to or greater than $39.45 but less than or equal to $41.45, then the exchange ratio shall be 240 (i.e., each share of Company Common Stock shall be converted into the right to receive 240 shares of CWS Common Stock).

		
	2.
	If the CWS share price is less than $39.45, the exchange ratio shall be equal to (A) $9,468 divided by (B) the CWS share price, rounded to the nearest hundredth.

	
			
	Docket No. 16-07-09
	 
	Page 11

		
	3.
	If the CWS share price is greater than $41.45, the exchange ratio shall be equal to (A) $9,948 divided by (B) the CWS share price, rounded to the nearest hundredth. The CWS share price shall be equal to the average of the closing price of the shares of CWS common stock as reported by the NASDAQ for the 20 trading days immediately preceding the third trading day prior to the effective time.  The closing price of CWS common stock for each day shall be the last reported sales price on the NASDAQ, or, if there is no transaction on any such day, the average of the bid and asked prices on that day.

Application, Exhibit B, p. 7.

It is estimated that 322,000 of the CWS shares will be needed to effectuate the closing.  Application, Benoit PFT, p. 5.  The 322,000 shares are the number of shares of CWS that will be exchanged for the 1,620 shares of HVWC should the CWS share price be greater than $41.45.  As CWS prepared this change of control application, the CWS share price was approximately $50.  As a result, the formula calls for the CWS share price to be divided into $9,948 to determine the exchange ratio which is shown in the following calculation:

$9,948/$50 per share = 198.96 (round to 199)
1,620 shares times 199= 322,380

Response to Interrogatory FI-49.

The acquisition premium for this transaction is determined using the capitalization of the HVWC and is shown in the following calculation:

	
				
	 
	

Book Value 12/31/15
	

Purchase Price
	Acquisition Premium (Enterprise Value-Purchase price)

	HVWC Common Equity
	

$4,540,696
	

$16,115,760
	

	Long-Term Debt
	$4,757,325
	$4,757,325
	 

	Total Capitalization (Enterprise Value)
	

$9,298,021
	

$20,873,085
	

$11,575,064

Late Filed Exhibit No. 3.

The purchase price paid for the HVWC stock is calculated with the expectation that the CWS share price will be more that the $41.45 in the collar value of CWS stock exchanged for each HVWC share.  This equates to $16,115,760 ($9,948 * 1,620 HVWC shares outstanding).  Application, Exhibit B, p. 7; Late Filed Exhibit No. 3.  This transaction calls for the assumption of all debt of HVWC by CWS which is $4,757,325.

	
			
	Docket No. 16-07-09
	 
	Page 12

The Authority accepts the above calculation of an $11,575,064 (20,873,085 - $9,298,021) acquisition premium.  CWS stated that it is not requesting the recovery of the acquisition premium in the instant proceeding.  However, in a later rate proceeding for the HVWC, treatment of the acquisition premium will be requested to be shared between shareholders and ratepayers with a portion to be in rate base and a portion to be treated as goodwill.  CWS understands that any future shared savings and/or recovery of a portion of the acquisition premium is subject to the Authority’s ruling in a future rate proceeding.  Application, p. 9.

The Authority takes particular note of water company acquisition dockets involving acquisition premiums.  The Authority believes consideration should be given on a case by case basis for the approval of acquisition premiums given the circumstances of the acquisition.  See the Decision dated August 22, 2012 in Docket No. 12-03-08, PURA and DPH Review of Joint Application of Aquarion Water Company of Connecticut, United Water Works, Inc. and United Water Connecticut, Inc. for Approval of a Change of Control of United Water of Connecticut Inc. and Merger of United Water Connecticut Inc. Into Aquarion Water Company of Connecticut where the Authority stated “Given the unique benefits and circumstances of this proposed merger and the benefits that will accrue to this region from a unified move toward further consolidation, the Authority approves the Company’s request to include the proposed acquisition premium for future ratemaking treatment.”  Decision, p. 22.  The Authority has also ruled against including acquisition premiums, based on the special circumstances of the case, in the Decision dated December 24, 2008 in Docket No. 08-08-15 Joint Proceeding of DPH and DPUC for the Application of The Connecticut Water Company for Change of Control of the Ellington Acres Company and Merger of Ellington Acres Company with and into The Connecticut Water Company.  In that Decision, the Authority stated “Based upon CWC’s proposed accounting treatment using CWIP and specific circumstances involved in this particular transaction, the DPUC concurs that there is no acquisition adjustment.”  Decision, p. 13. Although no specific acquisition premium was allowed, the Ellington Acres price was in excess of the book value and the Authority recognized that acquisitions which generate customer savings can result in sharing benefits between customers and shareholders of the acquiring company.  Due to this sharing of benefits, CWC was allowed certain rate base amounts.  Lastly, in the Decision dated August 4, 1999 in Docket No. 99-03-23, Application of Connecticut Water Services Inc. For Approval to Own Common Stock of Crystal Water Utilities Corporation, the Authority stated “The Department recognizes that this Decision is not the appropriate forum to make a ruling on recovery of a purchase price premium.  However, it should be noted that the Department has historically not allowed recovery of this type of premium through such mechanisms as purchase price premium adjustments to the Company’s asset base.”  Therefore, the Department advises CWS that proceeding with this transaction with the expectation that the Department would change its ratemaking policies is speculative.”  Decision, p. 4.  Accordingly, the Authority advises CWS that it should not proceed with this HVWC transaction with a guaranteed expectation that the Authority will allow such acquisition premium.  The Authority will review the issue of acquisition premium at the next rate case taking into consideration the facts of each case.  

	
			
	Docket No. 16-07-09
	 
	Page 13

1.    Financial Suitability and Responsibility

a.    Connecticut Water Service

CWS is one of the ten largest investor-owned water utilities in the country with a market capitalization of more than $580 million.  Non-regulated operations account for approximately 8% of its consolidated net income.  Response to Interrogatory FI-23, p. 4.  The active wholly-owned subsidiaries of CWS are the following:

		
	1.
	The CWC and Maine Water Company are regulated public utility water companies and collectively serve 123,633 customers in 77 towns throughout Connecticut and Maine.

		
	2.
	Chester Realty operates as a real estate company in the business of rental property.

		
	3.
	NEWUS is engaged in non-regulated water-related services including the maintenance of pipes, emergency drinking water, pool water and contract operations.

Application, Exhibit E, p. 50.

The Authority analyzed CWS income statements, balance sheets and cash flow statements and found them financially strong and more than able to effectuate the Heritage change of control transaction.  The following is a summary income statement for CWS:

	
					
	 
	12/31/13
($000)
	121/31/14
($000)
	12/31/15
($000)
	6/30/16
($000)

	Operating Revenues
	91,481
	94,020
	96,041
	47,607

	Total Operating Expenses
	69,399
	68,856
	69,399
	32,555

	Net Operating Revenues
	21,993
	25,164
	26,642
	15,052

	Net Income
	18,269
	21,319
	22,761
	13,091

	Preferred Stock Dividend
	38
	38
	38
	19

	Net Income Applicable to Common Stock
	

18,231
	

21,281
	

22,723
	

13,072

Application, Exhibit E, p. 47; Response to Updated Interrogatory FI-34.

The following is a summary balance sheet:

	
			
	Docket No. 16-07-09
	 
	Page 14

	
				
	 
	12/31/14
($000)
	12/31/15
($000)
	6/30/16
($000)

	Cash and Cash Equivalents
	2,475
	731
	1,143

	Accounts Receivable
	11,971
	11,012
	11,573

	Total Current Assets
	36,168
	27,029
	30,941

	Net Utility plant
	506,939
	546,284
	568,406

	Total Assets
	671,189
	716,518
	745,241

	Accounts Payable and Accrued Expenses
	10,019
	11,882
	137,163

	Total Current Liabilities
	36,939
	23,622
	30,273

	Total Long-term Liabilities
	176,372
	186,128
	190,470

	Total Capitalization
	386,824
	402,403
	432,072

	Total Capitalization and Liabilities
	671,189
	716,518
	745,241

Application Exhibit E, p. 48; Response to Updated Interrogatory FI-8.

CWS exhibits a very sound financial position for year-end 2015 and the six months ended June 30, 2016.  The 2015 balance sheet shows $716,518,000 in total assets and a capitalization of $402,403,000.  The June 2016 six months balance sheet shows $745,241,000 in total assets and a capitalization of $432,072,000.  The 2015 income statement shows a profitable company with operating revenues of $96,041,000 and a net income of $22,723,000.  The June 2016 six month income statement shows operating revenues of $47,607,000 and a net income of $13,091,000.  The three years ending 2013 through 2015 show revenue trending upward.  CWS reported that it has had 35% earnings growth from 2012-2015.  Response to Interrogatory FI-33.  Cash flow is more than ample with net cash and cash equivalents provided by operating activities of $41,146,000 at year end 2015.  Response to Interrogatory FI-20.  The Authority considers CWS to be strong financially, based on its balance sheet showing a good capitalization and its income statement showing profitability that is sufficient to execute the proposed change of control.

Financial analysis of the financial statements produced the following ratios:

	
			
	Docket No. 16-07-09
	 
	Page 15

	
			
	 
	CWS 
as of 12/31/15
	CWS Pro Forma taking into consideration Change of Control

	Current Ratio
	0.73
	0.77

	Cash Flow from Operations Ratio
	

1.09
	

1.08

	Times Interest Earned
	4.254
	4.20

	Cash Flow Coverage Ratio
	.18
	.18

	

Total Debt/Total Capital (%)
	

47% debt 53% equity
	

46% debt 54% equity

	Funds from operations/total debt (%)
	

19.83%
	

19.75%

	Net Debt to Earnings Before Interest Taxes Depreciation and Amortization Ratio
	

4.71
	

4.68

	Return on Total Assets
	4.00%
	3.92%

	Return on Total Capital
	2.74%
	2.60%

Response to Interrogatory FI-30.

The Company believes that it is financially suitable for this change of control.  Tr. 9/16/16, pp. 61 and 62.  In particular, the Authority, considered CWS times interest earned ratio of 4.254, which indicates the number of times that earnings cover interest expense.  This solvency ratio shows that CWS has the ability to meet long-term obligations as they come due.  Since this change of control is through a stock swap, the pro forma times interest earned ratio is barely affected.  The return on total assets of 4.00% is strong and indicates that the management of CWS has sufficiently used its resources to obtain income.  The Authority finds the above financial metrics to indicate a strong financial position and the suitability of combining with the HVWC in this proposed change of control transaction.  

CWS is of the opinion that this change of control transaction is beneficial due to the Company’s strong market capitalization and $60 million carrying lines of credit which should provide immediate access to capital greater than what is currently available to HVWC.  Response to Interrogatory FI-32.  During cross-examination the HVWC witness indicated that they do not have any current credit lines.  Tr. 9/16/16, p. 55.  The Authority concurs with CWS that this change of control will provide HVWC greater access to capital and provide a stable future financial platform for Heritage.

CWC and CWS both have an A credit rating with Standard and Poor’s.  Due to the merger with the HVWC, CWS is of the opinion that there should be no impact to the credit rating of CWC and CWS due to the relative size and small change to the current capital structure.  Response to Interrogatory FI-22.  The Authority finds these ratings show CWS has a strong financial position and is suitable for this change of control transaction.  

	
			
	Docket No. 16-07-09
	 
	Page 16

Short-term debt availability for CWS is shown through two lines of credit with Citizens and CoBank.  There is a $45,000,000 line with Citizens having a balance of $14,472,348 and a $15,000,000 line of credit with CoBank with a balance of $15,000,000.  Response to Interrogatory FI-44.  The Company believes these lines to be adequate considering the need for short-term financing in the future produced by the HVWC acquisition.  Tr. 9/16/16, p. 56.  The Authority agrees with CWS.

b.    Heritage Village Water Company

HVWC provides water and sewer treatment services for condominium units, commercial properties and recreational facilities at Heritage Village in Southbury, Connecticut.  HVWC also provides water services for sections of the towns of Middlebury, Southbury, and Oxford, Connecticut.  Application, Exhibit F, p. 5.

The following is a summary income statement for HVWC:

	
			
	 
	12/31/14
In $
	12/31/15
In $

	Revenues
	3,159,093
	3,531,920

	Total Operating Expenses
	3,077,051
	3,218,441

	Operating Income
	82,042
	313,479

	Other Income
	22,041
	47,064

	Net Income before Income Taxes
	104,083
	360,543

	Income Taxes
	50,032
	241,722

	Net Income
	54,051
	118,821

Application, Exhibit F, p. 3.

The following is a summary balance sheet for HVWC:

	
			
	 
	12/31/14
In $
	12/31/15
In $

	Cash and Cash Equivalents
	887,556
	1,180,061

	Accounts Receivable
	362,724
	394,093

	Net Utility plant
	27,990,519
	28,116,245

	Total Assets
	29,554,856
	30,183,101

	Accounts Payable and Accrued Expenses
	253,626
	388,215

	Total Long-term Liabilities
	7,225,832
	7,793,628

	Total Capitalization
	4,521,876
	4,540,697

	Total Capitalization and Liabilities
	29,554,856
	30,183,101

Application, Exhibit F, p. 2.

	
			
	Docket No. 16-07-09
	 
	Page 17

HVWC exhibits a strong balance sheet with $30,183,101 in total assets, net utility plant of $28,116,245 and a capitalization of $4,540,697 as of December 31, 2015.  HVWC‘s income statement shows revenues of $3,531,920 and a net income of $118,821.  Cash flow is ample showing net cash from operating activities of $716,998 as of December 31, 2015.  The Authority finds that HVWC has a strong financial position and will add revenues and profits to CWS when the change of control takes place.

c.    Capital Structure

The capital structure of CWS will be mildly impacted from this change of control; however, the capital structure of HVWC will be impacted with a large increase of equity in the capital structure.  CWS journal entries to record the acquisition price paid for HVWC in CWS stock is a debit to investment in subsidiary of $16,100,000 and a credit to common stock of $16,100,000.  The HVWC’s journal entries to adjust the Company’s equity to what CWS invested in it is a debit to Plant- Acquisition adjustment of $11,559,000 and a credit to common stock equity of $11,599,000.  The consolidating eliminating journal entries are a debit to common stock equity of $16,100,000 and a credit to investment in subsidiary of $16,100,000.  Application, Benoit PFT, p. 6; Exhibit DCB-2, p. 1.

There is minimal impact on the Company’s capital structure, because of this change of control transaction with a 0.7% change in the mix between equity and debt of the parent CWS. In addition, there is minimal impact on all line items in the projected balance sheet after the transaction is concluded.  Application, Exhibit DCB-3; Response to Interrogatory FI-7.

This transaction serves to increase the HVWC’s capital structure to 77.2% equity and 22.8% debt, as a standalone water utility.  For ratemaking purposes HVWC falls under the definition of a small water company and is subject to the Decision dated October 23, 2013, in Docket No. 13-01-29, Investigation for Streamlining the Ratemaking Process for Small Water Utilities (Streamlining Decision).  In that Decision, the Authority established an average capitalization equity ratio for small water companies at between 40% to 60%.  The Applicants suggest that any rate making issues associated with the HVWC capital structure be addressed the next time Heritage’s rates are subject to a general review.  Response to Interrogatory FI‐17.  The Authority agrees and finds this ratemaking issue not to be a hinder its review of the Application.

d.    Dividend Policy

CWS dividend policy to determine any dividends paid up from its subsidiaries is based on the following factors:

		
	1.
	Financial performance for the period ended.

		
	2.
	Current and resulting capital structure.

		
	3.
	Planned capital spending in the upcoming quarter and year.

	
			
	Docket No. 16-07-09
	 
	Page 18

CWS reported that these factors will be considered when the HVWC becomes a subsidiary of CWS.  Response to Interrogatory FI-24.  The Authority finds this dividend policy to be acceptable.

e.    Transaction Costs

CWS reported that total out of pocket costs should be in the range of $300,000 to $350,000.  Legal costs that CWS has incurred through July 2016 is $150,000.  The $150,000 to $200,000 anticipated additional costs will primarily be legal costs associated with the PURA hearings and briefing, governance matters associated with the closing, and the costs of defending any litigation.  Response to Interrogatory FI-21 Supplemental.  The Authority finds these estimated transaction costs to be reasonable.

f.    Ring Fencing

Ring fencing is defined as a process, used by regulators, of separating the parent company and other affiliates from the subject regulated utility to insulate the regulated utility from the business practices and credit risks of the parent and other affiliates.  Ring fencing serves to protect the ratepayer of the regulated utility from undo risk.  Ring fencing mechanisms, although a part of other change of control dockets was not built into this specific change of control docket.  CWS believes that in light of its business profile of owning primarily other domestic regulated water utilities, ring fencing measures are not necessary or appropriate.  Response to Interrogatory FI-41; Tr. 9/16/16, pp. 63 and 64.  The Authority concurs and will not require a ring fencing measure to be implemented as part of this acquisition.

g.    Employee Benefits

The Company stated that there will be no impact on the CWS subsidiary pension plans as they have been closed to new entrants since 2009.  HVWC does not offer a defined benefit pension plan.  Response to Interrogatory FI-38.  In addition, there will be no impact on post-retirement benefits other than pensions (PBOP) for CWS since it has been closed to new entrants as of 2009.  HVWC does not offer that benefit.  Response to Interrogatory FI-37.  The Authority finds that there will be no impact on the CWS’ subsidiaries pension and OPEB plans.

		
	F.
	CWS SUITABILITY TO ACQUIRE HVWC

1.    Financial, Technological and Managerial Suitability

In approving this acquisition, the Authority must consider in whether CWS has the financial, managerial and technical resources to operate the HVWC in a reliable and efficient manner and to provide continuous, adequate service to the customers served by Heritage.  CWS owns and operates public water systems serving customers in 56 cities and towns throughout Connecticut.  Application, Exhibit A.1, p. 3.  Additionally, in the past 30 years, CWS has acquired 58 small water systems and assimilated water systems into its operations.  Application, Exhibit A.1, p. 7.  CWS also has the technical expertise, 

	
			
	Docket No. 16-07-09
	 
	Page 19

economies of scale and financial strength of larger organizations to meet the drinking and wastewater needs to HVWC.  Id., p. 7.  Accordingly, CWS possesses the financial, managerial and technical resources to take the actions necessary to assure the availability and potability of water and the provision of water at adequate volume and pressure to the persons served by HVWC, including addressing deficiencies, if any, with respect to HVWC.  CWS has financial strength to acquire HVWC, which is discussed in details in the Section II.E.1.a above.

CWS is made up of small and medium-size water systems similar to HVWC.  Application, Thornburg PFT, pp. 73 and 74.  CWS has professionals who will maintain the HVWC systems, quickly respond to and identify issues associated with operations, regulations and maintenance of water and wastewater systems.  CWS also has access to technologies that can better serve customers.  Application, Thornburg PFT, pp. 97-135.  CWS will ensure the operations will be managed in a way they that will have a minimum impact on the Pomperaug River and local water resources.  

2.    Safe, adequate and reliable service to the public   

CWS and HVWC have ability to provide safe, adequate and reliable service to the public through the company’s plant, equipment and manner of operation.  CWS will have a regular communication with customers pertaining to their water services.  Customers will have options to pay their bills, will be kept informed about planned work in their neighborhood and surveyed by CWS to measure their satisfaction with the Company.  CWS will also provide HVWC customers a web page to access information customer service and billing.  Responses to Interrogatories CA-1 and CA-2, Exhibit CA‐1-1.  

3.    Summary

CWS/CWC has a long history of acquiring and assimilating water systems into its operations.  Based on CWS technical, financial, and managerial resources and proximity to CWC’s Naugatuck Water Supply System to HVWC, the Authority determines that CWS is a suitable entity to acquire HVWC.  

		
	G.
	SECTION 16-47 REQUEST FOR CHANGE OF CONTROL

The Authority commenced these proceedings pursuant to Conn. Gen. Stat. §16‐47.  Pursuant to Conn. Gen. Stat. §16-47, a water company may not change of control without the consent of the Authority.  In making such a determination, the Authority, is required under Conn. Gen. Stat. §16-47(d) to consider: (1) whether the acquiring entity has the financial, technological and managerial suitability and responsibility of CWS, (2) the ability of CWS and HVWC to provide safe, adequate and reliable service to the public through the company’s plant, equipment and manner of operation if the application were to be approved.  Under Conn. Gen. Stat. Title 16, the Authority also has a responsibility to ensure that the change of control is in the public interest.  The Authority, therefore, must determine the actions that must be taken and the expenditures that may be required, including approval of the change of control of HVWC to assure the availability and potability of water 

	
			
	Docket No. 16-07-09
	 
	Page 20

and the provision of water at adequate volume and pressure to the persons served by HVWC.

For the reasons discussed in this Decision, the Authority has determined, based on the factors set forth in Conn. Gen. Stat. §16-47, and based on evidence submitted in this proceeding, that approval of the change of control of HVWC is in order.  The HVWC will become a direct, wholly-owned subsidiary of CWS.  The HVWC will be the surviving corporation and all of the HVWC stock will be owned by CWS.  The HVWC customers will continue to be HVWC customers and be billed at this same rate for service, as they are billed currently.

		
	H.
	CUSTOMER SERVICE  

CWS plans to use a combination of tools to communicate to the HVWC customers and community leaders when the proposed acquisition is approved.  The communications will provide consistent messages for customers on how to reach the Company, where to access or request copies of Company Rules and Regulations and schedule of rate and charges, the benefits of the transaction, and the benefits related to water conservation efforts and the interest of the Town and the Pomperaug River.  The Company will use a direct mailing to welcome new customers, a news release, bill inserts and a set of Frequently Asked Questions will be posted on the website.  Response to Interrogatory CA-2.  

CWS has stated that many customer service benefits to former HVWC customers would result from the proposed acquisition.  These benefits include operational efficiencies, purchasing power and other economies of scale that is passed along to their customers.  CWC has been the contract operator, providing operations and other support services to the HVWC system for more than a decade.  CWS will continue to make available up to 0.5 million gallons to the HVWC system through the existing interconnection in Middlebury to satisfy peak demands. This interconnection agreement with CWS can also be used to meet additional demands of future users in an environmentally sound manner, while reducing the pressure on the sources in the Pomperaug River watershed.  Regular communications will be provided to customers and a dedicated web page will be established for the HVWC customers to access information on the process as well as customer service and billing.  Responses to Interrogatories CA-1 and CA-2, Exhibit CA-1-1.

III.    FINDINGS OF FACT

		
	1.
	CWS will acquire HVWC for $20.9 million, $16.1 million in a stock for stock merger transaction and $4.8 million in debt.  

		
	2.
	HVWC will become a direct, wholly-owned subsidiary of the CWS after the transaction.

		
	3.
	HVWC will maintain its current name after acquisition.

		
	4.
	HVWC is located in Southbury, Connecticut.

	
			
	Docket No. 16-07-09
	 
	Page 21

		
	5.
	HVWC owns water systems in the towns of Southbury, Middlebury and Southbury.  

		
	6.
	Southbury has not exercised its Right of First Refusal to purchase HVWC.

		
	7.
	CWS, Southbury and PRWC will study the interaction of water system operations and the Pomperaug River and develop a long term operations plan that seeks to mitigate the impacts on the Pomperaug while meeting the public water supply needs of the CWC and the HVWC customers. 

		
	8.
	The HVWC system serves currently 4,844 water customers and 3,040 wastewater customers.

		
	9.
	The HVWC net utility plant is $28.1 million.

		
	10.
	The HVWC distribution system has 421,968 feet, (about 80 miles) of transmission and distribution water mains.

		
	11.
	The HVWC water system has 2.54 mgd water supply including 0.5 mgd from the interconnection between HVWC and CWC.

		
	12.
	HVWC has five active wells and one inactive well, three pump stations and two water tanks.

		
	13.
	HVWC is interconnected with CWC Naugatuck Water Supply System at Judd Road in western Middlebury.  

		
	14.
	CWS serves approximately 92,000 customers in 56 towns across Connecticut.

		
	15.
	CWS is made up of small and medium-size water systems similar to HVWC.

		
	16.
	The HVWC water system is approximately 50-year old and is in good condition.

		
	17.
	The HVWC’s NRW is below 15%.

		
	18.
	The HVWC’s Rules and Regulations will remain the same after acquisition.

		
	19.
	Post-acquisition, CWC and HVWC will remain stand-alone entities under the parent company, CWS.

		
	20.
	The Company is not proposing any changes to the rates or any conditions to the water or sewer service for HVWC at this time.

		
	21.
	HVWC will continue to file its rate applications as a stand-alone entity unless or until, at some time in the future, it is merged into CWC.

		
	22.
	As long as CWC and HVWC remain separate companies, each company will submit separate cost of service studies when filing their respective rate applications.

	
			
	Docket No. 16-07-09
	 
	Page 22

		
	23.
	CWC is the largest domestically based investor-owned water company in Connecticut. 

		
	24.
	HVWC does not have a WICA program at this time.

		
	25.
	HVWC’s RAM and ESM filings will be submitted based on CWS’ existing audited accounting methods and must comply with Orders No. 10 and 11 from the 2015 Rate Decision.

		
	26.
	CWC will continue to be a separate subsidiary of CWS so CWC’s WICA, RAM and ESM will only be charged to its own customers.

		
	27.
	CWC’s current rate structure includes a Sales for Resale rate which is charged to HVWC for any water is purchases from CWC.

		
	28.
	The Sales for Resale rate is equal to its commercial rate in CWC’s Main Division.

		
	29.
	CWS will track synergy savings post-merger, and present a clear, transparent approach to the sharing of savings next time it seeks to modify the rates of HVWC.

		
	30.
	The purchase price of $16,115,760 was determined through a negotiation process between CWS and HVWC.  

		
	31.
	To effectuate this change of control, the acquisition of HVWC by CWS will be executed through a stock-for-stock merger transaction.  

		
	32.
	The parameters of the CWS/HVWC stock for stock merger are set by the exchange ratio.  

		
	33.
	The exchange ratio is the relative number of new shares that will be given to existing shareholders of a company that has been acquired or merged with another.  

		
	34.
	HVWC had 1,620 shares of issues and outstanding common stock as of December 31, 2015.

		
	35.
	The price to compute the purchase price is $9,948.

		
	36.
	This purchase price of $16,115,760 is equal to $9,948 x 1,620 HVWC shares outstanding.

		
	37.
	The acquisition premium was $11,575,064.

		
	38.
	CWS is one of the ten largest investor-owned water utilities in the country.

		
	39.
	Non-regulated operations account for approximately 8% of its consolidated net income.

	
			
	Docket No. 16-07-09
	 
	Page 23

		
	40.
	The active wholly-owned subsidiaries of CWS are the Connecticut Water Company, Maine Water Company, Chester Realty and NEWUS.

		
	41.
	CWS’s operating revenues are $91,481,000 for December 31, 2013; $94,020,000 for December 31, 2014; $96,041,000 for December 31, 2015 and $47,607,000 for June 30, 2016.

		
	42.
	CWS’s net income applicable to common stock is $18,231,000 for December 31, 2013; $21,281,000 on December 31, 2014; $22,723,000 for December 31, 2015 and $13,072,000 on June 30, 2016.

		
	43.
	CWS shows balances for total current assets of $36,168,000 in December 31, 2015; $27,029,000 for December 31, 2015 and $30,941,000 for June 30, 2016.

		
	44.
	CWS shows balances for net utility plant of $506,939,000 on December 31, 2014; $546,284,000 on December 31, 2015 and $568,406,000 on June 30, 2016.

		
	45.
	CWS shows balances for total assets of $671,189,000 on December 31, 2014; $716,518,000 on December 31, 2015 and $137,163,000 on June 30, 2016.

		
	46.
	CWS shows balances for total current liabilities of $36,939,000 on December 31, 2014; $23,622,000 on December 31, 2015 and $30,273,000 on June 30, 2016.

		
	47.
	CWS shows balances for total long-term liabilities of $176,372,000 on December 31, 2014, $186,128,000 on December 31, 2015 and $190,470,000 on June 30, 2016.

		
	48.
	CWS shows balances for total capitalization of $386,824,000 on December 31, 2014; $402,403,000 on December 31, 2015 and $432,072,000 on June 30, 2016.

		
	49.
	CWS shows a current ratio of 0.73 on December 31, 2016.

		
	50.
	CWS shows cash flow from operations ratio at 1.09 for December 31, 2015.

		
	51.
	CWS shows a times interest earned ratio of 4.25.

		
	52.
	CWS capital structure is 47% debt and 53% equity.

		
	53.
	CWS return on total assets is 4.00%.

		
	54.
	CWS return on total capital is 2.74%.

		
	55.
	HVWC provides water and sewer treatment services for condominium units, commercial properties and recreational facilities at Heritage Village in Southbury, Connecticut.  

	
			
	Docket No. 16-07-09
	 
	Page 24

		
	56.
	The HVWC balance sheet shows $30,183,101 in total assets, net utility plant of $28,116,245 and a capitalization of $4,540,697 as of December 31, 2015.  

		
	57.
	The HVWC income statement shows revenues of $3,531,920 and a net income of $118,821.  

		
	58.
	HVWC shows net cash from operating activities of $716,998 as of December 31, 2015.  

		
	59.
	CWS dividend policy is based on financial performance, capital structure and planned capital spending.

		
	60.
	CWS reported that total out of pocket costs should be in the range of $300,000 to $350,000 for this change of control transaction.

		
	61.
	The legal costs CWS has incurred through July 2016 is $150,000.

		
	62.
	Ring fencing is a process, used by regulators of separating the parent company and other affiliates from the subject regulated utility to insulate the regulated utility from the business practices and credit risks of the parent and other affiliates.  

		
	63.
	The process of ring fencing serves to protect the ratepayer of the regulated utility from undo risk.  

		
	64.
	HVWC does not offer a defined benefit pension plan.  

		
	65.
	HVWC does not offer PBOP benefits.  

		
	66.
	CWS/CWC has a long history of acquiring and assimilating water systems into its operations.

		
	67.
	CWS is a suitable entity to acquire HVWC.

		
	68.
	CWS has ability to provide safe, adequate and reliable service to the public through the company’s plant, equipment and manner of operation.

		
	69.
	CWS will use direct mailing to welcome new customers.

		
	70.
	CWS has been the operator, providing operations and other support services for the HVWC system for more than a decade.

		
	71.
	CWS will provide a dedicated web page for Heritage customers to access information regarding customer service and billing.

IV.    CONCLUSION AND ORDERS

		
	A.
	CONCLUSION

	
			
	Docket No. 16-07-09
	 
	Page 25

CWS has the technical, financial and managerial resources to own and operate HVWC and to provide potable water at adequate volume and pressure to Heritage customers and is geographically located close to HVWC.  Therefore, CWS is a suitable entity to assume the ownership, management and control of HVWC.  Accordingly, pursuant to Conn. Gen. Stat. §§16-47 the Authority hereby approves the acquisition of HVWC by CWS.  

The Authority finds a very robust financial picture for CWS with good earnings, a strong balance sheet and good cash flow.  This change of control will lead to a synergistic relationship that will benefit CWS with added revenues and HVWC with increased access to capital by being a subsidiary of a publicly traded parent company. 

		
	B.
	ORDERS

For the following Orders, submit one original of the required documentation to the Executive Secretary, Public Utilities Regulatory Authority, Ten Franklin Square, New Britain, CT 06051, and file an electronic version through PURA’s website at www.ct.gov/pura.  Submissions filed in compliance with PURA’s Orders must be identified by all three of the following:  Docket Number, Title and Order Number:

		
	1.
	Within 30 days of the issuance of this Decision, CWS shall submit to the Authority, in writing, the names, mailing and email addresses, and telephone numbers, including emergency telephone numbers, of the administrator and certified operator of HVWC.  

		
	2.
	No later than July 31, 2018, HVWC shall update HVWC’ Water Supply Plan and submit such update to the Authority.  Revisions shall include, but not be limited to, any agreed upon operational changes or revisions to the emergency contingency plan and water conservation, to strengthen protections for the water resources of the Pomperaug River.  

		
	3.
	No later than January 31, 2017, CWS shall submit to the Authority a plan for the repairs of the water tanks.  The plan shall include completion date and the estimate for the repairs.  

		
	4.
	No later than ten business days after the closing, the Applicants shall notify the Authority that no material modifications were made to the terms and conditions of the Purchase Agreement as specified in the Application.  

		
	5.
	No later than ten business days following the completion of the accounting for the proposed transaction, the Applicants shall file with the Authority all journal entries resulting at that point.  

		
	6.
	No later than 30 business days after the closing, the Applicants shall submit to the Authority, a schedule of all actual expenses related to this transaction indicating the payee, the amount and a brief description of the expense.  

	
			
	Docket No. 16-07-09
	 
	Page 26

		
	7.
	No later than ten business days after the closing, the Applicants shall submit to the Authority, the stock for stock exchange ratio calculation showing the price of the CWS stock at the closing of the transaction.  

		
	8.
	The HVWC shall file with the Authority with any rate application its requested treatment of the acquisition premium of $11,575,064 as a result of this change of control transaction.  

	
		
	DOCKET NO. 16-07-09
	APPLICATION OF CONNECTICUT WATER SERVICE, INC. AND THE HERITAGE VILLAGE WATER COMPANY FOR APPROVAL OF CHANGE OF CONTROL

This Decision is adopted by the following Commissioners:

	
	
	 

	 

	 

	John W. Betkoski, III

	 

	 

	 

	Michael A. Caron

	 

	 

	 

CERTIFICATE OF SERVICE

The foregoing is a true and correct copy of the Decision issued by the Public Utilities Regulatory Authority, State of Connecticut, and was forwarded by Certified Mail to all parties of record in this proceeding on the date indicated.

	
				
	 
	 
	 
	 

	 
	 
	 
	 

	 
	 
	 
	 

	 
	/s/ Jeffrey R. Gaudiosi, Esq.
	 
	

December 5, 2016

	 
	Jeffrey R. Gaudiosi, Esq.
	 
	Date

	 
	Executive Secretary
	 
	 

	 
	Public Utilities Regulatory Authority

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00265-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00265-of-00352.parquet"}]]