File No. 70-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM U-1
APPLICATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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NSTAR
c/o BEC ENERGY
800 Boylston Street
Boston, MA 02199
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(Name of companies filing this statement and
address of principal executive offices)
None
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(Name of top registered holding company
parent of each applicant or declarant)
Thomas J. May
Chairman of the Board and Chief Executive Officer
Russell D. Wright
President and Chief Operating Officer
NSTAR
c/o BEC ENERGY
800 Boylston Street
Boston, MA 02199
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(Name and address of agents for service)
The Commission is requested to mail copies of
all orders, notices and communications to:
Theodora S. Convisser, Esq. Michael P. Sullivan, Esq.
Clerk and Assistant Vice President, General Counsel
General Counsel and Secretary
BEC Energy Commonwealth Energy System
800 Boylston Street One Main Street
Boston, Massachusetts Cambridge, Massachusetts
02199 02142-9150
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Paul K. Connolly, Jr., Esq.
Timothy E. McAllister, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
260 Franklin Street
Boston, Massachusetts 02110
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TABLE OF CONTENTS
Item 1. DESCRIPTION OF PROPOSED TRANSACTIONS.......................1
A. Description of the Parties.................................1
NSTAR ..................................................1
2. BEC Energy.............................................1
Utility Subsidiaries............................1
Non-Utility Subsidiaries........................3
3. COM/Energy.............................................3
(a) Electric Utility Subsidiaries................4
(b) Gas Utility..................................6
(c) Non-Utility Subsidiaries.....................7
B. Description of the Transaction.............................8
1. Background of the Transaction..........................8
2. Reasons for the Mergers................................9
3. Structure and Terms of the Mergers....................12
(a) The BEC Energy Merger.......................12
(b) The COM/Energy Merger.......................12
Item 2. FEES, COMMISSIONS AND EXPENSES............................14
Item 3. APPLICABLE STATUTORY PROVISIONS...........................14
A. Section 10(b).............................................14
1. Section 10(b)(1).................................15
2. Section 10(b)(2) -- Fairness of Consideration....17
3. Section 10(b)(2) -- Reasonableness of Fees.......19
4. Section 10(b)(3).................................19
B. Section 10(c).............................................21
1. Section 10(c)(1).................................21
2. Section 10(c)(2).................................21
C. Section 3(a)(1)...........................................26
Item 4. REGULATORY APPROVALS......................................28
A. State Public Utility Regulation...........................28
B. Other Federal Regulations.................................28
Item 5. PROCEDURES................................................29
Item 6. EXHIBITS AND FINANCIAL STATEMENTS.........................30
A. Exhibits..................................................30
B. Financial Statements......................................31
Item 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS...................31
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Pursuant to Sections 9(a)(2) and 10 of the Public Utility Holding Company
Act of 1935 (the "Act"), NSTAR ("NSTAR"), a Massachusetts business trust, hereby
requests that the Securities and Exchange Commission (the "Commission" or "SEC")
authorize the acquisition by NSTAR of the outstanding voting securities of BEC
Energy and Commonwealth Energy System ("COM/Energy"), and issue an order
exempting NSTAR from all provisions of the Act except Section 9(a)(2) under
Section 3(a)(1) following the consummation of the acquisition described herein.
Item 1. DESCRIPTION OF PROPOSED TRANSACTIONS
A. Description of the Parties
1. NSTAR
NSTAR, a Massachusetts business trust, is an unincorporated business
organization with transferable shares. NSTAR has three subsidiaries: (1) NSTAR
Delaware LLC, a limited liability company organized under Delaware law ("NSTAR
Delaware"), of which NSTAR owns 100% of the membership interests; (2) BEC
Acquisition LLC, a limited liability company organized under Massachusetts law
("BEC Energy Merger Sub"), of which NSTAR owns 99.99% of the membership
interests and NSTAR Delaware owns the remaining 0.01% membership interest; and
(3) CES Acquisition LLC, a limited liability company organized under
Massachusetts law ("COM/Energy Merger Sub" and, together with BEC Energy Merger
Sub, the "Merger Subs"), of which NSTAR owns 99.99% of the membership interests
and NSTAR Delaware owns the remaining 0.01% membership interest. Currently, BEC
Energy and COM/Energy together own all of NSTAR's issued and outstanding shares.
Upon the completion of the proposed transaction, both BEC Energy and COM/Energy,
through mergers with BEC Energy Merger Sub and COM/Energy Merger Sub,
respectively, will become wholly-owned subsidiaries of NSTAR, and NSTAR will be
the new holding company for the combined business.
2. BEC Energy
BEC Energy, a Massachusetts business trust, is an unincorporated business
organization with transferable shares. BEC Energy conducts its business through
its operating subsidiaries. BEC Energy's principal subsidiaries are Boston
Edison Company ("Boston Edison"), a regulated utility company, and Boston Energy
Technology Group, Inc. (also referred to in this document as "BETG"). BEC Energy
has received an order from the Commission exempting it from all provisions of
the Act other than Section 9(a)(2) pursuant to Section 3(a)(1).1/
(a) Utility Subsidiaries.
Boston Edison Company: Boston Edison, a Massachusetts corporation, is a
public utility company engaged in the generation, purchase, transmission,
distribution and sale of electric
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1/ BEC Energy, et al., HCAR No. 26874 (May 15, 1998).
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energy in Massachusetts. Boston Edison's electric service territory covers about
590 square miles within 30 miles of Boston, encompassing the City of Boston and
39 surrounding cities and towns. Boston Edison serves some 663,000 electric
customers at retail. Boston Edison also sells electric energy at wholesale to
other electric utilities and municipal electric departments under rate schedules
and tariffs on file with the Federal Energy Regulatory Commission (the "FERC").
Boston Edison voluntarily divested its fossil generation business pursuant
to a Settlement Agreement reached with the Massachusetts Attorney General,
Massachusetts Division of Energy Resources and other interested parties and
filed on July 8, 1997 in restructuring proceedings before the Massachusetts
Department of Telecommunications and Energy (the "MDTE"). The generation already
divested by Boston Edison included 1,987 MW of fossil-fired capacity at six
different sites. Boston Edison accomplished the divestiture pursuant to a
competitive bidding procedure which resulted in the selection of Sithe Energy,
Inc. ("Sithe") as the winning bidder. The FERC granted approval for the transfer
of jurisdictional transmission facilities related to the generation from Boston
Edison to Sithe in its Docket No. EC98-16-000. Boston Edison's only remaining
owned-generation is its 670 MW Pilgrim nuclear power plant. Boston Edison
recently entered into an agreement to sell the Pilgrim nuclear power plant to
Entergy Nuclear Generation Company. If the requisite approvals for this sale are
not obtained, it is likely that Boston Edison, in the near future, would shut
down the Pilgrim plant and permanently retire it.
Boston Edison also owns and operates approximately 524 circuit miles of
interconnected transmission lines of 115-345 kV, including 176 circuit-miles of
230-345 kV lines and 348 circuit-miles of 115 kV lines. Boston Edison's
transmission facilities include substations with a capacity of approximately
3,500 MVA. All of these transmission facilities are located in Massachusetts. A
map of Boston Edison's transmission facilities is included in Exhibit E-1.
Boston Edison's electric distribution system consists of approximately 22,003
circuit miles and substations with a capacity of approximately 10,822 MVA.
Boston Edison also provides customers with transmission services, including
transmission service under its Open Access Transmission Tariff and individual
contracts. Boston Edison is a member of the New England Power Pool ("NEPOOL")
and has committed its pool transmission facilities ("PTF") to the operational
control of ISO-New England, Inc. ("ISO-New England"). ISO-New England's
principal responsibilities include administration of the NEPOOL open access
transmission tariff ("NEPOOL Tariff"), the operational control of the New
England bulk power system, protection of NEPOOL system reliability, and
oversight of the New England Power Exchange.2/ The NEPOOL Tariff provides for
postage-stamp rates which eliminate pancaking of transmission charges in New
England thereby creating a single power market that encompasses virtually the
entire New England region.
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2/ The FERC's order authorizing the establishment of ISO-New England and the
transfer of operational control of the NEPOOL grid to that entity was
issued on June 25, 1997. New England Power Pool, 79 FERC P. 61,374 (1997);
see also, New England Power Pool, on reh'g, 83 FERC P. 61,045 (1998), reh'g
denied, 85 FERC P. 61,141 (1998). See, in addition, New England Power Pool,
85 FERC P. 61,379 (1998) order conditionally accepting and approving
market-based rates.
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The FERC conditionally approved the formation of ISO-New England and
authorized, on an interim basis, the transfer of control of transmission
facilities owned by the public utility members of NEPOOL as part of a
comprehensive restructuring of NEPOOL on June 25, 1997.3/ On July 1, 1997,
ISO-New England was activated. Thus, although Boston Edison continues to own its
transmission facilities, PTF usage is and will be governed by ISO-New England.
Harbor Electric Energy Company: Harbor Electric Energy Company ("Harbor
Electric"), a Massachusetts corporation and a wholly owned subsidiary of Boston
Edison, delivers electric energy from Boston Edison to the Massachusetts Water
Resources Authority (the "MWRA"), a large retail customer. Although Harbor
Electric owns a small distribution system, that system is used exclusively for
distribution to the MWRA. In addition, Harbor Electric owns no generation and
does not engage in wholesale sales or purchases.
(b) Non-Utility Subsidiaries.
Boston Energy Technology Group, Inc.: BEC also wholly owns an unregulated
subsidiary, BETG. BETG has several subsidiaries and is engaged in various
businesses, including district energy and communications services. None of these
subsidiaries have any jurisdictional gas or electric utility operations. For
example, through a subsidiary, BETG has entered into a telecommunications joint
venture with RCN Telecom Services, Inc. to provide telecommunications services.
The common shares, $1.00 par value, of BEC Energy are listed on the New
York Stock Exchange ("NYSE") and the Boston Stock Exchange under the symbol
"BSE". As of December 31, 1998 there were 47,184,073 common shares of BEC Energy
outstanding.
For the year ended December 31, 1998, BEC Energy's operating revenues on a
consolidated basis were approximately $1.623 billion, all of which was derived
from Boston Edison's and Harbor Electric's electric operations. Consolidated
assets of BEC Energy and its subsidiaries at December 31, 1998 were
approximately $3.214 billion, of which approximately $2.27 billion consists of
identifiable utility property, plant and equipment.
A more detailed summary of information concerning BEC Energy and its
subsidiaries is contained in the BEC Energy's Annual Report on Form 10-K for the
year ended December 31, 1998, which is incorporated herein by reference as
Exhibit H-1.
3. COM/Energy
COM/Energy, a Massachusetts business trust, is an unincorporated business
organization with transferable shares. COM/Energy conducts its business through
its operating subsidiaries.
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3/ See New England Power Pool, 79 FERC P. 61,374 (1997) reh'g pending. This
order found that the New England ISO proposal met the FERC's eleven
principles for ISOs, and conditioned approval upon the ISO establishing a
self-funding mechanism.
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COM/Energy currently claims an exemption from all provisions of the Act other
than Section 9(a)(2) under Section 3(a)(1) pursuant to Rule 2.
COM/Energy holds all of the stock of five operating public utility
companies (Cambridge Electric Light Company ("Cambridge Electric"), Canal
Electric Company ("Canal Electric"), Commonwealth Electric Company
("Commonwealth Electric"), Commonwealth Gas Company ("Commonwealth Gas") and
Medical Area Total Energy Plant, Inc. ("MATEP")) and of several subsidiaries
engaged in non-utility businesses, such as steam distribution, servicing and
processing of liquefied natural gas and the sale of energy products. Through its
utility subsidiaries, COM/Energy serves the energy needs of approximately
600,000 customers in Eastern Massachusetts. COM/Energy's utility and non-utility
subsidiaries, all of which are wholly-owned, are described below:
(a) Electric Utility Subsidiaries.
COM/Energy's three primary generation owning subsidiaries, Commonwealth
Electric, Cambridge Electric, and Canal Electric, recently divested most of
their generation assets, in a transaction that was approved by the FERC by order
dated November 12, 1998 4/ and that closed on December 30, 1998. A brief
description of the respective companies' generation assets sold to Southern
Energy Canal, L.L.C. ("Southern Canal") and Southern Energy Kendall, L.L.C.
("Southern Kendall") is provided below by company. Also set forth below is a
brief description of each company's remaining generation assets, as well as
their transmission and distribution systems. The sale of generating assets by
Commonwealth Electric, Cambridge Electric, and Canal Electric and their
restructuring plans going forward are part of a longstanding intention of the
companies to divest their power supply portfolio.
Commonwealth Electric Company: Commonwealth Electric, a Massachusetts
corporation, is a franchised public utility company engaged in the purchase,
transmission, distribution and resale of power and energy in Massachusetts.
Commonwealth Electric's electric service territory covers about 1,100 square
miles in 40 communities located in southeastern Massachusetts, including Cape
Cod and Martha's Vineyard. The service territory includes all or part of
Plymouth, Bristol, Barnstable and Duke Counties in the Commonwealth of
Massachusetts. Commonwealth Electric serves some 327,000 electric customers at
retail in the Commonwealth of Massachusetts. Commonwealth Electric also sells
electric energy at wholesale to other electric utilities under rate schedules
and tariffs on file with the FERC but has no wholesale requirements customers.
The FERC approved the jurisdictional aspects of the sale of all of
Commonwealth Electric's generation assets to Southern Canal by order dated
November 12, 1998. The sale included the following generation facilities: (1)
five diesel generating plants at Oak Bluffs and West Tisbury on Martha's
Vineyard, Massachusetts with a total capacity of 13.8 MW; and (2) a 1.4325%
ownership interest in the oil-fired William F. Wyman Unit 4 located in Yarmouth
Maine, operated by Central Maine Power Company. Commonwealth Electric's interest
in the
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4/ See Cambridge Electric Light Co., 85 FERCP. 61,217 (1998).
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William F. Wyman Unit 4 translated into a 8.9 MW entitlement. The transaction
with Southern Canal closed on December 30, 1998.
Commonwealth Electric also provides customers with transmission services,
including transmission service under its Open Access Transmission Tariff.5/
Commonwealth Electric also owns and operates approximately 357.5 circuit miles
of interconnected transmission lines of 115 kV to 345 kV, including 297.6
circuit-miles of 115 kV lines and 59.9 circuit-miles of 345 kV lines.
Transmission facilities include substations with a capacity of approximately
475,000 kilovolt-amperes. All of these transmission facilities are located in
Massachusetts. A map of Commonwealth Electric's transmission facilities is
included in Exhibit E-1.
Commonwealth Electric is a member of NEPOOL. As explained above, the FERC
conditionally approved the formation of ISO-New England and authorized, on an
interim basis, the transfer of control of transmission facilities owned by the
public utility members of NEPOOL as part of a comprehensive restructuring of
NEPOOL, and on July 1, 1997, ISO-New England was activated. Thus, although
Commonwealth Electric continues to own its transmission facilities, PTF usage is
governed by ISO-New England. Commonwealth Electric's electric distribution
system consists of approximately 10,744 circuit miles and substations with a
capacity of approximately 1,814 MVA.
Cambridge Electric Light Company: Cambridge Electric, a Massachusetts
corporation, is a franchised public utility company engaged in the purchase,
transmission, distribution and resale of power and energy in Massachusetts.
Cambridge Electric's electric service territory covers about 7 square miles. It
provides retail service in the City of Cambridge, Massachusetts to some 45,900
electric customers. In addition, Cambridge Electric sells power for resale to
the Town of Belmont, Massachusetts, and through NEPOOL.
As mentioned above, the FERC approved the sale of most of Cambridge
Electric's generation assets to Southern Kendall by order dated November 12,
1998.6/ Prior to the sale to Southern Kendall, Cambridge Electric was primarily
a transmission and distribution utility. However, it did own the 113 MW Kendall
Generating Station and the 13.5 MW Blackstone Station facility both located in
Cambridge, Massachusetts. Cambridge Electric sold the 113 MW Kendall Generating
Station to Southern Kendall as part of the transaction that closed on December
30, 1998. The Blackstone Station facility is used substantially for the
production of steam for resale to retail customers. Currently, Cambridge
Electric is reviewing several options with regard to the Blackstone Station
facility and will seek the necessary approvals when any transaction is
finalized.
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5/ Subject to a compliance filing to revise the same, the FERC accepted
Commonwealth Electric's open access pro forma transmission compliance
tariff in Docket No. OA96-167-000 on July 31, 1997. Allegheny Power System,
Inc., 80 FERC P. 61,143 (1997).
6/ See Cambridge Electric Light Co., 85 FERCP. 61,217 (1998).
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Cambridge Electric also provides customers with transmission services,
including transmission service under its Open Access Transmission Tariff and
individual contracts. Cambridge Electric is a member of NEPOOL. As described
above in the discussion on Commonwealth Electric's transmission facilities,
although Cambridge Electric continues to own its transmission facilities, PTF
usage will be governed by ISO-New England.
Cambridge Electric also owns and operates approximately 7.3 circuit miles
of interconnected transmission lines of 13.8 kV to 115 kV. Transmission
facilities include substations with a capacity of approximately 311,000
kilovolt-amperes. All of these transmission facilities are located in
Massachusetts. A map of Cambridge Electric's transmission facilities is included
in Exhibit E-1. Cambridge Electric's electric distribution system consists of
approximately 584 circuit miles and substations with a capacity of approximately
218 MVA.
Canal Electric Company: Canal Electric, a Massachusetts corporation, is a
public utility engaged in the purchase and sale of electricity at wholesale.
Canal Electric holds no franchise- like authority and does not own, operate or
control any transmission or distribution. Canal Electric sells electric energy
at wholesale to its affiliates Cambridge Electric and Commonwealth Electric,
under rate schedules and tariffs on file with the FERC but has no retail
customers. With the exception of an ownership interest in the Seabrook 1 nuclear
power facility, Canal Electric recently divested its generation interests in a
sale to Southern Canal. Specifically, that sale included Canal Electric's oil
fired 566 MW Canal Unit 1 generating unit and Canal Electric's 50 percent
ownership interest in the 565 MW Canal Unit 2. The FERC approved the
jurisdictional aspects of the sale of these assets to Southern Canal by order
dated November 12, 1998.7/ The sale to Southern Canal closed on December 30,
1998.
Medical Area Total Energy Plant, Inc. Medical Area Total Energy Plant, Inc.
("MATEP") is a Massachusetts corporation and wholly-owned subsidiary of Advanced
Energy Systems, Inc., which in turn is a wholly-owned subsidiary of COM/Energy.
MATEP owns and operates a 62 MW steam, chilled water and electric generating
facility located in the Longwood Medical area of Boston, Massachusetts (the
"Facility"). MATEP has no transmission assets, and is not subject to regulation
as a utility under Massachusetts law. MATEP has obtained market- based rate
authority from the FERC.8/ Pursuant to that authority, MATEP sells the output of
the Facility to MATEP LLC, a Delaware limited liability company which is
wholly-owned by MATEP, and MATEP LLC resells such steam, chilled water and
electricity to several Harvard University-affiliated teaching hospitals, which
are adjacent to the Facility within the city of Boston, under long-term
contract.
(b) Gas Utility.
Commonwealth Gas Company. Commonwealth Gas Company ("Commonwealth Gas"), a
Massachusetts corporation, is a local gas distribution company operating in
Massachusetts.
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7/ See Cambridge Electric Light Co., 85 FERC P. 61,217 (1998).
8/ See Advanced Energy Systems, Inc., 83 FERC P. 61,044 (1998).
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Commonwealth Gas' service area is approximately 1,067 square miles and it
provides local gas distribution service to approximately 239,000 customers in
the Cities of Cambridge and Somerville in Middlesex County, a small portion of
the City of Boston in Suffolk County and in various other eastern and
southeastern Massachusetts municipalities in Bristol, Middlesex, Norfolk,
Plymouth and Worcester Counties.
(c) Non-Utility Subsidiaries.
COM/Energy Marketing, Inc. COM/Energy Marketing, Inc. ("CEM") is a power
marketing subsidiary. CEM has no physical facilities for the generation,
transmission, or distribution of electric power for sale, nor does it hold
franchises or have service territories for the transmission, distribution or
sale of electric power in the United States.
The FERC has authorized CEM to sell power in interstate commerce at
market-based rates upon finding that the company could not exercise market power
because it does not have market power over generation or transmission, nor can
it erect barriers to entry to relevant markets.9/ On February 23, 1999, CEM sold
most of its assets to Reliant Energy, Inc. for $2.2 million.
Advanced Energy Systems, Inc. Advanced Energy Systems, Inc. ("AES") is a
wholly- owned subsidiary of COM/Energy. AES is engaged in the business of owning
and operating energy facilities, including MATEP and MATEP LLC.
Hopkinton LNG Corp. Hopkinton LNG Corp. ("Hopkinton"), a Massachusetts
corporation, owns and operates an LNG facility at Hopkinton, Massachusetts for
the liquefaction, storage, and vaporization of natural gas for Commonwealth Gas.
Hopkinton also owns and operates an LNG storage facility in Acushnet,
Massachusetts for the storage and vaporization of natural gas for Commonwealth
Gas. By order issued March 3, 1998, Hopkinton was issued a blanket certificate
of limited jurisdiction by the FERC, authorizing Hopkinton to engage in the sale
and transportation of natural gas that is subject to the FERC's jurisdiction
under the Natural Gas Act.
COM/Energy Steam Company: COM/Energy Steam Company is a steam distribution
company that owns steam distribution facilities in two locations in Cambridge,
Massachusetts and sells steam for heating and industrial production to
commercial customers in Boston and Cambridge, Massachusetts.
COM/Energy Resources, Inc.: COM/Energy Resources, Inc. was organized to
engage in the sale of energy and energy services, but is not currently engaged
in any operations.
Energy Investment Services, Inc.: Energy Investment Services, Inc. is a
corporation organized to invest the proceeds of Canal Electric's asset
generation sales on behalf of utility customers.
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9/ See COM/Energy Marketing, Inc., 81 FERCP. 61,373 (1997).
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COM/Energy Technologies, Inc.: COM/Energy Technologies, Inc. is engaged in
the production, distribution, marketing and sale of energy information and
control products and technologies.
COM/Energy Acushnet Realty: COM/Energy Acushnet Realty is a realty trust
that leases land to Hopkinton LNG Corp.
COM/Energy Cambridge Realty: COM/Energy Cambridge Realty is a realty trust
that holds various properties.
COM/Energy Freetown Realty: COM/Energy Freetown Realty is a realty trust
organized to develop a 600 acre parcel of land that it owns in Freetown,
Massachusetts.
COM/Energy Research Park Realty: COM/Energy Research Park Realty is a
realty trust organized to develop a research complex; it sold its substantial
asset, a nine acre parcel of land in Cambridge, Massachusetts, in 1998.
COM/Energy Services Company: COM/Energy Services Company is the service
company for the COM/Energy holding company system. It provides various
professional and related support services to its affiliates.
Darvel Realty Trust: Darvel Realty Trust is a realty trust that owns,
develops and operates real estate.
The common shares, par value $2.00, of COM/Energy are listed on the NYSE
and the Pacific Stock Exchange under the symbol "CES". As of December 31, 1998,
there were 21,540,550 common shares of COM/Energy outstanding.
For the year ended December 31, 1998, COM/Energy's operating revenues on a
consolidated basis were approximately $980 million, of which approximately $627
million was derived from Commonwealth Electric's, Cambridge Electric's, Canal
Electric's and MATEP'S electric operations, and approximately $289 million was
attributable to regulated natural gas distribution activities. Consolidated
assets of COM/Energy and its subsidiaries at December 31, 1998 were $1.763
billion, of which approximately $673 million consists of its electric
distribution property, plant and equipment, and approximately $271 million
consists of its gas distribution property, plant and equipment.
A more detailed summary of information concerning COM/Energy and its
subsidiaries is contained in COM/Energy's Annual Report on Form 10-K for the
year ended December 31, 1998 and COM/Energy's Form U-3A-2 for the year ended
December 31, 1998, which are incorporated herein by reference as Exhibits H-2
and H-3 respectively.
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B. Description of the Transaction
1. Background of the Transaction
Traditionally, electric utilities have operated under a monopoly regulatory
framework under which consumers have been restricted to a single electricity
provider, typically a vertically integrated electric utility engaged in the
generation, transmission and distribution of electricity. The electric energy
business has, however, become increasingly competitive in recent years as a
result of industry restructuring and general economic trends. Boston Edison and,
following its formation in May 1998, BEC Energy, and COM/Energy have both been
anticipating and responding to such changes. In 1998, pursuant to the
Massachusetts Electric Restructuring Act, each company extended to its
electricity customers the option of choosing their own suppliers, and each
company sold substantially all of its fossil electric generating plants. In
addition, Boston Edison, a subsidiary of BEC Energy, has entered into an
agreement to sell its Pilgrim Nuclear Power Station. As a result of these
divestitures, the core electric utility business of each company will consist
substantially of the distribution and the transmission of electricity.
Competition has also been extended into some portions of the gas distribution
industry in Massachusetts, and further efforts to extend competition in the
natural gas industry are being spearheaded by the Massachusetts Gas Unbundling
Collaborative, of which COM/Energy has been a key participant. Since 1996, all
of Commonwealth Gas' commercial and industrial customers have had the
opportunity to acquire gas from other suppliers and to have gas transported
through Commonwealth Gas' distribution system.
Under the Amended and Restated Agreement and Plan of Merger, dated as of
December 5, 1998 and amended and restated as of May 4, 1999, among NSTAR, BEC
Energy, COM/Energy, BEC Energy Merger Sub and COM/Energy Merger Sub (the "Merger
Agreement"), at the Effective Time (as defined below), BEC Energy will merge
with the BEC Energy Merger Sub (the "BEC Merger"), with BEC Energy as the
surviving entity, and COM/Energy will merge with the COM/Energy Merger Sub (the
"COM/Energy Merger," and together with the BEC Merger, the "Mergers"), with
COM/Energy as the surviving entity. As a result of the Mergers, NSTAR will
become the direct and, through NSTAR Delaware, indirect owner of all of the
outstanding common shares of BEC Energy and COM/Energy; NSTAR Delaware will
shortly thereafter be liquidated and its interests in each of BEC Energy and
COM/Energy will thereby be transferred to NSTAR. In this document, we refer to
the time when the Mergers will be completed as the "Effective Time."
2. Reasons for the Mergers
As previously described, as a result of industry restructuring and the
generation plant divestitures by BEC Energy and COM/Energy, the respective
managements and Boards of Trustees of BEC Energy and COM/Energy decided to focus
on their distribution business and to expand geographically, particularly in the
New England area, through combinations with other electric and gas delivery
utilities. The Boards of Trustees and managements of BEC Energy and COM/Energy
each believe that the combination of BEC Energy's electric distribution business
with COM/Energy's electric and gas distribution business will provide a basis
for NSTAR to become the premier electric and gas distribution business in the
New England region and will
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provide strategic financial opportunities for both companies and their
shareholders, as well as benefits to their customers and employees, including:
o Customer Service -- BEC Energy and COM/Energy expect that the combined
enterprise will be in a better position to offer improved service
levels to customers. BEC Energy and COM/Energy believe that the
combined enterprise's broader customer base, enhanced financial
resources and collective experience in serving the energy needs of
communities in eastern and southern Massachusetts will allow it to
invest more efficiently in technology and infrastructure.
o Potential Cost Savings and Cost Avoidances Resulting from the Mergers
-- BEC Energy and COM/Energy believe that the Mergers will result in
net cost savings and cost avoidances estimated at $500 million in the
aggregate over a ten-year period. These savings, offset in part by
annual amortization of approximately $20 million of the estimated
acquisition premium, will benefit customers because BEC Energy's and
COM/Energy's rates are based on their costs of service.
o Competitive and Strategic Position -- NSTAR will have a broader and
more diversified customer base, including approximately 1,040,000
electric customers in 81 communities and 240,000 gas customers in 51
communities. As a result, it will have the size and scope to be an
effective competitor in the emerging and increasingly competitive
markets for transporting and distributing energy and marketing energy
services.
o Expanded Management Resources -- NSTAR will be able to draw on a
larger and more diverse pool of management for leadership in an
increasingly competitive environment.
As noted above, one of the more important potential benefits of the Mergers
is the cost savings expected to result from combining operations. Unlike some of
the other benefits mentioned above, estimates of potential costs savings may be
quantified and managements of BEC Energy and COM/Energy developed analyses of
potential cost savings as described below.
Estimated potential savings and avoidances expected to be achieved by the
two companies after the Mergers have been limited to quantifiable amounts, as
determined by the managements of BEC Energy and COM/Energy. Recognition has been
given to those costs to be incurred in achieving these potential savings and
avoidances and to the time required to implement plans designed to integrate
operations. These estimated savings and avoidances are attributable to the
Mergers and do not include other types of savings and avoidances that might be
achieved without a transaction between the companies. Operating synergies from
the Mergers are estimated to generate net cost savings and cost avoidances of
$500 million over a ten-year period, excluding the annual amortization of
approximately $20 million of the estimated acquisition premium. The major
components of the anticipated cost savings and cost avoidances identified by the
managements of BEC Energy and COM/Energy are set forth below.
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o Integration of Corporate Functions -- The combined company will have
the ability to eliminate redundant functions in a variety of areas,
including accounting and finance, human resources, information
services, external relations, legal, executive management, retail
marketing, and administrative support. The staffing levels for these
functions are relatively fixed and do not vary directly with changes
in the number of employees or customers. The estimated cost savings of
this component over the ten-year period totals approximately $322
million.
o Integration of Corporate Programs -- The combined company will have
the ability to integrate various corporate and administrative
functions, thereby reducing non-labor costs in the areas of
advertising and public relations, benefits plan administration,
insurance, professional services, facilities, vehicles, association
dues, and credit facilities. In addition, future expenditures in the
area of information systems that would be made by each company on a
stand-alone basis will be reduced for the combined company. Additional
expenditures will be reduced through the more efficient management of
investment in other technology areas, including personal computers,
other hardware and related software, and data center requirements. The
estimated cost savings of this component over the ten-year period
totals approximately $211 million.
o Integration of Customer Support Functions -- The combined company will
have the ability to integrate customer support functions in the areas
of customer service, marketing and sales, and other support services,
such as purchasing and materials management. The estimated cost
savings of this component over the ten-year period totals
approximately $81 million.
o Streamlining of Inventories and Purchasing Economies -- The combined
company will have the ability to centralize some purchasing and
inventory functions. Inventory may be shared across locations. BEC
Energy and COM/Energy expect purchasing power of the combined company
to lead to materials and services volume discounts. The estimated cost
savings of this component over the ten-year period totals
approximately $53 million.
BEC Energy and COM/Energy will jointly develop an integration management
plan that will examine the manner in which to best organize and manage the
businesses of BEC Energy and COM/Energy following the completion of the Mergers
and to identify duplicative positions in corporate and administrative functions.
BEC Energy and COM/Energy are committed to achieving cost savings and avoidances
resulting from personnel reductions through attrition, strictly controlled
hiring, reassignment, retraining, and voluntary separation programs.
The estimated costs savings and cost avoidances described above total
approximately $667 million for the ten-year estimation period, and are expected
to continue beyond the ten-year period following the merger. Estimated costs to
achieve the Mergers total approximately $111 million over the ten-year period.
There are several categories of costs included in the approximate total cost of
$111 million that BEC Energy and COM/Energy will incur to achieve the identified
savings that BEC Energy and COM/Energy expect from the Mergers. They include
11
<PAGE>
separation costs, employee retention costs, system integration costs, relocation
costs, regulatory process costs, transaction costs, and transition costs. Of the
approximately $111 million of estimated costs to achieve the Mergers,
approximately $69 million will be incurred in 1999 and 2000.
In addition, the combined company will incur the acquisition premium, which
is currently estimated to be approximately $516 million, over forty years. The
acquisition premium is the amount paid to COM/Energy shareholders in the Mergers
above the net book value of COM/Energy's assets and liabilities.
Cost savings initiatives that BEC Energy or COM/Energy already planned
prior to the Mergers were subtracted from the gross savings estimated to result
from the Mergers because there is likely to be some overlap between these
initiatives and identified cost savings resulting from the Mergers. These
ongoing or future initiatives will contribute to lower total costs to customers
and BEC Energy and COM/Energy estimated them to total $24 million over the
ten-year period.
The analyses employed by the managements of BEC Energy and COM/Energy in
order to develop estimates of potential savings as a result of the Mergers were
necessarily based upon various assumptions that involve judgments with respect
to, among other things, future national and regional economic and competitive
conditions, inflation rates, regulatory treatment, weather conditions, financial
markets and other uncertainties, all of which are difficult to predict and are
beyond the control of BEC Energy and COM/Energy. Accordingly, while BEC Energy
and COM/Energy believe that such assumptions are reasonable for purposes of
developing estimates of potential cost savings and cost avoidances, there can be
no assurance that such assumptions will approximate actual experience or that
such cost savings and cost avoidances will be realized.
3. Structure and Terms of the Mergers
Pursuant to the Merger Agreement, the combination of the operations of BEC
Energy and COM/Energy will be effected through two mergers, which will occur
simultaneously at the Effective Time. BEC Energy will merge with BEC Energy
Merger Sub, and COM/Energy will merge with COM/Energy Merger Sub.
(a) The BEC Energy Merger. At the Effective Time, BEC Energy will merge
with BEC Energy Merger Sub, with BEC Energy continuing as the surviving
Massachusetts business trust. Each common share of BEC Energy (other than shares
held by BEC Energy, COM/Energy, NSTAR or their subsidiaries, which shall be
canceled) that was issued and outstanding immediately prior to such merger shall
be converted into the right to receive either $44.10 in cash or one common share
of NSTAR, and each 1% membership interest in BEC Energy Merger Sub outstanding
immediately prior to such merger shall be converted into one hundred common
shares of BEC Energy. Each common share of NSTAR held by BEC Energy shall be
canceled. NSTAR Delaware will, shortly thereafter, be liquidated and all
interests it holds in BEC Energy will thereby be transferred to NSTAR.
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<PAGE>
(b) The COM/Energy Merger. At the Effective Time, COM/Energy will merge
with COM/Energy Merger Sub, with COM/Energy as the surviving Massachusetts
business trust. Each common share of COM/Energy (other than shares held by BEC
Energy, COM/Energy, NSTAR or their subsidiaries, which shall be canceled) that
was issued and outstanding immediately prior to such merger shall be converted
into the right to receive either $44.10 in cash or 1.05 common shares of NSTAR,
and each 1% membership interest in COM/Energy Merger Sub outstanding immediately
prior to such merger shall be converted into one hundred common shares of
COM/Energy. Each common share of NSTAR held by COM/Energy shall be canceled.
NSTAR Delaware will, shortly thereafter, be liquidated and all interests it
holds in COM/Energy will thereby be transferred to NSTAR.
As a result of the Mergers, each BEC Energy common share and each
COM/Energy common share (other than shares held by BEC Energy, COM/Energy, NSTAR
or their subsidiaries and affiliates, which will be canceled) will effectively
be converted into the right to receive cash or common shares of NSTAR. Subject
to certain restrictions on the amounts of cash and share consideration to be
issued, described below, BEC Energy and COM/Energy shareholders will be able to
elect the type of consideration they will receive from NSTAR in the Mergers.
The total cash consideration to be paid in connection with the Mergers will
be $300 million, with $200 million to be paid to shareholders of BEC Energy
pursuant to the BEC Energy Merger, and $100 million to be paid to shareholders
of COM/Energy pursuant to the COM/Energy Merger. Because the amount of cash
consideration is fixed, it is possible that some shareholders electing to
receive cash in the BEC Energy Merger or the COM/Energy Merger, as the case may
be, may receive shares of NSTAR in lieu of some or all of the cash that they
elected to receive and, conversely, shareholders electing to receive shares of
NSTAR may receive cash in lieu of some or all of the shares of NSTAR that they
elected to receive. In the event that shareholders of COM/Energy or of BEC
Energy make cash elections exceeding the cash consideration initially allocated
to such shareholders (i.e., $200 million, in the case of shareholders of BEC
Energy, and $100 million in the case of shareholders of COM/Energy), and the
shareholders of the other company make cash elections for less than all of the
cash consideration initially allocated to such shareholders, some or all of the
cash initially allocated to the shareholder group that under-elected cash
consideration may be allocated to the over-electing shareholder group.
At the Effective Time, each outstanding option or other right to purchase
or receive BEC Energy common shares shall be assumed by NSTAR in such manner as
to convert it into an option or other right to purchase or receive NSTAR common
stock. The options or other rights so converted shall be exercisable upon the
same terms and conditions which applied up until the Effective Time, and the
number of shares issuable under such options or other rights will remain
unchanged.
The closing of the Mergers (the "Closing") will take place on the second
Business day immediately following the date on which the last of the conditions
set forth in the Merger Agreement is fulfilled or waived, at 10:00 a.m. at the
offices of Ropes & Gray, One International
13
<PAGE>
Place, Boston, Massachusetts, or on such other date as BEC Energy and COM/Energy
mutually agree (the "Closing Date").
On the Closing Date, certificates of merger complying with the requirements
of the Massachusetts Limited Liability Company Act will be executed and filed
with the Secretary of the Commonwealth of Massachusetts. Each of the Mergers
shall become effective at the time and date agreed upon by BEC Energy and
COM/Energy and set forth in the corresponding certificates of merger; provided
that the Mergers shall become effective simultaneously.
Item 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses of NSTAR expected to be paid or
incurred, directly or indirectly, in connection with the transactions described
above are estimated as follows:
Auditors' Fees......................................*
Legal Fees......................................... *
Investment Bankers' Fees and Expenses...............*
Miscellaneous.......................................*
Total...............................................*
*To be filed by amendment.
Item 3. APPLICABLE STATUTORY PROVISIONS
The following sections of the Act are directly or indirectly applicable to
the proposed transactions: Sections 9(a)(2) and 10. To the extent other sections
of the Act or the Commission's rules thereunder are deemed applicable, such
sections and rules should be considered to be set forth in this Item 3.
Section 9(a)(2) makes it unlawful, without approval of the Commission under
Section 10, "for any person . . . to acquire, directly or indirectly, any
security of any public utility company, if such person is an affiliate . . . of
such company and of any other public utility or holding company, or will by
virtue of such acquisition become such an affiliate." Because NSTAR will, by
virtue of the Mergers, become an affiliate of Boston Edison, Harbor Electric,
Cambridge Electric, Canal Electric, Commonwealth Electric, MATEP and
Commonwealth Gas, Section 9(a)(2) requires approval by the Commission of the
proposed transactions under Section 10. NSTAR believes that the transactions
meet the requirements of Sections 9(a)(2) and 10.
A. Section 10(b)
Section 10(b) provides that if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to an
extent detrimental to the public interest or the interests of investors or
consumers;
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<PAGE>
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other remuneration, to
whomsoever paid, to be given, directly or indirectly, in connection with
such acquisition is not reasonable or does not bear a fair relation to the
sums invested in or the earning capacity of the utility assets to be
acquired or the utility assets underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of
the holding company system of the applicant or will be detrimental to the
public interest or the interests of investors or consumers or the proper
functioning of such holding company system.
1. Section 10(b)(1)
The proposed transaction will not tend towards interlocking relationships
or concentrations of control that would be detrimental to the public interest or
the interest of investors or consumers for several reasons.
(a) Interlocking Relationships
By its nature, any merger results in new links between theretofore
unrelated companies. Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990), as
modified, HCAR No. 25273 (March 15, 1991), aff'd sub nom. City of Holyoke v.
SEC, 972 F.2d 358 (D.C. Cir. 1992)("interlocking relationships are necessary to
integrate [the two merging entities]"). These links, however, are not the types
of interlocking relationships targeted by Section 10(b)(1), which was primarily
aimed at preventing business combinations unrelated to operating
efficiencies.10/ The Merger Agreement provides for the board of trustees of
NSTAR to be composed of all of the members of the boards of trustees of both BEC
Energy and COM/Energy. These management interlocks are necessary and desirable
to integrate the existing utility operations of BEC Energy and COM/Energy into a
single integrated public-utility system, and will be in the public interest and
the interests of investors and consumers. Forging such relations is beneficial
to the protected interests under the Act and thus is not prohibited by Section
10(b)(1).
(b) Concentration of Control
Section 10(b)(1) is intended to prevent utility acquisitions that would
result in "huge, complex and irrational systems", American Electric Power Co.,
46 S.E.C. 1299, 1307 (1978), and to avoid "an excess of concentration and
bigness" while preserving "opportunities for economies of scale, the elimination
of duplicate facilities and activities, the sharing of production capacity and
reserves and generally more efficient operations" afforded by the coordination
of local utilities into an integrated system. Id. at 1309. In applying Section
10(b)(1) to utility
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10/ See Section 1(b)(4) of the Act (finding that the public interest and
interests of consumers are adversely affected "when the growth and
extension of holding companies bears no relation to economy of management
and operation or the integration and coordination of related operating
properties . . .").
15
<PAGE>
acquisitions, the Commission must determine whether the acquisition will create
"the type of structures and combinations at which the Act was specifically
directed." Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700 (1968).
In Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990), the Commission
stated that "antitrust ramifications of an acquisition must be considered in
light of the fact that public utilities are regulated monopolies and that
federal and state administrative agencies regulate the rates charged consumers."
NSTAR's utility operations will be subject to regulation with respect to rates
and other corporate matters by the MDTE, to protect the interest of consumers
and the public interest. The public utility subsidiary companies of BEC Energy
and COM/Energy are currently, and following the proposed transaction will
remain, subject to the jurisdiction of the MDTE and the FERC.
The Commission has watchfully deferred to the work of other regulators with
respect to competition. BEC Energy and COM/Energy have each filed a Pre-merger
Notification and Report Form with the Antitrust Division of the Department of
Justice (the "DOJ") and the Federal Trade Commission (the "FTC") pursuant to the
Hart-Scott-Rodino Act (the "HSR Act"). The applicable waiting period under the
HSR Act was terminated on May 7, 1999. It is a condition to the consummation of
the Mergers that the applicable waiting periods under the HSR Act shall have
expired or been terminated.
In addition, the competitive impact of the Mergers will be fully considered
by the FERC pursuant to Section 203 of the Federal Power Act in its review of
the Mergers. As explained more fully in the FERC application, a copy of which is
attached hereto as Exhibit D-3, the Mergers will not produce any material
increase in market concentration, and will not have any adverse effect on
competition. As previously noted, the principal electric utility subsidiaries of
BEC Energy and COM/Energy have divested themselves of substantially all of their
generating assets, and the Mergers therefore will not result in any significant
increase in market concentration for generation. These electric utilities,
moreover, are members of NEPOOL, and have committed their PTF to the operational
control of ISO-New England. As previously noted, ISO-New England's principal
responsibilities include administration of the NEPOOL Tariff, the operational
control of the New England bulk power system, protection of NEPOOL system
reliability, and oversight of the New England Power Exchange. ISO-New England
also has planning and congestion-management responsibilities and maintains a
market monitoring function to protect against anti-competitive practices by the
owners of the region's generating assets. ISO-New England is complemented by the
restructured NEPOOL whose objective is also to foster competition within the New
England region, promote attainment of the maximum possible economy of service,
and protect system reliability. These arrangements create a competitive power
supply market that brings together power suppliers and electricity consumers in
the New England region. The effect of those arrangements is to create a power
supply market that encompasses the entire New England region, and which
eliminates transmission market power through operation of the ISO.
The Commission has recognized that there is no limit on size per se. On a
pro forma basis, giving effect to the proposed transaction, as of December 31,
1998, BEC Energy and COM/Energy would have combined assets of $5.14 billion and
total operating revenue for the
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<PAGE>
year ended December 31, 1998 of $2.42 billion and approximately 1.04 million
electric utility customers and approximately 240,000 gas utility customers. In
this case, as reflected in the table below, the proposed transaction will create
a system that is comparable to or smaller than other utility systems in the
region.
Comparison of Certain New England and New York Utilities11/
<TABLE>
<CAPTION>
Total Total Total Electric Total Gas
Assets Revenues Customers Customers
Company (Billions) (Billions) (Millions) (Thousands)
<S> <C> <C> <C>
NSTAR (pro forma) $ 5.14 $2.42 1.04 240
Northeast Utilities System $ 2.229 $3.8 1.7 N/A
New England Electric
System $ 5.07 $2.42 1.4 N/A
Consolidated Edison $ 14.7 $7.12 6.02 2,072
Central Maine Power $ 2.299 $0.954 0.528 N/A
Niagara Mohawk Power $ 13.86 $3.826 1.5 500
Eastern Enterprises $ 1.518 $0.935 N/A 579
</TABLE>
The Commission has approved acquisitions involving much larger operating
utilities (see Entergy Corp., HCAR No. 25952 (Dec. 17, 1993) approving the
acquisition of Gulf States Utilities, with combined assets at time of
acquisition in excess of $21 billion; The Southern Company, HCAR No. 24579 (Feb.
12, 1988) approving the acquisition of Savannah Electric and Power Company to
create a system with assets of $20 billion and 3.25 million customers) and has
not found the size of other existing holding companies of similar size to be
problematic.12/
For these reasons, the proposed transaction will not "tend toward
interlocking relations or the concentration of control" of public utility
companies, of a kind or to the extent detrimental to the public interest or the
interests of investors or customers within the meaning of Section 10(b)(1).
2. Section 10(b)(2) -- Fairness of Consideration
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given to the holders of BEC Energy and COM/Energy common
shares in connection with the Merger is reasonable and whether it bears a fair
relation to the investment in and the earning
- --------
11/ The material in this table with respect to entities other than NStar has
been compiled from the most recent Annual Report to Shareholders and/or
Form 10-K for each entity. While BEC Energy and COM/Energy believe the
figures in the table to be accurate and comparable to one another, an
individual figure may differ somewhat from figures filed elsewhere in other
contexts that may have been calculated in a different manner.
12/ The Southern Company System, for example, has assets of approximately $27
billion and revenues of approximately $8.3 billion, while American Electric
Power has assets of approximately $15.7 billion, revenues of approximately
$5.5 billion and approximately 2.9 million utility customers. Entergy,
which as a result of its acquisition of Gulf States Utilities Company
provides service in the State of Texas, currently has approximately 2.4
million utility customers.
17
<PAGE>
capacity of the utility assets underlying the securities being acquired. In its
determinations as to whether or not a price meets such standard, the Commission
has considered whether the price was decided as the result of arm's-length
negotiations,13/ whether each party's Board of Directors has approved the
purchase price,14/ the opinions of investment bankers15/ and the earnings,
dividends, book and market value of the shares of the company to be acquired.16/
The fairness of the consideration involved in the Merger is evidenced by
the fact that the exchange ratios are the product of extensive and vigorous
arm's-length negotiations between the parties, and the Merger Agreement was
approved by the Boards of Trustees of BEC Energy and COM/Energy acting in
accordance with their fiduciary duties to shareholders. These negotiations were
preceded by thoughtful analysis and evaluation of the assets, liabilities and
business prospects of each of the companies and involved careful due diligence
by both parties. See NSTAR Registration Statement on Form S-4 (incorporated by
reference as Exhibit C-1 hereto).
In addition, nationally-recognized investment bankers for each of the
parties have reviewed extensive information concerning the companies, analyzed
the exchange ratios employing a variety of valuation methodologies, and opined
that the exchange ratios are fair, from a financial point of view, to the
shareholders of the respective companies. The BEC Energy investment bankers'
opinion is incorporated by reference to/attached hereto as Exhibit G-1. The
COM/Energy investment bankers' opinion is incorporated by reference to/attached
hereto as Exhibit G-2.
Finally, a comparative analysis of the values of BEC Energy common shares
and COM/Energy common shares demonstrates the fairness of the conversions
ratios.
<TABLE>
<CAPTION>
BEC Energy17/ COM/Energy
Dividends Dividends
High Low Declared High Low Declared
<S> <C> <C> <C> <C> <C> <C>
1997
1st Quarter $27-3/8 $26 $0.470 $24-5/8 $20-7/8 $0.395
2nd Quarter $26-5/8 $24-5/8 $0.470 $24-3/16 $18-7/8 $0.395
3rd Quarter $30-7/8 $26-1/2 $0.470 $27 $23-7/16 $0.395
4th Quarter $38-3/8 $30-1/4 $0.470 $34-11/16 $25-5/16 $0.395
1998
1st Quarter $41-15/16 $35-1/16 $0.470 $40 $34-1/2 $0.405
2nd Quarter $42-5/8 $38-7/8 $0.470 $41 $34-1/8 $0.405
3rd Quarter $44-5/16 $37-3/4 $0.470 $38-1/8 $28-13/16 $0.405
4th Quarter 44-15/16 $39-5/8 $0.485 $40-1/2 $31-9/16 $0.405
</TABLE>
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13/ In the Matter of American Natural Gas Company, HCAR No. 15620 (Dec. 12,
1966).
14/ Consolidated Natural Gas Company, HCAR No. 25040 (Feb. 14, 1990).
15/ Id.
16/ In the Matter of Northeast Utilities, HCAR No. 15448 (Apr. 13, 1966).
17/ BEC Energy was formed as a holding company in May, 1998, when the existing
shareholders of Boston Edison exchanged their shares for shares of BEC
Energy. Share prices and dividend rates for dates prior to BEC Energy's
formation are of Boston Edison Company, its wholly-owned subsidiary.
18
<PAGE>
On December 4, 1998, the last business day preceding the day that the Merger
Agreement was entered into, BEC Energy common shares traded at a high of $42-1/4
and a low of $41-13/16, with a closing price of $42; COM/Energy common shares
traded at a high of $38-3/8 and a low of $37-11/16, with a closing price of
$37-13/16.
In light of the aforesaid opinions, and an analysis of all other relevant
factors, NSTAR believes that the exchange ratios fall within the range of
reasonableness, and that the consideration for the Merger bears a fair relation
to the sums invested in, and the earning capacity of, BEC Energy and COM/Energy,
respectively.
3. Section 10(b)(2) -- Reasonableness of Fees
NSTAR believes that the overall fees, commissions and expenses incurred and
to be incurred in connection with the Mergers are reasonable and fair in light
of the size and complexity of the Mergers relative to other transactions and the
anticipated benefits of the Merger to the public, investors and consumers; that
they are consistent with recent precedent, and that they meet the standards of
Section 10(b)(2).
As set forth in Item 2 of this Application, BEC Energy and COM/Energy
together expect to incur a combined total of approximately $-*- million in fees,
commissions and expenses in connection with the Mergers. By contrast, American
Electric Power Company and Central and South West Corporation have represented
that they expect to incur total transaction fees and regulatory processing fees
of approximately $53 million, including financial advisory fees of approximately
$31 million, in connection with their proposed Merger.
The Applicants believe that the estimated fees and expenses in this matter
bear a fair relation to the value of their combined company and the strategic
benefits to be achieved by the Mergers, and further that the fees and expenses
are fair and reasonable in light of the complexity of the Mergers. See Northeast
Utilities, Holding Co. Act Release No. 25548 (June 3, 1992), modified on other
grounds, Holding Co. Act Release No. 25550 (June 4, 1992) (noting that fees and
expenses must bear a fair relation to the value of the company to be acquired
and the benefits to be achieved in connection with the acquisition). Based on
the price of BEC Energy and COM/Energy common shares on December 4, 1998, the
Mergers would be valued at approximately $2.8 billion. The total estimated fees
and expenses of $-*- million represent approximately -*-% of the value of the
consideration to be paid to the shareholders of BEC Energy and COM/Energy, and
are consistent with percentages previously approved by the Commission. See,
e.g., Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993) (fees and
expenses represented approximately 1.7% of the value of the consideration paid
to the shareholders of Gulf States Utilities); Northeast Utilities, Holding Co.
Act Release No. 25548 (June 3, 1992) (approximately 2% of the value of the
assets to be acquired).
[* To be filed by amendment.]
4. Section 10(b)(3)
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<PAGE>
Section 10(b)(3) requires the Commission to determine whether the proposed
transactions will unduly complicate NSTAR's capital structure or will be
detrimental to the public interest, the interests of investors or consumers or
the proper functioning of NSTAR's system.
Set forth below are summaries of the pro forma capital structure of NSTAR
and the historical capital structure of BEC Energy and COM/Energy as of December
31, 1998:
BEC Energy and COM/Energy Historical Capital Structures
(In Millions)
BEC
Energy COM/Energy
Common Equity $1,051.9 $449.6
Cumulative Preferred Shares:
Non Mandatory Redeemable Series 43.0 -
Mandatory Redeemable Series 49.0 12.2
Long Term Debt (net) 956.2 441.9
Total $2,100.1 $903.7
Pro Forma Capital Structure
(In Millions)
NSTAR
Common Equity $1,715.5
Cumulative Preferred Shares:
Non-Mandatory Redeemable Series 43.0
Mandatory Redeemable Series 49.0
Long Term Debt (net) 1,398.1
Total $3,205.6
NSTAR will have a pro forma common equity to total capitalization ratio of
approximately 54%, which comfortably exceeds the "traditionally acceptable 30%
level." Northeast Utilities, 47 SEC Docket at 1279, 1284 (1990).
As previously set forth more fully herein, the proposed transaction will
generate net cost savings and cost avoidances of $500 million over a ten-year
period, will provide a basis for the combined company to become one of the
premier gas and electric distribution businesses in the New England region, and
will provide strategic financial opportunities for both companies and their
shareholders, as well as benefits to their customers and employees. The
transaction will
20
<PAGE>
therefore be in the public interest and the interests of investors and
consumers, and will not be detrimental to the proper functioning of the
resulting holding company system.
B. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions of
Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11; or
(2) the acquisition of securities or utility assets of a public
utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated public utility
system . . . .
1. Section 10(c)(1)
Section 10(c)(1) requires that the proposed acquisition not be "unlawful
under the provisions of Section 8" or "detrimental to the carrying out of the
provisions of Section 11." Section 8, by its terms, only applies to registered
holding companies and thus the proposed transaction cannot be unlawful under
Section 8 of the Act. As discussed in more detail below in connection with
Section 10(f), however, even if Section 8 applied to exempt holding companies,
the transaction would not be unlawful as there is no state law, regulation or
policy against combination companies. Section 11 of the Act relates to the
simplification of holding company systems, and by its terms also only applies to
registered holding companies. As discussed in more detail below in connection
with Section 10(c)(2), however, this transaction will tend toward the
development of an integrated public utility system.
2. Section 10(c)(2)
Section 10 analysis requires that the acquisition tend "towards the
economical and efficient development of an integrated public-utility system."
The Commission has stated in several cases, including in the Gaz Metropolitan
case, a seminal decision in this area, that under Section 10(c)(2) an exempt
holding company may consist of more than one integrated system.18/ In essence,
Section 10(c)(2) requires that (i) each utility system within the exempt holding
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18/ The United Gas Improvement Company, 9 SEC 52 (1941), Union Electric
Company, 45 SEC 489 (1974) and In the Matter of Gaz Metropolitan et al.,
HCAR No. 26170 (November 23, 1994). In Gaz Metropolitan, the Commission has
explicitly stated "[W]e have indicated in the past that acquisitions may be
approved even if the combined system will not be a single integrated
system. Section 10(c)(2) requires only that the acquisition tend 'towards
the economical and the efficient development of an integrated
public-utility system' (emphasis added)."
21
<PAGE>
company system be an integrated system and (ii) the acquisition tend toward the
economical and efficient development of an integrated system.
The term "integrated public-utility system" is defined in Section 2(a)(29)
to mean:
As applied to electric utility companies, a system consisting of one
or more units of generating plants and/or transmission lines and/or
distributing facilities, whose utility companies are physically
interconnected or capable of physical interconnection and which under
normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operations to a
single area or region, in one or more states, not so large as to
impair (considering the state of the art and the area or region
affected) the advantage of localized management, efficient operation,
and the effectiveness of regulation;
and
As applied to gas utility companies, a system consisting of one or
more gas utility companies which are so located and related that
substantial economies may be effectuated by being operated as a single
coordinated system confined in its operations to a single area or
region, in one or more states, not so large as to impair (considering
the state of the art and the area or region affected) the advantages
of localized management, efficient operation, and the effectiveness of
regulation: Provided, that gas utility companies deriving natural gas
from a common source of supply may be deemed to be included in a
single area or region.
As the Commission and its staff have previously noted, in connection with
an acquisition by an exempt holding company, Section 10(c)(1) mandates that such
acquisition not be detrimental to the carrying out of the provisions of Section
11, but does not require that the acquisition meet the strict integration
standards of Section 11(b)(1) as would be required of a registered holding
company. The Commission has previously determined that an exempt holding company
may acquire utility assets that will not, when combined with the acquiring
company's existing utility assets, make up an integrated system or fully comply
with the strict integration standards of Section 11(b)(1), as long as there is
de facto integration of contiguous utility properties and the holding company
will remain exempt from registration under Section 3 of the Act following the
acquisition. TUC Holding Company, HCAR No. 26749 (Aug. 1, 1997). The Commission
has previously approved the acquisition of gas or electric utility companies by
existing combination exempt holding companies.19/
- --------
19/ See e.g., NIPSCO Industries, Inc., HCAR No. 26975 (Feb. 10, 1999)
(authorizing acquisition of gas utility by holding company with existing
combination and gas utility subsidiaries); IE Industries, Inc., HCAR No.
25325 (June 3, 1991) (authorizing acquisition of large electric utility by
a holding company with a combination utility subsidiary); Southern Indiana
Gas and Electric Company, HCAR No. 26075 (June 30, 1994) (authorizing
acquisition of gas utility by combination utility company with a gas
utility subsidiary).
22
<PAGE>
Turning to the facts of the instant matter, the gas and electric operations
of BEC Energy and COM/Energy will separately form integrated utility systems and
the combined gas and electric system will not be detrimental to the carrying out
of Section 11. NSTAR's electric system will meet the standards of Section
2(a)(29)(A) as the electric operations of BEC Energy and COM/Energy will be
integrated.
There are a number of physical interconnections between the electric
utility subsidiaries of BEC Energy and COM/Energy. There are two physical
interconnections between the transmission systems of Boston Edison and Cambridge
Electric, occurring at Boston Edison's North Cambridge Substation 509 and its
Somerville Substation 402. Substation 509 connects Cambridge Electric's 115 kV
facilities with Boston Edison's 115 kV facilities. Substation 402 connects
Cambridge Electric's 13.8 kV lines with Boston Edison's 13.8kV facilities.
There are several physical interconnections between the transmission
systems of Commonwealth Electric and Boston Edison. In the Cape Cod and
Plymouth/Carver area, Commonwealth Electric has 345 kV interconnections with
Boston Edison through lines 342 and 355 in Plymouth, Massachusetts, and lines
331 and 322 in Carver, Massachusetts. Commonwealth Electric also has a 115 kV
interconnection with Boston Edison in Whitman, Massachusetts. Commonwealth
Electric and Boston Edison jointly own a transmission line, referred to as the
"Card Street" line, which runs from West Medway, Massachusetts to the
Massachusetts-Rhode Island border in Uxbridge, Massachusetts.
MATEP purchases electric power from Boston Edison from time to time both as
a backup power supply and at times when the cost of purchasing electricity from
Boston Edison is less expensive than the cost of producing it in order to
fulfill MATEP's power supply obligations to its customers. MATEP's 13.8 kV
distribution system is physically interconnected with Boston Edison's 13.8 kV
distribution system at a number of locations. In addition to an interconnection
at MATEP's facility, there are interconnections between the two systems at each
of MATEP's customers' facilities.
Moreover, with the exception of Harbor Electric and MATEP, the electric
utility subsidiaries of both BEC Energy and of COM/Energy are all members of
NEPOOL. The Commission has previously determined that electric utilities with no
actual physical interconnection may be "operated as a single interconnected and
coordinated system through . . . participation in NEPOOL" and thereby qualify as
an integrated electric utility system. UNITIL Corporation, HCAR No. 25524 (April
24, 1992).
NSTAR's gas system will meet the standards of Section 2(a)(29)(B).
COM/Energy is an existing exempt combination holding company, owning several
electric utility subsidiaries and
23
<PAGE>
one gas utility, Commonwealth Gas. BEC Energy is an exempt electric utility
holding company, and has no gas utility subsidiaries.
Commonwealth Gas operates entirely within the Commonwealth of
Massachusetts. It purchases gas commodity for its customers from a variety of
producers and suppliers to maintain reliable service at least cost. Commonwealth
Gas utilizes transmission pipeline capacity contracts, primarily with Algonquin
Gas and Tennessee Gas pipelines, to move the commodity from the various sources
to Commonwealth Gas' natural gas receiving stations located throughout
Commonwealth Gas' service territory. Natural gas received by Commonwealth Gas is
delivered into a fully integrated gas distribution delivery system operated and
maintained by Commonwealth Gas. A centralized system control center coordinates
daily dispatch of gas supplies into and around the distribution system.
Commonwealth Gas additionally provides transportation on its distribution system
to customers who elect by choice to be served by commodity suppliers other than
Commonwealth Gas.
Commonwealth Gas currently is an integrated gas utility company, and,
following the Mergers, will continue as such. There will be no increase in the
size of Commonwealth Gas' gas utility operations as a result of the Mergers; it
will simply be affiliated with a larger electric utility system than it is at
present.
There will be "de facto" integration of the gas and electric utility
systems of NSTAR following the Mergers under the standards enunciated by the
Commission recently in TUC Holding Co.:
Section 11(b)(1) makes provision for the acquisition and retention of
more than one integrated system only if the requirements of section
11(b)(1)(A)-(C) ("ABC clauses") are satisfied. By its terms, however,
section 11(b)(1) applies only to registered holding companies. The
Commission has previously determined that a holding company may acquire
utility assets that will not when combined with the acquiring company's
existing utility assets make up an integrated system or comply fully with
the ABC clauses, provided that there is de facto integration of contiguous
utility properties and the holding company will be exempt from registration
under section 3 of the Act following the acquisition. The proposed
acquisition meets these conditions for approval.
TUC Holding Co., HCAR No. 26749 at 305-06 (footnotes omitted).
In TUC Holding Co., applying this standard to the combination of a purely
electric utility system with a purely gas utility system, the Commission found
de facto integration of the combined utility systems:
The respective service territories of the TUC and ENSERCH systems
generally overlap. The two systems will be coordinated administratively.
The combination offers TUC and ENSERCH a means to compete more effectively
in the emerging energy services business, and it does not appear that the
merger will give rise to any of the abuses, such as ownership of scattered
utility properties, inefficient operations, lack of local management or
evasion of state regulation, that section 11(b)(1) and the Act generally
were intended to
24
<PAGE>
address. The merger of the two companies should have no effect upon the
ability of state and local ratemaking authorities to carry out their
statutory duties. Accordingly, the Commission does not find that the
proposed acquisition would be detrimental to the carrying out of section
11, so that section 10(c)(1) of the Act is satisfied.
Id. at 306 (footnotes omitted).
The combination of BEC Energy's electric utility system with COM/Energy's
combination gas and electric utility systems clearly meets the standards for de
facto integration enunciated by the Commission in TUC Holding Co. The service
territories of the gas and the electric systems overlap. The electric and the
gas systems will continue to be coordinated administratively, and the
consolidation of those functions within a larger combined system is expected to
provide substantial efficiencies and economies. The Mergers will not give rise
to any of the abuses, such as ownership of scattered utility properties,
inefficient operations, lack of local management or evasion of state regulation.
NSTAR's system following the Mergers will, in fact, be quite similar to the
combination exempt holding companies whose formation or expansion the Commission
has approved in the past under Section 10.20/ Moreover, NSTAR will remain an
exempt holding company and, once again, "exempt holding companies have generally
been permitted to retain or acquire combination systems so long as combined
ownership of gas and electric operations is permitted by state law."21/
The economies and efficiencies expected to accrue to NSTAR as a result of
the proposed transaction are sufficient to satisfy the standards of Section
10(c)(2).22/
The Commission has held that in order to demonstrate the required economies
and efficiencies it is permissible to:
- --------
20/ See supra note 18.
21/ Division Report at 74. See also In the Matter of Northern States Power
Company, HCAR No. 12655 (Sept. 16, 1954); Delmarva Power & Light Co., 46
SEC. 710 (1976); WPL Holdings, HCAR No. 24590 (Feb. 26, 1988).
22/ Centerior Energy Corp., HCAR No. 24073 (April 29, 1986) ("specific dollar
forecasts of future savings are not necessarily required; a demonstrated
potential for economies will suffice even when these are not precisely
quantifiable.").
WPL Holdings, Inc., HCAR No. 25377 (Sept. 18, 1991) ("Thus, in reviewing an
application under this Section [10(c)(2)], the Commission may recognize not
only benefits resulting from combination utility assets, but also financial
and organizational economies and efficiencies.").
25
<PAGE>
. . . depend less on specific dollar forecasts of future savings and more
on the potential for economies presented by the acquisition even where
these are not precisely quantifiable.23/
NSTAR expects that there will be economies and efficiencies resulting from the
Mergers. See "Reasons for the Mergers", supra.
It should be noted also that the Mergers are consistent with Section 10(f)
of the Act, which states that the Commission may not approve an acquisition
unless it appears to the Commission that such state laws as may apply in respect
of such acquisition have been complied with. Section 10(f), unlike Section 8,
applies directly to exempt holding companies and involves the issue of complying
with all aspects of state regulation that apply to the transaction, not just
whether or not state regulators have adequate regulatory authority over a
combination system, and is satisfied in this case.24/ Indeed, it is a condition
to consummation of the Mergers that all applicable state laws and regulations be
complied with.
C. Section 3(a)(1)
Both BEC Energy and COM/Energy are currently exempt from all provisions of
the Act except Section 9(a)(2) under Section 3(a)(1), BEC Energy by order of the
Commission and COM/Energy pursuant to Rule 2. NSTAR seeks an order of exemption
pursuant to Section 3(a)(1) upon completion of the proposed transactions.
Section 3(a)(1) of the Act authorizes the Commission to exempt any holding
company:
if such holding company, and every subsidiary company thereof which is a
public-utility company from which such holding company derives, directly or
indirectly, any material part of its income, are predominantly intrastate
in character and carry on their businesses substantially in a single State
in which such holding company and every such subsidiary company thereof are
organized.
- --------
23/ American Electric Power, HCAR No. 20633 (July 21, 1978)(authorizing
acquisition by registered holding company of electric utility company) See
also, Energy East Corporation, HCAR No. 26976 (Feb. 12, 1999) (authorizing
acquisition based on strategic benefits and potential but presently
unquantifiable savings); Illinova Corporation, HCAR No. 26054 (May 18,
1994) (authorizing formation of an exempt holding company based on
non-quantified economies and efficiencies such as permitting unregulated
affiliates to respond to competitive opportunities and increasing general
financial flexibility); and WPL Holdings, Inc., HCAR No. 25096 (May 25,
1990) (authorizing formation of an exempt holding company based on
non-quantified economies and efficiencies such as deployment of earnings
not needed for reinvestment in utility business, additional flexibility in
maintaining appropriate capital ratios and positioning the system to
respond to the developing competitive environment).
24/ It should be noted that the terms of Section 10(f) reinforce the fact that
the policy of the Act is to supplement, not supplant, state and local
regulation.
26
<PAGE>
Under Section 3(a)(1) of the Act, in order for a holding company to qualify
for an exemption, each of its "material" subsidiaries must be predominantly
intrastate in nature and carry out their businesses "substantially" in a single
state in which the holding company and each material subsidiary are organized.
Following the Mergers, NSTAR will have seven public utility subsidiaries:
Boston Edison, Harbor Electric, Commonwealth Electric, Cambridge Electric, Canal
Electric, Commonwealth Gas and MATEP. The contribution of each utility
subsidiary to NSTAR's consolidated utility revenues based on 1998 figures (pro
forma after adjustments related to sale of generating assets and the Mergers) is
shown below:
Revenue Percent
(millions) of total
BEC Energy consolidated utility revenues (pre-Mergers) $1,523
COM/Energy consolidated utility revenues (pre-Mergers) $ 836
NSTAR consolidated utility revenues (post-Mergers) $2,359
Boston Edison utility revenues $1,518 64.3%
Harbor Electric utility revenues $ 5 0.2%
Commonwealth Electric utility revenues $ 422 17.9%
Cambridge Electric utility revenues $ 111 4.7%
Canal Electric utility revenues25/ $ - -%
Commonwealth Gas utility revenues $ 289 12.3%
MATEP utility revenues $ 14 0.6%
Following the Mergers, NSTAR will continue to be entitled to an exemption
pursuant to Section 3(a)(1) because each of its material subsidiaries will
remain predominantly intrastate in character and carry on its operations
substantially within the Commonwealth of Massachusetts. As set forth in greater
detail in COM/Energy's 1998 Form U-3A-2 filing, a copy of which is attached
hereto as Exhibit H-3, and the order from the Commission exempting BEC Energy
from all provisions of the Act other than Section 9(a)(2) pursuant to Section
3(a)(1),26/ all retail gas and electric operations of the seven public utility
companies, and all of their generation, transmission and distribution assets,
are located in Massachusetts with the exception of certain minority interests in
non-Massachusetts power plants and transmission lines27/, which assets consist,
in the
- --------
25/ Canal Electric's revenues would be eliminated on a consolidated basis
because all of its sales are to retail utility affiliates.
26/ BEC Energy, et al., HCAR No. 26874 (May 15, 1998).
27/ Boston Edison owns 9.5% of the common stock of Connecticut Yankee Atomic
Power Company, which operated a nuclear power plant in Haddam, Connecticut,
that is currently being decommissioned. Canal Electric also owns 4.5% of
the common stock of Connecticut Yankee Atomic Power Company. Canal Electric
is a joint owner, together with several other New England utility
companies, of the Seabrook 1 nuclear power plant which is located in
Seabrook, New Hampshire. Canal Electric has a 3.52% interest in this
1,150,000 KW unit, with an entitlement of approximately 40 MW of power.
Canal Electric owns a 2.5% equity interest in the Vermont Yankee nuclear
power facility, with an entitlement of approximately 11.2 MW of power.
Canal Electric also owns a 4% equity interest in the Maine Yankee nuclear
power facility, which is being decommissioned.
Boston Edison owns 4.5% of the voting shares and has a 6.55% non-voting
interest in the New England Hydro-Transmission Electric Company, Inc., a
Massachusetts corporation which owns the Massachusetts portions of the high
voltage direct current (HVDC) interconnection which extends to the Canadian
border. Boston Edison also owns 4.5% of the voting shares and has a 6.55%
non-voting interest in the New England Hydro-Transmission Corporation, a
New Hampshire corporation which owns the New Hampshire portion of the HVDC
interconnection. Canal Electric owns a 3.8% interest in the Hydro-Quebec
Phase II transmission facilities from Monroe, New Hampshire to West Medway,
Massachusetts.
27
<PAGE>
aggregate, of less than 1% of the total assets on the books of the combined
enterprise. Boston Edison makes some sales of electricity at wholesale,
virtually all of which occur either within Massachusetts or at the Massachusetts
border, and are thus intrastate in character. None of COM/Energy's utility
subsidiaries sells gas or electricity at wholesale outside of Massachusetts.
Thus NSTAR, following the Mergers, will meet the requirements of Section
3(a)(1).
Item 4. REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals that the parties
have obtained or expect to obtain in connection with the proposed transaction.
A. State Public Utility Regulation
As a condition to the Mergers, the utility subsidiaries of BEC Energy and
COM/Energy must file and must obtain the approval of rate plans from the MDTE.
The MDTE has held several public hearings and has commenced a full investigation
of the rate plans in order to determine their propriety. In making such
determination, the MDTE may consider such factors as the effect of the Mergers
on the rates charged by BEC Energy's and COM/Energy's subsidiaries, service
quality issues, the financial integrity of the combined company, and the effect
of the Mergers on competition, economic development and employment. Assuming
that the MDTE approves the rate plans, following the Effective Time the utility
operations of NSTAR's utility subsidiaries will remain subject to regulation by
the MDTE.
A copy of the MDTE rate plan application is attached hereto as Exhibit D-1
and a copy of the order approving the rate plans will be filed by amendment as
Exhibit D-2.
B. Other Federal Regulations
28
<PAGE>
Federal Power Act. Section 203 of the Federal Power Act provides that
without first receiving authorization from the FERC, no public utility shall
sell or otherwise dispose of its jurisdictional facilities; directly or
indirectly, merge or consolidate its facilities with those of any other person;
or acquire any security of any other public utility. BEC Energy and COM/Energy
thus require FERC approval to combine their businesses by merging into
acquisition subsidiaries of a new holding company, NSTAR. Under Section 203 of
the Federal Power Act, the FERC must approve the Mergers if it finds that the
Mergers are consistent with the public interest. The FERC indicated in a recent
policy statement that it will evaluate the following criteria in analyzing a
merger under Section 203:
(1) The FERC will examine the effect of the merger on competition in
electric power markets, using an approach derived from the Department of
Justice/Federal Trade Commission Horizontal Merger Guidelines. It will use this
approach to determine s whether the merger will result in an undue increase in
market concentration or in the s market power of the applicants.
(2) The FERC will review the effect of the merger on state and federal
regulation of the applicants.
BEC Energy and COM/Energy have filed a combined application with the FERC
requesting that it approve the Mergers under Section 203 of the Federal Power
Act.
Antitrust Considerations. Under the HSR Act and related rules and
regulations, BEC Energy and COM/Energy may not complete the Mergers until they
have satisfied the HSR Act reporting and waiting requirements. Each Company must
first file notification and report forms with the Antitrust Division of the DOJ
and the FTC and then wait as its case is reviewed. The HSR Act waiting period is
30 days from the date both parties file their report forms unless the period is
terminated before 30 days have passed or extended by an FTC or DOJ Antitrust
Division request for additional information. The HSR Act waiting period was
terminated on May 7, 1999. If the Mergers are not completed within 12 months
after the expiration or earlier termination of the HSR waiting period, BEC
Energy and COM/Energy would be required to submit new filings to the DOJ
Antitrust Division and the FTC. In that case, a new HSR Act waiting period would
have to expire or earlier terminate before the Mergers could close.
Atomic Energy Act. Both Boston Edison Company's Pilgrim nuclear facility
and the Seabrook nuclear facility, a nuclear power plant in which COM/Energy has
a 3.52% ownership interest, are subject to the regulatory jurisdiction of the
Nuclear Regulatory Commission ("NRC"). The Atomic Energy Act of 1954 provides
that ownership interests in nuclear plants may not be transferred or disposed of
through a transfer of control unless the NRC finds that the transfer is
consistent with the Atomic Energy Act and consents to the transfer. In
accordance with the Atomic Energy Act, BEC Energy and COM/Energy will seek
approval from the Nuclear Regulatory Commission as necessary.
Item 5. PROCEDURES
29
<PAGE>
NSTAR hereby requests that there be no hearing on this Application and that
the Commission issue its order as soon as practicable after the filing hereof.
The Commission is respectfully requested to issue and publish the requisite
notice under Rule 23 with respect to the filing of this Application not later
than May 21, 1999, such notice to specify a date not later than June 16, 1999,
by which comments may be entered and a date not later than June 17, 1999, as the
date after which an order of the Commission granting and permitting the
Application to become effective may be entered by the Commission. A form of
Notice is filed herewith as Exhibit I-1.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
transaction. The Division of Investment Management may assist in the preparation
of the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Item 6. EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
A-1 Declaration of Trust of NSTAR (to be filed by amendment).
A-2 By-laws of NSTAR (to be filed by amendment).
B-1 Merger Agreement (to be filed by amendment).
C-1 Registration Statement on Form S-4 (to be filed by amendment).
C-2 Joint Proxy Statement and Prospectus of BEC Energy and COM/Energy
(included in Exhibit C-1, to be filed by amendment).
D-1 Joint application to the MDTE.
D-2 Massachusetts Order (to be filed by amendment).
D-3 Joint application to the FERC.
D-4 FERC Order (to be filed by amendment).
D-5 Boston Edison application to the NRC.
D-6 NRC Order (to be filed by amendment).
D-7 Canal Electric application to the NRC.
D-8 NRC Order (to be filed by amendment).
30
<PAGE>
E-1 Maps of service areas of BEC Energy and COM/Energy (to be filed on
Form SE).
F-1 Opinion of counsel (to be filed by amendment).
F-2 Past-tense opinion of counsel (to be filed by amendment).
G-1 Opinion of Goldman, Sachs & Co. (to be filed by amendment)
G-2 Opinion of SG Barr Devlin (to be filed by amendment)
H-1 Annual Report of BEC Energy on Form 10-K for the year ended December
31, 1998 ((filed on March 31, 1999) (File No. 1-14768) and
incorporated herein by reference).
H-2 Annual Report of COM/Energy on Form 10-K for the year ended December
31, 1998 ((filed on March 31, 1999) (File No. 1-07316) and
incorporated herein by reference).
H-3 COM/Energy Statement Claiming Exemption on Form U-3A-2 for the year
ended December 31, 1998 ((filed on March 1, 1999) and incorporated
herein by reference).
I-1 Proposed Form of Notice.
B. Financial Statements
FS-1 NSTAR Unaudited Pro Forma Combined Balance Sheets as of December 31,
1998 (included in Exhibit C-1, to be filed by amendment).
FS-2 NSTAR Unaudited Pro Forma Combined Statements of Operations for the
year ended December 31, 1998 (included in Exhibit C-1, to be filed by
amendment).
FS-3 BEC Energy Consolidated Balance Sheet as of December 31, 1998,
December 31, 1997 and December 31, 1996 (see Annual Report of BEC
Energy on Form 10-K for the year ended December 31, 1998 (Exhibit H-1
hereto)).
FS-4 BEC Energy Consolidated Statements of Income for its last three fiscal
years (see Annual Report of BEC Energy on Form 10-K for the year ended
December 31, 1998 (Exhibit H-1 hereto)).
FS-5 COM/Energy Consolidated Balance Sheet as of December 31, 1998,
December 31, 1997 and December 31, 1996 (see Annual Report of
31
<PAGE>
COM/Energy on Form 10-K for the year ended December 31, 1998 (Exhibit
H-2 hereto)).
FS-6 COM/Energy Consolidated Statements of Income for its last three fiscal
years (see Annual Report of COM/Energy on Form 10-K for the year ended
December 31, 1998 (Exhibit H-2 hereto))
Item 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The proposed transaction involves neither a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec. 4321 et seq. No federal agency is preparing an environmental impact
statement with respect to this matter.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned company has duly caused this Application to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: May 7, 1999
By: /s/ Thomas J. May
Chairman of the Board and Chief Executive Officer
32
EXHIBIT D-1
KEEGAN, WERLIN & PABIAN, LLP
ATTORNEYS AT LAW
21 CUSTOM HOUSE STREET
BOSTON, MASSACHUSETTS 02110-3525 TELECOPIERS:
------ (617) 951-1354
(617) 951-1400 (617) 951-0586
February 1, 1999
Mary L. Cottrell, Secretary
Department of Telecommunications and Energy
100 Cambridge Street, 12th Floor
Boston, MA 02202
Re: D.T.E. 99-19, Request for Approval of Rate Plan for Boston Edison
Company, Cambridge Electric Light Company, Commonwealth Electric
Company and Commonwealth Gas Company
Dear Secretary Cottrell:
Enclosed for filing is a $100 filing fee and an original and nine (9)
copies of the Joint Petition of Boston Edison Company ("Boston Edison"),
Cambridge Electric Light Company ("Cambridge"), Commonwealth Electric Company
("Commonwealth Electric") and Commonwealth Gas Company ("Commonwealth Gas")
(together, the "Joint Petitioners") for Approval of Rate Plan by the Department
of Telecommunications and Energy (the "Department") pursuant G.L. c. 164, ss.
94. The Rate Plan is filed in conjunction with the merger of the Joint
Petitioners' parent companies, BEC Energy and Commonwealth Energy System
("COM/Energy"). Also enclosed is a Motion for Protective Treatment for certain
confidential materials included in the filing. The original filing and one copy
include the materials for which the Joint Petitioners request protected
treatment. The confidential information has been redacted from the remaining
eight copies.
The Joint Petitioners believe that this merger will provide a unique
opportunity for the four companies to reduce costs while improving service to
customers. The proposed Rate Plan is intended to permit the consummation of the
merger in a way that will provide long-term value for customers, employees and
shareholders. The consolidation and integration of utility operations will
create economies of scale and synergies that will lower costs, diversify
operations and improve the financial strength of the individual companies. This
will lead to improved efficiency, lower-cost operations, better service for
utility customers, and opportunities for employees in a more diversified
company. Although the Rate Plan provides shareholders the opportunity to recover
the up-front costs needed to achieve these customer benefits, the magnitude and
permanence of the customer benefits will produce a value for customers that far
outweighs the associated costs. The Joint Petitioners seek approval of the Rate
Plan as consistent with the public interest pursuant to G.L. c. 164, ss. 94 and
Department precedent. See NIPSCO-Bay State Acquisition, D.T.E. 98-31 (1998);
Eastern-Essex Acquisition, D.T.E. 98-27 (1998); Mergers and Acquisitions, D.P.U.
93-167-A (1994).
In the filing, the Joint Petitioners present the following testimony:
Thomas J. May, President and Chief Executive Officer of BEC Energy and
Boston Edison, provides a description of BEC Energy's decision to pursue
this merger and an overview of how the Rate Plan is consistent with the
Department's regulatory objectives and policies.
Russell D. Wright, Chief Executive Officer of COM/Energy, Cambridge,
Commonwealth Electric and Commonwealth Gas, provides a description of
COM/Energy's decision to pursue this merger, explains how the merger
benefits customers and describes various elements of the Rate Plan,
including the four-year rate freeze, the allocation of net savings to
customers and the service-quality plan for Cambridge, Commonwealth Electric
and Commonwealth Gas.
James J. Judge, Senior Vice President and Treasurer of Boston Edison,
describes the merger transaction, describes various elements of the Rate
Plan, including the recovery of merger-related cost and the service-quality
plan for Boston Edison, and explains how approval of the proposed Rate Plan
is consistent with the public interest and complies with Department
precedent.
Thomas J. Flaherty, National Partner - Energy Consulting and a partner in
the Deloitte & Touche Consulting Group, LLC, describes and quantifies the
projected cost savings that have been identified as resulting from the
merger and compares those cost savings with other recent transactions.
John Scott Magrane, Jr., Vice President in the Energy and Power Group
(Investment Banking Division) of Goldman Sachs & Co., who provides
financial advisory services to BEC Energy, reviews the recent history of
mergers in the utility industry and discusses the manner in which this
transaction fits into that framework.
As described in the Joint Petition, Boston Edison, Cambridge, Commonwealth
Electric and Commonwealth Gas respectfully request that the Department:
Approve the proposed Rate Plan, pursuant to G.L. c. 164, ss. 94, as just
and reasonable and consistent with the public interest; and
Confirm that no transfer of the franchise rights of Boston Edison,
Cambridge, Commonwealth Electric or Commonwealth Gas will result from the
merger and related transactions, and therefore, no approval by the
Massachusetts General Court is required under G.L. c. 164, ss. 21.
Thank you for your attention to this matter.
Very truly yours,
/s/ Robert J. Keegan
Robert J. Keegan
Enclosures
cc: Janet Gail Besser, Chair
James Connelly, Commissioner
W. Robert Keating, Commissioner
Paul Vasington, Commissioner
Eugene J. Sullivan, Jr., Commissioner
Thomas Bessette, Acting General Counsel
Kevin Brannelly, Director, Rates and Revenue Requirements Division
George B. Dean, Assistant Attorney General, Regulated Industries Division
David O'Connor, Commissioner, Division of Energy Resources
<PAGE>
COMMONWEALTH OF MASSACHUSETTS
DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY
- ------------------------------------------
)
Boston Edison Company/Cambridge Electric Light )
Company/Commonwealth Electric Company/ ) D.T.E. 99-19
Commonwealth Gas Company )
)
- ------------------------------------------
JOINT PETITION OF BOSTON EDISON COMPANY, CAMBRIDGE ELECTRIC LIGHT COMPANY,
COMMONWEALTH ELECTRIC COMPANY AND COMMONWEALTH GAS COMPANY
FOR APPROVAL OF RATE PLAN
Now come Boston Edison Company ("Boston Edison"), Cambridge Electric Light
Company ("Cambridge"), Commonwealth Electric Company ("Commonwealth Electric")
and Commonwealth Gas Company ("Commonwealth Gas") (together, the "Joint
Petitioners"), and respectfully move that the Department of Telecommunications
and Energy (the "Department") approve the Joint Petitioners' Rate Plan, pursuant
to G.L. c. 164, ss. 94. In addition, the Joint Petitioners request that the
Department determine that no transfer of the franchise rights of Boston Edison,
Cambridge, Commonwealth Electric or Commonwealth Gas will result from the merger
and related transactions, and therefore, no approval by the Massachusetts
General Court is required under G.L. c. 164, ss. 21.
In support thereof, the Joint Petitioners state the following:
1. Boston Edison is a Massachusetts electric company providing retail service
in Massachusetts, and is subject to the regulatory jurisdiction of the
Department pursuant to G.L. c. 164, ss. 1.
2. Cambridge and Commonwealth Electric are Massachusetts electric companies
providing retail service in Massachusetts, and are subject to the
regulatory jurisdiction of the Department pursuant to G.L. c. 164, ss. 1.
3. Commonwealth Gas is a Massachusetts gas company providing retail service in
Massachusetts, and is subject to the regulatory jurisdiction of the
Department pursuant to G.L. c. 164, ss. 1.
4. BEC Energy is a Massachusetts business trust established and existing under
a Declaration of Trust dated March 25, 1997, with a principal place of
business in Boston, Massachusetts. Boston Edison is a wholly owned
subsidiary of BEC Energy.
5. Commonwealth Energy System ("COM/Energy") is a Massachusetts business trust
organized under a Declaration of Trust dated December 31, 1926, as amended,
with a principal place of business in Cambridge, Massachusetts. Cambridge,
Commonwealth Electric and Commonwealth Gas are wholly owned subsidiaries of
COM/Energy.
6. On December 5, 1998, BEC Energy and COM/Energy entered into an Agreement
and Plan of Merger (the "Merger Agreement"), which is subject to necessary
approvals of government regulatory agencies having jurisdiction, providing
for a merger transaction among the companies. As a result of the Merger
Agreement, the stock of BEC Energy and COM/Energy will be exchanged for
shares in BEC NEWCo, Inc. ("NEWCo"), a new Massachusetts holding company.
7. The Merger Agreement is subject to expiration of the waiting period and the
review of the United States Federal Trade Commission and the United States
Department of Justice pursuant to the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended. In addition, the Merger Agreement is
subject to the approval of the Federal Energy Regulatory Commission (the
"FERC") pursuant to the Federal Power Act, as amended, approvals of and
filings with the Securities and Exchange Commission pursuant to the
Securities and Exchange Act of 1934 and the Public Utility Holding Company
Act of 1935, as amended, and the Nuclear Regulatory Commission pursuant to
Section 184 of the Atomic Energy Act of 1954, as amended, and 10 C.F.R.
50.80. Department approval of the Merger Agreement is not required since
the merger is not between electric or gas companies, which would otherwise
be subject to Department approval in accordance with G.L. c. 164,ss. 96.
However, the Rate Plan for Cambridge, Commonwealth Electric, Commonwealth
Gas and Boston Edison is subject to the Department's review and approval
pursuant to G.L. c. 164,ss. 94.
8. The Rate Plan is fully described in the testimony and supporting
documentation filed by five witness: Thomas J. May, Chairman, President and
Chief Executive Officer of BEC Energy (Exhibit TJM-1); Russell D. Wright,
Chief Executive Officer of COM/Energy (Exhibit RDW-1); James J. Judge,
Senior Vice President and Treasurer of Boston Edison (Exhibit JJJ-1);
Thomas J. Flaherty, National Partner - Energy Consulting and partner in the
Deloitte & Touche Consulting Group LLC (Exhibit TJF-1) and John S. Magrane,
Jr., Vice President of Goldman, Sachs & Co. (Exhibit JSM-1).
9. The Rate Plan provides for: (1) a four-year distribution rate freeze; (2)
the recovery of merger-related costs over 40 years; and (3) a
service-quality plan that will ensure that there will be no degradation in
the service quality provided to retail customers of regulated utility
service.
10. The Rate Plan will provide customers with significant price stability,
savings through the avoidance of likely increases in base rates, continued
and improved quality of service and long-term rates that will be lower than
those that would otherwise have to be paid by customers in the absence of
the merger. The Rate Plan also includes the approval of a structure that
will afford shareholders a reasonable opportunity to recover merger-related
costs.
11. As discussed by Mr. Judge, the Rate Plan affects only the non-reconciling
base rates under the jurisdiction of the Department. Accordingly, the rates
for the three electric companies that reflect transition costs (including
mitigation), transmission services regulated by the FERC, standard offer
service and default service charges, are not covered by the Rate Plan and
will not be affected by the rate freeze. Similarly for Commonwealth Gas,
reconciling rate elements, like the cost of gas adjustment clause and local
distribution adjustment clause, are not included in the Rate Plan.
WHEREFORE, the Joint Petitioners respectfully request that the Department:
a. Approve the Rate Plan, pursuant to G.L. c. 164, ss. 94, as just and
reasonable and consistent with the public interest.
b. Confirm that no transfer of the franchise rights of Boston Edison,
Cambridge, Commonwealth Electric or Commonwealth Gas will result from
the merger and related transactions, and therefore, no approval by the
Massachusetts General Court is required under G.L. c. 164, ss. 21.
c. Issue such other and further orders as may be necessary.
Respectfully submitted,
JOINT PETITIONERS:
BOSTON EDISON COMPANY
CAMBRIDGE ELECTRIC LIGHT COMPANY
COMMONWEALTH ELECTRIC COMPANY
COMMONWEALTH GAS COMPANY
By their attorneys,
--------------------------------
Robert J. Keegan, Esq.
Robert N. Werlin, Esq.
Keegan, Werlin & Pabian, LLP
21 Custom House Street
Boston, MA 02202
(617) 951-1400
and
BOSTON EDISON COMPANY
By its attorneys,
------------------------------------
Douglas S. Horan, Esq.
Senior Vice President - Strategy and Law
and General Counsel
William S. Stowe, Esq.
Boston Edison Company
800 Boylston Street
Boston, MA 02199
(617) 424-2000
and
CAMBRIDGE ELECTRIC LIGHT COMPANY
COMMONWEALTH ELECTRIC COMPANY
COMMONWEALTH GAS COMPANY
By their attorneys,
------------------------------------
Michael P. Sullivan, Esq.
Vice President, Secretary and General
Counsel
Richard J. Morrison, Esq.
John Cope-Flanagan, Esq.
COM/Energy Services
One Main Street
Cambridge, MA 02142
(617) 225-4000
EXHIBIT D-3
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
)
BEC Energy and )
Commonwealth Energy System ) Docket No. EC99-
)
APPLICATION FOR APPROVAL OF MERGER
Commonwealth Energy System ("CES") and BEC Energy ("BEC") (collectively,
"the Applicants"), on behalf of BEC's affiliate Boston Edison Company ("BECO"),
CES' affiliates Canal Electric Company ("Canal"), Commonwealth Electric Company
("Commonwealth"), Cambridge Electric Light Company ("Cambridge"), COM/Energy
Marketing, Inc. ("CEM"), and Medical Area Total Energy Plant, Inc. ("MATEP"),
hereby file this Application requesting any and all authorizations necessary to
effectuate the approval of the merger of CES and BEC pursuant to Section 203 of
the Federal Power Act ("FPA"). As demonstrated below, the proposed merger easily
satisfies the standards set forth in the Commission's Merger Policy Statement1
and should therefore be approved as "consistent with the public interest."
I. SUMMARY AND REQUEST FOR EXPEDITED APPROVAL AS CONTEMPLATED BY THE MERGER
POLICY STATEMENT
The proposed merger is between two holding companies -- CES and BEC. CES's
utility subsidiaries are engaged in both natural gas and electric businesses;
BEC's utility subsidiaries are engaged in the electric business. As a result of
the merger, the Applicants' FPA-jurisdictional
- --------
1 Inquiry Concerning the Commission's Merger Policy Under the Federal Power
Act: Policy Statement, Order No. 592, III FERC Stats. & Regs. P. 31,044 (1996)
(codified at 18 C.F.R. ss. 2.26) ("Merger Policy Statement").
1
<PAGE>
affiliates will become wholly-owned subsidiaries of a new holding company
(currently named BEC Newco, Inc. ("BEC Newco")).
The merger satisfies the standards in the Merger Policy Statement. The
proposed merger:
o will not create undue market power or concentration in any relevant
market, based on a competitive screen analysis and other factors;
o will not adversely affect any wholesale rate; and
o will not impair the Commission's regulation or the regulation of any
state Commission.
The merger occurs within the context of the restructuring of the BEC and
CES regulated subsidiaries pursuant to state competitive plans.2 These
subsidiaries have already committed their transmission facilities to operation
and control by ISO-New England, Inc. ("ISO-New England"), and have already
divested themselves of most of their generating capacity. The regulated
subsidiaries have sold the vast majority of their owned generating resources,
are engaged in selling the remaining generation, will attempt to sell or buy out
of their purchased power agreements ("PPAs") and intend to withdraw from the
generation business. They will remain in the power sales business only as
necessary to serve "standard offer" and "default service" customers to the
extent required by the Massachusetts Department of Telecommunications and Energy
("Massachusetts DTE"), formerly the Massachusetts Department of Public
Utilities, and to serve requirements customers for the remaining terms of their
contracts. In short, the BEC and CES regulated subsidiaries will become, over
time, essentially wires companies enabling the ultimate consumers residing in
their distribution service areas to choose their power supplier.
- --------
2 The term "regulated subsidiaries" refers to the three BEC and CES
electric subsidiaries who serve retail load - Boston Edison Company, Cambridge
Electric Light Company, and Commonwealth Electric Company; and to Canal Electric
Company, a public utility engaged in the purchase and sale of electricity at
wholesale.
2
<PAGE>
The market concentration analysis, submitted herewith in accordance with
Appendix A of the Merger Policy Statement, demonstrates that the consolidation
of the remaining generating capacity temporarily still owned by the BEC and CES
regulated subsidiaries produces no material increase in market concentration and
does not in any other way have any adverse affects on competition. The
Applicants' submission shows that wholesale customers, most of whom are served
under recently renegotiated fixed rate contracts, will be "held harmless" from
merger- related costs that exceed merger-related savings.
Finally, the merger will not reduce the effectiveness of regulation. The
Commission's regulatory authority over the BEC and CES public utility affiliates
will be the same after the merger. The Applicants include with this filing a
commitment (the "Ohio Power" waiver) in wholesale ratemaking to follow this
Commission's policies for inter-affiliate non-power transactions. The merger
requires approval of the Massachusetts DTE. Thus, the merger of CES and BEC
satisfies the standards reflected in the Merger Policy Statement.
In the Merger Policy Statement, the Commission has committed to swift
action in cases, such as this, which do not present substantive issues:
if a merger falls below the HHI screen, the applicants propose
adequate ratepayer protection mechanisms, and the applicants make the
commitments necessary to assuage our concerns about the effect on
regulation, we should be able to act much more quickly.3
The Applicants respectfully submit that their proposed merger plainly meets all
of the Commission's requirements for regulatory approval and for granting that
approval on the expedited basis contemplated in the Merger Policy Statement.
- --------
3 Merger Policy Statement, at 30,127.
-3-
<PAGE>
II. JURISDICTIONAL STATEMENT
This Application is being submitted because the Commission has determined
that it has jurisdiction over the merger of holding companies with public
utility subsidiaries unless the holding companies can overcome a rebuttable
presumption that an indirect merger of the jurisdictional facilities of the
public utility subsidiaries occurs when the holding companies merge. Illinois
Power Co., 67 FERC P. 61,136 (1994) ("Illinois Power").4 The Applicants do not
contest the Commission's jurisdiction over the proposed merger and therefore
submit this Application, notwithstanding the fact that the facilities of the
public utility subsidiaries will not be consolidated or merged at this time.5
III. APPLICANTS
BEC is a Massachusetts business trust and an exempt public utility holding
company under the Public Utility Holding Company Act of 1935 ("PUHCA").6 BEC
owns all of the outstanding common stock of BECO, which is a public utility
under Section 201(e) of the FPA providing retail electric service chiefly in
metropolitan Boston, an area of about 590 square miles encompassing the City of
Boston and 39 surrounding cities and towns. BECO's distribution service area
includes some 663,000 retail customers. BECO also provides wholesale services
that are subject to this Commission's jurisdiction.
CES is also a Massachusetts business trust and an exempt public utility
holding company
- --------
4 In approving the formation of BEC, the Commission noted its Illinois
Power determination and ordered BEC to file an application for approval under
Section 203 if it merged with another holding company owning public utilities or
to overcome the rebuttable presumption. Boston Edison Co., 80 FERC P. 61,274, at
61,994-5 (Ordering Paragraph (F6)) (1997).
5 If the facilities of the public utility subsidiaries are proposed to be
combined at a later time, an appropriate application would be submitted for the
Commission's approval.
6 As amended, 15 U.S.C. ss. 79b(a)(1).
-4-
<PAGE>
under PUHCA. CES owns all the common stock of three regulated public utility
companies Commonwealth, Cambridge, and Canal. Commonwealth provides retail
service to approximately 327,000 retail customers in Southeastern Massachusetts,
including Cape Cod and Martha's Vineyard, and also provides FPA jurisdictional
services. Cambridge provides retail service to some 45,900 customers in the City
of Cambridge, Massachusetts, and also provides FPA jurisdictional services,
including partial requirements service to the Town of Belmont ("Belmont"),
Massachusetts. Canal, a wholesale electric generating company with no retail
customers, owns a 3.52% share of the Seabrook 1 nuclear power plant.
CES also owns CEM, a power marketing subsidiary which owns no physical
facilities for electric generation or transmission, and Advanced Energy Systems,
Inc. ("AES") which is the owner of MATEP. MATEP owns a 62 MW cogeneration
facility that sells electricity, steam and chilled water to its affiliate MATEP
LLC which, in turn, sells energy to specific retail customers including five
Boston area hospitals and the Harvard Medical School and its affiliated schools
under long-term contracts that do not expire until 2021. CES also owns two gas
companies: (1) Commonwealth Gas Company ("Commonwealth Gas") which provides
local gas distribution service to approximately 239,000 retail customers in the
Cities of Cambridge and Somerville in Middlesex County, a small portion of the
City of Boston in Suffolk County, and in various other eastern Massachusetts
municipalities; and (2) Hopkinton LNG Corp., an entity which owns and operates
two liquefied natural gas ("LNG") facilities.7
- --------
7 The Applicants and their affiliates are described in more detail in
Section VII hereof. Maps showing the location of the regulated subsidiaries'
service territories are attached as Exhibit I.
-5-
<PAGE>
IV. DESCRIPTION OF THE MERGER
The merger is between CES and BEC. Under the terms of the merger agreement,
a new holding company currently named BEC Newco, Inc. will be created and both
BEC and CES will exchange their shares for a combination of stock in BEC Newco
and cash. The parties anticipate that at the close of the transaction, BEC
stockholders will own approximately 68% of BEC Newco and CES stockholders will
own approximately 32%. BEC Newco will be an exempt public utility holding
company and the parent of all existing BEC and CES subsidiaries. (When BEC Newco
and its subsidiaries are referred to in the aggregate, they are described herein
as the "Combined Companies"). There are no immediate plans to merge the BEC
Newco subsidiaries, each of which will maintain its individual corporate
existence in the initial period following the merger. Article I of the Agreement
and Plan of Merger ("the Merger Agreement") describes the transactions that will
be utilized to effectuate the merger. The Merger Agreement is included in this
filing in Exhibit H.
V. MERGER ANALYSIS
In the Merger Policy Statement, the Commission reviewed and revised its
policy for determining whether a merger is consistent with the public interest
standard of Section 203 of the FPA. The Commission concluded that its analysis
would focus on three factors:
o The effect of the merger on competition, using a competitive screen to
determine whether the merger would increase horizontal market power in
a relevant market;
o The effect of the merger on ratepayers, focusing on the measures the
applicants propose to protect ratepayers from merger-related harm;
o The effect of the merger on regulation, focusing on any possible shift
of regulatory authority.8
- --------
8 Merger Policy Statement, at 30,111-12.
-6-
<PAGE>
A. The Transaction Will Not Create or Increase Undue Market Power in Any
Market
The proposed merger will not create or enhance market power in any market
under the standards employed by the Commission or, indeed, under any other
rational means of examining market power. To establish this, the Applicants
asked an independent expert, Mr. John J. Reed, to perform an Appendix A screen
analysis, as required by the Merger Policy Statement, to test for horizontal
market power impacts, and asked him to evaluate any other potential impacts of
the merger on competition. Mr. Reed concludes from his horizontal market
analysis that the changes in HHI values resulting from the merger will be
minimal as to concentration of control over generating resources. He found HHI
increases far below the safe-harbor thresholds established by the Merger Policy
Statement. Even those insignificant changes in market concentrations will be
further diminished as Applicants continue to implement their plans to divest
themselves of their remaining generation interests and PPAs. Mr. Reed also shows
that CES' affiliated natural gas assets cannot be used to restrict gas supplies
to generators in competition with the Applicants' generating companies and that
there are no other impacts of the merger that could reduce competition in the
electric generation market.
1. ISO-New England Eliminates Transmission Market Power in New
England
The BEC and CES regulated subsidiaries are members of the New England Power
Pool ("NEPOOL") and have committed their pool transmission facilities ("PTF") to
the operational control of ISO-New England. The ISO-New England's principal
responsibilities include administration of the NEPOOL open access transmission
tariff ("NEPOOL Tariff"), the operational control of the New England bulk power
system, protection of NEPOOL system
-7-
<PAGE>
reliability, and oversight of the New England Power Exchange.9 The NEPOOL Tariff
provides for postage-stamp rates which eliminate pancaking of transmission
charges in New England thereby creating a single power market that encompasses
virtually the entire New England region.
2. Transmission Tariff
As noted above, regional transmission service in New England is provided
over PTF under the NEPOOL Tariff, which is administered by ISO-New England. The
chief services are "RNS" or regional network service provided under the RNS
rates and regional point-to-point service provided under the regional
point-to-point rates. The NEPOOL Tariff is complemented by local transmission
services provided by the individual transmission-owning NEPOOL members,
including BECO, Cambridge, and Commonwealth, under their respective Order No.
888 tariffs. Local service is provided under individual utility "LNS" rates and
local point-to-point rates. These local rates include temporary transition
charges and local facility charges.
ISO-New England also has planning and congestion-management
responsibilities and maintains a market monitoring function to protect against
anti-competitive practices by the owners of the region's generating assets.
ISO-New England is complemented by the restructured NEPOOL whose objective is
also to foster competition within the New England region, promote attainment of
the maximum possible economy of service, and protect system reliability. These
arrangements create a competitive power supply market that brings together power
suppliers and
- --------
9 The Commission's order authorizing the establishment of ISO-New England
and the transfer of operational control of the NEPOOL grid to that entity was
issued on June 25, 1997. New England Power Pool, 79 FERC P. 61,374 (1997); see
also, New England Power Pool, on reh'g, 83 FERC P. 61,045 (1998), reh'g denied,
85 FERC P. 61,141 (1998). See, in addition, New England Power Pool, 85 FERC P.
61,379 (1998) order conditionally accepting and approving market-based rates.
-8-
<PAGE>
electricity consumers in the New England region. The effect of those
arrangements is to create a power supply market that encompasses the entire New
England region, and which eliminates transmission market power through operation
of the ISO.
3. Applicants' Affiliates Have Divested Virtually All of Their
Generation Facilities and are Divesting Their Power Supply
Portfolios
BEC and CES are in the process of converting their regulated subsidiaries
from vertically integrated operations by withdrawing those subsidiaries from the
business of power generation and by concentrating their public utility
activities in the transmission and distribution business. This conversion will
enable the Combined Companies' distribution customers to purchase power directly
from the suppliers of their choice.
Consistent with the withdrawal of their regulated subsidiaries from the
power generation business, BECO, Cambridge, and Commonwealth will be relieved of
their duty to provide generation service to the retail consumers residing in
their distribution service areas. On March 1, 1998, all retail customers became
free to purchase power directly from the power generation market. As further
described in the Testimony of Geoffrey O. Lubbock, appended hereto as Attachment
1 (the "Lubbock Testimony"), BECO, Cambridge and Commonwealth will continue to
provide service only to pre-March 1, 1998 customers who elect not to choose a
supplier, low-income customers unable to obtain service from a competitive
supplier, and retail customers temporarily between suppliers.10
BECO had owned 1,657 MW of fossil and nuclear generating capacity. On May
15, 1998 as part of the restructuring process, BECO sold to Sithe Energies the
entirety of its fossil
- --------
10 Lubbock Testimony, at 8.
-9-
<PAGE>
generation plants, representing about 8% of the regional generating capacity.
The divested plants are described in more detail in Section VII below.11
On November 18, 1998, BECO entered into a purchase and sale agreement with
Entergy Nuclear Generation Company ("Entergy Nuclear"), a subsidiary of Entergy
Corporation, for Entergy Nuclear to purchase BECO's 670 MW Pilgrim nuclear power
plant. The sale was a result of a competitive bid process which included opening
solicitations to approximately 175 potential purchasers. Filings were made with
the Massachusetts DTE on December 3, 1998, and with this Commission on December
24, 1998 (Docket Nos. EC99-18-000, et al.) for approval of this transaction. If
the requisite approvals for this sale are not obtained, it is likely that BECO,
in the near future, would shut down the Pilgrim plant and permanently retire it.
BECO also has several PPAs, chiefly with non-utility generators, under
which in the aggregate BECO purchases 828 MW of capacity.12 BECO's intent is to
sell or buy out of those contracts. When the Pilgrim unit is sold or shut down
and when BECO has divested itself of its PPAs, it will no longer own or have
contracts in any generating assets.
As discussed in the Testimony of Michael R. Kirkwood, appended hereto as
Attachment 2 (the "Kirkwood Testimony"), the CES regulated subsidiaries have
also sold most of their owned- generation plant to Southern Energy Canal, L.L.C.
("Southern Canal") and Southern Energy Kendall, L.L.C. ("Southern Kendall"),
subsidiaries of The Southern Company.13 The parties
- --------
11 See Boston Edison Co., 82 FERC P. 61,311 (1998) for the order approving
the FPA-jurisdictional aspects of the sale to Sithe.
12 Lubbock Testimony at 8 and Tables 4 and 5. This includes BECO's Hydro-
Quebec entitlement.
13 Kirkwood Testimony at 7-8.
-10-
<PAGE>
consummated the transaction on December 30, 1998.14 The divested units are
described in Section VII. These companies' remaining owned generating capacity
consists of Cambridge's 13.5 MW Blackstone facility and Canal's 40.5 MW interest
in the Seabrook nuclear power plant. Cambridge and Canal are engaged in efforts
to sell that generating capacity. In addition, like BECO, the CES regulated
subsidiaries will also seek to sell or buy out of their PPAs. When those
transactions are complete, none of CES' regulated subsidiaries will own or have
rights in any generating capacity.
4. The Proposed Merger Does Not Increase Horizontal Market Power
The Commission has adopted the Department of Justice/Federal Trade
Commission Merger Guidelines ("Guidelines") as the framework for analyzing
impact on competition,15 and it applies an analytic "screen" based on the
Guidelines. See Appendix A of the Merger Policy Statement (P. 31,044 at 30,128,
et seq.). As discussed above, Mr. John J. Reed has performed an Appendix A
analysis to test the impact of the merger on competition. Mr. Reed has
summarized his analysis in Testimony appended hereto as Attachment 3 (the "Reed
Testimony"). The analysis itself appears as Volume II of this filing.16 Based on
that analysis, Mr. Reed concludes that the merger does not pose any market power
concerns.
Following the principals of the Merger Policy Statement, Mr. Reed used four
product
- --------
14 The jurisdictional aspects of these sales were approved by Commission
order issued November 12, 1998. See Cambridge Electric Light Co., 85 FERC P.
61,217 (1998).
15 U.S. Department of Justice and Federal Trade Commission, Horizontal
Merger Guidelines, 57 Fed. Reg. 41,552 (1992).
16 Assessment of the Competitive Implications of the Proposed Merger
between BEC Energy and Commonwealth Energy System (February 8, 1999)("Reed
Report"). Two diskettes constituting the required electronic filings are also
submitted in pockets attached to Volume II.
-11-
<PAGE>
measures - economic capacity, available economic capacity, uncommitted capacity
and total capacity - to test the competitive impacts of the merger. He also
evaluated the effects of the market restructuring in New England, particularly
the adoption of a regional open-access transmission tariff with regional postage
stamp rates, and the creation of ISO-New England to administer that tariff and
to assume other responsibilities for coordinating the New England grid and the
regional power supply markets. He concluded that those initiatives have the
effect of enabling consumers to purchase electricity from suppliers located
throughout New England and had resulted in the establishment of a single
destination market consisting of the entire New England region. His conclusion
in that regard is consistent with determinations made by the Commission.17
Potential suppliers to this regional market consist of producers located in New
England and in the adjacent areas of New York, New Brunswick and Quebec which
have traditionally served as a source of power for New England utilities.
Mr. Reed found that BECO has no uncommitted capacity. Therefore, the merger
cannot increase market power as measured by that benchmark. He also found BECO
has no available economic capacity. Therefore, the merger cannot increase market
power as measured by that benchmark.
Mr. Reed's total capacity analysis, performed for the summer, winter and
shoulder peak periods, also demonstrates that the merger was devoid of
anti-competitive effects. He found that the market was moderately concentrated.
In that moderately concentrated market, the highest HHI increase resulting from
the merger is 28 in the winter period. Those increases are well within
- --------
17 See New England Power Pool, 85 FERC P. 61,379 (1998). In that order, the
Commission cited the following key elements of the NEPOOL restructuring: (i) the
formation of ISO-New England; (ii) the regional open-access tariff; (iii) the
restructured NEPOOL Agreement; (iv) the creation of a power exchange; (v) the
institution of market-based rates for both power and ancillary services; and
(vi) the formation of a regional transmission group.
-12-
<PAGE>
safe harbor levels, and show that the merger cannot possibly have the effect of
reducing competition.
Mr. Reed's economic capacity analysis, performed for seven time periods,
also showed that the merger has no adverse impact on competition. This market is
also moderately concentrated with post-merger HHIs well under the 1,800
demarcation line between heavily concentrated and moderately concentrated
markets. The largest HHI change, 47, occurred in the shoulder off-peak period.
The remaining HHI increases were within the range of 27 to 38. Those results,
which are summarized in the following table, show conclusively that the merger
of BEC and CES does not have the effect of reducing competition.
<TABLE>
<CAPTION>
Post-Merger Pre- to Post-Merger
Product Post-Merger HHI Market Share Change in HHI
- ------- --------------- ------------ -------------
<S> <C> <C> <C>
Summer Peak 1391 7.74% 28
Summer Off-Peak 1358 8.46% 33
Winter Peak 1479 8.03% 30
Winter Off-Peak 1497 9.10% 38
Should Peak 1449 7.71% 27
Should Off-Peak 1522 10.13% 47
Super Peak 1234 7.57% 25
</TABLE>
Even those insignificant increases in market concentration seriously
overstate the competitive effects of this merger due to the steps, described
above, that the merging companies' jurisdictional subsidiaries continue to take
to divest the relatively small remainder of their directly owned generating
plant and their PPAs. As those additional divestitures are completed, the
competitive effects of the merger will progressively reduce to zero or to nearly
zero. Moreover, because the Combined Company cannot exercise control over its
power purchases to withhold that capacity from the market, even in the interim
period following consummation of the merger and prior to the completion of those
planned divestitures, the merger can have virtually no market power impacts.
-13-
<PAGE>
In summary, Mr. Reed's finding is that the merger of BEC and CES has a zero
or de minimis impact on market concentration in the markets he studied.
Eventually, even the de minimis impact will be reduced to virtually zero as the
Combined Company's subsidiaries further implement their divestiture plans.
5. The Merger Does Not Raise Vertical Market Power Issues
In Enron Corp. and Portland General Corp., the Commission noted that the
merger of a company owning pipeline facilities with a company owning electric
generation assets could raise vertical market power issues if the pipeline
assets could be used to restrict gas supplies to a competing electric
generator.18 The Commission found in Enron that the pipeline assets could not be
used to restrict gas because the pipeline assets were operated on an open-access
basis and because there were competing pipelines with excess capacity to the
same markets.
As described in Mr. Reed's Testimony and the Reed Report, the proposed
merger would not increase the BEC and CES regulated subsidiaries' opportunity to
exercise vertical market power by interfering with the competitiveness of either
(i) the existing entities participating in the market; or (ii) any new entities
seeking to enter and compete in the market. The BEC and CES regulated
subsidiaries cannot create barriers to entry for existing or new electric
generation since:
o they do not control access to suitable sites for new generation
development;
o they do not control key inputs for electric generation, i.e., natural
gas supplies or electric generation equipment supplies, which could
impact the competitiveness of the market;
o they do not control the transportation of key inputs for electric
generation which could impact the competitiveness of the market, i.e.,
natural gas pipeline transportation assets; and
- --------
18 Enron Corp. and Portland General Corp., 78 FERC P. 61,179, at 61,736-37
(1997)("Enron").
-14-
<PAGE>
o they supply only a de minimis amount of natural gas to the downstream
electric generation market.
For these reasons, as further described in Attachment 3 and Volume II
hereto, the merger does not raise any vertical market power issues.
6. Conclusion Regarding the Effect of the Merger on Competition
For all the foregoing reasons, the merger is virtually devoid of market
power issues and easily passes the competitive screen adopted in the Merger
Policy Statement. This analysis shows that the merger would not significantly
increase the HHIs or any other index of market power and will only have a de
minimis effect in NEPOOL. There are no other factors which would tend to enhance
market power, either through control of natural gas facilities or otherwise. In
sum, it is simply not possible for the proposed merger to have any negative
effect upon competition, nor are there any reasonably disputable facts that
would warrant setting these issues for hearing. For these reasons, as further
described in Attachment 3 and Volume II hereto, the merger does not raise any
vertical market power status.
B. The Merger Will Not Adversely Affect Rates
In the Merger Policy Statement, the Commission made clear that its concern
with the effect of a proposed merger on rates is to protect ratepayers from rate
increases caused by the merger.19 This concern is focused on the ratepayers of
public utilities whose rates are premised on costs since, as the Commission
ruled in Enron, there are no rate-related concerns with respect to entities,
such as power marketers, which make sales only under market-based rate
schedules.20
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19 Merger Policy Statement, at 30,123.
20 Enron, at 61,738-40.
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The Applicants commit, as a condition for approval of the merger, that
their firm wholesale requirements and transmission customers will be held
harmless from merger-related cost increases. In addition, the nature of the
contracts with the few wholesale customers effectively prevents recovery of
merger-related costs. These facts and the related commitments are further
described in the Lubbock Testimony and the Kirkwood Testimony.
There are six BECO generation requirements customers: the Massachusetts
Port Authority ("MPA"), which principally takes service for Logan Airport; the
Massachusetts Bay Transportation Authority ("MBTA"), and the Towns of Braintree,
Concord, Reading and Wellesley. Cambridge's requirements customer is the
Belmont. The following table contains information regarding those customers.
TABLE A
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Supplier Customer Rate Supply Last 1998 Earliest
Effective Quantity of Termination
Date Capacity Date
(MW)
- ---------------- -------------------- ---------------- -------------- -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
BECO Massachusetts Fixed Full 11/05/95 20.5 2005
Port Authority
BECO MBTA Fixed Full 08/01/98 80.8 01/31/03
BECO Braintree Fixed Partial 10/01/98 5.55/7.70 10/31/04
BECO Reading Fixed Partial 11/01/98 20 10/31/02
BECO Wellesley Fixed Full 08/01/98 32.4 05/31/02
BECO Concord Fixed Full 04/13/93 25.6 05/31/04
Cambridge Belmont21 Fixed/ Partial 04/01/93 18 03/31/03
Cost of
Service
</TABLE>
- --------
21 Rates to Belmont will be fixed assuming the Commission accepts a
settlement, to be described herein. The settlement rates and charges will not be
subject to adjustment due to changes in Cambridge's cost of service.
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As described in the Lubbock Testimony, BECO's rates to Braintree, Concord,
the MBTA, Reading and Wellesley incorporate fixed demand charges and energy
charges. The Braintree, Concord, MBTA and Wellesley contracts are subject to
annual increases, in amounts previously agreed upon which will not be affected
by merger-related costs. The Reading contract is also subject to annual
increases based on charges in the GDPIPD Index, which obviously does not vary in
a manner that would reflect merger costs.22 As a consequence of recent contract
renegotiations, the rates under the Braintree, MBTA, Reading and Wellesley
contracts were reduced by approximately 10%.23
Similar contract negotiations with Concord were unsuccessful. However, the
fixed rate to Concord, and the pre-agreed upon annual increases, do not include
any merger costs. Therefore, BECO will not be able to recover merger costs
during the life of the Concord contract.24
The fixed rate to the MPA was negotiated several years ago and, as a fixed
rate, was not designed to allow recovery of merger-related costs. Therefore, all
of BECO's requirements customers are being served under fixed-rate contracts.
Fixed rates are among the ratepayer protection mechanisms which the Commission
has endorsed, and those contracts will hold all of these customers harmless from
increases due to the merger.
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22 Lubbock Testimony at 13.
23 Id. at 13.
24 Id. at 15-16. In 2002, Concord does convert to cost of service rates.
However, BECO will have to submit a detailed cost of service to support that new
Concord rate. At that time, BECO will have the burden of demonstrating and
quantifying the extent to which its cost data include merger costs in the cost
of service. To the extent that merger costs are included in the cost of service,
BECO will have to prove the existence of merger savings in the amounts needed to
offset those costs.
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As described by Mr. Kirkwood, other than market rate customers, the only
wholesale customer served by a CES subsidiary is Belmont.25 Belmont is served by
Cambridge under a Net Requirements Power Supply Agreement ("NRA") on file with
the Commission. Both the current rates, and the rates under an agreed-upon
settlement with Belmont are described in detail in the Kirkwood Testimony.26 The
NRA's currently effective rates consist of a demand charge and an energy charge.
The demand rate is currently set at a fixed level subject to upward adjustment
if Cambridge under-recovers its cost of service at a 3 percent rate of return.
The energy charge tracks costs. Even if this rate were to remain in place, the
proposed merger would not affect the cost components of this rate. Cambridge is
not being merged with another public utility and the proposed merger will not
change its service territory or affect its operations. As a result, the merger
would not cause a change in its operating costs and the inputs to the formula
will be unaffected as a result of the merger.
More importantly, on January 15, 1999, Cambridge and Belmont filed a Joint
Offer of Settlement with the Commission that would amend the NRA to eliminate
the rates and charges
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25 Kirkwood Testimony at 9 et seq. Canal previously provided its share of
the capacity and energy from Canal Unit 1 and Canal Unit 2 to wholesale
customers. However, in the divestiture proceeding, the Commission approved the
assignment of Canal's Canal Unit 1 power sales agreements to Southern Canal. As
described in the Section 203 application filed in the divestiture proceeding,
Docket Nos. EC98-50-000 et al., the agreements for Canal's interest in Canal
Unit 1 were with the following utility purchasers: Montaup Electric Company, New
England Power Company, BECO, and Cambridge and Commonwealth.
Canal previously sold its share of capacity and energy in Canal Unit 2 to
its affiliates, Cambridge and Commonwealth. In connection with the divestiture,
Cambridge, Commonwealth and Canal mutually agreed to terminate those power sales
agreements. As planned, the parties terminated those agreements upon closing of
the sale to Southern Canal on December 30, 1998.
26 Kirkwood Testimony at 10-11.
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<PAGE>
section and set forth a fixed monthly customer charge and energy charge.27 Mr.
Kirkwood states, the settlement rates would "sever any connection between the
rates and charges and Cambridge's cost of service."28 The customer charge will
remain fixed. The energy charge varies by year, but each yearly charge reflects
a predetermined amount that has already been agreed to by the parties. If the
settlement is accepted by the Commission and its fixed rates go into effect,
then Cambridge would be required to make a separate Section 205 filing with the
Commission before it could modify those rates. As with the BECO contracts, the
fixed rate settlement with Belmont protects that customer against any
merger-related increases. Thus, both under the old rates and under the recent
settlement, Belmont is fully protected from any rate increases due to
merger-related costs.29
The hold-harmless commitment also extends to transmission customers. Both
BECO and the CES subsidiaries commit to exclude any merger costs that exceed
merger savings from transmission rates. Under similar circumstances, FERC has
held that transmission customers will be sufficiently protected from any adverse
effect of the merger upon rates.30
The Applicants have not submitted a joint transmission rate for use of
their PTF as part of this application because they are participants in NEPOOL
and the use of their PTF is governed by the NEPOOL Tariff and by ISO-New
England. Thus, there can be no pancaking of transmission
- --------
27 The companies filed the joint offer of settlement in several dockets,
one concerning compliance issues related to the NRA, Docket No. ER98-1522-000,
and the others regarding the divestiture, Docket Nos. EC98-50-000 et al. See
Kirkwood Testimony at 10-11.
28 Kirkwood Testimony at 11.
29 In the unlikely event that the settlement with Belmont is not approved
and cost- derived rates remain, Cambridge extends the hold harmless commitment
to Belmont. Kirkwood Testimony at 12.
30 MidAmerican Energy Co. and MidAmerican Energy Holdings, 85 FERCP. 61,354
(1998).
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<PAGE>
charges for the use of the Applicants' PTF. The Applicants believe that, in the
vast majority of instances, the Combined Company cannot collect two local
service charges (LNS or point-to- point) for a transaction originating in one of
the Combined Company's non-PTF transmission systems and terminating in another
of those systems and using the local facilities of both transmission systems.
However, the Applicants are conducting an analysis to determine the very limited
circumstances in which it might be possible for the Combined Company to recover
two local service charges for a single transaction. If any such pancaking could
occur, the Applicants commit to making a corrective transmission rate filing
with the Commission under the provisions of Section 205 of the Federal Power
Act.
Thus, given the fixed-rate nature of the wholesale contracts (and of the
pending settlement with Belmont), the Applicants' hold harmless commitments, and
the fact that the public utility subsidiaries are not being combined, there are
no circumstances in which the merger will have an adverse impact upon rates.
C. The Merger Will Not Impair Effective Regulation
The merger also will not affect regulation. The Merger Policy Statement
mandates a waiver of merger applicants' Ohio Power immunity out of a concern
that the merger could result in the loss to the Securities and Exchange
Commission ("SEC") of this Commission's regulatory authority for rate making
purposes over inter-affiliate transactions.31 The merger will not affect this
Commission's regulatory jurisdiction. After the merger, BEC Newco will continue
to be an exempt PUHCA holding company with the result that the merger will not
reduce this Commission's jurisdiction. Nevertheless, in the event that BEC Newco
is unable to maintain its
- --------
31 Merger Policy Statement at 30,124-25. See also Ohio Power Co. v. FERC,
954 F.2d 779, 782-86 (D.C. Cir. 1992), cert. denied, 506 U.S. 981 (1992) ("Ohio
Power")
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<PAGE>
exempt status at any time in the future, BEC and CES will follow the
Commission's policy regarding the treatment of the costs and revenues of
affiliate non-power transactions for Commission ratemaking purposes. This
commitment is intended to eliminate the potential concern of the Commission
regarding pre-emptive SEC jurisdiction under the holding of Ohio Power. Nor will
the merger impair existing state regulation, because the Massachusetts DTE must
approve the retail rates and the rate plan filed with the Massachusetts DTE in
conjunction with the merger.
In sum, both state and federal jurisdiction will remain unchanged and will
not be impaired by the proposed merger.
VI. THE ACCOUNTING TREATMENT WILL BE CONSISTENT WITH COMMISSION PRECEDENT
As described in further detail in Section VII hereof, the accounting for
the merger transaction will be based on the "purchase" method which the
Commission has approved where it is required by Generally Accepted Accounting
Principles ("GAAP").32 Here, GAAP requires the Applicants to account for the
merger using the "purchase" accounting method. This is because, under the
Accounting Principles Board ("APB") Opinion No. 16, Business Combinations, the
purchase method must be used to account for a business combination when at least
one of the criteria required for use of the "pooling of interests" method is not
met. The proposed merger does not meet all of the pooling criteria. In order to
satisfy the criteria, the companies may not have disposed of a substantial
amount of their assets within a five year period prior to announcement of the
transaction. Because both Companies here have disposed of their electricity
- --------
32 See Enron, at 61,740; Entergy Services and Gulf States Utilities Co., 65
FERC P. 61,332, at 62,534 (1993); El Paso Electric Co. and Central and South
West Services Inc., 68 FERC P. 61,181 (1994).
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<PAGE>
generating units, pooling-of-interests accounting cannot be used for this
transaction.33
VII. INFORMATION REQUIRED BY SECTION 33.2 OF FERC'S REGULATIONS
In support of this Application, BEC and CES hereby submit the following
information required by Section 33.2 of the Commission's Regulations.
A. Section 33.2(a)
The exact names and principal business addresses of the Applicants are as
follows:
Commonwealth Energy System
One Main Street
P.O. Box 9150
Cambridge, MA 02142
BEC Energy
800 Boylston Street
Boston, Massachusetts 02199
B. Section 33.2(b)
The names and addresses of the persons authorized to receive notice and
communications on behalf of Commonwealth Energy System with respect to this
application are as follows:
Richard J. Morrison, Esq.
Mary E. Grover, Esq.
Legal Department
Commonwealth Energy System
One Main Street
P.O. Box 9150
Cambridge, Massachusetts 02142
(617) 225-4418
(617) 225-4284 (facsimile)
Michael R. Kirkwood
Commonwealth Electric Company
2421 Cranberry Highway
Wareham, Massachusetts 02571
(508) 291-0950, Ext. 3231
- --------
33 See APB No. 16.47c.
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<PAGE>
(508) 291-6275 (facsimile)
Sam Behrends, IV, Esq.
Catherine P. McCarthy, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
1875 Connecticut Ave., N.W.
Washington, D.C. 20009
(202) 986-8000
(202) 986-8102 (facsimile)
The names and addresses of the persons authorized to receive notice and
communications on behalf of BEC Energy are as follows:
Neven Rabadjija, Esq.
Associate General Counsel
Theodora S. Convisser, Esq.
Clerk of the Corporation &
Assistant General Counsel
Boston Edison Company
800 Boylston Street
Boston, Massachusetts 02199-8003
(617) 424-2223
(617) 424-2733 (facsimile)
Carmen L. Gentile, Esq.
Bruder, Gentile & Marcoux, L.L.P.
1100 New York Avenue, N.W.
Suite 510 East
Washington, D.C. 20005-3934
(202) 783-1350
(202) 737-9117 (facsimile)
The Applicants request that the names of these persons be placed upon the
official service list compiled by the Secretary of the Commission for this
proceeding.
C. Section 33.2(c) and (d)
1. CES And Its Subsidiaries
CES and its subsidiaries are described below. An organizational chart
depicting the principal entities within the CES family of companies is appended
hereto as Attachment 4.
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<PAGE>
a. CES
CES, by virtue of its ownership of Commonwealth, Cambridge and Canal, is an
electric utility holding company under the Public Utility Holding Company Act of
1935 and is exempt from registration under the terms of Section 3(a)(1) of that
Act.34
b. CES's FPA-Jurisdictional Subsidiaries
CES's generation owning subsidiaries, Commonwealth, Cambridge, and Canal,
recently divested most of their generation assets. A brief description of the
respective companies' generation assets sold to Southern Canal and Southern
Kendall is provided below by company. Also set forth below is a brief
description of each company's remaining generation assets, as well as their
transmission and distribution systems.
The sale of generating assets by Commonwealth, Cambridge, and Canal and
their restructuring plans going forward are part of a longstanding intention of
the companies to divest their power supply portfolio. The following are steps
Commonwealth, Cambridge, and Canal have taken as part of that effort:
o In February 1996, they publicly announced their intention to divest of
their power supply through a competitive auction process and exit from
the generation business.
o On February 27, 1998, the Massachusetts DTE approved Cambridge's,
Canal's, and Commonwealth's overall restructuring plan.35
o Cambridge, Canal, and Commonwealth received final bids on May 8, 1998
and Southern Energy New England, LLC was selected as the winner of
their generation assets.
- --------
34 Public Utility Holding Company Act of 1935, as amended, 15
U.S.C.ss.79b(a)(1).
35 Restructuring Order, Commonwealth Electric Company, Cambridge Electric
Light Company and Canal Electric Company, D.P.U./D.T.E. 97-111 (February 27,
1998). The final approval of the divestiture, including final rate issues was
issued by the Massachusetts DTE in D.T.E. 98-78/83-A on December 23, 1998.
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<PAGE>
o FERC approved those portions of the transaction that required Section
203 approval on November 12, 1998.
o The transaction closed on December 30, 1998.
i. The Franchised Public Utility Subsidiaries--
Commonwealth Electric Company, Canal Electric Company,
and Cambridge Electric Light Company
Commonwealth Electric Company
Commonwealth is a franchised electric public utility engaged in the
purchase, transmission, distribution and resale of power and energy in
Massachusetts and is a public utility as defined in Section 201(e) of the
Federal Power Act, 16 U.S.C. ss. 824(e). Commonwealth is a wholly owned
subsidiary of CES.
Commonwealth's electric service territory covers about 1,100 square miles
in 40 communities located in southeastern Massachusetts, including Cape Cod and
Martha's Vineyard. The service territory includes all or part of Plymouth,
Bristol, Barnstable and Duke Counties in the Commonwealth of Massachusetts.
Commonwealth serves some 327,000 electric customers at retail in the
Commonwealth of Massachusetts. Commonwealth also sells electric energy at
wholesale to other electric utilities under rate schedules and tariffs on file
with the Commission but has no wholesale requirements customers. By order dated
February 27, 1997 in Docket No. ER97-1068-000, the Commission granted
Commonwealth market-based rate authority.36
As noted above, the Commission recently approved the jurisdictional aspects
of the sale of
- --------
36 Commonwealth Electric Co. and Cambridge Electric Light Co., 78 FERC P.
61,191 (1997). The Commission conditioned its grant of market-based rate
authority upon Commonwealth revising its market-based power sales tariffs within
15 days of that order. Commonwealth made the appropriate compliance filing in
Docket No. ER97-2098-000 on March 14, 1997.
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<PAGE>
all of Commonwealth's generation assets to Southern Canal by order dated
November 12, 1998.37 The sale included the following generation facilities: (1)
five diesel generating plants at Oak Bluffs and West Tisbury on Martha's
Vineyard, Massachusetts with a total capacity of 13.8 MW; and (2) a 1.4325%
ownership interest in the oil-fired William F. Wyman Unit 4 located in Yarmouth
Maine, operated by Central Maine Power Company. Commonwealth's interest in the
William F. Wyman Unit 4 translated into a 8.9 MW entitlement. As described
above, the transaction with Southern Canal closed on December 30, 1998.
Commonwealth also provides customers with transmission services to others,
including transmission service under its Open Access Transmission Tariff.38
Commonwealth also owns and operates approximately 357.5 circuit miles of
interconnected transmission lines of 115 kV to 345 kV, including 297.6
circuit-miles of 115 kV lines and 59.9 circuit-miles of 345 kV lines.
Transmission facilities include substations with a capacity of approximately
475,000 kilovolt- amperes. All of these transmission facilities are located in
Massachusetts. A map of Commonwealth's transmission facilities is included in
Exhibit I. As explained above, the Commission conditionally approved the
formation of the ISO-New England and authorized, on an interim basis, the
transfer of control of transmission facilities owned by the public utility
members of NEPOOL as part of a comprehensive restructuring of NEPOOL on June 25,
1997.39 On July 1, 1997, ISO-New England was activated. Thus, although
Commonwealth continues to own its
- --------
37 See Cambridge Electric Light Co., 85 FERC P. 61,217 (1998).
38 Subject to a compliance filing to revise the same, the Commission
accepted Commonwealth's open access pro forma transmission compliance tariff in
Docket No. OA96- 167-000 on July 31, 1997. Allegheny Power System, Inc., 80 FERC
P. 61,143 (1997).
39 See New England Power Pool, 79 FERC P. 61,374 (1997). This order found
that the New England ISO proposal met the Commission's eleven principles for
ISOs, and conditioned approval upon the ISO establishing a self-funding
mechanism.
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<PAGE>
transmission facilities, PTF usage is governed by ISO-New England.
Commonwealth's electric distribution system consists of approximately 10,744
circuit miles and substations with a capacity of approximately 1,814 MVA.
Cambridge Electric Light Company
Cambridge is a franchised electric public utility engaged in the purchase,
transmission, distribution and resale of power and energy in Massachusetts and
is a public utility as defined in Section 201(e) of the Federal Power Act, 16
U.S.C. ss. 824(e). Cambridge is a wholly owned subsidiary of CES.
Cambridge's electric service territory covers about 7 square miles. It
provides retail service in the City of Cambridge, Middlesex County,
Massachusetts to some 45,900 electric customers. In addition, Cambridge sells
power for resale through NEPOOL pursuant to FERC- approved market-based rate
authority,40 and Belmont under a FERC-filed NRA.
As mentioned above, the Commission recently approved the sale of most of
Cambridge's generation assets to Southern Kendall by order dated November 12,
1998.41 Prior to the sale to Southern Kendall, Cambridge was primarily a
transmission and distribution utility. However, it did own the 113 MW Kendall
Generating Station and the 13.5 MW Blackstone Station facility both located in
Cambridge, Massachusetts. Cambridge sold the 113 MW Kendall Generating Station
to Southern Kendall as part of the transaction that closed on December 30, 1998.
The
- --------
40 By order dated February 27, 1997 in Docket No. ER97-1068-000, the
Commission granted Cambridge market-based rate authority. Commonwealth Electric
Co. and Cambridge Electric Light Co., 78 FERC P. 61,191 (1997). The Commission
conditioned its grant of market-based rate authority upon Cambridge revising its
market-based power sales tariff within 15 days of that order. Cambridge made the
appropriate compliance filing in Docket No. ER97-2098-000 on March 14, 1997.
41 See Cambridge Electric Light Co., 85 FERCP. 61,217 (1998).
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<PAGE>
Blackstone Station facility is used substantially for the production of steam
for resale to retail customers. Currently, Cambridge is reviewing several
options with regard to the Blackstone Station facility and will seek the
necessary approvals when any transaction is finalized.
Cambridge also provides customers with transmission services, including
transmission service under its Open Access Transmission Tariff42 and individual
contracts. As described above in the discussion on Commonwealth's transmission
facilities, although Cambridge continues to own its transmission facilities, PTF
usage will be governed by the ISO-New England.
Cambridge also owns and operates approximately 7.3 circuit miles of
interconnected transmission lines of 13.8 kV to 115 kV. Transmission facilities
include substations with a capacity of approximately 311,000 kilovolt-amperes.
All of these transmission facilities are located in Massachusetts. A map of
Cambridge's transmission facilities is included in Exhibit I. Cambridge's
electric distribution system consists of approximately 584 circuit miles and
substations with a capacity of approximately 218 MVA.
Canal Electric Company
Canal, a wholly owned subsidiary of CES, is a public utility as defined in
Section 201(e) of the FPA, 16 U.S.C. ss. 824(e) engaged in the purchase and sale
of electricity at wholesale. Canal holds no franchise-like authority and does
not own, operate or control any transmission or distribution. Canal sells
electric energy at wholesale to its affiliates Cambridge and Commonwealth, under
rate schedules and tariffs on file with the Commission but has no retail
customers. With the exception of an ownership interest in the Seabrook 1 nuclear
power facility, Canal recently divested of its generation interests in a sale to
Southern Canal. Specifically, that
- --------
42 Subject to a compliance filing to revise the same, the Commission
accepted Cambridge's open access pro forma transmission compliance tariff in
Docket No. OA96-178-000 on July 31, 1997. Allegheny Power System, Inc., 80 FERC
P. 61,143 (1997).
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<PAGE>
sale included Canal's oil fired 566 MW Canal Unit 1 generating unit and Canal's
50 percent ownership interest in the 565 MW Canal Unit 2. The Commission
approved the jurisdictional aspects of the sale of these assets to Southern
Canal by order dated November 12, 1998.43 The sale to Southern Canal closed on
December 30, 1998.
ii. Power Marketing Subsidiary -- COM/Energy Marketing,
Inc.
CES has a power marketing subsidiary that is a public utility under the
Federal Power Act, CEM. CEM has no physical facilities for the generation,
transmission, or distribution of electric power for sale, nor does it hold
franchises or have service territories for the transmission, distribution or
sale of electric power in the United States. It does not own jurisdictional
facilities other than rate schedules, contracts, and books and records (to the
extent they are used in connection with wholesale power supply transactions).
The Commission has authorized CEM to sell power in interstate commerce at
market- based rates upon finding that the company could not exercise market
power because it does not have market power over generation or transmission, nor
can it erect barriers to entry to relevant markets.44 Further details regarding
the activities of this entity can be found in the quarterly power marketer
filings, and related filings submitted in the following dockets: COM/Energy
Marketing, Inc. (ER98-449-001 et seq.). CES is actively pursuing the sale of
CEM.
iii. Medical Area Total Energy Plant, Inc.
MATEP is a Massachusetts corporation and wholly-owned subsidiary of AES,
which in turn is a wholly-owned subsidiary of CES. MATEP owns and operates a 62
MW steam, chilled
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43 See Cambridge Electric Light Co., 85 FERC P. 61,217 (1998).
44 See COM/Energy Marketing, Inc., 81 FERC P. 61,373 (1997).
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<PAGE>
water and electric generating facility located in the Longwood Medical Center
area of Boston, Massachusetts (the "Facility"). MATEP has no transmission
assets. MATEP, a public utility, has obtained market-based rate authority from
the Commission.45 Pursuant to that authority, MATEP sells the output of the
Facility to MATEP LLC, a Delaware limited liability company which is
wholly-owned by MATEP, and MATEP LLC resells such steam, chilled water and
electricity to several Harvard University-affiliated teaching hospitals under
long-term contract.
Specifically, MATEP LLC is party to several long-term retail contracts (the
"User Contracts") to provide the steam, chilled water and electric requirements
of its customers, which include Harvard Medical School, Harvard School of Public
Health, Harvard Dental School, Harvard Institutes of Medicine, and five
Harvard-affiliated teaching hospitals, all located within close geographical
proximity of the Facility in Boston, Massachusetts. The terms of the User
Contracts extend to September 30, 2021, and require the customers to take and
MATEP LLC to provide the customers' total requirements for steam, chilled water
and electricity from MATEP LLC to the extent of the Facility's capacity to
provide such products.
c. CES's Non-FPA-Jurisdictional Subsidiaries
i. Commonwealth Gas Company
Commonwealth Gas, a wholly owned subsidiary of CES, is a local gas
distribution company operating in Massachusetts. Commonwealth Gas' service area
is approximately 1,067 square miles and it provides local gas distribution
service to approximately 239,000 customers in the Cities of Cambridge and
Somerville in Middlesex County, a small portion of the City of Boston in Suffolk
County and in various other eastern Massachusetts municipalities in Middlesex,
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45 See Advanced Energy Systems, Inc., 83 FERCP. 61,044 (1998).
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<PAGE>
Norfolk and Worcester Counties.
ii. Hopkinton LNG Corp.
Hopkinton LNG Corp. ("Hopkinton"), a wholly-owned subsidiary of CES, owns
and operates an LNG facility at Hopkinton, Massachusetts for the liquefaction,
storage, and vaporization of natural gas for Commonwealth Gas. Hopkinton also
owns and operates an LNG storage facility in Acushnet, Massachusetts for the
storage and vaporization of natural gas for Commonwealth Gas. By order issued
March 3, 1998 in Docket No. CP97-156-001, Hopkinton was issued a blanket
certificate of limited jurisdiction under Section 284.224 of the Commission's
regulations, authorizing Hopkinton to engage in the sale and transportation of
natural gas that is subject to the Commission's jurisdiction under the Natural
Gas Act.
iii. Other Subsidiaries
In addition to the companies identified above, CES also owns all of the
stock of COM/Energy Steam Company (a steam distribution company), COM/Energy
Resources, Inc. (a non-regulated subsidiary), Energy Investment Services, Inc.
(a corporation organized to invest the proceeds of CES' affiliates' asset
generation sales on behalf of utility customers), COM/Energy Technologies, Inc.
(energy metering equipment) and five real estate trusts.46
2. BEC and its Subsidiaries
BEC and its affiliates are described below. An organizational chart
detailing the entities within the BEC corporate family is attached hereto as
Attachment 5.
a. BEC
BEC was created in 1997 for the purpose of implementing a corporate
reorganization plan
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46 The five real estate subsidiaries are: Darvel Realty Trust, COM/Energy
Acushnet Realty, COM/Energy Research Park Realty, COM/Energy Cambridge Realty,
and COM/Energy Freetown Realty.
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<PAGE>
under which BECO, an electric utility, would become a wholly-owned subsidiary of
a holding company. This reorganization was proposed to facilitate the separation
from BECO of unregulated business activities and to insulate utility ratepayers
from the risks of present and future non-utility businesses. In September of
1997, this Commission approved the reorganization as consistent with the public
interest.47 BEC, by virtue of its ownership of BECO, is an electric utility
holding company under the Public Utility Holding Company Act of 1935 and is
exempt from registration under the terms of Section 3(a)(1) of that Act.48
b. BEC's FPA - Jurisdictional Subsidiary - BECO
BECO is an electric public utility engaged in the generation, purchase,
transmission, distribution and sale of electric energy in Massachusetts and is a
public utility as defined in Section 201(e) of the Federal Power Act, 16 U.S.C.
ss. 824(e). BECO's electric service territory covers about 590 square miles
within 30 miles of Boston, encompassing the City of Boston and 39 surrounding
cities and towns. BECO serves some 663,000 electric customers at retail. BECO
also sells electric energy at wholesale to other electric utilities and
municipal electric departments under rate schedules and tariffs on file with the
Commission. On December 23, 1997, the Commission accepted BECO's market-based
rate tariff for filing, authorizing BECO to sell power at wholesale at
market-based rates.49
BECO voluntarily divested its fossil generation business pursuant to a
Settlement Agreement reached with the Massachusetts Attorney General,
Massachusetts Division of Energy Resources and other interested parties and
filed on July 8, 1997 in restructuring proceedings
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47 Boston Edison Co., 80 FERCP. 61,274 (1997).
48 Public Utility Holding Company Act of 1935, as amended, 15
U.S.C.ss.79b(a)(1).
49 Boston Edison Co., 81 FERCP. 61,372 (1997).
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before the Massachusetts DTE in Docket DPU 96-32. The generation already
divested by BECO included 1,987 MW of fossil-fired capacity at six different
sites. BECO accomplished the divestiture according to competitive bidding which
resulted in the selection of Sithe Energy, Inc. ("Sithe") as the winning bidder.
This Commission granted Section 203 approval for the transfer of jurisdictional
transmission facilities related to the generation from BECO to Sithe in Docket
No. EC98-16-000.50 As described above, BECO's only remaining owned-generation is
its 670 MW Pilgrim nuclear power plant. BECO and Entergy Nuclear recently
entered into a purchase and sale agreement with Entergy Nuclear to purchase the
Pilgrim nuclear power plant. If the requisite approvals for this sale are not
obtained, it is likely that BECO, in the near future, would shut down the
Pilgrim plant and permanently retire it.
BECO also owns and operates approximately 524 circuit miles of
interconnected transmission lines of 115-345 kV, including 176 circuit-miles of
230-345 kV lines and 348 circuit-miles of 115kV lines. BECO's transmission
facilities include substations with a capacity of approximately 3,500 MVA. All
of these transmission facilities are located in Massachusetts. A map of BECO's
transmission facilities is included in Exhibit I. BECO's electric distribution
system consists of approximately 22,003 circuit miles and substations with a
capacity of approximately 10,822 MVA.
BECO also provides customers with transmission services to others,
including transmission service under its Open Access Transmission Tariff51 and
individual contracts. As explained above, the Commission conditionally approved
the formation of the ISO-New England
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50 Boston Edison Co. and BEC Energy, 82 FERC P. 61,311 (1998).
51 BECO filed an open access pro forma compliance transmission tariff in
Docket No. OA96-70-000.
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and authorized, on an interim basis, the transfer of control of transmission
facilities owned by the public utility members of NEPOOL as part of a
comprehensive restructuring of NEPOOL on June 25, 1997.52 Thus, although BECO
continues to own its transmission facilities, PTF usage will be governed by
ISO-New England.
c. BEC's Non-FPA-Jurisdictional Subsidiaries
i. Harbor Electric Energy Company
Harbor Electric Energy Company ("Harbor Electric"), a wholly owned
subsidiary of BECO, delivers electric energy from BECO to the Massachusetts
Water Resources Authority, a large retail customer. Although Harbor Electric
owns a small distribution system, that system is used exclusively for
distribution. In addition, Harbor Electric owns no generation and does not
engage in wholesale sales or purchases.
ii. Boston Energy Technology Group, Inc.
BECO also wholly owns an unregulated subsidiary, Boston Energy Technology
Group, Inc. ("BETG"). BETG has several subsidiaries and is engaged in various
businesses, including energy conservation services, the production of water
treatment systems, and communications services. None of these subsidiaries are
FPA-jurisdictional, nor do they provide any gas distribution, sales or
transportation services. For example, through a subsidiary, BETG has entered
into a telecommunications joint venture with RCN Telecom Services, Inc. to
provide telecommunications services. BETG owns no generation or transmission and
does not engage in wholesale sales or purchases of energy.
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52 See New England Power Pool, 79 FERC P. 61,374 (1997) reh'g pending. This
order found that the New England ISO proposal met the Commission's eleven
principles for ISOs, and conditioned approval upon the ISO establishing a
self-funding mechanism.
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D. Section 33.2(e)
This application involves the proposed merger of two holding companies
which own public utility subsidiaries, as well as a change in control over a
power marketer entity that qualifies as a jurisdictional public utility. This
Application does not involve the direct disposition, by sale or lease, of
jurisdictional facilities.
The parties executed their merger agreement on December 5, 1998. The
following is a summary of the key aspects of the transaction. Exhibit H contains
the merger agreement which provides a more detailed description of the
transaction.
1. Structure of the Transaction
Under the terms of the agreement, a new holding company will be created and
both BEC and CES will exchange their shares for a combination of stock in the
new holding company and cash. The parties anticipate that at the close of the
transaction, BEC stockholders will own approximately 68% of the combined company
and CES stockholders will own approximately 32%. Upon proper filing with the
SEC, BEC Newco will be an exempt public utility holding company which will be
the parent of BECO and Commonwealth, Cambridge, Canal, Commonwealth Gas, and the
unregulated affiliates of BEC and CES, including CEM and MATEP.
2. Merger Consideration
BEC stockholders may elect to receive one share of the holding company's
common stock or $44.10 in cash for each BEC share they own. The cash price
represents a 5% premium to BEC's closing stock price on December 4, 1998. CES's
stockholders may elect to receive 1.05 shares of the holding company's common
stock or $44.10 in cash for each CES share they
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own, representing a 17% premium to CES's closing price on December 4, 1998.
Under the merger agreement, BEC stockholders will receive approximately 42.6
million shares in the Combined Company and $200 million in cash and CES
stockholders will receive approximately 20.2 million shares and $100 million in
cash.
3. Tax and Accounting Treatment
The parties intend that the merger of BEC and CES qualify as a non-taxable
transaction under existing law. Under this structure, neither entities'
shareholders will recognize any gain or loss for federal income tax purposes as
a consequence of the merger except to the extent that shareholders receive cash
in lieu of common stock BEC Newco. The merger is expected to be accounted for as
a purchase in accordance with GAAP.
4. Required Approvals and Consents
The merger is subject to approval of stockholders of BEC and of CES. The
Massachusetts DTE must also approve the rate plan and BEC and CES must also
receive authorizations related to the merger from the Nuclear Regulatory
Commission ("NRC") and the SEC. BEC and CES also shall make the Department of
Justice and the Federal Trade Commission ("FTC") pre-merger notification and
report form filings specified by the Hart-Scott- Rodino Antitrust Improvements
Act ("HSR Act"). Under the HSR Act, the parties to a proposed transaction, such
as BEC and CES are required to wait a period of time before closing the
transaction so that the antitrust authorities may review the transaction and
decide whether to seek additional information about it or seek to enjoin it.
E. Section 33.2(f)
Under the terms of the merger agreement, attached hereto as Exhibit H, the
proposed merger between CES and BEC will create a change in control over all the
jurisdictional operating
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facilities of the parties to the transaction. The jurisdictional facilities will
be operated after the consummation of the proposed merger in the same manner as
they are currently operated.
F. Section 33.2(g)
No jurisdictional facilities are being transferred, by direct sale or
disposition, as a result of the proposed merger. Upon consummation of the
proposed merger, BEC Newco will exercise control over BEC's and CES's regulated
subsidiaries. The book costs of the facilities involved in the merger are
contained in the balance sheets attached hereto as Exhibit C. As described
above, here, GAAP requires the Applicants to account for the merger using the
"purchase" accounting method.53 . Pursuant to the Applicants' proposed
implementation of the purchase method of accounting for this transaction, all
assets and liabilities of CES's regulated subsidiaries, as well as the assets
and liabilities of BEC's regulated subsidiary, will continue to be valued, for
both FERC accounting and financial reporting, at their historical cost less
accumulated depreciation. The excess of the consideration for BEC and CES over
their net book value is currently planned to be recorded on the books of BEC
Newco.
Applicants do not intend to "push down" any portion of the acquisition
premium to the books of any jurisdictional entity. Accordingly, the acquisition
premium will not affect the capital
- --------
53 If the requirements of pooling-of-interest accounting were met, then the
balance sheets of BEC and CES would have been combined. Under this approach, for
accounting purposes, there would be no adjustment (i.e., increase or decrease)
to any of the assets or liabilities of the merged entities to account for the
acquisition premium. In a purchase-accounting transaction, such as the BEC/CES
combination, any acquisition premium paid is recorded on the books and amortized
over a certain time period, not to exceed 40 years, in accordance with GAAP. For
regulated companies, such as the CES and BEC regulated subsidiaries, the amount
paid in excess of the net book value on an historical cost basis represents the
acquisition premium, which is amortized over a 40-year period. Generally,
utility companies use a 40-year period because of the long lives of the
underlying assets.
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structure of either BEC's or CES's regulated entities, or any other subsidiary
that provides a regulated service. Moreover, the acquisition premium will not be
included in the establishment of any cost-based regulated wholesale rate. If any
part of the acquisition premium is "pushed" down to the account of a
jurisdictional utility, it will be recorded in the appropriate account, and will
not be recoverable in wholesale rates without further order from the Commission.
This is consistent with Commission precedent.54
Exhibit C to this Application provides balance sheets for BEC's
jurisdictional subsidiary, and for CES' jurisdictional subsidiaries. Exhibit E
provides income statements for the same companies. These exhibits demonstrate
that the proposed transaction will have no effect on the books of Commonwealth,
Cambridge, Canal, or BECO, and no effect on the ability of the Commission to
regulate Commonwealth, Cambridge, Canal, or BECO under cost-based ratemaking.
G. Section 33.2(h)
The proposed merger is not anticipated to have any material effect upon any
existing contract for the purchase, sale, or interchanges of electricity.
H. Section 33.2(i)
Filings with respect to the transaction have been or are being made with
the Massachusetts DTE, the SEC, the Department of Justice, the FTC, and the NRC.
Thus far, filings have been made with the Massachusetts DTE and the SEC. The
filing with the Massachusetts DTE is included in Exhibit G. However, the SEC
filing, a Preliminary Proxy Filing, is confidential. The final version of that
SEC filing, as well as the PUHCA filing that must be made with the SEC, the NRC
filing, and the pre-merger notification and report form filings specified by the
HSR Act that
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54 See Public Service Co. of Colorado, 58 FERCP. 61,322 (1992).
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must be submitted to the Department of Justice and the FTC, will be filed with
the Commission as supplements to this Application.
I. Section 33.2(j)
The facts relied upon to demonstrate that the proposed merger is
consistent with the public interest are contained in the preceding sections of
this application and in the attachments and exhibits hereto and are incorporated
herein by reference.
J. Section 33.2(k)
Canal has no retail franchises or franchise-like authority.
Cambridge has franchise-like authority in the City of Cambridge, in the
Commonwealth of Massachusetts.
Commonwealth has franchise-like authority in the Counties of Bristol,
Barnstable, Dukes, and Plymouth, in the Commonwealth of Massachusetts.
BECO has franchise-like authority in the Cities of Acton, Arlington,
Ashland, Bedford, Bellingham, Boston, Brookline, Burlington, Canton, Carlisle,
Chelsea, Dedham, Dover, Framingham, Holliston, Hopkinton, Lexington, Lincoln,
Maynard, Medfield, Medway, Millis, Milton, Natick, Needham, Newton, Norfolk,
Sharon, Sherborn, Somerville, Stoneham, Sudbury, Walpole, Waltham, Watertown,
Wayland, Weston, Westwood, Winchester, and Woburn, in the Commonwealth of
Massachusetts.
It is the Applicants' position that their affiliates possess perpetual and
exclusive franchises to distribute gas and/or electricity in the municipalities
that they currently so provide such service.
K. Section 33.2(l)
A draft notice for publication in the Federal Register which briefly
summarizes the facts of the proposed merger is attached as Attachment 4 hereto.
As required by the Commission's
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regulations, 18 C.F.R. ss. 33.2(l), an electronic version of the draft notice is
also submitted on a 3 1/2" diskette in WordPerfect 5.2 format.
VIII. CONCLUSION
Applicants respectfully request that the Commission give expedited
consideration and approval to the proposed merger. Expedited treatment is
warranted in this case because no substantive issues are presented which cast
any doubt upon the appropriateness of the merger.
The Commission has committed to swift action in cases, such as this, which
do not present substantive issues.55 The proposed merger of BEC and CES plainly
meets all of the Commission's requirements for expedited regulatory approval.
There is virtually no change in HHIs as a result of the merger. Ratepayers will
be "held harmless" from merger-related costs and will be protected from any
other possible cost-increases resulting from the merger through existing
mechanisms. Existing regulation of the operating subsidiaries of the merging
companies will remain unchanged. In light of the clear absence of any adverse
impact on competition in any market, any regulated cost-based rates, or the
nature of regulation, the merger satisfies the standards of the Merger Policy
Statement. It should therefore be approved as being "consistent
- --------
55 Merger Policy Statement, at 30,127.
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with the public interest."
Respectfully submitted,
- --------------------- ---------------------
Carmen L. Gentile Sam Behrends, IV
Bruder, Gentile & Marcoux, L.L.P Catherine P. McCarthy
1100 New York Avenue, N.W. LeBoeuf, Lamb, Greene &
Suite 510 East MacRae, L.L.P.
Washington, D.C. 20005-3934 1875 Connecticut Avenue, N.W.
(202) 783-1350 Washington, D.C. 20009
(202) 986-8000
Neven Rabadjija Richard J. Morrison
Associate General Counsel Mary E. Grover
Theodora S. Convisser, Esq. Legal Department
Clerk of the Corporation & Commonwealth Energy System
Assistant General Counsel One Main Street
Boston Edison Company P.O. Box 9150
800 Boylston Street Cambridge, MA 02142
Boston, MA 02199-8003 (617) 225-4418
(617) 424-2223
Attorneys for BEC Energy Attorneys for Commonwealth Energy System
Dated: February 8, 1999
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Table of Contents
I. SUMMARY AND REQUEST FOR EXPEDITED APPROVAL.............................1
II. JURISDICTIONAL STATEMENT...............................................4
III. APPLICANTS.............................................................4
IV. DESCRIPTION OF THE MERGER..............................................6
V. MERGER ANALYSIS........................................................7
A. The Transaction Will Not Create or Increase Undue Market
Power In Any Market................................................7
1. Transmission Market Power in New England
Has Been Mitigated By ISO-New England..........................8
2. The Merger Will Not Result in Any Significant Increase
in Concentration or Horizontal Market Power Issues.............9
a. Applicants' Affiliates Have Divested Virtually all
of Their Generation Facilities.............................10
b. The Analytic Screen Demonstrates that the Proposed
Merger Will Not Cause and Undue Increase Horizontal
Market Power or Market Concentration ......................12
3. The Merger Does Not Raise Significant Vertical Market Power
Issues .......................................................15
4. Conclusion Regarding the Effect of the Merger on Competition...17
B. The Merger Will Not Adversely Affect Rates.........................17
1. CES............................................................18
2. BECO...........................................................21
3. Affiliate Transactions and the Cost of Capital ................22
C. The Merger Will Not Impair Effective Regulation....................23
VI. THE ACCOUNTING TREATMENT WILL BE CONSISTENT WITH COMMISSION
PRECEDENT..............................................................25
VII. INFORMATION REQUIRED BY SECTION 33.2 OF FERC'S
REGULATIONS........................................................25
A. Section 33.2(a)....................................................25
B. Section 33.2(b)....................................................26
C. Section 33.2(c) and (d)............................................27
1. CES And Its Subsidiaries.......................................27
a. CES ......................................................27
b. CES's FPA -Jurisdictional Subsidiaries.....................27
i. The Franchised Public Utility Subsidiaries--Commonwealth
Electric Company, Canal Electric Company, and Cambridge
Electric Light Company...............................29
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ii. Power Marketing Subsidiary -- COM/Energy Marketing,
Inc..................................................33
iii. Medical Area Total Energy Plant, Inc.................34
c. CES's Non-FPA-Jurisdictional Subsidiaries.................34
i. Commonwealth Gas Company.............................34
ii. Hopkinton LNG Corp. .................................34
iii. Other Subsidiaries...................................35
2. BEC and its Subsidiaries.......................................35
a. BEC.......................................................35
b. BEC's FPA - Jurisdictional Subsidiary - BECO..............36
c. BEC's Non-FPA-Jurisdictional Subsidiaries.................37
i. Harbor Electric Energy Company ......................37
ii. Boston Energy Technology Group.......................38
D. Section 33.2(e)....................................................38
1. Structure of the Transaction...................................38
2. Merger Consideration...........................................39
3. Tax and Accounting Treatment...................................39
4. Required Approvals and Consents................................39
E. Section 33.2(f)....................................................40
F. Section 33.2(g)....................................................40
G. Section 33.2(h)....................................................42
H. Section 33.2(i)....................................................42
I. Section 33.2(j)....................................................42
J. Section 33.2(k)....................................................43
K. Section 33.2(l)....................................................44
VIII. CONCLUSION.............................................................44
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EXHIBIT D-5
Conformed Copy
NRC Operating License No. DPR-35
Docket No, 50-293
February 3, 1999
U.S. Nuclear Regulatory Commission
One White Flint North
11555 Rockville Pike
Rockville, Maryland 20852
Attn: Document Control Desk
Re: Request for Commission Consent to the Indirect
Transfer of Control of the Operating License
Identified Above./1/
I. INTRODUCTION
Boston Edison Company ("Boston Edison"), hereby requests that the
Commission consent to the indirect transfer of control of Boston Edison's
interest in Operating License No. DPR-35 (the "Pilgrim Operating License")/2/
pursuant to Section 184/3/ of the Atomic Energy Act of 1954, as amended (the
"Act"), and 10 CFR ss.50.80. This request is being filed in
- ----------
1 This Request is being filed concurrently with a related filing in Docket
No. 50-443 that relates to the same transaction.
2 There is currently pending before the Commission in Docket No. 50-293 a
request, dated December 21, 1998, for approval of the Transfer of the
Pilgrim Operating License from Boston Edison to Entergy Nuclear Generation
Company in connection with the sale of Pilgrim Station (the "Pilgrim
Sale"), the consummation of which transaction would render Boston Edison's
request herein moot. However, it is unclear whether the Pilgrim Sale or the
Parent Merger will close first, and therefore Boston Edison requests prompt
processing of its request herein.
3 42 U.S.C. ss.2234.
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<PAGE>
connection with the proposed merger of the parent organization of Boston Edison
with Commonwealth Energy System (the "Parent Merger").
Transaction Background: Boston Edison is a wholly-owned subsidiary of BEC
Energy, a Voluntary Association organized under the laws of Massachusetts
("BEC"), and an exempt public utility holding company under Section 3(a)(1) of
the Public Utility Holding Company Act of 1935, as amended ("PUHCA"). On
December 5, 1998 BEC and Commonwealth Energy System ("CES") entered into an
Agreement and Plan of Merger pursuant to which those entities will merge into a
new surviving Massachusetts corporation (the "New Company"). Upon consummation
of the Parent Merger, the stockholders of BEC and CES will become stockholders
of New Company (with BEC stockholders owning approximately 68% of New Company
and CES stockholders owning approximately 32%) and the assets (including their
respective subsidiaries) and liabilities of BEC and CES will become assets and
liabilities of New Company. Therefore, Boston Edison will become a wholly-owned
subsidiary of New Company. Thus, the Parent Merger will effect an indirect
change of control of Boston Edison's interest in the Pilgrim Operating License.
Pilgrim Background: Pilgrim Nuclear Power Station ("Pilgrim Station") is a
nuclear powered generating facility owned by Boston Edison and is operated by
Boston Edison pursuant to the Pilgrim Operating License. As the original owner
of Pilgrim Station, Boston Edison was found to be technically and financially
qualified to construct, own and operate Pilgrim Station. Granting the request
contained in this submission will not in any way affect Boston Edison's
responsibilities as operator of Pilgrim Station or any technical aspects of the
Pilgrim Operating License.
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Regulatory Approvals. In addition to the consent of the Commission
requested hereby, the proposed Parent Merger will require the regulatory
approvals listed below.
1. Massachusetts Department of Telecommunications and Energy ("MDTE").
Boston Edison will file a rate plan for approval by the MDTE under the
provisions of M.G.L. c. 164, in order to receive the appropriate ratemaking
treatment for certain of the transaction costs associated with the proposed
Parent Merger.
2. Securities and Exchange Commission ("SEC"). A preliminary joint proxy
statement will be filed by BEC and CES for approval of the merger transaction
with the SEC, and a second filing will be made with the SEC seeking an exemption
for the New Company under the provisions of the PUHCA.
3. Federal Energy Regulatory Commission (""FERC"). An application will be
filed pursuant to section 203 of the Federal Power Act for FERC approval of the
Parent Merger.
4. Federal Trade Commission/Department of Justice. A letter regarding the
merger transaction will be filed with the United States Federal Trade Commission
and the United States Department of Justice pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
II. APPLICATION FOR CONSENT TO INDIRECT TRANSFER OF CONTROL.
Pursuant to 10 CFR ss.50.80, Boston Edison hereby requests that the
Commission consent to the indirect transfer of control of Boston Edison's
interest in the Pilgrim Operating License which indirect transfer of control
will result from the implementation of the Parent Merger described above.
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Set forth below is the supporting information required by the Commission's
implementing regulation, 10 CFR ss.50.80, for an application for consent to such
an indirect transfer.
1. 10 CFR ss.50.33 General Information:
(a) Name of Licensee: Boston Edison will continue to be the licensee
under the Pilgrim Operating License.
Address of Licensee: The current business address is 800 Boylston
Street, Boston, MA 02199, until the Commission is otherwise notified in
writing.
Description of Business: Boston Edison is a public utility under
Massachusetts law, doing business in Massachusetts, engaged primarily in
the transmission, distribution and sale of electric power at retail as well
as the generation of electric power at Pilgrim Station, a portion of which
is sold at wholesale under contracts regulated by FERC.
Corporate Charter:
(i) Boston Edison is an electric utility corporation organized
under the laws of the Commonwealth of Massachusetts with its principal
place of business in Massachusetts. Its Articles of Organization and Bylaws
will be provided upon request. They will not be changed in any way as a
result of the Parent Merger.
(ii) The names and addresses of the directors and principal
officers of Boston Edison, all of whom are United States citizens, are as
follows:
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DIRECTORS
---------
Names Business Address
----- ----------------
Gary L. Countryman (1)
Thomas G. Dignan, Jr. (1)
Richard J. Egan (1)
Charles K. Gifford (1)
Nelson S. Gifford (1)
Matina S. Horner (1)
Paul A. LaCamera (1)
Thomas J. May (1)
Sherry H. Penney (1)
Herbert Roth, Jr. (1)
Stephen J. Sweeney (1)
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(1) Boston Edison, 800 Boylston Street, Boston, MA 02199.
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OFFICERS
--------
Title Name Address
----- ---- -------
Chairman of the Board, President
and Chief Executive Officer Thomas J. May (1)
Executive Vice President Ronald A. Ledgett (1)
Senior Vice President Alison Alden (1)
Senior Vice President L. Carl Gustin (1)
Senior Vice President and
General Counsel Douglas S. Horan (1)
Senior Vice President and
Treasurer James J. Judge (1)
Vice President - Information
Technology William N. Dimoulas (1)
Vice President - Strategic
Planning and Business Dev. Philippe A. Frangules (1)
Vice President - Customer Care David A. Samuel (1)
Vice President - Nuclear and
Station Director Theodore A. Sullivan (1)
Vice President, Controller and
Chief Accounting Officer Robert J. Weafer, Jr. (1)
Clerk of the Corporation Theodora S. Convisser (1)
Assistant Treasurer Donald Anastasia (1)
Assistant Clerk of the Corporation Philip J. Lembo (1)
- ----------
(1) Boston Edison, 800 Boylston Street, Boston, MA 02199.
- ----------
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(iii) Foreign Control: Boston Edison is not now owned, controlled
or dominated by an alien, foreign corporation or foreign government. After
the merger, Boston Edison will not be owned, controlled or dominated by an
alien, foreign corporation or foreign government.
(e) Agency Status: Boston Edison is not acting as agent or
representative of any other person.
(f) Financial Information: The information with respect to Boston
Edison required by clause (4) of 10 CFR Section 50.33 appears in Paragraph
2(a) below.
(g) Emergency Response Plan: This section is not applicable to this
request
(h) Construction or Alteration at Facility: This section is not
applicable to this request.
(i) Regulatory Agencies and News Publications: The following
regulatory agencies, in addition to the Commission, have financing, siting,
or ratemaking jurisdiction over Boston Edison:
Massachusetts Department of Telecommunications and Energy
100 Cambridge Street
Boston, MA 02202
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Federal Energy Regulatory Commission
888 First Street, NE
Washington, D.C. 20426
The following publications circulate in the general area of Pilgrim
Station:
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The Boston Globe
P.O. Box 2378
Boston, MA 02107-2378
Patriot Ledger
P.O. Box 9159
Quincy, MA 02169
Old Colony Memorial
P.O. Box 9959
Plymouth, MA 02362
(j) Restricted Data:
This application does not contain any Restricted Data or other defense
information, and it is not expected that any such information will become
involved in the licensed activities. However, in the event such information
does become involved, Boston Edison agrees that it will appropriately
safeguard such information and will not permit any individual to have
access to Restricted Data until the Office of Personnel Management shall
have made an investigation and reported to the Commission on the character,
associations and loyalty of such individual, and the Commission shall have
determined that permitting such person to have access to Restricted Data
will not endanger the common defense and security of the United States.
(k) Decommissioning: The information under this clause appears in
Paragraph II 2(b) below.
2. 10 CFR ss.50.33 Financial Information:
(a) Financial Qualifications for Continued Conduct of Activities:
Clause (f) of 10 CFR ss.50.33 exempts an electric utility from
demonstrating its financial qualifications. Boston Edison currently is, and
after implementation of the Parent
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Merger will continue to be, an "electric utility" as defined in 10 CFR ss.50.2.
Having sold its fossil generating assets, Boston Edison's business now is
primarily that of a transmission and distribution company where rates are
regulated by the MDTE and, until the sale of Pilgrim Station is completed/4/,
also involves operation of Pilgrim Station, the output of which is sold in major
part at retail to Boston Edison customers and in part at wholesale under
cost-of-service contracts approved by FERC. Therefore, Boston Edison submits
that it is exempted from the requirements of clause (f) of 10 CFR ss.50.33.
Without waiving that exemption and to assist the Commission's evaluation of
this Joint Request, Boston Edison voluntarily submits the following information
relating to its qualifications to continue funding its operational activities
authorized by the Pilgrim Operating License:
Chapter 164 of the Acts of 1997 (the "Massachusetts Restructuring Act")
established the framework to restructure the electric utility industry in
Massachusetts. In anticipation of the Massachusetts Restructuring Act and
consistent with the Order, dated December 31, 1996, of the Massachusetts
Department of Public Utilities (now the MDTE) in Docket No. 96-23, Boston Edison
entered into a Settlement Agreement, dated July 8, 1997, with the Attorney
General of Massachusetts and other interested parties (a copy of which is
attached as Exhibit A hereto) that was designed to allow full recovery of Boston
Edison's share (74.26867%)5 of the sunk costs and the decommissioning costs
relating to Pilgrim Station and of the operational
- ----------
4 See footnote 2, supra.
5 The balance of these costs (25.73133%) are recovered under wholesale Power
Contracts with other investor-owned or municipal utilities that have been
filed with, and are regulated by, FERC.
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activities at Pilgrim Station based upon a performance based rate./6/
The Settlement Agreement was approved by the MDTE by Order, dated January 28,
1998, a copy of which is attached as Exhibit B.
(b) Decommissioning Funding: Clause (k) of 10 CFR ss.50.33 requires an
application for an operating license for a utilization facility to contain
information indicating how reasonable assurance will be provided that funds will
be available to decommission the facility.
On July 26, 1989, Boston Edison submitted the "Pilgrim Nuclear Power
Station Decommissioning Funding Report" that demonstrated how such reasonable
assurance would be provided by Boston Edison, which report has been updated as
required by NRC regulations. Boston Edison has made all required payments into
its Decommissioning Trust. In addition, Section 1G of the Massachusetts
Restructuring Act and the Settlement Agreement both provide that decommissioning
costs will be recovered under a non-avoidable wires charge to be collected from
ratepayers.
3. 10 CFR ss.50.34 Information:
Clause (b)(7) of 10 CFR ss.50.34 requires information describing the
technical qualifications of the applicant to engage in the proposed activity.
Boston Edison's technical qualifications were approved in Docket No. 50-293. The
Parent Merger does not involve any modification of Boston Edison's
responsibilities. The Parent Merger will not affect Boston Edison's technical
qualifications. Therefore, clause (b)(7) of 10 CFRss.50.34 is not applicable.
- ----------
6 See Section 2.7 of Attachment 3 to the Settlement Agreement (Exhibit A
hereto).
- ----------
-9-
<PAGE>
4. 10 CFR ss.50.33a Information:
Boston Edison has disposed of substantially all of its generation capacity
as a result of the Massachusetts Restructuring Act, except for its interest in
Pilgrim station/7/. Furthermore, the indirect change of control involved herein
does not represent a transfer to a new owner but only a corporate restructuring.
Finally, because the Pilgrim Operating License is issued under Section 104b of
the Act, it is not subject to antitrust review as provided in Section 105 of the
Act. Therefore, no Section 105 antitrust review is required.
III. CONCLUSION.
Based upon the foregoing, Boston Edison, hereby respectfully requests that
the Commission consent to the indirect transfers of control described in Section
II hereof.
As stated above, the proposed merger will require several different
regulatory approvals, the timing of which is difficult to predict. In order to
facilitate completion of the merger, the undersigned respectfully requests that
the Commission act on this Request as promptly as possible and that the
Commission provide that its Consent remain effective until at least December 31,
1999.
Respectfully submitted,
BOSTON EDISON COMPANY
By s/ Douglas S. Horan
-------------------
Douglas S. Horan
Senior Vice President and General Counsel.
- ----------
7 See footnote 2 supra.
- ----------
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<PAGE>
Commonwealth of Massachusetts )
County of Suffolk ) February 3, 1999
Then personally appeared before me, Douglas S. Horan, who being duly sworn,
did state that he is Senior Vice President and General Counsel of Boston Edison
Company and that he is duly authorized to execute and file the submittal
contained herein in the name and on behalf of Boston Edison Company and that the
statements herein attributable to Boston Edison Company are based on facts and
circumstances which are true and correct to the best of his knowledge and
belief.
s/ William S. Stowe
--------------------
Notary Public
(Seal)
My commission expires: _____________
William S. Stowe, Notary Public
Commission Expires May 7, 2004
-11-
EXHIBIT D-7
Conformed Copy
UNITED STATES OF AMERICA
NUCLEAR REGULATION COMMISSION
In the Matter of )
North Atlantic Energy Service Corporation ) Docket No. 50-443
and Canal Electric Company ) (License No. NPF-86)
)
February 2, 1999
Re: Request for Commission Consent to the Indirect
Transfer of Control of Interest in the Operating
License Identified Above./1/
I. INTRODUCTION
Canal Electric Company ("Canal"), for itself as a Joint Owner/2/ and a
licensee of Seabrook Station, hereby requests that the Commission consent to the
indirect transfer of control of Canal's interest in Operating License No. NPF-86
(the "Seabrook Operating License") pursuant to Section 184/3/ of the Atomic
Energy Act of 1954, as amended (the "Act"), and 10 CFR ss.50.80. This request is
being filed in connection with the proposed
- ----------
1 This Request is being filed concurrently with a filing in Docket No. 50-293
that relates to the same transaction.
2 North Atlantic Energy Service Corporation ("North Atlantic") is the
licensed operator of Seabrook Unit No. 1 and is also authorized to act as
agent for the eleven owners of the facility: North Atlantic Energy
Corporation, Canal Electric Company, The Connecticut Light and Power
Company, Great Bay Power Corporation, Hudson Light & Power Department,
Massachusetts Municipal Wholesale Electric Company, Montaup Electric
Company, New England Power Company, New Hampshire Electric Cooperative,
Inc., Taunton Municipal Light Plant and The United Illuminating Company
(collectively referred to herein as the "Seabrook Joint Owners" or with
North Atlantic the "Seabrook Licensees").
3 42 U.S.C. ss.2234.
- ----------
<PAGE>
merger of Canal's parent organization, Commonwealth Energy System ("CES"), with
BEC Energy (the "Parent Merger").
Transaction Background: Canal is a wholly-owned subsidiary of Commonwealth
Energy System, a Massachusetts Business Trust organized under the laws of
Massachusetts ("CES"), and an exempt public utility holding company under
Section 3(a)(1) of PUHCA. On December 5, 1998 CES and BEC Energy, a Voluntary
Association organized under the laws of Massachusetts ("BEC")/4/, entered into
an Agreement and Plan of Merger pursuant to which those entities will merge into
a new surviving Massachusetts corporation (the "New Company"). Upon consummation
of the Parent Merger, the stockholders of CES and BEC will become stockholders
of New Company (with BEC stockholders owning approximately 68% of New Company
and CES stockholders owning approximately 32%) and the assets (including their
respective subsidiaries) and liabilities of BEC and CES will become assets and
liabilities of New Company. Therefore, Canal will become a wholly-owned
subsidiary of New Company. Thus, the Parent Merger will effect an indirect
change of control of Canal's interest in the Seabrook Operating License.
Seabrook Background:. Seabrook Station Unit No. 1 ("Seabrook Station") is a
nuclear powered electric generating facility which is owned by the eleven
Seabrook Joint Owners pursuant to an Agreement for Joint Ownership, Construction
and Operation of New Hampshire Nuclear Units, dated May 1, 1973, as amended (the
"Joint Ownership Agreement"), and is operated by North Atlantic pursuant to the
Seabrook Operating License. In accordance with the Joint Ownership Agreement and
the Managing Agent Operating
- ----------
4 BEC is the parent of Boston Edison Company, the licensed owner and operator
of Pilgrim Nuclear Power Station, NRC Docket No. 50-293.
- ----------
-2-
<PAGE>
Agreement, dated as of June 29, 1992, as amended (the "MAOA")/5/, North Atlantic
is the Managing Agent for the eleven Seabrook Joint Owners and as such has
responsibility for the management, operation and maintenance of Seabrook
Station. North Atlantic's position as Managing Agent and operator was approved
by issuance of Amendment No. 10, dated May 29, 1992, to the Seabrook Operating
License. Granting the request contained in this submission will not in any way
affect North Atlantic's position as Managing Agent and operator of Seabrook
Station or its responsibilities under the MAOA or any technical aspects of the
Seabrook Operating License. Canal is the successor in title to the interest in
Seabrook Station originally acquired by one of its affiliates and currently owns
a 3.52317% interest in Seabrook Station. Since Canal is an electric utility, it
was found by the Commission to be financially qualified without a financial
review being required,/6/ and Canal continues to be listed as one of the
Seabrook Licensees identified in the Seabrook Operating License.
Regulatory Approvals. In addition to the consent of the Commission
requested hereby, the proposed Parent Merger will require the regulatory
approvals listed below.
1. Massachusetts Department of Telecommunications and Energy ("MDTE").
Certain affiliates of Canal that provide retail electric public utility service
under Massachusetts law/7/ will file a rate plan for each affected utility
company for approval by the MDTE under the
- ----------
5 A copy of the MAOA has been previously filed with the Commission in this
docket as part of the Application to Amend the Facility Operating License
to Authorize North Atlantic Energy Service Corporation to Act as Managing
Agent for Seabrook Station, dated November 13, 1990.
6 See Amendment No. 5 to Construction Permit No. CPPR-135, dated June 23,
1982, in the above docket.
7 The affiliates of Canal that provide retail public utility service in
Massachusetts are Cambridge Electric Light Company, Commonwealth Electric
Company and Commonwealth Gas Company.
- ----------
-3-
<PAGE>
provisions of M.G.L. c. 164, in order to receive the appropriate ratemaking
treatment for certain of the transaction costs associated with the proposed
Parent Merger.
2. Securities and Exchange Commission ("SEC"). A preliminary joint proxy
statement will be filed by CES and BEC for approval of the merger transaction
with the SEC, and a second filing will be made with the SEC seeking an exemption
for the New Company under the provisions of the PUHCA.
3. Federal Energy Regulatory Commission (""FERC"). An application will be
filed pursuant to section 203 of the Federal Power Act for FERC approval of the
Parent Merger.
4. Federal Trade Commission/Department of Justice. A letter regarding the
merger transaction will be filed with the United States Federal Trade Commission
and the United States Department of Justice pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
II. APPLICATION FOR CONSENT TO INDIRECT TRANSFER OF CONTROL.
Pursuant to 10 CFR ss.50.80, Canal hereby requests that the Commission
consent to the indirect transfer of control of Canal's interest in the Seabrook
Operating License, which indirect transfer of control will result from the
implementation of the Parent Merger described above.
Set forth below is the supporting information required by the Commission's
implementing regulation, 10 CFR ss.50.80, for an application for consent to such
an indirect transfer.
1. 10 CFR ss.50.33 General Information:
(a) Name of Licensee: Canal Electric Company will continue to be a Licensee
under the Seabrook Operating License.
-4-
<PAGE>
(b) Address of Licensee: The current business address is One Main Street,
Cambridge, MA 02142, until the Commission is otherwise notified in writing.
(c) Description of Business: Canal is an electric utility corporation
organized and operating under the laws of the Commonwealth of Massachusetts and
is a wholly-owned subsidiary of CES. In addition, CES has three wholly-owned
electric or gas distribution companies, Cambridge Electric Light Company,
Commonwealth Electric Company (together, the "Distribution Affiliates") and
Commonwealth Gas Company, (collectively with the Distribution Affiliates, the
"Retail Subsidiaries", and with Canal, the "CES System"), with service
territories in eastern Massachusetts. Canal has traditionally functioned as the
generating company within the CES System, engaging in the purchase of electric
power at wholesale and the generation of electric power which it has resold at
wholesale to the Distribution Affiliates under contracts containing rates based
upon cost-of-service approved by the Federal Energy Regulation Commission
("FERC"). The Distribution Affiliates and Canal hold valid franchises, permits
and other rights which are necessary to allow these companies to conduct an
electric utility business within the territories they serve.
(d) Corporate Charter:
(i) Canal is a corporation organized under the laws of the
Commonwealth of Massachusetts with its principal place of business in
Massachusetts. Its Articles of Organization and Bylaws will be provided upon
request. They will not be changed in any way as a result of the Parent Merger.
-5-
<PAGE>
(ii) The names and addresses of the directors and principal officers
of Canal, all of whom are United States citizens, are as follows:
DIRECTORS
---------
Name Business Address
---- ----------------
D.A. McLaughlin (1)
J.D. Rappoli (1)
M.P. Sullivan (1)
J. R. Williams (1)
R.D. Wright (1)
- ----------
(1) P.O. Box 9150, Cambridge, MA 02142-9150
- ----------
OFFICERS
--------
Title Name Address
----- ---- -------
Chairman of the Board and
Chief Executive Officer R.D. Wright (1)
President and Chief Operating
Officer D.A. McLaughlin (1)
Financial Vice President and
Treasurer J.D. Rappoli (1)
Vice President, Clerk and
General Counsel M.P. Sullivan (1)
Vice President-Customer Service C.W. Kiely (1)
Vice President-Energy Supply
and Engineering Services J.J. Keane (1)
Vice President-Operations K.F. Roberts (1)
Assistant Vice President -
Administration T.M.X. Fontes (1)
Assistant Clerk R.J. Morrison (1)
Assistant Clerk M.J. Doherty (1)
- ----------
(1) P.O. Box 9150, Cambridge, MA 02142-9150
- ----------
-6-
<PAGE>
(iii) Foreign Control: Canal is not now owned, controlled or dominated
by an alien, foreign corporation or foreign government. After the merger, Canal
will become a direct subsidiary of the New Company which is not owned,
controlled or dominated by an alien, foreign corporation or foreign government.
(e) Agency Status: Canal is not acting as agent or representative of any
other person.
(f) Financial Information: The information under clause (4) of 10 CFR
Section 50.33 appears in Paragraph II.2(a) below.
(g) Emergency Response Plan: This section is not applicable to this
Request.
(h) Construction or Alteration at Facility: This section is not applicable
to this Request.
(i) Regulatory Agencies and News Publications:
The following regulatory agencies, in addition to the Commission, have
financing, siting, or ratemaking jurisdiction over Canal:
Massachusetts Department of Telecommunications and Energy
100 Cambridge Street
Boston, MA 02202
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Federal Energy Regulatory Commission
888 First Street, NE
Washington, D.C. 20426
-7-
<PAGE>
The following publications circulate in the general area of Seabrook
Station:
The Boston Globe
P.O. Box 2378
Boston, MA 02107
The Union Leader
P.O. Box 9555
Manchester, NH 03108
(j) Restricted Data:
This request does not contain any Restricted Data or other defense
information, and it is not expected that any such information will become
involved in the licensed activities. However, in the event such information does
become involved, North Atlantic, as the representative of Canal, will
appropriately safeguard such information and will not permit any individual to
have access to Restricted Data until the Office of Personnel Management shall
have made an investigation and reported to the Commission on the character,
associations and loyalty of such individual, and the Commission shall have
determined that permitting such person to have access to Restricted Data will
not endanger the common defense and security of the United States.
(k) Decommissioning: The information under this clause appears in Paragraph
II 2(b) below.
2. 10 CFR ss.50.33 Financial Information:
(a) Financial Qualifications for Continued Conduct of Activities:
Clause (f) of 10 CFR ss.50.33 exempts an electric utility from
demonstrating its financial qualifications. Canal currently is, and after
implementation of the Parent Merger will continue to be, an "electric utility"
as defined in 10 CFR ss.50.2. Chapter 164 of the Acts of
-8-
<PAGE>
1997 (the "Massachusetts Restructuring Act") established the framework to
restructure the electric utility industry in Massachusetts. Having sold its
fossil generating assets in compliance with the Massachusetts Restructuring Act,
Canal's current business now involves the purchase of power at wholesale and the
generation of power at Seabrook Station and sale at wholesale of such electric
energy to the Distribution Affiliates under cost-of-service rates approved by
FERC. After implementation of the Parent Merger, Canal's contracts with the
Distribution Affiliates will continue to be regulated by FERC. Therefore, Canal
submits that it is exempted from the requirements of Clause (f) of 10 CFR
ss.50.33.
Without waiving that exemption and to assist the Commission's evaluation of
this Joint Request, Canal voluntarily submits the following information relating
to its qualifications to continue funding its operational activities authorized
by the Seabrook Operating License.
Canal specifically calls the Commission's attention to the fact that Canal
recovers the full amount of costs billed to Canal associated with Seabrook
Station operating costs from the Distribution Affiliates pursuant to the terms
of a cost-of-service Power Contract between Canal and those Companies, dated
September 1, 1986, as amended, that is regulated by FERC. That Contract provides
that, in consideration of the payment of those costs and Canal's share of other
Seabrook Station charges, the Distribution Affiliates collectively purchase 100%
of Canal's share of the capacity and energy generated at Seabrook Station. That
Contract has been filed with the FERC. The Distribution Affiliates in turn
recover those costs from their respective retail customers under rates subject
to the jurisdiction of the MDTE.
(b) Decommissioning Funding: Clause (k) of 10 CFR ss.50.33 requires an
application for an operating license for a utilization facility to contain
information indicating how reasonable assurance will be provided that funds will
be available to decommission the facility.
-9-
<PAGE>
The Seabrook Licensees previously filed on December 27, 1989, as updated on
July 23, 1990, a Report demonstrating how such reasonable assurance would be
provided by the Seabrook Licensees, including Canal, collectively. Canal has
made all required payments into the Seabrook Decommissioning Trust Fund. After
the Parent Merger is implemented, Canal will continue to make its ongoing
payments to the Seabrook Decommissioning Trust Fund and will continue to collect
it's share of the Seabrook Station decommissioning and other post shutdown costs
from the Distribution Affiliates pursuant to the terms of the aforesaid Power
Contract between Canal and those Companies dated September 1, 1986, as amended.
The Distribution Affiliates in turn are assured of recovering 100% of the
Seabrook decommissioning costs included in the payments due to Canal under that
Contract from their respective retail customers under rates subject to the
jurisdiction of the MDTE and approved in connection with the CES Electric
Restructuring Plan (a copy of which is attached as Exhibit A hereto), which was
approved by the MDTE on February 27, 1998 in Docket No. DPU/DTE 97-111 (a copy
of which is attached as Exhibit B hereto).
3. 10 CFR ss.50.34 Information:
Clause (b)(7) of 10 CFR ss.50.34 requires information describing the
technical qualifications of the applicant to engage in the proposed activity.
Pursuant to the MAOA, North Atlantic is the Managing Agent for the Seabrook
Joint Owners and, as such, has responsibility for the management, operation and
maintenance of Seabrook Station. North Atlantic's technical qualifications were
approved in connection with Amendment No. 10 to the Seabrook Operating License
in Docket No. 50-443. The Parent Merger will not affect the
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<PAGE>
technical qualifications of North Atlantic nor involve any modification of North
Atlantic's other responsibilities. Therefore, clause (b)(7) of 10 CFRss.50.34 is
not applicable.
4. 10 CFR ss.50.33a Information:
CES has disposed of substantially all of its generation capacity as a
result of the Massachusetts Restructuring Act, except for the nuclear interest
that is the subject of this Request and other minor interests./8/ Furthermore,
the indirect change of control involved herein does not represent a transfer to
a new owner but only a corporate restructuring. Finally, Canal's interest in
Seabrook Station amounts to only approximately 40MW and therefore constitutes a
de minimis interest. Therefore, no Section 105 antitrust review is required.
III. CONCLUSION.
Based upon the foregoing, Canal Electric Company hereby respectfully
request that the Commission consent to the indirect transfers of control
described in Section II hereof.
As stated above, the proposed merger will require several different
regulatory approvals, the timing of which is difficult to predict. In order to
facilitate completion of the merger, the undersigned respectfully request that
the Commission act on this Request as promptly as possible and that the
Commission provide that its Consent remain effective until at least December 31,
1999.
CANAL ELECTRIC COMPANY
By s/ R. D. Wright
---------------
Chairman of the Board
and Chief Executive Officer
- ----------
8 The CES System still retains two generation facilities: the Blackstone
Station in Cambridge, MA, and the MATEP plant in Boston, MA.
- ----------
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<PAGE>
Commonwealth of Massachusetts )
County of Middlesex ) February 2, 1999
Then personally appeared before me, Russell D. Wright, who being duly
sworn, did state that he is Chairman of the Board and Chief Executive Officer of
Canal Electric Company and that he is duly authorized to execute and file the
submittal contained herein in the name and on behalf of Canal Electric and that
the statements herein attributable to Canal Electric Company are based on facts
and circumstances which are true and accurate to the best of his knowledge and
belief.
s/ Richard J. Morrison
----------------------
Notary Public
My commission expires: September 23, 1999
------------------
-12-
EXHIBIT I-1
Securities and Exchange Commission
(Release No. 35- )
Filing under the Public Utility Holding Company Act of 1935
_____________________, 1999
NSTAR (70- )
NSTAR (the "Company"), 800 Boylston Street, Boston, Massachusetts
02199, a Massachusetts business trust not currently subject to the Act, has
filed an application-declaration on Form U-1 under Sections 9(a)(2), 10 and
3(a)(1) of the Act.
Pursuant to the terms of the Amended and Restated Agreement and Plan of
Merger dated as of December 5 and amended and restated as of May 4, 1999 (the
"Merger Agreement") among the Company, BEC Energy, a Massachusetts business
trust ("BEC Energy"), Commonwealth Energy System, a Massachusetts business trust
("COM/Energy"), BEC Acquisition LLC, a Massachusetts limited liability company
("BEC Energy Merger Sub"), and CES Acquisition LLC, a Massachusetts limited
liability company ("COM/Energy Merger Sub"), the Company proposes to acquire all
of the outstanding common shares of BEC Energy, a Massachusetts public-utility
holding company exempt from registration under section 3(a)(1) of the Act
pursuant to an order of the Commission, and COM/Energy, a Massachusetts
public-utility holding company exempt from registration under section 3(a)(2) of
the Act.
BEC Energy currently has two electric utility subsidiaries, Boston
Edison Company ("Boston Edison") and Harbor Electric Energy Company ("Harbor
Electric"), both of which are organized and operate as public utilities
exclusively in the Commonwealth of Massachusetts. COM/Energy currently has four
electric utility subsidiaries, Cambridge Electric Light Company ("Cambridge
Electric"), Commonwealth Electric Company ("Commonwealth Electric"), Canal
Electric Company ("Canal Electric"), and Medical Area Total Energy Plant, Inc.
("MATEP"), and one gas utility subsidiary, Commonwealth Gas Company
("Commonwealth Gas"), all of which are organized and operate as public utilities
exclusively in the Commonwealth of Massachusetts. BEC Energy Merger Sub and
COM/Energy Merger Sub are both wholly-owned subsidiaries of the Company.
The transaction would be effected through the mergers (the "Mergers")
of BEC Energy Merger Sub with and into BEC Energy (the "BEC Energy Merger") and
of COM/Energy Merger Sub with and into COM/Energy (the "COM/Energy Merger"). As
a result of the Mergers, the Company would be a public-utility holding company
as defined in section 2(a)(7) of the Act with seven public utility subsidiaries
(Boston Edison, Harbor Electric, Cambridge Electric, Commonwealth Electric,
Canal Electric, MATEP, and Commonwealth Gas). The Company has also requested an
order of exemption under section 3(a)(1) from all provisions of the Act other
than section 9(a)(2).
<PAGE>
- 2 -
BEC Energy was organized in 1998 as a public utility holding company.
BEC Energy owns all of the outstanding common stock of Boston Edison, which is
engaged in the generation, purchase, transmission, distribution and sale of
electric energy in Massachusetts. Boston Edison's electric service territory
covers about 590 square miles within 30 miles of Boston, encompassing the City
of Boston and 39 surrounding cities and towns. BEC Energy also owns all of the
outstanding common stock of Harbor Electric, which is engaged in the delivery of
electric energy from Boston Edison to the Massachusetts Water Resources
Authority (the "MWRA"), a large retail customer. Although Harbor Electric owns a
small distribution system, that system is used exclusively for distribution to
the MWRA. In addition, Harbor Electric owns no generation and does not engage in
wholesale sales or purchases. For the year ended December 31, 1998, BEC Energy's
operating revenues on a consolidated basis were approximately $1.623 billion,
all of which was derived from Boston Edison's and Harbor Electric's electric
operations. Consolidated assets of BEC Energy and its subsidiaries at December
31, 1998 were approximately $3.214 billion, of which approximately $2.27 billion
consists of identifiable utility property, plant and equipment. As of December
31, 1998, there were 47,184,073 common shares of BEC Energy outstanding.
COM/Energy was formed in 1926 as a public utility holding company.
COM/Energy owns all of the outstanding stock of Commonwealth Electric, Cambridge
Electric, Canal Electric, and Commonwealth Gas and, through a wholly-owned
subsidiary, owns all of the outstanding stock of MATEP. Commonwealth Electric is
engaged in the purchase, transmission, distribution and resale of power and
energy in Massachusetts. Commonwealth Electric's electric service territory
covers about 1,100 square miles in 40 communities located in southeastern
Massachusetts, including Cape Cod and Martha's Vineyard. Cambridge Electric is
engaged in the purchase, transmission, distribution and resale of power and
energy in Massachusetts. Cambridge Electric's electric service territory covers
about 7 square miles in Cambridge, Massachusetts. Canal Electric is engaged in
the purchase and sale of electricity at wholesale. Canal Electric holds no
franchise-like authority and does not own, operate or control any transmission
or distribution. Canal Electric sells electric energy at wholesale to its
affiliates Cambridge Electric and Commonwealth Electric, but has no retail
customers.. MATEP owns and operates a 62 MW steam, chilled water and electric
generating facility located in the Longwood Medical area of Boston,
Massachusetts. MATEP sells the output of this facility to a wholly-owned
subsidiary, which resells such steam, chilled water and electricity to several
Harvard University-affiliated teaching hospitals, which are adjacent to the
facility within the city of Boston, under long-term contract. Commonwealth Gas
is a local gas distribution company operating in Massachusetts. Commonwealth
Gas' service area is approximately 1,067 square miles and it provides local gas
distribution service to approximately 239,000 customers in the Cities of
Cambridge and Somerville in Middlesex County, a small portion of the City of
Boston in Suffolk County and in various other eastern and southeastern
Massachusetts municipalities in Bristol, Middlesex, Norfolk, Plymouth and
Worcester Counties. For the year ended December 31, 1998, COM/Energy's operating
revenues on a consolidated basis were approximately $980 million, of which
approximately $627 million was derived from Commonwealth Electric's, Cambridge
Electric's, Canal Electric's and MATEP'S electric operations, and approximately
$289 million was derived from Commonwealth Gas' gas operations. Consolidated
assets of COM/Energy and its subsidiaries at December 31, 1998 were
approximately $1.763 billion, of which approximately
<PAGE>
- 3 -
$673 million consists of identifiable electric utility property, plant and
equipment, and $271 million consists of identifiable gas utility property, plant
and equipment. As of December 31, 1998, there were 21,540,550 common shares of
COM/Energy outstanding.
The Company was formed under the laws of Massachusetts for purposes of
facilitating the Mergers. At present, all of the common shares of the Company
are held by BEC Energy and COM/Energy.
Upon consummation of the Mergers: (1) each issued and outstanding
common share of BEC Energy (other than shares held by BEC Energy, COM/Energy,
the Company or their subsidiaries, which shall be canceled) that was issued and
outstanding immediately prior to such merger shall be converted into the right
to receive either $44.10 in cash or one common share of the Company; (2) each
issued and outstanding common share of COM/Energy (other than shares held by BEC
Energy, COM/Energy, the Company or their subsidiaries, which shall be canceled)
that was issued and outstanding immediately prior to such merger shall be
converted into the right to receive either $44.10 in cash or 1.05 common shares
of the Company; (3) each 1% membership interest in BEC Energy Merger Sub
outstanding immediately prior to such merger shall be converted into one hundred
common shares of BEC Energy; (4) each 1% membership interest in COM/Energy
Merger Sub outstanding immediately prior to such merger shall be converted into
one hundred common shares of COM/Energy; and (5) each common share of the
Company held by BEC Energy or by COM/Energy shall be canceled.
As a result of the Mergers, each BEC Energy common share and each
COM/Energy common share (other than shares held by BEC Energy, COM/Energy, the
Company or their subsidiaries and affiliates, which will be canceled) will
effectively be converted into the right to receive cash or common shares of the
Company. Subject to certain restrictions on the amounts of cash and share
consideration to be issued, described below, BEC Energy and COM/Energy
shareholders will be able to elect the type of consideration they will receive
from the Company in the Mergers. The total cash consideration to be paid in
connection with the Mergers will be $300 million, with $200 million to be paid
to shareholders of BEC Energy pursuant to the BEC Energy Merger, and $100
million to be paid to shareholders of COM/Energy pursuant to the COM/Energy
Merger. Because the amount of cash consideration is fixed, it is possible that
some shareholders electing to receive cash in the BEC Energy Merger or the
COM/Energy Merger, as the case may be, may receive shares of the Company in lieu
of some or all of the cash that they elected to receive and, conversely,
shareholders electing to receive shares of the Company may receive cash in lieu
of some or all of the shares of the Company that they elected to receive. In the
event that shareholders of COM/Energy or of BEC Energy make cash elections
exceeding the cash consideration initially allocated to such shareholders (i.e.,
$200 million, in the case of shareholders of BEC Energy, and $100 million in the
case of shareholders of COM/Energy), and the shareholders of the other company
make cash elections for less than all of the cash consideration initially
allocated to such shareholders, some or all of the cash initially allocated to
the shareholder group that under-elected cash consideration may be allocated to
the over-electing shareholder group.
<PAGE>
- 4 -
The Company states that the Mergers are expected to be tax-free to BEC
Energy and COM/Energy shareholders, to the extent that they receive common
shares of the Company. It is expected that, following the consummation of the
Mergers, the shareholders of BEC Energy and COM/Energy would own securities
representing approximately 62% and 38%, respectively, of the outstanding voting
power of the Company.
The Mergers are subject to customary closing conditions, including the
receipt of the requisite approvals of the shareholders of BEC Energy and
COM/Energy. The BEC Energy shareholders meeting with respect to the Mergers is
expected to be held on June 25, 1999, and the COM/Energy shareholders meeting
with respect to the Mergers is expected to be held on June 24, 1999.
Consummation of the Mergers is also subject to receipt of certain rulings and
opinions relating to federal income tax issues and the expiration of the review
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The
Mergers require the approval of the Federal Energy Regulatory Commission (the
"FERC") and the Nuclear Regulatory Commission. The Mergers do not require the
approval of the Massachusetts Department of Telecommunication and Energy (the
"MDTE"), which regulates electric and gas utilities in Massachusetts; as a
condition to the Mergers, however, the utility subsidiaries of BEC Energy and
COM/Energy must file and must obtain the approval of rate plans from the MDTE.
Assuming that the MDTE approves the rate plans, following the consummation of
the Mergers the utility operations of the Company's utility subsidiaries will
remain subject to regulation by the MDTE.
The Company states that following the Mergers, it will be entitled to
an exemption from all provisions of the Act except section 9(a)(2) because it
and each of its public utility subsidiaries from which it derives a material
part of its income will be predominantly intrastate in character and will carry
on their utility businesses substantially within the Commonwealth of
Massachusetts.
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PRO-FORMA
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