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File No. 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
NEW ENGLAND ELECTRIC SYSTEM
NEW ENGLAND POWER COMPANY
MASSACHUSETTS ELECTRIC COMPANY
25 Research Drive
Westborough, Massachusetts 01582
(Name of company filing this statement and
address of principal executive office)
NEW ENGLAND ELECTRIC SYSTEM
(Name of top registered holding company parent of applicant)
Michael E. Jesanis Robert King Wulff
Treasurer Corporation Counsel
25 Research Drive 25 Research Drive
Westborough, Massachusetts 01582 Westborough, Massachusetts 01582
(Names and addresses of agents for service)
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Item 1. Description of Proposed Transaction
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New England Electric System (the Company), is a Massachusetts voluntary
association created by an Agreement and Declaration of Trust dated January 2,
1926, as amended, and is registered as a holding company under the Public
Utility Holding Company Act of 1935 (the Act).
New England Power Company (NEP), organized a Massachusetts corporation,
is a subsidiary of the Company qualified to do business in all the New England
states. NEP's business is principally that of generating, purchasing,
transmitting, and selling electric energy in wholesale quantities.
Massachusetts Electric Company (MEC) is a subsidiary of the Company and
a retail electric utility incorporated and doing business solely in
Massachusetts.
Nantucket Electric Company (NEC) is a non-affiliated Massachusetts
corporation engaged in the electric utility business. NEC serves
approximately 8,600 customers on the Island of Nantucket, Massachusetts. NEC
is not currently connected to the mainland in order to receive electric power.
A. Proposed Acquisition of NEC
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The Company and NEC have agreed, subject to various approvals including
approval from this Commission, that the Company will acquire NEC for the
Company's common shares based on a purchase price of $125 per share or $3.5
million plus an interest rate equivalent on this amount from March 22, 1995 to
the closing. This merger is proposed to be accomplished through an exchange
of NEES common shares for the 28,000 shares of outstanding common stock of
NEC. The NEC common stock is $25 par value voting stock and comprises one
class (Exhibit A-12 hereto sets forth the names of all security holders of
record owning one-percent or more of this stock). To facilitate this
transaction, NEES proposes to form NEWCO, a wholly-owned subsidiary which will
be merged into NEC. The terms and conditions agreed upon by and among the
Company and NEC, (to be joined later by NEWCO) are set forth in the agreement
included as Exhibit B-1 hereto (the Agreement)
On May 26, 1995, the Attorney General, NEC and the Company filed an
Offer of Settlement (Settlement) for approval with the Massachusetts
Department of Public Utilities (DPU) that incorporates approval of the
Agreement, other approvals required of the DPU to effectuate the merger and a
rate plan for the period following the merger (See Exhibit D-1 hereto). The
DPU is expected to rule on this Settlement by October 10, 1995. On August 18,
1995, the Company filed with the Federal Energy Regulatory Commission (FERC)
seeking either a declaratory order disclaiming jurisdiction over the merger or
in the event FERC asserts jurisdiction, authorization of the merger under
Section 203 of the Federal Power Act.
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1. Description of Business of NEC and the Company
As previously mentioned, NEC is an electric utility whose principal
business is the generation, distribution, and sale of electricity. NEC has
thirteen directors and four officers. NEC sells electricity to approximately
8,600 customers on the Island of Nantucket which is located in the Atlantic
Ocean approximately 30 miles off the coast of Cape Cod. The size of NEC's
customer base has been growing in recent years, with 400 additional
residential customers added in 1994. Currently, all of NEC's electricity is
generated by diesel generators located on the Island. NEC is a small electric
company under relevant tests, as evidenced by revenues, assets, number of
customers, number of employees, and net income (See NEC Balance Sheets and
Statements of Income for 1990-1994, Financial Exhibit (b) 3 hereto). Its
small size and limited resources cause it to experience difficulty in coping
with its increasing customer base and the many problems facing electric
companies today.
NEC's net income for the twelve months ended December 31, 1994, was
$398,000 on revenues of $12,351,000, which is insufficient to meet any
significant increase in its operation and maintenance expenditures, or any
other unusual expense such as clean-up of oil and hazardous materials on NEC
properties.
NEC has a total of approximately 40 employees to perform all the tasks
required to operate and maintain its electric system. These tasks include
operating and maintaining the generation facilities and distribution network,
meter reading, billing and accounting, complying with regulatory requirements,
financing additions and improvements to name just a few.
This limited staff is called upon to maintain and improve a diesel
generation system which has had increasing problems over the years, and a
distribution system which was built in the early 1900's and which may require
substantial maintenance and improvements in the near future. Furthermore, the
Massachusetts Department of Environmental Protection has notified NEC that it
would have responsibility to investigate and remediate the presence of oil and
hazardous substances on one of its properties. This investigation is ongoing.
These factors would burden the limited staff of NEC and would likely require
increased hiring of expensive outside contractors and consultants. (See NEC
1994 Annual Report, Financial Exhibit (b) 3 hereto, and Proxy Statement,
Exhibit A-13 hereto)
All electric companies, including NEC, face ongoing and increasing
regulatory costs as they comply with ever-changing regulatory requirements.
NEC is subject to the jurisdiction of the DPU. Because of the limited size of
NEC's current staff, NEC has to rely extensively on outside experts to assist
in these regulatory matters.
As previously mentioned, the Company is a voluntary association. As a
holding company, the Company owns voting stock in a number of companies, which
together constitute the Company's System. The Company's electric utility
operations are composed mainly of four operating companies: NEP, MEC, The
Narragansett Electric Company, and Granite State Electric Company. These
operating companies are provided certain services by New England Power Service
Company (NEPSCO), a subsidiary of the Company operating pursuant to Section 13
of the Act.
NEP's business is principally generating, purchasing, transmitting, and
selling electric energy in wholesale quantities. In 1994, 94% of NEP's
revenue from the sale of electricity was derived from sales for resale to
affiliated companies and 6% from sales for resale to municipal and other
utilities.
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MEC is engaged principally in the distribution and sale of electricity
at retail in Massachusetts. MEC provides approximately 940,000 customers with
electric service at retail in a service area comprising approximately 43% of
the area of The Commonwealth of Massachusetts. The population of the service
area is about 2,160,000 or 36% of the total population of the Commonwealth.
MEC's territory consists of 146 cities and towns including rural, suburban,
and urban communities with Worcester, Lowell, and Quincy being the largest
cities served. The acquisition of NEC would result in an increase of less
than one percent of customers served by the Company's subsidiaries in
Massachusetts. MEC is an all requirements wholesale electric customer of NEP.
NEPSCO is the subsidiary of the Company which provides certain support
services to its affiliates at the actual cost thereof.
2. Acquisition of NEC
The terms and mechanism for acquiring NEC are set forth in the Agreement
and described in the prospectus included in the Registration Statement of NEES
under the Securities Act of 1933 (Exhibit C hereto). In brief, they include
the following:
1. Formation of NEWCO with the Company acquiring one common share of
NEWCO for $10,000;
2. NEWCO will merge with and into NEC, with the surviving corporation
(Surviving Corporation) having all the rights, interests, and
obligations of NEC;
3. Shares of NEWCO will be converted into shares of new common stock
of the Surviving Corporation, with the Surviving Corporation being
a wholly owned subsidiary of the Company;
4. NEC stockholders will be receiving the Company's shares equivalent
to $125 per NEC common share outstanding plus interest at a rate
equivalent to the Bank of Boston prime rate on this amount from
March 22, 1995 to the closing. The Company will deposit the
requisite amount of shares with a disbursing agent, and this agent
will distribute the Company's shares to each NEC stockholder after
the surrender by each NEC stockholder of the certificates
representing his or her shares;
5. The Company will not issue any fractional shares. In lieu
thereof, each holder of shares of NEC common stock who would
otherwise be entitled to a fractional common share of NEES shall
upon surrender of such holder's certificate, receive a cash
payment in lieu of the unit of the Company's common shares of to
which such holder would otherwise be entitled.
The merger will become effective at the time of filing of the Articles
of Merger with the Secretary of State of the Commonwealth of Massachusetts.
The closing will be held only upon the satisfaction (or waiver, where
permissible) of certain conditions contained in the Agreement and provided
that the Agreement has not been terminated.
3. Common Shares Issued by Company
As stated, the NEC certificate holders will receive the Company's shares
equivalent to $125 per NEC common share outstanding, plus an interest
equivalent amount. The Company has registered with the Commission 160,000 of
its common shares for this purpose. (See Exhibit C hereto). At a current
price of $34 per share, the Company would have to issue approximately 103,000
shares, not taking into account interest.
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The Company's common shares are listed on the New York and Boston Stock
Exchanges. From January 1, 1995 through May 20, 1995, the Company's shares on
the New York Stock Exchange -- Composite Transactions ranged from a high of
$39 to a low of $28 7/8. The NEC stock has no active market. There are
currently about 100 stockholders of NEC.
4. Benefits to NEC of Becoming a Part of the Company's System
In view of the current circumstances of NEC and its electric system as
described above, the Company believes that, in the event the merger is
consummated, significant steps will be required to assure continued reliable
electric service to NEC's customers over the long term. As previously
indicated, because of its limited resources, NEC is in a disadvantaged
position to take these necessary steps, and as a result, faces the prospect of
deterioration in its system and its ability to serve its customers.
The Company's system, serving well over one million customers in three
states, has financial, operating, management, and other resources more than
adequate to provide for NEC's needs both immediate and over the longer term.
Among the ways in which these resources will be made available (at cost
through NEPSCO) are the following:
Full and complete responsibility for management at NEC and its
system will be taken over by management of the Company's system;
Responsibility for operation and maintenance of the NEC system,
including storm restoration, necessary improvements, and
replacement of equipment, will be taken over by the Company's
system;
Provision for adequate financing of NEC's needs, operational,
regulatory, and other, will be provided by the Company's system;
Updating of meter reading, billing, accounting, and similar
activities, including computer support and other technological
improvements will be provided by the Company's system;
Personnel with the necessary skills in operations, maintenance,
financing, accounting, rates, legal, and other matters will be
available through the Company's system; and
Conservation and load management services will be made available
through the Company's system.
Furthermore, as a condition to the merger, rates to NEC customers will
decrease in the short-term, and be stabilized in the long-term pursuant to a
rate plan to be approved by the DPU.
In short, it is the objective of the Company to make NEC a productive
addition to the Company's system, capable of providing reliable electric
service over the long term on an economical basis. The positive effect on
NEC's electric bills will be immediate. Furthermore, by being part of the
Company's system with access to services from NEPSCO, and other affiliates,
NEC would be able to provide more dependable electric service to its
customers. Today, because of NEC's limitations, NEC finds it difficult to
provide this kind of reliable service at reasonable cost. The benefits to NEC
and its ratepayers from the proposed merger are significant as evidenced by
NEC's decision to sign and jointly sponsor with the Massachusetts Attorney
General and the Company the Offer of Settlement (See Exhibit D-1) to the
Massachusetts Department of Public Utilities.
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5. Proposed Cable Project and Financing
As a result of a bidding process and approval from the DPU, NEC entered
into a longer term power contract with NEP to supply electricity to NEC over a
46kV undersea cable to be embedded under Nantucket Sound for a length of about
26 miles with associated facilities at either end (the Cable Facilities).
This interconnection is required for NEP to supply electricity to NEC. NEC
has agreed to fully support these facilities through the formation of a
special purpose company to be owned by the Company (up to 100%) and NEC (up
to 20%). However, if the merger is approved and NEC is acquired by the
Company, the Cable Facilities will be built, owned, and operated by the
Surviving Corporation and NEP will be reimbursed for its costs to that date.
The Surviving Corporation will become an all requirements wholesale electric
customer of NEP pursuant to an affiliate tariff as approved by FERC and the
power contract referred to above will be terminated.
The Surviving Corporation will finance the Cable Facilities through a
combination of debt and equity funds. A Company subsidiary has already
received an allocation of up to $28 million of tax-exempt private activity
bond volume cap from Massachusetts for this purpose, and specific financing
approvals from the DPU have been requested. In connection with the rate plan,
MEC has agreed to enter into a Credit and Operating Support Agreement (see
Exhibit B-2) with Surviving Corporation in order to provide additional
revenues to Surviving Corporation to cover its cost of service, including a
return on common equity. This Support Agreement will provide assurance to the
Surviving Corporation and its lenders that Surviving Corporation will be able
to maintain sufficient coverages and will likely be assigned as collateral as
part of permanent debt financing by Surviving Corporation. In addition, MEC
may be required to provide guarantees (see Exhibit B-3) to said lenders. As a
result of the merger, Surviving Corporation may assume some or all of the
existing indebtedness of NEC.
Neither NEC nor the Company nor any subsidiary of the Company has
ownership interest in an exempt wholesale generator ("EWG") or foreign utility
company ("FUCO") as defined in Sections 32 and 33 of the Act. Additionally,
neither the Company nor any subsidiary is a party to, or has any rights under,
a service, sales, or construction agreement with an EWG or FUCO. Although
neither the Company nor any subsidiary has any current intention to secure an
ownership interest in an EWG or FUCO, the Company and NEP wish to retain the
flexibility to invest up to a total of $100 million in one or more EWG's or
FUCO's subject to such further Commission rules and regulations and approvals
as may then be required.
6. Effects on the Company's System
It is not anticipated that the acquisition of NEC by the Company will
have any material effect on the consolidated earnings per share of the
Company. As shown in the financial statements, the proposed acquisition of
NEC will have a de minimus impact on the Company's system. The acquisition of
NEC makes sense to the Company at this time because NEP will be the wholesale
supplier of electricity to NEC for the foreseeable future. By acquiring NEC,
the Company will also avoid the additional costs associated with capitalizing
and maintaining a special purpose company to build, own, and construct the
Cable Facilities as mentioned in Paragraph 5 above.
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B. Proposed Acquisition of NEC Generation by NEP
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After the Cable Facilities are energized and Surviving Corporation
becomes an all requirements wholesale customer of NEP, NEP proposes to
purchase certain of the Surviving Corporation's diesel generators or assume
existing leases for these facilities. NEP would purchase these facilities to
provide back-up generation to the extent that sufficient electricity is
unavailable from the mainland. The current book value of generation
facilities of NEC is $315,000. NEP has sought DPU approval of this
acquisition. NEP believes that during the year in which this acquisition
occurs it will meet the $5,000,000 test to qualify for an exemption under Rule
41; however, if it does not so qualify it will file for the required approval
at that time.
C. Money Pool and Short-term Borrowing
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The Surviving Corporation seeks short-term borrowing authority through
October 31, 1997 and the authority to borrow and lend money in the Company's
Money Pool (approved by the Commission in its File No. 70-7765). The
Surviving Corporation seeks $5,000,000 of borrowing authority. As mentioned
above, Surviving Corporation may assume some or all of the existing
indebtedness of NEC. This amount of borrowing authority will enable Surviving
Corporation to pay off this indebtedness if desired or necessary and to meet
general business requirements and unforeseen needs.
The proceeds from the proposed borrowings are to be used (i) to pay then
outstanding notes initially issued to banks and/or borrowings from the Money
Pool, (ii) to provide new money for capitalizable expenditures and/or to
reimburse the treasury therefor, and (iii) for other corporate purposes
relating to ordinary business operations, including working capital and the
financing of construction and property acquisitions.
1. Borrowings from the Money Pool
The Surviving Corporation proposes to reduce its need for outside
borrowing authority through the use of the Money Pool. Under the Money Pool,
surplus funds that may be available from day to day in the treasures of the
Company and its participating subsidiaries (File No. 70-8261) are used to make
loans to borrowing companies within the Company's system in need of short-term
funds. The rate will be 1.08 times the monthly average of the rate for high
grade 30-day commercial paper sold through dealers by major corporations as
published in the "Wall Street Journal". Although there are no stated
maturities, the loans made by the Money Pool are payable on demand, and may be
prepaid by the borrower without penalty. Borrowings may, but need not be,
evidenced by notes. Borrowings will be available first to the wholly owned
subsidiaries of the Company (the Group I Borrowers). Thereafter, if the Money
Pool still has additional funds, those will be available to the non-utility
owned subsidiaries of the Company (the Group II Borrowers) before external
investments are made. All funds borrowed by the Group II Borrowers will be
used for their own internal financing and will not be loaned to stockholders.
Each member determines each day, on the basis of cash flow projections, the
amount of surplus funds it has available for contribution to the Money Pool.
The surplus funds are transferred to an account of NEPSCO, which administers
and maintains as agent the Money Pool for the Member Companies. The proposed
amended terms of the Money Pool, reflecting the addition of the Surviving
Corporation are shown in Exhibit G-1.
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2. Borrowings from Banks
The proposed borrowings from banks will be evidenced by notes maturing
in less than one year from the date of issuance. The Surviving Corporation
will negotiate with the banks the interest costs of such borrowings. The
Surviving Corporation will pay fees to the banks in lieu of compensating
balance arrangements. The effective interest cost of borrowings from a bank
will not exceed the greater of the bank's base or prime lending rate, or the
rate published in the "Wall Street Journal", as the high federal funds rate,
plus, in either case, one percent. Based on the current base lending rate of
8.75% and an equivalent or lower high federal funds rate, the effective
interest costs of such a borrowing today would not exceed 9.75% per annum.
Certain of such borrowings may be without prepayment privileges.
Payment of any short-term promissory notes prior to maturity will be made on
the basis most favorable to the Surviving Corporation, taking into account
fixed maturities, interest rates, and any other relevant financial
considerations.
3. Filing of Certificates of Notification
Within 45 days after the end of each calendar quarter, the Surviving
Corporation will file a Certificate of Notification covering the transactions
effected pursuant to the authority requested herein during such quarter. Such
certificate will show the dates and amounts of all new money borrowings, the
names of the lenders, the maximum concurrent amount of notes outstanding to
the banks, the Money Pool, the aggregate total outstanding at any one time,
and the aggregate total outstanding at the end of such quarter. Each
certificate will include a statement of whether any of the funds borrowed were
paid by a subsidiary company to the Company through dividends for the purpose
of the Company acquiring an interest in an exempt wholesale generator or
foreign utility company. The amount of such dividend payment must be given.
The final certificate of notification will be accompanied by the required past
tense opinion of counsel. If the same lines were maintained over the two-year
requested authority, the total of those fees would be approximately $10,000.
Item 2. Fees, Commissions and Expenses
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The estimated fees and expenses in connection with the proposed
transactions are set forth in Exhibit G hereto. Included in this estimate is
an amount for certain services being performed, at the actual cost thereof, by
New England Power Service Company (NEPSCO), an affiliated service company
operating pursuant to Section 13 of the Act and the Commissions rules
thereunder. The services of NEPSCO will consist principally of services
performed by the Executive and Administrative Department, the Corporate
Department (including attorneys and financial analysts), the Treasury
Department (including accountants), and the Office Service Departments. The
fee for filing under the Act of $2,000 has been paid by wire transfer.
Item 3. Applicable Statutory Provisions
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The proposed issue of the Additional Common Shares is subject to Section
6 (a) and 7 of the Act. Sections 9(a) and 10 are applicable to the
acquisition by the Company of shares of capital stock of NEC and NEWCO.
The proposed Money Pool and Short-term Borrowing authorization is
subject to the following provisions:
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(1) The issuance of notes by the Surviving Corporation to banks:
Sections 6(a) and 7 of the Act.
(2) Borrowings from the Money Pool: Sections 6(a), 7, 9(a), 10, 12 of
the Act and Rules 43 and 45.
(3) Loans to the Money Pool: Section 9(a), 10, and 12 of the Act; and
exempted from Rule 45(a) by subparagraph (b) (1) thereof.
(4) Investments by the Money Pool: Section 9(a), 10 and 12 of the
Act.
(5) The payment of indebtedness is exempted from Sections 9(a) and 12
and Rule 42(a) by subparagraph (b) (2) of the Rule.
The proposed Credit and Operating Support Agreement and guarantees by
MEC are subject to Section 12(b) of the Act of Rule 45.
Item 4. Regulatory Approval
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The DPU has jurisdiction over the proposed merger and certain matters in
connection therewith. FERC possibly has jurisdiction over the proposed
transaction. No other state regulatory Commission and no other Federal
commission (other than the Securities and Exchange Commission) has
jurisdiction over the proposed transactions.
Item 5. Procedure
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It is requested that the Commission take action with respect to this
Application/Declaration without a hearing being held and that an order be
issued allowing this Application/Declaration to become effective on or before
November 15, 1995 or as soon as practicable thereafter.
The Company (i) does not request a recommended decision by an
administrative law judge, (ii) does not request a recommended decision by any
other responsible officer of the Commission, (iii) hereby specifies that the
Division of Investment Management may assist in the preparation of the
Commission's decision, and (iv) hereby requests that there be no 30-day
waiting period between the date of issuance of the Commission's order and the
date on which it is to become effective.
Item 6. Exhibits and Financial Statements
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(a) Exhibits
A-1 Specimen copy of Common Share certificate of NEES
Incorporated herein by reference to Exhibit 4.1 to
Registration Statement on Form S-4, File No. 33-59775.
A-2 Declaration of Trust of NEES, dated as of January 2, 1926, as
amended
Incorporated herein by reference to Exhibit 3 to NEES's Annual
Report on Form 10-K for the year ended December 31, 1994 (File
No. 1-3446)
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A-3 Articles of Organization of NEC
A-4 By-laws of NEC
*A-5 Specimen copy of Common Stock certificate of NEC
*A-6 Articles of Organization of NEWCO
*A-7 By-laws of NEWCO
*A-8 Specimen copy of Common Stock certificate of NEWCO
*A-9 Articles of Organization of Surviving Corporation
*A-10 By-laws of Surviving Corporation
*A-11 Specimen copy of Common Stock certificate of Surviving
Corporation
A-12 List of NEC stockholders owning 1% or more of common stock
A-13 NEC's Proxy Statement for 1995 Annual Meeting of Stockholders
B-1 Merger Agreement with Exhibits and List of Schedules
Incorporated herein by reference to Exhibit 2.1 to
Registration Statement on Form S-4, File No. 33-59775.
B-2 Draft Credit and Operating Support Agreement
*B-3 Draft form of MEC Guarantee
C Registration Statement (S-4), including all financial
statements and exhibits thereto, with reference to additional
Common Shares of NEES
Incorporated herein by reference to File No. 33-59775
D-1 Offer of Settlement filed with the Massachusetts Department of
Public Utilities
*D-1(a) Certified copy of order of Massachusetts Department of Public
Utilities
*D-2 Filing with the Federal Energy Regulatory Commission (FERC)
*D-2(a) Certified copy of FERC approval
*F Opinion of Counsel
*G Statement of Estimated Fees and Expenses
*G-1 Proposed Amended Terms of the NEES Money Pool
H Form of Notice
*To be supplied by amendment
<PAGE>
(b) Financial Statements
1. Balance Sheets of NEES and of NEES and Subsidiaries
Consolidated and of MEC as of June 30, 1995.
Incorporated herein by reference to File No. 0-5464.
The proposed transactions will have no material effect on the
Balance Sheets of NEES and of NEES and Subsidiaries Consolidated
and of MEC; pro forma statements, therefore, are omitted.
2. Statements of income and Retained Earnings of NEES and
of NEES and Subsidiaries Consolidated and of MEC for
the twelve months ended June 30, 1995 on an actual
basis.
Incorporated herein by reference to File No. 1-3446.
Pro forma statements are omitted because of the lack of material
effect on the statements.
3. Balance Sheets and Statements of Income and Retained
Earnings of NEC as included in the Annual Reports for
the years 1990 through 1994.
Since the date of the Balance Sheets provided in 1 above, there have
been no material changes which were not in the ordinary course of
business.
Item 7. Information as to Environmental Effects
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The proposed transaction does not involve a major Federal action
significantly affecting the quality of the human environment.
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SIGNATURE
---------
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned companies have duly caused this statement to be
signed on its behalf by the undersigned officer thereunto duly authorized.
NEW ENGLAND ELECTRIC SYSTEM
MASSACHUSETTS ELECTRIC COMPANY
s/Michael E. Jesanis
By: ________________________
Michael E. Jesanis
Treasurer of each company
NEW ENGLAND POWER COMPANY
s/John G. Cochrane
By: ________________________
John G. Cochrane
Assistant Treasurer
Date: August 21, 1995
The name "New England Electric System" means the trustee or trustees for
the time being (as trustee or trustees but not personally) under an
agreement and declaration of trust dated January 2, 1926, as amended,
which is hereby referred to, and a copy of which as amended has been filed
with the Secretary of The Commonwealth of Massachusetts. Any agreement,
obligation or liability made, entered into or incurred by or on behalf of
New England Electric System binds only its trust estate, and no
shareholder, director, trustee, officer or agent thereof assumes or shall
be held to any liability therefor.
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
A-1 Specimen copy of Common Share Incorporated
certificate of NEES by reference
A-2 Declaration of Trust of NEES, dated Incorporated
as of January 2, 1926, as amended by reference
A-3 Articles of Organization of NEC Filed under
cover of Form SE
A-4 By-laws of NEC Filed under
cover of Form SE
A-5 Specimen copy of Common Stock To be filed by
certificate of NEC amendment
A-6 Articles of Organization of NEWCO To be filed by
amendment
A-7 By-laws of NEWCO To be filed by
amendment
A-8 Specimen copy of Common Stock To be filed by
certificate of NEWCO amendment
A-9 Articles of Organization of Surviving To be filed by
Corporation amendment
A-10 By-laws of Surviving Corporation To be filed by
amendment
A-11 Specimen copy of Common Stock To be filed by
certificate of Surviving Corporation amendment
A-12 List of NEC security holders of record Filed herewith
owning 1% or more of common stock
A-13 NEC's Proxy Statement for 1995 Annual Filed under
Meeting of Stockholders cover of Form SE
B-1 Merger Agreement with Exhibits and Incorporated
List of Schedules by reference
B-2 Draft Credit and Operating Support Filed herewith
Agreement
B-3 Draft form of MEC Guarantee To be filed by
amendment
C Registration Statement (S-4), including Incorporated
all financial statements and exhibits by reference
thereto, with reference to additional
Common Shares of NEES
D-1 Offer of Settlement filed with the Filed herewith
Massachusetts Department of Public
Utilities
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EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
D-1(a) Certified copy of order of Massachusetts To be filed by
Department of Public Utilities amendment
D-2 Filing with the Federal Energy To be filed by
Regulatory Commission (FERC) amendment
D-2(a) Certified copy of FERC approval To be filed by
amendment
F Opinion of Counsel To be filed by
amendment
G Statement of Estimated Fees and To be filed by
Expenses amendment
G-1 Proposed Amended Terms of the NEES To be filed by
Money Pool amendment
H Form of Notice Filed herewith
Financial
Statement No. Description Page
------------- ----------- ----
1 Balance Sheets of NEES and of NEES and Incorporated
Subsidiaries Consolidated and of MEC by reference
as of June 30, 1995
2 Statements of Income and Retained Incorporated
Earnings of NEES and of NEES and by reference
Subsidiaries Consolidated and of MEC
for the twelve months ended June 30,
1995 on an actual basis
3 Balance Sheets and Statements of Income Filed under
and Retained Earnings of NEC as included cover of Form SE
in the Annual Reports for the years 1990
through 1994
<PAGE>
Exhibit A-12
NEC Security Holders of Record
Owning One Percent or More of NEC Common Stock
----------------------------------------------
No. of % of Total
Name Shares Shares O/S
---- ------ ----------
Chemical Bank 2,899 10.4
Wheat First Securities, Inc. 2,394 8.6
Preservation Institute: Nantucket 2,208 7.9
Empire & Co. 1,900 6.8
P. Ashley FBO W. Beinecke, III 1,891 6.8
P. Ashley FBO BB Collar 1,886 6.7
Oliver, Ann (6/9/81 FBO Trust) 1,782 6.4
Beale, Deborah 1,330 4.8
Nantucket Historical Association 1,100 3.9
Winthrop/Nantucket Ltd Partnership 1,100 3.9
First Winthrop 1,000 3.6
Nantucket Conservation Foundation 1,000 3.6
Ravenscroft, Richard 1,000 3.6
Albion Investment 1,000 3.6
Brown Bros. Harriman 700 2.5
P. Ashley FBO D.B. Beale 556 2.0
Glidden, James 500 1.8
Hamilton College Trustees 397 1.4
<PAGE>
Exhibit B-2
CREDIT AND OPERATING SUPPORT AGREEMENT, dated as of _______________
between Nantucket Electric Company ("NEC"), a Massachusetts corporation,
and Massachusetts Electric Company ("Mass. Electric"), a Massachusetts
corporation.
I. Introduction
============
This Agreement will assure that NEC has sufficient revenues to earn
Mass Electric's MDPU-approved return on common equity without diminution
of NEC's return associated with the Cable Facilities.
II. Term
====
This Agreement shall become effective upon the merger of NEC into
NEES, and shall continue in effect for 99 years, unless terminated by
mutual agreement of the parties.
III. Reimbursement
=============
At the end of each fiscal quarter, Mass. Electric shall reimburse
NEC an amount equal to the difference between NEC's actual net income for
the fiscal quarter and the net income necessary for NEC to earn a return
on common equity equivalent to Mass Electric's MDPU-approved weighted
average allowed return on common equity (NEC Allowed ROE) for the fiscal
quarter. Actual net income for the quarter will exclude the impacts of
any amortization of acquisition adjustment. Notwithstanding the above, to
the extent NEC's actual return on common equity, excluding the
amortization of any acquisition adjustment, for the quarter exceeds NEC's
Allowed ROE, there will be no reimbursement. This reimbursement shall
constitute additional revenue to NEC and an expense to Mass Electric.
IV. Other Funds
===========
Nothing in this Agreement shall be construed as precluding NEC from
obtaining additional funds by other means, (subject to regulatory
approval) including, without limitation, debt financing and receipt of
capital contributions.
V. Regulatory Approvals
====================
The parties agree to cooperate in maintaining the regulatory
approvals necessitated by matters covered in this Agreement. Approval has
been obtained from the Securities and Exchange Commission under the Public
Utility Company Holding Act of 1935, and the MDPU.
<PAGE>
VI. Interpretation
==============
The interpretation and performance of this Agreement shall be in
accordance with and controlled by the law of The Commonwealth of
Massachusetts.
VII. Assignment
==========
Without the mutual consent of the other, neither party may assign,
pledge or otherwise transfer its interest in this Agreement.
VIII. General
=======
The name "New England Electric System" means the trustee or trustees
for the time being (as trustee or trustees but not personally) under an
Agreement and Declaration of Trust dated January 2, 1926, as amended,
which is hereby referred to, and a copy of which as amended has been filed
with the Secretary of The Commonwealth of Massachusetts. Any agreement,
obligation or liability made, entered into or incurred by or on behalf of
NEES binds only its trust estate, and no shareholder, director, trustee,
officer or agent thereof assumes or shall be held to any liability
therefor.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
by their respective officers thereunto duly authorized on the date first
above written.
NANTUCKET ELECTRIC COMPANY
DRAFT
By __________________________
Name:
Title:
MASSACHUSETTS ELECTRIC COMPANY
DRAFT
By __________________________
Name:
Title:
<PAGE>
Exhibit D-1
THE COMMONWEALTH OF MASSACHUSETTS
DEPARTMENT OF PUBLIC UTILITIES
D.P.U. 95-67
This offer of settlement is sponsored by the Office of the Attorney
General, New England Electric System Companies, and Nantucket Electric
Company (NEC), together the "Parties".
The Parties respectfully acknowledge that:
1. NEC is a Massachusetts corporation authorized to engage in and
engaging in the business of generating, distributing and selling
electricity at retail and is an electric company as defined in Chapter 164
of the Massachusetts General Laws Annotated (MGLA). New England Electric
System (NEES) is a Massachusetts business trust, whose subsidiary
companies include Massachusetts Electric Company (MEC), New England Power
Company (NEP), NEWCO (a to be formed Massachusetts corporation which will
be a wholly owned subsidiary of NEES, "NEWCO") and New England Power
Service Company, Massachusetts corporations.
2. NEC and NEES have entered into a merger agreement dated as of
March 22, 1995 (Merger Agreement), subject to necessary approvals of
government regulatory authorities having jurisdiction, providing for the
merger of NEWCO, with NEC, with the surviving corporation becoming a
wholly-owned subsidiary of NEES (Surviving Corporation). A copy of the
Merger Agreement is attached as Exhibit A hereto.
3. The testimony of John G. Cochrane, explaining in detail the
proposed merger and its expected benefits, is attached as Exhibit B
hereto.
4. The testimony of James E. Joynt is attached as Exhibit C hereto.
<PAGE>
The Parties have agreed that:
I. MERGER ISSUES
A. The merger of NEWCO with NEC and the terms of the Merger
Agreement, are consistent with the public interest under Chapter 164,
Section 96 of the MGLA and shall be approved.
B. The rights and franchises of the Surviving Corporation to carry on
its electric business on the island of Nantucket, the area where NEC is
now doing an electric business, shall be confirmed.
C. The rate plan for the Surviving Corporation, (as required to be
filed under MGLA Chapter 164, Section 94), shall be as detailed in Exhibit
B hereto, including, without limitation, the proposed accounting entries
and treatment of environmental response costs.
D. Credit and operating support agreements with MEC shall be approved
under MGLA Chapter 164, Section 17A to guarantee or to pay all interest,
debt, contractual or other obligations, including a return on the
Surviving Corporation's common equity equal to the return on equity last
approved for MEC by this Department, undertaken by the Surviving
Corporation not otherwise covered by the Surviving Corporation's utility
operating revenues.
E. Pursuant to Chapter 164, Section 17A, the Surviving Corporation
shall assume the liabilities of NEC, including the assumption of the
Massachusetts Industrial Finance Agency (MIFA) $3.5 million, 8.5% long-
term note due to mature in March, 2016, which has been approved by this
Department pursuant to MGLA Chapter 164, Section 14 and the Bank of Boston
Revolving Credit and Term Loan Agreement dated as of December 15, 1994,
for which the Term Loan was approved by this Department pursuant to MGLA
Chapter 164, Section 14.
F. The Surviving Corporation shall purchase requirements power from
NEP under MGLA Chapter 164 Section 94A, and NEP shall purchase certain of
<PAGE>
the Surviving Corporation's generation facilities at book value, or assume
existing leases for these facilities under MGLA Chapter 164, Section 97;
G. NEWCO and the Surviving Corporation shall issue common stock to
NEES, pursuant to MGLA Chapter 164, Section 14. Par value for this common
stock shall be $1.00.
H. The NEES Money Pool shall be amended to include the Surviving
Corporation as both a borrower and investor under MGLA Chapter 164,
Section 17A.
I. The financing arrangements of the Surviving Corporation for the
Nantucket Cable Project shall be approved under MGLA Chapter 164, Section
14, 15, 15A, 16, and 17A.
J. The Cable Facilities will serve the public convenience and be
consistent with the public interest and shall be approved under MGLA
Chapter 164, Section 72, if deemed necessary.
II. MISCELLANEOUS PROVISIONS
A. Other than as expressly stated herein, the making of this
settlement establishes no principles and shall not be deemed to foreclose
any party from making any contention in any future proceeding or
investigation
B. Other than as expressly stated herein, the acceptance of this
settlement by the Department shall not in any respect constitute a
determination by the Department as to the merits of any issue in any
subsequent proceeding.
C. This settlement is the product of settlement negotiations. The
content of those negotiations shall be privileged and all offers of
settlement shall be without prejudice to the position of any party or
participant presenting such offer.
<PAGE>
D. This settlement is submitted on the condition that it be approved
in full by the Department by August 1, 1995, and on the further condition
that if the Department does not approve the settlement in its entirety,
the settlement shall be deemed withdrawn and shall not constitute a part
of the record in any proceeding or used for any purpose.
Respectfully submitted,
Commonwealth of Massachusetts Attorneys for
OFFICE OF THE ATTORNEY GENERAL NANTUCKET ELECTRIC COMPANY
Scott Harshbarger 2 Fairgrounds Road
Nantucket, MA 02554-0179
s/Edward G. Bohlen s/David S. Rosenzweig
By: ______________________________ By: _________________________
Edward G. Bohlen David S. Rosenzweig, Esq.
Assistant Attorney General Keohane & Keegan
131 Tremont Street 21 Custom House Street
Boston, MA 02111 Boston, MA 02110-3525
Attorneys for
NEW ENGLAND ELECTRIC SYSTEM
COMPANIES
25 Research Drive
Westborough, MA 01582
s/Thomas G. Robinson
s/Craig L. Eaton
s/Kirk L. Ramsauer
By: _________________________
Thomas G. Robinson, Esq.
Craig L. Eaton, Esq.
Kirk L. Ramsauer, Esq.
<PAGE>
EXHIBIT H
Proposed Form of Notice
-----------------------
New England Electric System (the Company), a registered holding
company, and its subsidiaries New England Power Company (NEP) and
Massachusetts Electric Company (MEC) have filed Form U-1 Application/
Declaration File No. 70-________ pursuant to Sections 6(a), 7, 9(a), 10,
and 12 of the Public Utilities Holding Company Act of 1935 and Rules 42,
43, and 45 thereunder.
The Company is a voluntary association. As a holding company, the
Company owns voting stock in a number of companies, which together
constitute the Company's System. The Company's electric utility
operations are composed mainly of four operating companies: NEP, MEC, The
Narragansett Electric Company, and Granite State Electric Company. These
operating companies are provided certain services by New England Power
Service Company (NEPSCO), a subsidiary of the Company operating pursuant
to Section 13 of the Act.
NEP's business is principally generating, purchasing, transmitting,
and selling electric energy in wholesale quantities. In 1994, 94% of
NEP's revenue from the sale of electricity was derived from sales for
resale to affiliated companies and 6% from sales for resale to municipal
and other utilities.
MEC is engaged principally in the distribution and sale of
electricity at retail in Massachusetts. MEC provides approximately
940,000 customers with electric service at retail in a service area
comprising approximately 43% of the area of The Commonwealth of
Massachusetts. The population of the service area is about 2,160,000 or
36% of the total population of the Commonwealth. MEC's territory consists
of 146 cities and towns including rural, suburban, and urban communities
with Worcester, Lowell, and Quincy being the largest cities served. MEC
is an all requirements wholesale electric customer of NEP.
Nantucket Electric Company (NEC) is a non-affiliated Massachusetts
corporation engaged in the electric utility business. NEC serves
approximately 8,600 customers on the Island of Nantucket, Massachusetts.
NEC is not currently connected to the mainland in order to receive
electric power.
Proposed Acquisition of NEC
---------------------------
The Company and NEC have agreed, subject to various approvals
including approval from this Commission, that the Company will acquire NEC
for the Company's common shares based on a purchase price of $125 per
share or $3.5 million plus an interest rate equivalent on this amount from
March 22, 1995 to the closing. This merger is proposed to be accomplished
through an exchange of NEES common shares for the 28,000 shares of
outstanding common stock of NEC. The NEC common stock is $25 par value
voting stock and comprises one class. To facilitate this transaction,
NEES proposes to form NEWCO, a wholly-owned subsidiary which will be
merged into NEC.
<PAGE>
As previously mentioned, NEC is an electric utility whose principal
business is the generation, distribution, and sale of electricity. NEC
sells electricity to approximately 8,600 customers on the Island of
Nantucket which is located in the Atlantic Ocean approximately 30 miles
off the coast of Cape Cod. The size of NEC's customer base has been
growing in recent years, with 400 additional residential customers added
in 1994. Currently, all of NEC's electricity is generated by diesel
generators located on the Island. NEC is a small electric company under
relevant tests, as evidenced by revenues, assets, number of customers,
number of employees, and net income. Its small size and limited resources
cause it to experience difficulty in coping with its increasing customer
base and the many problems facing electric companies today.
NEC's net income for the twelve months ended December 31, 1994, was
$398,000 on revenues of $12,351,000, which is insufficient to meet any
significant increase in its operation and maintenance expenditures, or any
other unusual expense such as clean-up of oil and hazardous materials on
NEC properties.
NEC has a total of approximately 40 employees to perform all the
tasks required to operate and maintain its electric system. These tasks
include operating and maintaining the generation facilities and
distribution network, meter reading, billing and accounting, complying
with regulatory requirements, financing additions and improvements to name
just a few.
The terms and mechanisms for acquiring NEC are as follows:
1. Formation of NEWCO with the Company acquiring one common share of
NEWCO for $10,000;
2. NEWCO will merge with and into NEC, with the surviving corporation
(Surviving Corporation) having all the rights, interests, and
obligations of NEC;
3. Shares of NEWCO will be converted into shares of new common stock
of the Surviving Corporation, with the Surviving Corporation being
a wholly owned subsidiary of the Company;
4. NEC stockholders will be receiving the Company's shares equivalent
to $125 per NEC common share outstanding plus interest at a rate
equivalent to the Bank of Boston prime rate on this amount from
March 22, 1995 to the closing. The Company will deposit the
requisite amount of shares with a disbursing agent, and this agent
will distribute the Company's shares to each NEC stockholder after
the surrender by each NEC stockholder of the certificates
representing his or her shares;
5. The Company will not issue any fractional shares. In lieu
thereof, each holder of shares of NEC common stock who would
otherwise be entitled to a fractional common share of NEES shall
upon surrender of such holder's certificate, receive a cash
payment in lieu of the unit of the Company's common shares of to
which such holder would otherwise be entitled.
The NEC certificate holders will receive the Company's shares
equivalent to $125 per NEC common share outstanding, plus an interest
equivalent amount. The Company has registered with the Commission 160,000
of its common shares for this purpose. At a current price of $34 per
share, the Company would have to issue approximately 103,000 shares, not
taking into account interest.
<PAGE>
The Company's common shares are listed on the New York and Boston
Stock Exchanges. From January 1, 1995 through May 20, 1995, the Company's
shares on the New York Stock Exchange -- Composite Transactions ranged
from a high of $39 to a low of $28 7/8. The NEC stock has no active
market. There are currently about 100 stockholders of NEC.
Proposed Cable Project and Financing
------------------------------------
As a result of a bidding process and approval from the Massachusetts
Department of Public Utilities (DPU), NEC entered into a longer term power
contract with NEP to supply electricity to NEC over a 46kV undersea cable
to be embedded under Nantucket Sound for a length of about 26 miles with
associated facilities at either end (the Cable Facilities). This
interconnection is required for NEP to supply electricity to NEC. NEC has
agreed to fully support these facilities through the formation of a
special purpose company to be owned by the Company (up to 100%) and NEC
(up to 20%). However, if NEC is acquired by the Company, the Cable
Facilities will be built, owned, and operated by the Surviving Corporation
and NEP will be reimbursed for its costs to that date. The Surviving
Corporation will become an all requirements wholesale electric customer of
NEP pursuant to an affiliate tariff as approved by FERC and the power
contract referred to above will be terminated.
The Surviving Corporation will finance the Cable Facilities through
a combination of debt and equity funds. A Company subsidiary has already
received an allocation of up to $28 million of tax-exempt private activity
bond volume cap from Massachusetts for this purpose, and specific
financing approvals from the DPU have been requested. In connection with
a post merger rate plan, MEC has agreed to enter into a Credit and
Operating Support Agreement with Surviving Corporation in order to provide
additional revenues to Surviving Corporation to cover its cost of service,
including a return on common equity. This Support Agreement will provide
assurance to the Surviving Corporation and its lenders that Surviving
Corporation will be able to maintain sufficient coverages and will likely
be assigned as collateral as part of permanent debt financing by Surviving
Corporation. In addition, MEC may be required to provide guarantees to
said lenders. As a result of the merger, Surviving Corporation may assume
some or all of the existing indebtedness of NEC.
Neither NEC nor the Company nor any subsidiary of the Company has
ownership interest in an exempt wholesale generator ("EWG") or foreign
utility company ("FUCO") as defined in Sections 32 and 33 of the Act.
Additionally, neither the Company nor any subsidiary is a party to, or has
any rights under, a service, sales, or construction agreement with an EWG
or FUCO. Although neither the Company nor any subsidiary has any current
intention to secure an ownership interest in an EWG or FUCO, the Company
and NEP wish to retain the flexibility to invest up to a total of $100
million in one or more EWG's or FUCO's subject to such further Commission
rules and regulations and approvals as may then be required.
It is not anticipated that the acquisition of NEC by the Company will
have any material effect on the consolidated earnings per share of the
Company. As shown in the financial statements, the proposed acquisition
of NEC will have a de minimus impact on the Company's system. The
acquisition of NEC makes sense to the Company at this time because NEP
will be the wholesale supplier of electricity to NEC for the foreseeable
future. By acquiring NEC, the Company will also avoid the additional
costs associated with capitalizing and maintaining a special purpose
company to build, own, and construct the Cable Facilities as mentioned
above.
<PAGE>
Proposed Acquisition of NEC Generation by NEP
---------------------------------------------
After the Cable Facilities are energized and Surviving Corporation
becomes an all requirements wholesale customer of NEP, NEP proposes to
purchase certain of the Surviving Corporation's diesel generators or
assume existing leases for these facilities. NEP would purchase these
facilities to provide back-up generation to the extent that sufficient
electricity is unavailable from the mainland. The current book value of
generation facilities of NEC is $315,000. NEP has sought DPU approval of
this acquisition. NEP believes that during the year in which this
acquisition occurs it will meet the $5,000,000 test to qualify for an
exemption under Rule 41 ; however, if it does not so qualify it will file
for the required approval at that time.
Money Pool and Short-term borrowing
-----------------------------------
The Surviving Corporation seeks short-term borrowing authority
through October 31, 1997 and the authority to borrow and lend money in the
Company's Money Pool (approved by the Commission in its File No. 70-7765).
The Surviving Corporation seeks $5,000,000 of borrowing authority. As
mentioned above, Surviving Corporation may assume some or all of the
existing indebtedness of NEC. This amount of borrowing authority will
enable Surviving Corporation to pay off this indebtedness if desired or
necessary and to meet general business requirements and unforeseen needs.
The proceeds from the proposed borrowings are to be used (i) to pay
then outstanding notes initially issued to banks and/or borrowings from
the Money Pool, (ii) to provide new money for capitalizable expenditures
and/or to reimburse the treasury therefor, and (iii) for other corporate
purposes relating to ordinary business operations, including working
capital and the financing of construction and property acquisitions.
The Surviving Corporation proposes to reduce its need for outside
borrowing authority through the use of the Money Pool. Under the Money
Pool, surplus funds that may be available from day to day in the treasures
of the Company and its participating subsidiaries (File No. 70-8261) are
used to make loans to borrowing companies within the Company's system in
need of short-term funds. The rate will be 1.08 times the monthly average
of the rate for high grade 30-day commercial paper sold through dealers by
major corporations as published in the "Wall Street Journal". Although
there are no stated maturities, the loans made by the Money Pool are
payable on demand, and may be prepared by the borrower without penalty.
Borrowings may, but need not be, evidenced by notes.
The proposed borrowings from banks will be evidenced by notes
maturing in less than one year from the date of issuance. The Surviving
Corporation will negotiate with the banks the interest costs of such
borrowings. The Surviving Corporation will pay fees to the banks in lieu
of compensating balance arrangements. The effective interest cost of
borrowings from a bank will not exceed the greater of the bank's base or
prime lending rate, or the rate published in the "Wall Street Journal", as
the high federal funds rate, plus, in either case, one percent.
Certain of such borrowings may be without prepayment privileges.
Payment of any short-term promissory notes prior to maturity will be made
on the basis most favorable to the Surviving Corporation, taking into
account fixed maturities, interest rates, and any other relevant financial
considerations.
