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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
and
NEW ENGLAND ELECTRIC RESOURCES, INC.
(Name of company filing this statement)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
NEW ENGLAND ELECTRIC SYSTEM
(Name of top registered holding company parent in system)
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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New England Electric Resources, Inc. ("NEERI"), a wholly-owned,
non-utility subsidiary of New England Electric System ("NEES"), was organized
for the purpose of pursuing new business opportunities.
NEES is a registered holding company under the Public Utility Holding
Company Act of 1935 (the "Act") owning electric utility subsidiaries, New
England Power Service Company ("NEPSCO", a service company subsidiary), and an
energy company subsidiary (collectively, the "System").
Item 1. Description of Proposed Transactions:
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INTRODUCTION
The Commission, by its Order dated May 15, 1995, HCAR No. 35-26291, (the
"May Order"), authorized NEERI to invest an amount not exceeding $10 million in
research and development activities (the "Development Activities") for
exploring potential investments in exempt wholesale generators as defined in
Section 32 of the Act (each, an "EWG") and foreign utility companies as defined
in Section 33 of the Act (each, a "FUCO").
Neither NEES nor any subsidiary currently has an ownership interest in an
EWG or FUCO as defined in Sections 32 and 33 of the Act. Additionally, neither
NEES nor any subsidiary is a party to, or has any rights under, a service, sales
or construction agreement with an EWG or FUCO.
In its Application/ Declaration (File No. 70-8555), NEERI stated that it
(i) would not use any funds authorized for Development Activities to acquire an
interest in the business of any EWG or FUCO within the meaning of the Act and
(ii) would not invest in any EWG or FUCO project, investment in which requires
the Commission's approval under the Act, without requesting and receiving such
approval. By this Application/Declaration, NEES and NEERI propose to engage
in acquiring, financing and owning the securities of (or other interests in the
business of) FUCOs as defined in Section 33 of the Act and EWGs as defined in
Section 32 of the Act (each, an "Exempt Company") either directly or through a
"Project Parent" structure as discussed in detail below.
PART I
In the May Order, the Commission authorized NEES and NEERI to make
investments in EWGs and FUCOs without prior Commission approval to the extent
that such approval is not required under the Act, and any applicable rules and
regulations promulgated thereunder. The applicants are now seeking Commission
authorization to make EWG and FUCO acquisitions and financings without applying
for and receiving project specific authorizations from the Commission.
NEES and NEERI hereby seek authority, within the limitations set forth in
this filing, to (i) acquire interests in, finance the acquisition, and hold the
securities, of one or more Exempt Companies, either directly, or indirectly
through a Project Parent as discussed below, without filing specific project
applications. The applicants propose the following limitations on such
authority: first, the full amount of any such investment or financing, as well
as any authorized guarantees or assumptions of liability, shall be counted as
part of the Total Authority (defined in Part II, B, below); second, no such
investment or financing will be made unless at the time of the investment or
financing (and after giving effect thereto), NEES' "aggregate investment"
(determined in accordance with Rule 53(a)(1)(i)) in EWGs, FUCOs and Project
Parents does not exceed 50% of the system's "consolidated retained earnings"
(as defined in Rule 53(a)(1)(ii)) in compliance with the provisions set forth
in Rule 53 under the Act. The applicants will comply with all other applicable
rules under the Act, including, without limitation, such rules which may be
promulgated in the future pursuant to Section 33.
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NEES and NEERI have found that the ability to respond quickly to
investment opportunities in Exempt Companies and to acquire interests in,
finance the acquisition and hold securities of Project Parents through which
such investments in Exempt Companies are often made, is advantageous and
believe that the authority being requested herein will enable them to
effectively compete in this market in accordance with the principles of the
Energy Policy Act of 1992. Furthermore, since any investment in an Exempt
Company or Project Parent which is authorized hereunder will be subject to the
proposed Total Authority limitation, as well as the requirements of Rule 53,
this authorization will not have a detrimental effect on the NEES holding
company system's finances.
NEES and NEERI are in compliance with the criteria of Rule 53 under the
Act (see Part II, F, below). Before proceeding with the financing of an
investment in an Exempt Company or a Project Parent, NEES and NEERI shall take
the following steps to ensure continuing compliance with Section 32 and Section
33 and the regulations promulgated thereunder with regard to financing
investments in EWGs and FUCOs, including, without limitation, the criteria in
Rule 53. Specifically, all personnel of NEERI or NEERI's affiliates
responsible for evaluating potential Exempt Company investments will be fully
informed of the requirements of Section 32, Section 33 and Rule 53. Second, in
connection with evaluating an investment in an Exempt Company, the personnel of
NEERI or NEERI's affiliates responsible for evaluating potential Exempt Company
investments shall prepare, for internal review, an analysis of the impact of
the proposed investment on the requirements of Rule 53(a) and (b). Third, after
preparing an analysis of the proposed investment, the personnel of NEERI or
NEERI's affiliates responsible for evaluating the investment will consult with
in-house counsel or outside counsel to confirm compliance with the requirements
of Section 32 and Section 33 and the rules and regulations promulgated
thereunder.
PART II
A. Formation of Project Parents
To facilitate the acquisition and ownership of Exempt Companies, NEES and
NEERI seek authority to organize, form or acquire, and to liquidate, dissolve
or sell, in whole or in part, subsidiary companies which are not Exempt
Companies (each, a "Project Parent"). Project Parents shall engage, directly
or indirectly, and exclusively, in the business of owning and holding the
interests and securities of one or more Exempt Companies and in project
development activities relating to the acquisition of such interests and
securities and the underlying electrical generation, transmission and
distribution projects ("Investment Projects"). The authority requested by NEES
and NEERI in this filing is similar to that granted by the Commission in its
Orders dated August 3 1994 (HCAR 35-26096), November 3, 1994 (HCAR 35-26156),
and July 6, 1995 (HCAR 35-26326.)
Project Parents shall be special purpose domestic or foreign
corporations, partnerships or limited liability companies (or the equivalent of
such entities in the foreign country where such Project Parent may be formed).
NEES and NEERI request authority to form Project Parents (a) to facilitate
making bids or submitting proposals to acquire interests in Exempt Companies,
(b) in order to facilitate and/or close on the acquisition or financing of
interests in Exempt Companies, or (c) at any time subsequent to the acquisition
of an interest in an Exempt Company. Project Parents may also be formed to
participate in joint ventures with nonassociates for the purpose of owning
interests in Exempt Companies and/or engaging in Investment Projects.
NEES and NEERI believe that the organization, formation or acquisition of
one or more Project Parents may facilitate, among other things, minimization of
tax liabilities, both U. S. and foreign, bidding on interests in Exempt
Companies through joint ventures, compliance with applicable foreign laws
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limiting ownership of domestic entities by foreign entities, protection from
certain business risks, sales or adjustments of interests among or by the
members of joint ventures involved in acquiring an interest in an Exempt
Company, and other lawful purposes.
The applicants request authority for any Project Parent to issue
securities to NEES and/or NEERI and for NEES and/or NEERI to acquire such
securities. Such securities may take the form of capital stock or shares, debt
securities, trust certificates, partnership interests or other equity or
participation interests.
NEERI and NEES also request that NEERI and Project Parents have the
authority to provide Project Parent's and Project Parent subsidiaries, with all
services necessary or desirable for their operations, including, without
limitation, management, engineering, employment, administrative, tax,
consulting, accounting, and computer and software support. The Project
Parents, their subsidiaries, and/or NEERI will not provide such services for
any associate company which derives, directly or indirectly, any material part
of its income from sources within the United States, and which is a public
utility company operating within the United States, other than as authorized by
the Commission in a separate order or orders. Accordingly, NEES and NEERI
request that such services provided by NEERI and/or Project Parents and their
subsidiaries to Project Parents or their subsidiaries be exempt from the
standards of section 13(b) of the Act and the rules and regulations under such
section.
Within 45 days after NEES or NEERI, as the case may be, determines that
the purpose for owning any Project Parent no longer exists (whether due to
termination of a proposed project acquisition, loss of a bid, change of law, or
otherwise), it shall (to the extent it is able to do so) liquidate or dissolve
such Project Parent, unless, within that time, NEES or NEERI, as the case may
be, determines that such Project Parent may be used in connection with a
proposal or plan to develop or acquire an interest in an Exempt Company
different from that originally intended.
B. Investments in Project Parents and Exempt Companies
NEES proposes to finance, from time to time through December 31, 1998,
the activities of NEERI and Project Parents for the purposes set forth in this
Application/Declaration in the form of investments ("NEES Investments"). Such
NEES Investments may take the form of purchases of capital shares, partnership
interests, trust certificates (or the equivalent of any of the foregoing under
the laws of foreign jurisdictions), capital contributions, subordinated loans
evidenced by subordinated promissory notes substantially in the form of Exhibit
B hereto; open account advances; guarantees, bid bonds or other credit support
to secure obligations incurred by NEERI and/or Project Parents in connection
with Exempt Company investments, or of NEERI's undertaking to contribute equity
to a Project Parent; and reimbursement agreements with banks entered into to
support letters of credit delivered as security for NEES' or NEERI's equity
contribution obligation to a Project Parent or otherwise in connection with a
Project Parent's or NEERI's Exempt Company project development activities.
NEES Investments, together with the Non-Recourse Debt and Exempt Company
Investments (both as defined below), will not exceed a principal amount of
$60 million in the aggregate outstanding at any one time (the "Total
Authority"). No NEES Investment will be made unless at the time of the NEES
Investment (and after giving effect thereto), NEES' "aggregate investment"
(determined in accordance with Rule 53(a)(1)(i)) in EWGs, FUCOs and Project
Parents (inclusive of the Non-Recourse Debt and Exempt Company Investments,
both as defined below) does not exceed 50% of NEES' "consolidated retained
earnings" (as defined in Rule 53(a)(1)(ii)) in compliance with the provisions
set forth in Rule 53 under the Act.
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On occasion, NEES or NEERI may acquire, or anticipate acquiring, an
ownership interest in an Exempt Company directly and not through a Project
Parent. In such event, it may be necessary or desirable for NEES or NEERI to
guarantee the indebtedness or other obligations of, or to assume the
liabilities of, the Exempt Company, or to deliver a guarantee or letter of
credit to a third party in support of an equity contribution obligation to, or
otherwise in connection with project development activities for, such Exempt
Company. Even where NEES or NEERI acquires an interest in an Exempt Company
indirectly through a Project Parent (or, in the case of NEES, through NEERI), it
may be necessary on occasion for NEES or NEERI to directly guarantee the
indebtedness, or to assume the liabilities, of the Exempt Company. Therefore,
NEES and NEERI request authority to, from time to time through December 31,
1998, (i) guarantee the indebtedness or other obligations of one or more Exempt
Companies; (ii) assume the liabilities of one or more Exempt Companies; and/or
(iii) enter into guarantees and letters of credit reimbursement agreements in
support of equity contribution obligations to, or otherwise in connection with
project development activities for, one or more Exempt Companies ("Exempt
Company Investments"). Any such guarantees, reimbursement agreements and
letters of credit would have the terms specified below. The aggregate amount of
such Exempt Company Investments, together with the NEES Investments and the
Non-Recourse Debt, will not exceed the Total Authority in the aggregate
outstanding at any one time. No Exempt Company Investment will be made unless
at the time of the Exempt Company Investment (and after giving effect thereto),
NEES' "aggregate investment" (determined in accordance with Rule 53(a)(1)(i))
in EWGs, FUCOs and Project Parents (inclusive of the Non-Recourse Debt and NEES
Investments) does not exceed 50% of NEES' "consolidated retained earnings" (as
defined in Rule 53(a)(1)(ii)) in compliance with the provisions set forth in
Rule 53 under the Act.
NEES and NEERI propose that the amount of the Total Authority be reduced
from time to time by the amount of NEES Investments and/or Exempt Company
Investments made, and/or by the amount of Non-Recourse Debt issued, and be
increased from time to time by: (1) proceeds received upon the sale,
liquidation, repayment or other disposition of any NEES Investment or Exempt
Company Investment; (2) proceeds generated from NEERI's or Project Parents'
activities in connection with their investments in Exempt Companies or any
particular Investment Project in which NEERI or NEES has an interest, directly
or indirectly; (3) the reimbursement of such NEES Investments or Exempt Company
Investments out of the proceeds of any third party financing of NEERI's or
Project Parents' activities or any particular Investment Project in which NEERI
or NEES, directly or indirectly, has an interest; or (4) the extent to which
Non-Recourse Debt has been paid.
NEES Investments may be made from NEES to NEERI and/or Project Parents
directly or indirectly. Any open account advance made by NEES will be
non-interest bearing and shall have a maturity not exceeding one year. Any
promissory note issued to NEES by NEERI or a Project Parent, or to NEERI by a
Project Parent, and any promissory note or other similar evidence of
indebtedness issued by a Project Parent to a person other then NEES or NEERI
with respect to which NEES or NEERI may issue a guarantee, would mature not
later than 30 years after the date of issuance thereof, and would bear interest
at a rate (a) not greater than the prime rate of a bank to be designated by NEES
in the case of a promissory note issued to NEES or NEERI, and (b) in the case of
any note or similar evidence of indebtedness issued to a person other than NEES
or NEERI and guaranteed by NEES or NEERI, at a rate not in excess of the greater
of (1) if such note or other indebtedness is U. S. dollar denominated, the
greater of (i) 250 basis points above the greater of (A) the lending bank's or
other recognized prime rate and (B) 50 basis points above the federal funds
rate, (ii) 400 basis points above the specified London Interbank Offered Rate
plus any applicable reserve requirement, or (iii) a negotiated fixed rate
which, in any event, would not exceed 500 basis points above the 30 year
"current coupon" treasury bond rate; and (2) if such note or other indebtedness
is denominated in the currency of a foreign nation, at a fixed or floating rate
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which, when adjusted (i.e., reduced) for the prevailing rate of inflation in
such nation, as reported in official indices published by such nation, would be
equivalent to a rate on a U. S. dollar denominated borrowing of identical
average life that does not exceed 10% over the highest rate set forth in (1)
above.
Any promissory note issued by NEERI or any Project Parent to NEES, or by
any Project Parent to NEERI, may, at the option of the holder of such promissory
note, be converted to a capital contribution to the issuer of such promissory
note by such holder's forgiveness of the indebtedness evidenced by the note.
Any reimbursement agreement supporting a letter of credit would have a
term not in excess of 30 years. Drawings under any such letter of credit would
bear interest at not more than 5% above the prime rate of the letter of credit
bank as in effect from time to time, and letter of credit fees would not exceed
1% annually of the face amount of the letter of credit.
Any investment by NEES or NEERI in the capital shares or other equity
securities of a Project Parent that have a stated par value will be in an amount
equal to or greater than such par value. Any direct or indirect investment by
NEES and/or NEERI in any Project Parent would occur only if, at the time thereof
and after giving effect thereto, (1) the Total Authority is not exceeded, and
(2) NEES' "aggregate investment", determined in accordance with Rule
53(a)(1)(i), in all FUCOs, EWGs and Project Parents would not exceed 50% of
NEES' "consolidated retained earnings", as defined in Rule 53(a)(1)(ii). Any
direct or indirect investment by NEES and/or NEERI in any particular Project
Parent would be limited to an amount which does not exceed that reasonably
required in connection with making the underlying investment in any Exempt
Company with respect to which such Project Parent was organized or formed,
taking into account development expenditures, working capital needs and cash
reserves required to be maintained in accordance with any related financing
agreements.
C. Securities Issued to Third Parties
NEES and NEERI request authority for each Project Parent to issue, from
time to time, stock, promissory notes, commercial paper or other debt or equity
securities to entities other than NEES or NEERI (and with respect to which there
is no recourse to NEES or NEERI except to the extent that NEES or NEERI may
guarantee payment of such securities pursuant to the authorization requested in
this filing), including, without limitation, banks, insurance companies and
other financial institutions, exclusively for the purpose of financing or
refinancing investments in, and project development activities for, Exempt
Companies ("Non-Recourse Debt"). The applicants propose that Non-Recourse Debt
be issued in one or more transactions from time to time through the earlier to
occur of (i) December 31, 1998, and (ii) the effective date of any rule or
regulation under the Act exempting such transactions from the requirement for
prior Commission authorization.
The aggregate principal amount of Non-Recourse Debt issued, together with
NEES Investments and Exempt Company Investments, will not exceed the Total
Authority in the aggregate outstanding at any one time. No Non-Recourse Debt
will be issued unless at the time of such issuance (and after giving effect
thereto), NEES' "aggregate investment" (determined in accordance with Rule
53(a)(1)(i)) in EWGs, FUCOs and Project Parents (inclusive of the Exempt
Company Investments and NEES Investments) does not exceed 50% of NEES'
"consolidated retained earnings" (as defined in Rule 53(a)(1)(ii)) in
compliance with the provisions set forth in Rule 53 under the Act. Any or all
of such Non-Recourse Debt may be denominated in currencies other than U. S.
dollars. In any case in which NEES and NEERI together own less than all of the
equity interests of a Project Parent, only that percentage of the non-recourse
indebtedness of such Project Parent equal to NEES' and NEERI's combined equity
ownership percentage shall be included for purposes of the foregoing
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limitation. The applicants anticipate that fees in the form of placement or
commitment fees, or other similar fees, would be paid to lenders, placement
agents or other third parties in connection with the issuance of any such
Non-Recourse Debt.
The applicants propose that any equity securities issued by each Project
Parent to any third party may include capital shares, partnership interests,
trust certificates or the equivalent of any of the foregoing under applicable
foreign law. Debt securities issued to third parties may include secured and
unsecured promissory notes, subordinated notes, bonds or other evidence of
indebtedness. Securities issued by each Project Parent may be denominated in
either U.S. dollars or foreign currencies.
The amount and type of such Non-Recourse Debt securities, and the terms
thereof, including (in the case of any indebtedness) interest rate, maturity,
prepayment or redemption privileges and the terms of any collateral security
granted with respect thereto, would be negotiated in arms length transactions
on a case by case basis, taking into account differences from project to project
in optimum debt-equity ratios, projections of earnings and cash flow,
depreciation lives and methods and other similar financial and performance
characteristics of each project. The applicants request the authority to
negotiate the terms and conditions of such Non-Recourse Debt securities without
further approval by the Commission. Notwithstanding the foregoing, no equity
security having a stated or par value would be issued or sold by a Project
Parent for a consideration that is less than such stated or par value. Further,
any note, bond or other evidence of indebtedness issued or sold by a Project
Parent will mature not later than 30 years from the date of issuance thereof,
and will bear interest at a rate not in excess of the greater of (1) if such
note, bond or other indebtedness is U. S. dollar denominated, the greater of
(i) 250 basis points above the greater of (A) the lending bank's or other
recognized prime rate and (B) 50 basis points above the federal funds rate, (ii)
400 basis points above the specified London Interbank Offered Rate plus any
applicable reserve requirement, or (iii) a negotiated fixed rate which, in any
event, would not exceed 500 basis points above the 30 year "current coupon"
treasury bond rate; and (2) if such note, bond or other indebtedness is
denominated in the currency of a foreign nation, at a fixed or floating rate
which, when adjusted (i.e., reduced) for the prevailing rate of inflation in
such nation, as reported in official indices published by such nation, would be
equivalent to a rate on a U. S. dollar denominated borrowing of identical
average life that does not exceed 10% over the highest rate set forth in (1)
above.
The applicants request authority for any Project Parent and/or NEERI to
agree in any case to pay placement or commitment fees, and other similar fees,
in connection with such issuance, provided that the aggregate amount of any
such fees (i) payable at or about the time of issuance of the securities would
not exceed 4% of the stated or principal amount thereof and (ii) payable
thereafter would not cause the effective annual interest charge on such
securities to exceed 115% of the stated interest rate thereon.
In connection with investments in Exempt Companies, a portion of the
capital requirements of any such Exempt Company would typically be obtained
through non-recourse financing involving borrowings from banks and other
financial institutions. In some cases, however, it may be necessary or
desirable to structure an investment in an Exempt Company such that the
obligations created are not those of the Exempt Company but instead those of its
parent companies. For example, in a consortium of non-affiliated companies
bidding to purchase an interest in an Exempt Company, each consortium member
would ordinarily be obligated to fund its respective share of the proposed
purchase price. If external sources of funds are needed for this purpose, a
consortium participant may choose to engage in non-recourse financing through
one or more single purpose subsidiaries that would then utilize the proceeds of
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the financing to acquire an interest in the Exempt Company. The applicants
believe that such external financing by a Project Parent involves the same
issues as are involved when an Exempt Company carries out such external
financing, in terms of the possible adverse impacts upon the financial
integrity of a registered holding company system. Therefore, where the
proceeds of such an external financing (or refinancing) are used to invest in an
Exempt Company, without direct or indirect recourse to NEES or NEERI with
respect to the securities issued or sold (except to the extent that NEES or
NEERI may guarantee payment of such securities pursuant to the authorization
requested in this filing), there is no basis for any adverse findings under
Sections 6, 7 and/or 12 of the Act, provided that, at the time the securities
are issued, there is full compliance with Rule 53.
D. Pledge or Grant of Security Interests
NEES and NEERI anticipate that, in connection with the issuance of debt
securities by any Project Parent, it may be necessary for such Project Parent to
pledge and/or grant a security interest in its assets. Such pledge or grant of a
security interest may include, without limitation, the shares or other equity
securities of any Exempt Company or Project Parent, including, without
limitation, a security interest in any distributions from any such Exempt
Company or Project Parent, or a collateral assignment of its rights under, and
interests in, its other property, including, without limitation, any rights
under any power purchase agreement, fuel supply agreement or other project
agreement or contract to which it is a party. The applicants hereby request
authority for such pledges and/or grants to be made.
E. Source of Funds
NEES would obtain the funds for any direct or indirect investment in any
Project Parent or Exempt Company from available cash or as the Commission may
otherwise authorize by separate order. Neither NEES nor NEERI is requesting
authority herein to issue any additional securities for the purpose of funding
the acquisition of any Project Parents or Exempt Companies.
F. Compliance with Rule 53
NEES and NEERI submit that all of the criteria of Rule 53 under the Act
with respect to the proposed transactions are satisfied.
(i) Any investment by NEES and/or NEERI in any Exempt Company and/or
Project Parent would occur only if, at the time thereof and after
giving effect thereto, NEES' "aggregate investment", determined in
accordance with Rule 53(a)(1)(i), in all FUCOs, EWGs and Project
Parents does not exceed 50% of NEES' "consolidated retained
earnings", as defined in Rule 53(a)(1)(ii). The average
consolidated retained earnings for NEES and its subsidiaries, as
reported for the four most recent quarterly periods in NEES'
Quarterly Reports on Form 10-Q for the quarters ended December 31,
1994, March 31, 1995, June 30, 1995 and September 30, 1995, as
filed under the Securities Exchange Act of 1934, was approximately
$793,259,000. At present, NEES' and its subsidiaries' aggregate
investment (determined in accordance with Rule 53(a)(1)(i)) in
FUCOs, EWGs and Project Parents is zero. Accordingly such NEES'
aggregate investment in Exempt Companies and/or Project Parents,
assuming the Total Authority requested herein is granted and
invested in Exempt Companies and/or Project Parents, would be
approximately 8% of such average consolidated retained earnings,
which is below the 50% limitation in Rule 53.
(ii) NEES and NEERI shall comply with the recordkeeping requirements of
Rule 53(a)(2). NEES and NEERI shall maintain books and records
enabling them to identify investments in, and earnings from, any
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EWG or FUCO in which they directly or indirectly hold an interest.
For each United States EWG in which NEES or NEERI directly or
indirectly holds an interest: (a) the books and records of such EWG
will be kept in conformity with United States generally accepted
accounting principles ("GAAP"); (b) the financial statements of
such EWG will be prepared in conformity with GAAP; and (c) NEES
undertakes to provide the Commission, directly or through NEES'
subsidiaries, access to such books and records and financial
statements as the Commission may request. For each FUCO or foreign
EWG which is a "majority-owned subsidiary company" (as defined in
Rule 53(a)(2)) of NEES: (a) the books and records of such entity
will be kept in conformity with GAAP; (b) the financial statements
for such entity will be prepared in conformity with GAAP; and (c)
NEES undertakes to provide the Commission, directly or through
NEES' subsidiaries, access to such books and records and financial
statements, or copies thereof in English, as the Commission may
request. For each FUCO or foreign EWG which is not a
"majority-owned subsidiary company" (as defined in Rule 53(a)(2))
of NEES, NEES directly or through its subsidiaries will proceed in
good faith, to the extent reasonable under the circumstances, to
cause: (a) such entity to keep its books and records in conformity
with GAAP; (b) the financial statements of such entity to be
prepared in accordance with GAAP; and (c) access by the Commission
to such books and records and financial statements, or copies
thereof, in English, as the Commission may request and, in any
event, NEES will provide the Commission on request copies of such
materials as are made available to NEES and/or its subsidiaries.
If and to the extent that such entity's books, records or financial
statements are not maintained in accordance with GAAP, NEES will,
upon request of the Commission, describe and quantify for the
Commission each material variation from GAAP as and to the extent
required by Rule 53(a)(2)(iii)(A) and Rule 53(a)(2)(iii)(B).
(iii) Pursuant to Rule 53(a)(3), no more than 2% of the employees of the
domestic public utility subsidiaries of NEES will render services,
at any one time, directly or indirectly, to EWGs or FUCOs in which
NEES, directly or indirectly, holds an interest. Within such 2%
limit, time expended by employees of domestic public utility
subsidiaries of NEES in rendering services to EWGs, FUCOs, or
Project Parents in which NEES, directly or indirectly, owns an
interest, will not exceed an aggregate of 100 person-years without
further authorization from the Commission. The accounting by the
NEES system of such services will ensure that NEERI or the Project
Parents, as the case may be, will be obligated to reimburse the
appropriate domestic public utility subsidiary for any such
services. In no event will the provision of such services
adversely affect the rate base or the costs to ratepayers of any
such domestic public utility subsidiary.
(iv) In accordance with Rule 53(a)(4), NEES is simultaneously submitting
copies of this Application/Declaration on Form U-1 to the Rhode
Island Public Utilities Commission, the Massachusetts Department of
Public Utilities, and the New Hampshire Public Utilities
Commission, the only federal, state or local regulatory authorities
having jurisdiction over the retail rates of any NEES operating
utility subsidiary. In addition, NEES will, in future, submit
copies of all Form U-1s, certificates of notification under Rule 24
of the Act, and Item 9 of each NEES Form U5S, including Exhibits G
and H thereof (commencing with the Form U5S to be filed for the
calendar year in which the authorization herein requested is
granted), required to be so submitted under Rule 53(a)(4) to each
federal, state or local regulatory authority having jurisdiction
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over the retail rates of any affected public-utility company
(including the operating utility subsidiaries of NEES).
(v) None of the provisions of Rule 53(b) render the provisions of Rule
53(a) unavailable for the proposed transactions for which
authorization is requested herein.
In accordance with Rule 53(b)(1), neither NEES nor any subsidiary
of NEES has been the subject of a bankruptcy or other similar
proceeding.
NEES' average consolidated retained earnings for the four most
recent quarterly periods were approximately $793,259,000
representing an increase of approximately 5% from the average
consolidated retained earnings for the previous four quarterly
periods (approximately $756,229,000). Therefore, Rule 53(b)(2) has
been satisfied.
Since NEES has not, directly or indirectly, invested in any EWGs or
FUCOs to date, NEES had no operating losses in the previous fiscal
year attributable to direct or indirect investments in EWGs or
FUCOs; therefore, Rule 53(b)(3) has been satisfied.
G. Rule 24 Filings
NEERI (on behalf of itself, NEES, and the Project Parents) will provide
the Commission on a quarterly basis within 60 days of the end of each calendar
quarter, a certificate of notification pursuant to Rule 24 under the Act
("Certificate"). Such Certificate will (a) identify (i) each debt and equity
investment made by NEES and/or NEERI, directly or indirectly, in any Project
Parent or Exempt Company in the previous quarter, (ii) each guarantee by NEES
and/or NEERI of the securities of an Exempt Company or Project Parent, (iii)
each reimbursement agreement underlying a letter of credit issued with respect
to the activities of any Exempt Company or Project Parent, and (iv) each
agreement by NEES and/or NEERI to contribute equity to, or assume the
liabilities of, any Exempt Company or Project Parent, unless otherwise
disclosed; (b) indicate the amount and type of such investment or other
instrument; and (c) generally identify the project with respect to which such
investment or other instrument was made or executed. Such Certificates will
also describe in reasonable detail the amount, type and terms (including
interest rate, maturity, and the basis for inflation adjustment in the case of
indebtedness denominated in any currency other than U. S. dollars) of
securities issued by any Project Parent to third persons. Pursuant to Section
22 and Rule 104, NEERI may request confidential treatment for information
contained in Certificates which is commercially sensitive or proprietary.
Item 2. Fees, Commissions and Expenses
- --------------------------------------
Fees, commissions, and expenses to be incurred in connection with the
transactions contemplated by this Application/Declaration are not expected to
exceed $1,000,000. This amount includes a $2,000 filing fee paid by wire
transfer to the Commission at the time of filing this Application/Declaration.
Item 3. Applicable Statutory Provisions
- ----------------------------------------
The sections of the Act and rules or exemptions thereunder that are
believed to be applicable to the transactions are: Sections 6(a), 7, 9(a), 10,
12, 13, 32, 33, and Rules 45 and 53, all relating to the authority for NEES and
NEERI to undertake the transactions proposed herein.
<PAGE>
Item 4. Regulatory Approval
- ----------------------------
No Federal or state commission or regulatory body, other than the
Commission, has jurisdiction over the proposed transactions.
Item 5. Procedure
- ------------------
The Applicants request that the Commission take action with respect to
this Application/Declaration without a hearing being held, on or before
March 1, 1996, or as soon thereafter as practicable.
The Applicants (i) do not request a recommended decision by a hearing
officer, (ii) do not request a recommended decision by any other responsible
officer of the Commission, (iii) hereby specify that the Division of Investment
Management may assist in the preparation of the Commission's decision, and (iv)
hereby request 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:
- ------------------
(a) Exhibits
B Form of Subordinated Note
*F Opinion of Counsel
*G-1 Financial Data Schedule for NEERI
*G-2 Financial Data Schedule for NEES (Parent Company Only)
*G-3 Financial Data Schedule for NEES (Consolidated)
H Proposed Form of Notice
(b) Financial Statements
*1-A Balance Sheet of NEES at December 31, 1995, Actual and Pro
Forma (Parent Company Only)
*1-B Statement of Income and Retained Earnings for NEES for twelve
months ended December 31, 1995, Actual and Pro Forma (Parent
Company Only)
*2-A Consolidated Balance Sheet of NEES at December 31, 1995,
Actual and Pro Forma
*2-B Statement of Consolidated Income for NEES for twelve months
ended December 31, 1995, Actual and Pro Forma
*3-A Balance Sheet of NEERI at December 31, 1995, Actual and Pro
Forma
*3-B Statement of Loss and Retained Deficit for NEERI for twelve
months ended December 31, 1995, Actual and Pro-Forma
*To be filed by amendment
<PAGE>
Item 7. Environmental Effects
- ------------------------------
The transactions proposed by this Application/Declaration do not involve
a major Federal action significantly affecting the quality of the human
environment.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this Application/Declaration
on Form U-1 to be signed on their behalf, as indicated by the undersigned
officers thereunto duly authorized by such companies.
NEW ENGLAND ELECTRIC SYSTEM
s/Michael E. Jesanis
_____________________________________
Michael E. Jesanis, Treasurer
NEW ENGLAND ELECTRIC RESOURCES, INC.
s/John G. Cochrane
_____________________________________
John G. Cochrane, Treasurer
Dated: January 25, 1996
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. 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 assumed
or shall be held to any liability therefore.
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
B Form of Subordinated Note Filed herewith
F Opinion of Counsel To be filed by
amendment
G-1 Financial Data Schedule To be filed by
for NEERI amendment
G-2 Financial Data Schedule To be filed by
for NEES (Parent Company Only) amendment
G-3 Financial Data Schedule To be filed by
for NEES (Consolidated) amendment
H Proposed Form of Notice Filed herewith
FINANCIAL STATEMENT INDEX
FINANCIAL
STATEMENT
NO. DESCRIPTION PAGE
- --------- ----------- ----
1-A Balance Sheet of NEES at To be filed by
December 31, 1995, Actual amendment
and Pro Forma (Parent Company Only)
1-B Statement of Income and Retained To be filed by
Earnings for NEES for twelve months amendment
ended December 31, 1995, Actual
and Pro Forma (Parent Company Only)
2-A Consolidated Balance Sheet of NEES To be filed by
at December 31, 1995, Actual amendment
and Pro Forma
2-B Statement of Consolidated Income To be filed by
for NEES for twelve months amendment
ended December 31, 1995,
Actual and Pro Forma
3-A Balance Sheet of NEERI at To be filed by
December 31, 1995, Actual and amendment
Pro Forma
3-B Statement of Loss and Retained To be filed by
Deficit for NEERI for twelve months amendment
ended December 31, 1995, Actual and
Pro Forma
<PAGE>
EXHIBIT B
OPEN ACCOUNT ADVANCE
SUBORDINATED PROMISSORY NOTE
$_____________________ DATED:_________________
FOR VALUE RECEIVED, the undersigned NEW ENGLAND ELECTRIC RESOURCES, INC.
(NEERI), a Massachusetts corporation hereby promises to pay to NEW ENGLAND
ELECTRIC SYSTEM (NEES) ON DEMAND, but in any event, no later than ____________
the principal sum of ________________________ DOLLARS ($____________) or, if
less, the aggregate unpaid principal amount of all advances made by NEES to
NEERI pursuant to authority granted by orders of the Securities and Exchange
Commission under the Public Utility Holding Company Act of 1935 (the 1935 Act)
without interest. All such advances and all payments made on account of the
principal hereof shall be recorded by NEES and endorsed on the grid attached
hereto which is part of this Subordinated Promissory Note.
TERMS OF SUBORDINATION
(a) The principal on this Subordinated Promissory Note is and shall be
subordinated in right of payment in all respects to all other indebtedness of
NEERI to any lender which is not an "affiliate" of NEERI, as that term is
defined in the 1935 Act (hereinafter, "Senior Debt").
(b) Without limiting the foregoing subparagraph (a), (i) no payment on
this Subordinated Promissory Note shall be made or received, directly or
indirectly, in cash or other property or by set-off or in any other manner
(including, without limitation, from or by way of collateral), so long as any
Senior Debt remains outstanding, except that prepayments of principal on this
Subordinated Promissory Note may be made and received so long as, but only so
long as, at the time of such payments and immediately after giving effect
thereto, no Event of Default, or event which, with the giving of notice or the
lapse of time, or both, would become an Event of Default exists under the
provisions of any Senior Note or any other instrument evidencing Senior Debt or
any agreement under which Senior Debt is then outstanding, and (ii) in the event
of any insolvency or bankruptcy proceedings directly or indirectly involving
NEERI, then all principal of and interest (including, without limitation, any
and all interest which shall accrue after the filing of any petition in
bankruptcy) on, the Senior Debt shall first be paid in full before any payment
on account of principal, premium (if any) or interest is made upon this
Subordinated Promissory Note, and in any such proceedings any payment or
distribution of any kind or character, whether in cash, securities or other
property, to which the holder of this Subordinated Promissory Note would be
entitled if this Subordinated Promissory Note were not subordinated to the
Senior Debt shall be made by the liquidating trustee or agent or other person
making such payment or distribution, or by the holder of this Subordinated
Promissory Note if received by him, directly to the holders of the Senior Debt
to the extent necessary to make payment in full of the Senior Debt remaining
unpaid, after giving effect to any concurrent payment or distribution to or for
the holders of the Senior Debt.
<PAGE>
(c) The foregoing provisions regarding subordination are intended solely
for the purpose of defining the relative rights of the holders of the Senior
Debt on the one hand and the holder of this Subordinated Promissory Note on the
other hand. Nothing contained herein, is intended to or shall impair, as
between NEERI and the holder of this Subordinated Promissory Note, the
obligation of NEERI to pay to the holder of this Subordinated Promissory Note
the principal of such Subordinated Promissory Note, subject, in each case, to
the rights under the foregoing subparagraphs of the holders of the Senior Debt.
NEW ENGLAND ELECTRIC RESOURCES, INC.
By:_______________________________
Title:
<PAGE>
EXHIBIT H
PROPOSED FORM OF NOTICE
New England Electric System (NEES), a registered holding company, and its
subsidiary New England Electric Resources, Inc. (NEERI), have filed Form U-1
Application/Declaration File No. 70-____ under Sections 6(a), 7, 9(a), 10, 12,
13, 32, and 33 of the Public Utility Holding Company Act of 1935 (the Act) and
Rules 45 and 53 thereunder.
NEES and NEERI seek authority to (i) acquire interests in, finance the
acquisition, and hold the securities, of one or more exempt wholesale
generators (each, an "EWG") as defined in Section 32 of the Act and/or foreign
utility companies (each, a "FUCO") as defined in Section 33 of the Act, each, an
"Exempt Company", either directly, or indirectly through a Project Parent as
discussed below, without filing specific project applications. The applicants
propose the following limitations on such authority: first, the full amount of
any such investment or financing, as well as any authorized guarantees or
assumptions of liability, shall be counted as part of the Total Authority (as
defined below); second, no such investment or financing will be made unless at
the time of the investment or financing (and after giving effect thereto),
NEES' "aggregate investment" (determined in accordance with Rule 53(a)(1)(i))
in EWGs, FUCOs and Project Parents does not exceed 50% of the system's
"consolidated retained earnings" (as defined in Rule 53(a)(1)(ii)) in
compliance with the provisions set forth in Rule 53 of the Act. The applicants
state that they will comply with all other applicable rules under the Act,
including, without limitation, such rules which may be promulgated in the
future pursuant to Section 33.
NEES and NEERI shall take steps to ensure compliance with Section 32 and
Section 33 and the regulations promulgated thereunder with regard to financing
investments in EWGs and FUCOs, including, without limitation, the criteria in
Rule 53, before proceeding with the financing of an investment in an EWG, FUCO
or a Project Parent.
To facilitate the acquisition and ownership of Exempt Companies, NEES and
NEERI seek authority to organize, form or acquire, and to liquidate, dissolve
or sell, in whole or in part, subsidiary companies which are not Exempt
Companies (each, a "Project Parent"). Project Parents shall engage, directly
or indirectly, and exclusively, in the business of owning and holding the
interests and securities of one or more Exempt Companies and in project
development activities relating to the acquisition of such interests and
securities and the underlying electrical generation, transmission and
distribution projects ("Investment Projects").
Project Parents shall be special purpose domestic or foreign
corporations, partnerships or limited liability companies (or the equivalent of
such entities in the foreign country where such Project Parent may be formed).
NEES and NEERI request authority to form Project Parents (a) to facilitate
making bids or submitting proposals to acquire interests in Exempt Companies,
(b) in order to facilitate and/or close on the acquisition or financing of
interests in Exempt Companies, or (c) at any time subsequent to the acquisition
of an interest in an Exempt Company. Project Parents may also be formed to
participate in joint ventures with nonassociates for the purpose of owning
interests in Exempt Companies and/or engaging in Investment Projects.
The applicants request authority for any Project Parent to issue
securities to NEES and/or NEERI and for NEES and/or NEERI to acquire such
securities. Such securities may take the form of capital stock or shares, debt
securities, trust certificates, partnership interests or other equity or
participation interests.
<PAGE>
NEERI and NEES also request that NEERI and Project Parents have the
authority to provide Project Parent's and Project Parent subsidiaries, with all
services necessary or desirable for their operations, including, without
limitation, management, engineering, employment, administrative, tax,
consulting, accounting, and computer and software support. The Project
Parents, their subsidiaries, and/or NEERI will not provide such services for
any associate company which derives, directly or indirectly, any material part
of its income from sources within the United States, and which is a public
utility company operating within the United States, other than as authorized by
the Commission in a separate order or orders. Accordingly, NEES and NEERI
request that such services provided by NEERI and/or Project Parents and their
subsidiaries to Project Parents or their subsidiaries be exempt from the
standards of section 13(b) of the Act and the rules and regulations under such
section.
Within 45 days after NEES or NEERI, as the case may be, determines that
the purpose for owning any Project Parent no longer exists (whether due to
termination of a proposed project acquisition, loss of a bid, change of law, or
otherwise), it shall (to the extent it is able to do so) liquidate or dissolve
such Project Parent, unless, within that time, NEES or NEERI, as the case may
be, determines that such Project Parent may be used in connection with a
proposal or plan to develop or acquire an interest in an Exempt Company
different from that originally intended.
NEES proposes to finance, from time to time through December 31, 1998,
the activities of NEERI and Project Parents for the purposes set forth in this
Application/Declaration in the form of investments ("NEES Investments"). Such
NEES Investments may take the form of purchases of capital shares, partnership
interests, trust certificates (or the equivalent of any of the foregoing under
the laws of foreign jurisdictions), capital contributions, subordinated loans
evidenced by subordinated promissory notes; open account advances; guarantees,
bid bonds or other credit support to secure obligations incurred by NEERI
and/or Project Parents in connection with Exempt Company investments, or of
NEERI's undertaking to contribute equity to a Project Parent; and reimbursement
agreements with banks entered into to support letters of credit delivered as
security for NEES' or NEERI's equity contribution obligation to a Project
Parent or otherwise in connection with a Project Parent's or NEERI's Exempt
Company project development activities. NEES Investments, together with the
Non-Recourse Debt and Exempt Company Investments (both as defined below), will
not exceed a principal amount of $60 million in the aggregate outstanding at any
one time (the "Total Authority"). No NEES Investment will be made unless at the
time of the NEES Investment (and after giving effect thereto), NEES' "aggregate
investment" (determined in accordance with Rule 53(a)(1)(i)) in EWGs, FUCOs and
Project Parents (inclusive of the Non-Recourse Debt and Exempt Company
Investments, both as defined below) does not exceed 50% of NEES' "consolidated
retained earnings" (as defined in Rule 53(a)(1)(ii)) in compliance with the
provisions set forth in Rule 53 under the Act.
NEES and NEERI also request authority to, from time to time through
December 31, 1998, (i) guarantee the indebtedness or other obligations of one
or more Exempt Companies; (ii) assume the liabilities of one or more Exempt
Companies; and/or (iii) enter into guarantees and letters of credit
reimbursement agreements in support of equity contribution obligations or
otherwise in connection with project development activities for one or more
Exempt Companies ("Exempt Company Investments"). Any such guarantees,
reimbursement agreements and letters of credit would have the terms specified
below. The aggregate amount of such Exempt Company Investments, together with
the NEES Investments and the Non-Recourse Debt, will not exceed the Total
Authority in the aggregate outstanding at any one time. No Exempt Company
Investment will be made unless at the time of the Exempt Company Investment (and
after giving effect thereto), NEES' "aggregate investment" (determined in
accordance with Rule 53(a)(1)(i)) in EWGs, FUCOs and Project Parents (inclusive
of the Non-Recourse Debt and NEES Investments) does not exceed 50% of NEES'
<PAGE>
"consolidated retained earnings" (as defined in Rule 53(a)(1)(ii)) in
compliance with the provisions set forth in Rule 53 under the Act.
NEES and NEERI propose that the amount of the Total Authority be reduced
from time to time by the amount of NEES Investments and/or Exempt Company
Investments made, and Non-Recourse Debt issued, and be increased from time to
time by: (1) proceeds received upon the sale, liquidation, repayment or other
disposition of any NEES Investment or Exempt Company Investment; (2) proceeds
generated from NEERI's or Project Parents' activities in connection with their
investments in Exempt Companies or any particular Investment Project in which
NEERI or NEES has an interest, directly or indirectly; (3) the reimbursement of
such NEES Investments or Exempt Company Investments out of the proceeds of any
third party financing of NEERI's or Project Parents' activities or any
particular Investment Project in which NEERI or NEES, directly or indirectly,
has an interest; or (4) the extent to which Non-Recourse Debt issued has been
paid.
NEES Investments may be made from NEES to NEERI and/or Project Parents
directly or indirectly. Any open account advance made by NEES will be
non-interest bearing and shall have a maturity not exceeding one year. Any
promissory note issued to NEES by NEERI or a Project Parent, or to NEERI by a
Project Parent, and any promissory note or other similar evidence of
indebtedness issued by a Project Parent to a person other then NEES or NEERI
with respect to which NEES or NEERI may issue a guarantee, would mature not
later than 30 years after the date of issuance thereof, and would bear interest
at a rate (a) not greater than the prime rate of a bank to be designated by NEES
in the case of a promissory note issued to NEES or NEERI, and (b) in the case of
any note or similar evidence of indebtedness issued to a person other than NEES
or NEERI and guaranteed by NEES or NEERI, at a rate not in excess of the greater
of (1) if such note or other indebtedness is U. S. dollar denominated, the
greater of (i) 250 basis points above the greater of (A) the lending bank's or
other recognized prime rate and (B) 50 basis points above the federal funds
rate, (ii) 400 basis points above the specified London Interbank Offered Rate
plus any applicable reserve requirement, or (iii) a negotiated fixed rate
which, in any event, would not exceed 500 basis points above the 30 year
"current coupon" treasury bond rate; and (2) if such note or other indebtedness
is denominated in the currency of a foreign nation, at a fixed or floating rate
which, when adjusted (i.e., reduced) for the prevailing rate of inflation in
such nation, as reported in official indices published by such nation, would be
equivalent to a rate on a U. S. dollar denominated borrowing of identical
average life that does not exceed 10% over the highest rate set forth in (1)
above.
Any promissory note issued by NEERI or any Project Parent to NEES, or by
any Project Parent to NEERI, may, at the option of the holder of such promissory
note, be converted to a capital contribution to the issuer of such promissory
note by such holder's forgiveness of the indebtedness evidenced by the note.
Any reimbursement agreement supporting a letter of credit would have a
term not in excess of 30 years. Drawings under any such letter of credit would
bear interest at not more than 5% above the prime rate of the letter of credit
bank as in effect from time to time, and letter of credit fees would not exceed
1% annually of the face amount of the letter of credit.
Any investment by NEES or NEERI in the capital shares or other equity
securities of a Project Parent that have a stated par value will be in an amount
equal to or greater than such par value. Any direct or indirect investment by
NEES and/or NEERI in any Project Parent would occur only if, at the time thereof
and after giving effect thereto, (1) the Total Authority is not exceeded, and
(2) NEES' "aggregate investment", determined in accordance with Rule
53(a)(1)(i), in all FUCOs, EWGs and Project Parents would not exceed 50% of
NEES' "consolidated retained earnings", as defined in Rule 53(a)(1)(ii). Any
<PAGE>
direct or indirect investment by NEES and/or NEERI in any particular Project
Parent would be limited to an amount which does not exceed that reasonably
required in connection with making the underlying investment in any Exempt
Company with respect to which such Project Parent was organized or formed,
taking into account development expenditures, working capital needs and cash
reserves required to be maintained in accordance with any related financing
agreements.
NEES and NEERI request authority for each Project Parent to issue, from
time to time, stock, promissory notes, commercial paper or other debt or equity
securities to entities other than NEES or NEERI (and with respect to which there
is no recourse to NEES or NEERI except to the extent that NEES or NEERI may
guarantee payment of such securities pursuant to the authorization requested in
their Application/Declaration), including, without limitation, banks,
insurance companies and other financial institutions, exclusively for the
purpose of financing or refinancing investments in, and project development
activities for, Exempt Companies ("Non-Recourse Debt"). The applicants propose
that such Non-Recourse Debt be issued in one or more transactions from time to
time through the earlier to occur of (i) December 31, 1998, and (ii) the
effective date of any rule or regulation under the Act exempting such
transactions from the requirement for prior Commission authorization.
The aggregate principal amount of Non-Recourse Debt issued, together with
NEES Investments and Exempt Company Investments, will not exceed the Total
Authority in the aggregate outstanding at any one time. No Non-Recourse Debt
will be issued unless at the time of such issuance (and after giving effect
thereto), NEES' "aggregate investment" (determined in accordance with Rule
53(a)(1)(i)) in EWGs, FUCOs and Project Parents (inclusive of the Exempt
Company Investments and NEES Investments) does not exceed 50% of NEES'
"consolidated retained earnings" (as defined in Rule 53(a)(1)(ii)) in
compliance with the provisions set forth in Rule 53 under the Act. Any or all
of such Non-Recourse Debt may be denominated in currencies other than U. S.
dollars. In any case in which NEES and NEERI together own less than all of the
equity interests of a Project Parent, only that percentage of the non-recourse
indebtedness of such Project Parent equal to NEES' and NEERI's combined equity
ownership percentage shall be included for purposes of the foregoing
limitation. The applicants anticipate that fees in the form of placement or
commitment fees, or other similar fees, would be paid to lenders, placement
agents or other third parties in connection with the issuance of any such
Non-Recourse Debt.
The applicants propose that any equity securities issued by each Project
Parent to any third party may include capital shares, partnership interests,
trust certificates or the equivalent of any of the foregoing under applicable
foreign law. Debt securities issued to third parties may include secured and
unsecured promissory notes, subordinated notes, bonds or other evidence of
indebtedness. Securities issued by each Project Parent may be denominated in
either U.S. dollars or foreign currencies.
The amount and type of such Non-Recourse Debt securities, and the terms
thereof, including (in the case of any indebtedness) interest rate, maturity,
prepayment or redemption privileges and the terms of any collateral security
granted with respect thereto, would be negotiated in arms length transactions
on a case by case basis, taking into account differences from project to project
in optimum debt-equity ratios, projections of earnings and cash flow,
depreciation lives and methods and other similar financial and performance
characteristics of each project. The applicants request the authority to
negotiate the terms and conditions of such Non-Recourse Debt securities without
further approval by the Commission. Notwithstanding the foregoing, no equity
security having a stated or par value would be issued or sold by a Project
Parent for a consideration that is less than such stated or par value. Further,
no note, bond or other evidence of indebtedness issued or sold by a Project
Parent will mature later than 30 years from the date of issuance thereof, and
<PAGE>
will bear interest at a rate not in excess of the greater of (1) if such note,
bond or other indebtedness is U. S. dollar denominated, the greater of (i) 250
basis points above the greater of (A) the lending bank's or other recognized
prime rate and (B) 50 basis points above the federal funds rate, (ii) 400 basis
points above the specified London Interbank Offered Rate plus any applicable
reserve requirement, or (iii) a negotiated fixed rate which, in any event,
would not exceed 500 basis points above the 30 year "current coupon" treasury
bond rate; and (2) if such note, bond or other indebtedness is denominated in
the currency of a foreign nation, at a fixed or floating rate which, when
adjusted (i.e., reduced) for the prevailing rate of inflation in such nation,
as reported in official indices published by such nation, would be equivalent
to a rate on a U. S. dollar denominated borrowing of identical average life
that does not exceed 10% over the highest rate set forth in (1) above.
The applicants request authority for any Project Parent or NEERI to agree
in any case to pay placement or commitment fees, and other similar fees, in
connection with such issuance, provided that the aggregate amount of any such
fees (i) payable at or about the time of issuance of the Non-Recourse Debt
securities would not exceed 4% of the stated or principal amount thereof and
(ii) payable thereafter would not cause the effective annual interest charge on
such securities to exceed 115% of the stated interest rate thereon.
In connection with investments in Exempt Companies, a portion of the
capital requirements of any such Exempt Company would typically be obtained
through non-recourse financing involving borrowings from banks and other
financial institutions. In some cases, however, it may be necessary or
desirable to structure an investment in an Exempt Company such that the
obligations created are not those of the Exempt Company but instead those of its
parent companies. For example, in a consortium of non-affiliated companies
bidding to purchase an interest in an Exempt Company, each consortium member
would ordinarily be obligated to fund its respective share of the proposed
purchase price. If external sources of funds are needed for this purpose, a
consortium participant may choose to engage in non-recourse financing through
one or more single purpose subsidiaries that would then utilize the proceeds of
the financing to acquire an interest in the Exempt Company. The applicants
believe that such external financing by a Project Parent involves the same
issues as are involved when an Exempt Company carries out such external
financing, in terms of the possible adverse impacts upon the financial
integrity of a registered holding company system. Therefore, where the
proceeds of such an external financing (or refinancing) are used to invest in an
Exempt Company, without direct or indirect recourse to NEES or NEERI with
respect to the securities issued or sold (except to the extent that NEES or
NEERI may guarantee payment of such securities pursuant to the authorization
requested in their Application/Declaration), there is no basis for any adverse
findings under Sections 6, 7 and/or 12 of the Act, provided that, at the time
the securities are issued there is full compliance with Rule 53.
NEES and NEERI anticipate that, in connection with the issuance of debt
securities by any Project Parent, it may be necessary for such Project Parent to
pledge and/or grant a security interest in its assets. Such pledge or grant of a
security interest may include, without limitation, the shares or other equity
securities of any Exempt Company or Project Parent, including, without
limitation, a security interest in any distributions from any such Exempt
Company or Project Parent, or a collateral assignment of its rights under, and
interests in, its other property, including, without limitation, any rights
under any power purchase agreement, fuel supply agreement or other project
agreement or contract to which it is a party. The applicants request authority
for such pledges and/or grants to be made.
NEES would obtain the funds for any direct or indirect investment in any
Project Parent or Exempt Company from available cash or as the Commission may
otherwise authorize by separate order. Neither NEES nor NEERI is requesting
<PAGE>
authority to issue any additional securities for the purpose of funding the
acquisition of any Project Parents or Exempt Companies.
NEES and NEERI submit that all of the criteria of Rule 53 under the Act
with respect to the proposed transactions are satisfied. Any investment by
NEES and/or NEERI in any Project Parent would occur only if, at the time thereof
and after giving effect thereto, NEES' "aggregate investment", determined in
accordance with Rule 53(a)(1)(i), in all FUCOs, EWGs and Project Parents would
not exceed 50% of NEES' "consolidated retained earnings", as defined in Rule
53(a)(1)(ii). NEES and NEERI shall comply with the recordkeeping requirements
of Rule 53(a)(2). Pursuant to Rule 53(a)(3), no more than 2% of the employees
of operating subsidiaries of NEES will render services, at any one time,
directly or indirectly, to any EWG or FUCO held directly or indirectly by NEES
and/or NEERI. Within such 2% limit, time expended by employees of public
utility subsidiaries of NEES in rendering services to EWGs, FUCOs, or Project
Parents in which NEES, directly or indirectly, owns an interest, will not
exceed an aggregate of 100 person-years without further authorization from the
Commission. The accounting by the NEES system of such services will ensure that
NEERI or the Project Parents, as the case may be, will be obligated to reimburse
the appropriate operating subsidiary for any such services. In no event will
the provision of such services adversely affect the rate base or the costs to
ratepayers of any such operating subsidiary. The applicants shall comply with
the requirements of Rule 53(a)(4). None of the provisions of Rule 53(b) render
the provisions of Rule 53(a) unavailable for the proposed transactions for
which authorization is requested herein.
