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File No. 70-
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, DC 20549
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
NEW ENGLAND ELECTRIC SYSTEM
and
NEES ENERGY, INC.
(Name of companies 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 of applicant)
Michael E. Jesanis Kirk L. Ramsauer
Treasurer Associate General Counsel
25 Research Drive 25 Research Drive
Westborough, MA 01582 Westborough, MA 01582
(Names and address of agents for service)
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Item 1. Description of Proposed Transactions
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New England Electric System (NEES) is a registered holding
company under the Public Utility Holding Company Act of 1935 (the
Act) whose subsidiary companies include New England Power Company,
an electric generation subsidiary (NEP), retail electric utility
subsidiaries (the Retail Companies), New England Power Service
Company (NEPSCO, a service company subsidiary), New England
Electric Resources, Inc. (NEERI), a wholly-owned, non-utility
subsidiary of NEES, an energy company subsidiary, and two electric
power marketing subsidiaries (collectively, the NEES System).
By its Orders dated May 23, 1996 (HCAR No. 26520) and August
28, 1996 (HCAR No. 26563) (the Orders), the Commission approved
the formation of one or more marketing companies by NEES in
Massachusetts, New Hampshire, Rhode Island, Connecticut, Maine,
Vermont, Maryland, Delaware, Pennsylvania, New Jersey, and New
York (the Marketing Companies) as described in NEES'
Application/Declaration on Form U-1 (File No. 70-8803) (the
Statement). Pursuant to the Orders, NEES has formed NEES Energy,
Inc. (NEES Energy), a Massachusetts corporation, and Granite State
Energy, Inc. (Granite State Energy), a New Hampshire corporation,
to undertake marketing activities consistent with the Commission's
Orders.
A. AllEnergy LLC Investment
----------------------------
NEES Energy intends to enter into a joint venture with a
subsidiary of Eastern Enterprises (Eastern) to engage in the
marketing of energy and related services and products. The retail
electric utility subsidiaries of NEES serve approximately 1.3
million customers and have peak demand and capacity resources
above 4300 MW and 5500 MW, respectively. Eastern, an exempt
public utility holding company, owns and operates Boston Gas
Company, New England's largest distributor of natural gas, serving
over 500,000 customers in eastern and central Massachusetts
including Boston, and Midland Enterprises, Inc. a coal and other
dry bulk cargo inland waterway carrier.
NEES Energy proposes to invest, from time to time, not
exceeding $50 million in, and be a voting member of, AllEnergy
Marketing Company, L. L. C., a limited liability corporation to be
formed under the laws of The Commonwealth of Massachusetts on
September 18, 1996 (AllEnergy LLC) pursuant to a Limited Liability
Company Agreement (the LLC Agreement), a copy of which is attached
hereto as Exhibit B-1. NEES Energy proposes to own not exceeding a
fifty percent (50%) voting interest in AllEnergy LLC. The
remaining fifty percent (50%) voting interest in AllEnergy LLC
will initially be owned by AllEnergy Marketing Company, Inc., a
wholly owned subsidiary of Eastern Enterprises (Eastern Sub). The
LLC Agreement makes NEES Energy's obligation to invest in
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AllEnergy LLC conditional upon NEES Energy's receipt of investment
authorization from the Commission in a satisfactory form. Third
parties may later invest in owning an interest in AllEnergy LLC
pursuant to the terms of the LLC Agreement.
AllEnergy LLC will engage in the business of marketing and
selling: (i) energy commodities, including electricity, natural
gas, oil and other energy sources as well as options, futures
contracts, forward contracts, collars, spot contracts or swap
contracts related to the choice, purchase or consumption of any
such energy commodity and any other financial products marketed or
used in connection therewith, and (ii) products and services
related to the choice, purchase or consumption of any such energy
commodity, whether or not sold or provided on a bundled basis with
such natural gas, electricity, oil, or other energy source.
AllEnergy LLC will employ various risk-reduction measures to limit
potential losses that could be incurred through AllEnergy LLC
activities. These measures may include energy commodity hedging
transactions. Management of AllEnergy LLC will be by its
members, NEES Energy, Eastern Sub, and other entities (if any)
subsequently admitted to membership in AllEnergy LLC. The members
of AllEnergy LLC may delegate powers and authority to officers of
AllEnergy LLC, subject to the restrictions of the LLC Agreement.
AllEnergy LLC has developed a five year business plan to implement
its marketing strategy. AllEnergy LLC's initial target markets
are Massachusetts, Rhode Island, New Hampshire, Connecticut,
Vermont, Maine, and New York. AllEnergy LLC will only make retail
sales of an energy commodity in a target market state or other
state if such sales are allowed by other than a franchised
utility.
To date, three New England states have initiated programs for
the retail wheeling of electricity. Granite State Energy is
participating in the New Hampshire pilot program to establish
retail electric competition adopted by the New Hampshire Public
Utilities Commission. NEES Energy is participating in two of the
Massachusetts retail electric competition pilot programs approved
by the Massachusetts Department of Public Utilities. On August 7,
1996, the Governor of Rhode Island signed into law the Electric
Restructuring Act of 1996 (96-H 8124 SUB B; the RI Act). The RI
Act authorizes retail wheeling in Rhode Island on the following
timetable for the indicated customer classes:
July 1, 1997 -- All new customers over 200 KW, existing
manufacturing customers over 1500 KW, and all state accounts
January 1, 1998 -- All manufacturing customers over 200 KW,
and all municipal accounts
July 1, 1998 -- All remaining customers
<PAGE>
The RI Act provides that, if 40 percent of New England has
customer choice before July 1998, all Rhode Island customers will
have choice within three months, regardless of the above
timetable.
Gas deregulation in Massachusetts is proceeding on a company
by company basis. Boston Gas Company has a rate case on file with
the Massachusetts Department of Public Utilities setting forth a
plan to transition from traditional bundled service to a
"distribution only" company (by exiting the merchant function of
buying and arranging transport of gas) by the end of 1999 for all
commercial/industrial and residential customers; Boston Gas
Company's system is presently open for its largest customer class.
AllEnergy LLC may choose to form one or more subsidiaries in
order, among other things, to pursue its business in a particular
state; AllEnergy LLC requests authority to form such subsidiaries.
AllEnergy LLC may, pursuant to its business as outlined
above, acquire ownership interests in the physical or other assets
of third parties. AllEnergy LLC may have opportunities to acquire
businesses to complement its business, and rather than acquire
assets may prefer to acquire the securities thereof, but will not
acquire any securities of third parties, paying in the aggregate
therefor more than $20 million, without the further authorization
of the Commission. AllEnergy LLC will not acquire any utility
assets or gas distribution facilities, as those terms are defined
under the Act and regulations and orders issued thereunder, and
will, therefore, not be either an electric or gas utility under
the Act.
AllEnergy LLC may also be required to supply guarantees or
other credit support agreements of its members, or their
respective parents, in the ordinary course of its business
including, without limitation, in connection with its execution of
office leases, or of long term gas or electrical supply contracts.
The applicants request authorization to provide such guarantees or
credit support in amounts not to exceed, in the aggregate and
inclusive of guarantees or credit support provided in connection
with short term borrowing as set forth in Section E of this filing,
$20 million.
B. LLC Agreement Loan and Transfer Provisions
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Section 3.7 of the LLC Agreement provides that in the event
an AllEnergy LLC member defaults in making a required capital
contribution to AllEnergy LLC, the non-defaulting member may, at
its discretion, advance to AllEnergy LLC on behalf of the
defaulting member all or a portion of such required capital
contribution (a Member Default Loan). The defaulting member is
responsible for repaying the Member Default Loan to the member
making such loan in accordance with Section 3.7.3 of the LLC
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Agreement. In the event that (i) the non-defaulting member elects
not to make such a Member Default Loan, or (ii) the Member Default
Loan is not repaid, then the members' percentage interests in
AllEnergy LLC shall, at the election of the non-defaulting member,
be adjusted to reflect the failure of the defaulting member to
either make the required capital contribution, or repay the Member
Default Loan, as the case may be, in accordance with a formula set
forth in Section 3.7.4 of the LLC Agreement. The applicants
request authorization to make or repay any such Member Default
Loan, or effect such adjustments of member interests, pursuant to
the terms of the LLC Agreement.
Members of AllEnergy LLC may effect a transfer of all or a
portion of their interest therein in accordance with Article 9 of
the LLC Agreement. Such transfers may include required regulatory
transfers, transfers to affiliates, transfers to another member of
AllEnergy LLC, and transfers to third parties. Section 9.3 of the
LLC Agreement provides that, in the event an AllEnergy LLC member
receives an offer to purchase its interest therein and intends to
transfer its interest pursuant to such offer, or must make a
required regulatory transfer of all or a portion of its interest,
the other member shall have a right to purchase such interest at
the offer price, or at the fair market value of the transferred
portion of such interest (in the case of a required regulatory
transfer), (the Purchase Right). The applicants request
authorization to make from time to time such transfers, and to
exercise such Purchase Right, pursuant to the terms of the LLC
Agreement.
The LLC Agreement provides a mechanism whereby either NEES
Energy or Eastern Sub may trigger a withdrawal of either party
from AllEnergy LLC by means of a buy/sell transaction (the
Buy/Sell Provision). In summary, the Buy/Sell Provision permits
either party to withdraw by giving the other party a notice of
intention to withdraw indicating a cash price at which the
withdrawing party would be willing to either buy or sell its
interest in AllEnergy LLC. The party receiving such notice may
then either buy the other party's AllEnergy LLC interest, or sell
its own AllEnergy LLC interest to such other party, at such price.
The Buy/Sell Provision may, among other things, be used to address
conflicts between NEES Energy and Eastern Sub in connection with
AllEnergy LLC which the parties are unable to resolve. The
Buy/Sell Provision is set forth in detail in Section 9.6 of the LLC
Agreement (see Exhibit B-1). The applicants request authorization
to consummate a Buy/Sell Provision transaction, should this become
necessary, without further approval from the Commission.
C. Financing of AllEnergy LLC Investment
-----------------------------------------
NEES proposes to provide initial financing for NEES Energy's
investment in AllEnergy LLC by making capital contributions and/or
loans to NEES Energy from time to time, provided that such NEES
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financing shall not be in excess of $50 million in the aggregate
outstanding at any one time. Any such loans will be in the form of
non-interest bearing subordinated notes payable in twenty years or
less from the date of issue (see Exhibit B-2 hereto). NEES Energy
may prepay any or all of such outstanding notes, in whole or in
part, at any time and from time to time without premium or penalty.
NEES shall only make such loans provided: (a) there shall be in
full force and effect appropriate orders of all regulatory
authorities having jurisdiction in the premises; (b) the making of
such loan shall not contravene any provision of law or any
provision of the certificate of incorporation or by-laws of NEES
Energy or any agreement binding upon NEES Energy; and (c) the
making of such loan shall not contravene any provision of law or
any provision of the Agreement and Declaration of Trust of NEES.
Subsequent capital contributions or open account advances without
interest, loans, or extensions of credit, from NEES to NEES Energy
in accordance with the terms of Rule 45 of the Act, are exempt from
the requirement of authorization by the Commission. It is proposed
that the above investments be authorized through December 31,
2001.
D. Personnel
-------------
AllEnergy LLC staffing is expected to begin with a small
group of employees. It is intended that four employees of NEPSCO
will be assigned to AllEnergy LLC on a full-time basis; to the
extent any more NEPSCO personnel are assigned to AllEnergy LLC,
they will become employees of AllEnergy LLC. Other than such four
NEPSCO employees, AllEnergy LLC will have its own employees and
only rely on NEPSCO or an Eastern subsidiary for administrative
services such as accounting, tax, legal, information services,
insurance, and personnel management. All costs associated with
these NEPSCO services, and with services of the above four NEPSCO
employees assigned to AllEnergy LLC on a full-time basis, would be
fully reimbursed on a cost basis by AllEnergy LLC in accordance
with Rules 90 and 91 of the Act; reimbursements for these costs
will be on a thirty-day cycle basis.
E. Short-term Borrowing
------------------------
AllEnergy LLC seeks approval of the Commission for short-term
borrowings from third parties through December 31, 2001, such
borrowings not to exceed $50 million in the aggregate outstanding
at any one time.
The proceeds from the proposed borrowings are to be used
for general corporate purposes relating to ordinary business
operations, including working capital. As AllEnergy LLC is a new
entity, it is not possible to provide a meaningful analysis of the
source and application of funds through December 31, 2001.
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The proposed borrowings will be evidenced by notes maturing
in less than one year from the date of issuance. AllEnergy LLC
will negotiate with the lenders the interest costs of such
borrowings. AllEnergy LLC will pay fees to the lenders in lieu of
compensating balance arrangements. The effective interest cost of
borrowings from a lender will not exceed the greater of the
lender'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, two 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 AllEnergy
LLC, taking into account fixed maturities, interest rates, and any
other relevant financial considerations. In connection with such
borrowings, it may be necessary for NEES, NEES Energy, Eastern,
Eastern Sub, or affiliates thereof to enter into guarantee or
other credit support agreements with lenders. The applicants
request authorization to enter into such agreements from time to
time in connection with such borrowings.
F. Compliance with Rule 53
---------------------------
Neither NEES nor any subsidiary currently has an ownership
interest in an exempt wholesale generator ("EWG") as defined in
Section 32 of the Act or a foreign utility company ("FUCO") as
defined in Section 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. By its Order
dated April 15, 1996 (HCAR 35-26504), the Commission has
authorized financings by NEES and/or NEERI for the purpose of
acquiring EWGs and FUCOs as set forth in their
Application/Declaration in File No. 70-8783. In the event that
the total amount of authority requested in the above-referenced
Application/Declaration (File No. 70-8783) is invested in
connection with EWGs and FUCOs, NEES' "aggregate investment"
(determined in accordance with Rule 53(a)(1)(i)) in EWGs and FUCOs
would 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 its subsidiaries
shall comply with the requirements of Rules 53 and 54 of the Act in
connection with EWG and FUCO acquisitions and financings. No
funds or borrowings requested in this filing will be used by NEES,
NEERI, NEES Energy, AllEnergy LLC, or any associated company to
invest in EWGs and/or FUCOs.
<PAGE>
G. Rule 24 Certificates
------------------------
NEES Energy and AllEnergy LLC shall file certificates with
the Commission pursuant to the terms and conditions of Rule 24
under the Act on an annual basis, within 90 days of the end of each
year, in connection with the business of AllEnergy LLC. As part of
such Rule 24 filings, NEES Energy and AllEnergy LLC shall provide
the Commission with: (1) a report of the number of permanent
employees assigned to AllEnergy LLC during such period, (2) a
balance sheet, twelve months ending income statement, and
statement of cash flow for AllEnergy LLC, and (3) a description of
the general category of energy commodity related services and
products provided by AllEnergy LLC during such period.
In addition, AllEnergy LLC shall file a Rule 24 certificate
with the Commission informing it of any of the following
transactions, within thirty (30) days following the consummation
of any such transaction: (i) the formation of any subsidiary of
AllEnergy LLC, (ii) a Buy/Sell Provision transaction, or (iii) any
other transaction resulting in a change in the ownership of
membership interests in AllEnergy LLC.
Finally, within 90 days after the end of each calendar
quarter, AllEnergy LLC will file a Rule 24 certificate covering
the transactions effected pursuant to the short-term borrowing
authority requested in Section E hereof 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 lenders, 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 NEES through dividends for the purpose of
NEES 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.
Item 2. Fees, Commissions and Expenses
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Fees, commissions, and expenses to be incurred in connection
with the transactions contemplated by this Application/Declaration
are not expected to exceed $10,000. 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
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The sections of the Act and rules or exemptions thereunder
that are believed to be applicable to the transactions are:
<PAGE>
Sections 6(a), 7, 9(a), 10, 12, 13, 22, 32, 33, and Rules 45, 53,
54, 90, 91, and 104, all relating to the authority requested
herein.
Item 4. Regulatory Approval
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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 October 18, 1996.
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:
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(a) Exhibits
*B-1 LLC Agreement
B-2 Form of Subordinated Promissory Note
*F Opinion of Counsel
*G-1 Financial Data Schedule for NEES
(Parent Company Only)
*G-2 Financial Data Schedule for NEES (Consolidated)
*G-3 Financial Data Schedule for NEES Energy
H Proposed Form of Notice
Pursuant to Section 22 and Rule 104, the applicants hereby
object to the public disclosure of any part or parts of Exhibit B-1
and request confidential treatment therefor. The information
contained in Exhibit B-1 is commercially sensitive and the public
disclosure of such information has the potential to harm
commercial prospects for AllEnergy LLC and/or the applicants.
Since the contents of Exhibit B-1 are of a technical nature or
<PAGE>
concern the rights and obligations as between the private parties
to the LLC Agreement, public disclosure of such information is not
necessary or appropriate in the public interest or for the
protection of consumers or investors.
*To be filed by amendment
(b) Financial Statements
*1-A Balance Sheet of NEES at June 30, 1996,
Actual and Pro Forma (Parent Company Only)
*1-B Statement of Income and Retained Earnings
for NEES for twelve months ended June 30, 1996,
Actual and Pro Forma (Parent Company Only)
*2-A Consolidated Balance Sheet of NEES at
June 30, 1996, Actual and Pro Forma
*2-B Statement of Consolidated Income for NEES for
twelve months ended June 30, 1996, Actual and
Pro Forma
*3-A Balance Sheet of NEES Energy at June 30, 1996,
Actual and Pro Forma
*3-B Statement of Income and Retained Earnings
for NEES Energy for twelve months ended June 30, 1996,
Actual and Pro Forma
*To be filed by amendment
Item 7. Environmental Effects
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The transactions proposed by this Application/Declaration do
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 Application/Declaration on Form U-1 to be signed on their
behalf, as indicated by the undersigned officers thereunto duly
authorized.
NEW ENGLAND ELECTRIC SYSTEM
s/Alfred D. Houston
_______________________________________
Alfred D. Houston, Exec. Vice President
NEES ENERGY, INC.
s/John G. Cochrane
_______________________________________
John G. Cochrane, Treasurer
Dated: September 18, 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 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 therefore.
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EXHIBIT INDEX
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Exhibit
Number Description Page
- ------- ------------------------- ---------------
B-1 LLC Agreement To be filed
by amendment
B-2 Form of Subordinated Filed herewith
Promissory Note
F Opinion of Counsel To be filed
by amendment
G-1 Financial Data Schedule To be filed by
for NEES (Parent Company amendment
only)
G-2 Financial Data Schedule To be filed by
for NEES (Consolidated) amendment
G-3 Financial Data Schedule To be filed by
for NEES Energy 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
June 30, 1996, Actual and by amendment
Pro Forma (Parent Company
only)
1-B Statement of Income and To be filed
Retained Earnings for by amendment
NEES for twelve months
ended June 30, 1996, Actual
and Pro Forma (Parent Company
only)
2-A Consolidated Balance To be filed
Sheet of NEES at June 30, by amendment
1996, Actual and Pro Forma
2-B Statement of Consolidated To be filed
Income for NEES for by amendment
twelve months ended
June 30, 1996, Actual and
Pro Forma
3-A Balance Sheet of To be filed
NEES Energy at June 30, by amendment
1996, Actual and Pro Forma
3-B Statement of Income for To be filed
NEES Energy for twelve by amendment
months ended June 30, 1996,
Actual and Pro Forma
<PAGE>
EXHIBIT B-2
FORM OF OPEN ACCOUNT ADVANCE
SUBORDINATED PROMISSORY NOTE
$_____________________
DATED:_________________
FOR VALUE RECEIVED, the undersigned NEES ENERGY, INC. (NEES
ENERGY), a Massachusetts corporation hereby promises to pay to NEW
ENGLAND ELECTRIC SYSTEM (NEES) ON DEMAND, but in any event, no
later than ____________ the principal sum of
________________________ DOLLARS ($____________) or, if less, the
aggregate unpaid principal amount of all advances made by NEES to
NEES ENERGY 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 NEES ENERGY to any lender which is not an
"affiliate" of NEES ENERGY, 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 NEES ENERGY, 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
<PAGE>
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.
(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 NEES
ENERGY and the holder of this Subordinated Promissory Note, the
obligation of NEES ENERGY 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.
NEES ENERGY, INC.
By:_______________________________
Title:
<PAGE>
EXHIBIT H
PROPOSED FORM OF NOTICE
New England Electric System (NEES) is a registered holding
company under the Public Utility Holding Company Act of 1935 (the
Act) whose subsidiary companies include New England Power Company,
an electric generation subsidiary (NEP), retail electric utility
subsidiaries (the Retail Companies), New England Power Service
Company (NEPSCO, a service company subsidiary), New England
Electric Resources, Inc. (NEERI), a wholly-owned, non-utility
subsidiary of NEES, an energy company subsidiary, and two electric
power marketing subsidiaries (collectively, the NEES System).
By its Orders dated May 23, 1996 (HCAR No. 26520) and August
28, 1996 (HCAR No. 26563) (the Orders), the Commission approved
the formation of one or more marketing companies by NEES in
Massachusetts, New Hampshire, Rhode Island, Connecticut, Maine,
Vermont, Maryland, Delaware, Pennsylvania, New Jersey, and New
York (the Marketing Companies) as described in NEES'
Application/Declaration on Form U-1 (File No. 70-8803) (the
Statement). Pursuant to the Orders, NEES has formed NEES Energy,
Inc. (NEES Energy), a Massachusetts corporation, and Granite State
Energy, Inc. (Granite State Energy), a New Hampshire corporation,
to undertake marketing activities consistent with the Commission's
Orders.
NEES Energy intends to enter into a joint venture with a
subsidiary of Eastern Enterprises (Eastern) to engage in the
marketing of energy and related services and products. NEES
Energy proposes to invest, from time to time, not exceeding $50
million in, and be a voting member of, AllEnergy Marketing
Company, L. L. C., a limited liability corporation to be formed
under the laws of The Commonwealth of Massachusetts on September
18, 1996 (AllEnergy LLC) pursuant to a Limited Liability Company
Agreement (the LLC Agreement). NEES Energy proposes to own not
exceeding a fifty percent (50%) voting interest in AllEnergy LLC.
The remaining fifty percent (50%) voting interest in AllEnergy LLC
will initially be owned by AllEnergy Marketing Company, Inc., a
wholly owned subsidiary of Eastern Enterprises (Eastern Sub). The
LLC Agreement makes NEES Energy's obligation to invest in
AllEnergy LLC conditional upon NEES Energy's receipt of investment
authorization from the Commission in a satisfactory form. Third
parties may later invest in owning an interest in AllEnergy LLC
pursuant to the terms of the LLC Agreement.
AllEnergy LLC will engage in the business of marketing and
selling: (i) energy commodities, including electricity, natural
gas, oil and other energy sources as well as options, futures
contracts, forward contracts, collars, spot contracts or swap
contracts related to the choice, purchase or consumption of any
such energy commodity and any other financial products marketed or
used in connection therewith, and (ii) products and services
related to the choice, purchase or consumption of any such energy
commodity, whether or not sold or provided on a bundled basis with
such natural gas, electricity, oil, or other energy source.
AllEnergy LLC will employ various risk-reduction measures to limit
<PAGE>
potential losses that could be incurred through AllEnergy LLC
activities. These measures may include energy commodity hedging
transactions. AllEnergy LLC will not engage in speculative
trading in the energy market and will limit any hedging activity
to no more than the total amount of energy and energy related
commodities that are subject to market price fluctuations.
AllEnergy LLC's initial target markets are Massachusetts, Rhode
Island, New Hampshire, Connecticut, Vermont, Maine, and New York.
AllEnergy LLC will only make retail sales of an energy commodity
in a target market state or other state if such sales are allowed
by other than a franchised utility.
AllEnergy LLC may choose to form one or more subsidiaries in
order, among other things, to pursue its business in a particular
target state; AllEnergy LLC requests authority to form such
subsidiaries.
AllEnergy LLC may, pursuant to its business as outlined
above, acquire ownership interests in the physical or other assets
of third parties. AllEnergy LLC may have opportunities to acquire
small businesses to complement its business, and rather than
acquire assets may prefer to acquire the securities thereof, but
will not acquire any securities of third parties, paying in the
aggregate therefor more than $20 million, without the further
authorization of the Commission. AllEnergy LLC will not acquire
any utility assets or gas distribution facilities, as those terms
are defined under the Act and regulations and orders issued
thereunder, and will, therefore, not be either an electric or gas
utility under the Act.
AllEnergy LLC may also be required to supply guarantees or
other credit support agreements of its members, or their
respective parents, in the ordinary course of its business
including, without limitation, in connection with its execution of
office leases, or of long term gas or electrical supply contracts.
The applicants request authorization to provide such guarantees or
credit support in amounts not to exceed, in the aggregate and
inclusive of guarantees or credit support provided in connection
with short term borrowing, $20 million.
The LLC Agreement provides that in the event an AllEnergy LLC
member defaults in making a required capital contribution to
AllEnergy LLC, the non-defaulting member may, at its discretion,
advance to AllEnergy LLC on behalf of the defaulting member all or
a portion of such required capital contribution (a Member Default
Loan). The defaulting member is responsible for repaying the
Member Default Loan to the member making such loan in accordance
with the LLC Agreement. In the event that (i) the non-defaulting
member elects not to make such a Member Default Loan, or (ii) the
Member Default Loan is not repaid, then the members' percentage
interests in AllEnergy LLC shall, at the election of the non-
defaulting member, be adjusted to reflect the failure of the
defaulting member to either make the required capital
contribution, or repay the Member Default Loan, as the case may
be, in accordance with a formula set forth in the LLC Agreement.
The applicants and request authorization to make or repay any such
Member Default Loan, or effect such adjustments of member
interests, pursuant to the terms of the LLC Agreement.
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Members of AllEnergy LLC may effect a transfer of all or a
portion of their interest therein in accordance with terms of the
LLC Agreement. Such transfers may include required regulatory
transfers, transfers to affiliates, transfers to another member of
AllEnergy LLC, and transfers to third parties. The LLC Agreement
provides that, in the event an AllEnergy LLC member receives an
offer to purchase its interest therein and intends to transfer its
interest pursuant to such offer, or must make a required
regulatory transfer of all or a portion of its interest, the other
member shall have a right to purchase such interest at the offer
price, or at the fair market value of the transferred portion of
such interest (in the case of a required regulatory transfer),
(the Purchase Right). The applicants request authorization to
make from time to time such transfers, and to exercise such
Purchase Right, pursuant to the terms of the LLC Agreement.
The LLC Agreement provides a mechanism whereby either NEES
Energy or Eastern Sub may trigger a withdrawal of either party
from AllEnergy LLC by means of a buy/sell transaction (the
Buy/Sell Provision). In summary, the Buy/Sell Provision permits
either party to withdraw by giving the other party a notice of
intention to withdraw indicating a cash price at which the
withdrawing party would be willing to either buy or sell its
interest in AllEnergy LLC. The party receiving such notice may
then either buy the other party's AllEnergy LLC interest, or sell
its own AllEnergy LLC interest to such other party, at such price.
The Buy/Sell Provision is intended as a means of addressing
disputes between NEES Energy and Eastern Sub in connection with
AllEnergy LLC which the parties are unable to resolve. The
applicants request authorization to consummate a Buy/Sell
Provision transaction, should this become necessary, without
further approval from the Commission.
NEES proposes to provide initial financing for NEES Energy's
investment in AllEnergy LLC by making capital contributions and/or
loans to NEES Energy from time to time, provided that such NEES
financing shall not be in excess of $50 million in the aggregate
outstanding at any one time. Any such loans will be in the form of
non-interest bearing subordinated notes payable in twenty years or
less from the date of issue. NEES Energy may prepay any or all of
such outstanding notes, in whole or in part, at any time and from
time to time without premium or penalty. Subsequent capital
contributions or open account advances without interest, loans, or
extensions of credit, from NEES to NEES Energy in accordance with
the terms of Rule 45 of the Act, are exempt from the requirement of
authorization by the Commission. It is proposed that the above
investments be authorized through December 31, 2001.
AllEnergy LLC staffing is expected to begin with a small
group of employees. It is intended that four employees of NEPSCO
will be assigned to AllEnergy LLC on a full-time basis; to the
extent any more NEPSCO personnel are assigned to AllEnergy LLC,
they will become employees of AllEnergy LLC. Other than such four
NEPSCO employees, AllEnergy LLC will have its own employees and
only rely on NEPSCO or an Eastern subsidiary for administrative
services such as accounting, tax, legal, information services,
insurance, and personnel management. All costs associated with
<PAGE>
these NEPSCO services, and with services of the above four NEPSCO
employees assigned to AllEnergy LLC on a full-time basis, would be
fully reimbursed on a cost basis by AllEnergy LLC in accordance
with Rules 90 and 91 of the Act; reimbursements for these costs
will be on a thirty-day cycle basis.
AllEnergy LLC seeks approval of the Commission for short-term
borrowings from third parties through December 31, 2001, such
borrowings not to exceed $50 million in the aggregate outstanding
at any one time. The proceeds from the proposed borrowings are to
be used (i) to pay then outstanding notes initially issued to
banks, and (ii) for other corporate purposes relating to ordinary
business operations, including working capital. Certain of such
borrowings may be without prepayment privileges. In connection
with such borrowings, it may be necessary for NEES, NEES Energy,
Eastern, Eastern Sub, or affiliates thereof to enter into
guarantee or other credit support agreements with lenders. The
applicants request authorization to enter into such agreements
from time to time in connection with such borrowings.
