As filed with the Securities and Exchange Commission on March 23, 2000
File No. 70-9537
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1
-----------------------------------------
AMENDMENT NO. 2 TO FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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National Grid USA Eastern Utilities Associates
Massachusetts Electric Company Blackstone Valley Electric Company
Granite State Electric Company Eastern Edison Company
The Narragansett Electric Company Montaup Electric Company
Nantucket Electric Company Newport Electric Corporation
New England Power Company 750 West Center Street
New England Hydro-Transmission Corporation West Bridgewater, MA 02379
New England Hydro-Transmission Electric
Company
New England Electric Transmission Corporation
Research Drive LLC
New England Power Service Company
New England Energy Incorporated
25 Research Drive
Westborough, MA 01582
National Grid Group plc
National Grid (US) Holdings Limited
National Grid (US) Investments
National Grid House
Kirby Corner Road
Coventry CV4 8JY
United Kingdom
National Grid (Ireland) 1 Limited
National Grid (Ireland) 2 Limited
8-10 rue Mathias Hardt
BP39, L 2010
Luxembourg
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National Grid General Partnership
10th Floor
Oliver Building
2 Oliver Street
Boston, MA 02109
(Name of companies and top registered holding company
parents filing this statement and addresses of
principal executive offices)
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Michael E. Jesanis Donald G. Pardus
Kirk L. Ramsauer Clifford J. Hebert, Jr.
National Grid USA Eastern Utilities Associates
25 Research Drive 750 West Center Street
Westborough, MA 01582 West Bridgewater, MA 02379
(Name and addresses of agents for service)
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The Commission also is requested to send copies of any communications
in connection with this matter to:
Clifford M. Naeve, Esq. Arthur I. Anderson, P.C.
Judith A. Center, Esq. David A. Fazzone, P.C.
W. Mason Emnett, Esq. Amy J. Gould, Esq.
William C. Weeden McDermott, Will & Emery
Skadden, Arps, Slate, Meagher & 28 State Street
Flom LLP Boston, MA 02109-1775
1440 New York Avenue, N.W.
Washington, D.C. 20005
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National Grid USA, a Delaware corporation and a registered public
utility holding company, and Eastern Utilities Associates, a registered public
utility holding company organized under a Declaration of Trust in the
Commonwealth of Massachu setts, hereby amend and restate their
Application/Declaration on Form U-1 in File No. 70-9537 as follows:
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TABLE OF CONTENTS
Page
ITEM I: DESCRIPTION OF PROPOSED TRANSACTION................................... 1
A. Description of the Parties to the Transaction........................ 1
1. General Request................................................. 3
2. Overview of the Transaction..................................... 5
B. Description of the Parties to the Transaction........................ 7
1. General Description............................................. 7
a. Grid USA.................................................... 7
b. EUA.........................................................11
2. Description of Facilities.......................................13
a. Grid USA....................................................13
i. General............................................13
ii. Electric Generating Facilities and Resources.......13
iii. Electric Transmission Facilities...................14
b. EUA.........................................................14
i. General............................................14
ii. Electric Generating Facilities and Resources.......14
iii. Electric Transmission Facilities...................16
3. Non-Utility Businesses..........................................16
a. Grid USA....................................................16
i. New England Hydro Finance Company, Inc.............16
ii. NEES Communications, Inc...........................16
iii. Wayfinder Group, Inc...............................16
iv. NEES Energy, Inc...................................17
v. AllEnergy Marketing Company, L.L.C.................17
vi. Granite State Energy, Inc..........................17
vii. Service Company....................................17
viii. NEEI...............................................18
ix. Metrowest Realty, LLC..............................18
b. EUA.........................................................18
i. EUA Cogenex........................................18
ii. EUA Energy.........................................19
iii. EUA Ocean State....................................20
iv. EUA Energy Services................................20
v. EUA Telecommunications.............................20
vi. EUA Service........................................20
vii. Eastern Edison Electric Company....................21
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C. Description of Transaction...........................................21
1. Background......................................................21
2. Merger Agreement................................................21
D. Management and Operations Following the Transaction..................22
ITEM II. FEES, COMMISSIONS AND EXPENSES......................................23
ITEM III. APPLICABLE STATUTORY PROVISIONS....................................23
A. Section 10(b)........................................................25
1. Section 10(b)(1)................................................26
a. Interlocking Relations......................................26
b. Concentration of Control....................................26
i. Size ...................................................27
ii. Competition and Antitrust Considerations...............28
2. Section 10(b)(2)................................................29
a. Fairness of Consideration...................................29
b. Fairness of Fees............................................31
3. Section 10(b)(3)................................................31
a. Capital Structure...........................................32
b. Public Interest, Interest of Investors and Consumers,
and Proper Functioning of Holding Company System............34
B. Section 10(c)........................................................34
1. Section 10(c)(1)................................................34
a. Section 11(a) and Section 11(b)(2)..........................35
b. Section 11(b)(1) (single integrated public utility system)..35
i. Interconnection....................................36
ii. Single Interconnected and Coordinated System.......37
iii. Single Area or Region..............................38
iv. Localized Management, Efficient Operation and
Effective Regulation...............................39
c. Section 11(b)(1) (Acquisition of Non-Utility Interests).....39
2. Section 10(c)(2)................................................40
C. Section 10(f)........................................................42
D. Service Agreement....................................................42
E. Organization of LLC; Acquisition of Merger LLC Interests.............43
F. Financing and Other Commission Authorizations........................43
1. Payment of Dividends Out of Capital or Unearned Surplus.........43
2. Rule 53.........................................................48
3. Tax Allocation..................................................48
ITEM IV. REGULATORY APPROVAL.................................................48
ITEM V. PROCEDURE............................................................49
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ITEM VI. EXHIBITS AND FINANCIAL STATEMENTS...................................49
A. Exhibits.............................................................49
B. Financial Statements.................................................51
ITEM VII. INFORMATION AS TO ENVIRONMENTAL EFFECTS............................52
iii
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ITEM I: DESCRIPTION OF PROPOSED TRANSACTION
A. Description of the Parties to the Transaction
This Form U-1 Application/Declaration
("Application/Declaration") seeks approvals relating to the proposed combination
of National Grid USA ("Grid USA"),1 Eastern Utilities Associates ("EUA"), and
Research Drive LLC ("LLC"), a Massachusetts limited liability company2 (the
"Merger"). Pursuant to the merger, LLC will merge with and into EUA, with EUA as
the surviving entity, and, there fore, a wholly-owned subsidiary of Grid USA.
EUA subsequently will be merged with and into Grid USA, with Grid USA as the
surviving entity (together with the Merger, the "Transaction"). Subsequent to
the Transaction, Grid USA will remain a registered holding company pursuant to
the Public Utility Holding Company Act of 1935 (the "Act"). This
Application/Declaration is filed by Grid USA on behalf of itself and its
electric utility subsidiaries: Massachusetts Electric Company ("Mass.
Electric"); Granite State Electric Company ("Granite State"); The Narragansett
Electric Company ("Narragansett"); Nantucket Electric Company ("Nantucket"); New
England Power Company ("NEP"); New England Hydro-Transmission Corpo ration
("N.H. Hydro"); New England Hydro-Transmission Electric Company ("Mass. Hydro");
New England Electric Transmission Corporation ("NEET"), and non-utility
subsidiaries: LLC; New England Power Service Company ("Service Company"); New
England Energy Incorporated ("NEEI"); by EUA on behalf of itself and its
electric utility subsidiaries: Blackstone Valley Electric Company
("Blackstone"); Eastern Edison Company ("Eastern Edison"); Montaup Electric
Company ("Montaup"); and Newport Electric Corporation ("Newport"); and by The
National Grid Group plc ("NGG") on behalf of itself and the following
subsidiaries: National Grid (US) Holdings Limited; National Grid (US)
Investments; National Grid (Ireland) 1 Limited; National Grid (Ireland) 2
Limited; and National Grid General Partnership.
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1 Grid USA previously operated as the New England Electric System ("NEES").
On March 22, 2000, in conjunction with the acquisition of NEES by The
National Grid Group plc, NEES was reorganized as a Delaware corporation and
renamed National Grid USA.
2 Grid USA owns ninety-nine percent of the voting securities of LLC and
Wayfinder Group, Inc. (formerly NEES Global, Inc.) owns the remaining one
percent. Wayfinder Group, Inc. is wholly-owned by Grid USA.
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The Transaction will yield substantial benefits to investors,
consumers and the general public. It will create a merged company that will be
financially strong and well-equipped to meet increasing competition in wholesale
and retail power markets. Grid USA and EUA (collectively, the "Applicants")
consistently have been the two lowest-cost, major electric companies in New
England. The Transaction will generate efficiencies and cost savings which will
maintain low rates for customers of the merged companies. The benefits of the
Transaction are dis cussed in detail in Item III.B.2 below.
On March 22, 2000, pursuant to an Agreement and Plan of
Merger, dated as of December 11, 1998, by and among NGG, NGG Holdings LLC, a
Massachusetts limited liability company and a wholly-owned subsidiary of NGG,
and Grid USA (under its former corporate name, NEES) (the "NEES/NGG Merger
Agreement"), NGG Holdings LLC merged with and into NEES with NEES as the
surviving entity (the "NEES/NGG Merger"). Immediately subsequent to the NEES/NGG
Merger, NEES was reorganized as a Delaware corporation and renamed National Grid
USA. NGG, a public limited company incorporated under the laws of England and
Wales, owns and operates the England and Wales high-voltage trans mission
network, including interconnections with Scotland and France.
Under the terms of the NEES/NGG Merger Agreement (attached as
Exhibit B-1), Grid USA became an indirect, wholly-owned subsidiary of NGG, which
will become a registered holding company under the Act. On March 25, 1999, as
amended on July 12, 1999, Grid USA (under its former corporate name) and NGG
filed an application/declaration with the Commission requesting authority to
under take their merger.3 On May 3, 1999, NEES shareholders approved the
NEES/NGG Merger with 94 percent of the stock cast in favor of the NEES/NGG
Merger. On March 15, 2000, the Commission approved the NEES/NGG Merger, see
Holding Co. Act Release No. 27154, and on March 22, 2000, the Merger was
consummated.
The joint effect of this Transaction and the NEES/NGG Merger
will be the creation of a new registered holding company, NGG, which will own a
stronger, more efficient U.S. electric utility business formed through the
consolida tion of Grid USA and EUA.4
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3 See Holding Co. Act Release No. 26994 (Mar. 31, 1999).
4 The effects of the merger of Grid USA and NGG in conjunction with the
Transaction are addressed at various points in this
Application/Declaration.
2
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1. General Request
In connection with the Transaction, Applicants, pursuant to
Sections 6, 7, 9(a)(1), 10, 11, 12, and 13 of the Act and the rules thereunder,
hereby request authorizations and approvals from the Commission with respect to
the following:
o The acquisition by LLC of all of the issued and outstanding
EUA common shares, and the indirect acquisition of EUA common
shares by Grid USA through its wholly-owned subsidiary, LLC;
o The merger of Grid USA and EUA, with Grid USA being the surviv
ing entity;
o The mergers of Eastern Edison and Mass. Electric, with Mass.
Electric being the surviving entity; NEP and Montaup,5 with
NEP being the surviving entity; and Blackstone, Newport, and
Narragansett, with Narragansett being the surviving entity;
(the 6 5/8% Preferred Stock of Eastern Edison to be
mandatorily exchanged for a new issue of preferred stock of
Mass. Electric with the same par value, dividend rate, and
redemption provisions; the 5 7/8% Pollution Control Revenue
Bonds of Eastern Edison to be assumed by Mass. Electric; the
parties currently intending that all of the other outstanding
publicly held securities of Eastern Edison, Montaup,
Blackstone, and Newport will be either redeemed, retired, or
defeased);
o The indirect acquisition by Grid USA of EUA's non-utility
businesses through Grid USA's ownership of common shares or
equity in those non-utility businesses;
o The merger of EUA Service Corporation ("EUA Service") into Ser
vice Company, with Service Company being the surviving service
company, and the former EUA companies entering into service
agreements with Service Company in the authorized form;
o The issuance of securities related to the mergers of Mass.
Electric and Eastern Edison; NEP and Montaup; and
Narragansett, Blackstone and Newport. The assumption by Mass.
Electric of Eastern Edison's pollution control revenue bonds
and preferred stock;
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5 See note 10, infra.
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o The assumption by Grid USA of certain guarantees under various
debt instruments of EUA and its subsidiary companies (the "EUA
Sys tem"), including EUA's guaranty of the long-term debt of
EUA Cogenex Corporation ("EUA Cogenex"), EUA Cogenex's equity
maintenance agreement and EUA's guaranty of the debt of EUA
Ocean State Corporation ("EUA Ocean State");
o Following the merger of EUA into Grid USA, there will be a
time period before merger of EUA subsidiaries into Grid USA
subsidiaries, and during such time period, the participation
of EUA subsidiaries in the Grid USA money pool; and
o Payment of dividends out of capital or unearned surplus.
Applicants further request that the Commission grant such other authority as may
be necessary in connection with the Transaction.
The Merger is subject to certain customary closing conditions,
including the receipt of the approval of EUA's shareholders by an affirmative
vote of two-thirds of the outstanding EUA shares. At a meeting of EUA's
shareholders on May 17, 1999, the Merger was approved by 76.2 percent of the
outstanding EUA shares authorized to vote, and by a total of 97 percent of the
votes cast at the meet ing.
The Merger also requires receipt of the approval of: (i) the
Commission under the Act; (ii) the Federal Energy Regulatory Commission
("FERC"), which approval was granted on September 29, 1999; (iii) the Nuclear
Regulatory Commis sion ("NRC"), which approval was granted on February 24, 2000;
(iv) the Vermont Public Service Board (the "VPSB"), which approval was granted
on December 15, 1999; and (v) the Connecticut Department of Public Utility
Control (the "CDPUC"), which approval was granted on October 27, 1999.6
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6 In mid-November 1999, Montaup sold its ownership interest in the Seabrook
Nuclear Plant located in New Hampshire and is no longer regulated by the
New Hampshire Public Utilities Commission ("NHPUC"). Therefore, NHPUC
approval of the Transaction is not required. The NHPUC, however, has
asserted jurisdiction over the acquisition by NGG of all of the common
shares of Grid USA (which transaction was reviewed by the Commission in
File No. 70-9473). The NHPUC approved that acquisition, concluding that the
acquisition of Grid USA by NGG will not result in any net harm to New
Hampshire ratepayers. A copy of the NHPUC order is attached as Exhibit D-
5.2 to the Application/Declaration in File No. 70-9473.)
4
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Although the merger of the parent companies is not subject to
the jurisdiction of the Rhode Island Public Utilities Commission ("RIPUC"), the
RIPUC has jurisdiction over the retail rate plan associated with the combination
of Blackstone and Newport into Narragansett. The RIPUC has informally approved
Applicants' retail rate plan in an open meeting and a final order formalizing
such approval is expected in the coming days. Applicants will amend this Applica
tion/Declaration to include that order when it is issued. Additionally, pursuant
to Chapter 247 of the Acts of 1999 of the General Assembly of the State of Rhode
Island and the Providence Plantations (99-H 6374 am), enacted July 1, 1999, the
Rhode Island Division of Public Utilities and Carriers ("RIDIV") approved on
February 25, 2000, the merger of Blackstone and Newport into Narragansett (condi
tional on the RIPUC also giving their approval to the above rate plan).
While the approval of the Massachusetts Department of
Telecommu nications and Energy ("MDTE") is not required for the Transaction, the
MDTE has jurisdiction over the consolidation of the Massachusetts operating
companies and the rate plan for the combined operating companies. The MDTE
approved the consoli dation and rate plan for the combined companies on March
14, 2000.7
Applicants also filed the requisite notification with the
Federal Trade Commission ("FTC") and the Department of Justice ("DOJ") under the
Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and received clearance under the HSR Act on April 30, 1999. Finally, as a
result of the Merger, the consent of the Federal Communications Commission
("FCC") is required to transfer certain licenses held by EUA subsidiaries. The
Applicants have been notified that such consent has been granted.
2. Overview of the Transaction
Pursuant to an Agreement and Plan of Merger, dated as of
February 1, 1999 (the "Merger Agreement"), LLC will be merged with and into EUA
in accor dance with Section 2 of Chapter 182 and Sections 59 and 62 of Chapter
156C of the Massachusetts General Laws. Upon the execution and filing of a
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7 Copies of applications and orders for the above-mentioned FERC, NRC and
state proceedings are attached hereto as Exhibits D-1 through D-7.A.
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certificate of merger with the Secretary of the Commonwealth of Massachusetts by
EUA and LLC, or any later date specified by such certificate (the "Effective
Date"), the separate existence of LLC shall cease and EUA will be the surviving
entity.
Each one percent of the issued and outstanding membership
interests in LLC will be converted into one transferable certificate of
participation or share in EUA. All EUA shares that are owned by EUA as treasury
shares and any EUA shares owned by Grid USA or any other wholly-owned subsidiary
of Grid USA will be cancelled and retired and shall cease to exist, and no cash
or other consideration shall be delivered in exchange therefor. The remaining
EUA shares issued and outstanding immediately prior to the Effective Date will
be cancelled and converted into the right to receive cash in the amount of
$31.00 per share (the "Per Share Amount"), as such amount may be adjusted. If
the closing of the Merger and the transactions contemplated by the Merger
Agreement (the "Closing") have not taken place on or prior to November 17, 1999,
the six month anniversary of May 17, 1999, the date on which EUA shareholders'
approval was obtained, (the "Adjustment Date"), the Per Share Amount will be
increased, for each day after the Adjustment Date up to and including the day
which is one day prior to the earlier of the Closing and April 30, 2000, by an
amount equal to $0.003.
Grid USA intends to consummate the Transaction through use of
available cash and funds received from capital contributions from, or issuance
of equity to, NGG associated with its acquisition of Grid USA. Grid USA
estimates the consideration to be paid in the Transaction to be between $640 and
$644 million depending on the closing date.
As soon as practicable after the Transaction, Grid USA and EUA
plan to merge the Grid USA and EUA holding companies (with Grid USA becoming the
surviving holding company). In order to consolidate the underlying operating
companies in each state and the two service companies, Narragansett will merge
with Blackstone and Newport, with Narragansett the surviving company. Mass.
Electric will merge with Eastern Edison, with Mass. Electric the surviving
company. NEP will merge with Montaup, with NEP the surviving company. EUA
Service and Service Company also will be merged, with Service Company the
surviving company.
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B. Description of the Parties to the Transaction
1. General Description
a. Grid USA
Grid USA was organized on March 22, 2000, as a Delaware
corpora tion. Prior to that date, Grid USA operated as the New England Electric
System, a voluntary association created under the laws of the Commonwealth of
Massachusetts ("NEES"). A copy of Grid USA's Articles of Incorporation and
bylaws are attached hereto at Exhibit A-1.A and A-1.B. Grid USA's principal
executive office is located at 25 Research Drive, Westborough, Massachusetts
01582.
Grid USA is a registered public utility holding company, and
Grid USA and its subsidiaries are subject to the broad regulatory provisions of
the Act administered by the Commission. Various Grid USA subsidiaries also are
subject to regulation by (i) the FERC under the Federal Power Act (the "FPA"),
with respect to wholesale sales and transmission of electric power, construction
and operation of hydroelectric projects, and accounting and other matters, and
(ii) various state regulatory commissions (as discussed below). In addition, the
activities of nuclear facilities in which Grid USA and its subsidiaries have
ownership interests are regulated by the NRC.
On a consolidated basis as of September 30, 1999, Grid USA had
total assets of $4.9 billion, net utility assets of $2.5 billion, total
operating revenues of $2.51 billion, utility operating revenues of $2.14
billion, and net income of $148.9 million. Grid USA owns all of the voting
securities of the following four distribution subsidiaries: Mass. Electric,
Narragansett, Granite State, and Nantucket (collectively, the "Electricity
Delivery Companies"). Grid USA also owns 99.57 percent of the outstanding voting
securities of its principal transmission subsidiary, NEP. To gether, the
Electricity Delivery Companies and NEP constitute a single integrated electric
utility system (the "Grid USA System") that is directly interconnected with
other utilities in New England and New York State, including EUA, and indirectly
interconnected with utilities in Canada. The Grid USA System covers more than
4,500 square miles with a population of approximately 3,000,000. At December 31,
1999, Grid USA and its subsidiaries had approximately 3,825 employees. A map
marking the entire Grid USA service area is attached as Exhibit E-4.
Mass. Electric is a public utility company engaged in the
delivery of electricity to approximately 990,000 customers in an area comprising
approximately 43 percent of Massachusetts. The Mass. Electric service area
consists of 146 cities and towns, including the highly diversified commercial
7
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and industrial cities of Worcester, Lowell and Quincy. The population of the
service area is approximately 2,160,000, or 36 percent of the total population
of the state. During 1999, 42 percent of Mass. Electric's revenues from the sale
of electricity was derived from residential customers, 38 percent from
commercial customers, 19 percent from industrial customers, and 1 percent from
others. In 1999, the utility's 20 largest customers accounted for approximately
7 percent of its electric revenues. At September 30, 1999, Mass. Electric had
total assets of $1.41 billion, operating revenues of $1.4 billion and net income
of $59.3 million. Mass. Electric is subject to regulation by the FERC and the
MDTE.
Narragansett is a public utility company engaged in the
delivery of electricity to approximately 339,000 customers in Rhode Island.
Narragansett's service territory, which includes urban, suburban and rural
areas, covers approxi mately 839 square miles, or 80 percent of the area of the
state, and encompasses 27 cities and towns, including Providence, East
Providence, Cranston, and Warwick. The population of the service area is
approximately 725,000, which represents approximately 72 percent of the total
population of the state. During 1999, 44 percent of Narragansett's revenues from
the sale of electricity was derived from residential customers, 41 percent from
commercial customers, 13 percent from industrial customers, and 2 percent from
others. In 1999, the 20 largest customers of Narragansett accounted for
approximately 10 percent of its electric revenues. At September 30, 1999,
Narragansett had total assets of $673.4 million, operating revenues of $456.1
million, and net income of $29.7 million. Narragansett is subject to the
regulation of the FERC, the RIPUC and the RIDIV.
Granite State is a public utility company engaged in the
delivery of electricity to approximately 37,000 customers in 21 New Hampshire
communities. The Granite State service territory has a population of
approximately 73,000 and includes the Salem area of southern New Hampshire and
several communities along the Connecticut River. During 1999, 47 percent of
Granite State's revenues from the sale of electricity was derived from
commercial customers, 38 percent from residen tial customers, 14 percent from
industrial customers, and 1 percent from others. In 1999, the 10 largest
customers of Granite State accounted for approximately 17 percent of its
electric revenues. At September 30, 1999, Granite State had total assets of
$65.0 million, operating revenues of $60.6 million, and net income of $2.8
million. Granite State is subject to the regulation of the FERC and the NHPUC.
Nantucket provides electric delivery service to approximately
10,000 customers on Nantucket Island, which has a year-round population of
approximately 6,000 and a seasonal tourist population that peaks at
approximately 40,000 during the summer. Nantucket's service area covers the
entire island. During 1999, 62 percent of Nantucket's revenues from the sale of
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electricity was derived from residential customers, 37 percent from commercial
customers and 1 percent from others. At the end of 1998, Nantucket had total
assets of $44.0 million, operating revenues of $15.1 million, and net income of
$500,000. (Interim financials are not available for Nantucket.) Nantucket is
subject to the regulation of the FERC and the MDTE.
NEP is engaged in purchasing, transmitting and selling
electric energy at wholesale. In 1998, 98 percent of NEP's revenues from the
sale of electricity was derived from sales for resale to affiliated companies
and 2 percent from sales for resale to municipal and other utilities. NEP
recently has completed the sale of substantially all of its non-nuclear
generating business and currently is attempting to sell its minority interests
in three operating nuclear power plants and one fos sil-fueled generating
station in Maine.8 With the sale of its non-nuclear generating business, NEP is
principally an electric transmission company. At September 30, 1999, NEP had
total assets of $2.28 billion, operating revenues of $586.2 million and net
income of $70.7 million. NEP is subject, for certain purposes, to regulation by
the Commission, the FERC, the NRC, the MDTE, the NHPUC, the VPSB, the CDPUC, and
the Maine Public Utilities Commission (the "MPUC").9
NEET is a wholly-owned subsidiary of Grid USA. NEET owns and
operates a direct current/alternating current converter terminal facility for
the first phase of the Hydro-Quebec and New England interconnection (the
"Interconnec tion") and six miles of high voltage direct current transmission
line in New Hamp shire. NEET, Mass. Hydro (described below) and N.H. Hydro
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8 NEP also is a holding company because it owns more than 10 percent of the
outstanding voting securities of Vermont Yankee Nuclear Power Corporation
("Vermont Yankee"), the licensed operator of the Vermont Yankee nuclear
facility. NEP also has minority interests in Yankee Atomic Electric Com
pany ("Yankee Atomic"), Maine Yankee Atomic Power Company ("Maine Yankee")
and Connecticut Yankee Atomic Power Company ("Connecticut Yankee"), all of
which permanently have ceased operations. NEP is an exempt holding company
under the Act. Yankee Atomic Electric Company, Holding Co. Act Release No.
13048 (Nov. 25, 1955).
9 The MPUC does not have jurisdiction to review the Merger since NEP is a
foreign utility company but is not subject to general regulation by the
MPUC as a domestic utility. NEP is a joint owner of a generating plant
located in Maine and is interested in selling its ownership interest, but
at this time does not have a purchaser. The plant's domestic utility joint
owners are also endeavoring to sell their interests in this plant. Montaup
sold its interest in this plant during 1999.
9
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(described below) together own and operate, on behalf of New England Power Pool
("NEPOOL") participants in the second phase of the Interconnection, a 450 kV
direct current transmission line and related terminals. At September 30, 1999,
NEET had total assets of $31.8 million, operating revenues of $9.1 million and
net income of $757,000.
N.H. Hydro, in which Grid USA holds 53.97 percent of the
common stock, operates 121 miles of high-voltage direct current transmission
lines in New Hampshire for the second phase of the Interconnection, extending to
the Massachu setts border. At September 30, 1999, N.H. Hydro had total assets of
$129.3 million, operating revenues of $30.7 million and net income of $4.5
million.
Mass. Hydro, 53.97 percent of the voting stock of which is
held by Grid USA, operates a direct current/alternating current terminal and
related facilities for the second phase of the Interconnection and 12 miles of
high-voltage direct current transmission lines in Massachusetts. At September
30, 1999, Mass. Hydro had total assets of $155.7 million, operating revenues of
$35.5 million and net income of $7.3 million.
LLC, a Massachusetts limited liability company, exists solely
for the purpose of effecting this Transaction by merging with and into EUA.
Narragansett, Mass. Electric , Granite State, and NEP (and a
Grid USA non-utility subsidiary, AllEnergy (described below)) are participants
of NEPOOL. The NEPOOL Agreement provides for coordination of the operation of
the generation and transmission facilities of its members. The NEPOOL Agreement
incorporates generating installed capability obligations and an open access
transmis sion tariff. The NEPOOL Agreement further provides for New England-wide
central dispatch of generation by the Independent System Operator ("ISO").
Through NEPOOL, reserves are established on a region-wide rather than an
individual company basis.
In June 1997, the FERC ordered the creation of the ISO-New Eng
land. ISO-New England was activated on July 1, 1997 and has been operating the
control area since that time. It operates under contract with NEPOOL and is gov
erned by an independent Board of Directors. NEPOOL's Open Access Transmission
Tariff ("NOATT"), which covers service across pool transmission facilities, went
into effect, subject to refund, in March 1997. Parts of the NOATT have been
disputed, but were subsequently settled.
The FERC issued an order in December 1998 accepting the basic
structure of the NEPOOL markets. In May 1999, NEPOOL and ISO-New England
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commenced implementation of the NEPOOL competitive system. As ordered by the
FERC, NEPOOL is currently working to develop a Congestion Management System and
a Multi-Settlement System, which will be filed at the FERC by March 31, 2000.
b. EUA
EUA was organized and exists under a Declaration of Trust
dated April 2, 1928, as amended, in the Commonwealth of Massachusetts. A copy of
the EUA Declaration of Trust, as amended, is incorporated by reference as
Exhibit A-2. EUA's principal executive office is located at 750 West Center
Street, West Bridgewater, Massachusetts 02379.
EUA operates as a registered holding company pursuant to the
Act. At the end of 1999, the EUA System served approximately 309,000 retail
customers in Massachusetts and Rhode Island. As a registered public utility
holding company, EUA and its subsidiaries are subject to the broad regulatory
provisions of the Act administered by the Commission. Various EUA subsidiaries
also are subject to regulation by (i) the FERC under the FPA with respect to
wholesale sales and transmission of electric power, accounting and other matters
and (ii) various state regulatory commissions (as discussed below). In addition,
the activities of nuclear facilities in which EUA has ownership interests are
regulated by the NRC.
The common shares, par value of $5 per share, of EUA are
listed on the New York and Pacific Exchanges. At December 31, 1999, there were
20,435,997 EUA common shares outstanding. On a consolidated basis at the end of
1999, EUA had total assets of $1.5 billion, net utility assets of $454.0
million, operating reve nues of $553.8 million, utility operating revenues of
$499.7 million, net income of $19.2 million, and utility net income of $37.8
million
At December 31, 1999, EUA directly owned all of the common
stock of the following electric public utility companies: Blackstone, Eastern
Edison and Newport. On February 17, 2000, Eastern Edison transferred its
ownership of Montaup to EUA.10 At December 31, 1999, Blackstone, Eastern Edison,
- --------
10 On July 14, 1999, EUA filed an application (File No. 70-9527) with the
Commission seeking authority for Eastern Edison to transfer to EUA, and for
EUA to acquire from Eastern Edison, all of Eastern Edison's investment in
Montaup's capitalization, so that EUA will become the direct parent of
Montaup. This application was approved by the Commission on February 4,
2000, see Holding Co. Act Release No. 27131, and the transfer of Montaup
from Eastern Edison to EUA was consummated with a filing at the MDTE on
February 17, 2000.
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Newport, and Montaup together had 522 employees; EUA Service had an additional
317 employees. A map marking the entire EUA service area is attached as Exhibit
E-4.
Blackstone was organized in 1912 under the laws of the State
of Rhode Island. Blackstone serves a territory of approximately 150 square miles
in portions of northern Rhode Island with a population of approximately 207,000.
As of December 31, 1999, Blackstone furnished retail electric service to
approximately 87,000 customers. At the end of 1999, Blackstone had total assets
of $152.0 million, operating revenues of $127.1 and net income of $5.5 million.
Blackstone is subject to the regulation of the FERC, the RIDIV and the RIPUC.
Eastern Edison was organized in 1883 under the laws of the Com
monwealth of Massachusetts. Eastern Edison supplies electric service in 22
cities and towns in southeastern Massachusetts. Eastern Edison's retail electric
service territory covers approximately 392 square miles and has an estimated
population of approximately 463,000. At December 31, 1999, Eastern Edison served
approxi mately 188,000 retail customers. On a consolidated basis at the end of
1999, Eastern Edison had total assets of $1.0 billion, operating revenues of
$394.6 million and net income of $27.5 million. Eastern Edison is subject to the
regulation of the FERC and the MDTE.
Newport serves a territory of approximately 55 square miles
and an estimated population of approximately 70,000 in south coastal Rhode
Island. Newport supplies retail electric service to approximately 34,000
customers. At the end of 1999, Newport had total assets of $71.3 million,
operating revenues of $60.5 million and net income of $4.6 million. Newport is
subject to the regulation of the FERC, the RIDIV and the RIPUC.
Montaup is a generation and transmission company that supplies
electricity at wholesale to Eastern Edison, Blackstone, Newport, and two
unaffiliated utilities. Consistent with the electric utility industry
restructuring legislation passed in Massachusetts and Rhode Island and
settlement agreements approved by regula tors in those states and at the FERC,
Montaup had completed by the end of 1999 the transfer of all of its non-nuclear
power generation assets and power purchase agreements to various non-affiliated
parties. Montaup has minority ownership interests in Vermont Yankee, Connecticut
Yankee, Maine Yankee, and Yankee Atomic. Montaup also owns minority interests in
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Millstone 3. Yankee Atomic, Connecticut Yankee and Maine Yankee have shut down
operations permanently and are in the process of decommissioning. In addition,
Montaup continues to attempt to sell its interests in Vermont Yankee and
Millstone 3. At the end of 1999, Montaup had total assets of $801.5 million,
operating revenues of $263.3 million and net income of $13.8 million. Montaup is
subject to the regulation of the FERC, and the NRC, and to limited regulation by
the MPUC, the CDPUC, the VPSB, and the MDTE.
2. Description of Facilities
a. Grid USA
i. General
For the year ending December 31, 1999, Grid USA and its
utility subsidiaries sold 25,815 million kWh of electric energy (at retail or
wholesale).
ii. Electric Generating Facilities and Resources
Pursuant to a settlement agreement with the RIPUC and a
settlement agreement approved by the MDTE in connection with the electric
utility restructuring undertaken in their respective states, NEP and
Narragansett entered into an agreement to sell all their generating assets. On
September 1, 1998, NEP and Narragansett completed the sale of substantially all
of their non-nuclear generating business to USGen New England, Inc. ("USGen"),
an indirect wholly-owned subsidiary of PG&E Corporation. The non-nuclear
generating business included three fossil-fueled and 15 hydroelectric generating
stations, totaling approximately 4,000 megawatts ("MW") of capacity, as well as
Grid USA's 100 percent interest in Narragansett Energy Resources Company, a 20
percent general partner in the Ocean State Power project, all of which had a
book value of $1.1 billion at the time of sale. USGen also purchased NEP's
entitlement to approximately 1,100 MW of power procured under long-term
contracts.
NEP currently owns interests in six nuclear generating
facilities. As noted above, the nuclear plants owned by Yankee Atomic, Maine
Yankee and Connecticut Yankee have been shut down permanently. NEP currently is
attempting to sell its minority ownership interests in three other nuclear power
plants, Vermont Yankee, Millstone 3 and Seabrook 1, and a 60 MW interest in a
fossil-fueled generating station in Maine. Vermont Yankee has entered into an
agreement with AmerGen Energy Co., LLC to sell its nuclear assets, subject to
receipt of regulatory approvals. NEP has entered into a settlement agreement
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with Northeast Utilities providing that, among other things, NEP's share of
Millstone 3 will be included in Northeast's planned auction of the facility.
iii. Electric Transmission Facilities
At December 31, 1999, NEP's integrated transmission system
consisted of 2,236 circuit miles of transmission lines, 108 substations with an
aggregate capacity of 13,209,382 kVA and 7 pole or conduit miles of distribution
lines.
At December 31, 1999, Narragansett owned 325 circuit miles of
transmission lines, 226 substations with an aggregate capacity of 3,643,088 kVA,
54,229 line transformers with the capacity of 2,443,143 kVA, and 4,713 pole or
conduit miles of distribution lines.
At December 31, 1999, Mass. Electric owned 83 circuit miles of
transmission lines, 222 substations with an aggregate capacity of 3,221,931 kVA,
150,124 line transformers with the capacity of 8,624,264 kVA, and 17,574 pole or
conduit miles of distribution lines.
b. EUA
i. General
For the year ending December 31, 1999, EUA and its utility
subsidiaries sold 5,694 million kWh of electric energy (at retail or wholesale).
ii. Electric Generating Facilities and Resources
By the end of 1999, pursuant to settlement agreements approved
by federal and state regulators, Montaup had completed the transfer of all of
its non- nuclear power generation assets and power purchase agreements to
various non- affiliated parties in connection with electric utility
restructuring undertaken in Massachusetts and Rhode Island. At the end of 1998,
Montaup sold several diesel- powered generating units (totaling approximately 16
MW) owned by Newport to Illinois-based Wabash Power Equipment Company for
approximately $6.4 million and its 50 percent share (approximately 280 MW) of
Unit 2 of the Canal generating station in Sandwich, Massachusetts to Southern
Energy Canal, LLC, an indirect subsidiary of The Southern Company, for
approximately $75 million. On April 7, 1998, Montaup entered into an agreement
to transfer power purchase contracts for approximately 170 MW of output from
Ocean State Power I and Ocean State Power II to TransCanada Power Marketing
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Ltd., an indirect subsidiary of TransCanada Pipelines Limited; the transfer was
effective June 1, 1999. On December 21, 1998, Montaup entered into an agreement
to transfer purchase power contracts totaling approximately 177 MW to
Constellation Power Source, Inc., a wholly owned affiliate of the Baltimore Gas
and Electric Company; the transfer will become effective on September 1, 1999.
On April 26, 1999, Montaup completed the sale of its 170 MW Somerset Generating
Station, located in Somerset, Massachusetts, to Somerset Power, LLC, an indirect
subsidiary of NRG, Inc. for approximately $55 million. In June of 1999, Montaup
completed the sale of its and Newport's combined 2.6 percent (approximately 16
MW) share of the W.F. Wyman Unit 4 in Yarmouth, Maine to FPL Energy Wyman IV
LLC, an indirect subsidiary of the Florida-based FPL Group, Inc., for $2.4
million. Also in June of 1999, Blackstone sold its hydroelectric facility in
Pawtucket, Rhode Island (approximately 1 MW) to Pawtucket Hydropower LLC, an
affiliate of Putnam Hydropower Inc.
In July 1999, in connection with Entergy Nuclear Generation
Company's acquisition of Pilgrim Station from Boston Edison, Montaup agreed to a
buy-out of its power purchase agreement (approximately 73 MW) with Boston
Edison. As a condition of the termination, Montaup entered into a reduced term
power purchase contract for Pilgrim Station power with Entergy Nuclear
Generation Company.
In November 1999, Montaup completed the transfer of its
ownership interest in the Seabrook Station nuclear power plant to Little Bay
Power Corporation, a subsidiary of BayCorp Holdings, Ltd. Also in November 1999,
Vermont Yankee agreed to sell its 540 MW nuclear unit to AmerGen Energy Co.,
LLC, subject to receipt of regulatory approvals.
EUA's only remaining generating capacity is approximately 58
MW from its ownership share of the Millstone 3 nuclear facility. Montaup has
entered into a settlement agreement with Northeast Utilities, settling a number
of outstanding issues with respect to Millstone and providing that Montaup's
share of Millstone 3 will be included in Northeast's planned auction of the
facility.
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iii. Electric Transmission Facilities
The EUA transmission system consists of approximately 7,100
miles of transmission and distribution lines and 84 substations located in the
cities and towns served. Blackstone owns approximately 1,700 miles of
transmission and distribution lines and 26 substations. Eastern Edison and
Montaup own approximately 4,600 miles of transmission and distribution lines and
44 substations. Newport owns approximately 800 miles of transmission and
distribution lines and 14 substations.
3. Non-Utility Businesses
a. Grid USA
The following provides a summary of each of the non-utility
companies in which Grid USA has an ownership interest:
i. New England Hydro Finance Company, Inc.
New England Hydro Finance Company, Inc. ("N.E. Hydro
Finance"), owned in equal shares by Mass. Hydro and N.H. Hydro, provides the
debt financing required by Mass. Hydro and N.H. Hydro to fund the capital costs
of their participation in the Interconnection.
ii. NEES Communications, Inc.
NEES Communications, Inc. ("NEESCom") is a wholly-owned
subsidiary of Grid USA that provides telecommunications and information-related
products and services. NEESCom was established to allow Grid USA to participate
in the growing telecommunications industry. NEESCom, an exempt
telecommunications company, is not regulated under the Act and has a license
issued by and is subject to regulation by the FCC. NEESCom plans to focus on the
fiber optics cable and infrastructure sectors of the telecommunications
industry. At the end of 1998, NEESCom had total assets of $12.6 million,
operating revenues of $100,000 and a net loss of $1.2 million. (Interim
financial statements are not available for NEESCom.)
iii. Wayfinder Group, Inc. (formerly NEES Global,
Inc.)
Wayfinder Group, Inc. ("Wayfinder") is a wholly-owned
non-utility subsidiary of NEES which provides consulting services and product
licenses to unaffiliated utilities in the areas of electric utility
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restructuring and customer choice. At the end of 1998, Wayfinder had total
assets of $23.3 million, operating revenues of $5.0 million and a net loss of
$1.1 million. (Interim financial statements are not available for Wayfinder.)
iv. NEES Energy, Inc.
NEES Energy, Inc. ("NEES Energy") is a wholly-owned marketing
subsidiary of Grid USA. At September 30, 1999, NEES Energy had total assets of
$195.1 million, operating revenues of $358.8 million and a net loss of $10.3
million.
v. AllEnergy Marketing Company, L.L.C.
AllEnergy Marketing Company, L.L.C. ("AllEnergy") is an
indirect, wholly-owned subsidiary of Grid USA. NEES Energy owns 100 percent of
the voting securities of AllEnergy. AllEnergy, a member of NEPOOL, markets
energy commodities (natural gas, propane, and oil) and provides a wide range of
energy- related services, including but not limited to, marketing, brokering and
sales of energy, audits, fuel supply, repair, maintenance, construction,
operation, design, engineering, and consulting. AllEnergy also owns Texas
Liquids LLC, which is principally a propane and natural gas marketer with its
home office in New Jersey. On February 12, 1999, Grid USA and AllEnergy acquired
Griffith Consumers Company, a full service distributor of residential and
commercial heating oil in Washington, D.C., and in parts of Maryland, Delaware,
Virginia, and West Virginia. On July 1, 1999, AllEnergy acquired Texas-Ohio Gas,
Inc., a unit of Denver-based New Century Energies that sells gas to about 3,000
commercial and industrial customers in the Northeast of the United States.
vi. Granite State Energy, Inc.
Granite State Energy, Inc. ("Granite State Energy") is a
wholly- owned, non-utility marketing subsidiary of Grid USA that participated in
the New Hampshire retail choice pilot program. At the end of 1998, Granite State
Energy had total assets of $300,000, operating revenues of $700,000, and no net
income. (Interim financial statements are not available for Granite State
Energy.)
vii. Service Company
Service Company, wholly-owned by Grid USA, is a service
company pursuant to Section 13 of the Act. Service Company has contracted with
Grid USA and its subsidiaries to provide, at cost, such administrative,
engineering, construction, legal, and financial services as Grid USA and its
subsidiaries request pursuant to a service agreement approved by the Commission
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in accordance with the requirements of Rule 90. At September 30, 1999, Service
Company had total assets of $131.6 million and net income of $1.8 million.
viii. NEEI
As part of Grid USA's plan to divest its generating business,
NEEI, wholly-owned by Grid USA, sold its oil and gas properties in February
1998. NEEI is currently inactive.
ix. Metrowest Realty LLC
Metrowest Realty LLC, wholly-owned by Grid USA, owns the
headquarters complex of Grid USA and its subsidiaries. The complex is located in
Westborough, Massachusetts. Metrowest Realty LLC also owns the North Andover,
Massachusetts service center occupied by Mass. Electric.
b. EUA
EUA directly owns all of the common stock of the following
non- utility companies: EUA Cogenex, EUA Energy Investment Corporation ("EUA
Energy"), and EUA Ocean State. In addition, EUA directly owns all of the common
stock of EUA Service, a service company pursuant to Section 13 of the Act.
i. EUA Cogenex
EUA Cogenex is an energy services company that employs energy
efficient technology and equipment intended to reduce the energy consumption and
costs of its customers. Such technology and equipment include: building
automation systems, lighting modifications, boiler and chiller replacements, and
other mechanical measures such as motors and drives. EUA Cogenex also serves
public and private multi-family housing through its subsidiary, EUA Citizens
Conservation Services, Inc., of which EUA Cogenex holds all voting control. In
addition, EUA Cogenex owns 100 percent of the voting stock of EUA Cogenex West
(formerly EUA Highland Corporation), an energy services company that provides
energy conservation services in Colorado, Texas, Ohio, North Carolina, and
certain mid- western states. EUA Cogenex also holds all voting control of
Northeast Energy Management, Inc., a demand side management company, and EUA
Cogenex- Canada, Inc. (which holds 100 percent voting control of EUA
Cogenex-Canada Energy Services, Inc., a company formed to participate in a
marketing and development joint venture with Monenco Agra, an Ontario-based
engineering firm). As of December 31, 1999, EUA Cogenex held 50 percent of the
voting control and acted as managing general partner of the following
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partnerships which operate and monitor existing demand side management and/or
energy management services contractual obligations, but do not develop new
business: EUA WestCoast L.P., EUA Energy Capital and Services I, EUA Energy
Capital and Services II, EUA FRC II Energy Associates, and Micro Utility
Partners of America. As of December 31, 1999, EUA Cogenex also held 50 percent
of the voting power in APS Cogenex L.L.C., a limited liability company formed to
develop, engineer and construct projects at the National Cancer Institute in
Army Garrison at Fort Detrick, Maryland.
At December 31, 1999, EUA Cogenex employed 95 persons in its
operations and had total consolidated assets of $128.9 million, operating
revenues of $49.4 million, and a net loss of $6.4 million. In June 1999, the
management of EUA Cogenex decided to divest certain of its non-core businesses
and activities including EUA Citizens Conservation Services, Inc. ("EUA
Citizens") and the EUA/DAY division and to discontinue the operations of the
DAYMetrix division. On December 30, 1999, EUA Cogenex sold the assets of the
EUA/DAY division to its existing management for $1.5 million in cash plus the
assumption of certain liabilities. As a result of the sale of the EUA/DAY
division and its energy control software application and related technologies
division, as well as the corresponding cessation of DAYMetrix, EUA Cogenex
recorded after tax charges of $3.3 million in 1999. EUA Cogenex also has entered
into a letter of intent with a third party for the sale of the assets of EUA
Citizens.
ii. EUA Energy
EUA Energy invests in energy-related projects. EUA Energy
currently holds 9.9 percent of the voting power of Separation Technologies,
Inc., which markets and installs its own proprietary equipment for separating
unburned carbon from coal fly-ash. Separation Technologies, Inc., is the only
active investment of EUA Energy.
During 1999, three of EUA Energy's wholly-owned subsidiaries, EUA
TransCapacity, Inc., Eastern Unicord Corporation, and EUA Compression Services,
Inc. were dissolved. Prior to it's dissolution, EUA TransCapacity, Inc. sold in
August of 1999 all of its assets in TransCapacity L.P. and then dissolved the
limited partnership. EUA Energy will not have any further obligations or
commitments to TransCapacity L.P., its employees, or its successor. the
after-tax loss of $900,000 to EUA Energy in the third quarter of 1999 on this
transaction was offset by previously-established liabilities at EUA's parent
company. On September 30, 1999, EUA Energy also sold certain of Renova LLC's
assets to its management. EUA Energy recorded in the second quarter of 1999 an
after-tax charge of approximately $3.5 million for the Renova LLC sale.
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EUA Energy currently retains 100 percent voting power in EUA BIOTEN,
Inc. ("EUA BIOTEN"), which was formed to develop biomass-fueled generating units
and which owns 100 percent of the common stock of BIOTEN Operations, Inc., a
Tennessee corporation that owns a demonstration facility in Red Boiling Springs,
Tennessee and BIOTEN G.P.M., a corporation organized under the laws of
Mauritius, India.
EUA BIOTEN previously executed an agreement with the management of
BIOTEN Partnership to, among other things, extend through December 31, 1999, the
right of the management to purchase all of the assets of BIOTEN Partnership Due
to the inability of the management to attain financing and exercise the purchase
option, BIOTEN Partnership was dissolved and its assets were distributed to
BIOTEN which is currently negotiating with a third party for the sale of those
assets. EUA Energy recorded an after-tax charge to its earnings in the second
quarter of 1999 of approximately $9.5 million as a result of this asset
impairment.
At the end of 1999, EUA Energy had total assets of $15.1
million, operating revenues of $4.7 million, and a net loss of $17.3 million.
iii. EUA Ocean State
EUA Ocean State owns a 29.9 percent partnership interest in the
northern Rhode Island-based Ocean State generating station's two gas-fired
generating units, Ocean State Power I and Ocean State Power II. At the end of
1999, EUA Ocean State had total assets of $48.9 million and net income of $3.9
million. On February 14, 2000 EUA entered into a Letter of Intent with
TransCanada Energy Ltd for the sale of Ocean State Power I and Ocean State Power
II.
iv. EUA Energy Services
EUA Energy Services marketed energy and energy-related
services and was dissolved in 1999.
v. EUA Telecommunications
EUA Telecommunications provided telecommunications and
information services and was dissolved in 1999.
vi. EUA Service
EUA Service is a service company pursuant to Section 13 of the
Act. EUA Service provides various accounting, financial, engineering, planning,
data processing, and other services to all EUA System companies in accordance
with the requirements of Rule 90. At the end of 1999, EUA Service had total
assets of $38.6 million and net income of $250,000.
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vii. Eastern Edison Electric Company
Eastern Edison Electric Company was originally formed as part
of EUA's efforts to consolidate its subsidiaries. Eastern Edison Electric
Company, however, has been inactive for over six years and was dissolved in
1999.
C. Description of Transaction
1. Background
In late May, 1998, the EUA board of trustees (the "EUA Board")
met to review EUA's strategic options for future operations. The EUA Board
decided to open communications with selected electric utilities in the region in
an attempt to determine their interest in discussing some type of business
combination. In December 1998, EUA contacted Grid USA to explore Grid USA's
interest in discussing a possible business combination. After intensive
negotiations between Grid USA and EUA, the EUA Board held special meetings on
January 31, 1999 and February 1, 1999, to review and consider the proposals
received from Grid USA. After presentations by the EUA Board's legal and
financial advisors, and a full discussion and analysis by the EUA Board, the EUA
Board (1) determined that it was in the best interests of EUA's shareholders,
employees and customers for EUA to enter into a business combination with Grid
USA; (2) determined that the terms of the Merger were fair to, and in the best
interests of, EUA shareholders; and (3) authorized, approved and adopted the
proposed agreement and plan of merger and the transaction contemplated by the
Merger Agreement, and the execution and delivery of the Merger Agreement. EUA
was advised that Grid USA obtained the consent of NGG to enter into the Merger
Agreement, and on the morning of February 1, 1999, at the conclusion of the EUA
Board meeting and prior to the opening of markets, EUA and Grid USA executed and
delivered the Merger Agreement.
2. Merger Agreement
The Merger Agreement provides for the merger of LLC with and
into EUA, with EUA as the surviving entity. The Merger Agreement is incorporated
by reference as Exhibit B-4.
Under the terms of the Merger Agreement, each outstanding
common share of EUA (and collectively, the "EUA Common Shares"), other than
shares, if any, owned by EUA as treasury shares, or by Grid USA, LLC or any
other wholly-owned subsidiary of Grid USA, will be converted into the right to
receive cash in the amount of $31.00 per share. If the Closing does not occur on
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or prior to the Adjustment Date, then the per share amount will be increased by
an amount equal to $0.003 for each day after the Adjustment Date, up to and
including the day which is one day prior to the earlier of the Closing and April
30, 2000. The Merger Agreement may be terminated under certain circumstances,
some of which provide for the payment of termination fees.
The Transaction is subject to customary closing conditions,
including the approval of the holders of two-thirds of the outstanding EUA
Common Shares and all necessary governmental approvals, including that of the
Commission. The Transaction has been approved by the Grid USA Board of
Directors, the EUA Board and the Members of LLC. On May 17, 1999, EUA
shareholders approved the Merger, with 97 percent of the shareholders that voted
casting ballots in favor of the Merger.
Because the acquisition of EUA is for cash, the conditions for
pooling of interest accounting are not met with regard to the Transaction. The
Transaction will be accounted for as a purchase in accordance with generally
accepted accounting principles. The conversion of EUA Common Shares into the
right to receive the Merger consideration pursuant to the Merger Agreement will
be treated as a taxable sale of such shares for United States federal income tax
purposes (and also may be a taxable transaction under applicable state, local,
foreign, and other tax laws).
D. Management and Operations Following the Transaction
As noted above, as soon as practicable after the Merger, Grid
USA and EUA plan to merge the Grid USA and EUA holding companies, with Grid USA
as the surviving holding company. Subject to the receipt of state regulatory
approvals, as necessary, Narragansett will merge with Blackstone and Newport,
with Narragansett the surviving company; Eastern Edison will merge with Mass.
Electric, with Mass. Electric the surviving company; and Montaup will merge with
NEP, with NEP the surviving company. Finally, to lower administrative costs, EUA
Service and Service Company will be consolidated, with Service Company the
surviving company. After the Merger, the surviving companies will be managed and
operated in a manner similar to the current operations.
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ITEM II. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses that shall be paid or
incurred, directly or indirectly, in connection with the Transaction are
estimated as follows:
Thousands
Accountants' fees....................................................$ 400,000
Legal fees and expenses.............................................. 2,900,000
Investment bankers' fees and expenses................................ 7,700,000
Consulting fees...................................................... 300,000
Miscellaneous ....................................................... 100,000
----------
Total........................................................... 11,400,000
ITEM III. APPLICABLE STATUTORY PROVISIONS
The following Sections of the Act and Commission rules relate
to the Transaction:
Section or Rule
Under the Act Action to Which Section or Rule Relates
6, 7 and rules thereunder Issuance of securities related to the mergers of
Eastern Edison with Mass. Electric, Montaup with
NEP, and Blackstone and Newport with Narragansett.
Assumption by Mass. Electric of Eastern Edison's
pollution control revenue bonds, and preferred
stock. Grid USA assumption of guarantees under
various debt instruments of EUA System companies.
Participation of EUA subsidiaries in Grid USA
money pool.
9, 10, 11, 12 and rules Acquisition by Grid USA of LLC and of EUA Common
thereunder Shares; indirect acquisition by Grid USA of
securities and interests in the business of EUA's
subsidiary companies, including the non-utility
subsidiaries; payments of dividends out of capital
surplus.
13 and rules thereunder Merger of EUA Service into Service Company with
Service Company as the surviving service company.
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Section 9(a)(1) of the Act provides that unless the
acquisition has been approved by the Commission under Section 10, it shall be
unlawful for any registered holding company or any subsidiary company thereof
"to acquire, directly or indirectly, any securities or utility assets or any
other interest in any business." Section 9(a)(1) is applicable to the proposed
Transaction because it involves the acquisition by Grid USA of EUA Common
Shares, the indirect acquisition by Grid USA of the securities of and interests
in the businesses of EUA's subsidiary companies, and the merger of EUA's utility
subsidiaries into Grid USA's utility subsidiaries.
For the reasons set forth in detail below, the Transaction
fully complies with Section 10 of the Act:
o The Transaction will not create detrimental interlocking relations or
a detrimental concentration of control;
o The consideration and fees to be paid in connection with the
Transaction are fair and reasonable;
o The Transaction will not result in an unduly complicated capital
structure for the merged company;
o The Transaction is in the interests of the public, investors and
consumers;
o The merged company will be a single integrated public utility system;
o The Transaction will result in an equitable distribution of voting
power among Grid USA's investors and does not unduly complicate the
structure of the holding company system;
o The Transaction tends toward the economical and efficient development
of an integrated electric utility system; and
o The Transaction will comply with all applicable state laws.
Pursuant to Sections 9 and 10, Congress entrusted the
Commission with the responsibility for "supervision over the future development
of utility-holding company systems." The Southern Co., Holding Co. Act Release
No. 25639 (Sept. 23, 1992) ("Southern"). In Section 1(c), the Act directs the
Commission to interpret all provisions of the Act to address certain enumerated
problems and evils in order to protect the interests of the general public,
investors and consumers. As a result, the Commission's mandate under the Act is
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"to prevent acquisitions which would be 'attended by the evils which have
featured the past growth of holding companies.'" American Elec. Power Co.,
Holding Co. Act Release No. 20633 (July 21, 1978) (quoting H.R. Rep. No. 1318,
74th Cong., 1st Sess. 16 (1935)). Such evils include the "growth and extension
of holding companies [that] bears no relation to economy of management and
operation or the integration and coordination of related operating properties."
Section 1(b)(4) of the Act.
The Transaction fully complies with the Act and does not
prompt any of the concerns that the Act was intended to address. In fact, the
Transaction clearly promotes the goals of the Act by creating an integrated
merged entity that will benefit the interests of the general public, investors
and consumers. Both state and federal regulation will ensure that the interests
of the public, investors and consumers continue to be protected.
Set forth below are discussions of each of the subsections of
Section 10 of the Act as they relate to the Transaction.
A. Section 10(b)
Section 10(b) of the Act provides that if the requirements of
Section 10(f) are satisfied, the Commission must approve an acquisition under
Section 9(a) unless the Commission finds that:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind or to
an extent detrimental to the public interest or the interest of
investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly,
in connection with such acquisition is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of the
holding-company system of the applicant or will be detrimental to the
public interest or the interest of investors or consumers or the
proper functioning of such holding-company system.
25
<PAGE>
1. Section 10(b)(1)
Under Section 10(b)(1) of the Act, the Commission shall
approve a proposed acquisition unless it finds that the proposed acquisition
shall "tend towards interlocking relations or the concentration of control of
public utility companies of a kind or to an extent detrimental to the public
interest or the interest of investors or consumers." Thus, Section 10(b)(1) does
not prohibit a merger merely because it causes interlocking relations or
increases concentration of control to some degree. Rather, a merger fails the
balancing test set forth in Section 10 only when any detrimental effects from
any interlocking relations or concentration of control caused by the merger
outweigh the merger benefits.
a. Interlocking Relations
Any merger creates interlocking relations between previously
unrelated companies. As previously noted by the Commission: "[W]ith any addition
of a new subsidiary to a holding company system, the Acquisition will result in
certain interlocking relationships between [the two merging entities]."
Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990), modified
on other grounds, Holding Co. Act Release No. 25273 (Mar. 15, 1991), aff'd sub
nom. City of Holyoke Gas & Elec. Dep't v. SEC, 972 F.2d 358 (D.C. Cir. 1992)
("Northeast I"). Such "interlocking relationships are necessary to integrate
[the two merging entities.]" Id.
As noted above, immediately or shortly after consummation of
the Transaction, EUA will cease its corporate existence and its utility
subsidiaries will be merged into Grid USA's utility subsidiaries. Because EUA
thus will be completely merged into Grid USA and will end its independent
existence, no concern about interlocking relations is presented by the
Transaction.
b. Concentration of Control
When considering the issue of concentration of control
pursuant to Section 10(b)(1), the Commission "considers various factors,
including the size of the resulting system and the competitive effects of the
acquisition." Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993),
request for reconsideration denied, Holding Co. Act Release No. 26037 (Apr. 28,
1994), remanded sub nom. Cajun Elec. Power Coop. Inc. v. SEC, 1994 WL 704047
(D.C. Cir. Nov. 16, 1994) ("Entergy").
26
<PAGE>
i. Size
The Grid USA system following the acquisition of EUA's assets
and operations will serve approximately 1.67 million retail electric customers
in New England. Based on year-end 1998 figures, the system's annual operating
revenues will be approximately $2.96 billion (operating utility revenues of
approximately $2.72 billion); and its total assets will be approximately $6.37
billion (utility assets of approximately $3.14 billion).
The Commission has approved a number of mergers and
acquisitions involving utilities with combined assets and operations exceeding
or approximately those of the Grid USA/EUA merged company. See, e.g., New
Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997) (merged
company assets of approximately $7 billion); Ameren Corp., Holding Co. Act
Release No. 26809 (Dec. 30, 1997) (assets of $8.8 billion, utility assets of
approximately $6.6 billion); CINergy Corp., Holding Co. Act Release No. 26146
(Oct. 21, 1994) (assets of approximately $8 billion, utility assets of
approximately $6 billion) ("Cinergy").
Following the Transaction, Grid USA will be smaller than
Northeast Utilities, another registered holding company operating in New
England, and, as illustrated by the following table, will be among the smaller
of the registered holding companies.
<TABLE>
<CAPTION>
Registered Holding Company Statistics
(as of December 31, 1998)
($MM)
12 Months'
Consolidated Consolidated
Holding Company System Assets Rank Operating Earnings Rank
- ---------------------- ------ ---- ------------------ ----
<S> <C> <C> <C> <C>
Southern Co. (E) 36,192.0 1 11,403.0 2
Entergy Corp. (E) 22,848.0 2 11,494.8 1
American Electric Power Co. (E) 19,483.2 3 6,345.9 3
GPU Corp. (E) 16,288.1 4 4,248.8 7
Central and South West Corp. (E) 13,744.0 5 5,482.0 6
Northeast Utilities (E) 10,387.4 6 3,767.7 8
Cinergy Corp. (E)(G) 10,298.8 7 5,876.3 4
Ameren (E)(G) 8,847.4 8 3,318.2 10
New Century Energies (E)(G) 7,672.0 9 3,610.9 9
Columbia Energy Group (G) 6,968.7 10 5,731.8 5
Allegheny Energy, Inc. (E) 6,747.8 11 2,576.4 14
Grid USA/EUA (E) 6,373.2 12 2,959.3 12
Consolidated Natural Gas Co. (G) 6,361.9 13 2,760.4 13
Conectiv (E)(G) 6,100.0 14 3,100.0 11
Alliant Energy Corp. (E)(G) 4,959.0 15 2,131.0 15
National Fuel Gas Co. (G) 2,684.5 16 1,248.0 16
Unitil Co. (E)(G) 376.9 17 149.6 17
PECO Energy Power Co. (E) 118.0 18 18.5 18
</TABLE>
27
<PAGE>
Source:
Holding Companies Registered Under the Public Utility Holding Company Act of
1935 As of July 1, 1999, Report of the Division of Investment Management, United
States Securities and Exchange Commission.
Legend
(E): Electric Utility
(G): Gas Utility
ii. Competition and Antitrust Considerations
The Commission's Section 10(b)(1) analysis also must include
consideration of federal antitrust policies.11 Were the Commission to determine
that an acquisition tends toward the concentration of control of public utility
companies, the Commission balances this effect against the benefits of the
acquisition to determine whether the acquisition meets the Section 10(b)(1)
standards. In the past, the Commission "has approved acquisitions that decrease
competition when it concludes that the acquisitions would result in benefits
such as possible economies of scale, elimination of the duplication of
facilities and activities, sharing of production capacity and reserves, and
generally more efficient operations." Northeast I, supra. The Commission also
has stated that the "antitrust ramifications of an acquisition must be
considered in light of the fact that public utilities are regulated monopolies
and that federal and state administrative agencies regulate the rates charged
consumers." Id.
The Commission has concurrent jurisdiction in assessing the
competitive impacts of the Transaction with the DOJ, the FTC, and the FERC.
Additionally, the MDTE may inquire into the effects of competition. Applicants
filed Notification and Report Forms with the DOJ and the FTC, which contain a
description of the Transaction's effects on competition, as required by the HSR
Act, and received clearance under the HSR Act on April 30, 1999. In addition,
the FERC has concluded in its order approving the Transaction under Section 203
of the FPA, attached hereto as Exhibit D-1.A, that the proposed merger of Grid
USA and EUA "does not raise competitive concerns." New England Power Company, 88
FERC P. 61,292 at 12 (1999) (mimeo). In particular, the FERC found the Grid USA
system following the acquisition of EUA's assets would have only small interests
in, and no operational control over, jointly-owned generating resources within
- --------
11 See, e.g., Conectiv, Inc., Holding Co. Act Release No. 26832 (Feb. 25,
1998) ("Conectiv").
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<PAGE>
NEPOOL. This lack of control over generation resources, combined with the market
rules imposed by the ISO New England, would preclude any ability of Grid USA to
exercise market power by withholding output from the energy market. Additional,
detailed discussions and testimony explaining that the Transaction will not have
any adverse effect on competition are contained in Applicant's FERC application,
attached to Exhibit D-1 hereto.
The benefits accompanying the Transaction are outlined below
in Item III.B.2 and are benefits which the Commission has in other transactions
weighed against any concerns about concentration of control. See American
Electric Power Co., 46 S.E.C. Docket 1299 (1978). For all of these reasons,
Applicants believe that the Transaction will not result in a concentration of
control which will be detrimental to the public interest, but instead will offer
the potential to facilitate an actual increase in competition in regional
electricity markets.
2. Section 10(b)(2)
Pursuant to Section 10(b)(2) of the Act, the Commission will
approve the Transaction unless it finds that "the consideration, including all
fees, commissions and other remuneration, ... is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the utility
assets to be acquired or the utility assets underlying the securities to be
acquired."
a. Fairness of Consideration
When determining whether consideration for an acquisition
meets the fair and reasonable test of Section 10(b)(2), the Commission considers
various factors. The Commission has considered: (i) the market price at which
securities have traded; (ii) whether the purchase price was decided as the
result of arm's-length negotiations; and (iii) whether each party's board of
directors has approved the purchase price. Finally, the Commission considers the
opinions of investment bankers, and the earnings, dividends and book and market
value of the shares of the company to be acquired. See American National Gas
Co., 43 S.E.C. 203 (1966), Consolidated Natural Gas Co., Holding Co. Act Release
No. 25040 (Feb. 14, 1990).
Under the standards applied by the Commission in previous
utility mergers, the consideration to be paid by Grid USA in the Transaction is
reasonable and bears a fair relation to the earnings capacity of the utility
assets underlying the EUA Common Shares to be acquired, in compliance with
Section 10(b)(2).
Each of the EUA Common Shares will be converted into the right
to receive $31.00 per share in cash, plus the possible application of an upward
adjustment factor more fully discussed in the Merger Agreement. As shown in the
29
<PAGE>
table below, the quarterly data, high and low, for EUA Common Shares provide
support for the consideration for each EUA Common Share.
<TABLE>
<CAPTION>
Dividends
Paid Per
EUA High Low Common Share
---- --- ------------
1996
<S> <C> <C> <C>
First Quarter 24 1/4 20 5/8 $0.400
Second Quarter 21 7/8 18 1/2 0.415
Third Quarter 191/2 14 3/4 0.415
Fourth Quarter 171/2 16 0.415
1997
First Quarter 19 5/8 17 1/4 $0.415
Second Quarter 18 1/2 16 3/8 0.415
Third Quarter 19 15/16 18 7/16 0.415
Fourth Quarter 26 5/8 20 1/8 0.415
1998
First Quarter 27 11/16 23 11/16 $0.415
Second Quarter 27 3/8 24 7/16 0.415
Third Quarter 26 15/16 24 5/16 0.415
Fourth Quarter 28 1/4 24 5/8 0.415
</TABLE>
The $31.00 purchase price represents a 5 percent premium above EUA's closing
share price of $29.56 on January 29, 1999, the last trading day before the
Transaction was announced. The purchase price also represents a 23 percent
premium above the price of EUA's closing share price on December 4, 1998, the
last trading day before other regional merger announcements affected EUA's share
price.
Furthermore, Applicants' belief that the consideration is fair
and reasonable is based on the following additional considerations:
o The consideration is the product of extensive and vigorous arm's
length negotiations between Grid USA and EUA conducted in a
competitive context (see discussion of negotiations in Exhibit K-1);
o The Merger has been approved by (i) the Grid USA Board of Directors,
the EUA Board, and the Members of LLC and (ii) 97 percent of the EUA
shareholders casting votes regarding the Merger.
30
<PAGE>
o Internationally-recognized financial advisers for both Grid USA and
EUA have reviewed extensive information concerning the companies and
analyzed a variety of valuation methodologies. An opinion from Grid
USA's financial adviser, Merrill Lynch & Co. (see Exhibit F-1), states
that the consideration to be paid by Grid USA with respect to the
Merger is fair, from a financial point of view, to Grid USA. An
opinion from EUA's financial adviser, Salomon Smith Barney (see
Exhibit F-2), states that the consideration to be received by EUA's
shareholders with respect to the Merger is fair, from a financial
point of view, to EUA's shareholders;
o The inclusion of required closing conditions in the Merger Agreement
serves to assure that the Merger will be consummated on terms that are
fair to Applicants and their shareholders.
b. Fairness of Fees
The various categories of fees, commissions and expenses in
connection with the transaction and regulatory processing costs for the
Transaction are set forth in Item II of this Application/Declaration. Applicants
will file by amendment the total amount of transaction and regulatory processing
costs they together expect to incur, and also will file by amendment the amount
of financial advisory fees they expect to incur.
Applicants believe that the estimated fees and expenses they
will incur will bear fair relation to EUA's value and the Transaction savings,
and will be fair and reasonable. See Northeast Utilities, Holding Co. Act
Release No. 25548 (June 3, 1992), modified on other grounds, Holding Co. Act
Release No. 25550 (June 4, 1992) ("Northeast II") (Commission considers whether
fees and expenses bear a fair relation to the value of the company to be
acquired and the savings to be achieved by the acquisition). As discussed below
at Item III.B.2, the expected savings that will be achieved by the Transaction
substantially will outweigh the estimated fees. Furthermore, the estimated
overall fees will be reasonable as compared to the fees approved by the
Commission in other merger transactions.
For all of the above reasons, the consideration and fees to be
paid will be fair and reasonable in compliance with Section 10(b)(2).
3. Section 10(b)(3)
Section 10(b)(3) of the Act requires that the Commission
approve an acquisition unless "such acquisition will unduly complicate the
31
<PAGE>
capital structure of the holding-company system ... or will be detrimental to
the public interest or the interest of investors or consumers or the proper
functioning of such holding-company system."
a. Capital Structure
Acquisitions do not unduly complicate the capital structure of
the holding company system where the purchaser's capital structure negligibly is
affected and the debt-to-equity ratio of the merged holding company following
the acquisition falls within the seventy-to-thirty percent of debt-to-common
equity generally prescribed by the Commission. Entergy, supra (citing Northeast
I); Georgia Power Company, 45 S.E.C. 610, 615 (1974). Furthermore, the
Commission has approved common equity to total capitalization ratios as low as
27.6 percent. See Northeast I, supra.
The proposed combination of Grid USA and EUA will not unduly
complicate the capital structure of the merged company. Grid USA will finance
the Transaction with cash and funds received from capital contributions from, or
issuance of equity to, NGG, in the event the NEES/NGG Merger is consummated
prior to the Transaction.
The historical capital structures of Grid USA and EUA, as well
as of NGG, at September 30, 1999 are set forth below:
<TABLE>
<CAPTION>
Grid USA, EUA and NGG Historical Capital Structures
(In Millions)
Grid USA EUA NGG (c)
$ % $ % (pound) $ %
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt (a) $1,058.8 39.3% $189.8 32.6% (pound)1,989.69 $3,183.4 49.2%
Preferred 19.5 0.7% 35.2 6.0% 0.0 0.0 0.0%
Common Equity 1,617.6 60.0% 358.0 61.4% 2,058.4 3,293.4 50.8%
------- ----- ----- ----- ------- ------- ------
Total Capitalization (b) $2,695.9 100.0% $583.0 100.0% (pound)4,048.0 $6,476.8 100.0%
======== ====== ====== ====== ============== ======== ======
</TABLE>
32
<PAGE>
The pro forma consolidated capital structures of (i) Grid USA
and EUA and (ii) Grid USA, EUA and NGG following the two acquisitions at
September 30, 1999 would have been as follows:
Grid USA/EUA Pro Forma Consolidated Capital Structure
(in Millions)
$ %
Long-term Debt (a) 1,248.6 38.1%
Preferred 54.7 1.7%
Common Equity 1,975.6 60.3%
------- -----
Total Capitalization (b) 3,278.9 100.0%
======= ======
NGG/Grid USA/EUA Pro Forma Consolidated Capital Structure
(in Millions)
$ %
Long-term Debt (a) 4,432.0 45.4%
Preferred and
preference equity 54.7 0.6%
Common Equity 5,269.0 54.0%
------- -----
Total Capitalization (b) 9,755.7 100.0%
======= ======
(a) Grid USA: Long-term debt includes long-term debt of $1,009.5 million and
long-term debt due within one year of $49.3 million for a total of
$1,058.8 million.
EUA: Long-term debt includes long-term debt of $127.3
million and long-term debt due within one year of $62.5 million for a
total of $189.8 million.
NGG: Long-term debt includes long-term debt of (pound)1,597.0 million
($2,555.2 million) and long-term debt due within one year of (pound)392.6
million ($628.2 million) for a total of (pound)1,989.6 million ($3,183.4
million).
(b) Grid USA: Capitalization includes capitalization per B.S. of $2,646.6
million and long-term debt due within one year of $49.3 million for a total
of $2,695.9 million. EUA: Capitalization includes capitalization per B.S.
of $520.5 million and long-term debt due within one year of $62.5 million
for a total of $583.0 million.
(c) Exchange rate of(pound)/$1.60.
33
<PAGE>
As the above tables reveal, Grid USA's debt-to-equity ratio is
not affected by any material degree by the Transaction. The merged company's
common equity to total capitalization ratio significantly exceeds the
Commission's traditionally acceptable 30 to 35 percent level.
Since EUA will cease to exist shortly after consummation of
the Transaction and EUA's assets and operations will be merged into those of
Grid USA, there is no issue regarding minority ownership of common shares.
b. Public Interest, Interest of Investors and
Consumers, and Proper Functioning of Holding
Company System
Section 10(b)(3) also requires the Commission to determine
whether the proposed Transaction will be detrimental to the interests of the
general public, investors or consumers, or the proper functioning of the
combined system.
As set forth more fully below, the Transaction is expected to
result in substantial cost savings and synergies, and will integrate and improve
the efficiency of the combined utility systems. The Transaction, therefore, will
be in the public interest and the interests of investors and consumers, and will
not be detrimental to the proper functioning of the resulting holding company
system.
B. Section 10(c)
Section 10(c) of the Act establishes additional standards for
approval of the Transaction. Under Section 10(c), "the Commission shall not
approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11; or
(2) the acquisition of securities or utility assets of a public-utility or
holding company unless the Commission finds that such acquisition will
serve the public interest by tending towards the economical and
efficient development of an integrated public utility system."
1. Section 10(c)(1)
Section 10(c)(1) requires that an acquisition be lawful under
the provisions of Section 8 of the Act. Section 8 prohibits an acquisition by a
registered holding company of an interest in an electric and gas utility serving
substantially the same area without the express approval of the state commission
when that state's law prohibits or requires approval of the acquisition. As
34
<PAGE>
neither Grid USA nor EUA owns any interest in a gas utility, the provisions of
Section 8 are not applicable to the Transaction.
Section 10(c)(1) also requires that the Transaction not be
detrimental to the carrying out of the provisions of Section 11, specifically
those prohibiting unduly complex corporate structures and mandating integrated
public utility systems. The following analysis demonstrates that the Transaction
fully meets the standards of Section 11.
a. Section 11(a) and Section 11(b)(2)
Section 11(a) requires the Commission to examine the corporate
structure of registered holding companies to ensure that unnecessary
complexities are eliminated and voting powers are fairly and equitably
distributed. Similarly, Section 11(b)(2) of the Act requires that the Commission
"ensure that the corporate structure or continued existence of any company in
the holding-company system does not unduly or unnecessarily complicate the
structure, or unfairly or inequitably distribute voting power among security
holders, of such holding-company system." The Transaction fulfills the standard
imposed by Section 11(b)(2). The resulting capital structure will not be unduly
complicated, as discussed above. See, e.g., Sierra Pacific Resources, Holding
Co. Act Release No. 24566 (Jan. 28, 1988), aff'd, Environmental Action, Inc.,
895 F.2d 1255 (D.C. Cir. 1990) (Commission incorporates its Section 10(b)(3)
capital structure analysis into its Section 11(b)(2) corporate structure
analysis).
b. Section 11(b)(1) (single integrated public
utility system)
An integrated public utility system, as applied to electric
utility companies, is defined in Section 2(a)(29)(A) of the Act as:
"a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility assets,
whether owned by one or more electric utility companies, are physically
interconnected or capable of physical interconnection and which under
normal conditions may be economically operated as a single interconnected
and coordinated system confined in its operations to a single area or
region, in one or more States, not so large as to impair (considering the
state of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation;"
35
<PAGE>
Pursuant to the above definition, the Commission has
established four criteria that must be satisfied before the Commission finds
that an integrated electric public utility system will result from a proposed
merger of two separate systems:
(i) the utility assets of the systems are physically interconnected or
capable of physical interconnection;
(ii) the utility assets, under normal conditions, must be economically
operated as a single interconnected and coordinated system;
(iii) the system must be confined in its operations to a single area or
region; and
(iv) the system must not be so large as to impair (considering the state
of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
See, e.g., Environmental Action, Inc. v. SEC, supra (citing In re Electric
Energy Inc., 38 S.E.C. 658, 668 (1958)). As demonstrated below, the Transaction
meets each of these standards.
i. Interconnection
The Grid USA and EUA systems are adjacent to each other and
their transmission lines are directly physically interconnected; power is
exchanged presently between EUA and Grid USA. See Exhibit E-4. Physical
interconnections between the Grid USA and EUA systems include the following:
(i) Narragansett's Phillipsdale substation is supplied by a 115kV
transmission line emanating from Blackstone's Pawtucket No. 1
substation;
(ii) Two 23 kV distribution lines emanating from Narragansett's Admiral
Street substation interconnect with the Pawtucket Power Association
generating station located in Blackstone's service territory;
(iii) Two of Narragansett's 115 kV transmission lines enter and connect to
Blackstone's Farnum substation;
(iv) A Narragansett 345 kV transmission line connects to Blackstone's W.
Farnum substation extends to and supplies Narragansett's Kent County
substation;
36
<PAGE>
(v) A 115 kV transmission tap off of Narragansett's V-148 line supplies
Blackstone's Washington substation;
(vi) A 12.5 kV distribution line emanating from Narragansett's Tiverton
substation supplies Eastern Edison load in the Fall River area of
Massachusetts;
(vii) Two Montaup 115 kV lines connect to two Narragansett 115 kV
transmission lines at the Rhode Island state line to supply
Narragansett's Tiverton substation and to interconnect the EMI-
Tiverton generating plant;
(viii) A 345 kV transmission line connects NEP's 345 kV substation at
Brayton Point to Blackstone's W. Farnum 345 kV substation;
(iv) A 115 kV transmission line tap off NEP's V-148 line connects to
Montaup's Robinson Avenue substation.
In addition, Grid USA and EUA are interconnected via the
NEPOOL transmission network, which is administered by an ISO that assures
open-access transmission services for the New England marketplace. The
Commission has recognized that power pools and ISOs can provide a mechanism for
satisfying the physical interconnection requirement of the Act. See, e.g.,
Conectiv; Unitil Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992).
ii. Single Interconnected and Coordinated
System
The merged company will operate as a single interconnected and
coordinated system, pursuant to the requirements of Section 2(a)(29)(A). The
Commission has "interpreted this language to refer to the physical operation of
utility assets as a system in which, among other things, the generation and/or
flow of current within the system may be centrally controlled and allocated as
need or economy directs." Conectiv, supra (citing North American Co., 11 S.E.C.
194, 242 (1942), aff'd, SEC v. North American Co., 133 F.2d 148 (2d Cir. 1943),
aff'd on constitutional issues, 327 U.S. 686 (1946)). In enacting this standard,
Congress "intended that the utility properties be so connected and operated that
there is coordination among all parts, and that those parts bear an integral
operating relationship to one another." Id. (citing Cities Services Co., 14
S.E.C. 28, 55 (1943)).
Grid USA's and EUA's utility operations will be consolidated
fully into existing Grid USA utility subsidiaries, which will continue to
operate on a fully integrated basis. In addition, Grid USA's operations will be
coordinated via NEPOOL and the new ISO-managed bulk power system, which will
37
<PAGE>
administer a market-driven dispatch framework that matches loads with resources
bid into the system by generators and suppliers.
The Grid USA system will continue to be coordinated in a
variety of other ways, e.g. by way of centralized accounting and financial
systems, information system networks, strategic planning, etc. The Commission,
in applying the integration standard, looks beyond simply the coordination of
day-to-day utility operations to a broader range of corporate functions and
activities. See, e.g., General Public Utilities Corp., Holding Co. Act Release
No. 13116 (Mar. 2, 1956) (integration is accomplished through power dispatching
by a central load dispatcher as well as through coordination of maintenance and
construction requirements); Middle South Utilities, Holding Co. Act Release No.
11782 (March 20, 1953), petition to reopen denied, Holding Co. Act Release No.
12978 (Sept. 13, 1955), rev'd sub nom. Louisiana Public Service Comm'n v. SEC,
235 F.2d 167 (5th Cir. 1956), rev'd, 353 U.S. 368 (1957), reh'g denied, 354 U.S.
928 (1957) (integration is accomplished through an operating committee which
coordinates not only the scheduling of generation and system dispatch, but also
makes and keeps records and necessary reports, coordinates construction programs
and provides for all other interrelated operations involved in the coordination
of generation and transmission); The North American Co., Holding Co. Act Release
No. 10320 (Dec. 28, 1950) (economic integration is demonstrated by the exchange
of power, the coordination of future power demand, the sharing of extensive
experience with regard to engineering and other operating problems, and the
furnishing of financial aid to the company being acquired).
As required under Section 2(a)(29)(A), the coordinated system
must be "economically operated." Thus, the Commission analyzes whether the
coordinated system achieves economies and efficiencies. See, e.g., City of New
Orleans v. SEC, 969 F.2d 1163, 1168 (D.C. Cir. 1992) (the term "economically"
means "that facilities, in addition to their physical interconnection, be
consolidated so as to take advantage of efficiencies"). Applicants expect to
realize significant economies and efficiencies as a result of the Transaction.
As described in Item III.B.2 below, Applicants estimate the present value of the
net savings from the Transaction, after reflecting recovery rates of the
acquisition premium and transaction costs, to be approximately $356.0 million
following the Transaction.
iii. Single Area or Region
The merged company's operations will be confined to a "single
area or region in one or more States." Following the Transaction, Grid USA will
continue to operate in the same New England states in which it currently
conducts public utility operations.
38
<PAGE>
iv. Localized Management, Efficient
Operation and Effective Regulation
Section 2(a)(29)(A) also provides for the Commission's
consideration of the size of the combined system, requiring that the combined
system not be so large as to impair the advantages of localized management,
efficient operation, and the effectiveness of regulation.
Following the Transaction, Grid USA and its subsidiaries will
maintain their current management and local operating headquarters. EUA's
utility assets and operations will be combined fully into Grid USA's existing
utility subsidiaries. This structure will preserve all the benefits of localized
management which Grid USA and its subsidiaries currently enjoy, while promoting
maximum efficiencies and economies.
The Transaction will not impair the effectiveness of state
regulation. Following the Transaction, Grid USA and its subsidiaries will
continue to be regulated by the same state commissions which currently regulate
them, including those of Massachusetts and Rhode Island, which now regulate
EUA's utility activities. The Transaction has been approved by the CDPUC, which
found the Transaction does not adversely affect electric service in Connecticut.
Application of Montaup Electric Company, Docket Nos. 99-08-11, 99-08-12,
99-08-13 (Oct. 27, 1999) (attached hereto as Exhibit D-5.A). The Transaction
also is subject to the approval of the VPSB and the RIDIV. In addition,
Applicants are seeking rate plan approval from the MDTE and the RIPUC.
c. Section 11(b)(1) (Acquisition of Non-Utility
Interests)
Section 11(b)(1) of the Act also requires that a registered
holding company limit its operations to a single integrated public utility
system and "such other businesses as are reasonably incidental, or economically
necessary or appropriate to the operations of such integrated public-utility
system." Each of EUA's non-utility business interests conforms to the "other
business" standards of the Act as previously determined by the Commission. The
indirect acquisition by Grid USA of EUA's non-utility businesses in no way
affects the functional relationship of those businesses to Grid USA's core
electric business following the Transaction. See Item I.B.3(b) above for a
detailed description of EUA's non-utility businesses.
Based on the foregoing, the Transaction is not detrimental to
the carrying out of the provisions of Section 11.
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<PAGE>
2. Section 10(c)(2)
Section 10(c)(2) requires that the Commission approve a
transaction that serves the public interest through economical and efficient
development of an integrated public utility system. As described above, the Grid
USA System will be fully integrated following the Transaction. Further, the
Transaction will promote the economic and efficient development of the Grid USA
utility system.
Economic efficiency is the driving force behind the
Transaction; its purpose is to create an entity well situated to compete
effectively in an increasingly active market. The Transaction will allow Grid
USA to realize the "opportunities for economies of scale, the elimination of
duplicate facilities and activities, the sharing of production capacity and
reserves and generally more efficient operations" described by the Commission in
American Electric Power, supra. Applicants expect to achieve at least $484.0
million in present value net savings (after amortization of the EUA acquisition
premium and transaction costs) following consummation of the Transaction. (See,
e.g., Testimony of Michael E. Jesanis, The Narragansett Electric Company,
Blackstone Valley Electric Company, and Newport Electric Corporation: Rate Plan
Filing in Support of Merger, Vol. 1, Rhode Island Public Utilities Commission
(September, 1999)). The merger of Grid USA and EUA will result in cost savings
in a number of areas. Approximately 70 percent of the projected savings will
arise from personnel reductions in administrative areas such as accounting and
finance. In addition, Grid USA and EUA customer service operations will be
integrated to handle increased volumes with greater efficiency. Other operating
savings will result from the disposition of duplicate facilities, realization of
greater purchasing power, and elimination of redundant administrative costs such
as corporate governance expense.
On April 30, 1999, Eastern Edison and Mass. Electric
collectively submitted a Rate Plan in Support of Merger with the MDTE seeking
approval of the rate plan and the merger of Eastern Edison into Mass. Electric.
On November 29, 1999, a settlement agreement entered into by all of the
intervening parties was submitted. The uncontested settlement provides for,
among other things:
o Immediate rate reductions totaling $10 million for all customers of
the combined Mass. Electric and Eastern Edison entity and customers of
Nantucket;
o A rate freeze at the post reduction rate levels through February 28,
2005 subject only to limited exogenous events;
o A rate path for the period from March 1, 2005 through December 31,
2009 ("Rate Index Period") during which Mass. Electric's distribution
40
<PAGE>
rates are indexed to an average of regional distribution rates of
similarly unbundled investor owned utilities. The index is to be based
on Mass. Electric's rates at the inception of the Rate Index Period
relative to the regional average but in no case in excess of 90% of
such average.
o An opportunity for Mass. Electric to include earned savings in its
cost of service for rate making purposes for the period commencing
January 2010 and ending 20 years from the effective date of the
settlement; and,
o A comprehensive service quality plan which provides incentives and
penalties so that service quality in the combined service territory
will be maintained and enhanced through the 20-year rate plan period.
The MDTE issued an order approving the rate plan settlement on
March 14, 2000, a copy of which is attached hereto as Exhibit D-2.A.
Similarly, on May 20, 1999, Blackstone, Newport, and
Narragansett collectively submitted to the RIPUC a rate plan in support fo the
Transaction seeking approval for the rate plan and the merger of Blackstone and
Newport into Narragansett. On February 9, 2000, a settlement agreement entered
into with intervening parties was submitted to the RIPUC. The settlement
agreement provides for, among other things:
o Immediate rate reductions totaling $13.1 million for the combined
customers of the three companies;
o A rate freeze at the post-reduction level through December 31, 2004
subject only to limited exogenous events;
o Rate equalization for customer classes of the three individual
companies subsequent to the Transaction;
o A sharing of merger related savings between Narragansett and
customers, subject to demonstration proofs made by Narragansett;
o Narragansett's commitment to service quality including increased
penalties for service quality deterioration;
o A long-term incentive rate plan designed to required Narragansett to
maintain rates at a level below an agreed upon rate path in order to
retain a share of the merger savings; and,
41
<PAGE>
o A resolution of Blackstone's and Newport's overearnings.
The RIPUC has approved this rate plan in open meeting on March
14, 2000. A final order formalizing such approval is expected in the coming days
and will be provided to the Commission by amendment.
As the Commission has observed with reference to Section
10(c)(2), "specific dollar forecasts of future savings are not necessarily
required; a demonstrated potential for economies will suffice even when these
are not precisely quantifiable." Centerior Energy Corp., Holding Co. Act Release
No. 24073 (Apr. 29, 1986). In this regard, the Transaction will result in
additional benefits which, although not precisely quantifiable, are nonetheless
significant. For example, the merged company will be better situated to provide
more reliable electric service than is possible for Grid USA and EUA on a
stand-alone basis. It also will be better equipped and positioned to provide the
transmission and distribution infrastructure that is essential to the creation
of a robust power supply competitive market in restructured wholesale and retail
electric markets.
C. Section 10(f)
Section 10(f) provides that:
"The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect of such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be detrimental
to the carrying out of the provisions of section 11."
As described above, and as evidenced by the various
applications seeking authorization of the Transaction and rate plan approvals
and orders approving such, Grid USA and EUA will comply with all applicable
state laws related to the Transaction.
D. Service Agreement
As described in Item I.B.3(a) above, Service Company is a
service company that, pursuant to service agreements with each of the subsidiary
companies of Grid USA, provides various technical, engineering, accounting,
administrative, financial, purchasing, computing, managerial, operational, and
legal services to each of the Grid USA subsidiary companies. Pursuant to the
service agreements, these services are provided at cost. The Commission
previously has determined that Service Company is so organized and its business
42
<PAGE>
is so conducted as to meet the requirements of Section 13(b) of the Act and Rule
88 thereunder. New England Power Service Co., 1 SEC 615 (1936), continued by, 10
SEC 562 (1941), modified by, Holding Co. Act Release No. 14128 (Dec. 30, 1959).
Similarly, EUA Service is a service company which, pursuant to
service agreements signed with each of the subsidiary companies of EUA, provides
various technical, engineering, accounting, administrative, financial,
purchasing, computing, managerial, and operational services to each of the EUA
subsidiary companies. Pursuant to the service agreements, these services are
provided at cost. The Commission also previously has determined that EUA Service
is so organized and its business is so conducted as to meet the requirements of
Section 13(b) of the Act and Rule 88 thereunder. Eastern Utilities Associates,
Holding Co. Act Release No. 17029 (Mar. 5, 1971).
Upon consummation of the Transaction, EUA Service will be
merged with Service Company, and Service Company will be the surviving service
company for the Grid USA system. There will be no change in the method Service
Company's method of allocating costs and no changes are contemplated to existing
service agreements. The Service Company will pay off $4 million of notes of EUA
Services and requests authority to increase its borrowing authorization by $4
million for that purpose. The Service Company has just completed an audit by SEC
Staff and has agreed to certain adjustments to its capital structure that will
be included in a formal filing under the Act to be made during April. The
Service Company does not believe that the cost of its services will
significantly increase as a result of the Transaction.
E. Organization of LLC; Acquisition of Merger LLC Interests
LLC was organized solely for the purpose of effecting the
Transaction and has not conducted any activities other than in connection with
the Transaction. LLC has no subsidiaries. Each membership certificate of LLC to
be issued to LLC and outstanding immediately before the consummation of the
Merger will be converted into one share of the surviving entity upon
consummation of the Transaction. Thus, the sole purpose for LLC is to serve as
an acquisition subsidiary of Grid USA for purposes of effecting the Transaction.
Approval of this Application/Declaration will constitute approval of the
acquisition by Grid USA of the membership certificates of LLC.
F. Financing and Other Commission Authorizations
1. Payment of Dividends Out of Capital or Unearned Surplus.
As a result of the application of the purchase method of
accounting to the Transaction, the current retained earnings of EUA and its
43
<PAGE>
subsidiary companies (the "EUA Subsidiary Companies") will be recharacterized as
additional paid-in-capital. In addition, the Transaction will give rise to a
substantial level of goodwill, the difference between the aggregate fair values
of all identifiable tangible and intangible (non-goodwill) assets on the one
hand, and the total consideration to be paid for EUA and the fair value of the
liabilities assumed, on the other. In accordance with the Commission's Staff
Accounting Bulletin No. 54, Topic 5J ("Staff Accounting Bulletin"), the goodwill
will be "pushed down" to the EUA Subsidiary Companies and reflected as
additional paid-in-capital in their financial statements. The effect of these
accounting conventions would be to leave the EUA Subsidiary Companies with no
retained earnings, the traditional source of dividend payment, but,
nevertheless, strong balance sheets showing significant equity levels.
Applicants request authorization to pay dividends out of the additional paid-in-
capital account up to the amount of the EUA Subsidiary Companies' aggregate
retained earnings just prior to the Transaction and out of earnings before the
amortization of the goodwill thereafter.
As indicated in the Staff Accounting Bulletin, registrants
that have substantially all (generally defined as in excess of 95 percent) of
their common stock acquired by a third party, in a business combination
accounted for under the purchase method, should reflect the push-down of
goodwill in the registrant's post- acquisition financial statements. For any
post-acquisition reporting of the consolidated Grid USA financial statements,
push down accounting will be reflected in those statements and the full amount
of goodwill associated with the EUA acquisition will be reflected. Push down
accounting also will be applied to the EUA Subsidiary Companies.
Grid USA currently intends to amortize the goodwill resulting
from the acquisition of EUA over a 20-year period. Generally accepted accounting
principles ("GAAP") at present allow a goodwill life of up to 40 years. The
Commission, however, has been challenging registrants that adopt the maximum
period. Additionally, the FASB draft proposal relating to accounting for
business combinations would limit the maximum goodwill life to 20 years.
Applicants, therefore currently intend to adopt a 20-year goodwill amortization
period.
The application of "push down" accounting represents the
termination of the old accounting entity and the creation of a new one. For FERC
and state commission reporting purposes, goodwill will be recorded in the
"Acquisition adjustments" account. The original historical basis of the plant
accounts will not be disturbed.
As a result of the push down of the goodwill, the common
equity balances of EUA and the EUA Subsidiary Companies effectively are reset as
if they were new companies, because a new basis of accounting has been pushed
44
<PAGE>
down to the entities. As a result, retained earnings are eliminated. Immediately
following this accounting treatment, the only components with a recorded value
would be:
o Common shares - which would continue to reflect the par value of the common
shares issued.
o Additional paid in capital - which would reflect a value consistent with
total common stockholders equity minus the par value recorded in the common
stock line.
In other words, the resulting common stockholders' equity will equal the total
consideration paid for the entity.
Based on September 30, 1999 financial information, the
application of these accounting principles to the NEES/EUA merger will result in
following adjustments to EUA's accounts:
<TABLE>
<CAPTION>
$'000 1998 Adjustments 1 Adjustments 2 Restated
<S> <C> <C> <C> <C>
Common Shares $102,180 - - $102,180
Paid in capital $220,279 $35,548 $285,563 $541,390
Retained earnings $39,479 ($39,479) - 0
Common Share Expense ($3,931) $3,931 -- 0
Total equity $358,007 $0 $285,563 $643,570
</TABLE>
Adjustments 1 - capital accounts are restated as Paid in Capital.
Adjustments 2 - goodwill is added to Paid in Capital.
The push down of the goodwill also has an impact on the net
income of EUA. Since the goodwill will be amortized over 20 years, EUA's net
income will be reduced by the amount of the amortization.
The premium to be paid to acquire EUA will result in goodwill
and the elimination of EUA's retained earnings. EUA's consolidation with Grid
USA will further increase Grid USA's additional paid in capital account. The
amortization of the EUA goodwill also will reduce net income. The required
accounting adjustments put EUA in the anomalous position of having greater
stockholders' equity following the Transaction, but projected net income below
EUA's current dividend payment levels and no retained earnings from which to pay
dividends. As discussed further below, these merger-related accounting
adjustments do not affect the cash flow associated with the utility
subsidiaries.
45
<PAGE>
Section 12 of the 1935 Act, and Rule 46 thereunder, generally
prohibit the payment of dividends out of "capital or unearned surplus" except
pursuant to an order of the Commission. The legislative history explains that
this provision was intended to "prevent the milking of operating companies in
the interest of the controlling holding company groups." S. Rep. No. 621, 74th
Cong., 1st Sess. 34 (1935).12 In determining whether to permit a registered
holding company to pay dividends out of capital surplus, the Commission
considers various factors, including: (i) the asset value of the company in
relation to its capitalization, (ii) the company's prior earnings, (iii) the
company's current earnings in relation to the proposed dividend, and (iv) the
company's projected cash position after payment of a dividend. See Eastern
Utilities Associates, Holding Co. Act Release No. 25330 (June 13, 1991), and
cases cited therein. Further, the payment of the dividend must be "appropriate
in the public interest." Id., citing Commonwealth & Southern Corporation, 13
S.E.C. 489, 492 (1943).
Grid USA and its subsidiaries request authority to pay
dividends out of additional paid-in-capital up to the amount of EUA's
consolidated retained earnings and EUA's subsidiaries' retained earnings, just
prior to the Transaction and out of earnings before the amortization of goodwill
thereafter. In no case would dividends be paid if it would result in the
consolidated equity of Grid USA dropping below 30 percent on a consolidated
basis. This restriction is intended to protect both investors and consumers.
In support of their request, Applicants assert that each of
the standards of Section 12(c) of the 1935 Act enunciated in Eastern Utilities
Associates are satisfied:
(i) After the Transaction, and giving effect to the pushdown of goodwill,
Grid USA's equity as a percentage of total capitalization will be
63.2% percent, substantially in excess of the traditional levels of
equity capitalization that the Commission has authorized for other
registered holding company systems. Applicants' commitment to maintain
the capitalization of Grid USA at or above 30 percent equity on a
consolidated basis should result in a capital structure consistent
with industry norms.
- --------
12 Compare Section 305(a) of the Federal Power Act.
46
<PAGE>
(ii) Grid USA has a favorable history of prior earnings and it has a long
record of consistent dividend payments.13
(iii) Applicants anticipate that Grid USA's cash flow after the Transaction
will not differ significantly from its pre-Transaction cash flow and
that earnings before the amortization of goodwill ("Gross Earnings"),
therefore, should remain stable post-Transaction. Applicants intend
that dividends paid out of future earnings will continue to reflect a
dividend payout ratio of between 60 percent and 100 percent of Gross
Earnings, based on a rolling 5-year average.
(iv) The projected cash position of Grid USA and its utility subsidiaries
after the Transaction will be adequate to meet the obligations of each
company. As of September 30, 1999, Grid USA had cash balances of
$201.0 million on a consolidated basis. The amortization of goodwill
is a non-cash expense that will not affect the cash flow of Grid USA
or its subsidiaries. Each of Grid USA and its subsidiary companies is
forecast to have sufficient cash to pay dividends in the amounts
contemplated.
(v) The proposed dividend payments are in the public interest. Grid USA
and its subsidiary companies are in sound financial condition as
indicated by their credit ratings. Grid USA's commercial paper is
rated A-1 by Standard & Poor's ("S&P") and Prime-1 by Moody's Investor
Service ("Moody's"). The long-term debt of Mass. Electric,
Narragansett, and NEP is rated AA-, A1; AA-, A1; and A+, A1 by S&P and
Moody's, respectively. Indeed, S&P has placed the credit ratings of
- --------
13 In recent years, Grid USA's net income and dividends have been:
Year Net Income ($ millions) Dividends Paid ($ millions)
1995 205 151
1996 209 154
1997 220 153
1998 190 147
1999 163 137
47
<PAGE>
Grid USA, Mass. Electric, Narragansett, and NEP on "creditwatch with
positive implications."14 The expectations of continued strong credit
ratings by Grid USA's utility subsidiaries should allow them to
continue to access the capital markets to finance their operations and
growth.
In addition, the dividend payments are consistent with investor interests
because they allow the capital structure of Grid USA and its subsidiaries to be
adjusted to more appropriate levels of debt and equity.
2. Rule 53
Neither Grid USA nor EUA has an ownership interest in an
exempt wholesale generator ("EWG") or a foreign utility company ("FUCO") as
defined in Sections 32 and 33 of the Act. Additionally, neither Grid USA nor EUA
is a party to, nor does Grid USA or EUA have any rights under, a service, sales,
or construction agreement with an EWG or a FUCO. Grid USA shall comply with the
requirements of Rule 53 of the Act in connection with any future EWG and FUCO
acquisitions and financings. To the extent that any monies from the borrowings
hereunder are used to invest in, or otherwise acquire an interest in the
business of, any EWGs or FUCOs, Grid USA will comply with the Commission's
orders in File No. 70-8783 (Release No. 35-26504 dated April 15, 1996, as
supplemented by Release No. 35-26729 dated June 10, 1997).
3. Tax Allocation
Those subsidiaries of EUA that are not merged with Grid USA
companies will be added to the tax allocation agreement most recently approved
for Grid USA by order dated March 15, 2000, Holding Co. Act Release No. 27154.
ITEM IV. REGULATORY APPROVAL
In addition to required Commission approvals, the following
have jurisdiction over various aspects of the Transaction (and related
subsidiary company consolidations): the FERC, the NRC, the FCC, the VPSB, the
CDPUC, the MDTE, and the RIDIV.15 In addition, Applicants are seeking approval
from the MDTE and the RIPUC for a rate plan that allows recovery of the costs of
the acquisition and the acquisition premium. On March 14, 2000, the MDTE issued
- --------
14 S&P's Credit Wire (Dec. 14, 1998).
15 As mentioned above, the Merger is not subject to the jurisdiction of the
MPUC.
48
<PAGE>
an order approving the rate plan, and the RIPUC has informally approved
Applicants' retail rate plan in an open meeting. A final RIPUC order formalizing
its approval is expected in the coming days.
As discussed above, on September 29, 1999, the FERC
conditionally approved the Transaction under Section 203 of the FPA. On October
27, 1999, the CDPUC also approved Transaction. On December 15, 1999, the VPSB
gave its approval to the Merger. On February 24, 2000, the NRC approved the
transfer of licenses associated with the Merger. On February 25, 2000, the RIDIV
approved the Merger conditioned on final approval by the RIPUC of Applicants'
rate plan. The applications for and orders granting these approvals are attached
hereto as Exhibits D-1 to D-7.A. On March 14, 2000, Applicants received FCC
consent to the transfer of licenses currently held by EUA subsidiaries. In
addition, Applicants filed notification and report forms under the HSR Act with
the DOJ and the FTC with respect to the Merger. On April 30, 1999, Applicants
received clearance for the Merger under the HSR Act.
ITEM V. PROCEDURE
The Commission is respectfully requested to enter an order
granting and permitting this Application/Declaration to become effective at the
earliest possible date.
It is submitted that a recommended decision by a hearing or
other responsible officer of the Commission is not needed for approval of the
Transaction. The Division may assist in the preparation of the Commission's
decision. There should be no waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
ITEM VI. EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
A-1 Agreement and Declaration of Trust dated January 2, 1926, as
amended through April 28, 1992 (Exhibit 3 to 1994 NEES Form
10-K, File No. 1-3446, and incorporated herein by reference)**
A-1.A Articles of Incorporation of Grid USA
A-1.B Bylaws of Grid USA
A-2 Declaration of Trust, dated April 2, 1928, as amended (Exhibit
A-3, File No. 70-3188; Exhibit 1 to 8-K Reports for April in each
of the years 1957, 1962, 1966, 1968, 1972 and 1973, File No.
1-5366; Exhibit A-1(a), Amendment No. 2 to Form U-1, File No.
70-5997; Exhibit 4-3, Registration No. 2-72589; Exhibit 1 to
Certificate of Notification; File No. 70-6713; Exhibit 1 to
49
<PAGE>
Certificate of Notification; File No. 70-7084; Exhibit 3-2, Form
10-K for 1987, File No. 1-5366, and incorporated herein by
reference)**
A-3 Amended and Restated Certificate of Organization of LLC**
B-1 NEES/NGG Merger Agreement (Exhibit 10(mm) to NEES Form 8-K, File
No. 1-3446, dated December 16, 1998, and incorporated herein by
reference)**
B-2 [Deleted]
B-3 [Deleted]
B-4 Merger Agreement**
D-1 Application to the FERC, filed on May 5, 1999, as supplemented on
July 1, 1999, together with testimony and exhibits (pursuant to
Exhibit G, state filings provided separately)**
D-1.A Order of the Federal Energy Regulatory Commission**
D-2 Application to the MDTE, together with testimony and exhibits**
D-2.A Order of the MDTE
D-3 Application to the RIPUC, together with testimony and exhibits**
D-3.A Order of the RIDIV
D-3.B Order of the RIPUC (to be filed by amendment)
D-4 Application to the VPSB, together with testimony and exhibits**
D-4.A Order of the VPSB
D-5 Application to the CDPUC, together with testimony and exhibits
D-5.A Order of the Connecticut Department of Public Utility Control**
D-6 [Deleted]
D-6.A [Deleted]
D-7 Application to the NRC
D-7.A Order of the NRC
E-1 GRID USA organization chart
E-2 EUA organization chart
E-3 Combined company organization chart after the Transaction
E-4 Map of NEES and EUA service areas and transmission systems
(Exhibit I to Exhibit D-1 hereto)**
F-1 Opinion of Merrill Lynch & Co.
F-2 Opinion of Salomon Smith Barney (Annex II to EUA Schedule 14A,
File No. 1-5366, dated April 19, 1999, and incorporated herein by
reference)
F-3 Opinion of Counsel of Grid USA
F-4 Opinion of Counsel of EUA
F-5 Past Tense Opinion of Counsel (to be filed by amendment with Rule
24 certificate)
50
<PAGE>
G-1 NEES' Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (File No. 1-3446, filed March 31, 1999, and
incorporated herein by reference)**
G-2 NEES' Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (File No. 1-3446, filed November 12, 1999, and
incorporated herein by reference)
G-3 EUA's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (File No. 1-5366, filed March 31, 1999, and
incorporated herein by reference)**
G-4 EUA's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (File No. 1-5366, filed November 15, 1999, and
incorporated herein by reference)
H-1 Proposed Form of Notice**
K-1 Discussion of negotiations between NEES and EUA**
B. Financial Statements
FS-1 NEES' Consolidated Balance Sheet as of December 31, 1998
(previously filed with the Commission in NEES' Annual Report on
Form 10-K for the year ended December 31, 1998 (Exhibit G-1
hereto), filed March 31, 1999, File No. 1-3446, and incorporated
herein by reference))**
FS-1.A NEES' Consolidated Balance Sheet as of September 30, 1999
(previously filed with the Commission in NEES' Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999 (Exhibit
G-2 hereto), filed November 12, 1999, File No. 1-3446, and
incorporated herein by reference))
FS-2 NEES' Consolidated Statement of Income for the 12 months ended
December 31, 1998 (previously filed with the Commission in NEES'
Annual Report on Form 10-K for the year ended December 31, 1998
(Exhibit G-1 hereto), filed March 31, 1999, File No. 1-3446, and
incorporated herein by reference)**
FS-2.A NEES' Consolidated Statement of Income for the 9 months ended
September 30, 1999 (previously filed with the Commission in NEES'
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999 (Exhibit G-2 hereto), filed November 12, 1999, File No.
1-3446, and incorporated herein by reference))
FS-3 EUA's Consolidated Balance Sheet as of December 31, 1998
(previously filed with the Commission in NEES' Annual Report on
Form 10-K for the year ended December 31, 1998 (Exhibit G-3
hereto), filed March 31, 1999, File No. 1-5366, and incorporated
herein by reference)**
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<PAGE>
FS-3.A EUA's Consolidated Balance Sheets as of September 30, 1999
(previously filed with the Commission in EUA's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999 (Exhibit
G-4 hereto), filed November 15, 1999, File No. 1-5366, and
incorporated herein by reference))
FS-4 EUA's Consolidated Statement of Income for the 12 months ended
December 31, 1998 (previously filed with the Commission in NEES'
Annual Report on Form 10-K for the year ended December 31, 1998
(Exhibit G-3 hereto), filed March 31, 1999, File No. 1-5366, and
incorporated herein by reference)**
FS-4.A EUA's Consolidated Statement of Income for the 9 months ended
September 30, 1999 (previously filed with the Commission in EUA's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999 (Exhibit G-4 hereto), filed November 15, 1999, File No. 1-
5366, and incorporated herein by reference))
ITEM VII. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Transaction neither involves "major federal actions" nor
"significantly [affects] the quality of the human environment" as those terms
are used in Section 102(2)(C) of the National Environmental Policy Act, 42
U.S.C. Sec. 4332. The only federal actions related to the Transaction pertain to
the required approvals and actions summarized in Item IV, and Commission
approval of this Application/Declaration. Consummation of the Transaction will
not result in significant changes in the operations of the public utilities
involved in the Transaction that would have any impact on the environment. No
federal agency is preparing an environmental impact statement with respect to
this matter.
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Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned Applicants have caused this pre-effective Amendment No. 2
to the Application/Declaration in File No. 70-9537 to be signed on their behalf
by the undersigned thereunto duly authorized.
NATIONAL GRID USA
(formerly New England Electric System)
By: /s/ Kirk L. Ramsauer Date: March 23, 2000
------------------------------------ -------------------------
Title: Deputy General Counsel
------------------------------------
NATIONAL GRID GROUP, plc
By: /s/ Jonathan M. G. Carlton Date: March 23, 2000
------------------------------------ -------------------------
Title: Business Development Manager-Reg.
------------------------------------
EASTERN UTILITIES ASSOCIATES*
By: /s/ Clifford J. Hebert, Jr. Date: March 23, 2000
------------------------------------ -------------------------
Title: Treasurer
------------------------------------
*The name "Eastern Utilities Associates" is the designation of the Trustees of
EUA for the time being in their collective capacity but not personally, under a
Declaration of Trust dated April 2, 1928, as amended, a copy of which amended
Declaration of Trust has been filed in the office of the Secretary of The
Commonwealth of Massachusetts and elsewhere as required by law; and all persons
dealing with EUA must look solely to the trust property for the enforcement of
any claim against EUA, as neither the Trustees nor the officers or shareholders
of EUA assume any personal liability for obligations entered into on behalf of
EUA.
53
CERTIFICATE OF INCORPORATION
OF
IOSTA, INC.
FIRST. The name of the Corporation is Iosta, Inc.
SECOND. The address of the Corporation's registered office in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware.
FOURTH. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 3,000 shares, par value $0.10 per
share. The Common Stock shall be issued in one series. All voting rights of the
shareholders shall be vested exclusively in the outstanding shares of Common
Stock, and each such share shall entitle the holder thereof to one vote per
share.
FIFTH. The name of the Corporation's sole incorporator is Timothy E.
McAllister, whose mailing address is 260 Franklin Street, Suite 2300, Boston,
Massachusetts 02110.
SIXTH. The Corporation is to have perpetual existence.
SEVENTH. In furtherance of, and not in limitation of, powers conferred
by statute, it is further provided:
A. The Board of Directors is expressly authorized to adopt, amend
or repeal the By- Laws of the Corporation.
B. Election of directors need not be by written ballot unless the
By-Laws of the Corporation shall so provide.
C. The books and records of the Corporation may be kept as such
place within or without the State of Delaware as the By-Laws of the
Corporation may provide or as may be designated from time to time by
the Board of Directors.
EIGHTH. Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
<PAGE>
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
NINTH. Except to the extent that the General Corporation Law of the
State of Delaware prohibits the elimination or limitation of liability of
directors for breaches of fiduciary duty, no director of the Corporation shall
be personally liable to the Corporation or its stockholders for monetary damages
for any breach of fiduciary duty as a director, notwithstanding any provision of
law imposing such liability. No amendment to or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment.
TENTH. The Corporation shall indemnify each person who at any time is,
or shall have been, a director or officer of the Corporation, and is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is, or was, a director or officer of the Corporation,
or is or was serving at the request of the Corporation as a director or officer
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding to the maximum extent permitted by the General
Corporation Law of Delaware. The foregoing right of indemnification shall in no
way be exclusive of any other rights of indemnification to which any such
director or officer may be entitled, under any By-law, agreement, vote of
directors or stockholders or otherwise.
ELEVENTH. The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Certificate of
Incorporation (as it may, from time to time, be amended, altered or changed),
and all rights conferred upon stockholders herein are granted subject to this
reservation.
The undersigned, Timothy E. McAllister, being the sole incorporator
hereinabove named, for the purpose of forming a corporation pursuant to the
General Corporation Law of the State of Delaware, does make this certificate,
hereby declaring and certifying that this is my free act and deed and that the
facts herein stated are true, and accordingly have hereunto set my hand this
10th day of December, 1998.
/s/ Timothy E. McAllister
------------------------------------
Timothy E. McAllister
<PAGE>
IOSTA, INC.
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Iosta, Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify:
That the board of directors of the Corporation has duly adopted a
resolution proposing an amendment to the Certificate of Incorporation of the
Corporation and that the holders of the requisite number of outstanding shares
of Common Stock of the Corporation have duly approved such amendment by the
required vote of such stockholders, adopted by a written action in lieu of a
meeting of such stockholders, all in accordance with Sections 242 and 228 of the
General Corporation Law of the State of Delaware. The resolution adopting such
amendment is as follows:
"VOTED: That the Certificate of Incorporation of this Corporation be
amended by changing the Article thereof numbered First so
that, as amended, such Article First shall be and read in
its entirety as follows:
"FIRST. The name of the Corporation is NGG Holdings,
Inc."
IN WITNESS WHEREOF, NGG Holdings, Inc. has caused this certificate to
be signed, under penalties of perjury, by Clare M. Phelan, its Vice President,
as of December 31, 1998.
IOSTA, INC.
By: /s/ Clare M. Phelan
-----------------------------------
Clare M. Phelan, Vice President
<PAGE>
NGG HOLDINGS, INC.
NGG TRUSTEE LLC I
CERTIFICATE OF MERGER
NGG Holdings, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, and NGG Trustee
LLC I, a limited liability company organized and existing under and by virtue of
the Limited Liability Company Act of the Commonwealth of Massachusetts, do
hereby certify:
FIRST: That the constituent entities of the Merger are
1. NGG Holdings, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the
State of Delaware; and
2. NGG Trustee LLC I, a limited liability company organized and
existing under and by virtue of the Limited Liability
Company Act of the Commonwealth of Massachusetts.
SECOND: That an Agreement of Merger has been approved, adopted,
certified, executed and acknowledged by each of the constituent entities, all in
accordance with Section 264 of the General Corporation Law of the State of
Delaware and Section 60 of the Limited Liability Company Act of the Commonwealth
of Massachusetts.
THIRD: That the name of the surviving corporation is
NGG Holdings, Inc.
FOURTH: That the certificate of incorporation of NGG Holdings, Inc.
shall be the certificate of incorporation of the surviving corporation, and
shall be amended as follows:
"FIRST. The name of the Corporation is National Grid USA."
FIFTH: That the executed Agreement of Merger is on file at an office
of NGG Holdings, Inc., at 25 Research Drive, Westborough, Massachusetts 01582.
SIXTH: That a copy of the Agreement of Merger will be furnished by NGG
Holdings, Inc., on request and without cost, to any stockholder or member of any
constituent corporation or limited liability company.
IN WITNESS WHEREOF, NGG Holdings, Inc. has caused this certificate to
be signed, under penalties of perjury, by Clare M. Phelan, its Vice President,
<PAGE>
and NGG Trustee LLC I has caused this certificate to be signed, under penalties
of perjury, by Clare M. Phelan, its Manager and Vice President, as of March 22,
2000.
NGG HOLDINGS, INC.
By:
-----------------------------------
Clare M. Phelan, Vice President
NGG TRUSTEE LLC I
By:
-----------------------------------
Clare M. Phelan, Vice President and
Manager
2
AMENDED AND RESTATED
BY-LAWS OF
NATIONAL GRID USA
A DELAWARE CORPORATION
December 15, 1998
<PAGE>
Table of Contents
ARTICLE I. MEETINGS OF STOCKHOLDERS 1
Section 1. Place of Meetings............................................ 1
Section 2. Annual Meeting............................................... 1
Section 3. Special Meetings............................................. 1
Section 4. Notice of Meetings........................................... 1
Section 5. Voting List.................................................. 2
Section 6. Quorum....................................................... 2
Section 7. Adjournments................................................. 2
Section 8. Action at Meetings........................................... 2
Section 9. Voting and Proxies........................................... 2
Section 10. Action Without Meeting...................................... 3
ARTICLE II. DIRECTORS 3
Section 1. Number, Election, Tenure and Qualification................... 3
Section 2. Enlargement.................................................. 3
Section 3. Vacancies.................................................... 3
Section 4. Resignation and Removal...................................... 3
Section 5. General Powers............................................... 4
Section 6. Chairman of the Board........................................ 4
Section 7. Place of Meetings............................................ 4
Section 8. Regular Meetings............................................. 4
Section 9. Special Meetings............................................. 4
Section 10. Quorum, Action at Meeting, Adjournments..................... 4
Section 11. Telephonic Meetings......................................... 5
Section 12. Compensation................................................ 5
ARTICLE III. OFFICERS 5
Section 1. Enumeration.................................................. 5
Section 2. Election..................................................... 5
Section 3. Tenure....................................................... 5
Section 4. President.................................................... 6
Section 5. Vice Presidents.............................................. 6
Section 6. Secretary.................................................... 6
Section 7. Assistant Secretaries........................................ 6
Section 8. Treasurer.................................................... 7
Section 9. Assistant Treasurers......................................... 7
Section 10. Bond........................................................ 7
<PAGE>
ARTICLE IV. NOTICES 7
Section 1. Delivery..................................................... 7
Section 2. Waiver of Notice............................................. 8
ARTICLE V. INDEMNIFICATION 8
Section 1. Actions other than by or in the Right of the Corporation..... 8
Section 2. Actions by or in the Right of the Corporation................ 8
Section 3. Success on the Merits........................................ 9
Section 4. Specific Authorization....................................... 9
Section 5. Advance Payment.............................................. 9
Section 6. Non-Exclusivity.............................................. 9
Section 7. Insurance.................................................... 9
Section 8. Continuation of Indemnification and Advancement of Expenses.. 9
Section 9. Severability................................................. 9
Section 10. Intent of Article...........................................10
ARTICLE VI. CAPITAL STOCK 10
Section 1. Certificates of Stock........................................10
Section 2. Lost Certificates............................................10
Section 3. Transfer of Stock............................................10
Section 4. Record Date..................................................10
Section 5. Registered Stockholders......................................11
ARTICLE VII. CERTAIN TRANSACTIONS 11
Section 1. Transactions with Interested Parties.........................11
Section 2. Quorum.......................................................12
ARTICLE VIII. GENERAL PROVISIONS 12
Section 1. Dividends....................................................12
Section 2. Reserves.....................................................12
Section 3. Checks.......................................................12
Section 4. Fiscal Year..................................................12
Section 5. Seal.........................................................12
ARTICLE IX. AMENDMENTS 12
Addendum
Register of Amendments to the By-laws
<PAGE>
NATIONAL GRID USA
* * * * *
BY-LAWS
* * * * *
ARTICLE I. MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. All meetings of the stockholders shall
be held at such place within or without the State of Delaware as may be fixed
from time to time by the board of directors or the chief executive officer, or
if not so designated, at the registered office of the corporation.
Section 2. Annual Meeting. Annual meetings of stockholders shall be
held on the second Tuesday in February of each year if not a legal holiday, and
if a legal holiday, then on the next secular day following, at 10:00 a.m., or at
such other date and time as shall be designated from time to time by the board
of directors or the chief executive office, at which meeting the stockholders
shall elect by a plurality vote a board of directors and shall transact such
other business as may properly be brought before the meeting. If no annual
meeting is held in accordance with the foregoing provisions, the board of
directors shall cause the meeting to be held as soon thereafter as convenient,
which meeting shall be designated a special meeting in lieu of annual meeting.
Section 3. Special Meetings. Special meetings of the stockholders, for
any purpose or purposes, may, unless otherwise prescribed by statute or by the
certificate of incorporation, be called by the board of directors or the chief
executive officer and shall be called by the chief executive officer or
secretary at the request in writing of a majority of the board of directors, or
at the request in writing of stockholders owning a majority in amount of the
entire capital stock of the corporation issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of the proposed meeting.
Business transacted at any special meeting shall be limited to matters relating
to the purpose or purposes stated in the notice of meeting.
Section 4. Notice of Meetings. Except as otherwise provided by law,
written notice of each meeting of stockholders, annual or special, stating the
place, date and hour of the meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be given not less
than ten or more than sixty days before the date of the meeting, to each
stockholder entitled to vote at such meeting.
<PAGE>
- 2 -
Section 5. Voting List. The officer who has charge of the stock ledger
of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city or town where
the meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 6. Quorum. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute, the
certificate of incorporation or these by-laws. Where a separate vote by a class
or classes is required, a majority of the outstanding shares of such class or
classes, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter.
Section 7. Adjournments. Any meeting of stockholders may be adjourned
from time to time to any other time and to any other place at which a meeting of
stockholders may be held under these by-laws, which time and place shall be
announced at the meeting, by a majority of the stockholders present in person or
represented by proxy at the meeting and entitled to vote, though less than a
quorum, or, if no stockholder is present or represented by proxy, by any officer
entitled to preside at or to act as secretary of such meeting, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted that might have been transacted at
the original meeting. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Section 8. Action at Meetings. When a quorum is present at any
meeting, the vote of the holders of a majority of the stock present in person or
represented by proxy and entitled to vote on the matter (or where a separate
vote by a class or classes is required, the vote of the majority of shares of
such class or classes present in person or represented by proxy at the meeting)
shall decide any matter (other than the election of directors) brought before
such meeting, unless the matter is one upon which by express provision of law,
the certificate of incorporation or these by-laws, a different vote is required,
in which case such express provision shall govern and control the decision of
such matter. Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors.
Section 9. Voting and Proxies. Unless otherwise provided in the
certificate of incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one vote for each share of capital stock having
voting power held of record by such stockholder. Each stockholder entitled to
vote at a meeting of stockholders, or to express consent or dissent to corporate
<PAGE>
- 3 -
action in writing without a meeting, may authorize another person or persons to
act for such shareholder by proxy, but no such proxy shall be voted or acted
upon after three years from its date, unless the proxy provides for a longer
period.
Section 10. Action Without Meeting. Any action required to be taken at
any annual or special meeting of stockholders, or any action that may be taken
at any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be (1) signed and dated by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and (2) delivered to
the corporation within sixty days of the earliest dated consent by delivery to
its registered office in the State of Delaware (in which case delivery shall be
by hand or by certified or registered mail, return receipt requested), its
principal place of business, or an officer or agent of the corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE II. DIRECTORS
Section 1. Number, Election, Tenure and Qualification. The number of
directors that shall constitute the whole board shall be not less than one.
Within such limit, the number of directors shall be determined by resolution of
the board of directors or by the stockholders at the annual meeting or at any
special meeting or stockholders. The directors shall be elected at the annual
meeting or at any special meeting of the stockholders, except as provided in
Section 3 of this Article, and each director elected shall hold office until
such director's successor is elected and qualified, unless sooner displaced.
Directors need not be stockholders.
Section 2. Enlargement. The number of the board of directors may be
increased at any time by vote of a majority of the directors then in office.
Section 3. Vacancies. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, though less than a quorum, or by
a sole remaining director, and the directors so chosen shall hold office until
the next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in office, then an
election of directors may be held in the manner provided by statute. In the
event of a vacancy in the board of directors, the remaining directors, except as
otherwise provided by law or these by-laws, may exercise the powers of the full
board until the vacancy is filled.
Section 4. Resignation and Removal. Any director may resign at any
time upon written notice to the corporation at its principal place of business
or to the chief executive officer or secretary. Such resignation shall be
<PAGE>
- 4 -
effective upon receipt unless it is specified to be effective at some other time
or upon the happening of some other event. Any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors, unless otherwise
specified by law or the certificate of incorporation.
Section 5. General Powers. The business and affairs of the corporation
shall be managed by its board of directors, which may exercise all powers of the
corporation and do all such lawful acts and things as are not by statute or by
the certificate of incorporation or by these by-laws directed or required to be
exercised or done by the stockholders.
Section 6. Chairman of the Board. If the board of directors appoints a
chairman of the board, the chairman shall, when present, preside at all meetings
of the stockholders and the board of directors. The chairman shall perform such
duties and possess such powers as are customarily vested in the office of the
chairman of the board or as may be vested in the chairman by the board of
directors.
Section 7. Place of Meetings. The board of directors may hold
meetings, both regular and special, either within or without the State of
Delaware; provided, however, that all meetings shall take place within the
United States of America.
Section 8. Regular Meetings. Regular meetings of the board of
directors may be held without notice at such time and at such place as shall
from time to time be determined by the board; provided that any director who is
absent when such a determination is made shall be given prompt notice of such
determination. A regular meeting of the board of directors may be held without
notice immediately after and at the same place as the annual meeting of
stockholders.
Section 9. Special Meetings. Special meetings of the board may be
called by the chief executive officer, secretary, or on the written request of
two or more directors, or by one director in the event that there is only one
director in office. Two days' notice to each director, either personally or by
telegram, cable, telecopy, commercial delivery service, telex or similar means
sent to such director's business or home address, or three days' notice by
written notice deposited in the mail, shall be given to each director by the
secretary or by the officer or one of the directors calling the meeting. A
notice or waiver of notice of a meeting of the board of directors need not
specify the purposes of the meeting.
Section 10. Quorum, Action at Meeting, Adjournments. At all meetings
of the board a majority of directors then in office, but in no event less than
one-third of the entire board, shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the board of directors, except as
may be otherwise specifically provided by law or by the certificate of
incorporation. For purposes of this section, the term "entire board" shall mean
the number of directors last fixed by the stockholders or directors, as the case
may be, in accordance with law and these by-laws; provided, however, that if
less than all the number so fixed of directors were elected, the "entire board"
shall mean the greatest number of directors so elected to hold office at any one
time pursuant to such authorization. If a quorum shall not be present at any
<PAGE>
- 5 -
meeting of the board of directors, a majority of the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 11. Telephonic Meetings. Unless otherwise restricted by the
certificate of incorporation or these by-laws, members of the board of directors
or of any committee thereof may participate in a meeting of the board of
directors or of any committee, as the case may be, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting; provided, however,
that no director may participate by conference telephone or other such
communications equipment unless such director is physically located within the
United States of America.
Section 12. Compensation. Unless otherwise restricted by the
certificate of incorporation or these by-laws, the board of directors shall have
the authority to fix from time to time the compensation of directors. The
directors may be paid their expenses, if any, of attendance at each meeting of
the board of directors and the performance of their responsibilities as
directors and may be paid a fixed sum for attendance at each meeting of the
board of directors and/or a stated salary as director. No such payment shall
preclude any director from serving the corporation or its parent or subsidiary
corporations in any other capacity and receiving compensation therefor. The
board of directors may also allow compensation for members of special or
standing committees for service on such committees.
ARTICLE III. OFFICERS
Section 1. Enumeration. The officers of the corporation shall be
chosen by the board of directors and shall be a president, a secretary and a
treasurer and such other officers with such titles, terms of office and duties
as the board of directors may from time to time determine, including a chairman
of the board, one or more vice presidents, and one or more assistant secretaries
and assistant treasurers. If authorized by resolution of the board of directors,
the chief executive officer may be empowered to appoint from time to time
assistant secretaries and assistant treasurers. Any number of offices may be
held by the same person, unless the certificate of incorporation or these
by-laws otherwise provide.
Section 2. Election. The board of directors at its first meeting after
each annual meeting of stockholders shall choose a president, a secretary and a
treasurer. Other officers may be appointed by the board of directors at such
meeting, at any other meeting, or by written consent.
Section 3. Tenure. Each officer of the corporation shall hold office
until such officer's successor is chosen and qualifies, unless a different term
is specified in the vote choosing or appointing such officer, or until such
officer's earlier death, resignation or removal. Any officer elected or
appointed by the board of directors or by the chief executive officer may be
removed at any time by the affirmative vote of a majority of the board of
directors or a committee duly authorized to do so, except that any officer
<PAGE>
- 6 -
appointment by the chief executive officer may also be removed at any time by
the chief executive officer. Any vacancy occurring in any office of the
corporation may be filled by the board of directors, at its discretion. Any
officer may resign by delivering a written resignation to the corporation at its
principal place of business or to the chief executive officer or the secretary.
Such resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event.
Section 4. President. The president shall be the chief operating
officer of the corporation. The president shall also be the chief executive
officer unless the board of directors otherwise provides. The president shall,
unless the board of directors provides otherwise in a specific instance or
generally, preside at all meetings of the stockholders and the board of
directors, have general and active management of the business of the corporation
and see that all orders and resolutions of the board of directors are carried
into effect. The president shall execute bonds, mortgages, and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the board of
directors to some other officer or agent of the corporation.
Section 5. Vice Presidents. In the absence of the president or in the
event of the president's inability or refusal to act, the vice president, or if
there be more than one vice president, the vice presidents in the order
designated by the board of directors or the chief executive officer (or in the
absence of any designation, then in the order determined by their tenure in
office) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice presidents shall perform such other duties and have such
other powers as the board of directors or the chief executive officer may from
time to time prescribe.
Section 6. Secretary. The secretary shall have such powers and perform
such duties as are incident to the office of secretary. The secretary shall
maintain a stock ledger and prepare lists of stockholders and their addresses as
required and shall be the custodian of corporate records. The secretary shall
attend all meetings of the board of directors and all meetings of the
stockholders and record all the proceedings of the meetings of the corporation
and of the board of directors in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. The secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the board of directors, and shall perform such other duties
as may be from time to time prescribed by the board of directors or chief
executive officer, under whose supervision the secretary shall be. The secretary
shall have custody of the corporate seal of the corporation and the secretary,
or an assistant secretary, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the
secretary's signature or by the signature of such assistant secretary. The board
of directors may give general authority to any other officer to affix the seal
of the corporation and to attest the affixing of such officer's signature.
Section 7. Assistant Secretaries. The assistant secretary, or if there
be more than one, the assistant secretaries in the order determined by the board
of directors, the chief executive officer or the secretary (or if there be no
such determination, then in the order determined by their tenure in office),
shall, in the absence of the secretary or in the event of the secretary's
inability or refusal to act perform the duties and exercise the powers of the
secretary and shall perform such other duties and have such other powers as the
board of directors, the chief executive officer or the secretary may from time
<PAGE>
- 7 -
to time prescribe. In the absence of the secretary or any assistant secretary at
any meeting of stockholders or directors, the person presiding at the meeting
shall designate a temporary or acting secretary to keep a record of the meeting.
Section 8. Treasurer. The treasurer shall perform such duties and
shall have such powers as may be assigned by the board of directors or the chief
executive officer. In addition, the treasurer shall perform such duties and have
such powers as are incident to the office of treasurer. The treasurer shall have
the custody of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the board of directors. The treasurer shall disburse the funds of the
corporation as may be ordered by the board of directors, taking proper vouchers
for such disbursements, and shall render to the chief executive officer and the
board of directors, when the chief executive officer or board of directors so
requires, an account of all the treasurer's transactions as treasurer and of the
financial condition of the corporation.
Section 9. Assistant Treasurers. The assistant treasurer, or if there
shall be more than one, the assistant treasurers in the order determined by the
board of directors, the chief executive officer or the treasurer (or if there be
no such determination, then in the order determined by their tenure in office),
shall, in the absence of the treasurer or in the event of the treasurer's
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as the
board of directors, the chief executive officer or the treasurer may from time
to time prescribe.
Section 10. Bond. If required by the board of directors, any officer
shall give the corporation a bond in such sum and with such surety or sureties
and upon such terms and conditions as shall be satisfactory to the board of
directors, including without limitation a bond for the faithful performance of
the duties of such officer's office and for the restoration to the corporation
of all books, papers, vouchers, money and other property of whatever kind in
such officer's possession or under such officer's control and belonging to the
corporation.
ARTICLE IV. NOTICES
Section 1. Delivery. Whenever, under the provisions of law, or of the
certificate of incorporation or these by-laws, written notice is required to be
given to any director or stockholder, such notice may be given by mail,
addressed to such director or stockholder, at such person's address as it
appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Unless written notice by mail is required
by law, written notice may also be given by telegram, cable, telecopy,
commercial delivery service, telex or similar means, addressed to such director
or stockholder at such person's address as it appears on the records of the
corporation, in which case such notice shall be deemed to be given when
delivered into the control of the persons charged with effecting such
transmission, the transmission charge to be paid by the corporation or the
<PAGE>
- 8 -
person sending such notice and not by the addressee. Oral notice or other
in-hand delivery (in person or by telephone) shall be deemed given at the time
it is actually given.
Section 2. Waiver of Notice. Whenever any notice is required to be
given under the provisions of law or of the certificate of incorporation or of
these by-laws, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
ARTICLE V. INDEMNIFICATION
Section 1. Actions other than by or in the Right of the Corporation.
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceedings, had no reasonable cause to
believe such conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner that such person reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that such conduct was unlawful.
Section 2. Actions by or in the Right of the Corporation. The
corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable unless and only to the extent that the Court of Chancery
of the State of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses that the Court of Chancery of
the State of Delaware or such other court shall deem proper.
<PAGE>
- 9 -
Section 3. Success on the Merits. To the extent that any person
described in Section 1 or 2 of this Article V has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in such
Sections, or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
Section 4. Specific Authorization. Any indemnification under Section 1
or 2 of this Article V (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of any person described in such Sections is proper in the
circumstances because such person has met the applicable standard of conduct set
forth in such Sections. Such determination shall be made (1) by the board of
directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (2) if such a quorum is not
obtainable, or even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in written opinion, or (3) by the
stockholders of the corporation.
Section 5. Advance Payment. Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of any person described in such Section to repay
such amount if it shall ultimately be determined that such person is not
entitled to indemnification by the corporation as authorized in this Article V.
Section 6. Non-Exclusivity. The indemnification and advancement of
expenses provided by, or granted pursuant to, the other Sections of this Article
V shall not be deemed exclusive of any other rights to which any person provided
indemnification or advancement of expenses may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in such person's official capacity and as to action in another
capacity while holding such office.
Section 7. Insurance. The board of directors may authorize, by a vote
of the majority of the full board, the corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the corporation would have the
power to indemnify such person against such liability under the provisions of
this Article V.
Section 8. Continuation of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article V shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
Section 9. Severability. If any word, clause or provision of this
Article V or any award made hereunder shall for any reason be determined to be
invalid, the provisions hereof shall not otherwise be affected thereby but shall
remain in full force and effect.
<PAGE>
- 10 -
Section 10. Intent of Article. The intent of this Article V is to
provide for indemnification and advancement of expenses to the fullest extent
permitted by Section 145 of the General Corporation Law of Delaware. To the
extent that such Section or any successor section may be amended or supplemented
from time to time, this Article V shall be amended automatically and construed
so as to permit indemnification and advancement of expenses to the fullest
extent from time to time permitted by law.
ARTICLE VI. CAPITAL STOCK
Section 1. Certificates of Stock. Every holder of stock in the
corporation shall be entitled to have a certificate, signed by, or in the name
of the corporation by, the chairman or vice chairman of the board of directors,
or the president or a vice president and the treasurer or an assistant
treasurer, or the secretary or an assistant secretary of the corporation,
certifying the number of shares owned by such holder in the corporation. Any or
all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if such person were such officer,
transfer agent or registrar at the date of issue. Certificates may be issued for
partly paid shares and in such case upon the face or back of the certificate
issued to represent any such partly paid shares, the total amount of the
consideration to be paid therefor, and the amount paid thereon shall be
specified.
Section 2. Lost Certificates. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or such person's legal representative, to
give reasonable evidence of such loss, theft or destruction, to advertise the
same in such manner as it shall require and/or to give the corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed or the issuance of such new certificate.
Section 3. Transfer of Stock. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares, duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, and proper evidence of compliance with other conditions to rightful
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 4. Record Date. In order that the corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, the board of directors may fix a record date, which
shall not precede the date upon which the resolution fixing the record date is
adopted by the board of directors, and which shall not be more than sixty days
nor less than ten days before the date of such meeting. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
<PAGE>
- 11 -
that the board of directors may fix a new record date for the adjourned meeting.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the date before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. In order that the corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the board of directors may fix a record date, which shall not precede
the date upon which the resolution fixing the record date is adopted by the
board of directors, and which shall not be more than ten days after the date
upon which the resolution fixing the record date is adopted by the board of
directors. If no record date is fixed, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the board of directors is required by statute,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the corporation as provided
in Section 10 of Article I. If no record date is fixed and prior action by the
board of directors is required, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the date on which the board of directors adopts the
resolution taking such prior action. In order that the corporation may determine
the stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled to exercise
any rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the board of directors may fix a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted, and which shall be not more than sixty days prior to
such action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the date
on which the board of directors adopts the resolution relating to such purpose.
Section 5. Registered Stockholders. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
ARTICLE VII. CERTAIN TRANSACTIONS
Section 1. Transactions with Interested Parties. No contract or
transaction between the corporation and one or more of its directors of
officers, or between the corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the board or committee thereof that
authorizes the contract or transaction or solely because such person's or their
votes are counted for such purpose, if:
(a) The material facts as to such person's relationship or
interest and as to the contract or transaction are disclosed or are known
to the board of directors or the committee, and the board or committee in
good faith authorizes the contract or transaction by the affirmative votes
<PAGE>
- 12 -
of a majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(b) The material facts as to such person's relationship or
interest and as to the contract or transaction are disclosed or are known
to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
stockholders; or
(c) The contract is fair as to the corporation as of the time it
is authorized, approved or ratified, by the board of directors, a committee
thereof, or the stockholders.
Section 2. Quorum. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the board of directors or
of a committee that authorizes the contract or transaction.
ARTICLE VIII. GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
corporation, if any, may be declared by the board of directors at any regular or
special meeting or by written consent, pursuant to law. Dividends may be paid in
cash, in property, or in shares of the capital stack, subject to the provisions
of the certificate of incorporation.
Section 2. Reserves. The directors may set apart out of any funds or
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve.
Section 3. Checks. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the corporation shall be
fixed by resolution of the board of directors.
Section 5. Seal. The board of directors may, by resolution, adopt a
corporate seal. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the word "Delaware". The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. The seal may be altered from time to time by the board
of directors.
ARTICLE IX. AMENDMENTS
These by-laws may be altered, amended or repealed or new by-laws may
be adopted by the stockholders or by the board of directors, when such power is
<PAGE>
- 13 -
conferred upon the board of directors by the certificate of incorporation, at
any regular meeting of the stockholders or of the board of directors or at any
special meeting of the stockholders or of the board of directors provided,
however, that in the case of a regular or special meeting of stockholders,
notice of such alteration, amendment, repeal or adoption of new by-laws be
contained in the notice of such meeting.
- 14 -
<PAGE>
Register of Amendments to the By-Laws
Date Section Affected Change
The Commonwealth of Massachusetts
------------------
DEPARTMENT OF
TELECOMMUNICATIONS AND ENERGY
March 14, 2000
D.T.E. 99-47
Joint Petition of Massachusetts Electric Company and New England Power Company
(subsidiaries of New England Electric System), and Eastern Edison Company
(subsidiary of Eastern Utilities Associates) for approval of Eastern Edison Com
pany's merger into Massachusetts Electric Company and for other related
approvals, pursuant to G.L. c. 164, sections 9A, 14, 15, 15A, 16, 17A, 18, 21,
94, 96 and 99.
- --------------------------------------------------------------------------------
APPEARANCES: Thomas Robinson, Esq.
Terry L. Schwennesen, Esq.
25 Research Drive
Westborough, MA 01582
FOR: NEW ENGLAND ELECTRIC SYSTEM,
MASSACHUSETTS ELECTRIC COMPANY,
NEW ENGLAND POWER COMPANY
Petitioner
David A. Fazzone, Esq.
McDermott, Will & Emergy
75 State Street
Boston, MA 02109
FOR: EASTERN UTILITIES ASSOCIATES,
EASTERN EDISON COMPANY.
MONTAUP ELECTRIC COMPANY
Petitioner
Thomas F. Reilly, Attorney General
By: George B. Dean
Joseph Rogers
Assistant Attorneys General
200 Portland Street
Boston, MA 02114
Intervenor
<PAGE>
Richard B. Kennelly, Jr., Esq.
62 Summer Street
Boston, MA 02110
FOR: CONSERVATION LAW FOUNDATION
Intervenor
James O. Hall, Esq.
403 Highland Avenue
Somerville, MA 02144
FOR: LOCAL 1465, INTERNATIONAL
BROTHERHOOD OF ELECTRICAL
WORKERS
Intervenor
William S. Stowe, Esq.
800 Boylston Street
Boston, MA 02199
FOR: NSTAR SERVICES COMPANY
Limited Participant
John Cope-Flanagan, Esq.
800 Boylston Street
Boston, MA 02199
FOR: NSTAR SERVICES COMPANY
Limited Participant
John A. DeTore, Esq.
Rubin and Rudman
50 Rowes Wharf
Boston, MA 02110-3319
FOR: ENRON ENERGY SERVICES, INC.
Limited Participant
<PAGE>
Kevin M. Nasca, Esq.
Anna Blumkin, Esq.
100 Cambridge Street, Room 1500
Boston, MA 02202
FOR: MASSACHUSETTS DIVISION OF ENERGY
RESOURCES
Intervenor
Paul K. Connolly, Jr., Esq.
Erica L. Tarpey, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Boston, MA 02110
FOR: NATIONAL GRID GROUP plc.
Intervenor
Judith A. Silvia, Esq.
222 Berkeley Street, Suite 13
Boston, MA 02117
FOR: ASSOCIATED INDUSTRIES OF
MASSACHUSETTS
Intervenor
Roger Bortghesani
The Energy Consortium
24 Hastings Road
Lexington, MA 02421
Intervenor
Robert M. Granger, Esq.
Ferriter, Scobbo, Caruso & Rodophele
75 State Street, 7th Floor
Boston, MA 02109
FOR: MASSACHUSETTS MUNICIPAL WHOLESALE
ELECTRIC COMPANY
Intervenor
Stephen M. Tuleja
Alternate Power Source, Inc.
400 Blue Hill Drive, Suite 188
Westwood, MA 02090
Intervenor
<PAGE>
TABLE OF CONTENTS
PAGES
I. INTRODUCTION......................................................... 1
II. DESCRIPTION OF THE SETTLEMENT........................................ 4
A. Introduction................................................ 4
B. Rate Cap Period............................................. 5
C. Individual Customer Protection Provisions................... 5
D. Rate Index Period........................................... 9
E. Earned Savings Period.......................................11
F. Exogenous Factors...........................................12
G. Service Quality Plan........................................15
H. Other Features of the Settlement............................17
III. STANDARD OF REVIEW...................................................19
IV. SPECIFIC CONSIDERATIONS OF THE MERGER................................25
A. Introduction................................................25
B. Effect on Rates.............................................25
1. Individual Customer Protection Credits.............25
(a) Introduction..............................25
(b) Analysis and Findings.....................26
2. Introduction of New Services.......................28
(a) Introduction..............................28
(b) Analysis and Findings.....................29
3. Exogenous Factors..................................30
(a) Introduction..............................30
(b) Analysis and Findings.....................30
C. Effect on Service Quality...................................35
1. Introduction.......................................35
2. Analysis and Findings..............................36
D. Societal Costs..............................................38
1. Introduction.......................................38
2. Analysis and Finding...............................39
E. Distribution of Resulting Costs and Benefits between
Shareholders and Ratepayers.................................40
1. Introduction.......................................40
2. Transaction and Integration Costs..................42
(a) Introduction..............................42
(b) Analysis and Findings.....................43
3. System Integration Costs...........................45
4. Acquisition Premium................................47
(a) Introduction..............................47
(b) Analysis and Findings.....................48
5. Merger-Related Savings.............................51
(a) Introduction..............................51
(b) Analysis and Findings.....................56
F. Summary.....................................................63
<PAGE>
V. STOCK ISSUANCE.......................................................66
A. Introduction................................................67
1. Merger of MECo and EECo............................67
2. Merger of NEP and Montaup..........................68
B. Standard of Review..........................................69
C. Analysis and Findings.......................................73
1. Section 14.........................................73
2. Section 15.........................................74
3. Section 16.........................................75
4. Sections 15A, 18 and 19............................75
5. Section 99.........................................76
VI. CONFIRMATION OF FRANCHISE RIGHTS.....................................78
A. Introduction................................................78
B. Analysis and Findings.......................................78
VII. APPROVAL FOR ASSUMPTION OF OBLIGATIONS...............................79
A. Introduction................................................79
VIII. INTERIM FINANCING ARRANGEMENT........................................81
A. Introduction................................................81
B. Standard of Review..........................................82
C. Analysis and Findings.......................................83
IX. PARTIES' CLAIM OF PRIVILEGE..........................................85
A. Introduction................................................85
X. ORDER................................................................88
APPENDIX .....................................................................94
<PAGE>
I. INTRODUCTION
On April 30,1999, Massachusetts Electric Company ("MECo"), Eastern
Edison Company ("EECo"), New England Power Company ("NEP"), and Montaup Electric
Company ("Montaup") filed with the Department of Telecommunications and Energy
("Department") a petition for approval of the merger, pursuant to G.L. c. 16.4,
section 96, of Eastern Utilities Associates' ("EUA") electric company operating
subsidiaries.1 Specifically, EECO would merge into MECo, and Montaup would merge
into NEP. The Matter was docketed as D.T.E. 99-47.
Pursuant to notice duly issued, the Department conducted public
hearings from June 8 through June 17, 1999, in North Andover, Northampton, Fall
River, Worcester, and Brockton, to afford interested persons an opportunity to
comment on the proposal. The Attorney General of the Commonwealth ("Attorney
General") intervened as of right pursuant to G.L. c. 12, section 11E. The
Department granted the Petitions to Intervene of the Division of Energy
Resources ("DOER"), National Grid Group, plc ("National Grid"), Associated
Industries of Massachusetts ("AIM"), Conservation Law Foundation, The Energy
Consortium ("TEC"), Alternate Power sources, Massachusetts Municipal Wholesale
- ---------------
1 MECo and NEP are direct subsidiaries of the holding company NEES.
Similarly, EECo is a direct subsidiary of the holding company EUA. At the
time of the filing in this proceeding, Montaup was a direct subsidiary of
EECo; it is now a wholly-owned, first-tier subsidiary of EUA pursuant to
Eastern Edison Company, D.T.E. 99-67 (2000).
<PAGE>
Electric Company, and Local 1465, International Brotherhood of Electrical
Workers. The Department granted limited participant status to Boston Edison
Company, Com/Energy Company,2 and Enron Energy Services.
On June 16, 1999, pursuant to notice duly issued, the Department
conducted a procedural conference at its offices during which a schedule for
discovery and evidentiary hearings was set.3 On November 29, 1999, a Rate Plan
Settlement ("Settlement")4 was filed jointly by AIM, the Attorney General, DOER,
- ---------------
2 On July 27, 1999, the Department approved a section 94 Rate Plan for three
G.L. c. 164, section 1 electric companies and one G.L. c. 164, section 2
gas company, which rate plan was incident to the consolidation of BEC
Energy Company (the parent company of Boston Edison Company) and
Commonwealth Energy System (the holding company for Cambridge Electric
Light Company, Common wealth Electric Company, and Commonwealth Gas
company) into a new holding company, under the name NStar, Boston Edison
Com pany/Cambridge Electric Light Company/Commonwealth Electric Company/
Commonwealth Gas Company, D.T.E. 99-19.
3 The Department scheduled evidentiary hearings to begin on August 16, 1999,
but was repeatedly requested by the Petitioners to delay the start of
hearings. Motions to Defer Start of Hearings were filed by NEES on the
following dates: August 9, 1999; September 14, 999; and October 15, 1999.
These Motions were granted by the Department. At the parties' request, a
proce dural conference was scheduled for November 15, 1999. The Parties re
quested cancellation of the procedural conference, which was granted by the
Department.
4 Strictly speaking, though titled a "Rate Plan Settlement," this filing was
in the nature of a substitute, joint petition for approval of a merger plan
under G.L. c. 164, section 96. a section 96 judgment of consistency with
the public interest is a statutory obligation imposed on the Department by
the General Court. Such a substitute petition must be judged by the section
96 test developed in Boston Edison Company, D.P.U 850 (1983) and its
progeny through BECo-ComElec Acquisition, D.T.E. 99-19, and is so judged
here.
2
<PAGE>
TEC, MECo, National Grid and EUA (together, the "Petitioners").5 A technical
session was held at the Department's offices on December 13, 1999. comments were
received on the Settlement through December 17, 1999.
Pursuant to notice duly issued, the Department held evidentiary
hearings on the substitute, now joint, petition for section 96 approval on
February 4 and 7, 2000. The Petitioners presented four witnesses: Michael E.
Jesanis, senior vice-president and chief financial officer for NEES; Lawrence J.
Reilly, president and chief executive officer of MECo, The Narrangansett
Electric company, and Granite State Electric Company; James J. Bonner, manager
of retail pricing and rate administration for Eastern Utilities Service
Corporation; and Theresa M. Burns, principal rate analyst for MECo. The
evidentiary record includes 387 exhibits, including responses to information
requests and record requests.
II. DESCRIPTION OF THE SETTLEMENT
A. Introduction
According to the Petitioners, the Settlement is designed to resolve
all issues before the Department in this proceeding. These issues include the
approvals needed from the Department to (1) merge EECo into MECo and Montaup
- ---------------
5 Although unanimity is not required as a predicate to Department action, we
note that no opposition was raisedby those parties to this proceeding who
did not join in filing the Rate Plan Settlement. There is a residual
question as to the agency authority of the signatory for one of the
proponent parties to the Rate Plan Settlement. The record is silent as to
the lawyer/attorney status of one of the appearances. See Opinion of the
Attorney General, Number 48, December 24, 1975, at 136. Given, however, the
assent of the original petitioners of April 30, 1999, this defect, if any,
does not preclude Depart ment action on the substitute petition.
3
<PAGE>
into NEP, (2) consolidate MECo's and EECo's rates, and (3) have the opportunity
to collect in the future some of the merger-related costs.
The Settlement contains a rate consolidation plan ("Rate Plan")
whereby EECo's customers would receive distribution service under MECo's
distribution tariffs, and all other ram and charges would be consolidated
between the two companies (Settlement at 3). The manner m which the distribution
rates for MECo, including the merged EECo, would be established differs during
three distinct time periods. The first is the Rate Cap Period, which begins the
effective date of the Settlement and ends February 28, 2005 (id. at 10). The
second is the Rate Index Period, which begins March 1, 2005, and ends December
31, 2009 (id. at 17). The final period is the so-called Earned Savings period,
which commences January 1, 2010, and runs through the remainder of the
twenty-year Rate Plan (id. at 24-25).
B. Rate Cap Period
During the Rate Cap Period (2000-2005), the distribution rates would
be established by reducing MECO's current rates,6 as applied to the combined
companies, by $10 million (id.at 10). The distribution rates would remain
frozen during the Rate Cap Period, subject to adjustments, both positive and
negative for certain exogenous factors and service quality indices (id.). The
exogenous factors and service quality plan are described below in Sections II.F.
and II.G., respectively.
- ---------------
6 MECO's current rates were established in its restructuring plan, Massachu
setts Electric Company, D.P.U./D.T.E. 96-25 (1997).
4
<PAGE>
C. Individual Customer Protection Provisions
During the Rate Cap Period, the Settlement provides for individual
customer protection ("ICP") for customers of EECo7 who would otherwise incur
bill increases as a result of moving to MECo's rates (id. at 6; Settlement,
Supp. II, at 2-3). Al though MECo's retail rates8 are lower overall than EECo's
retail rates, differences in each company's rate design would result in a bill
increase for about 71,954 EECo customers, mostly low-consumption residential and
commercial users, absent the ICP provisions (Exh. DTE-1-29; Tr. 1, at 55-57).
In order to prevent these customers from being adversely affected by
the merger, the Settlement provides a system of ICP credits (Exh. DTE-1-114, at
138-142). Under this plan, EECo customers of record as of December 31, 1999,
whose average monthly consumption during 1999 fell below a level that varies by
rate class, would be eligible for ICP credits, such that those customers would
be billed an amount equal to the corresponding EECo rate that was in effect
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7 EECo's rates include Residential Rate R-1, Low-Income Residential Rate R-2,
Residential Space Heating Rate R-3, TOU Residential Rate R-4, Small
Secondary Voltage General Rate G-1, Medium Secondary Voltage General Rate
G-2, Small Primary Voltage General Rate G-4, Medium Primary Voltage General
Rate G-5, Large Primary Voltage General Rate G-6, Me dium TOU Secondary
General Rate T-2, General Space Heating Rate H-1, General Heating Rate H-2
(closed), Controlled Water Heating Rate W-1 (closed), and Outdoor Lighting
Rate S-1. While EECo also has a Large Primary Auxiliary Rate A-6, there are
presently no customers on that rate (Exh. DTE-1-6).
8 MECo's rates include Residential Rate R-1, Residential Low-Income Rate R-2,
Residential Optional TOU Rate R-4, General Service Small Commercial and
Industrial Rate G-1, General Service Demand G-2, TOU Rate G-3, Experimental
Flexible TOU Rate G-5 (closed), Scheduled Interruptible Rate I-1 (closed),
and five streetlighting rates S-1, S-2, S-3, S-5, and S-20 (Exh. DTE-1-114,
at 3-67).
5
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prior to the merger (Exh. DTE-1-114, at 138).9 The ICP credits would be
terminated on March 1, 2005 (id.).
EECo customers on Rates R-1, R-3, and G-1, whose average monthly
consumption during 1999 is less than 341 kilowatthours ("KWH"), 1,445 KWH, and
952 KWH, respectively, and who are moved to MECo's Rates R-1 or G-1, will
receive an annual ICP credit equal to the difference between EECo's applicable
rate and MECo's Rate R-1 or G-1 (id.). Subsidized Rate R-2 customers whose
monthly consumption during 1999 is less than 579 KWH and who are moved to MECo's
subsidized Rate R-2, will be grandfathered at EECo's present Rate R-2 customer
and distribution energy charges (id. at 7, 138).
For those EECo customers served under Rate G-2, MECo will analyze
their 1999 use and place the customers the lower of MECo's Rate G-1 or G-2 (id.
at 140-141). if a customer would continue to have higher rates even under Rate
G-2, the customer would receive a one-time credit for the difference between
MECo's Rate G-2 and the former EECo rate, as estimated over the entire Rate Cap
Period, based on that customer's 1999 consumption (id. at 140). As of March 1,
2005, remaining customers on MECo's Rate G-2 will be automatically transferred
to Rate G-1, unless they are otherwise qualified to remain on Rate G-2 (id.).
For EECo customers served on Rates G-2, G-4, G-6, H-1, T-1, H-2 or W-1, who have
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9 Customers on EECo Rate R-1, R-2, R-3, and G-1 have predetermined thresh old
levels, while customers on other rates have individual threshold levels
based on their particular use (Exh. DTE-1-63; Tr. 1, at 71-72). The
threshold levels are used to establish a customer's initial eligibility for
ICP credits (Exh. DTE-1-30). An eligible customer's actual consumption may
exceed the initial threshold by up to ten percent, to prevent loss of
eligibility because of a small change in use patterns, such as those
associated with unusual weather conditions (Exhs. DTE-1-30; DTE-1-64; Tr.
1, at 54).
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not otherwise been provided for as above, MECo will analyze these customers'
individual use over 1999 and place them on the appropriate MECo Rate (Exh.
DTE-1-115, at 2). If the rate transfer results in a rate increase to the
customer, the customer would receive an annual ICP credit for the difference
between the customer's former EECo rate and MECo's Rate G-1, G-2, G-3, or R-1,
depending upon which rate the former EECo customer is placed (id. at 2-3).10
EECo's streetlighting customers would receive a one-time ICP credit on their
first monthly bill after the merger, equal to the average monthly negative bill
impact based on 1999 use, multiplied by the total number of months between the
effective date of the merger and February 28, 2005 (id. at 2; RR-DTE-15, Att.
A). The Petitioners represented that the ICP credits have been designed with a
view towards ease of administration (TR. 1, at 55).
D. Rate Index Period
During the Rate Index Period (2005-2009), the distribution rates would
be adjusted annually by an index that is based on an average of the distribution
change of investor-owned electric utilities with unbundled rates in new England,
New York, New Jersey and Pennsylvania (the "Regional Index") (Settlement at 17;
Exh. DTE-1-114, Att. 8, 9). According to the Rate Plan, the Regional Index
would be determined as of July 1, 2004 (Settlement at 17; Exh. DTE-1-114, Att.
8, 9). The initial distribu tion rates for the combined companies that would be
included in the Regional Index are the lesser of (1) MECo's distribution rates
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10 Alternatively, in the case of EECo customers served under Rates H-2 and W-
1, which are separately metered rates that have no MECo counterpart, MECo
may implement a one-time credit equal to the customer's average monthly
negative bill impact multiplied by the total number of months between the
effective date of the merger and February 28, 2005 (Ex. DTE-1-115, at 3;
RR-DTE-15, Att. B),
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approved in Massachusetts Electric Company, D.P.U./D.T.E. 96-25 (1997), adjusted
to include exogenous factors, o r (2) 90 percent of the Regional Index average
rate (Exh. DTE-1-114, Att. 8, at 1-2).
According to the Rate Plan, MECo would calculate the Regional Index as
of July 1 of each year from 2005 through 2008, and would use the Regional Index
to adjust the combined companies' distribution rate (Settlement at 18; Exh.
DTE-1-114, Att. 8, at 1-2). The distribution rate adjustment would be calculated
by multiplying the combined companies' index by the regional average
distribution rate in July of each calendar year from 2005 through 2008
(Settlement at 18; Exh. DTE-1-114, Att. 9).
According to the Petitioners, approval of the Settlement would give
MECo the flexibility to apply the adjustments to the distribution rates during
the Rate Index Period in a manner that furthers rate design goals established by
MECo (id. at 18-19). The Settlement would allow for such adjustments to be
submitted to the Department for approval in a separate rate design proceeding
(id.). Absent such rate design goals, MECo would adjust its distribution rates
on an equal percentage basis among rate classes and rate elements (id.).
Under the proposed Rate Plan, the combined companies may adjust their
distribution rates during the Rate Index Period for exogenous factors and
service quality indices described below. During the Rate Index Period, the
Settlement allows adjustments for tax and accounting changes and legislative or
regulatory mandates only if such changes are unique to Massachusetts and do not
affect utilities in the Regional Index in a similar way (id. at 19).
8
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E. Earned Savings Period
During the Earned Savings Period (2010-2020),11 approval of the
Settlement would allow the combined companies to include what the Settlement
refers to as "earned savings" in its cost of service for setting distribution
rates to the extent that there are gained efficiencies resulting from the
merger, i.e., to the extent merger-related savings exceed merger-related costs
(Settlement at 24-25). According to the Rate Plan, earned savings are to be
determined by first calculating the combined companies' distribution revenues
based on rates in effect after March 1, 2009, including adjustments for
exogenous factors, but excluding service quality incen tives/penalties, and
excluding one-half the amount of any annual adjustments for tax and accounting
changes and legislative or regulatory changes that would be in effect on March
1, 2009. Second, the combined companies' pro forma cost of service, excluding
all recovery of acquisition premiums and transaction costs associated with the
NEES/EUA and NEES/National Grid mergers, would then be subtracted from the above
calculated amount (id.). According to the Rate Plan, during the Earned Savings
Period, the combined companies would be allowed to include the lesser of (1) 100
percent of the after-tax gained efficiencies up to $43 million, plus 50 percent
of the after-tax gained efficiencies in excess of $43 million, or (2) $66
million, as merger-related costs in its cost of service for setting distribution
rates (id.).
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11 The Settlement's use of the term "Earned Savings Period" attempts to avoid
the reality of allowing opportunity for recovery of acquisition premiums.
Since 1994, Department policy has allowed for such recovery, if the circum
stances warrant; and so there is no need for euphemism in future merger or
rate plan filings.
9
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F. Exogenous Factors
During the Rate Cap Period and the Rate Index Period (2000-2009), the
Settlement would allow MECo to adjust its distribution rates for the following
exogenous factors:
1. the effects associated with any changes in the federal, state, or
local rates, laws, regulations, or precedents governing income,
revenue, sales, franchise, or property taxes if the accounting
and tax changes individually affect MECo's costs by more than $1
million per year (id. at 11);
2. the effects of any legislative or regulatory changes that impose
new or modify existing obligations or duties which individually
affect MECo's costs by more than $1 million per year (id.);
3. the effects of any net distribution revenues that the Department
finds have been lost as a result of the installation of new
on-site generating capacity operational on or after July 1, 1999,
to the extent that such new generating capacity exceeds a
threshold of 15 megawatts ("MW") (id. at 11-13);12
4. the effects of any distribution revenue loss due to a change in
MECo's service responsibilities, such as through the introduction
of competi tion in metering, billing, or information services
(id. at 14-15);
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12 In the event that the 15 MW threshold may be exceeded, MECo would develop
an auxiliary service rate designed to collect the net lost revenues
attributable to the subset of customers to which the auxiliary service rate
would apply (Settlement at 11-12). Any remaining lost revenues that exceed
the 15 MW threshold would be collected as an exogenous cost (id.).
10
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5. the effects of any accumulated incentives or penalties in excess
of the threshold established under the quality plan described
below in Section II.G. (id. at 15);
6. the balance in the Storm Fund that either exceeds $20 million or
is negative by more than $20 million adjusted for inflation,13
such excess or deficiency would be recovered over a five-year
period (id.);
7. the effects of any change to the contribution Level of the
Environmen tal Response Fund as specified in the Settlement
approved by the Department in Docket D.P.U. 93-194 (id. at 16);14
and
8. the incremental effects on the distribution rates in the years
2003 and 2004 of inflation above four percent in the previous
year (id.).
With the exception of adjustments associated with new on-site generation,15 the
above-listed adjustments would be collected during the Rate Cap Period through a
uniform and fully reconciling surcharge or refund factor applied to all KWH
billed under the combined companies' rates for usage on or after January 1 of
the following year (id. at 16-17). Exogenous costs would be collected during the
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13 The Rate Plan is premised on contributions to the Storm Fund equal to $4.3
million annually (Settlement at 15).
14 The Environmental Response Fund is financed by a $30 million shareholder
contribution as of October 31, 1993 and annual contributions by MECo
million (Exh. MEC-1, vol. 2, 2xh. DMW-8, at 3).
15 The Settlement provides for MECo's Opportunity to adjust its distribution
rates in each rate class for any remaining revenues lost within that rate
class in the preceding calendar year as a result of new on-site generation
only to the extent that the distribution rate remain below 100 percent of
the Regional Index.
11
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Rate Index Period in the same manner that they are collected in the Rate Cap
Period except that the exogenous factor would be for usage on or after March 1
of the following year (id. at 17).
G. Service Quality Plan
The Settlement also includes a service quality plan dot coven the Rate
Cap Period and the Rate Index Period (Settlement at 26-27; Exh. DTE-1-1 14, Att.
10). The service quality plan would assess the combined companies' performance
in three sectors: (1) service reliability; (2) customer service; and (3) safety
(Exh. DTE-l-114, Att. 10, at l). Service reliability would be measured by the
following indices: (1) Frequency of Outages, as measured by a system average
interruption frequency index ("SAIFI" expressed as the number of outages per
customer per year); (2) Duration of Outtages, as measured by system average
interruption duration inclex ("SAIDI* expressed, as the average minutes of
interruptions per customer per year); (3) Major Event Performance; and (4)
Distribution Line Losses (Exh. DTE-1-114, Att. 10). Customer service would be
measured by the following indices: (1) Customer Satisfaction; (2) Customer
Contact; (3) Customer Telephone Service; (4) Customer Billing Service; and (5)
Complaint Cases filed with the Department's Consumer Division (id.). Safety
would be measured by Lost Time Accident Rate and Re stricted Work Case Rate
(id,.)
The performance benchmark for each index would be based on a five-year
rolling average of historic performance of the consolidated data of MECo and
EECo (id. at 1). Initially, each index would be based on performance data for
12
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the years 1995 through 1999 (id.). The service quality plan contains four
incentive and Penalty levels which are based on the number of standard
deviations from the benchmark that a particular performance represents (id.).
Performance on any measure at the benchmark would result in no penalties or
incentives (id.). A perfor mance on any measure that is at one standard
deviation from the benchmark would result in 25 percent of the incentive or
penalty being incurred or assessed, while a performance that is two standard
deviations above or below the benchmark would result in an additional 75 percent
of the incentive or penalty being incurred or assessed (id.).
Under the service quality plan, incentives and penalties for all of
the service quality measures would be calculated annually (id. at 2). The
maximum incentive MECo could earn annually is $15 million (id.). The maximum
penalty MECo could earn annually is $12 million, although the sum of the maximum
penalty for each index is $15 million (id.).16 For each index, any incentive or
penalty that does not exceed $50,000 would be considered to be zero (id.).
Incentives and penalties would be credited and debited to an incentive
and penalty account. If accumulated incentives or penalties reached the $20
million threshold, the amount over $20 million would be either sought from, or
returned to ratepayers (Exh. DTE-1-75). A summary of the details concerning each
of the service quality indices and the corresponding incentive and penalty
benchmarks is found below in the Appendix.
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16 General Law Chapter 164, section 1(E)(c) states that the penalty for
failing to meet service quality standards is an amount up to and including
the equivalent of two percent of a company's transmission and distribution
service revenue for the previous calendar year. For MECo, after the merger,
this amount would be $12 million.
13
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The Settlement states that the service quality plan is subject to
modification, dependent upon the findings of the Department's on-going
performance based regulationi6 ("PBR") proceeding, D.T.E. 99-84 (Settlement at
26). Also, at the time the service quality plan terminates, December 31, 2009,
the Department would determine how the balance in the incentive and penalty
account would be returned or recovered from ratepayers (Exh. DTE-1-1 15, at 4).
H. Other Features of the Settlement
The Petitioners state that approval of the Settlement represents: (1)
approval of the merger of Montaup into NEP pursuant to G.L. c. 164, section 96,
and a finding that further action of the Commonwealth under G.L. c. 164, section
21 is not required to consummate the merger; (2) consent by the Department for
the disposition of Montaup's securities by EECo pursuant to G.L. c. 164, section
9A; (3) approval by the Department under G.L. c. 164, sections 14, 18, 19, and
99, to issue up to $60,100,000 of additional capital stock to consummate the
NEP/Montaup merger; (4) the Depart ment's approval of NEP's assumption of
outstanding and preexisting obligations to the extent such assumption of
obligations requires Department approval pursuant to G.L. c. 164, section 17A;
(5) approval of the MECo/EECo merger pursuant to G.L, c. 164, section 96, and a
finding that further action of the Commonwealth under G.L. c. 164, section ii is
not required to consummate the merger; (6) approval by die Department pursuant
to G.L. c. 164, sections 14, 19, 19, and 99, to issue up to $78,108,558 of
additional common stock to consummate the MECo/EECo merger; (7) approval by the
Department pursuant to G.L. c. 164, section 14, 15A, 16, 18, and 19, to issue up
to $30 million of preferred stock and up to $40 million of bonds or other
14
<PAGE>
evidences of indebtedness to consummate the MECo/EECo Merger; approval by the
Department pursuant to G.L. c. 164, section 15, to exempt the sale of bonds from
the public bidding requirements in that section; (9) the Department's approval
of MECo's assumption of outstanding and preexisting obligations of EECo pursuant
to G.L. c. 164, section 17A, to the extent such approval is needed; and (10) ft
Department's approval pursuant to G.L. c. 164, section 17A, to add Montaup,
EECo, Blackstone Valley Electric Company, Newport Electric Corporation. and EUA
Service Corporation to the NEES Moneypool as both borrow ers and lenders and to
add to the Moneypool as lenders only, all other EUA and NEES affiliates
(SRR-DTE-18, Supp. I). Lastly, the Settlement includes a provision that would
(1) revise MECo's line extension Policy, found in Appendix B of MEECo's Terms
and Conditions For Distribution Service, and (2) allow MECo to introduce new
services that are either options for the customer or way be provided by
alternative suppliers without the Department's prior approval. (Settlement at
35-36).
III. STANDARD OF REVIEW
The fact that the NEES/EUA merger was submitted to do Department in
the form of a settlement does not diminish and cannot supplant the Department's
responsibility of ensuring that the Merger meets the statutory requirements of
G.L. c. 164. section 96. Section 96 sets forth the Department's authority to
review and approve mergers and acquisitions and as a condition for approval,
requires the Department to find that mergers and acquisitions are "consistent
15
<PAGE>
with the public interest."17 In Boston Edison Company D, D.P.U. 850, at 6-8
(1983), the Department construed the G.L. c. 164, section 96 standard of
consistency with the public interest as requiring a balancing of the costs and
benefits attendant on any proposed, merger or acquisition. The Department stated
that the core of the consistency standard was "avoidance of harm to the public."
Id., at 5. Therefore, under the term of D.P.U. 850, a proposed merger or
acquisition is allowed to go forward upon a finding by the Department that the
public interest would be at least as well served by approval of a proposal as by
its denial. BECo-ComElec Acquisition, D.T.E. 99-19, at 10 (1999) ("BECo-ComElec
Acquisition"); Eastern Enterprises-Colonial Acquisition"); Eastern Enterprises-
Colonial Gas Company, D.T.E. 98-128, at 5 (1999) ("Eastern-Colonial Acquisi
tion"); Bay State Gas Company-Northern Indiana Public Service Company-NIPSCO
Acquisition Company, D.T.E. 98-31, at 9 (1998) ("NIPSCO-Bay State Acquisition");
Eastern Enterprises-Essex County Gas Company, D.T.E. 98-27, at 8 (1998)
("Eastern-Essex Acquisition"); Boston Edison Company, D.P.U. 850, at 5-8. The
Department has reaffirmed that we would consider the potential gains and losses
of a proposed merger to determine whether the proposed transaction satisfies the
G.L. c. 164, section 96 standard. BECo-ComElec Acquisition, at 10;
Eastern-Colonial Acquisi tion at 5; NIPSCO-Bay State Acquisition at 8;
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17 The pendency of appeals from recent Department orders m MECo-ComElec
Acquisition, D.T.E. 99-19 (SJ 99-0384) (1999), and Eastern Enterprises-
Colonial Gas Company, D.T.E. 98-129 (SJ 99-0395) (1999) may have persuaded
tho original petitioner companies to avoid risk and accept the rather
complex arrangement embodied in the Rate Plan Settlement. But, whatever the
calculus of the Petitioners, the Department still must judge the substitute
proposal by its 'no net harm" standard under section 96 and its rate plan
under the section 94 standard described in BECo-ComElec Acquisition, D.T.E.
99-19.
16
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Eastern-Essex Acquisition at 8; Boston Edison Company-Boston Edison Mergeco
Electric Company, D.P.U./D.T.E. 97-63, at 7 (1998) ("Boston Edison Merger").
The section 96 public interest standard, as elucidated in D.P.U. 850,
must be understood as a "no net harm," rather than a "net benefit" test.18
Eastern-Colonial Acquisition at 5; NIPSCO-Bay State Acquisition at 9-10;
Eastern-Essex Acquisition at 8 (1998); Guidelines and Standards for Acquisitions
and Mergers, D.P.U. 93-167-A, at 7 (1994) ("Mergers and Acquisitions"). The
Department considers the special factors of an individual proposal to determine
whether it is consistent with the public interest. Eastern-Colonial Acquisition
at 5; NIPSCO-Bay State Acquisition at 9-10; Eastern-Essex Acquisition at 8;
Boston Edison at 7; Mergers and Acquisitions at 7-9. To meet this standard,
costs or disadvantages of a proposed merger must be accom panied by offsetting
benefits that warrant their allowance. Eastern-Colonial Acquisi tion at 5-6;
Boston Edison Merger at 7; Mergers and Acquisitions at 18-19.
Various factors may be considered in determining whether a proposed
merger or acquisition is consistent with the public interest pursuant to G.L. c.
164. section 96. Certain factors were set forth in Mergers and Acquisitions: (1)
effect on rates; (2) effect on the quality of service; (3) resulting net
savings; (4) effect on competition; (5) financial integrity of the post-merger
entity; (6) fairness of the distribution of resulting benefits between
shareholders and ratepayers; (7) societal costs; (8) effect on economic
development; and (9) alternatives to the merger or acquisition. Mergers and
Acquisitions at 7-9. This list is illustrative and not "exhaustive," and the
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18 The Department notes that a finding that a proposed merger or acquisition
would probably yield a net benefit does not mean that such a transaction
must yield a net benefit to satisfy G.L. c. 164, section 96 and Boston
Edison Company, D.P.U. 850.
17
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Department may consider other factors, or a subset of these factors, when
evaluating a G.L. c. 164, section 96 proposal. BECo-ComElec Acquisition at 12;
Eastern-Colonial Acquisition at 6.
The Department's determination whether the merger or acquisition meets
the requirements of section 96 must rest on a record that quantifies costs and
benefits to the extent that such quantification can be made. NIPSCO-Bay State
Acquisition at 11; Eastern-Essex Acquisition at 9. A section 96 petition that
expects to avoid an adverse result cannot rest its case on generalities, but
must instead demonstrate benefits that justify the costs, including the cost of
any premium sought. NIPSCO-Bay State Acquisition at 11; Eastern-Essex
Acquisition at 10; Mergers and Acquisition at 7.
Although the Petitioners have not sought approval of the proposed rate
plan under G.L. c. 164, section 94, a section 94 review is necessary, for the
public interest standard that is statutorily explicit in G.L. c. 164, section 96
lies also at the heart of G.L. c. 164, section 94 by judicial construction.
BECo-ComElec Acquisition at 8. Although the public interest standard is also
explicit in G.L. c. 164, section 94's provisions for review of contracts for
sale of gas and electricity, G.L. c. 164, section 94 speaks generally in terms
of the "propriety of rates." The Department has considerable discretion in
assessing the "propriety" of rates petitions submitted under G.L. c. 164,
section 94;19 and the Court has often so held. Id.; See American Hoechest
Company v. Department of Public Utilities, 379 Mass. 408, 411, 412, 413 (1980)
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19 Reliance on section 94 considerations in assessing a section 96 petition
was recognized - in fact, given pride of place - in the list of
illustrative factors for determining whether a proposal is consistent with
the public interest under section 96. Mergers and Acquisitions at 7 ("(1)
the impact of a proposed merger or acquisition on rates"). Both MECo and
the Attorney General then proposed this as a section 96 criterion. Id.
18
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(Department free to select or reject particular method of regulation as long as
choice not confiscatory or otherwise illegal). The Supreme Judicial Court has
construed G.L. c. 164, section 94 as requiring a public interest judgment by the
Department in a number of cases; Massachusetts Oilbeat Council v. Department of
Public Utilities, 418 Mass. 798, 804 (1994); Boston Real Estate Board v.
Department of Public Utilities, 334 Mass. 477, 495 (1956) ("[t]he controlling
consideration of the [D]epartment's statutory regulatory powers is implicit
throughout the statute. It is the standard which supports the grant of power
over rates and regulations in general and it is not necessary to specify
further"); Massachusetts Institute of Technology v. Department of Public
Utilities, 424 Mass. 856, 867 (1997) ("concur that the recovery of prudent and
verifiable stranded costs incurred by utility companies, as appropriately
authorized, is in the public interest."). See also Wolf v. Department of Public
Utilities, 407 Mass. 363, 369 (1990) ("the mission of the agency is to regulate
in the public interest," citing Zachs v. Department of Public Utilities, 406
Mass. 217, 223-2242 (1989))). Recent Department orders also apply a public
interest standard in G.L. c. 164, section 94 cases; BECo-ComElec Acquisition at
8-9; Tewksbury LNG, D.P.U. 97-49, at 27-28 (1997); Fitchburg Gas and Electric
Light Company Energy Bank, D.P.U. 95-75, at 9 (1995); and Cambridge Electric
Light Company, D.P.U. 94-101/95-36, at 8 (1995).
Because "the mission of the agency is to regulate in the public
interest," Wolf, 407 Mass. at 369, we apply a standard that amalgamates both
G.L. c. 164, sections 96 and 94's kindred public interest requirements. Where
statutes of general application allow a broad range of regulatory discretion but
19
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do not speak in particu larized terms to an instant case, the Court has
recognized that "the decision regarding what standard to apply is left to the
[D]epartment's discretion." Wolf, 407 Mass. at 370 (in the parallel context of
G.L. c. 159).
What a section 96 filing leads later to a substitute petition styled
as a "settlement," Department allowance of such a substitute petition must rest
on its determination that the proposed substitute petition, in fact, satisfies
the section 96 standard and the case law tests developed under that standard, as
most recently expressed and applied in BECo-ComElec Acquisition and
Eastern-Colonial Acquisition. Efforts of parties to a section 96 case to
"settle" may sometimes be helpful but cannot determine the outcome; nor may
their agreement satisfy the statute. Section 96 controls, and where a "settle
ment' is cloaked in a rate plan, the section 94 considerations described in
BECo-ComElec Acquisition, also obtain. Accordingly, we apply both our section 96
and our section 94 standard to the "settlement-cum-rate-plan" now before us.
IV. SPECIFIC CONSIDERATIONS OF THE MERGER
A. Introduction
As described earlier, the Department has developed a test using
several illustrative factors to examine the benefits and costs of a proposed
merger of utility companies. Mergers and Acquisitions at 7-9. While some or all
factors may be relevant in a review of any particular merger, four factors in
this proceeding warrant closer scrutiny: (1) effect on rates; (2) effect on
service quality; (3) fairness of the distribution of resulting benefits between
shareholders and ratepayers; and (4) societal cost of job displacement resulting
from the merger. However, the result of the analysis on any single factor is not
20
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controlling. Our review and judgment under G.L. c. 164, section 96, and in
D.P.U. 850. is of the proposal taken as a whole and of the consistency of the
proposal with the public interest.
B. Effect on Rates
1. Individual Customer Protection Credits
a. Introduction
During the hearings, the Petitioners acknowledged the value of
incorporating the ICP credits in the form of a tariff, as opposed to relying
solely on the text of the Settlement to understand the application of the ICP
credits (Tr. 1, at 141-142). The Petitioners also stated that the requirement of
a tariff ICP credit mechanism as a condition in a Department order would not be
contrary to the conditions of the Settlement (id. at 141).20 The Petitioners
provided a sample ICP credit tariff in a format similar to Exhibit DTE-1-114,
Attachment 3, modified to reflect several revisions agreed to by the Petitioners
during this proceeding (RR-DTE-10).
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20 The Settlement at Section VI.C.3. contains the following statement: This
Settlement is expressly conditioned upon the Department's acceptance of all
provisions hereof without change or condition." The stated consequence of
change or, condition would be a withdrawal or nullification of the
Settlement. Section 96 does not permit circumscribing or delimiting the
Department's statutory obligation in this way. A section 96 determination
by the Department of consistency with the public interest would authorize
the merger or acquisition on such terms as the Department approved (even
including conditions or changes), and the merging or acquiring/acquired
entities would be entitled but not required to proceed with the
transaction. Certainly, the Department "may . . . make informal disposition
of any adjudicatory proceeding by . . . agreed settlement" under G.L. c.
30A, section 10; but settlement provisions that would result in delegation
of statutory authority or would restrict the exercise of the Department's
statutory duty to the public interest are another matter alto gether.
21
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b. Analysis and Findings
Under G.L. c. 164, section 94, a utility's proposed rates must be
found as inconsistent with the public interest. One component of this standard,
applicable to tariff construction, requires a determination as to whether a
proposed tariff has sufficient detail to explain the basis for the rate to be
charged for the offered service. 220 C.M.R. sections 5.00 et seq. The
Petitioners' illustrative tariffs make reference to the ICP credits, but refer
the Rate Plan in order to gain an understanding of their application. The
sufficiency of a tariff, which has the force of law, must be judged on its face,
and testimony is insufficient to cure defect or supply a missing essential term.
Boston Gas Company, D.P.U. 92-259, at 47-48 (1993); Dedham Water Company, D.P.U.
13271, at 10 (1961); see also G.L. c. 164, section 94; 220 C.M.R. section 5.00
et seq. The Petitioners have acknowledged this requirement (Tr. 1, at 141-142).
Therefore, the Department concludes that the ICP credit provisions contained in
the illustrative distribution tariffs do not provide sufficient information on
their own to allow the Department to determine whether the proposed rates are
consistent with the public interest.
The Department has examined the illustrative ICP credit tariff
provided in Record Request DTE-10, and finds that the proposed language
accurately reflects the conditions under which the ICP credit would be
implemented. Eastern Edison Company, D.P.U. 96-24-C at 14-16 (1998). The
Petitioners are hereby directed to change their Rate Plan to include an ICP
credit tariff in the form provided in Record Request DTE-10 as part of their
compliance filing.
22
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2. Introduction of New Services
a. Introduction
The Petitioners proposed that, during the Rate Plan, MECo will be free
to introduce new services that are either optional for the customers or may be
necessary and provided by alternative suppliers (Settlement at 36). According to
the Petition ers, revenues realized from such new services will not be included
in the Rate Plan and will be retained by the Company (id.; Tr-2, at 181-182).
MECO stated that it has not made any final decision regarding the nature of the
services it may introduce, except for the provision of load data collection.
services (Exh. DTE-1-48).
The Petitioners also asserted that distribution company assets and
employees may be used for purposes of providing the new services (Exh-M-1-49).
However, the Petitioners claimed that the ratepayers will be protected from
potential abuse or cross subsidization because: (1) costs and revenues
associated with any new service will be excluded from the Rate Plan; (2) if MECo
were to choose to make a revenue-neutral, filing based on the cost of service,
any cost will be Subject to Department review and to proper allocation; (3) any
new service will only become effective 60 days after a fully described proposal
is filed with the Department, unless the Depart ment orders otherwise, (4) the
services to be provided will not entail any substantial financial risk; and (5)
the Standards of Conduct for Distribution Companies and their affiliates, 220
C.M.R. section 12.00 et seq. ("Standards of Conduct") and any amendment to the
23
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Standards of Conduct the Department may introduce in the future will con tinue
to apply to MECo (Settlement at 35-36, Exhs. DTE-1-48; DTE-1-50; DTE-1-51;
DTE-1-52, Tr. 2, at 204-208).
b. Analysis and Findings
The Petitioners correctly point out that there are some safeguards to
preserve our ability to protect the public interest. First, MECo acknowledges
that it is required to comply fully with the Standards of Conduct. Second, any
new service would not become effective until 60 days after a fully described
proposal is filed with the Department unless the Department orders otherwise.
Finally, the costs of any new service would be excluded from the Rate Plan, and
such costs would be subject to Department review and to proper allocation,
should MECo choose to make a revenue-neutral filing based on cost of service.
However, at this time, the Petition ers cannot describe in detail the nature of
any new services that may be offered in the future. The Department previously
has required that specific information about proposed investments be identified
in order to determine whether a proposal is consistent with the public interest.
Bay State Gas Company, D.P.U-97-24, at 22 (1997). The Department finds that the
information provided by the Petitioners regarding the new services MECo may
introduce is presently insufficient to fully evaluate the consistency of the
proposal with the public interest under section 96. The Department will take the
opportunity to evaluate any specific proposal when and if such a proposal is
filed.
24
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3. Exogenous Factors
a. Introduction
As described in Section II.F., above, the Petitioners requested that
MECo be provided the opportunity to recover or refund costs associated with
several exoge nous factors. Below, the Department addresses the proposed
exogenous factors in general and specifically addresses three issues associated
with the Petitioners' proposed treatment of exogenous factors that warrant
further discussion: (1) the $1 million threshold for the factors (a) tax land
accounting changes and (b) regulatory or legislative changes; (2) new on-site
generation exceeding 15 MW; and (3) any accumulated incentives or penalties in
excess of the threshold established under the proposed service quality plan.
b. Analysis and Findings
The Department has defined exogenous costs as positive or negative
cost changes beyond a company's control that would significantly affect the
company's operations. NIPSCO-Bay State Acquisition, D.T.E. 98-31, at 17;
Eastern-Essex Acquisition, D.T.E. 98-27, at 17; Boston Gas Company, D.P.U.
96-50, at 290 (1996). With the exception of the factors discussed below, the
proposed exogenous factors are either consistent, with the factors proposed and
approved in previous merger cases (tax and accounting changes and regulatory or
legislative changes), are unique to MECo but were approved in the Company's last
rate case settlement, D.P.U. 93-194 (storm and hazardous waste funds), or are
25
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consistent with the electric industry's move toward restructuring
(reclassification of costs).21 Therefore, the Department accepts these proposed
exogenous factors as a reasonable balance of risk between the company and its
customers.
Now we turn to the exogenous factors that warrant further discussion.
First MECo proposes to adjust its distribution rates for the effects of any
externally imposed accounting changes and for the effects associated with any
changes in the federal, state or local rates, laws, regulations, or precedents
governing income, revenue, sales, franchise, or property taxes if the accounting
and tax changes individ ually affect MECo's costs by more than $1 million per
year. Similarly, MECo proposes to adjust its distribution rates for the effects
of any legislative or regulatory changes which impose new or modify existing
obligations or duties which individu ally affect MECo's costs by more than $1
million per year. Concerning the $1 million threshold, the Department previously
has stated that the threshold for qualification as an exogenous cost should
avoid costly regulatory process over minimal dollars. Eastern-Colonial
Acquisition at 55; NIPSCO-Bay State Acquisition at 18; Boston Gas Company,
D.P.U. 96-50, at 288. Therefore, the Department has required that any individual
exogenous cost must exceed a threshold in order to qualify for recovery.
Eastern-Colonial Acquisition at 55. The Department previ ously has considered a
threshold for the opportunity to recover exogenous costs in Eastern-Colonial
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21 The proposal regarding inflation has been denied previously where the
petitioners proposed to modify their rate plans in the event that inflation
reached a certain level. Eastern-Colonial Acquisition at 56-57; NIPSCO-Bay
State Acquisition at 18-19. However, this proposal is different in that the
adjustment to distribution rates would be equal to the increment above four
percent and would be for the years 2003 and 2004 only (Settlement at 16;
Tr. 1, at 77).
26
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Acquisition at 55. There, the Department found that the proposed $140,000
threshold was unreasonable given the size of Colonial's revenues and we
determined that the effect of any individual exogenous cost must exceed $250,000
in a particular year in order for Petitioners to request recovery of that
particular exoge nous cost. Id. at 55-56. MECo states that companies under rate
plans that have frozen rates are vulnerable to regulatory or legislative changes
that impose costs on them when they have no ability to recover those costs from
customers. The Com pany indicated that it considered $1 million to be the
appropriate level to avoid having a rate change over a relatively small amount
of money (Tr. 1, at 73). Al though the $1 million threshold is low relative to
the size of MECo, on the whole, there is a sufficient balance of risk between
the Company and its customers with respect to all of the exogenous factors and
other benefits associated with the Rate Plan. The $1 million refers only to the
first two exogenous factors and is symmetric so that, for example, decreases in
taxes would be reflected in customers' rate as well as increases. Therefore, the
Department accepts the $1 million threshold level.
Second, regarding new on-site generation, the Settlement provides that
MECo shall adjust its distribution rates to recover lost revenues resulting from
the installation of any new on-site generating capacity operational on or after
July 1, 1999, that in the aggregate exceeds a 15 MW threshold (Settlement at
12). In the event the 15 MW threshold is exceeded, MECo would propose Auxiliary
Service provisions to seek recovery of the lost revenues for the increment above
27
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15 MW.26 The Settlement also provides that (1) the Auxiliary Service Rate would
be sought through its Exogenous Factors Adjustment proceedings and (2) the
Company will adjust its distribution rates in each rate class for any revenues
lost within that rate class within the preceding calendar year to the extent
that Auxiliary Service Rates approved by the Department are not sufficient to
recover the lost revenues associ ated with new on-site generation in excess of
the 15 MW (id.).
Although the Rate Plan does not explicitly exclude net-metering
customers from the Auxiliary Service provisions,27 the Company provided
assurances that any proposal in the Exogenous Factors Adjustment proceedings
would be consistent with the Department policy current at that time (Tr. 2, at
235-237).
Because it is outside the scope of this proceeding, the Department
does not make any findings on the appropriateness of an Auxiliary Service Rate
at this time. However, in addressing new on-site generation as an exogenous
factor in any future Exogenous Factors Adjustment proceeding, the Department at
a minimum will consider: (1) what method of analysis should be used to quantify
the economic impact on the Company of new on-site generation; (2) the potential
impact of assessing a special fee to certain customers installing new on-site
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26 The Settlement exempts the following technologies from the Auxiliary
Service Rate: non-dispatchable cogeneration facilities; heating and cooling
systems at the customer's location; and non-dispatchable, renewable energy
facilities. However, the Settlement provides that these technologies will
contribute to reaching or exceeding the 15 MW threshold (Settlement at 13).
27 According to 220 C.M.R. section 11.07(c), distribution companies shall be
prohibited from imposing special fees on net metering customers.
28
<PAGE>
generation on the emergence of new beneficial technologies; and (3) the extent
to which revenue losses from new on-site generation should be recovered through
a balance between special fees and the ratepayers within the designated rate
classes (Tr. 1, at 91-93).
Third, MECo proposes that any accumulated incentives or penalties in
excess of the $20 million threshold under the proposed service quality plan be
treated as an exogenous factor. In Section IV.C.2, below the Department finds
that the service quality plan developed by the Department pursuant to our
generic proceeding will supplant what is proposed here. Therefore, this proposed
exogenous factor will remain in place only until the Department has developed a
generic service quality plan and will continue to exist only if the Department
approves a similar threshold.
With the specific qualifications in place associated with on-site
generation and accumulated incentives and penalties, the inclusion of the Rate
Plan's exogenous factors is acceptable in the context of a rate reduction for a
period of time and limited rate increase for a time thereafter. Moreover, the
mechanism for inclusion of specific exogenous factors is not automatic.
Adjustments for exogenous factors would be subject to review, and after a public
hearing, approval by the Department. Therefore, the Department approves the
Petitioners' proposed list of exogenous factors and the mechanism for accounting
for them in the future.
29
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C. Effect on Service Quality
1. Introduction
The Petitioners proposed a service quality plan that measures
performance on reliability, customer service, and safety. In addition to the ten
specific measures that gauge performance in these areas, the Petitioners also
agreed to construct a measure of MECo's performance in major outages that would
be capable of implementation by 2003. A $3 million penalty would be associated
with the measure, but until the measure is implemented, the frequency of outage
measure, the duration of outage measure, and the customer satisfaction standard
would each have $1 million added to the penalty level of each measure. The
Petitioners proposed that the major event performance measure be implemented no
later than 2003, unless otherwise agreed by the Petitioners (Exh. DTE-1-114,
Att.10, at 1, 4).
The specific measures that gauge performance, the penalty and
incentive amounts, the annual penalty and incentive caps, and the $20 million
threshold that triggers, a collection from or return to ratepayers, as well as
other specific components of the plan, are explained in Section II.G. and the
Appendix. The service quality plan commences on the effective date of the merger
and remains in effect through December 31, 2009. However, the settlement
provides that the service quality plan "shall be subject to modification if a
generic PBR program is authorized or required by the Department" (Settlement at
26).
2. Analysis and Findings
The Department has recognized the importance of maintaining service
quality, particularly when mergers, and the resultant efforts to achieve cost
30
<PAGE>
savings or "synergies," can potentially lead to service quality degradation.
Boston Edison Merger at 15; Mergers and Acquisitions at 8-10. Acknowledgment of
the importance of service quality led the Department to direct all companies
that file for approval of mergers or acquisitions to include a service quality
plan in their filings. Eastern-Essex Acquisition at 33.
The service quality plan proposed by the Petitioners contains several
compo nents not previously seen in service quality plans filed with the
Department. See NYNEX Price Cap Order, D.P.U. 94-50 (1995) and Boston Gas
Company, D.P.U. 96-50. First, the instant plan contains incentives as well as
penalties. Secondly, the proposed plan contains a feature where incentives and
penalties can offset each other. Finally, the plan contains a monetary threshold
whereby there is not an immediate payout of penalties or incentives, but
instead, the funds remain in an account until a payout threshold is reached
(e.g., $20 million).28
Even before the Rate Plan Settlement was filed, the Department had
already opened a generic proceeding docketed as D.T.E. 99-84, on service quality
standards for electric distribution companies and natural gas local distribution
companies. Dependent upon the outcome of D.T.E. 99-84, the Petitioners concede,
the instant service quality plan is subject to modification. Therefore, the
Department approves the service quality plan proposed by the Petitioners with
the condition or caveat that the Department's Order in D.T.E. 99-84 may lead to
wholesale replacement, or to significant modification of some or all of the
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28 In the context of another rate plan, the Department noted: "For a rate
freeze to be a meaningful benefit to ratepayers . . . , the rate freeze
cannot be so heavily encumbered with the qualifications and 'outs.'"
NIPSCO-Bay State Acquisition at 18. The same might be said of a PBR plan.
31
<PAGE>
components of, the Petitioners' plan. These changes might include, but are not
limited to, changes in penalties, incentives, benchmarks, benchmarking method,
monetary thresholds before penalties (or incentives) are collected from a
company (or redound to it), and methods of distribut ing penalties or collecting
incentives. Thus, the proposed service quality plan could be completely
replaced, dependent upon the outcome of our generic service quality
investigation.
With respect to those measures the Petitioners claim are capable of
imple mentation by 2003, the Department will not delegate its authority to
determine whether an exemption to the 2003 end date should be granted.
Therefore, any request by the Petitioners to extend the date for implementation
shall be filed with the Department no later than July 1, 2002.
D. Societal Costs
1. Introduction
The Petitioners state that the benefits of the merger are determined
in part by the number and productivity of the employees retained by the
surviving entity and that some reduction in workforce is inevitable (Exh. MEC-1,
Vol. 1, at 107). As a result of the merger, the Petitioners estimate a reduction
in staffing from about 4,100 employees to 3,850 employees (id.). The Petitioners
anticipate that this reduction will be through attrition and voluntary early
retirement programs. Furthermore, the Petitioners state that they have reached
agreements with their unions that include appropriate employee protections
necessary for the unions to support the merger (Exh. DTE-1-113). In an effort to
mitigate the reduction in workforce, NEES also states that there will be
32
<PAGE>
employment opportunities with National Grid and that opportunities for employees
may be available through NEES's expanded transmis sion and distribution business
(Exh. MEC-1, Vol. 1, at 107).
2. Analysis and Finding
The only issue addressed under societal costs is the effect on
employment (id.). The Department notes that societal costs must be weighed and
balanced against the benefits resulting from the merger and Rate Plan. While
perpetuation of job redundancies in a merged entity would impose avoidable costs
and thus be detrimen tal to ratepayers, the elimination of these redundancies
can and should be accom plished in a way that mitigates the effect on employees.
The Petitioners represent that they have reached agreement with their unions
about employee protection measures and anticipate that the reduction will be
attained through attrition and voluntary retirement programs (Exh. DTE-1-113).
The Petitioners also represent that potential job opportunities exist with
National Grid.
The Department has stated that future proponents of mergers must demon
strate that they have a plan for minimizing the effect of job displacement on
employees. Eastern-Essex Acquisition at 44. To follow up on the effectiveness of
the Petitioners' efforts to assist displaced workers, the Department directs the
Petitioners to submit annual reports detailing their displaced workers
assistance efforts. Three such reports am required. The first report shall be
filed one year after the consumma tion of the merger, with the second and third
reports to be submitted annually thereafter.
33
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E. Distribution of Resulting Costs and Benefits between Shareholders
and Ratepayers
1. Introduction
The Petitioners estimated that the total acquisition premium and
transaction costs attributed to MECo under the NEES/EUA merger would be
approximately $336,210,000, with an annual amortization of approximately
$16,811,000 (Exh. DTE-1-113, Att. 1, at 2). The Petitioners estimated that the
total acqusition premium and transaction costs attributed to MECo under the
NEES/National Grid merger would be approximately $1,853,826,000, with an annual
amortization of $92,691,000 (id., Att. 1, at 3). The Petitioners represented
that their proposed ratemaking treatment ensures that benefits in the form of
cost savings and continued service quality accrue to customers, with
shareholders bearing the risk of merger-related costs exceeding savings (Exh.
DTE-1-113, at 4)."29
While these transaction costs and acquisition premiums are not being
directly charged to MECo's ratepayers, an evaluation of these costs is necessary
as part of the ba1ancing of costs and benefits required under our section 96
standard. Eastern-Essex Acquisition at 48. Moreover, the Petitioners' proposal
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29 As described above, if MECo does submit a general rate filing to the Depart
ment before December 31, 2009, the amortization of acquisition premiums and
transaction costs associated with either the NEES/EUA merger or the
NEES/National Grid acquisition, as well as any "Earned Savings," shall not
be included in MECo's rate base (Settlement at 20-21). After the conclusion
of the rate Plan on January 1, 2010, MECo would remain precluded from
including these acquisition premiums or transaction costs in distribution
rates, but may seek inclusion of "Earned Savings" in its distribution rates
(id. at 24-25).
34
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to permit the inclusion of "Earned Savings" in distribution rates after December
31, 2009 requires the examina tion of these costs to establish a basis on which
to assess the "Earned Savings" feature of the Merger.30
2. Transaction and Integration Costs
a. Introduction
The Petitioners estimate that the total transaction and integration
costs associated with the merger will be $74,145,000, consisting of $11,610,000
in transaction costs, $42,980,000 in personnel costs, $8,055,000 in transition
costs, and $11,500,000 in information systems costs which are considered
necessary to inte grate EUA's system with those of NEES (Exhs. MEC-1, Vol. 3, at
29-31; AG-1-82, at 23).31 These costs are expected to be incurred over a period
of three years after the merger, with most costs incurred during the first year
(Exhs. MEC-1, Vol. 3, at 10; AG-1-82, at 5).
The $11,610,000 in transaction costs consist of: (1) $7,500,000 in
bankers fees, (2) $3,500,000 in legal fees; (3) $400,000 in directors and
officers liability tail coverage; and (4) $210,000 in shareholder and proxy
costs (Exh. AG-1-82, at 23-24). The $42,980,000 in personnel costs consist of:
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30 Although the Petitioners represented that the merger is directly linked to
the consummation of the NEES/National Grid merger (Settlement at 27-28),
the acquisition of NEES by National Grid lies beyond the scope of the
instant proceeding. Accordingly, the Department finds it unnecessary to
consider the transaction costs and acquisition premium associated with the
NEES/National Grid merger as part of the balance of costs and benefits
required under section 96.
35
<PAGE>
(1) $30,330,000 in voluntary early retirement program costs; (2) $4,000,000 in
management separation costs; (3) $2,800,000 in limited hardship early decision
option costs; (4) $1,150,000 in employee retention costs; (5) $2,500,000 in
employee relocation costs; (6) $1,950,000 in employee retraining costs; and (7)
$250,000 in general reorientation costs (id. at 25). The $8,055,000 in
transition costs consist of. (1) $810,000 in internal support costs; (2)
$2,000,000 in non-intbrmationsystem outside support costs; (3) $250,000 in
telecommunications costs; (4) $3,215,000 in facilities consoli dation costs; (5)
$1,230,000 in dispatch consolidation costs; (6) $340,000 in opera tions
integration costs; (7) $85,000 in finance integration costs; and (8) $125,000 in
other transition costs (id. at 26-27). The $11,500,000 in information system
costs consist of: (1) $9,080,000 in systems integration and data center
consolidation costs; (2) $995,000 in customer-and meter-related costs; and (8)
$1,425,000 in telecommunications costs (id. at 28).
b. Analysis and Findings
The Department has recognized that there are transaction costs
associated with a merger or acquisition, and that these costs may be recovered
in rates provided the public interest standard of G.L. c. 164, section 96, is
satisfied. BECo-ComElec Acquisition at 37; Eastern-Colonial Acquisition at 90;
Eastern-Essex Acquisition at 52-53; Mergers and Acquisitions at 18-19. Certain
merger-related costs may not be subject to the same level of precision at the
time of the Department's investigation as generally can be attained in a
traditional cost-of-service rate procceding, using a historic test year.
BECo-ComElec Acquisition at 38; Eastern-Essex Acquisition at 51. Mergers and
Acquisitions at 7, recognized that precise calculation of costs and benefits is
not always possible and so required quantification to the extent such
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31 Of this amount, approximately $54,801,000 would be attributed to MECo, and
$19,134,000 would be attributed to NEES's Rhode Island operations (Exh.
DTE-1-113, Att. 1, at 2).
36
<PAGE>
quantification can be made. Therefore, the Department examines the basis for
these transaction cost estimates in our determination of the costs and benefits
associated with the merger, to the extent that these costs can be quantified.
Concerning transaction costs, the Department has taken into
consideration the estimation processes used by NEES and EUA, the expertise of
Mercer Management Consulting, and our experience with recent merger and
acquisition proceedings. The overall scope of the transaction, as measured by
EUA's projected acquisition cost, is approximately $633.5 million (Exh. MEC-1,
Vol. 1, at 79). The Department has considered transaction costs in the context
of the magnitude of assets involved and the complexity of the transaction.
BEC-ComElec Acquisition at 40; Eastern-Essex Acquisition at 52. The transaction
here involves the creation of a limited liability corporation, Research Drive
LLC, as a shell entity, the merger of a Massachusetts business trust, EUA, into
the shell entity, and the ultimate merger of EUA's operating companies into
those of NEES (Exhs. MEC-1, exh. MEJ-1, at 10; MEC-1, Vol. 1, at 101-102). This
Settlement is filed in conjunction with the proposed acquisition of NEES by a
British entity, National Grid (Exh. MEC-1, Vol. 1, at 12). This set of
transactions involves the Department, the Rhode Island Public Utilities
Commission and the Rhode Island Division of Public Utilities and Carriers, the
Securities and Exchange Commission, the Nuclear Energy Regulatory Commission,
and the Department of Justice for various regulatory approvals. Transaction
costs of $11,610,000 are reasonable in view of the multiple transactions
required to complete the business consolidation. Based on these considerations,
the Department finds that the proposed transaction expense of $11,610,00() is
37
<PAGE>
commensurate with the com plexity of the merger and reasonable in amount for
purposes of evaluating the costs associated with the merger. Accordingly, the
Department includes the full $11,610,000 in transaction costs in our estimate of
the costs associated with the consolidation.
3. System Integration Costs
As with merger-related transaction costs, the Department has
recognized that there are post-merger costs associated with a merger or
acquisition that may be recoverable if the public interest standard of G.L.c.
164, section 96 is satisfied. BECo-ComElec Acquisition at 41; Eastern-Colonial
Acquisition at 90; Eastern-Essex Acquisition at 51-52; Mergers and Acquisitions
at 16, 18-19. The Petitioners estimated that the system integration costs
resulting from this merger, including personnel, transition, and information
system costs, will be $62,535,000 (Exh. AG-1-82, at 23). The Department examines
the basis for these system integration cost estimates in our determination of
the costs allowed to be recovered under the Rate Plan.
Employee costs were estimated on the basis of the Petitioners'
analysis of post-merger staffing needs, compensation levels, and the forms of
severance pack ages developed (Exhs. MEC-1, Vol. 3, at 134; DTE-1-99
(Confidential); AG-1-82, at 25; Tr. 1, at 146-150). Although these costs are
estimated, the Department recog nizes that approximately 330 NEES and EUA
employees, mostly from EUA, have elected to take advantage of the voluntary
programs (Exh. DTE-1-101; Tr. 1, at 149-150). The Petitioners have made a
reasonable estimate of the total cost of the compensation packages to be offered
under these programs. The Petitioners have also made a reasonable estimate of
the number of employees taking advantage of the retention, relocation, and
retraining programs, as well as the cost associated with programs of this type
38
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(Exh. MEC-1, Vol. 3, at 134). The projected employee retention, relocation, and
retraining program expense levels are consistent with the extent of staffing
changes that would be expected with a merger of this type (id.; AG-1-82, at 25).
Therefore, the Department concludes that the proposed separation expense of
$42,980,000 is reasonable. Accordingly, the Department includes these costs in
our evaluation of the costs and benefits associated with the merger.
Transition and information system costs were estimated through a
detailed analysis of NEES's anticipated post-merger needs, which included an
evaluation of physical plant requirements and new dispatch and communications
hardware and software needs (Exhs. MEC-1. Vol. 3, at 134; AG-1-82, at 26-28,
154-176). Al though these costs are estimates, the Department recognizes that
the merger will result in the restructuring of MECo's physical plant operations
and system reconfigurations, which will require in some instances the services
of outside management consulting firms (Exhs. MEC-1, Vol. 3, at 134; AG-1-82, at
26). The Petitioners have provided the basis for the cost estimates, which rely
extensively on an analysis of various options (Exh. AG-1-82, at 154-176). The
proposed costs are commensurate with the complexity and nature of the merger and
are reasonable in amount. Therefore, the Department includes these costs in our
evaluation of the costs and benefits associated with the merger.
39
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4. Acquisition Premium
a. Introduction
The Petitioners estimate that the merger will result in an acquisition
premium of approximately $259.8 million, equal to the difference between the
$633.5 million purchase price which EUA's shareholders will be able to redeem
for cash and EUA's book value of approximately $373.7 million (Exhs. MEC-1, Vol.
1, MEJ-6, at 3; MEC-1, at 42). This estimate was developed by multiplying the
imputed purchase price per share of EUA's common stock, $31.00, by the 20.4
million outstanding shares, for a total of $633.5 million, and then subtracting
EUA's December 31, 1998 book value of approximately $373.7 million, determined
by multiplying the Decem ber 31, 1998 book value per share of $18.29 by 20.4
million shares (Exh. MEC-1, Vol. 1, MEJ-6, at 3). According to the Petitioners,
the acquisition premium cannot be precisely determined until the closing of the
merger, because of book value fluctuations prior to the closing of the merger
(Exh. MEC-1, at 42). The Petitioners stated that they will inform the Department
of the actual amount of the acquisition premium and related accounting entries
after the completion of the merger (Tr. 2, at 161).
b. Analysis and Findings
The Department has stated that it will consider, on a case-by-case
basis, individual merger or acquisition proposals that seek recovery of an
acquisition premium, as well as the appropriate recovery level of such a
premium. Merger and Acquisitions at 18-19. Under the Department's standard, a
company proposing a merger or acquisition must, as a practical matter,
demonstrate that the costs or disadvantages of the transaction are accompanied
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by benefits that warrant their allowance. Thus, allowance or disallowance of an
acquisition premium would be just one part (albeit an important one) of the
cost/benefit analysis under the section 96 standard as elaborated in Department
cases. Id. at 7; BECo-ComElec Acquisition at 56; Eastern-Colonial Acquisition at
94; NIPSCO-Bay State Acquisition at 38-39; Eastern-Essex Acquisition at 61.
With respect to the level of consideration paid by NEES, the record
evidence demonstrates that the purchase price was evaluated by the Petitioners
in comparison with purchase prices associated with other recent mergers and
acquisitions, and in light of the potential long-term benefits (RR-DTE-11). A
purchase price at a multiple of book value expresses a buyer's expectations of
the acquired company's future contributions to combined operations.
Eastern-Essex Acquisition at 64. The particular exchange rate in merger or
acquisition stock transactions involves a number of matters of value to the
buyer, including a premium for management control and long term strategic and
economic value perceived by the buyer as accruing from the transaction. Id. It
is clear that NEES, as a knowledgeable and willing buyer, experienced in other
acquisitions, was prepared to pay a premium over EUA's book value in exchange
for long-term growth potential (Exh. MEC-1, Vol. 1, exh. MEJ-6, at 3;
RR-DTE-11).
The proposed purchase price for EUA's stock represents a premium of
1.7 times book value (RR-DTE-1 1). The price paid by NEES for EUA in this case
lies in the range of what been offered in other transactions. BECo-ComElec
Acquisition at 60. EUA's independent advisor, Salomon Smith Barney, has
pronounced the terms of the transaction to be reasonable (Exh. MEC-1, at 109).
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Not only does the premium lie within an historic range that has been validated
by the market at large, but its reasonableness is credibly attested to and
corroborated by independent financial advisors. The Department finds that the
proposed purchase price for EUA's common stock and proposed exchange ratio is in
line with experience in other acquisitions and is reasonable for the transaction
at issue here. The opportunity sought to recover a premium at this level between
these companies is a reasonable and valid expression of today's market
conditions.
The actual level of the acquisition premium will be dependent upon a
number of factors, including the actual number of EUA's shares outstanding upon
the closing date, EUA's book value as of the completion of the merger, and the
revaluation of unregulated assets. Thus, the actual amount of the acquisition
premium cannot be precisely calculated until the consummation date or shortly
thereafter, although its range is formulaically determined. Easten-Essex
Acquisition at 65. The above formula for calculating the amount is sound and
acceptable. The Petitioners intend to provide the Department with a copy of the
journal entries or a schedule summariz ing such entries upon completion of the
merger accompanied by benefits that warrant their allowance. The Department
hereby instructs the Petitioners to provide this information, in sufficient
detail so as to provide the actual acquisition premium, within 90 days after the
completion of the merger.
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5. Merger-Related Savings
a. Introduction
The Petitioners state that the merger of NEES and EUA should result in
approximately $329,951,000 in estimated savings during the ten-year term of the
Rate Cap and Rate Index periods, 2000 through 2009 (Exh. AG-1-82, at 5). Al
though the Petitioners considered that merger-related savings generally would
continue into future periods, the savings estimates were limited to the term of
the Rate Plan (Exh. MEC-1, Vol. 3, at 10). The savings calculation was based on
savings that were attributable to the merger, i.e., those savings would not be
attain able but for the combination of two Massachusetts business trusts,32 NEES
and EUA, under NEES, and the merger of EUA's subsidiary companies, including
EECo, into those of NEES (id. at 10-11). The Petitioners considered the
potential for merger-related savings in (1) personnel, (2) information system,
(3) supply chain,33 (4) facilities, and (5) administrative and general ("A&G")
(id. at 12-13; Exh. AG-1-82, at 6-22). These savings were identified in both
operating expense and capital-related costs. In the case of capital-related
costs, such as those associated with fixed assets, savings estimates were
derived by using a revenue requirement method, using a blended levelized fixed
charge of 13.5 percent for non-information system capital items, and a levelized
fixed charge of 28.6 percent for information system-related capital items (Exh.
MEC-1, Vol. 3, at 12-13).
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32 The Petitioners state that NEES and EUA are business trusts (Exh. MEC-1,
Vol.4, Att. 1, at 10).
33 The Petitioners define supply chain expenses as those related to inventory,
procurement, contractor services, and vehicles (Exh. AG-1-82, at 19).
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The Petitioners stated that the savings associated with this merger
were not expected to be as great as those associated with other mergers,
including the consoli dation of BEC Energy and Commonwealth Energy System in
D.T.E. 99-19 (id. at 26). The Petitioners attributed this to the smaller size of
EUA in relation to NEES, and the lower employee/customer ratio for NEES and EUA
versus those for BEC Energy and Commonwealth Energy System, which would limit
the ability to reduce staffing levels (id. at 26-27).
i. Personnel
The Petitioners estimate that $267,100,000 in savings will result from
stafring reductions over the term of the Rate Plan (Exh. AG-1-82, at 5-9). In
calculating the estimate, the Petitioners first estimated staffing levels at
both NEES and EUA as of January 1, 2000, and developed detailed organization and
functional breakdowns to which each employee was assigned on the basis of
subfunctions (Exh. MEC-1, Vol. 3, at 15-16). Next, the Petitioners estimated the
number of positions that could be eliminated as a result of the merger through
an examination of duplica tive functions, the potential for integration, changes
in policies or practices, and any incremental workload within the particular
function (id. at 16). As a result of this analysis, the Petitioners estimated
that 312 positions could be eliminated as a result of the merger, of which 124
positions are in A&G functions, 87 positions are in customer functions, 95
positions are in transmission and distribution ("T&D") functions, and six
positions are in other functions (id. at 17; Exh. AG-1-82, at 6-9). For each
identified subfunction, the Petitioners then applied a weighted average annual
compensation level (wages or salary plus benefits) based on year 2000 dollars
(Exhs. MEC-1, Vol. 3, at 17; DTE-1-99 (Confidential), at 7-12). To account for
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capitalized T&D payroll, a blended capitalization rate of 35 percent for T&D
positions and a blended capitalization rate for A&G and customer positions of
zero percent was applied based on the respective companies' payroll allocation
data (id. at 18). As a result of this analysis, the Petitioners concluded that
personnel savings of $267,100,000 would result from the merger (Exh. AG-1-82, at
9).
ii. Information Systems
The Petitioners estimate that the merger will result in savings of
approxi mately $10,194,000 in information system expenses (other than
information system personnel) over the term of the Rate Plan (id. at 10). The
Petitioners derived this estimate under the assumption that data centers would
be consolidated as a result of the merger and that the combined companies would
adopt those information systems presently relied upon by NEES (Exh. MEC-1. Vol.
3, at 19, 52-62).
iii. Supply Chain
The Petitioners estimate that the merger will result in a total of
$20,428,000 in savings through purchasing economies over the term of the Rate
Plan (Exh. AG-1-92, at 5). These savings represent: (1) $3,323,000 in inventory
savings through a reduction in required inventory levels; (2) $6,097,000 in
procurement savings on materials and supplics; (3) $7,385,000 in contractor
savings; and (4) $20,428,000 in vehicle fixed and operating cost savings
resulting from personnel reductions (Exhs. MEC-1, Vol. 3, at 21; AG-1-82, at
11-14). The savings estimates were based on a number of considerations,
including an assumed three percent reduction in EUA-related purchases, a 25
percent reduction in EUA-related inventory costs, the elimination of five
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heavy-duty vehicles and ten passenger-vehicles, EUA's inventory and maintenance
programs, and contract service requirements (Exh. MEC-1, Vol. 3. at 65-81).
iv. Facilities
The Petitioners estimate that the merger will result in a total of
$43,719,000 in facilities savings over the term of the Rate Plan, as a result of
headquarters consolidation (Exh. AG-1-82, at 5). The savings estimates also
incorporate the closing of several MECo and EECo facilities in southeastern
Massachusetts and the construction of more centralized operating facilities in
the area (id. at 131-133).
v. Administrative and General
The Petitioners estimate that the merger will result in savimgs of
approximately $62,656,000 in A&G expenses during the term of the Rate Plan (id.
at 5). The Petitioners identified these savings within nine categories: (1)
$1,326,000 in A&G overhead savings; (2) $6,520,000 in advertising; (3)
$2,873,000 in association dues; (4) a nominal amount in benefits administration;
(5) $11,769,000 in corporate governance; (6) $6,188,000 in financial fees; (7)
$8,840,000 in insurance; (8) $25,140,000 in professional services; and (9) a
nominal amount in regulatory expenses (Exhs. MEC-1, Vol. 3, at 22; AG-1-82, at
16).34 For each of these expense categories, the Petitioners developed savings
estimates based on a mmber of consid erations, including the elimination of
duplicative costs and the use of assumptions (Exh. MEC-1, Vol. 3, at 22-26).
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34 Because the savings in benefits administration and regulatory expense were
not considered to be significant, these were not explicitly reflected in
the Petitioners' revised savings estimates (Exhs. MEC-1, Vol. 3, at 24-26;
AG-1-82, at 21-22).
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b. Analysis and Findings
To meet the G.L. c. 164, section 96, public interest standard,
rnerger-related costs must be accompanied by offsetting merger-related benefits
that warrant their recovery, including the cost of any premium sought.
BECo-ComElec Acquisitions at 68; Eastern-Colonial Acquisition at 5-6; NIPSCO-Bay
State Acquisition at 9-10; Eastern-Essex Acquisition at 8-10. Therefore, in
order for the Department to recognize the opportunity to recover merger-related
costs, a petitioner must demon strate savings related to the merger that are at
last equal to the costs of the merger.
The Department recognizes that the savings presented by the
Petitioners are based on forecast amounts. However, the determination of savings
through 2009 requires the Department to consider both historic and projected
savings. Reliance on precedent based solely on historic test-year cost of
service is not a sufficient guide in this case. BECoComElec Acquisition at 68;
Eastern-Colonial Acquisition at 20. The evaluation of these savings is not
subject to the same level of precision as generally can be attained in a
traditional rate case setting. BECoComElec Acquisi tion at 68-69. Therefore, the
Department's review of the Petitioners' savings esti mates must be based on
whether the figures proposed by the Petitioners are reason able estimates.
With respect to the Petitioners' estimate that $267,100,000 in savings
will result from personnel reductions, the Department determines that the
Petitioners have made a thorough, comprehensive analysis of pre- and post-merger
positions at NEES and EUA, and accepts the Petitioners' analysis that 312
positions could be eliminated through the creation of an integrated corporate
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and administrative organization (Exhs. MEC-1, Vol. 3, at 16; DTE-1-99
(Confidential); AG-1-82, at 6-9).35 The Department also accepts the Petitioners'
use of a weighted average blended on (wage or salary plus benefits) per
subfunction as consistent with the compensation levels associated with the
employee positions projected to be eliminated (Exhs. MEC-1, Vol. 3, at 17;
DTE-1-99 (Confidential), at 7-12). Finally, the Department accepts the
Petitioners' capitalized payroll estimates as consistent with the recent
experience of the Petitioners (Exh. MEC-1, Vol. 3, at 18). The Department
concludes that the Petitioners have provided a fair and reliable estimate of the
savings that would result from the merger. Accordingly, the Department uses a
personnel savings estimate of $267,100,000 for purposes of evaluating the costs
and benefits associated with the proposed merger.
Turning to the area of information system savings, the Department has
reviewed the saving estimate, including the data and assumptions relied upon by
the Petitioners. The Petitioners have demonstrated a thorough evaluation of
NEES's post-merger information system requirements and how EUA's current
information technology would be integrated into NEES (Exhs. MEC-1, Vol. 3, at
53-62; AG-1-82, at 18). The Department concludes that the Petitioners have made
a fair and reliable estimate of the savings that would occur as a result of the
merger. Accord ingly, the Department uses an information system savings estimate
of $10,194,000 for purposes of evaluating the costs and benefits associated with
the proposed merger.
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35 The estimate of 312 positions may be conservative in view of the
approximately 330 employees who have elected to accept the early retirement
options (Tr. 1, at 149).
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With respect to supply chain savings, the Department has reviewed the
savings estimate, including the data and assumptions relied upon by the
Petitioners. The Petitioners have demonstrated a comprehensive approach in
identifying merger-related changes in inventory and purchasing procedures,
taking into account the integration of EUA's inventory and purchasing practices
with those of NEES (Exhs. MEC-1, Vol. 3, at 65-81; AG-1-82, at 19). The
Department concludes that the Petitioners have made a fair and reliable estimate
of the savings that would occur as a result of the merger. Accordingly, the
Department uses a supply chain savings estimate of $20,428,000 for purposes of
evaluating the costs and benefits associated with the proposed merger.
With respect to facilities savings, the Department has reviewed the
savings estimate, including the data and assumptions relied upon by the
Petitioners. The Petitioners demonstrated a thorough approach in the
identification of NEES's and MECo's post-merger headquarter and service center
requirements, and the scope of changes that would be implemented in order to
integrate EUA's system into that of NEES (Exhs. MEC-1, Vol. 3, at 84-90;
AG-1-82, at 20). The Department concludes that the Petitioners have provided a
fair and reliable estimate of the savings that would result from the merger.
Accordingly, the Department uses a facilities savings estimate of $43,719,000
for purposes of evaluating the costs and benefits associated with the proposed
merger.
The Department has reviewed the Petitioners' administrative and
general savings estimates. The Petitioners estimated these savings based on a
review of NEES's and EUA's own fixed and variable costs associated with each of
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the nine administrative and general areas identified and experience based on
other utility mergers (Exh. MEC-1, Vol.3, at 9, 21-24). The Petitioners
demonstrated a thorough approach in identifying economies of scale associated
with an expanded NEES system, including Mercer Management Consulting's
experience attained through other utility mergers for these types of expenses
(id. at 93-131; Exh. AG-1-82, at 21-22). The Department concludes that the
Petitioners have made a fair and reasonable estimate of the savings that would
result from the merger in each of these areas. Therefore, the Department accepts
the Petitioners' savings estimates in these nine administrative and general
areas. Accordingly, the Department uses an administra tive and general savings
estimate of $62,656,000 for purposes of evaluating the costs and benefits
associated with the proposed merger.
The Department recognizes that the savings presented by the
Petitioners are based on forecast amounts. As noted in Eastern-Colonial
Acquisition at 18, projec tions of future events are not subject to the same
standards of measurement and evaluation that the Department uses in a rate case;
rather, they can be judged in terms of whether they are substantiated by past
experience, and supported by logical reasoning founded on sound theory. The
evidence demonstrates that the figure $329,951,000 reasonably forecasts the
likely projected merger-related savings over the ten-year period between the
years 2000 and 2009.
The Rate Plan in this proceeding raises issues similar to those
addressed by the Department in our previous G.L.c. 164, section 96 reviews of
the propriety of allowing recovery of acquisition premiums and other costs
associated with a merger. See, e.g., BECo-ComElec Acquisition at 81-82;
Eastern-Colonial Acquisition; NIPSCO-Bay State Acquisition; Eastern-Essex
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Acquisition; Mergers and Acquisitions. In those cases, the Department found that
mergers and associated cost recovery propos als must be "consistent with the
public interest." BECo-ComElec Acquisition at 7-8; Eastern-Colonial Acquisition
at 4-5; see also, NIPSCO-Bay State Acquisition at 9-11; Eastern-Essex
Acquisition at 8-10. The Department has reaffirmed that the public interest
standard must be understood as a "not net harm" standard. Eastern-Colonial
Acquisition at 4-5; see also, NIPSCO-Bay State Acquisition at 9-10;
Eastern-Essex Acquisition at 8. Here, the Petitioners' Rate Plan's conformance
to the public interest will be assessed by the same standard embodied in section
96 and developed in the just-cited cases.
While the Petitioners are not seeking direct and explicit recovery of
either the transaction costs or acquisition premium, they have included what
they label an Earned Savings feature in the Rate Plan, whereby revised MECo
distribution rates filed after the end of the Rate Plan on December 31, 2009,
would incorporate an expense representing a formulaically-determined measure of
merger-related costs in a future rate proceeding, the Department would have to
have a high degree of confidence in the demonstration that offsetting savings
will be realized. BECo-ComElec Acquisition at 83. Reaching that level of
confidence requires an evaluation of both he margin between projected
merger-related costs and savings (i.e., a margin of error in projections) and
the quality of the evidence supporting those projections. As noted earlier, the
quality of projections can be judged in terms of whether they are substantiated
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by past experience, and supported by logical reasoning founded on sound theory.
Eastern-Colonial Acquisition at 18.
The Department has found that projected merger-related savings of
$329,951,000 would probably be realized through the merger between the years
2000 and 2009. The Petitioners have provided detailed, substantial, and credible
evidence in support of these projections, as Mergers and Acquisitions at 7,
requires.36 The projected merger-related costs during that same period,
including the amortization of the NEES/EUA acquisition premium, are estimated to
be $168,100,000. Therefore, merger-related benefits are projected to exceed
merger-related costs by approxi mately $161,841,000, which goes well beyond
meeting the Department's "no net harm" standard to the point of actually
providing net benefits to customers. Even if the merger does not produce the
level of net savings anticipated by the Petitioners, the magnitude of the
difference between the approximately $329,951,000 in savings and $168,110,000 in
costs supports the conclusion that significant savings to ratepayers will likely
result from the merger.
The "Earned Savings" calculation, as described above in Section II.E.,
is structured to ensure that MECo would only be permitted to include
merger-related costs in its distribution rates after the end of the Rate Index
Period to the extent that savings are realized as a result of this merger
(Settlement at 24-25). Shareholders bear the risk that merger-related costs
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36 Some of the evidence was presented in responses to information requests
propounded concerning the Rate Plan Settlement and in the hearings of
February 4 and 7, 2000. Other evidence was filed with the original petition
and in response to information requests regarding it. All is properly
before the Department.
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might exceed merger-related savings. The Department concludes that the merger
will result in significant benefits for ratepay ers, and will allow the "Earned
Savings" component of the Rate Plan to be included in the cost of service of any
future MECo rate proceeding for the period 2010-20. This provision merely echoes
the opportunity recognized in Eastern-Essex Acquisi tion at 4.
F. Summary
The Department has evaluated the benefits and costs associated with
the merger based on the following four factors: (1) effect on rates, (2) effect
on service quality, (3) societal costs, and (4) distribution of resulting costs
and benefits between shareholders and ratepayers. The following presents the
Department's findings on the merger and Rate Plan based on these four factors.
With respect to effect on rates, the Rate Cap Period includes a $10
million rate reduction for all customers of MECo (including the former EECo) and
Nantucket, and a distribution rate freeze from the effective date of the merger
through February 28, 2005, subject to certain exogenous factors. During the Rate
Index Period, the Rate Plan implements a PBR mechanism that ensure MECo's
distribution rates will remain at least ten percent below the regional average
of similarly unbundled distribution rates for investor-owned utilities. This
provision ensures that ratepayers would benefit from lower than average rates
within the region. During the Rate Index Period, the Rate Plan assures that the
mergers do not harm ratepayers by comparing MECo's frozen distribution rates at
the end of the Rate Cap Period against the distribution rates of other utilities
in the northeast. Also, during the Rate Cap and Rate Index Periods, the Rate
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Plan assures that any merger-related costs by ratepayers will not exceed
ratepayer benefits, because during these two periods, recovery of acquisition
premiums and transaction costs associated with the mergers can only be derived
from savings created through synergies from the consolidation of MECo/EECo and
NEES/National Grid. Therefore, the Rate Plan is consistent with the "no net
harm" standard.
With respect to the merger's effect on service quality, the Department
determined that it is necessary to implement a service quality plan to ensure
ratepay ers experience no degradation of service following the merger. The
service quality plan complies with G.L.c. 164, section 1E, but is nevertheless
subject to modification pursuant to any generic performance-based program that
may be authorized by the Department.
Referring to societal costs, the Department found that while the
merger will cause workforce reductions, these costs will be balanced by the
benefits of the merger and Rate Plan. The Petitioners represent that they have
reached agreement with their unions, that most of the reductions will be by
attrition and voluntary early retirement, and that new job opportunities will
become available. The Department has required three annual reports detailing the
Petitioners' displaced workers assis tance efforts.
With respect to the distribution of resulting costs and benefits
between shareholders and ratepayers, benefits are shared with ratepayers during
the Rate Plan. During both the Rate Cap and Rate Index period, ratepayers will
benefit from lower distribution rates without the risk that costs of the merger
will exceed benefits. The "Earning Savings" calculation, described in Section
II.E., is structured to ensure that MECo only would be permitted to include
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merger-related costs in its distribution rates after the Rate Index Period to
the extent savings are realized as a result of the merger. During the Earned
Savings Period, any recovery of acquisition premiums and transaction costs will
depend entirely on actual cost savings achieved, measured against the agreed
upon rate levels in effect as of calendar year 2009. The Depart ment finds that
shareholders bear the risk that merger-related costs might exceed merger-related
savings and that the merger will result in significant benefits for ratepayers.
Based on our evaluation of the costs and benefits associated with the
merger, the Department finds that the public interest would be at least as well
served by approval of the proposed merger as by its denial, i.e., there is no
net harm to ratepayers. Therefore, the proposed merger is consistent with the
public interest. Accord ingly, the Department approves the merger between MECo
and EECo, and NEP and Montaup, and the Rate Plan, under the term of G.L. c. 164,
sections 94 and 96.37
V. STOCK ISSUANCE
A. Introduction
MECo and NEP are direct subsidiaries of NEES, a holding company
subject to the Public Utility Holding Company Act of 1935 ("PUHCA") (Exh. MEC-I,
Vol. 1, at 177). Similarly, EECo is a direct subsidiary of EUA, which is itself
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37 The Companies' original filing of April 30, 1999, satisfies section 96's
requirement of shareholders' votes approving the "merger and the terms
thereof." (Exh. MEC-1, Vol. 1, exh. MEI-1). If the merging companies decide
to proceed with the transaction in accordance with this Order's terms, then
they must file a representation that the original shareholders' votes are
legally sufficient as to the "merger and the terms thereof" no encompass
the terms of the Rate Plan Settlement or that, alternatively, votes later
taken have approved the terms of the merger set out in the Rate Plan
Settlement.
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a holding company subject to PUHCA (id.). At the time of the filing, Montaup was
a direct subsidiary of EECo and an indirect subsidiary of EUA. In its
Settlement, EAU requested approval to transfer its ownership of the common and
preferred stock and/or bonds of Montaup to EUA and seeks approval of the
disposition of Montaup's securities to EUA (Settlement at 32). In the interim,
the Department approved the transfer of EECo's interest in its subsidiary
Montaup to EUA, thereby causing Montaup to become a wholly-owned, first-tier
subsidiary of EUA. Eastern Edison Company, D.T.E. 99-67 (2000). NEES owns 100
percent of the common stock of MECo and NEP, and UA owns 100 percent of the
common stock of EECo (Exh. MEC-1, Vol. 1, at 177).
1. Merger of MECo and EECo
To effect the MECo and EUA merger, MECo requests approval: (1) under
G.L. c. 164, sections 14, 18, 19, and 99 to issue up to $78,108,558 of
additional common stock; (2) under G.L. c. 164 sections 14, 15A, 16, 18, and 19,
to issue up to $30 million of preferred stock and up to $40 million of bonds or
other evidences of indebtedness; and (3) under G.L. c. 164, section 15 to except
the sale of bonds from the public bidding requirements (Settlement at 33;
SRR-DTE-18, Supp. 1). NEES states that this request is not an attempt to raise
new funds, but is only a paper transaction to formalize the consolidation of
EECo's capitalization with and into MECo's capitalization (Tr. 2, at 195).
MECo explains that it would issue preferred stock to EECo stockholders
in exchange for their existing preferred stock (Exh. MEC-1, Vol. 1, at 178). The
Company further explains that because MECo is a larger company than EECo with
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higher credit ratings, MECo is able to access capital markers at rates generally
lower than those of EECo.38 The total savings that would be realized as EECo's
debt is refinanced would be approximately $300,000 to $400,000 per year (id.).
2. Merger of NEP and Montaup
To effect the merger, NEP requests approval under G.L. c. 164, section
14, 18, 19, and 99 to issue up to $60,100,000 of additional capital stock to
consummate the NEP/Montaup merger (Settlement at 32; SRR-DTE-18, Supp. 1). NEES
states that this request is not an attempt to raise new funds, but it is only a
paper transaction to formalize the consolidation of Montaup's capitalization
with and into NEP's capital ization (Tr. 2, at 195).
B. Standard of Review
In order for the Department to approve the issuance of stock, bonds,
coupon notes, or other types of long-term indebtedness39 by an electric or gas
company, the Department must determine that the proposed issuance meets, among
other requirements, two tests. First, the Department must assess whether the
proposed issuance is reasonably necessary to accomplish some legitimate purpose
in meeting a company's service obligations, pursuant to G.L. c. 164, section 14.
Fitchburg Gas & Electric Light Company v. Department of Public Utilities, 395
Mass. 836, 842 (1985) ("Fitchburg II"), citing Fitchburg Gas & Electric Light
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38 MECo is rated "A1" by Moody's Investors Service, "A +" by Standard and
Poor's and "AA-" by Duff & Phelps Credit Rating Company. EECo's ratings are
"Baa1+," and "A-," respectively (Exh. MEC-1, Vol. -1, at 179).
39 Long-term refers to periods of more than one year after the date of
issuance. G.L. c. 164, section 14.
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Company v. Department of Public Utilities, 394 Mass. 671, 678 (1985) ("Fitchburg
I"). Second, the Department ordinarily must determine whether a company has met
the net plant test.40 Colonial Gas Company, D.P.U. 84-96 (1984).
The Court has found that, for the purposes of G.L. c. 164, section
14, "reasonably necessary" means "reasonably necessary for the accomplishment of
some purpose having to do with the obligations of the company to the public and
its ability to carry out those obligations with the greatest possible
efficiency." "Fitchburg II at 836, citing Lowell Gas Light Company v. Department
of Public Utilities, 319 Mass. 46, 52 (1946). In cases where no issue exists
about the reasonableness of manage ment decisions regarding the requested
financing, the Department limits its section 14 review to the facial
reasonableness of the purpose to which the proceeds of the proposed issuance
will be put. Canal-Electric Company, et al., D.P.U. 84-152, at 20 (1984); see,
e.g., Colonia Gas Company, D.P.U. 90-50, at 6 (1990). The Fitchburg I and II and
Lowell Gas cases also established that the burden of proving that an issuance is
reasonably necessary rests with the company proposing the issuance, and that the
Department's authority to review a proposed issuance "is not limited to a
'perfunctory review,'" Fitchburg I at 678; Fitchburg II at 842, citing Lowell
Gas at 52. Where issues concerning th prudence of a company's capital financing
have not been raised or adjudicated in a proceeding, the Department's decision
in such a case does not represent a determination that any specific project is
economically benefi cial to a company or to its customers. In such
circumstances, the Department's determination in its Order may not in any way be
construed as ruling on the appropriate ratemaking treatment to be accorded any
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40 The net plant test is derived from G.L. c. 164, section 16.
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costs associated with the proposed financing. See, e.g., Boston Gas Company,
D.P.U. 95-66, at 7 (1995).
Regarding the net plant test, a company is ordinarily required to
present evidence that its net utility plant (original cost of capitalizable
plant less accumulated depreciation) is equal to or exceeds its total
capitalization (the sum of its long-term debt, preferred stock, common stock
outstanding, including premium on capital stock, other paid-in capital but
excluding retained earnings) and will continue to do so after the proposed
issuance. Colonial Gas Company, D.P.U. 84-96, at 5; New England Power Company,
D.P.U. 92-189, at 7 (1992). If the Department determines at that time that the
fair structural value of the net plant and land and the fair market value of the
nuclear fuel, gas or fossil fuel inventories owned by the company are less than
its outstanding debt and stock, it may prescribe such conditions and
requirements as it deems best to make good within a reasonable time the
impairment of the capital stock. G.L. c. 164, section 16.
Pursuant to G.L. c. 164, section 15, an electric or gas company
offering long-term bonds or notes with a face amount in excess of $1 million and
payable at periods of more than five years after the date thereof must invite
purchase proposals through newspaper advertisements. G.L. c. 164, section 15.
The Department may grant an exemption from this competitive bidding requirement
if the Department finds that an exemption is in the public interest. G.L. c.
164, section 15.
The Department has allowed an exemption from the advertising
requirement where there has been a measure of competition in private placement.
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See, .e.g, Western Massachusetts Electric Company, D.P.U. 88-32, at 5 (1988);
Eastern Edison Company, D.P.U. 88-127, at 11-12 (1988); Berkshire Gas Company,
D.P.U. 89-12, at 11 (1989). The Department also has found that it is in the
public interest to grant an exemption from the advertising requirement when a
measure of flexibility is necessary in order for a company to enter the bond
market in a timely manner. See, e.g., Western Massachusetts Electric Company,
D.P.U. 88-32, at 5. However, G.L. c. 164, section 15 requires advertising as the
general; and waiver cannot be automatic but must be justified whenever
requested.
Pursuant to G.L. c. 164, section 15A, a company is required to sell
long-term bonds, debentures, notes, or other evidence of indebtedness at no less
than the par value unless the sale at less than par value is found by the
Department to be in the public interest. G.L. c. 164, section 15A; see, e.g.,
Boston Gas Company, D.P.U. 92-127, at 8 (1992); Boston Edison Company, D.P.U.
91-47, at 15 (1991).
Pursuant to G.L. c. 164, section 18, shares of capital stock of a gas
or electric company shall be offered at such price, not less than par, as its
directors may fix.
Pursuant to G.L. c. 164, section 19, a gas or electric company may
issue an unissued shares of capital stock from time to time under its articles
of incorporation in such manner, at such times, upon such terms, and at such
price not less than par, except as otherwise authorized by the Department as
provided for in G.L. c. 164, section 18.
Pursuant to G.L. c. 164, section 99, the purchasing or consolidated
company may increase its capital stock and issue bonds, and exchange its
securities for those of the selling or merged company; but the aggregate amount
of the capital stock and the aggregate amount of debt, respectively, of the
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consolidated companies shall not, by reason of such consolidation, be increased.
A company must present evidence that its combined capital stock (common stock,
preferred stock, and premium on capital stock) and the combined amount of debt
is the sum of the accounts of the separate entities prior to the merger.
C. Analysis and Findings
1. Section 14
The Petitioners have requested that the Department authorize increases
in MECo's capital stock, preferred stock and bonds, and NEP's capital stock. The
Department finds that the issuance of up to $78,108,558 of additional capital
stock, $30 million of preferred stock and up to $40 million of bonds or other
evidences of indebtedness, is a necessary mechanism for the purpose of
consolidating MECo and EECo and then effecting the proposed merger. Therefore,
the Department finds in accordance with G.L. c. 164, section 14, that the
proposed stock and bond issuance is reasonably necessary on its face because it
is necessary to accomplish the surviving company's service obligation. The
Department also finds that the issuance of up to $60,100,000 of additional
capital stock, is a necessary mechanism for the purpose of consolidating NEP and
Montaup and then effecting the proposed merger. Therefore, the Department finds
in accordance with G.L. c. 164, section 14, that the proposed stock issuance is
reasonably necessary on its face because it is necessary to accomplish the
surviving company's service obligation. See Colonial Gas Company, D.P.U. 90-50,
at 6; Canal Electric Company, et al., D.P.U. 84-152, at 20.
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2. Section 15
The purpose behind G.L. c. 164 section 15 is to promote a competitive
debt market, with the intent of creating lower debt costs for utilities and
subsequent savings to ratepayers. In this case, MECo will assume the obligation
for repayment of EECo's indebtedness, including debt issues (Settlement at 34).
The bonds which MECo will issue would be tendered to EECo's current bondholders
in exchange for EECo's currently outstanding bonds. Therefore, the conditions
under which advertising and bidding would be appropriate are not applicable
here. The transactions proposed here are transparent, and no public protective
purpose would be served by imposing the advertising and bidding requirements
contained in G.L. c. 164, section 15. In fact, the imposition of advertising and
bidding requirements here may serve to delay a merger that has been found to be
in the public interests. Accordingly, the Department finds that it is in the
public interest to exempt MECo from the advertising and biding requirements of
G.L. c. 164, section 15.
3. Section 16
With regard to the net plant rest requirement of G.L. c. 164, section
164, section 16, the purpose of the net plant test is to protect investors from
watering of stock. The Petitioners have demonstrated that they are not seeking
additional funds but that this transaction is only a paper transaction to
formalize the consolidation of EECo's capitalization with and into MECo's
capitalization and the consolidation of Montaup's capitalization with and into
NEP's capitalization. The balance sheet of the combined entity shows the sum of
the balance sheets of the separate entities prior to the subsidiary merger,
demonstrating the petitioners are not seeking additional funds (Exh. MEC-1, Vol.
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1, exhs. JKZ-3-JKZ-6). Application of the net plant test has no place in a
transaction as patent and transparent as the instant one. Berkshire Gas Company,
D.T.E. 98-61/87, at 29 (1998). Therefore, the Department finds it unnecessary to
impose further conditions on the Petitioners under G.L. c. 164, section 16.
4. Sections 15A, 18 and 19
The Petitioners state that at the time of the filing, the Companies
had not determined the optimum form of the number of common and preferred shares
to be outstanding immediately following the merger (SRR-DTE-16). Pursuant to
G.L. c. 164, section 15A, 18, 19 the Department directs the petitioners that any
sale of stocks or bonds authorized in this Order shall be sold at a price not
less than par.
5. Section 99
Having filed pursuant to G.L. 164, section 99, the Petitioners must
demonstrate that the aggregate amount of MECo's and EECo's common stock and
preferred stock including premium on capital stock, and bonds (long-term debt)
has not increased. In its filing, the Petitioners submitted the 1998 balance
sheets for each entity prior to the merger and a pro forma balance sheet
illustrating the balance sheets for MECo and EECo post-merger (Exh. MEC-1, Vol.
1, exhs. JKZ-1-JKZ-3). The combined balance sheet shows that MECo's and EECo's
common equity balance is simply the sum of capital stock balances of EECo and
MECo just prior to the merger which indicates that the Petitioners are not
seeking additional funds. However, the defini tion of capital stock embodied in
G.L. c. 164, section 99 pertains to common equity and preferred stock, exclusive
of retained earnings and paid-in capital; in other words, common stock,
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preferred stock, and premium on capital stock. As the balance sheets submitted
in the filling do not show the breakdown of the common equity account, the
Department reviewed MECo's and EECo's 1998 Federal Energy Regulatory Commission
("FERC") Form 1.41 In its review of each FERC Form 1, the Depart ment finds that
the Petitioners are requesting an amount equal to EECo's common stock issued of
$72,283,925 and the premium on capital stock of $5,824,633 for a total of
$78,108,558. The Department also finds that the Petitioners are requesting an
amount equal to EECo's preferred stock balance of $30,000,000 and an amount less
than EECo's bond balance of $163,000,000. Therefore, the Department finds
pursuant to G.L. c. 164, section 99, that the aggregate amount of MECo's and
EECo's capital stock and long-term debt has not been increased.
The Department also reviewed NEP's and Montaup's FERC Form 1 and finds
that the Petitioners' request to issue $60,100,00 of capital stock is equal to
Montaup's common stock of $58,600,000 and preferred stock of $1,500,000. The
Department finds pursuant to G.L. c. 164, section 99, that the aggregate amount
of NEP and Montaup's capital stock has not been increased.
The Department notes that the amounts of capital stock and bonds are
based on a December 31, 1998 balance. To the extent the balances decreases at
the point in time of the merger, in compliance with G.L. c, 164, section 99, the
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41 In the absence of evidence presented by proponents of the Rate Plan Settle
ment on this important point, the Department must take administrative
notice of MECo's, EECo's, NEP's, and Montaup's FERC Form 1. No party
objected to the Department's remedying the parties' oversight after the
record had formally closed.
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aggregate amount of the capital stock and the aggregate amount of the debt of
the petitioners shall not be increased, by reason of the merger and completed
transaction.
VI. CONFIRMATION OF FRANCHISE RIGHTS
A. Introduction
MECo requested Department confirmation that it will have all the
franchise rights and obligations that were previously held by EECo, and that
further legislative action pursuant to G.L. c. 164, section 21, is not necessary
to consummate the merger (Settlement at 33). Similarly, NEP requested Department
confirmation that it will have all the franchise rights and obligations that
were previously held by Montaup, and that further legislative action pursuant to
G.L. c. 164, section 21, is not necessary to consummate the merger (id. at 31).
B. Analysis and Findings
The operative statute limiting the transfer of utility franchises is
found in G.L. c. 164, section 21, which states:
A corporation subject to this chapter shall not, except as to
otherwise expressly provided, transfer its franchise, lease its works
or contract with any person, association or corporation to carry on
its works, without the authority of the general court [Emphasis
added].
The Department has determined that approval of corporate mergers
pursuant to G.L. c. 164, section 96, obviates the n3ed for legislative approval
under G.L. c. 164, section 21. Haverhill Gas Company, D.P.U. 1301, at 4 (1984).
The Department has stated that an action properly approved under G.L. c. 154,
section 96, would not require separate authorization of the General Court, since
the General Court itself authorized the Department to otherwise approve such
transactions. Id. at 5. The Department finds that, on the effective date of the
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merger, MECo and NEP will have and enjoy all the powers, rights, locations,
licenses, privileges and franchises and be subject to all the duties,
liabilities and restrictions of EECo and Montaup, respectively, pursuant to G.L.
c. 164, section 96.
Accordingly, the Department hereby ratifies and confirms that all the
fran chise rights and obligations currently held by EECo shall continue with
MECo after the consummation of the merger and all the franchise rights and
obligations currently held by Montaup shall continue with NEP after the
consummation of the merger.
VII. APPROVAL FOR ASSUMPTION OF OBLIGATIONS
A. Introduction
The Petitioners have requested approval for MECo and NEP to assume
certain outstanding and preexisting obligations of EECo and Montaup,
respectively, pursuant to G.L. c. 164, section 17A, if the Department considers
it necessary under this statute (Settlement at 32, 34). EECo has an aggregate of
$70 million of securities outstanding that MECo plans to assume as part of the
merger, consisting of $40 million of long-term pollution control revenue bonds
and $30 million of preferred stock (Exh. DTE-1-44). The long-term debt matures
in 2008 and is not callable prior to maturity. The preferred stock is not
callable until 2003 (id.). MECo will issue preferred stock to holders of EECo
stock in exchange for their existing preferred stock (Exh. MEC-1, Vol. 1, at
178). The interest rate on the debt is 5.875 percent and the dividend rate on
the preferred stock is 6.625 percent (Exh. DTE-1-44). MECo and NEP will also
assume obligations of EECo and Montaup, respectively, to trade creditors,
employees, and others incurred in the ordinary course of business (id.).
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B. Analysis and Findings
The petitioners have requested approval for the assumption of EECo's
and Montaup's outstanding and preexisting obligations to the extent that such
approvals are necessary under G.L. c. 164, section 17A. This statute applies to
the guarantee of obligations by a utility of another company, and as a result of
the merger, EECo and Montaup will no longer be separate companies, but rather
absorbed by MECo and NEP, respectively. Therefore, the Department concludes that
G.L. c. 164, section 17A is not applicable here.
Notwithstanding the above, the record demonstrates that the assumption
of these liabilities is required under the purchase method of accounting42 and
is reason ably necessary to accomplish some legitimate purpose in meeting MECo's
and NEP's service obligation (Settlement at 0; SRR-DTE-16). See New England Elec
tric/Nantucket Electric Company, D.P.U. 95-67, at 12 (1995). Therefore, the
Department approves the Petitioners' request.
VIII. INTERIM FINANCING ARRANGEMENT
A. Introduction
The Petitioners have requested that for the period between the NEES
acquisi tion of EUA and the merger of the subsidiaries, that the EUA-regulated
subsidiaries, Montaup, EECo, Blackstone Valley Electric Company, Newport
Electric Corpora tion, and EUA Service Corporation, be able to participate in
the NEES Moneypool as borrowers and investors (Settlement at 34). In addition,
the Petitioners have re quested to add to the NEES Moneypool as lenders only all
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42 Purchase accounting is used in purchases that invoice cash or stock and
requires companies making the acquisition to write off goodwill charges
over a period not to exceed 40 years.
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other EUA and NEES affiliates. The NEES Moneypool allows for the excess cash of
affiliated companies to meet the short-term borrowing requirements of other
members, thereby reducing the outstanding borrowing needs and expenses of the
NEES subsidiaries (id.). After the closing of the operating company mergers, the
short-term financing needs of the former EUA subsidiaries will be incorporated
in the needs of the NEES operating companies that survives each merger (Exh.
DTE-1-45). The Petitioners maintain that the NEES Moneypool provides for
reductions in transaction and administrative costs that would otherwise be
incurred if the affiliates were to invest or borrow in the public markets and
opportunities for smaller companies who do not have the ability to readily
access public markets (Exh. MEC-1, Vol. 1, at 183). Furthermore, the Petitioners
maintain that the lines of credit the EUA companies have in place with various
banks could be cancelled sooner and the associated fees would be eliminated
(id.).
The petitioners maintain that there are no risks or uncertainties
related to this proposal because it would not be implemented until after the
parent companies had merged, at which point the operating companies would merge.
The Petitioners state that the savings associated with this proposal have been
incorporated in the rate plan proposal as part of the Settlement (Exh.
DTE-1-45).
B. Standard of Review
Pursuant to G.L. c. 164, section 17A, a gas or electric company must
obtain written Department approval in order to "loan its funds to, guarantee or
endorse the indebt edness of, or invest its funds in the stock, bonds,
certificates of participation or other securities of any corporation,
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association, or trust." The Department has required that such proposals must be
"consistent with the public interest," that is, a section 17a proposal will be
approved if the public interest is at least as well served by approval of the
proposal as by its denial. NIPSCO-Bay State Acquisition at 55.
The Department has stated that it will interpret the facts of each
section 17A case on their own merit to make a determination that the proposal is
consistent with the public interest. Id. The Department will base our
determination on the totality of what can be achieved by, rather than on a
determination of any single gain that could be derived from, the proposed
transaction. Id.; see Boston Edison Company, D.P.U. 850, at 7. Thus, the
Department's analysis must consider the overall anticipated effect on ratepayers
of the potential costs and benefits of the proposal. Bay State Gas Company,
D.T.E. 98-31, at 55. The effect on ratepayers may include consideration of a
number of factors, including but not limited to: the nature and complexity of
the proposal; the relationship of the parties involved in the underlying
transactions; the use of funds associated with the proposal; the risks and
uncertainties associated with the proposal; the extent of regulatory oversight
on the parties involved in the underlying transaction; and the existence of
safeguards to ensure financial integrity of the utility. Id.
C. Analysis and Findings
As part of the approval of NEES's Moneypool, the Department required
that any amendment or change in the funds pooling agreement be approved by the
Department prior to its implementation. New England Power com pany/Massachusetts
Electric Company, D.P.U. 589, at 4 (1981). The Department has approved
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amendments to other funds pooling agreements, including the addition of
participants to these fund pools. New England Electric/Nantucket Electric
Company, D.P.U. 95-67, at 15-16 (1995); Massachusetts Electric Company/New
England Hydro-Transmission Electric Company, Inc./New England Service, D.P.U.
91-133, at 4 (1992); New England Power Company, D.P.U. 88-166, at 2 (1989).
Having filed pursuant to G.I. 164, section 17A, the Petitioners must
demonstrate that the proposal is consistent with the public interest. The
Petitioners maintain that the NEES Moneypool affords the participants a
short-term cash management tool which will lower their borrowing costs by
enabling them to avoid requisite fees and compensating balances as normally
required by more conventional methods of financing. The Petitioners maintain
that these savings have been accounted for and inure to the benefits of the
participant ratepayers in the proposed rate plan (Exh. DTE-1-45). The addition
of the EUA subsidiaries as participants in the NEES Moneypool would provide the
subsidiaries with the opportunity to gain access to financing sources to meet
its short-term borrowing needs at a lower cost. The Department finds that
allowing EUA subsidiaries to participate in the NEEs Moneypool at both investors
and borrowers is in the public interest. The Department also finds that allowing
all other current EUA and NEEs affiliates, including EUA Cogenx Corporation and
EUA Ocean State Power, to participate in the NEES Moneypool as lenders only is
in the public interest.
The Department's decision does not represent a determination that the
financing arrangement is economically beneficial to the Petitioners or its
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customers nor is this determination in any way to be construed as a ruling
relative to the appropriate ratemaking to be accorded any costs associated with
the financing request.
IX. PARTIES' CLAIM OF PRIVILEGE
A. Introduction
Section VI.C.2. of the Rate Plan Settlement states that settlement
discussions were "concluded on the explicit understanding that any and all
offers of prior Settlement and discussions relating thereto are and shall be
privileged and are not to be used in connection with the present proceeding or
any other proceedings" (Settle ment at 36). In response to an information
request about this claim of evidentiary privilege, the petitioners stated that
no "mediator," as that term is used in G.L. c. 233, section 23C, and in Boston
Gas Company, D.P.U. 88-67, at 23-25 (1988), was engaged to negotiate or mediate
the Settlement (Exh. DTE-1-112). Apart from asserting their privilege claim, the
signatories offered no explanation of or argument for its basis.
B. Analysis and Findings
As we stated in Boston Gas Company, D.P.U. 88-67, at 15, a claim for
exclusion of compromise offers, and statements made in related negotiations,
from proceedings before this agency cannot be based on privilege.43 Pursuant to
the Administrative Procedure Act, ("APA"), G.L. c. 30A, section 11(2), the
Department need not follow the traditional rules of evidence, except in matters
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43 "An evidentiary privilege entitles the holder of the privilege, under
certain circumstances, to withhold competent evidence and to prevent others
from disclosing such evidence." Boston Gas Company, D.P.U. 88-67, at 15,
citing P.J. Liacos, Massachusetts Evidence 174 (5th Ed. 1981 & Supp. 1985).
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of privilege. Id. at 16. While this agency must follow recognized statutory and
common law rules of evidentiary privilege, the Department is not at liberty
itself to argument the law of privilege. The courts themselves customarily
"leave the creation of evidentiary privileges to legislative determination."
Three Juveniles v. Commonwealth, 390 Mass. 357, 360 (1983). A fortiori, an
administrative agency, the creature of statute, may not trench on either
legislative or judicial authority over privilege. In Boston Gas Company, D.P.U.
88-67, at 24, the Department instructed parties who engage in compromise
negotiations material to a Department proceeding, and who wish to have such
discussions shielded from Department inquiry, to make a motion in limine, either
jointly or individually, to exclude from evidence reference to all or part of
the negotiations.44 In the alternative, the parties may employ a mediator,
qualified under G.L. c. 233, section 23C, and thereby seek to raise a claim of
statutory privilege that may meet the requirements of G.L. c. 30A, section
11(2).45
Although the APA does not speak to the evidentiary status of
compromise offers, the Department does regard fostering compromise and
settlement in appropriate cases before the agency as an important administrative
objective. Id. at 16. Accordingly, in D.P.U. 88-67, at 24, the Department
instructed parties who engage in compromise negiotiations material to a
Department proceeding, and who wish to have such discussions shielded from
Department inquiry, to make a motion in limine, either jointly or individually,
to exclude from evidence reference to all or part of the negotiations.44 In the
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44 Standards for granting such a motion are left to development through actual
cases. Boston Gas Company, D.P.U. 88-67, at 24. In granting such a motion,
exclusion will be limited to admissions of the party making a compromise
offer as to the validity of another party's claim in the proceeding, not to
collateral or independent facts. Id. at 24-25.
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alternative, the parties may employ a mediator, qualified under G.L. c. 233,
section 23C, and thereby seek to raise a claim of statutory privilege that may
meet the requirements of G.L. c. 30A, section 11(2).45
Although we do not in this present docket inquire into the
negotiations leading to the Settlement, the claim of evidentiary privilege
asserted in the Rate Plan Settlement cannot be recognized. Moreover, the
Department does not intend that acceptance of the overall settlement containing
this claim may in any way be construed as satisfying the precondition for the
exemption from the Public Records law, G.L. c. 66, section 10, as contained in
G.L. c. 4, section 7, cl. Twenty-sixth(a), for any negotiation documents in the
custody of any other agency subject to G.L. c. 66.46
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45 "'[M]ediator' shall mean a person not a party to a dispute who enters into
a written agreement with the parties to assist them in resolving their
disputes and has completed at least thirty hours of training in mediation
and who either has four years of professional experience as a mediator or
is account able to a dispute resolution organization which has been in
existence for at least three years or one who has ben appointed to mediate
by a judicial or governmental body." G.L. c. 233, section 23C. A party
whose negotiation repre sentative is a non-attorney may be in particular
need of the protection that use of a statuary mediator may afford, for that
party may not be able to raise a colorable claim even of attorney-client
privilege, let alone a privilege to exclude evidence. See Foster v. Hall,
29 Mass. (12 Pick.) 89 (1831). "Privi lege" is a term of legal art, whose
implications a non-attorney representative of a party may not fully
appreciate.
46 G.L. c. 4, section 7, cl. Twenty-sixth, provides for exemptions from the
definition of "public records" referred to in G.L. c. 66, section 10(a).
Clause Twenty-sixth (a) exempts materials and data "specifically or by
necessary implication ex cluded from disclosure by statute." No implication
of exemption in satisfac tion of clause Twenty-sixth (a) may fairly be
assumed from the Department's action in the proposed Rate Plan Settlement,
for none is intended. Attorney General v. Assistant Commissioner of the
Real Property Department of Boston, 380 Mass. 623, 625 (1980) (":Given the
statutory presumption in favor of disclosure, exemptions must be strictly
construed).
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Department practice on this point has been clear since 1988. We take
this opportunity to remind parties to this and future cases the risks they run
by ignoring this long-established practice.
X. ORDER
Accordingly, after due notice, hearing and consideration, it is
ORDERED: That pursuant to G.L. c. 164, section 96, the merger of
Eastern Edison Company into Massachusetts Electric Company is hereby approved;
and it is
FURTHER ORDERED: That pursuant to G.L. c. 164, section 96, the merger
of Montaup electric Company into new England Power Company is hereby approved;
and it is
FURTHER ORDERED: That pursuant to G.L. c. 164, section 96, and subject
to the terms or conditions in this Order, the Rate Plan Settlement dated
November 29, 1999, filed by certain of the parties to this investigation as a
substitute for the petition field on April 30, 1999, is hereby determined to be
consistent with the public interest; and it is
FURTHER ORDERED: That pursuant to G.L. c. 164, section 94, and subject
to the terms or conditions of this Order, the Rate Plan Settlement dated
November 29, 1999, is hereby approved; and it is
FURTHER ORDERED: That the Department hereby approves and autho rizes
for Massachusetts Electric Company the issuance of up to $78,108,558 of common
stock; $30 million of preferred stock and $40 million of bonds or other
evidences of indebtedness, the aggregate amount of the capital stock and the
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aggregate amount of the debt shall not to be increased by reason of the merger
and completed transaction pursuant to G.L. c. 164, section 99; and it is
FURTHER ORDERED: That the Department hereby approves and autho rizes
for New England Power Company the issuance of up to $60,100,000 of additional
capital stock, the aggregate amount of the capital stock and the aggregate
amount of the debt shall not to be increased by reason of the merger and
completed transaction pursuant to G.L. c. 164 section 99; and it is
FURTHER ORDERED: That all stocks and bonds shall be offered at not
less than par; and it is
FURTHER ORDERED: That Massachusetts Electric Company's issuance and
sale of bonds without inviting proposals for the purchase thereof by publication
in certain designated newspapers, are in the public interest and such issuance
and sale shall be exempt from the provisions of G.L. c. 164 section 15; and it
is
FURTHER ORDERED: That the Department hereby approves in accordance
with the provisions of G.L. c. 164, section 17A, the participation of Montaup
Electric Company, Eastern Edison Company, Blackstone Valley Electric Company,
Newport Electric Corporation and Eastern Utilities Associates Service
Corporation in the New England Electric System Moneypool as borrowers and
investors; and it is
FURTHER ORDERED: That the Department hereby approves in accordance
with the provisions of G.L. c. 164, section 17A, the participation of all other
current Eastern Utilities Associates and New England Electric System affiliates
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including, Eastern Utilities Associates Cogenex Corporation and Eastern
Utilities Associates Ocean State Power in the New England Electric System
Moneypool as lenders only; and it is
FURTHER ORDERED: That the Department hereby approves in accordance
with the provisions of G.L. c. 164, section 17A, the participation of all other
current Eastern Utilities Associates and New England Electric System affiliates
including, Eastern Utilities Associates, Cogenex Corporation and Eastern
Utilities Associates Ocean State Power in the New England Electric System
Moneypool as lenders only; and it is
FURTHER ORDERED: That in all other respects, our Orders in Massachu
setts Electric Company/New England Hydro/Transmission Electric Company, Inc./New
England Power Company, D.P.U.91-133 (1992); Massachusetts Electric Company/New
England Power Company, D.P.U. 589 (1981); Massachusetts Electric Company/New
England Power Company, D.P.U. 589-A (1982); Massachusetts Electric Company/New
England Power Company, D.P.U. 589-B (1983); Massachusetts Electric Company/New
England Power Company, D.P.U. 86-175 (1986); and New England Power Company,
D.P.U. 88-166 (1989) shall remain in full force and effect; and it is
FURTHER ORDERED: That a copy of the journal entries, or a schedule
summarizing such entries, recording the effect of the merger shall be filed with
the Department upon consummation of the merger; and it is
FURTHER ORDERED: That the Secretary of the Commission notify the
Secretary of State of the issuance of stock and deliver a copy of this Order to
the Secretary of State within five business days hereof; and it is
76
<PAGE>
FURTHER ORDERED: That Massachusetts Electric Company, Nantucket
Electric Company, Eastern Edison Company, New England Power Company, Montaup
Electric Company, New England Electric System, and Eastern Utilities Associates
shall comply with all directives contained in this Order.
By Order of the Department,
/s/ James Connelly
----------------------------------------
James Connelly, Commissioner
/s/ W. Robert Keating
----------------------------------------
W. Robert Keating, Commissioner
/s/ Paul B. Vasington
----------------------------------------
Paul B. Vasington, Commissioner
A true copy
Attest
/s/ Eugene J. Sullivan, Jr.
----------------------------------------
/s/ Mary L. Cottrell Eugene J. Sullivan, Jr., Commissioner
- --------------------
Mary L. COTTRELL
Secretary
77
<PAGE>
Appeal as to matters of law from any final decision, order or ruling of the
Commis sion may be taken to the Supreme Judicial Court by an aggrieved party in
interest by the filing of a written petition praying that the Order of the
Commission be modified or set aside in whole or in part.
Such petition for appeal shall be filed with the Secretary of the Commission
within twenty days after the date of service of the decision, order or ruling of
the Commis sion, or within such further time as the Commission may allow upon
request filed prior to the expiration of twenty days after the date of service
of said decision, order or ruling. Within ten days after such petition has been
filed, the appealing party shall enter the appeal in the Supreme Judicial Court
sitting in Suffolk County by filing a copy thereof with the Clerk of said Court.
(Sec. 5, Chapter 25, G.L. Ter. Ed., as most recently amended by Chapter 485 of
the Acts of 1971).
78
<PAGE>
APPENDIX
The following provides details concerning each of the service quality
indices and the corresponding penalty and incentive benchmarks.
Frequency of Outages
An outage is defined as the loss of electric service to more than one
customer for more than one minute (Exh. DTE-114, Att. 10, at 3). The Frequency
of Outage index measures the frequency of outages per customer, per year (id.).
<TABLE>
<CAPTION>
Frequency of Outages Penalty/Incentive Transition Penalty/Incentive
- --------------------- ----------------- ----------------------------
<S> <C> <C>
1.46 $2,000,000 $3,000,000
1.35 $500,000 $750,000
1.24 $0 $0
1.13 $500,000 $750,000
1.02 $2,000,000 $3,000,000
</TABLE>
Duration of Outages
The Duration of Outage index measures the duration of outages (in
minutes) (id.).
<TABLE>
<CAPTION>
Duration of Outages Penalty/Incentive Transition Penalty/Incentive
- ------------------- ----------------- ----------------------------
<S> <C> <C>
113.84 $2,000,000 $3,000,000
101.59 $500,000 $750,000
89.34 $0 $0
77.09 $500,000 $750,000
64.84 $2,000,000 $3,000,00
</TABLE>
Distribution Line Losses
- ------------------------
Distribution line losses are defined as the difference between the
total energy delivered into the distribution system and the total energy sold to
retail customers (id.). The index is formed by comparing power delivered through
the system to the amount of power delivered at retail to customer locations (id.
At 5).
79
<PAGE>
<TABLE>
<CAPTION>
Distribution Line Losses47 Penalty/Incentive
- ------------------------ -----------------
<S> <C>
N/A $1,000,000
N/A $250,000
3.98% $0
N/A $250,000
N/A $1,000,000
</TABLE>
Customer Satisfaction
An annual survey of customers will be performed to determine the
overall level of satisfaction with the company (id. at 6). A seven point scale
(1 = poor and 7 = excellent) would be employed and the percentage of the
respondents falling into the top three categories of satisfaction would
constitute the index (id.).
<TABLE>
<CAPTION>
Percent Satisfied Penalty/Incentive Transition Penalty/Incentive
- ----------------- ----------------- ----------------------------
<S> <C> <C>
88.4% $1,000,000 $2,000,000
89.9% $250,000 $500,000
91.4% $0 $0
92.9% $250,000 $500,000
94.4% $1,000,000 $2,000,000
</TABLE>
Customer Contact Satisfaction
MECo would commission surveys of its customers who have contacted the
customer call center (id. at 7). The measurement of customer satisfaction would
be based on the top two categories of customer satisfaction on a scale where (1
= extremely dissatisfied and 7 = extremely satisfied) (id.).
<TABLE>
<CAPTION>
Percent Satisfied Penalty/Incentive
- ----------------- -----------------
<S> <C>
72.7% $1,000,000
74.8% $250,000
76.9% $0
79.0% $250,000
81.1% $1,000,000
</TABLE>
- ---------------
47 Only 1998 data are available. The data presented in the table will be
updated with 1999 data and 1997 data when further benchmarking data are
available.
80
<PAGE>
Customer Telephone Service
The Customer Telephone Service measure reflects the annual average of
calls answered within 20 seconds by customer service representatives (id. at 8).
<TABLE>
<CAPTION>
Percent Answered Penalty/Incentive
- ---------------- -----------------
<S> <C>
66.4% $1,000,000
68.4% $250,000
70.4% $0
72.4% $250,000
74.4% $1,000,000
</TABLE>
Customer Billing Service
The customer billing performance standard reflects the average percent
of meters read each month and averaged to form an annual rate (id. at 9).
<TABLE>
<CAPTION>
Percent Meters Read Penalty/Incentive
- ------------------- -----------------
<S> <C>
85.9% $1,000,000
88.6% $250,000
91.3% $0
94.0% $250,000
96.7% $1,000,000
</TABLE>
Department of Telecommunications and Energy Cases
The DTE cases index measures the number of complaint cases before the
Department per 1000 customers (id. at 10).
<TABLE>
<CAPTION>
Cases per 1000 Customers Penalty/Incentive
- ------------------------ -----------------
<S> <C>
0.96 $1,000,000
0.88 $250,000
0.80 $0
0.72 $250,000
0.64 $1,000,000
</TABLE>
81
<PAGE>
Lost Time Accident Rate
The safety performance standard would be based on a lost time accident
rate per 200,000 hours worked by company employees (id. at 11).
<TABLE>
<CAPTION>
LTA Rate Penalty/Incentive
- -------- -----------------
<S> <C>
1.98 $1,000,000
1.73 $250,000
1.48 $0
1.23 $250,000
0.98 $1,000,00
</TABLE>
Restricted Work Case Rate
The restricted work case standard would be based on the number of
restricted work cases per 2,000 hours worked by company employees (id. at 12).
<TABLE>
<CAPTION>
RW Rate Penalty/Incentive
- ------- -----------------
<S> <C>
6.93 $1,000,000
6.28 $250,000
5.63 $0
4.98 $250,000
4.33 $1,000,000
</TABLE>
The Petitioners proposed to define and collect data in the following
additional categories: transient or momentary outages, frequency distribution
of outage durations by number of customers, outages by feeder, and commercial
and industrial customer satisfaction (id. at 2). MECo would report these data to
the Department and to the parties, annually. The Settlement provides for a cap
of $250,000 in expenses for producing these data (id.).
82
STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS
DIVISION OF PUBLIC UTILITIES AND CARRIERS
100 ORANGE STREET
PROVIDENCE, RHODE ISLAND 02903
IN RE: Petition for Approval of Merger : Docket No. D-99-12
REPORT AND ORDER
On August 24, 1999, the Narragansett Electric Company
("Narragansett"), the Blackstone Valley Electric Company ("BVE") and the Newport
Electric Corporation ("Newport"), collectively (the "Companies") filed a
petition with the Rhode Island Division of Public Utilities and Carriers
("Division") seeking an approval of merger. The petition was filed pursuant to
the requirements of Rhode Island General Laws, Sections 39-3-24, 39-3-25 and
39-3-26.
The instant petition recites the following relevant rudimentary
information:
o Naragansett, BVE, and Newport are "electric distribution
companies" and "public utilities," as such terms are defined in
Title 39 of [the] Rhode Island General Laws. The Companies were
created by the General Assembly through their respective
legislatively created corporate charters.
o Naragansett provides electric distribution service in the cities
and towns of Barrington, Bristol, Charlestown, Coventry,
Cranston, East Greenwich, East Providence, Exeter, Foster,
Glocester, Hopkinton, Johnston, Little Compton, Narragansett,
North Kingstown, North Providence, Providence, Richmond,
Scituate, Smithfield, South Kingstown, Tiverton, Warren, Warwick,
Westerly, West Greenwich and West Warwick.
o BVE provides electric distribution service in the cities and
towns of Central Falls, Cumberland, Lincoln, North Smithfield,
Pawtucket, Woonsocket and a portion of Burrillville.
1
<PAGE>
o Newport provides electric distribution service in the cities and
towns of Jamestown, Middletown, Newport and Portsmouth.
o Each of the respective Companies also own transmission facilities
in Rhode Island.
o New England Electric System ("NEES") is the parent holding
company of Narragansett. Eastern Utilities Associates is the
parent holding company of both BVE and Newport.
The petition also contains an "Agreement and Plan of Merger," executed
by the Companies, wherein the details of the proposed merger are explained.
According to the Agreement and Plan of Merger:
o EUA will be merged into a special purpose subsidiary of NEES and,
as a result, EUA will become a wholly owned subsidiary of NEES
("EUA/NEES Merger"). As a result of the EUA/NEES Merger, the
Companies will become wholly owned subsidiaries of the same
parent holding company.
o As soon as practicable after the EUA/NEES Merger, BVE and Newport
will merge with and into Narragansett, leaving Narragansett as
the sole surviving entity among the three Companies
("Distribution Company Merger"). This Distribution Company Merger
is contingent upon the closing of the EUA/NEES Merger.
o As a result of the Distribution Company Merger:
(a) all of the rights, privileges, easements, powers and
franchises held or enjoyed by BVE and Newport as set forth
in their respective corporate charters will become vested in
Narragansett pursuant to Section 39-3-24 of Rhode Island
General Laws; and
(b) Narragansett will become the sole and exclusive electric
distribution company, serving the cities and towns in Rhode
Island listed . . . [above].
In support of the proposed merger, the Companies proffered the direct prefiled
testimony of Mr. Michael E. Jesanis, Senior Vice President and Chief Financial
Officer of NEES and Vice President of Narragansett, the New England Power
Company ("NEP") and the New England Power Service Company ("NEPSCO").
2
<PAGE>
In response to the filing, the Division conducted duly noticed public
hearings on January 6 and February 10, 2000. The hearings were held at the
Division's hearing room, located at 100 Orange Street in Providence. The
following counsel entered appearances:
For Naragansett: Ronald T. Gerwatowski, Esquire
For BVE: David A. Fazzone, Esquire
For the Division's
Advocacy Section: Elizabeth Kelleher, Esquire
For the Department of
Attorney General: Paul J. Roberti, Esquire1/
Mr. Michael Jesanis provided a detailed description of both the merger
of the parent companies (NEES/EUA) and the merger of the Rhode Island operating
companies (Narragansett/BVE/Newport). He also described the anticipated benefits
of the mergers.
Mr. Jesanis testified that the two mergers, taken together, "will
result in the creation of substantial benefits which can be used to provide
improved service at lower cost to customers" (Companies Exh. 3, p. 4). He
related that the mergers will "produce synergies which are typical of utilities
combinations" (Id., pp. 4-5).
- ---------------
1 The Department of Attorney General filed a motion to intervene on December
3, 1999. This motion was not opposed and consequently was approved by Rule
of the Division (See Rule 17(e) of the Division's Rules of Practice and
Procedure).
3
<PAGE>
Mr. Jesanis explained the cost savings will come from a variety of
categories. He testified that approximately 70 percent of the savings will come
from the elimination of about 310 positions from the combined organization. Mr.
Jesanis related that the reductions will take place where "significant
redundancies exist" between the two organizations (Id., p. 5). He indicated that
administrative, customer service and field operation areas will all be effected.
Mr. Jesanis testified that savings will also come from the elimination
of duplicative facilities; by realizing greater purchasing power; and the
elimination of redundant administrative costs, such as "corporate governance
expense" (Id.).
He related that further savings will result from the need to build one
rather than two sets of new information systems in the future. Mr. Jesanis
explained that after the merger a single information system can be used to
replace the older customer information systems currently used by NEES and EUA.
He stated that the cost of replacing these systems would currently be in excess
of $10 million per company (Id., p. 6).
Mr. Jesanis additionally opined that savings will also come from the
refinancing of current EUA debt. He related that the superior credit ratings of
the NEES companies will lead to financing savings. (Id.).
Mr. Jesanis conceded that a large part of the cost savings are
achievable solely by the merge of NEES and EUA. However, he contended that by
consolidating the three Rhode Island companies, savings can be maximized and
customer confusion avoided. He opined that it makes sense for the three
4
<PAGE>
companies to be merged into one legal entity because after the EUA/NEES merger
they will be "operated as a single entity" (Id.). He noted that the Companies
will otherwise incur additional costs to retain and administer their separate
legal identities.
Mr. Jesanis testified that the Division and the Public Utilities
commission ("commission") will also benefit from the merger of the Companies. He
reasoned that fewer electric distribution companies in Rhode Island will make it
easier on the Division and Commission to administer their respective regulations
and policies (Id., p. 7).
Mr. Jesanis also identified the following additional benefits in
support of the merger proposal:
o The larger company will have more resources to draw upon in the
event of storms or natural disasters;
o Customer service costs and other costs associated with
administering separate rates and maintaining separate companies
will be reduced;
o BVE and Newport customers will be provided 24 hour per day access
to customer service representatives for routine billing and
payment inquiries (currently such access is limited to 7 a.m. to
9 p.m. Monday through Saturday); and
o The consolidation will help in the development of the competitive
power supply market (Id., pp. 7 and 8).
On the last point above, Mr. Jesanis testified that the Companies believe that
the consolidation of rates for delivery service, the contiguous nature of the
expanded service territory, and one less point of contact for suppliers entering
the market here should all help to reduce barriers to entry into the competitive
supply market (Id., p. 8).
5
<PAGE>
Relative to the integration process, Mr. Jesanis discussed two goals.
He stated first that the integration process is critical to achieving the
efficiency gains upon which the transactions are predicated. Secondly, he
related that it is important to combine the NEES and EUA organizations in a way
that maintains or improves service quality (Id.).
Mr. Jesanis testified that to achieve these goals, NEES and EUA
created a transition team which was comprised of 60 sub-teams. He related that
each of these teams was charged with the task of identifying savings and
efficiency gains (Id., p. 9). He testified that these teams have now completed
their work and the Companies are ready to implement their various
recommendations (Id.).
The Division's Advocacy Section and the Department of Attorney General
each proffered one witness in response to the Companies petition filing.
The Advocacy Section's witness was identified as Mr. John K. Stutz,
whose business address is Tellus Institute, 11 Arlington Street, Boston,
Massachusetts. Mr. Stutz was qualified as an expert witness in public utility
and energy-related regulatory matters.
Mr. Stutz focused his testimony on the quality of service likely to be
provided by Narragansett if the merger were approved. In particular, Mr. Stutz
voiced concern over the potential effect the planned elimination of 310
positions would have on the Companies' future service quality (Advocacy Section
Exh. 1, p.3). Based on the concern, Mr. Stutz recommended that the Division make
its consent and approval to the merger contingent on the implementation of a
6
<PAGE>
"Service Quality Plan," designed to ensure that service quality is preserved
(Id.). Mr. Stutz contended that the plan should provide for penalties if targets
for service quality are not met (Id.).
Mr. Stutz related that there is a danger that service quality will
suffer after the merger due to the fact that EUA and NEES are already "lean
utilities" (Id., p. 5). He opined that a further reduction of 310 positions
poses a potential service quality problem. Mr. Stutz asserted that if the
service quality declines, the costs associated with Division and Commission
regulation could increase, due to increased oversight requirements. He opined
that these costs could reduce the savings realized from the efficiencies gained
by the merger. He related that any resulting increase in regulatory cost and
decrease in service quality would not be in the interest of ratepayers.
The Attorney General's witness was identified as Mr. Richard W.
LeLash, whose business address is 18 Seventy Acre Road, Redding, Connecticut.
Mr. LeLash was qualified as an expert witness in public utility financial and
regulatory matters.
Mr. LeLash testified that given the record in this proceeding, and the
data presented by the Companies in Docket No. 2930 before the Commission2,
substantial uncertainties exist regarding the merger's impact on service
reliability and customer rates. (Attorney General Exh., p. 8). Because of these
uncertainties, Mr. LeLash recommended that the Division:
- ---------------
2 Docket No. 2930 was established in response to a May 20, 1999 rate filing
made by the Companies. The filing proposes a new rate structure for the
post-merger Companies. As of this order, the docket is still pending before
the Commission.
7
<PAGE>
...defer any action on the pending merger proposal until the Companies
have made adequate commitments to ensure that the quality and
reliability of electric service will not be diminished and that rates
paid for electric service by Rhode Island customers will not be
adversely affected by the merger (Id.).
SETTLEMENT AGREEMENT
During the January 6, 2000 hearing, the parties jointly moved for a
continuation of the proceedings in the docket for the purpose of discussing a
possible settlement agreement. The parties indicated that they were attempting
to reach a comprehensive settlement agreement that could result in a dispositive
resolution to the parties' differences in the instant docket and the related
rate case pending before the Commission in Docket No. 2930, supra. The Division
verbally granted the motion on January 6, 2000.3
During a subsequent hearing on February 10, 2000 the parties
represented that a comprehensive settlement agreement had been achieved. The
parties proffered two joint exhibits as evidence of the agreement.
The first joint exhibit, entitled "Amended Stipulation and Settlement"
represents the settlement agreement reached between the parties in the
Commission docket.4 The second joint exhibit, entitled "Settlement and Joint
Request" was proffered as evidence of the parties' settlement agreement in this
proceedings.5 The latter settlement agreement is attached to this report and
order, and incorporated by reference.
- ---------------
3 1/6/00, Tr. 4-6
4 Joint Exh. 1
5 Joint Exh. 2
8
<PAGE>
The parties described the settlement reached in this docket as a
conditional agreement that hinges on the Commission's acceptance of the
settlement agreement filed by the parties in Commission Docket No. 2930. The
parties related that if "material modifications" to their agreement are ordered
by the Commission, they may seek to re-open the instant docket for further
argument to buttress their initial positions.
DIVISION FINDINGS
The Division has thoroughly examined the record in this case, and
finds that the stipulation proffered by the parties represents a fair and
reasonable resolution to the issues previously in dispute. The Division also
finds the stipulated agreement to be in the best interest of the ratepayers.
Consequently, the Division shall adopt the "Settlement and Joint Request" in its
entirety, and approve its terms as a dispositive conclusion to this merger
proceeding. Accordingly, it is
(16186) ORDERED :
1. That the August 24, 1999 petition filing by the Narragansett Electric
Company, the Blackstone Valley Electric Company and the Newport Electric
Corporation, seeking Division approval of a proposed merger agreement
between the petitioners, as modified by the settlement agreements reached
and filed during the instant proceeding and in Commission Docket No. 2930,
is hereby approved.
2. That the Division hereby adopts and approves the parties "Settlement and
Joint Request," attached herewith, in toto.
9
<PAGE>
Dated and Effective at Providence, Rhode Island on February 25, 2000.
Division of Public Utilities and Carriers
-----------------------------------------
John Spirito, Jr., Esq.
Hearing Officer
-----------------------------------------
Thomas F. Ahern
Administrator
10
<PAGE>
STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS
DIVISION OF PUBLIC UTILITIES AND CARRIERS
- ---------------------------------------------
IN RE: Petition of Narragansett Electric, )
Blackstone Valley Electric, and ) DOCKET NO. D-99-12
Newport Electric for Approval of )
Merger )
- ---------------------------------------------
SETTLEMENT AND JOINT REQUEST
The Narragansett Electric Company ("Narragansett"), Blackstone Valley
Electric Company ("BVE"), and Newport Electric Corporation ("Newport")
(collectively "Companies") hereby enter into this Settlement with the Department
of the Attorney General ("Attorney General") and the advocacy section of the
Division of Public Utilities and Carriers ("Division Advocacy Section"),
resolving all issues in this Docket.
On January 31, 2000, the Companies filed a Stipulation and Settlement
in Public Utilities Commission Docket 2930, which was amended on February 9,
2000 ("Rate Plan Settlement"). The Division of Public Utilities and Carriers and
the Attorney General were signatories to that Rate Plan Settlement. The Division
Advocacy Section and the Attorney General hereby agree that, if the Public
Utilities Commission approves the Rate Plan Settlement without material
modification in Docket 2930, all issues raised by the Division Advocacy Section
and the Attorney General in this Docket D-99-12 will be resolved to their
reasonable satisfaction. Accordingly, the Companies, the Division Advocacy
Section, and the Attorney General respectively request that the Division issue
an order approving the Petition of the Companies in this Docket, conditioned
<PAGE>
upon approval (without material modification) of the Rate Plan Settlement by the
Public Utilities Commission in Docket 2930.
Should any Party have a reasonable basis to believe there has been a
"material modification" of the Rate Plan Settlement, such Party must notify the
Division within two business days of issuance of the written order by the
Commission and request this Docket be re-opened. If such timely notification is
received by the Division, this Settlement shall be ineffective and the Parties
reserve their rights to take any position they deem appropriate with respect to
such re-opened proceedings.
Respectfully submitted,
The Narragansett Electric Company
By its Attorney
/s/ Ronald T. Gerwatowski
----------------------------------------
Ronald T. Gerwatowski
General Counsel
Blackstone Valley Electric Company
and Newport Electric Corporation
By their Attorney
/s/ David A. Fazzone
----------------------------------------
David A. Fazzone of David
A. Fazzone, P.C. and
McDermott, Will & Emory
<PAGE>
The Division of Public Utilities and
Carriers
By its Attorney
/s/ Elizabeth A. Kelleher
----------------------------------------
Elizabeth A. Kelleher
Special Assistant Attorney General
The Department of the Attorney General
By its Attorney
/s/ Paul Roberti
----------------------------------------
Paul Roberti
Assistant Attorney General
STATE OF VERMONT
PUBLIC SERVICE BOARD
Docket No. 6267
Petition of New England Power Company, )
pursuant to 30 V.S.A. section 109, to )
merge with Montaup Electric Company )
Order entered: 12/15/99
PRESENT: Kurt Janson, Esq.
Hearing Officer
APPEARANCES: Sarah Hofmann, Esq.
for Vermont Department of Public Service
Nancy S. Malmquist, Esq.
Downs Rachlin & Martin PLLC
for New England Power Company
Carlos A. Gavilondo, Esq.
Thomas G. Robinson, Esq.
for New England Power Company
I. INTRODUCTION
This Docket concerns a petition filed by New England Power Company
("NEP" or "Petitioner"), seeking Vermont Public Service Board ("Board") approval
under 30 V.S.A. sections 109 and 311 for the merger of Montaup Electric Company
("Montaup") with and into NEP. In this Proposal for Decision, I recommend that
the Board approve the proposed transaction.
The Petitioner filed the petition ("Petition") on July 13, 1999, with
prefiled testimony and supporting exhibits attached. A duly noticed prehearing
conference was held on August 31, 1999. At the prehearing conference, as
reflected in the Prehearing Conference Memorandum of September 1, 1999, I
requested that additional information be provided regarding whether the proposed
merger would affect the service NEP provides to two end-use customers in Vermont
<PAGE>
Docket No. 6267 Page 2
(the Island Corporation ("Island") and Simpson Power Company ("Simpson"). This
information was included in the draft Proposal for Decision filed October 26,
1999.
On October 26, 1999, NEP and the Vermont Department of Public Service
("Department") filed a stipulation ("Stipulation") and draft Proposal for
Decision ("Joint Proposal for Decision") recommending that this matter be
approved without a hearing.
In the Stipulation, the parties agreed that the record on which the
Board may base its determination in this proceeding shall consist of all
testimony, exhibits and data filed by NEP in support of its Petition, including
the testimony prefiled by NEP on July 13, 1999, the Joint Proposal for Decision,
the Stipulation and other filings or documents submitted by the Department or
the Petitioner in this proceeding. Based upon the absence of a request for
hearing from any party, the lack of objection of any party to the Stipulation
and Joint Proposal for Decision, and my review of those filings and the record
as a whole, I determined that an evidentiary hearing was not necessary.
II. FINDINGS OF FACT
Based on the evidence of record, I hereby report the following
findings to the Board in accordance with 30 V.S.A. section 8.
1. NEP is a Massachusetts corporation that owns and operates
properties in Massachusetts, New Hampshire, Connecticut, Maine and Vermont,
including transmission lines, and is a transmission subsidiary of New England
Electric System ("NEES"). NEP owns properties in several Vermont communities
used primarily for the transmission of electricity and has a twenty percent
share of the common stock of Vermont Yankee Nuclear Power Corporation. NEES is a
registered public utility holding company. NEP is qualified to transact business
in Vermont as a foreign corporation. Pet. at 1; Joint Proposal for Decision at
2.
2. NEP does not engage in local distribution of electricity in
Vermont, although NEP does provide service directly to two end-use customers in
Vermont, Island and Simpson. Pet. at 1; Joint Proposal for Decision at 2.
<PAGE>
Docket No. 6267 Page 3
3. Eastern Utilities Associates ("EUA") is a registered public utility
holding company that owns directly or indirectly the comon equity of several
electric utility companies, including Montaup, Blackstone Valley Electric
Company ("BVE"), Newport Electric Corporation ("Newport"), and Eastern Edison
Company ("Eastern"). Montaup has a 2.5 percent share of the common stock of
Vermont Yankee Nuclear Power Corporation. Pet. at 1-2; Zschokke pf. at 2; Joint
Proposal for Decision at 2-3.
4. NEES owns the common equity of several electric utility companies,
including NEP, Narragansett Electric Company ("Narragansett"), Massachusetts
Electric Company ("Mass Electric"), Nantucket Electric Company, and Granite
State Electric Company. Pet. at 1; Zschokke pf. at 2.
5. On February 1, 1999, NEES, EUA, and Research Drive LLC ("Research
Drive"), a directly and indirectly wholly-owned subsidiary of NEES, entered into
an Agreement and Plan of Merger ("EUA Agreement"), pursuant to which EUA will
become a wholly-owned subsidiary of NEES. Pet. at 2; Zschokke pf. at 2.
6. As soon as practicable after the closing of the merger transaction
with EUA, NEES intends to merge the operating companies of EUA (none of which
operates in Vermont) with and into the operating companies of NEES. NEES intends
to merge Montaup with and into NEP, pursuant to which NEP will be the surviving
entity (and will continue to be wholly owned by NEES). In Massachusetts, Eastern
Edison will merge with and into Mass Electric, and in Rhode Island, BVE and
Newport will merge with and into Narragansett, with Narragansett being the sole
surviving entity. Pet. at 2; Zschokke pf. at 3-4.
7. Following the merger of Montaup into NEP, NEP will remain a
separate corporation wholly owned by NEES and will continue to own and conduct a
public service business subject to the jurisdiction of the Board. Pet. at 2.
8. The merger of NEP and Montaup, and of their parent companies NEES
and EUA, must also be approved by several other regulatory bodies, including the
Securities and Exchange Commission (the "SEC") under the Public Utility Holding
Company Act of 1935 (the "Holding Company Act"), the Federal Energy Regulatory
Commission ("FERC"), under Sections 203 and 205 of the Federal Power Act, and
<PAGE>
Docket No. 6267 Page 4
the Nuclear Regulatory Commission under the Atomic Energy Act. The mergers also
require a filing with the U.S. Department of Justice and the Federal Trade
Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. NEES
and EUA have been granted early termination of the Hart-Scott-Rodino waiting
period on the proposed mergers. The FERC also conditionally approved the mergers
by order issued September 29, 1999. The mergers also require certain regulatory
approvals from state commissions in Massachusetts, Rhode Island, and
Connecticut; and may require approval in New Hampshire based upon the timing and
outcome of Montaup's proposed sale of its minority interest in the Seabrook
Nuclear Generating Station in Seabrook, New Hampshire. Zschokke pf. at 8-9;
Joint Proposal for Decision at 3-4.
9. At year end 1998, NEP's balance sheet was approximately four (4)
times the size of Montaup's balance sheet. NEP's assets and liabilities totaled
$2,415 billion and Montaup's assets and liabilities totaled $641 million. As of
year end, NEP owned $458 million of net utility plant, most of which is
transmission, and Montaup owned about $341 million of net utility plant, which
included the Somerset generating units subsequently sold in April, 1999.
Zschokke pf. at 5.
10. Since the divestiture of substantially all of its generating
business in 1998, NEP is primarily a transmission company. Montaup recently
completed the sale of the Canal, Somerset, and Wyman 4 generating stations, and
is also primarily a transmission company going forward similar to NEP. Zschokke
pf. at 5.
11. NEP and Montaup each recover through FERC-approved, wholesale
Contract Termination Charges, stranded costs associated with prior investments
in the generating business. Zschokke pf. at 5.
12. Montaup is an indirect subsidiary of EUA and 100% of its common
equity is owned by Eastern. Prior to the acquisition of EUA by NEES, Eastern is
expected to spin off 100% of its ownership of the common stock of Montaup to
EUA. The transaction is intended to (i) complete the functional unbundling of
the generation business from the distribution business of EUA through the
complete corporate separation of Eastern and Montaup, (ii) eliminate risk that
Eastern may have associated with its direct ownership of Montaup, (iii) isolate
Eastern's capital structure so that it applies to distribution ratemaking only,
and (iv) simplify EUA's corporate structure. Following the transaction, Montaup
<PAGE>
Docket No. 6267 Page 5
will be a direct subsidiary of EUA prior to its merger with NEP. Zschokke pf. at
4.
13. Montaup will be merged with and into NEP, and their balance sheets
will be consolidated. As part of the merger transaction, it is expected that NEP
will use its cash on hand to pay off Montaup's debentures and preferred stock,
currently held by Eastern. In addition, $147 million of common equity is
expected to be repaid to the direct parent of Montaup. Zschokke pf. at 6.
14. NEP currently serves two end-use customers in Vermont: Island and
Simpson. The arrangements with Island arise out of an old lease entered into in
1914 between the predecessor of NEP and the predecessor of Island (as well as
other documents dating back to the late 1800's and early 1900's). Under the
lease and documents, Island has the right to up to 300 kW per hour of
electricity in exchange for certain "mill powers." Joint Proposal for Decision
at 5.
15. In 1998, at the time of the transfer by NEP of its hydroelectric
facilities located all or partly in Vermont to USGen New England, Inc. ("USGen
NE"), NEP Island and USGen NE entered into an amended and restated lease
indenture, and NEP and USGen NE agreed to continue to provide Island with 300 kW
per hour of electricity at no additional charge. Under the arrangements, USGen
NE sells electricity at wholesale to NEP, sufficient to meet Island's 300 kW
entitlement, for resale by NEP to Island. USGen NE assumed other applicable
obligations contained in the agreements between Island's and NEP's predecessors,
as amended. In addition, at the time of the transfer of its hydroelectric
facilities, NEP confirmed to Island that it is willing, subject to the
requirements of Vermont law, approval of the Board, and applicable tariff
provisions then in effect, to supply service to Island above 300 kW under
special contract in the event this is requested by Island in the future. The
arrangements with and commitments to Island remain in effect, and are not
affected by the merger of NEP and Montaup. Joint Proposal for Decision at 5; See
Docket No. 6039, Order of 6/29/98 at 11.
16. Simpson is currently served by NEP pursuant to Special Contract
No. 361 which contains a specified rate for electricity. This special contract
is subject to the jurisdiction of the Board. The original contract was dated
<PAGE>
Docket No. 6267 Page 6
November 11, 1930, and has been subsequently amended. On February 5, 1999, the
Board approved an extension of that contract until December 31, 1999. NEP and
Simpson have signed an amendment to the contract extending it by one year
through December 31, 2000. NEP has filed the amendment requesting approval by
the Board. The arrangements with Simpson and Special Contract No. 361 remain in
effect, and are not affected by the merger of NEP and Montaup. Joint Proposal
for Decision at 5-6; February 5, 1999, Board approval of Special Contract No.
361; First Amendment to Special Contract No. 361, currently pending before the
Board.
17. The merger of NEP and Montaup and the merger of their parent
companies NEES and EUA, are expected by the companies to result in benefits,
including synergies and cost savings. Zschokke pf. at 6-10.
18. NEP's transmission rates to NEP's existing open-access
transmission customers should not be adversely affected as a result of the
merger, and may be reduced. First, because Montaup's transmission rates are on
average lower than NEP's, the merger of the companies will lower NEP's
FERC-filed, open-access transmission rates to the extent FERC authorizes the
integration of the companies' rates. Second, to the extent that efficiency gains
result in reduced transmission costs, such reductions would also be reflected in
NEP's formula rate for transmission service on file with FERC. Accordingly, the
transaction should produce beneficial effects for NEP's transmission customers,
including NEP's customers in Vermont, taking service under NEP's open access
transmission tariff. Zschokke pf. at 8; Joint Proposal for Decision at 6.
19. Other than its minority share in Vermont Yankee Nuclear Power
Corporation, Montaup owns no facilities and has no business in Vermont. The
merger should have no effect on the power markets in Vermont. Both NEP and
Montaup have divested substantially all of their non-nuclear generating
entitlements and have focused instead on the transmission business which remains
regulated by FERC. The companies filed a competitive analysis as part of their
application under Section 203 of the Federal Power Act, which was recently
conditionally approved by FERC. According to the companies, that analysis
demonstrates that the merger will not have an adverse affect on competition in
<PAGE>
Docket No. 6267 Page 7
the New England market. The merger of NEP and Montaup will not prevent or
obstruct competition in Vermont. Zschokke pf. at 8-9; Joint Proposal for
Decision at 6.
20. NEES has agreed in the merger to honor EUA's collective bargaining
agreements and to provide non-union employees joining the NEES companies with
compensation and benefits in the aggregate at least equivalent to those obtained
prior to the merger for a year following closing. Zschokke pf. at 10.
21. The Stipulation, in summary, states that the Department and NEP
agree that the proposed merger of Montaup with and into NEP will promote the
general good of the state of Vermont, and will not result in obstructing or
preventing competition. Joint Stipulation at 2.
III. DISCUSSION AND CONCLUSIONS
The proposed transaction requires approval by the Board under 30
V.S.A. sections 109 and 311. The statutes provide that the Board may issue such
approval only upon finding that the merger will promote the general good of the
State of Vermont (30 V.S.A. section 109) and will not obstruct or prevent
competition (30 V.S.A. section 311).
I have reviewed the Stipulation and the evidence in support of it. The
stipulating parties have agreed that the proposed merger of Montaup with and
into NEP will promote the general good of the State of Vermont, and will not
result in obstructing or preventing competition. Based on my review of the
evidence, I reached the same conclusions. Therefore, I recommend that the Board
accept the Stipulation.
Consequently, I find that the merger of Montaup with and into NEP will
promote the general good of the State of Vermont and will not result in
obstructing or preventing competition in the provision of the services that they
are currently offering. 30 V.S.A. sections 109 and 311. I thus recommend that
the Board approve the merger of Montaup with and into NEP.
The foregoing is hereby reported to the Public Service Board in
accordance with the provisions of 30 V.S.A. section 8.
All parties to this proceeding have waived their rights to comment on
this Proposal for Decision in accordance with 3 V.S.A. section 811.
<PAGE>
Docket No. 6267 Page 8
Dated at Montpelier, Vermont, this 16th day of December, 1999.
/s/ Kurt R. Janson
----------------------------------------
Kurt R. Janson
Hearing Officer
<PAGE>
Docket No. 6267 Page 9
IV. ORDER
IT IS HEREBY ORDERED, ADJUDGED AND DECREED by the Public Service Board
of the State of Vermont that :
1. The findings and conclusions of the Hearing Officer are adopted.
2. The Stipulation between the Vermont Department of Public Service
and New England Power Company is approved.
3. The Petition of New England Power Company for the merger of Montaup
Electric Company with and into New England Power Company is approved, pursuant
to 30 V.S.A. sections 109 and 311.
4. A Certificate of Consent to the merger shall be issued, pursuant to
30 V.S.A. section 109.
5. The Petitioner shall file a letter notifying the Board of the date
of the completion of the merger within ten days following said merger.
Dated at Montpelier, Vermont, this 15th day of December, 1999.
)
--------------------)
) PUBLIC SERVICE
)
--------------------) BOARD
)
) OF VERMONT
--------------------)
OFFICE OF THE CLERK
FILED: December 15, 1999
ATTEST: /s/ Susan McHughes
-------------------
Clerk of the Board
Notice to Readers: The decision is subject to revision of technical
errors. Readers are requested to notify the Clerk of the Board of any technical
errors, in order that any necessary corrections may be made.
Appeal of this decision to the Supreme Court of Vermont must be filed
with the Clerk of the Board within thirty days. Appeal will not stay the effect
of this Order, absent further Order by this Board or appropriate action by the
Supreme Court of Vermont. Motions for reconsideration or stay, if any, must be
filed with the Clerk of the Board within ten days of the date of this decision
and order.
<PAGE>
STATE OF VERMONT
PUBLIC SERVICE BOARD
Docket No. 6267
Petition of New England Power Company )
pursuant to 30 V.S.A. section 109, to )
merge with Montaup Electric Company )
CERTIFICATE OF CONSENT ISSUED
PURSUANT TO 30 V.S.A. SECTION 109
IT IS HEREBY CERTIFIED that the Public Service Board of the State of
Vermont has this date found and adjudged that the merger of Montaup Electric
Company with and into New England Power Company will promote the general good of
the State of Vermont, and hereby consents to said transfer.
Petitioner shall file this Certificate of Consent with the Vermont
Secretary of State, pursuant to 30 V.S.A. section 109.
Dated at Montpelier, Vermont, this 15th day of December, 1999.
)
--------------------)
) PUBLIC SERVICE
)
--------------------) BOARD
)
) OF VERMONT
--------------------)
OFFICE OF THE CLERK
FILED: December 15, 1999
ATTEST: /s/ Susan McHughes
-------------------
Clerk of the Board
Notice to Readers: This decision is subject to revision of technical
errors. Readers are requested to notify the Clerk of the Board of any technical
errors, in order that any necessary corrections may be made.
[Halloran & Sage LLP Letterhead]
August 12, 1999
Department of Public Utility Control
Ten Franklin Square
New Britain, CT 06051
Attn: Louise Rickard
Acting Executive Secretary
Re: New England Electric System - Merger with Eastern Utilities Associates
Dear Rickard:
We represent the New England Power Company ("NEP") and Montaup
Electric Company ( "Montaup") in jointly filing this petition with the
Department. Subject to obtaining all necessary approvals, NEP's parent company,
New England Electric System (NEES), will merge with Montaup's parent, Eastern
Utilities Associates (EUA) Department (the "NEES Merger"). NEP and Montaup
(together "Petitioners") are seeking herein the Department's approval of the
NEES Merger pursuant to Section 16-43(a)(1) of the Connecticut General Statutes.
Subsequent to the NEES Merger, Petitioners, as affiliates of the
merged entity and subject to all necessary approvals, will themselves merge (the
"NEP Merger").1/
NEP has previously obtained Department approval of the merger of its
parent, NEES, with the National Grid Group plc (the "National Grid Merger).2/
- ---------------
1 The NEP Merger is the subject of a separate petition for the Department' s
approval, of even date herewith.
2 The Department's approval of the National Grid Merger was obtained on June
30, 1999 in Docket No. 99-03-43, "Application of New England Power Company
concerning acquisition by the National Grid Group" (the "National Grid
Decision").
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 2
I. Description of Companies in the NEES Merger
Both NEES and EUA are registered holding companies under Public
Utility Holding Company Act of 1935.
A) NEES Companies
NEES is headquartered in Westborough, Massachusetts. Its subsidiaries
are engaged in the transmission and distribution of electricity, and the
marketing of energy commodities and services. The electricity delivery companies
serve approximately 1.3 million customers in Massachusetts, Rhode Island, and
New Hampshire. Other NEES subsidiaries offer telecommunication services. NEES
owns the common equity of NEP.
NEP, a wholly-owned subsidiary of NEES, is a regulated public-utility
company organized and operated under the laws of the Commonwealth of
Massachusetts. It is primarily a transmission company, operating over 2,600
miles of transmission facilities in Massachusetts, Rhode Island, New Hampshire,
and Vermont. NEP divested itself of substantially all of its generating business
in 1998; however, NEP still holds minority non-operating interests in three
nuclear generating companies with retired facilities, and in three operating
nuclear units, including Millstone 3, which is located in Connecticut. NEP
intends to divest its interests in the operating nuclear units.
B) EUA Companies
EUA is a public utilities holding company organized as a voluntary
association under Massachusetts law. Its affiliated companies are engaged in the
transmission and distribution of electricity in Massachusetts and Rhode Island,
delivering electric service to more than 305,000 customers in southeastern
Massachusetts and northern and coastal Rhode Island. EUA owns directly or
indirectly the common equity of several electric companies, including Montaup.
Montaup is a subsidiary of Eastern Edison, which is itself a
wholly-owned subsidiary of EUA. Montaup provides transmission service to its
retail distribution affiliates and to two non-affiliated municipal electric
utilities in Massachusetts and Rhode Island. Montaup has negotiated
comprehensive settlement agreements with its regulators providing for the
complete divestiture of its generating business. In conformance with those
agreements, Montaup has recently sold all of its non-nuclear generation
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 3
assets.3/ Montaup currently has minority, non-operating interests in the same
nuclear generating companies as NEP, including those with retired nuclear
facilities and those with operating units, including Millstone 3. With regard to
its interests in nuclear generating assets, Montaup has signed as agreement for
the sale of its share of Seabrook, and is attempting to divest the remainder of
these assets.4/
II. How the NEES Merger will occur
It is contemplated that a NEES affiliate, Research Drive LLC, will
merge with and into EUA, with EUA being the surviving entity. EUA with its
associated affiliates, will then become a wholly-owned subsidiary of NEES.5
III. Department Approval of the NEES Merger
Petitioners are "foreign electric companies" as defined in section
16-246a(1) of the General Statutes. Millstone Unit 3 is a "utility facility" as
defined in Section 16-246a(3) of the General Statutes. A foreign electric
company which owns a utility facility is both an "electric company" and a
"public service company", as defined in Section 16-246c(c) of the General
Statutes. Therefore, Petitioners are both electric companies and public service
companies for all purposes of Title 16 of the General Statutes. Because of this
status, a review of Title 16 of the General Statutes was necessary to determine
if the approval of the Department would be required for the NEES Merger.
- ---------------
3 The Department approved Montaup's sales of its non-nuclear assets in Docket
No. 98-09-11, "Application of Montaup Electric Company for Approval to Sell
its Non-Nuclear Generating Assets", and in Docket No. 98-12-18,
"Application of Montaup Electric Company for Approval of the Sale of
Interest in the Somerset and Wyman Stations".
4 The Department approved of Montaup sale of its ownership interest in the
Seabrook nuclear generating plant in Docket 99-01-14.
5 It is anticipated, that, prior to the NEES Merger, the ownership of Montaup
Power will transferred from Eastern to EUA. EUA would then own Montaup
directly, rather than indirectly through Eastern. This transfer is the
subject of a separate petition for approval by the Department, of even date
herewith.
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 4
A) General Statutes Section 16-47
There are two possible bases for Department jurisdiction over this
transaction. The first statute which must be considered is Section 16-47 of the
General Statutes, which governs holding companies. A "holding company" is
defined in Section 16-47(a) to mean "any corporation, association, partnership,
trust or similar organization, or person which, either alone or in conjunction
and pursuant to an arrangement or understanding with one or more other
corporations, associations, partnerships, trusts or similar organizations, or
persons, directly or indirectly, controls a gas, electric, electric
distribution, water, telephone or community antenna television company." The
regulatory oversight is provided by Section 16-47(c) which provides that "[n]o
corporation, association, ... or person shall take any action that causes it to
become a holding company with control over a gas, electric, electric
distribution, water, telephone or community antenna television company engaged
in the business of supplying service within this state, ... or acquire, directly
or indirectly, control over such a holding company, without first making written
application to and obtaining the approval of the department." (emphasis added)
As previously noted, Petitioners are "electric companies". The
critical inquiry, therefore, is whether or not Petitioners are electric
companies "engaged in the business of supplying service within this state",
solely due to their minority interests in Millstone 3.
The Department considered this question in Docket No. 98-06-28,
Application of Central Maine Power Company Concerning Holding Company
Restructuring (the Central Maine Decision"). In that proceeding, Central Maine
Power sought any Department approvals necessary for the formation of a
Maine-based holding company. The holding company would own an electric company
whose sole connection to Connecticut was a minority interest in Millstone.
Central Maine power contended in that case that the Department's approval would
not be required, since the electric company involved, despite its ownership in
Millstone, was not "engaged in the business of supplying service within
Connecticut" as contemplated by Section 16-47, and therefore, the Department did
not have jurisdiction over the holding company transaction. The Department
agreed, and ruled that its approval was not necessary under Section 16-47.
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 5
In a second Decision, in its review of the National Grid Merger of
NEP's parent NEES, the Department agreed with NEP that, consistent with the
Central Main Decision, the Department did not have jurisdiction over the
National Grid Merger.6/
In light of these Decisions of the Department, since Petitioners are
not engaged in the business of supplying service within this state solely by
virtue of their ownership interests in Millstone 3, Department approval pursuant
to Section 16-47 of the General Statutes is not required for the NEES Merger.
B) General Statutes Section 16-47(a)
The second statute potentially applicable to the NEES Merger is
Section 16-43(a) of General Statutes. The Department has previously determined
in the National Grid Decision that it had jurisdiction over the merger of NEP's
parent NEES and The National Grid Group plc pursuant to Section 16-43(a), due to
NEP's minority ownership interest in Millstone 3. For this reason, Petitioners
assume that the Department's approval will be required for the NEES Merger,
involving a merger of two companies, each with a public service company
affiliate with a minority interest in Millstone 3. Petitioners hereby request
the Department's approval of the NEES Merger, consistent with its approval of
the National Grid Merger.
IV. Discussion
The NEES Merger is directly analogous to the National Grid Merger in
at least two critical regards. First, this transaction involves on the merger of
two holding-company parents of affiliates who own minority, non-operating
interests in Millstone 3. The NEES Merger will have no effect on Connecticut
ratepayers, and involves no significant issues affecting Connecticut.
Second, the NEES Merger, like the National Grid Merger, is subject to
a large number of other regulatory approvals. This transaction is being
evaluated by the Securities and Exchange Commission ("SEC") under the Public
Utility Holding Company Act, the Federal Energy Regulatory Commission, to which
a Section 203 filing has been submitted, and the Nuclear Regulatory Commission
under the Atomic Energy Act. In addition, the approval of the Massachusetts
Department of Telecommunications and Energy ("DTE") is being sought. The Rhode
- ---------------
6 The National Grid Decision, see footnote 1 supra.
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 6
Island Public Utilities Commission has direct jurisdiction over the rate plan
for the Rhode Island companies. The Rhode Island Division of Public Utilities
and Carriers has jurisdiction over the consolidation of the Rhode Island
companies. Finally, the proposed transaction also requires a Hart Scott Rodino
filing with the U.S. Department of Justice and the Federal Trade Commission.
V. Conclusion
For the above reasons, Petitioners respectfully request that the
Department's approval of the NEES Merger be granted. Enclosed herewith as a bulk
filing is an original and one copy of exhibits which Petitioners are submitting
in fulfillment of the requirements of Section 16-43(a)(1) and Section 16-1-61 of
the Regulations of Connecticut State Agencies (the "NEES Merger Exhibits").
Because Petitioners are attempting to close the NEES Merger expeditiously,
they are requesting the Department's approval prior to October 31, 1999. To that
end, Petitioners would be happy to provide any additional documentation or
information that the Department believes its necessary to properly evaluate this
requests. Finally the Department's prompt response to this request would be
greatly appreciated.
Very truly yours,
New England Power Company
and
Montaup Electric Company
By: /s/ Peter G. Boucher
-----------------------------------
Peter G. Boucher
Their Attorney
Enclosure: NEES Merger Exhibits
Original and One Copy
<PAGE>
[Halloran and Sage LLP Letterhead]
August 12, 1999
Department of Public Utility Control
Ten Franklin Square
New Britain, CT 06051
Attn.: Louise Rickard
Acting Executive Secretary
Re: New England Power Company - Merger with Montaup Electric Company
Dear Ms. Rickard:
We represent the New England Power Company ("NEP") and Montaup
Electric Company ("Montaup") in jointly filing this petition with the
Department. Subject to obtaining all necessary approvals, NEP's parent company,
New England Electric System (NEES), will merge with Montaup's parent, Eastern
Utilities Associates (EUA) (the "NEES Merger").1/
Subsequent to the NEES Merger, NEP and Montaup (together
"Petitioners"), as affiliates of the merged entity and subject to all necessary
approvals, will themselves merge (the "NEP Merger"). Petitioners seek herein the
Department's approval of the NEP Merger pursuant to Section 16-43(a)(1) of the
Connecticut General Statutes.
NEP has previously obtained Department approval of the merger of its
parent NEES, with The National Grid Group plc (the "National Grid Merger)2/.
- ---------------
1/ The NEP Merger is the subject of a separate petition for the Deparment's
approval, of even date herewith.
2/ The Department's approval of The National Grid Merger wa obtained on June
30, 1999 in Docket No. 99-03-43, "Application of New England Power Company
concerning acquisition by the National Grid Group" ( the "National Grid
Decision").
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 2
I. Description of Companies in the NEP Merger
Both NEES and EUA are registered holding companies under the Public
Utility Holding Company Act of 1935.
A) NEES Companies
NEES is headquartered in Westborough, Massachusetts. It subsidiaries
are engaged in the transmission and distribution of electricity, and the
marketing of energy commodities and services. The electricity delivery companies
serve approximately 1.3 million customers in Massachusetts, Rhode Island, and
New Hampshire. Other NEES subsidiaries offer telecommunication services. NEES
owns the common equity of NEP.
NEP, a wholly-owned subsidiary of NEES, is a regulated public-utility
company organized and operated under the laws of the Commonwealth of
Massachusetts. It is primarily a transmission company, operating over 2,600
miles of transmission facilities in Massachusetts, Rhode Island, New Hampshire,
and Vermont. NEP divested itself of substantially all of its generating business
in 1998; however, NEP still holds minority non-operating interests in three
nuclear generating companies with retired facilities, and in three operating
nuclear units, including Millstone 3, which is located in Connecticut. NEP
intends to divest its interests in the operating nuclear units.
B) EUA Companies
EUA is a public utility holding company organized as a voluntary
association under Massachusetts law. Its affiliated companies are engaged in the
transmission and distribution of electricity in Massachusetts and Rhode Island,
delivering electric service to more than 305,000 customers in southeastern
Massachusetts and northern and coastal Rhode Island. EUA owns directly or
indirectly the common equity of several electric companies, including Montaup.
Montaup is a subsidiary of Eastern Edison, which is itself a
wholly-owned subsidiary of EUA. Montaup provides transmission service to its
retail distribution affiliates and to two non-affiliated municipal electric
utilities in Massachusetts and Rhode Island. Montaup has negotiated
comprehensive settlement agreements with its regulators providing for the
complete divestiture of its generating business. In conformance with those
agreements, Montaup has recently sold all of its non-nuclear generation
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 3
assets.3/ Montaup currently has minority, non-operating interests in the same
nuclear generating companies as NEP, including those with retired nuclear
facilities and those with operating units, including Millstone 3. With regard to
its interests in nuclear generating assets, Montaup has signed an agreement for
the sale of its share of Seabrook, and is attempting to divest the remainder of
these assets.4/
II. How The NEP Merger will occur
It is contemplated that Montaup will merge with and into NEP, and
their balance sheets will be consolidated.
III. Department Approval of the NEP Merger.
Petitioners are "foreign electric companies" as defined in section
16-246a(1) of the General Statutes. Millstone Unit 3 is a "utility facility" as
defined in Section 16-246a(3) of the General Statutes. A foreign electric
company which owns a utility facility is both an "electric company" and a
"public service company", as defined in Section 16-246c(c) of the General
Statutes. Therefore, Petitioners are both electric companies and public service
companies for all purposes of Title 16 of the General Statutes. Pursuant to
Section 16-43(a)(1) of the General Statutes, Department approval is required
before a public service company may "merge, consolidate or make common stock
with any other company". Because this transaction involves the merger of two
public service companies, the Department's approval will be required for the NEP
Merger.
IV. Discussion
The NEP Merger, from the point of view of Connecticut, involves only
the transfer of a minority non-operating interest in Millstone 3. As such, this
transaction will have no effect on Connecticut ratepayers, and involves no
- ---------------
3/ The Department approved Montaup's sale of its non-nuclear assets in Docket
No. 98-09-11, "Application of Montaup Electric Company for Approval to Sell
its Non-Nuclear Generating Assets", and in Docket No. 98-12-18,
"Application of Montaup Electric Company for Approval of the Sale of
Interest in the Somerset and Wyman Stations".
4/ The Department approved Montaup's sale of its ownership interest in the
Seabrook nuclear generating plant in Docket No. 99-01-14.
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 4
significant issues affecting Connecticut. In addition, this transaction is
subject to th approval of a number of other regulatory agencies, including the
Federal Energy Regulatory Commission and the Massachusetts Department of
Telecommunications and Energy. Approval of the state commission in Vermont,
where NEP and Montaup own property, is also required, and approval from the New
Hampshire commission may also be necessary.
III. Conclusion
For the above reasons, Petitioners respectfully request that the
Department's approval of the NEP Merger be granted. Enclosed herewith as a bulk
filing is an original and one copy of exhibits which Petitioners are submitting
in fulfillment of the requirements of Section 16-43(a) (1) and Section 16-1-61
of the Regulations of Connecticut State Agencies (the "NEP Merger Exhibits").
Because Petitioners are attempting to close the merger expeditiously, they are
requesting the Department's approval prior to October 31, 1999. To that end,
Petitioners would be happy to provide any additional documentation or
information that the Department believes is necessary to properly evaluate these
requests. Finally, the Department's prompt response to these requests would be
greatly appreciated.
Very truly yours,
New England Power Company
and
Montaup Electric Company
By: /s/ Peter G. Boucher
-----------------------------------
Peter G. Boucher
Their Attorney
Enclosure: NEP Merger Exhibits
Original and one copy
<PAGE>
[Halloran & Sage LLP Letterhead]
August 12, 1999
Department of Public Utility Control
Ten Franklin Square
New Britain, CT 06051
Attn. Louise Rickard
Acting Executive Secretary
Re: Montaup Electric Company;
Transfer of ownership from Eastern Edison Company
to Eastern Utilities Affiliates.
Dear Ms. Rickard:
We represent Montaup Electric Company ("Montaup") in filing this
letter with the Department.
Montaup is a wholly-owned subsidiary of Eastern Edison Company
("Eastern"). Subject to obtaining all necessary approvals, Eastern will transfer
all of its interests in Montaup to Eastern's corporate parent Eastern Utilities
Affiliates ("EUA"). Montaup is seeking confirmation that the Department's prior
approval is not required for this transfer of ownership (the "Transaction").
Alternatively, should the Department determine that its approval of the
Transaction is necessary, Montaup requests that the Department's approval be
granted.
I. Description of Entities in the Transaction.
A) EUA
EUA is a public utility holding company organized as a voluntary
association under Massachusetts law. Its affiliated companies are engaged in the
transmission and distribution of electricity in Massachusetts and Rhode Island,
delivering service to more than 305,000 customers in southeastern Massachusetts
and northern and coastal Rhode Island. EUA owns directly all common stock of
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 2
Eastern, Newport Electric Corporation ("Newport"), and Blackstone Valley
Electric Compan ("Blackstone"), and indirectly owns all common and preferred
stock of Montaup.
B) Eastern
Eastern is a wholly-owned subsidiary of EUA. It provide distribution
service to approximately 186,000 customers in non-contiguous territories
covering the southeastern Massachusetts cities of Brockton and Fall River, and
in 20 surrounding towns.
C) Montaup
Montaup is a subsidiary of Eastern. Montaup provides transmission
service to its retail distribution affiliates and to two non-affiliated
municipal electric utilities in Massachusetts and Rhode Island.
In the past, Montaup sold significant amounts of wholesale electricity
to Eastern, Blackstone, and Newport pursuant to all-requirements contracts. As
part of the restructuring of the utility industry in Massachusetts and Rhode
Island, Montaup entered into approved settlement agreements with its regulators
providing for the complete divestiture of Montaup's generating business. In
conformance with these agreements, Montaup has recently sold all of its
non-nuclear generation assets.1/ Montaup currently has minority, non-operating
interests in nuclear generating companies with both retired nuclear facilities
and operating units, including Millstone 3. With regard to its nuclear ownership
interests, Montaup has signed an agreement for the sale of its share of
Seabrook, and is attempting to divest the remainder of these interests.2/
- ---------------
1/ The Department approved Montaup's sale of its non-nuclear assets in Docket
No. 98-09-11, "Application of Montaup Electric Company for Approval to Sell
its Non-Nuclear Generating Assets", and in Docket No. 98-12-18,
"Application of Montaup Electric Company for Approval of the Sale of
Interest in the Somerset and Wyman Stations".
2/ The Department approved Montaup's sale of its ownership interest in the
Seabrook nuclear generating plant in Docket No. 99-01-14.
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 3
II. Description of the Transaction
Eastern will transfer to EUA all of Eastern's investment in Montaup's
capitalization, including outstanding preferred and common stock and debenture
bonds (collectively, the "Montaup Securities"). Montaup will thus become a
wholly-owned, first tier subsidiary of EUA. The transfer of the Montaup
Securities to EUA (the "Spin-Off") will take the form of a special dividend
payment comprising all of the capitalization of Montaup. The Spin-Off is
described in the Form U-1 to the Securities and Exchange Commission dated July
14, 1999, and Amendment No. 1 thereto, dated July 28, 1999, appended hereto as
Attachment 1.
III. Analysis of the Transaction
Montaup is a "foreign electric company," as that term is defined in
Section 16-246a of the Connecticut General Statutes, Revision of 1958, as
amended (all references hereinafter to "Section" refer to the General Statutes
unless otherwise noted). Millstone Unit 3 is a "utility facility" as that term
is defined in Section 16-246a(3). A foreign electric company which owns a
utility facility is both an "electric company" and a "public service company",
as those terms are defined in Section 16-246c(c), for all purposes of Title 16
of the General Statutes. Therefore, a review of Title 16 was necessary to
determine whether or not the Department's approval of the Spin-Off is necessary.
The following analysis suggests that such approval is not required.
The first statute which may be applicable is Section 16-47, which
governs "holding companies". A "holding company" is defined in Section 16-47(a)
to mean "any corporation, association, partnership, trust or similar
organization, or person which, either alone or in conjunction and pursuant to an
arrangement or understanding with one or more other corporations, associations,
partnerships, trusts or similar organizations, or persons, directly or
indirectly, controls a gas, electric, electric distribution, water, telephone or
community antenna television company." The regulatory oversight is provided by
Section 16-47(c) which states that "[n]o corporation, association, ... or person
shall take any action that causes it to become a holding company with control
over a gas, electric, electric distribution, water, telephone or community
antenna television company engaged in the business of supplying service within
this state, ... or acquire, directly or indirectly, control over such a holding
company, without first making written application to and obtaining the approval
of the department." (emphasis added) It would appear that, since neither EUA nor
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 4
Montaup engages in the business of supplying service within the state, the
requirement of Department approval of the Transaction pursuant to Section 16-47
does not apply.
The Department reached a similar conclusion in each of two recent
Decisions. In Docket No. 98-06-28, an application of Central Maine Power Company
("Central Maine") concerning that company's creation of a holding company, the
Department concluded that it did not have jurisdiction over the transaction
under Section 16-47. In that instance, Central Maine owned a minority interest
in Millstone 3. In the second Decision, in Docket No. 99-03-43, a submission by
New England Power Company ("NEP"), concerning the merger of NEP's parent New
England Electric System ("NEES") with The National Grid Group, the Department
concluded that it did not have jurisdiction over a merger of two holding
companies, one of which (NEES) owned a foreign electric company (NEP) with a
minority interest in Millstone 3.
The second statute potentially applicable is Section 16-43, which
provides in subsection (a) that "[a] public service company shall obtain the
approval of the Department of Public Utility Control to directly or indirectly
(1) merge, consolidate or make common stock with any other company, or (2) sell,
lease, assign, mortgage, ... or otherwise dispose of any essential part of its
franchise, plant equipment or other property necessary or useful in the
performance of its duty to the public, ...".
In regard to subdivision (1), "merger" is defined in Corporations Law
as "the absorption of one company by another, [the] latter retaining its own
name and identity and acquiring [the] assets, liabilities, franchises, and
powers of [the] former, and [the] absorbed company ceasing to exist as [a]
separate business entity.3 "Consolidation" is defined as "the combination of two
or more corporations into a newly created corporation. Thus, A Corporation and B
Corporation combine to form C Corporation."4
Clearly, the Transaction fits neither definition. Montaup is not being
"absorbed" into EUA; it is retaining its separate identity. Therefore, the
Transaction is not a merger. Montaup and EUA are not combining to form a new
entity; therefore, the Transaction is not a consolidation. Furthermore, no new
common stock in Montaup is being issued. The existing capitalization of Montaup
- ---------------
3/ BLACK'S LAW DICTIONARY 891 (5th ed. 1979)
4/ Id. at 280.
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 5
is being transferred from Eastern to Eastern's parent EUA. Therefore, Montaup
believes that the Department's approval of the Transaction is not required under
Section 16-43(a)(1).
With regard to subdivision (2), the type of transactions submitted to
the Department for approval thereunder are typically outright sales of real and
personal property, or the encumbrance of a public service company's assets
created by the issuance of debt. A survey conducted by Montaup of 30 Department
Decisions from the years 1983 to 1999 concerning transactions pursuant to
Section 16-43(a), revealed that the overwhelming majority of these transactions
involved either the issuance or outright sale of capital stock (including common
stock), or the assumption of a mortgage or other secured debt.5
In contrast, the Transaction involves the transfer, not the sale, of
Montaup's capitalization from a subsidiary to a parent company. The capital
structure of Montaup is not being altered, and Montaup is not divesting any
property. In addition, the entity with ultimate control of Montaup (EUA), is the
same both before and after the Transaction. For these reasons, Montaup
respectfully submits that the Department's approval of the Transaction is not
required pursuant to Section 16-43(a)(2).
While it could be argued that the phrase "...or otherwise dispose of
any essential part of its franchise, plant equipment or other property necessary
or useful in the performance of its duty to the public directly or indirectly"
in subdivision (2) covers this transfer of ownership of a public service company
from a corporate subsidiary to a corporate parent, we do not believe that the
legislature intended such unlimited state review over such transactions.
Montaup's survey of Department precedent revealed only one decision in which the
Department exercised its jurisdiction over a transaction even remotely analogous
to this Transaction; however, the transaction in that case is clearly
distinguishable.
In that decision, in Docket No. 86-11-02 (appended hereto as
Attachment 2), Cox Communications, Inc. requested Department's approval of a
pro-forma transfer of a company's stock from one corporate affiliate to another
- ---------------
5/ The breakdown of 29 of the 30 transactions is: Sale of stock (9)
Issuance of stock (4)
Sale of property (4)
Debt encumbrance (9)
Mergers (3)
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 6
as part of a reorganization (the "Cox Transfer"). In the Cox Transfer, all
issued and outstanding shares of the capital stock of Greater Hartford Cable, a
public service company, were transferred from Cox Cable to New Greater Hartford
Cable.
The Cox Transfer differed in two crucial aspects from the Transaction.
First, the Cox Transfer occurred against the backdrop of the liquidation of Cox
Cable and the subsequent merger of Greater Hartford Cable into New Greater
Hartford Cable. Therefore, that transaction contained a merger which would, in
any event, require the Department's approval pursuant to Section 16-43(a)(1). By
contrast, the Transaction involves neither the liquidation of Eastern, the
current owner of Montaup, nor any subsequent merger involving Montaup's new
parent EUA.6 Second, the subject of the Cox Transfer, Greater Hartford Cable,
was a community antenna television company providing service to Connecticut
consumers. Therefore, the Cox Transfer had a much closer nexus to Connecticut
than the Transaction involving Montaup, a public service company with no
customers in Connecticut, and whose only connection to Connecticut is a minority
interest in Millstone 3. For these reasons, the Transaction is distinguishable
from the Cox Transfer, and the Department's decision in that case is inapposite.
Finally, the Transaction is being examined by the Securities and
Exchange Commission ("SEC") under the Public Utility Holding Company Act, the
Federal Energy Regulatory Commission ("FERC"), and the Nuclear Regulatory
Commission ("NRC"). In addition, the Massachusetts Department of
Telecommunications and Energy ("MDTE") will retain jurisdiction over Montaup and
Eastern after the Transaction. It is respectfully submitted that this level of
federal oversight and the continuing jurisdiction of the MDTE over Montaup and
Eastern will ensure that the Transaction is conducted properly, and without harm
to investors and customers.
In view of the importance of the Transaction, Montaup wishes to be
certain that all required regulatory approvals have been obtained. On behalf of
Montaup, therefore, we would appreciate confirmation that it is not necessary to
- ---------------
6/ EUA will merge with NEES subsequent to this Transaction; however, that
merger is the subject of a separate petition for the Department's approval,
of even date herewith. It should be noted that the Spin-off of Montaup will
occur, subject to obtaining all necessary approvals, regardless of whether
the merger of NEES and EUA is consummated; the Transaction is consistent
with EUA's restructuring, completing the functional unbundling of Montaup's
generation business from Eastern's distribution business.
<PAGE>
Louise Rickard
Acting Executive Secretary
Department of Public Utility Control
August 12, 1999
Page 7
seek the Department's prior approval of the Transaction. If, however, the
Department does not concur with our analysis in this regard, Montaup requests
that the Department grant its approval of the Transaction.
Also submitted to the Department under separate cover, of even date
herewith, are petitions requesting the Department's approval of the merger of
Montaup's parent EUA with New England Electric System (NEES), and the merger of
Montaup with New England Power ("Petitions"); both mergers will take place after
the Spin-Off of Montaup is complete. The Petitions set forth in detail the
particular elements of those two transactions, and include exhibits detailing
the finances and operations of all four companies, including Montaup. We believe
that the Montaup exhibits therein contain sufficient information to allow the
Department to properly evaluate the Transaction, should it determine that its
approval of the Transaction is required. Enclosed herewith are two (2) copies of
the Petitions and their exhibits.
Because Montaup is attempting to complete this Transaction
expeditiously, it is requesting the Department's approval prior to October 31,
1999. To that end, Montaup would be pleased to provide any additional
documentation or information that the Department believes is necessary to
properly evaluate this request. Finally, the Department's prompt response to
this request would be greatly appreciated.
Very truly yours,
Montaup Electric Company
By: /s/ Peter G. Boucher
-----------------------------------
Peter G. Boucher
Its Attorney
Attachments
Enclosures: NEES Merger Exhibits
NEP Merger Exhibits
Two Copies
<PAGE>
SUBMISSION
TYPE U-1
RETURN-COPY EMAIL
DOCUMENT COUNT 2
NOTIFY 72731,215
NOTIFY-INTERNET [email protected]
SROS NYSE
SUBMISSION-CONTACT
NAME LEE AN KARALEKAS
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/FILER>
DOCUMENT
TYPE U-1
DESCRIPTION Acquisition/Unbundling
TEXT
File No. 70 -
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
APPLICATION-DECLARATION WITH RESPECT TO
THE ACQUISITION OF A SUBSIDIARY IN CONNECTION
WITH THE UNBUNDLING OF GENERATION BUSINESS
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
- --------------------------------
EASTERN UTILITIES ASSOCIATES ("EUA")
One Liberty Square, P.O. Box 2333, Boston, Massachusetts 02107
EASTERN EDISON COMPANY ("EASTERN")
750 West Center Street, West Bridgewater, Massachusetts 02379
MONTAUP ELECTRIC COMPANY
750 West Center Street, West Bridgewater, Massachusetts 02379
(Names of companies filing this statement and addresses of their principal
executive offices)
EASTERN UTILITIES ASSOCIATES
(Name of top registered holding company parent of each applicant or declarant)
- ---------------------------------
Clifford J. Hebert, Jr.
Treasurer
Eastern Utilities Associates
One Liberty Square
P.O. Box 2333
Boston, MA 02107
(Name and address of agent for service)
The Commission is requested to mail signed copies of all orders, notices and
communications to:
Arthur I. Anderson, P.C.
McDermott, Will & Emery
28 State Street
Boston, MA 02109-1775
Item 1. Description of Proposed Transaction.
I. Introduction.
A. Description of the Parties to the Transaction
This Application-Declaration (the "Declaration") is being filed with the United
States Securities and Exchange Commission (the "Commission") by Eastern
Utilities Associates ("EUA"), a Massachusetts voluntary association and a
registered public utility holding company under the Public Utility Holding
Company Act of 1935, as amended (the "Act"), Eastern Edison Company ("Eastern
Edison"), a Massachusetts corporation that is a registered retail electric
utility company and a wholly-owned subsidiary of EUA, and Montaup Electric
Company ("Montaup"), a Massachusetts corporation that is a wholesale generation
and transmission company and the wholly-owned subsidiary of Eastern Edison
(collectively, the "Declarants").
B. General Request and Overview of Transaction.
The Declarants hereby file this Declaration for the purpose of obtaining
Commission authorization for Eastern Edison to transfer to EUA, and for EUA to
acquire from Eastern Edison, all of Eastern Edison's investment in Montaup's
capitalization including its outstanding: (i) preferred stock of Montaup (ii)
common stock of Montaup; and (iii) debenture bonds of Montaup (the securities
described in clauses (i) through (iii), collectively, the "Montaup Securities"),
thereby causing Montaup to become a wholly-owned, first-tier subsidiary of EUA
(such transfer and acquisition of Montaup Securities, and the transactions
relating thereto, hereafter collectively referred to as the "Spin-Off"). The
transfer of the Montaup Securities to EUA by Eastern Edison will take the form
of a special dividend payment comprising all remaining capitalization of
Montaup, which will be paid out of Eastern Edison's retained earnings to the
maximum extent possible and, thereafter, subject to receipt of Commission
authorization, out of paid-in capital, unearned surplus and/or a redemption of
Eastern Edison common stock, such redemption to be funded with Montaup
Securities.
The Declarants expect that the Spin-Off will produce significant benefits to the
EUA holding company system's investors and consumers and will meet all
applicable standards of the Act. The corporate separation of Montaup from
Eastern Edison through the Spin-Off will complete the functional unbundling of
Montaup's generation business from Eastern Edison's distribution business,
consistent with the requirements of Section 1A(b) of the Massachusetts
Restructuring Act of 1997, and thereby isolating Eastern Edison's capital
structure so that it will apply only to distribution ratemaking. The Spin-Off
also will eliminate any risk that Eastern may have incurred through its
association with Montaup as a result of Montaup's ownership interest in a
nuclear facility and other contingent liabilities. In addition, the Spin-Off
will further simplify EUA's corporate structure.
C. Amendment of Montaup Charter
Prior to consummating the Spin-Off, and subject to obtaining (i) Commission
authorization therefor, which Montaup hereby requests, and (ii) the consent of
Eastern Edison, its sole shareholder, Montaup will amend its charter to
eliminate its status as a Section 9A company under Chapter 164 of the
Massachusetts General Laws so that its ability to transmit and sell electricity
will not be tied to its sole shareholder.
II. Dividend Distribution by Eastern Edison to EUA and Payment Out of Paid
In Capital.
Eastern Edison hereby proposes and requests authorization to distribute all of
the then remaining Montaup Securities to EUA in the form of a dividend which
shall, in part, exceed Eastern Edison's retained earnings and be paid out of
paid-in capital, unearned surplus and/or as the redemption price for the
redemption of Eastern Edison common stock (as described in paragraph I.B above).
EUA proposes and requests authorization to acquire and/or receive in the form of
a dividend from Eastern Edison such Montaup Securities. All of the Montaup
Securities are issued in the name of, and beneficially owned by, Eastern Edison.
Eastern Edison hereby further requests authorization, upon consummation of the
Spin-Off, to pay future dividends to EUA out of other than retained earnings.
III. EWGs and FUCOs.
None of the Declarants has acquired an ownership interest in any EWG or FUCO, or
now is or as a consequence of the transactions proposed herein will become a
party to or has or will as a consequence of the transactions proposed herein any
right under a service, sales or construction contract with an EWG or FUCO,
except in accordance with the provisions of the Act. The Declarants will not
acquire any such interest or right without first obtaining any necessary
Commission authorization. All applicable conditions contained in Rule 53(a) are,
and assuming the consummation of the proposed transactions will be, satisfied,
and none of the conditions contained in Rule 53 (b) exist or will exist as a
result of the proposed transactions making Rule 53(c) inapplicable.
Item 2. Fees, Commissions and Expenses.
The estimate of the approximate amount of fees and expenses payable in
connection with the proposed transactions is as follows:
(To be filed by Amendment)
Counsel fees
Financial fees
Miscellaneous
TOTAL
Item 3. Applicable Statutory Provisions.
The sections of the Act and rules or exemptions thereunder that the Declarants
consider applicable to the transactions, or the basis for exemption therefrom,
are set forth below:
Transaction Applicable Statutory Provisions
Acquisition of Montaup Securities Sections 9(a), 10 and 12(c); by EUA
from Eastern Edison Rule 43
Payment of dividends out of paid-in Section 12(c); Rule 46(a)
capital and unearned surplus by
Eastern Edison
Redemption of Eastern Edison Sections 9(a), 10, 12(c); Rule 43
common stock
Amendment of Montaup Charter Sections 6(a) and 7
to eliminate Section 9A status
Item 4. Regulatory Approval.
The following Federal and state regulatory authorities have jurisdiction over
the proposed transactions: the Nuclear Regulatory Commission ("NRC"), the
Federal Energy Regulatory Commission ("FERC"), and the Connecticut Department of
Public Utility Control ("CDPUC"). Additionally, the Applicants intend to request
from the Massachusetts Department of Telecommunications and Energy ("DTE")
confirmation that the proposed transactions do not fall within the jurisdiction
of the DTE or, in the alternative, approval of such transactions.
Item 5. Procedure.
(a) In order to enable Eastern Edison to spin-off Montaup to EUA and to
undertake the other related transactions contemplated in Item 1, the Declarants
request that the Commission issue and publish not later than August 9, 1999 a
notice with respect to the filing of this Declaration and, concurrently
therewith, that the Commission enter an appropriate order granting and
permitting this Declaration to become effective at the earliest convenient date.
(b) No recommended decision by a hearing officer or other responsible officer
of the Commission is necessary or required in this matter. The Division of
Investment Management of the Commission may assist in the preparation of the
Commission's decision in this matter. There should be no thirty-day waiting
period between the issuance and the effective date of any order issued by the
Commission in this matter, and it is respectfully requested that any such order
be made effective immediately upon the entry thereof.
Item 6. Exhibits and Financial Statements.
(a) Exhibits.
* To be filed by Amendment
*Exhibit A-1 Amended and Restated Articles of Organization
of Montaup
*Exhibit D-1 Regulatory filings with/orders of the FERC
*Exhibit D-2 Regulatory filings with/orders of the NRC
*Exhibit D-3 Regulatory filings with/orders of the CDPUC
*Exhibit D-4 Regulatory filings with/orders of the DTE
*Exhibit F Opinion of Counsel
*Exhibit G Proposed form of Notice
(b) Financial Statements
* To be filed by Amendment
Item 7. Environmental Effects.
The proposed transactions do not involve major Federal action having a
significant effect on the human environment. No Federal agency has prepared or
is preparing an environmental impact statement with respect to the proposed
transactions.
<PAGE>
S I G N A T U R E
Pursuant to the requirements of the Public Utility Holding Company Act of 1935,
as amended, each of the undersigned companies has duly caused this statement to
be duly signed on its behalf by the undersigned thereunto duly authorized.
Date: July 14, 1999
EASTERN UTILITIES ASSOCIATES,
EASTERN EDISON COMPANY, and
MONTAUP ELECTRIC COMPANY,
By /s/ Clifford J. Hebert, Jr.
-----------------------------------
Clifford J. Hebert, Jr.
Treasurer
<PAGE>
Attachment 2
File No. 70-9527
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
APPLICATION-DECLARATION WITH RESPECT TO
THE ACQUISITION OF A SUBSIDIARY IN CONNECTION
WITH THE UNBUNDLING OF GENERATION BUSINESS
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
--------------------------------
EASTERN UTILITIES ASSOCIATES ("EUA")
One Liberty Square, P.O. Box 2333, Boston, Massachusetts 02107
EASTERN EDISON COMPANY
("EASTERN") 750 West Center Street, West
Bridgewater, Massachusetts 02379
MONTAUP ELECTRIC COMPANY
750 West Center Street, West Bridgewater, Massachusetts 02379
(Names of companies filing this statement and addresses of their principal
executive offices)
EASTERN UTILITIES ASSOCIATES
(Name of top registered holding company parent of each applicant or declarant)
---------------------------------
Clifford J. Hebert, Jr.
Treasurer
Eastern Utilities Associates
One Liberty Square
P.O. Box 2333
Boston, MA 02107
(Name and address of agent for service)
The Commission is requested to mail signed copies of
all orders, notices and communications to:
Arthur I. Anderson, P.C.
McDermott, Will & Emery
28 State Street
Boston, MA 02109-1775
<PAGE>
This Amendment No. 1 amends the Application-Declaration on Form U-1
(File Number 70-9527) filed with the Commission on July 14, 1999. Item 4 is
hereby amended and restated in its entirety to read as follows:
Item 4. Regulatory Approval.
In addition to the Commission, the Nuclear Regulatory Commission
("NRC") and the Federal Energy Regulatory Commission ("FERC") are the federal
regulatory authorities that have jurisdiction over the proposed transactions:
Additionally, the Applicants intend to request from each of the Massachusetts
Department of Telecommunications and Energy ("DTE") and the Connecticut
Department of Public Utility Control ("CDPUC") confirmation that the proposed
transactions do not fall within their respective j urisdictions, or in the
alternative, approval of such transactions.
<PAGE>
S I G N A T U R E
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, as amended, each of the undersigned companies has duly caused this
statement to be duly signed on its behalf by the undersigned thereunto duly
authorized.
Date: July 28, 1999
EASTERN UTILITIES ASSOCIATES,
EASTERN EDISON COMPANY, and
MONTAUP ELECTRIC COMPANY,
By /s/ Clifford J. Hebert, Jr.
-----------------------------------
Clifford J. Hebert, Jr.
Treasurer
<PAGE>
Attachment 2
APPLICATION OF COX COMMUNICATIONS, INC. FOR APPROVAL OF
PRO FORMA STOCK TRANSFER AND MERGER
DOCKET NO. 86-11-02
Connecticut Department of Public Utility Control
1986 Conn. PUC LEXIS 16
December 9, 1986
PANEL:
[*1]
David J. Harrigan, Peter G. Boucher, Edythe J. Gaines
OPINION:
DECISION
I. INTRODUCTION
By application filed with the Connecticut Department of Public Utility
Control (Department) on November 4, 1986, Cox Communications, Inc. (CCI), a
Delaware corporation, pursuant to Section 16-43(a)(1) of the General Statutes of
Connecticut, as amended by Public Act 85-509, hereby requests the Department's
approval with respect to a proposed internal corporate reorganization involving
a pro forma transfer of the stock and merger of Cox Cable Greater Hartford, Inc,
(Greater Hartford).
There is no statutory requirement for a hearing and none has been held.
II. APPLICANT'S EVIDENCE
Greater Hartford, a Connecticut corporation, is a community antenna
television company and a public service company within the meaning of Section
16-1 of the General Statutes. Greater Hartford is a wholly-owned subsidiary of
Cox Cable Communications, Inc. (Cox Cable), which holds stock in a number of
companies engaged in the cable television business. In turn, Cox Cable is owned
by various other corporations, each of which is a wholly-owned subsidiary of
CCI. One of the shareholders of Cox Cable is New Cox [*2] Cable Greater
Hartford, Inc.
CCI proposes to effect an internal corporate restructuring of the ownership
of Greater Hartford. Cox Cable has adopted a plan of complete liquidation.
Pursuant to the Cox Cable plan of complete liquidation, and subject to the
receipt of any requisite approvals from the Federal Communications Commission
and other regulatory authorities, the issued and outstanding shares of the
capital stock of Greater Hartford (5,000 shares), presently held by Cox Cable,
are to be distributed in liquidation of Cox Cable to New Greater Hartford, with
the result that Greater Hartford will be a wholly-owned subsidiary of New
Greater Hartford. Greater Hartford will then be merged into New Greater
Hartford, with New Greater Hartford being the surviving corporation but changing
its corporate name by dropping the 'New" designation.
This transaction is being undertaken in order to simplify the current
corporate structure of CCI. After the proposed transaction, New Greater
Hartford will hold the cable television franchise and there will be no change in
the management or operation of the Greater Hartford cable television system as a
result of the transaction. The directors [*3] and officers of New Greater
Hartford are the same as the directors and officers of Greater Hartford, and
there will be no change in the directors and officers of Greater Hartford, New
Greater Hartford, or CCI in connection with the proposed reorganization.
As a result of the proposed transaction, the stock of Greater Hartford
presently held by CCI will be transferred to and held by New Greater Hartford
and Greater Hartford will merge into New Greater Hartford with the latter being
the surviving corporation.
Although CCI requests approval for the proposed stock transfer and merger, it
does not believe that the proposed internal corporate reorganization will result
in a transfer of the certificate held by Greater Hartford under Sections 16-43
and 16-331 of the General Statutes of Connecticut and the Department's "30%
Rule" set forth in Docket No. 11343, since the ultimate controlling ownership by
CCI of the corporation holding the cable television franchise at issue will
continue. The proposed corporate restructuring involves a transfer of the stock
and subsequent merger of Greater Hartford from one CCI subsidiary to another.
The proposed transaction will not affect the franchise [*4] terms of the cable
television franchise held by Greater Hartford, nor will the transaction result
in a new or sold franchise.
III. AUTHORITY ANALYSIS
The Authority has reviewed the evidence submitted and finds that the proposed
transaction will not affect operations in Connecticut. The proposed transaction
is strictly an internal restructuring of the corporate chain of command and will
not adversely affect Connecticut ratepayers.
IV. FINDINGS OF FACT
The proposed corporate restructuring will not adversely affect Connecticut
ratepayers.
V. CONCLUSION AND CONDITIONS
A. Conclusion
Upon consideration of all the evidence presented in this proceeding and
subject to certain conditions as detailed below, the proposed transaction is
hereby approved.
B. Conditions
1. The terms and conditions of the proposed transaction shall be as stated
in this proceeding and no further written material or oral supplements to or
material modification of those terms and conditions shall be executed without
prior approval of this Department. CCI shall notify the department within 30
days from the completion of the proposed restructuring that no material
modifications were [*5] made to the terms and conditions of the proposed
transaction.
We hereby direct that notice of the foregoing be given by the Executive
Secretary of this Department by forwarding true and correct copies of this
document to parties in interest, and due return make.
Dated at New Britain, Connecticut, this 9th day of December, 1986.
[Swidler Berlin Shereff Friedman, LLP Letterhead]
June 15, 1999
by hand
U.S. Nuclear Regulatory Commission
Attention: Docket Control Desk
Washington, D.C. 20555
Re: Application of Montaup Electric Company and
New England Power Company for Transfer of
Licenses and Ownership Interests
Dear Sirs:
Enclosed please find an original and one copy of a request for
approval of certain indirect and direct transfers of the license and ownership
interests of Montaup Electric Company ("Montaup") with respect to the nuclear
facilities described below.
Approval is being sought for the transfer of Montaup's minority
ownership interests in the licenses for Millstone Unit No. 3 and Seabrook Unit
No. 1, as well as Montaup's ownership interest as a minority shareholder in the
four Yankee Companies (Vermont Yankee Nuclear Power Corporation, Yankee Atomic
Electric Company, Maine Yankee Atomic Power Company, and Connecticut Yankee
Power Company), as a result of the proposed merger of the parent company of
Montaup, Eastern Utilities Associates ("EUA"), with New England Electric System
("NEES"), the parent company of New England Power Company ("NEP"). Approval is
sought for the following: (i) the indirect transfer of control from EUA to NEES
resulting from the merger;1/ (ii) the indirect transfer of control resulting
from a proposed merger of NEES with The National Grid Group plc, which is
subject to a separate application currently pending before the Commission; and
(iii) a direct transfer of the license and ownership interests from Montaup to
NEP that will result from the consolidation of Montaup into NEP in connection
with the merger.
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1 Approval is also sought, if required, for the restructuring of EUA's family
of companies that will take place independent of and prior to the merger.
That restructuring will make EUA, which currently owns Montaup through
another wholly-owned subsidiary, the direct parent company of Montaup.
<PAGE>
U.S. Nuclear Regulatory Commission
Attention: Docket Control Desk
June 15, 1999
Page 2
Copies of the application and exhibits are being provided to the
Commission's Regional Office, resident inspectors at the plants, the licensees
and the state officials designated for consultation by the Commission under 10
C.F.R. section 50.91(b). Also enclosed is an extra copy to be marked as filed
and returned to our messenger.
If you have any questions regarding this Application, please contact
me at 202-424-7555.
Sincerely,
/s/ Scott P. Klurfeld
----------------------------------------
Scott P. Klurfeld
On behalf of New England Power
Company and Montaup Electric Company
Enclosures
cc (w/enclosures): James Anderson (NRC)
Lawrence Chandler, Esq. (NRC)
John T. Harrison (NRC)
Steven Hom (NRC)
Robert S. Wood (NRC)
<PAGE>
TABLE OF CONTENTS
Page
I. INTRODUCTION............................................................. 1
II. SUMMARY OF APPLICATION AND REASONS FOR
PROPOSING THE TRANSFERS.................................................. 5
A. Merger Benefits..................................................... 5
B. The Facilities...................................................... 5
C. The Transaction Involves Both Indirect and Direct
Transfers of Control for Which Approvals Are Being Sought........... 6
D. The Transactions Will Not Adversely Affect Millstone 3,
Seabrook or the Yankee Plants....................................... 7
E. Expeditious Approval Is Requested................................... 8
III. DESCRIPTION OF THE PARTIES AND THE TRANSACTION........................... 9
A. EUA and Montaup..................................................... 9
B. NEES and NEP........................................................11
C. The Transaction.....................................................14
IV. THE TRANSFER MEETS ALL OF THE REQUIREMENTS GOVERN
ING LICENSE TRANSFERS....................................................15
A. The Merger Will Not Affect Operation of Millstone 3,
Seabrook or the Yankee Plants and Thus Will Not Affect the
Public Health or Safety, Common Defense and Security or
the Human Environment...............................................16
B. The Licensee Will Be Qualified Both Technically and
Financially to Meet All of the Commission's Obligations.............17
C. The Identity, Business Address, and Relevant Personnel of the
Licensee and of the Facilities Will Not Be Affected by the Merger...18
i
<PAGE>
D. The Merger Will Not Result in the Licensee Becoming
Directly Owned, Controlled, or Dominated by an Alien,
a Foreign Corporation, or a Foreign Government......................19
V. THE TRANSFER WILL NOT AFFECT THE DECOMMISSIONING
FINANCIAL ASSURANCES REQUIRED BY THE COMMISSION
AND WILL NOT BE DETRIMENTAL TO THE FINANCIAL
HEALTH OF THE LICENSEE...................................................22
A. The Financial Assurances Required by the Commission's
Recent Rulemaking Are Already in Place Regarding Montaup
and NEP and Will Not Be Affected by the Merger......................23
1. Non-Bypassable Charge in Massachusetts.........................24
2. Non-Bypassable Charge in Rhode Island..........................26
3. Non-Bypassable Charges in New Hampshire........................27
B. Conclusion..........................................................28
VI. THE MERGER WILL NOT HAVE SIGNIFICANT
ENVIRONMENTAL EFFECTS....................................................28
VII. REQUIRED INFORMATION.....................................................29
A. 10 C.F.R. section 50.33 - General Information.......................29
1. Name of Licensee...............................................29
2. Address of Licensee............................................29
3. Description of Business........................................29
4. Corporate Information..........................................30
5. Agency Status..................................................30
6. Financial Information..........................................30
7. Emergency Response Plan........................................30
ii
<PAGE>
8. Construction or Alteration at Facility.........................30
9. Regulatory Agencies and News Publications......................30
10. Restricted Data................................................31
11. Decommissioning................................................32
B. 10 C.F.R. section 50.33 - Financial Information.....................32
1. Financial Qualifications for Continued Conduct of Activities...32
2. Decommissioning Funding........................................33
C. 10 C.F.R. section 50.34 - Technical Information ....................33
D. 10 C.F.R. section 50.33a - Antitrust Information....................34
VIII. CONCLUSION..............................................................35
VERIFICATIONS............................................... follow page 35
EXHIBITS.....................................appear in two separate volumes
iv
<PAGE>
Exhibit List
Exhibit A: EUA's most recent Form 10-K
Exhibit B: EUA's most recent Annual Report to Shareholders
Exhibit C: NEES's most recent Form 10-K
Exhibit D: NEES' most recent Annual Report to Shareholders
Exhibit E: February 1, 1999 Merger Agreement between NEES and EUA
Exhibit F: Millstone 3 Sharing Agreement
Exhibit G: Names and addresses of Officers and Directors of NEES, NEP and
Montaup and names, addresses and country of citizenship of the
Officers and Directors of NEES and NEP after the closing of the
NEES-National Grid Merger
Exhibit H: Decommissioning Fund Information
Exhibit I: NEP's Proposed Amended Bylaws and Current Bylaws
Exhibit J: Seabrook Ownership and Operating Agreements
Exhibit K: Copy of declaration filed with the Federal Energy Regulatory
Commission explaining why the Merger raises no antitrust concerns
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE
NUCLEAR REGULATORY COMMISSION
Millstone Unit No. 3 ) NRC License No. NPF-49
Seabrook Unit No. 1 ) NRC License No. NPF-86
Vermont Yankee Nuclear Power Corporation ) NRC License No. DPR-28
Yankee Atomic Electric Company ) NRC License No. DPR-3
Maine Yankee Atomic Power Company ) NRC License No. DPR-36
Connecticut Yankee Power Company ) NRC License No. DPR-61
APPLICATION OF MONTAUP ELECTRIC COMPANY
AND NEW ENGLAND POWER COMPANY FOR
TRANSFER OF LICENSES AND OWNERSHIP INTERESTS
APPLICATION
Edward Berlin Thomas G. Dignan, Jr.
Kenneth G. Jaffe Ropes & Gray
Scott P. Klurfeld One International Place
Swidler Berlin Shereff Friedman, LLP Boston, Massachusetts 02110-2624
3000 K Street, N.W., Suite 300 617-951-7000
Washington, D.C. 20007-5116
202-424-7500
Attorneys for New England Power Company Attorneys for Montaup Electric Company
June 15, 1999
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE
NUCLEAR REGULATORY COMMISSION
Millstone Unit No. 3 ) NRC License No. NPF-49
Seabrook Unit No. 1 ) NRC License No. NPF-86
Vermont Yankee Nuclear Power Corporation ) NRC License No. DPR-28
Yankee Atomic Electric Company ) NRC License No. DPR-3
Maine Yankee Atomic Power Company ) NRC License No. DPR-36
Connecticut Yankee Power Company ) NRC License No. DPR-61
APPLICATION OF MONTAUP ELECTRIC COMPANY
AND NEW ENGLAND POWER COMPANY FOR
TRANSFER OF LICENSES AND OWNERSHIP INTERESTS
I. INTRODUCTION
Pursuant to Section 184 of the Atomic Energy Act of 1954, as
amended,1/ and Section 50.80 of the Commission's Rules,2/ Montaup Electric
Company ("Montaup") and New England Power Company ("NEP") hereby seek prior
Commission approval for certain indirect and direct transfers of (1) Montaup's
minority ownership interests in the licenses for the Millstone Unit No. 3 and
Seabrook Unit No. 1 3/ nuclear facilities, and (2) Montaup's interest as a
minority shareholder in the four Yankee nuclear facilities described below.
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1 42 U.S.C. section 2184 (1994).
2 10 C.F.R. section 50.80 (1998).
3 Montaup currently has pending in Docket No. 50-443 a request to transfer
its ownership share in Seabrook to Little Bay Power Corporation. The
request in this Applica tion by Montaup to transfer its Seabrook share is
being made on a conditional basis in the event that the merger between the
parent companies of Montaup and NEP is completed before the conclusion of
Montaup's transfer to Little Bay. If that is not the case, meaning that the
Little Bay transfer is completed before the Merger, then Montaup would no
longer own any share of Seabrook and the request in this Application to
transfer Montaup's share of Seabrook would be mooted. Montaup and NEP
request that if the latter situation occurs, then their request in this
Application to transfer Montaup's share of Seabrook to NEP be withdrawn
automatically. NEP had intervened in the Little Bay proceeding, requesting
additional financial assurances from Montaup with regard to the transfer,
but subsequently settled with Little Bay and, on April 15, 1999, withdrew
its intervention and other pleadings.
<PAGE>
Montaup and NEP both have minority, non-operating, ownership interests
in Unit No. 3 of the Millstone commercial nuclear facility located in Waterford,
Connecticut ("Millstone 3"). Montaup and NEP also are minority, non-operating,
owner licensees of Unit No. 1 of the Seabrook facility located in Seabrook, New
Hampshire ("Seabrook"). Both Montaup and NEP have minority ownership interests
in the Vermont Yankee Nuclear Power Corporation, Yankee Atomic Electric Company,
Maine Yankee Atomic Power Company, and Connecticut Yankee Power Company
(collectively, "Yankee Companies"), which hold Commission licenses for the
Vermont Yankee Nuclear Power Station, Yankee Nuclear Power Station, Maine Yankee
Nuclear Facility, and Connecti cut Yankee Nuclear Facility, respectively
(collectively, "Yankee Plants").4/ Neither Applicant has control of or conducts
licensed activities for any of the facilities.
This Application is being filed because of the proposed merger
("Merger") of Eastern Utilities Associates ("EUA") (Montaup's ultimate parent
organization) with New England Electric System ("NEES") (NEP's parent
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4 By letter dated April 22, 1999, from Samuel Collins, Director, Office of
Nuclear Reactor Regulation, to Mary Murphy, Attorney at LeBoeuf, Lamb,
Greene & MacRae, LLP, the Commission staff stated that Commission threshold
review was necessary regarding transfers of ownership interests in the
Yankee Companies in a merger transaction involving NEP's parent company.
Applicants are, therefore, specifically seeking approval in this
Application of Montaup's transfer of ownership interest in the Yankee
Companies.
3
<PAGE>
organization). Montaup is currently wholly owned by Eastern Edison Company
("Eastern Edison"), which is in turn wholly owned by EUA. Independent of and
prior to the closing of the Merger, Eastern Edison will transfer the common
stock of Montaup to EUA so that EUA will become the direct parent of Montaup.
Through the Merger, the parent company of Montaup will then change from EUA to
NEES, and following the Merger, Montaup will be consolidated into NEP. The
Merger will thus result in both an indirect transfer (from EUA to NEES) and a
direct transfer (from Montaup to NEP) of Montaup's interests in the nuclear
facilities described above for which Commission approval is required.5/
In addition, Montaup requests approval of an indirect transfer of
economic control resulting from the proposed Merger between NEES and The
National Grid Group plc ("National Grid"). NEP filed with the Commission on
March 15, 1999, a request for prior approval of the indirect transfer of control
of NEP's interests in nuclear facilities that would result from the National
Grid Merger. Because Montaup's minority ownership interest in the Millstone 3
and Seabrook licenses and in the Yankee Compa nies will be transferred to NEP
upon completion of the NEES-EUA Merger, the consummation of the NEES-National
Grid Merger will result in an indirect transfer of economic control of Montaup's
ownership interests from NEES to National Grid, again requiring Commission
approval.6/
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5 To the extent the transfer of ownership of Montaup from Eastern Edison to
EUA involves an indirect transfer of control that requires Commission
approval, Applicants request that approval as well.
6 The explanations and reasons for approving the indirect transfer of
economic control from NEES to National Grid are presented in full in NEP's
March 15, 1999, application ("March 15 Application") seeking approval of
the National Grid Merger with respect to NEP's ownership interests. NEP's
ownership interests are in the exact same nuclear facilities as Montaup's.
The reasoning supporting the indirect transfer of economic control to
National Grid with respect to NEP's ownership interests therefore applies
equally to Montaup's ownership interests in those same facilities. The
explanations and reasons from the March 15 Application are hereby
incorporated by reference to support the request for approval of the
indirect transfer of control of Montaup's interests as a result of the
NEES-National Grid Merger, and will not be restated in full in this
Application. Where necessary, specific references to the National Grid
Merger will be discussed. For example, a summary of how NEES and National
Grid will comply with Section 103(d) of the Atomic Energy Act and 10 C.F.R.
section 50.38 (1998) (through the use of a negation action plan
establishing an independent Special Nuclear Committee of the Board of
Directors of NEP consisting only of U.S. citizens) appears in Section IV.D,
below.
4
<PAGE>
The changes in ownership associated with the Merger will not change
the operation, management, license terms or conditions, or performance of
Millstone 3, Seabrook, or the Yankee Plants. The surviving consolidated entity,
NEP, will remain obligated to perform all current obligations, including
decommissioning funding. It will still hold only minority, non-operating
licenses in both Millstone 3 and Seabrook, and be only a minority shareholder in
the Yankee Companies. There will be no adverse change with respect to either
NEP's or Montaup's rights or duties under the licenses, ownership or
participation agreements regarding the facilities, or any other applicable law
or document. As described further below, the transaction will not affect the
common defense and security, the public health and safety, result in the
licenses being held by a foreign entity, or result in the licenses being owned,
controlled, or dominated by a foreign entity.7/ For those reasons, and other
reasons described below, the Commis sion should approve the requests in this
Application without delay.
- ---------------
7 As noted earlier, Section IV.D explains why there is no issue regarding
foreign ownership or control.
5
<PAGE>
II. SUMMARY OF APPLICATION AND REASONS
FOR PROPOSING THE TRANSFERS
A. Merger Benefits
The Merger between EUA and NEES will result in savings to consumers in
the New England area. NEES and EUA have consistently been among the lowest-cost
electric companies in the region. The geographic fit between these companies
will allow them to combine their existing transmission networks, eliminate
duplicative facilities, management, and overhead, as well as enhance economic
efficiencies. These efficiency gains will be further enhanced through the Merger
and consolidation of Montaup into NEP. Both Montaup and NEP have sold off almost
all of their non-nuclear generation assets. They both currently own shares of
the same nuclear assets. Both are under regulatory obligations to endeavor to
divest all of their remaining generation resources, including their nuclear
assets. The Merger will permit NEP, the surviving entity, to manage the
remaining nuclear assets more efficiently by eliminating duplicative efforts.
Consumers will be the ultimate beneficiaries of the transaction.
B. The Facilities
Millstone 3 is a 1,150 MW pressurized water reactor that began
commercial operation in May 1986. Montaup owns a 4.0% interest and NEP owns a
12.2% interest. A subsidiary of Northeast Utilities, Northeast Nuclear Energy
Company, is the licensed operator.8/
- ---------------
8 The remaining licensee-owners, with their proportionate interests, are:
Connecticut Light & Power Company (52.9%), Western Massachusetts Electric
Company (12.2%), Massachusetts Municipal Wholesale Electric Company (4.8%),
United Illuminating Company (3.7%), Public Service Company of New Hampshire
(2.8%), Central Maine Power Company (2.5%), Central Vermont Public Service
Corporation (1.7%), Chicopee Electric Light Department (1.35%), Connecticut
Municipal Electric Energy Cooperative, Inc. (1.1%), Vermont Electric
Generation and Transmission Cooperative, Inc. (0.35%), Fitchburg Gas &
Electric Company (0.2%), and Lyndonville (Village of) Electric Depart ment
(0.04%).
5
<PAGE>
Seabrook is a 1,150 MW pressurized water reactor that began commercial
operation in 1990. Montaup currently owns a 2.9% interest (as noted above, which
is subject to a prior sale)9/ and NEP owns a 9.9% interest. The North Atlantic
Energy Service Corporation ("North Atlantic") is the managing agent for
Seabrook.10/
Vermont Yankee Nuclear Power Station is a 510 MW facility that began
com mercial operations in November 1972. It is the only one of the four Yankee
Plants currently operating. Montaup and NEP own the following shares of the
Yankee Companies: Vermont Yankee (2.5% and 20%, respectively); Yankee Atomic
(4.5% and 30%); Maine Yankee (4% and 20%); and Connecticut Yankee (4.5% and
15%).
C. The Transaction Involves Both Indirect and
Direct Transfers of Control for Which Approvals
Are Being Sought.
As a result of the NEES-EUA Merger and the NEES-National Grid Merger,
there will be two separate indirect transfers as well as one direct transfer of
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9 As stated above, if Montaup's transfer to Little Bay is concluded before
the EUA-NEES Merger, then the request in this Application to transfer
Montaup's interest in Seabrook to NEP would be mooted. If the transfer is
not concluded at the time of the consummation of the Merger, NEP will
complete the transfer according to the terms of the agreement between
Montaup and Little Bay and the regulatory orders approving that transfer.
10 The other owners and their proportionate interests are: North Atlantic
Energy Corporation (35.9%); United Illuminating Company (17.5%); Great Bay
Power Corporation (12.1%); Massachusetts Municipal Wholesale Electric
Company (11.6%); Connecticut Light & Power Company (4.1%); Canal Electric
Company (3.5%); New Hampshire Electric Cooperative, Inc. (2.2%); Taunton
Municipal Light Plant (0.1%); and Hudson Light & Power Department (0.1%).
7
<PAGE>
control of Montaup's licenses in Millstone 3 and Seabrook and of its ownership
interests in the Yankee Companies. The two indirect transfers of Montaup's
interests are: (1) the change in the upstream economic ownership from EUA to
NEES as a result of the NEES-EUA Merger; and (2) the change in the upstream
economic ownership from NEES to National Grid as a result of the NEES-National
Grid Merger.11/ The direct transfer is from Montaup to NEP as a result of the
consolidation of Montaup into NEP. This Application seeks approval for all three
transfers.
D. The Transactions Will Not Adversely Affect
Millstone 3, Seabrook or the Yankee Plants.
The transactions will not have an adverse effect on the control,
operation, personnel, financial status, physical condition, environmental
effects, business plan, or decommissioning capability of Millstone 3, Seabrook
or the Yankee Plants.
As a minority, non-operating licensee for Millstone 3 and Seabrook,
Montaup's primary obligations are to contribute funds and take electricity. Its
obligations are similarly limited in its role as minority shareholder in the
Yankee Companies. The Merger will result in the transfer of Montaup's interests,
but only to NEP, an existing holder of interests in the same facilities, which
is fully capable of performing Montaup's obligations and responsibilities.
Consequently, the Merger will not interfere with the performance of Montaup's
obligations but, instead, by combining the two companies, it will build a
stronger, more financially secure company that will be better able to carry out
those obligations.
- ---------------
11 To the extent the change in upstream economic ownership from Eastern Edison
to EUA resulting from the transfer of Montaup's common stock is also an
indirect transfer of control that requires Commission approval, Applicants
request that as well. Commission approval of the indirect transfers of
control is governed by Streamlined Hearing Process for NRC Approval of
License Transfers, 63 Fed. Reg. 66721 (December 3, 1998) (to be codified at
10 C.F.R., pts. 2 and 51) ("Streamlined Final Rule").
8
<PAGE>
The transactions will not have any negative effect on the ability to
decommission Millstone 3, Seabrook or the Yankee Plants, or on the funds
available for such decom missioning. Both Montaup's and NEP's portions of the
decommissioning funds for the units are funded commensurate with the schedule
approved by jurisdictional regulatory agencies. They each currently collect
their respective share of estimated decommission ing costs for the facilities
through non-bypassable charges set forth in mandatory Contract Termination
Charges ("CTC") paid by their respective affiliated distribution utilities
(collectively, "Distribution Utilities"). The Distribution Utilities, in turn,
are allowed to collect funds for decommissioning through non-bypassable charges
to their retail customers. Nothing about the Merger will affect this regulatory
mechanism. And, once merged, NEP will continue to have access to a broad base of
customers to ensure the collection of adequate funds. For purposes of
decommissioning financial assurance under 10 C.F.R. section 50.75, NEP and
Montaup thus provide assurances equivalent to those offered by an "electric
utility." Accordingly, the Merger will not affect either of the Applicant's
ability to recover decommissioning expenses.
E. Expeditious Approval Is Requested.
NEES and EUA seek to close the transaction in calendar year 1999. The
Application shows that the Merger will not have an adverse effect on any of the
nuclear facilities involved and satisfies all regulatory requirements. For these
reasons, the Commission should approve the application without delay.
8
<PAGE>
III. DESCRIPTION OF THE PARTIES AND THE TRANSACTION
A. EUA and Montaup
EUA is a Massachusetts voluntary association organized and existing
under a Declaration of Trust dated April 2, 1928, as amended, and is a
registered holding company under the Public Utility Holding Company Act of 1935
("PUHCA").12/ Its subsidiaries are principally engaged in the following:
transmission, distribution and sale of electricity; energy related services such
as energy management; and promoting the conservation and efficient use of
energy. Through its utility subsidiaries, EUA delivers electric service to more
than 305,000 consumers in southeastern Massachusetts and northern and coastal
Rhode Island. Non-utility subsidiaries market energy efficiency services
nationwide and invest in energy-related, non-regulated businesses.
EUA's electric distribution company affiliates include Eastern Edison,
which provides service to approximately 186,000 customers in non-contiguous
service territories covering the southeastern Massachusetts cities of Brockton
and Fall River, plus 20 surrounding towns. Another electric distribution company
affiliate is Blackstone Valley Electric Company ("Blackstone Valley"), which
provides service to approximately 86,000 customers in the northern Rhode Island
cities of Pawtucket and Woonsocket and five neighboring communities. Finally,
Newport Electric Corporation ("Newport") is an electric distribution company
affiliate that provides service to approximately 33,000 customers in Newport,
Jamestown, Middletown, and Portsmouth, Rhode Island. Each of these companies
originally entered into long-term, all-require ments power purchase contracts
with Montaup. Although those contracts have been amended recently, the
- ---------------
12 15 U.S.C. section 79 et seq.
10
<PAGE>
purchasers under those contracts remain liable to pay charges to Montaup, which
include, among other things, amounts sufficient to pay each pur chaser's share
of Montaup's decommissioning liability for the nuclear facilities in which
Montaup holds an interest.
Montaup is currently a wholly-owned subsidiary of Eastern Edison, but,
as explained above, prior to the closing of the Merger, Eastern Edison will
transfer Montaup's common stock to Montaup's existing ultimate parent, EUA.
Montaup provides high voltage transmission service to Eastern Edison, Blackstone
Valley, and Newport, as well as to two small non-affiliates. As part of the
restructuring of the utility industry in Massachusetts and Rhode Island, Montaup
and its retail affiliates have negotiated comprehensive settlement agreements
with regulators in both states. These settlement agreements have been approved
by the states as well as by the Federal Energy Regulatory Commission ("FERC") in
Docket Nos. ER97-2800-000, et al. Under these settlement agreements, Montaup has
agreed to the complete divestiture of its generating business. Thus, Montaup
currently has completed the sale of some of its generation assets and has signed
purchase and sale agreements for all of its remaining non-nuclear generation
assets. It is also attempting to divest all of its nuclear assets, including the
facilities at issue here.
EUA also owns 100% of EUA Cogenex Corporation, an energy services
company that utilizes energy efficient technology and equipment intended to
reduce the energy consumption and costs of its customers. Other wholly-owned
subsidiaries of EUA include: EUA Energy Investment Corporation (which invests in
energy-related projects); EUA Ocean State (which owns a 29.9% partnership
10
<PAGE>
interest in the Ocean State Power generating station in northern Rhode Island, a
non-utility generating plant); EUA Energy Services (which markets energy and
energy services); EUA Service Corporation (which provides professional and
technical services to all EUA System companies); and EUA Telecommunications
(which provides telecommunications and information services).
For the year 1998, Montaup's revenues equaled approximately
$538,801,000. It should be noted that this figure may not be completely
representative of future revenues as these revenues were received prior to
divestiture of non-nuclear generation. Further information concerning Montaup
and EUA is contained in EUA's most recent Form 10-K filed with the Securities
and Exchange Commission ("SEC"), attached as Exhibit A to this Application, and
in EUA's most recent Annual Report to Shareholders, attached as Exhibit B to
this Application.
B. NEES and NEP
NEES was formed in 1947 as a Massachusetts business trust13/ and is
headquar tered in Westborough, Massachusetts. NEES is a registered holding
company under PUHCA. Through its subsidiaries, NEES is principally engaged in
the transmission, distribution, and sale of electricity, and the marketing of
energy commodities and services, serving roughly 1.3 million customers in
Massachusetts, New Hampshire, and Rhode Island. Through agreements with the
state utility commissions with jurisdiction over its subsidiaries, NEES has
divested itself of substantially all of its fossil and hydroelectric generating
- ---------------
13 As part of the NEES-National Grid Merger, immediately after the closing,
NEES will modify its structure to change from a business trust to a
corporation.
13
<PAGE>
facilities, and will endeavor to divest itself of all its ownership interests in
nuclear facilities, including the facilities at issue here. The company is now
focused almost exclusively on the transmission, distribution and sale of
electricity, rather than on generation.
NEP is a wholly-owned subsidiary of NEES, and is incorporated in
Massachu setts. In the past, NEP's primary role had been to generate and
transmit electricity for sale to its affiliates, which are the electric
distribution companies described below. With the sale of substantially all of
its fossil and hydroelectric generation, NEP's principal focus will be the
transmission of electricity. NEP's integrated system consists of approximately
2,400 miles of transmission lines, 118 substations, and 7 pole or conduit miles
of distribution lines. These facilities are spread throughout Connecticut,
Massachusetts, Rhode Island, New Hampshire and Vermont.
NEP's electric distribution company affiliates include Granite State
Electric Company ("Granite State"), which serves approximately 36,000 customers
in New Hampshire; Massachusetts Electric Company ("Massachusetts Electric"),
which serves approximately 960,000 customers in an area covering roughly 43% of
the Commonwealth of Massachusetts; The Narragansett Electric Company
("Narragansett"), which serves approximately 325,000 customers in an area
covering about 80% of the state of Rhode Island; and Nantucket Electric Company,
which serves approximately 10,000 customers on Nantucket Island. Each of these
companies originally entered into an individual long-term, all-requirements
power purchase contract with NEP. Although those contracts have been amended
recently, the purchasers under those contracts remain liable to pay charges to
NEP, which include, among other things, amounts sufficient to pay each
12
<PAGE>
purchaser's share of NEP's decommission ing liability for the nuclear facilities
in which NEP holds an interest.
NEES owns NEES Energy, Inc., a power marketing subsidiary which owns
AllEnergy Marketing Company, LLC, and New England Electric Transmission Corp.,
which owns and operates a portion of an electric interconnection between Hydro-
Quebec and New England. NEES also owns a 53.9% interest in New England Hydro
Transmission Corporation and New England Hydro Transmission Electric Company,
which own and operate facilities in connection with the second phase of the
Hydro-Quebec interconnection, including high-voltage transmission lines. NEES
also owns New England Power Service Company, which has contracted with NEES to
provide, at cost, a variety of administrative and consulting services; NEES
Global, which provides consulting and independent power development services to
non-affiliates domestically and internationally; New England Water Heater
Company; and NEES Communications, Inc., which provides telecommunications and
information-related products and services.
For the twelve months ended September 30, 1998, NEP's operating
revenues equaled approximately $1,481,068,000. It should be noted that this
figure may not be completely representative of future revenues as these revenues
were received prior to divestiture of generation. Further information concerning
NEES and its subsidiaries is contained in NEES's most recent Form 10-K filed
with the SEC attached as Exhibit C to this Application, and in NEES' most recent
Annual Report to Shareholders, attached as Exhibit D to this Application.
13
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C. The Transaction
On February 1, 1999, the Merger between NEES and EUA was announced. A
copy of the Merger Agreement is attached as Exhibit E. The Merger Agreement
establishes that Research Drive LLC, a limited liability company jointly owned
by NEES and EUA that was formed for purposes of effectuating the Merger, will
merge with EUA, which will make EUA a wholly-owned subsidiary of NEES. NEES will
then merge with EUA. EUA's shareholders will receive in return for their shares
a cash payment of $31.00 per share (subject to upward adjustment). The total
purchase price is approximately $634 million.
Subsequent to the Merger, EUA's operating companies will be merged
into NEES's operating companies. This means, among other things, that Montaup
will merge into NEP, with NEP being the surviving company.
The President and Chief Executive Officer of NEES will continue in
those positions in the combined company. EUA board members will be offered
positions on the NEES Advisory Board. The Boards of Directors of both NEES and
EUA have approved the Merger and shareholder approval has been received. In
addition to the approval of the Commission, the Merger is subject to regulatory
approvals by the SEC, the FERC, and the state utility commissions in
Connecticut, Massachusetts, Rhode Island and Vermont.14/ On April 30, 1999,
Applicants received notification that the Federal Trade Commission had granted
early termination of the waiting period under the Hart-Scott-Rodino Antitrust
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14 Approval from New Hampshire would be required if Montaup retains its share
of Seabrook. If the transfer to Little Bay, discussed above, is completed,
then no such approval would be required.
14
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Improvements Act of 1976. It is anticipated that all of the remaining approvals
will be obtained by the end of 1999.
IV. THE TRANSFER MEETS ALL OF THE REQUIREMENTS
GOVERNING LICENSE TRANSFERS.
With respect to Montaup's ownership share of Millstone 3 and Seabrook,
and its ownership interest in the Yankee Companies, the initial Merger (as well
as the transfer resulting from the NEES-National Grid Merger) does not involve
an actual transfer of a license, but merely a change in upstream economic
ownership. While the Commission has deemed such mergers to constitute a transfer
of control (or indirect transfer), it also has recognized that such transactions
do not involve many of the issues associated with an actual transfer of a
license. As the Commission held in its recent Streamlined Final Rule,
specifically referring to transfers of an interest held by a minority,
non-operating owner:
Although other requirements of the Commission's licensing provisions
may also be addressed to the extent relevant to the particular
transfer action, typical NRC staff review of such applications
consists largely of assuming that the ultimately licensed entity has
the capability to meet financial qualification and decommissioning
funding aspects of NRC regulations. These financial capabilities are
important over the long term, but have no direct or immediate impact
on the requirements for day-to-day operations as a licensed
facility.15/
As will be shown below, the licensed entity will remain fully capable of meeting
its license obligations, and nothing about the Merger will detract from that
capability. This Application shows that the transfers meet all requirements
associated with such indirect transfers.
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15 Streamlined Final Rule at 66722.
15
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The subsequent Merger of Montaup into NEP involves the direct transfer
of the licenses and the ownership interests in the Yankee Companies. That direct
transfer, however, will be to NEP. NEP is an existing licensee of the same
facilities as well as a shareholder of the same Yankee Companies. NEP has been
found qualified by the Commission with respect to the same facilities, and the
direct transfer meets all of the Commission's requirements regarding license
transfers. Accordingly, the Commission should approve Montaup's proposed
transfers to NEP.
A. The Merger Will Not Affect Operation of Millstone 3,
Seabrook or the Yankee Plants and Thus Will Not Affect
the Public Health or Safety, Common Defense and
Security or the Human Environment.
Montaup and NEP are each minority owners and licensees of Millstone 3
and Seabrook. They do not participate in the day-to-day operation of either of
the facilities, nor do they have the authority to make decisions on behalf of
any of the facilities.
Their rights as minority owners of Millstone 3 are limited by the 1979
Sharing Agreement, a copy of which is attached as Exhibit F, which states that
the Lead Participants have "sole responsibility for, and are fully authorized to
act for the other Associate Participants with respect to, the operation and
maintenance of the Unit." Neither company is now, nor has ever been a Lead
Participant in Millstone 3.16/
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16 The Lead Participants are two subsidiaries of Northeast Utilities, the
Connecticut Light & Power Company and Western Massachusetts Electric
Company. NEP and Montaup each are pursuing certain claims against Northeast
Utilities in connection with the operation of Millstone 3 in separate cases
that have now been consolidated. See Mass. Municipal Wholesale Electric
Co., et al. v. Northeast Utils., Docket Nos. 97-4254A, 97-4249A, and
97-1716 (Suffolk Sup. Ct.). Both are also pursuing claims in arbitration
against Western Massachusetts Electric Company and Connecticut Light &
Power Company in connection with Millstone 3's operation. In the Matter of
Arbitration, Mass. Municipal Wholesale Electric Co., et al. v. The
Connecticut Light & Power Co., et al., and New England Power Co. v. The
Connecticut Light & Power Co., et al. (Marshall, arb.).
16
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With regard to Seabrook, both NEP and Montaup are members of the
Seabrook Executive Committee, but their rights are similarly limited as their
rights with respect to Millstone 3.17/
For the Yankee Plants, Montaup and NEP are not licensees, but own
shares in the corporations that are licensees. Their participation rights are
limited to providing their share of operating and decommissioning funds, and
providing their share of other financial support or financial guarantees for the
plants.
Nothing about the NEES-EUA Merger, the consolidation of Montaup into
NEP, or the NEES-National Grid Merger will change these facts to increase
Montaup's or NEP's control or operation of the facilities. There will be no
effect on the operation of the facilities from either merger. Furthermore, NEP
has had no adverse effect on the public health or safety, common defense or the
human environment in its role as an existing licensee or shareholder, and there
is no reason to expect that it would have any adverse effect in the future.
Accordingly, there will be no adverse effect from the proposed transactions.
B. The Licensee Will Be Qualified Both Technically
and Financially to Meet All of the Commission's
Obligations.
At all times, both Montaup and NEP have fulfilled their financial and
other obligations regarding all of the facilities of which each is a licensee or
shareholder. Through the Merger, Montaup and NEP will become members of a
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17 If Montaup still owns its share of Seabrook at the time of the
consolidation of Montaup into NEP, Montaup would give up its independent
seat on the Executive Committee.
17
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corporate organiza tion that is stronger financially than either was
individually. The merged entity, which will still be only a minority owner in
each of the facilities, will therefore remain fully capable of meeting all of
its obligations, including its obligations to contribute neces sary funds for
decommissioning.18/ Each company has an ongoing, assured source of revenue,
which will be adjusted to meet decommissioning requirements. These sources are
based primarily on contracts with each company's distribution company
affiliates. These contracts have been approved by the FERC and the relevant
state commissions, and NEP, as the surviving entity, will be the holder of its
own and Montaup's contracts. In sum, NEP will remain financially stable and able
to fulfill all of its obligations under the licenses or as a shareholder of the
Yankee Companies.
C. The Identity, Business Address, and Relevant Personnel of
the Licensee and of the Facilities Will Not Be Affected by
the Merger.
It is anticipated that NEP will maintain its existing headquarters at
25 Research Drive, Westborough, Massachusetts, 01582, and that will be the
headquarters of the consolidated entity after the consummation of the Merger and
consolidation of Montaup into NEP. The current officers and directors of NEP,
Montaup and NEES, all of whom are United States citizens, are listed in pages 1
through 3 of Exhibit G. After the closing of the NEES-National Grid Merger, the
officers and directors of NEP and NEES will change as part of the plan
(discussed below in Section IV.D) being implemented to assure compliance with
Section 103(d) of the Atomic Energy Act and 10 C.F.R. section 50.38 (1998).
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18 Montaup's and NEP's contributions to the decommissioning funds are
discussed in more detail in Section V, below.
18
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Pages 4 and 5 of Exhibit G include a listing of the names, titles, business
addresses and country of citizenship of the officers and directors of NEP and
NEES after the NEES-National Grid Merger is closed.
Since Montaup and NEP do not now have any responsibility or authority
regarding the employees at any of the nuclear sites, the Merger will not affect
the size or performance of the workforce at any site. As with all other aspects
of the Merger, there will be no effect on the day-to-day operations of any of
the nuclear facilities, and there are consequently no operational concerns that
should delay Commission approval of the Merger.
D. The Merger Will Not Result in the Licensee Becoming
Directly Owned, Controlled, or Dominated by an Alien, a
Foreign Corporation, or a Foreign Government.
This Merger complies with the restriction in Section 103(d) of the
Atomic Energy Act and 10 C.F.R. section 50.38 (1998).
When the Merger is complete, EUA will be merged into NEES, and thus
NEES will own Montaup. Subsequently, Montaup will be consolidated into NEP, with
Montaup's licenses being transferred to NEP. NEES and NEP are not currently
owned, controlled, or dominated by an alien, a foreign corporation, or a foreign
government. Thus, the Merger, without more, would not result in foreign control
or domination.
The situation changes after NEES is merged with National Grid, but NEP
will also comply with Section 103(d) of the Atomic Energy Act after the National
Grid transaction.19/ First, NEP will continue to be the licensee of Millstone 3
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19 The plan is limited to assuring that NEP is in compliance with Section
103(d) because if the NEES-National Grid Merger is concluded after Montaup
has merged into NEP, NEP will be the surviving entity holding the nuclear
interests. To provide for the possibility of the NEES-National Grid Merger
being concluded before Montaup is consoli dated into NEP, Applicants hereby
commit to transfer all of Montaup's interests in nuclear facilities to NEP
at the time the NEES-National Grid Merger is concluded (assuming, of
course, that the NEES-EUA Merger has also been concluded). Once that
transfer is complete, the plan adopted by NEP to assure compliance with
Section 103(d) will apply to Montaup's interests as well.
19
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and Seabrook as well as the owner of shares of the Yankee Companies. NEES will
continue to own NEP, and thus, as a matter of law, the licensee will be owned by
a U.S. company. Thus, the strict letter of the law will be honored.
At the same time, Applicants recognize that after the consummation of
the NEES-National Grid Merger, NEES will be indirectly owned by a foreign
corporation. To respond to possible concerns resulting from that indirect
ownership, NEP will adopt a negation action plan that will assure that the
licensee will not be controlled or domi nated by any foreign interest. The focus
of the negation plan is the creation of a Special Nuclear Committee of the Board
of Directors of NEP ("Nuclear Committee"),20/ composed entirely of U.S.
citizens. With three exceptions unrelated to the operation of the nuclear
plant,21/ the Nuclear Committee will be authorized to act on behalf of NEP as to
all matters relating to all nuclear facilities in which NEP has an interest. The
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20 The Nuclear Committee will be established through an amendment to the
Bylaws of NEP, as described in the March 15 Application. A copy of the
amended Bylaws is included in this Application in Exhibit I.
21 The three exceptions are the following: (1) the right to vote as to whether
or not to close the facility and begin decommissioning, and as to whether
to seek relicensing; (2) the right to decide to sell, lease, or otherwise
dispose of NEP's interest in the facility; and (3) the right to take any
action that is ordered by this Commission or any other agency or court of
competent jurisdiction. These three rights are essential to protect the
economic and legal interests of National Grid and will be limited very
carefully, as described in NEP's amended Bylaws. The actions will also be
subject to Commission review under the Atomic Energy Act. Thus, there is no
possibility of detriment to the national interest due to foreign control
from these three exceptions.
20
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Nuclear Committee will have sole discretion regarding all issues of plant
operation, budget and expenditures, health and safety matters, matters affecting
national security, compliance with the Atomic Energy Act and this Commission's
orders, and all other matters regarding NEP's obligations with respect to the
Commission.22/
National Grid will not have any legal or practical authority to
control the actions of the Nuclear Committee. Moreover, a majority of the
Committee members will be independent directors, who cannot be influenced by
National Grid or NEP through an employment relationship or in any other manner.
Nuclear Committee members will also be obligated to report any attempt to
influence their votes contrary to the national interest, and will be protected
by the Commission's employee protection regulations to a greater extent than
required by law. The restrictions imposed by the negation plan can be removed
for a plant only upon a sale of NEP's interest in that nuclear plant, which sale
must be approved by the Commission, or the relaxation or repeal of the Atomic
Energy Act's restrictions on foreign ownership. Therefore, NEP in its role as
licensee or as shareholder will not be owned, controlled, or dominated by any
foreign interest. In this manner, the negation plan will assure compliance with
Section 103 of the Atomic Energy Act.23/
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22 As explained in this Application, NEP and Montaup, as non-operating
minority owners, do not generally become involved in activities relating to
substantive matters of safety or national security (other than funding safe
operating and decommissioning ex penses) and thus the concerns associated
with Section 103 of the Atomic Energy Act are of much less relevance than
for other owners. Nevertheless, Applicants will implement the negation plan
to remove any doubts regarding compliance with Section 103 of the Atomic
Energy Act.
23 The March 15 Application filed by NEP and the additional information
submitted to the Commission in connection with that Application include
additional discussions of the negation plan and reasons why Section 103 of
the Atomic Energy Act will be complied with under the National Grid
transaction.
21
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V. THE TRANSFER WILL NOT AFFECT THE DECOMMISSIONING
FINANCIAL ASSURANCES REQUIRED BY THE COMMISSION
AND WILL NOT BE DETRIMENTAL TO THE FINANCIAL
HEALTH OF THE LICENSEE.
On September 22, 1998, the Commission issued a Final Rule in its
Financial Assurance Requirements for Decommissioning Nuclear Power Reactors, 63
Fed. Reg. 50465 (1998) (to be codified at 10 C.F.R. pts. 30 and 50). In this
rule, the Commission established "non-bypassable charges" as a defined term and
modified its Final Rule to reflect that such charges should be available to the
licensee as part of the funds for decommissioning deposited in an external
sinking fund.24/ As set forth in 10 C.F.R. section 50.2 (1998), non-bypassable
charges are defined as:
. . . those charges imposed over an established period by a Government
authority that affected persons or entities are required to pay to
cover costs associated with the decommissioning of a nuclear power
plant. Such charges include, but are not limited to, wire charges,
stranded cost charges, transition charges, exit fees, other similar
charges, or the securitized proceeds of a revenue stream.25/
The Commission also amended its provision regarding the use of an
external sinking fund, one of the methods used to provide financial assurance.
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24 63 Fed. Reg. at 50466.
25 As the definition states, the non-bypassable charges enumerated in Section
50.2 are not intended to be all-inclusive. Indeed, in its Final Rule, the
Commission stated, "[it] believes it would be encroaching upon the
responsibility of other regulators if it were to establish a single method
for cost recovery." 63 Fed. Reg. 50467. Similarly, the Commis sion rejected
the suggestion that the definition be revised to replace the phrase
"governmen tal authority" with "regulatory authorities," noting that
"governmental authorities" was more inclusive and would allow actions by
non-regulatory authorities such as state legislatures. Id.
22
<PAGE>
Specifically, the Commission provided that an external sinking fund may be the
exclusive mechanism relied upon for providing financial assurance for
decommissioning even if the licensees' source of revenues for the external
sinking fund is a non-bypassable charge.26/ In this sense, the financial
assurance provided by the non-bypassable charge is equivalent to that provided
by traditional rate regulation applicable to an "electric utility." Informa tion
regarding the decommissioning funding of Millstone 3 and Seabrook, and the
Yankee Plants, as well as the calculation of the Commission formula amount for
decommissioning is set forth in Exhibit H.
A. The Financial Assurances Required by the Commission's
Recent Rulemaking Are Already in Place Regarding
Montaup and NEP and Will Not Be Affected by the Merger.
Under the terms of this transaction, decommissioning responsibility
will vest in NEP as the surviving entity. Pursuant to settlement agreements
approved by or entered into with the state commissions of Massachusetts, Rhode
Island and New Hampshire, its customers in those states, and the FERC, NEP is
permitted to recover decommission ing costs through non-bypassable charges of a
nature that meet the Commission's new requirements set forth in its Final Rule.
Similarly, Montaup has almost identical settlement agreements approved by or
entered into with the state commissions of Massachusetts and Rhode Island, its
customers in those states, and the FERC. Once the Merger is completed, NEP, as
the successor to Montaup, will take over Montaup's responsibilities under these
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26 10 C.F.R. section 50.75 (e)(1)(ii)(B) (1998).
23
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settlements and be able to collect Montaup's former share of the decommissioning
costs through the non-bypassable charges. The necessary financial assurances for
decommissioning are, and will remain, in place.
1. Non-Bypassable Charge in Massachusetts
On February 26, 1997, the agency then known as the Massachusetts
Department of Public Utilities ("MADPU") approved a revised, amended settlement
submitted by NEP, NEP's affiliates (Massachusetts Electric and Nantucket), and
others, which related to electric restructuring issues and included provisions
of a wholesale rate stipulation and agreement.27/ Subsequently, Massachusetts
Electric, Nantucket, and NEP submitted an amended offer of settlement to MADPU
for approval. On May 16, 1997, Montaup and Eastern Edison filed the same type of
comprehensive Offer of Settlement as NEP and its affiliates had filed.
Each of the settlement agreements at MADPU sought approval of retail
delivery rates for the Massachusetts Distribution Utilities (Massachusetts
Electric and Nantucket for NEP, and Eastern Edison for Montaup) which, among
other things, included a non-bypassable access charge designed to recover costs
associated with termination of the all-requirements contracts between the
Massachusetts Distribution Utilities and their affiliated Transmission Company
(NEP or Montaup). The settlements provided that, in place of the former
all-requirements contracts, the Transmission Company would collect a CTC, which
would enable the respective company to recover its stranded costs. The CTC
would, in turn, be collected by the Massachusetts Distribution Utilities through
an access charge applied to all kilowatt hours ("kwh") the Massachusetts
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27 Re Massachusetts Elec. Co., D.P.U. 96-25C Mass. Dep't of Pub. Utils., Feb.
26, 1997.
24
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Distribution Utilities delivered to customers in their service areas, whether or
not the customers were customers at the time the settlement was approved.28/
Under the settlements, the CTC contains a fixed component that recovers
the Massachusetts Distribution Utilities' allocated share of the Transmission
Company's respective investment in plant, materials, supplies, and the final
fuel core for their nuclear facilities. The variable component recovers 80% of
the operations and mainte nance expenses, capital additions, and property taxes
for the units. The variable component also would recover 100% of the
Massachusetts Distribution Utilities' allocated share of the Transmission
Company's respective costs for nuclear decommis sioning and site restoration
costs.
NEP's settlement was approved by the MADPU. Similarly, Montaup's
settle ment was approved by the successor agency to the MADPU, the Massachusetts
Department of Telecommunications and Energy, on December 24, 1997, in Docket No.
D.T.E./D.P.U. 96-24.
On May 28, 1997, NEP submitted to the FERC an amended wholesale
stipulation and agreement, containing substantially the same settlement
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28 Each of NEP's settlement agreements also provided that the Massachusetts
Distribu tion Utilities would enter into a network integration transmission
service agreement with their Transmission Company for transmission service
under the Transmission Company's open access transmission tariff. The
network integration transmission service agreement incorporates the CTC
provision. Also, in the event the Massachusetts Distribution Utilities were
denied the ability to recover the CTC from their customers in the access
charge for distribution service, the settlements provide for the collection
of the unrecovered balance as a surcharge on any rate paid for transmission
service to the Massachusetts Distribution Utilities' service areas.
25
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mechanism. On November 26, 1997, the FERC approved the agreement.29/ Montaup's
wholesale settlement was filed October 29, 1997, with the FERC, and was approved
in Docket No. ER97-3127-000 in a letter order dated December 19, 1997.
2. Non-Bypassable Charge in Rhode Island
On August 7, 1996, the Governor of Rhode Island signed into law the
Utility Restructuring Act of 1996 ("URA"). The URA provides for customer choice
of electricity supplier in several phases commencing July 1, 1997. To achieve
this result, the URA provides that the former all-requirements relationships,
such as between NEP and its affiliate (Narragansett) or Montaup and its
affiliates (Blackstone Valley and Newport), be terminated and that the former
wholesale power supplier be compensated through a CTC. The URA also provides for
a non-bypassable transition charge to be charged to all retail customers,
designed to provide full recovery of the former whole sale power supplier's
stranded costs. A variable component of the transition charge is explicitly
intended to recover "nuclear obligations including decommissioning costs and
nuclear costs independent of operations."30/ Both NEP and Montaup have entered
into settlement agreements with their respective former all-requirements
customers under the URA.
NEP entered into a settlement agreement with its customer,
Narragansett, and the Rhode Island Public Utilities Commission ("RIPUC") on May
30, 1997. Montaup entered into a similar settlement with its former
all-requirements customers, Blackstone Valley and Newport, and the RIPUC. Each
settlement terminated the Transmission Companies' respective long-term,
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29 New England Power Co., 81 FERC para. 61,281 (1997).
30 R.I.G.L. c. 39-1-27.4(b)(ii).
26
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all-requirements contracts with their affiliates and established, instead, a
CTC. The CTC includes recovery of the Rhode Island Distribu tion Utilities'
allocated shares of decommissioning and site restoration costs. The FERC
approved each settlement agreement.31/ The RIPUC has approved the Rhode Island
Distribution Utilities' collection of the CTC through an access charge that is
applied to all kwh delivered to customers in those companies' service areas who
receive distribution service, whether or not they were customers at the time of
approval of the settlements.
3. Non-Bypassable Charges in New Hampshire
A similar CTC arrangement was adopted by NEP in New Hampshire. On
February 3, 1998, and subsequently amended in July 1998, Granite State filed an
offer of settlement before the New Hampshire Public Utility Commission to
resolve electric restructuring issues related to retail choice in its service
territory. The settle ment provided that, pursuant to a separate wholesale rate
settlement approved by the FERC,32/ the long-term, all-requirements contract
between NEP and its affiliate Granite State would be terminated and that Granite
State would pay a CTC. The February 3, 1998, settlement provided that Granite
State would be permitted to recover in retail rates stranded cost charges, which
would recover the CTC paid by Granite State to NEP.33/ The stranded costs would
apply to all kwh delivered by Granite State to customers in its service area
regardless of whether or not the customers were Granite State customers at the
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31 See New England Power Co., 81 FERCP. 61,281 (1997); Montaup Electric Co.,
Docket No. ER97-2800-000 (letter order, Dec. 19, 1997).
32 New England Power Co., 83 FERCP. 61,085 (1998).
33 Id.
27
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time the settlement was approved. The CTC provides for the recovery of Granite
State's allocated share of NEP's nuclear decommissioning expenses.34/ On October
7, 1998, the New Hampshire Public Utility Commission approved the amended offer
of settlement in Order No. 23,041.
B. Conclusion
Pursuant to the settlements entered into with their Distribution
Utilities, which were approved by the state commissions and the FERC, NEP and
Montaup are assured that they will collect their decommissioning costs through
non-bypassable charges. These non-bypassable charges are of the exact nature
that the Commission outlined as meeting its concerns in its Final Rule. The
Merger will not modify those arrangements. Thus, adequate decommissioning funds
are assured, and the transfers in this transaction will not produce a
detrimental effect on the recovery of decommissioning costs.35/
VI. THE MERGER WILL NOT HAVE SIGNIFICANT ENVIRONMENTAL EFFECTS.
The Merger will have no effect on the operation of Millstone 3,
Seabrook or the Yankee Plants, nor will there be any physical changes to the
facilities. The Merger will not affect the qualifications or the organizational
affiliation of the personnel who operate and maintain the facilities. Further,
it will not increase the probability or consequences of accidents, no changes
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34 The settlement also provided for the divestiture of NEP's interests in six
nuclear facilities, and NEP's commitment to an accelerated level of
decommissioning funding.
35 If Montaup transfers its interest in the Seabrook facilities to Little Bay,
under a Decommissioning Funding Agreement executed in conjunction with the
Little Bay Purchase Agreement, Montaup has agreed to prefund the
decommissioning liability associated with its small ownership share in
Seabrook. Montaup will recover its pre-funding payment through the CTC
charges it bills to its Distribution Utilities.
28
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will be made in the types of radiological effluents that may be released, and
there will be no increase in the allowable individual or cumulative occupational
radiation exposure. The Merger will have no other environ mental impact.
Accordingly, Montaup and NEP request that the Commission issue and publish a
finding of no significant environmental impact pursuant to 10 C.F.R. sections
51.31 and 51.35.
VII. REQUIRED INFORMATION
As required by 10 C.F.R. section 50.80 for an application for
Commission consent to a license transfer, information with respect to the
proposed transfer of the type described in 10 C.F.R. sections 50.33 and 50.34
concerning the identity and financial and technical qualifications of the
proposed transferee is set forth below and, further, because the operating
license is a Class 103 license, information with respect to 10 C.F.R. section
50.33a is also set forth below.
A. 10 C.F.R. Section 50.33 - General Information
The following information is specifically required under Section 50.33
of the Commission's rules:
1. Name of Licensee: NEP will continue to be a non-operating licensee
under the operating licenses for Millstone 3 and Seabrook.
2. Address of Licensee: The current business address is 25 Research
Drive, Westborough, MA 01582, until the Commission is otherwise notified in
writing.
3. Description of Business: See discussion in Section III.A.
29
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4. Corporate Information:
a. State where incorporated and principal location where it
does business: NEP is incorporated under the laws of Massachusetts with its
principal place of business in Massachusetts. Its Bylaws, including the proposed
amendment discussed above, are attached in Exhibit I.
b. Names, addresses and citizenship of principal officers:
The names and addresses of the directors and principal officers of NEP, all of
whom are United States citizens, are listed in Exhibit G. The directors and
principal officers of NEP after the closing of its Merger with National Grid are
also listed in Exhibit G.
c. Foreign Control: NEP is not now owned, controlled, or
dominated by an alien, foreign corporation, or foreign government.36/
5. Agency Status: NEP is not acting as agent or representative of
any other person.
6. Financial Information: The information with respect to NEP
required by clause (4) of 10 C.F.R. section 50.33 appears in Paragraph VII.B
below.
7. Emergency Response Plan: This section is not applicable to this
request.
8. Construction or Alteration at Facility: This section is not
applicable to this request.
9. Regulatory Agencies and News Publications: The following
regulatory agencies, in addition to the Commission, will have financing, siting,
or ratemaking jurisdiction over NEP upon conclusion of the Merger:
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36 See Section IV.D, above, for a complete explanation of this conclusion.
30
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Massachusetts Department of
Telecommunications and Energy
100 Cambridge Street
Boston, MA 02202
Rhode Island Public Utilities Commission
100 Orange Street
Providence, RI 02903
New Hampshire Public Utility Commission
8 Old Suncook Road
Concord, NH 03301
Connecticut Department of Public Utility Control
Ten Franklin Square
New Britain, CT 06051
Vermont Public Service Board
112 State Street
Drawer 20
Montpelier, VT 05620-2701
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, DC 20426
The following publications circulate in the general area of the
facilities:
The Hartford Courant, Hartford, Connecticut; Journal Inquirer,
Manchester, Connecticut; New Haven Register, New Haven, Connecticut;
Norwich Bulletin, Norwich, Connecticut; Union Leader, Manchester, New
Hampshire; Foster's Daily Demo crat, Dover, New Hampshire; Boston
Globe, Boston, Massa chusetts; and New London Day, New London,
Connecticut.
10. Restricted Data: This Application does not contain any Restricted
Data or other defense information, and it is not expected that any such
information will become involved in the licensed activities. However, in the
31
<PAGE>
event such information does become involved, NEP agrees that it will
appropriately safeguard such information and will not permit any individual to
have access to Restricted Data until the Office of Personnel Management shall
have made an investigation and reported to the Commis sion on the character,
associations and loyalty of such individual, and the Commission shall have
determined that permitting such person to have access to Restricted Data will
not endanger the common defense and security of the United States.
11. Decommissioning: The information under this clause appears in
Paragraph VII.B.2 below.
B. 10 C.F.R. Section 50.33 - Financial Information
The following financial information is specifically required under
Section 50.33 of the Commission's rules:
1. Financial Qualifications for Continued Conduct of Activities:
Clause (f) of 10 C.F.R. section 50.33 exempts an electric utility from
demonstrating its financial qualifications. NEP currently is, and after
implementation of the Merger will continue to be, an "electric utility" as
defined in 10 C.F.R. section 50.2.37/ NEP has sold nearly all of its non-nuclear
generating assets, and is seeking to sell the remainder, as well as its nuclear
interests. As a result of the divestiture of the predominant portion of the
generation assets, the company's business now is primarily that of a
- ---------------
37 10 C.F.R. section 50.2 defines an electric utility as any entity that
generates or distributes electricity and which recovers the cost of this
electricity, either directly or indirectly, through rates established by
the entity itself or by a separate regulatory authority. Investor-owned
utilities, including generation or distribution subsidiaries, public
utility districts, municipali ties, rural electric cooperatives, and State
and Federal agencies, including associations of any of the foregoing, are
included within the meaning of "electric utility."
32
<PAGE>
transmission company whose rates are regulated by the FERC. Any remaining sales
of electricity are under cost-of-service contracts approved by the FERC.
Therefore, NEP submits that it is exempted from the requirements of clause (f)
of 10 C.F.R. section 50.33.
2. Decommissioning Funding: Clause (k) of 10 C.F.R. section 50.33
requires an application for an operating license for a utilization facility to
contain information indicating how reasonable assurance will be provided that
funds will be available to decommission the facility. As discussed above in
Section V, there is reasonable assurance that NEP will be able to comply with
its decommissioning funding responsi bility.
C. 10 C.F.R. Section 50.34 - Technical Information
Clause (b)(7) of 10 C.F.R. section 50.34 requires information
describing the technical qualifications of the applicant to engage in the
proposed activity.
With respect to Millstone 3, a Northeast Utilities subsidiary,
Northeast Nuclear Energy Company, is the managing agent for the facility. Its
Operating License, dated January 31, 1986, contains the Commission's findings
that Northeast Nuclear Energy Company is technically qualified to engage in the
activities authorized by the license. The proposed Merger will not result in any
modification in the existing arrangement.
With respect to Seabrook,38/ it is owned by eleven Joint Owners
pursuant to an Agreement for Joint Ownership, Construction, and Operation of New
Hampshire Nuclear Units, dated May 1, 1973, as amended (the "Joint Ownership
Agreement"). In accordance with the Joint Ownership Agreement and the Managing
Agent Operating Agreement, dated June 29, 1992, as amended (the "MAOA"), North
- ---------------
38 See Exhibit J for copies of the relevant ownership and operating agreements
discussed in this section.
33
<PAGE>
Atlantic is the Managing Agent and as such has exclusive responsibility for the
management, opera tion, and maintenance of Seabrook. Amendment No. 10 to the
Operating License contains the Commission's findings that North Atlantic is
technically qualified to perform those responsibilities. The proposed Merger
will not result in any modification in the existing arrangement regarding
operation and management.
With respect to the Yankee Plants, the respective Yankee Companies are
licensees and the proposed Merger will not result in any change in the existing
arrange ments regarding operations and management.
D. 10 C.F.R. Section 50.33a - Antitrust Information
Section 50.33a requires the Commission to undertake an antitrust
review in certain situations. Pursuant to the settlements discussed above, both
Montaup and NEP have divested, or are in the process of divesting, all of their
non-nuclear generating facilities. Both entities are also committed to divesting
their nuclear facilities. Thus, the Merger will not raise any antitrust concerns
since the surviving NEP entity will effectively be a regulated transmission
company.
Both the FERC39/ and the SEC will be conducting an analysis of the
effect of this Merger on competition. The Merger has been subject to premerger
notification review under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 by the Federal Trade Commission, and, on April 30, 1999, NEES and EUA
received notification of early termination of the waiting period under that Act.
- ---------------
39 A copy of the declaration filed in connection with the request for FERC
approval of the Merger, explaining why the Merger raises no antitrust
concerns is attached as Exhibit K.
34
<PAGE>
Thus, there is no need for the Commission to conduct an independent analysis of
the antitrust implications of the Merger.
VIII. CONCLUSION
Based upon the foregoing, Montaup and NEP hereby respectfully request
that the Commission consent to the two indirect transfers of control and the
direct transfer described above. In order to facilitate completion of the
Merger, Montaup and NEP respectfully request that the Commission act on this
Application expeditiously.
Respectfully submitted,
/s/ Scott P. Klurfeld /s/ Thomas G. Dignan, Jr./SPR
- ---------------------------------- -------------------------------------
Edward Berlin Thomas G. Dignan, Jr.
Kenneth G. Jaffe Ropes & Gray
Scott P. Klurfeld One International Place
Swidler Berlin Shereff Friedman, LLP Boston, Massachusetts 02110-2624
3000 K Street, N.W., Suite 300 617-951-7000
Washington, D.C. 20007-5116
202-424-7500
Attorneys for New England Power Company Attorney for Montaup Electric Company
Filed: June 15, 1999.
35
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE
NUCLEAR REGULATORY COMMISSION
Millstone Unit No. 3 ) NRC License No. NPF-49
Seabrook Unit No. 1 ) NRC License No. NPF-86
Vermont Yankee Nuclear Power Corporation ) NRC License No. DPR-28
Yankee Atomic Electric Company ) NRC License No. DPR-3
Maine Yankee Atomic Power Company ) NRC License No. DPR-36
Connecticut Yankee Power Company ) NRC License No. DPR-61
AFFIDAVIT
I, Jonathan M.G. Carlton, being duly sworn, state that I am Business
Develop ment Manager - Regulation of the National Grid Group plc; that I am
authorized on the part of said company to sign and file with the Nuclear
Regulatory Commission of the United States of America the documents attached
hereto; and that all such documents are true and correct to the best of my
knowledge, information and belief.
/s/ Jonathan M.G. Carlton
----------------------------------------
Jonathan M.G. Carlton
COMMONWEALTH OF MASSACHUSETTS )
) SS.
COUNTY OF WORCESTER )
Subscribed and sworn before me, a Notary Public in and for the
Commonwealth above named, this 11th day of June, 1999.
/s/ Susan A. Costa
----------------------------------------
My Commission expires: April 13, 2001
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE
NUCLEAR REGULATORY COMMISSION
) Docket No. 50 -
Millstone Unit No. 3 ) NRC License No. NPF-49
Seabrook Unit No. 1 ) NRC License No. NPF-86
Vermont Yankee Nuclear Power Corporation ) NRC License No. DPR-28
Yankee Atomic Electric Company ) NRC License No. DPR-3
Maine Yankee Atomic Power Company ) NRC License No. DPR-36
Connecticut Yankee Power Company ) NRC License No. DPR-61
AFFIDAVIT
I, Kevin A. Kirby, duly sworn, state that I am Vice President of
Montaup Electric Company, that I am authorized on the part of said company to
sign and file with the Nuclear Regulatory Commission the documents attached
hereto; and that all such documents are true and correct to the best of my
knowledge, information and belief.
/s/ Kevin A. Kirby
----------------------------------------
Kevin A. Kirby
COMMONWEALTH OF MASSACHUSETTS )
) SS.
COUNTY OF WORCESTER )
Subscribed and sworn before me, a Notary Public in and for the
Commonwealth above named, this 2d day of June, 1999.
/s/ Barbara L. Dantono
----------------------------------------
Barbara L. Dantono
My Commission expires: March 30, 2001
--------------
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE
NUCLEAR REGULATORY COMMISSION
) Docket No. 50 -
Millstone Unit No. 3 ) NRC License No. NPF-49
Seabrook Unit No. 1 ) NRC License No. NPF-86
Vermont Yankee Nuclear Power Corporation ) NRC License No. DPR-28
Yankee Atomic Electric Company ) NRC License No. DPR-3
Maine Yankee Atomic Power Company ) NRC License No. DPR-36
Connecticut Yankee Power Company ) NRC License No. DPR-61
AFFIDAVIT
I, James S. Robinson, being duly sworn, state that I am Vice President
of New England Power Company, that I am authorized on the part of said company
to sign and file with the Nuclear Regulatory Commission the documents attached
hereto; and that all such documents are true and correct to the best of my
knowledge, information and belief.
/s/ James S. Robinson
----------------------------------------
James S. Robinson
COMMONWEALTH OF MASSACHUSETTS )
) SS.
COUNTY OF WORCESTER )
Subscribed and sworn before me, a Notary Public in and for the
Commonwealth above named, this 4th day of June, 1999.
My Commission expires: 12/11/03.
44
7590-01-P
UNITED STATES OF AMERICA
NUCLEAR REGULATORY COMMISSION
In the Matter of )
)
NORTHEAST NUCLEAR ENERGY ) Docket No. 50-423
COMPANY, et al. )
)
(Millstone Nuclear Power Station, Unit 3) )
ORDER APPROVING TRANSFER OF LICENSE AND CONFORMING AMENDMENT
I.
Northeast Nuclear Energy Company (NNECO) is authorized to act as agent
for the joint owners of the Millstone Nuclear Power Station, Unit 3, (Millstone
3), and has exclusive responsibility and control over the physical construction,
operation, and maintenance of the facility as reflected in Facility Operating
License No. NPF-49. Montaup Electric Company (Montaup), one of the joint owners,
currently owns a 4.0-percent interest in Millstone 3; New England Power Company
(NEP), another of the joint owners, currently owns a 12.2-percent interest. The
U.S. Nuclear Regulatory Commission (NRC) issued Facility Operating License No.
NPF-49 on January 31, 1986, pursuant to Part 50 of Title 10 of the Code of
Federal Regulations (10 CFR Part 50). The facility is located in New London
County, on the southern coast of the state of Connecticut.
II.
Under cover of a letter dated June 15, 1999, Montaup and NEP submitted
an application requesting approval of the direct and indirect transfers of the
license to the extent held by Montaup in connection with its 4.0-percent
<PAGE>
- 2 -
ownership interest in Millstone 3, regarding a proposed acquisition of that
interest by NEP. The June 15, 1999, application, which incorporated by reference
a related application dated March 15, 1999, filed by NEP (NEP-National Grid
submittal), was supplemented July 20, September 3, and November 29, 1999, and
January 18, 2000 (collectively hereinafter "the application"). In addition, the
application requested approval of a conforming amendment to reflect the direct
transfer.
According to the application, on February 1, 1999, New England
Electric System (NEES), the parent company of NEP, entered into an Agreement and
Plan of Merger and Consent Agreement (Merger Agreement) with Eastern Utilities
Associates (EUA), a Massachusetts business trust, which is the indirect parent
of Montaup. Under the Merger Agreement, certain transactions will occur that
will ultimately result in the indirect transfer of Montaup's interest in
Millstone 3 to NEES and the direct transfer of that interest to NEP. NEP would
then own a 16.2-percent interest in Millstone 3.
In addition, by virtue of a separate merger agreement between NEES and
the National Grid Group, plc (National Grid), an indirect transfer of Montaup's
Millstone 3 license to National Grid would occur by virtue of National Grid
acquiring NEES and, indirectly, NEP. NNECO, the sole licensed operator of the
facility, would remain the managing agent for the joint owners of the facility
and continue to have exclusive responsibility for the management, operations and
maintenance of Millstone 3. The application did not propose a change in the
rights, obligations, or interests of the other joint owners of Millstone 3. In
addition, no physical changes to Millstone 3 or operational changes were
proposed.
The proposed conforming amendment, submitted by NNECO on behalf of NEP
to address the proposed direct transfer of the license from Montaup to NEP with
regard to NEP's acquisition of Montaup's 4.0-percent interest in Millstone 3,
would remove references to Montaup in the license and change the number of
<PAGE>
- 3 -
license holders as stated in the license from 14 to 13. NEP is currently
referenced in the license as a licensee, given its existing 12.2-percent
ownership interest in Millstone 3, and therefore would not need to be added to
the license.
Approval of the above described license transfer and conforming
license amendment was requested pursuant to 10 CFR 50.80 and 50.90. Notice of
the application for approval and an opportunity for a hearing was published in
the Federal Register on January 19, 2000 (65 FR 2990). No hearing requests were
filed.
Under 10 CFR 50.80, no license, or any right thereunder, shall be
transferred, directly or indirectly, through transfer of control of the license,
unless the Commission shall give its consent in writing. Upon review of the
information in the application, and other information before the Commission, the
NRC staff has determined the (1) the merger between EUA and NEES will not affect
the qualifications of Montaup as a holder of Facility Operating License NPF-49,
(2) NEP is qualified to hold the license following the acquisition of Montaup's
ownership interest in Millstone 3 by NEP, and (3) the acquisition of NEES by
National Grid will not affect the qualifications of NEP to hold the license as
proposed in the application; and that the direct and indirect transfers of the
license, to the extent effected by the described mergers and acquisitions, are
otherwise consistent with applicable provisions of law, regulations, and orders
issued by the Commission, subject to the conditions set forth herein.
The NRC staff has further found that the application for the proposed
license amendment complies with the standards and requirements of the Atomic
Energy Act of 1954, as amended (the Act), and the Commission's rules and
regulations set forth in 10 CFR Chapter 1; the facility will operate in
conformity with the application, the provisions of the Act, and the rules and
regulations of the Commission; there is reasonable assurance that the activities
<PAGE>
- 4 -
authorized by the proposed license amendment can be conducted without
endangering the health and safety of the public and that such activities will be
conducted in compliance with the Commission's regulations; the issuance of the
proposed license amendment will not be inimical to the common defense and
security or to the health and safety of the public; and the issuance of the
proposed license amendment will be in accordance with 10 CFR Part 51 of the
Commission's regulations, and all applicable requirements have been satisfied.
The foregoing findings are supported by a safety evaluation dated February 24,
2000.
III.
Accordingly, pursuant to Sections 161b, 161i, 161o and 184 of the
Atomic Energy Act of 1954 (AEA), as amended, 42 USC Sections 2201(b), 2201(i),
2201(o), and 2234; and 10 CFR 50.80, IT IS HEREBY ORDERED that the direct and
indirect license transfers referenced above are approved, subject to the
following conditions:
(1) No later than the time the proposed NEES merger with National
Grid is consummated, NEP shall establish and make operational a
Special Nuclear Committee, as described in the NEP-National Grid
submittal, having the composition, authority, responsibilities,
and obligations specified in the NEP-National Grid submittal,
provided, however, the Special Nuclear Committee may also have
exclusive authority on behalf of NEP over taking any action which
is ordered by the NRC or any other agency or court of competent
jurisdiction. No material changes with respect to the Special
Nuclear Committee may be made without the prior written consent
of the Director, Office of Nuclear Reactor Regulation. The
foregoing provisions may be modified by the Commission upon
application and for good cause shown.
<PAGE>
- 5 -
(2) The special Nuclear Committee, once established in accordance
with Condition (1) above, shall have the responsibility and
exclusive authority to ensure, and shall ensure, that the
business and activities of NEP with respect to the Millstone 3
license are at all times conducted in a manner consistent with
the protection of the public health and safety and common defense
and security of the United States.
(3) NEP shall provide the Director, Office of Nuclear Reactor
Regulation a copy of any application, at the time it is filed, to
transfer (excluding grants of security interests or liens) from
NEP to its current or proposed direct or indirect parent, or to
any other affiliated company, facilities for the production,
transmission, or distribution of electric energy having a
depreciated book value exceeding ten percent (10%) of NEP's
consolidated net utility plant, as recorded on NEP's book of
accounts.
(4) Should any of the proposed license transfers approved by this
Order not be completed by February 28, 2001, this Order shall
become null and void with respect to such transfer, provided,
however, upon application and for good cause shown, such date may
be extended.
It is FURTHER ORDERED that, consistent with 10 CFR 2.1315(b), a
license amendment that makes the changes, as indicated in Enclosure 2 to the
cover letter forwarding this Order, to conform the license to reflect the
subject direct license transfer from Montaup to NEP is approved. Such amendment
shall be issued and made effective at the time the proposed direct license
transfer from Montaup to NEP is completed.
This Order is effective upon issuance.
For further details with respect to this Order, see the initial
application dated June 15, 1999, and supplements dated July 20, September 3, and
November 29, 1999, and January 18, 2000, the NEP-National Grid submittal dated
March 15, 1999, and the safety evaluation dated February 24, 2000, which are
<PAGE>
- 6 -
available for public inspection at the Commission's Public Document Room, the
Gelman Building, 2120 L Street, NW., Washington, DC, and accessible
electronically through the ADAMS Public Electronic Reading Room link at the NRC
Web site http://www.nrc.gov.
Dated at Rockville, Maryland this 24th day of February, 2000.
FOR THE NUCLEAR REGULATORY COMMISSION
/s/ Samuel J. Collins
----------------------------------------
Samuel J. Collins, Director
Office of Nuclear Reactor Regulation
<TABLE>
<CAPTION>
National Grid USA
<S> <C>
|
|---------------Massachusetts Electric Co.
|
|---------------The Naragansett Electric Co.
|
|---------------Granite State Electric Co.
|
|---------------Nantucket Electric Co.
|
|---------------New England Power Co.
|
|---------------New England Electric Transmission Corp.
|
|---------------NEES Communications, Inc.
|
|---------------Wayfinder Group, Inc.
|
|---------------Granite State Energy, Inc.
|
|---------------New England Energy, Inc.
|
|---------------Metrowest Realty LLC
|
|---------------New England Power Service Co.
|
|---------------NEES Energy, Inc.
| |
| |---------------AllEnergy Marketing Co., LLC
|
|---------------New England
| Hydro-Transmission Corp.--------
| |--New England Hydro Finance Co.
|---------------New England |
| Hydro-Transmission Electric Co.-
|
|---------------Research Drive LLC
</TABLE>
Eastern Utilities Associates
|
|-------------Blackstone Valley Electric Co.
|
|-------------Eastern Edison Co.
|
|-------------Montaup Electric Co.
|
|-------------Newport Electric Corp.
|
|-------------EUA Cogenex Corp.
|
|-------------EUA Energy
|
|-------------EUA Ocean State Corp.
|
|-------------EAU Energy Services
|
|-------------EUA Telecommunications
|
|-------------EUA Service Corp.
<TABLE>
<CAPTION>
National Grid USA
<S> <C>
|
|---------------Massachusetts Electric Co.
|
|---------------The Naragansett Electric Co.
|
|---------------Granite State Electric Co.
|
|---------------Nantucket Electric Co.
|
|---------------New England Power Co.
|
|---------------New England Electric Transmission Corp.
|
|---------------NEES Communications, Inc.
|
|---------------Wayfinder Group, Inc.
|
|---------------Granite State Energy, Inc.
|
|---------------New England Energy, Inc.
|
|---------------Metrowest Realty LLC
|
|---------------New England Power Service Co.
|
|---------------NEES Energy, Inc.
| |
| |---------------AllEnergy Marketing Co., LLC
|
|---------------New England
| Hydro-Transmission Corp.--------
| |--New England Hydro Finance Co.
|---------------New England |
| Hydro-Transmission Electric Co.-
|
|---------------Blackstone Valley Electric Co.
|
|---------------Eastern Edison Co.
|
|---------------Montaup Electric Co.
|
|---------------Newport Electric Corp.
|
|---------------EUA Cogenex Corp.
|
|---------------EUA Energy
|
|---------------EUA Ocean State Corp.
|
|---------------EAU Energy Services
|
|---------------EUA Telecommunications
|
|---------------EUA Service Corp.
</TABLE>
[Merrill Lynch Letterhead]
January 30, 1999
Board of Directors
New England Electric System
25 Research Drive
Westborough, MA 01582
Members of the Board of Directors:
New England Electric System (the "Acquiror"), Research Drive LLC, a limited
liability company that is directly and indirectly wholly-owned by the Acquiror
(the "Acquisition Sub"), and Eastern Utilities Associates (the "Company")
propose to enter into an Agreement and Plan of Merger (the "Agreement") in which
each outstanding common share of the Company (the "Company Shares") would be
converted into the right to receive $31.00 per share in cash, subject to
increase as set forth in the Agreement (the "Consideration").
You have asked us whether, in our opinion, the Consideration to be paid by
the Acquiror pursuant to the Merger is fair from a financial point of view tot
he Acquiror.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to the Company and the Acquiror that we deemed to be
relevant;
(2) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and
prospects of the Company and the Acquiror, as well as the amount and
timing of the cost savings and related expenses and synergies expected
to result from the Merger (the "Expected Synergies") furnished to us
by the Company and the Acquiror, respectively;
(3) Conducted discussions with members of senior management and
representatives of the Company and the Acquiror concerning the matters
described in clauses 1 and 2 above, as well as their businesses and
prospects before and after giving effect to the Merger and the
Expected Synergies;
(4) Reviewed the market prices and valuation multiples for the Company
Shares and compared them with those of certain publicly traded
companies that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and compared them
with those of certain publicly traded companies that we deemed to be
relevant;
(6) Compared the proposed financial terms of the Merger with the financial
terms of certain other mergers which we deemed to be relevant;
(7) Participated in discussions and negotiations among representatives of
the Company and the Acquiror and their financial and legal advisors;
(8) Reviewed the potential pro forma impace of the Merger on the Acquiror;
(9) Reviewed a draft dated January 28, 1999 of the Agreement; and
(10) Reviewed such other financial studies and analyses and took into
accuont such other matters we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing out opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the company or been furnished with any such evaluation or
appraisal. In addition, we have not assumed any obligation to conduct any
physical inspection of the properies or facilities of the Company. Wtih respect
to the financial forecast information and the Expected Synergies furnished to or
discussed with us by the Company or the Acquiror, we have assumed that they have
been reasonably prepared and reflect the best currently available estimates and
judgment of the Company's or the Acquiror's management as to the expected future
financial performance of the Company or the Acquiror, as the case may be, and
the Expected Synergies. We have also assumed that the final form of the
Agreement will be substantially similar to the last draft reviewed by us.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory and other consents or approvals (contractual or otherwise)
for the Merger, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger.
We are rendering the opinion set forth below without regard to whether the
pending acquisition of the Acquiror by The National Grid Group plc (the
"National Grid Transaction") will be consummated. However, with your consent we
have assumed that neither the execution of the Agreement nor the consummation of
the Merger will result in any delay or otherwise have an adverse effect on the
process of obtaining the required regulatory approvals in connection with the
National Grid Transaction.
We are acting as financial advisor to the Acquiror in connection with the
Merger and will receive a fee from the Acquiror for our services, a significant
portion of which is contingent upon the consummation of the Merger. In addition,
the Acquiror has agreed to indemnify us for certain liabilities arising out of
our engagement. We are currently providing financial advisory services to the
Acquiror in connection with the National Grid Transaction and have received, and
may receive, fees for the rendering of such services. In addition, in the
ordinary course of our business, we may actively trade the Company Shares and
other securities of the Company, as well as securities of the Acquiror for our
own account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Acquiror. Our opinion does not address the merits of the underlying decision by
the Acquiror to engage in the Merger.
We are not expressing any opinion herein as to the prices at which the
Acquiror common stock will trade following the announcement or consummation of
the Merger.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Consideration to be paid by the Acquiror pursuant to
the Merger is fair from a financial point of view of the Acquiror.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
/s/ Merrill Lynch, Pierce, Fenner & Smith
Incorporated
LAC
25 Research Drive, Westborough, Massachusetts 01582
March 23, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Form U-1 Application/Declaration Seeking Approvals Related to the
Proposed Combination of National Grid USA (formerly New England
Electric System) and Eastern Utilities Associates - File No. 70-9537
Ladies and Gentlemen:
National Grid USA (formerly New England Electric System) (hereinafter
referred to as "Grid USA') proposed to acquire Eastern Utilities Associates
("EUA") with Grid USA being the surviving entity. Grid USA is a registered
holding company under the Public Utility Holding Company Act of 1935 (the
"Act"), and is a member of the National Grid Group plc holding company system,
also registered under the Act. The Application/Declaration also covers the
acquisition of common shares related to the mergers of Eastern Edison Company
and Massachusetts Electric Company ("Mass. Electric"), with Mass. Electric being
the surviving entity; Montaup Electric Company and New England Power Company
("NEP"), with NEP being the surviving entity; Blackstone Valley Electric
Company, Newport Electric Corporation, and The Narragansett Electric Company
("Narragansett"), with Narragansett being the surviving entity; and EUA Service
Corporation and New England Power Service Company ("Service Company"), with
Service Company being the surviving entity. Grid USA will also indirectly
acquire EUA's non-utility business. In connection with these mergers, securities
will be issued, indebtedness assumed, and guarantees assumed, all as more fully
described in the Application/Declaration. Authorization for payment of dividends
out of surplus is also requested. I am Deputy General Counsel for Grid USA and
the companies in its holding company system and am familiar with the
transactions covered by the Application/Declaration for which approval is sought
(the "Transactions") under the Act.
I am a member of the bar of Massachusetts. I am not a member of the bar of
any other country or state of the United States in which certain of the
Applicants are incorporated or qualified to do business, and do not hold myself
out as an expert in the laws of such states, although I have consulted and will
consult with counsel who are experts in such laws. For purposes of this opinion,
to the extent I deemed necessary, I have relied on advice from counsel employed
or retained directly or indirectly by Grid USA.
In connection with this opinion, I or attorneys in whom I have confidence,
have examined originals or copies, certified or otherwise identified to my
satisfaction, of such records and such other documents, certificates and
corporate or other records as I have deemed necessary or appropriate as a basis
for the opinions expressed in this letter. In my examination, I have assumed the
genuineness of all signatures, the legal capacity of all persons, the
authenticity of all documents submitted to me as originals, the conformity to
original documents of documents submitted to me as certified or photostatic
copies and the authenticity of the originals of such copies. As to various
questions of fact material to such opinions, I have, when relevant facts were
not independently established, relied upon statements contained in the
Application-Declaration.
The opinions expressed below are subject to the following assumptions,
qualifications, limitations, conditions and exceptions:
o The Commission shall have duly entered an appropriate order or orders
with respect to the proposed transactions, as described in the
Application-Declaration, permitting the Application-Declaration to
become effective under the Act and the rules and regulations
thereunder, and the proposed transactions are consummated in
accordance with the Application-Declaration and the Commission's
orders.
o No act or event other than as described herein shall have occurred
subsequent to the date hereof which would change the opinions
expressed below.
o With respect to Grid USA and each of its subsidiaries and associate
companies, appropriate corporate actions will have been taken by both
the issuer and acquirer of the securities contemplated by the
Application-Declaration and the documents transferring the securities
will have been duly authorized, executed and delivered with all
appropriate transfer or other taxes paid.
o Grid USA and each of its subsidiaries and associate companies involved
in the proposed transactions, will at the time of the proposed
transactions be a duly incorporated corporation or duly formed limited
liability company or partnership in the jurisdiction in which it is
domiciled.
o Issuance by the Rhode Island Public Utilities Commission of an order
approving the retail rate plan associated with the combination of
Blackstone Valley Electric Company and Newport Electric Corporation
into The Narragansett Electric Company.
Based upon the foregoing and subject to the assumptions, qualifications,
limitations, conditions and exceptions set forth herein, it is my opinion that,
with respect to Grid USA and each of its subsidiaries and associate companies,
in the event the proposed transactions are consummated in accordance with the
Application-Declaration:
(a) all state and federal laws applicable to the proposed transactions
will have been complied with;
(b) the issuer of any securities proposed in the Application-Declaration
is duly formed or incorporated under the laws of the jurisdiction in
which it is domiciled;
(c) such securities will be validly issued, fully paid and nonassessable,
and the holders thereof will be entitled to the rights and privileges
appertaining thereto set forth in the charter or other document
defining such rights and privileges;
(d) the Applicants will legally acquire any securities or assets subject
to this Application-Declaration, and;
(e) the consummation of the proposed transactions will not violate the
legal rights of the holders of any securities issued by Grid USA or
any of its subsidiaries and associate companies.
I hereby consent to the filing of this opinion as an exhibit to the
Application-Declaration.
Very truly yours,
/s/ Kirk Ramsauer
Deputy General Counsel
National Grid USA
[McDermott, Will & Emery Letterhead]
March 23, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: File No. 709537
Form U1 Application/Declaration Seeking Approvals Related to the
Proposed Combination of National Grid USA (formerly New England
Electric System) and Eastern Utilities Associates
Ladies and Gentlemen:
As counsel for Eastern Utilities Associates ("EUA") on behalf of itself and
its electric utility subsidiaries Blackstone Valley Electric Company
("Blackstone"); Eastern Edison Company ("Eastern Edison"); Montaup Electric
Company ("Montaup"); and Newport Electric Corporation ("Newport"), we are
furnishing this opinion to be used in connection with the filing by EUA,
National Grid USA ("Grid USA" formerly New England Electric System) and National
Grid Group plc ("NGG") (EUA, Grid USA and NGG collectively the "Declarants")
with the U.S. Securities and Exchange Commission (the "Commission"), of an
Application-Declaration on Form U-1, as amended (File No. 70-9537; hereinafter,
the "Application-Declaration"), under the Public Utility Holding Company Act of
1935, as amended.
The Declarants are filing the Application-Declaration for the purpose of
obtaining Commission authorization for the proposed combination of Grid USA,
EUA, and Research Drive LLC ("LLC"), a Massachusetts limited liability company
(the "Merger"). Pursuant to the Merger, LLC will merge with and into EUA, with
EUA as the surviving entity, and subsequently EUA will be merged with and into
Grid USA, with Grid USA as the surviving entity (together with the Merger, the
"Transaction"). Subsequent to the Transaction, Grid USA will remain a registered
holding company pursuant to the Public Utility Holding Company Act of 1935 (the
"Act").
The Application/Declaration also covers following the consummation of the
Merger the acquisition of common shares related to the mergers of Eastern and
Massachusetts Electric Company ("Mass. Electric"), with Mass. Electric being the
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Securities and Exchange Commission
March 23, 2000
Page 2
surviving entity; Montaup and New England Power Company ("NEP"), with NEP being
the surviving entity; Blackstone, Newport, and The Narragansett Electric Company
("Narragansett"), with Narragansett being the surviving entity; and EUA Service
Corporation ("EUA Service") and New England Power Service Company ("Service
Company"), with Service Company being the surviving entity. Grid USA will also
indirectly acquire EUA's nonutility business. In connection with these mergers,
securities will be issued, indebtedness assumed, and guarantees assumed, all as
more fully described in the Application/Declaration.
It is our opinion, subject to the additional assumptions, exceptions and
qualifications hereinafter stated, that in the event the Merger is consummated
in accordance with the Application-Declaration:
(a) All state laws applicable to the Merger will have been complied with by
EUA and its subsidiaries and associate companies.
(b) EUA is a validly organized and duly existing voluntary association
organized under the laws of the Commonwealth of Massachusetts.
(c) The securities of EUA issued in connection with the consummation of the
Merger will be validly issued, fully paid and nonassessable and the holders
thereof will be entitled to the rights and privileges appertaining thereto set
forth in Declaration of Trust of EUA, as amended, which is the document defining
such rights and privileges.
(d) The consummation of the Merger will not violate the legal rights of the
holders of any of the securities issued by EUA and its associate companies,
Eastern Edison, Montaup, Blackstone, Newport, Cogenex, EUA Ocean State
Corporation ("Ocean State"), EUA Service, Northeast Energy Management, Inc.
("NEM"), EUA Citizens Conservation Services, Inc. ("CCS"), EUA Cogenex-West
Corporation ("Cogenex-West"), EUA Cogenex-Canada Inc. ("Cogenex-Canada"), EUA
Cogenex-Canada Energy Services, Inc. ("Cogenex-Canada Energy Services") (each of
NEM, CCS, Cogenex-West, Cogenex-Canada and Cogenex-Canada Energy Services being
an associate or subsidiary company of Cogenex), EUA Energy Investment
Corporation ("EEIC"), EUA BIOTEN, Inc. ("EUA BIOTEN"), BIOTEN Operations, Inc.
("BIOTEN Operations"), (EUA BIOTEN and BIOTEN Operations being associate
companies of EEIC), Ocean State Power I ("OSP I"), Ocean State Power II ("OSP
II") (OSP I and OSP II being Rhode Island general partnerships), APS Cogenex
L.L.C., EUA WestCoast L.P., BIOTEN GPM, EUA Energy Capital and Services I, EUA
Energy Capital and Services II, EUA FRC II Energy Associates, Micro Utility
Partners of America and Renova, L.L.C..
This opinion, in addition to being subject to the consummation of the
Merger, is also subject to the following additional assumptions, exceptions and
qualifications:
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Securities and Exchange Commission
March 23, 2000
Page 3
(1) compliance with such order or orders as the SEC may issue from time to
time upon the Application-Declaration;
(2) all consents required in connection with the consummation of the Merger
shall have been obtained;
(3) the accuracy of information furnished to us (a) as to the outstanding
securities of EUA and its associate companies, Eastern, Montaup, Blackstone,
Newport, Cogenex, Ocean State, EUA Service, NEM, CCS, Cogenex-West,
Cogenex-Canada, Cogenex-Canada Energy Services, EEIC, EUA BIOTEN, BIOTEN
Operations, OSP I, OSP II, and such other associate companies listed in
paragraph (d) above; and (b) that there is no provision or condition in
outstanding securities of the above listed corporations limiting the
consummation of the Merger;
(4) that all requirements of applicable state securities or "blue sky" laws
will have been complied with;
(5) that the enforceability of the transactions contemplated in the
Application-Declaration may be subject to and affected by applicable bankruptcy,
receivership, insolvency, reorganization, moratorium, fraudulent conveyance or
other laws affecting the enforcement of the rights and remedies of creditors
generally (including, without limitation, such as may deny giving effect to
waivers of rights to debtors or guarantors); and such duties and standards as
are or may be imposed on creditors, including, without limitation, good faith,
reasonableness and fair dealing under any applicable statute, rule, regulation
or judicial decision;
(6) that the enforceability of the transactions contemplated in the
Application-Declaration may be subject to and affected by general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law) and the exercise of equitable powers by a court of
competent jurisdiction (and no opinion is given herein as to specific
performance or as to the availability of other equitable remedies or equitable
relief of any kind);
(7) No act or event other than as described herein shall have occurred
subsequent to the date hereof which would change the opinions expressed herein;
(8) EUA will at the time of the Merger be a duly incorporated voluntary
association in the Commonwealth of Massachusetts.
This opinion relates only to federal law and the laws of the Commonwealth
of Massachusetts, and we express no opinion with respect to any other
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Securities and Exchange Commission
March 23, 2000
Page 4
jurisdiction. To the extent that certain matters addressed may involve the laws
of other states, we have assumed that such laws are not materially different
from the laws of the Commonwealth of Massachusetts.
We consent to the use of this opinion in connection with the
Application-Declaration.
Very truly yours,
/s/ McDermott, Will & Emery
McDermott, Will & Emery
