File No. 70-8086
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
to
APPLICATION/DECLARATION
under
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
(the "Act")
HEC INC.
24 Prime Parkway
Natick, MA 01760
(Name of company filing this statement and address of
principal executive office)
NORTHEAST UTILITIES
(Name of top registered holding company)
Jeffrey C. Miller
Assistant General Counsel
Northeast Utilities Service Company
P.O. Box 270
Hartford, CT 06141-0270
(Name and address of agent for service)
The Commission is requested to mail signed copies of all orders, notices and
communications to:
Jeffery D. Cochran, Attorney
Northeast Utilities Service Company
P.O. Box 270
Hartford, CT 06141-0270
The application/declaration, as previously amended, is hereby further
amended and restated as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
The purpose of this application/declaration (the "Application") is to
request the Commission's authorization for two groups of related transactions
under which HEC Inc.("HEC"), a wholly-owned subsidiary of Northeast Utilities
("NU"), a registered holding company, would create and finance two
wholly-owned subsidiaries to provide energy services and related consulting
services in markets outside of New England and New York. The first
of these subsidiaries, HEC Energy Consulting Canada Inc. ("HEC Canada"),
would provide energy management, demand-side management and consulting
services to utilities, governmental agencies and large energy consumers
located in Canada. The second subsidiary, HEC International Corporation
("HEC International") would be created to be an equal participant (i.e.,
fifty percent) in a joint venture, HECI, with a subsidiary of Barakat &
Chamberlin, Inc ("BCI"), an unaffiliated company. Because HEC International
would have a fifty percent interest in HECI, HECI would be a subsidiary of
HEC International as defined by Section 2(a)(8) of the Act. HECI would draw
on the capabilities and resources of both HEC and BCI to provide energy
management, demand-side management, and consulting services to utilities,
governmental agencies and large energy consumers located in the western
United States and internationally (excluding Canada). See Exhibit H-1, which
illustrates HEC's proposed corporate structure after HEC Canada and HEC
International are organized.
A. General
The transactions associated with the formation and operation of HEC
Canada for which authorization under the Public Utility Holding Company Act
of 1935 ("Act") is sought herein involve (i) the completion of the initial
steps necessary for the organization of HEC Canada under the laws of the
province of Ontario and the laws of Canada, as a new wholly-owned subsidiary
of HEC by no later than 120 days after the Commission issues an order
approving the Application, (ii) the issuance by HEC Canada to HEC, and the
acquisition by HEC from HEC Canada, of 100 shares of no par value common
stock of HEC Canada ("HEC Canada Common Stock") for $10,000 (U.S.), which HEC
Canada Common Stock would constitute all of HEC Canada's initial issued and
outstanding capital stock by no later than 120 days after the Commission
issues an order approving the Application, (iii) HEC's investment of up to a
maximum aggregate amount of $1,500,000 (U.S.) in HEC Canada, at any time
needed during the period through June 30, 1996, for the purpose of funding
HEC Canada's working capital requirements and (iv) HEC's provision of
engineering, administrative and marketing services to HEC Canada at any time
needed during the period through June 30, 1996.
The transactions associated with HECI for which authorization under the
Act is sought herein involve (i) the completion of the initial steps
necessary for the organization of HEC International under the laws of the
Commonwealth of Massachusetts, as a new wholly-owned subsidiary of HEC, (ii)
the issuance by HEC International to HEC, and the acquisition by HEC from HEC
International of 100 shares of common stock, par value $1 per share, of HEC
International ("HEC International Common Stock") for $10,000 in cash, which
HEC International Common Stock would constitute all of HEC International's
initial issued and outstanding capital stock, (iii) the formation of HECI as
a joint venture between HEC International and BCI by no later than 120 days
after the Commission issues an order approving the Application, (iv) HEC's
investment of up to a maximum aggregate amount of $2,500,000 in HEC
International, at any time as needed during the period through June 30,
1996, under the terms described below, for the purpose of funding HEC
International's share of the organizational and operational costs of HECI and
(v) HEC's provision of administrative, engineering and marketing services to
HEC International and to HECI at any time needed during the period through
June 30, 1996.
HEC believes that the proposed activities of HEC Canada, HEC
International, and HECI should be conducted by new subsidiaries primarily to
insulate HEC's other assets and business activities from the business risks,
contractual obligations and the potential liabilities of the proposed
activities of the new subsidiaries. See Northeast Utilities, et al., HCA
Rel. No. 35-25655 (October 16, 1992). In addition, HEC would be insulated
from any burdens of foreign regulation associated with the activities of
these subsidiaries. Also, there would be a simple and logical division for
operating and financial purposes between the activities of the new
subsidiaries and HEC's other business. Separate financial statements will be
generated for the new subsidiaries, which will allow NU to ensure that the
new subsidiaries' activities are not cross-subsidized by NU's operating
companies. Furthermore, HEC, NU and its shareholders will use the separate
financial statements to closely monitor the profitability of the new
subsidiaries' activities.
B. The 1990 Order
As authorized by the Commission's Order dated July 27, 1990 (HCA Rel.
No. 35-25114-A, the "1990 Order"), HEC has provided various energy management
services primarily to customers in New England and New York (the "Region")
and to a limited extent customers outside the Region. These energy
management services have included identification of various energy cost
reduction opportunities, design of facility and process enhancements,
management of and/or the direct construction and installation of energy
conservation equipment, training of client personnel in the operation of
equipment, maintenance of energy systems and reporting of system results.
C. The 1993 Order
In its order dated September 30, 1993 (HCA Rel. No. 35-25900, the "1993
Order"), the Commission authorized HEC to provide additional types of energy
management and demand-side management ("DSM") services and to provide
consulting services. The 1993 Order authorized HEC to provide its energy
management and DSM services without limitation to customers located in the
Region and to provide limited services outside the Region, with the
restriction that revenues attributable to customers outside the Region do not
exceed the revenues attributable to customers inside the Region (the "50%
Revenue Restriction"). In their application/declaration requesting such
authorization (the "1993 Application"), NU and HEC explained that all HEC
consulting services would be based on existing HEC and NUSCO skills and
expertise developed in HEC's and NU system activities and such services would
not require significant additional investment. In addition, they explained
that HEC's provision of consulting services would benefit NU investors by
enhancing HEC's profits from its activities and would benefit customers of NU
system companies by further refining HEC's skills and expertise in energy
management and DSM services. Consequently, the 1993 Order does not include
revenues from HEC's consulting activities in the 50% Revenue Restriction.
Subject to the 50% Revenue Restriction with respect to HEC's combined
energy management and DSM services (i.e., the energy management and DSM
services of HEC combined with those of HEC Canada and HECI), HECI and HEC
Canada would provide energy management and DSM services outside the Region.
HEC Canada's provision of consulting services would be based on existing HEC
and NUSCO skills and expertise and would not require significant additional
investment by HEC or NU. Similarly, HECI's provision of consulting services
would be based on existing HEC expertise and expertise of BCI and would not
require significant investment by HECI, HEC International or HEC or any of
its affiliates. HEC Canada's and HECI's provision of consulting services
would enhance the profitability of those entities and further refine HEC's
skills and expertise in energy management and DSM. Therefore, HEC requests
that consulting services, as defined below, provided by HEC Canada and HECI
not be subject to the 50% Revenue Restriction.
The 1993 Order authorized NU, for the period through June 30, 1996, to
make capital contributions to HEC up to an aggregate amount of approximately
$6 million. By Order dated June 25, 1993 (HCA Rel. No. 35-25836, the "Money
Pool Order"), the Commission authorized HEC to borrow up to $11 million for
the period through December 31, 1994, in the form of loans through the Money
Pool.
Unless first approved by the Commission, HEC would not exceed the total
borrowing limitation explained above, as a result of its investments in HEC
Canada and HEC International. In addition, NU would not exceed the
limitation on its funding of HEC explained above, unless first approved by
the Commission.
D. HEC Canada's Energy Management, DSM and Consulting Services
HEC intends to form HEC Canada for the purpose of providing energy
management and DSM services as well as consulting services to utilities,
government entities, trade associations, and large energy consumers located
in Canada. Energy management services would include: (i) identification of
energy and other resource (water, labor, maintenance, materials) cost
reduction opportunities; (ii) design of facility and process modifications
and/or enhancements to realize such opportunities; (iii) design of new and
retrofit heating, ventilating and air conditioning, electrical and power
systems, motors, pumps, lighting, water and plumbing systems and related
structures to realize energy and other resource efficiency; (iv) management
or direct installation of energy conservation equipment; (v) performance
contracts, i.e., contracts under which HEC Canada is paid for its services
and the equipment it installs based on the energy savings that result from
such services and equipment; (vi) assistance in identifying and arranging
third-party financing for energy conservation programs;[1] (vii) system
commissioning, i.e., observing the operation of the installed system to
insure that it meets design specifications and (viii) reporting of system
results.
HEC Canada's DSM services would include: (i) design of energy
conservation programs; (ii) implementation of energy conservation programs;
(iii) performance contracts for DSM work; and (iv) monitoring and/or
evaluation of DSM programs, including metering and site inspections.
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[1] The actual sources of financing would be entities unaffiliated with HEC
Canada, HEC and their affiliates. Neither HEC nor HEC Canada would provide
any guarantees or accept any other obligations associated with such third-
party financing. However, HEC Canada may guaranty energy savings to some of
its energy management and DSM customers.
Consulting services would include: (i) development and review of
architectural, structural and engineering drawings for energy and other
resource efficiency; (ii) design and specification of energy consuming
equipment; (iii) design and marketing of "Intellectual Property," i.e., any
process, program, technique or computer software, used to analyze energy
conservation opportunities and results;[2] (iv) general technical advice
concerning the use, benefits, planning and/or administration of energy
management and/or DSM programs that is not associated with current, planned,
or potential HEC Canada energy management or DSM services.[3] The above
definitions of energy management, DSM, and consulting services are consistent
with the definitions used in the 1993 Application.
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[2] The 1993 Application provided that HEC would pay the following amounts
to Northeast Utilities Service Company ("NUSCO") or any other NU subsidiary
for Intellectual Property developed by such NU subsidiary if HEC sells or
licenses such Intellectual Property:
(i) 70% of the revenues from the Intellectual Property until the
subsidiary that developed the Property recovers its programming and
development costs; and
(ii) 20% of such revenues thereafter.
HEC would pay the costs of Intellectual Property developed at its request.
HEC would address such requests only to NUSCO. In addition, HEC would pay
NUSCO an amount equal to 20% of any revenues received from the sale or
license of such Intellectual Property. HEC Canada would pay the same amounts
to any NU subsidiary for Intellectual Property developed by that subsidiary
which HEC Canada sells or licenses.
[3] The 1993 Order also incorporated the following categorization rules to
ensure that HEC's consulting revenues do not include any revenues from energy
management or DSM services: First, revenues will only be categorized as
consulting revenues if HEC is not at the same time also providing energy
management and/or DSM services to that customer. Second, if a consulting
client of HEC requests that HEC also provide energy management and/or DSM
services (and HEC agrees to provide such services), all revenues received
from that customer, until the energy management and/or DSM work is completed,
would be categorized as energy management and/or DSM services revenues, which
would be subject to the 50% Revenue Restriction. Third, if a customer for
whom HEC is providing energy management and/or DSM services requests that HEC
also provide a consulting service or services, all revenues from that
customer would be categorizied as energy management and/or DSM services,
which would be subject to the 50% Revenue Restriction, until all the energy
management and/or DSM services work is completed. HEC Canada would apply
these same categorization rules to revenues from its services.
E. Need for a Canadian Subsidiary
HEC believes there is a strong market for HEC's services in Canada and
it would be beneficial for HEC to have a Canadian subsidiary that would be
able to take full advantage of such opportunities. The two largest utilities
in Canada, Ontario Hydro and Hydro Quebec, have devoted large budgets to
promoting and subsidizing energy conservation. In addition, Canada has a
national government initiative to promote energy conservation. With its ten
years of experience in the United States in similar projects, HEC is well
qualified to provide energy management, DSM and consulting services in
Canada. Furthermore, HEC's experience profile compares favorably with
existing Canadian providers of energy services.
HEC needs to have a Canadian subsidiary because several major Canadian
purchasers of energy management, DSM, and consulting services prefer to use
or restrict purchases to Canadian companies. For example, the Canadian
Department of Energy, Mines and Resources currently is sponsoring a major
program to improve the energy efficiency of government buildings, its new
Federal Building Initiative ("FBI"), in which only Canadian companies are
eligible to participate as lead contractors. Also, Canadian utilities
normally give preference to Canadian vendors. Finally, private consumers of
energy services consider the establishment of a Canadian subsidiary as an
indication of an energy service company's long-term commitment to serve
Canadian customers. HEC believes that it needs to have a Canadian subsidiary
to successfully compete in this attractive market.
F. Benefits of HEC Canada to the NU System
In its 1990 application/declaration requesting Commission authorization
to organize and finance HEC, NU explained that improved C&LM measures
implemented anywhere in New England or in New York would benefit the New
England Power Pool participants, including the NU system companies, by
suppressing demand, thereby deferring the date at which new generation units
will be needed, and by freeing up available transmission to transfer lower
cost power into and within New England. Similar benefits would accrue from
improved conservation in eastern Canada (i.e., Quebec, New Brunswick, Nova
Scotia, Prince Edward Island and, to some extent, Ontario) since eastern
Canada is interconnected with New England and New England relies on power
generated there. Improved conservation in eastern Canada would free up more
low cost electricity generated by hydroelectric projects in eastern Canada.
In addition, improved conservation in eastern Canada could reduce the number
of occasions when New England must curtail power imports from Canada (under
various firm energy contracts) because of Canadian power emergencies. Also,
there would be more power available in eastern Canada to send to New England
in times of high demand, such as peak periods of high summer heat, severe
winter cold, and unusual outages at New England generating units.
Furthermore, the NU companies participate in the Northeast Power
Coordinating Council ("NPCC"), which provides overall coordination of
electric power system reliability for New York, New England, Quebec, and the
Canadian maritime (i.e., New Brunswick, Prince Edward Island, and Nova
Scotia). Therefore, any conservation that takes place in these areas of
Canada will improve reliability in New England through NPCC coordination by
reducing the chance of overloaded transmission lines between New England and
eastern Canada.
All of HEC Canada's activities in Canada will benefit NU by allowing HEC
to better utilize HEC's excess resources and to further develop its skills
and expertise in energy management and DSM activities.
G. Initial Operations and Authorized Funding of HEC Canada
The setup cost of HEC Canada would include HEC's initial capital
contribution to HEC Canada and organization costs. Initially, HEC Canada
would have capital of $10,000. In addition, organization costs of
approximately $10,000 would be required for legal and SEC fees and related
expenses.
HEC Canada's annual operating budget would be established by HEC.
Initially, HEC Canada would be a "presence" in Ontario with telephone
service, stationary, marketing materials and some marketing travel expense
for HEC personnel, but no full-time HEC Canada employees. HEC Canada would
hire subcontractors and consultants to complete work pursuant to HEC Canada's
contracts. HEC would charge HEC Canada the cost of engineering,
administrative, marketing services that HEC provides to HEC Canada. When
the level of interest in its services grows to a point where HEC Canada needs
more than a presence in Ontario, it would hire a senior engineer/consultant
to develop and administer contracts and hire additional staff as needed.
HEC would advance any monies needed by HEC Canada to operate for the
period through June 30, 1996. HEC's investments in HEC Canada could occur at
any time through June 30, 1996 and would take the form of additional
acquisitions of common stock, capital contributions, open account advances
and/or subordinated loans. The sources of HEC's investments in HEC Canada
would include internally generated funds and HEC's borrowing through the
Money Pool. The interest rate on HEC's open account advances and
subordinated loans to HEC Canada would equal the interest rate then in effect
on HEC's loan through the Money Pool. The maximum term of such loans would
not exceed five years and the maturity date would be no later than June 30,
2001. However, to the extent that the source of HEC's advances and/or loans
to HEC Canada is HEC's borrowing through the Money Pool, the term and
maturity date of such advances and/or loans would match those of HEC's
borrowings through the Money Pool. In total, HEC Canada's sale of stock to
HEC, capital contributions by HEC to HEC Canada, outstanding open account
advances and subordinated loans from HEC to HEC Canada would not exceed $1.5
million (U.S.) at any time during the period through June 30, 1996, unless
further Commission approval is obtained.[4]
HEC Canada would be subject to provincial and Canadian national income
taxes. Eventually, HEC Canada may pay dividends to HEC out of profits earned
on HEC Canada's activities. Any such dividends would be subject to a 25
percent withholding tax.
HEC would consider HEC Canada's revenues from energy management and DSM
services as revenues from outside the Region and would add them to HEC's
other revenues from outside the Region for purposes of the 50% Revenue
Restriction. Since HEC Canada's provision of consulting would not require
significant investment and would enhance HEC Canada's profitability as well
as further refine HEC's skills and expertise in energy management and DSM
services, HEC requests that HEC Canada's provision of consulting services not
be subject to the 50% Revenue Restriction.
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[4] HEC Canada would not be financed on a revolving credit basis.
H. HEC Canada's Directors
The HEC Canada Board of Directors would be required to have a majority
of Canadian residents. HEC expects that initially it would nominate a
majority of Canadian citizens who have been consultants to HEC and who later
would be replaced by HEC Canada employees, as HEC Canada's activities grow.
Except for HEC employees who may be elected as directors of HEC Canada, HEC
does not anticipate that HEC Canada would use any members of its Board of
Directors as consultants on HEC Canada's projects.
I. Basis for HECI
HECI presents an attractive opportunity for HEC and BCI to combine their
unique capabilities and experience to form a competitive team in the energy
and consulting services market. BCI is based in Oakland, California and
provides economic and management consulting services to utilities and energy
companies. It has experience in conceptualizing, designing and obtaining
rate recovery for DSM programs. BCI specializes in the application of
traditional economic analysis services (e.g., data collection and analysis)
in very high-value settings. It has a national reputation for quality work
and a large customer base. HEC complements BCI's capabilities with its DSM
engineering and implementation experience.
Specifically, HECI would provide energy management, DSM and consulting
services to utilities, governmental agencies and large energy consumers
located in the western United States (Washington, Oregon, California,
Montana, Idaho, Wyoming, Colorado, Utah, New Mexico, Nevada and Arizona),
and internationally (except Canada). Services offered by HECI would include
some services offered by HEC and some offered by BCI.
HECI would provide the following services: (1) on-site energy audits,
engineering, design and construction management and savings measurement for
utilities and utility customers; (2) DSM services to utilities, regulators
and development banks associated with technical aspects of DSM programs
including analyses of cost effectiveness, tracking, quality control
standards, standard contract terms, facility audit protocol, persistence
measurement, metering and monitoring and other aspects of conservation; (3)
engineering support of heating, ventilation and air conditioning systems,
boilers, chillers, energy management systems and other energy systems; (4)
consulting as defined above for HEC Canada;[5] and (5) related services.
HECI's activities may eventually lead to projects that require
investment of capital by HEC International or BCI or both in the form of
additional loans to HECI. In that event, the participant[s] providing
capital will be paid an interest rate and fees that reflect the risk of the
loan and the underlying project. Such loans will be project specific and
depend on revenues generated by the project for payment of interest and
repayment of principal. The need for such loans could arise as proposed
projects are selected and commenced, which could occur at any time through
June 30, 1996. The interest rate on such loans would not exceed 17 percent
per year. The term for these loans would not exceed three years, and the
maturity date for such loans would be no later than June 30, 1999.
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[5] HEC International would employ the same revenue categorization rules as
HEC and HEC Canada. See Section D., above. If HECI sells or licenses
Intellectual Property developed by NUSCO or some other NU subsidiary, it
would pay that NU subsidiary the same amount that HEC and HEC Canada would
pay for use of NU system company Intellectual Property. See Section D.,
above.
Profits from such projects beyond the return of capital and payment of
interest and fees will accrue to HECI. Any project specific loans made by
HEC International would be considered a contribution subject to the overall
aggregate limitation on contributions by HEC International to HECI of
$2,500,000. The maximum total amount of such loans to HECI outstanding at
any time would be $5,000,000 (i.e., $2,500,000 each for HEC International's
loans and for BCI's loans).
HECI may also subcontract with HEC for construction and engineering
projects, including construction financing, performance and other contractual
guarantees. The need for construction financing, performance and other
contractual guarantees could arise as projects are commenced, which could
occur at any time through June 30, 1996. HEC's maximum commitment and/or
exposure on financing, performance and other contractual guarantees of HECI's
work would be considered a contribution from HEC to HECI and would be subject
to the overall aggregate limitation on such contributions of $2,500,000.
J. Need for HECI
Favorable factors for energy conservation include regulatory support for
utility sponsored conservation, high energy prices, extreme climate and
utility supply and capacity shortages and constraints. The west coast of
North America and certain foreign countries have these characteristics. In
addition, the international market for conservation services is expected to
grow dramatically in the next decade as a result of increasingly burdensome
requirements for financing additional utility capacity, utility
privatization, and the elimination of energy price subsidies.
Eastern European countries are expected to experience three-fold energy
price increases as their utilities are privatized and the government
subsidies are withdrawn. In other developing countries, the growth in
electric demand is such that the World Bank and other financing sources are
expected to require conservation as part of their financing packages for
power projects. BCI is actively marketing its consulting services in the
international arena.
K. Benefits of HECI
HECI would allow HEC to more fully utilize and to further develop its
skills and expertise in energy management and DSM disciplines and to take
advantage of most attractive opportunities to employ its excess resources
outside the Region, including internationally, while sharing the business
risk of such work. In addition, HECI would combine the strengths of two
firms that have synergistic skills. HEC's participation in HECI would
benefit NU investors by enhancing HEC's profits and would benefit electric
customers in the Region by further developing HEC's skills and expertise in
energy management and DSM services.
HECI would reduce the cost of market entry in the targeted areas since
BCI is currently developing relationships with utilities and major
corporations there. In fact, much of the joint venture services would be
follow-on work for BCI's consulting services. HEC International and BCI
would share the start-up costs of each territory.
L. Initial Operations and Authorized Funding of HEC International
On March 10, 1993, HEC and BCI signed a letter of intent stating that upon
receipt of Commission approval, HEC International and BCI would enter into
the HECI joint venture agreement. HECI would be formed as a joint venture
under the laws of the State of California. BCI and HEC International will
project the cash needs of HECI prior to the start of each quarter and will
establish the required cash investments in HECI by BCI and HEC International.
If, during an actual operating period, HEC International and BCI
determine that HECI will need additional cash for operations, they will agree
on an additional amount for each of them to invest in HECI to meet such a
need. BCI and HEC International will make all such investments on a 50/50
basis. BCI and HEC International would each advance money to HECI for their
respective 50% shares of HECI's expenses in the form of open account advances
at any time as needed for HECI's operations during the period through June
30, 1996. The interest on these advances would equal the interest rate then
in effect on HEC International's loans or advances from HEC. If derived from
HEC's loans or advances, the term and the maturity date of HEC
International's advances to HECI would match those of the advances or loans
from HEC. Otherwise, the maximum term of advances to HECI would not exceed
five years and the maturity date would be no later than June 30, 2001.
Some of HECI's expenses will be paid directly by HEC International or
BCI. For those expenses, the joint venture participant paying the bill will
invoice the other participant for that participant's 50% share of the paid
expense. Direct payments of HECI expenses would be treated as advances to
HECI with the same term and interest rate as the open account advances
described above. HEC International's outstanding advances combined with
HEC International's payment of any other costs associated with HECI plus any
outstanding project specific loans made by HEC International to HECI would
not exceed $2,500,000 at any time, unless specifically approved by the
Commission.
HECI would initially be located in Oakland, California and operate out
of office space provided by BCI. The setup costs of HECI would include legal
fees for drafting the HECI agreement and associated subcontract agreement,
initial costs for marketing material, stationary and registration fees, which
are estimated to total approximately $30,000. HEC International would be
responsible for legal fees, but the remaining costs would be shared between
HEC International and BCI. The setup costs of HEC International are
estimated at $1,000.
Operating costs of HECI initially would include salary and benefits for
one employee to manage the joint venture, office space, engineering and
support staff services, telephone, travel, marketing and accounting charges.
BCI and HEC International would share these operating costs equally, and HEC
International's portion for the first year is expected to be approximately
$100,000.
HEC would advance any monies needed by HEC International to make
advances to HECI or to pay HEC International's share of the operating costs
of HECI. HEC's investments in HEC International could occur at any time
through June 30, 1996 and would take the form of additional acquisitions of
common stock, capital contributions, open account advances and/or
subordinated loans. The sources of HEC's investments in HEC International
would include internally generated funds and HEC's borrowing through the
Money Pool. Any open account advances or subordinated loans from HEC to HEC
International would bear interest equal to the rate then in effect on HEC's
loan through the Money Pool. The maximum term of such loans would not exceed
five years, and the maturity date would be no later than June 30, 2001.
However, to the extent that the source of HEC's advances and/or loans to HEC
International is HEC's borrowing through the Money Pool, the term and
maturity date of such advances and/or loans would match the term and maturity
date of HEC's borrowings through the Money Pool. In total, HEC
International's sale of stock to HEC, capital contributions by HEC to HEC
International, outstanding open account advances and subordinated loans from
HEC to HEC International, and any financing, performance or other contractual
guarantees made by HEC to HECI would not exceed $2,500,000 at any time.
HECI would enter into an agreement with HEC and BCI to subcontract for
their services. HEC would charge HECI on the basis of its cost for services
provided, pursuant to Rule 90. The subcontract agreement between HECI, HEC
and BCI would also include a provision prohibiting HEC and BCI from competing
with HECI.
As the level of its business activities increases, HECI would hire
additional staff. Earnings from operations of HECI will be accounted for on
a quarterly basis. Each year, HEC International and BCI will agree on the
amount of earnings from operations that HECI should keep as retained earnings
for on-going operating needs. At the time of each year, any HECI earnings
and cash in excess of the amount needed for on-going operations would be
used first to repay BCI's and HEC International's advances and loans. Once
HECI repaid all such advances and loans, earnings in excess of operating
needs would be paid to HEC International and BCI in the form of dividends in
equal amounts to HEC International and BCI. Any such dividends would only be
paid out of earned surplus unless authorization from the Commission to use
any other account is obtained.
HEC would consider HECI's revenues from energy management and DSM
services as revenues from outside the Region and would add them to HEC's
other revenues from outside the Region for purposes of the 50% Revenue
Restriction. Since HECI's provision of consulting would not require
significant investment by HEC, HEC International or HECI, and would enhance
HEC International's profitability as well as further refine HEC's skills and
expertise in energy management and DSM services, HEC requests that consulting
services revenues not be subject to the 50% Revenue Restriction.
M. Governance of HECI
HECI would be controlled by a management committee made up of a
representative of BCI, a representative of HEC International and the HECI
manager. The HECI manager would be selected by agreement of HEC
International and BCI.
N. Buy-out Provisions
The HECI agreement would contain a provision to allow either of the
participants, HEC International or BCI, to purchase the other participant's
share if that other participant, or any holding company thereof, were to
become bankrupt, enter into an arrangement with its creditors generally, go
into liquidation or otherwise become the subject of an insolvency proceeding.
The HECI agreement would also have a provision to allow either of the
participants to purchase the other's share if controlling interest in the
other participant were transferred to an unaffiliated party. The purchase
price under both of these provisions would be the fair market value as
mutually agreed by the participants, or if no agreement is reached, as
determined by an independent appraiser, who would be selected by vote of
the two HECI participants and the joint venture manager.
Either participant would also have the right to initiate an offer to
sell its share of HECI. The selling price would be the fair market value as
mutually agreed by the participants, or if no agreement is reached, as
determined by an independent appraiser, who would be selected by vote of the
two HECI participants and the joint venture manager. HEC International would
seek Commission authorization to sell its share of HECI to BCI or to acquire
BCI's share of HECI.
O. Effect of Proposed Transactions
Based on the experience of HEC, NUSCO and its own analysis, NU
management believes that the proposed transactions would not be detrimental
to NU, the other NU system companies, or their customers. The aggregate
maximum contributions to HEC Canada and HEC International (not to exceed
$4,000,000 unless approved by the Commission) would be relatively small in
relation to the NU's total assets, i.e., less than one-twentieth of one
percent of the total assets of the NU system. NU management would not permit
use of personnel or resources if such use would adversely affect the NU
system shareholders, other NU system companies or customers.
Other than the interest recently acquired in the Encoe Partners, which
has been qualified as a foreign utility company ("FUCO"), neither NU nor any
subsidiary thereof: (1) has acquired an ownership interest in an exempt
wholesale generator ("EWG") or as defined in Sections 32 and 33 of the Act;
(2) will use the proceeds of the proposed transactions to invest in an EWG or
FUCO; or (3) 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 have any right under a service, sales, or construction
contract with an EWG or FUCO, except in accordance with the provisions of the
Act.
Pursuant to Rule 54 as it relates to "other transactions" by registered
holding companies or their subsidiaries, the Commission does not need to
consider the effect of the capitalization or earnings of any NU subsidiary
that is an EWG or FUCO in determining whether to approve the proposed
transaction, because NU is in compliance with Rule 53(a), (b) and (c). In
particular:
(i) NU's current aggregate investment in EWGs and FUCOs (i.e., amounts
invested in or committed to be invested in EWGs and FUCOs, for which there is
recourse to NU) is approximately $6.6 million, which represents approximately
0.72% of the System's consolidated retained earnings of $920,681,000 as
reported in NU's Form 10-Q for the quarter ended March 31, 1994.
(ii) Encoe Partners (NU's only EWG or FUCO at this time) maintains
books and records, and prepares financial statements in accordance with Rule
53(a)(2). Furthermore, NU has undertaken to provide the Commission access to
such books and records and financial statements, as it may request.
(iii) No employees of the NU system's public utility companies have
rendered services to Encoe Partners.
(iv) NU has submitted (a) a copy of each Form U-1 and Rule 24
certificates that have been filed with the Commission under Rule 53 and (b) a
copy of Item 9 of Form U5S and Exhibits G and H thereof to each state
regulator having jurisdiction over the retail rates of the NU system public
utility companies.
(v) Neither NU nor any NU subsidiaries has been the subject of a
bankruptcy or similar proceeding unless a plan of reorganization has been
confirmed in such proceeding. In addition, NU's average consolidated
retained earnings for the four most recent quarterly periods has not
decreased by 10% or more from the average for the previous four quarterly
periods.
(vi) In the previous fiscal year, NU did not report operating losses
attributable to its investment in Encoe Partners, unless such losses did not
exceed 5 percent of NU's consolidated retained earnings.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
The estimated fees and expenses payable in connection with the
transactions contemplated by this application/declaration are as follows:
Legal fees and expenses $16,000
Miscellaneous related expenses
(such as telephone, courier and trav $ 500
Incorporation fees for HEC Canada
under the laws of Canada $ 500
Incorporation fees for HEC International and
registration fees for HECI $ 1,000
Commission filing fee $ 2,000
ITEM 3. APPLICABLE STATUTORY PROVISIONS
The sections of the Act and the rules or exemptions thereunder that HEC
considers applicable to the transactions and the basis for exemption
therefrom are set forth below:
(i) Issuance of HEC Canada Sections 6(a) and 7
Common Stock Rule 50(a)(3)
(ii) Acquisition by HEC of Sections 9 and 10
HEC Canada Common Stock Rule 45(a)
(iii) Issuance of HEC International Sections 6(a) and 7
Common Stock
(iv) Acquisition by HEC of HEC Sections 9 and 10
International Common Stock Rule 45(a)
(v) Services provided by NU Section 13(b)
companies to HEC Canada Rules 87(b)(1),
and/or HEC International 90 and 91
(vi) Services provided by Section 13(b)
HEC to HECI Rules 87(b)(1),
90 and 91
(vii) Open account advances and Section 12(b)
subordinated loans from HEC Rules 45(a) and
to HEC Canada 45(b)(1)
(viii)Open account advances and Section 12(b)
subordinated loans from HEC Rules 45(a) and 45(b)(1)
to HEC International
(ix) Formation of HECI Sections 9 and 10
and participation Rule 45(a)
by HEC International
(x) Project specific loans Section 12(b)
from HEC International Rule 45(a) and 45(b)(1)
to HECI
(xi) Construction financing, Section 12(b)
performance and other Rule 45(a), 45(b)(1)
contractual guarantees
provided by HEC to
HECI
Pursuant to Rule 87(b)(1), any NU system company may provide services to
HEC Canada and/or to HEC International since these two subsidiaries would not
be utility companies but instead would be principally engaged in a business
or businesses other than that of a holding company or fiscal or financing
agency of a holding company, or that of an investment company or investment
trust. Such services would be provided at cost pursuant to Rules 90 and 91.
HEC anticipates that such services would be provided only by the NU system
service company, Northeast Utilities Service Company and/or HEC, and it does
not anticipate that any of the NU system operating electric utility companies
would provide services to HEC Canada or HEC International.
Pursuant to Rule 87(b)(1), HEC may provide services to HECI because
these two subsidiaries would not be utility companies but instead would be
principally engaged in a business or businesses other than that of a holding
company or fiscal or financing agency of a holding company or that of an
investment company or investment trust. Such services would be provided at
cost pursuant to Rules 90 and 91.
HEC requests the Commission's approval, pursuant to the Application, of
all transactions connected to the transactions described herein, whether
under the enumerated sections of the Act and rules thereunder or otherwise.
ITEM 4. REGULATORY APPROVAL
No commission, other than this Commission, has jurisdiction over any of
the proposed transactions described in the Application.
ITEM 5. PROCEDURE
HEC respectfully requests, pursuant to Rule 23(c) of the Commission's
Rules and Regulations under the Act, that the Commission permit the
Application to become effective on or before August 15, 1993, or as soon
thereafter as practicable. HEC hereby waives any recommended decision by a
hearing officer or by any other responsible officer of the Commission and
waives the 30-day waiting period between the issuance of the Commission's
Order and the date on which it is to become effective, since it is desired
that the Commission's Order, when issued, become effective forthwith. HEC
consents that the Office of Public Utility Regulation within the Division of
the Investment Management may assist in the preparation of the Commission's
decision and/or Order unless the Office opposes the transactions covered by
the Application.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
The following exhibits and financial statements are filed as part of
this statement:
(a) Exhibits:
Exhibit A-1 - Copy of the Articles of Incorporation of HEC Canada
(to be filed by amendment)
Exhibit A-2 - Copy of by-laws of HEC Canada (to be filed by
amendment)
Exhibit A-3 - Copy of the Certificate of Incorporation of HEC
International (to be filed by amendment)
Exhibit A-4 - Copy of by-laws of HEC International (to be filed by
amendment)
Exhibit A-5 - The HECI joint venture agreement and associated
subcontract agreement (to be filed by amendment)
Exhibit A-6 - Service Agreement between HEC and HEC Canada (to be
filed by amendment)
Exhibit A-7 - Service Agreement between HEC and HEC International
(to be filed by amendment)
Exhibit B - None
Exhibit C - None
Exhibit D - None
Exhibit E - None
Exhibit F - Opinion of Counsel (to be filed by amendment)
Exhibit G - Form of Notice (filed as an exhibit to the
Application)
Exhibit H-1- Proposed HEC Corporate Structure including HECI and
HEC International (filed as an exhibit to the Application)
Exhibit H-2- HEC's Projected Financing Requirements (filed as an
exhibit to the 1993 Application in File 70-8076, HCA Rel. No. 35-25900)
Exhibit H-3- Letter of Intent between HEC and BCI (filed as an
exhibit to the Application)
(b) Financial Statements
1.1 Balance Sheet - HEC Inc., as of September 30, 1993 (filed
as an exhibit to Amendment 1 to the Application)
1.2 Statement Income and Retained Earnings - HEC Inc., as of
September 30, 1993 (filed as an exhibit to Amendment 1 to the Application)
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
It is believed that the granting and permitting to become effective of
this application/declaration will not constitute a major federal action
significantly affecting the quality of the human environment. No other
federal agency has prepared or is preparing an environmental impact statement
with respect to the proposed transactions.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this amendment to its
application/declaration on Form U-1 to be signed on its behalf by the
undersigned thereunto duly authorized.
HEC Inc.
By: /s/Jeffery D. Cochran
Its Attorney
Dated: July 29, 1994
