File No. 70-8086
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
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 submitted, is hereby
amended and restated as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
The purpose of this application/declaration 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 in a joint
venture, HECI, with a subsidiary of Barakat & Chamberlin, Inc ("BCI"), an
unaffiliated company. 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, (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, (iii) HEC's investment of up to a maximum
of $1,500,000 (U.S.) in HEC Canada, for the purpose of funding HEC Canada's
working capital requirements as needed during the period through June 30,
1996 and (iv) HEC's provision of engineering, administrative and marketing
services to HEC Canada.
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, and
(iv) HEC's investment of up to a maximum of $2,500,000 in HEC
International, for the purpose of funding HEC International's share of the
organizational and operational costs of HECI as needed
during the period through June 30, 1996 and (v) HEC's provision of
administrative, engineering and marketing services to HEC International and
to HECI.
HEC believes that the proposed activities of HEC Canada and HEC
International should be conducted by new subsidiaries of HEC 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 Commissions'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 50% of such HECI's
services, HEC International's share of HECI's energy management and DSM
services), 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
contributions to HEC Canada and to 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 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 (ix) 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.
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.
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 classified 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 classification 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. 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 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.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.
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 one of the participants in the form of additional
loans to HECI. In that event, the participant providing capital will be
paid an interest rate and fees that reflect the risk of the investment.6
Profits beyond the return of capital and interest and fees will accrue to
HECI.
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.
6 Such loans will be project specific and depend on revenues
generated by the project for payment of interest and repayment of
HECI may also subcontract with HEC for construction and engineering
projects, including construction financing, performance and other
contractual guarantees. 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 would each advance money to HECI for their respective 50%
6. [continued]
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.
shares of HECI's expenses in the form of open account advances as needed
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. However, HEC
International's advances combined with any direct payments by HEC
International to HECI and HEC International's payment of any other costs
associated with HECI would not exceed $2,500,000, 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, 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 pay its
share of the operating costs of HECI. HEC's investments in HEC
International 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 at a discount of 20 percent from their respective billing
rates. This subcontract agreement 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. Except
for a portion of profits that HEC International and BCI agree to keep as
retained earnings in HECI, all of the profits first would be used to repay
HEC International and BCI for their respective contributions, advances and
loans, if any, and thereafter would be split on a fifty-fifty basis between
HEC International and BCI.
HEC would consider HEC International's share of 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 HEC International's share of HECI consulting services 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. Because ownership
of a portion of the HECI joint venture would not constitute ownership of a
utility asset, HEC believes that HEC International may sell its share of
HECI. However, HEC International would seek Commission authorization 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 FUCO 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.
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 travel) $ 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 Rule 50(a)(3)
(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 86 and 87
(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
HEC submits that the issue and sale of common stock to HEC by HEC
Canada and the issue and sale of common stock to HEC by HEC International
are expressly excepted from Rule 50 by the provisions of Rule 50(a)(3)
since the issuance and sale of such securities would be made to a
subsidiary of a registered holding company whose acquisition of such
securities would have been approved by the Commission pursuant to Section
10 of the Act. Furthermore, 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 86, HEC may
provide services to HECI at its normal billing rates less twenty percent,
since its provision of services at that rate would have been approved by
order of the Commission. HEC requests the Commission's approval, pursuant
to this application/declaration, 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 this application/declaration.
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 this
application/declaration 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 this application/declaration.
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
original application)
Exhibit H-1 - Proposed HEC Corporate Structure including HECI
and HEC International (filed as an exhibit to the
original application)
Exhibit H-2 - HEC's Projected Financing Requirements (filed as
an exhibit to the 1993 Application, File 70-8076)
Exhibit H-3- Letter of Intent between HEC and BCI (filed as an
exhibit to the original application)
(b) Financial Statements
1.1 Balance Sheet - HEC Inc., as of September 30, 1993 (filed
herewith)
1.2 Statement Income - HEC Inc., for twelve months ending
September 30, 1993 (filed herewith)
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.
<PAGE>
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/Linda A. Jensen
Linda A. Jensen
Its Vice President-Finance,
Treasurer and Clerk
Dated: January 12, 1994
HEC INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF SEPT. 30, 1993
(THOUSANDS OF DOLLARS)
FINANCIAL STATEMENT 1.1 PAGE 1 OF 2
PRO FORMA
GIVING EFFECT
PRO FORMA TO PROPOSED
PER BOOK ADJUSTMENTS* TRANSACTION
---------------------------------
ASSETS
PLANT AT ORIGINAL COST:
ENCORE $2,299 $2,299
CONTRACT RECEIVABLE, NET ALLOWANCE 1,225 $1,225
FIXED ASSETS 630 $630
OTHER ASSETS, NET 86 $86
---------------------------------
4,240 0 4,240
LESS: ACCUMULATED PROVISION FOR
DEPRECIATION 342 342
---------------------------------
NET PLANT 3,898 0 3,898
---------------------------------
OTHER PROPERTY AND INVESTMENTS: 60 60
INVESTMENT IN HEC INTERNATIONAL 0 2,500 (a) 2,500
INVESTMENT IN HEC CANADA 0 1,500 (a) 1,500
---------------------------------
TOTAL OTHER PROPERTY/INVESTMENTS 60 4,000 4,060
CURRENT ASSETS:
CASH 418 4,000 (a) 418
(4,000) (a)
RECEIVABLES, NET 3,952 3,952
PREPAYMENTS AND OTHER 200 200
---------------------------------
TOTAL CURRENT ASSETS 4,570 0 4,570
---------------------------------
TOTAL ASSETS AND OTHER DEBITS $8,528 $4,000 $12,528
======== ============= ==========
* EXPLANATION AT FINANCIAL STATEMENT 1.2 PAGE 2 OF 2
HEC INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF SEPT. 30, 1993
(THOUSANDS OF DOLLARS)
FINANCIAL STATEMENT 1.1 PAGE 2 OF 2
PRO FORMA
GIVING EFFECT
PRO FORMA TO PROPOSED
PER BOOK ADJUSTMENTS* TRANSACTION
---------------------------------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
COMMMON SHARES $0 $0
CAPITAL SURPLUS, PAID IN 4,316 4,316
RETAINED EARNINGS (1,296) (106)(b & c) (1,402)
---------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY 3,020 (106) 2,914
DEBT 4,000 4,000 (a) 8,000
---------------------------------
TOTAL CAPITALIZATION 7,020 3,894 10,914
CURRENT LIABILITIES:
ACCOUNTS PAYABLE 1,155 1,155
ACCRUED EXPENSES 76 160 236
ACCRUED TAXES 152 (54) 98
OTHER 126 126
---------------------------------
TOTAL CURRENT LIABILITIES 1,508 106 1,614
---------------------------------
TOTAL CAPITALIZATION AND
LIABILITIES $8,528 $4,000 $12,528
======== ============= ==========
* EXPLANATION AT FINANCIAL STATEMENT 1.2 PAGE 2 OF 2
HEC INC.
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
TWELVE MONTHS AS OF SEPT. 30, 1993
(THOUSANDS OF DOLLARS)
FINANCIAL STATEMENT 1.2 PAGE 1 OF 2
PRO FORMA
GIVING EFFECT
PRO FORMA TO PROPOSED
PER BOOK ADJUSTMENTS* TRANSACTION
---------------------------------
OPERATING REVENUE $8,556 $0 $8,556
---------------------------------
OPERATING EXPENSES:
DIRECT EXPENSES EXCLUDING 5,892 5,892
DEPRECIATION 0
INDIRECT COSTS 2,519 2,519
DEPRECIATION 373 373
---------------------------------
TOTAL OPERATING EXPENSES 8,783 0 8,783
---------------------------------
OPERATING INCOME: (227) 0 (227)
---------------------------------
INTEREST INCOME, NET 64 (160) (b) (96)
---------------------------------
INCOME BEFORE TAXES (163) (160) (323)
INCOME TAXES 90 (54) (c) 36
---------------------------------
NET INCOME (LOSS) (253) (106) (359)
* EXPLANATION AT FINANCIAL STATEMENT 1.2 PAGE 2 OF 2
HEC INC.
* EXPLANATION OF ADJUSTMENTS
(THOUSANDS OF DOLLARS)
FINANCIAL STATEMENT 1.2 PAGE 2 OF 2
DEBITS CREDITS
(a) CASH 4,000
DEBT 4,000
INVESTMENTS IN HEC INTERNATIONAL 2,500
AND HEC CANADA 1,500
CASH 4,000
To record a $4 million investment by HEC (parent) in HEC International
($2.5 million) and in HEC Canada ($1.5 million). HEC would finance the
investment by increased use of HEC's borrowing through the NU system money
pool with no additional equity coming from Northeast Utilities.
(b) INTEREST EXPENSE 160
ACCRUED INTEREST 160
INTEREST EXPENSE = 4,000 X 4.0% = 160
(c) ACCRUED TAXES 54
INCOME TAX EXPENSE 54
TAX EXPENSE = 160 X 34% = 54
To record the higher interest expense and the reduction in income tax due
to the higher interest expense along with the short term effects on the
balance sheet.
