0000071297-95-000060.txt : 19950822 0000071297-95-000060.hdr.sgml : 19950822 ACCESSION NUMBER: 0000071297-95-000060 CONFORMED SUBMISSION TYPE: U-1 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19950821 SROS: BSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND ELECTRIC SYSTEM CENTRAL INDEX KEY: 0000071297 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041663060 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1 SEC ACT: 1935 Act SEC FILE NUMBER: 070-08675 FILM NUMBER: 95565644 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01581 BUSINESS PHONE: 5083669011 U-1 1 File No. 70- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM U-1 APPLICATION/DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 NEW ENGLAND ELECTRIC SYSTEM NEW ENGLAND POWER COMPANY MASSACHUSETTS ELECTRIC COMPANY 25 Research Drive Westborough, Massachusetts 01582 (Name of company filing this statement and address of principal executive office) NEW ENGLAND ELECTRIC SYSTEM (Name of top registered holding company parent of applicant) Michael E. Jesanis Robert King Wulff Treasurer Corporation Counsel 25 Research Drive 25 Research Drive Westborough, Massachusetts 01582 Westborough, Massachusetts 01582 (Names and addresses of agents for service) Item 1. Description of Proposed Transaction -------------------------------------------- New England Electric System (the Company), is a Massachusetts voluntary association created by an Agreement and Declaration of Trust dated January 2, 1926, as amended, and is registered as a holding company under the Public Utility Holding Company Act of 1935 (the Act). New England Power Company (NEP), organized a Massachusetts corporation, is a subsidiary of the Company qualified to do business in all the New England states. NEP's business is principally that of generating, purchasing, transmitting, and selling electric energy in wholesale quantities. Massachusetts Electric Company (MEC) is a subsidiary of the Company and a retail electric utility incorporated and doing business solely in Massachusetts. Nantucket Electric Company (NEC) is a non-affiliated Massachusetts corporation engaged in the electric utility business. NEC serves approximately 8,600 customers on the Island of Nantucket, Massachusetts. NEC is not currently connected to the mainland in order to receive electric power. A. Proposed Acquisition of NEC ------------------------------- The Company and NEC have agreed, subject to various approvals including approval from this Commission, that the Company will acquire NEC for the Company's common shares based on a purchase price of $125 per share or $3.5 million plus an interest rate equivalent on this amount from March 22, 1995 to the closing. This merger is proposed to be accomplished through an exchange of NEES common shares for the 28,000 shares of outstanding common stock of NEC. The NEC common stock is $25 par value voting stock and comprises one class (Exhibit A-12 hereto sets forth the names of all security holders of record owning one-percent or more of this stock). To facilitate this transaction, NEES proposes to form NEWCO, a wholly-owned subsidiary which will be merged into NEC. The terms and conditions agreed upon by and among the Company and NEC, (to be joined later by NEWCO) are set forth in the agreement included as Exhibit B-1 hereto (the Agreement) On May 26, 1995, the Attorney General, NEC and the Company filed an Offer of Settlement (Settlement) for approval with the Massachusetts Department of Public Utilities (DPU) that incorporates approval of the Agreement, other approvals required of the DPU to effectuate the merger and a rate plan for the period following the merger (See Exhibit D-1 hereto). The DPU is expected to rule on this Settlement by October 10, 1995. On August 18, 1995, the Company filed with the Federal Energy Regulatory Commission (FERC) seeking either a declaratory order disclaiming jurisdiction over the merger or in the event FERC asserts jurisdiction, authorization of the merger under Section 203 of the Federal Power Act. 1. Description of Business of NEC and the Company As previously mentioned, NEC is an electric utility whose principal business is the generation, distribution, and sale of electricity. NEC has thirteen directors and four officers. NEC sells electricity to approximately 8,600 customers on the Island of Nantucket which is located in the Atlantic Ocean approximately 30 miles off the coast of Cape Cod. The size of NEC's customer base has been growing in recent years, with 400 additional residential customers added in 1994. Currently, all of NEC's electricity is generated by diesel generators located on the Island. NEC is a small electric company under relevant tests, as evidenced by revenues, assets, number of customers, number of employees, and net income (See NEC Balance Sheets and Statements of Income for 1990-1994, Financial Exhibit (b) 3 hereto). Its small size and limited resources cause it to experience difficulty in coping with its increasing customer base and the many problems facing electric companies today. NEC's net income for the twelve months ended December 31, 1994, was $398,000 on revenues of $12,351,000, which is insufficient to meet any significant increase in its operation and maintenance expenditures, or any other unusual expense such as clean-up of oil and hazardous materials on NEC properties. NEC has a total of approximately 40 employees to perform all the tasks required to operate and maintain its electric system. These tasks include operating and maintaining the generation facilities and distribution network, meter reading, billing and accounting, complying with regulatory requirements, financing additions and improvements to name just a few. This limited staff is called upon to maintain and improve a diesel generation system which has had increasing problems over the years, and a distribution system which was built in the early 1900's and which may require substantial maintenance and improvements in the near future. Furthermore, the Massachusetts Department of Environmental Protection has notified NEC that it would have responsibility to investigate and remediate the presence of oil and hazardous substances on one of its properties. This investigation is ongoing. These factors would burden the limited staff of NEC and would likely require increased hiring of expensive outside contractors and consultants. (See NEC 1994 Annual Report, Financial Exhibit (b) 3 hereto, and Proxy Statement, Exhibit A-13 hereto) All electric companies, including NEC, face ongoing and increasing regulatory costs as they comply with ever-changing regulatory requirements. NEC is subject to the jurisdiction of the DPU. Because of the limited size of NEC's current staff, NEC has to rely extensively on outside experts to assist in these regulatory matters. As previously mentioned, the Company is a voluntary association. As a holding company, the Company owns voting stock in a number of companies, which together constitute the Company's System. The Company's electric utility operations are composed mainly of four operating companies: NEP, MEC, The Narragansett Electric Company, and Granite State Electric Company. These operating companies are provided certain services by New England Power Service Company (NEPSCO), a subsidiary of the Company operating pursuant to Section 13 of the Act. NEP's business is principally generating, purchasing, transmitting, and selling electric energy in wholesale quantities. In 1994, 94% of NEP's revenue from the sale of electricity was derived from sales for resale to affiliated companies and 6% from sales for resale to municipal and other utilities. MEC is engaged principally in the distribution and sale of electricity at retail in Massachusetts. MEC provides approximately 940,000 customers with electric service at retail in a service area comprising approximately 43% of the area of The Commonwealth of Massachusetts. The population of the service area is about 2,160,000 or 36% of the total population of the Commonwealth. MEC's territory consists of 146 cities and towns including rural, suburban, and urban communities with Worcester, Lowell, and Quincy being the largest cities served. The acquisition of NEC would result in an increase of less than one percent of customers served by the Company's subsidiaries in Massachusetts. MEC is an all requirements wholesale electric customer of NEP. NEPSCO is the subsidiary of the Company which provides certain support services to its affiliates at the actual cost thereof. 2. Acquisition of NEC The terms and mechanism for acquiring NEC are set forth in the Agreement and described in the prospectus included in the Registration Statement of NEES under the Securities Act of 1933 (Exhibit C hereto). In brief, they include the following: 1. Formation of NEWCO with the Company acquiring one common share of NEWCO for $10,000; 2. NEWCO will merge with and into NEC, with the surviving corporation (Surviving Corporation) having all the rights, interests, and obligations of NEC; 3. Shares of NEWCO will be converted into shares of new common stock of the Surviving Corporation, with the Surviving Corporation being a wholly owned subsidiary of the Company; 4. NEC stockholders will be receiving the Company's shares equivalent to $125 per NEC common share outstanding plus interest at a rate equivalent to the Bank of Boston prime rate on this amount from March 22, 1995 to the closing. The Company will deposit the requisite amount of shares with a disbursing agent, and this agent will distribute the Company's shares to each NEC stockholder after the surrender by each NEC stockholder of the certificates representing his or her shares; 5. The Company will not issue any fractional shares. In lieu thereof, each holder of shares of NEC common stock who would otherwise be entitled to a fractional common share of NEES shall upon surrender of such holder's certificate, receive a cash payment in lieu of the unit of the Company's common shares of to which such holder would otherwise be entitled. The merger will become effective at the time of filing of the Articles of Merger with the Secretary of State of the Commonwealth of Massachusetts. The closing will be held only upon the satisfaction (or waiver, where permissible) of certain conditions contained in the Agreement and provided that the Agreement has not been terminated. 3. Common Shares Issued by Company As stated, the NEC certificate holders will receive the Company's shares equivalent to $125 per NEC common share outstanding, plus an interest equivalent amount. The Company has registered with the Commission 160,000 of its common shares for this purpose. (See Exhibit C hereto). At a current price of $34 per share, the Company would have to issue approximately 103,000 shares, not taking into account interest. The Company's common shares are listed on the New York and Boston Stock Exchanges. From January 1, 1995 through May 20, 1995, the Company's shares on the New York Stock Exchange -- Composite Transactions ranged from a high of $39 to a low of $28 7/8. The NEC stock has no active market. There are currently about 100 stockholders of NEC. 4. Benefits to NEC of Becoming a Part of the Company's System In view of the current circumstances of NEC and its electric system as described above, the Company believes that, in the event the merger is consummated, significant steps will be required to assure continued reliable electric service to NEC's customers over the long term. As previously indicated, because of its limited resources, NEC is in a disadvantaged position to take these necessary steps, and as a result, faces the prospect of deterioration in its system and its ability to serve its customers. The Company's system, serving well over one million customers in three states, has financial, operating, management, and other resources more than adequate to provide for NEC's needs both immediate and over the longer term. Among the ways in which these resources will be made available (at cost through NEPSCO) are the following: Full and complete responsibility for management at NEC and its system will be taken over by management of the Company's system; Responsibility for operation and maintenance of the NEC system, including storm restoration, necessary improvements, and replacement of equipment, will be taken over by the Company's system; Provision for adequate financing of NEC's needs, operational, regulatory, and other, will be provided by the Company's system; Updating of meter reading, billing, accounting, and similar activities, including computer support and other technological improvements will be provided by the Company's system; Personnel with the necessary skills in operations, maintenance, financing, accounting, rates, legal, and other matters will be available through the Company's system; and Conservation and load management services will be made available through the Company's system. Furthermore, as a condition to the merger, rates to NEC customers will decrease in the short-term, and be stabilized in the long-term pursuant to a rate plan to be approved by the DPU. In short, it is the objective of the Company to make NEC a productive addition to the Company's system, capable of providing reliable electric service over the long term on an economical basis. The positive effect on NEC's electric bills will be immediate. Furthermore, by being part of the Company's system with access to services from NEPSCO, and other affiliates, NEC would be able to provide more dependable electric service to its customers. Today, because of NEC's limitations, NEC finds it difficult to provide this kind of reliable service at reasonable cost. The benefits to NEC and its ratepayers from the proposed merger are significant as evidenced by NEC's decision to sign and jointly sponsor with the Massachusetts Attorney General and the Company the Offer of Settlement (See Exhibit D-1) to the Massachusetts Department of Public Utilities. 5. Proposed Cable Project and Financing As a result of a bidding process and approval from the DPU, NEC entered into a longer term power contract with NEP to supply electricity to NEC over a 46kV undersea cable to be embedded under Nantucket Sound for a length of about 26 miles with associated facilities at either end (the Cable Facilities). This interconnection is required for NEP to supply electricity to NEC. NEC has agreed to fully support these facilities through the formation of a special purpose company to be owned by the Company (up to 100%) and NEC (up to 20%). However, if the merger is approved and NEC is acquired by the Company, the Cable Facilities will be built, owned, and operated by the Surviving Corporation and NEP will be reimbursed for its costs to that date. The Surviving Corporation will become an all requirements wholesale electric customer of NEP pursuant to an affiliate tariff as approved by FERC and the power contract referred to above will be terminated. The Surviving Corporation will finance the Cable Facilities through a combination of debt and equity funds. A Company subsidiary has already received an allocation of up to $28 million of tax-exempt private activity bond volume cap from Massachusetts for this purpose, and specific financing approvals from the DPU have been requested. In connection with the rate plan, MEC has agreed to enter into a Credit and Operating Support Agreement (see Exhibit B-2) with Surviving Corporation in order to provide additional revenues to Surviving Corporation to cover its cost of service, including a return on common equity. This Support Agreement will provide assurance to the Surviving Corporation and its lenders that Surviving Corporation will be able to maintain sufficient coverages and will likely be assigned as collateral as part of permanent debt financing by Surviving Corporation. In addition, MEC may be required to provide guarantees (see Exhibit B-3) to said lenders. As a result of the merger, Surviving Corporation may assume some or all of the existing indebtedness of NEC. Neither NEC nor the Company nor any subsidiary of the Company has ownership interest in an exempt wholesale generator ("EWG") or foreign utility company ("FUCO") as defined in Sections 32 and 33 of the Act. Additionally, neither the Company nor any subsidiary is a party to, or has any rights under, a service, sales, or construction agreement with an EWG or FUCO. Although neither the Company nor any subsidiary has any current intention to secure an ownership interest in an EWG or FUCO, the Company and NEP wish to retain the flexibility to invest up to a total of $100 million in one or more EWG's or FUCO's subject to such further Commission rules and regulations and approvals as may then be required. 6. Effects on the Company's System It is not anticipated that the acquisition of NEC by the Company will have any material effect on the consolidated earnings per share of the Company. As shown in the financial statements, the proposed acquisition of NEC will have a de minimus impact on the Company's system. The acquisition of NEC makes sense to the Company at this time because NEP will be the wholesale supplier of electricity to NEC for the foreseeable future. By acquiring NEC, the Company will also avoid the additional costs associated with capitalizing and maintaining a special purpose company to build, own, and construct the Cable Facilities as mentioned in Paragraph 5 above. B. Proposed Acquisition of NEC Generation by NEP ------------------------------------------------- After the Cable Facilities are energized and Surviving Corporation becomes an all requirements wholesale customer of NEP, NEP proposes to purchase certain of the Surviving Corporation's diesel generators or assume existing leases for these facilities. NEP would purchase these facilities to provide back-up generation to the extent that sufficient electricity is unavailable from the mainland. The current book value of generation facilities of NEC is $315,000. NEP has sought DPU approval of this acquisition. NEP believes that during the year in which this acquisition occurs it will meet the $5,000,000 test to qualify for an exemption under Rule 41; however, if it does not so qualify it will file for the required approval at that time. C. Money Pool and Short-term Borrowing --------------------------------------- The Surviving Corporation seeks short-term borrowing authority through October 31, 1997 and the authority to borrow and lend money in the Company's Money Pool (approved by the Commission in its File No. 70-7765). The Surviving Corporation seeks $5,000,000 of borrowing authority. As mentioned above, Surviving Corporation may assume some or all of the existing indebtedness of NEC. This amount of borrowing authority will enable Surviving Corporation to pay off this indebtedness if desired or necessary and to meet general business requirements and unforeseen needs. The proceeds from the proposed borrowings are to be used (i) to pay then outstanding notes initially issued to banks and/or borrowings from the Money Pool, (ii) to provide new money for capitalizable expenditures and/or to reimburse the treasury therefor, and (iii) for other corporate purposes relating to ordinary business operations, including working capital and the financing of construction and property acquisitions. 1. Borrowings from the Money Pool The Surviving Corporation proposes to reduce its need for outside borrowing authority through the use of the Money Pool. Under the Money Pool, surplus funds that may be available from day to day in the treasures of the Company and its participating subsidiaries (File No. 70-8261) are used to make loans to borrowing companies within the Company's system in need of short-term funds. The rate will be 1.08 times the monthly average of the rate for high grade 30-day commercial paper sold through dealers by major corporations as published in the "Wall Street Journal". Although there are no stated maturities, the loans made by the Money Pool are payable on demand, and may be prepaid by the borrower without penalty. Borrowings may, but need not be, evidenced by notes. Borrowings will be available first to the wholly owned subsidiaries of the Company (the Group I Borrowers). Thereafter, if the Money Pool still has additional funds, those will be available to the non-utility owned subsidiaries of the Company (the Group II Borrowers) before external investments are made. All funds borrowed by the Group II Borrowers will be used for their own internal financing and will not be loaned to stockholders. Each member determines each day, on the basis of cash flow projections, the amount of surplus funds it has available for contribution to the Money Pool. The surplus funds are transferred to an account of NEPSCO, which administers and maintains as agent the Money Pool for the Member Companies. The proposed amended terms of the Money Pool, reflecting the addition of the Surviving Corporation are shown in Exhibit G-1. 2. Borrowings from Banks The proposed borrowings from banks will be evidenced by notes maturing in less than one year from the date of issuance. The Surviving Corporation will negotiate with the banks the interest costs of such borrowings. The Surviving Corporation will pay fees to the banks in lieu of compensating balance arrangements. The effective interest cost of borrowings from a bank will not exceed the greater of the bank's base or prime lending rate, or the rate published in the "Wall Street Journal", as the high federal funds rate, plus, in either case, one percent. Based on the current base lending rate of 8.75% and an equivalent or lower high federal funds rate, the effective interest costs of such a borrowing today would not exceed 9.75% per annum. Certain of such borrowings may be without prepayment privileges. Payment of any short-term promissory notes prior to maturity will be made on the basis most favorable to the Surviving Corporation, taking into account fixed maturities, interest rates, and any other relevant financial considerations. 3. Filing of Certificates of Notification Within 45 days after the end of each calendar quarter, the Surviving Corporation will file a Certificate of Notification covering the transactions effected pursuant to the authority requested herein during such quarter. Such certificate will show the dates and amounts of all new money borrowings, the names of the lenders, the maximum concurrent amount of notes outstanding to the banks, the Money Pool, the aggregate total outstanding at any one time, and the aggregate total outstanding at the end of such quarter. Each certificate will include a statement of whether any of the funds borrowed were paid by a subsidiary company to the Company through dividends for the purpose of the Company acquiring an interest in an exempt wholesale generator or foreign utility company. The amount of such dividend payment must be given. The final certificate of notification will be accompanied by the required past tense opinion of counsel. If the same lines were maintained over the two-year requested authority, the total of those fees would be approximately $10,000. Item 2. Fees, Commissions and Expenses --------------------------------------- The estimated fees and expenses in connection with the proposed transactions are set forth in Exhibit G hereto. Included in this estimate is an amount for certain services being performed, at the actual cost thereof, by New England Power Service Company (NEPSCO), an affiliated service company operating pursuant to Section 13 of the Act and the Commissions rules thereunder. The services of NEPSCO will consist principally of services performed by the Executive and Administrative Department, the Corporate Department (including attorneys and financial analysts), the Treasury Department (including accountants), and the Office Service Departments. The fee for filing under the Act of $2,000 has been paid by wire transfer. Item 3. Applicable Statutory Provisions ---------------------------------------- The proposed issue of the Additional Common Shares is subject to Section 6 (a) and 7 of the Act. Sections 9(a) and 10 are applicable to the acquisition by the Company of shares of capital stock of NEC and NEWCO. The proposed Money Pool and Short-term Borrowing authorization is subject to the following provisions: (1) The issuance of notes by the Surviving Corporation to banks: Sections 6(a) and 7 of the Act. (2) Borrowings from the Money Pool: Sections 6(a), 7, 9(a), 10, 12 of the Act and Rules 43 and 45. (3) Loans to the Money Pool: Section 9(a), 10, and 12 of the Act; and exempted from Rule 45(a) by subparagraph (b) (1) thereof. (4) Investments by the Money Pool: Section 9(a), 10 and 12 of the Act. (5) The payment of indebtedness is exempted from Sections 9(a) and 12 and Rule 42(a) by subparagraph (b) (2) of the Rule. The proposed Credit and Operating Support Agreement and guarantees by MEC are subject to Section 12(b) of the Act of Rule 45. Item 4. Regulatory Approval ---------------------------- The DPU has jurisdiction over the proposed merger and certain matters in connection therewith. FERC possibly has jurisdiction over the proposed transaction. No other state regulatory Commission and no other Federal commission (other than the Securities and Exchange Commission) has jurisdiction over the proposed transactions. Item 5. Procedure ------------------ It is requested that the Commission take action with respect to this Application/Declaration without a hearing being held and that an order be issued allowing this Application/Declaration to become effective on or before November 15, 1995 or as soon as practicable thereafter. The Company (i) does not request a recommended decision by an administrative law judge, (ii) does not request a recommended decision by any other responsible officer of the Commission, (iii) hereby specifies that the Division of Investment Management may assist in the preparation of the Commission's decision, and (iv) hereby requests that there be no 30-day waiting period between the date of issuance of the Commission's order and the date on which it is to become effective. Item 6. Exhibits and Financial Statements ------------------------------------------ (a) Exhibits A-1 Specimen copy of Common Share certificate of NEES Incorporated herein by reference to Exhibit 4.1 to Registration Statement on Form S-4, File No. 33-59775. A-2 Declaration of Trust of NEES, dated as of January 2, 1926, as amended Incorporated herein by reference to Exhibit 3 to NEES's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-3446) A-3 Articles of Organization of NEC A-4 By-laws of NEC *A-5 Specimen copy of Common Stock certificate of NEC *A-6 Articles of Organization of NEWCO *A-7 By-laws of NEWCO *A-8 Specimen copy of Common Stock certificate of NEWCO *A-9 Articles of Organization of Surviving Corporation *A-10 By-laws of Surviving Corporation *A-11 Specimen copy of Common Stock certificate of Surviving Corporation A-12 List of NEC stockholders owning 1% or more of common stock A-13 NEC's Proxy Statement for 1995 Annual Meeting of Stockholders B-1 Merger Agreement with Exhibits and List of Schedules Incorporated herein by reference to Exhibit 2.1 to Registration Statement on Form S-4, File No. 33-59775. B-2 Draft Credit and Operating Support Agreement *B-3 Draft form of MEC Guarantee C Registration Statement (S-4), including all financial statements and exhibits thereto, with reference to additional Common Shares of NEES Incorporated herein by reference to File No. 33-59775 D-1 Offer of Settlement filed with the Massachusetts Department of Public Utilities *D-1(a) Certified copy of order of Massachusetts Department of Public Utilities *D-2 Filing with the Federal Energy Regulatory Commission (FERC) *D-2(a) Certified copy of FERC approval *F Opinion of Counsel *G Statement of Estimated Fees and Expenses *G-1 Proposed Amended Terms of the NEES Money Pool H Form of Notice *To be supplied by amendment (b) Financial Statements 1. Balance Sheets of NEES and of NEES and Subsidiaries Consolidated and of MEC as of June 30, 1995. Incorporated herein by reference to File No. 0-5464. The proposed transactions will have no material effect on the Balance Sheets of NEES and of NEES and Subsidiaries Consolidated and of MEC; pro forma statements, therefore, are omitted. 2. Statements of income and Retained Earnings of NEES and of NEES and Subsidiaries Consolidated and of MEC for the twelve months ended June 30, 1995 on an actual basis. Incorporated herein by reference to File No. 1-3446. Pro forma statements are omitted because of the lack of material effect on the statements. 3. Balance Sheets and Statements of Income and Retained Earnings of NEC as included in the Annual Reports for the years 1990 through 1994. Since the date of the Balance Sheets provided in 1 above, there have been no material changes which were not in the ordinary course of business. Item 7. Information as to Environmental Effects ------------------------------------------------ The proposed transaction does not involve a major Federal action significantly affecting the quality of the human environment. SIGNATURE --------- Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned companies have duly caused this statement to be signed on its behalf by the undersigned officer thereunto duly authorized. NEW ENGLAND ELECTRIC SYSTEM MASSACHUSETTS ELECTRIC COMPANY s/Michael E. Jesanis By: ________________________ Michael E. Jesanis Treasurer of each company NEW ENGLAND POWER COMPANY s/John G. Cochrane By: ________________________ John G. Cochrane Assistant Treasurer Date: August 21, 1995 The name "New England Electric System" means the trustee or trustees for the time being (as trustee or trustees but not personally) under an agreement and declaration of trust dated January 2, 1926, as amended, which is hereby referred to, and a copy of which as amended has been filed with the Secretary of The Commonwealth of Massachusetts. Any agreement, obligation or liability made, entered into or incurred by or on behalf of New England Electric System binds only its trust estate, and no shareholder, director, trustee, officer or agent thereof assumes or shall be held to any liability therefor. EX-99 2 EXHIBIT INDEX Exhibit No. Description Page ----------- ----------- ---- A-1 Specimen copy of Common Share Incorporated certificate of NEES by reference A-2 Declaration of Trust of NEES, dated Incorporated as of January 2, 1926, as amended by reference A-3 Articles of Organization of NEC Filed under cover of Form SE A-4 By-laws of NEC Filed under cover of Form SE A-5 Specimen copy of Common Stock To be filed by certificate of NEC amendment A-6 Articles of Organization of NEWCO To be filed by amendment A-7 By-laws of NEWCO To be filed by amendment A-8 Specimen copy of Common Stock To be filed by certificate of NEWCO amendment A-9 Articles of Organization of Surviving To be filed by Corporation amendment A-10 By-laws of Surviving Corporation To be filed by amendment A-11 Specimen copy of Common Stock To be filed by certificate of Surviving Corporation amendment A-12 List of NEC security holders of record Filed herewith owning 1% or more of common stock A-13 NEC's Proxy Statement for 1995 Annual Filed under Meeting of Stockholders cover of Form SE B-1 Merger Agreement with Exhibits and Incorporated List of Schedules by reference B-2 Draft Credit and Operating Support Filed herewith Agreement B-3 Draft form of MEC Guarantee To be filed by amendment C Registration Statement (S-4), including Incorporated all financial statements and exhibits by reference thereto, with reference to additional Common Shares of NEES D-1 Offer of Settlement filed with the Filed herewith Massachusetts Department of Public Utilities EXHIBIT INDEX Exhibit No. Description Page ----------- ----------- ---- D-1(a) Certified copy of order of Massachusetts To be filed by Department of Public Utilities amendment D-2 Filing with the Federal Energy To be filed by Regulatory Commission (FERC) amendment D-2(a) Certified copy of FERC approval To be filed by amendment F Opinion of Counsel To be filed by amendment G Statement of Estimated Fees and To be filed by Expenses amendment G-1 Proposed Amended Terms of the NEES To be filed by Money Pool amendment H Form of Notice Filed herewith Financial Statement No. Description Page ------------- ----------- ---- 1 Balance Sheets of NEES and of NEES and Incorporated Subsidiaries Consolidated and of MEC by reference as of June 30, 1995 2 Statements of Income and Retained Incorporated Earnings of NEES and of NEES and by reference Subsidiaries Consolidated and of MEC for the twelve months ended June 30, 1995 on an actual basis 3 Balance Sheets and Statements of Income Filed under and Retained Earnings of NEC as included cover of Form SE in the Annual Reports for the years 1990 through 1994 EX-99 3 EXHIBIT A-12 Exhibit A-12 NEC Security Holders of Record Owning One Percent or More of NEC Common Stock ---------------------------------------------- No. of % of Total Name Shares Shares O/S ---- ------ ---------- Chemical Bank 2,899 10.4 Wheat First Securities, Inc. 2,394 8.6 Preservation Institute: Nantucket 2,208 7.9 Empire & Co. 1,900 6.8 P. Ashley FBO W. Beinecke, III 1,891 6.8 P. Ashley FBO BB Collar 1,886 6.7 Oliver, Ann (6/9/81 FBO Trust) 1,782 6.4 Beale, Deborah 1,330 4.8 Nantucket Historical Association 1,100 3.9 Winthrop/Nantucket Ltd Partnership 1,100 3.9 First Winthrop 1,000 3.6 Nantucket Conservation Foundation 1,000 3.6 Ravenscroft, Richard 1,000 3.6 Albion Investment 1,000 3.6 Brown Bros. Harriman 700 2.5 P. Ashley FBO D.B. Beale 556 2.0 Glidden, James 500 1.8 Hamilton College Trustees 397 1.4 EX-99 4 EXHIBIT B-2 Exhibit B-2 CREDIT AND OPERATING SUPPORT AGREEMENT, dated as of _______________ between Nantucket Electric Company ("NEC"), a Massachusetts corporation, and Massachusetts Electric Company ("Mass. Electric"), a Massachusetts corporation. I. Introduction ============ This Agreement will assure that NEC has sufficient revenues to earn Mass Electric's MDPU-approved return on common equity without diminution of NEC's return associated with the Cable Facilities. II. Term ==== This Agreement shall become effective upon the merger of NEC into NEES, and shall continue in effect for 99 years, unless terminated by mutual agreement of the parties. III. Reimbursement ============= At the end of each fiscal quarter, Mass. Electric shall reimburse NEC an amount equal to the difference between NEC's actual net income for the fiscal quarter and the net income necessary for NEC to earn a return on common equity equivalent to Mass Electric's MDPU-approved weighted average allowed return on common equity (NEC Allowed ROE) for the fiscal quarter. Actual net income for the quarter will exclude the impacts of any amortization of acquisition adjustment. Notwithstanding the above, to the extent NEC's actual return on common equity, excluding the amortization of any acquisition adjustment, for the quarter exceeds NEC's Allowed ROE, there will be no reimbursement. This reimbursement shall constitute additional revenue to NEC and an expense to Mass Electric. IV. Other Funds =========== Nothing in this Agreement shall be construed as precluding NEC from obtaining additional funds by other means, (subject to regulatory approval) including, without limitation, debt financing and receipt of capital contributions. V. Regulatory Approvals ==================== The parties agree to cooperate in maintaining the regulatory approvals necessitated by matters covered in this Agreement. Approval has been obtained from the Securities and Exchange Commission under the Public Utility Company Holding Act of 1935, and the MDPU. VI. Interpretation ============== The interpretation and performance of this Agreement shall be in accordance with and controlled by the law of The Commonwealth of Massachusetts. VII. Assignment ========== Without the mutual consent of the other, neither party may assign, pledge or otherwise transfer its interest in this Agreement. VIII. General ======= The name "New England Electric System" means the trustee or trustees for the time being (as trustee or trustees but not personally) under an Agreement and Declaration of Trust dated January 2, 1926, as amended, which is hereby referred to, and a copy of which as amended has been filed with the Secretary of The Commonwealth of Massachusetts. Any agreement, obligation or liability made, entered into or incurred by or on behalf of NEES binds only its trust estate, and no shareholder, director, trustee, officer or agent thereof assumes or shall be held to any liability therefor. IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their respective officers thereunto duly authorized on the date first above written. NANTUCKET ELECTRIC COMPANY DRAFT By __________________________ Name: Title: MASSACHUSETTS ELECTRIC COMPANY DRAFT By __________________________ Name: Title: EX-99 5 EXHIBIT D-1 Exhibit D-1 THE COMMONWEALTH OF MASSACHUSETTS DEPARTMENT OF PUBLIC UTILITIES D.P.U. 95-67 This offer of settlement is sponsored by the Office of the Attorney General, New England Electric System Companies, and Nantucket Electric Company (NEC), together the "Parties". The Parties respectfully acknowledge that: 1. NEC is a Massachusetts corporation authorized to engage in and engaging in the business of generating, distributing and selling electricity at retail and is an electric company as defined in Chapter 164 of the Massachusetts General Laws Annotated (MGLA). New England Electric System (NEES) is a Massachusetts business trust, whose subsidiary companies include Massachusetts Electric Company (MEC), New England Power Company (NEP), NEWCO (a to be formed Massachusetts corporation which will be a wholly owned subsidiary of NEES, "NEWCO") and New England Power Service Company, Massachusetts corporations. 2. NEC and NEES have entered into a merger agreement dated as of March 22, 1995 (Merger Agreement), subject to necessary approvals of government regulatory authorities having jurisdiction, providing for the merger of NEWCO, with NEC, with the surviving corporation becoming a wholly-owned subsidiary of NEES (Surviving Corporation). A copy of the Merger Agreement is attached as Exhibit A hereto. 3. The testimony of John G. Cochrane, explaining in detail the proposed merger and its expected benefits, is attached as Exhibit B hereto. 4. The testimony of James E. Joynt is attached as Exhibit C hereto. The Parties have agreed that: I. MERGER ISSUES A. The merger of NEWCO with NEC and the terms of the Merger Agreement, are consistent with the public interest under Chapter 164, Section 96 of the MGLA and shall be approved. B. The rights and franchises of the Surviving Corporation to carry on its electric business on the island of Nantucket, the area where NEC is now doing an electric business, shall be confirmed. C. The rate plan for the Surviving Corporation, (as required to be filed under MGLA Chapter 164, Section 94), shall be as detailed in Exhibit B hereto, including, without limitation, the proposed accounting entries and treatment of environmental response costs. D. Credit and operating support agreements with MEC shall be approved under MGLA Chapter 164, Section 17A to guarantee or to pay all interest, debt, contractual or other obligations, including a return on the Surviving Corporation's common equity equal to the return on equity last approved for MEC by this Department, undertaken by the Surviving Corporation not otherwise covered by the Surviving Corporation's utility operating revenues. E. Pursuant to Chapter 164, Section 17A, the Surviving Corporation shall assume the liabilities of NEC, including the assumption of the Massachusetts Industrial Finance Agency (MIFA) $3.5 million, 8.5% long- term note due to mature in March, 2016, which has been approved by this Department pursuant to MGLA Chapter 164, Section 14 and the Bank of Boston Revolving Credit and Term Loan Agreement dated as of December 15, 1994, for which the Term Loan was approved by this Department pursuant to MGLA Chapter 164, Section 14. F. The Surviving Corporation shall purchase requirements power from NEP under MGLA Chapter 164 Section 94A, and NEP shall purchase certain of the Surviving Corporation's generation facilities at book value, or assume existing leases for these facilities under MGLA Chapter 164, Section 97; G. NEWCO and the Surviving Corporation shall issue common stock to NEES, pursuant to MGLA Chapter 164, Section 14. Par value for this common stock shall be $1.00. H. The NEES Money Pool shall be amended to include the Surviving Corporation as both a borrower and investor under MGLA Chapter 164, Section 17A. I. The financing arrangements of the Surviving Corporation for the Nantucket Cable Project shall be approved under MGLA Chapter 164, Section 14, 15, 15A, 16, and 17A. J. The Cable Facilities will serve the public convenience and be consistent with the public interest and shall be approved under MGLA Chapter 164, Section 72, if deemed necessary. II. MISCELLANEOUS PROVISIONS A. Other than as expressly stated herein, the making of this settlement establishes no principles and shall not be deemed to foreclose any party from making any contention in any future proceeding or investigation B. Other than as expressly stated herein, the acceptance of this settlement by the Department shall not in any respect constitute a determination by the Department as to the merits of any issue in any subsequent proceeding. C. This settlement is the product of settlement negotiations. The content of those negotiations shall be privileged and all offers of settlement shall be without prejudice to the position of any party or participant presenting such offer. D. This settlement is submitted on the condition that it be approved in full by the Department by August 1, 1995, and on the further condition that if the Department does not approve the settlement in its entirety, the settlement shall be deemed withdrawn and shall not constitute a part of the record in any proceeding or used for any purpose. Respectfully submitted, Commonwealth of Massachusetts Attorneys for OFFICE OF THE ATTORNEY GENERAL NANTUCKET ELECTRIC COMPANY Scott Harshbarger 2 Fairgrounds Road Nantucket, MA 02554-0179 s/Edward G. Bohlen s/David S. Rosenzweig By: ______________________________ By: _________________________ Edward G. Bohlen David S. Rosenzweig, Esq. Assistant Attorney General Keohane & Keegan 131 Tremont Street 21 Custom House Street Boston, MA 02111 Boston, MA 02110-3525 Attorneys for NEW ENGLAND ELECTRIC SYSTEM COMPANIES 25 Research Drive Westborough, MA 01582 s/Thomas G. Robinson s/Craig L. Eaton s/Kirk L. Ramsauer By: _________________________ Thomas G. Robinson, Esq. Craig L. Eaton, Esq. Kirk L. Ramsauer, Esq. EX-99 6 EXHIBIT H EXHIBIT H Proposed Form of Notice ----------------------- New England Electric System (the Company), a registered holding company, and its subsidiaries New England Power Company (NEP) and Massachusetts Electric Company (MEC) have filed Form U-1 Application/ Declaration File No. 70-________ pursuant to Sections 6(a), 7, 9(a), 10, and 12 of the Public Utilities Holding Company Act of 1935 and Rules 42, 43, and 45 thereunder. The Company is a voluntary association. As a holding company, the Company owns voting stock in a number of companies, which together constitute the Company's System. The Company's electric utility operations are composed mainly of four operating companies: NEP, MEC, The Narragansett Electric Company, and Granite State Electric Company. These operating companies are provided certain services by New England Power Service Company (NEPSCO), a subsidiary of the Company operating pursuant to Section 13 of the Act. NEP's business is principally generating, purchasing, transmitting, and selling electric energy in wholesale quantities. In 1994, 94% of NEP's revenue from the sale of electricity was derived from sales for resale to affiliated companies and 6% from sales for resale to municipal and other utilities. MEC is engaged principally in the distribution and sale of electricity at retail in Massachusetts. MEC provides approximately 940,000 customers with electric service at retail in a service area comprising approximately 43% of the area of The Commonwealth of Massachusetts. The population of the service area is about 2,160,000 or 36% of the total population of the Commonwealth. MEC's territory consists of 146 cities and towns including rural, suburban, and urban communities with Worcester, Lowell, and Quincy being the largest cities served. MEC is an all requirements wholesale electric customer of NEP. Nantucket Electric Company (NEC) is a non-affiliated Massachusetts corporation engaged in the electric utility business. NEC serves approximately 8,600 customers on the Island of Nantucket, Massachusetts. NEC is not currently connected to the mainland in order to receive electric power. Proposed Acquisition of NEC --------------------------- The Company and NEC have agreed, subject to various approvals including approval from this Commission, that the Company will acquire NEC for the Company's common shares based on a purchase price of $125 per share or $3.5 million plus an interest rate equivalent on this amount from March 22, 1995 to the closing. This merger is proposed to be accomplished through an exchange of NEES common shares for the 28,000 shares of outstanding common stock of NEC. The NEC common stock is $25 par value voting stock and comprises one class. To facilitate this transaction, NEES proposes to form NEWCO, a wholly-owned subsidiary which will be merged into NEC. As previously mentioned, NEC is an electric utility whose principal business is the generation, distribution, and sale of electricity. NEC sells electricity to approximately 8,600 customers on the Island of Nantucket which is located in the Atlantic Ocean approximately 30 miles off the coast of Cape Cod. The size of NEC's customer base has been growing in recent years, with 400 additional residential customers added in 1994. Currently, all of NEC's electricity is generated by diesel generators located on the Island. NEC is a small electric company under relevant tests, as evidenced by revenues, assets, number of customers, number of employees, and net income. Its small size and limited resources cause it to experience difficulty in coping with its increasing customer base and the many problems facing electric companies today. NEC's net income for the twelve months ended December 31, 1994, was $398,000 on revenues of $12,351,000, which is insufficient to meet any significant increase in its operation and maintenance expenditures, or any other unusual expense such as clean-up of oil and hazardous materials on NEC properties. NEC has a total of approximately 40 employees to perform all the tasks required to operate and maintain its electric system. These tasks include operating and maintaining the generation facilities and distribution network, meter reading, billing and accounting, complying with regulatory requirements, financing additions and improvements to name just a few. The terms and mechanisms for acquiring NEC are as follows: 1. Formation of NEWCO with the Company acquiring one common share of NEWCO for $10,000; 2. NEWCO will merge with and into NEC, with the surviving corporation (Surviving Corporation) having all the rights, interests, and obligations of NEC; 3. Shares of NEWCO will be converted into shares of new common stock of the Surviving Corporation, with the Surviving Corporation being a wholly owned subsidiary of the Company; 4. NEC stockholders will be receiving the Company's shares equivalent to $125 per NEC common share outstanding plus interest at a rate equivalent to the Bank of Boston prime rate on this amount from March 22, 1995 to the closing. The Company will deposit the requisite amount of shares with a disbursing agent, and this agent will distribute the Company's shares to each NEC stockholder after the surrender by each NEC stockholder of the certificates representing his or her shares; 5. The Company will not issue any fractional shares. In lieu thereof, each holder of shares of NEC common stock who would otherwise be entitled to a fractional common share of NEES shall upon surrender of such holder's certificate, receive a cash payment in lieu of the unit of the Company's common shares of to which such holder would otherwise be entitled. The NEC certificate holders will receive the Company's shares equivalent to $125 per NEC common share outstanding, plus an interest equivalent amount. The Company has registered with the Commission 160,000 of its common shares for this purpose. At a current price of $34 per share, the Company would have to issue approximately 103,000 shares, not taking into account interest. The Company's common shares are listed on the New York and Boston Stock Exchanges. From January 1, 1995 through May 20, 1995, the Company's shares on the New York Stock Exchange -- Composite Transactions ranged from a high of $39 to a low of $28 7/8. The NEC stock has no active market. There are currently about 100 stockholders of NEC. Proposed Cable Project and Financing ------------------------------------ As a result of a bidding process and approval from the Massachusetts Department of Public Utilities (DPU), NEC entered into a longer term power contract with NEP to supply electricity to NEC over a 46kV undersea cable to be embedded under Nantucket Sound for a length of about 26 miles with associated facilities at either end (the Cable Facilities). This interconnection is required for NEP to supply electricity to NEC. NEC has agreed to fully support these facilities through the formation of a special purpose company to be owned by the Company (up to 100%) and NEC (up to 20%). However, if NEC is acquired by the Company, the Cable Facilities will be built, owned, and operated by the Surviving Corporation and NEP will be reimbursed for its costs to that date. The Surviving Corporation will become an all requirements wholesale electric customer of NEP pursuant to an affiliate tariff as approved by FERC and the power contract referred to above will be terminated. The Surviving Corporation will finance the Cable Facilities through a combination of debt and equity funds. A Company subsidiary has already received an allocation of up to $28 million of tax-exempt private activity bond volume cap from Massachusetts for this purpose, and specific financing approvals from the DPU have been requested. In connection with a post merger rate plan, MEC has agreed to enter into a Credit and Operating Support Agreement with Surviving Corporation in order to provide additional revenues to Surviving Corporation to cover its cost of service, including a return on common equity. This Support Agreement will provide assurance to the Surviving Corporation and its lenders that Surviving Corporation will be able to maintain sufficient coverages and will likely be assigned as collateral as part of permanent debt financing by Surviving Corporation. In addition, MEC may be required to provide guarantees to said lenders. As a result of the merger, Surviving Corporation may assume some or all of the existing indebtedness of NEC. Neither NEC nor the Company nor any subsidiary of the Company has ownership interest in an exempt wholesale generator ("EWG") or foreign utility company ("FUCO") as defined in Sections 32 and 33 of the Act. Additionally, neither the Company nor any subsidiary is a party to, or has any rights under, a service, sales, or construction agreement with an EWG or FUCO. Although neither the Company nor any subsidiary has any current intention to secure an ownership interest in an EWG or FUCO, the Company and NEP wish to retain the flexibility to invest up to a total of $100 million in one or more EWG's or FUCO's subject to such further Commission rules and regulations and approvals as may then be required. It is not anticipated that the acquisition of NEC by the Company will have any material effect on the consolidated earnings per share of the Company. As shown in the financial statements, the proposed acquisition of NEC will have a de minimus impact on the Company's system. The acquisition of NEC makes sense to the Company at this time because NEP will be the wholesale supplier of electricity to NEC for the foreseeable future. By acquiring NEC, the Company will also avoid the additional costs associated with capitalizing and maintaining a special purpose company to build, own, and construct the Cable Facilities as mentioned above. Proposed Acquisition of NEC Generation by NEP --------------------------------------------- After the Cable Facilities are energized and Surviving Corporation becomes an all requirements wholesale customer of NEP, NEP proposes to purchase certain of the Surviving Corporation's diesel generators or assume existing leases for these facilities. NEP would purchase these facilities to provide back-up generation to the extent that sufficient electricity is unavailable from the mainland. The current book value of generation facilities of NEC is $315,000. NEP has sought DPU approval of this acquisition. NEP believes that during the year in which this acquisition occurs it will meet the $5,000,000 test to qualify for an exemption under Rule 41 ; however, if it does not so qualify it will file for the required approval at that time. Money Pool and Short-term borrowing ----------------------------------- The Surviving Corporation seeks short-term borrowing authority through October 31, 1997 and the authority to borrow and lend money in the Company's Money Pool (approved by the Commission in its File No. 70-7765). The Surviving Corporation seeks $5,000,000 of borrowing authority. As mentioned above, Surviving Corporation may assume some or all of the existing indebtedness of NEC. This amount of borrowing authority will enable Surviving Corporation to pay off this indebtedness if desired or necessary and to meet general business requirements and unforeseen needs. The proceeds from the proposed borrowings are to be used (i) to pay then outstanding notes initially issued to banks and/or borrowings from the Money Pool, (ii) to provide new money for capitalizable expenditures and/or to reimburse the treasury therefor, and (iii) for other corporate purposes relating to ordinary business operations, including working capital and the financing of construction and property acquisitions. The Surviving Corporation proposes to reduce its need for outside borrowing authority through the use of the Money Pool. Under the Money Pool, surplus funds that may be available from day to day in the treasures of the Company and its participating subsidiaries (File No. 70-8261) are used to make loans to borrowing companies within the Company's system in need of short-term funds. The rate will be 1.08 times the monthly average of the rate for high grade 30-day commercial paper sold through dealers by major corporations as published in the "Wall Street Journal". Although there are no stated maturities, the loans made by the Money Pool are payable on demand, and may be prepared by the borrower without penalty. Borrowings may, but need not be, evidenced by notes. The proposed borrowings from banks will be evidenced by notes maturing in less than one year from the date of issuance. The Surviving Corporation will negotiate with the banks the interest costs of such borrowings. The Surviving Corporation will pay fees to the banks in lieu of compensating balance arrangements. The effective interest cost of borrowings from a bank will not exceed the greater of the bank's base or prime lending rate, or the rate published in the "Wall Street Journal", as the high federal funds rate, plus, in either case, one percent. Certain of such borrowings may be without prepayment privileges. Payment of any short-term promissory notes prior to maturity will be made on the basis most favorable to the Surviving Corporation, taking into account fixed maturities, interest rates, and any other relevant financial considerations.