ML20210H566

Testimony of RG Hildreth Re Merrill Lynch Plan for Capitalizing Transfer of Seabrook Project Shares to Eua Power Corp.Related Info Encl

ML20210H566
Person / Time
Site:	Seabrook
Issue date:	08/28/1985
From:	Hildreth R EASTERN UTILITIES ASSOCIATES, MERRILL LYNCH CAPITAL MARKETS
To:
Shared Package
ML20205L098	List: ML20205L094 ML20210H495 ML20210H510 ML20210H530 ML20210H555 ML20210H566
References
NUDOCS 8604030097
Download: ML20210H566 (76)

Text

- - . _ _ ._ . _ _ _ _ _ _ _ _ _ .

o Attachment 4 Part III '

is l

l

1. Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.

, j l

l

2. A. My name is Robert G. Hildreth, Jr. My business address is

3. 165 Broadway, New York, New York 10080.  ;

l 1

4, Q. BY WHOM AND IN WHAT CAPACITY ARE YOU EMPLOYED?

5. A. I am employed by Merrill Lynch a Co., and am a Managing

6. Director and a Vice President in the Investment Banking Divi-

7. slon of Merrill Lynch Capital Markets.

8. Q. BRIEFLY DESCRIBE THE BUSINESS OF MERRILL LYNCH.

9. A. Merrill Lynch is the leading global financial institution offering

10. all types of financial services, including corporate finance,

11. insurance, real estate, leasing, brokerage, trading and other

12. services for a vast array of clients, both individual and institu-

13. tional in the United States and most foreign countries.

14 We are the largest securities firm in the world. We have 489

15. sales offices in the United States, 75 in foreign countries, 9,863

16. retail account ~ executives and 890 institutional account

17. executives.

e604030097e60q43 PDR ADOCK 0 % DR

^ l 41789/W1/850801/01-0002.0.0 I

\

1. In 1983 and 1984 Merrill Lynch acted as manager of over $140

2. billion of publicly issued financings in the municipal and corpo-

3. rate areas. In addition, Merrill Lynch is a leading agent in the

4. private placement of securities with institutional investers.

5. Finally, Merrill Lynch has acted as financial advisor or invest-

6. ment banker for over $30 billion of financings for energy and

7. natural resource projects.

8. Supporting Merrill Lynch's presence in these markets is a

9. capital base exceeding $2.5 billion, exceptional independent

10. research arms speciallring in equities, fixed-income securities

11. and economics and expertise in the trading of -all types of

12. government, municipal and corporate securities.

13. With the acquisition last year of Becker Paribas, Merrill Lynch 14 became the nation's largest commercial paper dealer.

15. Q. WHAT ARE YOUR RESPONSIBILITIES AT MERRILL LYNCH?

l 16. A. I am in charge of the Firm's Public Utility Group, which in-

17. cludes electric and telephone companies, and am also the Senior

18. Investment Banker for Cross Border Transactions, principally

19. financing in Canada and Australia.~ The International Project

20. Financing area and the Corporate Tax-Exempt area also report

21. to me.

41789/W1/850801/01-0003.0.0

1. The Public Utility Group is responsible for rendering advice

2. and executing all financings for the electric and telephone

3. utnity companies. In 1983 and 1984, Merrill Lynch acted as

4. manager of 119 public offerings for electric uttuties, with

5. proceeds totaling in excess of $10 billion. Approximately one-i 6. half of the companies in the electric utility industry consider ,

l

7. Merrill Lynch to be their investment banker.  ;

8. Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND L 9. YOUR WORK EXPERIENCE.

l

10. A. In 1953 I graduated from Bates College in Maine with a Bachelor

11. of Arts Degree, with a major in Economics. I then joined the

12. United States Marine Corps. In September 1955, at the renk of l

13. Captain, I received an honorable discharge from active duty. I i

14. remained in the Marine Corps Reserve for an additional 19 years '

15. and retired as a Major. i

16. I enrolled at Boston University in the Graduate School of Busi-

17. ness Administration in- September 1955 and remained there until

18. June 1956. I then entered the Graduate School of Business

19. Administration at New York University in the evening program,

20. where I continued in advanced business courses for seven

21. years.

41789/W1/850801/01-0004.0.0

c .

1. In the fail of 1958. I joined the Irving Trust Company in New

2. York City in the loan officer program, later specialising in

3. PubHe utfHty companies. I was an Assistant Vice President I. , when I left Irving Trust in February,1963 to join Norr!U Lynch

5. in the Public UttHty Department.

6. Since joining Merrill Lynch, I have been engaged in all aspects

7. of corporate finance for utility companies and oversee all the

8. firm's activities in these areas. I am presently a Director and

9. the Treasurer of the Atomic Industrial Forum, and have been a

10. member of the New York Society of Security Analysts for many

11. years.

! 12. I have apent over 25 years specialising in all aspects of the

13. public utility industry.

)

i

14. Q. BRIEFLY, PLEASE EXPLAIN MERRILL LYNCH'S EXPERIENCE

15. WITH DESIGNING FINANCING PLANS FOR LARGE CAPITAL

'l

16. PROJECTS.

4

17. A. Merrill Lynch is the largest investment banking firm in the

18. United States. The investment banking division, called Merrill

19. Lynch Capital Markets, has extensive experience in -designing l

20. and implementing financial plans, involving large amounts of l

21. espital under various circumstances. For example, my division

22. acted as the f.aancial advisor to General Public Utilities during 41789/W1/850801/01-0005.0.0

i

1. Its financial difficulties following the Three Mile Island accident

2. In March 1979. We arranged and attended numerous meetings

3. with prospective short-term and long-term lenders in developing

4. -

a financing strategy which would maintain GPU's financial

5. viability. We also~ met with and testified before State and

6. Federal regulatory bodies on the subject of GPU's financial

7. viability. Within three months of the accident. Merrill Lynch

8. privately placed $100 million of debt securities for two of GPU's

9. subsidiaries. In October 1979, seven months after the acci-

10. dent, we privately placed an additional $47.5 million of debt

11. securities for a GPU subsidiary. Since that time, the Company

12. and its operating subsidiaries have not required external long-

13. term financing. We have continued our services for the Compa-

14. ny and its short-term lenders. Iong-term lenders and regulatory

15. authorities.

16. Our experience as financial advisor to the Seabrook Joint Own-

17. ers and Public Service Company of New Hampshire ("PSNH") is i

18. perhaps our best known recent effort in the area of large

19. project financings. In essence, our mission was to fashion a

20. plan that would sava Seabrook and each Joint Owner's invest-l l

21. ment th4 rein and restore the lead owner. PSNH, to financial

22. health. To this end, we formulated a comprehensive financial

23. plan, which we called the Newbrook Plan, for each of the Joint i

24. Owners and PSNH. The Newbrook Plan relies upon a complex

25. pre-financing arrangement and a transfer in control over con-

26. struction management to a new company to improve the overall 41789/W1/850001/01-0006.0.0

1. eredit of each Joint Owner, bolster the credibility of the pro-

2. ject's construction management and restore the momentum the

3. Project had lost. As part of the Newbrook Plan, we executed a i

4. $90 adhn private placement that restored PSNH's liquidity (at i

5. a time when bankruptcy appeared imminent), subsequently sold

6. $425 mihn principal amount of PSNH debentures with warrants l

7. last December, executed or assisted in the execution of financ-l

8. ings or restructurings for several of the other Joint Owners,

9. and are now working on taxable and tax-exempt financings that

10. will provide the funds needed to complete Seabrook Unit 1. As

11. a result, construction at Seabrook has resumed, and the plant

12. is expected to be commercial in 1988. *

13. In the course of formulating and executing this plan for the

14. Seabrook Joint Owners, we have met with domestic and foreign

15. commercial banks, insurance companies, engineering firms and

16. other providers of capital to negotiate and renegotiate bridge 17 loans, nuclear fuel agreements, extensions, restructurings ,

18. receivables fine.ncings and other financial agreements.

19. Merrill Lynch Capital Markets has extensive experience in the

20. marketing of securities which do not have investment-grade

21. ratings. In this regard we have acted, in recent years, as

22. manager of financings for Eastern Air Lines ($278 mihn), Jim d

23. Walter Corporation ($240 mihn). LTV Corporation ($313 mil-

24. lion), Global Marine ($236 million), and Illinois Central Gulf

25. Railroad ($150 million). We recently completed three financings

26. for Harnischfeger Corporation ($150 mihn).

41789/W1/8508C1/01-0007.0.0

1. Q. BY WHOM WERE YOU RETAINED AND POR WHAT PURPOSE IN

2. THIS PROCEEDING?

i

3. A. I was retained by Eastern Utilities Associates ("EUA"), a Mas-

4. sachusetts utility and the parent company of the applicant here,

5. EUA Power Corporation ("EUA Power") , to present to the

6. Federal Energy Regulatory Commission MerrlH Lynch's plan for

7. capitalising EUA Power.

8. Q WHAT IS THE PURPOSE OF EUA POWER?

9. A. In 1984, Central Maine Power Company, Maine Public Service

10. Company and Bangor-Hydro Electric Company (the " Maine 4

11. Companies") retained Merrill Lynch to seek purchasers for 'the

12. shares of Seabrook owned by the Maine Companies. Merrill

13. Lynch incorporated NuMaineCo the predecessor of EUA Power,

14. In New Hampshire in 1984 to provide a corporate vehicle that

15. would allow private investors to purchase the share of Seabrook

16. Unit 1 owned by the Maine Companies (the " Maine Share").

17. Subsequently, EUA Power was acquired by EUA and its name

18. was changed to EUA Power Corporation in acknowledgement of

19. the affiliation.

g_

41789/W1/850801/01-0008.0.0

1. ,

In late 1984 and early 1945. Merrill Lynch solicited indications

2. of interest in the' Naine Share from potential investors. In

3. February 1985. Merrill Lynch submitted to the Maine Companies

4. en investor bid for the Maine Share. That bid elicited no

5. response from the Maine Companies nor from the Public Service

6. Commission and it was not renewed after it expired.

7. In July 1985 EUA indicated to Merrill Lynch that it would

8. consider making a bid for the Maine Share and the share of

9. Seabrook Unit 1 owned by Central Vermont Public Service  !

10. Company (the " Vermont Share") and that it would consider

11. using EUA Power as a vehicle for owning the Maine and Ver-

12. mont Shares.

13. Q. HOW WOULD EUA POWER BE CAPITALIZED?

14. A. EUA would own all of the common stock and preferred stock of

15. EUA Power, which will be wholly-owned and completely con-

16. trolled by EUA. EUA would contribute approximately 20% of the I

17. initial capitalisation of EUA Power by purchasing a combination

18. of common stock and preferred equity, as set forth in more

19. detail in' Mr. Eichorn's testimony. From the standpoint of l l

20. potential debt investors, the key point is that approximately 20%

i

21. of EUA Power's capitalization will be provided by EUA as equi-l 22.- ty. Those investors are not concerned with the manner in

23. which that 20% is divided between common and preferred stock.

l 41789/W1/850001/01-0009.0.0

i

(

1. Werrill Lynch will place with investors up to $200 million of debt

2. escurities that will have a claim on EUA Power's assets and

3. revenues prior: to the equity owned by EUA. The precise

4. amount of debt securities to be sold will be an . amount sufft- '

5. cient, together with EUA's equity contribution, to complete the

6. acquisition and construction of the Maine and Vermont Shares. '

7. Q. HOW WAS 20% SELECTED AS THE APPROPRIATE LEVEL OF

8. EQUITYf

9. A .- In project financings, debt investors require a minimum equity

10. commitment by the project sponsors. Typically, that equity

11. commitment varies between 10% and 30% of the total capitalisa-

12. tion, depending on the economic strength of the project and the

13. level of risk investors are willing to bear. Although we might

14. have capitalised EUA Power with less than 20% equity, our

15. discussions with potential investors indicated that 20% equity

16. would be optimal.

17. Q.

, HOW WILL EUA POWER USE THE PROCEEDS OF THESE EQUITY

18. AND DEBT SECURITIES?

19. A. The proceeds of EUA Power securities will be used to meet the

20. cost to complete the Maine and Vermont Shares.

21. The cost to complete Seabrook Unit 1 is currently estimated as

22. of August 1, 1985 at $558 million, including $149 million of

23. contingencies.- . These amounts transiste to less than $63 million 41789/W1/850801/01-0010.0.0

1. and $17 million, respectively, fbr the 11.27% of Seabrook Unit 1

2. ** Presented by the Maine and Vermont Shares, in addition, EUA has also agreed to pay $85.4 million for transfer of the 3.

4. Maine and Vermont Shares. In addition EUA Fower will incur 3 substantial carrying charges on its investment. Accordingly,

6. the total cash required to purchase and complete the Maine and 1

7. Vermont Shares should not exceed approximately $189 million, of

s. which EUA would be expected to contribute approximately 204, )

9. or $38 million, as equity. Accordingly, while Merrill Lynch is

10. prepared to place up to $200 million of debt securities, it

11. appears that the actual amount will not exceed $151 million.

12. Q. WHAT WILL BE THE TERMS OF THE EUA POWER DEBT

13. SECURITIES?

14 A. The final terms of the EUA Power debt securities will, of'

13. course, be subject to modification as the result of negotiations

16. among the investors EUA and EUA Power. The basic terms.

17. however, will approximate the following:

18. Principal Amount and

19. Gross Proceeds: Up to $200 million

20. Maturity: Five to ten years 41789/W1/850801/01-0011.0.0

.-,,--,-,,,-,,v, -

--,y ---,,.y,-.-, ---- ,.---,m-

--t-w- -e--+ e---,,-,-..,--,,.-% .w-e, - - . ,-- ,- --

w. , ~ . - - , , - - - , . . . . , , , , - , - , , , , , - .,.,y

1. Interest Rate: Up to 304 per annum

2. Interest Payment Dates: Payable semi-annually l l

3. Redemption Provisions: Non-redeemable for three years 1 l

1

4. Covenants: Negative Pledge and Limitation

5. on Debt

6. 9- . ROW WILL EUA POWER'S OBLIGATIONS ON THE DEBT SECUR!-

7, TIES BE AFFECTED IF UNIT 1 IS NOT PLACED INTO COMMER-

8. CIAL OPERATION?

9, A. No principal payments will be made on the debt securities

10. unless and until Unit 1 goes into commercial operation.

11. Q. PLEASE DESCRIBE IN MORE DETAIL THE ALLOCATION OF

12. RISK.

't i

13. A. The allocation of risk is, I believe, especia!!y significut. If

14. (1) consIruction of Unit 1 is not completed; (ii) the Unit does

15. not receive a full-power licenses or (iii) the Unit is not placed

16. into commercial operation, the debt investors as well as EUA

17. will lose their entira investment.

41789/W1/850001/01-0012.0.0 i

1. Very $sw investments involve any significant risk of total loss.

2. whleh is why these debt securities require a premium interest

3. rate. What is important here, however, is the fact that, not-

4. withstanding the troubled record of many nuclear construction

5. projects, including Seabrook, over the past several years, our

6. Investors wlU be staking their money on the belief that

7. Seabrook Unit 1 will be completed and placed into commercial '

8. operation.

9. I am satisfied that private investors can be found to invest in

10. Seabrook debt securities at this time. However. given the

11. problems and delays that have been and are being experienced

12. by other nuclear projects that are virtually complete, investors

13. wUl not invest the EUA Power debt securities for merely ordi-

14. nary returns. If they are to put their capital at risk of total j ,

15. loss, they expect premium returns.

4

16. Q. WHAT WERE THE KEY FACTORS IN SETTING THE TERMS OF

17. THE EUA POWER DEBT SECURITIES?

18. A. The key factors in setting the terms of the' EUA Power debt 19.

sepurities were the objectives of EUA the objectives of poten-

20. tial investors. Merrill Lynch recommended a set of terms that

21. would optimize attainment of these objectives.

22. Mr. Eichorn has explained EUA's objectives.

1 41789/W1/850001/01-0013.0.0

1. The primary fhetors considered by a potential debt investor are

2. the issuer's reputation in the financial marketplace, its operating

3. history, its assets and its long-term debt ratings from Woody's and

4. Standard a Poor's. EUA Power is a new company with no prior

5. reputation or operating history, no assets, and no ratings. EUA

6. Power will never repay any of its borrowings if Seabrook Unit 1 is

7. cancelled.

8. A second consideration for a debt investor is liquidity. The

9. investor prefers an SEC registered debt instrument that is 10.

widely . held and actively traded on a recognized exchange, il. providing liquidity. EUA Power debt securities will likely not 12.

be registered with the SEC when offered because they will

13. likely be privately placed (although they will have registration

14. rights) . In addition, they will not be widely held or actively

15. traded. Accordingly, the purchaser of these debt securities i

16. will have limited liquidity.

I 17 A third objective for the debt investor is multiple sources of

18. repayment and security. Here, there is only one source of 1

19.

repayment and one source of security, and if Seabrook is not l 20.

completed, there will be no source of repayment and no

21. security.

22.

Given the risk characteristics of these debt securities, many 23.

financial institutions are prohibited from purchasing them. As

24. a result, aggregate demand is greatly reduced, the avsflable 41789/W1/050801/01-0014.0.0

l g, market is more narrow and any potential buyer has a strong

2. negotiating advantage.

3. Q. HOW WILL THE ACTUAL RATE ON THE EUA POWER DEBT

4. SECURITIES BE DETERMINED?

5. A. The actual rate on the EUA Power debt securities, along with

6. all other terms, will depend on merket conditions at the time of

7. offering and the market's perception of the progress of the.

8. Seabrook project. We have already begun the process of solic-

9. fting investors in nuclear utilities and other high yield inves-

10. tort, and our discussions with those investors have given us

11. indications of the level of demand for EUA Power Corporation i 12.

debt securities as the terms and interest rate are varied.

13.

Both the seller and the buyer of these securities will be guided

14. by yields on securities of comparable risk. Securities of com-i j 15. parable risk would include the preferred stock and common 16.

stock of Public Service Company of New Hampshire, because 'all 17.

payments on those securities, like all payments on EUA Power

18. securities, deper.d on the success of Seabrook Unit 1. The j 19. projected yields on PSNH securities, assuming Seabrook Unit 1

20. is completed and goes into commercial operation in 1987, ap-

21. proach 30% per annum. The primary difference between the

22. PSNH debt securities and the EUA securities is that the PSNH

23. debt securities will have some value even if Seabrook Unit 1 is f

41789/W1/050801/01-0015.0.0

a

1. not completed. Under current market conditions, I do not

2. erPoet the rate on EUA Power debt securities to exceed 30% per

3. annum. e 4 Q. HOW DOES TPE EXPECTED RATE ON THE EUA POWER DEBT

5. 8ECURITIES COMPARE WITH THE RATE REQUIRED TO AT- )

6. TRACT EQUITY INVESTORS FOR EUA Power?

7, A. In general, equity investors accept more risk than debt inves-

8. tors and therefore expect greater returns. The investors,

9. other than EUA. that we spoke to regarding an equity invest-

10. ment in EUA Power have looked for yted returns of 40% per

11. annum or more.

l i

l

12. Q. DO YOU BELIEVE MERRILL LYNCH CAN PLACE UP TO $200

13. MILLION OF EUA POWER DEBT SECURITIES?

14 A. Bened on our experience -with Seabrook, our knowledge of the

15. marketplace and our discussions with investors, we are confi-

16. dont that we can place up to $200 million of EUA Power debt i

17. securities on the terms that I. specified absent any esterial

18. adverse change.

Q. DOES THAT CONCLUDE YOUR DIRECT TESTIMONY?

i A. Yes, it does.

41749/W1/850801/91-0018.0.0

y O

AFFIDAVIT Robert G. Hildreth, Jr., being duly sworn, deposes and says:

that he has reed the foregoing questions and answers labeled as his testimony, and if asked the questions therein his answers in re- "

sponse.would be as shown: that the facts contained in said answers are true to the best of his knowledge, information and belief. l Yl f Robert G. d!!dreth, Jr.  !

l I

Subscribe and sworn before me I this 28th day of August 1985. j

^

(kJ hry Public is1 W YeIcwNA -

t " ,r.n$bb'7

Att::chrent 5 9

AFFIDAVIT OF DONALD G. PARDUS CHIEF FINANCIAL OFFICER EASTERN UTILITIES ASSOCIATES I, Donald G. Pardus, am Chief Financial Officer of Eastem Utilities Associates, a position I have held for approximately seven years. Prior to this position, I held the position of Assistant Treasurer-Financial Planning with another utility for a period of seven years. My fourteen years of experience have directly involved me in the issue and sale of over $1.5 billion of permanent securities. My experience has also required me to provide expert financial testimony before various regulatory bodies, including the Federal Energy Regulatory Comission, the Massachusetts Department of Public Utilities, the Rhode Island Public Utilities Comission, the New Hampshire Public Utilities Comissim and the Connecticut Department of Public Utility Control.

I am one of the authors of EUA Power Corporation's plan to acquire Ownership Shares in the Seabrook Project. I am familiar with the financial position of Eastern Utilities Associates and also with the Target Budget for Seabrook Station Unit 1 & Comon, dated July 24, 1985, and the terms and conditions of the Agrements of Purchase and Sale dich EUA Powcr Corporation has negotiated, or is negotiating, with five current owners of the Seabrook Project. In developing the financing plan for EUA Power Corporation, I have utilized my years of finance experience as well as other sources. The other sources have included: inquiries of investment banking firms that deal in the low quality issue market; institutional investors who deal in the low quality l

1 l

l

market and other financial people who have sold securities in the low quality market.

Based upon my experience and my evaluation of the market place, it is my opinion (1) that EUA Power Corporation has reasonable assurance of obtaining the funds necessary to acquire up to a 12.13225% Ownership Share of Seabrook Project and to cover that portion of the estimated construction costs involved in completing Seabrook Station Unit 1 and Comron, together with related fuel cycle costs; (ii) that Eastern Utilities Associates has the financial ability to invest up to 20% of the capital needs of EUA Power Corporation as contsplated by the financing plan; and (iii) that EUA Power Corporation has reasonable assurance of obtaining whatever additional funds may be necessary to permanently shut down Seabrook Unit 2, if that becomes necessary.

.6 fc>- _L - -

Donald G. Pardus Chief Financial Officer Eastern Utilities Associates Attachment 6 o

5 File No. 70-7161 1

SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 AMENDMENT NO. 3 TO FORM U-1 APPLICATION / DECLARATION WITH RESPECT TO ACQUISITION AND FINANCING OF NEW WHOLLY-OWNED SUBSIDIARY AND AUTHORIZATION OF SHORT-TERM BANK BORROWINGS:

REQUEST FOR EXCEPTION FROM COMPETITIVE BIDDING UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 EASTERN UTILITIES ASSOCIATES (EUA)

P. O. BOX 2333, BOSTON, MASSACHUSETTS 02107 (Name of company filing this statement -and address of principal executive office)

EASTERN UTILITIES ASSOCIATES (Name of top registered holding company)

DONALD G. PARDUS, PRESIDENT AND TREASURER EASTERN UTILITIES ASSOCIATES P. O. BOX 2333, BOSTON, MASSACHUSETTS'02107 (Name and address of agent for service)

The conunission is requested to mail signed copies of all orders, notices and communications to:

l ANDREW M. WOOD, ESQ.

Gaston Snow & Ely Bartlett One Federal Street Boston, Massachusetts 02110

. . . _ _ . , _ _ _ _ _ _ _ _ . . _ _ . _ _ _ _ . _ . - . . . _ _ _ _ _ . - - _ . _ . , - _ _ _ . . . _ . - _ _ _ . _ _ _ _ . . _ . _ - . _ _ - ~

b.

Item 1. Description of Proposed Transaction ~.

Item 1 is further amended by adding the following.

36. EUA has entered into Agreements of Purchase and Sale (subject to regulatory appovals and other conditions) with three of the four Sellers with whom it had earlier entered into letters of intent as described in paragraph 12 of this Item 1. In the' case of the fourth Seller, Maine Public Service Company, EUA has entered into a memorandum of understanding (the "MPSC memorandum"), which contemplates a

~

definitive agreement to be executed no later than June 30, 1986. Copies of the three Agreements of Purchase and Sale and of the MPSC memorandum are filed herewith as Exhibits B~6 (Bangor), B-7 (CMP), B-8 (Central Vermont) and B-4(a)

(MPSC); they supersede the letters of intent previously filed as Exhibits B-1, B-2, B-3 and B-4, respectively.

-(EUA has-in addition made an offer to Fitchburg Gas and Electric Light Commpany ("Fitchburg"), a Massachusetts cor-poration and a Participant in the Seabrook Project, which owns a 0.86519% interest therein, for the purchase of that ownership interest by EUA Power, but the offered terms have not yet been accepted.)

37. The three Agreements of Purchase and Sale and the MPSC

, memorandum reflect various agreed modifications of the

[ terms contemplated by the superseded letters of intent exe-cuted in July 1985. They extend the deadline for the closings from March.31 to June 30, 1986. They also con-l 4871W  !

4 tain, among other things, provisions for addition ~al pay-ments by EUA Power aggregating $30.9 million as follows:

$6.0 million to Bangor, $16.5 million to CMP, $4.4 million to' Central Vermont, and $4,0 million to MPSC. There will be no carrying charges on these additional amounts; how-ever, as part of the revised payment terms, the provision referred to in subparagraph (c) of paragraph 13 for the 1

payment by EUA Power of carrying charges on the base amount 1

and.on the progress payments has been enlarged to include carrying. charges on the payments, occasioned by delay in .

closing, referred to in subparagraph'(d) of paragraph 13.

Despite the_ extension of the final date for closing from

.; March 31 to June 30, 1986, those payments will be made only with respect to the five months from November 1985 through l March 1986. EUA Power expects to make all payments (except i

in the case of CMP) in cash or immediately available funds, but, if EUA and CMP (or any of the other Sellers) agree, payments to such Seller or Sellers may include one or more promissory notes secured by mortgages and security inter-ests, or otherwise. Authorization for such notes and secu-i rity_is hereby reques'ed; t if and when any such arrangements a

are agreed upon, a description of their terms will be

, supplied by further amendment of this application-declaration. The modified terms also eliminate a limited indemnification of EUA Power by each of the Sellers with respect to cancellation costs of Seabrook Unit No. 2 and 4 4871W

relieve-EUA Power from reimbursing Sellers for construction costs incurred with respect to Unit No. 2 from June 1, 1985 through closing, both of which had been contemplated in the letters of intent. -

38. The additional amounts to be paid to the four Sellers as described in paragraph 37 above have been agreed to in response to concerns as to adequacy of consideration raised in proceedings before at least one state regulatory author-ity and the Federal Energy Regulatory Commission ("FERC")

and in recognition of changed circumstances at the Seabrook Project. Construction progress since the original application-declaration was filed in September 1985, when Unit No. I was approximately 91%. complete, has been sub-stantial, bringing the unit to approximately 96% of comple-tion. The important " hot functional" test was successfully performed in November-1985. The estimated cost of pur-chasing the four interests and completing the related portion of Unit No. I construction, after giving effect to the additional payments and other changes referred to in paragraph 37, is summarized and compared with the estimated cost originally stated in paragraph 16 of this Item 1, in the following table. The revised figures are based on the assumptions (where applicable) that the closings will take place on June 30, 1986 (rather than March 31, 1986 as I

assumed in the application-declaration as originally filed) and that the commercial operation date of Unit No. I will

, be October 31, 1986 (unchanged since the original filing).

4871W

(In thousands)

Original As U-1 revised A. Payments at closings -

(1) Original base' amounts for Sellers' interests as of May 31, 1985 (TT13(a) and 14) $65,400 $65,400

'(2) Reimbursement of progress payments from May 31, 1985 to closin6 (1113(b) and 16) 54,500 64.700 (3) Payments related to delay (1T13(d) and 16) 18,000 18,000 (4) Carrying charges on (1), (2) and (3) above (1113(c) and 16) 10,900 16,000 (5) Additional payments agreed ,

on with Sellers (137) 30,900 B. Progress payments from closing date to commercial operation date plus carrying charges thereon at assumed rate of 25% (116) 39,400 21,800 Total cost for the purchased interests in the completed Unit No. 1 $188,200 .$216,800*

Were the Fitchburg purchase to be included under currently pecposed terms, the total ccat would be $226,184,000. The amount of financing for which approval is sought herein is considered sufficient for all five purchases.

i

. I 4871W

39. As shown in the table in paragraph 38 above, the pro-posed transactions with four Sellers will result in an )

estimated cost to EUA Power, for the acquisition of l Seabrook ownership interests aggregating 11.26721%, of

$216.8 million (as compared with the original $188.2 "

million stated in paragraph 16). Based on an 80%-20% ratio of debt to equity described in paragraph 18, the increase will require the raising of approximately $173.5 million in debt and $43.3 million in equity (as compared with $151 million in debt and $37 million in equity stated in para-gr'aph 16 for the purchases on the original terms). EUA does not now expect to enter into any. fuel leasing arrange-ment as referred to in the last two sentences of paragraph

16. After considering the effect of the increase from $37 million to $43.3 million in the amount of EUA's proposed equity investment in EUA Power, EUA continues'to believe, as stated in paragraph 19, that a write-off of that investment in the event of cancellation of Seabrook Unit No. I would have no effect on maintenance of the dividend on EUA's common shares. Nor does that increase, together with the increase from $151 million to $173.5 million in the projected amount of debt to be issued by'EUA Power, require, in EUA's opinion, any increase in the amount of EUA's short-term borrowings ($50 million) or in the amount of common and preferred stock ($50 million) of EUA Power, for which authorization is sought in this application-4871W

a

. T

. '\

6-declaration. It does require, in EUA'r opinion, an in-crease from $170 million to $200 million in the amount of ,,

the requested authorization for Notes to be issued by EUA i ,

Power. After consultation with=its financial advisor and

^

placement agent, Merrill Lynch (paragraph 23), EUA believes

' (

that the larger amount of Notes can be successfully placed s

\( and hereby amends its request for Commission authorization accordingly.

40. In the proceeding before FERC (paragraph 18 of this Item 1), a Settlement Agreement has been entered into.

• Filed with this Amendment No. 3 are copies of the Settlement Agreement (Exhibit J-1), an Explanation of Settlement Agreement (Exhibit J-2), and EUA Power Corporation's Request to Allow Further Comment on Settlement Agreement and Then to Certify the Agreement to the Commission (Exhibit J-3), all as presented to the Administrative Law Judge in the FERC proceeding.

~

t In order to meet concerns raised by some of the participants in that proceeding, certain changes have been made in the proposed terms of EUA Power's preferred stock described in paragraph 18, as follows:

(a) The preferred stock will convert to common

( -

p stock after a minimum of seven years and a maximum of

( twelve years from the commercial operation date of 5

Unit No. 1. The conversion date depends on when EUA Power achiev'es an authorized refinancing of the debt i

4871W

. which is outstanding at the commercial operation

. date. An authorized refinancing is a refinancing at an interest rate not exceeding 175% of the prime

~

rate. The schedule for conversion (the years being measured from the commercial operation date of Unit.

1 No. 1) is as follows:

If Refinancing Then Conversion Occurs In: Occurs After:

4th year or earlier 12th year 5th year loth year 6th year 8th year 7th year (or no refinancing) 7th year If less than 100% of the debt is refinanced in any of t

the above years, then only the equivalent percentage of preferred stock will-be converted in the associated conversion year. The schedule for conversion is I intended to'give EUA Power an incentive to call its i

high-cost initial debt as soon as practicable and refinance it at lower interest rates.

(b) EUA Power is to be allowed the following

~ rates of return:

1 For capital invested at the commercial operation date of Unit No. 1,'the rates will be:

$10,000 Common 25% per annum Preferred 25% per annum Debt Weighted average actual cost except that the rate of return on preferred for rate-making purposes will be limited to 20% per annum on 4871W

l.'

certain sales of unit power to Montaup. For new capi-

.tal invested after the commercial operation date of Unit No. 1, the rates will be:

Common " Going" common equity rate Preferred issued to EUA " Going" preferred dividend rate j Preferred issued in Weighted average actual j market dividend rate '

Debt Weighted average actual cost For common stock converted from preferred stock and

, for the $10,000 of initial common stock after the last i

conversion of preferred stock, the rates will be:  !

\

Converted common " Going" common equity

' rate {

$10,000 initial common " Going" common equity rate The term " going" rate as used above means a rate of return appropriate for-EUA Power for the type of secu- '

l rity involved when the security is issued. The going rate is to be established by a filing with FERC. The going rate for common equity thereafter is subject to I revision from time to time under Sections 205 and 206 of the Fed 9ral Power Act.

41. EUA believes that the-revised terms of EUA Power's preferred stock (see paragraphs 18 and 40) are reasonably adapted to the security structure of both EUA and the other companies in the the EUA System ("EUA System" or " System")

and to the earning power of EUA itself, and that financing by means of the issue of the preferred stock is necessary 4871W

and appropriate to the economical and efficient operation of the business.of EUA and the EUA System, as required by Section 7(d) of the Act.

(a) EUA Power will be a wholly-owned subsidiary of EUA. The preferred stock will be held entirely by EUA and, on a consolidated basis, will not appear as part of the EUA System's capitalization. The inclusion of preferred stock in the capitalization of an integrated public utility system is neither unique nor inappropriate. The EUA System's current capital-ization includes preferred stock of subsidiaries; a Statement of Policy issued by the Commission spe'cifi-cally contemplates issuance of preferred stock by registered systems (see HCAR No. 13106, February 16, 1956).

(b) The proposed rate of return on.the preferred stock is reasonable in view of the risks to be assumed by EUA in making its investment in EUA. Power. As was~

stated in testimony in the FERC proceeding (see sum-mary of testimony, Exhibit D-1, page 19), one major risk is delay in completion of. Unit No. 1, with consequ'ent cost increases, leading to cancellation of the unit. Another risk is the possibility that EUA Power's shars of the capacity and output of the com- -

pleted unit cannot be sold by it at compensatory rates. Testimony by a rate of return expert supported 4871W

the reasonableness of the proposed 25% return (id. at i ~

19-20). Moreover, the FERC Trial Staff, in its Comments of Commission Trial, Staff in Support of Offer ~

of Settlement ("FERC Staff Comments"), filed herewith as Exhibit J-4, states that the proposed return on equity "is low when compared with the return on many risk-prone industrial ventures and is not unreasonably

. high in this situation".

(c) The sequential convertibility of the pre-ferred stock, described in detail in paragraph 40, resulted, as did the proposed rate of return, from arms-length bargaining among representatives of EUA-Power, the staff of FERC, and intervening parties in the FERC proceeding, including the Attorneys General of Massachusetts and Rhode Island. As described in paragraph 40, the preferred stock is to be converted

into common stock after a minimum of seven years and a maximum of twelve years from the date of commercial operation of Unit No. 1 in accordance with a formula related to the refinancing or retirement of EUA Power's debt. According to testimony of a FERC staff expert,'-filed herewith as Exhibit J-5, the use of cu-mulative convertible preferred stock is not uncommon in the electric utility industry. (Exhibit J-5 at p.

30). The FERC staff expert further testified that sequential conversion would minimize the life of the 4871W

.- - - . . . .- . ~ _ - _ , - - _ - . ~ . - . _ - . - . . . . - _ _ - - .

high-yield ~ debt; would reward EUA Power for its risk-assumption by allowing a risk-premium rate of return for a period equal to 40% of the life of Unit No. 1; and would benefit the consumer by providing power at rates equal to or slightly below those from other-sources during the first 40% of the project's life, and thereafter provide power at a straight cost-based rate at prices so low as to reduce average power costs for the customer. (Exhibit J-5 at pp. 29-30).

42. EUALalso believes that the proposed transactions sat-isfy the requirements of Section 10(c) of the Act in that they will serve the public interest by " tending towards~the economical and efficient development of an integrated public-utility system" (Section 10(c)(2)) and will not be

" detrimental to the carrying out of the provisions of sec-tion 11". (Section'10(c)(1))

(a) The Act defines an " integrated public-utility system" (as applied to electric utility com-panies) in Section 2(a)(29)(A) in terms of physical interconnection of facilities, economical and coordinated operation, confined geographical location, and the advantagcc of localized management, efficient operation and effectiveness of regulation. EUA is a registered holding company, and the present EUA System meets the requirements of Section 11. The characteristics of the System include: (i) physical 4871W

interconnection; (ii) coordinated operation through its own and other facilities administered by the New England Power ~ Pool; and (iii) properties all situated within contiguous states. The proposed acquisition by EUA, through EUA Power, of interests in the Seabrook generating facilities, in addition to the interest in those same facilities already held by EUA's subsidi-ary, Montaup, will not' alter or impair the existence of the aforesaid three important characteristics. Nor

.will the acquisition impair the System's efficiency, local management, or amenability to regulation. EUA believes, in fact, that the capability of its Sy' stem to operate economically and efficiently is likely to be enhanced by the proposed transactions. In this regard, the FERC Staff has stated: "The settlement...

creates the probability that electric power will be available for sale at prices below the price that would have been obtained if EUA Power did not purchase Seabrook; and adequately protects.the existing custom-ers of EUA and its affiliates..." (Exhibit J-4-at p.

1-2). With respect to local management, the degree of centralization in the management of EUA Power would be substantially similar to that which exists in Montaup-and which is commonly found in subsidiaries in inte-grated holding company systems. With respect to effectiveness of regulation, System transactions, I

l 4871W

including those of EUA Power, will continue to be subject to applicable Commission jurisdiction under the Act, and the Settlement Agreement, filed herewith as Exhibit J-l', specifically requires that sales of Unit No. 1 power, whether to Montaup or to non-affiliated entities, will be subject to the continuing jurisdiction of'FERC with opportunity for participa-tion bf the State Commissions and Attorneys General of MassachussFts and Rhode Island and with proceedings directly before the State Commissions in the case of sales _from Montaup to the two retail subsidiaries of EUA. (See Exhibit J-1 at pp. 7, 9, 10-13, 20.)

(b) The proposed acquisition is not " detrimental to the carrying out of the provisions of Section 11" of the Act. The overriding purpose of Section 11 is to " limit the operations of [a] holding company sys-tem... to a single integrated public-utility system and to such other businesses as are reasonably inci-dental or economically necessary or appropriate to the operations of such integrated public-utility system" (Section 11(b)(1)). Seabrook itself is located in the immedia'tely adjoining state of New Hampshire so that the acquisition of EUA Power, a New Hampshire corpora-tion, by EUA, located in Massachusetts, would meet the '

standard for geographical integration established {

under Section 11. The acquisition may enable EUA's l

1 14- 4871W ,

l

subsidiary, Montaup, to acquire an additional source of power which Montaup projects it will need in the future. EUA, through its acquisition of EUA Power, would not be entering into a new business but merely lending additional financial support to.a commitment which it has already made (for Montaup's benefit) for a business in which it is already engaged.

Accordingly, EUA's acquisition of EUA Power cannot be regarded as an expansion by EUA whic's (in terms of concerns expressed in Section 1 of one Act) bears no relation to economy of its. management and. operation or to the integration and coordination of its related properties. EUA believes that the proposed acquisi-tion does not raise any question concerning the con-tinued qualification of the EUA System under Section 11 standards because it does not take the EUA System .

beyond the boundaries of a single " integrated public-utility system" as defined in Section (2)(a)(29)(A).

(c) As EUA has previously stated (paragraph 11 of this Item 1), the completion and commercial ooer-ation of Unit No. 1 are of obvious importance to the EUA Sys' tem. For one thing, Montaup already has a large investment in that unit (approximately $118.1 million at December 31, 1985 excluding nuclear fuel but including allowance for funds used during con-struction). In addition, as shown by the Load and 4871W

Capability table (Exhibit H) in the EUA System's Long-Range Forecast of Electric Power Needs and Requirements (1985-1994), the EUA System is relying on Montaup's Unit No. I capacity for the period after the Unit's estimated 1986 completion date. EUA Power has been organized to purchase the ownership interests of four (and possibly five) present owners of Seabrook-whose respective regulatory authorities have placed them under pressure to sell their ownership interests or otherwise abandon the Seabrook Project. Their failure to continue to fund the Seabrook Project would have serious consequences in terms of its completion and commercial operation, as scheduled. The acquisi-tion by EUA Power of these ownership interests latu-rally increases the likelihood of completion of the Seabrook Project and commencement of commercial oper-ation of Unit No. 1, as scheduled, and the consequent preservation of Montaup's investment in the Unit.

(d) The proposed transactions will provide the EUA System with a share of Unit No. I capacity beyond that which it has included in its forecast. Although

~

sales of that additional capacity will be made off-system where it is economically advantageous to do so, that should not be regarded as an obstacle to approval of the proposed transactions. EUA believes that the recitals in Section 1 of the Act and the relevant sub-4871W I i

stantive provisions elsewhere in the Act show that the likelihood-that such off-system sales will be made, or even the possibility that all of EUA Power's Seabrook capacity and output will be sold off-system, is simply not among the matters which are required by the'Act to be taken into consideration in determining whether the transactions herein proposed conform to the statutory requirements.

(e) EUA believes that,.whether or not the pros-pect that sales of Unit No. 1 power will be made ta non-affiliates is considered to have statutory signi-ficance, the potential availability through EUA Power of additional Seabrook capacity is distinctly benefi-cial to Montaup and the other EUA System companies as an integrated public-utility system. The EUA Load and Capability forecast (Exhibit H) clearly shows that the EUA System will need at a minimum an additional 125 megawatts of non-peaking power between 1992 and 1994 and. smaller off-system non-peaking sources beginning in 1990. Assuming that no additional acquisition of Unit No. 1 power were made by EUA, EUA's needs would have to be satisfied by off-system purchases at prices probably higher than prices for power available through the proposed additional Unit No. 1 purchases.

As the FERC Staff Comments state, "If the Unit comes on time, EUA Power will have available to it a unit 4871W

which has a cost per KW which is less than that of recent-vintage coal units, and, far less than that of recently completed nuclear units. The low cost of the unit will be of significant benefit to purchasers of the_ energy from EUA Power." (Exhibit J-4 at p.2).

The Settlement Agreement specifically. contemplates that Unit No. 1 power may be sold by EUA Power to Montaup and establishes elaborate requirements and-procedures for those sales and for resales by Montaup to the retail subsidiaries of EUA. (See Exhibit J-1 at pp. 8-13). Thus it is clear that the signatories to the-Settlement Agreement assumed and recognized that among the potential " purchasers" that might receive the benefits referred to above would be Montaup and, through Montaup, the System's retail sub-sidiaries.

(f) Moreover, EUA believes that'it is essential to understanding the proposed transaction to recognize that this economical source of power will be available to the EUA System unless EUA Power has previously sold all additional Unit No. 1-power elsewhere (to the ben-efit of'the EUA System's investors and without any detriment to its consumers) at competitively favorable rates. The arrangements in this regard are summarized in the Explanation of Settlement Agreement (Exhibit J-2):

4871W

"If any of EUA Power's share of Seabrook

.No. 1 power remains unsold to non-affiliates at the commercial operation date of the unit, EUA Power will offer power for sale to Montaup as unit power under life-of-the-unit contracts. The amount of unit power offered shall be (1) at least 15.5% of EUA Power's Seabrook No. I entitlement, if that amount remains unsold or (2) if that amount does not remain unsold, such total lesser amount as does remain unsold. If Montaup does not contract for 15.5% of the entitlement at the time of such offer, EUA Power will extend to Montaup a right of first refusal to 15.5% of the entitlement upon the occasion of any future of-fers to non-affiliates. For sales to Montaup of unit power up to 15.5% of EUA Power's Seabrook No. I entitlement, the rate of return on the pre-ferred stock outstanding at the commercial oper-

, ation date will be'20% per annum. This provision is intended to reserve to Montaup benefits if the-unit is completed and the costs of its power are advantageous."

Although EUA cannot state categorically-that power from EUA Power's interest in Seabrook Unit No. I will be available to the System or, if available, in what amounts, it can state that EUA Power currently has no existing customer base or contractual power commitments. The Settlement Agreement permits EUA Power to sell unit power (i.e., power involving a res-ervation of capacity from Unit No. 1 for more than a year) to non-affiliates at market-based prices through 1990. -(Market-based prices are prices negotiated with the purchaser but not to exceed prices at the mid-point between EUA Power's cost-based rates from Seabrook Unit No 1 and Montaup's cost-based rates for unit power from Seabrook Unit No. 1.) That 1990 date 4871W

coincides with the beginning of the period during which the EUA System Load and Capacity forecast predicts a System need for off-system non-peaking purchases (Exhibit H). Sales of unit power to non-afdiliatesafter1990arerequiredbytheSettlement Agreement to be at prices which do not exceed EUA Power's cost-based rates unless FERC has given permission for market-based rates to' continue after 1990. The fact that EUA Power thus faces after 1990 a regulatory requirement that may compel it to charge less favorable rates for off-system sales than in the earlier period gives EUA Power, once the period 'of need for additional power for Montaup has arrived, a lessened incentive to dispose of power.off-system. In addition, the Settlement Agreement stipulates that EUA Power's rates for sales to Montaup of unit power shall not exceed the lowest of (1) EUA Power's cost-based rates, (2) the cost to Montaup of Montaup's most desirable alternative source of comparable power or (3) if EUA Power has made an offer to sell comparable power to a non-affiliate within six months, the rate for the' sale to the non-affiliate. Thus, the framers of the Settlement Agreement recognized the System's additional power needs beginning in 1990 and limited the attractiveness of off-system sales after that year. They recognized the fact that EUA Power's 4871W

1 Seabrook capacity may well be used for meeting those needs, and built provisions into the Agreement to ensure that in that event Montaup and the retail sub-sidiaries-will participate in the economies inherent in the proposed transactions. Furthermore, they included in the Settlement Agreement the provision, mentioned above, that "If any of EUA-Power's share of Seabrook No. 1 power remains unsold to non-affiliates at the Unit's commercial operation date, EUA Power shall offer Unit Power for sale to Montaup under life-of-the-unit contracts" (Exhibit J-1 at p. 8). Another circ ~umstance which will encourage sales to Montaup is the likelihood that the availability of additional Unit No. 1 power will allow Montaup to expand its sales to non-affiliates which it regards as favorable.

(g) The use by Montaup of a portion of EUA Power's expected' entitlement to low-cost Seabrook pow-er,'while not assured, is sufficiently likely,.on the basis of the foregoing load and capacity considera-tions, so that EUA Power's proposed acquisitions should be regarded as significantly beneficial to the existing EUA System. This, taken together wit h the usefulness, discussed above, of the acquisitions as a means toward the preservation of Montaup's present Seabrook investment, makes it clear, in EUA's opinion, that the proposed transactions will tend toward the

-4871W

i further economical and efficient development of the EUA System as an integrated public-utility system.

4 Item 6. Exhibits and Financial Statements.

(a) Exhibits

• denotes filed herewith

• Exhibit B-4(a) -- Memorandum of understanding between EUA and MPSC (supersedes Exhibit B-4).

• Exhibit B-6 -

Agreement of Purchase and Sale between EUA and Bangor (supersedes Exhibit B-1).

• Exhibit B-7 - Agreement of Purchase and Sale between EUA and CMP (supersedes Exhibit B-2).

• Exhibit B-8 - Agreement of Purchase and Sale L.9 tween EUA and Central Vermont (sspersedes Exhibit B-3).

• Exhibit J-1 --

Settlement Agreement filed in EUA Power's FERC proceeding.

• Exhibit J-2 -

Explanation of Settlement Agreement filed in EUA Power's FERC proceeding.

• Exhibit J-3 -

EUA Power Corporation's Request to Allow Further Comment on Settlement Agreement and Then to Certify the Agreement to the Commission filed in EUA Power's FERC proceeding.

'* Exhibit J-4 -

Comments of Commission Trial Staff in Support of Offer of Settlement in EUA Power's FERC proceeding.

• Exhibit J-5 -

Direct Rate of Return Testimony of Staff Witness Timothy O.

4871W

Temple in EUA Power's FERC pro-ceeding.

Exhibit J-6 -

EUA's Annual Report on Form 10-K for the year ended December 31, 1984 (incorporated by this reference from File No.

1-5366).

Exhibit J-7 -

EUA's Quarterly Report on Form 10-Q for the quarter ended March 31, 1985 (incorporated by this reference from File No.

1-5366).

Exhibit J-8 -

EUA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985 (incorpor~ated by this reference from File No.

1-5366).

Exhibit J-9 -

EUA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1985 (incorpo-rated by this reference from File No. 1-5366).

4871W

F SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned company has duly caused this Amendment to be signed on its behalf by the undersigned thereunto duly authorized.

EASTERN UTILITIES ASSOCIATES By S- W A' '

President and Treasurer Dated March 7, 1986 4871W l

Attachnent 7~

' 0' '

Part I 3 .

6 .

UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION EUA Power Corporation ~) Docket No. EL85-46-000 SETTLEMENT AGREEMENT This Settlement Agreement is made and entered into between, on the one hand, EUA Power Corporation ("EUA Power"), Montaup Electric

~

Company ("Montaup"), Eastern Edison Company and Blackstone Valley Electric Company and, on the other, the Department of Public Utilities of the Commonwealth of Massachusetts, the Attorney General for the Commonwealth of Massachusetts, the Rhode Island Division of Public Utilities and Carriers, the Rhode Island Public Utilities Commission and the Attorney General of Rhode Island. None of the other parties to this proceeding is known to oppose the Settlement Agreement. b Hereinafter in this Settlement Agreement, the Department of Public Utilities of the Commonwealth of Massachusetts and the Rhode Island Public Utilities Commission shall be referred to jointly as "the State Commissions" and individually as "the State Commission," and the Attorney General for the Commonwealth of Massachusetts and the Attorney

-1/

The other parties arc Dangor Hydro-Electric Company, Central Maine Power Company, Central Vermont Public Service Corporation, Dirigo Electric Cooperative, Inc., Maine Public Service ' Company, Maine Public Utilitics Commission, New Ilampshire Public Utilities Commission, Newport Electric Company and Public Advocate of the State of Maine.

, - 2'- I o- ,

General of Rhode Island shall be referred to jointly as the " Attorneys General" and individually as "the Attorney General."

WHEREAS:

1. EUA Power is a New Hampshire corporation organized to' acquire ownership shares in the Seabrook nuclear generating project from joint owners which seek to disengage from the project.

2. Eastern Utilities Associates ("EUA"), a Massachusetts Business Trust which is a public utility holding company under the Public Utility Holding Company Act, will acquire EUA Power as a wholly owned subsidiary upon approval of the acquisition by the Securities and Exchange Commission. Montaup Electric Company is the wholesale power supply utility for the EUA electric system. Montaup's customers are EUA's two retail electric subsidiaries, Eastern Edison Company and Blackstone Valley Electric Company, and several non-affiliated wholesale customers.

3. Bangor Ilydro Electric Company, Central Maine Power Company, Central Vermont Public Service Corporation and Maine Public Service Corporation ("the Sellers") seek to disengage from the Seabrook project and sell their ownership shares in the project, which total 11.26721% of the project. That percentage represents approximately 130 megawatts from Unit No.1.

4. Between July 24 and July 31, 1985 EUA and the Sellers executed letter agreements setting forth the terms of the proposed sale of the Seller's ownership shares to EUA Power. Among the terms was the condition that, prior to closing on the sale, the Federal Energy

z

, eg .

Regulatory Commission ("FER C") have acted favorably on certain ratemaking determinations sought by EUA Power.

5. On August 29, 1985 EUA Power filed a petition for a declaratory order with FERC seeking determinations (1) that EUA Power may sell power from Seabrook No. 1 at market-based rates (that is, at rates negotiated at arm's length in a workable market) and (2) that EUA Power might make the sales at cost-based rates derived under the following cost of ' service determinations:

(a) That a capital structure for EUA Power of 80% debt and 20% equity is just and reasonable.

(b) That an equity structure consisting of preferred stock except for $10,000 of common stock is just and reasonable.

(c) That a rate of return on equity of 25% per annum and a rate of return on debt at the weighted average cost actually experienced (up to 30% per annum for issues prior to the commercial operation date of Seabrook No.1) is just and reasonable.

(d) That if any subsequent proceeding on the prudence of Seabrook construction costs results in a disallowance of costs incurred before the closing date on the sale, such disallowance shall not affect EUA Power's rates unless the disallowance reduces the allowed rate base for construction work before the date of closing to a level below the total purchase price paid by EUA Power for the unfinished construction at the closing date.

T

The cost-based rates were to be used (1) for all sales if the Commission disallowed market-based rates or (2) for sales to an affiliate even if the Commission approved market-based rates.

5. The Commission by order of October 9,1985, set EUA Power's petition for a declaratory order for hearing. The Presiding Judge thereafter divided the issues into two phases: . Phase I to deal with the cost of service issues and Phase 11 to deal with' the market-based pricing .

issue.

6. Prior to hearing in Phase I, the parties entered into settlement discussions and reached the settlement terms embodied in this Settlement Agreement. To expedite prompt presentation of the Settlement Agreement to the Commission, the parties agreed that the agreement would be executed only by EUA Power and its three affiliates, the State Commissions and the Attorneys General, other parties to indicate their assent to the agreement by not cpposing it in comments to the Commission.

NOW THEREFORE:

As a result of the settlement discussions, but subject in evsry particular to the conditions set forth in this Settlement Agreement, including approval of this Settlement Agreement in its entirety and without change or condition, and with the understanding that each . term of the Settlement Agreement is in consideration and support of every other term, the parties have agreed as follows:

ARTICLE I Definitions 1.1 "The Unit" is the Seabrook No.1 nuclear generating unit.

. ~

1.2 " Unit Power" is power, including associated energy, which involves a reservation of capacity from EUA Power's ownership share in the Unit' for periods of more than 12 months.

1.3 "Non-Unit Power" is all power or energy from EUA Power's ownership share in the Unit other than Unit Power.

1.4 ' " Market-based Prices" are prices for Unit Power negotiated at arm's length between EUA Power and non-affiliated purchasers at a level exceeding EUA Power's Cost-based Rates. Market-based- Prices shall not exceed prices at the midpoint between EUA Power's Cost-based Rates. for Unit Power and, if they are higher, Montaup's Cost-based Rates for unit power from Seabrook No. '1, each as estimated for future periods at- the time the contract establishing the Market-based Prices is entered into.

1.5 "EUA Power's Cost-based Rates" are rates for Unit Power derived under (1) cost of service procedures specifically agreed to in this Settlement Agreement and (2) FERC-approved cost of service procedures on any matters not specifically agreed to in this Settlement Agreement.

Any rates which are at or below the level of EUA Power's Cost-based P.ates qualify as such rates, even if the level of the rates is determined by market forces.

1.6 "Montaup's Cost-based Rates" means rates for unit power that  ;

would be derived under FERC-approved cost of service procedures if Montaup were to-make unit power sales from its share of Seabrook No.1 power.

1.7 "Non-affiliates" 'are entitles that have no corporate affiliation with EUA Power.

i i

l

1.8 " Affiliates" consist of EUA ' Power's parent, EUA, and EUA's other subsidiaries, whether owned directly or through intermediary companies.

- 1. 9 "The Unit's commercial operation date" is the date on which the Unit commences commercial operation. In the event of any dispute as to the proper date, the dispute shall be resolved by FERC.

1.10

" Initial Debt" is EUA Power's outstanding long-term debt at the Unit's commercial operation date.

1.11 An " Authorized Refinancing" is a refinancing of EUA Power's Initial Debt, or any part thereof, at rates that are no higher than 175% of the prime rate one week before the refinancing at the First National Bank of Boston or its successor.

'1.12  ;

" Initial Preferred Stock" is EUA Power's outstanding cumulative convertible preferred stock at the Unit's commercial operation date.

1.13

" Retail Rates" are rates for sales by Montaup's distribution affiliates to ultimate consumers and are subject to regulation by the State Commissions.

ARTICLE II Sales of Unit Power to Hon-affiliates i l 1

2.1 On on before December 31, 1988, EUA Power may enter into contracts with non-affiliates to sell Unit Power at Market-based Prices.

The period of such sales shall not extend beyond December 31, 1990.

2.2 After December 31,198u, EUA Power may enter into contracts to sell Unit Power to non-affiliates at prices established by the market i only if, prior to the dates that such contracts are executed, (1) EUA '

Power has obtained approval from FERC of market-based pricing for the d

period in which the contracts are executed or (2) market-based pricing is allowed under FERC regulations or precedents of general applicability.

The periods of sales under such contracts shall be as allowed by FERC.

Any EUA Power request for FERC approval to enter into market-based pricing contracts after December 31, 1988 shall be filed no later than one year before the commencement date of the period for.which the approval is sought. Copies of any such request shall be served upon the State Commissions and the Attorneys General. Nothing in this - Settlement Agreement commits any party to any position on the merits of such.

request.

2.3 Promptly upon execution of any contract for sales of Unit Power to non-affiliates at Market-based Prices, and, if possible, before filing such contract with FERC, EUA Power shall provide copies of the contract to the State Commissions and the Attorneys General.

2.4 The contracts or rate schedules for any sales to non-affiliates of Unit Power shall be filed with FERC. Copics of such filings shall be served upon the State Commissions and the Attorneys General. Any disputes as- to the proper rates charged by EUA Power under this Settlement Agreement fcr such sales shall be resolved by FERC.

ARTICLE III Special Provisions Regarding Sales to Affiliates 3.1 The parties acknowledge that special provisions are appropriate fo'r power and energy transactions between EUA Power and its affiliates because of lack of arm's length dealing. These provisions are set out in this Article III and in Articles IV, V and VI below.

( 4 3.2 EUA Power shall not make any sales of either Unit . Power or l , Non-Unit -Power to Eastern Edison Company, or Blackstone Valley Electric

(. Company at any time.

3.3 Prior to the Unit's commercial operation date. EUA Power shall not execute any contracts to sell either Unit Power or Non-Unit Power to Montaup. Prior to that date, EUA Power. may make sales of test power, a type of. Non-Unit Power, to Montaup if such sales are to Montaup's benefit.

ARTICLE IV Sales of Unit Power to Montaup 4.1 If any of EUA Power's share of Seabrook No.1 power remains unsold to non-affiliates at the Unit's commercial operation date, EUA Power shall offer Unit Power for sale to Montaup under life-of-the-unit contracts. . The amount of Unit Power offered to Montaup shall be (1) at

.least 15.5% of EUA Power's share of Seabrook No.1 power, if that amount remains unsold, or (2) if that amount does not remain unsold, such total lesser amount as does remain unsold. Montaup, at its option, may accept the offer for a period of less than the life of the unit.

4.2 If Montaup has contracted to purchase less than 15.5% of EUA Power's share of Seabrook No.1 power as a result of the offer made under Section 4.1 above, EUA Power, when it thereafter offers Unit Power for sale to non-affiliates, shall extend to Montaup a right of first refusal for Unit Power in an amount not to exceed the difference between the amount of Unit Power, if any, already under contract for sale to Montaup and.15.5% of EUA Power's share of Seabrook No.1 power.

l l

l

v 4.3 Copies of EUA Power's offers to sell Unit Power to Montaup and Montaup's responses to such offers shall be supplied to the State Commissions and the Attorneys General.

4.4 EUA Power shall not sell, or execute a contract to sell, any Unit Power to Montaup except under the procedures established under Article V of this Settlement Agreement.

4.5 EUA Power's rates for sales of Unit Power to Montaup shall not exceed the lowest of (1) EUA Power's Cost-based Rates, (2) the cost to Montaup of Montaup's most desirable alternative source of power having comparable reliability, availability, operational and term-of-sale characteristics, 2,/ or (3) if EUA Power has made a contract to sell Unit Power to a non-affiliate within the six months prior to the offer'to sell Unit Power to Montaup and if the contract with the non-affiliate is for power having comparable reliability, availability, operational and term-of-sale characteristics, the rate for the sale to the non-affiliate.

4.6 The contracts or rate schedules for any sales of Unit Power to Montaup shall be filed with FERC. The filing shall show how the rates for such sales meet the standard of Section 4.5 above. Copies of the filing shall be served upon the State Commissions and Attorneys General.

Any disputes as to the proper rates under Section 4.5 of this Settlement Agreement shall be resolved by FERC.

2/

It is not intended that the requirement of comparable characteristics will limit the alternative sources only to other nuclear units.

2 .

~

ARTICLE V Procedures for Selling Unit Power to Montaup l 5.1 Any contract for sale of Unit Power by EUA Power to Montaup shall specify the portion of the power to be resold to Eastern Edison Company and Blackstone Valley Electric Company (the " distribution

- affiliates") . The contract shall provide that the sale of the Unit Power to Montaup for resale to either of the distribution affiliates is to commence only when Montaup's contract with the distribution affiliate has become effective by its terms.

5.2 Montaup shall enter into a separate contract with each of its

~

two distribution affiliates for sale of that portion of the Unit Power 4

[ purchased from EUA Power for resale to the distribution affiliate. The

contract shall specify that it shall not become effective until either of the I , following events has occurred

(1) the State Commission has determined ,

1-the purchase of the Unit Powtr by the distribution affiliate to be prudent

i. from .the affiliate's standpoint or (2) if the State Commission makes a -

i contrary determination, the distribution ' affiliate notifies Montaup in T

writing that it desires to make the contract effective nonetheless.

5.3 When EUA Power contracts to sell Unit Power to Montaup for

resale to its distribution affiliates, three filings shan be made simultaneously as follows

(1) EUA Power shall fDe its contract with Montaup at FERC, (0) Montaup shall file its separate new contracts with its distribution affiliates at FERC, and (3) Montaup's distribution affiliates

, shall request their respective State Commissions to determine that the purchase of the Unit Power from Montaup is prudent from their standpoint. Copies of all three filings shall be served on the State Commissions and the Attorneys General. Two weeks before the

- . ~ , - . . --. ..- ,_~ _ ,,. ,-.. - . . ,,. ~ ~ .,m..._._-,,_.._v...-.-.,-- ~,-.-.,_....---,,---.--,n,--..-,. .

i r

submission of a request for a prudence determination, the distribution affiliates shall advise their State Commissions and Attorneys General of the intent to Sie such request.

s -

5.4 In requesting its State Commission ~ to determine that the purchase of Unit Power from Montaup is prudent from its standpoint, a distribution affiliate shall show' (1) Montaup's need for the power to supply the distribution afSliates with their total requirements, (2), the terms of the proposed sale and rates and (3) . the anticipated terms and costs of alternative power sources available to Montaup. The request 1

shall be accompanied by a written presentation intended to serve as the v

distribution afAliate's' direct case, its testimony, supporting documentation and workpapers. The written presentation shall include a showing of the 4 .

l desirability of the purchase of the Unit Power from the standpoint of the retail ratepayers of the distribution affiliate. The written presentation shall be supported by all relevant and material information available to the s

distribution affiliate, EUA Power and Montaup. Under the direction of the State Commission, the distribution affiliate shall provide additional relevant and material information requested by the State Commission's staff or other participants in the proceeding. The State Commission shall decide all matters relating to information production.

5.5 The State Commissions agree to issue notices of requests by Montaup's distribution affiliates for determinations of the prudence of

, purchases of Unit Power from Montaup, to open proceedings on such i

requests v

, to accept timely interventions, to hold public hearings if requested or deemed appropriate, and to issuc decisions within 120 days of the niing of the requests. The procedures governing the conduct of

.such proceedings and appellate review thereof shall be those of the

_, .' .. - - - .-- --. - - -- - -~ ~~'~~~~~~~~~~ ~ ~ ~ ~ ~ ~ ~ ~' ~

. )

respective state commissilons and relevant state statutes (the distribution affiliates shall not appeal any adverse decision). Any decision that finds the purchase prudent only upon condition or modification of the terms or rates of the purchase shall be considered a determination that the purchase is imprudent. Any failure to issue a decision within 120 days shall be treated as a determination that the purchase is prudent. The decision of the State Commission is not intended to, nor shall it, affect or impede any of EUA Power's or Montaup's rights under the Federal Power

- Act or affect the jurisdiction of FERC in the review of EUA Power's or Montaup's rates. The distribution affiliates agree to bear any necessary and reasonable regulatory expenses incurred by the State Commissions in a proceeding on the prudence of a purchase from Montaup of Unit Power.

5.6 If a State Commission determines that the purchase of Unit Power from Montaup is prudent from the standpoint of Montaup's distribution affiliate, the contract between Montaup and its distribution affiliate for the salc. of the Unit Power shall become immediately effective by its terms and sales under the contract may commence at the earliest practicable _ time allowed in the contract. When the contract between Montaup and its distribution affiliate becomes effective, sales by EUA Power to Montaup for resale to Montaup's distribution affiliate may commence under the contract between EUA Power and Montaup.

5.7 If a State Commission determines that the purchase of Unit Power from Montaup is imprudent from the standpoint of Montaup's distribution affiliate, the distribution affiliate may declare in writing that the contract between Montaup and itself is voided. Alternatively, the distribution affiliate may declare in writing the contract to be effective notwithstanding the imprudence determination, cnd Montaup then shall

commence to make sales under the contract. But if the distribution

~

affiliate declares the contract to be effective notwithstanding the imprudence determination of the State Commission, the distribution affiliate agrees not to seek recovery of the costs of the purchase in retail rates.

5.8 Neither EUA Power nor Montaup shall be required to make any sale of Unit Power prior to the date on which FERC has permitted both the contract. between EUA Power and Montaup and the contract between Montaup and its distribution affiliate to beco.no effective, either subject to refund or otherwise, as a rate schedule under the Federal Power Act.

If, upon thi submission of those contracts FERC sets for bearing the issue of the prudence of EUA Power's sale to Montaup, or the prudence of Montaup's purchase from EUA Power, or the prudence of Montaup's sales to its customers, the contracts may be voided at the option of either EUA Power or Montaup, and the filings at FERC and at the State Commissions may be withdrawn.

5.9 If the purchase of Unit Power by a distribution affiliate is not l

con:;uiumated because r State Commission finds the purchase to be '

I imprudent from the distribution affiliate's standpoint, no contention shall be made by any party to the present proceeding, and no contention shall l

be entertained by the State Commission, that EUA Power or Montaup was imprudent not to proceed with sales of the Unit Power.

ARTICLE VI Sales of Non-Unit Power to Affiliates and Non-Affiliates 6.1 Sales of Non-Unit power involving a reservation of capacity and sales of energy from Scabrook No. I at rates in excess of 125% of

Seabrook No.1 fuel costs shall be made subject to a separate contract or contracts between Montaup and its distribution affiliates, and when the number of hours during which such sales take place, irrespective of the level of the sales, accumulate in any NEPOOL power year to more than the number of hours found by multiplying 185 days x 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> x the actual Seabrook No.1 operating factor for the period of accumulation, the distribution affiliate shall request from its state commission a determination of the prudence of future purchases of such power or energy for the balance of the current HEPOOL power year and the succeeding NEPOOL power year. Such request is to be made pursuant to the provisions of Sections 5.4 through 5.7 of this Settlement Agreement, all signatories hereto to be bound by the provisions thereof in relation to a proceeding under this Section 6.1. If the distribution affiliate proceeds with future purchases in the face of a determination of imprudence, it agrees not to seek recovery in retail rates of the costs of the futura purchases in the balance of the current NEPOOL power year and the succeeding NEPOOL power year. For purposes of this section, (1) a NEPOOL power year shall be November 1 of one year to October 31 of the following year, (2) the operating factor shall be found by dividing the number of hours in which the Unit operated in the accumulation period by the total number of hours in that period, and (3) the accumulation period begins when the 'first sale of the types described in the first sentence of this Section 6.1 is made in the relevant NEPOOL power year and runs through the most recent date of such sales in that power year.

6.2 This Settlement Agreement establishes no procedures or principles regarding the pricing for sales of Non-Unit Power, whether such sales are made to affiliates or non-affiliates.

O

d

- 15.-

6.3 EUA Power's rates for sales of power or energy other than Unit Power shall be set forth in contracts or rate schedules filed with FERC and subject to its review and approval.

j- 6.4- Copies of the filings of any contracts or rate schedules for the sales of Non-Unit Power shall be served upon the State Commissions and

'the Attorneys General.

ARTICLE VII '

1 Determination of EUA Power's Cost-based Rates 7.1 - FERC's approval of this Settlement Agreement shall constitute the equivalent -of a declaratory order that the following cost of . service i elements are just and reasonable for EUA Power for sales of unit power i

and may be used in conjunction with FERC-approved cost of service procedures for the determination of EUA Power's Cost-based. Rates for t'

such sdes:

(1) . A debt / equity ratio of approximately 80%/20% prior to and at the i

Unit's ' commercial operation date. This ratio may be changed

[ after that date by (1) accumulation of retained earnings by EUA i.

. Power, (2) additional equity ' contributions from EUA, and (3) sale of additional debt or retirement of existing debt by EUA Power. The sale of additional debt shall never cause the e

dabt/ equity ratio to exceed 80%/20%; any ratio at or below the

. 80%/20% ratio shall not be considered unreasonably leveraged.

(2) An equity structure prior to and at the Unit's commercial

' operation date consisting of $10,000 in common stock and all other equity capital in cumulative convertible preferred stock.

The cumulative convertible preferred stock shall be converted to common stock on the following schedule:

1

-0 (a) If EUA Power achieves an Authorized Refinancing of a percentage of its Initial Debt (up to and including 100%)

I within four years of the Unit's commercial operation date, an equivalent percentage of Initial Preferred Stock shall be converted to common stock at a date 12 years from the Unit's commercial operation date.

(b) If EUA ' Power achieves an Authorized Refinancing of a percentage of its Initial Debt (up to and including 100%) in the fifth year after the Unit's commercial operation date, an equivalent percentage of Initial Preferred Stock shall be converted to common stock at a date 10 years from the Unli's commercial operation date.

(c) If EUA Power achieves an Authorized Refinancing of a percentage of its Initial Debt (up to and including 100%) in the sixth year after the Unit's commercial operation date, an equivalent percentage of Initial Preferred Stock shall be converted to common stock at a date eight years from the Unit's commercial operation date.

(d) If EUA Power has not achieved an Authorized Refinancing of its entire Initial Debt by the end of the sixth year after the Unit's commercial operation date, the percentage of Initial Preferred Stock (up to and including 100%)

equivalent to the percentage of Initial Debt that has not been refinanced will be converted to common stock at a date seven years from the Unit's commercial operation date.

t No claim to any accumulated unpaid dividends shall survive the conversion j

of the preferred stock to common stock. l

o

, ne -

1 (3) Rates of return as follows:

Common Equity (a) The rate of return on the initial $10,000 of common stock,.

which will be the only common stock issued prior to the 4

Unit's commercial operation date, 'shall be _25% per annum i-4 until the last Initial Preferred Stock is converted to.

4 common stock. Thereafter, the rate ' of return on this  ;

common stock shall be a rate appropriate for EUA Power in e

its then circumstances, as they change from time to time, such rate to be established by a filing with FERC when j

the last Initial Preferred Stock is converted to common stock and thereafter to be subject to revision as provided -

in Sections 205 and 206 of the Federal Power Act.

(b) The rate of return on any~ common stock issued or common I

equity accumulated after the Unit's commercial operation-date shall be a rate appropriate for EUA Power in its then circumstances, as they change from time to time, such rate a

a, to be established by a filing with FERC and thereafter to be subject to revision as provided in Sections 205 and 206 -

of the Federal Power Act.

(c) The rate of return on the common stock which is converted L

i from Initial Preferred Stock shall be a rate appropriate for EUA Power in its then circumstances, as they change from time to time, such rate to be established by a filing with FERC when the Initial' Preferred' Stock is converted and thereafter to be subject to revision as provided in Sections 205 and 206 of the Federal Power Act, i

• -,--e - -

--m. ,- . - - - - . - - - - - - ----- -

Preferred Stock (d) The rate of return on the Initial Preferred Stock shall be 25% per annum until its conversion to common stock, except that the rate of return on Initial Preferred Stock for any sale of Unit Power to Montaup consisting of up to 15.5% of EUA Power's share of Seabrook No.1 power shall be 20% per annum.

(e) The rate of return on preferred stock issued after the Unit's commercial operation date shall be a rate appropriate for EUA Power in its then circumstances, as they change from time to time. If such preferred stock is issued to a non-affiliate, the rate of return shall be the actual dividend rate. If such preferred stock is issued to EUA 4

or any other affiliate of EUA Power, the rate of return shall be filed with FERC and shall be subject to its review and approval.

Debt (f) The rate of return on Initial Debt shall be the weighted average actual cost of such debt.

(g) The rate of return on any long-term debt issued after the Unit's commercial operation date shall be the weighted average actual cost of such debt.

7.2 To the extent that EUA Power earns a return of 20% on sales of Unit Power to Montaup consisting of up to 15.5% of EUA Power's share of Seabrook No. 1, but pays a dividend of 25% on preferred stock, the accumulated unpaid earnings arising from the 5% differential may be

recovered from sales of market-based rates but shall not cause any increase in cost-based rates.

7.3 For rate base purposes, EUA Power's investment in Seabrook No.1 as of the closing date for the acquisition, shall consist of (1) its payments for partially constructed plant and partially fabricated nuclear fuel as they existed on June 1, 1985, (2) its reimbursement to the Sellers of progress payments for construction of plant and fabrication of nuclear fuel on and after June 1,198E'haq,%the closing date, (3) its various interest payments made to the Sellers on the ek.dng de.te and (4) its delayed-closing progress payments. Should any of the construction costs of partially constructed plant as it existed on June 1,1985 be disallowed as imprudent in a subsequent FERC proceeding, such disallowance shall not affect EUA Power's rates unless the amount of the disallowance reduces the construction costs to a level lower than the payment for such plant covered in item (1) of the items enumerated in the first sentence of this section.

ARTICLE VIII Protection to EUA System Ratepayers 8.1 ~ EUA and its subsidiaries shall not guarantee EUA Power's Initial Debt in any way.

8.2 In deriving its capital structure for wholesale ratemaking purposes on a consolidated system basis, Montaup shall remove from the structure EUA Power's Initial Debt.

8.3 In the event that EUA Power were to fail to meet its debt service, Montaup agrees that any wholesale rate filing made during the -!

period of failure should include a downward adjustment to its rate of l

return and commits that it shall propose such an adjustment. Any other party to this Settlement Agreement may propose a different adjustment, and FERC shall determine the appropriate adjustment.

ARTICLE IX Study of Market-based Pricing 9.1 In April of each year, EUA Power shall provide to FERC, the State Commissions and the Attorneys General a report showing the sales and revenues for Unit Power and Non-Unit Power and energy from the Unit in the preceding calendar year.

For Unit Power and any other capacity sales, the report shall additionally show the rates of return earned in the preceding calendar year. The data in the report shall be presented by individual transaction or, where grouping of transactions is appropriate, by category of transaction. The report shall be accompanied by the underlying workpapers. At the request of FERC, the State Commissions or the Attorneys General, EUA Power shall provide ~such additional information as may be needed to show or verify the data presented.

9.2 If EUA Power makes sales at Market-based Prices, EUA Power shall reimburse the Massachusetts Attorney General an amount, not to exceed $60,000, to study market-based pricing in New England and shall reimburse the Rhode Island Division of Public Utilities and Carriers an amount, not to exceed $15,000, to adapt and supplement such study for Rhode Island'e. purposes. The study may include, but is not limited to, the question of whether the market for wholesale power in New England is competitively workable and the question of whether there are transmission constraints in such market. EUA Power shall cooperate in the provision

of information for such study, but may seek a protective order from FERC for any confidential or privileged information. The study shall be under the sole direction and control of the Massachusetts Attorney General, and EUA Power's reimbursement for the study shall not be taken as any endorsement of its conclusions.

4 ARTICLE X.

Conditions 10.1 The making of this Settlement Agreement shall not be deemed in any respect to constitute an admission by any party to the proceeding that any allegation or contention in this docket is true and valid.

10.2 The making of this Se'ttlement Agreement establishes no principles of general applicability.  :

10.3 This Settlement Agreement is expressly conditioned upon the Commission's acceptance of all the provisions thereof without change or conditions.

10.4 The discussions which have produced this Settlement Agreement have been conducted on the explicit understanding that all offers of settlement and discussions relating thereto are and shall be privileged, shall be without prejud!ce to the position of any party or participant presenting any such offer or participating in any such discussion, and are not to be usert in any manner in connection with this proceeding or otherwise. The Settlement Agreement is submitted on the condition that, in the event the Commission does not by order accept it in its entirety, it shall be deemed withdrawn and shall not constitute any part of the record

'in this docket or be used for any other purpose . l 1

i

, ,. . - - ..,, . . , , . - , , . _ _ -., - . . , - , - , , , , . - . - - - ,, , .n.. .-,

4 This Settlement Agreement is entered into as of thisf7 day of December,1985 by and between the undersigned by their respective attorneys, who represent that they are fully authorized to do so on behalf of their principals.

EUA POWER CORPORATION MONTAUP ELECTRIC COMPANY */

EASTERN EDISON COMPANY */ -

BLACKSTONE VALLEY ELECTIIIC COMPANY 1/

By George F/Brudef (Their Yttorney)

DEPARTMENT OF PUBLIC UTILITIES OF THE COMMONWEALTH OF MASSACHUSETTS By James W. Stetson (Its Attorney)

THE ATTORNEY GENERAL FOR THE COMMONWEALTH OF MASSACHUSETTS By

, Donna Sorgi (Ilis Attorney)

• /

Although these companies are not parties to this proceeding, EUA Power's counsel is authorized to sign in their behalf and bind them thereby. .

4 attorneys, who represent that they are fully authorized to do so on

, behalf of their principals.

EUA POWER CORPORATION MONTA UP ELECTRIC ~ COMPANY */

. EASTERN EDISON COMPANY */ ~

BLACKSTONE VALLEY ELECUtIC COMPA Dy George F. Bruder .

(Their Attorney) .

DEPARTMENT OF PUBLIC UTILITIES OF THE COMMONWEALTH OF MASSACHUSETTS By- _

fames W. Stetson-ts Attorney)

THE ATTORNEY GENERAL FOR T!!E COMMONWEALTH OF MASSACHUSETTS By Donna Sorgt (His Attorney)

~ \

\

Although these companies are not parties to this proceeding , E L' A Power's counsel is authorized to sign in their behalf and bind them thereby,.

j

~

attorneys, who represent that they are fully authori:ed to do so on

, behalf of their principals.

EUA POWER CORPORATION MONTAUP ELECTRIC COMPANY */

EASTERN EDISON COMPANY */ ~

BLACKSTONE VALLEY ELECTRIC COMPANY

• Dy_

George F. Bruder (Their Attorney)

DEPARTMENT OF PUBLIC UTILID.3 OF THE COMMONWEALTH OF MASSACHUSETTS B)(ItsEmes W. strtson Attorney) -

THE ATTORNEY OENERAL FOR T!!E COMMONWEALTH OF MASSACHUSETTS 0

By ,% W s Ironnu sorgt (His Attorney) ,

. ~

~

• /

Although these companies are not Power's counsel is authorized thereby. to sign in their behalf and m

bind thepar

~nn.

.s 23 RIIC,D3 !3tAND DIVI 5 ION OF Ptl=e --

D CAng;3g3 .w...

. . . . . ; *: 3

~

CC fyggggg' [fDEICUTILITIC3 ggj gII OI.D.AL OF THZ 3;A=; 0F M.MCO2

)

syJ A /jk(R "h* icon Nntienoupe m

( helt Atterney)

~

i W.f to this proAlt.".oug.*. the RP.oca Island Put!!c IJtt! ttes C ~

1 intervonors,:sedir.g. the counsol for the other Rhoda Is'andw.imission is no I as an Assistant authert:ed to sign in its behal.' anc . bind it tharsbyAttorne

~ .--_- _ _ _ A _.

Attachnent 7

.. .. - Part II s

V s UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION EUA Power Corporation ) Docket No. EL85-46-000 EXPLANATION OF SETTLEMENT AGREEMENT The principal terms of the Settlement Agreement in this case are summarized below. In the Agreement, a basic distinction is drawn between unit power and non-unit power. Unit power is defined as. power involving a reservation of capacity from Seabrook No. I for periods of more than a year. Non-unit power is defined as all other power and energy from the unit.

A distinction is also drawn between sales by EUA Power Corporation ("EUA Power") to non-affiliates and sales to Montaup Electric Company ("Montaup"), the power supply utility in the EUA system.

A. Pricing Terms

1. Prices to Non-Affiliates for Unit Power EUA Power may sell unit power to non-affiliates at market-based prices through 1990. Market-bewd prices are prices negotiated with the purchaser but not to exceed prices at the mid point between EUA Power's cost-based rates for unit power from Seabrook No. I and Montaup's cost-based rates for unit power from Seabrook No. 1. Montaup is an affiliate of EUA Power and is the owner of a small share in Seabrook.

The difference between EUA Power's cost-based rates for unit power and

G Montaup's cost-based rates .for such power represents the cost advantage that EUA Power enjoys over other joint owners because of the discount'at which it purchased its share. The mid-point cap requires EUA Power to share its cost advantage at least equally with its purchasers.

~ Contracts for sales at market-based prices must be be executed by year-end 1988. EUA Power in a subsequent proceeding may apply to the Commission to allow contracts for market-based rates to be executed after 1988 and for sales at market-based rates to continue after 1990. Unless the Commission gives such permission, any sales of unit power to non-affiliates under contracts executed after 1988 or any sales made after 1990 will be at prices not exceeding EUA Power's cost-based rates.

Contracts for sales of unit power to non-affiliates, whether at market-based prices or cost-based rates, are to be filed at FERC. Any question of whether market-based prices meet the mid-point test or whether cost-based rates are properly derived under FERC cost of service procedures, including the cost of service elements determined by settlement in this proceeding, is to be resolved by FERC.

2. Rates to Montaup for Unit Power EUA Power's rates for sales to Montaup of unit power shall not exceed the lowest of (1) EUA Power's cost-based rates, (2) the cost to Montaup of Montaup's most desirable alternative source of comparable power or (3) if EUA Power has made an offer to sell comparable power to a non-affiliate within six months, the rate for the sale to the non-affiliate. Contracts for sales to Montaup are to be filed at FERC, which is to resolve any disputes concerning the application of the above standards.

c .

F

3. Rates for Non-Unit Power The Settlement Agreement establishes no procedures or principles regarding the pricing for sales of non-unit power, whether the sales are made to affiliates or to non-affiliates. The rates for non-unit power are to be set forth in contracts or rate schedules filed with FERC and subject

~ to its review and approval.

B. Cost of Service Elements EUA Power's cost-based rates for unit power are to include the following cost of service elements:

1. Debt / Equity Ratio EUA Power's debt / equity ratio is not to exceed 80%/20%; any ratio that is at or below that ratio shall not be considered unreasonably leveraged. EUA Power states that 20%, estimated to be $43.3 million, is the ma cimum capital that it 'is prepared to commit to the purchase. The debt is to be callable after three years.

2. Equity Structure EUA Power initially will issue $10,000 of common stock to its parent Eastern Utilities- As~sociates to retain voting control of the subsidiary in the parent. All other equity capital during the construction period will be secured by issue to the parent of cumulative convertible preferred stock. The use of preferred stock to raise almost all equity capital is intended to establish a fixed dividend rate for the life of the preferred.

3. Conversion of Preferred Stock to Common Stock The preferred stock will convert to common stock after a minimum of seven years and a maximum of twelve years from the commercial operation

r 9

date of Seabrook No.1. : The period until. conversion depends on when .

EUA Power achieves an authorized refinancing of the debt which is

~ ,

outstanding at the commercial operation date. An authorized refinancing is a refinancing at an interest rate not exceeding 175% of the prime rate.

The schedule for conversion is as follows:

If Refinancing Then Conversion-Occurs In: Occurs After: "

4th year or earlier 1/ 12th year 1/

5th year 10th year 6th year _

8th year i

7th year (or no refinancing) 7th year If less than 100% of the debt is refinanced in any of the above years,

- then' only the equivalent percentage of preferred stock will be converted after the indicated period. The schedule for conversion is inten'ded to give EUA Power an incentive to call its high-cost initial debt as soon as -

practicable and refinance.it at lower interest rates.

3'. Rates of Return EUA. Power shall be allowed the following rates of return:  !

For capital invested at the commercial operation date of Seabrook No.

1, .the rates will be:

$10,000 Common 25% per annum Preferred 25% per annum 2/

Debt _ Weighted average' actual cost For new capital invested after the commercial operation date of Seabrook No.1, the rates will be:

-1/

Years measured from the commercial operation date of Seabrook No . 1.

-2/

Except 20% per annum on certain sales of unit power to Montaup, as

.cubsequently described.

I

% - - - , m._...~3 - _ _ , . . _ , . - - - . - - - , - - , . . .-.w , , _ . . . _ , , - . _ , . .....-_.___,,m,, ..,... . . . . . ,, ,-

[.

q Common

" Going" common equity rate Preferred issued to EUA " Going" preferred dividend rate Preferred issued in market Weighted average actual -

Debt dividend rate Weighted average actual cost For. common steck converted from preferred stock and- for the $10,000 of initial- common stock after the last conversion of preferred stock, the rates will be:

Converted common " Going" common ~ equity rate

$10,000 initial common

" Going" common equity rate The term " going" rate as used above means a rate of return appropriate for EUA -Power for the type of security involved when the security is issued. The going rate is to be established by a filing with FERC. The going rate ~ for common equity thereafter is subject to revision from time to time under Sections 205 and 206 of the Federal Power Act.

4. Subsequent Determinations of Imprudence If the construction costs of partially constructed plant as it existed on _ June 1, _1985 are disallowed as imprudent in a subsequent FERC proceeding, EUA Power's cost-based rates are not to be affected unless the amount of the disallowance reduces the construction costs below the level of EUA Power's payment for such plant. In effect, any disallowance of construction. costs before June 1,1985 will be imputed to the discount at which EUA Power purchased the plant as it existed on that date before being imputed'to EUA Power's purchase price for plant as of that date.

C. Provisions on Sales to Montaup The Settlement Agreement contains these provisions concerning sales of power to Montaup:

._____,_,,-.-,,-,---->v-'

v 1.

EUA Power is not to execute contracts for sale of either unit power or non-unit power to Montaup before the commercial operation date of Seabrook No.1. 'The prohibition is included to insure that Montaup is not adversely affected if the unit is cancelled.

2. If any of _ EUA Power's share of Seabrook No.1 power remains unsold to non-affiliates at the commercial operation date of the unit, EUA Power will offer power for sale to Montaup as unit power ubder life-of-the-unit contracts. The amount of unit power offered shall be (1) at least 15.5% of EUA Power's Seabrook No.1 entitlement, if that amount remains unsold or (2) if that amount does not remain unsold, such total

' lesser amount as does remain unsold. If Montaup does not contract for 15.5% of the entitlement at the time of such offer, EUA. Power will extend to Montaup a right of first refusal to 15.5% of the entitlement upon the occasion of any future offers to non-affiliates. For sales to Montaup of unit power ~up to 15.5% of EUA Power's Seabrook No. I entitlement, the rate of return on the preferred stock outstanding at the commercial operation date will be 20% per annum. This provision is intended to reserve to Montaup benefits if the unit is completed and the costs of its power are advantageous.

3. Any. contracts between EUA Power and Montaup and, in turn, Montaup and its distribution affiliates for sale of unit power will be made contingent upon -a determination by the state commission regulating the distribution affiliate's retail rates that the purchase of. the unit power by the' distribution affiliate is prudent. The distribution affiliate may elect to proceed with the purchase in the face of a determinatior of imprudence but, if it does so, agrees not to seek recovery of the cost of the purchase in retail rates.

This provision is included to ensure that EUA

.G 9

Power will not attempt to " dump" unneeded or uneconomic Seabrook No.1 power on its affiliate if the power cannot be marketed elsewhere.

4. If EUA Power contracts to sell unit power to Montaup for resale to distribution affiliates, three filings will be made simultaneously: (1)

EUA ' Power will file its contract with Montaup at FERC, (2)' Montaup will file. its contracts with the distribution affiliates at FERC and (3) the distribution affiliates will file their requests for prudence determinations at the state . commissions, which commit themselves to act on-the requests within 120 days. If FERC sets for hearing the prudence of the transaction under its jurisdiction, the contracts may be voided by EUA Power or Montaup and the several filings at FERC and the -state commissions may be withdrawn.

5.- When sales of non-unit power involving a reservation . of '

capacity and sales of energy at rates in excess of 125% of Seabrook No. I fuel costs accumulate, in a twelve month period, to more than a certain i

number of hours, a distribution affiliate will request a determination from -

its state commission that purchases of such power for stated future i

periods are prudent. The state commissions, again, commit to issue a 4

determination within 120' days. If the distribution affiliate, in the face of a determination of imprudence, proceeds with the future purchases, it

{

agrees not to seek recovery.in retail rates of the costs of the future purchases. This is- another " anti-dumping" provision; it relates to i

Non-Unit power, whereas the earlier provision relates to Unit Power.

D. Protection of EUA System Ratepayers EUA Power makes the following commitments in the interest of

' protecting system ratepayers:

- . . , . = . . . _ , _ , - _ _ , . _ . _ . , _ , . . _ . _ _ _ _ , , _ - _ - _ _ _ . , _ . . .

r-a

1. EUA and its subsidiaries will not guarantee in any way EUA Power's- debt issued before the commercial operation date of Seabrook No.

1.

2. Montaup will remove debt issued before the commercial operation date of Seabrook No.1 from the consolidated system capital structure for purposes of Montaup's wholesale ratemaking.

3. If EUA Power fails to meet its debt service, Montaup will propose a downward adjustment to its rate of return in any wholesale filing made during the period of the failure. Other parties in the wholesale rate proceeding may propose other adjustments. FERC will determine the appropriate adjustment.

E. Study of Market-Based Pricing EUA Power yearly will prepare a report of the sales, ' revenues and rates of return earned on unit sales and other capacity sales in the previous year. The report will be submitted to FERC and the signatories of the. Settlement Agreement.

I .

_a If EUA Power makes sales at market-based _ prices, it will reimburse the Massachusetts Attorney General an amount, not.to exceed $60,000, to study market-based pricing in New England and will reimburse the Rhode ,

Island Division of Public Utilities and Carriers an amount, not to exceed

$15,000, to adapt and supplement such study for Rhode Island's purposes.

"D Respectfully submitted, BRUDER & GENTILE By 2ph. -

Georg6 F/ Brutier' -

Bruder & Gentile 1350 New York _ Avenue,' N.tl.

Suite 600 Washington, D.C. 20005 Telephone: (202) 783-1350 Attorneys fcc EUA Power Corporation March 4,1986

.- . . __ - - _ . . _ . -