EXHIBIT L
[Consolidated Edison Logo]
August 10, 2000
Office of Public Utility Regulation
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549
Attention: Mr. David E. Marsh
Financial Analyst
Commission File No. 70-09613
Consolidated Edison, Inc.
Ladies and Gentlemen:
This letter is in response to your request that Consolidated Edison, Inc.
("Con Edison") explain the basis upon which Con Edison has determined not to
record ("push down") the purchase accounting adjustments which will result
from its proposed acquisition of Northeast Utilities ("Northeast") in the
financial statements of Northeast and its subsidiaries.
Con Edison's acquisition of Northeast will be accounted for in accordance
with APB No. 16 "Business Combinations" utilizing the purchase method of
accounting. APB 16 does not specifically address "push down" accounting.
"Push down" accounting is addressed in SEC Staff Accounting Bulletin No. 54,
Topic 5J. Staff Accounting Bulletin No. 54, Topic 5 J is the basis for Con
Edison's decision to not push down the purchase accounting adjustments. In
particular, Con Edison relied on question 2 of Topic 5J and its related
interpretive response which states:
Question 2: What is the staff's position if Company A acquired less
than substantially all of the common stock of Company B or Company
B had publicly held debt or preferred stock at the time Company B
became wholly owned?
Interpretive Response: The staff recognized that the existence of
outstanding public debt, preferred stock or a significant minority
interest in a subsidiary might impact the parent's ability to
control the form of ownership. Although encouraging its use, the
staff generally does not insist on the application of push down
accounting in these circumstances.
You also requested that we advise you whether Northeast and its subsidiaries
will have material amounts of public debt and preferred outstanding at the
time the acquisition is completed.
Northeast has advised us that Northeast and its subsidiaries, on a
consolidated basis, have approximately $3.95 billion of debt and preferred
stock outstanding at June 30, 2000. Northeast estimates that approximately
56% of that debt and preferred stock is subject to an ongoing public
reporting requirement under the Securities Exchange Act of 1934.
Finally, you asked us to provide you with information about whether Northeast
and its subsidiaries will continue to have material amounts of public debt
and preferred stock outstanding following completion of the acquisition.
State regulatory approval is generally required for the issuance of debt or
preferred stock by the utility subsidiaries of Northeast. Commission approval
under the 1935 Act will be required for issuance of debt or preferred stock
by Con Edison or Northeast and, in those instances where state regulatory
approval is not required, for issuance of debt or preferred stock by their
utility subsidiaries. Con Edison and Northeast have submitted an application
to the Commission with respect to their ongoing financing activities
subsequent to the proposed merger (Commission File No. 070-09711).
Northeast has advised us that the indentures pursuant to which public debt of
its subsidiaries has been issued include restrictions on additional bonded
indebtedness and other restrictive covenants common to such agreements. Any
significant modification of the terms of the indentures would require
securityholder approval. Generally, the securityholders have superior claims
to Northeast with respect to the rights to receive assets upon liquidation or
reorganization of the subsidiaries.
Con Edison has no intent to cause Northeast or its subsidiaries to redeem
their public debt or preferred stock following the merger. Northeast has
advised Con Edison that it has no intent to redeem its or its subsidiaries'
public debt or preferred stock other than at maturity, through economic
refundings or in connection with the ongoing utility industry restructuring.
Northeast's subsidiaries as part of the restructuring, among other things,
are expected to redeem public debt and preferred stock with the proceeds of
new public debt secured by payments from customers relating to certain
regulatory assets or from the proceeds of asset sales.
In no event is it expected that Northeast and its subsidiaries, on a
consolidated basis, will at any time have less than a material amount of
public debt or preferred stock outstanding relative to total debt and
preferred stock outstanding.
Very truly yours,
/s/Joan S. Freilich
Executive Vice President &
Chief Financial Officer
[PRICEWATERHOUSE COOPERS LOGO]
Mr. Hyman Schoenblum
Vice President and Controller
Consolidated Edison, Inc.
4 Irving Place
New York, NY 10003
August 10, 2000
Dear Mr. Schoenblum
We have been engaged to comment on the appropriate reporting for the excess
of purchase price over net book value of net assets acquired in the separate
financial statements of Northeast and certain of its subsidiaries with
respect to the proposed Consolidated Edison, Inc. ("Con Edison") acquisition
(the "proposed acquisition") of Northeast Utilities, Inc. and its
subsidiaries (collectively referred to as "Northeast"), as more fully
described below. This letter is being issued to Con Edison for assistance in
evaluating such reporting.
Description of the Acquisition
We have read the Registration Statement on Form S-4 of Consolidated Edison,
Inc. dated February 29, 2000 (the "S-4") which describes the proposed
acquisition of Northeast by Con Edison. We concur with Con Edison's
representation to us that nothing in the Form S-4 indicates that Con Edison
has any intention of retiring the Northeast public debt and/or preferred
stock that will be subject to ongoing reporting requirements under the
Securities and Exchange Act of 1934 as an integrated planned series of
transactions to be undertaken in connection with the proposed acquisition of
Northeast. In addition, we have discussed the proposed acquisition of
Northeast by Con Edison with the following officials of Con Edison:
Hyman Schoenblum, Vice President and Controller
Joseph Miller, Department Manager of Accounting Research and
Procedures
Peter Barrett, Associate Counsel
Con Edison is proceeding to acquire Northeast in a business combination to be
accounted for as a purchase business combination in accordance with
Accounting Principles Board Opinion No. 16, Business Combinations ("APB 16").
Based on the purchase price Con Edison has represented that it will incur for
the proposed Northeast acquisition, this transaction will result in a new
basis of accounting for the purchased Northeast assets and liabilities. Con
Edison has determined not to record ("push down") the purchase accounting
adjustments that will result from the acquisition in the separate financial
statements of Northeast and the separate financial statements of its
subsidiaries. Con Edison expects that the proposed acquisition of Northeast
will be completed in the fourth quarter of 2000.
As part of the acquisition, Con Edison has made a preliminary determination
of the amount of Northeast's debt and preferred stock that will remain
outstanding after its acquisition of Northeast and that will be subject to
ongoing public reporting requirements under the Securities Exchange Act of
1934 (the "public debt and/or preferred stock"). Such determination is based
on representations from Con Edison that the public debt and/or preferred
stock will be repaid based on scheduled maturity dates. For each Northeast
entity that will have continuing SEC reporting requirements as a result of
having public debt and/or preferred stock outstanding, this determination is
necessary to establish that the public debt and/or preferred stock to remain
outstanding on the date of the acquisition is quantitatively significant, as
discussed below.
Con Edison has specifically identified and represented to us that the public
debt and/or preferred stock of each of the Northeast entities that will have
SEC reporting requirements is as follows:
Northeast Utilities, Inc. ("Northeast Consolidated")
Connecticut Light and Power Company ("CL&P")
Public Service of New Hampshire ("PSNH")
Western Massachusetts Electric Company ("WMECO")
North Atlantic Energy Corporation ("NAEC")
Attachment A contains a table with public debt and/or preferred stock
information for Northeast and its subsidiaries, including each of the
Northeast entities subject to ongoing SEC reporting requirements. In order to
illustrate the level of quantitative significance of such public debt and/or
preferred stock of each such SEC reporting entity, the following comparisons
have been made:
Percentage of publicly held long-term debt to total debt, and
Percentage of publicly held long-term debt to total capitalization and
liabilities.
Appropriate Accounting References
Con Edison has asked that we comment on their conclusion not to push down the
purchase accounting adjustments resulting from their proposed acquisition of
Northeast.
APB 16 does not specifically address push down accounting. Push down
accounting is addressed in SEC Staff Accounting Bulleting No. 54, Topic 5-J
and an additional relevant SEC position is contained in a December 9, 1999
speech give by Eric W. Casey, Professional Accounting Fellow, Office of the
Chief Accountant of the SEC (the "December 1999 Speech").
Staff Accounting Bulletin No. 54, Topic 5-J is the principal basis for a
decision as to the appropriateness of not applying push down accounting to
the purchase adjustments arising in an acquisition accounted for by the
purchase accounting method described in APB 16. Question 2 of Staff
Accounting Bulletin No. 54, Topic 5-J and its related interpretive response
states:
Question 2: What is the staff's position if Company A acquired less
than substantially all of the common stock of Company B or Company
B had publicly held debt or preferred stock at the time Company B
became wholly owned?
Interpretive Response: The staff recognizes that the existence of
outstanding public debt, preferred stock or a significant minority
interest in a subsidiary might impact the parent's ability to
control the form of ownership. Although encouraging its use, the
staff generally does not insist on the application of push down
accounting in these circumstances.
For each Northeast entity that will be subject to SEC reporting requirements
due to its public debt and/or preferred stock outstanding, in order to not
push down the excess of proposed purchase price over net book value of net
assets acquired, the amount of Northeast and its subsidiaries' public debt
and/or preferred stock estimated to be outstanding on the date of the
proposed Northeast acquisition must be quantitatively significant. The
December 1999 Speech provides guidance with regard to the SEC staff's views
as to quantitatively significant amounts upon completion of purchase
accounting transactions.
Con Edison has also represented to us that pursuant to the terms of the
public debt and/or preferred stock indentures, the public debt and/or
preferred stock may be repaid in one of two ways, as follows:
(1) On the scheduled maturity date(s), or
(2) Prepaid prior to scheduled maturity, which may include prepayment
penalties.
However, Con Edison has represented to us that there is no present intention
to retire such public debt and/or preferred stock prior to maturity as a part
of an integrated, planned series of transactions to be undertaken in
connection with the proposed acquisition of Northeast.
Based on the facts, circumstances and representations noted in this letter,
we concur with the conclusion of Con Edison management that it is appropriate
to not push down the purchase accounting adjustments to the separate
financial statements of each Northeast entity subject to SEC reporting
requirements. Such concurrence is due to the quantitative significance of
each such entity's public debt and/or preferred stock outstanding on the date
the proposed acquisition of Northeast by Con Edison is estimated to be
completed and the representation by Con Edison management that it has no
intention of retiring such public debt and/or preferred stock as part of an
integrated, planned series of transactions to be undertaken in connection
with the proposed acquisition of Northeast. Such conclusion of Con Edison
management is based on the following SEC guidance:
Staff Accounting Bulletin 54, Topic 5-J, and
The December 9, 1999 speech give by Eric W. Casey, Professional
Accounting Fellow, Office of the Chief Accountant of the SEC.
Concluding Comments
The ultimate responsibility for the decision on the appropriate reporting for
the excess of purchase price over the net book value in the separate
financial statements of Northeast and certain of its subsidiaries with
respect to the proposed Northeast acquisition rests with Con Edison as the
preparer of its financial statements. The appropriate reporting must be
determined based on the specific facts and circumstances in place on the
consummation date of the Northeast acquisition. Our judgement on the
appropriate reporting for the excess of purchase price over the net book
value with respect to the acquisition of Northeast as described above, is
based solely on the facts, circumstances and representations provided to us
as described above; should these facts, representations and
circumstances differ, our conclusion may change. This letter is not intended
to, and does not, address the business and other risks related to the
proposed acquisition of Northeast. Further, we assume no responsibility to
update this letter for events and circumstances occurring after the date of
this letter.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
Attachment A
Northeast Utilities and its Subsidiaries
Push Down Accounting Issue - Determination of Quantitatively Significant
Balances at June 30, 2000
$000s
Line Northeast
# Description Consolidated CL&P PSNH WMECO NAEC
1 Preferred Stock - not $136,200 $116,200 $ - $20,000 $ -
subject to redemption
2 Preferred Stock - 15,000 - - 15,00 -
subject to redemption
3 Long-term Debt 2,211,019 1,066,669 516,485 198,004 65,000
4 Current portion 479,834 160,000 25,000 1,500 270,000
5 Short-term Debt 1,104,000 90,000 - 118,000 -
6 Total debt and 3,946,053 1,432,869 541,485 352,504 335,000
preferred stock
Less non-public debt and preferred stock:
7 Short-term debt 1,104,000 90,000 - 118,000 -
(line 5)
8 Spent Nuclear Fuel 232,969 188,705 44,264 - -
Disposal Costs
9 ESOP debt (A) 152,000 - - - -
10 Yankee Gas/Norconn 158,139 - - - -
debt (A)
11 Holyoke PCBs (A) 38,300 - - - -
12 Rocky River Realty 13,279 - - - -
Mortgage Note (A)
13 HEC - Tobyhanna 26,477 - - - -
Project (A)
Sub-total 1,725,164 278,705 44,264 118,000 -
14 Publicly held debt $2,220,889 $1,154,164 $497,221 $234,504 $335,000
and preferred stock
15 Total capitalization $10,762,243 $4,764,533 $2,588,003 $1,082,077 $751,613
and liabilities
16 Percentage of publicly
held debt and preferred
stock (line 14) to total
debt and preferred stock
(line 6) 56% 81% 92% 67% 100%
17 Percentage of publicly
held debt and preferred
stock (line 14) to total
capitalization and
liabilities (line 15) 21% 24% 19% 22% 45%
(A) The Northeast Consolidated column includes $388,195 of debt that will
not have an ongoing public reporting requirement and has been excluded from
the disaggregated totals.
