File No. 70-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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The National Grid Group plc New England Electric System
National Grid House New England Power Company
Kirby Corner Road Massachusetts Electric Company
Coventry CV4 8JY The Narragansett Electric Company
United Kingdom Granite State Electric Company
Nantucket Electric Company
National Grid (US) Holdings New England Electric Transmission Corporation
Limited New England Hydro-Transmission Corporation
National Grid (US) New England Hydro-Transmission Electric
Investments Company, Inc.
National Grid (Ireland) 1 Vermont Yankee Nuclear Power Corporation
Limited New England Hydro Finance Company, Inc.
National Grid (Ireland) 2 NEES Global, Inc.
Limited NEES Energy, Inc.
National Grid General AllEnergy Marketing Company, L.L.C.
Partnership Granite State Energy, Inc.
NGG Holdings, Inc. New England Water Heating Company
New England Power Service Company
25 Research Drive
Westborough, Massachusetts 01582
(Name of company filing this statement and
address of principal executive offices)
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The National Grid Group plc New England Electric System
(Name of top registered holding company
parent of each applicant or declarant)
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Jonathan M. G. Carlton Douglas W. Hawes
The National Grid Group plc Joanne C. Rutkowski
National Grid House Sheri E. Bloomberg
Kirby Corner Road Markian M.W. Melnyk
Coventry CV4 8JY LeBoeuf, Lamb, Greene & MacRae, L.L.P.
United Kingdom New York, NY 10019
Telephone: 011-44-1203-537-777 Telephone: 212-424-8000
Facsimile: 011-4401203-423-678 Facsimile: 212-424-8500
NGG Holdings, Inc.
10th Floor
Oliver Building
2 Oliver Street
Boston, MA 02109
Telephone: 617-946-2104
Facsimile: 617-946-2111
Michael E. Jesanis Clifford M. Naeve
Kirk L. Ramsauer Judith A. Center
New England Electric System Skadden, Arps, Slate, Meagher
25 Research Drive & Flom L.L.P.
Westborough, Massachusetts 01582 1440 New York Avenue, N.W.
Washington, D.C. 20005
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(Names and addresses of agents for service)
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Defined Terms
1. Intermediate Companies means National Grid (US) Holdings Limited, National
Grid (US) Investments, National Grid (Ireland) 1 Limited, National Grid
(Ireland) 2 Limited and National Grid General Partnership.
2. NEES -- Immediately after the proposed Merger, NEES will have been merged
with and into NGG Holdings, LLC, with NEES as the surviving entity and then
merged again into another to-be-formed LLC (which survives) which in turn
will merge into NGG Holdings, Inc. with NGG Holdings, Inc. as the surviving
entity. The term "NEES" refers to both NEES and NGG Holdings, Inc. as the
surviving entity.
3. National Grid means The National Grid Group plc.
4. National Grid System means National Grid and its subsidiary companies.
5. NEES Group means NEES and the NEES Subsidiary Companies.
6. NEES Subsidiary Companies means the subsidiary companies of NEES.
7. U.S. Subsidiary Companies means NEES, the NEES Subsidiary Companies and the
Intermediate Companies.
8. U.S. Utility Subsidiaries means New England Power Company, Massachusetts
Electric Company, The Narragansett Electric Company, Granite State Electric
Company, Nantucket Electric Company, New England Electric Transmission
Corporation, New England Hydro-Transmission Corporation, New England Hydro-
Transmission Electric Company, Inc. and Vermont Yankee Nuclear Power
Corporation.
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TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF THE PROPOSED TRANSACTION
A. Introduction and General Request
B. Description of Existing NEES Financing Arrangements
C. Overview of Proposed Financings
D. Specifics of Proposed Financing Arrangements
1. National Grid External Financing
(a) Ordinary Shares
(b) Debt
(c) Interest Rate and Currency Risk Management Devices
2. U.S. Subsidiary Company Financings
(a) National Grid and U.S. Subsidiary Companies
(b) Money Pool
(c) Guarantees
(d) Payment of Dividends Out of Capital or Unearned Surplus
(e) Approval of New Tax Allocation Agreement
3. Changes in Capital Stock of Subsidiaries
4. Financing Entities
5. EWG/FUCO-related Financings
E. Filing of Certificates of Notification
ITEM 2. FEES, COMMISSIONS AND EXPENSES
ITEM 3. APPLICABLE STATUTORY PROVISIONS
ITEM 4. REGULATORY APPROVALS
ITEM 5. PROCEDURE
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
ITEM 7. STATEMENT AS TO ENVIRONMENTAL EFFECTS
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ITEM 1. DESCRIPTION OF THE PROPOSED TRANSACTION
A. Introduction and General Request
This Application-Declaration is submitted in connection with the proposed
acquisition of the New England Electric System ("NEES") by National Grid.
National Grid and NEES have previously filed an Application/Declaration on Form
U-1 (File No. 70-9473) with the Securities and Exchange Commission (the
"Commission") under the Public Utility Holding Company Act of 1935, as amended
(the "1935 Act" or "Act"), seeking approvals relating to the proposed
acquisition by National Grid of all of the voting securities of NEES, and its
consequent indirect acquisition of the voting securities of the NEES Subsidiary
Companies, as well as for certain related transactions (the "Merger U-1").1
Upon consummation of the transactions described in the Merger U-1, National
Grid and each of the Intermediate Companies will register as holding companies
under Section 5 of the Act.2 NEES will continue to be regulated as a registered
holding company, and its subsidiary companies will continue to be regulated as
members of a registered holding company system.3 National Grid's other
operations have been segregated under a newly-formed first-tier subsidiary
company, National Grid Holdings Ltd. ("Holdings"), which will be a foreign
utility
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1 On February 1, 1999, NEES announced that it had entered into an agreement
to acquire all of the outstanding common stock of Eastern Utilities Associates
("EUA"), a holding company registered under the Act. The consummation of the
merger between NEES and EUA is not conditional on, and is proceeding
independently from, the closing of the Merger. It is contemplated that similar
authority will be requested in connection with EUA and its subsidiary companies.
2 The Intermediate Companies either have been or will be formed prior to
the consummation of the Merger. They have been added to the instant application,
and will be added to the application for the Merger, to enable the Commission to
notice the Merger-related transactions. The Intermediate Companies will require
the approval of their respective boards of directors to engage in the activities
contemplated by this filing and the Merger U-1.
3 The Merger U-1 further requests that the Commission deem the Intermediate
Companies not to be "subsidiary companies" of National Grid, solely for purposes
of complying with the "great-grandfather" provisions of Section 11(b)(2).
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company ("FUCO") within the meaning of Section 33 of the Act. The Applicants
intend that the operations of Holdings and its subsidiary companies will largely
be financed at the Holdings level to avoid the need for significant additional
capital investments by, or credit support from, National Grid. The purpose of
this separation is to create a financial firewall between the NEES Group, on the
one hand, and National Grid's non-U.S. interests, on the other.
In the instant matter, the Applicants request that the Commission extend
the existing financing authority of the NEES Group for a period of five years
from the date of consummation of the Merger (the "Authorization Period"). In
addition, the Applicants seek authority for the following transactions through
the Authorization Period:
(i) financings by National Grid, including but not limited to issuance of
ordinary shares and American Depositary Shares, short and long-term debt, and
currency and interest rate swaps;
(ii) financings by the U.S. Subsidiary Companies;
(iii) intrasystem financings, including (a) the continuation of the NEES
system money pool ("Money Pool"), (b) guarantees of the obligations of, and
other forms of credit support for, the U.S. Subsidiary Companies, (c) the
payment of dividends out of capital or unearned surplus, and (d) approval of a
new tax allocation agreement;
(iv) the issuance by the U.S. Subsidiary Companies of additional shares, or
alteration of the terms of any then-existing authorized security;
(v) the formation of financing entities and the issuance by such entities
of securities otherwise authorized to be issued and sold pursuant to this
Application/Declaration or pursuant to applicable exemptions under the Act,
including intrasystem guarantees of such securities; and
(vi) financings by National Grid for the purposes of acquiring, or funding
the operations of, exempt wholesale generators ("EWGs") and FUCOs.
As explained more fully herein, the specific terms and conditions of the
requested authority are not known at this time. Accordingly, the Applicants
represent that the proposed transactions will be subject to the following
general terms and conditions:
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1. National Grid will maintain its long-term debt rating at an investment
grade level as established by a nationally recognized statistical rating
organization, as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of
Rule 15c3-1 of the Securities Exchange Act of 1934. In addition, the National
Grid System will maintain a ratio of Consolidated EBITDA to Net Interest Payable
of not less than 2.5:1, and a ratio of Consolidated Total Net Debt to
Consolidated EBITDA not to exceed 6:1;4
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4 The terms are as defined in the Credit Agreement which is attached as
Exhibit B-3 to the Merger U-1. Generally,
Consolidated EBITDA means: in respect of any period, Consolidated Profits Before
Interest and Tax for that period after adding back depreciation and amortization
of goodwill and excludes the group's share of associate and joint venture
operating profits;
Consolidated Profits Before Interest and Tax means: in respect of any period,
the consolidated net pre-taxation profits on operating activities (after adding
back Net Interest Payable and excluding any Exceptional Items and after adding
back restructuring costs incurred as a result of the Merger or other
acquisitions) of the National Grid System;
Consolidated Total Net Debt means: the aggregate principal amount (or amounts
equivalent to principal, howsoever described) comprised in the financial
indebtedness of the National Grid System at the time calculated on a
consolidated basis less cash and cash equivalents held by any member of the
National Grid System as shown in the consolidated financial statements;
Exceptional Items: has the meaning given to it in FRS3 issued by the UK
Accounting Standards Board; and
Net Interest Payable means: in relation to any period, all interest, acceptance
commission and all other continuing, regular or periodic costs, charges and
expenses in the nature of interest (whether paid, payable or capitalized)
incurred by the National Grid System in effecting, servicing or maintaining all
financial indebtedness of the National Grid System less all interest and other
similar income receivable by members of the National Grid System during that
period (but only to the extent the same accrue and are receivable by the
National Grid System in a freely convertible and transferrable currency) in each
case as determined from the consolidated financial statements relating to that
period and excludes the group's share of associate and joint venture net
interest payable.
If any subsidiary has joined the National Grid System during the financial year,
an adjustment will be made to reflect a full 12 months period and if any
subsidiary leaves the National Grid System an equivalent adjustment will be
made.
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2. The common equity (including additional paid in capital) and reserves of
NEES on a consolidated basis, as reflected in its most recent Annual Report or
Interim Earnings Report, will not fall below 30% of total capitalization;5
3. The cost of money on debt financings of National Grid will not exceed
300 basis points over that for comparable term U.S. treasury securities or
government benchmark for the currency concerned;
4. The cost of money on preferred securities or other fixed income oriented
securities of National Grid, when issued, will not exceed 500 basis points over
that for comparable term U.S. treasury securities or government benchmark for
the currency concerned;
5. The underwriting fees, commissions or other similar remuneration paid in
connection with the non-competitive issue, sale or distribution of a security
pursuant to the Application/Declaration will not exceed 5% of the principal or
total amount of the security being issued.
6. The aggregate amount of external debt and equity issued by National Grid
pursuant to the authority requested in this matter will not exceed $7.5 billion,
at any one time outstanding.
7. Post-Merger, National Grid's additional "aggregate investment" in EWGs
and FUCOs, as defined in Rule 53 under the Act, will not exceed 50 percent of
the consolidated retained earnings of the National Grid System.
8. The proceeds from the sale of securities in external financing
transactions will be used for general and corporate purposes including (i)
extension or renewal of the merger- related debt, (ii) the financing, in part,
of the capital expenditures of the National Grid System, (iii) the financing of
working capital requirements of the National Grid System, (iv) the acquisition,
retirement or redemption of securities issued by National Grid or its U.S.
Subsidiary Companies, without the need for prior Commission approval, and (v)
other lawful general purposes. The Applicants represent that no financing
proceeds will be used to acquire a new subsidiary, other than a special purpose
financing entity as described below, unless such financing
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5 Applicants would calculate the equity to total capitalization ratio as
follows: equity/(gross debt + equity - cash).
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is consummated in accordance with an order of the Commission or an available
exemption under the Act.
The requested authority will give the Applicants the flexibility to respond
quickly and efficiently to their financing needs and to changes in market
conditions to the benefit of customers and shareholders. Approval of this
Application/Declaration is consistent with existing Commission precedent, both
for newly registered holding company systems (See, e.g., Conectiv, Inc., Holding
Co. Act Release No. 26833 (Feb. 26,1998); New Century Energies, Inc., Holding
Co. Act Release No. 26750 (Aug.1, 1997)), and for holding company systems that
have been registered for a longer period of time (See, e.g., The Columbia Gas
System, Inc., Holding Co. Act Release No. 26634 (Dec. 23, 1996); Gulf States
Utilities Co., Holding Co. Act Release No. 26451 (Jan.16, 1996)).
B. Description of Existing NEES Financing Arrangements
Unlike some of the other U.S. registered holding companies, NEES does not
have a so-called "omnibus" financing order. Instead, financing transactions have
been authorized on a discrete basis. The major NEES financing orders are
summarized below:
By order dated October 29, 1997, the Commission authorized participation in
the NEES intrasystem money pool by Massachusetts Electric Company, Nantucket
Electric Company, Narragansett Electric Company, New England Hydro-Transmission
Electric Co., Inc., New England Power Company and New England Power Service
Company (collectively, the "Borrowing Companies"), and the issue and sale of
commercial paper and short-term debt by the Borrowing Companies, all through
October 31, 2001. The Borrowing Companies were authorized to borrow money and/or
issue commercial paper up to the following amounts: $150 million for
Massachusetts Electric Company, $5 million for Nantucket Electric Company, $100
million for Narragansett Electric Company, $25 million for New England
Hydro-Transmission Electric Co., Inc., $375 million for New England Power
Company and $12 million for New England Power Service Company. The order noted
that financings for the remaining U.S. Utility
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Subsidiaries had been expressly authorized by the New Hampshire Public Utilities
Commission and were thus exempt pursuant to Rule 52. New England Electric
System, Holding Co. Act Release No. 26768 (Oct. 29, 1997).
By order dated June 2, 1998, the Commission increased the limits on
short-term borrowings by New England Power Company from $375 million to $750
million. New England Electric System, Holding Co. Act Release No. 26881 (June 2,
1998).
By order dated October 9, 1996, the Commission authorized NEES to issue and
sell short-term notes in a principal amount of up to $100 million at any one
time outstanding through October 31, 2001. New England Electric System, Holding
Co. Act Release No. 26589 (Oct. 9, 1996), as amended by Holding Co. Act Release
No. 26793 (Dec. 10, 1997) (authorizing NEES to borrow up to $500 million).
NEES has also been authorized to invest up to $50 million in one or more
new special purpose subsidiaries that will acquire interests in office and
warehouse space that would be leased to associate companies, New England
Electric System, Holding Co. Act Release No. 26969 (Jan. 27, 1999), and to issue
up to one million shares of its common stock, through December 31, 2002, to
acquire the stock or assets of one or more "energy-related companies," within
the meaning of Rule 58. New England Electric System, Holding Co. Act Release No.
26849 (March 25, 1998), as modified by Holding Co. Act Release No. 26942 (Nov.
11, 1998).
Lastly, by order dated September 25, 1998, New England Power Company was
authorized to repurchase up to 5 million shares of its common stock from NEES
through December 31, 2000. New England Electric System, Holding Co. Act Release
No. 26918 (Sept. 25, 1998).
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C. Overview of Proposed Financings
Briefly stated, the proposed financing authority is intended primarily to
fund National Grid's U.S. operations. A secondary purpose is to provide a
limited source of capital and credit support for Holdings and its subsidiaries.
It should be emphasized that any parent-level financing is merely supplementary
to financings at the Holdings level. In this regard, the Applicants believe that
Holdings and its subsidiary companies will be largely self funding.
D. Specifics of Proposed Financing Arrangements
1. National Grid External Financing
National Grid proposes to issue long-term equity and debt securities
aggregating not more than $7.5 billion at any one time outstanding during the
Authorization Period.6 Such securities could include, but would not necessarily
be limited to, ordinary shares, preferred shares, options, warrants, long- and
short-term debt (including commercial paper), convertible securities,
subordinated debt, bank borrowings and securities with call or put options.
National Grid may also enter into currency and interest rate swaps as described
below.
(a) Ordinary Shares. As discussed in the Merger U-1, National Grid's common
equity consists of ordinary shares, with a par value of 11 13/17 pence each,
that are listed on the London Stock Exchange. National Grid currently has a
small number of American Depositary Shares ("ADS'") in the U.S. which trade as
American Depositary Receipts ("ADRs"). Prior to the consummation of the Merger,
National Grid intends to establish a sponsored ADR program in the US pursuant to
which ADRs will be listed on a national stock exchange and registered under the
Securities Act of 1933, as amended (the "1933 Act"). As a result, National Grid
will register under the Securities Exchange Act of 1934, as amended (the "1934
Act"), and file the periodic disclosure reports required of a foreign issuer
with the Commission. The request
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6 The overall limit of $7.5 billion includes the merger-related financing.
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contained herein with respect to ordinary shares refers to the issuance of
ordinary shares directly or through the ADR program and, for purposes of this
request, the ADS' and ADRs are not considered separate securities from the
underlying ordinary shares.
Ordinary shares may be sold pursuant to underwriting agreements of a type
generally standard in the industry in the U.K. or the U.S. (depending on the
selling location). Such public distributions may be pursuant to private
negotiation with underwriters, dealers or agents (as discussed in more detail
below) or effected through competitive bidding among underwriters. In addition,
sales may be made through private placements or other non-public offerings to
one or more persons. All such sales of ordinary shares will be at rates or
prices and under conditions negotiated or based upon or otherwise determined by,
competitive capital markets.
Ordinary share financings covered by this Application/Declaration may occur
in any one of the following ways: (i) through underwriters or dealers; (ii)
through agents; (iii) directly to a number of purchasers or a single purchaser;
(iv) directly to employees (or to trusts established for their benefit) and
other shareholders through National Grid's employee benefit schemes; or (v)
through the issuance of bonus shares (i.e., stock dividends) to existing
shareholders. If underwriters are used in the sale of the securities, such
securities will be acquired by the underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The securities may be offered to the public either through
underwriting syndicates (which may be represented by a managing underwriter or
underwriters designated by National Grid) or directly by one or more
underwriters acting alone. The securities may be sold directly by National Grid
or through agents designated by National Grid from time to time. If dealers are
utilized in the sale of any of the securities, National Grid will sell such
securities to the dealers as principals. Any dealer may then resell such
securities to the public at varying prices to be determined by such dealer at
the time of resale. If common stock is being sold in an underwritten offering,
National Grid may grant the underwriters thereof a "green shoe"
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option permitting the purchase from National Grid at the same price additional
shares then being offered solely for the purpose of covering over-allotments.
National Grid seeks authority to use its ordinary shares (or associated
ADS' or ADRs) as consideration for acquisitions that are otherwise authorized
under the Act. Among other things, transactions may involve the exchange of
parent company equity securities for securities of the company being acquired in
order to provide the seller with certain tax advantages. These transactions are
individually negotiated. The ability to offer stock as consideration provides
both National Grid and the seller of the business with flexibility. The National
Grid ordinary shares to be exchanged may, among other things, be purchased on
the open market pursuant to Rule 42 or may be original issue. The National Grid
ordinary shares would be valued at market value based upon the closing price on
the London Stock Exchange on the day before closing of the sale or based upon
average high and low prices for a period prior to the closing of the sale as
negotiated by the parties. From the perspective of the Commission, the use of
stock as consideration valued at market value is no different than a sale of
common stock on the open market and use of the proceeds to acquire securities,
the acquisition of which is otherwise authorized.
In addition to other general corporate purposes, the ordinary shares will
be used to fund employee benefit plans. National Grid currently maintains three
employee benefit plans pursuant to which its employees may acquire equity
interests in the company as part of their compensation: (a) The National Grid
1990 Savings Related Share Option Scheme. National Grid operates an employee
savings plan that offers staff who take out special savings contracts the
opportunity to purchase National Grid shares at a discount. Approximately 85% of
employees participate in this scheme. (b) The National Grid Executive Share
Option Scheme 1990. National Grid operates an executive share option plan for
its senior executives. Share options have been granted to over 120 senior
executives under this plan to a maximum aggregate level of four times base
salary for executive directors and lower levels for other participants. Options
may be exercised after they have been held for a minimum period of three years
provided that financial performance targets have been achieved. (c) The National
Grid Share Match Plan 1996. The
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share match plan requires executive directors to invest 25% of their annual
bonuses, net of income tax, in shares. Provided these shares are held for a
minimum of three years, the company will provide additional shares equal to the
pre-tax equivalent of the investment by the director. A small number of other
senior executives may also, but are not required to, participate in the share
match.
By order dated December 11, 1996, NEES was authorized to issue and sell up
to 10,693,536 shares of its authorized but unissued common stock pursuant to the
NEES System Dividend Reinvestment and Common Share Purchase Plan ("Plan"). In
the alternative, NEES was authorized to purchase shares of its common stock on
the open market and sell those shares to the Plan at the market price. New
England Electric System, Holding Co. Act Release No. 26621 (Dec. 11, 1996).
Following consummation of the Merger, National Grid intends to issue ordinary
shares to US employees through the introduction of the National Grid US Employee
Stock Purchase Plan (the "US Plan"). The US Plan, which is designed to qualify
under Section 423 of the US Internal Revenue Code of 1986, will enable US
employees to receive awards of National Grid shares on an all-employee basis. In
addition, other share-based plans may be developed to motivate and retain key
executives.
Certain existing NEES programs provide for investment in or awards payable
in NEES shares (see, e.g., Holding Co. Act Release Nos. 26301 (June 2, 1995);
25051 (Mar. 8, 1990); 25678 (Nov. 18, 1992); and 26195 (Dec. 19, 1994). NEES has
also guaranteed to the participants in certain plans that if his or her employer
does not make distributions provided thereunder, NEES will make such planned
payments. Under deferral plans for employees and directors, participants are
given the option of investing at prime rate or, at the present time, in NEES
shares. It may be desirable to add additional investment options in the future.
The companies understand that it is the position of the staff of the Commission
that interests in deferred compensation plans may be securities for the purposes
of the securities laws.
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Following consummation of the Merger, National Grid may wish to adopt
similar plans to give investment opportunities, to provide retirement benefits,
to facilitate deferral of compensation opportunities, and to motivate and retain
key executives and other employees.
(b) Debt. National Grid proposes to issue debt securities from time to time
during the Authorization Period. Any debt securities would have the designation,
aggregate principal amount, maturity, interest rate(s) or method of determining
the same, terms of payment of interest, redemption provisions, non-refunding
provisions, sinking fund terms, conversion or put terms and other terms and
conditions as are deemed appropriate at the time of issuance. The debt
securities may be issued and sold pursuant to standard underwriting agreements
or under negotiated bank facilities. In the case of public debt offerings,
distribution may be effected through private negotiations with underwriters,
dealers or agents, or through competitive bidding among underwriters. In
addition, the debt securities may be issued and sold through private placements
or other non-public offerings to one or more persons or distributed by dividend
or otherwise to existing shareholders. All transactions will be at rates or
prices, and under conditions negotiated pursuant to, based upon, or otherwise
determined by competitive capital markets.
The Commission has previously approved the use of parent-level debt by a
registered electric utility holding company in connection with a cross-border
transaction. In General Public Utilities Corporation, Holding Co. Act Release
No. 26559 (Aug. 23, 1996), the Commission authorized GPU to issue and sell
debentures with terms of one up to 40 years and to use the proceeds of such
financings to, among other things, "fund the acquisition of interests, and to
make investments, in . . . foreign utility companies," and "for other GPU
corporate purposes."
Parent-level debt may be issued in connection with the servicing of the
acquisition debt as well as for general working capital purposes. Section
7(c)(2)(A) expressly contemplates that a registered holding company can issue
such securities "for the purpose of refunding, extending, exchanging, or
discharging an outstanding security of the declarant and/or a predecessor
company thereof." Section 7(c)(2)(D) further provides for the issuance of
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nontraditional securities if "such security is to be issued or sold solely for
necessary or urgent corporate purposes of the declarant where the requirements
of the provisions of paragraph (1) would impose an unreasonable financial burden
upon the declarant and are not necessary or appropriate in the public interest
or for the protection of investors or consumers." Registered gas systems have
relied on this provision for years in connection with their routine financing
transactions. See, e.g., The Columbia Gas System, Inc., Holding Co. Act Release
No. 26634 (Dec. 23, 1996) (authorizing Columbia to issue external, long-term
debt which, in the aggregate with equity financing issued by Columbia, would not
exceed $5 billion at any one time outstanding through December 31, 2001). In
addition, as noted above, the Commission has also authorized registered electric
systems to issue parent-level debt for general corporate purposes. General
Public Utilities Corporation, Holding Co. Act Release No. 26559 (Aug. 23, 1996).
To the extent that the question is not the existence of parent-level debt
per se but rather the appropriateness of debt at more than one level, again, the
Commission has resolved that issue. In the 1992 amendments to Rule 52, the
Commission eliminated the requirement that a public-utility subsidiary company
could issue debt to nonassociates only if its parent holding company had issued
no securities other than common stock and short-term debt. The rule release
explains:
Condition (6) provides that a public-utility subsidiary
company may issue and sell securities to nonassociates only if its
parent holding company has issued no securities other than common stock
and short-term debt. All eight commenters that considered this
condition recommended that it be eliminated. They noted that it may be
appropriate for a holding company to issue and sell long-term debt and
that such a transaction is subject to prior Commission approval. They
further observed that other controls, that did not exist when the
statute was enacted, provide assurance that such financings will not
lead to abuse. These include the likely adverse reaction of rating
agencies to excessive amounts of debt at the parent holding company
level and the disclosure required of companies seeking public capital.
The Commission agrees with these observations and also notes the power
of many state utility commissions to limit the ability of utility
subsidiaries to service
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holding company debt by restricting the payment of dividends to the
parent company. The Commission concludes that this provision should be
eliminated.
Exemption of Issuance and Sale of Certain Securities by Public-Utility
Subsidiary Companies of Registered Public-Utility Holding Companies, Holding Co.
Act Release No. 25573 (July 7, 1992).
The Applicants have commissioned a study by Professor Julian Franks of the
London Business School, working with independent consultants from the Brattle
Group, to address the financial strength of the National Grid System
post-Merger.7 The Franks/Brattle Study examines National Grid's debt level after
both the merger with NEES and the subsequent acquisition by NEES of EUA, and
concludes that National Grid's post-acquisition debt, relative to its projected
rate base, will lie within a range for comparable U.S. utilities. Credit rating
agencies have confirmed that National Grid will retain a strong credit rating.
The debt issuances of National Grid currently have a rating of "AA" from
Standard and Poor's and "A1" from Moody's. The major rating agencies have
indicated that National Grid will retain at least an "A" rating post- Merger.
The financial strength is confirmed by the competitive terms under which
National Grid has been able to secure financing for the proposed transaction.
(c) Interest Rate and Currency Risk Management Devices
In order to protect the National Grid System from adverse interest rate
movements, the interest rate on the debt portfolio is managed through the use of
fixed-rate debt, combined with interest rate swaps, options and option-related
instruments with a view to maintaining a significant proportion of fixed rates
over the medium term. The proportion at fixed rates is varied over time and
within policy guidelines, depending on debt projections and market levels of
interest rates. The resulting position as of March 31, 1999 was that 57% of the
System borrowings were at fixed rates of interest.
- --------
7 A copy of the study (the "Franks/Brattle Study") is included in Exhibit
J-3 to the Merger U-1 in File No. 70-9473.
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<PAGE>
The National Grid System's exposure to currency risk is not significant at
present. In the future, National Grid may seek to hedge its exposure to currency
fluctuations through currency swaps and forward exchange or similar
transactions.
National Grid maintains a central treasury department whose activities are
governed by policies and guidelines approved by the Board of Directors, with
regular reviews and monitoring by a standing committee of the Board. The
treasury department operates as a service center rather than as a profit center
and is subject to internal and external audit. Treasury activities are managed
in a non-speculative manner and all transactions in financial instruments or
products are matched to an underlying business requirement.
2. U.S. Subsidiary Company Financings
The existing financing arrangements of the NEES Group have been authorized
by rule or Commission order. These arrangements will remain in place. The
Applicants request the Commission to extend the term of any existing authority,
as necessary, for the Authorization Period.
Each of the Intermediate Companies is seeking approval to issue and sell
securities, acquire securities, and issue guarantees and other forms of credit
support, to National Grid or the U.S. Subsidiary Companies.8 The terms and
conditions of any financings will be on an arm's length basis. In addition:
(a) National Grid and U.S. Subsidiary Companies. National Grid, the
Intermediate Companies and NEES may finance the acquisition and operation of
U.S. Subsidiary Companies (except the U.S. Utility Subsidiaries) during the
Authorization Period. Such financings would generally be in the form of open
account advances, long-term loans, and/or capital stock purchases. Open account
advances will provide funds for general corporate
- --------
8 Such financings will be consistent with the requirements of the Act, in
particular, Section 12(a).
-16-
<PAGE>
purposes and other working capital requirements and temporarily for capital
expenditures until long-term financing is obtained and/or cash generated
internally.
Downstream loans and open account advances with interest, which would not
be covered by rule 45 or Rule 52, may be made, repaid and remade on a revolving
basis, with interest at the same effective rate of interest as the daily
weighted average effective rate of commercial paper, revolving credit and/or
other borrowings in the same currency of National Grid or the lending U.S.
Subsidiary Company, as the case may be. If no such borrowings are outstanding
then, the interest rate shall be on an arm's length basis predicated on an
appropriate and relevant open market benchmark (e.g., LIBOR, Fed Funds rate, UK
Pound Base Rate, etc.).
(b) Money Pool. National Grid requests authority to continue the operation
of the NEES Money Pool, with the substitution of NGG Holdings, Inc., the
successor to NEES, as an investor in the Money Pool. From time to time, NEES may
form or acquire new subsidiary companies or reorganize its existing holdings.
National Grid accordingly seeks permission to add newly-formed or acquired NEES
Subsidiary Companies to the NEES Money Pool without the need for additional
Commission approval, provided that it will not add a FUCO or exempt
telecommunications company as defined in Section 34 of the Act, to the Money
Pool.
(c) Guarantees. National Grid requests authorization to enter into
guarantees, obtain letters of credit, enter into guaranty-type expense
agreements or otherwise provide credit support with respect to the obligations
of the U.S. Subsidiary Companies as may be appropriate to enable such system
companies to carry on their respective authorized or permitted businesses. Such
credit support may be in the form of committed bank lines of credit. In
addition, authority is requested for the U.S. Subsidiary Companies to enter into
similar arrangements with one another, consistent with the limitations imposed
by Section 12(a) of the Act.
(d) Payment of Dividends Out of Capital or Unearned Surplus. As a result of
the application of the purchase method of accounting to the Merger, the current
retained
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<PAGE>
earnings of NEES and the NEES Subsidiary Companies will be recharacterized as
additional paid-in-capital. In addition, the Merger will give rise to a
substantial level of goodwill, the difference between the aggregate fair values
of all identifiable tangible and intangible (non-goodwill) assets on the one
hand, and the total consideration to be paid for NEES and the fair value of the
liabilities assumed, on the other. In accordance with the Commission's Staff
Accounting Bulletin No. 54, Topic 5J ("Staff Accounting Bulletin"), the goodwill
will be "pushed down" to the NEES Subsidiary Companies and reflected as
additional paid-in-capital in their financial statements. The effect of these
accounting conventions would be to leave the NEES subsidiary companies with no
retained earnings, the traditional source of dividend payment, but,
nevertheless, strong balance sheets showing significant equity levels.
Applicants request authorization to pay dividends out of the additional
paid-in-capital account up to the amount of NEES Subsidiary Companies' aggregate
retained earnings just prior to the Merger and out of earnings before the
amortization of the goodwill thereafter.
The accounting for a business combination is done on a pooling of interests
basis if it meets certain specified criteria. Business combinations that do not
meet all of the specified criteria must be accounted for as a purchase. One
requirement for pooling of interests accounting is that cash represent not more
than 10% of the consideration paid for the acquisition. The NEES/National Grid
combination does not meet this criteria because more than 10% of the
consideration paid by National Grid to NEES shareholders is cash - in fact, all
of the consideration is cash. Another requirement is that significant assets
cannot be disposed of in contemplation of the combination. The Commission's
accounting staff has concluded that a sale of assets prior to a combination
would be presumed to be in contemplation of the combination. New England Power's
sale of generation assets which commenced in September 1996 but was not
concluded until September 1998 may be viewed as significant. While NEES believes
that there are arguments to rebut the Staff's presumption, there is no certainty
that the Commission would allow pooling because of the generation sale.
In purchase accounting, the grand total value, which must be assigned to
NEES's assets, is the total consideration to be paid for NEES, plus the fair
value of all liabilities assumed
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<PAGE>
in the acquisition. Generally speaking, goodwill is the residual balance of the
total value remaining after fair values have been assigned to all of NEES's
identifiable assets (both tangible and non-goodwill intangible assets).
Accordingly, the excess of the purchase consideration over the fair market value
of the acquired assets of NEES will be assigned to goodwill for US GAAP
purposes.9
As indicated in the Staff Accounting Bulletin, registrants that have
substantially all (generally defined as in excess of 95%) of their common stock
acquired by a third party, in a business combination accounted for under the
purchase method, should reflect the push-down of goodwill in the registrant's
post-acquisition financial statements. For any post-acquisition reporting of the
consolidated NEES financial statements, push down accounting will be reflected
in those statements and the full amount of goodwill associated with the NEES
acquisition will be reflected. Push down accounting will also be applied to the
NEES Subsidiary Companies.
Under UK GAAP, there is a presumption that the goodwill amortization period
should not exceed 20 years. This presumption is rebuttable by annual valuations
to confirm that no impairment of the carrying value of the goodwill has
occurred. National Grid currently intends to amortize the goodwill resulting
from the acquisition of NEES over a 20-year period. US GAAP at present allows a
goodwill life of up to 40 years. The Commission, however, has been challenging
registrants that adopt the maximum period. Additionally, the FASB draft proposal
relating to accounting for business combinations would limit the maximum
goodwill life to 20 years. Applicants, therefore, currently intend to adopt a
20-year goodwill amortization period for NEES for purposes of its separate US
reporting. This has the advantage of consistency with UK reporting requirements.
The application of "push down" accounting represents the termination of the
old accounting entity and the creation of a new one. For FERC and state
commission reporting
- --------
9 The amount of goodwill for US reporting purposes will vary somewhat from
the UK goodwill amount because of identified UK/US GAAP differences, which will
have an effect on the respective fair valuation analyses.
-19-
<PAGE>
purposes, goodwill will be recorded in the "Acquisition adjustments" account.
The original historical basis of the plant accounts will not be disturbed.
As a result of the push down of the goodwill, the common equity balances of
NEES and the NEES Subsidiary Companies are effectively reset as if they were new
companies, because a new basis of accounting has been pushed down to the
entities. As a result, retained earnings are eliminated. Immediately following
this accounting treatment, the only components with a recorded value would be:
o Common stock - which would continue to reflect the par value of the common
stock issued.
o Additional paid in capital - which would reflect a value consistent with
total common stockholders equity minus the par value recorded in the common
stock line.
In other words, the resulting common stockholders' equity will equal the total
consideration paid for the entity.
Based on 1998 financial information, the application of these accounting
principles to the NEES/National Grid merger will result in following adjustments
to NEES' accounts:
<TABLE>
<S> <C> <C> <C> <C>
$'000 1998 Adjustments1 Adjustments2 Restated
Common shares 64,970 - - 64,970
Paid in capital 736,689 768,538 1,620,148 3,125,375
Retained earnings 998,912 (998,912) - -
Treasury stock (231,125) 231,125 - -
Accumulated comprehensive 751 (751) - -
income, net
Total equity 1,570,197 - 1,620,148 3,190,345
- -------------------------------------- -------------------- -------------------- --------------------- --------------------
</TABLE>
Adjustments 1 -- capital accounts are restated as Paid in Capital.
Adjustments 2 -- goodwill is added to Paid in Capital.
-21-
<PAGE>
The push down of the goodwill also has an impact on the net income of NEES.
Since the goodwill will be amortized over 20 years, NEES's net income will be
reduced by the amount of the amortization. For example, net income of $190
million in 1998 would be reduced by a goodwill amortization of $80 million. The
resulting net income after amortization would be $110 million. That amount is
less than the $147 million in dividends paid to NEES's shareholders in 1998.
NEES' acquisition of EUA also will involve similar issues. The premium to
be paid to acquire EUA will result in goodwill and the elimination of EUA's
retained earnings. EUA's consolidation with NEES will further increase NEES'
additional paid in capital account. The amortization of the EUA goodwill also
will reduce net income. The required accounting adjustments put NEES in the
anomalous position of having greater stockholders' equity following both
mergers, but projected net income below NEES current dividend payment levels and
no retained earnings from which to pay dividends. As discussed further below,
these merger-related accounting adjustments do not affect the cash flow
associated with the U.S. Utility Subsidiaries.
Section 12 of the 1935 Act, and Rule 46 thereunder, generally prohibit the
payment of dividends out of "capital or unearned surplus" except pursuant to an
order of the Commission. The legislative history explains that this provision
was intended to "prevent the milking of operating companies in the interest of
the controlling holding company groups." S. Rep. No. 621, 74th Cong., 1st Sess.
34 (1935).10 In determining whether to permit a registered holding company to
pay dividends out of capital surplus, the Commission considers various factors,
including: (i) the asset value of the company in relation to its capitalization,
(ii) the company's prior earnings, (iii) the company's current earnings in
relation to the proposed dividend, and (iv) the company's projected cash
position after payment of a dividend. See Eastern Utilities Associates, Holding
Co. Act Release No. 25330 (June 13, 1991), and cases cited therein. Further, the
payment of the dividend must be "appropriate in the public interest." Id.,
citing Commonwealth & Southern Corporation, 13 S.E.C. 489, 492 (1943). --------
10 Compare Section 305(a) of the Federal Power Act.
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<PAGE>
National Grid and the U.S. Subsidiary Companies request authority to pay
dividends out of additional paid-in-capital up to the amount of NEES'
consolidated retained earnings just prior to the Merger and out of earnings
before the amortization of goodwill thereafter. In no case would dividends be
paid if the equity of NEES as a percentage of total capital was below 30% on a
consolidated basis. This restriction is intended to protect both investors and
consumers.
In support of their request, Applicants assert that each of the standards
of Section 12(c) of the 1935 Act enunciated in the EUA case are satisfied:
(i) After the Merger, and giving effect to the pushdown of goodwill, NEES'
equity as a percentage of total capitalization will be 75%,
substantially in excess of the traditional levels of equity
capitalization that the Commission has authorized for other registered
holding company systems. Applicants' commitment to maintain the
capitalization of NEES at or above 30% equity on a consolidated basis
should result in a capital structure consistent with industry norms.
(ii) NEES has a favorable history of prior earnings and it has a long
record of consistent dividend payments.11
- --------
11 In recent years, NEES' net income and dividends have been:
Year Net Income ($ millions) Dividends Paid ($ millions)
1994 199 149
1995 205 152
1996 209 153
1997 220 152
1998 190 146
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<PAGE>
(iii)Applicants anticipate that NEES' cash flow after the Merger will not
differ significantly from its pre-Merger cash flow and that earnings
before the amortization of goodwill ("Gross Earnings"), therefore,
should remain stable post- Merger. Applicants intend that dividends
paid out of future earnings will continue to reflect a dividend payout
ratio of between 60% and 100% of Gross Earnings, based on a rolling
5-year average.
(iv) The projected cash position of NEES and its U.S. Utility Subsidiaries
after the Merger will be adequate to meet the obligations of each
company. As of March 31, 1999, NEES had cash balances of $62.9 million
and marketable securities of $93.9 million on a consolidated basis.
The amortization of goodwill is a non-cash expense that will not
affect the cash flow of NEES or its subsidiaries. Each of NEES and its
subsidiary companies is forecast to have sufficient cash to pay
dividends in the amounts contemplated.
(v) The proposed dividend payments are in the public interest. NEES and
its subsidiary companies are in sound financial condition as indicated
by their credit ratings. NEES' commercial paper is rated A-1 by S&P
and Prime-1 by Moody's. The long-term debt of Massachusetts Electric
Co., Narragansett Electric Co., and New England Power Co. is rated
AA-, A1; AA-, A1; and A+, A1 by S&P and Moody's, respectively. Indeed,
Standard & Poor's has placed the credit ratings of NEES, Massachusetts
Electric Co., Narragansett Electric Co. and New England Power Co. on
"creditwatch with positive implications."12 The positive implications
for NEES and its subsidiaries are a result of their association with
the even stronger credit of National Grid. The expectations of
continued strong credit ratings by the U.S. Utility Subsidiaries
should allow them to continue to access the capital markets to finance
their operations and growth.
- --------
12 Standard & Poor's Credit Wire (Dec. 14, 1998).
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<PAGE>
In addition, the dividend payments are consistent with investor interests
because they allow the capital structure of the NEES Group to be adjusted to
more appropriate levels of debt and equity. Lastly, a prohibition on dividend
payments out of additional paid-in-capital would seriously harm the ability of
National Grid to service the acquisition debt incurred in connection with the
Merger.
(e) Approval of New Tax Allocation Agreement The Applicants ask the
Commission to approve an agreement for the allocation of consolidated tax among
National Grid General Partnership and the NEES Group post-Merger (the "Tax
Allocation Agreement"). Approval is necessary because the Tax Allocation
Agreement provides for the retention by National Grid General Partnership of
certain payments for tax losses that it has incurred, rather than the allocation
of such losses to subsidiary companies without payment as would otherwise be
required by Rule 45(c)(5). Exhibit C-1 is a copy of the proposed Tax Allocation
Agreement.
Provisions in a tax allocation agreement between a registered holding
company and its subsidiaries must comply with Section 12 of the Act and Rule 45
thereunder. Rule 45(a) of the Act generally prohibits any registered holding
company or subsidiary company from, directly or indirectly, lending or in any
manner extending its credit to or indemnifying, or making any donation or
capital contribution to, any company in the same holding company system, except
pursuant to a Commission order. Rule 45(c) provides that no approval is required
for a tax allocation agreement between eligible associate companies in
registered holding company system, that "provides for allocation among such
associate companies of the liabilities and benefits arising from such
consolidated tax return for each tax year in a manner not inconsistent with" the
conditions of the rule. Of interest here, Rule 45(c)(5) provides that:
The agreement may, instead of excluding members as provided in
paragraph (c)(4), include all members of the group in the tax
allocation, recognizing negative corporate taxable income or a negative
corporate tax, according to the allocation method chosen. An agreement
under this paragraph shall provide that those associate companies with
a positive allocation will pay the amount allocated and those
subsidiary companies with a negative allocation will receive current
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<PAGE>
payment of their corporate tax credits. The agreement shall provide a
method for apportioning such payments, and for carrying over
uncompensated benefits, if the consolidated loss is too large to be
used in full. Such method may assign priorities to specified kinds of
benefits. (Emphasis added.)
Under the rule, only "subsidiary companies," as opposed to "associate companies"
(which includes the holding company in a holding company system), are entitled
to be paid for corporate tax credits. However, if a tax allocation agreement
does not fully comply with the provisions of Rule 45(c), it may nonetheless be
approved by the Commission under Section 12(b) and Rule 45(a).
In connection with the 1981 amendments to Rule 45, the Commission explained
that the distinction between associate companies, on the one hand, and
subsidiary companies, on the other, represented a policy decision to preclude
the holding company from sharing in consolidated return savings. The Commission
noted that exploitation of utility companies by holding companies through the
misallocation of consolidated tax return benefits was among the abuses examined
in the investigations underlying the enactment of the 1935 Act. Holding Co. Act
Release No. 21968 (March 25, 1981), citing Sen. Doc. 92, Part 72A, 70th
Congress, 1st Sess. at 477-482. It must be noted, however, that the result in
Rule 45(c)(5) is not dictated by the statute and, as the Commission has
recognized, there is discretion on the part of the agency to approve tax
allocation agreements that do not, by their terms, comply with Rule 45(c) -- so
long as the policies and provisions of the Act are otherwise satisfied. In this
matter, where the holding company is seeking only to receive payment for tax
losses that have been generated by it, the proposed arrangement will not give
rise to the types of problems (e.g., upstream loans) that the Act was intended
to address. Compare Section 12(a) of the Act. Accordingly, the Applicants
request that the Commission approve the Tax Allocation Agreement.
3. Changes in Capital Stock of Subsidiaries
The portion of an individual U.S. Subsidiary Company's aggregate financing
to be effected through the sale of equity securities to National Grid or other
intermediate parent
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<PAGE>
company during the Authorization Period cannot be determined at this time. It
may happen that the proposed sale of capital securities may in some cases exceed
the then authorized capital stock of such U.S. Subsidiary Company. In addition,
the U.S. Subsidiary Company may choose to use other forms of capital securities.
As needed to accommodate such proposed transactions and to provide for future
issues, Applicants request the authority to increase the amount or change the
terms of any such U.S. Subsidiary Company's authorized capital securities,
without additional Commission approval.
4. Financing Entities
Authority is sought for National Grid and the U.S. Subsidiary Companies to
organize new corporations, trusts, partnerships or other entities created for
the purpose of facilitating financings through their issuance to third parties
of income preferred securities or other securities authorized hereby or issued
pursuant to an applicable exemption. Request is also made for these financing
entities to issue such securities to third parties in the event such issuances
are not exempt pursuant to Rule 52. Additionally, request is made for
authorization with respect to (i) the issuance of debentures or other evidences
of indebtedness by any of National Grid or the U.S. Subsidiary Companies to a
financing entity in return for the proceeds of the financing, (ii) the
acquisition by any of National Grid or the U.S. Subsidiary Companies of voting
interests or equity securities issued by the financing entity to establish
ownership of the financing entity and (iii) the guarantee by the Applicants of
such financing entity's obligations in connection therewith. Each of National
Grid and the U.S. Subsidiary Companies also requests authorization to enter into
expense agreements with its respective financing entity, pursuant to which it
would agree to pay all expenses of such entity. Any amounts issued by such
financing entities to third parties pursuant to this authorization will be
included in the overall external financing limitation authorized herein for the
immediate parent of such financing entity. However, the underlying intra-system
mirror debt and parent guarantee shall not be so included. The authorization
sought herein with respect to financing entities is substantially the same as
that given to New Century Energies, Inc. in Holding Co. Act Release No. 26750
(Aug.1, 1997) and Conectiv, Inc. in Holding Co. Act Release No. 26833 (Feb. 26,
1998).
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<PAGE>
5. EWG/FUCO-related Financings
National Grid has adopted a corporate structure that separates its existing
foreign operations from its U.S. utility operations. The organization of foreign
activities under Holdings, and U.S. utility activities under NEES, reflects
National Grid's intent to develop these two business areas in a financially
independent manner. As a general matter, National Grid intends to fund its FUCO
activities at the Holdings level, although under certain circumstances it may be
necessary from time to time for National Grid to provide some investment capital
or credit support for FUCO acquisitions or operations.13 To that end, National
Grid is seeking authority to finance EWG and FUCO investments and operations in
an aggregate amount of up to 50% of its consolidated retained earnings at any
one time outstanding, during the Authorization Period.14 As explained more fully
below, the proposed financing will not have an adverse effect on the financial
integrity of the National Grid System, nor will it have an adverse impact on any
U.S. Utility Subsidiary, any customers of any U.S. Utility Subsidiary, or the
ability of the affected state commissions to protect the U.S. Utility
Subsidiaries and their customers.
National Grid differs from all other registered holding companies with FUCO
investments because it developed first as a foreign utility company, involved in
high-voltage transmission of electricity in England and Wales, and only
secondarily has become involved, through the NEES acquisition, in the U.S.
energy industry. National Grid, therefore, joins the family of registered
holding companies with significant foreign investments and operating experience
in foreign markets.
- --------
13 For example, it may be desirable for reasons of economic efficiency to
hold certain FUCO interests outside Holdings and its subsidiary companies.
14 As noted above, all of National Grid's current subsidiaries are held
through a FUCO. The National Grid System will not own any EWGs at the closing of
the Merger. In the Merger U-1, National Grid has requested that its pre-existing
investment in FUCOs be grandfathered for purpose on the financing limits under
Rule 53.
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<PAGE>
National Grid's unique background makes it difficult for the company to
comply fully with certain of the technical requirements of Rule 53. In
particular because National Grid has pre-existing foreign utility operations, it
cannot at this time commit to maintain the books and records of its FUCOs in
conformity with U.S. GAAP. Nonetheless, National Grid satisfies the ultimate
standards, as set forth in Section 32 and reflected in Rule 53(c), namely, the
proposed investment will not have a substantial adverse impact on the financial
integrity of the National Grid System, or an adverse impact on any of the U.S.
Utility Subsidiaries, or their customers, or on the ability of state commissions
to protect such subsidiary or customers. National Grid makes this assertion
based on an assessment of its business activities, its capital structure, the
earnings and cash flows anticipated from its assets, and the risks that could
affect the financial stability of the National Grid System.
The Franks/Brattle Study provides useful comparisons between National Grid
and other registered holding companies. In particular, the business of National
Grid's primary asset, The National Grid Company plc ("NGC"), enjoys stable
revenues from its electric transmission business. NGC's current rate structure
insulates it from the weather-related or economy-related variability in revenues
that typically affect U.S. utilities. National Grid's other significant business
is a telecommunications company named Energis plc. The majority of Energis
shares are publicly held and National Grid has announced its intention to
dispose of its Energis holdings over the next several years. The investment bank
Dresdner Kleinwort Benson has opined that "National Grid's credit will remain
stronger than that of its peers since its earnings will almost exclusively be
derived from stable predictable monopoly distribution and transmission cash
flows."15 This stability is reflected in the low volatility of National Grid's
stock since its initial public offering in December, 1995. National Grid's beta,
a measure of a stock's variability of returns as compared with the returns of
the market as a whole, is .66. Stated in other words, National Grid's stock was
only 66% as volatile as the market. The average beta of U.K. electric utilities
is .84, and the betas of comparable U.S. utilities range from .55 to .85.
National Grid's business activities, therefore, present a favorable financial
profile.
- --------
15 Franks/Brattle Study, at 11.
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<PAGE>
The soundness of National Grid's security structure can be shown in several
ways. Perhaps the best overall expression of sound capitalization is a high
credit rating. National Grid's AA rating by Standard & Poor's exceeds the
ratings of the other U.S. registered holding companies examined in the
Franks/Brattle Study.16 National Grid shares an A1 Moody's rating with several
of the utilities in the study group. In contrast to the 63% average debt to
asset base ratio of the utilities in the Franks/Brattle Study group, National
Grid will have a post-Merger ratio of 56% of regulatory asset base. National
Grid also gains additional flexibility from having convertible debt as part of
its capital structure. National Grid's current stock price is above the exchange
price of the convertible debt, making it likely that the debt will be converted
into equity. The debt ratio comparison shows that National Grid has significant
debt capacity and that the proposed FUCO investment authority would not result
in a substantial adverse impact to the system.
Cash flow forecasts indicate that National Grid would be able to finance
new capital expenditures and pay down all debt over the estimated useful life of
its assets.17 National Grid's remaining equity holdings in Energis also
represent a large, marketable security that National Grid may use to service the
acquisition debt or the additional financing proposed in this Application-
Declaration. The current market value of National Grid's Energis stake is $3.7
billion (based on the June 7, 1999 closing market price on the London Stock
Exchange).
The final aspect of the Commission's inquiry into the proposed FUCO
financing should focus on whether risks associated with the foreign utility
businesses could adversely affect the financial stability of the system. In this
regard, National Grid's successful operation of a national, high-voltage
transmission system and its profitable investment in Energis should indicate
that the firm has sound management skills and expertise in the utility industry,
particularly as it relates to foreign utility operations. To ensure continued
success in its new ventures, National Grid subjects all project proposals to
stringent reviews.
- --------
16 Franks/Brattle Study, Table 5.
17 Id.
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<PAGE>
National Grid's disciplined investment review process minimizes the risks
associated with FUCO activities. Before National Grid or its subsidiaries make
any investment in a project, the project is analyzed in detail, including the
specific country risk, where applicable. The project review process includes a
series of independent internal reviews, both at the subsidiary and National Grid
levels.
In the UK, the majority of projects by number will relate to NGC's
transmission business. Each potential project is subjected to a series of formal
reviews to ensure its financial robustness. The process begins with a
consideration of NGC's strategic plans, which are updated periodically. The
investment procedure follows on from and integrates with the planning cycle of
National Grid. Individual project business plans are prepared as part of the
process of including potential investments in the Group Business Plan. All
projects identified as requiring future funding must be included within the
planning cycle. This planning procedure ensures that all capital and
non-recurring revenue project expenditures can be justified on business,
technical and economic grounds. In addition project progress is monitored and
subject to normal business control to ensure that approved projects meet their
performance targets.
The project review process includes consideration of business, financial,
regulatory, environmental and legal risks. Foreign projects are subject to an
additional level of scrutiny concerning:
o the political and economic stability of the particular country,
o the host governments' commitment to private power, o the legal and
regulatory framework for private investment in utility facilities,
o the local business support for long-term investment of private capital,
o the economic viability of the project,
o the environmental impact, and
o the currency conversion and repatriation of dividends
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Project proposals are subject to successive stages of review by senior
management and directors depending upon National Grid's projected financial
exposure in a particular project. Generally, the process by which National Grid
identifies, manages and approves its business development activities, broadly
follows the following lines:
o The production of an Opportunity Registration Paper (ORP), which covers, in
outline form, a description of the opportunity, a brief description of the
investment environment, the strategic importance of the investment and
future actions. The ORP would also be presented to the Business Development
Committee for approval.
o The production of a Development Strategy Paper (DSP), which identifies the
development strategy for the investment and covers, in outline form, market
conditions, the development strategy, competitive position and an action
plan. The DSP would also be presented to the Business Development Committee
for approval.
o The production of an Investment Proposal Paper ("IPP") seeking approval for
a bid. This paper would cover the investment opportunity, a financial
appraisal, existing strategy, the transaction, bid details, and planned
future actions. The IPP is the board paper for National Grid, and must be
approved by the directors.
Once development of a project is undertaken, milestones are established to
ensure that continuing expenditures are producing acceptable results. In
addition, project teams are established to identify the major technical,
financial, commercial and legal risks associated with a particular project and
risk mitigation strategies. The process would follow the following broad
outline:
o undertake due diligence
o prepare valuation
o prepare business plan
o obtain internal approvals
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<PAGE>
o obtain acquisition financing
o develop corporate and tax structure
o prepare corporate communications plan
o prepare and submit bid/offer
o prepare post acquisition plan
The final project review process, in many cases is, to a large extent,
duplicated by the lenders who agree to provide construction or permanent debt
financing on a non-recourse basis, since repayment of that debt will depend
solely upon the success of the project. National Grid's ability to arrange
appropriate levels of non-recourse financing for its existing investments is
evidence of the success of the project review and risk management process
outlined above.
In addition, it is noteworthy that none of the conditions described in
paragraph (b) of Rule 53 is applicable. Specifically; (1) there has been no
bankruptcy of any National Grid associate company in which a plan of
reorganization has not been confirmed; (2) the average consolidated retained
earnings for the four most recent quarterly periods has not decreased by 10
percent from the average for the previous four quarterly periods; and (3) in the
past fiscal year, National Grid has not reported operating losses attributable
to its direct or indirect investments in EWGs and FUCOs.
Statement of Financial Accounting Standards No.121 requires a listing of
all assets of a utility that a company plans to write down and take as a loss.
National Grid currently has no assets listed pursuant to SFAS 121. No assets
with respect to any FUCOs currently owned (directly or indirectly) by National
Grid are expected to be listed pursuant to SFAS 121, nor has any associate EWG
or FUCO ever defaulted under the terms of any financing document. National Grid
undertakes to notify the Commission by filing a post-effective amendment in this
proceeding in the event that any of the circumstances described in Rule 53(b)
occurs during the authorization period.
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<PAGE>
The Commission has found the standards of the Act satisfied in connection
with requests by a number of U.S. registered holding companies to exceed the
so-called "50 percent limit" under Rule 53. Southern Co., Holding Co. Act
Release No. 26501 (April 1, 1996); Central and South West Corporation, Holding
Co. Act Release No. 26653 (Jan. 24. 1997). See also GPU, Inc., Holding Co. Act
Release No. 26779 (Nov. 17, 1997); Cinergy Corp., Holding Co. Act Release No.
26848 (March 23, 1998); American Electric Power Company, Holding Co. Act Release
No. 26864 (April 27, 1998); New Century Energies, Holding Co. Act Release No.
26982 (Feb. 26, 1999). In each of those matters, the applicant sought relief
from the safe-harbor requirements of Rule 53(a)(1) to allow investments in an
amount equal to the applicant's consolidated retained earnings. The Commission
found that the applicants in each matter had demonstrated successfully, through
the use of certain financial indicators, that investing in EWGs and FUCOs in an
amount not to exceed their consolidated retained earnings would not have a
substantial adverse impact on the financial integrity of the holding company
system. Applicants assert that the comparison of the financial measures and
indicators discussed above, and National Grid's stringent project review
procedures, demonstrate that the financial integrity of the National Grid System
is superior to or substantially similar to the financial integrity of the
applicants in matters in which the Commission has previously granted exceptions
to the safe harbor requirements of Rule 53.
Under Rule 53(c)(2) National Grid must demonstrate that the proposed use of
financing proceeds to invest in FUCOs will not have an "adverse impact" on any
of the U.S. Utility Subsidiaries, their respective customers, or on the ability
of the State commissions having jurisdiction over one or more such utility
subsidiaries to protect such public utility companies or such customers.
The conclusion that the customers of the U.S. Utility Subsidiaries will not
be adversely impacted by increased levels of investment is well-supported by the
following:
(a) All of National Grid's investments in FUCOs will be segregated from the
U.S. Utility Subsidiaries. None of the U.S. Utility Subsidiaries will provide
financing for, extend credit
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<PAGE>
to, or sell or pledge its assets directly or indirectly to any FUCO in which
National Grid owns any interest. National Grid further commits not to seek
recovery in retail rates for any failed investment in, or inadequate returns
from, a FUCO investment.
(b) Investments in EWGs and FUCOs will not have any negative impact on the
ability of the U.S. Utility Subsidiaries to fund operations and growth. The U.S.
Utility Subsidiaries currently have financial facilities in place that are
adequate to support their operations.18 These facilities will continue
subsequent to the Merger. Indeed, as noted previously, Standard & Poor's has
placed the credit ratings of NEES, Massachusetts Electric Co., Narragansett
Electric Co. and New England Power Co. on "creditwatch with positive
implications."19 The positive implications for NEES and its subsidiaries are a
result of their association with the even stronger credit of National Grid. The
expectation of continued strong credit ratings by the U.S. Utility Subsidiaries
should allow them to continue to access the capital markets to finance their
operations and growth.
(c) National Grid will comply with the requirements of Rule 53(a)(3)
regarding the limitation on the use of the U.S. Utility Subsidiaries' employees
in connection with providing services to FUCOs. It is contemplated that project
development, management and home office support functions for the projects will
be largely performed by Holdings and its subsidiary companies, and by outside
consultants (e.g., engineers, investment advisors, accountants and attorneys)
engaged by National Grid or Holdings.
(d) National Grid believes that the State commissions are able to protect
utility customers within their respective states. In connection with the
National Grid/NEES transaction generally, representatives of National Grid have
met with each of the affected state commissions and requested them to provide
the Commission with letters certifying that the state commission has
jurisdiction over the respective NEES system public-utility companies and that
the state commission will exercise this authority to protect ratepayers.
- --------
18 See, Item 1.B., supra.
19 Standard & Poor's CreditWire (Dec. 14, 1998).
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<PAGE>
E. Filing of Certificates of Notification
It is proposed that, with respect to National Grid which, as noted above,
will register under the 1934 Act in connection with its sponsored ADR program,
the reporting systems of the 1934 Act and the 1933 Act be integrated with
reports under the 1935 Act. This would eliminate duplication of filings with the
Commission that cover essentially the same subject matters, and reduce burdens
on both the Commission and National Grid. To effect such integration, the
Applicants propose to incorporate by reference into the Rule 24 certificates of
notification under this file the portion of the 1933 Act and 1934 Act reports
containing or reflecting disclosures of transactions occurring pursuant to the
authorization granted in this proceeding. The certificates would also contain
all other information required by Rule 24, including the certification that each
transaction included in the report had been carried out in accordance with the
terms and conditions of and for the purposes represented in this Application.
Applicants propose to provide Rule 24 certificates on a semiannual basis,
consistent with the frequency of financial reporting required in the UK. Under
UK rules, National Grid must prepare and disclose financial information
semi-annually. In addition, National Grid intends to maintain semiannual
financial reporting subsequent to its planned listing on a U.S. securities
exchange. To allow National Grid to present consolidated financial statements,
all of National Grid's subsidiary companies also prepare financial statements
semi-annually, which is the standard practice for UK listed companies. Due to
the National Grid's extensive foreign holdings, it would entail significant
additional work and expense for National Grid to prepare consolidated financial
statements on a quarterly or more frequent basis.
The Rule 24 certificates will contain the following information:
a. If sales of ordinary shares or debt by National Grid are reported, the
purchase price per share and the market price per share at the date of
the agreement of sale;
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<PAGE>
b. The total number of shares of National Grid ordinary shares issued or
issuable pursuant to options granted during the period under employee
benefit plans including any plans hereinafter adopted;
c. If National Grid ordinary shares have been transferred to a seller of
securities of a company being acquired, the number of shares so
issued, the value per share, and whether the shares are restricted in
the hands of the acquirer;
d. If a guarantee is issued during the period, the name of the guarantor,
the name of the beneficiary of the guarantee and the amount, terms and
purpose of the guarantee;
e. The amount and terms of any short-term debt issued by any U.S. Utility
Subsidiary during the period;
f. The amount and terms of any nonexempt financings consummated during
the period by any U.S. Utility Subsidiary during the period;
g. The amount and terms of any nonexempt financings consummated by any
nonutility U.S. Subsidiary Company during the period;
h. A list of U-6B-2 forms filed with the Commission during the period,
including the name of the filing entity and the date of filing;
i Consolidated balance sheets as of the end of the period and separate
balance sheets as of the end of the period for each company, including
National Grid, that has engaged in jurisdictional financing
transactions during the period; and
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<PAGE>
j. Future registration statements filed under the 1933 Act with respect
to securities that are subject of the Application will be filed or
incorporated by reference as exhibits to the next certificate filed
pursuant to Rule 24.
ITEM 2 FEES, COMMISSIONS AND EXPENSES
Estimated legal fees and expenses $ *
Estimated miscellaneous expenses $ *
------
Total $ *
*To be filed by amendment.
The above fees do not include the expenses for the public issuance of
securities. As noted previously, National Grid proposes that such fees be capped
at 5% of the issuance amount.
ITEM 3 APPLICABLE STATUTORY PROVISIONS
Sections 6(a), 7, 9(a), 10 and 12 of the Act and Rules 42, 43, 45, 52, 53
and 54 are considered applicable to the proposed transactions.
To the extent that the proposed transactions are considered by the
Commission to require authorization, exemption or approval under any section of
the Act or the rules and regulations other than those set forth above, request
for such authorization, exemption or approval is hereby made.
ITEM 4 REGULATORY APPROVALS
Except as stated above, no state or federal regulatory agency other than
the Commission under the Act has jurisdiction over the proposed transactions.
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<PAGE>
ITEM 5 PROCEDURE
The Applicants hereby request that there be no hearing on this
Application/Declaration and that the Commission issue its order as soon as
practicable after the filing hereof. The Commission is respectfully requested to
issue and publish the requisite notice under Rule 23 with respect to the filing
of this Application/Declaration not later than June 30, 1999, such notice to
specify a date not later than July 25, 1999, by which comments may be entered
and a date not later than the date of the Commission's order for the Merger U-1,
as the date on which an order of the Commission granting and permitting the
Application/Declaration to become effective may be entered by the Commission.
The Applicants hereby (i) waive a recommended decision by a hearing
officer, (ii) waive a recommended decision by any other responsible officer or
the Commission, (iii) consent that the Division of Investment Management may
assist in the preparation of the Commission's decision and (iv) waive a 30-day
waiting period between the issuance of the Commission's order and the date on
which it is to become effective.
ITEM 6 EXHIBITS AND FINANCIAL STATEMENTS
Exhibits
A-1 Articles and Memorandum of Association of National Grid (incorporated by
reference to Exhibit A-1 of the Merger U-1)
B-1 National Grid Credit Facility (incorporated by reference to Exhibit B-3 of
the Merger U-1)
C-1 Form of Tax Allocation Agreement
F-1.1 Opinion of counsel (to be filed by amendment)
F-1.2 Past-tense opinion of counsel (to be filed by amendment)
H-1 Annual Report of National Grid dated March 31, 1998 (incorporated by
reference to Exhibit H-1 of the Merger U-1)
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<PAGE>
H-2 Annual Report on Form 10-K of NEES for the year ended December 31, 1998
(filed with the Commission on March 31, 1999 (File No. 1-3446) and
incorporated by reference herein)
I-1 Proposed Form of Notice
Financial Statements
FS-1 National Grid Unaudited Pro Forma Condensed Consolidated Balance Sheet (to
be filed by amendment)
FS-2 National Grid Unaudited Pro Forma Condensed Consolidated Statement of
Income (to be filed by amendment)
FS-3 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(to be filed by amendment)
S-4 National Grid Consolidated Balance Sheet as of September 30, 1998
(incorporated by reference to Exhibit FS-4 to the Merger U-1)
FS-5 National Grid Consolidated Statement of Income as of September 30, 1998
(incorporated by reference to Exhibit FS-5 to the Merger U-1)
FS-6 NEES Consolidated Balance Sheet as of December 31, 1998 (see NEES Form 10-K
for the year ended December 30, 1998 (Exhibit H-2 hereto))
FS-7 NEES Consolidated Statement of Income for the twelve months ended December
31, 1998 (see NEES Form 10-K for the year ended December 31, 1998 (Exhibit
H-2 hereto))
ITEM 7 STATEMENT AS TO ENVIRONMENTAL EFFECTS
None of the matters that are the subject of this Application involves a
"major federal action" nor do they "significantly affect the quality of the
human environment" as those terms are used in Section 102(2)(C) of the National
Environmental Policy Act. The transactions
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<PAGE>
that are the subject of this Application will not result in changes in the
operation of the company that will have an impact on the environment. The
Applicants are not aware of any federal agency that has prepared or is preparing
an environmental impact statement with respect to the transactions that are the
subject of this Application.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this Form U-1 to be signed on
their behalf by the undersigned thereunto duly authorized.
The signature of the Applicants and of the persons on their behalf are
restricted to the information contained in this application which is pertinent
to the application of the respective companies.
Date: June 9, 1999
/s/ Jonathan M. G. Carlton
Jonathan M. G. Carlton
Business Development Manager -- Regulation
The National Grid Group plc
/s/ Kirk Ramsauer
Kirk Ramsauer
Deputy General Counsel
New England Electric System*
* The name "New England Electric System" means the trustee or trustees for
the time being (as trustee or trustees but not personally) under an
agreement and declaration of trust dated January 2, 1926, as amended, which
is hereby referred to, and a copy of which as amended has been filed with
the Secretary of the Commonwealth of Massachusetts. Any agreement,
obligation or liability made, entered into or incurred by or on behalf of
New England Electric System binds only its trust estate, and no
shareholder, director, trustee, officer or agent thereof assumes or shall
be held to any liability therefor.
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NATIONAL GRID GENERAL PARTNERSHIP AND
AFFILIATED U.S. CORPORATIONS
FORM OF
FEDERAL AND STATE INCOME TAX ALLOCATION AGREEMENT
This agreement made as of ___________, among National Grid General
Partnership, a Delaware general partnership ("GP"); NGG Holdings, Inc, a
Delaware corporation ("NGG Holdings"); New England Power Company, a
Massachusetts corporation ("NEP"); Massachusetts Electric Company, a
Massachusetts corporation ("Mass Electric"), The Narragansett Electric Company,
a Rhode Island corporation ("Narragansett"); Granite State Electric Company, a
New Hampshire corporation ("Granite"); Nantucket Electric Company, a
Massachusetts corporation ("Nantucket"); New England Electric Transmission
Corporation, a New Hampshire corporation ("NEET"); New England
Hydro-Transmission Corporation, a New Hampshire corporation ("NEHTC"); New
England Hydro-Transmission Electric Company, Inc., a Massachusetts corporation
("NEHTEC"); New England Hydro Finance Company, a Massachusetts corporation
("NEHF"); AllEnergy Fuels Corporation, as Delaware corporation ("AllEnergy");
NEES Global, Inc., a Massachusetts corporation ("NEES Global"); NEES Energy,
Inc., a Massachusetts corporation ("NEES Energy"); Granite State Energy, Inc., a
New Hampshire corporation ("Granite State Energy"); New England Water Heating
Company, a Massachusetts corporation ("NEWH"); New England Power Services
Company, a Massachusetts corporation ("NEPS"), NEES Communications, Inc., a
Massachusetts corporation ("NEESCom"); NEES Telecommunications Corp., a
Massachusetts corporation ("NEES Telecom") and New England Energy, Incorporated,
a Massachusetts corporation ("NEEI") (each, a "Member").
W I T N E S S E T H T H A T:
WHEREAS, the term "Affiliates" as used herein shall be deemed to refer to
NGG Holdings, NEP, Mass Electric, Narragansett, Granite, Nantucket, NEET, NEES
Global, NEES Energy, ALLEnergy, Granite State Energy, NEWH, NEPS, NEESCom, NEES
Telecom and NEEI. The Affiliates together with GP, as a collective taxpaying
unit, is sometimes referred to as the "Group" and
WHEREAS, GP owns directly or indirectly at least 80 percent of the issued
and outstanding shares of each class of voting common stock of each of the
Affiliates and at least 80 percent of the total value of the stock of each of
the Affiliates; each of GP and the Affiliates is a member of an affiliated group
within the meaning of Section 1504 of the Internal Revenue Code of 1954, as
amended (the "Code"), of which GP is the common parent; and the Group presently
participates in the filing of a consolidated income tax return.
<PAGE>
WHEREAS, GP owns directly or indirectly less than 80 percent of the total
voting power of each of NEHTC, NEHTEC and NEHF (the "Hydro Group") or less than
80 percent of the total value of the stock of each of NEHTC, NEHTEC and NEHF,
but files certain unitary state tax returns with the Hydro Group,
GP, the Affiliates and the Hydro Group agree to allocate tax liability as
follows:
I. Allocation shall be made in accordance with Treasury Regulation Sections
1.1552-1(a)(1) and 1.1502-33(d)(3).
A. General Rule
Step 1 - The federal consolidated tax liability of the Group (not including
any liability for alternative minimum tax) shall be apportioned among the
Members of the Group in the ratio that each Member's separate taxable income
bears to the sum of the separate taxable incomes of all Members having taxable
income.
Step 2 - An additional liability amount will be allocated to Members of the
Group equal to 100% of the excess of the Member's separate tax liability over
the consolidated tax liability of the Group allocated to the Member under Step
1.
Step 3 - The total of the amounts allocated under Step 2 is credited
pursuant to a consistent method to those Members of the Group who had losses,
credits or other net tax benefits included in the consolidated return, (referred
to as "corporate tax benefits") as follows:
(a) If all corporate tax benefits reduce the amount of tax due in the
consolidated return of the Group, each Member of the Group having corporate tax
benefits will be allocated the value thereof. The value of net operating losses
shall generally be determined by applying the then current corporate income tax
rate to the amount of the loss, and the value of a credit shall generally equal
100% of the credit utilized.
(b) If the total of the corporate tax benefits is greater than the total
reduction in the consolidated tax of the Group, then the benefits arising from
the inclusion of negative taxable incomes in the consolidated return shall be
recognized and paid prior to the benefits arising from credits or other
benefits.
(c) If the corporate tax benefits attributable to Members of the Group with
negative taxable incomes are not absorbed in the consolidated return, the
benefit allocated to each such Member of the Group shall be in proportion to
their respective negative taxable incomes.
(d) If the corporate tax benefits attributable to credits or other net tax
benefits are not fully applied in the consolidated return of the Group, the
benefits arising from credits shall be recognized and paid prior to the benefits
arising from other benefits.
<PAGE>
(e) If the corporate tax benefits attributable to Members of the Group with
credits are not absorbed in the consolidated return of the Group, the benefit
allocated to each Member company shall be in proportion to their respective
credits.
(f) If the corporate tax benefits attributable to Members of the Group with
other benefits are not absorbed in the consolidated return of the Group, the
benefit allocated to each Member company shall be in proportion to their
respective other benefits.
Step 4 - If the total consolidated tax liability results in an "Alternative
Minimum Tax" liability, then any additional amount will be allocated to the
Members of the Group based upon their proportionate amounts of separate adjusted
alternative minimum taxable income.
Step 5 - Under no circumstances shall the amount of tax allocated to a
Member exceed its separate tax liability.
Step 6 - Reimbursement - Each Member of the Group shall pay its apportioned
share of the consolidated tax liability (including its apportioned share of
consolidated alternative minimum tax) along with any additional amount
determined under Step 2 to GP no later than 90 days after the filing of the
consolidated tax return. GP shall thereafter distribute any amounts determined
under Step 3 to the appropriate Member of the Group. Within 30 days of each
quarterly payment date for estimated taxes, each Member of the Group shall pay
to GP an estimate of the amounts due to GP under Steps 1 and 2 above. GP will
thereafter distribute an estimate of the amounts due under Step 3 to appropriate
members of the Group. These amounts shall be paid within a reasonable period
after request by GP. Any amounts so paid in any year shall reduce the final
amounts payable as set forth above, and any balance due resulting from the
reduction shall be promptly refunded.
B. Unused Corporate Tax Benefits
A Member of the Group that is entitled to payment for a corporate tax
benefit, but does not receive such payment because of the rules in Step 3 shall
retain such right for the future to the extent that such benefit can be applied
against the consolidated tax liability. Uncompensated corporate tax benefits
arising from negative taxable income shall have priority over the benefits
attributable to excess tax credits.
C. NEET Rule
Notwithstanding any other provisions herein, NEET shall be paid, in lieu of
any payments for its corporate tax credits, the amount, if any, by which the
consolidated tax liability determined without the inclusion of NEET in the
consolidated return exceeds the actual consolidated tax liability, all in
accordance with the Phase I Terminal Facility Support Agreement, dated as of
December 1, 1981, and amended as of June 1, 1982, November 1, 1982 and January
1, 1986.
<PAGE>
D. Tax Adjustments
In the event of any adjustments to the tax returns of any of the Members of
the Group filed (by reason of an amended return, a claim for refund or an audit
by the Internal Revenue Service), the liability, if any, of each of the Members
of the Group under Section A shall be redetermined to give effect to any such
adjustment as if it had been made as part of the original computation of tax
liability, and payments between GP and the appropriate Members of the Group
shall be made within 120 days after any such payments are made or refunds are
received, or, in the case of contested proceedings, within 120 days after a
final determination of the contest. Interest and penalties, if any, attributable
to such an adjustment shall be paid by each Member of the Group to GP in
proportion to the increase in such Member's separate return tax liability
computed under Section A of this Agreement that is required to be paid to GP. In
any situation in which the Group's tax liability is adjusted by a revenue
agent's report or a court settlement and an item-by-item modification is not
made, the Group shall consult its accountants for assistance in determining a
fair allocation of the adjusted liability.
II. Allocation Procedures for State Income Tax Liabilities
A. Massachusetts Combined Returns
The combined state tax liability shall be allocated to each company
participating in the combined return in proportion to the state taxable income,
whether positive or negative, of each such company. For this purpose, state
taxable income is determined after application of each company's separate
apportionment percentage and net operating loss deduction. Those companies with
a positive allocation shall pay the amount allocated and those companies with a
negative allocation shall receive payment of their corporate tax credits. If the
total positive tax allocation is less than the total corporate tax credits, the
positive allocation shall be paid on a pro rata basis to those companies with
corporate tax credits. No company shall be allocated a state tax which is
greater than its state tax liability had it filed a separate return.
B. New Hampshire Unitary Business Profits Returns
The combined unitary business profits tax liability shall be allocated to
each company included in the unitary return in accordance with the following
principles:
1. NEET and the Hydro Group will be allocated a total business profits
tax liability equal to the difference in the combined business profits
taxes, before reduction for any franchise tax credit or other tax
credits, computed with and without the inclusion of such companies as
a group. The business profits tax of NEET and the Hydro Group shall be
allocated first to NEET in an amount equal to the difference in the
combined unitary tax computed with and without its inclusion, with the
balance, if any, assigned to NEHTC.
2. The balance of the combined unitary tax, before reduction for any
franchise tax credit or other tax credits, shall be allocated to the
remaining companies in
<PAGE>
proportion to each company's separate company business profits tax to
the combined total of such separate company taxes. Any franchise tax
credit or other tax credits available, on a separate company basis, to
a particular company in the combined group shall be applied to reduce
the combined unitary tax allocated to that particular company.
3. The excess of any unitary tax credit allowed in the combined return
over the amount applied to reduce a particular company's liability,
shall be used to reduce the allocated unitary tax liability of the
other members in the combined group on a pro rata basis. To the extent
a company's allocated unitary tax liability is reduced by application
of the franchise tax credit or other tax credits attributable to
another member of the group, the amount so reduced shall be paid to
such other member.
4. For purposes of this section IIB, the separate company business
profits tax is to be determined only for those companies with tax
nexus in New Hampshire and is to be computed by multiplying each such
company's separately apportioned state taxable income by the
applicable state tax rate. The separate company business profits tax
cannot be less than zero.
C. Vermont Consolidated Income Tax Returns
The consolidated corporate income tax liability shall be allocated to each
company included in the consolidated return in proportion to the Vermont net
taxable income before apportionment, whether positive or negative, of each such
company. Those companies with a positive allocation shall pay the amount
allocated and those companies with a negative allocation shall receive payment
of their corporate tax credits. If the total positive tax allocation is less
than the total corporate tax credits, the positive allocation shall be paid on a
pro rata basis to those companies with corporate tax credits. No company shall
be allocated a state tax which is greater than its state tax liability had it
filed a separate return.
D. Connecticut Combined Business Tax Returns
The tax on combined net income shall be allocated to each company
participating in the combined return in proportion to the Connecticut net income
after apportionment, whether positive or negative, of each such company. The tax
on combined minimum tax base shall be allocated to each company in proportion to
such company's separate minimum tax base. The tax on the number of companies
included in the combined return and the combined return preference tax shall be
allocated equally among the companies participating in the return. Those
companies with a positive allocation shall pay the amount allocated and those
companies with a negative allocation shall receive payment of their corporate
tax credits. No company shall be allocated a state tax which is greater than its
state tax liability had it filed a separate return.
<PAGE>
E. Other State Consolidated, Combined or Unitary Returns
The consolidated, combined or unitary tax liability shall be allocated to
each company included in a consolidated, combined or unitary income tax return
in accordance with the procedures set forth in paragraph IA above. Only
companies with tax nexus in a particular state shall be allocated a portion of
such state's income tax liability.
III. Subsidiaries of Affiliates
If at any time, any of the Affiliates acquires or creates one or more
subsidiary corporations that are includible corporations of the Group, they
shall be subject to this Agreement and all references to the Affiliates herein
shall be interpreted to include such subsidiaries as a group.
IV. Successors
This Agreement shall be binding on and insure to the benefit of any
successor, by merger, acquisition of assets or otherwise, to any of the parties
hereto (including but not limited to any successor of GP or any of the
Affiliates succeeding to the tax attributes of such corporation under Section
381 of the Code) to the same extent as if such successor had been an original
party to this agreement.
V. Termination Clause
This Agreement shall apply to the taxable year ending ________, and
subsequent taxable years, unless all of the members of the Group agree in
writing to terminate the Agreement prior to the end of the taxable year.
Notwithstanding any termination, this Agreement shall continue in effect with
respect to any payment or refunds due for all taxable periods prior to
termination.
IN WITNESS WHEREOF, the duly authorized representatives of the parties have
set their hands this ____ day of _______________.
[signature blocks]
EXHIBIT I-1
SECURITIES AND EXCHANGE COMMISSION
(Release No. )
June __, 1999
The National Grid Group plc ("National Grid"), and its subsidiary
companies: National Grid (US) Holdings Limited, National Grid (US)Investments,
National Grid (Ireland) 1 Limited, National Grid (Ireland) 2 Limited, National
Grid General Partnership, and NGG Holdings, Inc., and New England Electric
System ("NEES"), and its subsidiary companies: New England Power Company,
Massachusetts Electric Company, The Narragansett Electric Company, Granite State
Electric Company, Nantucket Electric Company, New England Electric Transmission
Corporation, New England Hydro-Transmission Corporation, New England Hydro-
Transmission Electric Company, Inc., Vermont Yankee Nuclear Power Corporation,
New England Hydro Finance Company, Inc., NEES Global, Inc., NEES Energy, Inc.,
AllEnergy Marketing Company, L.L.C., Granite State Energy, Inc., New England
Water Heating Company, and New England Power Service Company have filed an
appplication-declaration under the Public Utility Holding Company Act of 1935,
as amended.
In a related application-declaration (File No. 70-9473), National Grid has
proposed to acquire NEES in a merger. Applicants are now requesting the
Commission to extend the existing financing authority of NEES and its direct or
indirect subsidiary companies for a period of five years from the date of
consummation of the merger (the "Authorization Period"). Applicants also seek
authority to finance National Grid and its direct or indirect subsidiary
companies through the Authorization Period, including financings by National
Grid for the purposes of acquiring, or funding the operations of, exempt
wholesale generators and foreign utility companies.
The filings and amendments thereto are available for public inspection
through the Commission's Office of Public Reference. Interested persons wishing
to comment or request a hearing should submit their views in writing by , to the
Secretary, Securities and Exchange Commission, Washington, D.C. 20549, and serve
a copy on the applicants-declarants at the address specified above. Proof of
service (by affidavit or, in case of an attorney-at-law, by certificate) should
be filed with the request. Any request for a hearing shall identify specifically
the issues of fact or law that are disputed. A person who so requests will be
notified of any hearing, if ordered, and will receive a copy of any notice or
order issued in this matter. After said date, the joint application-declaration,
as filed or as it may be amended, may be permitted to become effective.
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
Jonathan G. Katz
Secretary
