File No. 70-9519
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
AMENDMENT NO. 1
TO
FORM U-1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
----------------------------------------------------
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)
----------------------------------------------
The National Grid Group plc New England Electric System
(Name of top registered holding company
parent of each applicant or declarant)
<PAGE>
------------------------------------------
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
------------------------------------
(Names and addresses of agents for service)
<PAGE>
This Pre-effective Amendment No. 1 revises the Form U-1
Application/Declaration in this proceeding, originally filed with the Securities
and Exchange Commission on June 11, 1999 in File No. 70-9519 as follows:
(1) Revise the second paragraph of Item 1.A. to add the following sentence to
the end of the paragraph to read as follows:
Exhibit D-1 sets forth the corporate structure of National Grid System after the
proposed Merger and Exhibit D-2 describes each company in the National Grid
System.
(2) Revise paragraph D.2.(d) of Item 1 to restate paragraph (iii) as follows:
(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. In addition, to assure that the
U.S. Utility Subsidiaries have sufficient cash to support their businesses,
Applicants will not cause any of the U.S. Utility Subsidiaries to pay more than
80% of their Gross Earnings as dividends, based on a rolling 5-year average./1/
Exhibit D-3 describes the dividend history of the NEES subsidiaries in detail
for the years 1994 to 1994.
(3) Revise paragraph D.2.(e) of Item 1 to add the following sentence to the end
of the first paragraph:
Applicants have provided a detailed legal analysis of Rule 45(c) and the
proposed Tax Allocation Agreement in Exhibit C-2.
- ----------
/1/ Applicants request the Commission to grant the proposed dividend relief for
the duration of the goodwill amortization period.
- ----------
<PAGE>
(4) Revise paragraph D.5 of Item 1 to add the following sentence after the
fourth sentence of the first paragraph:
Such financings may include the issue or sale of a security for purposes of
financing the acquisition or operations of an EWG or FUCO, or the guarantee of a
security of an EWG or FUCO.
(5) Revise Item 6 to add the following exhibits and financial statements:
ITEM 6 EXHIBITS AND FINANCIAL STATEMENTS
Exhibits
- --------
C-2 Legal Analysis of Rule 45(c) and the Proposed Tax Allocation Agreement
D-1 National Grid Corporate Chart (Filed on Form SE)
D-2 Description of the Companies in the National Grid System
D-3 Dividend History of NEES and its Subsidiaries
Financial Statements
- --------------------
FS-1 National Grid Unaudited Pro Forma Condensed Consolidated Balance Sheet
(Confidential Treatment Requested)
FS-2 National Grid Unaudited Pro Forma Condensed Consolidated Statement of
Income (Confidential Treatment Requested)
FS-3 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(Confidential Treatment Requested)
FS-8 National Grid Financial Projections for the Years 1999-2004 (Confidential
Treatment Requested)
FS-9 Notes to National Grid's Financial Projections for the Years 1999-2004
(Confidential Treatment Requested)
-2-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this Pre-Effective Amendment to
the 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: August 17, 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.
-3-
Exhibit C-2
Legal Analysis of Rule 45(c) and the Proposed Tax Allocation Agreement
Introduction and Summary
The applicants are seeking approval of a tax allocation agreement that is
intended to minimize the economic inefficiency to The National Grid Group plc
("National Grid") as a result of the likely increase in the UK tax liability on
dividends remitted by subsidiaries of New England Electric System ("NEES") to
National Grid. While the agreement does not appear to come within the safe
harbor of Rule 45(c) under the Public Utility Holding Company Act of 1935
("Act"), it nonetheless complies with the statutory requirements and, so, should
be approved under Section 12(b) of the Act and Rule 45(a). The basis for this
view is explained in more detail below, together with an analysis of the
background to Rule 45(c).
Key to our analysis are the following two points:
a) No entity will pay more tax under the tax allocation agreement than it
would on a stand alone basis; and
b) The tax allocation agreement relates only to the US entities in the
National Grid/NEES holding company system. It does not include any non-US
entity. Any dividends from the US entities to non-US parent companies will
be subject to the requirements of Section 12(c) and Rule 46. Consequently,
the allocation agreement does not provide the means for a foreign parent to
"milk" the US entities.
Rule 45(c) is intended to facilitate the sharing of consolidated tax return
benefits while, at the same time, ensuring that the benefits are not
misallocated to the detriment of utility subsidiaries and consumers. The rule is
not intended to address all possible situations. Rather, it provides a safe
harbor for certain types of sharing arrangements. In the fashion of a
safe-harbor rule, it applies a cautious and narrow approach to achieve its
purpose and excludes holding companies from retaining the benefit of losses
attributable to holding company operations unrelated to the business of the
subsidiary companies.
The tax allocation agreement at issue in this matter provides, in addition,
that the holding company may receive current payment for its tax losses so long
as the "separate return limitation" is observed, that is, no other entity in the
consolidated group pays more under the tax allocation agreement than it would
have paid on a stand-alone basis. It is our view, consistent with the policies
and provisions of the Act, that a holding company should be permitted under the
Act to retain the benefit of losses that it incurs in circumstances where there
is no detriment to the subsidiaries or consumers. The losses at issue in this
matter flow from interest payments on debt incurred to acquire the equity of
NEES, and not from subsidiary company
<PAGE>
activities. Consequently, the tax benefit of the losses should properly be
allocated to the holding company incurring interest on the debt.
Tax Allocation Agreements, Generally
Companies in a related corporate group often file consolidated tax returns
that combine the income, tax credits, and losses of the group members on one
consolidated return. Consolidation has the advantage of offsetting the taxable
income of some companies in the group with the losses or tax credits of other
group companies. The offsetting allows the consolidated group to pay less tax
currently than if each company in the group filed separate tax returns.
Companies that participate in the filing of a consolidated tax return may
agree to share the consolidated tax liability and any tax savings in various
ways. The benefit to an individual company associated with filing on a
consolidated basis is generally measured by comparison to the tax that the
company would have paid if it had filed a separate, unconsolidated tax return.
The following example illustrates how a simple consolidated return might work
and the allocation of tax benefits and liabilities. The example also illustrates
that each of the participating companies brings its unique tax attributes to the
consolidation, such as investment tax credits, losses carried forward from prior
years, and current income or losses.
Subsidiary A Subsidiary B Holding Co. C Consolidated
Revenues 400 800 200 1400
Expenses 200 300 400 900
-------------------------------------------------------------
Income 200 500 -200 500
Loss Carryforward 0 0 -300 -300
=============================================================
Net Taxable Income 200 500 0 200
Tax (40%) 80 200 0 80
Tax Credit 0 100 0 80
=============================================================
Net Tax 80 100 0 0
The columns for companies A, B and C illustrate the tax calculations on an
unconsolidated, separate basis for each company. The consolidated column shows
how the individual tax attributes of each company are combined in the
consolidated return. For example, adding across columns the income of A and B,
and the $200 current year loss of C, produces consolidated income of $500.
Moving to the next row we note that C also had accumulated losses of $300 from
prior years which reduce the consolidated net taxable income to $200. Applying a
hypothetical 40% tax rate to the consolidated net taxable income results in a
consolidated tax of $80, before credits. We apply $80 of the $100 tax credit
held by B to the consolidated tax to produce a net tax of $0. The remaining $20
of credit goes unused, on a consolidated basis, and is carried forward to future
years.
On a separate return basis, A and B would have tax before credits of $80
and $200, respectively on their separate incomes. C would pay no tax on a
separate
2
<PAGE>
return basis because it has no net taxable income. On a separate return basis B
can use all of its $100 tax credit to offset part of its $200 tax, with the
result that it would owe net tax of $100.
The tax savings realized from consolidation is $180; the difference between
the aggregate tax payable by A, B, and C, on a separate return basis ($80, $100,
and $0, respectively) and the tax payable on a consolidated basis ($0). The
consolidated group saves by using holding company C's losses, and $80 of the
$100 tax credit held by B, on the consolidated return. The tax savings may be
allocated in many ways. An equitable allocation method might take into
consideration that C has surrendered the ability it would have had to accumulate
and use its losses against income that it may earn in future years, if it had
filed a separate tax return. The allocation method also might recognize that the
consolidated group has retained $20 of unused tax credits. Lastly, the
allocation method may require that no company be worse off than it would have
been had it filed a separate tax return.
Based on these considerations, it would not be unreasonable for A and B to
pay $80 and $100, respectively, to C and, in addition, for C to receive the
entitlement to the $20 unused tax credit. C would receive aggregate value of
$200; the equivalent of the tax benefit that it provided to the consolidated
group by contributing its losses ($500 x 40% = $200). A and B are no worse off
by participating in the consolidated return and the system, as a whole, is $180
better off.
The Commission's Regulation of Tax Allocation Agreements
The commingling of tax attributes and the allocation of tax liabilities and
benefits under a consolidated return are intrasystem transactions regulated
under Section 12 of the Act. Section 12(b) prohibits a registered holding
company or subsidiary company from lending to, extending its credit to, or
indemnifying any company in the same holding company system in violation of such
rules, regulations or orders as the Commission deems necessary or appropriate in
the public interest or for the protection of investors and consumers. Rule 45(a)
prohibits a registered holding company or subsidiary company from lending,
extending its credit to, indemnifying, or making a donation or capital
contribution to, any company in the same holding company system, except pursuant
to a declaration filed with the Commission.
A declaration is not required, however, for the filing of a consolidated
tax return by companies in a holding company system if the consolidated return
is filed under a tax allocation agreement that provides for the allocation of
liabilities and benefits arising from the consolidated return for each tax year
in a manner not inconsistent with the provisions of Rule 45(c). The rule has one
fundamental requirement: that the consolidated tax apportioned to any subsidiary
shall not exceed the tax that the company would have paid computed as though it
were not a member of the consolidated group (the "separate return limitation").
Rule 45(c) provides that an allocation agreement can either pay companies with
losses currently for the use of the losses on the consolidated return,/1/
- ----------
/1/ Rule 45(c)(5).
- ----------
3
<PAGE>
or the agreement can exclude loss companies from a current allocation of the
benefit of their losses provided that the agreement gives the loss companies
carryover rights that can be used to reduce their consolidated tax allocation in
future years./2/ The latter provision, providing for future compensation to the
associate company for the current use of losses or credits by the consolidated
group, addresses the circumstances that are most likely to have the potential
for abuse and, from a policy perspective, is closest to the intrasystem loans
and extensions of credit that Section 12 was intended to address.
Rule 45(c)(5) also contains one additional interesting feature. To comply
with the rule, an allocation agreement should provide that associate companies
with a positive allocation will pay the amount allocated, but only those
subsidiary companies with a negative allocation, i.e., the loss companies,
receive current payment or carryover rights for their losses or credits. Because
the term "associate company" includes a holding company, but we understand the
term "subsidiary company" to exclude a holding company, Rule 45(c) has the
effect of requiring holding companies to pay their share of the consolidated tax
liability, but excludes them from sharing in the tax benefits of any losses they
may have generated on a stand-alone basis./3/ In the example shown above, an
allocation agreement in compliance with Rule 45(c) would allocate $0 tax
liability to subsidiaries A and B, allow B to retain the unused $20 of tax
credits, and allocate $0 to holding company C for the use of its losses on the
consolidated return. In effect, Rule 45(c) requires C to contribute an aggregate
of $200, the value of its losses, to A and B.
National Grid's Proposal
The proposed tax allocation agreement (Exhibit C-1) provides for the
retention by National Grid General Partnership ("NGGP"), a US subsidiary of
National Grid and the holding company parent of NEES, of certain payments for
tax losses that it has incurred -- rather than the allocation of the tax
benefits of such losses to its subsidiary companies without payment, as would
otherwise be required by Rule 45(c). Under an alternative reading of the rule,
where, as in this case, a holding company is also a subsidiary of a second
holding company, it is arguable that NGGP, as a subsidiary company, is entitled
to payment for its losses. NGGP's tax losses will come principally from interest
expenses incurred to finance its equity investment in NEES.
As a general matter, registered holding companies that incur debt loan it
to subsidiaries on mirror image terms. These holding companies, therefore, do
not generate significant interest-related losses because they receive offsetting
interest income from the borrowing subsidiaries. NGGP, however, is using its
debt proceeds to purchase NEES' equity and, consequently, NGGP will not earn
offsetting interest income. The NGGP financing costs will not have been incurred
by the regulated subsidiaries to acquire or operate their businesses. Nor will
the borrowings be guaranteed by the utility companies. Accordingly, the
providers of the finance will not have recourse to the assets of the regulated
subsidiaries.
- ----------
/2/ Rule 45(c)(4).
/3/ Holding Company Act Release No. 21767 (Oct. 29, 1980) ("Rule 45(c)
Proposing Release").
- ----------
4
<PAGE>
As with other expenses, the tax relief for the interest is a consequence of
the borrowing and it is not a benefit per se. As noted below in the discussion
of the background to Rule 45(c), it is not detrimental to the subsidiaries or
consumers if the holding company retains the tax benefit of losses that it
incurs from activities that are unrelated to subsidiary operations and not
properly chargeable to the subsidiaries. For example, NGGP may not properly pass
through to the subsidiary companies legal expenses due to a corporate
reorganization unrelated to subsidiary operations. For the same reason, as a
matter of equity, NGGP also should retain the tax benefit produced by the
interest. Accordingly, it is both economically appropriate and equitable that
NGGP should receive current payment for its losses that are used on the
consolidated return to offset the income of its subsidiaries. Moreover, the tax
benefit of NGGP's debt-related losses are integral to NGGP's ability to service
its debt.
National Grid's proposal is consistent with the policy of Section 12 of the
1935 Act. The Act does not prohibit holding companies the benefit of the tax
attributes that they generate, nor does it require holding companies to
distribute all tax benefits to subsidiary companies. Section 12 merely requires
that holding companies may not borrow from subsidiaries and that loans from the
holding company to a subsidiary, or loans among subsidiaries, not violate rules
adopted by the Commission for the protection of consumers, investors and the
public interest./4/
That Rule 45(c) does not provide for holding company retention of tax
benefits is not surprising, and is, perhaps, appropriate because Rule 45(c) is a
safe-harbor rule. Safe-harbor rules by their nature are intended to provide for
typical situations and to exclude unique circumstances or close calls.
Agreements that fall outside the safe harbor should be permitted if they do not
adversely affect the protected interests under the Act and are consistent with
the policies underlying the Act. Because National Grid's proposed tax allocation
agreement may not fall within the safe harbor of Rule 45(c) (unless as noted
above NGGP is deemed to be a subsidiary company entitled to payment for its
losses), National Grid seeks the Commission's authorization of the agreement by
order under Section 12 of the Act and Rule 45(a).
Analysis
Prior to the Adoption of Rule 45(c), the Commission Permitted Holding
Companies to Share in the Tax Savings
In 1941, the Commission adopted an amendment to Rule U-45 to exempt a loan,
extension or credit or and an agreement of indemnity arising out of a joint tax
return filed by a holding company and its subsidiaries./5/ Rule U-45(b)(6)
conditioned the exemption upon the assumption by the top company in the group of
the primary responsibility for the payment of any tax liability involved,
subject to the right to contribution of the several members of the group in an
amount not exceeding as to any
- ----------
/4/ Sections 12(a) and (b).
/5/ Holding Company Act Release No. 2902 (July 23, 1941).
- ----------
5
<PAGE>
company that percentage of the total tax which the individual tax of such
company (if paid under a separate return) would bear to the total amount of
individual taxes for all members of the group, for the particular tax period. At
its inception therefore, Rule U-45(b)(6) established the fundamental principle
of the separate return limitation and did not restrict holding companies from
retaining the benefit of any tax losses that they may have generated.
In 1955, in response to the Commission's directive to make further study of
the subject of tax allocation, the staff proposed, and the Commission adopted,
further amendments to Rule 45(b)(6)./6/ The amendments required a tax agreement
to allocate the consolidated tax liability by either of two methods prescribed
in the Internal Revenue Code. One method allocated the consolidated tax based on
the proportion of taxable income attributable to each member and the other
method allocated the consolidated tax based on the proportion of each member's
separate return tax to the aggregate separate return tax of all the group
members. The amendment also reaffirmed the principle that the allocations could
not violate the separate return limit and, if excess tax would have been
allocated to a subsidiary company but for the separate return limit, that the
excess liability would be allocated among the other members of the group,
including the holding company, in direct proportion to the tax savings of each
member.
In 1981, Rule 45(b)(6) was revised for the last time and redesignated Rule
45(c)./7/ This revision was meant to eliminate the numerous declarations and
Commission orders which had been necessary because Rule 45(b)(6) did not
adequately address the case in which one or more operating companies in the
system suffers a loss. The allocation methods in Rule 45(b)(6) had been
interpreted to require sharing of tax liabilities and savings exclusively among
group companies with actual separate return tax liabilities or positive income.
Consequently, loss companies had been excluded from receiving the benefit of
their losses.
The Rule 45(c) Proposing Release indicates that Rule 45(c) is intended to
allow loss subsidiaries to receive the benefit of their losses, but that holding
companies must give their loss-related tax benefits to their subsidiaries. With
regard to subsidiary losses, the proposing release observes that oil and gas
exploration subsidiaries often produced substantial losses, especially in the
early years of operation, because large up-front development expenses were
immediately deductible, while the income producing oil and gas production occurs
significantly later.
On the subject of holding companies, however, the Commission's reasoning is
less clear. As the Rule 45(c) Proposing Release explains, the exploitation of
utility companies by holding companies through asserted misallocation of
consolidated tax return benefits was among the abuses examined in the
investigations underlying the Act./8/ Then the release states:
- ----------
/6/ Holding Company Act Release No. 12776 (Jan. 12, 1955).
/7/ Holding Company Act Release No. 21968 (Mar. 18, 1981) ("Rule 45(c) Adopting
Release").
/8/ Rule 45(c) Proposing Release (citing Senate Doc. 92, Part 72A, 70th
Congress, 1st Sess., 1930 (pp. 477-482).
- ----------
6
<PAGE>
The corporate relationships required by the Act assure that the deductible
corporate expenses of the holding company itself will always create a
consolidated tax saving, since Section 13(a) of the Act precludes such
expenses being passed on to the subsidiaries, through service charge or
contract, so as to transform them into corporate deductions of the
subsidiaries. In light of the legislative history referred to, an expense
reimbursement of the holding company, in the guise of a tax allocation,
would seem inconsistent with Section 13(a). The exclusion in our earlier
rule of the holding company from sharing in consolidated return savings was
intentional and will continue. These considerations do not apply to other
companies in the group that incur losses.
Section 13 is fundamentally about fairness of allocation in service charges
and other contracts. There is no violation of Section 13 where a holding
company, which does not pass through its expenses to the subsidiary companies,
retains the tax benefit flowing from the expenses for itself. As the example
that began this discussion illustrates, subsidiaries A and B pay amounts equal
to their separate return tax liabilities to the holding company and B gives up
$20 of tax credits that it also would have used on a separate return basis. C,
the holding company, retains these payments instead of remitting them to the
IRS. The IRS, in fact, is the entity that provides the partial reimbursement for
the holding company's expenses through a reduction in taxes that the
consolidated group otherwise would have paid. The subsidiaries, in this
situation, are not reimbursing the holding company's expenses through their
consolidated tax payments or otherwise. Indeed, Rule 45(c)'s separate return
limitation assures the Commission that an impermissible reimbursement does not
occur. If, as Rule 45(c) provides, C must instead remit the IRS reimbursement to
the subsidiaries, C is in effect required to make a capital contribution to them
that is not otherwise required by the Act and contrary to the separate return
limitation that has been the fundamental allocation principle since Rule
U-45(b)(6) was adopted.
In addition, the conclusion of the Rule 45(c) Proposing Release -- that
holding companies should not retain the benefit of their tax losses -- does not
follow from the legislative history that it cites. Rather, the legislative
history argues for retaining to each subsidiary the benefits of its tax losses.
Clearly, subsidiary losses should not be used to benefit the holding company
that had not incurred the expense that gave rise to the loss. To allocate the
loss otherwise would be detrimental to ratepayers who benefit from the
tax-reducing value of the loss through lower rates. It is not, however,
detrimental to the subsidiaries or consumers if the holding company retains the
tax benefit of losses that it incurs from activities that are unrelated to
subsidiary operations and not properly chargeable to the subsidiaries. Rule
45(c)(3) reflects this principle by requiring that the allocations under an
agreement provide for equitable adjustment of the material effects of any
particular features of the tax law applicable to the individual members of the
group, e.g., capital gains taxed at a different rate than ordinary income./9/
- ----------
/9/ See Rule 45(c) Adopting Release ("The rule specifies the amount to be
allocated, that is, the difference between the consolidated return and
separate return results, and establishes the principle of allocating to the
individual members of the group the material effects of any particular
features of the tax law applicable to them.").
- ----------
7
<PAGE>
For example, if a utility subsidiary earns investment tax credits from
building a plant, its tax liability should reflect the benefit of the credits
and its rates should also reflect the tax savings from the credits. Similarly,
if the holding company incurs legal expenses from a corporate reorganization
that may not properly be passed through to the subsidiary companies, the holding
company should retain the tax benefit produced by the expenses. Rule 45(c)
addresses Congress' concerns as expressed in the legislative history to the
extent that it requires that tax benefits should track the entity that created
them./10/ The complete exclusion of holding companies from receiving the benefit
of their losses under the rule, however, does not accurately reflect the
legislative history.
Why National Grid May Suffer an Increased UK Tax Liability Without the
Proposed Tax Allocation Agreement
As a UK company, National Grid must manage both UK and US taxes on the
profits of its US subsidiaries. When a UK company receives a dividend from an
"overseas" subsidiary, such as NGGP, the dividend is subject to UK corporation
tax. As the dividend is paid out of profits that have been taxed in the overseas
subsidiary, in order to avoid the UK company suffering tax twice on the same
profit, the UK tax system gives a credit against the UK tax charge for the
foreign tax already paid on the profits and for withholding taxes suffered on
the dividend payment ("double tax relief").
Most developed countries operate some form of double tax relief system. The
US tax system allows credit relief for foreign taxes on foreign source income,
although the mechanics of computing the relief differ from the UK approach. The
credit given by the UK for the tax paid by the subsidiary on the profits out of
which the dividend has been paid is "so much of the foreign (i.e., US and any
third country) tax borne on the relevant profits by the body corporate paying
the dividend as is properly attributable to the proportion of the relevant
profits represented by the dividend."/11/ The "relevant profits" are the profits
available for distribution out of which the dividend has been paid and not, for
example, the taxable profits of the overseas subsidiary./12/
Consequently, if in the example shown above subsidiary A was a single
company wholly owned directly by a UK company, its relevant profits would be
computed as follows:
- ----------
/10/ See Rule 45(c) Proposing Release: "The investment tax credit, an important
addition to the tax law subsequent to the adoption of [Rule 45(b)(6)], is
similar in significant respects to the tax loss. It is clearly identifiable
to a particular member of the group, its incidence has no necessary
relationship to current income, and its use in the consolidated return
precludes a carryover by the company entitled to it."
/11/ UK Income and Corporation Taxes Act 1988, section 799(1).
/12/ Bowater Paper Corporation v. Murgatroyd, 46 TC 37 (House of Lords, 1970).
- ----------
8
<PAGE>
Subsidiary A
Revenues 400
Expenses 200
----------------
Income 200
Tax (40%) 80
================
Relevant profits 120
Therefore, if A paid a dividend equal to its relevant profits of $120, the UK
will give a credit for the US tax of $80 paid on those profits, because that is
the US tax borne on the relevant profits by the company. The UK double tax
relief position would be exactly the same if A is a member of a consolidated tax
group in which all members are profit making and paying tax.
However, when tax losses incurred by one overseas company, i.e., NGGP, are
used by another overseas company, one of the NEES retail utilities, for example,
for the purposes of calculating the overseas tax paid by that company, the
amount of UK double tax relief available will depend upon whether the profit
making company pays for the use of tax losses. The issue arises because, when a
dividend is paid, the tax paid by the company paying the dividend is pro-rated
in accordance with the proportion of the company's relevant profits that are
distributed. A payment for tax losses reduces relevant profits of the company,
thereby increasing the proportion of relevant profits that relate to the
dividend.
The tax paid by the consolidated group is always divided between the
companies with taxable profits pro-rata to their taxable profits. The tax
allocation agreement is not used to allocate tax paid; it only has an impact on
the computation of relevant post-tax profits. UK tax relief looks at each
company separately for the tax paid, the relevant profits and the dividend. It
does not look at the companies on a combined basis.
This can be illustrated by the following example:
Subsidiary A Subsidiary B Holding Co. C Consolidated
Revenues 400 800 200 1400
Expenses 200 300 410 910
--------------------------------------------------------
Income 200 500 -210 490
Allocation of C's loss
60 150 210 0
Net Taxable Income 140 350 0 490
Tax (40%) 56 140 0 196
(1) If A pays $24 (i.e., 40% of $60) to C for its losses, its relevant profits
are $120 (i.e., the same as if it were a stand alone entity), calculated as
follows:
9
<PAGE>
Subsidiary A
Revenues 400
Expenses 200
-----------------
Income 200
Tax paid -56
Payment to C for loss -24
Relevant profits 120
Thus if A pays a dividend of $120 the dividend represents the whole of the
relevant profits of A and so the tax credit attaching to the dividend is the
amount of tax paid by the consolidated group allocated to A (i.e., $56).
(2) However, if A did not pay C for its loss, its relevant profits would be
$144 (i.e., income of $200 less tax paid allocated to A of $56). Therefore,
if A paid a dividend of $120 the proportion of the relevant profits
represented by the dividend is 120/144 of the relevant profits of A.
Consequently, the tax credit attaching to the dividend is only $47, 120/144
of the tax paid by the consolidated group allocated to A, and not the full
$56.
This is not reversed when C returns to profitability.
Although UK companies tend to own overseas subsidiaries through one or more
intermediate wholly owned holding company resident in an EU state this does not
affect the analysis above.
Why National Grid Has a Policy for Payment for Tax Losses
The UK does not have a system of consolidated tax returns. Each company is
taxed as a separate entity. If a UK company ("the surrendering company") incurs
a loss it may "surrender" that loss to another UK company in the same group
which has profits (the "claimant company"), thereby reducing the taxable profits
and hence tax liability of the claimant company. This is known as "group relief"
and is available where the companies are at least 75% owned by a common UK
parent company.
The UK tax legislation specifically provides that a claimant company may
pay the surrendering company for the losses surrendered and that such payments
are ignored for UK tax purposes (i.e., they are neither tax deductible nor
taxable), provided that the payment does not exceed the amount of the loss./13/
In many cases payment for losses must be made by a claimant company,
otherwise the surrender of the losses is unlawful and is void. This is because
the losses are seen as an "asset" of the surrendering company and in many cases
a company cannot
- ----------
/13/ UK Income and Corporation Taxes Act 1988, section 402(6).
- ----------
10
<PAGE>
dispose of an asset for less than its value. This principle can apply, for
purposes of creditor protection, even within a group of wholly owned companies.
Furthermore, the surrender of losses without payment could, in certain
circumstances, amount to unlawful "financial assistance" for the acquisition of
a company's shares; a criminal offense.
For these reasons, National Grid has a group policy requiring payments by
group companies whose tax liability is reduced due to transfers of tax losses
from other group companies. National Grid's intention is that such policy be
applied to all companies within the group, including US companies.
Conclusion
National Grid's proposed tax allocation agreement seeks to give each
associate company in the group, including NGGP, the opportunity to receive
payment for the tax losses or credits that entity generates. The agreement will
not give rise to the types of problems (e.g., upstream loans and misallocation
of tax benefits) that the 1935 Act was intended to address.
The subsidiary-but-not-holding-company reading of Rule 45(c) is not
required by the Act. The separate return limitation and other provisions of Rule
45(c) prevent the misallocation of tax benefits to the holding company. The
wholesale exclusion of holding companies from retaining their tax benefits is
not only unnecessary to meet the policy objectives of the Act, but unfair to
holding company investors.
Under Section 12(b) and Rule 45(a), the Commission may approve a tax
allocation agreement that does not comply with Rule 45(c), provided that the
agreement otherwise satisfies the policies and provisions of the Act./14/
National Grid's proposed tax allocation agreement complies with Rule 45(c) in
all respects other than allowing NGGP to retain the benefit of its losses,/15/
and this deviation from the rule does not create an impermissible loan,
extension of credit or indemnity under Section 12./16/ In addition, the
agreement is not an impermissible allocation under Section 13, and it is not
detrimental to consumers, investors or the public interest. For the reasons
stated above, we believe that the Commission should approve the tax allocation
agreement, as proposed.
- ----------
/14/ Rule 45(c) Proposing Release ("While tax agreements inconsistent with the
rule may, in principle, still be applied for under Rule 45(a), such action
is not expected. It would be justified only in truly unforeseen and
exceptional circumstances.").
/15/ As observed above it is arguable that NGGP should be deemed to be a
subsidiary company entitled to payment for its losses.
/16/ In particular, because the agreement provides for current payment of
corporate tax credits (i.e., the value of the tax loss or other tax benefit
used on the consolidated return) to loss companies, it does not involve an
impermissible loan within the meaning of Section 12(a).
- ----------
11
EXHIBIT D-2
DESCRIPTION OF NGG COMPANIES AND SUMMARY OF AUTHORITY
The National Grid Group plc ("National Grid") will be the parent registered
holding company.
We are seeking the following authority for National Grid:
(i) external financing authority, to issue debt and equity in an aggregate
amount of $7.5 billion, and to engage in currency and interest rate swaps;
(ii) related intrasystem financing authority;
(iii) authority to use National Grid stock as consideration;
(iv) authority to form financing entities;
(v) EWG and FUCO financing authority in an amount of up to 50% of consolidated
retained earnings; and
(vi) authority to file financial statements on a semi-annual, rather than
quarterly, basis, consistent with the requirements of Form 20-F.
1. National Grid (US) Holdings Limited will serve to facilitate the
formation of the NEES acquisition structure outlined below by
permitting a wholly owned subsidiary to undertake certain transactions
rather than National Grid itself. For example, under UK company law
certain of the transactions may require board approval and it would be
easier to do this at a subsidiary company level, rather than at the
National Grid level. This company will be incorporated, and tax
resident, in the UK.
We are seeking the following authority for National Grid (US) Holdings
Limited:
(i) intrasystem financing authority; and
(ii) Section 6(a)(2) authority.
1.1 National Grid (US) Investments will serve to facilitate the
foreign exchange hedging for UK tax purposes of National Grid's
investment in NEES. The company will also function to ensure than
an exemption is obtained from Luxembourg capital duty on the
formation of the structure. This company will be incorporated,
and tax resident, in the UK.
We are seeking the following authority for National Grid (US)
Investments:
(i) intrasystem financing authority; and
(ii) Section 6(a)(2) authority.
1.1.1 National Grid (Ireland) 1 Limited -- UK groups typically
hold non-UK investments through a non-UK, but European
Union, incorporated
<PAGE>
DESCRIPTION OF NGG COMPANIES
(Continued)
company. National Grid (Ireland) 1 Limited is such a
company. The function of National Grid (Ireland) 1 Limited
is to avoid wasting UK tax relief for foreign taxes suffered
on profits repatriated to the UK and to minimize withholding
taxes on the repatriation of profits to the UK. In addition,
National Grid (Ireland) 1 Limited initially will be tax
resident in Luxembourg (rather than Ireland) in order to
minimize the tax suffered on the repatriation of interest
and dividends from the US group to the UK.
We are seeking the following authority for National Grid
(Ireland) 1 Limited:
(i) intrasystem financing authority; and
(ii) Section 6(a)(2) authority.
1.1.1.1 National Grid (Ireland) 2 Limited is required
because the top US "entity" is a Delaware General
Partnership and there must be at least two partners
in the partnership. National Grid (Ireland) 2
Limited initially will be tax resident in
Luxembourg for the same reasons as National Grid
(Ireland) 1 Limited.
We are seeking the following authority for National
Grid (Ireland) 1 Limited:
(i) intrasystem financing authority; and
(ii) Section 6(a)(2) authority.
1.1.1.1.1 National Grid General Partnership, a
Delaware general partnership will be the
top US entity. National Grid General
Partnership will "check the box" to be
taxed as a corporation for US Federal
tax purposes. A Delaware general
partnership is used in the structure in
order to eliminate Luxembourg tax on
interest payments made by National Grid
General Partnership to National Grid
(Ireland) 1 Limited and National Grid
(Ireland) 2 Limited. National Grid
General Partnership will be financed
with a mix of partnership capital and
debt (internal only), subject to US thin
capitalization requirements.
We are seeking the following authority
for National Grid General Partnership:
<PAGE>
DESCRIPTION OF NGG COMPANIES
(Continued)
(i) intrasystem financing authority;
(ii) Section 6(a)(2) authority; and
(iii) approval of the tax allocation
agreement.
1.1.1.1.1.1.1 NGG Holdings Inc. has already been
formed to hold the 99.99% interest
in NGG Holdings LLC, which is the
transitory merger vehicle formed
to facilitate the acquisition with
NEES. The acquisition of NEES is
structured as a "reverse
triangular merger" under which
NEES will merge with NGG Holdings
LLC with NEES as the surviving
"entity". Following the
acquisition, NGG Holdings, Inc.
will be the "local holding
company" for National Grid's US
utility interests.
For NEES and its subsidiary companies, we are seeking:
(i) continuation of all outstanding authority;
(ii) Section 6(a)(2) authority;
(iii) authority to add new NEES entities to the system money pool;
(iv) approval of tax allocation agreement; and
(v) authority to pay dividends from capital or unearned surplus, subject
to certain conditions.
2. National Grid Holdings Limited ("NGH") is the intermediate holding
company for all of National Grid's non-NEES related operations. On or
prior to consummation of the Merger, NGH will be qualified as a
"foreign utility company" within the meaning of the Act. As a result,
it and all of its subsidiaries may be retained by National Grid
pursuant to the provisions of Section 33(c) of the Act.
Because NGH will be a FUCO, no further authority is needed for the operations of
NGH and its subsidiary companies as such. Transactions involving other entities
in the National Grid system will, however, continue to be jurisdictional.
Accordingly, as noted above, National Grid is seeking financing authority in an
amount equal to up to 50% of its consolidated retained earnings. The applicants
will seek such other authority as may be required for any additional intrasystem
transactions including, for example, any "across-the-wall" service, sales and
construction contracts.
2.1 The National Grid Company plc is the electric transmission
company in England and Wales. The National Grid Company plc is
organized under the
<PAGE>
DESCRIPTION OF NGG COMPANIES
(Continued)
laws of England and Wales and is subject to regulatory controls
overseen by the Director General of Electricity Supply. It has
seven active subsidiaries, as follows:
2.1.1 NGC Nominees Limited serves as a shareholder for a number
of National Grid Group entities, as it is customary in the
UK to have more than one shareholder in most corporate
entities. This company is not otherwise an operating
entity.
2.1.1.1 Dormant subsidiaries.
2.1.2 Datum Solutions Limited is engaged in providing metering
services in the United Kingdom at entry and exit points of
the U.K. transmission system, and more widely to customers
in the competitive market.
2.1.3 Energy Settlements and Information Services Limited
operates the computer systems needed to calculate prices
and payments due as a result of the daily trading of power
across England and Wales.
2.1.4 NGC Properties Limited owns and develops property that is
not used for the operation of the transmission system,
usually with a view toward eventual sale.
2.1.5 Energy Pool Funds Administration Limited manages the
transfer of funds in payments for the energy traded.
2.1.6 NGC Two Ltd is an inactive shell company.
2.1.6.1 The National Grid Investments Company is an
inactive shell company.
2.1.7 NGC Leasing Limited is engaged in the leasing of motor
vehicles for use by employees of the National Grid system.
2.1.8 NGC Employee Shares Trustee Limited serves as trustee in
respect of the National Grid Profit Sharing Scheme and
Employee Benefit Trust, which are trusts set up for
employees of National Grid. This company does not have any
independent operations.
2.2 NatGrid Finance Holdings Limited is a holding company for NatGrid
Finance Limited, NG Investment Limited and Natgrid Investments
Limited, which are Jersey corporations that provide financial
management services
<PAGE>
DESCRIPTION OF NGG COMPANIES
(Continued)
to National Grid. For example, this group of companies is
currently involved in investing and managing the proceeds from
the recent public offering by National Grid Group of some of its
interest in the ordinary shares of Energis plc.
2.2.1 Natgrid Finance Limited
2.2.2 NG Investments Limited [Jersey]
2.2.3 Natgrid Investments Limited
2.3 National Grid International Limited is the holding company for a
number of the group's non-U.K. investments, including operations
in South America, India, Africa and the U.S. National Grid
International was formed has four direct and a number of indirect
subsidiaries, as follows:
2.3.1 National Grid Overseas Limited is an intermediate holding
company above most of the South American, Indian and
African interests held by the NGG.
2.3.1.1 National Grid Holdings BV is organized in the
Netherlands and is a holding company for operations
in Brazil and India.
2.3.1.1.1 National Grid Indus BV is an inactive
shell company.
2.3.1.1.2 National Grid India BV, another
Netherlands organized company, organizes
and controls National Grid Group's
investments in India.
2.3.1.1.2.1 Karnataka Translink Limited
[need info]
2.3.1.1.3 NGC do Brasil Participacoes Ltda, a
Brazilian company, and National Grid
Brazil BV, a Netherlands company, serve
to organize and control National Grid
Group's investments in Brazil. They
currently own three entities formed under
the laws of Brazil as follows:
2.3.1.1.3.1 JVCO Participacoes Ltda is a
joint venture vehicle for NGG
and Sprint
<PAGE>
DESCRIPTION OF NGG COMPANIES
(Continued)
2.3.1.1.3.2 Holdco Participacoes Ltda is
an intermediate joint venture
vehicle pursuant to which
other investors are involved
in Brazilian telecom
operations.
2.3.1.1.3.2.1 Bonari Holding Ltda
is an operating
company engaged in
telecommunications
operations in Brazil.
2.3.1.1.4 National Grid Zambia BV, which is formed
under the laws of the Netherlands,
organizes and controls National Grid's
investments in Zambia.
2.3.1.1.4.1 Copperbelt Energy Corporation
plc is a Zambian corporation
that is some 40% owned by
National Grid and is engaged
in buying, selling and
transmitting electricity to
meet the needs of the copper
mining regions of Zambia. NGC
Zambia and National Grid
Zambia were formed for the
purpose of facilitating
National Grid's ownership and
operations of African
operations. Another
registered holding company,
CINergy, also owns a
significant interest in
Copperbelt.
2.3.1.1.5 National Grid Finance BV is a company
formed under the laws of the Netherlands
that serves as a holding company for
operations in Argentina. National Grid
Overseas holds a one third interest in
National Grid Finance directly. Through
subsidiaries, National Grid owns an
interest in the primary transmission
system that services Argentina and acts
as operator thereof.
2.3.2 The Electricity Transmission Company Limited is an inactive
shell company.
2.3.3 NGC Zambia Ltd. is an inactive shell company.
<PAGE>
DESCRIPTION OF NGG COMPANIES
(Continued)
2.3.4 Teldata International Limited is a holding company for US
billing and energy service operations. Teldata Inc. is a
Delaware corporation that provides complete, end-to-end,
automated metering and billing solutions for electric, gas
and water utilities and energy service providers.
2.3.5 National Grid International Limited
2.3.5.1 First Point Services Inc. [US] is a Delaware
corporation engaged in providing billing software
solutions for electric, gas and water utilities and
energy service providers.
2.3.6 National Grid USA Inc. is a Delaware corporation formed to
investigate potential opportunities in the U.S. market for
National Grid.
2.3.7 National Grid Investment Holdings Limited is an inactive
shell company.
2.3.7.1 Grid One is an inactive shell company.
2.3.7.1.1 Grid Investment Company Ltd [Jersey] is
an inactive shell company.
2.3.8 National Grid (Isle of Man) Limited is a holding company
for operations on the Isle and is organized under the laws
of the Isle of Man.
2.3.8.1 Manx Cable Company (Isle of Man) is organized under
the laws of the Isle of Man for the purpose of
developing an undersea connector between England
and the Isle of Man.
2.4 National Grid Insurance Limited [Guernsey] was organized in
Guernsey in connection with the self-insured retention of NGC's
transmission assets. National Grid holds all of the outstanding
ordinary shares of National Grid Insurance and Barclays Bank
holds its outstanding preference shares.
2.5 The National Grid Group Quest Trustee Company Limited serves as
trustee with respect to the National Grid Group Qualifying Share
Trust, which is a trust established for employees of National
Grid. This company does not have any independent operations.
<PAGE>
DESCRIPTION OF NGG COMPANIES
(Continued)
2.6 NGG Telecoms Holdings Limited is a holding company for National
Grid's interest in certain telecommunications operations.
2.6.1 NGG Telecoms Limited also serves to hold National Grid's
interest in these telecommunications operations.
2.6.1.1 Energis plc is the publicly-traded parent company
of Energis Communications. National Grid holds a
48.3% interest in Energis plc.
2.6.2 NGG Telecoms Investment Limited is an internal holding
company for part of National Grid's interest in Energis
plc.
Exhibit D-3
<TABLE>
<CAPTION>
Dividends from Subs
1994-1998
Dollars in thousands
1998
- ----
NEP Mass Narragansett Granite State NEPSCo NEHTECI NEHTC NERC Total (1)
--- ---- ------------ ------------- ------ ------- ----- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings 122,895 50,386 32,253 3,167 1,839 7,835 4,831 2,908
less: Preferred Dividends (1,230) (873) (567) 0 0 0 0 0
less or plus: Loss or Gain
on Preferred stock
redemption (264) (165) (1,176) 0 0 0 0 0
------- ------ ------ ------ ----- ----- ----- -----
Equals: Balance available
for Common 121,401 49,348 30,510 3,167 1,839 7,835 4,831 2,908 190,042 NEES Consolidated
Net Income
Dividends paid to parent 130,610 41,967 73,612 2,174 1,839 7,975 5,769 1,250 265,196 Total Dividends
from Subs
145,648 NEES Dividend
Declared
Payout Ratio (%) 108% 85% 241% 69% 100% 102% 119% 43% 77% NEES Consolidated
Payout Ratio
1997
- ----
NEP Mass Narragansett Granite State NEPSCo NEHTECI NEHTC NERC Total (1)
--- ---- ------------ ------------- ------ ------- ----- ---- ---------
Earnings 144,543 65,758 27,932 2,209 1,839 8,221 5,190 2,540
less: Preferred Dividends (2,075) (2,821) (1,955) 0 0 0 0 0
less or plus: Loss or Gain
on Preferred stock
redemption 0 (3,736) (1,666) 0 0 0 0 0
------- ------ ------ ------ ----- ----- ----- -----
Equals: Balance available
for Common 142,468 59,201 24,311 2,209 1,839 8,221 5,190 2,540 220,038 NEES Consolidated
Net Income
Dividends paid to parent 135,448 23,981 14,722 1,027 1,839 8,035 5,139 1,000 191,191 Total Dividends
from Subs
152,812 NEES Dividend
Declared
Payout Ratio (%) 95% 41% 61% 46% 100% 98% 99% 39% 69% NEES Consolidated
Payout Ratio
1996
- ----
NEP Mass Narragansett Granite State NEPSCo NEHTECI NEHTC NERC Total (1)
--- ---- ------------ ------------- ------ ------- ----- ---- ---------
Earnings 152,483 37,926 22,954 1,704 1,839 8,932 5,447 2,835
less: Preferred Dividends (2,574) (3,114) (2,143) 0 0 0 0 0
less or plus: Loss or Gain
on Preferred stock
redemption 1,368 0 0 0 0 0 0 0
------- ------ ------ ------ ----- ----- ----- -----
Equals: Balance available
for Common 151,277 34,812 20,811 1,704 1,839 8,932 5,447 2,835 208,936 NEES Consolidated
Net Income
Dividends paid to parent 134,158 19,184 9,060 1,057 165 11,600 4,767 2,000 181,991 Total Dividends
from Subs
153,173 NEES Dividend
Declared
Payout Ratio (%) 89% 55% 44% 62% 9% 130% 88% 71% 73% NEES Consolidated
Payout Ratio
1995
- ----
NEP Mass Narragansett Granite State NEPSCo NEHTECI NEHTC NERC Total (1)
--- ---- ------------ ------------- ------ ------- ----- ---- ---------
Earnings 151,427 29,101 23,910 1,412 165 9,924 6,023 4,602
less: Preferred Dividends (3,433) (3,114) (2,143) 0 0 0 0 0
less or plus: Loss or Gain
on Preferred stock
redemption 0 0 0 0 0 0 0 0
------- ------ ------ ------ ----- ----- ----- -----
Equals: Balance available
for Common 147,994 25,987 21,767 1,412 165 9,924 6,023 4,602 204,757 NEES Consolidated
Net Income
Dividends paid to parent 135,488 12,590 5,096 363 158 18,000 7,610 5,000 184,305 Total Dividends
from Subs
152,273 NEES Dividend
Declared
Payout Ratio (%) 92% 48% 23% 26% 96% 181% 126% 109% 74% NEES Consolidated
Payout Ratio
1994
- ----
NEP Mass Narragansett Granite State NEPSCo NEHTECI NEHTC NERC Total (1)
--- ---- ------------ ------------- ------ ------- ----- ---- ---------
Earnings 149,373 34,726 14,589 1,057 158 9,067 5,938 4,891
less: Preferred Dividends (3,440) (3,114) (2,143) 0 0 0 0 0
less or plus: Loss or Gain
on Preferred stock
redemption 0 0 0 0 0 0 0 0
------- ------ ------ ------ ----- ----- ----- -----
Equals: Balance available
for Common 145,933 31,612 12,446 1,057 158 9,067 5,938 4,891 199,426 NEES Consolidated
Net Income
Dividends paid to parent 119,323 29,977 2,549 362 158 12,000 4,600 5,000 173,969 Total Dividends
from Subs
148,456 NEES Dividend
Declared
Payout Ratio (%) 82% 95% 20% 34% 100% 132% 77% 102% 74% NEES Consolidated
Payout Ratio
</TABLE>
(1) Only the NEES companies that paid a dividend to the parent are shown above.
Net Income total is NEES Consolidated, which includes other subs and
eliminations.
<PAGE>
<TABLE>
<CAPTION>
Earnings and Payout Ratios
Dollars in thousands
5-Year
Weighted
New England Power Company Average
- --------------------------------------------------------------------------------------------------------- ----------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Earnings 122,895 144,543 152,483 151,427 149,373
less: Preferred Dividends (1,230) (2,075) (2,574) (3,433) (3,440)
less or plus: Loss or Gain on Preferred stock
redemption (a) (264) 0 1,368 0
------- ------- ------- ------- -------
Equals: Balance available for Common 121,401 142,468 151,277 147,994 145,933
Dividends paid to parent 130,610 135,448 134,158 135,488 119,323
Payout Ratio (%) 108% 95% 89% 92% 82% 92%
Note: In 1998 NEP repurchased 2.7 million shares of its common stock from NEES for $418 million. Approximately $194
million in connection with the repurchase was charged to retained earnings.
Note: In 1996, NEP realized a gain of $1,818,180 on redemption of preferred which was not credited to retained earnings
but to paid in capital in accordance with FERC accounting rules. If this gain were excluded, NEP's payout ratio would
have been 90%
Massachusetts Electric Company
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
Earnings 50,386 65,758 37,926 29,101 34,726
less: Preferred Dividends (873) (2,821) (3,114) (3,114) (3,114)
less or plus: Loss or Gain on Preferred stock
redemption (165) (3,736) 0 0
------- ------- ------- ------- -------
Equals: Balance available for Common 49,348 59,201 34,812 25,987 31,612
Dividends paid to parent 41,967 23,981 19,184 12,590 29,977
Payout Ratio (%) 85% 41% 55% 48% 95% 64%
The Narragansett Electric Company
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
Earnings 32,253 27,932 22,954 23,910 14,589
less: Preferred Dividends (567) (1,955) (2,143) (2,143) (2,143)
less or plus: Loss or Gain on Preferred stock
redemption (1,176) (1,666) 0 0 0
------- ------- ------- ------- -------
Equals: Balance available for Common 30,510 24,311 20,811 21,767 12,446
Dividends paid to parent 73,612 14,722 9,060 5,096 2,549
Payout Ratio (%) 241% 61% 44% 23% 20% 96%
Note: in 1998 The Narragansett Electric Company received approximately $40 million for sale to USGen of its percentage
of Manchester Street Station
The Payout Ratio excluding this payment is: 111%
Granite State Electric Company
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
Earnings 3,167 2,209 1,704 1,412 1,057
less: Preferred Dividends 0 0 0 0 0
less or plus: Loss or Gain on Preferred stock
redemption 0 0 0 0 0
------- ------- ------- ------- -------
Equals: Balance available for Common 3,167 2,209 1,704 1,412 1,057
Dividends paid to parent 2,174 1,027 1,057 363 362
Payout Ratio (%) 69% 46% 62% 26% 34% 52%
Nantucket Electric Company
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
Earnings 567 503 356
less: Preferred Dividends 0 0 0
less or plus: Loss or Gain on Preferred stock
redemption 0 0 0
------- ------- -------
Equals: Balance available for Common 567 503 356
Dividends paid to parent 0 0 0
Payout Ratio (%) 0% 0% 0% 0%
1996 Numbers are for the 9 months ended 12/31/96.
Total, NEP & the Retails
- ---------------------------------------------------------------------------------------------------------
Net Income available for common dividends 204,993 228,692 208,960 197,160 191,048
Dividends paid to parent 248,363 175,178 163,459 153,537 152,211
Payout Ratio (%) 121% 77% 78% 78% 80% 87%
</TABLE>
