File No. 70-9519
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5
TO
FORM U-1
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 (US) Holdings New England Power Company
Limited Massachusetts Electric Company
National Grid (US) The Narragansett Electric Company
Investments Granite State Electric Company
Kirby Corner Road Nantucket Electric Company
Coventry CV48JY New England Electric Transmission Corporation
United Kingdom New England Hydro-Transmission Corporation
New England Hydro-Transmission Electric
National Grid (Ireland) 1 Company, Inc.
Limited Vermont Yankee Nuclear Power Corporation
National Grid (Ireland) 2 New England Hydro Finance Company, Inc.
Limited NEES Global, Inc.
8-10 rue Mathias Hardt NEES Energy, Inc.
BP39, L2010 AllEnergy Marketing Company, L.L.C.
Luxembourg Granite State Energy, Inc.
New England Power Service Company, Inc.
National Grid General New England Hydro Finance Company, Inc.
Partnership NEES Communication, Inc.
NGG Holding, Inc. Texas Liquids, L.L.C.
10th Floor Texas-Ohio Gas, Inc.
Oliver Building Metro West Realty L.L.C.
2 Oliver Street 25 Research Drive
Boston, MA 02109 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 125 West 55th Street
Telephone: 011-44-1203-537-777 New York, NY 10019
Facsimile: 011-44-1203-423-678 Telephone: 212-424-8000
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. Applicants means the Intermediate Companies, National Grid and NEES.
2. 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.
3. NEES -- Immediately after the proposed Merger, pursuant to an amendment to
NEES' Agreement and Declaration of Trust, NEES will have been merged with
NGG Holdings, LLC, with NEES as the surviving entity and then merged again
into another 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.
4. National Grid means The National Grid Group plc.
5. National Grid System means National Grid and its subsidiary companies.
6. NEES Group means NEES and the NEES Subsidiary Companies.
7. NEES Subsidiary Companies means the subsidiary companies of NEES.
8. U.S. Subsidiary Companies means NEES, the NEES Subsidiary Companies and the
Intermediate Companies.
9. 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) Preferred Stock
(c) Debt
(d) Interest Rate and Currency Risk Management Devices
2. U.S. Subsidiary Company Financings
(a) Money Pool
(b) Guarantees
(c) Payment of Dividends Out of Capital or Unearned Surplus
(d) 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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This Pre-effective Amendment No. 5 replaces and 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 in its entirety,
with the exception that it does not replace exhibits previously filed:
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
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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.
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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 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. 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.
In the instant matter, the Applicants request that the Commission extend
the existing financing authority of the NEES Group for a period of approximately
three and one-half years from the date of consummation of the Merger through May
31, 2003 (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, preferred stock, 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
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/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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(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:
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/ National Grid's commitment to maintain the above stated EBITDA ratios
demonstrates that the securities issuances proposed in this
Application-Declaration will be reasonably adapted to National Grid's
security structure and earning power, and that such issuances will not be
detrimental to the public interest in a prudently capitalized holding
company system, consistent with the standards of Sections 7(d) and 10(b)(3)
under the Act. 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. An associate interest is an equity
interest of greater than 20%, but less than 50%;
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. Cash equivalents are readily marketable securities such as
gilts (i.e. treasury bonds) and other near-cash items such as deposits and
commercial paper;
Exceptional Items: has the meaning given to it in FRS3 issued by the UK
Accounting Standards Board (i.e., material items which derive from events
or transactions that fall within the ordinary activities of the reporting
entity and which individually or, if of a similar type, in aggregate, need
to be disclosed by virtue of their size or incidence if the financial
statements are to give a true and fair view); 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 stock equity (including additional paid in capital) and
reserves of NEES on a consolidated basis, as reflected in its most recent
annual, quarterly or other periodic earnings report, and the NEES retail
electric utility subsidiaries, individually, will not fall below 35% of total
capitalization;/5/
3. National Grid expects that its common stock equity as a percentage of
total capitalization, measured on a book value US GAAP basis, will increase
through the Authorization Period. National Grid undertakes to cause its common
stock equity percentage measured on such basis to be 25% or above at the time of
closing and thereafter during the Authorization Period, and 30% or above by May
31, 2003;/6/
4. 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;
5. 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;
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/5/ Applicants would calculate the common stock equity to total capitalization
ratio as follows: equity/(gross debt + equity). Total capitalization is the
sum of common stock equity, preferred stock, long-term debt, short-term
debt and current maturities.
/6/ National Grid will report its compliance with this undertaking in its Rule
24 certificate for the fiscal year end period ended March 31, 2003.
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6. 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;
7. The aggregate amount of external debt and equity issued by National Grid
pursuant to the authority requested in this matter will not exceed $4.0 billion,
at any one time outstanding;
8. 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; and
9. The proceeds from the sale of securities in external financing
transactions will be used for 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 for necessary and urgent general
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, and (iv) 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 acquisition is consummated in accordance with an order of the
Commission or an available exemption under the Act. The proceeds of external
financings will be allocated to companies in the National Grid System in various
ways through intrasystem financing discussed in this application and will be
used for general and corporate purposes including capital expenditures, working
capital and other permitted activities. Similarly, the proceeds of external
financings of the NEES Group, authorized previously by the Commission and
extended by the authorization requested in this application, will be used for
general and corporate purposes including capital expenditures, working capital
and other purposes consistent with permitted activities.
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,
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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)).
The table below shows the revenues, net income and total assets of National
Grid, NEES and EUA for the twelve months to September 30, 1999, according to
U.S. GAAP.
National Grid NEES EUA
($ mm) ($ mm) ($ mm)
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Revenues 2,412 2,513 548
Net Income 1,661 149 17
Total Assets 8,437 4,900 1,481
The table below shows the capitalization of National Grid, NEES, EUA, and
the combined company on a pro forma basis, as of September 30, 1999, according
to U.S. GAAP./7/
<TABLE>
<CAPTION>
National National NEES NEES EUA EUA Pro Forma Pro Forma
Grid Grid (%) ($ mm) (%) ($ mm) (%) Combined Combined
($ mm) ($ mm) (%)
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term 404 6.7% 39 1.4% 118 16.8% 561 5.7%
debt
Long-term 3,133 52.3% 1,059 38.8% 190 27.1% 6,682/8/ 68.2%
debt
Preferred - - 20 0.7% 35 5.0% 55 0.6%
stock
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/7/ The figures for revenues, net income and assets were translated into
dollars using a rate of U.S. $1.60 equals one pound. Consistent with U.S.
GAAP, National Grid's share of joint ventures and associate's businesses is
included in net income and assets but is omitted from revenues. For the
year ended September 30, 1999, National Grid's share of Energis losses were
$26 million (excluding exceptional profits of $1,427 million).
/8/ Includes $2,300 million of acquisition financing.
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Minority 1 - 39 1.4% - - 40 0.4%
interest
Common 2,454 41.0% 1,578 57.7% 358 51.1% 2,454 25.1%/9/
stock equity
Total 5,992 100% 2,735 100% 701 100% 9,791 100%
</TABLE>
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 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).
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/9/ Cash balances of $1,074 million (on a pro forma basis) on hand on September
30, 1999 are not shown above.
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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 two 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.
18, 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).
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.
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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 $4.0 billion at any one time outstanding during the
Authorization Period./10/ 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.
National Grid proposes that the various securities to be issued would
generally fall within the following limits, but would not in the aggregate
exceed the $4.0 billion limit stated above:
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/10/ The overall limit of $4.0 billion includes the merger-related financing.
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Security $ billions
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Equity, including options and warrants/11/ 0.5
Preferred stock 0.1
Bank debt 3.0
Commercial paper 3.0
Bond issues - straight 3.0
Bond issues - convertible 1.0
(a) Ordinary Shares. As discussed in the Merger U-1, National Grid's common
stock 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"). National Grid has established a sponsored
ADR program in the US and has its ADRs listed on the New York Stock Exchange and
registered under the Securities Act of 1933, as amended (the "1933 Act"). As a
result, National Grid has registered under the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and will file the periodic disclosure reports
required of a foreign issuer with the Commission. The request 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
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/11/ National Grid currently has outstanding $742 million (translated at $1.60
equals one Pound) of 4.25% exchangeable bonds that mature in 2008. The
bonds are exchangeable on or prior to February 8, 2008, at the option of
the holder, into common stock of National Grid. Should bondholders exchange
their bonds prior to maturity, National Grid may issue up to 110 million
additional shares of common stock not included in the overall $4.0 billion
external financing limit and the $0.5 billion sub-limit for equity
issuances.
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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" 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. From the
perspective of the
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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. For
purposes of the $4.0 billion external financing limit, National Grid ordinary
shares used to fund an acquisition of a company through the exchange of National
Grid equity for securities being acquired, 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 issuance.
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 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.
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.
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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 the prime rate or, at the present time, in NEES
shares.
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. National Grid requests authority to issue
ordinary shares to employees under its existing plans, the US Plan and such
additional plans that may be developed for the purposes stated above. Securities
issued by National Grid under all of the plans will be included within the $4.0
billion external financing limit and will be valued, if ordinary shares, at
market value based on the closing price on the London Stock Exchange on the day
before the award. Securities issued by National Grid to a plan that are not
ordinary shares will be valued based on a reasonable and consistent method
applied at the time of the award.
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). As
all outstanding shares of NEES will be acquired by National Grid pursuant to the
Merger, the Plan will cease to operate following the Merger.
(b) Preferred Stock. National Grid proposes to issue preferred stock from
time to time during the Authorization period. Any such preferred stock would
have dividend rates or methods of determining the same, redemption provisions,
conversion or put
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terms and other terms and conditions as National Grid may determine at the time
of issuance, provided that, the cost of money on preferred stock 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. In addition, all issuances of preferred stock will be at rates or
prices, and under conditions negotiated pursuant to, based upon, or otherwise
determined by competitive capital markets.
(c) 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, 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, provided however, that 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. In addition, the maturity of any debt securities
will not exceed 50 years.
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.
National Grid intends to finance the acquisition of NEES through a
combination of borrowings under existing bank facilities and other internal cash
sources. Debt incurred to fund the acquisition is included in the $4.0 billion
external financing authority requested in this application. Given the price
escalation provisions of the Merger Agreement and the nature of the transaction,
the exact cash purchase price to be paid to NEES shareholders in the aggregate
will depend on the timing of the closing of the Merger as well as the number of
NEES shares outstanding at that time. However, it is expected that the
acquisition price will be approximately
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$3.2 billion. On March 5, 1999, National Grid entered into a fully committed
bank facility with six banks providing for up to $2.750 billion in borrowings by
National Grid, wholly-owned National Grid subsidiaries incorporated in the UK
(other than National Grid Company), and other National Grid subsidiaries as
approved in writing by the banks, plus a further 250 million Pound Sterling
facility available to National Grid Company only. The facility has a maturity of
3 to 5 years. Each of these banks is a sophisticated commercial lender and the
facilities were negotiated at arm's length. It is expected that additional banks
will be added to the facility and subsequent syndication may bring the number of
banks involved to over 70. These facilities were established both for funding
the acquisition and to provide other working capital needs for National Grid. In
addition, National Grid will have access to other internal sources of funds for
the acquisition, namely existing cash balances. As of September 30, 1999,
National Grid had on hand deposits of $2,432 million.
Parent-level debt may be issued in connection with the servicing of the
acquisition debt as well as for necessary and urgent general and corporate
purposes including, financing capital expenditures and working capital
requirements, the acquisition, retirement or redemption of securities issued by
National Grid or its U.S. Subsidiary Companies, and other lawful general
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 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
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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).
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 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).
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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./12/ 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.
National Grid believes that a restriction against parent-level debt is an
unreasonable financial burden that is not necessary or appropriate in the public
interest or for the protection of investors or consumers because it may
interfere with National Grid's ability to implement an optimal capital structure
for its business. Prior to issuing debt, preferred securities or equity,
National Grid will evaluate the relevant financial implications of the issuance,
including without limit, the cost of capital, and select the security that
provides the most efficient capital structure consistent with sound financial
practices and the capital markets.
It is important to note, however, that the issuance of debt is subject to
certain objective conditions intended to ensure the financial integrity of
National Grid and the NEES Group. National Grid has committed to cause its
common stock equity as a percentage of total capitalization, measured on a book
value U.S. GAAP basis, to be 30% or above by May 31, 2003. In addition, National
Grid will maintain the common stock equity of NEES and its retail electric
utility subsidiaries at or above 35% of total capitalization.
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/12/ 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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(d) 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 of debt 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 September 30, 1999 was that 57% of
the System borrowings were at fixed rates of interest.
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. Such transactions
will meet the criteria established by the Financial Accounting Standards Board
in order to qualify for hedge- accounting treatment or will so qualify under UK
GAAP. No gain or loss on a hedging transaction will be allocated to any company
in the NEES Group, regardless of the accounting treatment accorded to the
transaction.
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. The extended existing NEES Group
financing authority is in addition to the $4.0 billion external financing
authority requested by National Grid.
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<PAGE>
Each of the Intermediate Companies and NEES is seeking authorization to
issue and sell securities to, and acquire securities from, its immediate parent
and subsidiary companies, respectively. Each of the Intermediate Companies and
NEES is also seeking authorization to issue guarantees and other forms of credit
support to direct and indirect subsidiaries. Guarantees entered into by NEES
will be subject to a limit of $500 million based upon the amount at risk. In no
case would the Intermediate Companies or NEES borrow, or receive any extension
of credit or indemnity from any of their respective direct or indirect
subsidiary companies. For reasons of economic efficiency, the terms and
conditions of any such financings will be on an arm's length basis, except that
the interest rates and maturity dates of any debt security issued by NEES to its
immediate parent company will be designed to parallel the effective cost of debt
capital of National Grid./13/ Securities issuances by NEES will be limited to
issuances permitted by the existing NEES group financing orders, as extended
through the Authorization Period.
(a) 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 and the addition to the
Money Pool as lenders only of the Intermediate Companies, National Grid and all
other newly-formed or acquired or currently non-participating NEES Subsidiary
Companies.
(b) 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 NEES Subsidiary Companies (except the
U.S. Utility Subsidiaries) to enter into similar arrangements with one another,
except as exempted under Rule 45. Guarantees entered into by National Grid will
be subject to a $2.0 billion limit (i.e., not included in the $4.0 billion
external financing limit), based upon the amount at risk.
- ----------
/13/ Borrowings by an Intermediate Company or NEES, for example, would not be
subject to Rule 52 because each is a holding company.
- ----------
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<PAGE>
(c) 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 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 common stock equity
levels. Applicants request authorization to pay dividends out of the additional
paid-in-capital account up to the amount of the NEES Group 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./14/
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 purposes, goodwill will be recorded in the "Acquisition
adjustments" account. The original historical basis of the plant accounts will
not be disturbed.
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/14/ 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.
- ----------
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<PAGE>
As a result of the push down of the goodwill, the common stock 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 the following
adjustments to NEES' accounts:
<TABLE>
<CAPTION>
$'000 1998 Adjustments/1/ Adjustments/2/ Restated
- ----------------------------------------------------------------------------------------
<S> <C> <C>
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 income, net 751 (751) - -
Total common stock 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.
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
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$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's 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)./15/ 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).
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 common stock equity of NEES as a
- ----------
/15/ Compare Section 305(a) of the Federal Power Act.
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<PAGE>
percentage of total capitalization was below 35% 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'
common stock 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 35% common stock 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.16
(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 post-Merger earnings will continue to reflect a dividend
payout ratio of between 60% and 100% of Gross
- ----------
/16/ 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>
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 post- Merger Gross Earnings
as dividends, based on a rolling 5-year average./17/ Exhibit D-3
describes the dividend history of the NEES subsidiaries in detail for
the years 1994 to 1998.
(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 September 30, 1999, NEES had cash balances of $201
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."/18/ 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.
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/17/ Applicants request the Commission to grant the proposed dividend relief for
the duration of the goodwill amortization period.
/18/ 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.
(d) 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. Applicants have provided a detailed legal analysis of Rule 45(c) and
the proposed Tax Allocation Agreement in Exhibit C-2.
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 a
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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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, in the limited and discrete circumstances
where the losses were incurred in connection with acquisition-related debt only,
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.
National Grid may suffer an increased UK tax liability without the tax
allocation agreement. UK corporate law looks at each company as a separate
entity, even where a company is a wholly owned subsidiary of another. This
perspective requires the maintenance of corporate capital and is particularly
important for creditor protection. Each company is required to prepare and
publicly file its own statutory accounts.
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Each company is also taxed separately. The UK does not have a system of
consolidated groups. If one company in a group has a loss for tax purposes then
it may "surrender" that loss to another member thereby reducing its taxable
profits by the amount of the loss surrendered. The companies are separate
entities, however, for corporate law purposes and, because a tax loss is
available to reduce future taxable profits and therefore tax liabilities if not
surrendered, a loss is considered an asset which is invariably paid for if
surrendered. A payment avoids distorting the results of each entity and the risk
of voiding the surrender.
When a UK company receives a dividend from an overseas company it is
subject to tax on that dividend but is given a credit for the foreign tax borne
on the profits out of which the dividend has been paid. These rules also operate
on an entity by entity basis (consistent with the general approach in the UK
explained above). Therefore, if the tax paid by the foreign company has been
reduced by a loss incurred by another member of the group, the amount of relief
for foreign tax is distorted unless the foreign entity reimburses the loss maker
for the losses. This is illustrated in the example below. In the example it is
assumed that National Grid General Partnership ("NGGP") has debt of $2.2bn and
is a holding company of the U.S. Utility Subsidiaries only (i.e,, not EUA). The
example shows the impact of the tax allocation payments and the potential
increase in UK tax if the payments were not made.
<TABLE>
<CAPTION>
Illustrative post-acquisition
using 1998 figures
---------------------------------------------
1998 Without tax With tax allocation
allocation payments payments
$'000 $'000 $'000
<S> <C> <C> <C>
Profit before tax (note 1) 312,396 312,396 312,396
Tax (note 2)
- tax payments 122,354 76,154 76,154
- tax allocation
agreement payments 0 0 46,200
Profit after tax 190,042 236,242 190,042
Dividends (note 3) 145,648 145,648 145,648
UK tax on dividend of 10,829 2,839
$145,648 (note 4)
</TABLE>
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<PAGE>
Notes
1. The debt :equity ratio of the U.S. Utility Subsidiaries will be unaffected
by the National Grid acquisition and therefore the profit before tax of the
U.S. Utility Subsidiaries will not change for this reason.
2. If the debt in NGGP is assumed to be $2,200 million and the interest rate
is 6%, interest of $132 million is payable per annum by NGGP. Tax relief
for this interest reduces the federal tax paid by the U.S. Utility
Subsidiaries by 35% of $132 million, i.e. $46.2 million.
If no tax allocation payment is made, the U.S. Utility Subsidiaries' tax
expense is reduced by $46.2 million to $76.1 million. Alternatively, under
the proposed tax allocation agreement the U.S. Utility Subsidiaries will
make a payment of $46.2 million to NGGP to leave their total tax expense
the same as it would be on a separate return basis. The proposed tax
allocation agreement provides that the utilities tax payments and tax
allocation payments together will not exceed their tax payments on a
separate return basis.
3. Dividends cannot exceed profit after tax.
4. The calculations are as follows:
Without tax allocation With tax allocation
payment Payment
$'000 $'000
---------------------- -------------------
Dividend 145,648 145,648
Gross up 145,648 x 76,154 46,950
-------
236,242
145,648 x 76,154 58,364
------- ------
190,042
Taxable amount 192,598 204,012
======= =======
UK tax @ 30% 57,779 61,203
Less credit for US tax 46,950 58,364
------ ------
UK tax due 10,829 2,839
====== =====
It is important to note that various safeguards assure that the structure
proposed in this application cannot be used to the detriment of investors,
consumers or the public interest. Most importantly, the tax allocation
agreement, included as Exhibit C-1 to the application, provides that "under no
circumstances shall the amount of tax allocated to a Member exceed its separate
tax liability." Secondly, the U.S. Utility Subsidiaries are limited to dividend
payments that do not exceed 80% of their Gross Earnings. Further,
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NEES on a consolidated basis and its retail electric utility subsidiaries must
maintain common stock equity capitalization of at least 35% of total
capitalization. With regard to debt financing, NEES' financing will mirror the
market terms of debt raised by National Grid and the NEES Subsidiary Companies
will finance their operations as permitted under existing Commission orders or
the rules under the 1935 Act. Lastly, with respect to service transactions, the
NEES Group will receive certain limited services from National Grid and its
subsidiaries, but all service transactions will be priced at cost in accordance
with Section 13 and the rules thereunder. Consequently, the NEES Group is
effectively insulated from the financial abuses targeted by the 1935 Act. The
proposed tax allocation agreement and Intermediate Company structure should be
permitted as reasonable and appropriate measures to organize National Grid's
ownership of NEES efficiently in a manner consistent with the protection of
investors, consumers and the public interest./19/
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 its immediate parent
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.
Capital stock includes common stock, preferred stock, other preferred
securities, options and/or warrants convertible into common or preferred stock,
rights, and similar securities. As needed to accommodate the sale of additional
equity, 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, except as provided below. The terms that
may be changed include dividend rates, conversion rates and dates, and
expiration dates. Applicants note that each of the Intermediate Companies will
be wholly-owned directly or indirectly by National Grid and that none will have
third-party investors. Applicants
- ----------
/19/ Exhibit C-3 describes the manner in which funds flow among the Intermediate
Companies.
- ----------
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<PAGE>
request that the Commission reserve jurisdiction over changes to the capital
stock of any U.S. Subsidiary Company that is not wholly-owned directly or
indirectly by National Grid. The changes to capital stock proposed above affect
only the manner in which financing is conducted by the U.S. Subsidiary Companies
and will not alter the terms or limits proposed in this application or those of
the existing NEES Group financing orders.
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 may enter into expense agreements
with its respective financing entity, pursuant to which it would agree to pay
all expenses of such entity. All expense reimbursements would be at cost.
Applicants seek authorization for such expense reimbursement arrangements under
Section 7(d)(4) of the Act, regarding the reasonableness of fees paid in
connection with the issuance of a security, and/or under Section 13 of the Act
and the rules thereunder to the extent the financing entity is deemed to provide
services to an associate company.
Any amounts issued by such financing entities to third parties pursuant to
this authorization will count against the $4.0 billion external financing limit
authorized herein for the immediate parent of such financing entity. However,
the underlying intra- system mirror debt and parent guarantee will not count
against the $4 billion external
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<PAGE>
financing limit or the separate National Grid and NEES guarantee limits. 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).
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./20/ 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./21/ As of September 30,
1999, 50% of National Grid's consolidated retained earnings on a U.S. GAAP basis
was $874 million. 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. 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.
- ----------
/20/ For example, it may be desirable for reasons of economic efficiency to hold
certain FUCO interests outside Holdings and its subsidiary companies.
/21/ 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 purposes of the
financing limits under Rule 53.
- ----------
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<PAGE>
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. As of September 30, 1999 National Grid had an "aggregate
investment", as the term is defined in Rule 53 under the Act, in EWGs and FUCOs
of $3,532 million. This investment represents 202% of the combined NEES and
National Grid pro forma consolidated retained earnings as of September 30, 1999
calculated in accordance with U.S. GAAP.
This information is provided for historical perspective only. As stated
above, due to National Grid's unique history as a significant operator and
investor in foreign utility companies at the time that it will become a
registered holding company, a forward-looking view of the appropriate level of
investment in EWGs and FUCOs is most valuable in determining whether the
financing proposed in this application will have a substantial adverse effect
upon the financial integrity of the registered holding company system. In fact,
the expertise that National Grid has gained in operating the England and Wales
transmission system, and other transmission throughout the world, promises to be
of substantial benefit to U.S. consumers in the management of NEES. It would
indeed be a curious result if the Commission found that National Grid's
preexisting FUCO investments adversely affected the registered holding company
system, U.S. customers or state regulation.
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
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<PAGE>
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."/22/ 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.
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./23/ 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,
- ----------
/22/ Franks/Brattle Study, at 11.
/23/ Franks/Brattle Study, Table 5.
- ----------
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<PAGE>
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./24/ 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 market value of National Grid's Energis stake is
$3.3 billion (based on the September 30, 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.
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.
- ----------
/24/ Id.
- ----------
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<PAGE>
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
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
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<PAGE>
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
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
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<PAGE>
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 two most recent semiannual periods has not decreased by 10
percent from the average for the previous two semiannual periods;/25/ 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.
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
- ----------
/25/ Although Rule 53 specifies quarterly periods, National Grid does not
prepare accounts with this frequency.
- ----------
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<PAGE>
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.
The soundness of National Grid's financial structure and the lack of risk
to U.S. utility consumers is further demonstrated by the following:
o National Grid's commitment to maintain the common stock equity ratios of
NEES and its retail electric utility subsidiaries at a minimum of 35%;
o National Grid's commitment to maintain its long-term debt rating at an
investment grade level;
o National Grid's commitment to maintain its interest cover ratio
(Consolidated EBITDA to Net Interest Payable) at not less than 2.5:1, and;
o National Grid's undertaking to cause its common stock equity as a
percentage of total capitalization, measured on a book value US GAAP basis,
to be 30% or above by May 31, 2003.
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
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<PAGE>
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 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./26/ 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."/27/ 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
- ----------
/26/ See, Item 1.B., supra.
/27/ Standard & Poor's CreditWire (Dec. 14, 1998).
- ----------
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<PAGE>
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.
(e) In addition, National Grid will provide the information required by
Form 20-F to permit the Commission to monitor the effect of National Grid's EWG
and FUCO investments on National Grid's financial condition.
E. Filing of Certificates of Notification
It is proposed that, with respect to National Grid which, as noted above,
has registered 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 publish consolidated financial
information semi-annually. In addition, semiannual financial reporting is
consistent with National Grid's ADR listing on the New York Stock Exchange. Due
to National Grid's extensive foreign holdings, it would entail significant
additional work and expense
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<PAGE>
for National Grid to prepare consolidated financial statements on a quarterly
basis.
Applicants also request an exemption from Rule 26(a)(1) under the Act,
regarding the maintenance of financial statements in conformance with Regulation
S-X, for any subsidiary of Holdings organized outside the U.S. Any FUCO acquired
directly or indirectly by National Grid subsequent to the issuance of an order
in this Application-Declaration will maintain its financial statements in U.S.
GAAP or reconcile such statements to U.S. GAAP in the same manner as required by
Form 20-F.
The Rule 24 certificates will be provided to the Commission within 90 days
after the end of National Grid's fiscal year and within 60 days of the end of
its second fiscal quarter and will contain the following information:
a. The principal amount, interest rate, term, number of shares, market
price per share, sales price per share (if other than market price)
and aggregate proceeds, as applicable, of any securities issued by
National Grid during the reporting period, including securities issued
to dividend reinvestment plans and employee benefit plans;
b. The amount of guarantees issued during the reporting period by
National Grid, the name of the beneficiary of the guarantee and the
terms and purpose of the guarantee;
c. National Grid's aggregate investment, as defined under Rule 53, in
EWGs and FUCOs, excluding grandfathered investments, as of the end of
the reporting period in dollars and as a percentage of National Grid's
consolidated retained earnings, and a description of EWG and FUCO
investments during the reporting period;
d. The aggregate amount of securities and the aggregate amount of
guarantees
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<PAGE>
issued and outstanding by National Grid since the date of the order in
this application, including any NEES acquisition debt;
e. A list of the securities issued by the Intermediate Companies during
the reporting period, including principal amount, interest rate, term,
number of shares and aggregate proceeds, as applicable, with the
acquiring company identified;
f. The amount and terms of any short-term debt issued by any U.S. Utility
Subsidiary, and a list of the deposits and withdrawals by company from
the system money pool during the reporting period;
g. The amount and terms of any nonexempt financings consummated during
the period by any U.S. Utility Subsidiary during the reporting period;
h. The amount and terms of any nonexempt financings consummated by any
nonutility U.S. Subsidiary Company during the reporting period;
i. A retained earnings analysis of each company in the NEES Group
detailing Gross Earnings, goodwill amortization, dividends paid out of
each capital account, and the resulting capital account balances at
the end of the reporting period;
j. A table showing, as of the end of the reporting period, the dollar and
percentage components of the capital structures of National Grid,
Holdings, each Intermediate Company, and each company in the NEES
Group;
k. Paper copies of National Grid's filings of Form 20-F and semiannual
reports to shareholders; and
l. As applicable, all amounts shall be expressed in U.K. Pounds and
converted to U.S. dollars and shall be presented in accordance with
the U.S. GAAP
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<PAGE>
reconciliation requirements of Form 20-F. In particular, the
semiannual reports provided to the Commission in Rule 24 filings under
this Application-Declaration shall be organized so that all columns
showing amounts in Pounds in financial statements or tables are
accompanied by parallel columns showing dollar amounts.
ITEM 2 FEES, COMMISSIONS AND EXPENSES
Applicants have incurred or will incur estimated fees and expenses of
approximately $30 million in connection with the financing transactions proposed
in this Application. This amount includes arrangement fees, underwriting costs,
facility fees and hedging and option costs. As noted previously, National Grid
proposes that fees, commissions or other similar remuneration paid in connection
with the non-competitive issue, sale or distribution of a security pursuant to
the Application will not exceed 5% of the principal or total amount of the
security issued. Fees for investment bankers, lawyers, brokers, accountants,
consultants and other service providers are included within the Merger-related
fees disclosed in Item 2 of File No. 70-9473.
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
No state or federal regulatory agency other than the Commission under the
Act has jurisdiction over the proposed transactions.
-46-
<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, revised
C-2 Legal Analysis of Rule 45(c) and the Proposed Tax Allocation Agreement
C-3 Intercompany Debt and Funds Flow
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
-47-
<PAGE>
F-1.1 Opinion of counsel
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)
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
K-1 Response to the Comments of Russell G. Gilmore (filed with the
Commission on November 30, 1999 in File No. 70-9473 and incorporated
herein by reference)
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-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))
-48-
<PAGE>
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)
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 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.
-49-
<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
No. 5 to the Application-Declaration, File No. 70-9519, 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: December 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.
-50-
<PAGE>
EXHIBIT INDEX
Exhibit
-------
C-1 Form of Tax Allocation Agreement, revised
C-3 Intercompany Debt and Funds Flow
F-1.1 Opinion of counsel
-51-
EXHIBIT C-1
FORM OF TAX ALLOCATION AGREEMENT, REVISED
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, a 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, except that for the purposes of this
Step 3, GP shall be deemed to have corporate tax benefits only with regard to
that portion of its losses, credits or other tax benefits that arise from taking
into account items attributable to acquisition related debt.
(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.
<PAGE>
(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.
(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 ("AMT") liability, as imposed by Internal Revenue Code section
55(a), then any consolidated AMT will be allocated to the Members of the Group
based upon their proportionate amounts of separate alternative minimum tax.
Step 5 - If the total consolidated return liability results in consolidated
minimum tax credit utilization, the consolidated minimum tax credit shall be
tentatively allocated to each company participating in the consolidated return
in an amount equal to the lesser of (1) each company's separate Minimum Tax
Credit Carryforward or (2) the excess of such company's allocated regular tax
over its separate alternative minimum tax ("AMT"). Minimum Tax Credit
Carryforward for this purpose is the sum of the annual amounts of consolidated
AMT allocated to a company in prior years less the sum of the consolidated
minimum tax credits allocated to that company in prior years. If the total of
such tentative allocations exceeds the consolidated minimum tax credit utilized
in the current taxable year, then the difference between the total of the
tentative allocations and the consolidated minimum tax credit utilized for the
taxable year shall be allocated as a negative amount to each company in
proportion to that company's tentative allocation to the combined total of all
such amounts. If the total of the tentative allocations is less than the
consolidated minimum tax credit utilized, the difference between the
consolidated minimum tax credit utilization and the total of the tentative
allocations shall be allocated to each company in proportion to that company's
remaining Minimum Tax Credit Carryforward to the combined total of such
carryforwards. The consolidated minimum tax credit allocated to each company for
the taxable year will equal the sum of the amounts allocated in the two step
computation.
Step 6 - Under no circumstances shall the amount of tax or other liability
allocated to a Member under this Agreement exceed its separate tax liability.
Step 7 - 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
<PAGE>
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.
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,
<PAGE>
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 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
<PAGE>
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.
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 inure 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
<PAGE>
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 C-3
Explanation of Intercompany Debt and Funds Flow
(The following diagram sets out the ways in which funds
may leave each of the entities in the National Grid system
and rationale for intercompany debt)
Rationale for intercompany debt Ways in which funds
may leave each company
Debt at these levels |-----------------|
insures that UK tax on --- | NGG plc |
US$:(pound) movements is | |-----------------|
minimized. This is | |
achieved by "matching", Debt |
for UK tax purposes, | |
US$ borrowings with | |-----------------| Dividends and interest
US$ assets. The asset --- | NGUSH | payments to NGG plc Loan
of NGUSH is a loan to | |-----------------| repayments to NGG plc
NGUSI and of NGUSI is | |
the shares in NGI 1. Debt |
(Note 1) | |
| |-----------------| Dividends and interest
--- | NGUSI | payments to NGUSH
|-----------------| Loan repayments to NGUSH
|
|
|-----------------| Dividends to NGUSI
Debt at this level | NGI 1 | Repayments of capital
insures that surplus --- | NGI 2 | (purchase of own shares)
funds of the utility | |-----------------|
subsidiaries can be | |
extracted from the US Debt |
with minimum tax cost, | |
can be repatriated to | |-----------------| Interest payments to NGI 1
the UK (to service the --- | NGGP | and NGI 2
acquisition debt) with- |-----------------| Dividends to NGI 1 and NGI 2
out tax inefficiency, and |
facilitates overall |
tax efficiency. The US |-----------------|
withholding tax cost on | NGGHI | Dividends to NGGP
interest is 0%, whereas |-----------------|
the US withholding tax |
cost on dividends is |
currently 15%. |-----------------|
(Note 2) | NEES | Tax allocation agreement
| Utility | payments to NGGP
| Subsidiaries | Dividends to NGGHI
|-----------------|
<PAGE>
Notes
1. In order to maximize the UK tax matching, the borrowings of NGUSH and NGUSI
need to equal their US$ investment in NGUSI and NGI 1 respectively. As such
the debt level will, to the extent possible, be maximized.
2. The amount of debt, and terms of the debt, at this level is the maximum
that would be lent to NGGP, on a stand-alone basis, by an arm's length
lender.
3. Except as detailed above, all funding of the intermediary companies will be
by way of equity. The intermediate company structure will also be free of
minority equity interest holders, except that
(i) NGUSH will own one share in each of its indirect subsidiary companies,
NGI 1 and NGI 2. NGUSH's wholly-owned subsidiary company, NGUSI, will
own all the remaining shares.
(ii) NGG plc will own 0.1% of the preference shares issued by NGUSI. All
the remaining preference shares (and all the ordinary shares issued by
NGUSI) will be owned by NGUSH.
EXHIBIT F-1.1
December 8, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The National Grid Group plc/New England Electric System Financing
Application, File No. 70-9519
Dear Sirs:
The National Grid Group plc ("National Grid") has applied to the Commission
for authority to acquire the New England Electric System ("NEES") (the
"Merger"). Upon consummation of the Merger, National Grid will register as a
holding company under the Public Utility Holding Company Act of 1935 (the
"Act"). As counsel for National Grid and its subsidiary companies, I deliver
this opinion to you for filing as Exhibit F-1.1 to the Application- Declaration
referenced above. Briefly stated, the Applicants are seeking authority for the
financing of the National Grid System, including NEES and its subsidiary
companies, for a period of approximately three and one-half years from the date
of consummation of the Merger through May 31, 2003 (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, preferred stock, short
and long-term debt, guarantees, 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, (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, EWGs and FUCOs.
Applicants propose to engage in the proposed transactions within various limits
prescribed in the Application-Declaration.
I am a member of the Law Society of England and Wales, the place of
incorporation of National Grid.
<PAGE>
I am not a member of the bars of any other country, or any of the United States,
states in which certain of the Applicants are incorporated or qualified to do
business, and do not hold myself out as an expert in the laws of such states,
although I have consulted and will consult with counsel to National Grid who are
experts in such laws. For purposes of this opinion, to the extent I deemed
necessary, I have relied on advice from counsel employed or retained by National
Grid, in particular, CMS Cameron McKenna and LeBoeuf, Lamb, Greene & MacRae,
L.L.P., who are expert in the laws applicable to the Applicants.
In connection with this opinion, I or attorneys in whom I have confidence,
have examined originals or copies, certified or otherwise identified to my
satisfaction, of such records and such other documents, certificates and
corporate or other records as I have deemed necessary or appropriate as a basis
for the opinions expressed in this letter. In my examination, I have assumed the
genuineness of all signatures, the legal capacity of all persons, the
authenticity of all documents submitted to me as originals, the conformity to
original documents of documents submitted to me as certified or photostatic
copies and the authenticity of the originals of such copies. As to various
questions of fact material to such opinions, I have, when relevant facts were
not independently established, relied upon statements contained in the
Application-Declaration.
The opinions expressed below are subject to the following assumptions,
qualifications, limitations, conditions and exceptions:
o The Commission shall have duly entered an appropriate order or orders
with respect to the proposed transactions, as described in the
Application-Declaration, permitting the Application-Declaration to
become effective under the Act and the rules and regulations
thereunder, and the proposed transactions are consummated in
accordance with the Application-Declaration and the Commission's
orders.
o No act or event other than as described herein shall have occurred
subsequent to the date hereof which would change the opinions
expressed below.
o Appropriate corporate actions will have been taken by both the issuer
and acquirer of the securities contemplated by the
Application-Declaration and the documents transferring the securities
will have been duly authorized, executed and delivered with all
appropriate transfer or other taxes paid.
o Each of the Applicants, and their subsidiaries involved in the
proposed transactions, will at the time of the proposed transactions
be a duly incorporated corporation or duly formed limited liability
company or partnership in the jurisdiction in which it is domiciled.
Based upon the foregoing and subject to the assumptions, qualifications,
limitations, conditions and exceptions set forth herein, I am of the opinion
that, in the event the proposed transactions are consummated in accordance with
the Application-Declaration:
(a) all state and federal laws applicable to the proposed transactions
will have been complied with;
<PAGE>
(b) the issuer of any securities proposed in the Application-Declaration
is duly formed or incorporated under the laws of the jurisdiction in
which it is domiciled;
(c) such securities will, in the case of stock, be validly issued, fully
paid and nonassessable, and the holders thereof will be entitled to
the rights and privileges appertaining thereto set forth in the
charter or other document defining such rights and privileges;
(d) in the case of debt securities, such securities will be valid and
binding obligations of the issuer or guarantor in accordance with
their terms;
(e) the Applicants will legally acquire any securities or assets subject
to this Application-Declaration, and;
(f) the consummation of the proposed transactions will not violate the
legal rights of the holders of any securities issued by National Grid,
or by any associate company thereof.
I hereby consent to the filing of this opinion as an exhibit to the
Application- Declaration.
Very truly yours,
//s//Fiona Smith
Company Secretary and General Counsel
The National Grid Group plc
<PAGE>
