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File No. 70-9673
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
NATIONAL GRID USA SERVICE COMPANY, INC.,
FORMERLY, NEW ENGLAND POWER SERVICE COMPANY
(Names of company filing this statement)
25 Research Drive
Westborough, Massachusetts 01582
(Address of principal executive offices)
THE NATIONAL GRID GROUP PLC
(Name of top registered holding company parent of applicant)
John G. Cochrane Kirk L. Ramsauer
Vice President and Treasurer Deputy General Counsel
National Grid USA National Grid USA
25 Research Drive 25 Research Drive
Westborough, Massachusetts 01582 Westborough, Massachusetts 01582
(Names and addresses of agents for service)
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Form U-1 Application/Declaration filed under the Public Utility Holding
Company Act of 1935, File No. 70-9673, is hereby amended to read, in its
entirety, as follows:
Item 1. Description of Proposed Transactions
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National Grid USA Service Company, Inc., (formerly, New England Power
Service Company, hereafter referred to as the Service Company) is a direct
wholly-owned subsidiary of National Grid USA and an indirect wholly-owned
subsidiary of The National Grid Group plc, a registered public utility holding
company. It has contracted with the National Grid USA companies to provide,
at cost, such administrative, engineering, construction, legal, and financial
services as the companies request.
Effective May 1, 2000, EUA Service Company was merged into the Service
Company in accordance with the Commission's order dated April 14, 2000
(Release No. 35-27166) in File No. 70-9537.
In accordance with the Commission's Order dated December 21, 1979,
(Release No. 35-21354) in File No. 70-6353, the Service Company includes in
its service charges to customers a rate of return on equity capital (excluding
retained earnings and accumulated other comprehensive income) equal to the
authorized rate of return on common equity for its affiliate, the New England
Power Company. Under this formula, the Service Company currently uses an
equity rate of return of 11.25.
The Service Company now proposes (a) to restructure its capitalization to
reduce its equity capital and (b) to change the formula for its return on
equity. The Service Company is also filing in File No. 70-9089 an amendment
to that Application/Declaration relating to existing short-term borrowing
authority to reflect, in part, the effects of this equity restructuring.
As of December 31, 1999, the capitalization of the Service Company
consisted of $75 common stock, $16.4 million of miscellaneous paid-in capital,
$1.8 million of retained earnings, and $10.8 million of accumulated other
comprehensive income-net. The Service Company does not calculate an equity
return allowance on the accumulated other comprehensive income, which
represents unrealized appreciation on its supplemental retirement/deferred
compensation plan trust fund recorded in accordance with Statement of
Financial Accounting Standards No. 130. At September 30, 2000 (after the
merger with EUA Service Company), the Service Company had increased its
miscellaneous paid-in capital to $28.2 million (however, $8.8 million of that
was reflective of accumulated other comprehensive income- net). (The Service
Company also had $5.3 million in short-term debt at the close of 1999, and
none at September 30, 2000.) It is the Service Company's practice to pay its
retained earnings out in dividends to its parent shortly after year end.
The Service Company proposes to reduce its common stock and paid-in
capital as stated above to $5 million (exclusive of an amount reflective of
accumulated other comprehensive income-net) by means of a distributive
dividend to National Grid USA from paid-in capital.
The results of this recapitalization (assuming no increase in total
capitalization and assuming the replacement of the distributed capital by new
debt) would be as follows:
Before After
Miscellaneous paid-in capital $19.4 million $5.0 million
(exclusive of an amount reflective
of Accumulated Other Comprehensive Income)
New Debt $14.4 million
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The Service Company further proposes that it continue to be allowed to
include in its service charges to customers (1) the actual interest on funds
borrowed and (2) as reasonable compensation for its equity capitalization, a
return on the book value of its equity (excluding retained earnings and
accumulated other comprehensive income-net). However, the Service Company
proposes that following the reduction in capital, its rate of return on equity
capital will be fixed at 10.5%, the allowed rate of return stipulated in the
most recent negotiated rate settlement for its affiliate, The Narragansett
Electric Company. The Narragansett Electric Company return on equity is used
because the Service Company's other retail public utility affiliates do not
have specified rates of return approved in their rates. The Narragansett
Electric Company is the second largest retail public utility affiliate of the
Service Company; the 10.5% rate of return on equity requested by this filing
is consistent with returns on equity of other electric utilities. The
authorization being sought here for both the level of equity to be included in
the Service Company and the return on equity to be charged on such equity will
remain in effect through December 31, 2004.
As a result of this recapitalization, assuming debt is carried at the end
of month prime rate at FleetBoston minus one percentage point, there will be a
reduction in the Service Company's charges. That reduction is calculated as
follows, assuming the same total level of capital and debt outstanding:
at 12/31/99 Proposed
Return on Equity
$16.4 million @ 11.25% $1.9m
$ 5.0 million @ 10.50% $ .5m
Gross up for taxes 1.3m .4m
Interest on new debt
$11.3 million @ 8.00% .9m
Total $3.2m $1.8m
Reduction in charges $1.4m
The recapitalization proposed in this filing will be completed on or
before the thirtieth (30th) day following receipt of the Commission Orders
granting the authority requested in this file.
Rule 54 Analysis
Under Rule 54, the Commission may not consider the effect of the
capitalization or earnings of any subsidiary which is an exempt wholesale
generator (EWG) or foreign utility company (FUCO) upon the registered holding
company system "if Rules 53(a), (b) and (c) are satisfied." The National Grid
Group plc currently meets all of the conditions of Rule 53(a), except for
clauses (1) and (2).<F1> Due to the level of The National Grid Group plc's
aggregate investment in EWGs and FUCOs and the lack of U.S. GAAP books and
records for its FUCO investments, The National Grid Group plc cannot comply
with Rule 53(a) and consequently, it must demonstrate that it complies with
Rule 53(c).
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[FN] 1. As the Commission noted in The National Grid Group plc, Holding
Co. Act Release No. 27154 (March 15, 2000) (the March Order), National Grid
has preexisting foreign operations and cannot at this time commit to maintain
the books and records of these interests in conformity with U.S. GAAP.
National Grid will, however, comply fully with the substantive provisions of
Rule 53.
</FN>
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The National Grid Group plc's aggregate investment, as defined in Rule
53(a), in EWGs and FUCOs as of September 30, 2000 was $4,034,303,800. As of
September 30, 2000, The National Grid Group plc's consolidated retained
earnings calculated in accordance with U.S. GAAP was $3,296,256,000.
Consequently, The National Grid Group plc's aggregate investment in EWGs and
FUCOs as a percentage of its consolidated retained earnings was 122% as of
September 30, 2000.<F2> In the Commission's March Order, The National Grid
Group plc was authorized to invest up to 252% of its retained earnings in EWGs
and FUCOs.
The Service Company also notes 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 Group plc 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, and (3) in
the past fiscal year, The National Grid Group plc has not reported operating
losses attributable to its direct or indirect investments in EWGs and FUCOs.
Indeed, The National Grid Group plc's interests in EWGs and FUCOs have
contributed positively to its consolidated earnings during the period since
the March Order.
The National Grid Group plc is in full compliance with the conditions of
Rule 53(c). Under Rule 53(c), "[a]n applicant that is unable to satisfy the
requirements of paragraphs (a) and (b) of this section must affirmatively
demonstrate that the proposed issue and sale of a security to finance the
acquisition of an exempt wholesale generator, or the guarantee of a security
of an exempt wholesale generator (1) will not have a substantial adverse
impact upon the financial integrity of the registered holding company system;
and (2) will not have an adverse impact on any utility subsidiary of the
registered holding company, or its customers, or on the ability of state
commissions to protect such subsidiary or customers."
The authority sought herein to reduce the capital of the Service Company
will have no effect upon The National Grid Group plc's investment, direct or
indirect, in EWGs or FUCO. The recapitalization of the Service Company also
is not an issuance of securities to finance the acquisition of, or investment
in, EWGs or FUCOs that could have the potential to adversely affect the
financial soundness of The National Grid Group plc system or any of its public
utility subsidiaries. Since this Application/Declaration does not involve
additional capital, there is no basis for the Commission to withhold or deny
approval for the proposal made in this Application/ Declaration. The action
requested in the instant filing would not have an adverse effect on the
financial integrity of The National Grid Group plc system, or an adverse
impact on National Grid's public-utility subsidiaries, their customers, or the
ability of State commissions to protect such public-utility customers.
The lack of any adverse effect associated with National Grid's current
financing plan was fully demonstrated in National Grid's Application in File
No. 70-9519 and confirmed by the Commission in its March Order. The March
Order notes that in its Application (1) The
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[FN] 2. National Grid's consolidated capitalization was 33.5% common
stock and 66.5% debt as of September 30, 2000.
</FN>
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National Grid Group plc demonstrated that it had an investment grade credit
rating, (2) a history of positive contributions to earnings from National Grid
Company (the most significant part of The National Grid Group plc's FUCO
operations), (3) that the Application contained various commitments by The Natio
nal Grid Group plc to maintain its financial strength, and (4) that the public
utility subsidiaries in The National Grid Group plc system were insulated from
the direct effects of EWG and FUCO investments. Lastly, the Application notes
that The National Grid Group plc has demonstrated expertise and sound
management skills with respect to its operation of the high-voltage system in
England and Wales and that its project review procedures are stringent. Based
on all these factors, the Commission found in the March Order that "National
Grid has made the requisite showing under rule 53(c)."<F3>
Given The National Grid Group plc's continued compliance with the terms
of the March Order and the lack of any proposed financing transaction in the
instant Application-Declaration, the Commission should find the terms of Rule
54 satisfied.
Item 2. Fees, Commissions and Expenses
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There are no fees or commissions to be paid in connection with the
proposed transaction. Services will be performed by the Service Company at
the actual cost thereof. The cost is not expected to exceed $1,000.
Item 3. Applicable Statutory Provisions
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(1) Distributive dividend: Section 12(c) of the Act and Rule 46.
(2) Return on capital: Section 13 of the Act and Rules 90 and 91.
Item 4. Regulatory Approval
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No other state or Federal commission has jurisdiction over the proposed
transactions.
Item 5. Procedure
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It is requested that the Commission take action with respect to this
Application/Declaration without a hearing being held and that an order
allowing this Application/Declaration to become effective on December 29,
2000, or as soon as practicable.
The Service Company (i) does not request a recommended decision by a
hearing officer, (ii) does not request a recommended decision by any other
responsible officer of the Commission, (iii) hereby specifies that the
Division of Corporate Regulation may assist in the preparation of the
Commission's decision, and (iv) hereby requests that there be no 30-day
waiting period between the date of issuance of the Commission's Order and the
date on which it is to become effective.
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[FN] 3. March Order at 64.
</FN>
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Item 6. Exhibits and Financial Statements
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(a) Exhibits
F Opinion of Counsel
H Proposed Form of Notice
(b) Financial Statements
1aBalance Sheet of the Service Company as of December 31, 1999, actual.
1bStatements of Income and Retained Earnings of the Service Company for
the twelve months ended December 31, 1999, actual.
1cBalance Sheet of the Service Company as of September 30, 2000
Since the date of the Balance Sheet, there have been no material changes which
were not in the ordinary course of business.
2aBalance Sheet of The National Grid Group plc and Subsidiaries
Consolidated as of March 31, 2000.
The proposed transactions will have no material effect on the Balance Sheets
of The National Grid Group plc and Subsidiaries Consolidated; pro forma
statements are therefore omitted.
2bStatements of Income and Retained Earnings of The National Grid Group
plc and Subsidiaries Consolidated for the twelve months ended March 31, 2000.
The proposed transaction will have no material effect on the Income and
Retained Earnings of The National Grid Group plc and Subsidiaries
Consolidated; pro forma statements are therefore omitted.
3aBalance Sheet of National Grid USA and Subsidiaries Consolidated as of
September 30, 2000
Since the date of the Balance Sheet, there have been no material changes which
were not in the ordinary course of business.
3bStatements of Income and Retained Earnings of National Grid USA and
Subsidiaries Consolidated as of September 30, 2000
The proposed transactions will have no material effect on the Income and
Retained Earnings National Grid USA and Subsidiaries Consolidated; pro forma
statements are therefore omitted.
Item 7. Information as to Environmental Effects
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The proposed transactions do not involve a major Federal action
significantly affecting the quality of the human environment.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned company has duly caused this statement to be signed on
its behalf, as indicated, by the undersigned officer thereunto duly authorized
by such company.
NATIONAL GRID USA SERVICE COMPANY, INC.
s/ John G. Cochrane
By
John G. Cochrane, Vice President and Treasurer
DATE: January 3, 2001
