FILE NO. 70-9535
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
FORM U-1
APPLICATION/DECLARATION UNDER THE PUBLIC
UTILITY HOLDING COMPANY ACT OF 1935
NORTHEAST UTILITIES
174 Brush Hill Avenue
West Springfield, MA 01090-0010
(Names of companies filing this statement and addresses of principal
executive offices.)
NORTHEAST UTILITIES
(Name of top registered holding company)
Cheryl W. Grise
Senior Vice President, Secretary and General Counsel
Northeast Utilities Service Company
107 Selden Street
Berlin, CT 06037
(Name and address of agent for service)
The Commission is requested to mail signed copies of all orders, notices and
communications to:
Jeffrey C. Miller, Esq. David R. McHale Joanne Rutkowski, Esq.
Assistant General Vice President LeBoeuf, Lamb, Greene &
Counsel and Treasurer MacRae, L.L.P.
Northeast Utilities Northeast Utilities 1875 Connecticut Ave., N.W
Service Company Service Company Washington, D.C. 20009
107 Selden Street 107 Selden Street
Berlin, CT 06037 Berlin, CT 06037
Table of Contents
Item 1. Description of the Proposed Transaction
A. Introduction
1. General Request
2. Overview of Transaction
B. Description of the Parties
1. Northeast Utilities and its Subsidiaries
2. Yankee Energy System, Inc. and its Subsidiaries
C. Description of the Merger
D. YES Reasons for the Merger
E. NU Reasons for the Merger
Item 2. Fees, Commissions and Expenses
Item 3. Applicable Statutory Provisions
A. Section 10(b)
1. Section 10(b)(1)
2. Section 10(b)(2)
3. Section 10(b)(3)
B. Section 10(c)
1. Section 10(c)(1)
i. Retention of Gas Properties
ii. Retention of Other Businesses
2. Section 10(c)(2)
i. Efficiencies and Economies
ii. Integrated Public Utility System
I. Electric System
II. Gas System
C. Section 10(f)
D. Other Statutory Provisions - Section 6(a) and 7
Item 4. Regulatory Approvals
A. Antitrust (FTC and DOJ)
B. Connecticut Department of Public Utility Control
C. Other Regulatory Matters
Item 5. Procedures
Item 6 Exhibits and Financial Statements
a. Exhibits
b. Financial Statements
Item 7. Information as to Environmental Effects
The Application/Declaration in this File, as heretofore amended, is
amended and restated to read as follows:
Item 1. Description of Proposed Transaction
A. Introduction
This Application/Declaration seeks approvals relating to the proposed
combination of Northeast Utilities ("NU" or the "Applicant"), a registered
holding company under the Public Utility Holding Company Act of 1935 (the
"Act") and Yankee Energy System, Inc. ("YES"), currently an exempt holding
company under the Act, pursuant to which YES will merge with and into a to-
be-formed wholly-owned subsidiary of NU ("Merger Sub"). The merger is
referred to herein as the "Transaction" or the "Merger." Merger Sub will be
renamed Yankee Energy System, Inc. upon the effectiveness of the Merger and
will register as a holding company pursuant to Section 5 of the Act.
NU and YES believe that their combination provides a unique opportunity
for NU, YES and their respective shareholders, customers and employees to
participate in the formation of a competitive energy services provider in the
rapidly evolving energy services business and to share in the benefits of
industry restructuring which is already occurring in Connecticut and other
states. The energy industry, including both the gas and electricity segments
of the business, is evolving from an industry characterized by the presence
of regulated natural monopolies confined in their operations to prescribed
geographical service territories into a competitive industry in which
national and regional participants compete for the right to provide energy
services to retail customers who increasingly have a choice in their energy
supply needs. The result of these changes is the transformation of the U.S.
energy industry in which energy production, transportation/transmission and
distribution are reorganizing along national and regional functional lines.
NU and YES believe that, in the restructured and competitive energy
industry, the post-merger NU system will be well-positioned to compete with
other national and regional industry participants, a competitive position
that neither NU nor YES, acting alone, would be able to achieve. The Merger
will provide NU and YES with the ability to integrate their complementary
lines of business: retail and wholesale natural gas and electricity sales and
new merchant electric generation. A more complete description of the Merger
and its anticipated benefits is contained in the Joint Proxy and Registration
Statement on Form S-4 of NU and YES which is annexed as Exhibit c.1 hereto.
On October 13, 1999, NU and Consolidated Edison, Inc. ("Con Ed")
announced that they had agreed to a merger to combine the two companies. The
terms of their agreement are described in NU's Current Report on Form 8-K
dated October 13, 1999 and the Exhibits thereto. NU expects the Con Ed
merger to take 12 to 18 months to consummate, and presently intends to follow
its announced schedule to consummate the YES merger in the first quarter of
2000, assuming all approvals are obtained. The NU/Con Ed merger will be the
subject of a separate application to the Commission.
NU and YES believe that their combination offers significant strategic
and financial benefits to each company and to their respective shareholders ,
as well as to their employees and customers. These benefits include, among
others: (i) maintenance of competitive rates that will improve the combined
entity's ability to meet the challenges of the increasingly competitive
environment in both the electric and gas utility industry, (ii) over time a
reduction in operating costs and expenditures resulting from integration of
corporate and administrative functions, including the elimination of
duplicative positions, limiting duplicative capital expenditures for
administrative and customer service programs and information systems, and
savings in areas such as legal, audit and consulting fees, (iii) greater
purchasing power for items such as fuel and transportation services, general
and operational goods and services, (iv) more controlled expansion into non-
core utility businesses, (v) expanded management resources and ability to
select leadership from a larger and more diverse management pool, and (vi) a
financially stronger company that, through the use of the combined capital,
management, human resources and technical expertise of each company, will be
able to achieve greater financial stability and strength and greater
opportunities for earnings and dividend growth. NU and Yankee believe that
over time synergies created by the Transaction will generate cost savings to
the surviving company which would not be available to the separate companies
absent the Transaction.
The Transaction was approved by the Board of Directors of YES on June
14, 1999, by the shareholders of YES on October 12, 1999 and by the Board of
Trustees of NU on June 8, 1999. NU and YES submitted a joint application
requesting approval of the Transaction to the Connecticut Department of
Public Utility Control (the "DPUC") and a combined proxy and registration
statement on Form S-4 to the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933 and the Securities Exchange
Act of 1934 (the "Exchange Act") during the first week of August, 1999. NU
and YES made the required filings with the Antitrust Division of the U.S.
Department of Justice and the Federal Trade Commission under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended on October 29, 1999 and
requested acceleration of the waiting period. YES will also be seeking the
approval of the Federal Communications Commission to transfer certain
telecommunications licenses necessary for the operation of YES' gas business.
See Item 4 below for additional detail regarding these regulatory approvals.
Apart from the approval of the Commission under the Act, the foregoing
approvals are the only regulatory approvals presently expected to be required
for the Transaction. In order to permit timely consummation of the
Transaction and the realization of the benefits it is expected to produce,
the Applicant requests that the Commission's review of this
Application/Declaration proceed as expeditiously as practicable.
1. General Request
Pursuant to Sections 9(a)(1) and 10 of the Act, the Applicant hereby
requests authorization and approval of the Commission for NU to acquire, by
means of the direct merger described below, all of the issued and outstanding
common stock of YES, a Connecticut corporation and an exempt holding company
with one subsidiary that is a gas utility company as defined in Section
2(a)(4) of the Act, all pursuant to an Agreement and Plan of Merger dated as
of June 14, 1999 by and between NU and YES (the "Merger Agreement"), a copy
of which is attached hereto as Exhibit b.1. The Merger Agreement provides
for the merger of YES with and into Merger Sub with Merger Sub to be the
surviving corporation. Upon completion of the Merger, Merger Sub will have
changed its name to Yankee Energy System, Inc. and will register as a holding
company pursuant to Section 5 of the Act. The Applicant also hereby requests
that the Commission approve (i) the formation of Merger Sub, (ii) the
issuance of a sufficient number of shares of NU Common Shares, $5.00 par
value per share, (the "NU Common Shares") to satisfy the stock portion of the
consideration payable (approximately $215 million) in connection with the
Transaction, (iii) the issuance of short- or long- term debt by NU in an
aggregate amount not exceeding $275 million to satisfy the cash portion of
the consideration payable in connection with the Transaction and to refund
and replace debt initially issued and (iv) the retention of certain utility
and nonutility subsidiaries.
2. Overview of the Transaction
NU proposes to cause (i) the organization of Merger Sub under the laws
of the State of Connecticut as a new wholly-owned first tier subsidiary of NU
and (ii) the issuance by Merger Sub and acquisition by NU of one hundred
shares of the common stock, par value $10 per share of Merger Sub for $1,000.
Pursuant to the Merger Agreement, YES will merge with and into Merger Sub.
Holders of the common stock of YES will receive consideration in cash and NU
Common Shares valued at $45.00 per YES share contributed to Merger Sub by NU.
Each YES shareholder can elect the form of consideration he or she would like
to receive, but this election is subject to proration and adjustment. Under
the Merger Agreement, 55% of all issued and outstanding YES shares will be
exchanged for cash, and 45% will be exchanged for NU Common Shares. If YES
shareholders owning more than 55% of YES shares elect to receive cash, the
number of YES shares converted into cash will be less than the number
elected. Similarly, if YES shareholders owning more than 45% of YES shares
elect to receive NU Common Shares, the number of YES shares converted into
stock will be less than the number elected.
Merger Sub, as a wholly-owned subsidiary of NU and as successor to YES,
will become a registered holding company under the Act and will act as the
holding company for NU's post-merger operating gas utility subsidiary and
related companies. The primary reasons for Merger Sub to register under the
Act is (i) to enable Merger Sub to benefit from the advantages provided to
registered gas holding companies under the Gas Related Activities Act (Pub.
L. No. 101-572, 104 Stat. 2810 (Nov. 15, 1990), codified as a note to section
11 of the Act) and (ii) to enable NU, if it so desired, to acquire
additional gas utility companies using YES as the holding company for such
additional systems. NU's existing operating electric utility subsidiaries,
will remain direct operating subsidiaries of NU. Accordingly, upon
consummation of the Transaction, NU will be a registered holding company
owning an integrated electric utility system consisting of four electric
public utility companies and an integrated gas utility system consisting of a
registered gas utility holding company owning one gas public utility company
and other nonutility subsidiaries. Prior to completion of the Merger, NU
will file one or more additional applications-declarations under the Act with
the Commission with respect to future financing arrangements of the
companies, ongoing activities, and other investments of, and other matters
pertaining to, the combined company after giving effect to the Merger and the
registration of Merger Sub as a holding company.
NU currently anticipates that the full amount necessary to fund the cash
consideration to be paid to YES shareholders will be financed through debt
issued by NU. NU requests Commission authorization to issue from time to
time through June 30, 2002, short or long-term debt securities in an amount
sufficient to satisfy the cash portion of the consideration in connection
with the Transaction, estimated not to exceed $275 million and to refund and
replace any and all debt securities initially issued. Such debt securities
may include notes, debentures and medium-term notes and/or borrowings from
banks and other financial institutions. Any long-term debt security would
have such designation, aggregate principal amount, maturity, interest rate(s)
or methods of determining the same, terms of payment of interest, redemption
provisions, non-refunding provisions, sinking fund terms and other terms and
conditions as NU may determine at the time of issuance.
The effective cost of money on short-term debt borrowings occurring
pursuant to the authorizations granted under the Application will not exceed
at issuance 400 basis points over the comparable term London Interbank
Offered Rate ("LIBOR") and the effective cost of money on long-term
borrowings pursuant to authorizations granted under the Application will not
exceed at issuance 400 basis over comparable term U.S. Treasury securities.
The maturity of indebtedness will not exceed 10 years from the date of
issuance and 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 will not exceed 2.5%
of the principal or total amount of the financing.
B. Description of the Parties
1. Northeast Utilities and its subsidiaries
Northeast Utilities is the parent of a number of companies comprising
the Northeast Utilities system (the "System") and is not itself an operating
company. The System has traditionally furnished franchised retail electric
service in Connecticut, New Hampshire and western Massachusetts through three
of NU's wholly owned subsidiaries, The Connecticut Light and Power Company
("CL&P"), Public Service Company of New Hampshire ("PSNH") and Western
Massachusetts Electric Company ("WMECO"), and has additionally furnished
retail electric service to a limited number of customers through another
wholly owned subsidiary, Holyoke Water Power Company ("HWP"), doing business
in and around Holyoke, Massachusetts. In addition to their retail electric
service business, CL&P, PSNH, WMECO and HWP (including its wholly owned
subsidiary, Holyoke Power and Electric Company) (collectively, the "NU
Operating Companies") together furnish wholesale electric service to various
municipalities and other utilities throughout the Northeast. The System
serves approximately 30 percent of New England's electric needs and is one of
the 24 largest electric utility systems in the country as measured by
revenues.
North Atlantic Energy Corporation is a special-purpose operating
subsidiary of NU that owns a 35.98 percent interest in the Seabrook nuclear
generating facility ("Seabrook") in Seabrook, New Hampshire, and sells its
share of the capacity and output from Seabrook to PSNH under two life-of-
unit, full-cost recovery contracts.
Several wholly owned subsidiaries of NU provide support services for the
System companies and, in some cases, for other New England utilities.
Northeast Utilities Service Company ("NUSCO") provides centralized
accounting, administrative, information resources, engineering, financial,
legal, operational, planning, purchasing and other services to the System
companies. North Atlantic Energy Service Corporation has operational
responsibility for Seabrook. Northeast Nuclear Energy Company acts as agent
for the System companies and other New England utilities in operating the
Millstone nuclear generating facilities in Waterford, Connecticut. Three
other subsidiaries (Rocky River Realty Company, The Quinnehtuk Company, and
Properties, Inc.) construct, acquire or lease some of the property and
facilities used by the System companies.
In January 1999, NU added three new corporations to the System: NU
Enterprises, Inc. ("NUEI"), Northeast Generation Company ("NGC") and
Northeast Generation Services Company ("NGS"). NUEI, a direct subsidiary of
NU, will act as a holding company for the System's unregulated businesses.
NGC, a subsidiary of NUEI, will acquire and manage generating facilities.
NGS, another subsidiary of NUEI, will provide services to the electric
generation market as well as to large commercial and industrial customers in
the Northeast. Also in January 1999, NU transferred to NUEI the stock of
three other of its subsidiaries, making them wholly owned subsidiaries of
NUEI: Select Energy, Inc. ("Select Energy"), HEC Inc. ("HEC") and Mode 1
Communications, Inc. ("Mode 1"). (See, generally, Commission Orders dated
November 12, 1998 (HCAR No. 26939) and may 19, 1999 (HCAR No. 27029). These
companies engage, either directly or indirectly through subsidiaries, in a
variety of energy-related and telecommunications activities, as applicable,
primarily in the unregulated energy retail and wholesale commodity, marketing
and services fields. In addition, Select Energy Portland Pipeline, Inc.,
a subsidiary of NUEI was formed as a single purpose Rule 58 subsidiary to
hold a 5% partnership interest in the Portland Natural Gas Transmission
System Partnership, the partnership that owns and operates the Portland
Natural Gas Transmission Pipeline. Lastly, Merger Sub, a to-be-formed
wholly-owned direct subsidiary of NU, will be created, upon approval by the
Commission, in accordance with section 2 above, to carry out the Merger and
become a registered holding company for the NU system gas operations.
The System companies traditionally have owned and operated a fully
integrated electric utility business. Restructuring legislation in New
Hampshire, Massachusetts and Connecticut, however, will now require PSNH,
WMECO and CL&P, respectively, to separate the distribution and transmission
functions of their business from the generation function by mandating the
sale of fossil fuel and hydroelectric generation. In July 1999, WMECO closed
on the sale of its fossil generating plants. On July 6, 1999, CL&P and WMECO
announced the results of their auction of CL&P's non-nuclear generating
assets and WMECO's remaining non-nuclear generating assets. Approximately
2,235 megawatts of fossil-fueled generating assets will be sold to a third
party and 1,329 megawatts of hydro-powered generating assets will be sold to
NGC.
CL&P, PSNH and WMECO furnish retail delivery franchise service in 149,
198 and 59 cities and towns in Connecticut, New Hampshire and Massachusetts,
respectively. In 1998, CL&P furnished retail franchise service to
approximately 1.11 million customers in Connecticut, PSNH provided retail
service to approximately 422,000 customers in New Hampshire and WMECO served
approximately 196,000 retail franchise customers in Massachusetts. HWP
serves 32 retail customers in Holyoke, Massachusetts.
The following table shows the sources of 1998 electric revenues based on
categories of customers:
CL&P PSNH WMECO Total System
Residential 41% 32% 39% 41%
Commercial 37 27 35 34
Industrial 13 17 20 15
Wholesale* 7 23 5 9
Other 2 1 1 1
---- ---- ---- ----
Total 100% 100% 100% 100%
* Includes capacity sales and sales from PSNH to CL&P and WMECO.
Competition in the energy industry continues to grow as a result of
legislative and regulatory action, technological advances, relatively high
electric rates in certain regions of the country, including New England, and
the increased availability of natural gas. These competitive pressures are
particularly strong in New England, where legislatures and regulatory
agencies in these states have been at the forefront of restructuring of the
electric industry. Changes in this industry are expected to place downward
pressure on prices and to increase customer choice through competition.
In April 1996, FERC issued its final open access rule (Order 888) to
promote competition in the electric industry. Order 888 requires, among
other things, all public utilities that own, control or operate facilities
used for transmitting electric energy in interstate commerce to file an open-
access, nondiscriminatory transmission tariff and to take transmission
service for their own new wholesale sales and purchases under the open access
tariffs. NU System Companies have one in place and take service under that
tariff. Order 888 also supports full recovery of legitimate, prudent and
verifiable wholesale stranded costs, but indicates that FERC will not
interfere with state determinations of retail stranded costs.
In a companion order to Order 888 (Order 889), FERC also required
electric utilities to develop and maintain a same-time information system
that will give existing and potential transmission users the same access to
transmission information that the electric utility enjoys, and required
electric utilities to separate transmission from generation marketing
functions pursuant to standards of conduct. The System companies are
complying with the requirements of Order 889. In 1998, the System companies
collected approximately $34 million in incremental transmission revenues from
other electric utility generators.
In April 1998, Connecticut enacted comprehensive electric utility
restructuring legislation. The legislation provides a clear path to
competition in the state, while permitting, subject to mitigation
requirements, utilities to recover their stranded costs. CL&P is subject to
this legislation.
Similar restructuring laws are planned or in place in both Massachusetts
and New Hampshire.
2. Yankee Energy System, Inc. and its Subsidiaries
Yankee Energy System, Inc. ("YES"), is a public utility holding company
incorporated in Connecticut in 1988. The Company is primarily engaged in the
retail distribution of natural gas through its wholly-owned subsidiary,
Yankee Gas Services Company ("Yankee Gas"), a Connecticut public utility
service company. Yankee Gas serves approximately 185,000 residential,
commercial and industrial customers in 69 cities and towns in Connecticut.
The Company is exempt from registration under the Act under Section 3(a)(2)
of the Act. YES is the holding company for Yankee Gas and four active non-
utility subsidiaries, NorConn Properties, Inc. ("NorConn"), Yankee Energy
Financial Services Company ("Yankee Financial"), Yankee Energy Services
Company ("YESCo") and R.M. Services, Inc. ("RMS"). These companies are
referred to collectively herein as "the Yankee Energy System." YES' business
essentially is confined to the ownership of its subsidiaries. Yankee Gas,
the principal subsidiary of YES, is a Connecticut corporation that purchases,
distributes and sells natural gas at retail in Connecticut.
All four non-utility subsidiaries are Connecticut corporations. NorConn
was formed in 1988 to hold property and facilities of the Yankee Energy
System. Yankee Financial, incorporated in 1992, provides customers with
financing for energy equipment installations. YESCo provides a wide range of
energy-related services for its customers. Through its YESCo Controls
division, incorporated in November 1996, such services include comprehensive
building automation with engineering, installation and maintenance of
building control systems. Through its YESCo Mechanical Services division,
customers are provided comprehensive heating, ventilation and air-
conditioning (HVAC), boiler and refrigeration equipment services and
installation. RMS was formed in 1994 to provide debt collection service to
utilities and other businesses nationwide. YES, Yankee Gas, Yankee Financial,
NorConn, and YESCo, are predominantly intrastate in character.
Yankee Gas purchases, distributes and sells natural gas to approximately
185,000 residential, commercial and industrial users in Connecticut. Its
service territory consists of 69 cities and towns, and covers approximately
1,995 square miles, all in Connecticut and all within the service territory
of CL&P. Until YES was formed in 1988, Yankee Gas' gas business was part of
the NU system and was operated by CL&P on a fully integrated and coordinated
part of the NU system companies. NU divested Yankee Gas in 1989 through the
spin-off to its shareholders of the stock of YES, and believes that the re-
combination of Yankee Gas and NU will be facilitated and enhanced by the
companies' shared past.
Yankee Gas' assets include distribution lines (mains and services),
meters, pumps, valves and pressure and flow controllers, all located in
Connecticut. Yankee Gas owns approximately 2,820 miles of distribution
mains, 133,033 service lines, and 185,000 active meters for customer use, all
located in Connecticut. Yankee Gas also owns and operates various propane
facilities and six gas storage holders, all located in Connecticut. Yankee
Gas also contracts for storage capacity with other energy and pipeline
companies. Yankee Gas operates the largest natural gas distribution system in
Connecticut as measured by number of customers and size of service territory.
Total throughput (sales and transportation) for fiscal 1998 was 47.1 billion
cubic feet. In fiscal 1998, total gas operating revenues were comprised of
the following: 47% residential; 26% commercial; 18% industrial; and the
remaining 9% other. Yankee Gas provides firm gas sales service to customers
who require a continuous gas supply throughout the year, such as residential
customers who rely on gas for their heating, hot water, and cooking needs.
Yankee Gas also provides interruptible gas sales service to certain
commercial and industrial customers that have the capability to switch from
natural gas to an alternative fuel on short notice. Yankee Gas can interrupt
service to these customers during peak demand periods. Yankee Gas offers
firm and interruptible transportation services to customers who purchase gas
from sources other than Yankee Gas. In addition, Yankee Gas performs gas
exchanges and capacity releases to marketers to reduce its overall gas
expense.
Yankee Gas sells gas to its retail customers under rate schedules filed
with and approved by the DPUC. Firm sales rates are subject to monthly
adjustments pursuant to a Purchased Gas Adjustment ("PGA") clause approved by
the DPUC. The PGA passes through to customers the cost of gas purchased by
Yankee Gas. The PGA is designed to collect or refund differences between
actual purchased gas costs and the costs included in Yankee Gas' base rates.
In 1997, the DPUC conducted a review of the Connecticut local distribution
companies' ("LDC") PGA mechanism to determine if any changes were warranted.
The most significant change approved by the DPUC was the authorization for
LDCs to pass on to customers the costs of the Connecticut Gross Earnings Tax
related to PGA revenues.
FERC Order No. 636. In implementing Order No. 636, the FERC recognized
that the restructuring of the pipelines' traditional services would cause
pipelines to incur transition costs in several areas. The FERC has permitted
certain transition costs to be recovered by the pipeline companies from their
customers.
In July 1994, the DPUC issued an order permitting the recovery of
transition costs billed by pipelines under FERC Order No. 636 through various
mechanisms authorized by the DPUC. Though September 30, 1998, Yankee Gas
has paid approximately $20.5 million of transition costs and an additional
$2.5 million are anticipated. To date, Yankee Gas has collected $46.3
million through a combination of credits received from pipeline refunds,
capacity release agreements, deferred gas costs credits, off system sales
margins and excess interruptible margins. The DPUC approved a settlement
agreement in January 1996 and an amendment thereto in October 1997 between
Yankee Gas and the Connecticut Office of Consumer Counsel that permits Yankee
Gas to retain over-collected transition cost credits to offset certain
deferred regulatory assets. As of September 30, 1998, excess collections of
approximately $25.8 million were applied against the deferred regulatory
assets specified in the agreement.
In January 1996, the DPUC, in response to Order No. 636, authorized the
Connecticut LDCs to offer unbundled firm transportation rates to its
commercial and industrial customers. The DPUC's decision permits Yankee Gas
to offer a variety of service options to its commercial and industrial firm
transportation customers. Yankee Gas implemented new firm transportation
rates and services in April 1996. In October 1998, the DPUC issued a
decision making a number of modifications to the commercial and industrial
firm transportation program. These modifications, effective January 1, 1999,
are designed to simplify and improve the program based on the initial firm
transportation experience. As of September 30, 1998, Yankee Gas had
approximately 3,100 customers under firm transportation service. The
migration by existing customers to transportation service will result in
decreased revenues for Yankee Gas, as that portion of revenues representing
gas costs will be borne directly by these customers who will purchase their
own gas directly. Yankee Gas, however, does not expect customer migrations
to transportation service to affect its net income because under DPUC
regulation, the cost of gas has traditionally been a pass through item with
no income impact. The DPUC's October 1998 decision did not address Yankee
Gas' revenue requirement.
Order No. 636 also authorizes LDCs to make off system sales or to
release firm pipeline capacity and Yankee Gas has engaged in these activities
to maximize revenues and for effective gas supply planning.
Yankee Gas faces competition from other gas suppliers. In the past,
LDCs did not directly compete with other suppliers of gas for retail
customers because the territories they serve are fixed by franchise.
However, since 1996 in Connecticut, other suppliers, who registered with the
DPUC, began marketing efforts within Yankee Gas' service territory to supply
the gas while Yankee Gas provides the transportation service necessary
through its distribution system. NU and YES believe that deregulation of the
sale of natural gas has created an opportunity for their commercial and
industrial customers to achieve savings on the purchase price of natural gas
by helping customers lower the purchase price of natural gas.
Federal regulation also permits customers within Yankee Gas' franchise
to connect directly with transmission pipelines and bypass Yankee Gas'
distribution system under blanket certificates granted by the FERC. These
certificates allow gas to be sold, but not necessarily delivered, in the
service territory of another LDC. Within Yankee Gas' service territory,
Yankee makes available its transportation services to move other parties' gas
through its distribution system. However, a Connecticut statute currently
prohibits an interstate pipeline from bypassing an LDC without the DPUC's
prior approval.
C. Description of the Merger
The Merger Agreement provides that YES will merge into Merger Sub, a to-
be-formed wholly-owned subsidiary of NU. Merger Sub will be the surviving
company and will continue to conduct YES' businesses as a direct, wholly
owned subsidiary of NU. Merger Sub will change its name to Yankee Energy
System, Inc. as part of the Merger. In the Merger, each outstanding YES
share (other than those that are held by YES shareholders who have not voted
in favor of the Merger and have properly demanded dissenters' rights) will be
converted into the right to receive cash or NU Common Shares having a value
of $45 per share of YES common stock. The total consideration to be paid by
NU for the outstanding shares of YES common stock will be approximately $478
million, based on approximately 10.6 million shares of YES common stock
outstanding. YES shareholders can choose to convert some or all of their YES
shares into cash and others into NU Common Shares.
Each YES shareholder can elect the form of consideration he/she would
like to receive, but this election is subject to proration and an adjustment
driven by tax considerations so that 55% of all issued and outstanding YES
shares will be exchanged for cash (or $263 million in the aggregate), and
45% will be exchanged for NU Common Shares having an aggregate value of
approximately $215 million. If YES shareholders owning more than 55% of YES
shares elect to receive cash, the number of YES shares converted into cash
will be less than the number elected. Similarly, if YES shareholders owning
more than 45% of YES shares elect to receive NU Common Shares, the number of
YES shares converted into stock will be less than the number elected.
The per share cash consideration amounts to $45.00 in cash, without
interest. The per share stock consideration is that number of NU Common
Shares equal to $45.00 divided by the average closing trading price of NU
Common Shares 20 trading days prior to the second trading day before the date
the Merger becomes effective.
The Transaction is subject to customary closing conditions, including
the approval of the Commission. In addition, if the Merger does not become
effective within 6 months after the date of YES shareholder approval, October
12, 1999, the per share merger consideration will be increased by $.005 per
day or approximately $.15 per month per share. Moreover, if the Merger is
not consummated by September 14, 2000, solely because of NU's failure to
obtain Commission authorization under the Act, YES can terminate the Merger
Agreement and NU would have to pay YES a "break-up" fee of $1.00 per share,
or approximately $10.625 million. The Merger Agreement also contains other
termination provisions as are customary in merger transactions generally.
The Transaction is designed to qualify as a tax-free reorganization under
Section 368 of the Internal Revenue Code of 1986, as amended.
The Merger Agreement contains certain covenants relating to the conduct
of business by the parties pending the consummation of the Transaction, which
are customarily contained in merger transactions generally. As a general
matter, among other things, YES must carry on its business in the ordinary
course consistent with past practice, and may not increase dividends beyond
specified levels or issue capital stock, all except as otherwise specified.
The Merger Agreement also contains customary restrictions on, among other
things, charter and bylaw amendments, capital expenditures, acquisitions,
dispositions, incurrence of indebtedness and certain increases in employee
compensation and benefits and affiliate transactions.
Following consummation of the Transaction, the NU Board of Trustees will
be expanded by two positions which will be filled by two current outside
directors of YES selected by NU. The board of directors of Merger Sub will
consist of 7 directors, three of which will be current directors of YES
designated by NU and the other four will be selected by NU. Upon
consummation of the Transaction, members of the senior management of YES are
expected to remain members of senior management of either YES, NU or other
NU subsidiaries.
NU and YES believe that the Merger will give the combined company the
platform it needs for growth in a region that is rapidly deregulating,
allowing the company to market its portfolio of energy products to a broad
customer base.
When the Merger is complete the companies expect the combined company
will have the following primary businesses:
o retail natural gas and unregulated electricity sales;
o electric and gas distribution;
o wholesale natural gas and electricity sales and electric
transmission; and
o electric generation.
The companies intend to integrate these complementary businesses,
subject to applicable state and federal regulatory requirements. The
complementary nature of these businesses will over time result in lower costs
and in improved service. These businesses will not only serve existing
retail and wholesale customers, but will reach out to new customers as a full
service energy provider as both gas and electricity deregulation proceeds.
Applicant expects to achieve enhanced revenues and net income in the future
through increased efficiency in providing energy to customers, whether gas or
electric, and more competitive rates.
In addition, the Merger will ultimately enable the combined company to
realize cost savings from elimination of duplicate corporate and
administrative programs, greater efficiencies in operations and business
processes, and streamlined purchasing practices.
D. YES Reasons for the Merger
YES has been seeking to position itself to take full advantage of the
increased growth of the gas business that is resulting and will result from
the increased competition in gas marketing and the deregulation of the
electric industry. Over the past several years, YES' Board of Directors had
reviewed strategic options available to the Yankee Energy System to take
advantage of these opportunities and provide benefits for its customers,
shareholders and employees. Among the options considered during this time
were (1) remaining an independent and small-sized company concentrated in the
business of gas distribution in Connecticut; (2) growing the company through
increased emphasis on diversification into non-regulated businesses; (3)
looking for a merger partner of similar size; and (4) looking for a merger
partner of larger size.
Prior to the third quarter of 1998, management's efforts were directed
primarily to diversification activities through YESCo and RMS. During the
fourth quarter of 1998, the RMS business was showing strong potential, but
YESCo's diversification efforts had not yielded the magnitude of earnings
growth necessary to justify further substantial investment by YES, given YES'
size. During this period, the pace of consolidation within the gas industry
had picked up and electric utility companies were showing increased interest
in acquiring gas utilities due to the perceived advantage of being able to
offer customers multiple energy products and services, utilizing both
electricity and natural gas in a growing competitive environment.
Accordingly, in the period October 1998 through April 1999, YES undertook
various activities to explore potential business combinations.
In concluding that the Merger was in the best interests of YES and its
shareholders, YES' Board of Directors considered a variety of factors,
including an analysis of the Yankee Energy System's businesses, current and
future financial condition, current earnings and earnings prospects, the
competitive business environment and changing regulatory environment facing a
relatively smaller company such as Yankee Gas; alternatives, including the
prospects of continuing to operate as a small sized independent gas
distribution company or attempting to acquire other smaller distribution
companies in New England; the per share consideration to be paid in the
Merger; and its assessment of NU's future prospects and business strategy.
Based on these considerations, the Board determined that the benefits
resulting from this Merger will position YES, as part of the NU System, as
one of the premier energy distribution companies and provider of energy-
related services in the northeastern United States.
E. NU Reasons for the Merger
The economic benefits achievable through the combination of natural gas
with electric power operations serve the public interest by enabling energy
suppliers to satisfy the needs of consumers more efficiently. Given the
fundamental structural changes in the industry, the proposed transaction
clearly provides NU with an efficient way to resume its involvement in the
natural gas business, which in turn will allow the NU System utilities,
including Yankee Gas, to remain competitive with the growing number of energy
services companies offering customers a choice of fuels to meet their energy
needs.
Following the Merger, the NU System electric utility companies will face
the same competitive forces from other electric suppliers as prior to the
Merger, just as Yankee Gas will face the same competitive forces it faces
today. NU believes that it is possible for the gas business of Yankee Gas to
grow since there is significant room for additional consolidations among New
England's many small gas utilities. Prospects for the growth of Yankee Gas
operations, with the increased financial flexibility and strength provided to
it as part of the NU System, are strong. The saturation rate for gas in the
towns served by Yankee Gas is 33%. Gas penetration in New England is 45%,
below the national average. Yankee Gas also has one of the most modern gas
systems in the region, with a high level of plastic and high-grade steel
pipes.
As an energy services company with electric and natural gas
subsidiaries, NU will be positioned to offer its residential, commercial,
industrial, and municipal customers the convenience and efficiency of service
by a single energy provider with reduced transaction costs incurred in
gathering and analyzing information, contacting energy suppliers, negotiating
terms of services and paying bills. At the same time, NU's shareholders and
employees will benefit from an energy service company that is better able to
respond to a competitive environment, better able to remain an attractive
investment opportunity for shareholders, and better able to remain an
appealing employer for utility employees.
This Merger also represents a logical step in reaching the goal of NU
senior management to strategically, financially and technologically position
NU to remain the leading energy company in the region and become within the
next few years one of the top five providers of energy products and services
and a major energy trader in the Northeast. As part of this strategy, NU
will retain its regulated transmission and distribution companies as the
foundation of the NU System. These operations represent NU's core
competencies and embody its century-old history of delivering power to its
customers. Since the natural growth of NU's regulated electric business is
limited, however, by the modest growth of electric consumption in New
England, NU has undertaken various initiatives to spur increases in revenues
from regulated operations. These initiatives include pursuing opportunities
for business expansion in both the electric and natural gas distribution
businesses by, for example, combining with natural gas utilities such as YES.
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses paid or incurred, or to be paid or
incurred, directly or indirectly, in connection with the proposed transaction
by the Applicant are estimated to total approximately $10 million, as
follows:
Accountant Fees $*
Fees for outside counsel $*
Investment Bankers' Fees
Credit Suisse-First Boston $5,100,000**
Fees and Expenses relating to
Financing the Merger $*
Hart-Scott-Rodino Fees $45,000
SEC Filing Fees relating to
Registration Statement on Form S-4 $*
Printing and delivery $*
Miscellaneous costs $*
* to be filed by amendment.
** estimated.
None of such fees, commission or expenses will be paid to any associate
company or affiliate of the Applicant except for payments by NU for financial
and other services, to be performed at cost by NUSCO, an affiliated service
company.
Item 3. Applicable Statutory Provisions
The following sections of the Act and the Commission's rules thereunder
are or may be applicable to the authorization being sought hereunder by the
Applicant: 6(a), 7, 9(a), 10 and by reference Section 11.
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to the Transaction, such sections and rules
should be considered to be set forth in this Item 3.
Section 9(a)(2) makes it unlawful, without approval of the Commission
under Section 10, "for any person . . . to acquire, directly or indirectly,
any security of any public utility company, if such person is an affiliate
[under Section 2(a)(11)(A) of the Act] . . . of such company and of any other
public utility or holding company, or will by virtue of such acquisition
become such an affiliate." Under the definition set forth in Section
2(a)(11)(A), an "affiliate" of a specified company means "any person that
directly or indirectly owns, controls, or holds with power to vote, 5 per
centum or more of the outstanding voting securities of such specified
company."
Yankee Gas and the NU Operating Companies are public utility companies
as defined in Section 2(a)(5) of the Act. Because NU, an "affiliate" of the
NU Operating Companies within the meaning of Section 2(a)(11) of the Act,
will acquire more than five percent of the voting securities of YES as a
result of the Transaction, and will thereby become an affiliate of Yankee
Gas, NU must obtain the approval of the Commission for the Transaction under
Sections 9(a)(2) and 10 of the Act. The statutory standards to be considered
by the Commission in evaluating the proposed transaction are set forth in
Sections 10(b), (c) and (f) of the Act.
As recognized throughout Commission decisions and in the comprehensive
report issued by the Division of Investment Management in June 1995 entitled
"The Regulation of Public-Utility Holding Companies" (the "Division Report"),
the framers of the Act understood the need and intended for the Act to be
interpreted in a flexible manner, taking into account changes in the nature
of the utility industry over time. While the Applicant believes that the
requested authorization is within existing precedent, changes in the industry
make the case for the transaction even more compelling. For example, one
change that the Commission has recently explicitly recognized is that "the
utility industry is evolving towards a broadly based energy-related
business." (Consolidated Natural Gas Company, HCAR No. 26512 (April 30, 1996)
As will be discussed in greater detail below, this fundamental evolution
influences not only the appropriate notion of what a utility system consists
of, but also affects the value of benefits gained by becoming a full energy
services utility system.
Furthermore, this Transaction also provides an opportunity for the
Commission to follow certain of the interpretive recommendations made in the
Division Report as well as certain of the Commission's recent precedents
concerning the formation of new holding companies consisting of both electric
utilities and gas utilities. A number of the recommendations contained in
the Division Report serve to strengthen the Applicant's analysis and would
facilitate the acquisition of YES by NU, thus creating a company better able
to compete in the rapidly evolving utility industry. The Division's overall
recommendation that the Commission "act administratively to modernize and
simplify holding company regulation . . . and minimize regulatory overlap,
while protecting the interests of consumers and investors," should be used
in reviewing this Application/Declaration since, as demonstrated below, the
Transaction will benefit both consumers and shareholders of NU and it is
anticipated that the other federal and state regulatory authorities with
jurisdiction over this Transaction will approve it as in the public interest.
The Applicant believes that this Transaction is in accord with the recent
Commission decisions approving the retention of gas properties by newly
merged combination electric and gas companies under a registered holding
company and also is consistent with, and furthers the policy, of fostering
the creation of competitive energy services companies as the energy industry
continues its evolution towards a more competitive market. It is noted that
in the precedents of the Commission approving a registered holding company
consisting of both an electric utility and a gas utility, at least one of the
merger partners in those transactions was already a combination electric and
gas company and the Commission was addressing the question of whether an
additional system could be retained by the principal system rather than
acquired. (See, WP Holdings, Inc. HCAR No. 26856 (April 14, 1998), New
Century Energies, Inc. HCAR No. 26748 (August 1, 1997). In the instant
situation, NU, a registered electric utility holding company, is acquiring
YES, an exempt gas utility holding company, and, thus, the Transaction is
the first time the Commission is presented with the question of whether a
"pure" electric registered holding company can acquire a "pure" gas company
where the approval being sought is of the acquisition not the retention. (As
noted below, the Commission has approved an exempt "pure" electric utility's
acquisition of an exempt "pure" gas utility. See, TUC Holdings, Inc., HCAR
No. 35-2674 (Aug. 1, 1997)).
The Applicant believes the Commission should approve the Transaction as
a matter of policy and as a matter of fairness and can approve the
Transaction as a matter of law. First, the Commission has already
acknowledged that the electric and gas industries are converging and that
separation of gas and electric businesses may cause the separated entities to
be weaker competitors than they would otherwise be together. (New Century
Energies, Inc., HCAR No. 26748 (Aug. 1, 1997)). The Commission has
recognized and accepted the changing nature of the energy industry and, in
particular, the fact that the combination of electric and gas operations in a
single company offers that company a means to compete more effectively in the
emerging energy services business in which a few cents can make the
difference between economic success and economic failure. WPL Holdings,
Inc., HCAR No. 26856 (April 14, 1998), aff'd sub nom., Madison Gas and
Electric Company v. Securities and Exchange Commission, (D.C. Cir. 1999). In
the present Transaction, the lost economies that would follow from denial of
approval for the Merger are substantial, both quantitatively and
qualitatively. Second, as indicated, the Commission has allowed exempt
holding companies to acquire gas utilities and thereby to become combination
companies, (see TUC Holding Company, HCAR No. 26749 (August 1, 1997), and
Houston Industries Incorporated, HCAR No. 26744 (July 24, 1997)), and has
allowed newly formed registered holding companies to retain their combination
assets. (See WPL Holdings, Inc., HCAR No. 26856 (April 14, 1998) and New
Century Energies, Inc., HCAR No. 26748 (Aug. 1, 1997)). Lastly, the proposed
Merger seeks to combine two utility companies that had previously operated as
a combination company for 22 years. The two companies share a rich history
and many employees of one company had previously worked for the other. This
factor should also be considered in determining whether the Merger is
consistent with public policy.
The Transaction satisfies all of the requirements of Section 10 and
should therefore be approved. Specifically, as the following discussion more
fully explains:
1. the Transaction will not tend towards interlocking relations or
the concentration of control of public utility companies to the
detriment of investors and consumers;
2. the consideration, including all commissions and fees, to be paid
in connection with the Transaction is reasonable;
3. the Transaction will not unduly complicate the capital structure of
the NU holding company system;
4. the Transaction is in the public interest and the interests of
consumers and investors;
5. the Transaction will tend towards the development of an integrated
gas utility system; and
6. the Transaction will comply with all applicable State laws.
A. Section 10(b)
1. Section 10(b)(1)
Section 10(b)(1) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to an
extent detrimental to the public interest or the interests of investors or
consumers. The Applicant believes that the Merger will not tend toward
interlocking relationships or concentration of control that would be
detrimental to the public interest or the interest of investors or consumers
because (i) following the Merger, CL&P and Yankee Gas will remain subject to
regulation by the DPUC which operates pursuant to regulations specifically
designed to protect the public interest and the interests of consumers; (ii)
the Merger will not increase the size of the NU system dramatically and after
the Merger, NU will be a holding company comparable in size to or smaller
than other utility holding companies that the Commission has approved; and
(iii) as a result of the Merger, NU expects, over time, to achieve economies
of scale and efficiencies and expects to be able to compete more effectively
in the evolving utility industry, which will benefit both shareholders and
ratepayers and will be in the public interest.
Interlocking Relations. With regard to interlocking relations, any
merger, by its nature, results in new links between theretofore unrelated
companies. However, these links are not the types of interlocking
relationships targeted by Section 10(b)(1), which was primarily aimed at
preventing business combinations unrelated to operating synergies. Under the
terms of the Merger Agreement, following consummation of the Transaction, the
NU Board of Trustees will be expanded by two positions which will be filled
by two current outside directors of YES designated by NU. The board of
directors of Merger Sub will consist of 7 directors, three of which will be
current directors of YES designated by NU to serve on Merger Sub's board and
the other four will be selected by NU. In addition, members of the senior
management of YES are expected to remain as members of senior management of
Merger Sub or other NU system companies. This combination of existing NU and
YES management is necessary to integrate YES fully into the NU system and
will help NU realize the expected synergies from the Merger. In addition,
such continuity in management will help to assure the responsiveness of NU
management to local regulation and to other essentially local interests
(e.g., consumers, labor, etc.).
Regulation. Both CL&P and Yankee Gas are currently, and following the
Merger will remain, subject to the jurisdiction of the DPUC with regard to
rates, terms and conditions for service, affiliate transactions, service
territory and various other matters. The level of regulatory authority of
the DPUC over CL&P and Yankee Gas will not be affected in any manner by the
Merger. Accordingly, the presence of continuing state regulation will help
to ensure that that the Merger will not have a detrimental effect on the
public interest or consumers. Moreover, rather than provide a means for
evading regulation, the Transaction, by virtue of the fact that YES will be a
part of a holding company registered under the Act, will in fact increase the
regulation to which YES is currently subject and not affect the regulation to
which NU is subject. In the Division Report at p. 73-4, the Division of
Investment Management recommended that the Commission approach its analysis
on merger and acquisition transactions in a flexible manner with emphasis on
whether the transaction creates an entity subject to effective regulation and
is beneficial for shareholders and customers, as opposed to focusing on
rigid, mechanical tests.
Concentration of Control. Section 10(b)(1) is intended to avoid "an
excess of concentration and bigness" while preserving the "opportunities for
economies of scale, the elimination of duplicate facilities and activities,
the sharing of production capacity and reserves and generally more efficient
operations" afforded by the coordination of local utilities into an
integrated system. American Electric Power Co., 46 S.E.C. 1299, 1309 (1978).
In applying Section 10(b)(1) to utility acquisitions, the Commission must
determine whether the acquisition will create "the type of structures and
combinations at which the Act was specifically directed." Vermont Yankee
Nuclear Corp., 43 S.E.C. 693, 700 (1968). As discussed below, the Merger
will not create a "huge, complex, and irrational system" of a type at which
the Act is directed, but rather will afford the opportunity to achieve
economies of scale and efficiencies which are expected to benefit investors
and consumers. American Electric Power Co., 46 S.E.C. 1299, 1307 (1978).
Furthermore, the Merger will restore a partnership between YES and CL&P which
existed for many years. The combination in that time operated efficiently
and effectively and did not constitute an "irrational" system.
Efficiencies and Economies. The Commission has rejected a mechanical
size analysis under Section 10(b)(1) in favor of assessing the size of the
resulting system with reference to the efficiencies and economies that can be
achieved through the integration and coordination of utility operations.
American Electric Power Co., 46 S.E.C. 1299, 1309. More recent
pronouncements of the Commission confirm that size is not determinative.
Thus, in Centerior Energy Corp., HCAR No. 24073 (April 29, 1986), the
Commission stated flatly that a "determination of whether to prohibit
enlargement of a system by acquisition is to be made on the basis of all the
circumstances, not on the basis of size alone." See also Entergy Corporation,
HCAR No. 25952 (December 17, 1993).
By virtue of the Transaction, NU and YES, as a combined company, will be
in a position to realize substantial opportunities to become a more effective
competitor in a rapidly deregulating and increasingly competitive energy
market that neither, acting alone, would be in a position to achieve. In
addition, the combined company will over time be able to produce capital
expenditure savings through the elimination of duplicate facilities and
activities, labor cost savings, administration and general savings and cost
of capital savings. These expected economies are described in greater detail
elsewhere in this Application. The combination of NU and YES offers the same
type of synergies and efficiencies that were sought and are now being
realized by the applicants (both exempt and registered) in TUC Holding
Company, HCAR No. 26749 (Aug. 1, 1997); Houston Industries Incorporated, HCAR
No. 26744 (July 24, 1997); WPL Holdings, Inc., HCAR No. 26856 (April 14,
1998); and New Century Energies, Inc., HCAR No. 26748 (Aug. 1, 1997).
Size. As of March 31, 1999, NU had total assets of $10.4 billion, while
for the year ended December 31, 1998, NU had operating revenues of $3.77
billion and 1.11 million utility customers in Connecticut (two other NU
subsidiaries serve approximately 422,000 and 196,000 customers in New
Hampshire and Massachusetts, respectively). As of March 31, 1999, YES had
total assets of $548 million, while for the year ended September 30, 1998,
YES had utility revenues of $284 million and approximately 185,000 utility
customers. On a pro forma basis, giving effect to the Merger, (i) as of
March 31, 1999, the combined assets of the Company would have totaled
approximately $11 billion; and (ii) for the year ended December 31, 1998, the
Company would have had combined operating revenues totaling approximately
$4.06 billion and approximately 1.29 million utility customers.
By comparison, the Commission has approved a number of acquisitions
involving larger operating utilities (see, e.g., TUC Holding Company, Inc.,
HCAR No. 26749 (Aug. 1, 1997), approving the acquisition and combination of
Texas Utility Company and Enserch Corporation, with combined assets at the
time of acquisition of approximately $24 billion, Entergy Corp., HCAR No.
25952 (Dec. 17, 1993), approving the acquisition of Gulf States Utilities by
Entergy, with combined assets at time of acquisition in excess of $21
billion; The Southern Company, HCAR No. 24579 (Feb. 12, 1988), approving the
acquisition of Savannah Electric and Power Company to create a system with
assets of $20 billion).
Competitive Effects: The Transaction will have no adverse effect on the
competitive environments in which NU's electric business operates. Following
the Transaction, NU's electric business will face the same competitive forces
from other electric suppliers as prior to the Transaction. The Transaction
will have no adverse effect on the competitive environments in which YES' gas
business operates. Following the Transaction, YES' gas business will face
the same competitive forces from other gas suppliers as prior to the
Transaction.
The NU Operating Companies do not generally compete directly with Yankee
Gas for several reasons. First, there is little substitution between gas and
electricity as energy sources in most industrial and commercial applications.
Technically, gas cannot be substituted for electricity on an instantaneous
basis because most industrial and commercial processes are energy-specific.
Thermal processes most often employ natural gas, while motor and machine
driven processes employ electricity. Where an industrial or commercial
application permits the use of either fuel, the substitution of one fuel for
another requires equipment investment and other expense that does not allow
substitution in response to relatively insignificant price changes. Most
often, the choice of fuel is dictated by numerous considerations in addition
to fuel prices, such as quality control, safety and environmental concerns.
For residential users, natural gas cannot be substituted for electricity in
lighting, refrigeration, and most household appliances. The amount of fuel
used for residential cooking is very small, and the choice of equipment tends
to be dictated by personal preference rather than by fuel price. Residential
customers generally choose fuel sources for heating based on many factors,
including equipment prices, reliability, service, the size of the home,
perceptions of energy efficiency and matters of comfort, convenience and
aesthetics, and not solely based on relative fuel price.
Second, there will be competition in the retail market for industrial
and commercial customers of natural gas in Connecticut. In the past, LDCs
did not directly compete with other LDCs for retail customers because the
territories they serve are fixed by franchise. However, since 1993, LDCs and
marketers began marketing efforts within the service territory of other LDCs
under blanket certificates granted by the FERC. These certificates allow gas
to be sold, but not necessarily delivered, in the service territory of
another LDC. Within Yankee Gas' service territory, Yankee makes available
its transportation services to move other parties' gas through its
distribution system. Yankee does not currently market gas in other LDC
service territories.
Federal regulation also permits customers within Yankee Gas'
distribution system to connect directly with transmission pipelines and
bypass Yankee Gas' distribution system. However, a Connecticut statute
currently prohibits an interstate pipeline from bypassing a LDC without the
DPUC's prior approval.
Following the Merger, the NU electric utility companies will face the
same competitive forces from other electric suppliers as prior to the Merger,
just as Yankee Gas will face the same competitive forces from other gas
suppliers it faces today. Because these utilities' competitive behavior is
shaped by competition with their respective energy "peers," and because the
NU Operating Companies and Yankee Gas rarely engage in direct competition in
any event, the Merger will have little or no adverse effect on competition in
a manner or to an extent detrimental to the public interest or the interests
of investors or consumers.
The Commission should also note that NU and YES have filed Premerger
Notification and Report Forms with the Antitrust Division of the Department
of Justice (the "DOJ") and the Federal Trade Commission (the "FTC") pursuant
to the Hart-Scott-Rodino Antitrust Improvements Act of 1974, as amended (the
"HSR Act") describing the effects of the Merger on competition in the
relevant market and it is a condition to the consummation of the Merger that
the applicable waiting periods under the HSR Act must expire and clearances
obtained. Such filings were made on October 29, 1999 and accelerated
termination of the waiting period was requested.
For these reasons, the Transaction will not "tend toward interlocking
relations or the concentration of control" of public utility companies, of a
kind or to the extent detrimental to the public interest or the interests of
investors or customers within the meaning of Section 10(b)(1).
2. Section 10(b)(2)
Section 10(b)(2) provides that an acquisition of securities or utility
assets should be approved, unless the consideration, including all fees,
commissions, and other remuneration, to whomsoever paid, to be given,
directly or indirectly, in connection with such acquisition is not reasonable
or does not bear a fair relation to the sums invested in or the earning
capacity of the utility assets to be acquired or the utility assets
underlying the securities to be acquired.
Fairness of Consideration: For the reasons set forth below, the
requirements of Section 10(b)(2) regarding consideration are satisfied in
this Transaction. In its determinations as to whether or not a price meets
such standard, the Commission has considered whether the price was decided as
the result of arms length negotiations (In the Matter of American Natural Gas
Company, HCAR No. 15620 (Dec. 12, 1966)), whether each of the parties' Board
of Directors has approved the purchase price, the opinions of investment
bankers (Consolidated Natural Gas Company, HCAR No. 25040 (Feb. 14, 1990))
and the earnings, dividends, book and market value of the shares of, the
company to be acquired (In the Matter of Northeast Utilities, HCAR No. 15448
(Apr. 13, 1966)).
The fairness of the consideration involved in the Merger is evidenced by
the fact that the amount of consideration paid to YES shareholders under the
Merger Agreement is the product of a process conducted by an investment
banker appointed by YES and extensive and vigorous arms-length negotiations
between NU and YES. The Merger Agreement was approved by the Board of
Trustees of NU and the Board of Directors of YES acting in accordance with
their fiduciary duties to shareholders and others. These negotiations were
preceded by thoughtful analysis and evaluation of the assets, liabilities and
business prospects of YES and involved careful due diligence by NU. These
negotiations concluded with the offer of consideration consisting of a
combination of cash and NU Common Shares in the amount of $45.00 per YES
share. As recognized by the Commission in Ohio Power Co., 44 S.E.C. 340, 346
(1970), prices arrived at through arms-length negotiations are particularly
persuasive evidence that Section 10(b)(2) is satisfied.
In addition, nationally-recognized investment bankers for each of NU and
YES have reviewed extensive information concerning the companies and served
as financial advisors to NU and YES. The financial advisor for YES has also
opined that the consideration is fair, from a financial point of view, to the
holders of YES common stock.
In light of these opinions and an analysis of all relevant factors,
including the benefits that may be realized as a result of the Transaction,
NU believes that the consideration payable to YES shareholders falls within
the range of reasonableness, and the consideration for the Transaction bears
a fair relation to the sums invested in, and the earning capacity of, the
utility assets of YES.
Reasonableness of Fees. NU and YES believe that the overall fees,
commissions and expenses incurred and to be incurred in connection with the
Transaction are reasonable and fair in light of the size and complexity of
the Transaction relative to other transactions and the anticipated benefits
of the Transaction to the public, investors and consumers; that they are
consistent with recent precedent; and that they meet the standards of Section
10(b)(2).
As set forth in Item 2 of this Application/Declaration, NU expects to
incur a total of approximately $ 10 million in fees, commissions and expenses
in connection with the Transaction. This total is solely an estimate, but NU
believes that the actual total will not vary significantly. NU believes that
the estimated fees and expenses in this matter bear a fair relation to the
value of its combined company and the strategic benefits to be achieved by
the Merger, and further that the fees and expenses are fair and reasonable in
light of the complexity of the Merger. By contrast, TUC and Enserch incurred
$37 million in fees, commission and expenses in connection with their
reorganization as subsidiaries of TUC Holdings, Inc., Cincinnati Gas &
Electric Company and PSI Resources incurred $47.1 million in fees,
commissions and expenses in connection with their reorganization as
subsidiaries of CINergy, and Entergy alone incurred approximately $38 million
in fees, commissions and expenses in connection with its acquisition of Gulf
States Utilities -- all of which amounts were approved as reasonable by the
Commission. See TUC Holdings, Inc., HCAR No. 26749 (August 1, 1997); CINergy,
HCAR No. 26146 (Oct. 21, 1994); and Entergy Corp., HCAR No. 25952 (Dec. 17,
1993).
Furthermore, based on a price for YES stock of $45.00, the Merger would
be valued at approximately $478 million (excluding the outstanding debt of
YES). The total estimated fees and expenses of $10 million represent
approximately 2% of the value of the consideration to be paid to shareholders
of YES by NU, and are consistent with percentages previously approved by the
Commission. See, e.g., Entergy Corp., HCAR No. 25952 (Dec. 17, 1993) (fees
and expenses represented approximately 1.7% of the value of the
consideration paid to the shareholders of Gulf States Utilities); Northeast
Utilities, HCAR No. 25548 (June 3, 1992) (fees and expenses represented
approximately 2% of the value of the assets to be acquired).
With respect to financial advisory fees, NU believes that the fees
payable to their investment bankers are fair and reasonable for similar
reasons. Pursuant to the terms of an engagement letter dated April 13,, 1999,
NU has agreed to pay Credit Suisse First Boston ("CSFB") a transaction fee of
0.75% of the total consideration paid to YES in connection with the Merger or
approximately $5.1 million. NU has also agreed to reimburse CSFB for its
out-of-pocket expenses, including all fees and disbursements of its legal
counsel and other advisors retained by CSFB, and to indemnify CSFB and
certain related persons against certain liabilities in connection with its
engagement, including certain liabilities under the federal securities laws.
3. Section 10(b)(3)
Section 10(b)(3) directs approval of an acquisition unless the
Commission finds that the Transaction will unduly complicate NU's capital
structure or will be detrimental to the public interest, the interests of
investors or consumers or the proper functioning of NU's system.
Capital Structure: The corporate capital structure of NU after the
Transaction will not be unduly complicated and will be substantially similar
to the capital structure of NU prior to the Merger and, with the exception
that both NU and Merger Sub will be registered holding companies under the
Act, similar to those of existing registered holding company systems approved
by the Commission in other orders. See, e.g., TUC Holdings, Inc., HCAR No.
26749 (Aug. 1, 1997); CINergy, HCAR No. 26146 (Oct. 21, 1994); Centerior
Energy Corp., HCAR No. 24073 (April 29, 1986); Midwest Resources, et al.,
HCAR No. 25159 (Sept. 26, 1990); and Entergy Corp., HCAR No. 25952 (Dec. 17,
1993);
In the Transaction, the common shareholders of YES will receive a
combination of cash and NU Common Shares in exchange for their share of YES
Common Stock. After the Merger, NU will own 100% of the common stock of YES
and there will be no minority common stock interest in YES or any of its
subsidiaries. The capitalization of NU's subsidiaries will not be affected
in any way. The debt securities of NU and its subsidiaries will not be
affected by the Merger. The debt of YES' subsidiaries outstanding at the
time of the consummation of the Transaction will remain outstanding without
change.
Set forth below are summaries of the historical capital structure of NU
for the year ended December 31, 1998 and of YES for the year ended September
30,1998 and the pro forma consolidated capital structure of NU (assuming the
Transaction had occurred at December 31, 1998):
NU and YES Historical Capital Structures
(dollars in thousands)
(as of 12/31/98)
NU YES
Total Common Equity $2,047,372 $164,992
Preferred Stock not
subject to mandatory redemption 136,200 -----
Preferred Stock subject
to mandatory redemption 167,539 -----
Long-term Debt (net) 3,282,138* 131,048
-------- --------
Total $5,633,249 $296,040
* All but approximately $ 158 Million is debt of NU's subsidiary companies;
Long-term debt of NU was previously approved by the Commission in
connection
with the PSNH Merger.
NU Pro Forma Consolidated Capital Structure
(Dollars in millions)(unaudited)
Common Stock $ 2,212,364 37%
Preferred Stock not
subject to mandatory redemption 136,200 2.24%
Preferred Stock subject
to mandatory redemption 167,539 2.76%
Long-Term Debt (net) 3,413,186 58%
-------- -------
Total
$ 5,929,289 100.0%
NU's pro forma consolidated common equity to total capitalization ratio of
37% approximates the common equity position approved by the Commission for
CINergy (39.5%) and comfortably exceeds the "traditionally acceptable 30%
level." Northeast Utilities, HCAR 25221 (December 21, 1990).
The registration of Merger Sub under the Act and, thereafter, the
continued existence of both Merger Sub and NU as registered holding companies
in the same system is unusual but is not inappropriate for the facts of this
situation particularly given the fact that NU will be the holding company of
the NU Operating Companies and Merger Sub will be the holding company of a
separate integrated utility system consisting of the gas utility. The
benefits of such a structure are substantial and outweigh any undue interest
in simplicity for its own sake. The primary benefits of such a structure are
that it would enable Merger Sub to take advantage of the provisions of the
Gas Related Activities Act ("GRRA") which are applicable only to registered
gas holding companies, and it would enable NU, if it so desired, to acquire
additional gas utility companies using YES as the holding company for such
additional systems. These benefits would be available to YES and flow
through to and benefit the NU system.
Presently, YES is an exempt gas utility holding company, not subject to
the limitations of the Act in its activities. The GRRA was intended to
"level the playing field" to enable registered gas utility holding companies
to compete on an equal plane with exempt and unregulated gas companies. It
would be anomalous to deny the benefits of the GRRA to YES simply because it
has become a subsidiary of a registered electric utility holding company,
while it could obtain these benefits if it joined registered gas holding
company system. Such an outcome could deter convergence mergers of the sort
being proposed here.
The Commission has equated the public interest with the interest in a
financially sound U.S. utility industry. Realization of the tangible
economic benefits of this structure contributes to the financial stability of
the NU-YES system and outweighs any historical preference for one registered
holding company over all subsidiaries. Consumer interests are likewise not
impaired as no change is being made to the capital structures of any of the
operating subsidiaries (either electric or gas) in the combined system and
each such operating subsidiary will continue to be regulated by relevant
regulators as they were prior to the Merger.
Protected interests: As set forth more fully elsewhere in this
Application/Declaration, the Transaction is expected, over time, to result in
otherwise unavailable, cost savings and benefits to the public and to
consumers and investors of NU and YES, and will integrate and improve the
efficiency of the NU and YES utility systems. Moreover, as noted by the
Commission in Entergy Corporation, HCAR 25952 (December 17, 1993), "concerns
with respect to investors' interests have been largely addressed by
developments in federal securities laws and the securities market
themselves." NU and four of the NU Operating Companies are reporting
companies subject to the continuous disclosure requirements of the Exchange
Act and will continue to be so following completion of the Transaction, which
will provide investors with readily available information concerning these
companies. Likewise, YES has been and will continue to be a reporting
company post-merger. Furthermore, the Transaction is subject to state
regulatory approval, which will have been obtained prior to the consummation
of the Merger (see Item 4 - Regulatory Approvals, below).
The economic benefits achievable through the combination of natural gas
operations with electric power operations serve the public interest through
enabling energy suppliers to satisfy the needs of consumers more efficiently.
In Consolidated Natural Gas Co., HCAR No. 35-26512 (April 30, 1996), the
Commission acknowledged the nature of the market energy suppliers must
prepare to satisfy: "fundamental changes in the energy industry are leading
to an increasingly competitive and integrated market in which marketers deal
in interchangeable units of energy expressed in British thermal unit values,
rather than natural gas or electricity. To retain and attract wholesale and
industrial customers, utilities need to provide competitively priced power
and related customer services . . . . It now appears that the restructuring
of the electricity industry now underway will dramatically affect all United
States energy markets as a result of growing interdependence of natural gas
transmission and electric generation; and the interchangeability of different
forms of energy, particularly gas and electricity." The Merger is designed
to position the Applicant to be responsive to these emerging market
conditions and is therefore consistent with the public interest. For these
reasons, NU submits that the Commission would have no basis for making a
negative finding under Section 10(b)(3).
B. Section 10(c)
The relevant provisions of Section 10(c) of the Act state that,
notwithstanding the provisions of Section 10(b), the Commission shall not
approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11; or
(2) the acquisition of securities or utility assets of a public utility
or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated public
utility system.
1. Section 10(c)(1)
i. Retention of the Gas Properties
Section 8 Analysis. Section 10(c)(1) requires that an acquisition not
be "unlawful under the provisions of Section 8." Section 8 prohibits
registered holding companies from acquiring, owning interests in or operating
both a gas and an electric utility serving substantially the same area if
prohibited by state law. The only state in which NU and YES have overlapping
service territories is Connecticut. There is no state law, regulation or
policy which would prohibit the Transaction provided that DPUC approval is
obtained. NU and YES have made the appropriate filing with the DPUC and
anticipate that the Transaction will be approved by the DPUC. Moreover, the
prior fear that a holding company such as NU would be able to greatly
emphasize one form of energy over the other based on its own agenda has
dissipated both because of the competitive nature of the energy market, which
requires utilities to meet customer demand for energy supply requirements or
risk losing the customer to a competing supplier (whether electrical or
natural gas is largely irrelevant, the ultimate customer requirement is for
energy), and because state regulators will have sufficient control over, a
combination company to ensure that it will act in the public interest.
Accordingly, the Transaction will not be unlawful under the provisions of
Section 8.
Section 11 Analysis. Section 10(c)(1) also requires that the
Transaction not be detrimental to the carrying out of the provisions of
Section 11. In pertinent part, Section 11(b)(1) generally confines the
utility properties of a registered holding company to "a single integrated
public utility system," either gas or electric. The Commission has stated
that it is not of the view that the Act "expresses a Federal policy against
combined gas and electric operations as such. The Act is concerned with
interstate holding company activities and within that area it prescribes
tests of retainability which must be met." WPL Holdings Inc., HCAR No. 26856
(April 14, 1998); New England Electric System, 41 S.E.C. 888, 892-93 (1964),
rev'd on other grounds; SEC v. New England Electric System, 346 F. 2d 399
(1st Cir. 1966), rev'd and remanded,384 U.S. 176 (1965); and New Century
Energies, Inc., HCAR No. 26748 (Aug 1, 1997). An exception to this
requirement is provided in section 11(b)(1)(A)-(C) (the "ABC clauses"). A
registered holding company may own more than one integrated system, if each
system meets the criteria of these clauses. WPL Holdings, Inc., HCAR No.
26856 (April 14, 1998). Specifically the Commission must find that (A) the
additional system "cannot be operated as an independent system without the
loss of substantial economies which can be secured by the retention of
control by the holding company of such system, (B) the additional system is
located in one or more adjoining states, and (C) the combination of systems
under the control of the single holding company is not so large . . . as to
impair the advantages of localized management, efficient operation, or the
effectiveness of regulation." The standards of each clause must be
satisfied. (WPL Holdings, Inc., HCAR No. 26856 (April
14, 1998) Note 29).
Section 2(a)(29)(A) defines an integrated public-utility system, as
applied to electric utility properties, to mean:
a system consisting of one or more units of generating plants and/or
transmission lines or distributing facilities, whose utility assets,
whether owned by one or more electric utility companies, are physically
interconnected or capable of physical interconnection and which under
normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operations to a
single area or region, in one or more States, not so large as to impair
. . . the advantages of localized management, efficient operations, and
the effectiveness of regulation.
Section 2(a)(29)(B) defines an integrated public-utility system, as
applied to gas utility properties, to mean:
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by
being operated as a single coordinated system confined in its operations
to a single area or region, in one or more States, not too large as to
impair . . . the advantages of localized management, efficient
operations, and the effectiveness of regulation: Provided, That gas
utility companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
In view of the separate definitions and their differing criteria, the
Commission has long held that gas and electric properties do not together
constitute an integrated system. (See SEC v. New England Electric System, 384
U.S. at 178, n.7 and the cases cited in that case (1965); WPL Holdings Inc.,
HCAR No. 26856 (April 14, 1998); and New Century Energies, Inc., HCAR No.
26748 (August 1, 1997)). As stated above, however, the Commission has held
that a registered holding company may own utility properties that are not
part of its principal integrated system only so long as they satisfy the ABC
clauses. (See., e.g., WPL Holdings, Inc.; United Gas Improvement Co., 9
S.E.C. 52, 65 (1941); and Philadelphia Co., 28 S.E.C. 35 (1948, aff'd, 177
F.2d 720 (D.C. Cir. 1949)).
It is clear that the Transaction will result in a combined system that
will not be detrimental to the carrying out of Section 11. The electric
utility system of NU (including CL&P, WMECO and PSNH) is presently
"integrated" within the meaning of Section 2(a)(29) of the Act and will
remain so after the Transaction. The Transaction will not affect the
physical interconnection of such electric utility system. Likewise, the area
of operations of such system will not be affected by the Transaction. The
gas operations of YES will be operated as a separate integrated system and
the Transaction, as discussed below, satisfies the ABC clauses. The
Applicant hereby requests approval of the Merger and the acquisition and
retention of the gas properties of YES.
ABC Clauses. Section 11(b)(1) of the Act permits a registered holding
company to control one or more additional integrated public utility systems -
- - i.e., gas as well as electric -- if:
(A) each of such additional systems cannot be operated as an
independent system without the loss of substantial economies which
can be secured by the retention of control by such holding company
of such system;
(B) all of such additional systems are located in one state, adjoining
states, or a contiguous foreign country; and
(C) the continued combination of such systems under the control of such
holding company is not so large (considering the state of the art
and the area or region affected) as to impair the advantages of
localized management, efficient operation, or the effectiveness of
regulation.
Each of these requirements is satisfied in this Transaction. The
acquisition is, therefore, appropriate on the basis of Section 11(b)(1).
Clause A. Clause A requires a showing that each of such additional
systems cannot be operated as an independent system without the loss of
substantial economies which can be secured by the retention of control by
such holding company of such system. The Commission has noted that, by its
terms, clause A of section 11(b)(1) requires the Commission to consider
whether an additional system can be operated as an independent system
"without the loss of substantial economies." The Commission has historically
given consideration to four ratios as a "guide" to determining whether lost
economies are "substantial" under Section 11(b)(1)(A). Specifically, the
Commission has examined the estimated loss of economies expressed in terms of
the ratio of increased expenses to the system's total operating revenues,
operating revenue deductions (excluding federal income taxes), gross income
and net income before federal income taxes. (See, e.g. WPL Holdings, Inc.,
HCAR No. 26856 (April 14, 1998); and New England Electric System, 41 S.E.C.
at 898-99).
In a number of early cases, the Commission considered the increases in
operational expenses that were anticipated upon divestiture, but also took
into account, as offsetting benefits, the significant competitive advantages
that were perceived to flow from a separation of gas and electric operations.
Among these was the assumption that a combination of gas and electric
operations is typically disadvantageous to the gas operations and,
conversely, the assumption that the public interest and the interests of
investors and consumers (the protected interests under the Act) are promoted
by a separation of gas and electric operations.
Utility companies and related entities are presently in the midst of, or
have completed, restructurings or major transactions designed to permit them
to become complete energy services companies, offering customers an array of
fuels to meet their complete energy needs through a "one-stop" energy
company, an industry shift that the Commission has expressly recognized.
Recently, the Commission has approved various transactions wherein a gas
company and electric company were combined. All of those transactions
demonstrate that market forces are pushing for the convergence of electric
and gas operations in one corporate entity; namely, a full service energy
utility company.
Thus, the traditional model of a vertically integrated gas or electric
utility company is becoming, in various regions of the country, obsolete and
evidence continues to mount that the model utility company of the near future
will be the one-stop energy company. Evidence of this trend in Connecticut is
the electric utility restructuring legislation passed in Connecticut in 1998
and which is intended to promote competition and a movement to an unregulated
energy market in Connecticut. The Commission has recognized this trend and
has heeded the Division's recommendation made in the Division Report to
"liberalize its interpretation of the "ABC clauses."
In the Division Report, the Division noted that "it does not appear that
the SEC's precedent concerning additional systems precludes the SEC from
relaxing its interpretation of Section 11(b)(1)(A)" and "that the utility
industry is evolving toward the creation of one-source energy companies that
will provide their customers with whatever type of energy supply they want,
whether electricity or gas." The Division recommended that the Commission
interpret Section 11(b)(1) of the Act to allow registered holding companies
to hold both gas and electric operations as long as each affected state
utility regulatory commission approves of the existence of such a company.
In the present situation, following consummation of the Merger, the
entire NU system will be operated as a single coordinated system to the
extent that there will be a significant degree of centralized services
(including accounting, financial planning and analysis, financial reporting,
human resources, information systems, insurance, legal, payroll, purchasing,
tax, treasury, billing support, facilities management, call center services,
construction and environmental services and general administrative services)
provided by NU subsidiaries. Thus, following consummation of the
Transaction, the NU system will consist of a large integrated electric
utility system and a smaller integrated gas utility system which together
will operate on a coordinated basis offering services to customers in
substantially the same area in the State of Connecticut.
Taking this industry evolution into account, it becomes clear that the
Transaction will provide NU with an efficient basis for entering into the
natural gas business and provide YES with greater financial and other
resources, allowing the NU system utilities, including YES, to remain
competitive with the emerging one-stop energy services companies. After the
merger, NU believes that it will be able to offer its customers a choice of
fuels (gas and/or electricity) to meet their energy needs at competitive
prices in a more economical and efficient manner.
As indicated above, in its analysis of the applicability of the ABC
Clauses to a specific transaction, the Commission has historically examined
the estimated loss of economies to the additional system expressed in terms
of the ratio of increased expenses to the system's total operating revenues,
operating revenue deductions (excluding federal income taxes), gross income
and net income before federal income taxes. (See, e.g. WPL Holdings, Inc.,
HCAR No. 26856 (April 14,1998); and New England Electric System, 41 S.E.C. at
898-99). Although the Commission has declined to draw a bright-line
numerical test under Section 11(b)(1)(A), it has indicated that cost
increases resulting in a 6.78% loss of operating revenues, a 9.72% increase
in operating revenue deductions, a 25.44% loss of gross income and a 42.46%
loss of net income would afford an "impressive basis for finding a loss of
substantial economies." Engineers Public Service Co., 12 S.E.C. 41, 59
(1942).
In New Century Energies, Inc., the Commission applied the ABC Clauses to
a proposed acquisition by a to-be-registered holding company. The Commission
reconsidered and rejected the emphasis in many of its earlier cases requiring
evidence of a severe, even crippling, effect of divestment upon the separated
system. The Commission stated that this approach is outmoded in the
contemporary utility industry. The Commission explained that as a result of
the convergence of the gas and electric industries now underway, separation
of gas and electric businesses may cause the separated entities to be weaker
competitors than they would be together. This factor therefore operates to
compound the loss of economies represented by increased costs. This view was
repeated in WPL Holdings, Inc. In WPL Holdings, the Commission noted that,
although franchised monopolies are still the rule, competition is increasing
and increased expenses of separate operation may no longer be offset, as they
were in New England Electric System, by a gain of qualitative competitive
benefits, but rather may be compounded by a loss of these benefits.
As indicated earlier, the Commission's decision in past precedents
pertaining to registered holding companies involved determining whether the
registered holding company (i.e. principally an electric system) could
retain a separate system (i.e. a gas system) after the combination of two
companies, at least one of which was a combined gas and electric company
prior to the business combination. The analysis of lost economies, then, was
measured as economies that would be lost as a result of the divestiture of
the gas properties of the holding company. These economies that existed for
the combination gas and electric company prior to the combination for which
approval was being sought were realized over time and accordingly they were
quantifiable by estimating the amount of expenses which would be incurred by
the gas company in order to create a stand alone company. These expenses can
be calculated, at least in part, at a specific point in time, post-
divestiture. In the NU/YES combination, neither company is a combination gas
and electric company. Accordingly, the economies which were lost in the
Commissions' precedents have not yet been realized. Consequently, the lost
economies in the instant situation should be measured as those economies that
are expected to be gained over time by the Merger but would not be realized
if the Merger were not approved. Economies lost upon the divestiture of a
gas company, however are not the same as economies immediately gained as a
result of a merger of two companies. Lost economies as a result of a
divestiture result from the need to replicate services once performed by the
combination company, the loss of economies of scale pertaining to physical
plant and office space and purchasing, and other factors. In an acquisition
or merger scenario, as exists here, these types of economies are realized
over time and often, as here, cannot be quantified as significant immediate
gains but rather as gains over time which will not be realized if the Merger
is not approved.
The combination of the gas operations of YES into the NU system are
presently expected to realize, after a period of four to five years,
significant cost savings NU currently expects that these cost savings will
amount to approximately $10 million annually. These potential cost savings
translate into lost economies, if the Merger is not approved. The amount of
annual cost savings, once realized, compare with gas operating revenues of
$284 million, gas operating revenue deductions of $241 million; gas gross
income of $29 million; and gas net income of $17 million.
As indicated above, although the Commission has declined to draw a
bright-line numerical test concerning lost economies, it has indicated that
cost increases resulting in a 6.78% loss of operating revenues, a 9.72%
increase in operating revenue deductions, a 25.44% loss of gross income and a
42.46% loss of net income would afford an "impressive basis for finding a
loss of substantial economies." As a percentage of YES' 1998 gas operating
revenues ($284 million), the lost economies amount to 3.5%. As a percentage
of YES' 1998 expenses or operating revenue deductions ($241 million), the
lost economies would result in an increase of 4.1%. As a percentage of YES'
1998 gas gross income ($29 million), the lost economies amount to 34.5% and
as a percentage of YES' 1998 gas net income ($17 million), the lost economies
would equal 58%. The lost economies in relation to the gross gas income and
the net gas income are both higher than the standards set forth in Engineers
Public Service Co. while the lost economies in relation to gas operating
revenues and gas operating deductions are slightly lower.
In this matter, however, as in New Century Energies, Inc., other factors
operate to compound the loss of economies represented by the increased costs
set forth above. The Commission has previously taken notice of developments
that have occurred in the gas and electric industries in recent years, and
has interpreted the Act and analyzed proposed transactions in light of these
changed and changing circumstances (see, Consolidated Natural Gas Co., HCAR
No. 26512 (Apr. 30, 1996), New Century Energies, Inc., HCAR 26748, (August 1,
1997)). The Commission has repeatedly stated that it is of the view that
increased operational expenses are not alone sufficient to show satisfaction
of clause A (see, e.g., New Century Energies, HCAR No. 26748, Aug. 1, 1997,
New England Electric System, 41 S.E.C. 888, (1964), Standard Power and Light
Corp., HCAR No. 8242 (1948) (increased expenses are "not in and of
[themselves] determinative and cannot be regarded as conclusive proof of a
'loss of economies' in the amount of the increased expense"); and Engineers
Public Service Co., 12 S.E.C. 41, 62 (1942) (increased expenses are "not
necessarily equivalent to lost economies").
However, where in the past the Commission took into consideration the
benefits flowing from divestiture of the secondary utility, primarily in the
area of increased competition, the Commission has now recognized (see, e.g.
New Century Energies) that the gas and electric industries are converging
and, in these circumstances, separation of gas and electric businesses may
cause the separated entities to be weaker competitors than they would be
together. The Commission has previously noted that this factor now adds to
the quantifiable loss of economies caused by increased costs. The Applicant
believes that these factors must be considered in this situation and should
be viewed as a compelling factor in support of approval of the Merger.
NU's competitive position in the market would suffer because as the
utility industry moves toward a complete energy services concept, competitive
companies must be able to offer customers a range of options to meet their
energy needs. To date, the other two investor-owned LDCs in Connecticut have
announced business combinations with another utility, principally located
outside Connecticut. The same sort of merger and acquisition activity
concerning LDCs is also taking place in the other states of New England.
Given YES' size, it is apparent that it was necessary that YES combine with
another entity in order to continue to be a successful company. The Merger
allows YES to remain a part of a Connecticut utility system and will enable
NU and YES to offer their customers a significant and important option,
namely gas services. Refusal to approve the Transaction would compound the
increased costs described above because of a loss of qualitative competitive
benefits.
In addition, a substantial portion of the rationale for effecting the
Merger is the convergence of the electric and gas markets as the utility
industry evolves towards competition. NU and YES are seeking to create a
convergence company that will be an effective competitor. Limiting either NU
or YES to a single energy commodity through the refusal to authorize the
Merger would prevent each from realizing their combined competitive potential
and is not required as a matter of law.
The energy services company operating combination utilities offers a
wide range of benefits. For customers, an energy service company provides
the convenience and efficiency of service by a single energy provider and
reduces transaction costs incurred in gathering and analyzing information,
contacting energy suppliers, negotiating terms of services and paying bills.
For the communities in which an energy service company operates, combining
gas and electric operations simplifies community planning on energy-related
matters. For society, an energy service company is best able to ensure an
environmentally efficient allocation of energy. For utility shareholders and
employees, an energy service company is better able to respond to a
competitive environment and to remain an attractive investment opportunity
for shareholders and an appealing employer for utility employees.
Refusal to approve the Merger would also result in the loss to consumers
of the economies offered by the "energy services" approach of NU to the
utility business which would be realized if the Merger were approved. While
the losses cannot be fully quantified, they are clearly substantial. For the
energy services company, providing gas and electric products is only the
start of the job. Such a company must also provide enhanced service to the
consumer by providing an entire package of both energy products and services.
In this regard, the efforts of the NU system companies reflect a trend by
utilities to organize themselves as energy service companies which provide a
total package of energy services rather than merely supplying gas and
electric products. The goal of an energy service company is to retain its
current customers and obtain new customers in an increasingly competitive
environment by meeting customers' needs better than the competition. An
energy service company can provide the customer with a low cost energy (i.e.,
gas, electricity or conservation) option with a minimum of inefficient
subsidies.
As indicated, the proposed combination offers the Applicant a means to
compete more effectively in the emerging energy services business. The
Merger will not give rise to any of the abuses, such as ownership of
scattered utility properties, inefficient operations, lack of local
management or evasion of state regulation, that Section 11(b)(1) and the Act
generally were intended to prohibit. The Merger should have no effect upon
the ability of state ratemaking authorities to carry out their statutory
duties. As indicated earlier, it is anticipated that the DPUC will approve
the Merger and/or related transactions. It is anticipated that the DPUC will
find that gas customers will benefit from the Merger.
As indicated above and in more recent Commission precedents, the
Commission has adopted a new model of regulation under the Act which permits
convergence of energy services under a registered holding company and which
promotes competition among energy providers. In New Century Energies, the
Commission relied on both increased expenses and the potential loss of
competitive advantages that could result from separation from the electric
system in approving the merger. The Applicant believes that, consistent with
recent prior practice, the Commission should approve the Merger, relying on
both the increased expenses set forth above and the loss of potential
competitive advantages if the Merger is not approved. For all of the
foregoing reasons, the Commission should hold that the combination of NU and
YES as described herein is lawful under the provisions of Section 8 and is
not detrimental to the carrying out of the provisions of Section 11.
(B) and (C) Clauses. Clause B of the ABC Clauses requires that the
additional system be located in one or adjoining states. This requirement is
met because the gas operations of YES are located in one state (Connecticut)
which is one of the states in which NU's electric properties are located.
Clause C requires that the combination of systems under the control of
the single holding company is not "so large . . . as to impair the advantages
of localized management, efficient operation, or the effectiveness of
regulation." This requirement is also met because the combination of the
gas operations under NU is not so large (considering the state of the art and
the area or region affected) as to impair the advantages of localized
management, efficient operation or the effectiveness of regulation. After
the combination, the electric operations of CL&P will continue to be the same
as it is today with some 1.1 million customers in Connecticut and will,
accordingly, remain the largest electric operation in the region. However,
the gas systems of YES are confined to a relatively small area, with only
185,000 customers. Moreover, based on data through December 31, 1998, and
giving effect to the Transaction, these gas assets will represent less than
5% of the total utility assets of NU, utility operating revenues for the gas
operations will represent only 7% of the total NU utility revenues as
compared with 93% for the electric operations; and customers of the gas
operations will constitute 14% of all NU utility customers while electric
operations will represent 86%. Moreover, as the Commission has recognized
elsewhere, the determinative consideration is not size alone or size in an
absolute sense, either big or small, but size in relation to its effect, if
any, on localized management, efficient operation and effective regulation.
Furthermore, the gas systems are confined to only part of one state and
will preserve the advantages of localized management, efficient operation and
effectiveness of regulation after the Merger. There are no additional gas
properties among NU system companies with which YES will be combined. The
gas properties after the Merger will be the same size as prior to the Merger.
Although the Merger will increase the size of the NU system, YES is located
in the same state where NU's largest electric utility subsidiary, CL&P, and
NU's corporate headquarters are located. Therefore, there will be no adverse
effect on localized management, efficient operation or effective regulation.
With respect to localized management, YES will be operated as a separate
subsidiary of NU and will continue to be headquartered in Connecticut and
management will remain in Connecticut, thereby preserving the advantages of
localized management. From the standpoint of regulatory effectiveness, YES
will be organized as a separate holding company registered under the Act and
will consequently be subject to the regulation of the Commission and Yankee
Gas will continue to be regulated by the DPUC, which will ensure the
continued effectiveness of state regulation. In addition, the DPUC must
approve the Merger before it is consummated thereby ensuring that the DPUC
can continue to regulate the combined system effectively. Finally, as
detailed above, the gas operations of YES over time will realize additional
economies as a result of the Merger as part of the NU system. Far from
impairing the advantages of efficient operation, the continued combination of
the gas operations under NU will facilitate and enhance the efficiency of gas
operations.
ii. Retention of Other Businesses
As a result of the Transaction, the non-utility subsidiaries of YES
described in Item 1.B.2. above will become subsidiaries of Merger Sub and
therefore indirect subsidiaries of NU.
Standard for retention: Section 11(b)(1) permits a registered holding
company to retain "such other businesses as are reasonably incidental, or
economically necessary or appropriate, to the operations of [an] integrated
public utility system." Under the cases interpreting Section 11, an interest
is retainable if (1) there is an operating or functional relationship between
the operations of the utility system and the non-utility business sought to
be retained, and retention is in the public interest (see, e.g. Michigan
Consolidated Gas Co., 44 S.E.C. 361 (1970) aff'd 444 F.2d 913 (D.C. Cir.
1971)) or if (2) the business evolved out of the system's utility business,
the investment is not significant in relation to the system's total financial
resources, and the investment has the potential to produce benefits for
investors and/or consumers. (see, e.g. CSW Credit, Inc., HCAR No 25995
(1994); Jersey Central Power and Light Co., HCAR No. 24348 (March 18, 1987)).
In addition, the Commission has stated that "retainable non-utility interests
should occupy a clearly subordinate position to the integrated system
constituting the primary business of the registered holding company." (See,
e.g. United Light and Railways Co., 35 S.E.C. at 519). With respect to new
acquisitions, the Commission has interpreted Section 10(c)(1) of the Act to
mean that "any property whose disposition would be required under Section
11(b)(1) may not be acquired. (WPL Holdings, Inc., HCAR No. 26856 (April
14,1998)).
YES conducts non-utility operations through four active subsidiaries,
NorConn, Yankee Financial, YESCo and RMS. All four non-utility subsidiaries
are Connecticut corporations.
NorConn was formed in 1988 and its purpose is to hold non-utility
property interests that may be acquired by the Yankee Energy System. NorConn
owns YES' corporate office building and another service building and leases
both to Yankee Gas. There is clearly a functional relationship between the
operations of the utility system and NorConn, and retention is in the public
interest. (See, , New Century Energies, Inc., HCAR No. 26748 (Aug.1, 1997);
UNITIL Corp., HCAR No. 25524 (April 24, 1992); American Electric Power Co.,
HCAR No. 21898 (Jan. 27, 1981); and Commonwealth & Southern Corp., HCAR No.
7615 (Aug. 2, 1947)).
Yankee Financial, incorporated in 1992, offers energy equipment
financing for customers. Through a variety of programs, Yankee Financial
makes it possible for customers to acquire new equipment (i.e. gas, oil or
electric), upgrade existing equipment, and enhance the delivery of energy
services. Yankee Financial supports the growth of Yankee Gas and YESCo by
providing capital to fund the energy conversion needs of Yankee Gas'
commercial, industrial and residential customers as well as those of certain
noncustomers. Again, clearly there is an operating and functional
relationship between the operations of the utility system and the operations
of Yankee Financial, and retention is in the public interest. (See, New
Century Energies, Inc., HCAR No. 26748 (Aug.1, 1997); Central and South West
Corp., HCAR No. 26367 (Sept. 1, 1995); Entergy Corp., HCAR No. 25718 (Dec.
28, 1992); and Consolidated Natural Gas Co., HCAR No. 26234 (Feb. 23, 1995)).
YESCo provides a wide range of energy-related services for its
customers, including facility operations and maintenance, comprehensive
conversion equipment and control systems and mechanical and HVAC contracting.
Once again, there is clearly an operating or functional relationship between
the operations of the utility system and the business of YESCo, and retention
is in the public interest. (See, Columbia Energy Group, HCAR No. 26868 (May
6, 1998); Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998) and cases cited
therein).
RMS was created as a separate entity of YES in 1995 initially to provide
debt collection service to Yankee Gas and YESCo. Due to its excellent
performance, it began marketing its services to other utilities. In 1998,
RMS entered into a service agreement with Dun & Bradstreet Receivables
Management Services ("D&B"). Pursuant to the agreement, RMS will work with
D&B to provide consumer collections services to D&B's credit and collections
division, focused primarily on utility and telecommunications entities. With
the support of RMS, Yankee Gas has enjoyed one of the lowest uncollectible
rates among New England utilities. RMS satisfies the requirements of Section
11 as the RMS business evolved out of the system's utility business, and the
investment has the potential to produce benefits for investors and/or
consumers. The RMS business is a permissible activity under the "functional
relationship" test applied in Jersey Central Power & Light Company, HCAR No.
24348 (March 18, 1987). In that release, the Commission applied the
following three-prong test; whether: (1) the business had evolved in
connection with the system's utility business; (2) the investment in the
other business was not significant in relation to the system's total
financial resources; and (3) the investment had the potential to produce
benefits for investors or consumers. In this matter, the debt collection
service evolved in connection with debt collection services for Yankee Gas
and YESCo and there was little investment required to enable RMS to provide
these services to D&B and other businesses in relation to YES' total
financial resources. Lastly, the increased size of the business has the
potential to create benefits for customers and, ultimately, investors in
terms of lower costs to the system companies. The retention of RMS therefore
should be allowed because it satisfies the requirements of Section 11.
A number of general considerations support NU's retention of the non-
utility businesses of YES as subsidiaries of Merger Sub. First, as indicated
above, the businesses in question provide benefits to customers, investors
and the public. Second, the Transaction is, at heart, a utility combination,
in which the non-utility businesses are small and only incidentally involved,
amounting, in the aggregate, to less than 11% of consolidated revenues of the
YES system for the fiscal year ended September 30, 1998 and less than 1% of
the pro forma 1998 consolidated revenues of the NU system after giving effect
to the Merger. Accordingly, the nonutility businesses sought to be retained
will clearly occupy a subordinate position to the integrated electric and gas
system which will constitute the primary business of NU. Third, this is not
a case in which an existing registered holding company system is acquiring
solely non-utility interests; rather, NU is only seeking authorization to
retain the non-utility interests held by YES before the Transaction. Lastly,
these non-utility subsidiaries existed as subsidiaries of YES when YES was
exempted from the Act and, after the Merger, will be held directly by Merger
Sub, a registered holding company under the Act, as successor to YES. For
these reasons, NU submits that the Commission should find that retention of
YES' non-utility systems as subsidiaries of Merger Sub is permitted under
section 11(b)(1).
2. Section 10(c)(2)
Section 10(c)(2) requires that the Transaction tend toward the
economical and efficient development of an integrated public utility system,
thereby serving the public interest.
i. Efficiencies and Economies.
The Transaction will over time produce economies and efficiencies
sufficient to satisfy the standards of Section 10(c)(2). Although the
anticipated economies and efficiencies will be fully realizable only in the
longer term, they are properly considered in determining whether the
standards of Section 10(c)(2) have been met. See American Electric Power Co.,
46 S.E.C. 1299, 1320-21 (1978). The potential benefits cannot be precisely
estimated; nevertheless they too are entitled to be considered: "[S]pecific
dollar forecasts of future savings are not necessarily required; a
demonstrated potential for economies will suffice even when these are not
precisely quantifiable." Centerior Energy Corp., HCAR No. 24073 (April 29,
1986).
Over time, the Merger is expected to yield several types of benefits:
(1) corporate and operations labor cost savings; (2) corporate and
administrative programs cost savings; and (3) non-fuel purchasing economies
savings. Within four to five years of the consummation of the Merger, NU
anticipates that the benefits will approximate $10 million in annual cost
savings. As indicated earlier in this Application, the Commission's
decisions in past precedents pertaining to business combinations of gas and
electric companies involved the combination of two companies, at least one of
which was a combined gas and electric company prior to the business
combination. In this situation, neither NU nor YES is a combination company.
Accordingly, the above-referenced benefits realized as a result of the Merger
will flow directly to YES and consist of the same $10 million in annual
benefits which were classified as lost economies in the analysis of the ABC
clauses under Section 11(b)(1) earlier in this Application. Subsequent to
the Merger, however, any benefits realized by YES will also benefit the NU
system, including the operating subsidiaries.
Integration of Corporate and Administrative Functions: In the long term,
NU will be able to consolidate certain corporate and administrative functions
of NU and YES, thereby eliminating duplicative positions, reducing other non-
labor corporate and administrative expenses and limiting or avoiding
duplicative expenditures. These include savings related to information
systems, insurance costs, outside services, shareholder services, benefits
administration and other general and administrative overheads. The aggregate
cost of these items for the companies on a stand-alone basis is greater than
the cost will be to the combined new company. An example would be the hiring
of one outside professional service (external auditors, attorneys,
consultants, etc.) instead of two. A joint transition task force is
examining the manner in which to best organize and manage the businesses of
NU after the Merger and identify duplicative positions in the corporate and
administrative areas. It is anticipated that, as a result of combining staff
and other functions, NU will have somewhat fewer employees within several
years than NU and YES currently have in the aggregate. NU and YES are
committed to achieve cost savings in the area of personnel reductions through
attrition, strictly controlled hiring, and reassignment and retraining and,
to the extent required, severance and targeted early retirement programs. In
addition, some savings in areas such as insurance and regulatory costs and
legal, audit and consulting fees are expected to be realized.
Non-Fuel Purchasing Economies Savings: These are the savings which will
result from the new, larger company having greater purchasing power. As a
result of the Merger, YES will be able to coordinate its purchasing needs,
buy in greater quantity, negotiate with vendors and receive larger discounts.
Additional Expected Benefits: In addition to the benefits described
above, there are other benefits which, while presently difficult to quantify,
are nonetheless substantial. These other benefits include maintenance of
competitive rates and services, increased size and stability, coordination of
diversification programs and expanded management resources.
Maintenance of Competitive Rates: NU will be more effective in meeting
the challenges of the increasingly competitive environment in the utility
industry than either NU or YES standing alone due to the economies of scale
available to NU in the long term. The impact of these economies of scale
will help to position NU to deal effectively with increased competition with
respect to rates. The Merger, by creating the potential for increased
economies of scale over time, will create the opportunity for strategic,
financial and operational benefits for customers in the form of more
competitive rates over the long term and for shareholders in the form of
greater financial strength and financial flexibility.
Increased Size and Stability: The combination of NU and YES will create
a significantly larger company than YES. The increased size and stability of
such a larger company with operating utilities in three states will provide
YES with a greater chance to compete with other LDCs in Connecticut which,
after their mergers are consummated, will be part of a utility system much
larger than YES standing alone. In addition, through the use of the combined
equity, management, human resources and technical expertise of each company,
NU will be able to achieve greater financial stability and strength and
greater opportunities for earnings and dividend growth.
Coordination of Diversification Programs: NU and YES each have
significant non-utility subsidiaries, and NU, as a larger financial entity,
should be able to manage and pursue such subsidiary businesses more
efficiently and effectively. NU and YES currently engage in a number of
diversified businesses, some of which are complementary. To the extent such
complementary businesses are combined and able to collaborate in the pursuit
of market opportunities, benefits from economies of scale should be obtained
and thereby improve the performance of these businesses. Furthermore, due to
the larger capital base of NU after the Merger, the financial flexibility
will exist to support the existing businesses as well as to take advantage of
new business opportunities as they arise.
Expanded Management Resources: In combination, NU and YES will be able
to draw on a larger and more diverse mid- and senior-level management pool to
lead NU forward in an increasingly competitive environment for the delivery
of energy and should be better able to attract and retain the most qualified
employees. The employees of NU and YES should also benefit from new
opportunities in the expanded organization.
ii. Integrated Public Utility System
I. Electric System
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating plants
and/or transmission lines and/or distributing facilities, whose
utility assets, whether owned by one or more electric utility
companies, are physically interconnected or capable of physical
interconnection and which under normal conditions may be
economically operated as a single interconnected and coordinated
system confined in its operation to a single area or region, in one
or more states, not so large as to impair (considering the state of
the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
On the basis of this statutory definition, the Commission has established
four standards that must be met before the Commission will find that an
integrated public utility system will result from a proposed acquisition of
securities:
(1) the utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) the utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) the system must be confined in its operations to a single area or
region; and
(4) the system must not be so large as to impair (considering the state
of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
Environmental Action, Inc. v. S.E.C., 895 F.2d 1255, 1263 (9th Cir. 1990)
(citing In re Electric Energy, Inc., 38 S.E.C. 658, 668 (1958)). NU's
electric properties are physically interconnected and have been operated as a
single interconnected and coordinated system limited to a single region, the
states of Connecticut, New Hampshire and Massachusetts. Furthermore, the NU
system is not so large as to impair the advantages of localized management,
efficient operation and the effectiveness of regulation. Lastly, NU is a
public utility holding company registered under the Act.
II. Gas Utility System
Section 2(a)(29)(B) of the Act defines an "integrated public utility
system" as applied to gas utility companies as:
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by
being operated as a single coordinated system confined in its operation
to a single area or region, in one or more states, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation: provided, that gas utility
companies deriving natural gas from a common source of supply may be
deemed to be included in a single area or region.
The YES gas properties are clearly an integrated system as they are part
of one company operated as a single coordinated system limited in its
operation to the State of Connecticut.
For the foregoing reasons, the provisions of Section 10(c)(2) are met.
C. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect to such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of section 11.
As described in Item 4 of this Application/Declaration, and as evidenced
by the application made by the Applicant to the DPUC, NU intends to comply
with all applicable state laws related to the proposed transaction.
D. Other Statutory Provisions - Section 6(a) and 7
The issuance of stock by Merger Sub to NU, the issuance of NU Common
Shares in connection with the Merger and the issuance of the short or long
term debt to satisfy the cash portion of the consideration are subject to
Sections 6 and 7 of the Act.
Section 7(c) sets forth the requirements to be met for the issuance of
securities by registered public utility holding companies. Section 7(c)(1)
essentially requires that the registered company issue only common stock or
debt which is secured by a lien on a physical asset of the company or
indirectly secured by a physical asset of a subsidiary. Certain refunding
obligations are also permitted.
Under Section 7, the Commission shall not permit a declaration regarding
the issue or sale of a security to become effective unless it finds that:
(1) such security is (A) a common stock having a par value and
being without preference as to dividends or distributions over and having at
least equal voting rights with any outstanding security of the declarant; (B)
a bond (i) secured by a first lien on physical property of the declarant, or
(ii) secured by an obligation of a subsidiary company of the declarant
secured by a first lien on physical property of such subsidiary company, or
(iii) secured by any other assets of the type and character which the
Commission by rules and regulations or order may prescribe as appropriate in
the public interest or for the protection of investors; (C) a guaranty of, or
assumption of liability on, a security of another company; or (D) a
receiver's or trustee's certificate duly authorized by the appropriate court
or courts.
The NU Common Shares to be issued in connection with the Merger have a
par value of $5 per share and are of the same type and class of securities
which NU currently has outstanding and which is tradable on the New York
Stock Exchange. The common stock of Merger Sub to be issued to NU will be
the only class of stock of Merger Sub outstanding. As indicated earlier, NU
intends to comply with all state laws concerning the Merger and issuance of
shares, including the relevant Connecticut "blue sky" securities laws.
Accordingly, the provisions of Sections 6(a) and 7 are satisfied with respect
to both the issuance of common stock by Merger Sub to NU and the issuance by
NU of the NU Common Shares to satisfy the stock portion of the consideration
payable in connection with the Transaction.
In addition, subparagraph (2) of Section 7(c) permits other securities
to be issued if certain criteria are met:
"such security is to be issued or sold solely (A) for the purpose
of refunding, extending, exchanging or discharging an outstanding security of
the declarant and/or a predecessor company thereof or for the purpose of
effecting a merger, consolidation or other reorganization; (B) for the
purpose of financing the business of the declarant as a public-utility
company; (C) for the purpose of financing the business of the declarant, when
the declarant is neither a holding company nor a public-utility company;
and/or (D) for necessary and urgent corporate purposes of the declarant
where the provisions of [Section 7(c)(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."
In order for the Commission to issue an order permitting the issuance
of a security not complying with Section 7(c)(1), Section 7(c)(2)(D) requires
that the proposed financing (i) be for necessary and urgent corporate
purposes of the declarant, (ii) where the provisions of Section 7(c)(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. NU submits that the proposed issuance of short or
long term debt is for a necessary and urgent corporate purpose in that it is
for the financing of the cash portion of the consideration payable in
connection with the merger of YES with and into NU. Also, compliance with
the provisions of Section 7(c)(1) would impose an unreasonable financial
burden on the declarant by imposing a more costly and unnecessary means of
raising the needed capital. Compliance with the provisions of Section
7(c)(1) is not necessary or appropriate in the public interest or for the
protection of investors or consumers.
1. The proposed debt issuance is required for a necessary and urgent
corporate purposes of the declarant.
The proposed financing is required to consummate the Transaction
which the Applicant believes is an urgent corporate purpose which will enable
the Applicant to compete effectively in the rapidly changing gas and electric
industry. As indicated earlier in this Application, the Commission has
already acknowledged that the electric and gas industries are converging and
that separation of gas and electric businesses may cause the separated
entities to be weaker competitors than they would otherwise be together. The
Commission has recognized that the combination of electric and gas operations
in a single company offers that company a means to compete more effectively
in the emerging energy services .
2. Compliance with the provisions of Section 7(c)(1) would impose an
unreasonable burden on the Declarant.
In the absence of an order under Section 7(c)(2)(D) permitting the
issuance of the short or long-term debt by NU, there would be three practical
avenues open to NU, as one of a few registered holding companies, to finance
investments in permissible energy-related businesses: common stock, short-
term debt and subsidiary level financing guaranteed by NU. All would impose
an unreasonable cost on NU when compared to the cost of long term financing
by NU. Long term debt issuance by NU would be the most efficient, least
costly and therefore most competitive means of raising capital for the
Transaction.
3. Compliance with Section 7(c)(1) is neither necessary nor appropriate
in the public interest or for the protection of investors or consumers.
The adequacy of the underlying assets and income stream will be
attested for by either the willingness of sophisticated institutions and
banks to provide funds to NU for this purpose or, in the case of rated
securities, the rating agency evaluating the debentures. Today rating
agencies and disclosure laws provide the investor with adequate information
concerning a security. The ownership of a debenture issued by a parent
holding company in a system where subsidiaries also have debt outstanding is
similar to that of a minority common stock holder. As was stated by the
Commission in the Release proposing amendments to Rule 52 to, among other
things, delete the requirement that common stock only by issued to the parent
company:
"The Commission, in the early years of the Act's history, was concerned
about the ability of the stock purchaser to evaluate without adequate and
verifiable disclosure, the potential disadvantages of owning a minority
interest. The situation is quite different now. Accurate information is
readily available to the investor though prospectuses, 10-K filings and other
public information, which allows the investor to make an informed decision as
to the advisability of purchasing a minority interest. Thus, the Commission
believes there may no longer exist valid reasons to prohibit the public-
utility subsidiaries of registered holding companies from financing in a
manner available to corporate subsidiaries generally." (See HCAR No. 25059,
dated March 19, 1990).
Thus, the Commission has quite clearly indicated that two-tier
debt financing may be appropriate today and compliance with Section 7(c)(1)
is not necessary for the protection of investors. As discussed above, some
debt financing by NU as part of an overall financing program is the most
efficient, least costly and therefore most competitive means for NU to fund
the cash portion of the consideration payable in connection with the
Transaction.
Section 7(d) sets forth specific findings that, if made, preclude
the Commission from permitting the application to go effective. None of such
findings should be made in connection with the authorizations sought hereby:
i. the security is not reasonably adapted to the security structure of the
declarant and other companies in the same holding company system;
At a 10-year targeted maturity date, NU anticipates that the cash
flow from YES will be sufficient to service and fully amortize the debt
issued.
ii. the security is not reasonably adapted to the earning power of the
declarant;
The ability of NU to meet its interest obligations hinges on the
earnings of its subsidiaries. NU will have the financial capacity to
discharge all of its payment obligations without adversely affecting the
operating companies.
iii. financing by the issue and sale of the particular security is not
necessary or appropriate to the economical and efficient operation of a
business in which the applicant is engaged or has an interest;
As discussed above, financing with short or long term debt offers
distinct advantages over alternative means of obtaining funding.
iv. the fees, commission, or other remuneration, to whomsoever paid,
directly or indirectly, in connection with the issue, sale or distribution
of the security are not reasonable;
As discussed above, the fees, commissions, expenses and margins
referenced in Item 2 are reasonable.
v. the terms and conditions of the issue or sale of the security are
detrimental to the public interest or the interest of investors or consumers.
The investor and public interest issues are discussed above.
For the above reasons, the Applicant request approval for the issuance
of short- or long- term debt in an amount not to exceed $275 million to
satisfy the cash portion of the consideration in connection with the
Transaction and for refunding purposes through June 30, 2002.
Item 4. Regulatory Approvals.
Set forth below is a summary of the regulatory approvals that NU and YES
expect to obtain in connection with the Merger in addition to the approval of
the Commission under the Act.
A. Antitrust Considerations
Under the HSR Act, NU and YES cannot consummate the Merger until each
has submitted certain information to the Antitrust Division of the DOJ and
the FTC. Additionally, each company must satisfy specified HSR Act waiting
period requirements. The required filings were made by NU and YES on October
29, 1999 and accelerated termination of the waiting period was requested.
The expiration or earlier termination of the HSR Act waiting period will not
prevent the DOJ or the FTC from challenging the Merger on antitrust grounds.
Neither NU nor YES believes that the Merger will violate Federal antitrust
laws. If the Merger is not consummated within 12 months after the expiration
or earlier termination of the HSR Act waiting period, NU and YES must submit
new information to the DOJ and the FTC, and a new HSR Act waiting period will
begin.
B. Department of Public Utility Control
NU and YES have filed a joint application with the DPUC, seeking
authorization and approval of the Merger. It is anticipated that such
approval will be granted. A copy of the application is filed as Exhibit d.1.
C. Federal Communications Commission
YES will file the necessary applications with the Federal Communications
Commission to seek approval to transfer certain telecommunications licenses
which it currently holds and which are necessary for the operation of YES'
gas business.
D. Other Regulatory Matters
NU and YES and their respective subsidiaries have obtained from various
regulatory authorities certain franchises, permits and licenses which may
need to be renewed, replaced or transferred in connection with the Merger,
and approvals, consents or notifications may be required in connection with
such renewals, replacements or transfers.
Item 5. Procedure
The Applicant hereby requests that the Commission publish a notice under
Rule 23 with respect to the filing of this Application as soon as practicable
and that the Commission's order be issued as soon as possible. A form of
notice suitable for publication in the Federal Register is attached hereto as
Exhibit h.1. The Applicant respectfully requests the Commission's approval,
pursuant to this Application/Declaration, of all transactions described
herein, whether under the sections of the Act and Rules thereunder enumerated
in Item 3 or otherwise. It is further requested that the Commission issue an
order authorizing the transactions proposed herein at the earliest
practicable date but in any event not later than February 1, 2000.
Additionally, the Applicant (i) requests that there not be any recommended
decision by a hearing officer or by any responsible officer of the
Commission, (ii) consents to the Office of Public Utility Regulation within
the Division of Investment Management assisting in the preparation of the
Commission's decision, and (iii) waives the 30-day waiting period between the
issuance of the Commission's order and the date on which it is to become
effective, since it is desired that the Commission's order, when issued,
become effective immediately.
Item 6. Exhibits and Financial Statement
(a) Exhibits
b.1 Merger Agreement between Northeast Utilities and Yankee Energy
System, Inc. dated as of June 14, 1999 (See Exhibit 1 in NU's
Current Report on Form 8-K dated June 14, 1999, File No. 1-
5324)*
c.1 Joint Proxy and Registration Statement on Form S-4*
d.1 Application to the Department of Public Utility Control*
f.1 Legal Opinion*
g.1 Financial Data Schedule*
h.2 Form of Notice
(b) Financial Statements*
* previously filed
Item 7. Information as to Environmental Effects
The Transaction neither involves a "major federal action" nor
"significantly affects the quality of the human environment" as those terms
are used in Section 102(2)(C) of the National Environmental Policy Act, 42
U.S.C. Sec. 4321 et seq. The only federal actions related to the Transaction
pertain to the Commission's declaration of the effectiveness of the
Registration Statement of NU and YES on Form S-4, the approvals and actions
described under Item 4 and Commission approval of this
Application/Declaration. Consummation of the Transaction will not result in
changes in the operations of NU, YES or any of their respective subsidiaries
that would have any impact on the environment. No federal agency is
preparing an environmental impact statement with respect to this matter.
Other Matters
Except in accordance with the Act, neither NU nor any subsidiary thereof
(a) has acquired an ownership interest in an exempt wholesale generator
("EWG") or a foreign utility company ("FUCO") as defined in Sections 32 and
33 of the Act, or (b) now is or as a consequence of the transactions proposed
herein will become a party to, or has or will as a consequence of the
transactions proposed herein have a right under, a service, sales, or
construction contract with an EWG or a FUCO. None of the proceeds from the
transactions proposed herein will be used by NU and its subsidiaries to
acquire any securities of, or any interest in, an EWG or a FUCO.
NU and its subsidiaries are in compliance with Rule 53(a), (b), and (c),
as demonstrated by the following determinations:
(i) NU's aggregate investment in EWGs and FUCOs (i.e., amounts invested
in or committed to be invested in EWGs and FUCOs, for which there
is recourse to NU) does not exceed 50% of NU and its subsidiaries'
consolidated retained earnings as reported for the four most recent
quarterly periods on NU's Form 10-K and 10-Qs. As of March 31 ,
1999, the ratio of such investment ($ 49 million) to such
consolidated retained earnings ($624 million) was 7.9 percent.
(ii) Ave Fenix (NU's only EWG or FUCO at this time) maintains books and
records, and prepares financial statements in accordance with Rule
53(a)(2). Furthermore, NU has undertaken to provide the Commission
access to such books and records and financial statements, as it
may request.
(iii) No employees of NU's public utility subsidiaries have rendered
services to the EWGs/FUCOs.
(iv) NU has submitted (a) a copy of each Form U-1 and Rule 24
certificate that has been filed with the Commission under Rule 53
and (b) a copy of Item 9 of the Form U5S and Exhibits G and H
thereof to each state regulator having jurisdiction over the retail
rates of NU's public utility subsidiaries.
(v) Neither NU nor any subsidiary has been the subject of a bankruptcy
or similar proceeding unless a plan of reorganization has been
confirmed in such proceeding. In addition, although NU's average
consolidated retained earnings ("CREs") for the four most recent
quarterly periods have decreased by 10% or more from the average
for the previous four quarterly periods (at March 31 ,1998 , NU's
CREs were $ 715 million; at March 31, 1999 NU's CREs were $624
million), NU's aggregate investment in EWGs/FUCOs at such date($ 49
million) did not exceed two percent of NU's consolidated capital
invested in utility operations ($124 million).
(vi) In the previous fiscal year, NU did not report operating losses
attributable to its investment in EWGs/FUCOs, unless such losses
did not exceed 3 percent of NU's consolidated retained earnings.
SIGNATURES
Pursuant to the requirement of the Public Utility Holding Company Act of
1935, as amended, the undersigned companies have duly caused this statement
to be signed on their behalf by the undersigned thereunto duly authorized.
Date: November 16, 1999
NORTHEAST UTILITIES
By/S/ David R. McHale
Name: David R. McHale
Title: Vice President and Treasurer
EXHIBIT h.2
FORM OF NOTICE
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- ; 70-9535)
Filings Under the Public Utility Holding Company Act of 1935 ("Act").
Northeast Utilities ("NU"), et al.
November 1999
Notice is hereby given that the following filings has/have been made
with the Securities and Exchange Commission (the "Commission") pursuant to
provisions of the Act and rules promulgated thereunder. All interested
persons are referred to the application(s) and/or declaration(s) for complete
statements of the proposed transaction(s) summarized below. The
application(s) and/or declaration(s) and any amendments thereto is/are
available for public inspection through the Commission's Office of Public
Reference.
Interested persons wishing to comment or request a hearing on the
application(s) and/or declaration(s) should submit their views in writing by
, 1999 to the Secretary, Securities and Exchange Commission,--------
Washington, D.C. 20549, and serve a copy on the applicant(s) and/or
declarant(s) at the address(es) specified below. Proof of service (by
affidavit or, in case of an attorney at law, by certificate) should be filed
with the request. Any request for hearing shall identify specifically the
issues of fact or law that are disputed. A person who so requests will be
notified of any hearing, if ordered, and will receive a copy of any notice or
order issued in the matter. After said date, the application(s) and/or
declaration(s), as filed or as amended, may be granted and/or permitted to
become effective.
* * * * *
NU, 174 Brush Hill Avenue, West Springfield, MA 01090-0010, a registered
holding company under the Act, has filed an application or declaration under
sections 6(a), 7, 9(a), 10 and by reference Section 11. NU requests
authorization and approval of the Commission for NU to acquire, by means of
the merger described below, all of the issued and outstanding common stock of
Yankee Energy System, Inc. (YES), a Connecticut corporation and an exempt
holding company with one subsidiary that is a gas utility company as defined
in Section 2(a)(4) of the Act, all pursuant to an Agreement and Plan of
Merger dated as of June 14, 1999 by and between NU and YES (the Merger
Agreement). The Applicant also requests that the Commission approve (i) the
formation of Merger Sub, (ii) the issuance of shares of NU Common Shares,
$5.00 par value per share, (the "NU Common Shares") in an aggregate amount of
approximately $215 million to satisfy the stock portion of the consideration
payable in connection with the Transaction, (iii) the issuance of short- or
long- term debt in an aggregate amount not to exceed $275 million to satisfy
the cash portion of the consideration payable in connection with the
Transaction and for refunding purposes through June 30, 2002, and (iv) the
retention of certain utility and non-utility subsidiaries of YES.
Pursuant to the Merger Agreement, YES will merge with and into Merger
Sub, a wholly-owned subsidiary of NU. Upon completion of the Merger, Merger
Sub will change its name to Yankee Energy System, Inc. and will thereafter
register as a holding company pursuant to Section 5 of the Act. Holders of
the common stock of YES will receive consideration in cash and NU Common
Shares valued at $45.00 per YES share. Each YES shareholder can elect the
form of consideration he or she would like to receive, but this election is
subject to proration and adjustment. Under the Merger Agreement, 55% of all
issued and outstanding YES shares will be exchanged for cash, and 45% will be
exchanged for NU Common Shares. If YES shareholders owning more than 55% of
YES shares elect to receive cash, the number of YES shares converted into
cash will be less than the number elected. Similarly, if YES shareholders
owning more than 45% of YES shares elect to receive NU Common Shares, the
number of YES shares converted into stock will be less than the number
elected.
Merger Sub, as a wholly-owned subsidiary of NU and as successor to YES,
will become a registered holding company under the Act and will act as the
holding company for NU's post-merger operating gas utility subsidiary and
related companies. NU's existing operating electric utility subsidiaries,
will remain direct operating subsidiaries of NU. Accordingly, upon
consummation of the Transaction, NU will be a holding company owning an
integrated electric utility system consisting of four electric public utility
companies and an integrated gas utility system consisting of a gas utility
holding company owning one gas public utility company and other non-utility
subsidiaries. Prior to completion of the Merger, NU will file one or more
additional applications-declarations under the Act with the Commission with
respect to future financing arrangements, ongoing activities and other
investments of, and other matters pertaining to, the combined company after
giving effect to the Merger and the registration of Merger Sub as a holding
company.
NU is the parent of a number of companies comprising the Northeast
Utilities system (the System) and is not itself an operating company. The
System has traditionally furnished franchised retail electric service in
Connecticut, New Hampshire and western Massachusetts through three of NU's
wholly owned subsidiaries, The Connecticut Light and Power Company (CL&P),
Public Service Company of New Hampshire (PSNH) and Western Massachusetts
Electric Company (WMECO), and has additionally furnished retail electric
service to a limited number of customers through another wholly owned
subsidiary, Holyoke Water Power Company (HWP), doing business in and around
Holyoke, Massachusetts. In addition to their retail electric service
business, CL&P, PSNH, WMECO and HWP (including its wholly owned subsidiary,
Holyoke Power and Electric Company) (collectively, the NU Operating
Companies) together furnish wholesale electric service to various
municipalities and other utilities throughout the Northeast. The System
serves approximately 30 percent of New England's electric needs and is one of
the 24 largest electric utility systems in the country as measured by
revenues.
North Atlantic Energy Corporation is a special-purpose operating
subsidiary of NU that owns a 35.98 percent interest in the Seabrook nuclear
generating facility (Seabrook) in Seabrook, New Hampshire, and sells its
share of the capacity and output from Seabrook to PSNH under two life-of-
unit, full-cost recovery contracts.
Several wholly owned subsidiaries of NU provide support services for the
System companies and, in some cases, for other New England utilities.
Northeast Utilities Service Company (NUSCO) provides centralized accounting,
administrative, information resources, engineering, financial, legal,
operational, planning, purchasing and other services to the System companies.
North Atlantic Energy Service Corporation has operational responsibility for
Seabrook. Northeast Nuclear Energy Company acts as agent for the System
companies and other New England utilities in operating the Millstone nuclear
generating facilities in Waterford, Connecticut. Three other subsidiaries
(Rocky River Realty Company, The Quinnehtuk Company, and Properties, Inc.)
construct, acquire or lease some of the property and facilities used by the
System companies.
In January 1999, NU added three new corporations to the System: NU
Enterprises, Inc. (NUEI), Northeast Generation Company (NGC) and Northeast
Generation Services Company (NGS). NUEI, a direct subsidiary of NU, will act
as a holding company for the System's unregulated businesses. NGC, a
subsidiary of NUEI, will acquire and manage generating facilities. NGS,
another subsidiary of NUEI, will provide services to the electric generation
market as well as to large commercial and industrial customers in the
Northeast. Also in January 1999, NU transferred to NUEI the stock of three
other of its subsidiaries, making them wholly owned subsidiaries of NUEI:
Select Energy, Inc. (Select Energy), HEC Inc. (HEC) and Mode 1
Communications, Inc. (Mode 1). See, generally, Commission Orders dated
November 12, 1998 (HCAR No. 26939) and May 19, 1999 (HCAR No. 27029). These
companies engage, either directly or indirectly through subsidiaries, in a
variety of energy-related and telecommunications activities, as applicable,
primarily in the unregulated energy retail and wholesale commodity, marketing
and services fields. In addition, Select Energy Portland Pipeline, Inc., a
subsidiary of NUEI was formed as a single purpose Rule 58 subsidiary to hold
a 5% partnership interest in the Portland Natural Gas Transmission System
Partnership, the partnership that owns and operates the Portland Natural Gas
Transmission Pipeline. Lastly, Merger Sub, a to-be-formed wholly-owned
direct subsidiary of NU, will be created, upon approval by the Commission, to
carry out the Merger and become a registered holding company for the NU
system gas operations.
The System companies traditionally have owned and operated a fully
integrated electric utility business. Restructuring legislation in New
Hampshire, Massachusetts and Connecticut, however, will now require PSNH,
WMECO and CL&P, respectively, to separate the distribution and transmission
functions of their business from the generation function by mandating the
sale of fossil fuel and hydroelectric generation. In July 1999, WMECO closed
on the sale of its fossil generating plants. On July 6, 1999, CL&P and WMECO
announced the results of their auction of CL&P's non-nuclear generating
assets and WMECO's remaining non-nuclear generating assets. Approximately
2,235 megawatts of fossil-fueled generating assets will be sold to a third
party and 1,329 megawatts of hydro-powered generating assets will be sold to
NGC.
CL&P, PSNH and WMECO furnish retail delivery franchise service in 149,
198 and 59 cities and towns in Connecticut, New Hampshire and Massachusetts,
respectively. In 1998, CL&P furnished retail franchise service to
approximately 1.11 million customers in Connecticut, PSNH provided retail
service to approximately 422,000 customers in New Hampshire and WMECO served
approximately 196,000 retail franchise customers in Massachusetts. HWP
serves 32 retail customers in Holyoke, Massachusetts.
YES, is a public utility holding company incorporated in Connecticut in
1988. YES is primarily engaged in the retail distribution of natural gas
through its wholly-owned subsidiary, Yankee Gas Services Company ("Yankee
Gas"), a Connecticut public utility service company. Yankee Gas serves
approximately 185,000 residential, commercial and industrial customers in 69
cities and towns in Connecticut. The Company is exempt from registration
under the Act under Rule 3(a)(2) promulgated under the Act. YES is the
holding company for Yankee Gas and four active non-utility subsidiaries,
NorConn Properties, Inc. ("NorConn"), Yankee Energy Financial Services
Company ("Yankee Financial"), Yankee Energy Services Company ("YESCo") and
R.M. Services, Inc. ("RMS"). These companies are referred to collectively
herein as "the Yankee Energy System." YES business essentially is confined
to the ownership of its subsidiaries. Yankee Gas, the principal subsidiary
of YES, is a Connecticut corporation that purchases, distributes and sells
natural gas at retail in Connecticut.
All four non-utility subsidiaries are Connecticut corporations. NorConn
was formed in 1988 to hold property and facilities of the Yankee Energy
System. Yankee Financial, incorporated in 1992, provides customers with
financing for energy equipment installations. YESCo provides a wide range of
energy-related services for its customers. Through its YESCo Controls
division, incorporated in November 1996, such services include comprehensive
building automation with engineering, installation and maintenance of
building control systems. Through its YESCo Mechanical Services division,
customers are provided comprehensive heating, ventilation and air-
conditioning (HVAC), boiler and refrigeration equipment services and
installation. RMS was formed in 1994 to provide debt collection service to
utilities and other businesses nationwide. YES, Yankee Gas, Yankee Financial,
NorConn, and YESCo, are predominantly intrastate in character.
Yankee Gas purchases, distributes and sells natural gas to approximately
185,000 residential, commercial and industrial users in Connecticut. Its
service territory consists of 69 cities and towns, and covers approximately
1,995 square miles, all in Connecticut and all within the service territory
of CL&P. Until YES was formed in 1988, Yankee Gas' gas business was part of
the NU system and was operated by CL&P on a fully integrated and coordinated
part of the NU system companies. NU divested Yankee Gas in 1989 through the
spin-off to its shareholders of the stock of YES, and believes that the re-
combination of Yankee Gas and NU will be facilitated and enhanced by the
companies' shared past.
Yankee Gas' assets include distribution lines (mains and services),
meters, pumps, valves and pressure and flow controllers, all located in
Connecticut. Yankee Gas owns approximately 2,820 miles of distribution
mains, 133,033 service lines, and 185,000 active meters for customer use, all
located in Connecticut. Yankee Gas also owns and operates various propane
facilities and six gas storage holders, all located in Connecticut. Yankee
Gas also contracts for storage capacity with other energy and pipeline
companies. Yankee Gas operates the largest natural gas distribution system in
Connecticut as measured by number of customers and size of service territory.
Total throughput (sales and transportation) for fiscal 1998 was 47.1 billion
cubic feet In fiscal 1998, total gas operating revenues were comprised of
the following: 47% residential; 26% commercial; 18% industrial; and the
remaining 9% other. Yankee Gas provides firm gas sales service to customers
who require a continuous gas supply throughout the year, such as residential
customers who rely on gas for their heating, hot water, and cooking needs.
Yankee Gas also provides interruptible gas sales service to certain
commercial and industrial customers that have the capability to switch from
natural gas to an alternative fuel on short notice. Yankee Gas can interrupt
service to these customers during peak demand periods. Yankee Gas offers
firm and interruptible transportation services to customers who purchase gas
from sources other than Yankee Gas. In addition, Yankee Gas performs gas
exchanges and capacity releases to marketers to reduce its overall gas
expense.
When the Merger is complete the companies expect the combined company
will have the following primary businesses:
o retail natural gas and unregulated electricity sales;
o electric and gas distribution;
o wholesale natural gas and electricity sales and electric
transmission; and
o electric generation.
The companies intend to integrate these complementary businesses,
subject to applicable state and federal regulatory requirements. The
complementary nature of these businesses will over time result in lower costs
and in improved service. These businesses will not only serve existing
retail and wholesale customers, but will reach out to new customers as a full
service energy provider as both gas and electricity deregulation proceeds.
Applicant expects to achieve enhanced revenues and net income in the future
through increased efficiency in providing energy to customers, whether gas or
electric, and more competitive rates.
In addition, the Merger will ultimately enable the combined company to
realize cost savings from elimination of duplicate corporate and
administrative programs, greater efficiencies in operations and business
processes, and streamlined purchasing practices.
* * * * *
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
Jonathan G. Katz
Secretary
