File No. 70-9535
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO.1
TO
FORM U-1
APPLICATION/DECLARATION UNDER THE PUBLIC
UTILITY HOLDING COMPANY ACT OF 1935
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
The Application/Declaration in this file is amended by filing the following
exhibits:
Item 6. Exhibits and Financial Statement
(a) Exhibits
c.1 Joint Proxy and Registration Statement on Form S-4 (incorporated by
reference to Form S-4, File No. 333-85613, filed August 20, 1999 with the
Commission).
d.1 Application of Northeast Utilities to the Connecticut Department of Public
Utility Control.
f.1 Legal Opinion
g.1 Financial Data Schedule
(b) Financial Statements
1. Northeast Utilities
1.1 Balance Sheet, per books and pro forma, as of June 30, 1999.
1.2 Statement of Income, per books and pro forma, for 12 months ended
June 30, 1999 and capital structure, per books and pro forma,
as of June 30, 1999.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, as amended, the undersigned has duly caused this Amendment to
be signed on behalf of the undersigned thereunto duly authorized.
Date: September 17, 1999
NORTHEAST UTILITIES
By: /s/ David R. McHale
Vice President & Treasurer
Exhibit d.1
STATE OF CONNECTICUT
DEPARTMENT OF PUBLIC UTILITY CONTROL
JOINT APPLICATION OF NORTHEAST :DOCKET NO.: 99-08-
UTILITIES AND YANKEE ENERGY :
SYSTEM, INC. FOR APPROVAL OF :
A CHANGE OF CONTROL :AUGUST 4, 1999
JOINT APPLICATION
FOR
APPROVAL OF A CHANGE OF CONTROL
For Northeast Utilities For Yankee Energy System, Inc.
John Shea, Esq. Mary J. Healey, Esq.
Assistant General Counsel Vice President, General
Northeast Utilities Counsel and
107 Selden Street Secretary
Berlin, CT 06037 Yankee Energy System, Inc.
Tel: (860) 665-3416 599 Research Parkway
Fax: (860) 665-5504 Meriden, CT 06540
Tel: (203) 639-4405
Fax: (203) 639-4185
Robert P. Knickerbocker, Jr. Thomas J. Houde
Day, Berry & Howard LLP Vice President
City Place I Yankee Energy System, Inc.
Hartford, CT 06103-3499 599 Research Parkway
Tel: (860) 275-0122 Meriden, CT 06450
Fax: (860) 275-0343 Tel: (203) 639-4477
Fax: (203) 639-4117
EXECUTIVE SUMMARY
I. INTRODUCTION
II. THE APPLICANTS
A. Northeast Utilities
i. NU System Operating Companies
ii. NU System Support Subsidiaries
iii. NU System Nonregulated Subsidiaries
B. Yankee Energy System, Inc.
i. Yankee Gas
ii. Yankee Energy System Non-Utility Businesses
C. Merger Sub
III. THE PROPOSED MERGER
A. Description of the Proposed Merger
B. Post-Merger Organization, Management and Operations
C. The Merger Will Have No Effect on the Department's Ability
to Regulate the YES or NU Public Service Companies
IV. REASONS FOR THE MERGER
A. The Changing Marketplace
B. Benefits of the Merger
V. COMPLIANCE WITH REQUIREMENTS OF CONN. GEN. STAT. ( 16-47)
A. NU is Financially, Technologically and Managerially Suitable
and Responsible to Control Yankee Gas
B. Yankee Gas' Ability to Provide Safe, Adequate
and Reliable Service Will be Enhanced By the Merger
VI. THE MERGER WILL BENEFIT THE STATE OF CONNECTICUT, EMPLOYEES AND CONSUMERS
VII. COMPLIANCE WITH DEPARTMENT REGULATIONS
A. Compliance With Section 16-1-46 of the Department's Regulations
B. Compliance with Section 16-1-65 of the Department's Regulations
C. Compliance with Section 16-1-65B of the Department's Regulations
D. Compliance with Section 16-1-61 of the Department's Regulations
(Conn. Gen. Stat. (16-43)
F. List of Prefiled Testimony
G. Statutory Bond Requirement
VIII. CONCLUSION AND REQUEST FOR APPROVAL
EXECUTIVE SUMMARY
The Connecticut Light and Power Company ("CL&P") was a combined electric and
gas utility for more than 100 years. It was both the largest electric and gas
company in the state until 10 years ago, when it was required to divest its
ownership of its gas operations (resulting in the creation Yankee Gas)
under the then-current interpretation of the Public Utility Holding Company
Act of 1935 ("PUHCA"). In this Application, Northeast Utilities ("NU") and
Yankee Energy System, Inc. ("YES"), corporate parent of Yankee Gas Services
Company ("Yankee Gas"), seek to reunite the former CL&P electric and gas
operations. Under Connecticut law, in order to approve this Application
the Department need only conclude that NU (already the holding company of
CL&P) has the requisite financial, technological and managerial suitability
to become a holding company of Yankee Gas, and that the merger will not
interfere with Yankee Gas' provision of safe, adequate and reliable public
service. (Conn. Gen. Stat. 16-47(d).)
While Yankee Gas may be the largest gas utility in Connecticut, it services
only 185 thousand customers. This is far less than the critical mass required
to succeed in today's highly competitive energy industry. As gas markets
continue to unbundle and open to competition, many of Yankee Gas' customers
are now able to take service from a variety of alternative energy suppliers.
In this newly competitive environment, Yankee Gas faces limited growth
opportunities in its regulated gas distribution business absent new investment
to expand its system and to pursue opportunities in marketing and other
related areas. Because of its limited size and scope, Yankee Gas is not
readily able to seize these opportunities.
NU, which up to now was the largest integrated utility in New England, is in
the process of divesting all of its generating assets. Unlike most of its
New England competitors, however, NU has sought to remain in the generation
business through unregulated affiliates as a competitive supplier and owner
of merchant plants. NU's near-term goal is to remain the largest energy
company in New England and be one of the major suppliers of electricity and
natural gas in the Northeast. At this time, its regulated energy distribution
operations, while spanning three of the six New England states, are strictly
limited to electricity.
While NU is already a large electric distribution company, it is shrinking
through deregulation at the same time as new and much larger nationally-based
energy conglomerates are entering the New England market. If NU is to remain
a leading regional competitor, it must grow both through expansion of its
remaining energy businesses and by expanding into related businesses, such as
the gas distribution services offered by YES. Adding gas to NU's energy mix
will broaden services to existing customers of both YES and NU, and provide NU
with a platform to expand further in the Northeast, where substantial
opportunities for long-term growth exist.
In this light, and given the extensive experience of several of NU's senior
management in the natural gas industry, it is not surprising that NU's
includes expansion into natural gas distribution. Similarly, YES eagerly
anticipates the prospect of new growth, efficiencies and synergies associated
with the ability to market more than one energy product to NU's and YES'
customers. NU's and YES' perceptions in this regard are shared by many,
as reflected in the recent flurry of merger activity in the region.
In February 1998 the Department entered a new era of mergers and consolidations
of the largest companies that it regulates when SBC Communications Inc. ("SBC")
sought permission to become a holding company of the various regulated
subsidiaries of Southern New England Telecommunications Corporation, including
the Southern New England Telephone Company ("SNET"). Despite its dominance of
the state's telecommunications market, SNET perceived itself as too small to
compete and meet the growing needs of its customers. Its choice of a merger
candidate reflected that perception. SBC was a large company, with $25 billion
in revenues, 33 million access lines and 118 thousand employees before its
pending acquisition of Ameritech Corporation, another regional Bell operating
company with $17 billion in revenues, 21 million access lines and 70 thousand
employees. Following approval by the Department, the SBC/SNET merger closed on
October 26, 1998.
Over the last year, similar mergers have spread rapidly through the New England
energy industry. New England Electric System ("NEES") announced that it would
be acquired by The National Grid Group plc and would in turn acquire
Eastern Utilities Associates ("EUA"). When combined, NEES/EUA will serve 1.6
million customers and will be the largest electric distribution company in both
Massachusetts and Rhode Island.
BEC Energy (just formed in 1998 to be the holding company for Boston Edison)
and Commonwealth Energy System have announced a planned merger in which the
combined company will serve one million electric and 240 thousand gas customers
creating the largest New England utility, based upon its $2.6 billion combined
equity value. The stated purpose of that merger is to enable BEC Energy "to be
the premier energy delivery company in our region."
New England's local gas distribution companies ("LDCs") have begun actively
consolidating over the same time period. Early this year Bay State Gas Company
and its subsidiary, Northern Utilities, were acquired by NiSource, Inc., a
holding company whose primary businesses are the distribution of electricity,
gas and water in the Midwest and New England, now serving 1.1 million gas and
400 thousand electric customers. As a result of that acquisition, NiSource
controls the second largest LDC system in New England. The largest New England
LDC system is Eastern Enterprises, with its subsidiaries Boston Gas Company
and Essex Gas Company, which it acquired in late 1998. Eastern Enterprises
has announced mergers with two other neighboring LDCs, Colonial Gas Company
and EnergyNorth, Inc. When the Colonial Gas and EnergyNorth transactions are
completed, Eastern will serve more than 800 thousand natural gas customers in
New England, cementing its stated position as "by far the largest gas
distribution company in the region."
Connecticut's LDCs have not missed the significance of these mergers and
consolidations taking place elsewhere in New England. Energy East Corporation
is another company that did not even exist until 1998, when it became the
holding company for New York State Electric and Gas Company, a combined
electric and gas distribution company serving primarily rural areas in upstate
New York. Energy East has announced acquisitions of both Connecticut Energy
Corporation, parent of the Southern Connecticut Gas Company, and CTG Resources,
Inc., parent of Connecticut Natural Gas Corporation. In addition, Energy East
has announced a merger with CMP Group, gaining control Central Maine Power
Company's 530 thousand electric customers.
The merger proposed in this Application reflects what is occurring throughout
New England, where gas utilities are attempting to attain economies of size
and scope by combining with other business entities. Looking beyond that
developing business goal, this proposed merger also serves many other
interests. Customers of both NU and YES will have a stronger combined service
provider that can make new customer choices available that they do not enjoy
today. The combined larger company will have more than $6 billion of
capitalization, offering the prospect of greater access to the capital
markets. As part of the combined company, the Applicants expect that YES
will have greater ability to invest in infrastructure expansion and
improvements which will enable it to increase its penetration among
Connecticut's now non-gas residents. As a more competitive energy supplier
offering a choice of fuels, the combined NU/YES system will contribute to
growth in Connecticut's economy and provide additional opportunities to
existing and future employees.
Unlike other merger applications now pending before the Department, both NU
and YES are known entities to the Department, with major subsidiaries that
long have been subject to the Department's scrutiny and regulation. If
Connecticut's largest gas company needs to be acquired in order to remain
competitive and continue to provide a full range of products and services
to its customers, then NU is the ideal merger candidate because the
Department's task of evaluating its financial, technological and managerial
suitability under Section 16-47 is greatly simplified.
I. INTRODUCTION
NU and YES (the "Applicants") jointly request that the Department of Public
Utility Control (the "Department") approve the change of control of Yankee Gas
to NU. This Application is made under Conn. Gen. Stat. * 16-47 and other
statutes and regulations, if any, as the Department may deem applicable.
Through the proposed change of control transaction (the "Merger"), YES will
merge with and into Merger Sub, a to-be-formed wholly-owned subsidiary of NU
which will be created solely for purposes of effecting the Merger. Merger Sub
will take on the name and operations of YES upon the effectiveness of the
Merger. Upon consummation of the Merger, YES will become a first-tier
subsidiary of NU and will continue to own all of the outstanding common
stock of Yankee Gas as well as its related non-utility businesses. There is
no direct or indirect merger of public service companies, and CL&P, a
Connecticut electric distribution company, will remain a direct operating
subsidiary of NU. Yankee Gas and CL&P will continue to be subject to regulation
by the Department as at present.
The transaction will be consummated 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 1. The Applicants seek to close
the Merger by late 1999 or in January, 2000. Since NU will indirectly own 100
percent of the common stock of Yankee Gas after the Merger, this application
requests Department approval of the acquisition and exercise of control by NU
over Yankee Gas.
This combination provides a unique opportunity for NU, YES and their customers,
employees and shareholders to participate in the formation of a competitive
multi-product energy services provider in the rapidly evolving energy services
business. Yankee Gas and CL&P will continue to operate as separate regulated
energy distribution companies after the Merger, but they will enjoy increased
scope and economies of scale that will allow them to meet the needs of their
customers more efficiently. All NU and YES stakeholders will be better
positioned as a result of the Merger to share in the benefits of industry
restructuring which is rapidly occurring in the New England and Northeast
regions.
The Merger will provide NU and YES with the ability to integrate their
complementary lines of business, allowing the combined company to market a
portfolio of energy products to a broad customer base. The Merger also will
give the combined company a solid platform for growth in a deregulated
environment. After the Merger, both Yankee Gas and the larger NU system will
be better-positioned to compete with other national and regional industry
competitors in a way that neither NU nor YES acting alone could achieve.
Over time, NU and YES also expect to achieve synergy-related cost savings
which would not be available to the separate companies absent the Merger.
The proposed Merger also combines two companies that share a common regulatory
environment, service area and customers, and that were once joined together.
The Applicants anticipate that the over 100-year historic interrelationship
of CL&P and Yankee Gas will be a significant positive factor facilitating
their recombination and reintegration of their business operations.
Section II of this Application provides information regarding YES and NU, both
of which are well-known to the Department. Section III describes the proposed
Merger and its anticipated benefits and effects in more detail. Section IV
discusses the reasons for the Merger. Section V demonstrates that all
criteria for approval of the Merger under Conn. Gen. Stat. * 16-47 have been
met.1 Section VII includes the detailed information required by Sections
16-1-61, 16-1-65 and 16-1-65B of the Department's Regulations.
NU and YES, joint Applicants herein, respectfully urge the Department to act
as promptly as possible on this Application in order to capture the
efficiencies and market benefits that the merger offers.
Based upon the information contained herein, the Applicants respectfully
request that the Department find that NU has satisfied the requirements of
Conn. Gen. Stat. * 16-47 to become a holding company of Yankee Gas.
In particular, the Applicants request that the Department find: (i) that NU,
through its present operations generally and through its operation of CL&P in
particular, has demonstrated to the Department that it is financially,
technologically and managerially suitable and responsible to acquire control
of Yankee Gas; and, (ii) that Yankee Gas will continue to provide safe,
adequate and reliable service to the public through its plant, equipment
and manner of operation. The Applicants also request that the Department
consider this Application expeditiously, in order that the Merger can become
effective in late 1999 or early 2000.
IV. THE APPLICANTS
A. Northeast Utilities
The legal name and principal place of business of NU is:
Northeast Utilities
174 Brush Hill Avenue
West Springfield, MA 01090-2010
1. The Applicants believe that Conn. Gen. Stat. Section 16-43 is not
applicable to this transaction, and that the Department's review is properly
limited to Conn. Gen. Stat. Section 16-47. See, e.g., Docket No. 98-02-20,
Joint Application of SBC Communications, Inc. and Southern New England
Telecommunications Corporation for a Change of Control (September 2, 1998);
Docket No. 98-09-15, Application of AT&T Corp. and Tele-Communications, Inc.
for Approval of a Change of Control (January 6, 1999). To the extent that
the Department determines that Conn. Gen. Stat. Section 16-43 is applicable
to the proposed transaction, the Applicants have included all information
required by the Department's Regulations for approval of an application under
Conn. Gen. Stat. Section 16-43, and have demonstrated that the Application
satisfies the requirements of Section 16-43.
NU, a Massachusetts business trust headquartered in Berlin, Connecticut, is
the parent company of the Northeast Utilities system (the "NU System") and a
registered holding company under the PUHCA. The NU System serves approximately
30 percent of New England's electric needs, with approximately 1.7 million
utility customers, and is one of the 24 largest electric utility systems in the
country as measured by revenues. NU is not itself an operating company or a
public service company. As of March 31, 1999, NU had total assets of $10.4
billion, with operating revenues of $3.77 billion for the year ended
December 31, 1998. As of June 30, 1999, NU System companies had 9,034 full
and part-time employees.
i. NU System Operating Companies
The NU System has traditionally furnished franchised retail electric service in
Connecticut, New Hampshire and western Massachusetts through NU's wholly-owned
operating company subsidiaries: CL&P, Public Service Company of New
Hampshire ("PSNH"), Western Massachusetts Electric Company ("WMECO") and
Holyoke Water Power Company ("HWP") (collectively, the "NU Operating
Companies"). In addition to their retail electric service business, the NU
Operating Companies (including HWP through its wholly owned subsidiary, Holyoke
Power and Electric Company) also furnish wholesale electric service to various
municipalities and other utilities and participate in limited retail access
programs, providing off-system retail service.
ii. NU System Support Subsidiaries
Several wholly-owned subsidiaries of NU provide support services for the
NU System companies and, in some cases, for other New England utilities.
Northeast Utilities Service Company provides centralized accounting,
administrative, information resources, engineering, financial, legal,
regulatory, operational, planning, purchasing and other services to the
NU System companies. North Atlantic Energy Service Corporation has operational
responsibility for the Seabrook nuclear power plant. Northeast Nuclear Energy
Company acts as agent for the NU System companies and other New England
utilities in operating the Millstone nuclear generating facilities.
Rocky River Realty Company, The Quinnehtuk Company, and Properties, Inc.
build, acquire or lease some of the property and facilities used by the NU
System companies.
iii. NU System Nonregulated Subsidiaries
The NU System also includes a number of non-regulated subsidiaries. These
include: NU Enterprises, Inc., a direct subsidiary of NU, which acts as a
holding company for non-regulated businesses; Northeast Generation Company,
formed to acquire and manage generating facilities; Northeast Generation
Service Company, which provides operating and environmental services,
preventative maintenance and other services to generators and large
customers; and SelectEnergy, Inc., a retail energy services and power
marketing company.2
Other nonregulated NU subsidiaries include: HEC, an energy engineering and
design firm serving energy and water utilities and large consumers; Mode 1
Communications, which owns approximately 30 percent of NorthEast Optic Network,
Inc. ("NEON"), a fiber-optic telecommunications carrier; Select Energy Portland
Pipeline, Inc., formed to hold a 5 percent partnership interest in the
Portland Natural Gas Transmission System pipeline which has recently commenced
operations in northern New England; and North Atlantic Energy Corporation,
which owns 36 percent of the Seabrook nuclear generating plant.
B. Yankee Energy System, Inc.
The legal name and principal place of business of YES is:
Yankee Energy System, Inc.
599 Research Parkway
Meriden, CT 06450-1030
YES is a public utility holding company incorporated in Connecticut in 1988
to acquire the gas utility assets and operations of CL&P. Prior to the
formation of YES, the gas business now owned and operated by Yankee Gas was
part of the NU system and was operated on a fully integrated and coordinated
basis as part of CL&P. In 1989, the Department approved the spin-off of YES
in Docket No. 88-04-28. Thus, for all but approximately the last 10 years,
CL&P's and Yankee Gas' utility operations were combined in one company.2
YES is primarily engaged in the purchase and retail distribution of natural
gas to residential, industrial and commercial customers in Connecticut through
its wholly-owned subsidiary, Yankee Gas. Its headquarters is in Meriden,
Connecticut. YES is the holding company for Yankee Gas and four active
non-utility subsidiaries. As of March 31, 1999, YES had total assets of $548
million, with utility revenues of $284 million for the year ended September 30,
1998. The YES system employs approximately 830 people.
2. Of relevance to this proposed Merger is that, in May 1999, Select Energy
agreed to acquire 8 billion cubic feet (Bcf) of annual gas contracts Aurora
Natural Gas holds with commercial and industrial customers in Connecticut,
Massachusetts, New Hampshire and Rhode Island, and associated natural gas
supplies.
i. Yankee Gas
Yankee Gas, a Connecticut public service company subject to the Department's
jurisdiction and the principal subsidiary of YES, purchases, distributes and
sells natural gas to approximately 185 thousand residential, commercial and
industrial users in Connecticut, of which approximately 170 thousand are also
CL&P customers. Yankee Gas operates the largest natural gas distribution
system in Connecticut as measured by number of customers and size of service
territory. This system is also one of the most modern LDC systems in the
Northeast.
The Yankee Gas service territory consists of 69 Connecticut cities and towns,
and covers approximately 1,995 square miles (or approximately half of
Connecticut's land area), all within the service territory of CL&P. Yankee Gas
owns approximately 2,820 miles of distribution mains; 133,033 miles of service
lines; 185 thousand active meters for customer use; pumps, valves and pressure
and flow controllers; service facilities located in Meriden, Waterbury,
Torrington, Mystic, Shelton, Bethel and Danielson; various propane facilities
with a combined storage capacity equivalent to approximately 245,000 million
cubic feet ("Mcf"); and six gas storage holders. All of these assets are
located in Connecticut.
Yankee Gas provides firm gas sales service to customers who require a
continuous gas supply throughout the year, and 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
also offers firm and interruptible transportation services to customers who
purchase gas from sources other than Yankee Gas.
ii. Yankee Energy System Non-Utility Businesses
YES conducts non-utility operations through four subsidiaries: NorConn
Properties, Inc., which holds property such as the YES headquarters building
in Meriden and a Yankee Gas service building in East Windsor; Yankee Energy
Financial Services Company, which provides equipment and home improvement
financing to energy consumers and municipal utilities across the country;
Yankee Energy Services Company, which provides building automation services,
heating, ventilation and air-conditioning, boiler and refrigeration equipment
services and installation; and R.M. Services, Inc., created initially to
provide debt collection service to Yankee Gas, but now marketing its services
to other utilities and to Dun & Bradstreet Receivables Management Services,
and providing consumer collections services focused primarily on utility and
telecommunications entities.
C. Merger Sub
Merger Sub, a to-be-formed wholly-owned direct subsidiary of NU, will be a
Connecticut corporation created to carry out the Merger. Although Merger
Sub will be the surviving company, upon the Merger it will change its name to
"Yankee Energy System, Inc." and continue to act as a holding company for YES'
utility and non-utility operations after the Merger.
V. THE PROPOSED MERGER
A. Description of the Proposed Merger
The Merger was approved by the YES Board of Directors on June 14, 1999 and by
the NU Board of Trustees on June 8, 1999. YES will merge into Merger Sub and
continue to conduct its business as a wholly-owned subsidiary of NU under the
YES name. On a pro forma basis, giving effect to the Merger, the combined
company would serve approximately 1.3 million utility customers (14 percent
of which would be gas utility customers), with combined assets of approximately
$11 billion as of March 31, 1999 and approximately $4.06 billion in combined
operating revenues for the year ended December 31, 1998.
The Merger Agreement provides that holders of outstanding YES shares (other
than those shareholders who do not vote in favor of the Merger and have
properly demanded dissenters' rights under Connecticut law) can choose to
convert their YES shares into cash, into NU common shares having a value of
$45 per share of YES common stock, or some combination of shares and cash.3
The per share consideration of $45.00 represents a premium for YES shares of
approximately 38 percent over the $32.50 per share price of the Yankee shares
on June 14, 1999, the last trading day before the announcement of the Merger.
NU intends to fund the cash consideration to be paid to YES shareholders with
internal resources. To the extent necessary, NU believes it will have access
to sufficient short-term and long-term capital financing at reasonable rates
to meet its obligations under the Merger Agreement in any event.
The Merger will be accounted for under the purchase method of accounting in
accordance with generally accepted accounting principles. The purchase price
will be allocated to YES utility and non-utility assets and liabilities based
on their estimated fair market values at the date of acquisition. The
difference between the purchase price, representing fair value, and the
recorded amounts will be shown as plant acquisition adjustment (for the
regulated business) and goodwill (for the unregulated businesses) on
the consolidated balance sheet.
3.The Merger is designed to qualify as a tax-free reorganization under Section
368 of the Internal Revenue Code of 1986, as amended. Accordingly, this
election is subject to proration and an adjustment driven by tax considerations
so that 55 percent of all issued and outstanding YES shares will be exchanged
for cash (or $263 million in the aggregate), and 45 percent will be exchanged
for NU common shares (or 12.6 million NU Common Shares in the aggregate,
assuming a market price of $17 per share for such shares). If YES shareholders
owning more than 55 percent 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 percent of YES shares elect
to receive NU common shares, the number of YES shares converted into stock will
be less than the number elected.
After the Merger, NU will own 100 percent of the common stock of YES and there
will be no minority common stock interest in YES or Yankee Gas. Neither the
capitalization nor debt securities of CL&P or any of the other NU subsidiaries
will be affected in any way by the Merger. The outstanding debt of Yankee Gas
and the other YES subsidiaries at the time of the consummation of the Merger
will remain outstanding without change.
Completion of the Merger requires, among other things, that two-thirds of
the outstanding YES shares vote to approve the Merger Agreement. NU
shareholders need not approve the Merger. The Merger is subject to customary
closing conditions, including the securing of necessary regulatory approvals
as described more fully in Section VII. In addition, if the Merger does not
become effective within six months after approval by YES shareholders, the
per share merger consideration will be increased by $.005 per day (or
approximately $1.6 million per month). The Merger Agreement also contains
customary termination provisions.
B. Post-Merger Organization, Management and Operations
Following consummation of the Merger, the entire NU System, including YES
and Yankee Gas, will be operated as a single coordinated system. The
Applicants anticipate a significant degree of centralization of services
with respect to such areas as accounting, financial planning and analysis,
financial reporting, human resources, governmental affairs, regulatory
relations, corporate communications, information systems, insurance, legal,
payroll, purchasing, tax, treasury, billing support, facilities management,
call center services, engineering, construction and environmental services
and general administrative services. Yankee Gas' headquarters will remain
in Connecticut. Since the NU System currently owns no gas properties, its
gas properties after the Merger will be the same size and location as the
Yankee Gas operation prior to the Merger.
Following the Merger, the NU Board of Trustees will be expanded by two
positions to be filled by two current outside directors of YES. After
the Merger, the Board of Directors of YES will consist of seven directors,
three of whom will be current directors of YES. The senior management team
at YES, including the senior management team of Yankee Gas, is expected to be
unchanged by the Merger. The Applicants project that approximately 50 YES
positions would overlap with positions now held by NU System employees and
could be eliminated over time. However, the Applicants do not presently
anticipate that any NU or YES employees will be laid-off as a result of the
Merger. Rather, it is expected that, as a result of expanded business
opportunities, as well as natural attrition and potential for reassignment,
current employees will have an opportunity to continue in the employ of the
combined companies.
C. The Merger Will Have No Effect on the Department's
Ability to Regulate the YES or NU Public Service Companies
The level of regulatory authority of the Department over Yankee Gas will not
be affected by the Merger. Following the Merger, Yankee Gas will remain a
public service company subject to the same jurisdiction of the Department
as at present. The Department's jurisdiction over CL&P also would remain
unchanged.
VI. REASONS FOR THE MERGER
A. The Changing Marketplace
The utility industry has been undergoing dramatic structural change for
several years, resulting in the introduction of competitive pressures into
the electric and natural gas business. These changes are leading to an
increasingly competitive and integrated environment, in which marketers and
customers deal in interchangeable units of energy expressed in British thermal
unit values, rather than in natural gas or electricity. To retain and attract
business in such a changing market in which customers' buying patterns already
have converged, a number of major energy industry companies have proposed or
completed mergers and other joint ventures designed to create complete energy
service companies, offering customers an array of fuels and related products
to meet their increasingly complex and price-sensitive energy needs.
The convergence of the electric and gas industries reflects the simple reality
that non-integrated gas and electric businesses will prove to be weaker
competitors than if they were combined, and that combining electric and gas
operations offers a means to compete more effectively in an environment in
which a few cents saved can make the difference between economic success and
failure in the new international economy.
The Applicants (as a combined company engaged in retail and wholesale natural
gas and electricity sales, regulated electric and gas distribution services and
soon-to-be-unregulated electric generation) will be in a position to
realize enhanced opportunities for growth and the provision of full customer
energy services in an increasingly competitive energy market, opportunities
that neither company, acting alone, would achieve. Moreover, as part of
the combined company, YES will have greater ability to increase its
penetration among Connecticut's now non-gas residents.
B. Benefits of the Merger
The Merger offers significant strategic and financial benefits to NU, YES,
and their respective customers, employees and shareholders, and to the State of
Connecticut. These benefits include:
(a) increasingly competitive gas and electric rates;
(b) long-term synergy-related cost savings which would not be available to the
separate companies absent the Merger, which are presently expected to be
realized over time in areas such as reduced operating costs and expenditures
resulting from integration of corporate and administrative functions,
elimination of duplicative positions, reduction of duplicative capital
expenditures for administrative and customer service programs and information
systems, and savings in areas such as legal, audit and consulting fees;
(c) longer term benefits from greater purchasing power for items such as
fuel and transportation services, general and operational goods and services;
(d) greater opportunities for expansion into non-utility businesses and
greater coordination of expansion efforts;
(e) expanded management resources and ability to select leadership from a
larger and more diverse management pool; and
(f) a financially stronger company that, through the use of the combined
equity, 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; and
(g) expansion of the current Yankee Gas distribution system.
All of these benefits will enhance Yankee Gas' ability to provide reliable
and safe services to customers going forward. In addition, these benefits,
which accrue to both of the Applicants' systems and their customers, are
expected to enhance economic development in Connecticut.
The economies of scale created by the Merger will enhance Yankee Gas'
ability to implement state-of-the-art technology across its operations,
including maintenance and development of infrastructure (including expansion
of YES'gas distribution system to provide gas service to current non-gas
residents), customer service, research and development, call center operations,
and information technology. Consolidating with a larger partner, which has the
ability to finance these types of costs competitively, will allow Yankee Gas to
grow and acquire more customers, thereby spreading some of its basic service
costs over a larger customer base and mitigating the frequency and size of
future Yankee Gas rate increases.
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.
For those communities in which the combined energy service company operates,
combined community planning on energy-related matters will prove to be a
distinct advantage. More generally, such a combination benefits society in
other ways, for example, by providing the means to ensure a more
environmentally efficient allocation of energy resources.
It is against this backdrop that the Boards of both YES and NU determined
that the Merger was in the compelling best interest of the customers,
employees and shareholders of both companies. More specific support for
the reasons why this proposed Merger will benefit all constituencies and
enhance Yankee Gas' ability to provide safe, adequate, reliable and
efficient service to its customers is provided in the prefiled testimonies
of Michael G. Morris, Chairman and Chief Executive Officer of NU, and Charles
E. Gooley, President and Chief Executive Officer of YES. Messrs. Morris and
Gooley also offer an inside look at the reasons why each company decided
to pursue this particular merger instead of other options that may have
been available to them to achieve greater scope and scale in the changing
energy economy.
In addition, the prefiled testimony of Michael A. Wiater, Director,
Business Analysis for the NU system, discusses how NU management evaluated
the potential to achieve synergies from this Merger, the likely timing and
amount of those synergies, as well as the risks that they might not be
achieved. Based on that analysis, NU concluded that it is likely that the
Merger will be enhance competitiveness and produce savings.
Potential merger synergies and benefits come at a cost. Specifically, it
was necessary for NU to pay a premium over market price in order to induce
YES shareholders to approve the Merger. As is typical for mergers of this
type, NU will be required to account for that over-market payment as an
acquisition premium for YES' regulated operations and as goodwill for its
unregulated businesses.
The Applicants believe that it would be appropriate for the Department,
if it approves this proposed Merger, to provide the two companies with a
reasonable opportunity to earn both a return of and on the investment made
in connection with this Merger since, without that investment - made in real
dollars with real lost opportunity costs - there would be no synergies to
share and no benefits to customers, employees and the State of Connecticut.
The Applicants further believes that such an opportunity is reasonable and
appropriate in this Merger since Applicants do not propose to increase rates
or to otherwise shift Merger costs to customers, nor do they request that any
specific rate mechanism be approved in this proceeding.
Recently, regulators have increasingly recognized that mergers can benefit
customers, and that companies should be permitted the opportunity to recover
the costs incurred to achieve those benefits. Mr. Wiater's testimony provides
some examples of transactions in which regulators have allowed merger savings
to be applied to pay the cost of the merger. The Applicants believe that
these other merger decisions provide a reasoned basis for the Department
to permit the Applicants in this proceeding with an opportunity to recover
their merger costs. Applicants further believe that a fair balance can be
struck between shareholders and customers if, on the one hand, no rate
increases are sought on account of the Merger and, on the other hand,
the Department provides the Applicants with an opportunity to recover
their Merger-related investment.
Applicants believe that the rulings requested herein are consistent
with the legislative mandate that governs the Department in this
proceeding to make a determination as to NU's financial, technological
and managerial suitability and responsibility to control Yankee Gas. Making
such findings while providing the balanced approach toward merger costs and
benefits as outlined above would treat both customers and shareholders fairly.
VII. COMPLIANCE WITH REQUIREMENTS OF CONN. GEN. STAT. * 16-47
The Applicants have satisfied, through this Application and the attached
exhibits and testimony, all statutory requirements for approval of the proposed
change of control.
A. NU is Financially, Technologically and Managerially
Suitable and Responsible to Control Yankee Gas
NU's management seeks to position the NU System to be a leading electric and
gas energy services company in the Northeast. The experience of NU senior
management in the gas business, both at the pipeline and distribution levels,
enhanced by the experience of YES' current management team assures the
managerial suitability of NU to control Yankee Gas.
Under the vision and leadership of that senior management, and the balanced
orders issued by the Department over the past few years, NU has moved beyond
its Millstone-related difficulties and is showing an improving financial
condition. In addition to enhancing revenues from its core regulated
operations through combinations with other utilities such as YES, NU has
also aggressively promoted the efficient use of energy, which in turn permits
customers to reduce operating expenses and increase their potential for
economic growth and expansion. Last year, NU helped its customers save
approximately $120 million through these efforts.
NU's achievements in obtaining customer savings have not been at the expense
of customer service. The NU System Customer Service Call Center responds to
over four million customers calls a year. Customer satisfaction surveys have
been increasingly favorable. Notably, on July 19, 1999 the DPUC published its
annual Consumer Service Complaint Scorecard, reporting that CL&P was one of a
handful of regulated companies achieving a reduction in the number of
complaints to regulators by more than 25 percent.
Other initiatives include offering, through its non-regulated HEC subsidiary,
new products that make electricity an environmentally and economically
responsible and attractive energy choice. Both SelectEnergy and HEC are
aggressively (and successfully) pursuing business opportunities. To improve
its position in the energy commodity marketing business, NU is also seeking
to acquire economically efficient generating assets, to partner in the
construction of new facilities and to purchase output from other generating
companies. The ultimate goal is to have a generation portfolio spread over
the 11-state Northeast region within the next five to ten years.
These efforts, across a broad range of energy and energy-related business,
are bearing fruit and offer hard evidence of NU's managerial, financial and
technological suitability to operate the YES businesses, which are
complementary to existing NU regulated and non-regulated businesses. These
efforts also help demonstrate that NU has moved beyond its past Millstone
outage difficulties. The return of Millstone 2 and 3 to high levels of
performance and efficiency, the decision to decommission Millstone 1 as no
longer serving the economic needs of CL&P customers, and developments in
Connecticut, New Hampshire and Massachusetts with respect to restructuring
and recovery of stranded costs all have helped to stabilize NU's financial
situation and to produce a substantial increase in share price since 1997.
NU's progress - reflecting the efforts of a largely new senior management team
at NU and reasoned support from the Department - began in 1998 and continues in
1999. NU had earnings of $18.7 million (or $0.14 a share) in the first six
months of 1999, compared with a loss of $11.7 million (or a loss of $0.09 a
share) for the first six months of 1998. NU's credit ratings stabilized in
mid-1998 and continue to improve in 1999. In March 1999, S&P revised its
outlook on the entire NU System from "Stable" to "Positive." Fitch IBCA
raised its credit ratings on NU, CL&P and WMECO in March 1999. In May 1999,
Moody's Investors Service placed the securities of NU, CL&P and WMECO under
review for a possible upgrade. NU's financial position will continue to
improve as the Department continues to implement P.A. 98-28 and as the
proceeds from generation asset divestiture and securitization become
available to retire expensive debt and preferred securities and shrink NU's
capitalization.
NU remains strongly committed to the communities in which the NU System
operates. In 1998, NU funded more than $1.6 million in economic and
community development initiatives within the service territories of
its Operating Companies to help strengthen the cities and towns in
which NU System customers and employees live. One such program,
the Main Street Approach, is a community-based, long-term effort
to strengthen communities by reinvigorating central business districts
through the provision of organizational guidance, information and technical
assistance to communities to help them run their own local programs. CL&P
and PSNH sponsor the Main Street program in Connecticut and New Hampshire.
Similarly, YES recognizes the value of and responsibility to be continually
involved with an supportive of community activities and endeavors. This
commitment is reflected by YES' charitable contributions of approximately
$200,000 throughout Connecticut. YES' corporate contributions are primarily
targeted at initiatives or organizations that support education, the
environment and the arts. In December 1998, YES was ranked 14 among
Connecticut companies as socially responsible in its corporate giving.
Among the many programs, festivals and events that YES supports are the
Meriden Daffodil Festival (title sponsor), New Opportunities for Waterbury
(annual scholarship), American Diabetes Association, CPTV membership drives
and auction, and Amistad America.
In addition, in 1998, the NU Operating Companies contributed more than $2.2
million to their communities to support education, improve social conditions
and protect the environment. Hundreds of CL&P, WMECO and PSNH employees came
to the rescue of people in Canada, New York and Puerto Rico when devastating
storms caused extensive power losses and economic devastation in those areas.
The Edison Electric Institute honored NU for its role in coordinating, at the
request of the federal government, the U.S. efforts to help Puerto Rico recover
from Hurricane Georges, which knocked out power to 1.3 million people and took
more than eight weeks to restore.
B. Yankee Gas' Ability to Provide Safe, Adequate and Reliable Service Will be
Enhanced By the Merger
Yankee Gas is a well-run public service company, providing superior service to
its customers. As an example, for the second year in a row, Yankee Gas has
been cited by the American Gas Association as an industry leader in accident
prevention and safety. Yankee Gas is the only Connecticut LCD to receive
this citation, and has one of the lowest incident rates in the country among
companies of similar size. Yankee Gas' ability to achieve consistently
excellent safety performance and to continue to provide adequate, reliable
and economic service will not be adversely affected by the Merger. In fact,
Yankee Gas' service quality will be enhanced through the increased financial
flexibility, the larger pool of managerial resources and potential future
cost-savings that are expected to result from the Merger.
As explained above, Yankee Gas will continue to be regulated as at present by
the Department. Its operating headquarters and service centers will remain in
Connecticut. NU hopes to retain existing YES and Yankee Gas management and
employees.
NU will continue Yankee Gas' strong commitment to customer service and
community support. The combined company will offer YES employees with
enhanced opportunities for career growth. The common roots and historical
interrelationship of Yankee Gas and CL&P are expected to facilitate the
integration of YES and Yankee Gas into the NU System. NU's ability to fund
capital improvements and a shared commitment to excellence and the adoption
of the best practices of both companies will assure improvements in the
already high level of service that Yankee Gas provides.
VIII. THE MERGER WILL BENEFIT THE STATE OF CONNECTICUT, EMPLOYEES AND CONSUMERS
YES, NU and their subsidiaries are well-known to the Department as good
Connecticut corporate citizens, with thousands of local employees and over
one million customers statewide. In order to continue to succeed in a
deregulated energy environment, both NU and YES need to increase the size
and scope of their operations. Elsewhere in this Application the increasing
consolidation of the New England energy industry has been summarized. In tha
t environment, growth requires size and strength that can best be met through
a combination of NU and YES and their separate energy resources.
The Applicants believe that the Merger offers the prospect for new investment
in the State, including the expansion of YES' gas distribution system, and more
job opportunities for Connecticut citizens, as well as for the existing
employees of both companies. Both NU and YES have a long history of supporting
Connecticut's charities and other volunteer organizations, and have been
generous corporate citizens in both time and financial commitments. With new
opportunities available to the combined company, these local contributions can
only grow. Similarly, the new products and services that can be made available
through the combination of NU and YES, including the provision of gas service
for residents currently without access to such service, and their added
strength as energy competitors, will benefit all aspects of the Connecticut
business community. Combining gas and electric functions enhances the
Applicants' ability to partner with commercial and industrial customers and
promote economic development.
In sum, NU has demonstrated that it can financially, technologically and
managerially assume control over YES without interfering with the safety,
adequacy and reliability of service. Therefore, the Department should find
that * 16-47 has been met.
IX. COMPLIANCE WITH DEPARTMENT REGULATIONS
This Part of the Application demonstrates compliance with Sections 16-1-46,
16-1-61, 16-1-65, 16-1-65B of the Department's Regulations.
A. Compliance With Section 16-1-46 of the Department's Regulations
Section 16-1-46(a) - Statement of Application
As stated above, The Applicants respectfully request Department approval
pursuant to Conn. Gen. Stat. * 16-47, and any other applicable statute or
regulation, of NU's exercise of control over Yankee Gas and the carrying
out of the other transactions contemplated by the Application and Merger
Agreement.
Section 16-1-46(a)(2) Individuals to Whom All
Correspondence and
Communication Regarding This
Application are to be
Addressed
John Shea, Esq.
Assistant General Counsel
Northeast Utilities
107 Selden Street
Berlin, CT 06037
Tel: (860) 665-3416
Fax: (860) 665-5504
e-mail: [email protected]
Mary J. Healey, Esq.
Vice President, General
Counsel and
Secretary
Yankee Energy System, Inc.
599 Research Parkway
Meriden, CT 06540
Tel: (203) 639-4405
Fax: (203) 639-4185
e-mail:
[email protected]
Robert P. Knickerbocker, Jr.
Day, Berry & Howard LLP
City Place I
Hartford, CT 06103-3499
Tel: (860) 275-0122
Fax: (860) 275-0343
e-mail:
[email protected]
Thomas J. Houde
Vice President
Yankee Energy System, Inc.
599 Research Parkway
Meriden, CT 06450
Tel: (203) 639-4477
Fax: (203) 639-4117
e-mail: [email protected]
Section 16-1-46(a)(3) - Statement of Facts
The facts on which the Department is expected to rely in granting its approval
of the Application are set forth in this Application and the Exhibits and
prefiled testimony filed herewith. The Applicants reserve the right to
supplement that information as they may deem necessary or desirable or as
the Department may request.
Section 16-1-46(a)(4) - Special Circumstances
The Applicants hope to effectuate the Merger in late 1999 or January, 2000.
Action by the Department on this Application on or before December 1, 1999
will facilitate completion of the Merger as promptly as possible. Because
the Applicants believe that the Merger satisfies the applicable statutory
requirements and is in the public interest, prompt Department consideration
and approval is requested.
B. Compliance with Section 16-1-65 of the Department's Regulations
This Application is jointly sponsored by NU and YES. For purposes of
Regulations Section 16-1-65, however, the "applicant" is interpreted to mean
NU.
Section 16-1-65(a) - General Description of the Property, Field of Operation
and Existing Business Interests of the Applicant
In addition to the information provided in Sections III and IV above,
see Exhibit 2 (NU 1998 Annual Report) Exhibit 3 (NU SEC Form 10-K for year
ended 12/31/98) and Exhibit 4 (NU SEC Form 10-Q dated March 31, 1999).
Section 16-1-65(b) - Financial Statement for the Most Recent Fiscal Year
and Pro Forma Period (Including Assumptions) Giving Effect to the Proposed
Transaction, To Include Balance Sheet, Income Statement and Statement of Source
and Application of Funds
See Exhibit 5 (Pro forma financial statements, to be filed separately under
protective order).
Section 16-1-65(c) - NU's Most Recent Form 10-K and Subsequent Forms 10-Q
filed with the Securities and Exchange Commission
See Exhibit 3 (NU SEC Form 10-K for year ended 12/31/98)
and Exhibit 4 (NU SEC Form 10-Q dated March 31, 1999).
Section 16-1-65(d) - NU's Most Recent Form 8-K Filed with the Securities
and Exchange Commission
See Exhibit 6 (NU SEC Form 8-K, filed July 6, 1999).
Section 16-1-65(e) - NU's Most Recent Annual Report to Shareholders
See Exhibit 22 (NU 1999 Annual Shareholders Meeting Proxy Statement).
Section 16-1-65(f) - NU's Latest Proxy Statement Sent to Shareholders
See Exhibit 22 (NU 1999 Annual Shareholders Meeting Proxy Statement).
Section 16-1-65(g) - Description of the Transaction, Including Intended
Financing, By which the Proposed Transaction will be Effected, and Agreement
or Other Instruments Associated with the Proposed Transaction
As set forth more fully in Section III above, YES will merge into Merger Sub,
a to be formed wholly-owned subsidiary created by NU to effectuate the Merger.
Merger Sub will survive as a wholly-owned subsidiary of NU and will change its
name to "Yankee Energy System, Inc." Further details regarding the Merger
are set forth in Section III above, and in Exhibit 1 (Merger Agreement),
Exhibit 5 (Pro forma financial statements) and Exhibit 11 (SEC Form U-1).
Additional information is also provided in Exhibit 10 (Prospectus/Proxy
Statement), which is being prepared and will be filed with the Department,
subject to the granting of a motion for protective order, after it is filed
with the SEC on a confidential basis.
Section 16-1-65(h) - Statement of Purpose and Intent of NU in Undertaking the
Proposed Transaction
This information is provided in detail in Section IV of this Application and
in the prefiled testimony submitted herewith. See also Exhibit 11 (SEC Form
U-1) and Exhibit 10 (Prospectus/Proxy).
Section 16-1-65(i) - A Statement of the Benefits That Would Result to the
Customers and Shareholders of YES
This information is provided in detail in Sections III, IV and V of this
Application and in the prefiled testimony submitted herewith. See also
Exhibit 11 (SEC Form U-1) and Exhibit 10 (Prospectus/Proxy Statement).
Section 16-1-65(j) - Any Prospectus, Official Statement, Preliminary Prospectus
or Preliminary Official Statement Prepared by or on Behalf of NU or any Other
Person with Regard to the Proposed Transaction
See Exhibit 10 (Prospectus/Proxy Statement).
Section 16-1-65(k) -NU's Capital Structure and Capitalization Ratios, Present
and Pro Forma (Include Assumptions), Assuming Approval of the Proposed
Transaction
See Exhibit 5 (Financial statements, present and pro forma).
Section 16-1-65(l) - NU's Interest (Before and After Income Taxes) and
Fixed Charge Coverage, Present and Pro Forma (Include Assumptions), Assuming
Approval of the Proposed Transaction
See Exhibit 5 (Financial statements, present and pro forma).
Section 16-1-65(m) - Table of Organization of Management After Giving Effect
to the Proposed Transaction, Including the Name of Each Executive Officer
See Exhibit 8 (NU corporate organization, pre- and post-merger; NU executive
officers, pre- and post-merger).
Section 16-1-65(n) -Proposed Members of the NU Board of Trustees After Giving
Effect to the Proposed Transaction
See Exhibit 9 (NU Board of Trustees, pre- and post-merger).
Section 16-1-65(o) - A Narrative of the Proposed Operations of the Combined
Company for the First Calendar Year Following the Effectiveness of the Proposed
Transaction, Including But Not Limited to Employment Levels and Office and
Service Center Locations, and Details of all Changes from the Existing
Operations of YES
The Merger is expected to result in no material changes to the present
operations and management of either NU or YES for the first calendar year
following the effectiveness of the Merger. Further detail is provided in
Sections III and V above and in the prefiled testimony submitted herewith.
It is anticipated that employees of YES subsidiaries will continue in their
positions or be provided the opportunity to continue in other positions in NU
System companies.
Section 16-1-65(p) - A Description of the Experience of NU in the Operation,
Management and Control of any Public Service Company, and, to the Extent Not
Otherwise Provided, a Statement as to the Suitability of NU to Control YES
Detailed information on these matters is provided in Sections II, III, IV and
V of this Application and in the prefiled testimony submitted herewith. NU
has extensive experience in operating, managing and controlling public
service companies, including gas companies subject to the jurisdiction of
the Department.
Section 16-1-65(q) - A List of All Department Orders, Rulings and Regulations
In Effect and Applicable to YES, and an Indication of those Which NU Proposes
Would be Discontinued in Connection with the Proposed Transaction, Together
with a Statement of the Reason for each Such Proposed Discontinuance
The Applicants do not anticipate that the Merger will have any impact
on any Department orders, rulings or regulations in effect and applicable
to YES or its subsidiaries.
Section 16-1-65(r) - A List of Stockholder Approval and All Federal, State and
Local Governmental Approvals Required to Effect the Proposed Transaction,
Together with a Description of the Status of the Efforts to obtain Such
Approval as of the Date Reasonably Proximate to the Date of the Application
The Merger was approved by the YES Board of Directors on June 14, 1999 and
by the NU Board of Trustees on June 8, 1999. Approval by the holders of
outstanding YES common shares is expected at a special meeting presently
scheduled to be held on October 12, 1999. Under Massachusetts law,
approval of the Merger by NU shareholders is not required.
The Applicants will submit as Exhibit 10 a Prospectus/Proxy filed with the
SEC subject to the granting of a protective order. The Applicants will also
make a filing with the SEC on August 4, 1999 for approval of the Merger
under the provisions of the PUHCA, a copy of which will be filed as Exhibit
11 hereto.
The Applicants presently intend to make the required filing 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, in
the third quarter of 1999.
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.
All required approvals will be forwarded to the Department upon receipt.
Section 16-1-65(s) - A Statement of the Percentage of Voting Securities Of YES
Owned or Controlled by NU, and Control Exercised or Capable of Being Exercised
Over the Public Service Company After the Conclusion of the Proposed
Transactions
After completion of the proposed Merger, YES will be a wholly-owned direct
subsidiary of NU and Yankee Gas will be a wholly-owned indirect subsidiary
of NU.
C. Compliance with Section 16-1-65B of the Department's Regulations
This Application is jointly sponsored by NU and YES. However, for purposes
of these Regulations, the "affected company" is interpreted to mean YES.
Section 16-1-65B(a) - YES's Financial Statement for the Most Recent Fiscal Year
and Pro Forma Period (Including Assumptions) Giving Effect to the Proposed
Transaction, To Include Balance Sheet, Income Statement and Statement of Source
and Application of Funds
See Exhibit 5 (Financial statements, present and pro forma).
Section 16-1-65B(b) - Existing Reporting Structure for Personnel, from
Connecticut Local Operations to Chief Executive Officer, Including Board
of Directors
See Exhibit 17 (Present YES corporate and reporting structure).
Section 16-1-65B(c) - Capital Structure and Capitalization Ratios, Present
and Pro Forma (Include Assumptions) Giving Effect to the Proposed Transaction
See Exhibit 5 (Financial statements, present and pro forma).
Section 16-1-65B(d) - Any Prospectus, Official Statement, Preliminary
Prospectus or Preliminary or Official Statement Associated with the Transaction
for which Approval Is Sought
See Exhibit 10 (Prospectus/Proxy Statement).
Section 16-1-65B(e) - A Statement of the Control That NU is Capable of
Exercising over YES After Completion of the Proposed Transaction
After completion of the proposed Merger, YES will be a wholly-owned direct
subsidiary of NU and Yankee Gas will be a wholly-owned indirect subsidiary
of NU.
D. Compliance with Section 16-1-61 of the Department's Regulations (Conn. Gen.
Stat. * 16-43)
To the extent that the Department determines that Conn. Gen. Stat. * 16-43
is applicable, the Applicants provide the following information in compliance
with Section 16-1-61 of the Department's Regulations. This Application is
jointly sponsored by NU and YES. However, for purposes of these Regulations,
the "applicant" is Yankee Gas.
Section 16-1-61(a)(1) - Statement of financial condition of Yankee Gas and the
surviving company, reflecting the financial condition of the surviving company
before and after the merger.
See Exhibit 13 (Yankee Gas Annual Report to the Department for the fiscal
year ending 9/30/98). There will be no change to Yankee Gas' financial
condition as a result of the Merger.
Section 16-1-61(a)(2) -Copy of the Merger Agreement
See Exhibit 1.
Section 16-1-61(a)(3)- Description of Yankee Gas' Property, Field of
Operation, Property, Equipment, Depreciation and Amortization Reserves
In addition to the information provided in Section II above, see Exhibit 13
(Yankee Gas Annual Report to the Department); Exhibit 10 (Prospectus/Proxy
Statement); and Exhibit 19 (Yankee Gas fixed asset report).
Section 16-1-61(a)(4)-Financial Structure of the Deal
See Exhibit 1.
Section 16-1-61(a)(5)- Copies of Instruments Defining the Terms of Any
Proposed Security, Any Plans or Offers of Reorganization or Readjustment of
Indebtedness or Capitalization, and Any Plan for the Retirement or Exchange
of Securities
Not applicable.
Section 16-1-61(a)(6) - Statement of the Purpose For Which the Securities
Are to be Issued
Not applicable.
Section 16-1-61(a)(7)- Complete Description of Obligations/Liabilities Assumed
by Yankee Gas
Not applicable.
Section 16-1-61(a)(8) - Copy of the Latest Proxy Statement and Annual Report
of Applicant or Parent Company
See Exhibit 12 (YES Annual Report for the fiscal year ended 9/30/98);
Exhibit 10 (Prospectus/Proxy Statement to be filed with the Department),
and Exhibit 20 (YES Proxy Statement for 1999 Annual Meeting).
Section 16-1-61(a)(9)- Copies of All SEC Filings of Applicant or Parent Company
in Connection with the Merger
See Exhibit 10 (Prospectus/Proxy Statement to be filed with the Department).
Section 16-1-61(a)(10)- Description of Property Involved In the Transaction
In addition to the information provided in Section II above, see Exhibit
13 (Yankee Gas Annual Report to the Department).
Section 16-1-61(a)(11)- Certified Copy of the YES Board of Directors
Resolutions Approving the Initiation of the Transaction
See Exhibit 21.
E. List of Exhibits
Exhibit 1 Merger Agreement
Exhibit 2 NU 1998 Annual Report with audited financial statements
Exhibit 3 NU SEC Form 10-K for year ended 12/31/98
Exhibit 4 NU SEC Form 10-Q dated 3/31/99
Exhibit 5 Pro forma financial statements for the most recent fiscal year
and pro forma period giving effect to the merger (to be filed
subsequently)
Exhibit 6 NU SEC Form 8-K dated 7/6/99
Exhibit 7 Joint press release dated 6/15/99
Exhibit 8 NU corporate organization, pre- and post-merger; NU executive
officers, pre- and post-merger
Exhibit 9 Members of NU Board of Trustees, pre- and post-merger
Exhibit 10 Prospectus/Proxy Statement (to be filed subsequently)
Exhibit 11 SEC Form U-1
Exhibit 12 YES 1998 Annual Report, including audited financial statements
Exhibit 13 Yankee Gas Annual Report to the Department for the fiscal year
ending 9/30/98
Exhibit 14 YES SEC Form 10-K
Exhibit 15 YES SEC Form 10-Q for the periods ending 12/31/98 and 3/31/99
Exhibit 16 YES SEC Form 8-K dated 6/14/99
Exhibit 17 Present YES corporate organization and reporting structure
Exhibit 18 Present YES capital structure and capitalization ratios
Exhibit 19 Yankee Gas fixed asset report
Exhibit 20 YES Proxy Statement for 1999 Annual Meeting
Exhibit 21 YES Board of Directors resolutions
Exhibit 22 NU Annual Shareholders Meeting Proxy Statement
Exhibit 23 Surety Bond
F. List of Prefiled Testimony
1. Prefiled testimony of Michael G. Morris.
2. Prefiled testimony of Charles E. Gooley.
3. Prefiled testimony of Michael A. Wiater.
G. Statutory Bond Requirement
Pursuant to Conn. Gen. Stat. * 16-47(c), a bond in the amount of $50,000
is required to indemnify the Department for the reasonable expenses incurred
by the Department in reviewing this Application. The required bond is
furnished as Exhibit 23.
X. CONCLUSION AND REQUEST FOR APPROVAL
The Applicants respectfully request approval of the transactions described
herein, and in the Merger Agreement, pursuant to Conn. Gen. Stat. * 16-47
and any other statute or regulation the Department finds applicable, as set
forth herein and in the Exhibits hereto.
RESPECTFULLY SUBMITTED,
NORTHEAST UTILITIES
By: /s/John Shea
Assistant General Counsel
YANKEE ENERGY SYSTEM, INC.
By: /s/ Mary J. Healey
Vice President, General Counsel and Secretary
The Applicants believe that Conn. Gen. Stat. * 16-43 is not applicable to
this transaction, and that the Department's review is properly limited to
Conn. Gen. Stat. * 16-47. See, e.g., Docket No. 98-02-20, Joint Application
of SBC Communications, Inc. and Southern New England Telecommunications
Corporation for a Change of Control (September 2, 1998); Docket No. 98-09-15,
Application of AT&T Corp. and Tele-Communications, Inc. for Approval of a
Change of Control (January 6, 1999). To the extent that the Department
determines that Conn. Gen. Stat. * 16-43 is applicable to the proposed
transaction, the Applicants have included all information required by the
Department's Regulations for approval of an application under Conn. Gen.
Stat. * 16-43, and have demonstrated that the Application satisfies the
requirements of Section 16-43.
Of relevance to this proposed Merger is that, in May 1999, SelectEnergy
agreed to acquire 8 billion cubic feet (Bcf) of annual gas contracts Aurora
Natural Gas holds with commercial and industrial customers in Connecticut,
Massachusetts, New Hampshire and Rhode Island, and associated natural gas
supplies.
The Merger is designed to qualify as a tax-free reorganization under Section
368 of the Internal Revenue Code of 1986, as amended. Accordingly, this
election is subject to proration and an adjustment driven by tax
considerations so that 55 percent of all issued and outstanding YES
shares will be exchanged for cash (or $263 million in the aggregate),
and 45 percent will be exchanged for NU common shares (or 12.6 million
NU Common Shares in the aggregate, assuming a market price of $17 per
share for such shares). If YES shareholders owning more than 55 percent
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 percent of YES shares elect to receive
NU common shares, the number of YES shares converted into stock will be
less than the number elected.
Exhibit f.1
September 13, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Northeast Utilities
SEC File Number 70-9535
Ladies and Gentlemen:
I am Assistant General Counsel of Northeast Utilities Service
Company ("NUSCO"), a service company affiliate of Northeast Utilities ("NU"
or the "Applicant"). I have acted as counsel for the Applicant in connection
with its Form U-1 Application/Declaration ("Declaration"), filed August 4,
1999 (File No. 70-9535) with the Securities and Exchange Commission
("Commission") with respect to the proposed transactions described therein
("Proposed Transactions"). In the Declaration, NU sought the approval of the
Commission for NU to acquire, by means of a direct merger, all of the issued
and outstanding common stock ("YES Common Stock") of Yankee Energy System,
Inc. ("YES"), a Connecticut corporation and an exempt holding company,
pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), and to
issue shares of NU Common Shares, $5.00 par value per share, ("NU Common
Shares") in connection with the Transaction.
In connection with this opinion, I have examined or caused to be
examined by counsel associated with or engaged by me, including counsel who
are employed by NUSCO, originals or copies certified to my satisfaction of
such corporate records of the Applicant, certificates of public officials and
of officers of the Applicant, and agreements, instruments and other
documents, as I have deemed necessary as a basis for the opinions expressed
below. In my examination of such agreements, instruments and documents, I
have assumed the genuineness of all signatures, the authenticity of all
agreements, instruments and documents submitted to me as originals, and the
conformity to original agreements, instruments and documents of all
agreements, instruments and documents submitted to me as certified, conformed
or photostatic copies and the authenticity of the originals of such copies.
The opinions set forth herein are limited to the laws of the
Commonwealth of Massachusetts, the State of Connecticut and the federal laws
of the United States. I am a member of the bar of the State of New York. I
am not a member of the bar of the Commonwealth of Massachusetts nor of the
bar of the State of Connecticut, and do not hold myself out as an expert in
the laws of such Commonwealth and State, although I have made a study of
relevant laws of such Commonwealth and State. In expressing opinions about
matters governed by the laws of the Commonwealth of Massachusetts, I have
consulted with counsel who are employed by NUSCO and are members of the bar
of such Commonwealth. In expressing opinions about matters governed by the
laws of the State of Connecticut, I have consulted with counsel who are
employed by NUSCO and are members of the bar of such State.
I have assumed that the Proposed Transactions are carried out in
conformity with the Securities Act of 1933, the Securities Exchange Act of
1934 and the requisite authorizations, approvals, consents or exemptions
under the securities laws of the various States and other jurisdictions of
the United States.
Based upon and subject to the foregoing, and assuming that the Proposed
Transactions are carried out in accordance with the Declaration, I am of the
opinion that, when the Commission shall have entered an order forthwith
granting the Declaration:
(a) all State laws applicable to the Proposed Transactions will have
been complied with;
(b) NU is validly organized and existing under the laws of the
Commonwealth of Massachusetts;
(c) when issued pursuant to the Merger Agreement, the NU Common
Shares will be validly issued, fully paid and nonassessable, and
the holders thereof will be entitled to the rights and
privileges appertaining thereto set forth in the Declaration of
Trust of NU;
(d) NU will legally acquire the YES Common Stock; and
(e) the consummation of the Proposed Transactions will not violate
the legal rights of the holders of any securities issued by NU or any
associate company thereof.
I hereby consent to the filing of this opinion as an exhibit to the
Declaration and in any proceedings before the Commission that may be held in
connection therewith.
Very truly yours,
/s/ Jeffrey C. Miller
Jeffrey C. Miller
Assistant General Counsel
<TABLE> <S> <C>
<ARTICLE> OPUR1
<CIK> 0000072741
<NAME> NU CONSOLIDATED
<MULTIPLIER> 1000
<S> <C> <C>
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1999 JUN-30-1999
<PERIOD-TYPE> YEAR YEAR
<BOOK-VALUE> PER-BOOK PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 6,110,287 6,485,728
<OTHER-PROPERTY-AND-INVEST> 891,645 904,913
<TOTAL-CURRENT-ASSETS> 1,067,485 1,131,289
<TOTAL-DEFERRED-CHARGES> 2,279,109 2,335,017
<OTHER-ASSETS> 0 322,462
<TOTAL-ASSETS> 10,348,526 11,179,409
<COMMON> 0 0
<CAPITAL-SURPLUS-PAID-IN> 0 0
<RETAINED-EARNINGS> 0 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,073,662 2,268,765
141,039 141,039
136,200 136,200
<LONG-TERM-DEBT-NET> 3,151,013 3,578,686
<SHORT-TERM-NOTES> 258,000 260,000
<LONG-TERM-NOTES-PAYABLE> 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 0 0
0 0
<CAPITAL-LEASE-OBLIGATIONS> 79,628 79,628
<LEASES-CURRENT> 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 4,508,984 4,715,091
<TOT-CAPITALIZATION-AND-LIAB> 10,348,526 11,179,409
<GROSS-OPERATING-REVENUE> 4,015,975 4,319,293
<INCOME-TAX-EXPENSE> 232,382 240,890
<OTHER-OPERATING-EXPENSES> 3,529,520 3,808,161
<TOTAL-OPERATING-EXPENSES> 3,761,902 4,049,051
<OPERATING-INCOME-LOSS> 254,073 270,242
<OTHER-INCOME-NET> (166,350) (166,125)
<INCOME-BEFORE-INTEREST-EXPEN> 174,227 199,139
<TOTAL-INTEREST-EXPENSE> 266,444 301,914
<NET-INCOME> (116,406) (126,964)
24,189 24,189
<EARNINGS-AVAILABLE-FOR-COMM> (92,217) (102,775)
<COMMON-STOCK-DIVIDENDS> 0 0
<TOTAL-INTEREST-ON-BONDS> 0 0
<CASH-FLOW-OPERATIONS> 0 0
<EPS-BASIC> (0.89) (0.89)
<EPS-DILUTED> (0.89) (0.89)
</TABLE>
Northeast Utilities System Combined Condensed Financial Statements
Giving Effect to the Yankee Energy System Merger
Actual and Pro Forma Balance Sheet
As of June 30, 1999
(000's)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Northeast Yankee Pro Giving Effect
Utilities Energy Forma to proposed
System Systems, Inc. Adj. Transactions
<S> <C> <C> <C> <C>
ASSETS
Utility plant, net $ 6,110,287 $ 375,441 $ $ 6,485,728
Other property and
investments 891,645 13,268 904,913
Assets held for sale 16,160 16,160
Current Assets:
Cash and cash
equivalents 220,318 5,443 0 [1] 225,761
Accounts rec., net 342,518 43,485 386,003
Other current assets 504,649 14,876 519,525
Regulatory assets
and deferred charges 2,279,109 53,908 2,000 [2] 2,335,017
Purchase Price in
Excess of Net Assets
Acquired 306,302 [3] 306,302
----------- ------------ -------- -------------
Total assets $ 10,348,526 $ 522,581 $308,302 $ 11,179,409
=========== ============ ======== =============
CAPITALIZATION AND
LIABILITES
Capitalization:
Common shareholder's
equity 2,073,662 173,250 21,853 [4] 2,268,765
Preferred stock not
subject to mandatory
redemption 136,200 136,200
Preferred stock
subject to mandatory
redemption 141,039 141,039
Long-term debt 3,151,013 164,000 263,673 [5] 3,578,686
----------- ------------ -------- -------------
Total Capitalization 5,501,914 337,250 285,526 6,124,690
Minority interest in
cons. subsidiaries 100,000 100,000
Obligations under
capital leases 79,628 79,628
Short-term debt 258,000 2,000 260,000
Other current
liabilities 1,012,943 58,462 22,776 [6] 1,094,181
Accumulated deferred
income taxes 1,811,673 61,705 1,873,378
Other deferred credits 1,584,368 63,164 1,647,532
----------- ------------ -------- -------------
Total Capitalization
and Liabilities $ 10,348,526 $ 522,581 $ 308,302 $ 11,179,409
=========== ============ ======== =============
</TABLE>
References are based on numeric for Footnote references and alpha
for actual journal entry adjustments.
[1] See notes and adjustments 4, 6, a, b.
[2] See notes and adjustments 6, a.
[3] See notes and adjustments 5, a, d.
[4] See notes and adjustments 7, a.
[5] See notes and adjustments 6, b.
[6] See notes and adjustments 6, 8, a, c.
Northeast Utilities System Combined Condensed Financial Statements
Giving Effect to the Yankee Energy System Merger
Actual and Pro Forma Income Statement
Twelve Months Ended June 30, 1999
(000's)
(Unaudited)
<TABLE>
<CAPTION>
Pro
Northeast Yankee Pro Forma
Utilities Energy Forma Giving
System Systems Adj. Effect to
to Adj.
<S> <C> <C> <C> <C>
Operating Revenues $ 4,015,975 $ 303,318 $ $ 4,319,293
Operating Expenses:
Operation-
Fuel, purchased
and net inter-
change power/gas 1,394,647 154,279 1,548,926
Other 1,018,396 62,753 1,081,149
Maintenance 395,676 10,866 406,542
Merger Expenses 1,382 1,382
Depreciation 326,145 20,724 346,869
Amort. of Excess of
Purch. Price over
Net Assets Acq. 7,854 [1] 7,854
Amort. of regulatory
assets, net 269,164 269,164
Federal and State
Income Taxes 232,382 8,508 240,890
Taxes other than
income taxes 125,492 20,783 146,275
---------- ---------- ---------- ----------
Total operating
expenses $ 3,761,902 $ 279,295 $ 7,854 $ 4,049,051
Operating Income/
(Loss) 254,073 24,023 (7,854) 270,242
Other Income/
(Expense):
Interest charges, net (266,444) (14,176) (21,294)[2] (301,914)
Income taxes, net 86,504 8,518 [3] 95,022
Other, net (166,350) 225 (166,125)
---------- ---------- ---------- ----------
Income/(Expense)
before divdends (92,217) 10,072 (20,630) (102,775)
Preferred dividends
of subsidiaries 24,189 24,189
---------- ---------- ---------- ----------
Net Income/(Loss) $ (116,406)$ 10,072 $ (20,630) $ (126,964)
========== ========== ========== ==========
Earnings Per
Common Share--
Basic and Diluted (0.89) 0.95 (0.89)
Common Shares
Outstanding
(average) 130,967,209 10,583,564 1,485,387 143,036,160
</TABLE>
See accompanying Notes to Unaudited Pro Forma
Combined Condensed Financial statements.
References are based on numeric for Footnote references
and alpha for actual journal entry adjustments.
[1] See notes and adjustments 9, d.
[2] See notes and adjustments 6, 10, c.
[3] See notes and adjustments 11, c.
Northeast Utilities System Combined Condensed Financial Statements
Giving Effect to the Yankee Energy System Merger
Actual and Pro Forma Statement of Retained Earnings
As of June 30, 1999
(000's)
(Unaudited)
<TABLE>
<CAPTION>
Northeast Yankee Pro Pro Forma
Utilities Energy Forma Giving Effect
System Systems, Adj. to proposed
Inc. Transactions
<S> <C> <C> <C> <C>
Balance at beginning
of period $ 695,855 $ 19,080 $ $ 714,935
Net Income/(Loss) (92,217) 10,072 (20,630) (102,775)
Common Dividends 0
Cash dividends on preferred
stock (24,189) (24,189)
Adjustment 0
--------- --------- --------- ---------
Balance at end of period $ 579,449 $ 29,152 $ (20,630)$ 587,971
========= ========= ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma
Combined Condensed Financial Statements.
Northeast Utilities System Combined Condensed Financial Statements
Giving Effect to the Yankee Energy System Merger
Actual and Pro Forma Capital Structure
As of June 30, 1999
(000's)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Northeast Yankee Pro Giving Effect
Utilities Energy Forma to proposed
System Systems, Adj. Transactions
Inc.
<S> <C> <C> <C> <C>
Long-term Debt * $ 3,151,013 $ 164,000 $ 263,673 $ 3,578,686
Preferred stock not
subject to mandatory
redemption 136,200 136,200
Preferred stock subject
to mandatory redemption 141,039 141,039
Common Stock Equity 2,073,662 173,250 21,853 2,268,765
----------- ---------- -------- --------------
Total Capitalization $ 5,501,914 $ 337,250 $ 285,526 $ 6,124,690
=========== ========== ======== ==============
</TABLE>
* Does not include current portion
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
Northeast Utilities System Combined Condensed
Financial Statements Giving Effect to the
Yankee Energy System Merger Pro Forma
Adjustments
(000's)
<TABLE>
<CAPTION>
Debit Credit
<C> <C>
a) Purchase Price in Excess of Net Assets Acquired 314,156
Regulatory assets and deferred charges 2,000
Other current liabilities 10,000
Common shareholder's equity 42,483
Cash 263,673
To record the purchase of Yankee Energy System.
b) Cash 263,673
Long-term Debt 263,673
To record issuance of 8% amortizing notes
payable to fund the cash consideration to be
paid to Yankee Energy System shareholders.
c) Interest charges, net 21,294
Other current liabilities 8,518
Other current liabilities 21,294
Income taxes, net 8,518
To record addtional interest expense and debt
issuance costs and related tax impacts.
d) Amortization of Purchase Price in Excess of 7,854
Net Assets Acquired
Purchase Price in Excess of 7,854
Net Assets Acquired
To record the amortization of Purchase Price
in Excess of Net Assets Acquired.
</TABLE>
Northeast Utilities System Combined Condensed Financial
Statements
Giving Effect to the Yankee Energy System Merger
Footnotes to Pro Forma Financial Statements
(000's)
<TABLE>
<CAPTION>
<S> <C>
Note 1: Unaudited Pro Forma Combined Condensed Financial
Statements
The unaudited pro forma combined condensed Balance Sheet as
of June 30, 1999 and the unaudited pro forma combined condensed
Income Statements for the twelve months ended June 30, 1999
combine the historical information of Northeast Utilities (NU)
and Yankee Energy System (YES) to give effect of the
proposed acquisition.
Note 2: Accounting Method
The acquisition is accounted for using the purchase method of
accounting in accordance with generally accepted accounting
principles.
Note 3: Merger
For purposes of reflecting the pro forma amounts, the balance
sheets have given effect to the acquisition as if it had
occurred at the end of each respective period and the income
statements have given effect to the acquisition as if it had
occurred at the beginning of each respective period.
Note 4: Cash Consideration
Based on the assumed amounts to be paid at the merger date of
of $479 million. The Shareholders' of YES will receive $45.00
a share, 45% payable in NU system shares and 55% payable in
cash, which may be paid from cash on hand, proceeds from a NU
debt offering, and proceeds from restructuring.
Note 5: Excess of Purchase Price over Net Assets Acquired
Reflects the recognition of the excess amount of the purchase
price over the net assets acquired, calculated as follows:
Purchase Price, assumed value of common stock
and cash consideration (based on 10,653,457 YES
shares outstanding at June 30, 1999 at $45 per share) $ 479,406
Estimated Direct Costs to be incurred in consummating the
proposed merger 8,000
--------
487,406
Net Assets of YES (173,250)
--------
Excess of purchase price over net assets acquired $ 314,156
========
Note 6: Long-term Debt
Reflects the issuance of $264 million principal amount of 8%
amortizing notes payable. The proceeds of which may be used
to fund the cash consideration paid to YES shareholders.
An estimate of $2 million of Debt Issuance Costs has also been
reflected as a pro forma adjustment related to this debt
issuance.
Note 7: Common Shareholder's Equity
Based on the assumed amounts to be paid at the merger date.
The Shareholders' of YES will receive $45 per share, 45%
payable in NU System shares and 55% payable in cash.
Reflects the issuance of 12,068,951 shares of NU System common
stock at an assumed issuance cost of $17.875 per share, net
of the elimination of YES shareholders' equity.
Note 8: Merger Related Costs
Northeast Utilities System and Yankee Energy System will incur
direct expenses related to the merger, including accounting
and consulting fees. The pro forma adjustments include an
estimate for Northeast Utilities System's merger-related costs
of $8 million, which is included in the Excess of Purchase
Price over Net Assets Acquired. YES expects to incur
approximately $5 million of merger-related costs, which it
will expense as incurred.
Note 9: Amortization of the Excess of Purchase Price over
Net Assets Acquired
Represents the amortization of the excess of purchase price
over net assets acquired which is not tax deductible, over a
40 year period.
Note 10: Interest Expense, net
Represents the interest expense related to the issuance of
$264 million principal amount of 8% notes payable and the
amortization of deferred financing costs over ten years.
Note 11: Income Taxes
Income Taxes on the pro forma income statements have been
based on a rate of 40%. A tax benefit has not been provided
for the Excess of Purchase Price over Net Assets Acquired
since it is not tax deductible.
Note 12: Earnings Per Share
Reflects the issuance of 12,068,951 shares of NU System
Common Shares at an assumed issuance cost of $17.875 at
June 30, 1999 net of the elimination of the YES shares
outstanding.
</TABLE>
