FILE NO. 70-9657
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM U-1
APPLICATION/DECLARATION UNDER THE PUBLIC
UTILITY HOLDING COMPANY ACT OF 1935
NORTHEAST UTILITIES YANKEE ENERGY SYSTEM, INC.
174 Brush Hill Avenue YANKEE GAS SERVICES COMPANY
West Springfield, MA 01090-0010 YANKEE ENERGY FINANCIAL SERVICES
COMPANY
R.M. SERVICES INC. NORCONN PROPERTIES, INC.
639 Research Parkway YANKEE ENERGY SERVICES COMPANY
Meriden, CT 06450 599 Research Parkway
Meriden, CT 06450
(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
Assistant General Vice President
Counsel and Treasurer
Northeast Utilities Northeast Utilities
Service Company Service Company
107 Selden Street 107 Selden Street
Berlin, CT 06037 Berlin, CT 06037
The Application/Declaration in this file is amended and restated in its
entirety to read as follows:
"Item 1. Description of Proposed Transaction
A. Introduction and General Request
Northeast Utilities ("NU"), a public utility holding company registered
under the Public Utility Holding Company Act of 1935 (the "Act"), has
previously filed an Application/Declaration on Form U-1 (File No. 70-9535,
the "Merger U-1") with the Securities and Exchange Commission (the
"Commission") under Sections 9 and 10 and other applicable provisions of the
Act, seeking approvals relating to the acquisition by NU of all of the
outstanding securities of Yankee Energy System, Inc., a Connecticut
Corporation ("YES") pursuant to which YES became a wholly owned subsidiary of
NU (the "Merger"), and for other related transactions. A more complete
description of the Merger and the transactions contemplated in connection
with the Merger is contained in the Merger U-1, which description is hereby
incorporated by reference herein. The Commission approved the Merger by
Order dated January 31, 2000 (Holding Co. Act Release No. 35-27127).
This Application/Declaration seeks authorization and approval of the
Commission with respect to (i) the payment of dividends out of capital and
unearned surplus by YES and its public utility subsidiary, Yankee Gas
Services Company ("Yankee Gas"), through June 30, 2002 (the "Authorization
Period") subject to certain limits as set forth herein, (ii) the computation
of the earnings for the purpose of computing dividends of Yankee Gas
subsequent to the Merger without regard to the amortization of the Merger
Goodwill (as described below) through the Authorization Period, (iii) the
payment of dividends out of capital and unearned surplus by YES' nonutility
subsidiaries through the Authorization Period, and (iv) the repurchase of
stock by YES and its subsidiaries from their respective shareholders from
time to time through the Authorization Period subject to certain limits as
set forth herein.
The repurchase of stock and payment of dividends by YES and its
subsidiaries for which authorization is sought herein is necessary to enable
NU to service the acquisition debt it incurred in connection with the Merger.
Such repurchases and dividend payments are part of the NU system's overall
plan to maintain its level of investment in each subsidiary as will most
benefit its shareholders and ratepayers, and so having such flexibility will
improve, rather than harm, the financial integrity of the NU system and its
operating companies.
B. Description of the Parties to the Transaction
NU is a holding company directly owning all of the common stock of the
following electric public utility subsidiaries: Western Massachusetts
Electric Company, The Connecticut Light and Power Company, Public Service
Company of New Hampshire, North Atlantic Energy Corporation and Holyoke Water
and Power Company, and various nonutility subsidiaries. As a result of the
Merger, YES, which owns one gas public utility, Yankee Gas, and four wholly-
owned nonutility subsidiaries (the "Yankee Nonutility Subsidiaries"), Yankee
Financial Services Company, NorConn Properties, Inc., R. M. Services, Inc.
("RMS") and Yankee Energy Services Company ("Yesco"), is now a wholly-owned
subsidiary of NU (NU, YES, Yankee Gas and the Yankee Nonutility Subsidiaries
are sometimes referred to herein as the "Applicants").
C. Payment of Dividends out of Capital or Unearned Surplus by YES and its
Subsidiaries and Repurchase of Stock by YES and its Subsidiaries
1. Payment of Dividends by YES and Yankee Gas
As a result of the application of the purchase method of accounting to
the Merger, the current retained earnings of YES and its subsidiaries have
been recharacterized as additional paid-in-capital. In addition, the Merger
gave rise to a substantial level of goodwill ("Merger Goodwill"), the
difference between the aggregate fair value of all of YES's identifiable
tangible and intangible (non-goodwill) assets on the one hand, and the total
consideration paid for YES and the fair value of the liabilities assumed, on
the other. In accordance with the Commission's Staff Accounting Bulletin No.
54, Topic 5J ("Staff Accounting Bulletin") and for the reasons described in
the next paragraph, the Merger Goodwill has been "pushed down" to YES and its
subsidiaries and reflected as additional paid-in-capital in their financial
statements.
As indicated in the Staff Accounting Bulletin, registrants that have
substantially all (generally defined as in excess of 95%) of their common
stock acquired by a third party, in a business combination accounted for
under the purchase method, should reflect the push-down of goodwill in the
registrant's post-acquisition financial statements, subject to certain
exceptions. The application of "push down" accounting represents the
termination of the old accounting entity and the creation of a new one. For
FERC and state commission reporting purposes, goodwill will be recorded in
the "Acquisition adjustments" account. The original historical basis of the
plant accounts has not been disturbed. For any post-acquisition reporting of
the consolidated NU financial statements, push down accounting will be
reflected in those statements and the full amount of Merger Goodwill
associated with the NU acquisition will be reflected.
As a result of the push down of the Merger Goodwill, the common equity
balances of YES and its subsidiaries have effectively been reset as if they
were new companies, because a new basis of accounting has been pushed down to
the entities. As a result, the retained earnings of YES and its subsidiaries
were converted to additional paid-in-capital. Immediately following this
accounting treatment, common stockholders' equity equaled the total
consideration paid for the entity and the only components with a recorded
value would be:
o Common shares - which would continue to reflect the par value of the
common shares issued.
o Additional paid in capital - which would reflect a value consistent with
total common stockholders equity minus the par value recorded in the common
stock line.
As of April 9, 2000, NU intended to allocate the Merger Goodwill
associated with the acquisition in the following manner: $279 million to
Yankee Gas, $29 million to RMS and $2 million to Yesco. The goodwill
allocated to Yankee Gas will be amortized over a period not to exceed 40
years while the goodwill allocated to RMS and Yesco will be amortized over a
period not to exceed 20 years. The push down of the Merger Goodwill also has
an impact on the net income of YES and its subsidiaries. Since the Merger
Goodwill will be amortized over a period not to exceed 40 years for Yankee
Gas, for example, Yankee Gas' annual net income will be reduced by the amount
of the amortization.
Each of YES and Yankee Gas request authorization to pay dividends (i)
out of the additional paid-in-capital account up to the amount of their
respective retained earnings just prior to the Merger and (ii) out of
earnings before the amortization of the Merger Goodwill ("Gross Earnings"),
in the case of Yankee Gas and out of distributed earnings in the case of YES
in accordance with Rule 26(c)(3), thereafter. To assure that Yankee Gas has
sufficient cash to fund operations, Yankee Gas will not pay dividends during
the Authorization Period in excess of 80% of Gross Earnings on a rolling
five-year average basis. In no case would dividends be paid by YES during
the Authorization Period if the common stock equity of YES as a percentage of
total capitalization was, or would, as a result of the dividend, fall below
50% on a consolidated basis. In no case would dividends be paid by Yankee
Gas if the common stock equity of Yankee Gas as a percentage of total
capitalization was below 50%. This restriction is intended to protect both
investors and consumers.
2. Payment of Dividends by Yankee Nonutility Subsidiaries.
NU also requests authorization, on behalf of YES's current and future
non-exempt Yankee Nonutility Subsidiaries, that such companies be permitted
to pay dividends with respect to the securities of such companies, from time
to time through the Authorization Period, out of capital and unearned
surplus. (The Commission has granted similar approvals to other registered
holding companies. See Entergy Corporation, et al., Holding Co. Act Release
No. 35-27039 (June 22, 1999); Interstate Energy Corporation, et al., Holding
Co. Act Release No. 35-27069 (August 26, 1999); and most recently, Northeast
Utilities, et al., Holding Co. Act Release No. 35-27147 (March 7, 2000)).
NU anticipates that there may be situations in which one or more Yankee
Nonutility Subsidiaries will have unrestricted cash available for
distribution in excess of any such company's current and retained earnings.
In such situations, the declaration and payment of a dividend would have to
be charged, in whole or in part, to capital or unearned surplus.
Further, there may be periods during which unrestricted cash available
for distribution by a Yankee Nonutility Subsidiary exceeds current and
retained earnings due to the difference between accelerated depreciation
allowed for tax purposes, which may generate significant amounts of
distributable cash, and depreciation methods required to be used in
determining book income.
NU, on behalf of each current and future non-exempt Yankee Nonutility
Subsidiary represents that it will not declare or pay any dividend out of
capital or unearned surplus in contravention of any law restricting the
payment of dividends. NU also states that the Yankee Nonutility Subsidiaries
will comply with the terms of any credit agreements and indentures that
restrict the amount and timing of distributions to shareholders.
3. Repurchase of Stock
After the Merger, and giving effect to the push down of Merger Goodwill
and its periodic amortization, YES's consolidated common equity as a
percentage of total capital as at March 31, 2000 was 68.3% and that of Yankee
Gas was 70.5%. Accordingly, YES seeks approval through the Authorization
Period, (i) to repurchase enough of its common shares from NU, such that
YES's consolidated common equity ratio, taking into account both dividend
payments and stock repurchases, would not fall below 50% and (ii) for its
subsidiaries to repurchase shares of their respective stock from YES out of
capital or unearned surplus such that no subsidiary's common equity ratio,
taking into account both dividend payments and stock repurchases, would fall
below 50%. These repurchases by YES and its subsidiaries will be effected
from time to time during the Authorization Period as they have cash
available. The amount of these repurchases will be dictated by competitive
and commercial considerations at the time.
4. Discussion
Section 12(c) of the Act, and Rule 46 thereunder, generally prohibit
the payment of dividends or the repurchase of stock by a registered holding
company or any subsidiary thereof out of "capital or unearned surplus" except
pursuant to an order of the Commission. The legislative history explains
that this provision was intended to "prevent the milking of operating
companies in the interest of the controlling holding company groups." S. Rep.
No. 621, 74th Cong., 1st Sess. 34 (1935). In determining whether to permit
a registered holding company to pay dividends out of capital surplus, the
Commission considers various factors, including: (i) the asset value of the
company in relation to its capitalization, (ii) the company's prior earnings,
(iii) the company's current earnings in relation to the proposed dividend,
and (iv) the company's projected cash position after payment of a dividend.
See Eastern Utilities Associates, Holding Co. Act Release No. 25330 (June 13,
1991) ("EUA"), and cases cited therein. Further, the payment of the dividend
must be "appropriate in the public interest." Id., citing Commonwealth &
Southern Corporation, 13 S.E.C. 489, 492 (1943).
The Applicants request authority herein for YES and Yankee Gas to pay
dividends through the Authorization Period, out of (i) the additional paid-
in-capital account up to the amount of each company's respective retained
earnings as calculated just prior to the Merger and (ii) Gross Earnings
thereafter (distributed earnings from subsidiaries in the case of YES). The
Applicants also request authority for the Yankee Nonutility Subsidiaries to
pay dividends, through the Authorization Period, out of capital and unearned
surplus. In no event will Yankee Gas pay dividends in an amount in excess of
80% of Gross Earnings based on a rolling five-year average. Authorization is
also requested for YES and its subsidiaries to repurchase shares of their
respective stock during the Authorization Period in order to lower the
respective company's equity to total capital ratio.
In support of their request, Applicants assert that each of the
standards of Section 12(c) of the Act enunciated in the EUA case are
satisfied:
(i) As indicated above, after the Merger, and giving effect to the push
down of Merger Goodwill and its periodic amortization, YES's common
consolidated equity as a percentage of total capital at March 31, 2000 was
68.3%, significantly higher than traditional levels of equity capitalization
that the Commission has authorized for other registered holding company
systems.
(ii) YES has a favorable history of prior earnings and it has a long record
of consistent dividend payments. In the last five years, YES's net income and
dividends paid have been as follows:
Year Net Income (Thousands)*FN1 Dividends paid (Thousands)
1995 12,358 12,808
1996 21,919 13,357
1997 16,957 13,797
1998 10,883 14,267
1999 13,375 14,858
(iii) The Applicants anticipate that YES's cash flow after the Merger will
not differ significantly from its pre-Merger cash flow and that Gross
Earnings, therefore, should remain stable. The Applicants presently intend
that dividends paid out of future earnings will reflect a dividend payout
ratio of up to 100% of earnings and the Applicants represent that Yankee Gas
will not pay dividends in excess of 80% of Gross Earnings based on a rolling
five-year average
(iv) The projected cash position of YES after the Merger will be adequate
to meet the obligations of each of its subsidiary companies. Cash provided
by operating activities was $42.9 million in fiscal 1999. The amortization
of Merger Goodwill is a non-cash expense that will not affect the cash flow
of YES, nor will the recharacterization of retained earnings as additional
paid in capital affect cash flow. YES is forecast to have sufficient cash to
pay dividends in the amounts contemplated.
(v) The proposed dividend payments and stock repurchases are in the public
interest. YES is in sound financial condition as indicated by its
consolidated capitalization ratio. At March 31, 2000, the consolidated
common equity to total consolidated capital ratio of YES was 68.3% and that
of Yankee Gas was 70.5%. Furthermore, assuming continuation of its strong
financial condition, which management expects, management believes that YES
should have continued access to the capital markets to finance its operations
and growth.
*FN1 The fiscal 1999 and 1998 results were both affected by non-recurring
and non-operating items. Specifically, expenses associated with the Merger
reduced fiscal 1999 results by approximately $2.0 million or $0.19 per
share. Fiscal 1998 results were negatively impacted by non-recurring
charges totaling $2.1 million, or $0.20 per share, related primarily to
restructuring issues at Yesco. Accordingly, YES' earnings before non-
recurring items for 1998 and 1999 was as follows:
1999 1998
Reported Net Income 13.4 10.9
Earnings Impact of non-recurring items 2.0 2.1
Earning before non-recurring items 15.4 13.0
In addition, the proposed dividend payments and/or share repurchases are
consistent with investor interests because they allow the capital structure
of YES to be adjusted to more appropriate levels of debt and equity. Lastly,
a prohibition on dividend payments and/or share repurchases out of additional
paid-in-capital would negatively impact the ability of NU to service the
acquisition debt that it incurred in connection with the Merger and to pay
dividends on NU Common Shares issued to YES shareholders.
YES and its subsidiaries represent that they will not declare or pay any
dividend out of capital or unearned surplus or repurchase any shares of stock
in contravention of any law restricting the payment of dividends. YES and
its subsidiaries will also comply with the terms of any credit agreements and
indentures that restrict the amount and timing of distributions to
shareholders. Because this request to pay dividends is a result of
exceptional circumstances (i.e. merger accounting and the push-down of
goodwill), it does not contravene the intent of Section 12 and is clearly not
the type of situation that Section 12 is designed to address (See, The
National Grid Group plc, Holding Co. Act Release No. 35-27154, March 15,
2000).
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
transactions by the Applicants are not expected to exceed $20,000 and are
expected to be comprised primarily of fees for ordinary legal and accounting
services. None of such fees, commissions or expenses will be paid to any
associate company or affiliate of the Applicants except for payments to
Northeast Utilities Service Company for legal, financial and other services.
None of such fees, commission or expenses will be paid to any associate
company or affiliate of the Applicants 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: Section 12(c) of the Act and Rules 26, 42 and 46 promulgated
thereunder.
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.
Item 4. Regulatory Approvals.
No state or federal regulatory agency other than the Commission under
the Act has jurisdiction over the transactions proposed herein.
Item 5. Procedure
The Applicants hereby request 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 Applicants respectfully request 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 July 15, 2000.
Additionally, the Applicants (i) request that there not be any recommended
decision by a hearing officer or by any responsible officer of the
Commission, (ii) consent to the Office of Public Utility Regulation within
the Division of Investment Management assisting in the preparation of the
Commission's decision, and (iii) waive 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
f.1 Legal Opinion*
g.1 Financial Data Schedule
h.1 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. 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 currently meets all of the conditions of Rule 53(a),except for clause
(1). At June 30, 2000, NU's "aggregate investment," as defined in Rule
53(a)(1), in EWGs and FUCOs was approximately $476.5 million, or
approximately 77% of NU's average "consolidated retained earnings," also as
defined in Rule 53(a)(1), for the four quarters ended June 30, 2000 ($615.3
million). With respect to Rule 53(a)(1), however, the Commission has
determined that NU's financing of its investment in Northeast Generation
Company ("NGC"), NU's only current EWG or FUCO in an amount greater than the
amount that would otherwise be allowed by Rule 53(a)(1) would not have either
of the adverse effects set forth in Rule 53(c). See Northeast Utilities,
Holding Company Act Release No. 27148, dated March 7, 2000. NU continues to
assert that its EWG investment in NGC will not adversely affect the System.
NU's "aggregate investment" in EWGs and FUCOs has increased from the amount
at March 31, 2000 due to earnings at NGC, which increased NGC's retained
earnings and hence NU's reported NGC investment at June 30, 2000.
In addition, NU and its subsidiaries are in compliance with the other
provisions of Rule 53(a) and (b), as demonstrated by the following
determinations:
(i) NGC 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;
(ii) No employees of NU's public utility subsidiaries have rendered
services to NGC;
(iii) 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;
(iv) 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;
(v) NU's average CREs for the four most recent quarterly periods have not
decreased by 10% or more from the average for the previous four quarterly
periods; and
(vi) In the previous fiscal year, NU did not report operating losses
attributable to its investment in EWGs/FUCOs exceeding 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: October 13, 2000
NORTHEAST UTILITIES
YANKEE ENERGY SYSTEM INC.
YANKEE GAS SERVICES, INC.
By /s/ Cheryl W. Grise'
Name: Cheryl W. Grise'
Title: Senior Vice President, Secretary and General Counsel
YANKEE ENERGY FINANCIAL SERVICES COMPANY
YANKEE ENERGY SERVICES COMPANY
NORCONN PROPERTIES, INC.
R.M. SERVICES, INC.
By /s/ Cheryl W. Grise'
Name: Cheryl W. Grise'
Title: Senior Vice President, Secretary and General Counsel of Northeast
Utilities Service Company, agent for the above-named companies
