FILE NO. 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
APPLICATION/DECLARATION UNDER THE PUBLIC
UTILITY HOLDING COMPANY ACT OF 1935
NORTHEAST UTILITIES YANKEE ENERGY SYSTEM, INC.
174 Brush Hill Avenue 599 Research Parkway
West Springfield, MA 01090-0010 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
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 (HCAR 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 subsidiaries (ii) the repurchase of stock by
YES and its subsidiaries from their respective shareholder through June 30,
2005 , (the "Authorization Period") (iii) the inclusion of the consolidated
retained earnings of YES as of the date of the Merger in NU's calculation of
its consolidated retained earnings for purposes of Rule 53(a)(1)(ii) <FN1>
and (iv) the computation of the earnings of YES and its subsidiaries
subsequent to the Merger without regard to the amortization of the Merger
premium,
_________________
<FN1> Rule 53 (a), subject to conditions specified in Rule 53(b), allows a
registered holding company to issue or sell securities equal to up to 50% of
its consolidated retained earnings to finance the acquisition of an exempt
wholesale generator.
_______
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 Services Company
("Yankee Gas") , and four 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 herein seeks authorization for YES and its subsidiaries to pay
dividends out of capital and unearned surplus, as described herein, subject
to certain limitations, and authorization for NU to include YES' consolidated
retained earnings in NU's consolidated retained earnings for purposes of the
calculation under Rule 53(a)(1)(ii). NU also seeks authorization for YES to
repurchase stock from NU and for YES' subsidiaries to repurchase stock from
YES, under the conditions and subject to the limits set forth herein.
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
As a result of the application of the purchase method of accounting to
the Merger, the current retained earnings of YES and its subsidiaries will be
recharacterized as additional paid-in-capital ("Purchase Accounting
Capital"). In addition, the Merger will give rise to a substantial level of
goodwill ("Merger Goodwill"), the difference between the aggregate fair
values of all of YES's identifiable tangible and intangible (non-goodwill)
assets on the one hand, and the total consideration to be 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 will be "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. 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.
The application of "push down" accounting represents the termination of
the old accounting entity and the creation of a new one. For FERC and state
commission reporting purposes, goodwill will be recorded in the "Acquisition
adjustments" account. The original historical basis of the plant accounts
will not be disturbed.
As a result of the push down of the goodwill, the common equity balances
of YES and its subsidiaries effectively are reset as if they were new
companies, because a new basis of accounting has been pushed down to the
entities. As a result, retained earnings are eliminated. Immediately
following this accounting treatment, the only components with a recorded
value would be:
* Common shares - which would continue to reflect the par value of the
common shares issued.
* Additional paid in capital - which would reflect a value consistent with
total common stockholders equity minus the par value recorded in the
common stock line.
In other words, the resulting common stockholders' equity will equal the
total consideration paid for the entity.
For this reason, NU will amortize approximately $310 million of
goodwill (valued as of December 31, 1999) resulting from the acquisition of
YES. NU intends to allocate this goodwill 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. Since the Merger Goodwill will be amortized over a period not
to exceed 40 years, YES's annual net income will be reduced by the amount of
the amortization. For example, net income for YES of $13.4 million in 1999
would be reduced by a goodwill amortization of $8.5 million. The resulting
net income after amortization would be $4.9 million.
Each of YES and its subsidiaries request authorization to pay dividends
out of the Purchase Accounting Capital up to the amount of their respective
retained earnings just prior to the Merger and out of earnings before the
amortization of the Merger Goodwill thereafter.
2. 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 will be 67%. Accordingly, YES seeks approval
through the Authorization Period, to repurchase its stock from NU out of
capital or unearned surplus and to cause its subsidiaries to repurchase
their stock from YES out of capital or unearned surplus. These repurchases by
YES and its subsidiaries will be effected from time to time during the
Authorization Period as they have cash available in excess of current or
retained earnings which could be better arranged or deployed elsewhere within
the NU system. The amount of these repurchases will be dictated by
competitive and commercial considerations at the time. In no case would
dividends be paid by YES or shares of stock be purchased by YES, if the
equity of YES as a percentage of total capital was below 30% on a
consolidated basis and in no case would a dividends be paid by a subsidiary
of YES or shares of stock repurchased by a subsidiary of YES if the equity of
such subsidiary as a percentage of total capital was below 30%. This
restriction is intended to protect both investors and consumers. The
repurchase of stock by YES and its subsidiaries is 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.
3. 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 its subsidiaries to
pay dividends out of the (i) Purchase Accounting Capital up to the amount of
YES' consolidated retained earnings and the YES subsidiaries' retained
earnings as calculated just prior to the Merger and (ii) earnings before the
amortization of the Merger Goodwill thereafter. Authorization is also
requested for YES and its subsidiaries to repurchase shares of their
respective stock 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 will be 67%, 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)<FN2> 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
_________________
<FN2> 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
_______________
(iii) The Applicants anticipate that YES's cash flow after the Merger will
not differ significantly from its pre-Merger cash flow and that earnings
before the amortization of Merger Goodwill ("Gross Earnings"), therefore,
should remain stable. In addition to the dividends proposed to be paid out
of Purchase Accounting Capital for which authorization is sought herein, the
Applicants presently intend to maintain a dividend payout ratio of up to
100% of Gross Earnings going forward.
(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 to Purchase
Accounting Capital affect cash flow. YES is forecast to have sufficient cash
to pay dividends in the amounts contemplated.
(v) The proposed dividend payments are in the public interest. YES is in
sound financial condition as indicated by its consolidated capitalization
ratio. At September 30, 1999, the consolidated common equity to total
consolidated capital ratio of YES was 55.7%. After giving effect to the
push down of Merger Goodwill and its periodic amortization, YES's
consolidated equity as a percentage of total consolidated capital will be
67%. In addition, 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.
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 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.
D. 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.
E. Inclusion of the Consolidated Retained Earnings of YES in NU's
Calculation of its Consolidated Retained Earnings for purposes of Rule
53(a)(1)(ii).
As stated earlier, on March 1, 2000, YES merged with and into NU
Acquisition Corp., a wholly-owned subsidiary of NU and became a wholly-owned
subsidiary of NU. At the time immediately before the effectiveness of the
Merger, YES had consolidated retained earnings of $29,018,000. NU hereby
seeks authority to include the amount of YES' consolidated retained earnings
as of immediately before the Merger ($29,018,000) in the calculation of NU's
consolidated retained earnings for purposes of Rule 53(a)(1). In addition,
on a going forward basis, NU hereby seeks authorization and approval to
include the amount of consolidated earnings of YES, before giving effect to
the amortization of goodwill, in NU's calculation of its consolidated
retained earnings for purposes of Rule 53(a)(1).
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 Applicant except for payments by NU for financial
and other services, to be performed at cost by NUSCO, an affiliated service
company.
Item 3. Applicable Statutory Provisions
The following sections of the Act and the Commission's rules thereunder
are or may be applicable to the authorization being sought hereunder by the
Applicant: Section 12(c) of the Act and Rule 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 Applicant hereby requests that the Commission publish a notice under
Rule 23 with respect to the filing of this Application as soon as practicable
and that the Commission's order be issued as soon as possible. A form of
notice suitable for publication in the Federal Register is attached hereto as
Exhibit h.1. The Applicant respectfully requests the Commission's approval,
pursuant to this Application/Declaration, of all transactions described
herein, whether under the sections of the Act and Rules thereunder enumerated
in Item 3 or otherwise. It is further requested that the Commission issue an
order authorizing the transactions proposed herein at the earliest
practicable date but in any event not later than May 15, 2000. Additionally,
the Applicant (i) requests that there not be any recommended decision by a
hearing officer or by any responsible officer of the Commission, (ii)
consents to the Office of Public Utility Regulation within the Division of
Investment Management assisting in the preparation of the Commission's
decision, and (iii) waives the 30-day waiting period between the issuance of
the Commission's order and the date on which it is to become effective, since
it is desired that the Commission's order, when issued, become effective
immediately.
Item 6. Exhibits and Financial Statement
(a) Exhibits
f.1 Legal Opinion*
g.1 Financial Data Schedule*
h.1 Form of Notice*
(b) Financial Statements*
* To be filed by amendment
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 and its subsidiaries are in compliance with Rule 53(a), (b), and (c),
as demonstrated by the following determinations:
(i) NU's aggregate investment in EWGs and FUCOs (i.e., amounts
invested in or committed to be invested in EWGs and FUCOs, for
which there is recourse to NU), does not exceed 83% of NU and its
subsidiaries' consolidated retained earnings ("CREs") as reported
for the four most recent quarterly periods on NU's Form 10-K and
10-Qs.
(ii) Northeast Generation Company ("NGC", NU's only EWG or FUCO at
this time) maintains books and records, and prepares financial
statements in accordance with Rule 53(a)(2). Furthermore, NU has
undertaken to provide the Commission access to such books and
records and financial statements, as it may request.
(iii) No employees of NU's public utility subsidiaries have rendered
services to NGC.
(iv) NU has submitted (a) a copy of each Form U-1 and Rule 24
certificate that has been filed with the Commission under Rule 53
and (b) a copy of Item 9 of the Form U5S and Exhibits G and H
thereof to each state regulator having jurisdiction over the retail
rates of NU's public utility subsidiaries.
(v) Neither NU nor any subsidiary has been the subject of a bankruptcy
or similar proceeding unless a plan of reorganization has been
confirmed in such proceeding. In addition, 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 (at
December 31, 1998, NU's CREs were $561 million; at December 31,
1999, NU's CREs were $582 million). .
(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: April 7, 2000
NORTHEAST UTILITIES
By /s/ Cheryl W. Grise
Name: Cheryl W. Grise
Title: Senior Vice President, Secretary and
General Counsel
YANKEE ENERGY SYSTEM, INC.
By /s/ Cheryl W. Grise
Name: Cheryl W. Grise
Title: Senior Vice President, Secretary and
General Counsel
