File No. 70-9849
United States Securities and Exchange Commission
Washington, D.C. 20549
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Amendment No. 3 to
Form U-1
Application/Declaration
Under the
Public Utility Holding Company Act of 1935
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National Grid Group plc New England Power Company
(to be renamed National Grid Holdings Massachusetts Electric Company
One plc) The Narragansett Electric Company
New National Grid plc Granite State Electric Company
(to be renamed National Grid Group plc) Nantucket Electric Company
National Grid (US) Holdings Limited New England Electric Transmission Corporation
National Grid (US) Investments 4 New England Hydro-Transmission Corporation
National Grid (US) Partner 1 Limited New England Hydro-Transmission Electric Co. Inc.
National Grid (US) Partner 2 Limited Vermont Yankee Nuclear Power Corporation
NGG Finance plc Wayfinder Group, Inc.
15 Marylebone Road NEES Energy, Inc.
London NW15JD EUA Energy Investments Corp.
United Kingdom National Grid Transmission Services Corp.
National Grid USA Service Company Inc.
National Grid General Partnership Metrowest Realty LLC
c/o RL&F Service Corp. National Grid USA
One Rodney Square National Grid Holdings Inc.
Wilmington, 25 Research Drive
New Castle County, DE 19801 Westborough, MA 01582
Niagara Mohawk Holdings, Inc.
Niagara Mohawk Power Corporation
Opinac North America, Inc.
300 Erie Boulevard West
Syracuse, New York 13202
(Names of companies filing this statement
and addresses of principal executive offices)
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New National Grid plc
(Name of top registered holding company)
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1
Kirk L. Ramsauer Gary J. Lavine
Deputy General Counsel Senior Vice President and Chief Legal
National Grid USA Officer
25 Research Drive Niagara Mohawk Holdings, Inc.
Westborough, Massachusetts 01582 300 Erie Boulevard West
Telephone: (508) 389-2972 Syracuse, New York 13202
Facsimile: (508) 389-3518 Telephone: (315) 428-6947
Facsimile: (315) 428-5746
(Names and addresses of agents for service)
The Commission is also requested to send copies
of any communication in connection with this matter to:
Markian M. W. Melnyk Steven Agresta
Thomas B. Reems Swidler Berlin Shereff Friedman, LLP
LeBoeuf, Lamb, Greene & MacRae, L.L.P. 3000 K Street. N.W.
1875 Connecticut Ave., N.W. Washington, D.C. 20007
Washington, D.C. 20009-5728 Telephone: (202) 424-7500
Telephone: (202) 986-8000 Facsimile: (202) 424-7643
Facsimile: (202) 986-8102
Janet Geldzahler
Sullivan & Cromwell
125 Broad Street
New York, New York 10004-2498
Telephone: (212) 558-4000
Facsimile: (212) 558-3588 or (212)
514-5706
2
TABLE OF CONTENTS
Item 1. Description of the Proposed Transaction.............................6
A Introduction........................................................6
B. General Request.....................................................9
C. The Companies.......................................................10
1. The Current NGG System...........................................10
2. The NiMo System..................................................15
3. Niagara Mohawk's Regulatory Environment..........................23
4. Holding Company Financial Information............................26
D. Description of the Merger and the Restructuring.....................28
1. The Merger.......................................................28
2. The Restructuring................................................33
3. Background of the Merger.........................................35
4. Financing the Merger.............................................37
5. Management and Operations of Niagara Mohawk Following the Merger.38
6. Benefits of the Merger...........................................40
E. Financing the National Grid System Following the Acquisition........42
1. Summary of Current NGG System Authorization......................42
2. Summary of Authorization Requested...............................44
3. Specifics of Proposed Financing Arrangements.....................45
(a) National Grid External Financing..............................45
(b) Interest Rate and Currency Risk Management Devices............46
(c) U.S. Subsidiary Company Financings............................48
(d) Money Pool....................................................53
(e) Guarantees....................................................53
(f) New System Financing Parameters...............................54
(g) Payment of Dividends Out of Capital or Unearned Surplus.......57
(h) Tax Allocation Agreement......................................60
(i) Changes in Capital Stock of Subsidiaries......................63
(j) Financing Entities............................................63
(k) EWG-FUCO Financing Limits.....................................64
F. Intra-System Service Transactions...................................70
G. Nonutility Reorganizations..........................................71
H. Certificates of Notification........................................73
Item 2. Fees, Commissions and Expenses......................................77
Item 3. Applicable Statutory Provisions.....................................80
A. Applicable Provisions.................................................80
B. Legal Analysis........................................................80
1. Section 10(b)......................................................80
a. Section 10(b)(1)................................................81
3
i. Interlocking Relations.......................................81
ii. Concentration of Control....................................82
b. Section 10(b)(2)................................................85
i. Fairness of Consideration....................................85
ii. Reasonableness of Fees......................................87
2. Section 10(c)......................................................90
i. Section 10(c)(1).............................................90
(a). Section 11, Integrated Utility System...................91
(b). Section 11, Retention of the Additional Gas System......98
(c). Non-Utility Subsidiaries................................105
ii. Section 10(c)(2)............................................111
3. Section 10(f)......................................................113
4. Exemptions Under Section 3 of the Act.............................117
4. Exemptions Under Section 33 of the Act............................117
Item 4. Regulatory Approvals................................................122
A. State Regulation......................................................122
B. Federal Regulation....................................................124
Item 5. Procedure...........................................................126
Item 6. Exhibits and Financial Statements...................................127
Item 7. Information as to Environmental Effects.............................130
4
Defined Terms
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Term Definition
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National Grid New National Grid plc (to be renamed
National Grid Group plc), the proposed
successor to NGG according to the
Restructuring.
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NGG National Grid Group plc., the current
registered holding company parent of the
system and, post-Restructuring, a
subsidiary of National Grid and top-level
FUCO holding company. Post-Restructuring
NGG will be renamed National Grid
Holdings One plc.
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NiMo Niagara Mohawk Holdings, Inc.
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Niagara Mohawk Niagara Mohawk Power Corporation.
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Utility Subsidiaries All current National Grid USA public
utility subsidiary companies
and Niagara Mohawk.
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Nonutility Subsidiaries All nonutility subsidiary companies set
forth in Exhibit L-1 (including the
nonutility subsidiaries of National Grid
USA, NiMo and its nonutility
subsidiaries, and CNP Limited and CNP
Inc). The term Nonutility Subsidiaries
also includes other direct or indirect
subsidiaries of National Grid USA that
are formed or acquired in accordance with
an order of the Commission or applicable
exemption subsequent to the issuance of
an order by the Commission in this file.
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Subsidiaries The Utility Subsidiaries and the
Nonutility Subsidiaries, collectively.
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National Grid System National Grid and all its associate
companies.
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National Grid USA Group National Grid USA and its direct
and indirect subsidiaries.
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Intermediate Companies All holding companies in the chain of
ownership of National Grid USA that are
direct or indirect subsidiaries of NGG
(currently) or National Grid
(post-Restructuring) including National
Grid (US) Holdings Limited, National Grid
(US) Investments 4, National Grid (US)
Partner 1 Limited, National Grid (US)
Partner 2 Limited, National Grid General
Partnership, National Grid Holdings Inc.
and any new companies in the chain of
ownership as the structure may be revised
from time to time.
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5
This pre-effective Amendment No. 3 replaces and revises the Form U-1
Application-Declaration in this proceeding, originally filed in File No. 70-9849
on February 6, 2001 and Amendments No. 1 and 2 filed on May 10, 2001 and October
30, 2001, in their entireties, except that it does not replace exhibits
previously filed.
Item 1. Description of the Proposed Transaction
A. Introduction
This Application-Declaration ("Application") seeks approvals relating to
the proposed acquisition of NiMo, a New York public utility holding company
exempt from registration under Section 3(a)(1) of the Public Utility Holding
Company Act of 1935 (the "1935 Act" or "Act"). Applicants/1 propose that upon
the satisfaction of certain conditions, including receipt of all necessary
regulatory approvals, (i) New National Grid plc will become a holding company of
NGG with a share-for-share exchange of the outstanding common stock of NGG for
New National Grid plc stock (the "Restructuring"), and (ii) a wholly-owned
direct subsidiary of New National Grid plc, Grid Delaware, Inc. ("Grid
Delaware"), will merge with and into NiMo, with NiMo as the surviving
corporation (the "Merger")./2 New National Grid plc will be renamed National
Grid Group plc after the implementation of the Merger and Restructuring and is
hereinafter referred to as National Grid./3
NGG currently holds the utility and nonutility operations of the former New
England Electric System ("NEES") and Eastern Utilities Associates ("EUA") in its
wholly-owned indirect subsidiary, National Grid USA. After the Merger, National
Grid USA
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1 Applicants are identified on the cover page of this Application and to the
extent new Intermediate Companies are formed, will include such companies. Where
the relief requested herein would apply to nonutility subsidiaries of the
Applicants, for example requests for authorization to pay dividends out of paid
in capital or capital surplus, change the terms of capital stock or reorganize
nonutility holdings, such nonutility subsidiaries would also be deemed
Applicants hereunder.
2 The current holders of the common stock of NiMo will receive: (a) cash; (b) a
number of Newco American Depositary Shares ("ADSs"); or, (c) a combination of
Newco ADSs and cash. Details of the exchange are explained more fully infra at
note 37 and the accompanying text.
3 National Grid has filed with the SEC a registration statement on Form F-4 to
register the ordinary shares to be issued by it to holders of NiMo common stock
in the Merger. SEC File No. 333-47234.
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will also hold NiMo as a direct subsidiary./4 NiMo's most significant subsidiary
is Niagara Mohawk Power Corporation ("Niagara Mohawk"), a public utility company
with electric and gas operations in the state of New York.
As of and for the 12 months ended March 31, 2001, certain key financial
information, in millions, for the companies was as follows (in U.S. GAAP).
----------------------- --------------------- -------------------- --------------------- --------------------
NGG National Grid USA NiMo Niagara Mohawk
----------------------- --------------------- -------------------- --------------------- --------------------
Operating Revenues 5,371 3,118 4,712 4,004
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Net Income 1,151 105 (20) (39)
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Net Utility Assets 7,917 2,933 5,717 5,717
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Net Nonutility Assets 6,839 5,422 6,664 6,352
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Total Net Assets 14,756 8,355 12,381 12,069
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As of and for the 12 months ended September 30, 2001, certain key financial
information, in millions, for the companies was as follows (in U.S. GAAP).
----------------------- --------------------- -------------------- --------------------- --------------------
NGG National Grid USA NiMo Niagara Mohawk
----------------------- --------------------- -------------------- --------------------- --------------------
Operating Revenues 5,757 3,375 4,791 4,143
----------------------- --------------------- -------------------- --------------------- --------------------
Net Income 575 170 (79) (16)
----------------------- --------------------- -------------------- --------------------- --------------------
Net Utility Assets 8,229 2,962 4,587 4,587
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Net Nonutility Assets 6,573 5,400 7,710 7,458
----------------------- --------------------- -------------------- --------------------- --------------------
Total Net Assets 14,802 8,362 12,297 12,045
----------------------- --------------------- -------------------- --------------------- --------------------
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4 An organizational chart showing the entities comprising the National Grid
System after the Merger is included in Exhibit N-3.
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7
The Merger, which values NiMo's common stock at approximately $3.1 billion,
will create a stronger combined company, yielding significant benefits for
customers, communities, shareholders, employees and the region. The Merger
builds on National Grid's existing New England base and gives it a much stronger
U.S. presence with neighboring regional territories in New England and New York.
Niagara Mohawk's electricity system, which interconnects with the National Grid
USA's system, consists of 9,327 pole miles of transmission lines and 41,125 pole
miles of distribution networks. In terms of customer numbers, Niagara Mohawk is
of a similar size to National Grid USA, serving in excess of 1.5 million
electric customers. Niagara Mohawk is also the third largest gas distribution
company in New York State, serving over 540,000 gas customers. The Merger will
form the ninth largest electric utility in the U.S. with pro forma U.S. revenues
of approximately $10.5 billion, a customer base of 3.4 million and a service
territory of approximately 29,450 square miles.
Customers and the economy in New York will benefit from National Grid's
commitment to work closely with regulators to provide stable pricing for energy
delivery services for customers in Niagara Mohawk's upstate New York service
territory. Under a rate plan authorized by the New York Public Service
Commission, if the Merger is consummated, Niagara Mohawk's electric delivery
rates would be reduced by $152 million a year through December 31, 2011. Niagara
Mohawk's' gas customers would benefit from an extension of an existing rate
freeze. A "service quality assurance program" included in the rate plan assures
that satisfactory levels of service and reliability will be maintained. In
addition, NiMo's shareholders will benefit from the purchase of their shares at
a premium to the market price and from the opportunity to receive equity in a
vibrant, profitable global company like National Grid. National Grid's
shareholders will benefit from National Grid's significantly expanded platform
for growth in a rapidly deregulating U.S. market.
The National Grid System received comprehensive financing and affiliate
transactions authorization in connection with the Commission's order approving
the acquisition of NEES./5 This Application also seeks to amend the
authorization granted in
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5 The National Grid Group plc, Holding Co. Act Release No. 27154 (Mar. 15, 2000)
("NEES Acquisition Order").
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the NEES Acquisition Order to accommodate the integration of the NiMo system
into the National Grid System.
B. General Request
National Grid requests authorization under Sections 9(a)(2) and 10 of the
Act, to effect the Restructuring. To implement the Restructuring, National Grid
will acquire all the issued and outstanding common stock of NGG, a registered
electric public-utility holding company, and indirectly acquire the intermediate
registered holding companies and public utility companies that are currently NGG
subsidiaries. National Grid also requests authorization to effect the Merger
and, indirectly, to acquire NiMo's utility and nonutility subsidiaries. In
addition, the following authorizations relative to the operations of the
post-Merger system are requested:
o National Grid proposes to succeed to the authorizations granted to NGG
in the NEES Acquisition Order, to extend that authorization through
September 30, 2004 (the "Authorization Period" as defined herein), and
to modify it in certain respects as set forth in this Application.
National Grid also proposes to succeed to the authorizations granted
to NGG in any other current financing orders from the Commission./6
o National Grid intends to acquire NiMo in the Merger with a combination
of its stock and cash. Accordingly, National Grid requests
authorization to issue its common stock pursuant to the Merger and to
issue and sell debt securities to finance, and as necessary refinance,
the cash portion of the Merger consideration.
o National Grid also proposes to issue equity and debt securities for
general corporate financing purposes related to the business of the
National Grid System post-Merger in an amount outstanding at any one
time not to exceed $6 billion.
o In addition, NiMo and its subsidiaries propose to issue and sell
securities to finance their businesses as set forth in more detail
below.
o NiMo and its subsidiaries propose to enter into various affiliate
transactions with National Grid System companies after the Merger. In
particular the NiMo companies will (1) enter into service contracts
with National Grid USA Service Company and (2) enter into a
consolidated tax allocation agreement with other
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6 These orders are: National Grid Group plc, Holding Co. Act Release No. 27455
(Oct. 22, 2001) ("October 2001 Order"); and the NEES Acquisition Order.
Applicants are not proposing to amend the authority granted in the October 2001
Order.
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9
National Grid System companies.
o NiMo and its subsidiaries propose to pay dividends out of capital and
unearned surplus.
o Applicants seek authority to retain Niagara Mohawk's gas operations.
o To efficiently integrate the NiMo subsidiaries into the National Grid
System, Applicants request the flexibility to reorganize the
Nonutility Subsidiaries without the need to seek further Commission
authorization.
o Applicants request a continued exemption for NiMo under Section
3(a)(1) of the Act.
C. The Companies
1. The Current NGG System
NGG was incorporated in England and Wales on April 1, 1989, and is a
registered holding company under the 1935 Act. NGG's ordinary shares are listed
on the London Stock Exchange and its American Depositary Receipts ("ADRs") are
listed on the New York Stock Exchange./7 As of September 30, 2001, there were
1,486,690,953 ordinary shares and one special share outstanding./8 NGG employs,
in conjunction with its subsidiaries, approximately 7,400 full-time employees.
Through its wholly owned indirect subsidiary, The National Grid Company
("NGC"), NGG's principal business in the UK is the transmission of electricity
in England and Wales. NGG derives the majority of its profit from charges for
services provided by the transmission business. NGC owns and operates a
transmission system consisting of approximately 4,400 route miles of overhead
lines and approximately 600 route miles of underground cable together with
substations at some 220 sites. NGC and the other non-US operations of NGG are
held by National Grid Holdings Limited ("National Grid Holdings"), a foreign
utility company under Section 33 of the Act.
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7 NGG has a small number of American Depositary Shares ("ADSs") in the U.S.
which trade as ADRs and are principally held by U.S. institutions. ADSs, in the
aggregate, account for less than 1% of NGG's publicly issued shares.
8 The special share is a non-voting share owned by the U.K. government. The
special share, also referred to as the golden share, is a means for the
government to assure the continued independence of NGG as a provider of
transmission services.
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10
National Grid was incorporated in England and Wales on July 11, 2000 and it
does not currently conduct any business activities./9 Following the approval and
implementation of the Restructuring and the Commission's authorization of this
Application, National Grid will be the holding company for the National Grid
System. Like NGG, National Grid's ordinary shares will be listed on the London
Stock Exchange and its ADSs will be listed on the New York Stock Exchange. Upon
completion of the Restructuring, National Grid will register as a holding
company under the 1935 Act.
National Grid USA is an indirect wholly-owned subsidiary of NGG. Through
its subsidiaries, National Grid USA is engaged in electric distribution to
residential, commercial, and industrial customers in New England. The National
Grid USA group operates and maintains distribution power lines and substations;
provides metering, billing, and customer services; designs and builds
distribution-related facilities; and provides related products and services
including energy efficiency programs for customers. The company also holds
certain interests in generating units, which it is actively seeking to divest.
National Grid USA's nonutility subsidiaries are engaged in the construction and
leasing of fiber optic telecommunications systems and the provision of
consulting services to nonaffiliated utilities in the area of electric utility
restructuring and customer choice.
National Grid USA owns companies which deliver electricity to approximately
1.7 million customers in Massachusetts, Rhode Island and New Hampshire. These
electric public utility companies own and operate approximately 34,000 miles of
transmission and distribution lines in New England.
The National Grid USA family of companies includes four wholly-owned
electricity distribution companies: Massachusetts Electric Company ("Mass.
Electric"), The Narragansett Electric Company ("Narragansett"), Granite State
Electric Company ("Granite State"), and Nantucket Electric Company ("Nantucket")
and three other utility
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9 An executive director of NGG holds 10 ordinary shares (10 pence par value) of
National Grid and NG Nominees Limited owns 499,990 ordinary shares. This level
of issued share capital is required for the company to re-register as a plc in
connection with the Restructuring - to qualify as a public limited company,
National Grid must have at least two shareholders and at least (pound) 50,000 of
authorized and issued share capital which must be paid up as to one-quarter. NG
Nominees Limited will not hold an interest in National Grid after the
Restructuring; its shares and those held by the director will be cancelled, and
the public shareholders formerly holding share of NGG will hold shares of
National Grid.
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companies/10: New England Electric Transmission Corporation ("NEET"), New
England Hydro-Transmission Corporation ("N.H. Hydro") and New England
Hydro-Transmission Electric Company, Inc. ("Mass. Hydro"). The distribution
companies focus on delivering electricity to residential, commercial, and
industrial customers. The distribution companies operate and maintain
distribution power lines and substations; provide metering, billing, and
customer services; design and build distribution-related facilities; and provide
related products and services including energy efficiency programs for
customers. Their cost per delivered kilowatt-hour of electricity is among the
lowest of major electricity suppliers in the states that they serve.
Mass. Electric, a wholly-owned subsidiary of National Grid USA, is a public
utility company engaged in the delivery of electric energy to approximately 1.2
million customers in 170 cities and towns in Massachusetts. The cities and towns
served by the company include the highly diversified commercial and industrial
cities of Worcester, Lowell, and Quincy, the Interstate 495 high technology
belt, suburban communities, and many rural towns. Mass. Electric owns
approximately 16,021 pole miles of electric transmission and distribution lines.
As of and for the 12 months ended September 30, 2001, Mass. Electric had total
assets of $3,008 million, operating revenues of $2,119 million and net income of
$59 million. Mass. Electric is subject to rate regulation by the Federal Energy
Regulatory Commission ("FERC") and the Massachusetts Department of
Telecommunications and Energy ("MDTE"). The MDTE also has jurisdiction over
Mass. Electric's financings and transactions with affiliates.
Narragansett is a public utility company engaged in the delivery of
electric energy to approximately 460,000 customers in 38 cities and towns in
Rhode Island. Narragansett's service area, which includes urban, suburban, and
rural areas, covers approximately 99% of Rhode Island, and includes the cities
of Providence, East Providence, Cranston, and Warwick. Narragansett owns
approximately 4,737 pole miles of electric transmission and distribution lines.
As of and for the 12 months ended September 30, 2001, Narragansett had total
assets of $1,483 million, operating revenues of $800 million and net income of
$30 million. Narragansett is subject to rate regulation
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10 National Grid Transmission Services Corp. is not a utility company. This
company provides non-affiliate companies services such as metering and generator
interconnection studies.
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12
by the FERC and the Rhode Island Public Utilities Commission ("RIPUC"). and the
Rhode Island Division of Public Utilities and Carriers ("RIDIV") has
jurisdiction over Narragansett's financings and transactions with affiliates.
Granite State, a wholly-owned subsidiary of National Grid USA, provides
retail electric service to approximately 36,000 customers in 21 communities in
New Hampshire. Granite State's service area includes the Salem area of southern
New Hampshire, as well as several communities located along the Connecticut
River, primarily in the Lebanon and Walpole areas. Granite State owns
approximately 1,049 pole miles of electric transmission and distribution lines.
As of and for the 12 months ended September 30, 2001, Granite State had total
assets of $94 million, operating revenues of $82 million and net income of $3
million. Granite State is subject to rate regulation by the FERC and the New
Hampshire Public Utilities Commission ("NHPUC"). The NHPUC also has jurisdiction
over Granite State's financings and transactions with affiliates.
Nantucket, a wholly-owned subsidiary of National Grid USA, provides retail
electric service to approximately 10,000 customers on Nantucket Island,
Massachusetts. Nantucket's service area covers the entire island. Nantucket owns
approximately 110 pole miles of electric transmission and distribution lines. As
of and for the 12 months ended September 30, 2001, Nantucket had total assets of
$58 million, operating revenues of $19 million and net income of $0.3 million.
Nantucket is subject to rate regulation by the FERC and the MDTE. The MDTE also
has jurisdiction over Nantucket's financings and transactions with affiliates.
National Grid USA's wholly-owned subsidiary, New England Power Company
("NEPCO"), is the operator of electricity transmission facilities in the states
of Massachusetts, Rhode Island, New Hampshire, and Vermont. NEPCO also holds
National Grid USA's remaining interests in generating units, which the company
is actively seeking to divest./11 As of September 30, 2001, NEPCO had total
assets of
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11 NEPCO is also a holding company because it owns approximately 20% of the
outstanding voting securities of Vermont Yankee Nuclear Power Corporation, the
licensed operator of the Vermont Yankee nuclear facility which has a gross
maximum dependable capacity of approximately 535 MW. NEPCO receives a portion of
the plant's output. As of and for the year ended March 31, 2001 Vermont Yankee
Nuclear Power Corporation had $178,565,569 in total operating revenues,
$6,388,956 in total net income, and total assets of $710,851,866. As of and for
the nine months ended September 30, 2001 (unaudited), Vermont Yankee Nuclear
Power Corporation had $135,862,772 in total operating revenues, $4,764,761 in
total net income, and total assets of $720,803,246. NEPCO also has minority
interests in Yankee Atomic Electric Company (30%), Maine Yankee Atomic Power
Company (20%) and Connecticut Yankee Atomic Power Company (15%), all of which
have permanently ceased operations. NEPCO is an exempt holding company under the
Act. Yankee Atomic Electric Company, Holding Co. Act Release No. 13048 (Nov.
25, 1955); Connecticut Yankee Atomic Power Company, Holding Co. Act Release No.
14768 (Nov. 15, 1963).
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13
$2,866 million, operating revenues of $617 million and net income of $71 million
for the 12 months to date. NEPCO is subject to rate regulation by the FERC. The
RIDIV, the MDTE, the NHPUC, and the Vermont Public Service Board have
jurisdiction over NEPCO's financings and transactions with affiliates. Although
the Maine Public Utilities Commission has jurisdiction over NEPCO's financings,
it defers to the financing authorization from the MDTE. The Nuclear Regulatory
Commission ("NRC") has jurisdiction over NEPCO's ownership of nuclear
facilities.
National Grid USA's public utility subsidiary companies are members of the
New England Power Pool ("NEPOOL") and they have transferred control over their
pool transmission facilities to the Independent System Operator New England
("ISO-NE")./12 NEPCO operates the transmission assets owned by its associate
public utility companies in concert with ISO-NE. ISO-NE directs and controls the
operation of certain facilities, in particular pool transmission facilities
("PTF") that are owned by ISO-NE participants and rated 69 kV or above which are
required to allow energy from significant power sources to move freely on the
New England transmission network. ISO-NE also directs and controls the operation
of certain generating facilities that are subject to central dispatch. ISO-NE is
the central dispatching agency and has responsibility for the NEPOOL control
area and the administration of the NEPOOL Open Access Transmission Tariff.
NEPCO operates the non-pool transmission facilities, i.e., transmission
facilities rated below 69 kV. NEPCO also operates the PTF facilities owned by
the National Grid USA utility companies in accordance with the rules and
directions of ISO-NE. Although ISO-NE directs the central dispatch of the
transmission facilities, NEPCO retains the responsibility to determine whether
or not, and to what extent, safety requires
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12 As noted by FERC in its Regional Transmission Organization Notice of Proposed
Rulemaking, ISO-NE was established on the platform of an existing tight power
pool following the Federal Energy Regulatory Commission's ("FERC's")
encouragement in Order No. 888. ISO-NE was formed based upon NEPOOL. See UNITIL
Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992) ("Unitil"). NEPOOL,
formed in 1971, is a voluntary association of electric utilities in New England
that established a single regional network to direct the operations of the major
generating and transmission facilities in the region. NEPOOL built a control
center to centrally dispatch the bulk power system using the most economic
generating and transmission equipment available at any given time to match the
electric load of region. Central dispatch provided savings in supply costs and
increased the reliability of the bulk power system. NEPOOL continues to exist as
the entity representing not only traditional electric utilities but also
merchant generating companies that provide wholesale electricity supply. ISO New
England has a services contract with NEPOOL to operate the bulk power system an
to administer the wholesale marketplace.
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14
facilities to be operated at less than their rated capability.
NEET, a wholly owned subsidiary of National Grid USA, owns and operates a
direct current/alternating current converter terminal facility for the first
phase of the Hydro-Quebec and New England interconnection (the
"Interconnection") and six miles of high voltage direct current transmission
line in New Hampshire. As of September 30, 2001, NEET had total assets of $22
million, operating revenues of $8 million, and net income of $0.6 million for
the 12 months to date. NEET is subject to rate regulation by FERC. The NHPUC has
jurisdiction over its financings and transactions with affiliates.
N.H. Hydro, in which National Grid USA holds 53.97% of the common stock,
operates 121 miles of high-voltage direct current transmission line in New
Hampshire for the second phase of the Interconnection, extending to the
Massachusetts border. As of September 30, 2001, N.H. Hydro had total assets of
$110 million, operating revenues of $27 million, and net income of $4 million
for the 12 months to date. NH Hydro is subject to rate regulation by FERC. The
NHPUC has jurisdiction over NH Hydro's financings and transactions with
affiliates.
Mass. Hydro, 53.97% of the voting stock of which is held by National Grid
USA, operates a direct current/alternating current terminal and related
facilities for the second phase of the Interconnection and 12 miles of
high-voltage direct current transmission line in Massachusetts. As of September
30, 2001, Mass. Hydro had total assets of $132 million, operating revenues of
$33 million, and net income of $6 million for the 12 months to date. New England
Hydro Finance Company, Inc. ("NE Hydro Finance") is owned in equal shares by
Mass. Hydro and N.H. Hydro and provides the debt financing required by the
owners to fund the capital costs of their participation in the Interconnection.
Mass Hydro is subject to rate regulation by FERC. The MDTE has jurisdiction over
Mass Hydro's financings and transactions with affiliates.
National Grid USA's existing public utility subsidiaries and nonutility
companies are described in further detail in Exhibit L-1 to this Application.
2. The NiMo System
NiMo is a New York corporation and a public utility holding company
15
exempt under Section 3(a)(1) of the Act by Commission order./13 NiMo's common
stock is listed on the New York Stock Exchange and as of September 30, 2001,
there were 160,239,818 outstanding shares. NiMo employs, in conjunction with its
subsidiaries, approximately 7,546 full-time employees.
NiMo has two direct subsidiaries: (1) Niagara Mohawk, a combination
electric and gas public utility company, and (2) Opinac North America, Inc.
("Opinac"), a company engaged, through its subsidiaries, which is engaged in
unregulated activities in the energy industry and is a holding company over a
Canadian utility that will certify as a FUCO under Section 33 of the Act before
the consummation of the Merger./14 Niagara Mohawk comprises 98% of NiMo's total
assets and generates 87% of NiMo's total revenues.
For the twelve months ended April 30, 2001, Niagara Mohawk provided
electric service and sold, distributed and transported natural gas to (on
average) 1,535,135 electric and 546,835 gas customers in eastern, central,
northern and western New York State. Niagara Mohawk provides electric service to
the cities of Buffalo, Syracuse, Albany, Utica, Schenectady, Niagara Falls and
Troy. As of March 31, 2001, Niagara Mohawk had approximately 50,412 miles of
electric transmission and distribution lines. On November 7, 2001, Niagara
Mohawk sold its Nine Mile Point Unit 1 ("Unit 1") and 41% share of its Nine Mile
Point Unit 2 ("Unit 2") nuclear plants pursuant to an agreement dated December
2000 to Nine Mile Point Station LLC, a wholly-owned subsidiary of Constellation
Energy Group, Inc. ("Constellation Energy")./15
----------------
13 Niagara Mohawk Holdings, Inc., Holding Co. Act Release No. 26986 (March 4,
1999).
14 The Canadian utility is Canadian Niagara Power Company Limited ("CNP
Limited"), discussed infra. FUCO status for CNP Limited would also run to its
subsidiaries because they reside under the "FUCO Umbrella." See e.g., the NEES
Acquisition order at 27 (finding that National Grid Holdings Ltd., a subholding
company for National Grid's foreign utility holdings, would certify as a FUCO,
exempting all of its direct and indirect subsidiaries). Because CNP Limited will
qualify as a FUCO, Opinac would be a nonutility holding company.
Currently, Opinac is an exempt holding company under Rule 10(a)(2) because its
subsidiary Opinac Energy Corp. is exempt by order under Section 3(a)(5). See
note 21. See also, note 22, explaining the status of Opinac's indirect
subsidiaries CNP Limited and Canadian Niagara Power Inc. ("CNP Inc").
15 Niagara Mohawk is obligated to use 85% of the net proceeds of the sales of
the generation assets to reduce its senior debt outstanding within 180 days
after the receipt of such proceeds pursuant to the covenants of the Senior Notes
issued in 1998. Such Senior Notes were issued to fund the Master Restructuring
Agreement. Along with the asset purchase agreements, Niagara Mohawk also signed
power purchase agreements ("PPAs") with Constellation Energy to purchase energy
at negotiated competitive prices for approximately ten years.
----------------
16
Niagara Mohawk wholly owns hydro generation assets in Mechanicville, New York,
which while inoperable since 1997, have a nominal capacity of 4.5 MW of
power./16 In addition to the Mechanicville facilities, Niagara Mohawk also has
an interest in an additional 58.5 MW of hydroelectric generation facilities that
it has leased to third parties./17
Niagara Mohawk has transferred control of its transmission system to the
New York Independent System Operator ("NYISO"). The NYISO is an independent
operator of the electric transmission systems of all of the public utility
systems in New York State.
Niagara Mohawk also purchases, transports and distributes natural gas in
eastern, central and northern New York State in an area that generally extends
from Syracuse to Albany. Gas utility service is provided largely in areas where
Niagara Mohawk also provides electrical service. The majority of Niagara
Mohawk's gas sales are for residential and commercial space and water heating.
Consequently, the demand for natural gas by Niagara Mohawk's customers is
seasonal and influenced by weather factors. Niagara Mohawk purchases its natural
gas for sale to its customers under firm and spot contracts, and transports the
gas under both firm and interruptible transportation
----------------
16 The site's six .750 MW units have not been operated since approximately
October 27, 1997. While the FERC issued a new license for the facility on June
9, 1993 authorizing site redevelopment and installation of 1.7 MW of new
generation capacity, redevelopment has not begun. Initially, the units were not
operated due to low water levels. In a later assessment, Niagara Mohawk
evaluated the units and determined that they should not be operated for several
reasons: (a) deterioration of the sub-structure; (b) the high cost of repairs
compared to alternative power; (c) a subsequent NYPSC decision and directive
that Niagara Mohawk sell its generation; and (d) a civil dispute over the
license and generating rights at the site between FERC project co-licensees that
led to a regulatory impasse at FERC as to the "going forward" plan for the
facility.
17 The 1.2 MW Diamond Island facility land and facility are leased to
Consolidated Hydro Incorporated; land rights in the 36 MW Hudson Falls facility
are leased to Northern Electric Power Co. Limited partnership, and Niagara
Mohawk is co-licensee; land rights in the 3.1 MW Middle Falls facility are
leased to Adirondack Hydro Development Corporation; land rights in the 14 MW
South Glens Falls are leased to South Glen Falls Limited Partnership; the 1.6
Theresa facility and land are leased to Consolidated Hydro Incorporated; and
land rights in the 2.6 MW Union Falls project are leased to Union Falls Hydro
Limited Partnership. None of the leasees for the facilities is an affiliate of
NiMo. Niagara Mohawk purchases from these third parties the power from these
units pursuant to power purchase agreements.
----------------
17
contracts./18
Niagara Mohawk's wholly-owned nonutility subsidiaries are NM Uranium, Inc.,
NM Properties, Inc., NM Receivables LLC and NM Receivables Corp. II. NM Uranium,
Inc. has a 50% interest/19 in certain closed uranium mines in the State of
Texas. NM Properties, Inc. manages real property formerly owned by Niagara
Mohawk. NM Receivables, LLC, a single-purpose, financing subsidiary, purchases
and resells Niagara Mohawk's customer receivables, including accrued unbilled
revenues. NM Receivables, LLC is over 99.99% owned by Niagara Mohawk and is also
owned by NM Receivables Corp. II, which is a wholly owned subsidiary of Niagara
Mohawk that manages NM Receivables, LLC.
NM Properties, Inc. wholly owns the following subsidiary real estate
development companies: Hudson Pointe, Inc., Land Management & Development, Inc.,
Landwest, Inc., Moreau Park, Inc., Riverview, Inc., Salmon Shores, Inc., Upper
Hudson Development, Inc., Arbuckle Acres, Inc., and OproprCo., Inc.
Opinac's wholly-owned, direct subsidiaries are Opinac Energy Corporation
("Opinac Energy") and Niagara Mohawk Energy, Inc. ("NM Energy"). Opinac Energy
is a Canadian corporation that owns a portfolio of cash equivalent securities
and owns a 50% interest in Canadian Niagara Power Company, Limited ("CNP
Limited")./20 CNP Limited is a Canadian public utility company based in Ontario,
----------------
18 Effective April 1, 2000 through October 31, 2000, Niagara Mohawk entered into
an Agreement for Portfolio Management and Gas Supply with an unaffiliated
company. The portfolio manager optimizes Niagara Mohawk's portfolio of
contractual entitlements to pipeline and storage capacity to satisfy Niagara
Mohawk's firm requirements and to create value. In accordance with the
provisions of the Agreement for Portfolio Management and Gas Supply, the
portfolio manager dispatched gas supplies Niagara Mohawk had under contract with
others and supplied the balance on a firm basis. Thus Niagara Mohawk purchased
no gas under spot supply contracts since April 1, 2000. Niagara Mohawk entered
into a second agreement upon the expiration of the Agreement for Portfolio
Management and Gas Supply. For the first twelve months ending March 31, 2001,
Niagara Mohawk purchased approximately 57% of its gas supplies from third
parties under existing firm contracts and 43% from its portfolio manager.
19 The remaining 50% interest is owned by USX Corp., an unaffiliated company.
20 The remaining 50% of CNP Limited is owned by Fortis Inc. ("Fortis"), an
unaffiliated holding company. Fortis is a Newfoundland organized company with
diversified investments in seven companies. Besides CNP Limited, these companies
include the following: (1) Newfoundland Power supplies electricity to
approximately 216,000 customers on the island portion of the Canadian Province
of Newfoundland and Labrador. Newfoundland Power also owns and operates 23 small
hydroelectric generating plants, five diesel plants and three combustion
turbines with a total installed capacity of 148.4 MW, that provide 10% of the
energy Newfoundland power sells. Newfoundland Power is wholly owned by Fortis;
(2) Maritime Electric supplies electricity to approximately 63,000 customers
throughout the Canadian Province of Prince Edward Island. It owns 2 combustion
turbines and six steam turbines with a combined capacity of 103.5 MW. Maritime
Electric is wholly owned by Fortis. (3) FortisUS Energy Corporation,
("FortisUS") is a New York company and a wholly owned subsidiary of Maritime
Electric. FortisUS owns and operates four hydroelectric generating stations,
with a total capacity of 22.9 MW, located in upper New York State. The four
generating stations are qualifying facilities ("QFs") under the Public Utilities
Regulatory Policies Act of 1978 ("PURPA"); (4) Fortis owns 20% of the
outstanding Class A Ordinary Shares of Caribbean Utilities Company, Ltd., a
publicly traded electric utility known as CUC. CUC, one of the most reliable and
efficient power companies in the Caribbean, is the sole provider of electricity
to the Island of Grand Cayman, Cayman Islands serving over 18,000 customers; (5)
Fortis owns 67% of the Common Shares of Belize Electricity Limited ("BEL"), the
primary producer, transmitter and distributor of electricity in Belize. BEL
serves over 51,000 customers; (6) Fortis owns 95% of Belize Electric Company
Limited ("BECOL"). BECOL owns and operates a 25-MW hydroelectric generating
facility in Belize; and (7) Fortis Properties owns and manages commercial,
retail and hotel properties in Newfoundland and Nova Scotia. With the exception
of FortisUS, neither Fortis nor its subsidiaries are organized under the laws of
any of the United States. FortisUS does not own utility assets located within
the U.S. Consequently, Fortis is an exempt foreign holding company under Rule 5.
Fortis would not acquire, directly or indirectly, any security of any public
utility company as a consequence of National Grid's acquisition of NiMo. Fortis,
therefore, is not subject to Section 9(a)(2) of the Act in connection with the
proposed transaction.
----------------
18
Canada that generates electricity and supplies and markets energy and energy
services in Ontario. CNP Limited also sells electricity that is surplus to its
Ontario needs into the New York market, principally into the market run by the
NYISO. CNP Limited owns and operates the William B. Rankine Generating Station,
a 74.6 MW hydroelectric plant located on the Canadian side of the Niagara River
at Niagara Falls. Opinac Energy was granted an exemption by Commission order
under Section 3(a)(5) of the Act, with respect to its interest in CNP
Limited./21
On March 31, 1999, the transmission and distribution assets of CNP Limited
were transferred to a 100% owned subsidiary, Canadian Niagara Power Inc. ("CNP
Inc."). The transfer was made to comply with the Electricity Act 1998 and with
regulations of the Ontario Energy Board./22 CNP Inc. distributes electricity to
residential,
----------------
21 Opinac Energy Corporation, Holding Co. Act Release No. 25632 (September 16,
1992). The order states that "[a]lthough Opinac was not incorporated until 1982,
the affiliation between CNP and Niagara Mohawk predates the passage of the Act.
The Commission considered, but did not expressly pass upon, retention of the
foreign utility in the section 11 reorganization proceedings involving Niagara
Mohawk's predecessors in interest. See, e.g., Niagara Hudson Power Corp., 16
S.E.C. 139, 170 n. 46 (1944) (citing the domestic company's "substantial
dependence upon the receipt of electric energy from Canadian sources"); The
United Corp., 32 S.E.C. 378, 396 (1951) (foreign operations "related" to Niagara
Mohawk's domestic utility business)." See also, In the Matter of Niagara Mohawk
Power Corp., The Niagara Falls Power Co., Holding Co. Act Release No. 10130
(October 4, 1950) (noting in its order approving the merger of Niagara Mohawk
with The Niagara Falls Power Co. that CNP would be directly transferred to
Niagar a Mohawk).
22 The formation of CNP Inc. was exempt from Section 9(a)(2) under Rule 11. The
indirect acquisition of the securities of CNP Inc. by NiMo was exempt under Rule
11(a) which provides: "Any holding company which is exempt from Sections 4 and
5(a) of the Act and which is not a subsidiary of any registered holding company,
shall be exempt from Section 9(a)(2) of the Act with respect to the acquisition
of any securities issued by any subsidiary of such exempt holding company." The
direct acquisition of the securities of CNP Inc. by CNP Limited was exempt under
Rule 11(b)(2) which provides: "Any holding company specified in paragraph (a)
and any person which is not a holding company or a subsidiary of any registered
holding company, shall be exempt from Section 9(a)(2) of the Act with respect to
the acquisition of any of the following securities: . . . (2) Securities of
Foreign Companies. Securities issued by any company which does not own or
operate, or have a subsidiary which owns or operates, any utility assets
located in the United States; provided, that the acquiring company is not an
affiliate under Section 2(a)(11)(A) of the Act of any company which owns or
operates, and has no subsidiary which owns or operates, any utility assets
located in the United States." CNP Limited is not an affiliate under Section
2(a)(11)(A) of the Act of Niagara Mohawk and does not otherwise have any
affiliate or subsidiary that owns or operates utility assets in the U.S.
----------------
19
commercial and industrial customers in Fort Erie, Ontario. CNP Inc. has an
international electric interconnection with Niagara Mohawk that provides back-up
power in the event of an outage at Niagara Falls. CNP Inc. also has a 25 hertz
transmission line that interconnects the 25 hertz grid in Niagara Falls, Ontario
with the Niagara Mohawk system in Buffalo, N.Y. CNP Inc. serves approximately
14,600 customers with 44 employees, 32 km of transmission lines and 900 km of
distribution lines. For the twelve months ended March 31, 2001, CNP Limited sold
293,807 MWh to CNP Inc. for $7.4 million and sold 355,886 MWh to various parties
in the northeastern U.S. CNP Limited engaged solely in wholesale energy
transactions during this period./23 CNP Limited is licensed by the Ontario
Energy Board ("OEB") and its operations are subject to compliance with the terms
of its licenses. CNP Inc. is regulated by the OEB.
On July 19, 2001, CNP Limited, CNP Inc., the City of Port Colborne, Ontario
and Port Colborne Hydro, Inc. ("Port Colborne Hydro"), a distribution utility,
signed an agreement for CNP Inc. to lease the electric distribution business of
Port Colborne Hydro. The agreement is subject to OEB approval before closing.
Under the terms of the 10-year deal, CNP Inc. will receive all revenues from
Port Colborne Hydro in exchange for assuming responsibility for the operations
of the business. The City of Port Colborne will receive lease payments from CNP
Inc. CNP Inc. will finance and own all capital additions and will hold an option
to purchase the business for a predetermined fair market value at the end of the
10-year term. Port Colborne is located on the north shore of Lake Erie at the
entrance to the Welland Canal. The utility serves approximately
----------------
23 These sales included 17,200 MWh to NM Energy and 338,686 MWh to the NYISO.
----------------
20
9,000 customers within the City of Port Colborne. Port Colborne has 270
kilometers of distribution lines and no generation or transmission facilities.
CNP Limited has also recently acquired a 10% interest in two newly-formed
companies in Ontario, Westario Power Holdings Inc. ("Westario Power") and Rideau
St. Lawrence Holdings Inc. ("Rideau St. Lawrence")./24 Westario Power is a
nonutility holding company with two wholly-owned subsidiaries. Westario Power
Inc., the first subsidiary, is an electric distribution utility that serves
20,000 customers in the counties of Bruce, Grey and Huron, Ontario. It owns 370
kilometers of distribution lines and no generation or transmission facilities.
Westario Power Services Inc., the second subsidiary, markets and sells
associated products and services.
Rideau St. Lawrence is a nonutility holding company with three wholly-owned
subsidiaries. The first subsidiary, Rideau St. Lawrence Distribution Inc., is an
electric distribution utility that serves 6,000 customers in the counties of
Leeds-Grenville and Stormont-Dundes, Ontario. It owns 84 kilometers of
distribution lines and no generation and transmission facilities. The second
subsidiary, Rideau St. Lawrence Utilities Inc., provides human resources and
asset services to the other two subsidiaries. The final subsidiary, Rideau St.
Lawrence Services Inc., provides operational services to Rideau St. Lawrence
Distribution Inc.
CNP Limited's other wholly-owned subsidiaries are 1161557 Ontario Inc, and
Ziegler Energy Demands Inc., which are both inactive. Ziegler Energy Demands
Inc. recently transferred its demand-side energy services business to CNP
Limited and is in the process of winding up its operations.
CNP Limited will certify as a FUCO under Section 33 of the Act before the
consummation of the Merger.
----------------
24 The Ontario Energy Board recently approved the completion of the transactions
with Rideau St. Lawrence, and approval for Westario Power remains outstanding.
----------------
21
----------------------------------------------------------------------------------------------------------------------
Financial Information
For the Twelve Months Ended March 31, 2001 (in US$ millions)
----------------------------------------------------------------------------------------------------------------------
Operating Net Income Assets as of
Revenues March 31, 2001
------------------------------------------------------------ ------------------ ------------------- ------------------
Niagara Mohawk 4,003.6 (39.2) 12,069.8
------------------------------------------------------------ ------------------ ------------------- ------------------
CNP Limited (Consolidated)* 13.0 4.5 20.3
------------------------------------------------------------ ------------------ ------------------- ------------------
CNP Inc* 6.8 (0.0) 15.8
------------------------------------------------------------ ------------------ ------------------- ------------------
*The amounts provided represent NiMo's 50% ownership interest.
----------------------------------------------------------------------------------------------------------------------
Financial Information
For the Twelve Months Ended September 30, 2001 (in US$ millions)
----------------------------------------------------------------------------------------------------------------------
Operating Net Income Assets as of
Revenues September 30,
2001
------------------------------------------------------------ ------------------ ------------------- ------------------
Niagara Mohawk 4,143 (16) 12,045
------------------------------------------------------------ ------------------ ------------------- ------------------
CNP Limited (Consolidated)* 13.3 4.6 21.2
------------------------------------------------------------ ------------------ ------------------- ------------------
CNP Inc* 7.0 0.4 16.8
------------------------------------------------------------ ------------------ ------------------- ------------------
*The amounts provided represent NiMo's 50% ownership interest.
Opinac is also a holding company over partially-owned subsidiaries engaged
in energy-related businesses, including: (a) Telergy, Inc., a development-stage
company that was engaged in the construction, ownership and operation of a fiber
optic telecommunications network, but is now in liquidation, and; (b) eVionyx,
Inc. (formerly EVonyx, Inc.), a research and development company that has
developed and intends to commercialize new fuel cell and battery technology.
Telergy, Inc. is an exempt telecommunications company ("ETC") under Section 34
of the 1935 Act./25
NM Energy was, until recently, engaged indirectly in energy marketing and
energy services through its wholly-owned direct subsidiary Niagara Mohawk Energy
Marketing, Inc. As of December 1, 2001, Niagara Mohawk Energy Marketing Inc. was
sold to Select Energy Inc., a non-affiliate.
NM Energy is a holding company over two partially-owned subsidiaries
engaged in energy-related businesses: (a) Telergy Central LLC, a company that
was engaged in the construction, ownership and operation of a fiber optic
telecommunications
----------------
25 Telergy, Inc. and certain affiliated companies filed for ETC status with the
Federal Communications Commission on March 7, 2001, in FCC File No. ETC-01-06.
----------------
22
network, but is now in liquidation, and/26 (b) Direct Global Power, a company
doing business in photovoltaics. All of NiMo's direct and indirect nonutility
subsidiaries are further described in Exhibit L-2./27
3. Niagara Mohawk's Regulatory Environment
The New York State Public Service Commission ("NYPSC") regulates Niagara
Mohawk's overall operations. It regulates financings by Niagara Mohawk with a
term of one year or more, capital structure, dividend payments, asset sales,
affiliate transactions, terms of service and service quality. On March 20, 1998,
the NYPSC approved Niagara Mohawk's Power Choice agreement ("Power Choice"),
including its Master Restructuring Agreement ("MRA") (discussed below). Power
Choice is a five-year electric rate plan that provides for a restructuring of
Niagara Mohawk's regulated electric utility business and reduces average
residential and commercial rates by an aggregate of 3.2% over the first three
years through September 1, 2001./28 Under the MRA, Niagara Mohawk bought out a
majority of its above-market government-mandated power purchase agreements,
which helped stabilize its financial condition./29
Under Power Choice, as of August 1, 1999, all of Niagara Mohawk's
----------------
26 Telergy Central LLC is an ETC under Section 34 of the 1935 Act. It filed for
ETC status with Telergy, Inc. in FCC File No. ETC-01-06 on March 7, 2001.
27 In the event National Grid seeks to reactivate the business activities of any
inactive subsidiary acquired from NiMo and such business is not authorized by an
applicable exemption or Commission rule or order under the 1935 Act, National
Grid will file a post-effective amendment seeking authorization to engage in the
proposed activities.
28 Niagara Mohawk retains the flexibility to address specific competitive
challenges for energy intensive customers through individual rate negotiations.
29 As a result of various federal and state requirements, Niagara Mohawk was
required to enter into contracts to purchase electricity from Independent Power
Producers ("IPPs") in quantities in excess of its own demand and at prices in
excess of those available to it. In mid-1996, Niagara Mohawk began comprehensive
negotiations to terminate, amend or restate a substantial portion of
above-market Power Purchase Agreements ("PPAs") in an effort to mitigate the
escalating cost of these PPAs as well as to prepare Niagara Mohawk for a more
competitive environment. These negotiations led to the MRA and Power Choice. The
MRA was consummated on June 30, 1998 with 14 IPPs (the "IPP Parties"). The MRA
allowed Niagara Mohawk to terminate, restate or amend 27 PPAs which represented
approximately three-quarters of its above-market purchased power obligations.
Niagara Mohawk terminated 18 PPAs for 1,092 MW of electric generating capacity,
restated eight PPAs representing 535 MW of capacity and amended one PPA represe
nting 42 MW of capacity. Niagara Mohawk paid the IPP Parties an aggregate of
$3.934 billion in cash and issued 20.5 million shares of common stock to the IPP
Parties.
----------------
23
customers may now choose their electricity supplier./30 Niagara Mohawk continues
to distribute electricity through its transmission and distribution systems for
all customers, regardless of supplier, and it provides electricity to those
customers who do not choose a new electricity supplier. Power Choice provides
that if a customer chooses an alternative supplier, Niagara Mohawk may continue
to charge the customer for delivery of the energy and for a non-bypassable
Competitive Transition Charge ("CTC"). Niagara Mohawk will also give a customer
service back out credit to customers choosing an alternative supplier.
In furtherance of the restructuring, Niagara Mohawk has completed the sale
of its coal-fired generation plants and its oil and gas-fired generation plants
at Oswego and Albany. On January 31, 2001, Niagara Mohawk completed the sale of
its 25% interest in the Roseton Steam Station to Dynegy Inc. This sale completes
the divestiture of Niagara Mohawk's fossil-fueled generating assets. On November
7, 2001, Niagara Mohawk sold its interests in Nine Mile Point Unit 1 and Unit 2
to a wholly-owned subsidiary of Constellation Energy./31 As described in the
previous section, Niagara Mohawk retains an interest in 58.5 MW of hydroelectric
facilities that it has leased to third parties.
The NYPSC has allowed Niagara Mohawk to record a regulatory asset for the
costs of the MRA and has designed the utility's rates to permit recovery of the
MRA regulatory asset./32 The regulatory asset is being amortized over a period
generally not to exceed ten years and, although the amortization has the effect
of depressing Niagara
----------------
30 As of January 30, 2001, 22% of Niagara Mohawk's commercial and industrial
customers or approximately 27% of eligible load, and 3% of residential customers
and their eligible load, have chosen an electricity supplier other than Niagara
Mohawk.
31 The Merger was contingent on, among other things, the completion of the sale
of the nuclear assets or the entry into another arrangement covering the nuclear
assets agreed to by the parties to the Merger and approved by all appropriate
regulatory agencies. By order dated June 22, 2001, the Nuclear Regulatory
Commission approved the sale of the nuclear assets. The NYPSC also approved the
asset transfer in an order issued October 26, 2001. Case 01-E-0011, Niagara
Mohawk Power Corp., et. al. - Nine Mile Point Transfer, Order Authorizing Asset
Transfers (issued October 26, 2001).
32 In approving Power Choice, the NYPSC limited the estimated value of the MRA
regulatory asset that could be recovered, which resulted in a charge to the
second quarter of 1998 earnings of $263.2 million upon the closing of the MRA.
----------------
24
Mohawk's earnings, the rate plan has resulted in a substantial improvement to
operating cash flow.
On December 3, 2001, the NYPSC issued its order authorizing the Merger and
adopting a new rate plan for Niagara Mohawk./33 The rate plan, which is
contingent on the consummation of the Merger, covers a period of approximately
ten years from the day after the Merger closes ("Plan Effective Date") through
December 31, 2011. Under the plan, Niagara Mohawk's electric delivery rates
would be reduced by $152 million a year, equivalent to a reduction of 8.0% in
delivery rates and a reduction of 4.6% overall (considering delivery plus
commodity rates). The plan provides for recovery of Niagara Mohawk's
transmission and distribution costs, reflecting a 10.6% return on equity, and a
CTC that recovers fixed and forecast variable stranded costs. The recoverable
fixed stranded costs under the rate plan are reduced by an approximately $850
million write-off of stranded costs associated with the Nine Mile Point nuclear
facility, in addition to the $123 million in fixed costs written off in
connection with the NYPSC's October 26, 2001 order authorizing the transfer of
the Nine Mile Point assets. The unamortized balance of fixed costs is allowed a
return.
The rate reductions also reflect the assignment to ratepayers of 50% of the
electric portion of the forecast efficiency gains and synergy savings (net of
costs to achieve) agreed to by the parties to the Merger proceeding. Synergy
savings over the term of the plan are set at about $130 million per year,
allocated 62% to New York, and efficiency gains are set at $60 million per year,
allocated 100% to New York. The imputed levels of savings flow to ratepayers
regardless of whether they are achieved in fact.
The rate plan also includes an incentive mechanism. Niagara Mohawk is
permitted to retain any earnings over the allowed 10.6% return on equity up to
11.75%, which may be increased to 12% provided that Niagara Mohawk achieves
certain goals related to competition and low income programs. Earnings above
11.75% (or the higher number possible in subsequent years) would be shared
between Niagara Mohawk and its
----------------
33 Case 01-M-0075, Niagara Mohawk Holdings, Inc. et. al., Opinion and Order
Authorizing Merger and Adopting Rate Plan, (issued December 3, 2001).
----------------
25
ratepayers.
The rate plan also provides for penalties of approximately 24 million under
the "service quality assurance program" if satisfactory levels of service and
reliability are not delivered. The customer service provisions adopt standards
related to call center operations, billing and collections, field services, and
the low-income customer assistance program. The electric reliability standards
relate to service reliability (i.e., frequency and duration of interruptions)
and power quality (i.e., momentary interruptions).
The rate plan extends through December 31, 2004 an existing freeze on
Niagara Mohawk's rates for gas delivery service, which would otherwise expire on
August 31, 2003. In the event Niagara Mohawk receives a gas delivery service
rate increase to take effect at any time, all synergy and efficiency savings
from the current Merger or any follow-on merger or acquisition associated with
the gas business would be allocated wholly to customers. In the absence of gas
delivery service rate increases, Niagara Mohawk may retain 50% of follow-on
merger savings allocable to gas service.
4. Holding Company Financial Information
For the twelve months ended March 31, 2001, NGG and NiMo had the following
financial results individually, and on a pro forma combined basis (US GAAP):
------------------------------------ --------------- ----------------- -----------------------------
NGG NiMo Pro Forma Combined
------------------------------------ --------------- ----------------- -----------------------------
($ millions)
------------------------------------ ---------------------------------------------------------------
Total assets 14,756 12,381 27,137
------------------------------------ --------------- ----------------- -----------------------------
Net utility plant assets 7,917 5,717 13,634
------------------------------------ --------------- ----------------- -----------------------------
Total operating revenues 5,371 4,712 10,083
------------------------------------ --------------- ----------------- -----------------------------
Operating income* 1,119 397 1,516
------------------------------------ --------------- ----------------- -----------------------------
Net income 1,151 (20) 1,131
------------------------------------ --------------- ----------------- -----------------------------
*Operating income is income before goodwill amortization and income taxes.
26
The table below provides that information for the twelve months ended September
30, 2001.
------------------------------------ --------------- ----------------- -----------------------------
NGG NiMo Pro Forma Combined
------------------------------------ --------------- ----------------- -----------------------------
($ millions)
------------------------------------ ---------------------------------------------------------------
Total assets 14,802 12,297 27,099
------------------------------------ --------------- ----------------- -----------------------------
Net utility plant assets 8,229 4,587 12,816
------------------------------------ --------------- ----------------- -----------------------------
Total operating revenues 5,757 4,791 10,548
------------------------------------ --------------- ----------------- -----------------------------
Operating income* 1,123 281 1,404
------------------------------------ --------------- ----------------- -----------------------------
Net income 507 (79) 428
------------------------------------ --------------- ----------------- -----------------------------
*Operating income is income before goodwill amortization and income taxes.
The table below shows the capitalization of NGG, NiMo, and the National
Grid combined system on a pro forma basis as of March 31, 2001, according to
U.S. GAAP.
------------------- ----------- ---------- --------- --------- --------- -------------- -------------- ------------
NGG ($ mm) NGG (%) NiMo NiMo (%) Acqui- Consolidating Pro Forma Pro Forma
($ mm) sition Adjustments Combined Combined
Cost ($ mm) (%)
------------------- ----------- ---------- --------- --------- --------- -------------- -------------- ------------
Short-term debt* 1,379 14 651 8 2,030 11
------------------- ----------- ---------- --------- --------- --------- -------------- -------------- ------------
Long-term debt 4,517 45 4,674 54 1,582 10,773 57
------------------- ----------- ---------- --------- --------- --------- -------------- -------------- ------------
Preferred stock 28 0 494 6 522 3
------------------- ----------- ---------- --------- --------- --------- -------------- -------------- ------------
Minority interest 31 0 0 0 31 0.2
------------------- ----------- ---------- --------- --------- --------- -------------- -------------- ------------
Common stock 4,146 41 2,715 32 1,522 (2,715) 5,669 29.8
equity
------------------- ----------- ---------- --------- --------- --------- -------------- -------------- ------------
Total 10,101 100% 8,534 100% 3,105 (2,715) 19,025 100%
------------------- ----------- ---------- --------- --------- --------- -------------- -------------- ------------
* Includes current maturities of long-term debt, plus for NiMo only, sinking
fund payments on preferred stock.
27
The table below shows the capitalization of NGG, NiMo, and the National
Grid combined system on a pro forma basis as of September 30, 2001, according to
U.S. GAAP.
------------------- ---------- --------- ---------- ---------- --------- ----------- -------------- ---------------
NGG ($ mm) NGG (%) NiMo NiMo (%) Acqui- Consolidating Pro Forma Pro Forma
($ mm) sition Adjustments Combined Combined
Cost ($ mm) (%)
------------------- ---------- --------- ---------- ---------- --------- ----------- -------------- ---------------
Short-term debt* 108 1% 591 7% 699 4%
------------------- ---------- --------- ---------- ---------- --------- ----------- -------------- ---------------
Long-term debt 5,776 58% 4,815 56% 1,604 12,196 64%
------------------- ---------- --------- ---------- ---------- --------- ----------- -------------- ---------------
Preferred stock 24 0% 494 6% 517 3%
------------------- ---------- --------- ---------- ---------- --------- ----------- -------------- ---------------
Minority interest 28 0% - 0% 28 0%
------------------- ---------- --------- ---------- ---------- --------- ----------- -------------- ---------------
Common stock
equity 4,106 41% 2,616 31% 1,522 (2,616) 5,628 30%
------------------- ---------- --------- ---------- ---------- --------- ----------- -------------- ---------------
Total 10,042 100% 8,516 100% 3,127 (2,616) 19,068 100%
------------------- ---------- --------- ---------- ---------- --------- ----------- -------------- ---------------
* Includes current maturities of long-term debt, plus for NiMo only, sinking
fund payments on preferred stock.
D. Description of the Merger and the Restructuring
1. The Merger
The Agreement and Plan of Merger and Scheme of Arrangement by and among
NGG, NiMo, National Grid, and Grid Delaware, dated as of September 4, 2000 and
amended December 1, 2000 ("Merger Agreement"), contemplates a scheme of
arrangement (previously defined as the "Restructuring") and a merger which taken
together will result in the creation of National Grid, a new holding company for
the National Grid System, and the acquisition by National Grid of NiMo.
The Restructuring involves canceling and exchanging NGG's existing shares
for shares of National Grid, with NGG becoming a wholly owned subsidiary of
National Grid. The Merger Agreement contemplates that Grid Delaware, a wholly
owned subsidiary of National Grid, will merge into NiMo with NiMo surviving.
Upon the closing of the Merger, NiMo will be a subsidiary of National Grid and
will subsequently be transferred to become a wholly-owned subsidiary of National
Grid USA.
28
It is intended that the Restructuring and Merger taken together will qualify as
a tax-free transaction within the meaning of Section 351 of the Internal Revenue
Code of 1986, as amended. The Restructuring will be implemented immediately
prior to the Merger.
The introduction of a new holding company, National Grid, is intended to
give NGG the flexibility to increase the cash portion of the Merger
consideration mix without jeopardizing the tax free nature of the transaction
for NiMo shareholders who elect to exchange their shares in NiMo for shares in
National Grid, should the shareholders in aggregate elect to receive more than
one-fifth of the consideration for their NiMo shares in cash. NGG can not be
eliminated in the restructuring without jeopardizing the tax-free nature of the
transaction.
Transaction Steps
The Merger and Restructuring would be effected though a series of
transactions involving special purpose acquisition corporations, intercompany
loans, the acquisition of securities, share repurchases or redemptions and other
transactions. The specific transactions are summarized below and described in
more detail in Exhibit M-1. After the Merger, however, all of the NiMo stock
will be owned by National Grid USA and NiMo's current subsidiaries will remain
its subsidiaries. The corporate structure of the National Grid System
post-Merger, illustrated by the organization chart included in Exhibit N-3, will
be fully consistent with the Act.
The initial steps in the transaction involve transferring the National Grid
USA chain of companies and NGG Finance plc to the direct ownership of National
Grid to replicate the current corporate structure after the Restructuring. In
particular, the Restructuring leaves National Grid as the immediate parent of
NGG. NGG has, among its subsidiaries, NGG Finance plc, a special purpose
financing entity and National Grid (US) Holdings Ltd., a registered holding
company that indirectly holds NGG's interest in National Grid USA. After the
restructuring, NGG transfers NGG Finance plc and National Grid (US) Holdings
Ltd. to National Grid. As a result, NGG no longer holds direct or indirect
voting securities in National Grid USA. NGG remains, however, the parent of
National Grid Holdings Ltd., a FUCO./34 The existing loan from NGG Finance
----------------
34 NGG expects that some time after the Merger it will file an application with
the Commission seeking deregistration and file Form U-57 certifying itself as a
FUCO.
----------------
29
plc to NGG is novated such that National Grid becomes the borrower. National
Grid also acquires an equivalent amount of the loan between NGG and National
Grid (US) Holdings Ltd. used to acquire National Grid USA.
The subsequent steps in the transaction involve the financing of the cash
component of the Merger consideration. Assuming that the approximately $3
billion consideration to be paid for NiMo shares is split evenly between cash
and National Grid shares, NGG Finance plc would borrow $1.5 billion from banks
under a credit facility dated November 22, 2001 between National Grid, NGG, NGG
Finance plc and a syndicate of banks (the "Credit Facility"). NGG Finance plc
would loan the proceeds to a second special purpose subsidiary of National Grid,
NG10, which, in turn would loan the funds to National Grid for deposit with the
paying agent under the Merger Agreement./35
----------------
35 The loan from NG10 to National Grid is an upstream loan. Because NGG Finance
plc and NG10 are special purpose entities used to facilitate the financing of
the Merger and the funds at issue here ultimately come from banks under the
Credit Facility, the loan does not give rise to the abuses that the Act was
intended to prevent in Section 12(a) by prohibiting registered holding companies
from borrowing from subsidiaries. The Credit Facility is not secured by any
public utility subsidiary company of National Grid. The loan is merely
incidental to National Grid's financing of the Merger and is consistent with the
public interest and the interests of investors and consumers. The Commission
found in several instances that upstream loans from financing subsidiaries do
not violate Section 12(a). See, e.g., The Southern Company, Holding Co. Act
Release No. 27134 (Feb. 9, 2000); Exelon Corp., Holding Co. Act Release No.
27266 (November 2, 2000); PowerGen plc, Holding Co. Act Release No. 27291
(December 6, 2000 ), and; Scottish Power plc, Holding Co. Act Release No. 27290
(December 6, 2000) (authorizing registered holding companies to establish
financing subsidiaries and to borrow the proceeds of the financing from the
special purpose subsidiaries).
The Senate Report that accompanied the adoption of the Act stressed the need to
protect the credit of public utility subsidiaries: "Money raised on the credit
of a public-utility company should be devoted solely to the regulated business
of that company and not used to finance the speculative activities of those who
control it." Sen. Rep. 621, 74th Cong., 1st Sess., p.34. Apparently,
"subsidiaries" were included within the Section 12 prohibition of upstream loans
to holding companies to capture both public utility operating companies and
sub-holding companies that were their parents, and not nonutility company
operations. Report of National Power Policy Committee on Public Utility Holding
Companies, 74th Cong. 1st Sess. Cong. Record, June 27 1935, at 10323 ("Loans by
operating companies are sometimes called upstream loans."); House Rep. No. 1318,
74th Cong. 1st Session, June 24, 1935 (characterizing the "flat prohibition" of
Section 12(a) as applying to public utility company "upstream loans" and stating
that "[r]egulation of intercompany transactions is provided to prevent the
milking of operating companies for undue advantage to the controlling holding
companies . . . Section 12 covers other intercompany transactions detrimental to
operating companies."; 74th Cong. Com. Interstate Commerce, Hearings on S. 1725
(April 26-29, 1935), at 59 ("flat prohibition" of "upstream loans" applies to
public utility companies"). These arguments were advanced persuasively by the
Southern Company in an application for authorization to restructure some
nonutility interests. The restructuring involved an indemnification of Southern
by its nonutility subsidiary that the Commission found not to violate Section
12(a) based on the intent demonstrated in the legislative history to protect
public utility subsidiaries. See The Southern Company, File No. 70-9727, and The
Southern Company, Holding Co. Act Release No. 27303 (Dec. 15, 2000). The loan
from NG10 to National Grid would be unsecured and would not obligate any public
utility subsidiaries in the National Grid USA Group and accordingly is
consistent with the policy underlying Section 12(a) and should be permitted.
There are no other upstream loans in the transaction steps.
----------------
30
With the funds in place, the next steps involve the Merger itself. National
Grid's wholly-owned subsidiary Grid Delaware merges into NiMo, with NiMo
surviving. With the exception of shares held by NiMo, National Grid, NGG or
their subsidiaries, the outstanding NiMo shares are converted into the right to
receive National Grid shares, cash or a combination of both. After the Merger,
National Grid will own 100% of NiMo.
The last group of steps involves the repositioning of NiMo as a
wholly-owned subsidiary of National Grid USA. National Grid sells NiMo to NG10,
in settlement of the previously outstanding loan from NG10 to National Grid, and
additional NG10 shares. NG10 is then transferred down the chain of Intermediate
Companies until it resides as a subsidiary of National Grid Holdings Inc.
("NGHI"), the immediate parent of National Grid USA. NGHI enters into a
subscription agreement with its special purpose subsidiary National Grid 11
Limited ("NG11"). Under the agreement, NG11 issues shares to NGHI which agrees
to pay for the shares by a series of calls through December, 2006. NGHI then
sells its NG11 shares to National Grid (US) Investments 4 (an Intermediate
Company subsidiary of National Grid (US) Holdings Ltd.) for the present value of
the future calls ($1.5 billion)./36 NGHI invests the funds received from
National Grid (US) Investments 4 into NG10 which uses the proceeds to repay its
debt to NGG Finance plc. In the final steps, NiMo merges with a direct
subsidiary of NGHI and survives. NGHI then transfers NiMo to National Grid USA
as a capital contribution.
The Merger and Restructuring transaction steps accomplish several
objectives. They preserve the ability of NiMo's shareholders to receive National
Grid shares tax free while maximizing the ability to pay other NiMo shareholders
cash. The steps also allow National Grid to transfer its acquired NiMo shares to
National Grid USA
----------------
36 The acquisition by National Grid (US) Investments 4 of the NG11 shares
subject to NGHI's obligation to pay up the calls in the future is the economic
equivalent of a downstream loan from National Grid (US) Investments 4 to NGHI.
Such loans are permitted under the Commission's order dated October 11, 2001;
National Grid Group plc, Holding Co. Act Release No. 27455.
----------------
31
efficiently by avoiding a deemed distribution under U.S. tax law as a result of
the assumption of the acquisition debt by NGHI. Lastly, the steps facilitate the
servicing of the acquisition debt and the repatriation of dividends from
National Grid USA across borders. See Powergen plc, Holding Co. Act Release No.
27291 (Dec. 6, 2000) (authorizing financial transactions among intermediate
holding companies to facilitate dividend repatriation in a U.S./U.K.
transaction).
Merger Consideration
The time when the Merger is completed is referred to as the "Merger
Effective Time," and the time when the Restructuring is completed is referred to
as the "Restructuring Effective Time." At the Merger Effective Time, all of the
shares of common stock of Grid Delaware issued and outstanding prior to the
Merger will be converted into the right to receive common stock of NiMo. Each
share of NiMo common stock will be converted into the right to receive the
merger consideration in the form of cash, ADSs or a combination of cash and
ADSs./37
The per share merger consideration will be $19.00 if the Average Price
(defined below) is between $32.50 and $51.00. In the event that the Average
Price is greater than $51.00, the per share consideration received by NiMo
shareholders will increase by two-thirds of the percentage of the increase in
value over $51.00. In the event that the Average Price is less than $32.50, the
per share consideration received by NiMo shareholders will decrease by
two-thirds of the percentage of the decrease in value below $32.50. NiMo
shareholders can elect to receive their consideration in cash, ADSs or as a
combination of both, subject to the aggregate cash consideration paid being
$1.015 billion. NGG has announced that it will increase this amount to 50% of
the purchase price if there are sufficient cash elections. If elections for one
form of consideration exceed the amount of such form of consideration to be
issued in the Merger, all shareholders electing the oversubscribed form of
consideration will receive,
----------------
37 Trading in the common stock of NiMo on the New York Stock Exchange will cease
immediately following the Merger Effective Time. At such time, the common stock
will be delisted from the New York Stock Exchange. Registration of the common
stock under the Securities Exchange Act of 1934, as amended, will also be
terminated. Niagara Mohawk, however, will have publicly held preferred stock and
debt outstanding after the Merger and will continue as a reporting entity under
the Federal securities laws.
----------------
32
on a pro rata basis, some of the undersubscribed form of consideration.
"Average Price" means the average of the closing prices of NGG ordinary
shares, as derived from the Daily Official List of the London Stock Exchange
(converted to a US dollar value using the exchange rate for each date for which
the closing price is to be determined as reported in The Financial Times) for 20
trading days selected at random (using mutually agreed upon procedures) in the
period of 40 consecutive London Stock Exchange trading days ending on the close
of business on the tenth London Stock Exchange trading day prior to the election
deadline, multiplied by five.
The Merger Agreement provides that the closing of the Merger shall take
place on the business day that is no later than the first business day that is
forty days following the date on which the last of certain conditions to the
Merger is fulfilled or waived and which is also after, but no more than seven
days after the Restructuring is sanctioned by the High Court in London, England,
or as mutually agreed by the parties to the Merger Agreement. A form of election
with respect to the form of consideration to be received has been mailed to NiMo
shareholders. Elections must be received by the fifth business day immediately
preceding the closing date.
The Merger will be accounted for under the purchase method of accounting,
in accordance with generally accepted accounting principles. Under the purchase
method of accounting, the purchase price of NiMo, including direct costs of the
acquisition, will be allocated to the assets acquired and liabilities assumed
based upon their estimated fair values, with the excess, i.e., the difference
between the purchase price, representing fair value, and the fair value of the
identified assets acquired, recorded as goodwill.
2. The Restructuring
The board of directors of NGG has recommended to NGG shareholders a
proposal to form a new holding company for the National Grid System. The holding
company structure will be effected through a Restructuring which must be
sanctioned by the High Court in London, England and approved by NGG's
shareholders. Under the Restructuring, National Grid will issue one share in
National Grid in exchange for each outstanding NGG share. As a result, National
Grid will become the holding company for
33
NGG. NGG expects that the special share in NGG will be canceled and that
National Grid will issue a special share to the holder of the NGG special
share./38
The introduction of National Grid as the new holding company of NGG will be
achieved through a "scheme of arrangement" under Section 425 of the Companies
Act 1985 (U.K.). Appropriate clearances have been obtained from the U.K. Inland
Revenue for the scheme, including under Section 138 of the Taxation of
Chargeable Gains Act 1992 (U.K.) and section 707 of the Income and Corporation
Taxes Act 1988 (U.K.), and the Inland Revenue is satisfied that the scheme of
arrangement will be effected for bona fide commercial reasons and not for tax
avoidance. Accordingly, U.K. resident National Grid shareholders should not be
treated as making a disposal of their National Grid shares under the scheme.
The ordinary shares of National Grid will be listed for trading on the
London Stock Exchange and National Grid ADSs will be listed for trading on the
New York Stock Exchange. National Grid will be subject to the registration and
disclosure requirements of the US securities laws.
The rights attaching to National Grid ordinary shares will be the same in
all material respects as those currently attaching to NGG ordinary shares. Thus,
after the Restructuring is implemented (but before completion of the Merger),
holders of National Grid ordinary shares will have their interest in NGG
replaced by an equivalent proportionate interest in National Grid and, subject
to the effect of exercise of options to subscribe for NGG shares granted under
NGG share plans, their proportionate interests in the profits, net assets and
dividends of NGG will not be affected.
The scheme will require the approval of a simple majority in number of
those NGG shareholders present and voting (either in person or by proxy) at a
meeting of NGG shareholders called by order of the High Court representing not
less than 75% of the number of the NGG shares held by such shareholders. In
addition, to implement the scheme it will be necessary for a special resolution
to be approved at a separate Extraordinary General Meeting of NGG shareholders.
At a meeting of NGG
----------------
38 National Grid's authorized share capital will be 2,125,000,000 ordinary
shares of 10p each and one special rights non-voting redeemable preference share
of pound1.
----------------
34
shareholders held on January 7, 2002, the shareholders approved the scheme and
the special resolution necessary to implement the scheme. In addition, the
scheme has been consented to by the U.K. Secretary of State for Trade and
Industry, currently the special shareholder. The scheme is subject to the
sanction of the High Court once the necessary approvals have been obtained from
the NGG shareholders. The High Court uses an objective test to evaluate the
proposed scheme. The High Court will not substitute its view for that of the
shareholders - the question is not is the scheme reasonable but could a
shareholder have reasonably approved it. Provided the scheme is fair and
equitable, the High Court will sanction it and not judge its commercial merits.
The effect of the High Court's sanction of the proposal is that, when the High
Court order is delivered to the Registrar of Companies and registered by him,
all National Grid shareholders are bound by the terms of the scheme.
3. Background of the Merger
Since entering into the MRA in 1998, the board of directors and management
of NiMo have periodically reviewed NiMo's strategic alternatives, including
internal growth, growth by acquisition, the sale of NiMo and a combination with
another company in which NiMo shareholders would continue to participate.
Consideration was given not only to electric and gas utilities, but also to the
oil and gas and telecommunications industries. NiMo has engaged in preliminary
discussions with a number of parties about potential transactions, but, except
as set forth below, no specific proposals were made and these discussions did
not evolve beyond a preliminary stage.
Since 1998, NGG has been pursuing a growth strategy in the electric
transmission and distribution market in the United States, with a particular
focus on the Northeast region where many states have been engaged in electric
deregulation. Deregulation has resulted in, among other things, the separation
of the ownership and operation of generation facilities from that of
transmission and distribution facilities. Consistent with this strategy, in
March 2000, NGG completed the acquisition of NEES (currently known as National
Grid USA), whose subsidiaries operate electric transmission and distribution
systems principally in Massachusetts, Rhode Island and New Hampshire, followed
in April 2000 by National Grid USA's acquisition of EUA, whose subsidiaries
operated transmission and distribution systems in Massachusetts and
35
Rhode Island./39 Both NEES and EUA had divested the vast majority of their
generation assets prior to being acquired by NGG and are seeking to sell the
remainder of their generation assets. Since the announcement of the NEES and EUA
acquisitions, NGG has continued to investigate the possibility of further
strategic transactions with US electric utility companies, such as Niagara
Mohawk, that have or are in the process of divesting their generation assets in
order to expand NGG's transmission and distribution operations in the US.
In November 1999, Richard P. Sergel, then President and Chief Executive
Officer of NEES, David Jones, NGG's CEO and William E. Davis, Chairman of the
Board and CEO of NiMo met to discuss the experience of the then-pending NEES/NGG
merger and to explore whether NiMo might be interested in pursuing talks with
NGG. NiMo and NGG entered into a Confidentiality Agreement on December 13, 1999
and a meeting between representatives of the parties was held on December 14,
1999, but immediately following that meeting it was decided to delay any further
substantive discussions pending the completion of the NEES/NGG merger. In April,
following completion of the NEES/NGG merger, the parties resumed discussions,
with due diligence being performed on both sides for a period of months.
In late August, a presentation about NGG and the possible terms of a
transaction was made to the NiMo board of directors at its regularly scheduled
late August off-site meeting. Following that meeting, negotiations continued,
including, without limitation, on the per share price, the mix of cash and
securities, the conditions to the merger and other terms of the merger
agreement. On August 30, 2000, a telephonic board meeting was held to update the
NiMo board of directors on the status of the negotiations.
On August 31, 2000, the NGG board of directors met to consider the proposed
transaction. At this meeting, the NGG board of directors discussed the structure
of the proposed transaction and the terms of the merger, including financial
terms. As part of this meeting, the NGG board of directors received advice from
its
----------------
39 See NEES Acquisition Order, supra, note 5, and National Grid USA (formerly
New England Electric System), Holding Co. Act Release No. 27166 (April 14,
2000).
----------------
36
financial advisors regarding the financial terms of the merger and other matters
relevant to their consideration of the proposed transaction. Following these
deliberations, the NGG board of directors unanimously approved the proposed
transaction and terms of the merger agreement and established a committee,
consisting of any two directors, one of whom had to be David Jones, Stephen Box,
NGG's Group Finance Director, or Richard P. Sergel (the "National Grid Special
Committee"), to finalize the outstanding terms of the merger agreement and to
authorize the execution and delivery of the merger agreement.
By September 3, 2000, all remaining issues had been negotiated and on
September 4, 2000, the NiMo board of directors and the National Grid Special
Committee comprising David Jones and Stephen Box adopted and approved the merger
agreement, which was then executed by the parties.
4. Financing the Merger
As described above, NiMo shareholders will receive both National Grid
ordinary shares and cash as consideration in the transaction. National Grid will
fund the cash portion of the Merger consideration with a combination of cash on
hand and bank borrowings under the Credit Facility./40 Borrowings under the
Credit Facility would be made by NGG Finance plc, a special purpose financing
subsidiary of National Grid formed in accordance with the NEES Acquisition Order
for the purpose of facilitating financings through the issuance to third parties
of securities authorized in the NEES Acquisition Order or issued under an
applicable exemption. Applicants request authorization to use NGG Finance plc
for the additional purpose of financing the Merger through borrowings under the
Credit Facility. The amount that will be borrowed under Credit Facility to
finance the Merger and the value of the ordinary shares issued in connection
with the Merger will not exceed an aggregate of $4 billion outstanding at any
one time. Based on NGG's current share price, the value of the Merger
consideration is approximately $3.1 billion. Because the Merger consideration
may increase if the Average Price of National Grid shares increases above
$51.00, the authorization requested for Merger financing requested here is
larger than the currently estimated Merger consideration. The Merger-related
financing limit is separate from the $6 billion aggregate financing limit
proposed in this Application concerning the financing of the National Grid
System post-Merger. Any Credit Facility entered into to finance the Merger will
comply with all the terms and conditions applicable to debt issued by National
Grid and discussed further below in Item 1.E./41 The pro forma effect of the
----------------
40 See supra text accompanying footnote 35.
41 A Credit Facility may have multiple intended uses. National Grid may enter
into one or more Credit Facilities to provide funding for the Merger, to
refinance previously incurred merger-related debt and to finance authorized or
permitted general corporate activities. To the extent funds from a Credit
Facility are used to fund or refinance the Merger consideration, they would be
counted against the $4 billion limit. To the extent Credit Facility borrowings
are used for other authorized or permitted corporate purposes, they would count
against the $6 billion limit.
----------------
37
Merger on the capital structure of National Grid is also described further below
in Item 3.B.1.c.
5. Management and Operations of Niagara Mohawk Following the Merger
Upon completion of the transaction, National Grid USA will assume ownership
of NiMo and its subsidiary companies, including Niagara Mohawk. Niagara Mohawk
will retain a significant presence in New York; its operating headquarters will
stay in Syracuse and local facilities for customer service, maintenance and
field operations will be maintained as necessary. National Grid will honor or
will cause the appropriate subsidiary to honor all collective bargaining
agreements in effect at the Merger Effective Time until their expiration and
assume all rights and obligations under those agreements. Niagara Mohawk will be
re-branded "Niagara Mohawk, a National Grid Company."
For at least two years following the Merger, NiMo will have an advisory
board comprised of up to 12 persons who were, immediately prior to the Merger,
serving as non-executive members of NiMo's board of directors, who are not
appointed to serve on the National Grid board of directors and who are willing
to serve in such capacity on the advisory board. The function of the advisory
board will be to advise NiMo's board of directors with respect to general
business as well as opportunities and activities in the State of New York and to
maintain and develop customer relationships in New York. The advisory board will
meet at least three times a year.
For a period of two years following the Merger, William E. Davis will serve
as Chairman of the board of directors of National Grid USA and two other current
executive officers of NiMo as determined by NGG will serve on the board of
directors of National Grid USA.
National Grid also will take all actions necessary to appoint all members
serving on the NGG board of directors immediately prior to the Merger, the
current CEO
38
of NiMo and one additional outside director/42 of the board of directors of
NiMo, as determined by NGG, to serve on the National Grid board of directors
following the Merger Effective Time.
NGG is currently a public utility holding company registered under Section
5 of the 1935 Act. In connection with the Merger and Restructuring, NGG will
cease to be an indirect holding company over National Grid USA and its
intermediate holding company parents./43 NGG will, however, continue as the
parent company of National Grid Holdings, a FUCO. Accordingly, NGG will submit
an application to deregister as a holding company under the Act and submit a
certification on Form U-57 to obtain FUCO status.
Upon completion of the Restructuring, National Grid will register as a
public utility holding company under the Act and become subject to regulation
thereunder as NGG is currently. NiMo and its subsidiaries will be subject to
regulation under the Act as subsidiaries of a registered holding company.
Applicants request that the Commission affirm by order the continued exempt
status of NiMo under Section 3(a)(1) of the Act. Applicants commit that as long
as NiMo continues to exist as a holding company, unless otherwise authorized by
the Commission, NiMo will not; (1) directly or indirectly borrow, or receive any
extension of credit or indemnity, from any public utility company in the same
holding company system or from any subsidiary company of such holding company as
prohibited under Section 12(a) of the Act, (2) sell any security which it owns
of any public utility company, or any utility assets, as restricted under
Section 12(d) of the Act and the rules thereunder, or (3) enter into or take any
step in the performance of any service, sales or construction contract to
perform any services or construction work for, or sell goods to, any associate
company which is a public utility or mutual service company as restricted under
Section 13(a) of the Act and the rules thereunder.
----------------
42 Applicants anticipate that Dr. Bonnie Hill will serve as the outside
director.
43 NGG may, however, continue to lend funds in certain circumstances to one or
more Intermediate Companies. See Item 1.E.3.(c) infra.
----------------
39
6. Benefits of the Merger
The combination of NiMo and National Grid will create the ninth largest
electric utility in the U.S. with an electric customer base of approximately 3.3
million. After the Merger, National Grid will own and operate an extensive
transmission and distribution network in the New England/New York market.
As discussed in Item 1.C.3 above, in particular in the text accompanying
footnote 33, the NYPSC issued an order authorizing the Merger and approving
Niagara Mohawk's rate plan for the period commencing on the Plan Effective Date
through December 31, 2011. The rate plan is conditioned on the closing of the
Merger. Under the rate plan electric delivery rates would be reduced by $152
million a year, equivalent to a reduction of 8.0% in delivery rates and a
reduction of 4.6% overall (considering delivery plus commodity rates). The rate
reductions reflect the assignment to ratepayers of 50% of the electric portion
of the forecast efficiency gains and synergy savings (net of costs to achieve)
agreed to by the parties to the Merger proceeding. Synergy savings over the term
of the plan are set at about $130 million per year, allocated 62% to New York,
and efficiency gains are set at $60 million per year, allocated 100% to New
York. The imputed levels of savings flow to ratepayers regardless of whether
they are achieved in fact.
The rate plan also benefits Niagara Mohawk's gas customers. It extends
through December 31, 2004 an existing freeze on Niagara Mohawk's rates for gas
delivery service, which would otherwise expire on August 31, 2003. In the event
Niagara Mohawk receives a gas delivery service rate increase to take effect at
any time, all synergy and efficiency savings from the current Merger or any
follow-on merger or acquisition associated with the gas business would be
allocated wholly to customers. In the absence of gas delivery service rate
increases, Niagara Mohawk may retain 50% of follow-on merger savings allocable
to gas service.
National Grid has demonstrated the ability to achieve targeted merger
savings and efficiencies in connection with the EUA merger./44 The direct
savings and
----------------
44 EUA was integrated into the National Grid USA business ahead of schedule. The
transaction delivered integration savings of approximately 10% of the combined
controllable cost base of NEES and EUA (over 50% more savings than originally
estimated).
----------------
40
sharing of best practices attributable to the Merger should create an even more
efficient company, leading to lower delivery costs and enhanced customer
service, making upstate New York a more attractive region for economic growth.
National Grid will have - following the acquisition of NiMo - approximately
10,000 employees in its regulated electric and gas businesses in New York and
New England. National Grid's goal is to achieve workforce reductions across the
entire National Grid USA organization by 800 to 950 positions through natural
attrition and voluntary programs. In addition, National Grid will seek to
improve the efficiency and customer service of Niagara Mohawk's core
transmission and distribution operations. A joint National Grid - Niagara Mohawk
integration team will manage the efficient integration of the two companies.
The Merger allows National Grid to build on the platform it has created in
New England and reinforce its position as a leading player in the Northeast - a
region that is at the forefront of the electric industry's restructuring in the
U.S. NiMo's strong management and experience in New York electric and gas
operations will add to National Grid USA's top quality U.S. management team and
National Grid's decade of experience operating a transmission system in a
competitive environment. The combination will strengthen National Grid's ability
to provide services that will benefit customers in today's rapidly changing U.S.
energy markets. National Grid intends to bring its combined experience to bear
in New York, and to continue to contribute to the current debate on the
restructuring of the U.S. transmission sector. The rate plan approved by the
NYPSC is an example of a long-term rate plan that benefits customers and
shareholders and includes incentives for cost control and superior customer
service. Post-closing National Grid intends to provide long-term rate stability
that will support regional economic development in upstate New York.
41
E. Financing the National Grid System Following the Acquisition
1. Summary of Current NGG System Authorization
The NEES Acquisition Order authorized the financing of the National Grid
System through May 31, 2003 through the issuance by NGG of equity and debt
securities in an amount not to exceed $4.0 billion, and guarantees in an amount
not to exceed $2.0 billion, both at any one time outstanding. NGG was also
authorized to enter into currency and interest rate swaps transactions.
Financing of NGG's U.S. Subsidiary Companies (i.e., National Grid USA, its
subsidiaries and the Intermediate Companies) was also authorized. In particular,
the existing financing of the National Grid USA Group, obtained when it was the
NEES group of companies, was extended through May 31, 2003. In addition, the
Commission authorized the continuation of the NEES system money pool ("Money
Pool"), guarantees of the obligations of, and other forms of credit support for,
the U.S. Subsidiary Companies, and the payment of dividends out of capital or
unearned surplus.
The NEES Acquisition Order also authorized National Grid General
Partnership ("NGGP") and National Grid USA and its subsidiaries to enter into an
agreement for the allocation of consolidated tax that permitted NGGP to retain
the tax-related benefits of the debt incurred to finance the NEES acquisition.
In addition, the Commission authorized the U.S. Subsidiary Companies to issue
additional shares or alter the terms of any then-existing authorized security
and authorized NGG and the U.S. Subsidiary Companies to form financing entities
for the purpose of indirectly issuing securities otherwise authorized by the
NEES Acquisition Order. Lastly, the Commission authorized NGG to finance
additional investments in exempt wholesale generators ("EWGs") and foreign
utility companies ("FUCOs") in an amount up to 50% of NGG's consolidated
retained earnings.
The financing authority was subject to various terms and conditions as
summarized below:
1. Maintenance of NGG's long-term debt rating at the investment grade level
and the maintenance of a ratio of Consolidated EBITDA to Net Interest Payable of
not less than 3:1, and a ratio of Consolidated Total Net Debt to Consolidated
EBITDA not to
42
exceed 4.75:1;/45
2. Maintenance of common stock equity/46 of at least 35% of total
capitalization/47 by National Grid USA on a consolidated basis and on an
individual basis by each National Grid USA electric utility subsidiary;/48
3. Maintenance of NGG's common stock equity as a percentage of total
capitalization, measured on a book value US GAAP basis at 28.5% or above at the
time of closing and thereafter during the term of the financing authorization,
and 30% or
----------------
45 The terms were defined in the Credit Agreement attached as Exhibit B-3 to
National Grid's Application on Form U-1, SEC File No. 70-9473. Generally,
Consolidated EBITDA means: in respect of any period, Consolidated Profits Before
Interest and Tax for that period after adding back depreciation and amortization
of goodwill and excludes the group's share of associate and joint venture
operating results. An associate interest is an equity interest of greater than
20%, but less than 50%;
Consolidated Profits Before Interest and Tax means: in respect of any period,
the consolidated net pre-taxation profits on operating activities (after adding
back Net Interest Payable and excluding any Exceptional Items and after adding
back restructuring costs incurred as a result of the Merger or other
acquisitions) of the National Grid System;
Consolidated Total Net Debt means: the aggregate principal amount (or amounts
equivalent to principal, howsoever described) comprised in the financial
indebtedness of the National Grid System at the time calculated on a
consolidated basis less cash and cash equivalents held by any member of the
National Grid System as shown in the consolidated financial statements. Cash
equivalents are readily marketable securities such as gilts (i.e. treasury
bonds) and other near-cash items such as deposits and commercial paper;
Exceptional Items: has the meaning given to it in FRS3 issued by the UK
Accounting Standards Board (i.e., material items which derive from events or
transactions that fall within the ordinary activities of the reporting entity
and which individually or, if of a similar type, in aggregate, need to be
disclosed by virtue of their size or incidence if the financial statements are
to give a true and fair view); and
Net Interest Payable means: in relation to any period, all interest, acceptance
commission and all other continuing, regular or periodic costs, charges and
expenses in the nature of interest (whether paid, payable or capitalized)
incurred by the National Grid System in effecting, servicing or maintaining all
financial indebtedness of the National Grid System less all interest and other
similar income receivable by members of the National Grid System during that
period (but only to the extent the same accrue and are receivable by the
National Grid System in a freely convertible and transferrable currency) in each
case as determined from the consolidated financial statements relating to that
period and excludes the group's share of associate and joint venture net
interest payable.
46 Common stock equity was defined to include common stock (i.e., amounts
received equal to the par or stated value of the common stock), additional paid
in capital and retained earnings.
47 The common stock equity to total capitalization ratio was calculated as
follows: equity/(gross debt + equity). Total capitalization refers to the sum of
common stock equity, preferred stock, long-term debt, short-term debt and
current maturities.
48 New England Electric Transmission Corporation and Vermont Yankee Nuclear
Power Corporation were excluded from the 35% common stock equity capitalization
standard. In addition, the 35% standard was applied to the combined
capitalization of Nantucket Electric Company and Massachusetts Electric Company.
----------------
43
above by March 31, 2002;
4. The cost of money on debt financings of NGG would not exceed 300 basis
points over that for comparable term U.S. treasury securities or government
benchmark for the currency concerned;
5. The cost of money on preferred securities or other fixed income oriented
securities of NGG, when issued, would not exceed 500 basis points over that for
comparable term U.S. treasury securities or government benchmark for the
currency concerned;
6. The underwriting fees, commissions or other similar remuneration paid in
connection with the non-competitive issue, sale or distribution of a security
would not exceed 5% of the principal or total amount of the security being
issued;
7. The aggregate amount of external debt and equity issued by NGG would not
exceed $4.0 billion, at any one time outstanding; and
8. Post-merger, NGG's additional "aggregate investment" in EWGs and FUCOs,
as defined in Rule 53 under the Act, would not exceed 50 percent of the
consolidated retained earnings of NGG.
In addition, the payment of dividends by NEES and the U.S. Utility
Subsidiaries (as defined in the NEES Acquisition Order/49) was restricted.
Dividends out of post-merger earnings would reflect a dividend payout ratio of
between 60% and 100% of earnings before the amortization of goodwill ("Gross
Earnings"), based on a rolling 5-year average. In addition, to assure that the
U.S. Utility Subsidiaries would have sufficient cash to support their
businesses, Applicants committed not to cause any of the U.S. Utility
Subsidiaries to pay more than 80% of their post-merger Gross Earnings as
dividends based on a rolling 5-year average.
2. Summary of Authorization Requested
Applicants now seek Commission authorization to finance the National Grid
System for the period beginning with the effective date of an order issued
pursuant
----------------
49 The NEES Acquisition Order defined the U.S. Utility Subsidiaries to mean: New
England Power Company, Massachusetts Electric Company, The Narragansett Electric
Company, Granite State Electric Company, Nantucket Electric Company, New England
Electric Transmission Corporation, New England Hydro-Transmission Corporation,
New England Hydro-Transmission Electric Company, Inc. and Vermont Yankee Nuclear
Power Corporation.
----------------
44
to this filing and continuing through September 30, 2004 ("Authorization
Period"). Applicants request authorization through the Authorization period for
all financing and related transactions proposed in this Application and the
extension through the Authorization Period of the Commission's financing and
related orders granted to National Grid System companies and cited herein. The
authorizations requested below amend and supplement the financing authorization
granted by the Commission in the NEES Acquisition Order and are intended to
provide for the financial integration of NiMo and its subsidiaries into the
National Grid System. The NEES Acquisition Order and all of its terms and
conditions would remain in effect and would be extended through the
Authorization Period, except as amended by the Commission's authorization of the
proposals in this Application.
3. Specifics of Proposed Financing Arrangements
(a) National Grid External Financing
National Grid proposes to issue equity and debt securities in an amount
aggregating not more than $6 billion at any one time outstanding ("Aggregate
Limit")./50 Such securities could include, but would not necessarily be limited
to, ordinary shares, preferred shares, options, warrants, long- and short-term
debt (including commercial paper), convertible securities, subordinated debt,
bank borrowings and securities with call or put options. National Grid may also
enter into currency and interest rate derivatives as described below.
National Grid proposes that the various securities to be issued would be
limited as follows, but would not in the aggregate exceed the Aggregate Limit:
----------------
50 The Aggregate Limit replaces the $4 billion limit in the NEES Acquisition
Order and does not include the Merger-related financing. Because the Aggregate
Limit applies only to securities issued and outstanding during the Authorization
Period, when a security is issued during the Authorization Period and later
redeemed or retired during the Authorization Period, the aggregate amount issued
and outstanding under the Aggregate Limit is reduced and additional financing
capacity under the Aggregate Limit is made available.
----------------
45
--------------------------------------------- ----------------------------------
Security $ billions
--------------------------------------------- ----------------------------------
Equity, including options and warrants/51 4.5
--------------------------------------------- ----------------------------------
Debt 5.0
--------------------------------------------- ----------------------------------
Except as provided in Item 1.E.3.(f) below, the terms of all such debt and
equity securities will be the same as the terms described in NGG's application
in SEC File No. 70-9519 and authorized by the Commission in the NEES Acquisition
Order. The debt incurred to finance the cash portion of the Merger consideration
and described above in Item 1.D.4., and the National Grid equity issued to NiMo
shareholders, would not be included in the Aggregate Limit.
(b) Interest Rate and Currency Risk Management Devices
National Grid proposes to enter into, perform, purchase and sell financial
instruments intended to manage the volatility of currencies and interest rates,
including but not limited to currency and interest rate swaps, caps, floors,
collars and forward agreements or any other similar agreements ("Hedging
Instruments"). National Grid would employ Hedging Instruments as a means of
prudently managing the risk associated with any of its outstanding or
anticipated debt by, for example, synthetically (i) converting variable rate
debt to fixed rate debt, (ii) converting fixed rate debt to variable rate debt,
(iii) limiting the impact of changes in interest rates resulting from variable
rate debt and (iv) providing an option to enter into interest rate swap
transactions in future periods for planned issuances of debt securities.
National Grid proposes to enter into Hedging Instruments with respect to
anticipated debt offerings ("Anticipatory Hedges"), to fix and/or limit the
interest rate or currency exchange rate risk associated with any new issuance.
In addition to the use of Hedging Instruments, Anticipatory Hedges may include
(i) a forward sale of exchange-
----------------
51 NGG currently has outstanding $742 million (translated at $1.60 equals one
Pound) of 4.25% exchangeable bonds that mature in 2008. The bonds are
exchangeable on or prior to February 8, 2008, at the option of the holder, into
common stock of NGG. Should bondholders exchange their bonds prior to maturity,
NGG may issue up to 110 million additional shares of common stock not included
in the overall Aggregate Limit.
----------------
46
traded Government Securities/52 futures contracts, Government Securities and/or
a forward swap (each a "Forward Sale"), (ii) the purchase of put options on
Government Securities (a "Put Options Purchase"), (iii) a Put Options Purchase
in combination with the sale of call options on Government Securities (a "Zero
Cost Collar"), (iv) transactions involving the purchase or sale, including short
sales, of Government Securities, or (v) some combination of a Forward Sale, Put
Options Purchase, Zero Cost Collar and/or other derivative or cash transactions,
including, but not limited to structured notes, caps and collars, appropriate
for the Anticipatory Hedges. National Grid may seek to hedge its exposure to
currency fluctuations through currency swaps or options and forward exchange or
similar transactions.
Hedging Instruments and instruments used to effect Anticipatory Hedges will
be executed on-exchange ("On-Exchange Trades") with brokers through the opening
of futures and/or options positions, the opening of over-the-counter positions
with one or more counterparties ("Off-Exchange Trades"), or a combination of
On-Exchange Trades and Off-Exchange Trades. National Grid will determine the
optimal structure of each transaction at the time of execution. Off-Exchange
Trades would be entered into only with Intermediate Companies or with
counterparties whose senior debt ratings are investment grade as determined by
Standard & Poor's, Moody's Investors Service, Inc. or Fitch IBCA, Inc.
("Approved Counterparties").
The Utility Subsidiaries, to the extent such securities are not exempt
under Rule 52(a), also propose to enter into Hedging Instruments with
third-party Approved Counterparties, but not other National Grid System
companies, on the same terms generally applicable/53 to National Grid./54 The
Utility Subsidiaries expect to use such authority principally to hedge external
debt.
----------------
52 Government Securities would include U.S. Treasury obligations, U.K. Gilts or
the appropriate government benchmark security for the currency involved in the
hedge.
53 The terms applicable to Hedging Instruments entered into by the Utility
Subsidiaries differ from those applicable to National Grid in the following way.
Hedging Instruments entered into by the Utility Subsidiaries will qualify for
hedge accounting treatment under U.S. GAAP. In addition, to the extent a Utility
Subsidiary incurs a gain or loss on a Hedging Instrument that it has entered
into to hedge a currency or interest rate risk associated with a security that
such Utility Subsidiary has issued, the gain or loss would be attributed to the
Utility Subsidiary.
----------------
47
National Grid maintains a central treasury department whose activities are
governed by policies and guidelines approved by the Board of Directors, with
regular reviews and monitoring by a standing committee of the Board. The
treasury department operates as a service center rather than as a profit center
and is subject to internal and external audit. Treasury activities are managed
in a non-speculative manner and all transactions in Hedging Instruments would be
matched to an underlying business purpose. Consequently, National Grid, the
Intermediate Companies and the Utility Subsidiaries would not enter into
transactions in Hedging Instruments for speculative purposes or to finance
businesses that are not permitted, authorized or exempt under the Act. Such
transactions will qualify for hedge-accounting treatment under generally
accepted accounting principles ("GAAP") in the US or the UK. In the event
transactions in Hedging Instruments are qualified for hedge accounting treatment
under UK GAAP, but not under US GAAP, National Grid's financial statements filed
in accordance with Form 20-F will contain a reconciliation of the difference
between the two methods of accounting treatment. No gain or loss on a Hedging
Instrument entered into by National Grid or the Intermediate Companies, or
associated tax effects, will be allocated to National Grid USA or NiMo or their
subsidiaries, regardless of the accounting treatment accorded to the transaction
and consequently, National Grid USA, NiMo and their subsidiaries will not be
adversely affected by such transactions.
(c) Subsidiary Company Financings
The Utility Subsidiaries will generally finance their operations on an
exempt basis according to Rule 52(a) under the Act, and non-utility subsidiaries
will generally rely on Rule 52(b). To the extent their financing is not exempt,
the Utility Subsidiaries other than Niagara Mohawk will finance their operations
in accordance with the authorization granted in the NEES Acquisition Order as
extended through the Authorization Period. The NYPSC regulates the issuance by
Niagara Mohawk of equity securities and debt with maturities greater than one
year. Consequently, Niagara
----------------
54 The Intermediate Companies have received authorization to enter into certain
currency derivatives with National Grid and other Intermediate Companies. See
National Grid Group plc, Holding Co. Act Release No. 27445 (October 22, 2001).
The authorization granted by the Commission in that order would continue to
apply to the National Grid System after the NiMo Merger where National Grid
takes the place of NGG as the top holding company in the National Grid System.
----------------
48
Mohawk requests authorization to issue to associate companies and third parties
debt securities with maturities of one year or less in an aggregate amount
outstanding at any one time not to exceed $1 billion.
NiMo has requested that the Commission find that it continues to be an
exempt holding company under Section 3(a)(1) of the Act. As a technical matter,
however, NiMo will remain a subsidiary of a registered holding company.
Applicants request authorization for NiMo to issue and sell securities, other
than equity and convertible securities, to associate companies, but not NiMo's
direct and indirect subsidiaries (other than special purpose financing
subsidiaries), for the purpose of financing NiMo's existing business and its
respective subsidiaries and future authorized or permitted businesses, provided,
however, that the foregoing shall not restrict NiMo from issuing securities to
its immediate parent company./55 Debt securities issued by NiMo would bear
interest at the rates applicable to National Grid USA Group companies under the
Best Rate Method described below. To the extent NiMo invests any funds in its
FUCO subsidiary, CNP Limited or its subsidiaries, such amounts would be counted
against the overall EWG and FUCO investment limits applicable to National Grid.
All borrowings by NiMo would be unsecured, except that it may be guaranteed as
provided in Item 1.E.3.(e) below.
To provide increased flexibility to finance the operations of the National
Grid USA Group, the Intermediate Companies and National Grid USA propose to
issue and sell securities to: (1) direct and indirect parent companies, and; (2)
NGG and its associate company subsidiaries (except that such companies would not
purchase equity and convertible debt securities from the Intermediate Companies
and National Grid USA)./56 The Intermediate Companies and National Grid USA also
propose to acquire securities from their direct or indirect subsidiary
----------------
55 NiMo would not issue securities to third parties.
56 After the Restructuring, NGG will certify as a FUCO and become a holding
company over National Grid Holdings, the current FUCO holding company in the
National Grid System.
----------------
49
companies. In no case would the Intermediate Companies, National Grid USA or
NiMo borrow, or receive any extension of credit or indemnity from any of their
respective direct or indirect subsidiary companies. Further, the Intermediate
Companies, National Grid USA or NiMo would not acquire equity or convertible
securities from indirect subsidiaries if the result would be to create a
minority interest in a public utility company unless otherwise authorized or
permitted by the Commission. The Intermediate Companies would not issue
securities to third parties. All borrowings by the Intermediate Companies would
be unsecured, but may be guaranteed by National Grid or other Intermediate
Companies. Debt offerings by the Intermediate Companies and National Grid USA
would have short, medium and long-term maturities. Short-term debt would be less
than one year in maturity, medium-term debt would have maturities up to 5 years,
and long-term debt would have maturities up to 50 years.
The proposed financing authority provides additional flexibility to
structure financings within the National Grid System. From time-to-time, it is
advantageous for an Intermediate Company or National Grid USA to borrow funds
from the parent of its immediate parent (or a more remote company) or from an
associate company on the FUCO side of the National Grid System./57 Such loans
allow National Grid the flexibility to meet the short-term working capital
requirements of National Grid USA and its subsidiaries where the funds could be
raised at a lower cost by National Grid. When funds are needed on short notice,
it is often easier from a financial/treasury management perspective to make
loans directly to National Grid USA rather than through each Intermediate
Company. The numerous board meetings and approvals necessary to fund capital
needs through the Intermediate Companies can be time consuming and prevent the
rapid funding of short-term capital needs. Loans from associate companies also
allow more efficient use of surplus cash, minimizing having cash on deposit
within the group when other group companies have external borrowings. The
requested flexibility allows National Grid and National Grid USA to reduce the
number of unused committed bank facilities while maintaining liquidity to meet
working capital requirements. When unused bank facilities are eliminated the
fees associated with maintaining the facilities are saved.
----------------
57 Such flexible financing authorization was provided by the Commission in
National Grid Group plc, Holding Co. Act Release No. 27455 (October 22, 2001).
----------------
50
For reasons of economic efficiency, the terms and conditions of any
financings between an Intermediate Company and its direct or indirect parent, or
between an Intermediate Company and NGG or its associate company subsidiaries
(i.e., the companies in the FUCO chain) will be on market terms. Financing on
market terms assists National Grid to comply with U.K. tax regulations. Market
rate financing assures that intercompany loans will not be used to transfer
profits from one related entity to another. Market rates also allow the lending
entity to recover its true costs of liquidity, and the risks associated with
credit quality and interest rate and currency variability. In all cases,
however, the interest rates and maturity dates of any debt security issued by
National Grid USA or NiMo to an associate company would be designed to parallel
the lower of the effective cost of capital of National Grid or other available
terms under the Best Rate Method, as explained below./58
In practice, this means that for short-term loans from associate companies,
the National Grid USA Group companies would incur interest at the rate, as
published in the Wall Street Journal on the day of the borrowing (or the most
recently published rate when borrowings occur on days when the Wall Street
Journal is not published), for high grade 30-day commercial paper issued by
major corporations and sold through dealers plus an "at cost" allocation of
National Grid's funding costs. For medium and long-term loans to National Grid
USA Group companies, unless there is a directly identifiable external borrowing
intended to finance such company, National Grid would use a rate equal to the
effective rate that National Grid would pay on the issuance of a comparable
security in a competitive offering to nonaffiliated banks or other lenders.
The interest rates paid by the National Grid USA Group companies on loans
from National Grid and the other companies in the National Grid System should
not result in an increase in the cost of capital used by the National Grid USA
Group. If National Grid determines, however, that its lending rate is higher
than the cost of funds a National Grid USA Group company would incur in a direct
borrowing at that time from a nonassociate, the interest rate applied to
National Grid USA Group borrowings would be based on that lower cost of funds.
To the extent that a National Grid USA Group
----------------
58 Borrowings by an Intermediate Company, National Grid USA or NiMo would not be
subject to Rule 52 because each is a holding company.
----------------
51
company borrows from any other associate company, the same terms would apply.
Consequently, loans to the National Grid USA Group would be at a rate equal to
or lower than National Grid's cost of funds, the cost of funds incurred by an
associate company lender to a company in the National Grid USA Group, or the
rate available to the respective National Grid USA Group company in a direct
borrowing at that time from a nonassociate (the "Best Rate Method").
National Grid would determine whether the lending rate in an associate
company loan is equal to or lower than the rate available to a National Grid USA
Group company in a direct borrowing from a nonassociate (i.e., a market rate),
in much the same manner practiced by an independent bank. National Grid would
take into account the nature of National Grid USA's business, or that of the
individual subsidiary to be financed, evaluate its capital structure, the
particular risks to which it is subject, and generally prevailing market
conditions. National Grid would also evaluate and take into account information
from third parties such as banks that would indicate the prevailing market rates
for similar businesses. In particular, National Grid will obtain information on
the range of rates used by one or more banks for loans to similar businesses.
Such independent third-party information would serve as an index against which
an appropriate market rate would be determined.
National Grid will report the amount and terms of borrowings by National
Grid USA in the Rule 24 certificate filed by National Grid under the terms of
the authorization in this application. See Item 1.H, infra. In addition, if a
National Grid USA Group company borrows from an associate company on the FUCO
side of the National Grid System the Rule 24 certificate will list a minimum of
at least three other sources of funds and their rates and terms and, consistent
with the procedure described above, provide a cost/benefit rationale explaining
why funding from the FUCO associate was the best option.
National Grid USA also requests authorization to issue debt securities to
third parties through public or private offerings. Any such issuances will be
limited to an aggregate amount outstanding at any one time of $500 million. All
borrowings by National Grid USA would be unsecured.
52
(d) Money Pool
National Grid requests authority to continue the operation of the Money
Pool as previously authorized. In addition, Applicants propose that NiMo's
current subsidiary companies, except for any EWG, FUCO or Exempt
Telecommunications Company ("ETC"), be authorized to both lend to and borrow
from the Money Pool under the same terms and conditions authorized in the NEES
Acquisition Order. Applicants also propose that any newly-formed or acquired or
currently non-participating National Grid subsidiary company, including EWGs,
and FUCOs, but excluding ETCs, may participate in the Money Pool as a lender
only. Applicants request that the Commission reserve jurisdiction over the
participation of any newly-formed or acquired or currently non-participating
National Grid subsidiary company as a Money Pool borrower pending completion of
the record.
(e) Guarantees
National Grid requests authorization to enter into guarantees, obtain
letters of credit, enter into guaranty-type expense agreements or otherwise
provide credit support with respect to the obligations of the Subsidiaries as
may be appropriate to enable such system companies to carry on their respective
authorized or permitted businesses. In addition, authority is requested for the
Nonutility Subsidiaries, up to an aggregate amount of $1 billion, to enter into
similar arrangements with one another, to the extent such transactions are not
exempt under Rule 45. Guarantees entered into by National Grid in support of the
external obligations of Subsidiaries will be subject to a $2 billion limit
(i.e., not included in the Aggregate Limit). Where National Grid assumes a
guarantee previously issued by NGG, such assumption would not be counted as the
issuance of a new guarantee. (In the NEES Acquisition Order, the Commission
granted NGG authority to issue up to $2 billion in guarantees.) Certain
guarantees may be in support of obligations that are not capable of exact
quantification. In these cases, National Grid will determine the exposure under
a guarantee for purposes of measuring compliance with the guarantee limit by
appropriate means including estimation of exposure based on loss experience or
projected potential payment amounts.
Each of the Intermediate Companies, National Grid USA and NiMo is also
53
seeking authorization to issue guarantees and other forms of credit support to
direct and indirect subsidiaries. Guarantees entered into by such companies in
support of the external obligations of direct or indirect subsidiaries would be
subject to a limit of $1 billion, calculated as stated above. The fee, if any,
charged for any guaranty will not exceed the cost of obtaining the liquidity
necessary to perform the guaranty for the period of time the guaranty remains
outstanding.
(f) New System Financing Parameters
National Grid proposes that the financing of the National Grid System be
subject to new parameters designed to assure that all financings are consistent
with the continued financial soundness of the National Grid System. In place of
the financing parameters from the NEES Acquisition Order described in Item
1.E.1. above, National Grid proposes that, as applicable, the following
conditions would apply to all National Grid System financings that are the
subject of this Application:
1. Any long-term debt or preferred stock issued by National Grid in a
public offering will, when issued, be rated investment grade by a nationally
recognized statistical rating organization;
2. National Grid will maintain common stock equity/59 as a percentage of
total capitalization,/60 measured on a book value US GAAP basis, of at least
28.5% or above at the time of the closing of the Merger and thereafter, and 30%
or above by March 31, 2002;
3. National Grid USA, on a consolidated basis, and National Grid USA's
electric utility subsidiaries, on an individual basis except as noted below,
would maintain common stock equity of at least 30% of total capitalization. In
addition, if such companies issue long-term debt or preferred stock in a public
offering subject to Commission authorization such securities would, when issued,
be rated investment grade by a nationally recognized statistical rating
organization;
4. The cost of money on National Grid's debt or preferred stock financings
would not exceed the cost of comparable term U.S. treasury securities or
government benchmark for the currency concerned plus the margin demanded in the
financial markets
----------------
59 Common stock equity would include common stock (i.e., amounts received equal
to the par or stated value of the common stock), additional paid in capital,
retained earnings and minority interests.
60 Applicants would calculate the common stock equity to total capitalization
ratio as follows: common stock equity (as defined in the immediately preceding
footnote)/(common stock equity + preferred stock + gross debt). Gross debt is
the sum of long-term debt, short-term debt and current maturities.
----------------
54
in a competitive offering by an issuer of such securities with National Grid's
credit rating;
5. For Utility Subsidiaries requesting authority to issue debt under this
Application (Niagara Mohawk, Mass. Electric, Nantucket, Narragansett, NEPCO and
Mass Hydro), the cost of money on debt securities issued to third parties would
not exceed the cost of comparable term U.S. treasury securities or government
benchmark for the currency concerned plus the margin demanded in the financial
markets in a competitive offering by an issuer of such securities with the
respective Utility Subsidiary's credit rating.
6. The cost of money on National Grid USA's debt or preferred stock
financings would not exceed the cost of comparable term U.S. treasury securities
or government benchmark for the currency concerned plus the margin demanded in
the financial markets in a competitive offering by an issuer of such securities
with National Grid USA's credit rating;
7. The underwriting fees, commissions or other similar remuneration paid in
connection with the non-competitive issue, sale or distribution of a security
would not exceed 5% of the principal or total amount of the security being
issued.
The Utility Subsidiaries that will be part of the National Grid system
post-Merger, their financing authorizations and their commitments to comply with
the 30% minimum equity standard are summarized below:
----------------------- --------------------- -------------------- --------------------- --------------------
Utility Subsidiary Principal Activity Status Under 30% Existing or Notes
Minimum Common Requested
Equity Standard Short-Term Debt
Authorization
----------------------- --------------------- -------------------- --------------------- --------------------
Niagara Mohawk/61 electric Will maintain 30%. $1 billion Other than
transmission & requested. short-term, will
distribution, gas rely on Rule 52.
distribution
----------------------- --------------------- -------------------- --------------------- --------------------
Massachusetts electric Will maintain 30% $275 MM/63 Other than
Electric Co. ("Mass. distribution on a combined short-term, will
Electric") basis with rely on Rule 52.
Nantucket./62
----------------------- --------------------- -------------------- --------------------- --------------------
----------------
61 As of September 30, 2001, Niagara Mohawk's capital structure was: (a)
long-term debt, 58.1%; (b) short-term debt 7.2% (c) preferred stock, 5.9%,
common equity, 28.8%. It is possible that Niagara Mohawk may enter into a
transaction to securitize its stranded cost regulatory asset. The effect of such
securitization would not be included for purposes of calculating compliance with
any equity capitalization commitment if the securitization was authorized by the
NYPSC.
62 Mass. Electric and Nantucket are combined to calculate the 30% minimum common
equity ratio.
63 National Grid USA, Holding Co. Act Release No. 27381 (April 19, 2001).
----------------
55
----------------------- --------------------- -------------------- --------------------- --------------------
Nantucket Electric electric Will maintain 30% $6 MM/64 Other than
Co. ("Nantucket") distribution on a combined short-term, will
basis with Mass. rely on Rule 52.
Electric.
----------------------- --------------------- -------------------- --------------------- --------------------
The Narragansett electric Will maintain 30%. $145 MM/65 Other than
Electric Co. distribution short-term, will
rely on Rule 52.
----------------------- --------------------- -------------------- --------------------- --------------------
Granite State electric Will maintain 30%. -- Will rely on Rule
Electric Co. distribution 52 for all
borrowings.
----------------------- --------------------- -------------------- --------------------- --------------------
New England Power Co. electric Will maintain 30%. $750 MM/66 Other than
("NEPCO") transmission short-term, will
operations, power rely on Rule 52.
marketing
----------------------- --------------------- -------------------- --------------------- --------------------
New England Electric electric Will not maintain -- Will rely on Rule
Transmission Corp. transmission 30%./67 52 for all
("NEET") borrowings.
----------------------- --------------------- -------------------- --------------------- --------------------
New England electric Will maintain 30%. -- Will rely on Rule
Hydro-Transmission transmission 52 for all
Corp. ("NH Hydro") borrowings.
----------------------- --------------------- -------------------- --------------------- --------------------
----------------
64 Id.
65 Id.
66 New England Electric System, Holding Co. Act Release No. 26881 (June 2,
1998).
67 NEET owns and operates a direct current/alternating current converter
terminal facility for the first phase of the Hydro-Quebec and New England
interconnection and six miles of high voltage DC transmission line in New
Hampshire. The facilities are financed with a high level of debt on a project
basis. The New England utilities participating in Phase 1 are responsible for
the full costs of the facilities under a support agreement. It would be
disruptive and economically inappropriate to refinance the facilities with
additional equity since that would increase the cost of operating the facility.
----------------
56
----------------------- --------------------- -------------------- --------------------- --------------------
New England electric Will maintain $25 MM/68 Other than short
Hydro-Transmission transmission 30%. term will rely on
Electric Corp. Rule 52.
("Mass. Hydro")
----------------------- --------------------- -------------------- --------------------- --------------------
Vermont Yankee nuclear plant Will not maintain -- --
Nuclear Power Corp. operations 30%./69
("Vermont Yankee")
----------------------- --------------------- -------------------- --------------------- --------------------
(g) Payment of Dividends Out of Capital or Unearned Surplus
National Grid proposes to acquire NiMo shares at a premium of approximately
37%, relative to the closing price of NiMo shares on September 1, 2000. Because
the conditions for pooling of interest accounting are not met in this
transaction, the purchase accounting method applies. Under GAAP, the purchase
accounting method requires the premium, together with transaction costs, to be
recorded as goodwill on the acquired company's accounts./70 In accordance with
the Commission's Staff Accounting Bulletin No. 54, Topic 5J, National Grid plans
to "push down" and allocate the goodwill among Niagara Mohawk and the other NiMo
subsidiary companies. This approach is fully consistent with National Grid's
accounting for the NEES acquisition and National Grid USA's acquisition of EUA,
both recently approved by the Commission, as well as US GAAP and FERC precedent.
National Grid expects to account for the goodwill under FASB 142, "Goodwill and
Intangible Assets." Under these standards goodwill would not
----------------
68 New England Electric System, Holding Co. Act Release No. 26768 (October 29,
1997).
69 Vermont Yankee, the licensed operator of the Vermont Yankee nuclear facility,
is 20% owned by NEPCO. Given National Grid's inability to control the capital
structure of Vermont Yankee, Applicants cannot commit to maintaining a minimum
common equity level in Vermont Yankee.
70 Goodwill is the difference between the aggregate values allocated to all
identifiable tangible and intangible (non-goodwill) assets and the sum of (1)
the total consideration paid for NiMo, and (2) the fair value of the liabilities
assumed.
----------------
57
be amortized against earnings. Instead, goodwill would be reviewed for
impairment and written down and expensed only in a period in which the goodwill
recorded value exceeded its fair value.
As a result of the application of the purchase method of accounting to the
Merger, the current retained earnings of NiMo and its subsidiaries, including
Niagara Mohawk, will be eliminated and the value of the goodwill will be
reflected as additional paid-in-capital in their financial statements. These
accounting practices will leave NiMo and its subsidiaries without retained
earnings, the traditional source of dividend payment, but, nevertheless, a
strong balance sheet. Consequently, Niagara Mohawk requests authorization to pay
dividends or to acquire, retire or redeem its securities using its capital or
unearned surplus as described below. Applicants also request that NiMo and its
nonutility subsidiaries be permitted to pay dividends or to acquire, retire or
redeem their securities without restriction as permitted by applicable state and
corporate law or applicable financing covenants. In the discussion below, the
term "dividends" refers broadly to payments in the form of dividends or the
acquisition, retirement or redemption of securities of the issuer.
In addition, Applicants request that the Commission eliminate the
restriction in the NEES Acquisition Order limiting the payment of dividends by
the U.S. Utility Subsidiaries to 80% of their post-NEES merger Gross Earnings,
based on a rolling 5-year average. The restriction is unnecessary in light of
the continuing commitment regarding minimum equity capitalization that would
apply to such companies./71
To allow Niagara Mohawk to pay dividends after the Merger, Applicants
propose that Niagara Mohawk will limit dividends paid on its common stock to an
amount equal to its retained earnings prior to the Merger plus earnings after
----------------
71 See Item 1.E.3.(f) above.
----------------
58
the Merger adjusted to add back amounts attributable to the write down of
goodwill (a non-cash item) ("Income Available for Dividends"). Consequently,
Income Available for Dividends will reflect Niagara Mohawk's income before the
deduction for goodwill impairment. In addition, Income Available for Dividends
would be calculated by excluding non-cash charges to income resulting from
accounting changes or charges to income resulting from significant unanticipated
events. In the future, Niagara Mohawk may seek to pay further dividends to
distribute cash obtained in connection with major transactions, such as asset
sales, divestitures or securitization transactions or for the purpose of
reducing Niagara Mohawk's capital ratio to a level appropriate to its business
risk. Niagara Mohawk proposes to pay such additional dividends only up to the
proceeds of such transactions. No dividends would be paid out of Niagara
Mohawk's paid in capital accounts unless Niagara Mohawk has an investment grade
credit rating for its debt./72
In determining whether to permit a registered holding company subsidiary to
pay dividends out of capital surplus, the Commission reviews various factors
indicative of the financial condition of the company and, generally, whether the
proposed dividends would be appropriate in the public interest. See Eastern
Utilities Associates, Holding Co. Act Release No. 25330 (June 13, 1991) ("EUA"),
and The National Grid Group plc, Holding Co. Act Release No. 27154 (Mar. 15,
2000).
Niagara Mohawk is forecast to have sufficient cash to pay dividends in the
amounts contemplated. As of September 30, 2001, Niagara Mohawk had cash balances
----------------
72 Niagara Mohawk's long-term senior outstanding debt would maintain an
investment grade rating from at least one of the major credit rating agencies.
----------------
59
of $436 million. Applicants anticipate that Niagara Mohawk's cash flow from
operations after the Merger will improve and "income available for dividends"
should be adequate to support the requested dividend authorization and to meet
Niagara Mohawk's operating needs. In addition, the amortization of goodwill is a
non-cash expense that will not affect the cash flow of Niagara Mohawk.
Consumer interests will also be protected since the accounting for the
Merger will not affect Niagara Mohawk's historical rate base. As a result of
"push down" accounting, for FERC and state commission reporting purposes,
goodwill will be recorded in Niagara Mohawk's books in a manner that leaves the
original historical basis of Niagara Mohawk's assets undisturbed.
The proposed dividend payments are also in the interest of investors and
the public because they allow the capital structure of Niagara Mohawk to be
adjusted to more appropriate levels of debt and equity consistent with the
maintenance of Niagara Mohawk's sound financial condition. The NYPSC's on-going
monitoring of Niagara Mohawk's dividend policy also will ensure that the
requested authority is appropriate and in the public interest.
(h) Tax Allocation Agreement
In the NEES Acquisition Order, the Commission authorized NGGP and the
National Grid USA Group to enter into an agreement to allocate consolidated
taxes. The agreement permitted NGGP to retain the value of the tax deduction
associated with the debt incurred by NGG to finance the NEES and EUA
acquisitions. Applicants propose to amend the National Grid USA Group tax
allocation agreement to add NiMo and its subsidiaries as members. Consistent
with the relief granted in the NEES Acquisition Order, Applicants request that
the Commission authorize NGGP, its direct subsidiary, National Grid Holdings
Inc. ("NG Holdings"), or its agent, a direct special purpose subsidiary,
(collectively, "NGGP"), to retain: (a) the value of the tax deduction associated
with the debt incurred by National Grid to finance the Merger and; (b) the value
of deductions for merger and acquisition related expenses that are prohibited
from being charged or allocated to National Grid USA's subsidiaries
(collectively, the "Tax
60
Benefits")./73 Such merger and acquisition related expenses include various
costs allocated to merger and acquisition projects that failed to result in a
completed transaction. Applicants request that the Commission reserve
jurisdiction over the retention of the value of the expenses described in (b)
above, until the record is complete with respect to this matter.
The Tax Allocation Agreement provides for the retention by NGGP of the Tax
Benefits, rather than the allocation of such Tax Benefits to subsidiary
companies without payment as would otherwise be required by Rule 45(c)(5). The
form of proposed Tax Allocation Agreement is attached as Exhibit Q-1. If not
reinvested in National Grid USA or another business, National Grid expects that
funds retained by NGGP under the tax allocation agreement will flow up the chain
of Intermediate Companies to National Grid through dividends, interest payments,
share repurchases and the repayment of principal.
Provisions in a tax allocation agreement between a registered holding
company and its subsidiaries must comply with Section 12 of the Act and Rule 45
thereunder. Rule 45(a) of the Act generally prohibits any registered holding
company or subsidiary company from, directly or indirectly, lending or in any
manner extending its credit to or indemnifying, or making any donation or
capital contribution to, any company in the same holding company system, except
pursuant to a Commission order. Rule 45(c) provides that no approval is required
for a tax allocation agreement between eligible associate companies in a
registered holding company system, that "provides for allocation among such
associate companies of the liabilities and benefits arising from such
consolidated tax return for each tax year in a manner not inconsistent with" the
conditions of the rule. Of interest here, Rule 45(c)(5) provides that:
The agreement may, instead of excluding members as provided in
paragraph (c)(4), include all members of the group in the tax
allocation, recognizing negative corporate taxable income or a
negative corporate tax,
----------------
73 The NEES Acquisition Order provides that "charges associated with future
mergers and acquisitions may be allocated to NEES [now, National Grid USA]
and/or to other National Grid Group companies, but not to the NEES
Subsidiaries." NEES Acquisition Order Appendix C at C-2. Because these charges
are not borne by the subsidiaries they are in all relevant respects equivalent
to the acquisition-related debt interest expense.
----------------
61
according to the allocation method chosen. An agreement under this
paragraph shall provide that those associate companies with a positive
allocation will pay the amount allocated and those subsidiary
companies with a negative allocation will receive current payment of
their corporate tax credits. The agreement shall provide a method for
apportioning such payments, and for carrying over uncompensated
benefits, if the consolidated loss is too large to be used in full.
Such method may assign priorities to specified kinds of benefits.
(Emphasis added.)
Under the rule, only "subsidiary companies," as opposed to "associate companies"
(which includes the holding company in a holding company system), are entitled
to be paid for corporate tax credits. However, if a tax allocation agreement
does not fully comply with the provisions of Rule 45(c), it may nonetheless be
approved by the Commission under Section 12(b) and Rule 45(a).
In connection with the 1981 amendments to Rule 45, the Commission explained
that the distinction between associate companies, on the one hand, and
subsidiary companies, on the other, represented a policy decision to preclude
the holding company from sharing in consolidated return savings. The Commission
noted that exploitation of utility companies by holding companies through the
misallocation of consolidated tax return benefits was among the abuses examined
in the investigations underlying the enactment of the 1935 Act. Holding Co. Act
Release No. 21968 (March 25, 1981), citing Sen. Doc. 92, Part 72A, 70th
Congress, 1st Sess. at 477-482. It must be noted, however, that the result in
Rule 45(c)(5) is not dictated by the statute and, as the Commission has
recognized, there is discretion on the part of the agency to approve tax
allocation agreements that do not, by their terms, comply with Rule 45(c) -- so
long as the policies and provisions of the Act are otherwise satisfied. In this
matter, where the holding company (i.e., NGGP) is seeking only to receive
payment for Tax Benefits that have been generated by it, in the limited and
discrete circumstances where the benefits arose in connection with
acquisition-related debt and merger and acquisition expenses, the proposed
arrangement will not give rise to the types of problems (e.g., upstream loans)
that the Act was intended to address. Compare Section 12(a) of the Act. It is
also important to note that the tax allocation agreement provides that "under no
circumstances shall the amount of tax allocated to a Member exceed its separate
tax liability." Consequently, the National Grid USA group is effectively
insulated from the financial
62
abuses targeted by the Act. For these reasons, the Applicants request that the
Commission approve the Tax Allocation Agreement. A memorandum included as
Exhibit Q-2 to the Application provides further arguments in support of the
proposed tax allocation relief.
(i) Changes in Capital Stock of Subsidiaries
The NEES Acquisition Order authorized Applicants to increase the amount or
change the terms of the authorized capital securities of National Grid USA, its
subsidiaries and the Intermediate Companies, without additional Commission
approval./74 The terms that may be changed include dividend rates, conversion
rates and dates, and expiration dates. Applicants request that this
authorization extend to NiMo and its wholly-owned subsidiaries. The changes to
capital stock would affect only the manner in which financing is conducted by
those companies and would not alter any of the terms or limits proposed in this
Application or prior Commission orders.
(j) Financing Entities
The NEES Acquisition Order authorized NGG, the Intermediate Companies and
the National Grid USA Group to organize financing entities for the purpose of
facilitating financings through their issuance to third parties of income
preferred securities or other securities authorized hereby or issued pursuant to
an applicable exemption. Applicants request authorization for NiMo and its
subsidiaries to organize and employ financing entities in the same manner as
authorized in the NEES Acquisition Order. Any amounts issued by financing
entities to third parties pursuant to the Commission's authorization will count
against any applicable limits for the immediate parent of such financing entity.
However, the underlying intra-system mirror debt and parent guarantee will not
count against any financing or guarantee limits. If financing entities organized
by National Grid, National Grid USA or the Utility Subsidiaries, except NEET and
Vermont Yankee, issue long-term debt or preferred stock in a public offering,
such securities would, when issued, be rated investment grade by a
----------------
74 Applicants requested that the Commission reserve jurisdiction over changes to
the capital stock of National Grid USA and any of its subsidiary companies that
is not wholly-owned directly or indirectly by National Grid.
----------------
63
nationally recognized statistical rating organization.
(k) EWG-FUCO Financing Limits
National Grid may use the proceeds of the financings proposed in this
Application, in part, for investments in EWGs and FUCOs. Under Rule 53, in
determining whether to approve the issue or sale of a security by National Grid
to finance an EWG or FUCO investment, the Commission must consider the
circumstances surrounding the proposed issuance and, if the issuance cannot
qualify for the safe harbor in Rule 53(a), the applicant must demonstrate that
the proposed EWG and FUCO financing will not have an adverse impact on the
financial integrity of the registered holding company system, any utility
subsidiary, its customers or on the ability of state commissions to protect such
subsidiary or customers.
National Grid's aggregate investment, as defined in Rule 53(a), in EWGs and
FUCOs as of September 30, 2001 was $3,092 million./75 As of September 30, 2001,
National Grid's consolidated retained earnings calculated in accordance with
U.S. GAAP was $3,533 million. Consequently, National Grid's aggregate investment
in EWGs and FUCOs as a percentage of its consolidated retained earnings was 88%
as of September 30, 2001. In the NEES Acquisition Order, National Grid was
authorized to finance additional EWG and FUCO investments and operations up to a
total aggregate investment of $4.406 billion at any one time.
National Grid now proposes to succeed to the authority previously granted
to NGG. National Grid proposes to increase its authority to issue and sell
securities for the purpose of financing investments in EWGs and FUCOs to $5.406
billion at any one time outstanding during the Authorization period. Any new
investment through CNP
----------------
75 Aggregate investment is defined in Rule 53 under the Act to include all
amounts invested, or committed to be invested, in EWGs and FUCOs, for which
there is recourse, directly or indirectly to National Grid. This limit is
applied on a net basis and to the extent National Grid's previous investments or
guarantees have been repaid or have expired, those investments are netted from
the total aggregate investment. In its Certificate of Notification filed on
November 28, 2001, NGG reported an aggregate investment in EWGs and FUCOs as of
September 30, 2001 of $4,572 million. This figure was calculated based on the
equity method of accounting and differs from the historical cost of National
Grid's EWG and FUCO investments that is presented here. National Grid will file
an amended Certificate of Notification shortly to report the aggregate
investment in EWGs and FUCOs in accordance with the historical cost procedure
set forth in Rule 53.
----------------
64
Limited and its subsidiaries, except the transactions in progress described in
this Application, will count against the proposed limit on investment in EWGs
and FUCOs.
Currently and post-Merger, the conditions of Rule 53(c) will be satisfied.
The soundness of National Grid's security structure is demonstrated by its high
credit rating. Consistent with the maintenance of investment grade status,
National Grid expects to have a post-Merger long-term debt credit rating of
A./76 National Grid's capitalization is currently sound and should continue to
be sound post-Merger. National Grid's consolidated capitalization (on a U.S.
GAAP basis) over the recent past is shown in the table below. The capital
structure of the combined system post-Merger is shown in a table in Item 1.C.4.
------------------------- --------------------------- ----------------------- ------------------------------
National Grid March 31, 1999 March 31, 2000 September 30, 2001
as at:
------------------------- --------------------------- ----------------------- ------------------------------
($ mm) (%) ($ mm) (%) ($ mm) (%)
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
Debt, preferred stock 3,676 60.3 6,120 62.0 5,936 59.1%
and minority interests
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
Common stock equity 2,416 39.7 3,753 38.0 4,106 40.9%
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
Total 6,092 100% 9,874 100% 10,042 100%
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
National Grid's equity market value to book value ratios and stock price to
earnings ratios over recent years are provided below:
----------------
76 National Grid is currently on credit watch and it expects to have a
post-Merger long term credit rating from Moody's and Standard and Poor's in the
single A band.
----------------
65
--------------------------------------------------------------------------------------------------------
Market to Book Value
--------------------------------------------------------------------------------------------------------
As at: Mar. 31, 1998 Mar. 31, 1999 Mar. 31, 2000 Mar. 31, 2001 Sept. 30, 2001
------------------ ----------------- ---------------- -------------- ------------------ -----------------
$mm $mm $mm $mm $mm
------------------ ----------------- ---------------- -------------- ------------------ -----------------
Market value of 8,552 11,084 13,611 11,468 9,399
equity
------------------ ----------------- ---------------- -------------- ------------------ -----------------
Book value of 1,022 2,416 3,753 4,146 4,106
equity (under
U.S. GAAP)
------------------ ----------------- ---------------- -------------- ------------------ -----------------
Ratio of market 8.4x 4.6x 3.6x 2.8x 2.3x
to book value
(times)
------------------ ----------------- ---------------- -------------- ------------------ -----------------
--------------------------------------------------------------------------------------------------------
Price/Earnings Ratios
--------------------------------------------------------------------------------------------------------
As at: Mar. 31, 1998 Mar. 31, 1999 Mar. 31, 2000 Mar. 31, 2001 Sept. 30,
2001
---------------------- -------------- ------------------ ------------------ -------------- -------------
$ $ $ $ $
---------------------- -------------- ------------------ ------------------ -------------- -------------
Basic earnings per
share (U.S. GAAP)/77 0.52 1.13 1.10 0.78 0.27
---------------------- -------------- ------------------ ------------------ -------------- -------------
Ratio of price to
earnings 11.2x 6.6x 8.4x 9.9x 23.4x
---------------------- -------------- ------------------ ------------------ -------------- -------------
The recent growth in National Grid's retained earnings and consolidated
common stock equity is shown below:
----------------
77 Unadjusted for the net income arising on the sale of Energis
plc ("Energis") shares in the year ended March 31, 1999 of $1,149.8 million.
Unadjusted for the net income arising on the reduction in NGG's interest in
Energis in the year ended March 31, 1998 of $184.5 million.
----------------
66
--------------------- --------------- --------------- ----------------- --------- --------- ------------------
As at: Mar. 31, 1997 Mar. 31, 1998 Mar. 31, 1999 Mar. Mar. Sept. 30, 2001
31, 2000 31, 2001
--------------------- --------------- --------------- ----------------- --------- --------- ------------------
$mm $mm $mm $mm $mm $mm
--------------------- --------------- --------------- ----------------- --------- --------- ------------------
Capital stock 283 286 287 280 248 257
--------------------- --------------- --------------- ----------------- --------- --------- ------------------
Paid-in-capital 304 384 407 440 393 421
--------------------- --------------- --------------- ----------------- --------- --------- ------------------
Treasury stock 0 (17) (18) (26) (14) (7)
--------------------- --------------- --------------- ----------------- --------- --------- ------------------
Retained earnings 1,252 369 1,740 3,060 3,520 3,436
--------------------- --------------- --------------- ----------------- --------- --------- ------------------
Shareholder's equity 1,839 1,022 2,416 3,753 4,146 4,106
--------------------- --------------- --------------- ----------------- --------- --------- ------------------
Growth per period __ (44)%/78 136% 55% 10% -1%
--------------------- --------------------------------------------------------------------- ------------------
Growth rate over 123%
last 4.5 years
--------------------- ------------------
Annualized growth 20%
rate
--------------------- --------------------------------------------------------------------- ------------------
These tables demonstrate that on a book and market basis National Grid has
been soundly capitalized in the past and that it should continue to be
financially stable. Applicants also incorporate by reference to their previous
financing application (SEC File No. 70-9519) the extensive discussion of
National Grid's experience operating foreign utility properties and its thorough
and disciplined foreign project investment review process.
In addition, Applicants note that none of the conditions described in
paragraph (b) of Rule 53 is applicable. Specifically: (1) there has been no
bankruptcy of any National Grid associate company in which a plan of
reorganization has not been confirmed; (2) the average consolidated retained
earnings for the two most recent
----------------
78 A special dividend of $1.23 billion was paid during the year ended March 31,
1998, which distorts the historical trend in growth of shareholder's equity.
----------------
67
semiannual periods has not decreased by 10 percent from the average for the
previous two semiannual periods,/79 and; (3) in the past fiscal year, National
Grid has not reported operating losses attributable to its aggregate direct or
indirect investments in EWGs and FUCOs. Indeed, National Grid's interests in
EWGs and FUCOs have contributed positively to its consolidated earnings during
the period since the NEES Acquisition Order.
Statement of Financial Accounting Standards No.121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,
requires an evaluation of the impairment of all assets of a utility that a
company plans to write down and take as a loss. National Grid currently has no
assets that would need to be written down under SFAS 121. No assets with respect
to any FUCOs currently owned (directly or indirectly) by National Grid are
expected to require a write down under SFAS 121, nor has any associate EWG or
FUCO ever defaulted under the terms of any financing document. National Grid
undertakes to notify the Commission by filing a post-effective amendment in this
proceeding in the event that any of the circumstances described in Rule 53(b)
occurs during the Authorization Period. Consequently, the conditions of Rule
53(c)(1) are satisfied.
Under Rule 53(c)(2) National Grid must demonstrate that the proposed use of
financing proceeds to invest in FUCOs will not have an "adverse impact" on any
of the Utility Subsidiaries, their respective customers, or on the ability of
the State commissions having jurisdiction over one or more of such utility
subsidiaries to protect such public utility companies or such customers.
The conclusion that the customers of the Utility Subsidiaries will not be
adversely impacted by the proposed level of investment is well-supported by the
following:
(a) All of National Grid's investments in EWGs and FUCOs will be segregated
from the Utility Subsidiaries. None of the Utility Subsidiaries will provide
----------------
79 Although Rule 53 specifies quarterly periods, National Grid does not prepare
accounts with this frequency. If the substantial gains that NGG has earned in
the past two years from its Energis shareholding are not repeated in the current
year, average consolidated retained earnings may decrease.
----------------
68
financing for, extend credit to, or sell or pledge its assets directly or
indirectly to any EWG or FUCO in which National Grid owns any interest. National
Grid further commits not to seek recovery in retail rates for any failed
investment in, or inadequate returns from, an EWG or FUCO investment.
(b) Investments in EWGs and FUCOs will not have any negative impact on the
ability of the Utility Subsidiaries to fund operations and growth. The Utility
Subsidiaries will continue to have financial facilities in place that adequately
support their operations.
(c) National Grid will comply with the requirements of Rule 53(a)(3)
regarding the limitation on the use of the Utility Subsidiaries' employees in
connection with providing services to FUCOs. It is contemplated that project
development, management and home office support functions for the projects will
be largely performed post-Restructuring by NGG (as a FUCO) and its subsidiary
companies, and by outside consultants (e.g., engineers, investment advisors,
accountants and attorneys) engaged by National Grid, NGG, National Grid Holdings
or their subsidiary companies. National Grid also will comply with Rule 53(a)(4)
regarding the provision of EWG and FUCO related information to every federal,
state and local regulator having jurisdiction over the retail rates, as
applicable, of the Utility Subsidiaries.
(d) In connection with the NEES acquisition National Grid obtained
statements from State commissions under Rule 53./80 Applicants understand that
the Commission has received letters from the NYPSC, the Vermont Public Service
Board, the Rhode Island Public Utilities Commission, the Massachusetts
Department of Telecommunications and Energy and the New Hampshire Public Utility
Commission stating that the proposed investments would not have an adverse
effect on the National Grid utility subsidiaries subject to their jurisdiction
or customers, and stated explicitly or by implication, on the state commissions'
regulatory ability to protect the utility
----------------
80 See SEC File No. 70-9473, Exhibits, D-3.2, D-5.3, D-6.2, D-7.2, and D-8,
orders or certifications from the Massachusetts, New Hampshire, Vermont,
Connecticut, and Rhode Island utility regulatory commissions.
----------------
69
subsidiary or its customers. The letter from the New Hampshire Public Utility
Commission limited its comments to National Grid's Proposed Investments in
FUCOs, and noted National Grid's representation that it did not intend to invest
in EWGs. National requests that the commission reserve jurisdiction over the
issuance and sale of securities for the purposes of financing investments in
EWGs pending completion of the record.
(e) In addition, National Grid will provide the information required by
Form 20-F to permit the Commission to monitor the effect of National Grid's EWG
and FUCO investments on National Grid's financial condition.
Consequently, the conditions of Rule 53(c)(2) are satisfied.
F. Intra-System Service Transactions
The NEES Acquisition Order authorized the continuation of the former New
England Power Service Company (since renamed National Grid USA Service Company)
as the new service company for the National Grid USA Group. In addition, the
NEES Acquisition Order authorized National Grid Company to provide certain
services to the National Grid USA group in accordance with Section 13 of the Act
and the rules thereunder. Applicants now propose that NiMo and its subsidiaries
would enter into service agreements with National Grid USA Service Company and
receive the same services that current members of the National Grid USA Group
receive from National Grid USA Service Company and National Grid Company./81
This affiliate service relationship will follow in all material respects the
authorization granted in the NEES Acquisition Order. National Grid USA Service
Company will continue to be operated in accordance with the policies and
procedures manual previously filed, and the service agreements entered into
between National Grid USA Service Company and NiMo and its subsidiaries would be
in the same form as those entered into by the current National Grid USA
Group./82
----------------
81 It is unlikely that a significant level of services will be performed for CNP
Limited and its subsidiaries.
82 National Grid has received the Reports of the Staff of the Office of Public
Utility Regulation, Division of Investment Management, U.S. Securities and
Exchange Commission; (1) PUHCA Staff Examination Instructional Manual and (2)
Staff Recommendations and Examination Findings of Service Companies (June 2001).
National Grid will review the specific examination findings and recommendations
presented in the Staff's Recommendations and Examination Findings of Service
Companies Report to determine whether the operating practices of National Grid
USA Service Company require modification. If operating practice modifications
are determined to be necessary, the employees of National Grid USA Service
Company will receive additional instruction and training as appropriate.
----------------
70
G. Nonutility Reorganizations
Applicants propose to restructure the Nonutility Subsidiaries from time to
time as may be necessary or appropriate in the furtherance of the National Grid
System's authorized nonutility activities. To that end, National Grid requests
authorization to acquire, directly or indirectly, the equity securities of one
or more intermediate subsidiaries ("Intermediate Subsidiaries") organized
exclusively for the purpose of acquiring, financing, and holding the securities
of one or more existing or future Nonutility Subsidiaries. Intermediate
Subsidiaries may also provide management, administrative, project development,
and operating services to such entities.
Reorganizations could involve the acquisition of one or more new
special-purpose subsidiaries to acquire and hold direct or indirect interests in
any or all of the National Grid System's existing or future authorized
nonutility businesses. Restructuring could also involve the transfer of existing
subsidiaries, or portions of existing businesses, among the National Grid System
associates and/or the reincorporation of existing subsidiaries in a different
jurisdiction. This would enable the National Grid System to consolidate similar
businesses and to participate effectively in authorized nonutility activities,
without the need to apply for or receive additional Commission approval.
These direct or indirect subsidiaries might be corporations, partnerships,
limited liability companies or other entities in which National Grid, directly
or indirectly, might have a 100% interest, a majority equity or debt position,
or a minority debt or equity position. These subsidiaries would engage only in
businesses to the extent the National Grid System is authorized, whether by
statute, rule, regulation or order, to engage in those businesses. National Grid
does not seek authorization to acquire an interest in any nonassociate company
as part of the authority requested in this application and states that the
reorganization will not result in the entry by the National Grid System into a
new, unauthorized line of business.
The Intermediate Subsidiaries would be organized for the purpose of
acquiring, holding and/or financing the acquisition of the securities of or
other interest in one or more Rule 58 Subsidiaries, ETCs or other non-exempt
nonutility subsidiaries as permitted or authorized by the Commission. Applicants
expect that as a general matter all EWG and FUCO operations would be conducted
under NGG after the Restructuring.
71
Intermediate Subsidiaries may also engage in development activities
("Development Activities") and administrative activities ("Administrative
Activities") relating to the permitted businesses of the nonutility
subsidiaries. To the extent such transactions are not exempt from the Act or
otherwise authorized or permitted by rule, regulation or order of the Commission
issued thereunder, National Grid requests authority for Intermediate
Subsidiaries to provide management, administrative, project development and
operating services to such entities at cost in accordance with Section 13 of the
Act and the rules thereunder.
Development Activities will be limited to due diligence and design review;
market studies; preliminary engineering; site inspection; preparation of bid
proposals, including, in connection therewith, posting of bid bonds; application
for required permits and/or regulatory approvals; acquisition of site options
and options on other necessary rights; negotiation and execution of contractual
commitments with owners of existing facilities, equipment vendors, construction
firms, power purchasers, thermal "hosts," fuel suppliers and other project
contractors; negotiation of financing commitments with lenders and other
third-party investors; and such other preliminary activities as may be required
in connection with the purchase, acquisition, financing or construction of
facilities or the acquisition of securities of or interests in new businesses.
Administrative Activities will be limited to personnel, accounting, engineering,
legal, financial, and other support activities necessary to manage National
Grid's investments in Nonutility Subsidiaries.
An Intermediate Subsidiary may be organized, among other things, (1) in
order to facilitate the making of bids or proposals to develop or acquire an
interest in any Rule 58 Subsidiary, ETC or other non-exempt nonutility
subsidiary; (2) after the award of such a bid proposal, in order to facilitate
closing on the purchase or financing of such acquired company; (3) at any time
subsequent to the consummation of an acquisition of an interest in any such
company in order, among other things, to effect an adjustment in the respective
ownership interests in such business held by National Grid and non-affiliated
investors; (4) to facilitate the sale of ownership interests in one or more
acquired nonutility companies; (5) to comply with applicable laws of foreign
jurisdictions limiting or otherwise relating to the ownership of domestic
companies by foreign
72
nationals; (6) to minimize National Grid's exposure to taxes; (7) to further
insulate National Grid and the Utility Subsidiaries from operational or other
business risks that may be associated with investments in non-utility companies;
or (8) for other lawful business purposes.
Investments in Intermediate Subsidiaries may take the form of any
combination of the following: (1) purchases of capital shares, partnership
interests, member interests in limited liability companies, trust certificates
or other forms of equity interests; (2) capital contributions; (3) open account
advances with or without interest; (4) loans; and (5) guarantees issued,
provided or arranged in respect of the securities or other obligations of any
Intermediate Subsidiaries. Funds for any direct or indirect investment in any
Intermediate Subsidiary will be derived from (1) financings authorized in this
proceeding; (2) any appropriate future debt or equity securities issuance
authorization obtained by National Grid from the Commission; and (3) other
available cash resources, including proceeds of securities sales by a Nonutility
Subsidiary pursuant to Rule 52. To the extent that National Grid provides funds
or guarantees directly or indirectly to an Intermediate Subsidiary that are used
for the purpose of making an investment in any Rule 58 Subsidiary, the amount of
such funds or guarantees will be included in National Grid's "aggregate
investment" in such entities, as calculated in accordance with Rule 58.
H. Certificates of Notification
Applicants propose to provide Rule 24 certificates on a semiannual basis,
consistent with the frequency of financial reporting required in the UK. Under
UK rules, National Grid must prepare and publish consolidated financial
information semi-annually. In addition, semiannual financial reporting is
consistent with National Grid's ADR listing on the New York Stock Exchange. Due
to National Grid's extensive foreign holdings, it would entail significant
additional work and expense for National Grid to prepare consolidated financial
statements on a quarterly basis. In that regard, in the interest of maintaining
the consistent presentation of financial information, Applicants propose that
their Form U5S filings will comprise National Grid's consolidated financial
statements in the format required by Form 20-F, i.e., U.K. GAAP format with
reconciliations to U.S. GAAP. In addition, Applicants propose to include in
their Form U5S filings: (1) U.S. GAAP financial statements for all the companies
in the National
73
Grid USA Group, and (2) U.S. GAAP financial statements or financial statements
in the format required by Form 20-F for (a) NGG, on a consolidated basis, (b)
any subsequently acquired FUCO, and (c) the Intermediate Companies. Amounts
included in Form U5S filings will be stated in U.S. dollars. National Grid will
provide the Commission access to the books, records and financial statements, or
copies thereof, of any of its subsidiary companies, in English, as the
Commission may request.
In the NEES Acquisition Order, the Commission granted an exemption from
Rule 26(a)(1) under the Act regarding the maintenance of financial statements in
conformance with Regulation S-X. The exemption applied only to existing
subsidiaries of National Grid Holdings Ltd, (the National Grid System's FUCO)
that are organized outside the U.S. New foreign subsidiaries that engage in
foreign utility operations were required to maintain their financial statements
in accordance with U.S. GAAP or reconcile the financial statements to U.S. GAAP
in the manner required by Form 20-F. National Grid or the new foreign subsidiary
would also file Form U-57. This exemption would remain in effect post-Merger.
Consistent with and as a substitute for the current reporting obligations
of the National Grid System under the NEES Acquisition Order and the
supplemental financing order issued October 12, 2001,/83 National Grid proposes
to provide the information listed below in its semi-annual Rule 24 certificates.
The Rule 24 certificates will be provided to the Commission within 90 days after
the end of National Grid's fiscal year and within 60 days of the end of its
second fiscal quarter.
a. The principal amount, interest rate, term, number of shares, market
price per share, sales price per share (if other than market price)
and aggregate proceeds, as applicable, of any securities issued by
National Grid during the reporting period, including securities issued
to dividend reinvestment plans and employee benefit plans;
b. The amount of guarantees issued during the reporting period by
National Grid, the name of the beneficiary of the guarantee and the
terms and purpose of the guarantee;
----------------
83 National Grid Group plc, Holding Co. Act Release No. 27455 (October 22,
2001).
----------------
74
c. National Grid's aggregate investment, as defined under Rule 53, in
EWGs and FUCOs as of the end of the reporting period in dollars and as
a percentage of National Grid's consolidated retained earnings, and a
description of EWG and FUCO investments during the reporting period;
d. The aggregate amount of securities and the aggregate amount of
guarantees issued and outstanding by National Grid since the date of
the order in this application;
e. A list of the securities issued by the Intermediate Companies during
the reporting period, including principal amount, interest rate, term,
number of shares and aggregate proceeds, with the acquiring company
identified and a brief explanation of the procedures followed to
determined the market rate of interest charged, as applicable;
f. The amount and terms of any short-term debt issued by any Utility
Subsidiary, and a list of the deposits and withdrawals by company from
the system money pool during the reporting period;/84
g. The amount and terms of any nonexempt financings consummated during
the period by any Utility Subsidiary during the reporting period;
h. The amount and terms of any nonexempt financings consummated by any
Nonutility Subsidiary during the reporting period;/85
i. A retained earnings analysis of each company in the National Grid USA
Group detailing Gross Earnings (as defined in the NEES Acquisition
Order) or income available for dividends, goodwill amortization,
dividends paid out of each capital account, and the resulting capital
account balances at the end of the reporting period;
j. A table showing, as of the end of the reporting period, the dollar and
percentage components of the capital structures of National Grid, NGG,
----------------
84 This reporting requirement would replace the one in File No. 70-9089. See New
England Electric System, Holding Co. Act Release No. 26768 (Oct. 29, 1997) as
supplemented in Holding Co. Act Releases 26811 (June 2, 1998), 27381 (April 19,
2001) and 27414, (June 6, 2001).
85 Applicants request that the Commission waive the requirement that National
Grid file Form U-6B-2 on the basis that National Grid will be providing
substantially similar information to the Commission on a regular basis in its
certificates under Rule 24.
----------------
75
each Intermediate Company, and each company in the National Grid USA
Group;
k. If any National Grid USA Group company borrows from an associate
company on the FUCO side of the National Grid System, National Grid
will; (1) list a minimum of three other sources of funds and their
rates and terms, and (2) provide a cost/benefit rationale, consistent
with the procedure described in the Application for determining
available market rates, explaining why funding from the FUCO associate
was the best option;
l. An identification of any entity or entities established during the
reporting period directly or indirectly by National Grid under the
authorization provided herein, the business purpose of such entity,
the significant assets held by such entity and the owners of such
entity with percentage interests provided;
m. Paper copies of National Grid's filings of Form 20-F and semiannual
reports to shareholders; and
n. As applicable, all amounts shall be expressed in U.K. Pounds and
converted to U.S. dollars and shall be presented in accordance with
the U.S. GAAP reconciliation requirements of Form 20-F. In particular,
the semiannual reports provided to the Commission in Rule 24 filings
under this Application-Declaration shall be organized so that all
columns showing amounts in Pounds in financial statements or tables
are accompanied by parallel columns showing dollar amounts.
National Grid also proposes to provide the following supplemental
information in its annual Form U5S filing. This supplemental information
replaces the supplemental Form U5S information required in the NEES Acquisition
Order:
1. The amount of any income tax credit and/or income tax liability
incurred during the previous fiscal year by NGGP or NG Holdings, or their
special purpose subsidiaries: (a) as a result of any acquisition-related
debt; (b) other merger or acquisition-related expense; and (c) as a result
of any other income source or
76
expense;
2. A description of how the income tax credit and/or income tax
liability was calculated and allocated to all companies included in the
consolidated tax return, showing the interest costs and any assumptions
used in the calculation;
3. A description of how any acquisition-related funding is effected
through all Intermediate Companies;
4. A description of the amount and character of any payments made by
each Intermediate Company to any other National Grid System company during
the reporting period; and
5. A statement that the allocation of tax credits and liabilities was
conducted in accordance with the tax allocation agreement in effect and
filed as an exhibit to the Form U5S.
In connection with the registration of National Grid and any
newly-organized Intermediate Companies, Applicants request under Section 5(b) of
the Act and Rule 20(a)(3) that the Commission authorize National Grid to
substitute its next annual report of the registered holding company system on
Form U5S in place of the requirement to file a registration statement on Form
U5B. As a result of the Restructuring, National Grid will merely step into the
shoes of NGG, consequently, an additional filing on Form U5B is not necessary to
provide the Commission with comprehensive information about the National Grid
System. The Commission currently has extensive information at its disposal and
will obtain updated information through periodic filings. Form U5B was submitted
on July 13, 2000 in connection with the registration of NGG and Form U5S was
filed by NGG on July 26, 2001 and will be filed annually thereafter by National
Grid. These documents, National Grid's Form 20-F filings, the Rule 24
certificates and the information contained in this Application provide all
information necessary for the Commission to fully regulate the National Grid
System under the Act.
Item 2. Fees, Commissions and Expenses
National Grid expects to pay or incur approximately $24.9 million in
aggregate fees, commissions and expenses, directly or indirectly, in connection
with the
77
Merger and Restructuring. The estimated fees, commissions and expenses
are set forth below by category.
78
Category of Fee or Expense $ millions
Financial advisors 12.5
Legal advisors 5.8
Other advisors and consultants 2.0
Accountants 1.6
Miscellaneous costs 3.0
Total 24.9
The amounts set forth above do not include fees associated with National
Grid's listing in connection with the Restructuring since those fees were
reported in National Grid's application for proxy solicitation authorization in
SEC File No. 70-9773. The estimated fees and expenses also do not include fees
associated with the financing authorization sought herein, other than
Merger-related financing, since these fees have not been incurred to date and
are unknown at this time. Fees and expenses that may be incurred in connection
with future financing transactions entered into during the Authorization Period
are extremely difficult to accurately estimate since specific financing plans
have not been made at this time.
Nevertheless, the fees and expenses expected to be incurred in the
financing transactions that will be conducted under the authorization proposed
herein will be consistent with market terms at the time of issuance. As set
forth in Item 1.E.3.(f) above, the cost of funds in debt or preferred stock
financings by National Grid or National Grid USA "would not exceed the cost of
comparable term U.S. treasury securities or government benchmark for the
currency concerned plus the margin demanded in the financial markets in a
competitive offering by an issuer of such securities with National Grid [or
National Grid USA's] credit rating." The underwriting fees, commissions or other
similar remuneration paid in connection with the non-
79
competitive issue, sale or distribution of a security also would not exceed 5%
of the principal or total amount of the security being issued.
Item 3. Applicable Statutory Provisions
A. Applicable Provisions
The proposed transactions are subject to Sections 3(a)(1), 5, 6(a), 7,
9(a), 10, 12 and 13 of the Act and Rules 20, 26, 42, 43, 45, 52, 53, 54 and 88
thereunder.
B. Legal Analysis
Section 9(a)(2) of the Act makes it unlawful, without approval of the
Commission under Section 10, "for any person . . . to acquire, directly or
indirectly, any security of any public utility company, if such person is an
affiliate . . . of such company and of any other public utility or holding
company, or will by virtue of such acquisition become such an affiliate." Under
the definition set forth in Section 2(a)(11)(A) of the Act, an "affiliate" of a
specified company means "any person that directly or indirectly owns, controls,
or holds with power to vote, 5 per centum or more of the outstanding voting
securities of such specified company."
NGG is currently the beneficial owner of 100% of the voting stock of seven
public utility companies. Niagara Mohawk is also a public utility company as
defined in Section 2(a)(5) of the Act. Because National Grid will, as a result
of the Merger and the Restructuring, own more than five percent of the
outstanding voting securities of an additional public utility company, National
Grid must obtain the approval of the Commission for the acquisition under
Sections 9(a)(2) and 10 of the Act. The statutory standards to be considered by
the Commission in determining whether to approve the proposed acquisition are
set forth in Sections 10(b), 10(c) and 10(f) of the Act.
As described below, the Acquisition complies with all of the applicable
provisions of Section 10 of the Act.
1. Section 10(b)
Section 10(b) provides that if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)(2)
unless the
80
Commission finds that:
such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to
an extent detrimental to the public interest or the interests of
investors or consumers;
in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly,
in connection with such acquisition is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the
securities to be acquired; or
such acquisition will unduly complicate the capital structure of the
holding company system of the applicant or will be detrimental to the
public interest or the interests of investors or consumers or the
proper functioning of such holding company system.
a. Section 10(b)(1)
i. Interlocking Relations
Under Section 10(b)(1), the Commission shall approve an acquisition unless
the Commission finds that "such acquisition will tend towards interlocking
relations. . . ." By its nature, any merger of previously unrelated companies
results in new links and relations between the companies. Northeast Utilities,
Holding Co. Act Release No. 25221 (Dec. 21, 1990), as modified, Holding Co. Act
Release No. 25273 (March 15, 1991), aff'd sub nom. City of Holyoke v. SEC, 972
F.2d 358 (D.C. Cir. 1992) ("interlocking relationships are necessary to
integrate [the two merging entities]"). These links, however, are not the types
of interlocking relations targeted by Section 10(b)(1), which was primarily
aimed at preventing business combinations unrelated to operating
efficiencies./86
National Grid's purchase of NiMo is motivated by operating efficiencies and
does not create the type of interlocking relations prohibited by Section
10(b)(1). For a period of two years after the Merger, NiMo's current Chairman
and CEO, William E.
----------------
86 See Section 1(b)(4) of the Act (finding that the public interests of
consumers are adversely affected "when the growth and extension of holding
companies bears no relation to economy of management and operation or the
integration and coordination of related operating properties. . . .").
----------------
81
Davis, will serve as Chairman of National Grid USA. In addition, two other
current executive officers of NiMo will serve on the board of directors of
National Grid USA. National Grid will also take the actions necessary to appoint
NiMo's CEO and one additional outside member of the board of directors of
NiMo/87 to serve on National Grid's board of directors after the Merger.
In addition, NiMo will be connected to the National Grid USA group through
the National Grid USA Service Company. Like the present National Grid USA
subsidiaries, NiMo and its subsidiaries will contract with National Grid USA
Service Company for various administrative and operational services. Through the
common provision of services, critical resources, expertise, and best practices
will be shared and coordinated among the group companies. These arrangements and
the representation of NiMo on the National Grid and National Grid USA boards are
necessary to integrate NiMo fully into the National Grid System and to promote
group-wide policies and practices for the efficient operation of the combined
system. Such overlap is, therefore, in the public interest and in the interest
of investors and consumers.
ii. Concentration of Control
Section 10(b)(1) is intended to prevent utility acquisitions that would
result in "huge, complex and irrational systems", and to avoid "an excess of
concentration and bigness" while preserving opportunities for the "economies of
scale, the elimination of duplicate facilities and activities, the sharing of
production capacity and reserves and the generally more efficient operations"
afforded by the coordination of local utilities into an integrated system.
American Electric Power Co., Holding Co. Act Release No. 20633 (July 21, 1978).
In applying Section 10(b)(1) to utility acquisitions, the Commission must
determine whether the acquisition will create "the type of structures and
combinations which the Act was specifically directed [to prohibit]." Vermont
Yankee Nuclear Corp., Holding Co. Act Release No. 15958 (Feb. 6, 1968). National
Grid's acquisition of NiMo will not result in a "huge system" and will avoid the
"excess of concentration and bigness" which Section 10(b)(1) seeks to prevent.
The National Grid System will be smaller than many other systems that have been
approved by the
----------------
87 Applicants anticipate that Dr. Bonnie Hill will serve as the outside
director.
----------------
82
Commission.
The Commission has approved acquisitions involving registered holding
companies with much larger public utility systems. See American Electric Power
Company, Inc. and Central and South West Corporation, Holding Co. Act Release
No. 27186 (June 14, 2000); and Exelon Corp., Holding Co. Act Release No. 27256
(Oct. 19, 2000) supplemented by Holding Co. Act Release No. 27259 (Oct. 20,
2000). As the table below shows, after the Merger, National Grid will be smaller
than several other registered holding companies. The table compares National
Grid and NiMo combined on a pro forma basis to Southern Company, American
Electric Power Company, Exelon Corp., Entergy, and Xcel Energy Inc.; all large
registered holding companies.
---------------------- ---------------- -------------------- ------------------
Company/88 Total Assets Operating Revenues Customers
(000s) (000s)
---------------------- ---------------- -------------------- ------------------
AEP 54,548,000 13,694,000 4,893,000
---------------------- ---------------- -------------------- ------------------
Exelon Corp 34,597,000 7,499,000 5,425,001
---------------------- ---------------- -------------------- ------------------
Southern Company 31,362,000 10,066,000 3,944,000
---------------------- ---------------- -------------------- ------------------
National Grid/NiMo/89 27,099,000 10,548,000 3,392,000
---------------------- ---------------- -------------------- ------------------
Entergy 25,565,227 10,016,148 2,795,000
---------------------- ---------------- -------------------- ------------------
Xcel Energy 21,768,843 11,591,796 4,801,139
---------------------- ---------------- -------------------- ------------------
Overall, National Grid's acquisition of NiMo will not create a "complex and
irrational system," but will create a company focused on reliability,
competitive pricing and high quality customer service. The larger size of the
combined company will provide opportunities to eliminate duplicate facilities
and generally achieve the benefits of economies of scale and more efficient
operations. Among other things, the acquisition is expected to yield labor cost
savings, corporate, administrative and purchasing savings, and purchased power
savings. The expected economies and efficiencies from the
----------------
88 Source: U.S. Securities and Exchange Commission, Financial and Corporate
Report, Holding Companies Registered under the Public Utility Holding Company
Act of 1935, updated August 1, 2001 (information provided is for the fiscal year
ended in 2000).
89 Pro forma information as of and for the 12 months ended September 30, 2001.
----------------
83
combined utility operations are described in greater detail in the discussion of
the standards of Section 10(c)(2) of the Act in Item 3.B.2.ii below.
Finally, Section 10(b)(1) also requires the Commission to consider possible
anticompetitive effects of a proposed combination. As the Commission noted in
Northeast Utilities, the "antitrust ramifications of an acquisition must be
considered in light of the fact that public utilities are regulated monopolies
and that federal and state administrative agencies regulate the rates charged to
customers." National Grid and NiMo have filed Notification and Report Forms with
the Department of Justice and the Federal Trade Commission under the
Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act") describing the effects
of the acquisition on competition in the relevant market and the applicable
waiting period under the HSR Act has terminated.
The competitive impact of the acquisition has also been fully considered by
FERC in proceedings under Section 203 of the Federal Power Act. As described in
its Merger Policy Statement, the FERC evaluates the competitive effects of a
proposed merger before deciding whether to approve the merger as "consistent
with the public interest," the applicable standard of review./90 In particular,
under the Merger Policy Statement the FERC considers whether a merger has an
adverse effect on (1) competition in any market, (2) customer rates, and (3) the
effectiveness of regulation.
Applicants FERC application demonstrated that all the tests in the Merger
Policy Statement are satisfied and that the acquisition is in the public
interest. Included in the FERC application is the declaration of Dr. Henry J.
Kahwaty, Senior Managing Economist at the Law and Economics Consulting Group,
demonstrating that the acquisition will not have an adverse effect on
competition. As Dr. Kahwaty's testimony shows, the markets in New England and
New York in which the Applicants operate are relatively unconcentrated as a
result of industry restructuring and related generation asset divestitures. As a
result of prior divestitures, Applicants own limited generation assets and are
in the process of selling their remaining generation assets. Consequently, the
acquisition's effect on competition in the horizontal generation market is weak.
----------------
90 16 U.S.C. ss824b(a). The factors that FERC focuses on in making this public
interest determination are set out in its Inquiry Concerning the Commission's
Merger Policy Under the Federal Power Act: Policy Statement, Order No. 592, 61
Fed. Reg. 68, 595 (1996), reconsideration denied, Order No. 592-A, 62 Fed. Reg.
33,341 (1997) ("Merger Policy Statement").
----------------
84
The acquisition also does not have a significant effect on vertical market
power as a result of control over transmission, the siting of new generation, or
fuel supplies and delivery systems. Since both applicants participate in ISOs,
they cannot exercise market power through control of their bulk power
transmission systems. Transmission access to new generators is assured through
the independent control by the ISOs (ISO-NE and NYISO) of Applicants'
transmission systems and the Commission's open access policies. The numerous
generating plant projects that are planned or under development in the Northeast
demonstrate that Applicants will not possess control over generating sites as a
consequence of the acquisition.
Applicants' FERC application also shows that the acquisition also will not
adversely impact customer rates. Applicants commit that they will not attempt to
recover merger-related costs through rates without first receiving specific
regulatory approval.
Lastly, the acquisition will not impair effective regulation. The
regulation of the National Grid USA utility subsidiaries will not be affected.
The acquisition does not alter the corporate form of Niagara Mohawk and it will
continue to be subject to FERC and state regulation, in particular, as to its
rates, operations and services. By order dated June 13, 2001, the FERC
authorized the Merger and found that it would not adversely affect competition,
rates or regulation and, therefore, was in the public interest. For all these
reasons, the acquisition does not result in the concentration of control of
public utility companies to an extent detrimental to the public interest or the
interest of investors or consumers and the Commission should find the standards
of Section 10(b)(1) satisfied.
b. Section 10(b)(2)
i. Fairness of Consideration
Section 10(b)(2) precludes approval of the acquisition if the Commission
finds that the consideration paid by National Grid for NiMo is not reasonable or
does not bear a fair relation to the sums invested in or the earning capacity of
the utility assets underlying the securities to be acquired. National Grid
relied in part on the analysis of NM Rothschild & Sons Ltd that the
consideration to be paid for NiMo was fair to National Grid from a financial
point of view. The NiMo board of directors had the benefit of a fairness opinion
issued by Donaldson Lufkin and Jenrette ("DLJ") that
85
concluded that the price offered by National Grid was fair, from a financial
point of view, to the holders of NiMo common stock, based on and subject to the
assumptions, limitations and qualifications set forth in DLJ's written opinion.
NiMo's proxy statement includes an extensive discussion of the analysis
conducted by DLJ in arriving at its opinion./91
As explained in the proxy statement, the historical price data for NiMo
common stock provide support for the consideration of $19.00 for each share of
NiMo common stock (assuming that the aggregate dollar value of five National
Grid ordinary shares is between $32.50 and $51.00 during the applicable time
period prior to the election deadline)./92 DLJ examined the historical closing
prices of Niagara Mohawk common stock from August 31, 1999 to September 1, 2000.
During this time period, Niagara Mohawk common stock reached a high of $16.19
per share and a low of $11.00 per share. On September 1, 2000, the price was
$13.88. The consideration offered by National Grid for the NiMo stock reflects a
premium of 36% over the average closing price during the twelve months prior to
the announcement of the merger.
DLJ also performed a discounted cash flow, or DCF, analysis of the
projected cash flows of NiMo for the fiscal years ending December 31, 2000
through December 31, 2007, using projections and assumptions provided by the
management of NiMo. The DCF value for NiMo was estimated using discount rates
ranging from 7.0% to 8.0%, based on estimates related to the weighted average
cost of capital of NiMo, and terminal multiples of estimated EBITDA for NiMo's
fiscal year ending December 31, 2007 ranging from 6.5x to 7.5x. The DCF analysis
also took into account NiMo's net operating loss or NOL position and the value
associated with such NOLs. Based on this analysis, DLJ estimated a value per
share of NiMo common stock ranging from $10.16 to $15.61, compared to the
proposed consideration to be received in the merger of $19.00 per share.
In addition, DLJ performed a valuation analysis based on the sum of the
----------------
91 NiMo's proxy statement on Form F-4 is included as Exhibit B-2 hereto. The DLJ
fairness opinion is Appendix B to the proxy statement.
92 Under the terms of the Merger Agreement, NiMo shareholders share in the
effect of increases or decreases in the price of five of National Grid's
ordinary shares above $51.00 and below $32.50.
----------------
86
value of each of the segments of NiMo, namely the regulated businesses and the
unregulated businesses. The regulated businesses include electric and gas
transmission and distribution, and nuclear generation. The unregulated
businesses include Opinac (which has investments in Telergy and eVionyx) and CNP
Limited. Based on this analysis, DLJ estimated the value per share of NiMo
common stock ranging from $11.71 to $18.13, compared to the proposed
consideration to be received in the merger of $19.00 per share.
DLJ also analyzed the market values and trading multiples of comparable
publicly traded US utility companies and reviewed selected acquisitions
involving comparable companies in the utility industry, in addition to analyzing
the premiums paid in selected utility mergers and acquisitions. The results of
these analyses were consistent with the proposed merger consideration.
Lastly, DLJ performed similar analyses of National Grid to determine the
value of National Grid's business. Based on the results of all the analyses,
taken as a whole, DLJ concluded that the analyses supported its fairness
opinion.
More importantly, however, the consideration agreed to by the parties was
the product of arm's-length negotiation. See the summary of the companies'
preliminary discussions in Item 1.D.3, supra. The Commission has found
"persuasive evidence" that the standards of Section 10(b)(2) are satisfied
where, as here, the agreed consideration for an acquisition is the result of
arm's-length negotiations between the managements of the companies involved,
supported by the opinions of financial advisors./93
Finally, the acquisition has been submitted to, and has been approved by,
the affected public shareholders, i.e., the common stockholders of NiMo and the
ordinary shareholders of NGG. On January 19, 2001 and January 29, 2001 the
shareholders of NiMo and NGG respectively, voted overwhelmingly to approve the
Merger.
ii. Reasonableness of Fees
National Grid believes that the estimated overall fees, commissions and
expenses incurred and to be incurred in connection with the Merger and
Restructuring are reasonable and fair in light of the size and complexity of the
transaction relative to other
----------------
93 See Southern Company, Holding Co. Act Release No. 24579 (Feb. 12, 1988).
----------------
87
transactions and the anticipated benefits of the acquisition to the public,
investors and consumers; that they are consistent with recent precedent; and
that they meet the standards of Section 10(b)(2).
The fees and expenses that National Grid expects to incur in connection
with the Merger and Restructuring total approximately $24.9 million. This amount
represents 0.83% (based on a purchase price of $3 billion) of the value of the
consideration to be paid by National Grid to NiMo's shareholders. This
percentage is consistent with percentages previously approved by the Commission.
See, e.g., Powergen plc, Holding Co. Act Release No. 27291 (Dec. 6, 2000) (fees
and expenses of approximately $50.4 million represented approximately 1.6% of
equity value of LG&E Energy Corp. common stock on Feb. 25, 2000, the last day of
trading before the announcement of the merger); NiSource, Inc., Holding Co. Act
Release No. 27263 (Oct. 30, 2000) (fees and expenses of approximately $50
million represented approximately 0.83% of the value of the consideration to be
paid for Columbia Energy); Exelon Corporation, Holding Co. Act Release No. 27256
(Oct. 19, 2000) supplemented by Holding Co. Act Release No. 27259 (Oct. 20,
2000) (fees and expenses of approximately $87.4 million represented
approximately 0.49% of the value of Unicom and PECO common stock on Sep. 21,
1999); Xcel Energy, Holding Co. Act Release No. 27212 (Aug. 16, 2000) (fees and
expenses of approximately $52 million represented approximately 1.4% of the
value of the consideration to be paid for New Century Energies, Inc.); American
Electric Power Co., Inc., Holding Co. Act Release No. 27186 (June 14, 2000)
(fees and expenses of approximately $73 million represented approximately 1.1%
of the value of the consideration to be paid for Central and South West
Corporation); Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993)
(fees and expenses represented approximately 1.7% of the value of the
consideration paid to the shareholders of Gulf States Utilities); Northeast
Utilities, Holding Co. Act Release No. 25548 (June 3, 1992) (fees and expenses
of approximately 2% of the value of the assets to be acquired).
c. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
acquisition will unduly complicate National Grid's capital structure or be
detrimental to
88
the public interest, the interest of investors or consumers or the proper
functioning of the National Grid system.
The proposed transactions will not unduly complicate the capital structure
of National Grid or its subsidiaries. The financing of the Merger will not
affect the priorities, preferences, voting power, or other rights of the holders
of the outstanding securities of National Grid or its subsidiaries. The proposed
transactions do not involve the creation of any minority interests. As a result
of the Merger, NiMo's common stock will become wholly owned by National Grid and
Niagara Mohawk's publicly-held debt will remain outstanding; unaffected by the
Merger.
Current NGG shareholders will exchange their ordinary shares for shares in
National Grid that will be the same in all material respects. NGG will assume
subsidiary status and its third-party debt will be assumed by National Grid.
Post-Merger, National Grid, National Grid USA, and its principal utility
subsidiaries, with the exception of Niagara Mohawk, will fall within the
seventy-to-thirty percent debt-to-common equity ratio generally prescribed by
the Commission. See, e.g., The National Grid Group plc, Holding Co. Act Release
No. 27154 (March 15, 2000) and notes 59 and 60 and the accompanying text supra.
On a pro forma basis, as the following table shows, assuming the Merger was
consummated on September 30, 2001, common stockholders' equity would make up 30%
of National Grid's total capitalization at that date.
--------------------------------------------------------------------------
Pro Forma Capital Structure
--------------------------------------------------------------------------
($ millions) % of Total
Capitalization
------------------------------------ ----------------- -------------------
Short-term debt (including current 699 4%
portion of long-term debt)
------------------------------------ ----------------- -------------------
Long-term debt 12,196 64%
------------------------------------ ----------------- -------------------
Preferred stock 517 3%
------------------------------------ ----------------- -------------------
Minority interest 28 0%
------------------------------------ ----------------- -------------------
Common stockholders' equity 5,628 30%
------------------------------------ ----------------- -------------------
Total capitalization 19,068 100%
------------------------------------ ----------------- -------------------
Section 10(b)(3) also requires that a proposed acquisition not be
89
detrimental to the public interest, the interest of the investors or consumers
or the proper functioning of the resulting holding company system. As set forth
more fully in the discussion of the standards of Section 10(c)(2), below, and
elsewhere in this Application, the acquisition will benefit shareholders and
consumers. The combination will result in a fully integrated utility system and
will produce savings and benefits to the public, consumers and investors that
would, quite possibly, be otherwise unavailable.
As noted by the Commission in Entergy Corp., Holding Co. Act Release No.
25952 (Dec. 17, 1993), "concerns with respect to investors' interests have been
largely addressed by developments in the federal securities laws and the
securities markets themselves." In this regard, following completion of the
acquisition, National Grid will be a reporting company subject to the disclosure
requirements of the Securities Exchange Act of 1934 (the "Exchange Act") that
will provide investors with readily available information concerning National
Grid and its subsidiary companies. In addition, the Restructuring is subject to
the review and approval of the U.K. High Court.
The transaction is also subject to various other federal and state
regulatory approvals as discussed in Item 4. In particular, FERC's review and
approval of the transaction assures that there will be no significant effect to
competition resulting from the Merger. The numerous regulatory reviews provide
adequate protection for the public interest and the interest of customers.
Also noteworthy is the judgement of the credit rating agencies in
evaluating the impact of the transaction on the financial soundness of National
Grid. As is customary with similar transactions, the rating agencies have placed
National Grid on credit watch to evaluate the effect of the Merger. Nonetheless
National Grid's current long-term debt credit rating is A1 from Moody's
Investors Service and A from Standard & Poor's Corporation, Inc. Even if the
credit watch resulted in a downgrade, National Grid's credit would remain
investment grade.
2. Section 10(c)
i. Section 10(c)(1)
Section 10(c)(1) prohibits the Commission from approving an acquisition if
it would be unlawful under the provisions of Section 8 or detrimental to
carrying out the provisions of Section 11. Section 8 requires National Grid to
obtain the express
90
approval of a state commission to acquire an interest in electric and gas public
utility companies that provides utility service in substantially the same
territory. Because Niagara Mohawk's electric and gas utility services overlap in
many of the areas it serves, its acquisition by National Grid is subject to
Section 8 of the Act. The NYPSC order expressly authorizes National Grid to
acquire Niagara Mohawk.
In addition, as explained below, the acquisition will not be detrimental to
carrying out the provisions of Section 11. The primary electric operations of
NiMo and National Grid will result in a single integrated electric utility
system. Integration will result primarily from the companies' membership in
adjacent, highly interconnected and coordinated power pools and participation in
their ISOs, and will be accomplished by the functioning of the open, competitive
markets administered by the interconnected ISOs. Sellers and purchasers in
either ISO's control area may engage in transactions in the other ISO's control
area through readily-accessible, OASIS-based transmission access.
Integration also will result from a direct transmission interconnection
between the New York operations of Niagara Mohawk and the New England operations
of National Grid USA. Additionally, the common use of National Grid USA Service
Company will promote the coordinated and efficient operation of the integrated
system. The Niagara Mohawk gas system will also result in a separate integrated
gas utility system and, as demonstrated below, the Commission should find that
the gas system is a permissible additional system under the A-B-C clauses of
Section 11(b)(1).
(a). Section 11, Integrated Utility System
Section 11 (b)(1) directs the Commission to require each registered holding
company system to limit its utility operations to "a single integrated public
utility system" and "such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public utility system." Section 2(a)(29)(A) defines an integrated public utility
system with respect to electric utility companies as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
91
which under normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operations to a
single area or region, in one or more states, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation.
The Commission has established four standards that must be met before it
will find that a proposed combination of utilities will result in an integrated
electric system:
1. the combined utility assets must be physically interconnected or
capable of physical interconnection ("interconnection requirement");
2. the combined utility assets, under normal conditions, must be
economically operated as a single interconnected and coordinated
system ("economic and coordinated operation requirement");
3. the system must be confined in its operations to a single area or
region ("single area or region requirement"); and
4. the system must not be so large as to impair (considering the state of
the art and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of regulation
("no impairment requirement").
Recently, in the context of the Energy East Corp. merger with CMP Group,
Inc., CTG Resources, Inc. and Berkshire Energy Resources the Commission found
that the merger of transmission and distribution utilities did result in an
integrated system under the Act and that an additional gas system could be
retained./94 Since the Energy East transaction shares many similarities with
National Grid's acquisition of NiMo, it is important precedent for the
transaction proposed in this Application. Energy East is a holding company over
a combined electric and gas system. Its principal utility subsidiary, New York
State Electric and Gas Corp. ("NYSEG") serves parts of central, eastern and
western New York State. NYSEG also was a member of the NYPP and it has
transferred control of its transmission system to NYISO. Through NYSEG and its
other utility subsidiaries, Energy East also has a significant gas distribution
business.
The Energy East merger targets were CMP Group, a holding company
----------------
94 Energy East Corp., Holding Co. Act Release No. 27224 (Aug. 31, 2000).
----------------
92
over several Maine utilities including Central Maine Power , the largest
electric utility in Maine, CTG Resources, a holding company over Connecticut
Natural Gas Corp. ("CNGC"), a Connecticut gas utility company, and Berkshire
Energy, a holding company over The Berkshire Gas Company ("Berkshire Gas"), a
Massachusetts gas utility company. CMP is a member of NEPOOL and has transferred
control over its pool transmission facilities system to ISO-NE.
In the order approving the Energy East merger, the Commission noted that
the NYISO and ISO-NE were established on the platform of existing tight power
pools following the FERC's encouragement in Order No. 888. NYISO was formed
based upon the NYPP and ISO-NE was formed based upon NEPOOL./95 The two ISOs
administer competitive, bid-based markets for electric energy and other electric
power products, provide non-discriminatory transmission service at a single,
embedded cost-based rate, and facilitate transmission planning and expansion on
a regional basis. NYISO and ISO-NE are contiguous along a 500-mile border and
are interconnected by eight different interties with aggregate transfer
capability of 1,600 to 2,300 MW, depending on direction and system conditions.
The eight existing interties provide significant transfer capability between
these control areas. Scheduled energy transfers between NEPOOL and NYPP were
approximately 7,100,000 MW per year for the three years ended December 31, 1998.
This is equivalent to the transfer between NYISO and ISO-NE of 1,707 MW during
every peak hour of the year./96 The role of the neighboring ISO's in
interconnecting and coordinating the merged entity's electric operations was a
key aspect of the Commission's finding of integration in the Energy East
decision.
The Interconnection Requirement
The electric transmission facilities of NiMo and National Grid USA are
directly interconnected by a 230 kilovolt ("kV") transmission line extending
from the Bear Swamp Substation in the northwest corner of Massachusetts, across
southern Vermont, to the Rotterdam Substation near Schenectady New York. This
line directly interconnects New England Power Company, National Grid USA's
transmission
----------------
95 See UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992) ("Unitil
Order").
96 The peak hours of the year for electricity demand are the 16 "on peak" hours
Monday through Friday.
----------------
93
company subsidiary, and Niagara Mohawk. Power transfers along this
interconnection are scheduled by agreement between NYISO and ISO-NE, the parties
with operational control of the Niagara Mohawk and National Grid USA
transmission assets.
In addition to this intertie, NYISO and ISO-NE are interconnected with
seven other interties which together form the New York/NEPOOL Interface. In
particular, the New York/NEPOOL Interface includes: (1) a 345 kV intertie
between Connecticut Power & Light ("CP&L") in NEPOOL and ConEd in NYISO; (2) a
345 kV intertie between Massachusetts Electric Co. in NEPOOL and Niagara Mohawk
in NYISO; (3) a 230 kV intertie between the New England Power Company in NEPOOL
and Niagara Mohawk in NYISO (referred to above); (4) a 115 kV intertie between
Vermont Electric Power Company ("Vermont Electric") in NEPOOL and the NYPA in
NYISO; (5) a 115 kV intertie between Vermont Electric in NEPOOL and Niagara
Mohawk in NYISO; (6) an additional 115 kV intertie between Vermont Electric in
NEPOOL and Niagara Mohawk in NYISO; (7) a 69 kV intertie between CP&L in NEPOOL
and Central Hudson in NYISO; and (8) a 138 kV intertie between CP&L in NEPOOL
and LIPA in NYISO. The New York/NEPOOL Interface has aggregate transfer capacity
between 1,600 to 2,300 MW, depending on direction and system conditions.
The Commission has previously found the interconnection requirement
satisfied on the basis of contractual rights to use a third-party's transmission
lines/97 or when physical interconnection is possible or contemplated within the
near future./98 In this matter, where the two parties have a direct
interconnection along transmission lines which they own and there is substantial
additional available interconnection capacity on third party-owned systems,
there can be no doubt that the interconnection requirement is satisfied.
The Economic and Coordinated Operation Requirement
Where previously vertically integrated companies combined generation,
----------------
97 See Unitil Order; American Electric Power Co., Inc. and Central and South
West Corp., Holding Co. Act Release No. 27186 (June 14, 2000) ("AEP/CSW Order").
98 See New Century Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997).
----------------
94
transmission and distribution functions to provide a "bundled" product --
delivered electricity -- to retail customers within franchised service areas,
under the new functionally, or operationally separated industry structure,
separate companies, or separate functional/operational components of companies,
perform the generation, merchant, transmission and distribution functions, with
the goal of fostering competition in the generation sector.
Among other things, these structural changes have resulted in the rapid
development of wholesale markets through which load-serving utilities, retail
aggregators, and individual retail customers are able to obtain needed
electricity products. Many states, including New York and the states in which
National Grid USA operates, have implemented or are considering open access at
the retail level./99 Where retail open access is provided, retail customers
have the ability to "shop" for their electric power from a power supplier other
than their traditional distribution utility. The distributor is obligated to
deliver the third-party power supplies to the customer.
The FERC has recognized that the efficient functioning of the transmission
grid is critical to connecting buyers with the competitive generation markets
and has promoted the formation of Regional Transmission Organizations to reduce
the barriers to the free flow of power and increase reliability and transmission
efficiency./100 Having evolved from tight power pools with a history of
coordinated operations, ISO-NE and NYISO are good examples of the trend towards
the regionalization of electric transmission operations. Because of the
contiguous, highly interconnected, and coordinated relationships between the
power pools and ISOs to which Niagara Mohawk and the National Grid USA utilities
belong, their transmission and distribution systems are now used, and in the
future will increasingly be used, to accomplish transfers of power between
generation and load within the NYISO region and NEPOOL and for transfers of
power to, and through, both systems. In sum, the coordination of transmission
operations among ISO-NE and NYISO effectively coordinates the operations of
Niagara Mohawk and the National Grid USA group in satisfaction of the
----------------
99 As of October 1, 1999, twenty-four states have enacted policies, either
through legislation or administrative action, requiring utilities to offer open
access to retail customers.
100 Regional Transmission Organizations, FERC Order 2000, 65 FR 809 (January 6,
2000).
----------------
95
economic and coordinated operations requirement.
The two ISOs engage in coordinated activities so that they function as a
single market, with free-flowing interties that are available, on an open-access
basis, to purchasers and sellers of electric energy and related energy products.
The two ISOs operate the bid-based market on a competitive basis that is
equivalent to economic dispatch./101 Also, the two ISOs and individual members
of both pools, including Niagara Mohawk and the National Grid USA group,
participate in joint pool and regional transmission planning and reliability
studies. Both ISOs operate as non-profit organizations and include
investor-owned utility ("IOU") and non-IOU members, and both operate centralized
power markets. In addition, both perform congestion management to free up
transmission capacity for the most economic uses of the system.
ISO-NE and NYISO, along with other system operators in the Northeast, are
parties to a Northeast ISO Memorandum of Understanding ("ISO MOU"). The ISO MOU
is an agreement to explore ways in which the ISOs can work cooperatively to
resolve present and future interregional issues with the aim of better
integrating the electricity markets in their respective control areas. The ISO
MOU includes a commitment to attempt to: (i) enhance interregional reliability
through coordinated operations and planning of the bulk power system; (ii)
facilitate broader competitive markets; (iii) and improve information flow to
market participants and the public.
Although coordination between merging utilities has traditionally been
shown by using joint operating agreements to dispatch generating plants on a
coordinated basis,/102 as the Commission found in the Energy East matter, "the
fact that NYSEG and Central Maine Power are now essentially transmission and
distribution companies does not preclude a finding that the combined electric
properties are an integrated system." In
----------------
101 As stated in Energy East, "These two ISOs operate the combined generation
and transmission assets of their participants as a single electrical system,
ensuring that transmission capacity is provided to enable the market to
function. Further, the two ISOs coordinate their scheduling and operations so as
to enable "cross-border" transactions to occur seamlessly. The high degree of
integrated operations insures that the two systems are operated as a coordinated
system in which the flow of energy is "centrally controlled and allocated, as
need or economy directs," and in which no generator, purchaser, or transmission
owner operates in isolation." [citation omitted] Energy East at 39-40.
102 See the AEP/CSW Order (applicants implemented a joint operating agreement to
coordinate the efficient use of generating resources).
----------------
96
addition to the coordination of their transmission systems, Niagara Mohawk and
the National Grid USA utilities will also be economically operated as a single
interconnected and coordinated system through (1) coordinated power purchasing
to satisfy their standard offer service (provider of last resort) obligations,
(2) coordinated disaster response programs, (3) the sharing of utility supplies
inventories, and (4) the integration of a range of central and corporate
functions. The utilities' combined purchasing power can provide efficiencies in
their ability to obtain economies of scale and will provide a ready market for
power supplies that turn out to be in excess of one of the individual utility's
needs. The utilities will also coordinate their activities on a daily basis, so
as to obtain maximum benefit from each one's localized knowledge, with respect
to making arrangements for transmission of power supplies to one another.
Through these efforts, for example, National Grid USA staff, who have extensive
familiarity with the New England market, will identify supply opportunities for
Niagara Mohawk, and, subject to FERC Order No. 889 constraints, could identify
the transmission routing, timing, and pricing strategies on the NEPOOL system
that would maximize the benefits of the transaction.
Similarly, both Niagara Mohawk and National Grid USA procure and provide
certain ancillary services, including black-start restoration services (through
the provision of transmission operations functions) and voltage support to
retail and wholesale customers. Following the Merger, the two companies'
transmission systems will be managed as a single management unit. The common
management will determine the best strategies and opportunities for providing
these services.
Single Area or Region Requirement
The third requirement for integration; the single area or region
requirement, is also satisfied. The combined post-Merger system will extend from
Niagara Falls, Ontario, just over the New York - Canada border, to eastern
Massachusetts. This service area, substantially in the Northeast U.S., is much
the same in size and scope as the area found to be a single area or region in
the Energy East matter./103 The Commission has made clear that the "single area
or region" requirement
----------------
103 In Energy East, the combined electric system of the merging electric
utilities also was located in the Northeast U.S. and extended from upstate New
York to central and southern Maine.
----------------
97
does not mandate that a system's operations be confined to a small geographic
area or a single state. In considering size, the Commission has consistently
found that utility systems spanning multiple states satisfy the single area or
region requirement of the Act./104 In addition, the high degree of operational
coordination and energy trading that occurs between NYISO and ISO-NE demonstrate
that the Northeast U.S. is a single area or region in both operational and
economic terms.
The No Impairment Requirement
Lastly, the combined NiMo and National Grid USA system will not be so large
as to impair (considering the state of the art and the area or region affected)
the advantages of localized management, efficient operation, and the
effectiveness of regulation. National Grid USA will adopt a regional management
structure to efficiently operate and manage the combined system. Niagara Mohawk
will stay responsive to customer needs on the local level by maintaining its
presence with local field offices. In addition, Niagara Mohawk will keep its
corporate headquarters in Syracuse, New York. NiMo's CEO, William Davis will
join the National Grid USA board and National Grid will take efforts to include
Mr. Davis and one other NiMo director on National Grid's board of directors.
Niagara Mohawk will continue to be subject to the regulation of the NYPSC and
the FERC. In sum, Niagara Mohawk will preserve all the benefits of localized
management that it currently enjoys while coordinating its management with
National Grid USA so as to achieve the economies and efficiencies of operation
from the Merger.
(b). Section 11, Retention of the Additional Gas System
Under Section 10(c)(1) of the Act, the Commission may not approve an
acquisition that "would be detrimental to the carrying out of the provisions of
Section 11." Section 11(b)(1) of the Act generally confines the utility
properties of a registered holding company to a "single integrated
public-utility system," either gas or electric. An exception to the requirement
of a "single system" is provided in Section 11(b)(1) A-C
----------------
104 See, e.g., Southern Co. Holding Co. Act Release No. 24579 (Feb. 12, 1988)
(approving an electric utility system covering portions of four states) and New
Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997)
(approving a utility system covering portions of five states.)
----------------
98
(the "ABC clauses")./105 A registered holding company may own one or more
additional integrated public utility systems -- i.e., gas as well as electric --
if each system meets the criteria set forth in these clauses.
The threshold issue, therefore, is whether Niagara Mohawk's gas utility
system is a single integrated public-utility system. Section 2(a)(29)(B) defines
an integrated public utility system with respect to gas utility companies as:
a system comprised of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by
being operated as a single coordinated system confined in its
operations to a single area or region, in one or more states, not so
large as to impair (considering the state of the art and area or
region affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation; provided that gas
utility companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
Niagara Mohawk sells, distributes and transports natural gas in a
geographic territory in New York State that generally extends from Syracuse to
Albany. The northern reaches of the system extend to Watertown and Glens Falls,
New York. Niagara Mohawk's distribution areas are physically interconnected with
one another by facilities owned by Niagara Mohawk or nonaffiliates. Presently,
nine separate gas distribution areas are connected directly with Dominion
Transmission, Inc. ("Dominion Transmission"), a non-affiliated interstate
natural gas pipeline. Other interconnections with non-affiliated pipelines
include, two direct connections with Iroquois Gas Transmission ("Iroquois"), one
with Empire State Pipeline ("Empire"), and one with Tennessee Gas Pipeline
("Tennessee Gas").
Niagara Mohawk's gas distribution system enjoys access to multiple gas
supply basins. The diversity of supply provides Niagara Mohawk with several
advantages: (1) the opportunity to take advantage of regional supply
differences, (2) the opportunity to manage supply risk and (3) the opportunity
to lower overall supply costs.
----------------
105 See, generally, NIPSCO Industries, Inc., HCAR No. 26975 (Feb. 10,1999).
----------------
99
The connection with Dominion Transmission provides access to the Gulf Coast,
Canadian, Appalachian and Mid-Continent gas producing regions. The connections
with Empire and Iroquois provide access to gas supplies in western Canada and
the Gulf Coast. The Tennessee Gas connections currently provides access to Gulf
Coast gas supplies, but expansion projects currently underway will provide
increased access to gas from the Canadian Maritimes region.
Niagara Mohawk's gas utility operations in its distribution areas are
integrated into one utility with coordinated operations. The gas supply needs of
the distribution areas are coordinated with centralized purchasing and
coordinated transportation and storage management. Technical, operating and
maintenance services are also managed centrally for the distribution areas./106
Section 2(a)(29)(B) expressly provides that companies that derive natural
gas from a common source of supply may be deemed to be included in a single area
or region. The Commission interprets "common source of supply" flexibly based on
its understanding of the contemporary gas industry and may find that companies
purchasing gas from a common producer or basin are in a "single area or region"
when doing so does not undercut the Act's policies, particularly, the growth and
extension of holding companies that bears no relation to economy of management
and operation or the integration and coordination of related operating
properties. See NIPSCO.
Applicants are not required, however, to show that they share a common
source of supply to establish that they form an integrated gas public-utility
system in a single area or region. The Act merely requires that the operations
that the Applicants seek to integrate be in a single area or region, in one or
more states, not so large that the combination impairs the advantages of
localized management, efficient operation and the effectiveness of regulation.
Niagara Mohawk's gas utility operations are limited to a single area or region;
the north-central area of New York State. The gas operations are managed within
New York and regulated by the NYPSC. Many electric and gas holding companies
maintain single integrated utility systems across several states. For example,
American Electric Power Company operates in 11 states and Dominion Resources
Inc.
----------------
106 NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999)
("NIPSCO"); Sempra Energy, Holding Co. Act Release No. 26791 (Feb. 1, 1999)
("Sempra").
----------------
100
operates in five states./107 Fundamentally, the single area or region standard
reflects the policy of the Act against "scatteration" - the ownership of widely
dispersed utility properties that do not lend themselves to efficient
operation./108 Niagara Mohawk's gas utility assets are not scattered and are
within a "single area or region" within the meaning of Section 2(a)(29)(B).
Consequently, Niagara Mohawk's gas utility operations form a single integrated
gas utility system under the Act.
As discussed below, Niagara Mohawk's integrated gas system qualifies under
the exception established under the ABC clauses and may be retained by the
combined entity post-Merger.
The ABC Clauses
Section 11(b)(1) of the Act permits a registered holding company to control
one or more additional integrated public utility systems if:
each of such additional systems cannot be operated as an independent
system without the loss of substantial economies which can be secured
by the retention of control by such holding company of such system,
all of such additional systems are located in one state, adjoining
states, or a contiguous foreign country; and the continued combination
of such systems under the control of such holding company is not so
large (considering the state of the art and the area or region
affected) as to impair the advantages of localized management,
efficient operation, or the effectiveness of regulation.
For the reasons set forth below, a divestiture order would be contrary to the
public interest and Applicants therefore request that the Commission authorize
National Grid to retain Niagara Mohawk's existing gas operations.
In light of the precedent in the recent Energy East order, the Commission
clearly should permit retention of Niagara Mohawk's gas operations. In Energy
East, the Commission approved the acquisition and retention of a gas system that
in the aggregate was similar in size to Niagara Mohawk's gas operations. The
Energy East gas assets included:
----------------
107 Securities and Exchange Commission, Financial and Corporate Report, Holding
Companies Registered Under the Public Utility Holding Company Act of 1935 as of
August 1, 2001.
108 Sempra at 5.
----------------
101
(1) in the pre-merger Energy East system, a combination electric and gas
utility (NYSEG), and two smaller gas utilities (CMP Natural Gas, L.L.C. and The
Southern Connecticut Gas Company);
(2) in the CTG Resources system, a gas utility, Connecticut Natural Gas
Corp.; and
(3) in the Berkshire Energy system, a gas utility, The Berkshire Gas
Company. The table below compares the number of customers and gas utility
revenues of the combined Energy East system with Niagara Mohawk's gas
operations. On this basis alone the Commission could conclude that, as in the
Energy East matter, substantial economies would likely be lost to the detriment
of the public interest if Niagara Mohawk was required to divest its gas assets.
------------------------------------- ----------------------------------- -----------------------------------
Company Gas Utility Customers Gas Operating Revenues/109
------------------------------------- ----------------------------------- -----------------------------------
Post-Merger Energy East/110
------------------------------------- ----------------------------------- -----------------------------------
NYSEG/111 246,000 457,361,000
------------------------------------- ----------------------------------- -----------------------------------
The Southern Connecticut Gas 163,000 (included with NYSEG, above)
Company
------------------------------------- ----------------------------------- -----------------------------------
Connecticut Natural Gas Corp. 145,000 292,376,000
------------------------------------- ----------------------------------- -----------------------------------
The Berkshire Gas Company 34,000 47,056,000
------------------------------------- ----------------------------------- -----------------------------------
Total 588,000 796,793,000
------------------------------------- ----------------------------------- -----------------------------------
Post-Merger National Grid USA
------------------------------------- ----------------------------------- -----------------------------------
Niagara Mohawk gas operations 542,000 611,226,000
------------------------------------- ----------------------------------- -----------------------------------
Total 542,000 611,226,000
------------------------------------- ----------------------------------- -----------------------------------
----------------
109 Gas Operating Revenues for the post-merger Energy East system and the
post-Merger National Grid USA system are for the 12 months ended June 30, 2000
and December 31, 1999, respectively.
110 CMP Natural Gas, L.L.C. is excluded from the table because it is in the
process of constructing a local natural gas distribution system at the time of
the Commission's Energy East decision and revenue and customer information was
not available.
111 The gas operating revenue figure for NYSEG includes the gas operating
revenues that Energy East derived from The Southern Connecticut Gas Company.
----------------
102
We proceed, however, to discuss below why Niagara Mohawk's gas operations do
satisfy the ABC clauses and why the Commission should permit their retention as
an additional integrated system. First, we address clauses B and C.
Niagara Mohawk's gas operations are located exclusively in New York State
in the region located roughly between Syracuse and Albany. Accordingly, the
requirement of clause B is satisfied. Niagara Mohawk's operation of its gas
system is subject to the regulation of the NYPSC. As with the integration of
Niagara Mohawk's electric operations into the National Grid USA system, the
Merger will not adversely affect localized management, efficient operation or
the effective regulation of the gas operations. Local management will continue
to oversee the gas operations to ensure that service is responsive to customer
needs and central management will coordinate on a system-wide level so as to
achieve the economies and efficiencies of operation from the Merger. Niagara
Mohawk's gas operations will continue, as before the Merger, to be subject to
the regulation of the NYPSC. Accordingly, the requirement of clause C is
satisfied.
With regard to clause A, Applicants have studied the impact of the
divestiture of the gas operations ("Gas Study")./112 The analysis focuses upon
the increases in operating costs that would result from divestment. As set forth
in the Gas Study, annual operating costs of the resulting separate electric and
gas systems will increase by a total of approximately $114 million. The
increased costs are split evenly with the gas system suffering an increased cost
of $56.8 million annually and the electric system suffering a $57.4 million
annual increase. The increases result primarily from higher personnel costs
attributable to additional employees required to perform functions accomplished
by employees who currently work for both the electric and gas businesses. For
example, 118 additional meter readers at an annual cost of $5,942,800 are
required to separate the function that previously was jointly provided. Customer
service costs increase significantly when the call center, billing, collections
and payment remittance
----------------
112 The Gas Study is included as Exhibit J-1 to the Application.
----------------
103
functions are separated. The largest cost involves the acquisition and support
of additional information technology necessary to support a stand-alone gas
company. Start-up capital costs for information technology are estimated at
$61,400,000 and annual information technology support costs of $22,000,000 are
expected to be incurred in connection with the divestiture of the gas
operations.
The Gas Study describes the size of the estimated loss in relation to the
separate system's total revenues, expenses and income. In particular, as with
studies done in the context of past mergers where gas system divestiture was at
issue, the Gas Study compares the ratio of increased expenses to the system's
total operating revenues, operating revenue deductions (excluding federal income
taxes), gross income and net income before federal income taxes./113 The
findings of the Gas Study are summarized in the table below. The data clearly
shows that the detriment due to divestiture significantly exceeds the historical
guidelines established in Engineers Public Service Co./114 and the recent
precedent in the Commission's order authorizing the merger of Florida Progress
Corp. and CP&L Energy, Inc./115 On this basis, clause A is satisfied.
------------------------------------- ----------------------------------- -----------------------------------
Niagara Mohawk Gas Divestiture CP&L Energy, Inc.
------------------------------------- ----------------------------------- -----------------------------------
One-time costs of divestiture $83.8 million $17.4 million
------------------------------------- ----------------------------------- -----------------------------------
Increase in annual costs from $114.2 million $12.5 million
divestiture
------------------------------------- ----------------------------------- -----------------------------------
Annual increased costs as a
percentage of:
------------------------------------- ----------------------------------- -----------------------------------
gas operating revenues 19% 5.65%
------------------------------------- ----------------------------------- -----------------------------------
gas operating revenue deductions 36.3% 6.17%
------------------------------------- ----------------------------------- -----------------------------------
----------------
113 See, e.g., New Century Energies, Inc., Holding Co. Act Release No. 26748
(Aug. 1, 1997), at note 52 , citing New England Electric System, 41 S.E.C. 888,
898-99 (1964), rev'd, SEC v. New England Electric System, 346 F.2d 399 (1st Cir
1966), rev'd and remanded, 384 U.S. 176 (1965), on remand, 376 F.2d 107 (1st
Cir. 1967), rev'd, 390 U.S. 207 (1968).
114 In Engineers Public Service Co., the Commission suggested that cost
increases from divestment of a gas system resulting in a 6.78% loss of operating
revenues, a 9.72% increase in operating revenue deductions, a 25.44% loss of
gross income and a 42.46% loss of net income would afford an "impressive basis
for finding a loss of substantial economies." Engineers Public Service Co., 12
S.E.C. 41, 59 (1942), rev'd on other grounds and remanded, 138 F.2d. 936 (D.C.
Cir. 1943), vacated as moot, 332 U.S. 788 (1947).
115 CP&L Energy, Inc., Holding Co. Act Release No. 27284 (Nov. 27, 2000) ("CP&L
Order").
----------------
104
------------------------------------- ----------------------------------- -----------------------------------
gross gas income 139.8% 66.90%
------------------------------------- ----------------------------------- -----------------------------------
net gas income 203.9% 308.34%
------------------------------------- ----------------------------------- -----------------------------------
The lost economies evidenced above do not include the loss of competitive
benefits that would flow from the ownership of combined gas and electric
properties. As the Commission found in the CP&L matter, "a combined company's
competitive position in the market would suffer if it were unable to own
combined electric and gas operations because, as the utility industry moves
toward a complete energy services business, energy suppliers must be able to
offer customers a total range of energy options to meet their energy needs."/116
The divested Niagara Mohawk gas operations also would not benefit from the
greater financial and other resources that the current association with Niagara
Mohawk and now with National Grid make possible.
(c). Non-Utility Subsidiaries
The acquisition of NiMo introduces several new non-utility subsidiaries
into the National Grid System, but all of NiMo's non-utility businesses are
energy-related or otherwise retainable under the Commission's rules and
precedent.
Section 11(b)(1) limits the non-utility interests of a registered holding
company to those that are "reasonably incidental, or economically necessary or
appropriate to the operations of such integrated public-utility system," on a
finding by the Commission that such interests are "necessary or appropriate in
the public interest or for the protection of investors or consumers and not
detrimental to the proper functioning" of the integrated system. The Commission
has interpreted these provisions to require; (i) the existence of an operating
or functional relationship between the utility operations of the registered
holding company and the non-utility activities sought to be retained, see
generally, Michigan Consolidated Gas Co., Holding Co. Act Release No. 16763
(June 22, 1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971), and (ii) that the
retention is in the public interest, see, e.g., id. quoting General Public
Utilities Corp., Holding Co. Act Release No. 10982 (Dec. 28, 1951); United Light
and Railways Co., Holding Co. Act Release No.
----------------
116 CP&L Order at 40.
----------------
105
12317 (Jan. 22, 1954). A non-utility business may also be retained if it evolved
out of the system's utility business, the investment is not significant in
relation to the system's total financial resources and the investment has the
potential to produce benefits for investors and/or consumers. CSW Credit, Inc.,
Holding Co., Act Release No. 25995 (1994); Jersey Central Power - and Light Co.,
Holding Co. Act Release No. 24348 (March 18, 1987).
Rule 58 under the Act codifies the types of permissible non-utility
activities retainable by registered systems by exempting from Section 9(a) of
the Act acquisitions by registered holding companies of the securities of
energy-related companies or gas-related companies. With respect to
energy-related companies, a holding company's aggregate investment in such
energy-related companies may not exceed the greater of $50 million or 15% of the
consolidated capitalization of the registered holding company. Rule
58(a)(1)(i)-(ii). Rule 58 defines "energy-related company" as a company that,
directly or indirectly, derives substantially all of its revenues from certain
enumerated activities such as rendering energy management services, the sale of
electric and gas appliances and the development of certain energy-related
technologies./117
As discussed below, each of NiMo's non-utility subsidiaries is retainable.
o NM Uranium, Inc. - owns an interest in a closed uranium mining facility in
Live Oak, Texas that is in the process of reclamation and restoration. The
mine was formerly a source of fuel for Niagara Mohawk's nuclear plants. The
company derives substantially all of its revenues from activities within
the U.S. and is retainable under Rule 58(b)(1)(ix).
o NM Properties, Inc. - Manages real property formerly owned by Niagara
Mohawk and divests or, in conjunction with others, develops these real
property holdings. NM Properties, Inc. wholly owns the following
subsidiaries which are formed for the purpose of carrying out the business
described in the preceding sentence: Hudson Pointe, Inc., Land Management &
Development, Inc., Landwest, Inc., Moreau Park, Inc., Riverview, Inc.,
Salmon Shores, Inc., Upper Hudson Development, Inc., Arbuckle Acres, Inc.,
and OproprCo., Inc. These companies are retainable under Powergen plc,
Holding Co. Act Release No. 27291 (December 6, 2000) (authorizing the
retention of Harns Hall Management Co. Ltd, a company that maintained and
sold plots of land on a former power station site) and New Century
Energies, Inc., Holding
----------------
117 The Act also allows registered holding companies to acquire and maintain
interests in the following exempt entities: exempt telecommunications companies
(Section 34), foreign utility companies (Section 33) and exempt wholesale
generators (Section 32).
----------------
106
Co. Act Release No. 26748 (August 1, 1997) (authorizing retention of 1480
Welton Inc., a dedicated real estate subsidiary).
NM Properties presently owns land that was either previously retained on
Niagara Mohawk's books as Other Physical Property ("OPP") or was rate base
property that was no longer required for operational purposes (e.g., closed
service centers, retired rights of way, lands surrounding previously owned
generating properties, etc.). The NYPSC has approved the disposition and
valuation process for disposing of surplus land and facilities. NM
Properties and its subsidiaries are the approved entities to own the
surplus properties and they are funded from shareholder funds. NM
Properties' corporate purpose is to divest excess lands in a manner that
maximizes return while supporting NiMo's values of sustainable economic
growth and environmental stewardship. In addition to disposing of
properties already identified as surplus, NM Properties also assists NiMo's
businesses, principally Niagara Mohawk, in reviewing NiMo's entire
portfolio of land holdings, determining what additional lands are surplus,
valuing them, removing them from rate base and disposing of them in a
manner consistent with corporate policy. NiMo estimates that it will take
approximately three years to sell the present portfolio of property and ten
years to fully review, evaluate, retire and dispose of all non-essential,
excess lands and properties presently owned by Niagara Mohawk.
In general, the Commission has permitted registered holding companies to
retain subsidiaries engaged in real estate activities where such activities
have some relationship to the core functions of the holding company system.
The Commission has given particularly broad latitude where the subsidiaries
hold or manage property used in support of utility activities. See, e.g.,
Energy East Corp., Holding Co. Act Release No. 27224 (August 31, 2000)
(corporation that was formed to hold property in connection with public
utility operations was retainable); UNITIL Corp., Holding Co. Act Release
No. 25524 (April 24, 1992) (subsidiary that had acquired real estate to
support the system's utility operations deemed to be retainable). The
Commission has allowed retention in this circumstance even where the
property's utility function no longer exists or has yet to be realized.
Compare WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14,
1998) (real estate holding company that holds undeveloped property that may
be used for future utility-related activities) with Emera, Inc., Holding
Co. Act Release No. 27445 (October 1, 2001) (subsidiaries that managed
property originally used for hydroelectric projects retainable, even though
subsidiaries were inactive when the order was issued and no longer served a
utility-related function); Conectiv, Inc., Holding Co. Act Release No.
26832 (February 25, 1998) (corporation that managed real estate, and was
acquired for an intended utility purpose that no longer existed, was
retainable as a vehicle for the development and sale of such real estate).
Subsidiaries with properties that do not serve a utility-related function
might still be retained if the acquisition of the properties had at least
some connection with the system's utility operations. For example, in New
Century Energies, Inc., Holding Co. Act Release No. 27212 (August 16,
2000), the applicant stated that it often needed to acquire land for its
utility operations as part of purchases of larger tracts, resulting in
large portions of land unusable for utility purposes. A subsidiary leased
this extra
107
land to third parties, generally for agricultural purposes; the Commission
permitted retention.
The Commission has also allowed subsidiaries to engage in real estate
activities related to the holding company's administration and management.
See New Century Energies, Inc., Holding Co. Act Release No. 27212 (August
16, 2000) (allowing retention of subsidiaries that operate parking facility
and office buildings used as headquarters by holding company); Central
Power & Light, Holding Co. Act Release No. 26408 (November 13, 1995)
(retained subsidiary leased excess office space in holding company
headquarters building).
Finally, the Commission has permitted retention of subsidiaries that engage
in real estate activities in the context of community redevelopment. For
example, Ameren Corp. was permitted to retain a subsidiary that provided
venture capital financing for business and residential development projects
within the utility's service area. Ameren Corp., Holding Co. Act Release
No. 26809 (December 30, 1997). The Commission noted that "[a]s one of the
few large, public companies located and operating in the area, CIPSCO,
through CIPSCO Ventures, can be a source of capital for economic
development when few other sources are available." The Commission noted,
however, that the subsidiary's participation in the various real estate
projects was passive, and it did not take any role in the management of the
properties. See also New Century Energies, Inc., Holding Co. Act Release
No. 27212 (August 16, 2000) (subsidiaries engaged in owning interests in
affordable housing projects may be retained, but subsidiaries' role was
limited to investment oversight, not property management); East Ohio Gas
Co., Holding Co. Act Release No. 25046 (February 27, 1990) (authorizing
limited partnership to finance the development of real estate projects
designed to create jobs and other benefits in downtown Cleveland).
Applicants request that the Commission reserve jurisdiction over the
retention of NM Properties and its subsidiaries and commit to file a
post-effective amendment to this Application by January 10, 2003 describing
in more detail the business of NM Properties and its subsidiaries and
proposing retention or divestiture of such businesses as appropriate.
o NM Receivables LLC ("NM Receivables")- acts as a single-purpose financing
subsidiary that purchases and resells Niagara Mohawk's customer
receivables, including accrued unbilled revenues. The company is retainable
under Powergen plc, Holding Co. Act Release No. 27291 (December 6, 2000)
(authorizing formation and retention of LG&E Receivables LLC and KU
Receivables LLC). Applicants propose to continue financing Niagara Mohawk's
receivables post-Merger through this company.
Niagara Mohawk established NM Receivables as a limited purpose,
wholly-owned subsidiary solely to preserve the substantial cash-flow
benefits of accelerating the realization of funds from Niagara Mohawk's
accounts receivable. Previously Niagara Mohawk accomplished this objective
by selling undivided interests in its accounts receivable directly to
investors. Since investors are willing to accept a lower
108
yield if interests in receivables are sold by a bankruptcy-remote
intermediate purchaser, Niagara Mohawk now sells interests in receivables
to NM Receivables, which in turn resells them to investors.
Loans between Niagara Mohawk and NM Receivables are a means by which
Niagara Mohawk smoothes out the cash-flow effects of seasonal fluctuations
in Niagara Mohawk's sales of electricity and gas. When receivables are
increasing relative to cash receipts (as in the late fall), Niagara Mohawk
may borrow from NM Receivables. The debtor-creditor relationship may be
reversed when cash receipts are increasing relative to receivables (as in
the spring). Applicants request authorization to continue to borrow and
make such loans.
o NM Receivables Corp. II - is the managing member of NM Receivables.
o Opinac North America, Inc. - is a Delaware holding company engaged through
its subsidiaries in unregulated activities in the energy industry and is an
indirect holding company over CNP Limited, a Canadian utility that will
certify as a FUCO under Section 33 of the Act before the consummation of
the Merger. Opinac North America, Inc. is retainable as a nonutility
holding company under Interstate Energy Corp., Holding Co. Act Release No.
27069 (August 26, 1999) (authorizing the formation and financing of
nonutility subsidiaries of registered holding companies to invest and hold
securities of nonutility investments).
o Opinac Energy is a Canadian corporation that owns a portfolio of cash
equivalent securities and an interest in CNP Limited. It is retainable as a
nonutility holding company under Interstate Energy Corp., Holding Co. Act
Release No. 27069 (August 26, 1999) (authorizing the formation and
financing of nonutility subsidiaries of registered holding companies to
invest and hold securities of nonutility investments).
o CNP Limited is a Canadian public utility company based in Ontario, Canada
that generates electricity and supplies and markets energy and energy
services in Ontario. CNP Limited also sells electricity that is surplus to
its Ontario needs into the New York market, principally into the market run
by the NYISO. CNP Limited owns and operates the William B. Rankine
Generating Station, a 74.6 MW hydroelectric plant located on the Canadian
side of the Niagara River at Niagara Falls. Opinac Energy was granted an
exemption by Commission order under Section 3(a)(5) of the Act, with
respect to its interest in CNP Limited./118 CNP Limited has the following
direct or indirect subsidiaries as described in this application and
Exhibit N-2: CNP Inc., 1161557 Ontario Inc., Ziegler Energy Demands Inc.,
Westario Power Holdings Inc., Westario Power Services, Inc. Westario Power
Inc., Rideau St. Lawrence Holdings Inc, Rideau St. Lawrence Distribution
Inc., Rideau St. Lawrence Utilities Inc., and Rideau St. Lawrence Services
Inc. CNP Limited will register as a FUCO before the consummation of the
Merger.
o Niagara Mohawk Energy, Inc. - is a holding company for interests in the
following companies (its equity ownership is shown in parenthesis): Telergy
Central LLC (25%) and Direct Global Power (26%). Niagara Mohawk Energy,
Inc. is also
----------------
118 See footnote 21.
----------------
109
engaged in energy management services. Niagara Mohawk Energy, Inc. is
retainable under Interstate Energy, supra and Rule 58(b)(1)(i).
o Telergy, Inc. - is an ETC engaged in the development, deployment and
operation of a fiber optic network and telecommunications generally.
Telergy, Inc. is in liquidation under Chapter 7 of the U.S. Bankruptcy
Code. The company is retainable under Section 34 of the Act.
o Telergy Central LLC - is an ETC engaged in the development, deployment and
operation of a fiber optic network and telecommunications generally.
Telergy Central LLC is also in liquidation under Chapter 7 of the U.S.
Bankruptcy Code. The company is retainable under Section 34 of the Act.
o eVionyx, Inc. - is engaged in the research and development of fuel cell and
battery technology. The company derives substantially all of its revenues
from activities within the U.S. and is retainable under Rule 58(b)(1)(ii).
o Direct Global Power - is engaged in the development of photovoltaic and
other renewable energy products. The company derives substantially all of
its revenues from activities within the U.S. and is retainable under Rule
58(b)(1)(ii) and (vi).
110
ii. Section 10(c)(2)
Section 10(c)(2) requires the Commission to examine whether a proposed
acquisition will serve the public interest by tending towards the economical and
efficient development of an integrated public utility system. The Merger and
Restructuring will result in benefits to investors, consumers and the public
interest and represents an opportunity for growth.
The Merger will provide significant savings to ratepayers immediately upon
the consummation of the Merger and continuing through 2011. The savings are
attributable to Merger-related cost synergies and the sharing of best practices
across the operations of National Grid USA and NiMo. The direct savings and
sharing of best practices should create an even more efficient company, leading
to lower delivery costs and enhanced customer service, making upstate New York a
more attractive region for economic growth. National Grid will have - following
the acquisition of NiMo - approximately 10,000 employees in its regulated
electric and gas businesses in New York and New England. National Grid's goal is
to achieve workforce reductions across the entire National Grid USA organization
by 800 to 950 positions through natural attrition and voluntary programs. In
addition, National Grid will seek to improve the efficiency and customer service
of Niagara Mohawk's core transmission and distribution operations. A joint
National Grid - Niagara Mohawk integration team will manage the efficient
integration of the two companies.
In a study conducted from July to November 2000, Mercer Management
Consulting assisted National Grid in (1) identifying areas with potential cost
savings or costs to achieve, (2) collecting relevant data, (3) developing
related operating and financial assumptions, and (4) estimating potential
"steady-state" savings. This information was obtained by consulting with
managers from both National Grid and Niagara Mohawk to gather information and to
develop a fuller understanding of business practices, operations and costs, and
how the combined company might operate in the future, in particular in the areas
of administrative and general functions, customer-related services and
transmission and distribution functions./119
----------------
119 A description of the estimated merger savings is included in Applicants'
application to the NYPSC, Exhibit C-1, Appendix C, hereto.
----------------
111
The study led to the creation of a financial model that indicated
merger-related synergy savings of $895 million before costs to achieve over the
ten-year period of 2002-2011, or approximately $90 million per year. Based on an
estimated cost to achieve of $180 million (assuming costs equal two times the
annual savings of $90 million), net synergy savings over the ten-year period are
estimated to be $715 million as summarized below.
------------------------------------------------------------------------
Estimated 2002-2011 Merger-related Synergy Savings
($ millions (nominal))
------------------------------------------------------------------------
Personnel Savings $478
------------------------------------------------- ----------------------
Information Systems Savings 187
------------------------------------------------- ----------------------
Supply Chain Savings 49
------------------------------------------------- ----------------------
Facilities Savings 16
------------------------------------------------- ----------------------
Administrative and General Savings 165
---
------------------------------------------------- ----------------------
Total Savings 895
------------------------------------------------- ----------------------
Costs to Achieve (180)
-----
------------------------------------------------- ----------------------
Net Savings $715
------------------------------------------------- ----------------------
The Merger allows National Grid to build on the platform it has created in
New England and reinforce its position as a leading player in the Northeast - a
region that is at the forefront of the electric industry's restructuring in the
U.S. The addition of NiMo's experience in New York and with gas operations,
National Grid's ten years of experience operating a transmission system in a
competitive environment, and its top quality U.S. management team, strengthen
National Grid's ability to provide services that will benefit customers in
today's rapidly changing U.S. energy markets. National Grid intends to bring its
combined experience to bear in New York, and to continue to contribute to the
current debate on the restructuring of the U.S. transmission sector. In
112
particular, the rate plan authorized by the NYPSC demonstrates National Grid's
success in structuring long-term rate plans that benefit customers and
shareholders and include incentives for cost control and superior customer
service. The rate plan provides long-term rate stability that will support
regional economic development in upstate New York.
Although some of the anticipated benefits are strategic and will be fully
realizable only in the longer term, they are properly considered in determining
whether the standards of Section 10(c)(2) are met. See The National Grid Group
plc, Holding Co. Act Release No. 27154 (March 15, 2000). The Commission has
recognized that potential benefits are entitled to be considered, regardless of
whether they can be precisely estimated: "[S]pecific dollar forecasts of future
savings are not necessarily required; a demonstrated potential for economies
will suffice even where these are not precisely quantifiable." Centerior Energy
Corp., Holding Co. Act Release No. 24073 (April 29, 1986) (citation omitted).
See also Energy East Corporation, Holding Co. Act Release No. 26976 (Feb. 12,
1999) (authorizing acquisition based on strategic benefits and potential, but
unquantifiable, savings).
3. Section 10(f)
Section 10(f) prohibits the Commission from approving an acquisition unless
the Commission is satisfied that the acquisition will be undertaken in
compliance with applicable state laws. As described in Item 4, the acquisition
will be consummated in compliance with all applicable state laws.
4. Intermediate Holding Companies Under Section 11(b)(2)
Upon completion of the Merger, NiMo will be a wholly-owned direct
subsidiary of National Grid USA. NiMo will continue as a holding company of
Niagara Mohawk, exempt under Section 3(a)(1) of the Act. National Grid USA, in
turn, will have several direct or indirect Intermediate Company parents that are
also registered holding companies and they, in turn, will be directly or
indirectly owned by National Grid, a registered holding company.
113
Section 11(b)(2) directs the Commission:
To require . . . that each registered holding company, and each
subsidiary company thereof, shall take such steps as the Commission
shall find necessary to ensure that the corporate structure or
continued existence of any company in the holding-company system does
not unduly or unnecessarily complicate the structure, or unfairly or
inequitably distribute voting power among security holders, of such
holding-company system. In carrying out the provisions of this
paragraph the Commission shall require each registered holding company
(and any such company in the same holding company system with such
holding company) to take such action as the Commission shall find
necessary in order that such holding company shall cease to be a
holding company with respect to each of its subsidiary companies which
itself has a subsidiary company which is a holding company. Except for
the purpose of fairly and equitably distributing voting power among
the security holders of such company, nothing in this paragraph shall
authorize the Commission to require any change in the corporate
structure or existence or any company which is not a holding company,
or of any company whose principal business is that of a public-utility
company.
In plain terms, Section 11(b)(2) directs the Commission to inquire whether
holding company systems with "great grandfather" holding companies should be
simplified. In the post-Merger National Grid Group structure, Niagara Mohawk
would be the "child" utility, NiMo the father holding company, National Grid USA
the grandfather holding company and its parents up to National Grid would be
great grandfather holding companies.
Not all great grandfather holding companies, however, raise issues under
Section 11(b)(2). National Grid's application to acquire NEES raised similar
issues with regard to whether the Intermediate Companies resulted in unnecessary
complication of National Grid's corporate structure. National Grid justified its
proposed corporate structure as necessary and appropriate to maximize after-tax
returns to shareholders and noted that this was the norm rather than the
exception for cross-border transactions generally.
114
Further, the Intermediate Companies were not used as a means to diffuse
control over NEES, but merely used as special-purpose entities to hold the U.S.
assets efficiently. To assure the Commission that the abuses of pyramided
holding companies or the unfair distribution of voting power would not occur,
National Grid pledged that the Intermediate Companies would have no third-party
investors and that they would be wholly-owned directly or indirectly by National
Grid. The Commission accepted these explanations and commitments and authorized
the continued existence of the Intermediate Companies in the NEES Acquisition
Order./120
The same reasons for continuing the use of the Intermediate Companies apply
today. These companies are still needed to capture the economic efficiencies
that might otherwise be lost in a cross-border transaction. The Intermediate
Companies continue to be subject to a commitment not to issue securities to
third-party investors and the Commission should continue to view them as mere
"financial conduits," that do not introduce unnecessary complexity into the
holding company system.
The same is largely true for NiMo, which should also be viewed as a
financial conduit for the investment in Niagara Mohawk and NiMo's nonutility
subsidiaries. Retaining NiMo as a separate holding company is necessary to
insure that the NiMo shareholders who elect to receive NGG shares do so on a
tax-free basis./121 The abuses associated with pyramided holding companies are
not facilitated by permitting NiMo's retention because it will be wholly-owned
by National Grid USA and NiMo will not issue equity or debt securities to third
parties./122
----------------
120 See NEES Acquisition Order, supra, note 5 ("The Intermediate [Holding]
Companies will not serve as a means by which National Grid seeks to diffuse
control of the NEES Group. Rather, these companies will be created as
special-purpose entities for the sole purpose of helping the parties to capture
economic efficiencies that might otherwise be lost in a cross-border
transaction.")
121 In other situations, the Commission has recognized that efforts to achieve
economic efficiencies and synergies through tax savings are "in the ordinary
course of business" of a registered holding company. See Central and South West
Corporation, Holding Company Act Release No. 23578 (Jan. 22 1985) ("It can
hardly be argued that for a business to attempt to reduce its tax liability is
anything but an indication of prudent management and is not uncommon in the
non-regulated business sector. For such businesses to attempt such reductions
can fairly be characterized as being in the ordinary course of business . . .
The Commission can think of no argument which suggests that attempting to reduce
one's tax liability should not also be considered to be in the ordinary course
of business for a regulated utility holding company.").
122 See Exelon Corp., Holding Co. Act Release No. 27256 (Oct. 19, 2000)
supplemented by Holding Co. Act Release No. 27259 (Oct. 20, 2000). National Grid
USA will own 100% of the voting securities of NiMo and indirectly Niagara
Mohawk. Niagara Mohawk will, after the proposed consummation of the Merger, have
outstanding preferred stock. This preferred stock, however, has no present
voting rights and only gains voting rights after a dividend default for four
full quarters. Accordingly, these shares are not voting securities. See Exhibit
L-1 for a full discussion of Niagara Mohawk's capitalization.
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115
As demonstrated above, NiMo and the Intermediate Companies are properly
viewed as financing conduits that are beneficial to secure the full economic
benefits of the proposed Merger and ongoing asset ownership. It is not necessary
to protect investors, consumers or the public trust that they be eliminated to
reduce corporate complexity. Consequently, after "looking through" the financial
conduits, the National Grid System has but two holding companies of substance:
National Grid and National Grid USA, each of which has third-party investors.
Since National Grid would be only a "grandfather" holding company under this
analysis, the requirements of Section 11(b)(2) are satisfied.
The proposed structure likewise does not raise any regulatory concerns
under the second aspect of the analysis under Section 11(b)(2), whether the
Merger will result in an unfair or inequitable distribution of voting power
among the security holders of National Grid. NGG is a public corporation
organized under and domiciled in the U.K. Its shares are listed on, and trade
on, the London Stock Exchange. The government of the U.K. also owns what is
commonly referred to as the "golden share" in NGG./123 The golden share is a
single non-voting share that prevents amendments to NGG's Articles of
Association without the consent of the holder of the golden share. The Articles
of Association contain restrictions on certain classes of persons holding more
than a prescribed shareholding in NGG (as the indirect holder of the England and
Wales Transmission License through NGC). In particular, the Articles of
Association restrict companies that trade electricity in England and Wales from
owning more than 1% of the shares of NGG and also requires that no party may own
more than 15% of NGG's shares. The golden share is a means to preserve the
status of NGG as an independent provider of transmission services and as such
does not restrict shareholder voting rights. The golden share may not be sold or
transferred by the U.K. government, but it may be rescinded. The golden share in
NGG will be replaced by a golden share in National Grid upon
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123 The Commission addressed the Golden Share under Section 11(b)(2) in the NEES
Acquisition Order.
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116
completion of the Restructuring./124
NGG also has American Depositary Shares in the U.S. which trade as ADRs.
The moneys necessary to pay the cash consideration portion of the merger
consideration will be borrowed by National Grid from sophisticated commercial
lenders and documented in fully negotiated loan agreements. None of the
Intermediate Companies or NiMo will issue equity or debt to third parties./125
While the operating Subsidiaries have, and will continue to have, publicly
issued preferred stock and long-term debt, the terms of these securities will
not be altered or modified or otherwise affected by virtue of the Merger or the
proposed transaction structure./126 Thus, as there are no direct or indirect
security holders of NiMo with whom National Grid must share voting power, the
voting power of security holders of the National Grid holding company system
would not be unfairly or inequitably distributed.
5. Exemptions Under Section 3 of the Act
Applicants have requested that the Commission affirm by order the continued
exempt status of NiMo under Section 3(a)(1) of the Act./127 NiMo continues to
qualify for exemption under the standards of Section 3(a)(1). For the purpose of
this analysis, NiMo's only utility subsidiary is Niagara Mohawk. CNP Limited
will certify as a FUCO before the consummation of the Merger. Both Niagara
Mohawk and NiMo are incorporated in New York State and Niagara Mohawk carries on
its business exclusively in that state.
6. Exemptions Under Section 33 of the Act
CNP Limited will certify as a FUCO under Section 33 of the Act before the
consummation of the Merger. The FUCO exemption would apply to CNP Limited
----------------
124 The Commission addressed the golden share in the NEES Acquisition Order and
found no issues under Section 11(b)(2).
125 After consummation of the proposed Merger, NiMo will be a wholly owned
indirectly by National Grid. NiMo's board of directors previously authorized
50,000,000 shares of preferred stock, with a par value of $.01, but no shares
have been issued.
126 Niagara Mohawk's authorized and outstanding securities are described in
Exhibit L-1 and include preferred stock and debt.
127 If the Commission confirms NiMo's exempt status by order, NiMo would cease
filing Form U-3A-2.
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117
and its direct and indirect subsidiaries CNP Inc., 1161557 Ontario Inc., Ziegler
Energy Demands Inc., Westario Power Holdings Inc., Westario Power Services, Inc.
Westario Power Inc., Rideau St. Lawrence Holdings Inc, Rideau St. Lawrence
Distribution Inc., Rideau St. Lawrence Utilities Inc., and Rideau St. Lawrence
Services Inc. To qualify as a FUCO under Section 33 of the Act:
(1) CNP Limited must own or operate facilities that are not located in any
state and that are used for the generation, transmission, or
distribution of electric energy for sale or the distribution at retail
of natural or manufactured gas for heat, light, or power;
(2) CNP Limited may not derive any part of its income, directly or
indirectly, from the generation, transmission, or distribution of
electric energy for sale or the distribution at retail of natural or
manufactured gas for heat, light, or power, within the U.S.;
(3) Neither CNP Limited nor any of its subsidiaries may be a public
utility company operating in the U.S.; and,
(4) CNP Limited must provide notice to the Commission on Form U-57 that it
is a FUCO. Sections 33(a)(2) and 33(a)(3).
As demonstrated below, CNP Limited satisfies each of the criteria of
Section 33(a)(2) and 33(a)(3) and is therefore entitled to FUCO status.
Ownership of Utility Facilities
CNP Limited is an electric generating and marketing company with electric
transmission and distribution subsidiaries. CNP Limited and its subsidiaries are
located in Ontario, Canada. Together they serve approximately 50,000 customers.
CNP Limited's principle utility asset is the 74.6 MW Rankine hydroelectric
generating plant located at Niagara Falls. Through its subsidiary CNP Inc, CNP
Limited indirectly owns approximately 32 km of transmission lines and 900 km of
distribution lines, including one 25 hertz transmission line and one 60 hertz
transmission line that interconnect the grids in southern Ontario with
northwestern New York State. CNP Limited has no direct or indirect ownership of
retail gas distribution facilities. Neither CNP Limited nor its subsidiaries
owns or operate utility facilities located in the U.S. The companies derive none
of their income from the generation, transmission or distribution of electricity
for
118
sale, or retail gas distribution, within the U.S.
Source of Income
CNP Limited's income comes from its utility activities in Ontario. CNP
Limited does not derive any part of its income, directly or indirectly, from the
generation, transmission, or distribution of electric energy for sale or the
distribution at retail of natural or manufactured gas for heat, light, or power,
within the U.S. For the 12 months ended March 31, 2001, CNP Limited sold 649,693
MWh of electric energy within Canada or at the Canada/U.S. border to various
wholesale purchasers for export to the U.S. These sales used the lines of CNP
Inc. or other unaffiliated utilities that are interconnected with the
transmission facilities of the NYISO. All purchasers take title to any energy
sold by CNP Limited within Canada or at the international border for
transmission via NYISO facilities. CNP Inc. holds permits from the Canadian
National Energy Board ("NEB") to own and operate its international transmission
lines between Canada and the U.S. CNP Limited holds a permit from the NEB for
the export of electricity from Canada to the U.S. The NEB permit is for up to
300 MW. CNP Limited is licensed by the FERC to sell electricity at market-based
rates into the U.S. CNP Limited is also a member of the NYISO./128
The sale of power by CNP Limited at the Canadian border does not cause CNP
Limited to fail to qualify for FUCO status. Sales by CNP Limited at the Canadian
border should be treated as Canadian sales consistent with Commission precedent.
As Canadian sales, these transactions should not be deemed to involve income
from the generation, transmission or distribution of electric energy for sale in
the U.S. that would cause CNP Limited to fail to qualify for exempt FUCO status,
so long as the purchaser is
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128 Section 402(f) of the Department of Energy Organization Act ("DOE Act")
(Pub. L. 95-91) provides that no function which regulates the export or import
of electricity shall be within the jurisdiction of the FERC unless the Secretary
of Energy assigns such function to the FERC. The DOE supports the FERC's open
access and non-discriminatory transmission service initiatives for the
development of a more competitive wholesale electricity market and the DOE
believes that cross-border trade in energy should be subject to this same
policy. Consequently, the Secretary of Energy delegated to the FERC the
authority to regulate access to, and the rates, terms, and conditions for,
transmission services over permitted international electric transmission
facilities to the extent the FERC finds it necessary and appropriate to the
public interest. Department of Energy, Notice of Proposed Amendment to
Presidential Permits and Export Authorizations and Delegation and Assignment to
the Federal Energy Regulatory Commissi on, 64 Fed. Reg. 40586 (July 27, 1999).
----------------
119
not a direct or indirect subsidiary of CNP Limited.
That CNP Limited's sales at the Canadian border are Canadian in character
is consistent with Commission precedent concerning the treatment of sales at a
state border in cases under Section 3(a)(1). See, e.g., Consolidated Edison,
Inc., Holding Co. Act Release No. 27021 (May 13, 1999) ("Con Edison makes only a
small number of wholesale sales, and the majority of those sales are in New York
or at the New York border, and thus are intrastate in character."); NIPSCO
Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999) ("Although
Northern Indiana sells electricity at wholesale to non-Indiana customers, almost
all of those sales take place in Indiana or at the Indiana border, and therefore
do not constitute utility operations outside of Indiana.") (emphasis added). To
establish that the applicants were entitled to an exemption under Section
3(a)(1) of the Act, the Commission in these cases found that the holding company
and its material utility subsidiaries were "predominantly intrastate in
character" and that they did "carry on their business substantially in a single
state." By finding that the sales of electricity took place at the border, the
Commission determined that applicants' operations met that standard. Similarly,
given that CNP Limited structures its sales so that all purchasers take title to
any energy sold at the international border, it is appropriate to find that
these sales are fundamentally Canadian.
Because the sales by CNP Limited will take place in Canada, they cannot be
deemed to generate income directly from the generation, transmission or
distribution of electric energy for sale in the U.S. To assure the Commission
that CNP Limited will continue not to derive income directly from the
generation, transmission or distribution of electric energy for sale in the
U.S., Applicants commit that as long as Applicants hold an interest in CNP
Limited all future sales of electricity by CNP Limited will take place at the
border or within Canada. In addition, to fully protect U.S. retail customers
from utility service that is not regulated in the U.S., CNP Limited will not
sell electricity or transmission or distribution services directly to retail
customers within the U.S.
With regard to whether CNP Limited's sales at the border provide it with
indirect income from the generation, transmission or distribution of electric
energy for sale in the U.S., we note that since September 2000, all sales have
been made to unaffiliated purchasers. Consequently, CNP Limited did not receive
any income
120
indirectly from these purchasers' subsequent resale of power in the U.S. To
assure the Commission that CNP Limited will continue not to derive income
indirectly from the generation, transmission or distribution of electric energy
for sale in the U.S., Applicants commit that, as long as Applicants hold an
interest in CNP Limited, no direct or indirect subsidiary of CNP Limited will
engage in the generation, transmission or distribution of electric energy for
sale in the U.S. In addition, as long as Applicants hold an interest in CNP
Limited, it will not sell power directly or indirectly to a subsidiary,
associate or affiliate company for sale in the U.S. and also will not sell power
directly or indirectly to a nonaffiliate where the purchaser resells the power
in the U.S. under terms controlled by CNP Limited or its associate or affiliate
companies./129 These commitments preclude CNP Limited from using any NiMo
existing or to be acquired subsidiary, associate or affiliate company, or a
nonaffiliate, as an intermediary to indirectly effect a sale of power in the
U.S./130
Utility Operations in the U.S.
CNP Limited does not, directly or through subsidiaries, own or operate
utility assets, as defined under the Act, located in the U.S.
Notice on Form U-57 and MPUC Certification
NiMo will file Form U-57 with the Commission, claiming FUCO status for CNP
Limited before the Merger is consummated.
Nonutility Subsidiaries
CNP Limited's subsidiaries are all engaged in utility or energy-related
non-utility businesses. Consequently, its exemption under Section 33 does not
raise any issue with respect to whether certain nonutility businesses may or may
not be retainable by a FUCO./131
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129 Sales by CNP Limited at the Canadian border into the NY spot market where
the NYISO sets the market clearing price and buyers including, potentially,
Niagara Mohawk, purchase that power would not be prohibited. In such cases, CNP
Limited does not know the identity of the purchaser and cannot choose the
purchaser. CNP Limited also cannot set the price.
130 See Emera Inc., Holding Co. Act Release No. 27445 (October 1, 2001) (FUCO
certification is made where substantially the same commitments regarding sales
into the U.S. were provided by the Applicant).
131 See, Foreign Utility Companies, Holding Co. Act Release No. 27342 (January
31, 2001) (proposing for comment rules 55 and 56 regarding investments in FUCOs
and suggesting that the Commission should establish standards for the type of
businesses in which a FUCO could engage).
----------------
121
Under Section 33(a)(1) of the Act, a FUCO is generally exempt from all the
provisions of the Act and is not considered a public utility company under the
Act. Accordingly, CNP Limited and its subsidiaries will not be public utility
subsidiaries in the National Grid System after the Merger for purposes of
Sections 9 and 10 of the Act.
Item 4. Regulatory Approvals
A. State Regulation
The Merger and Restructuring do not require the approval of the
Massachusetts Department of Telecommunications and Energy, the Rhode Island
Public Utilities Commission, the Connecticut Department of Public Utility
Control/132 or the Maine Public Utilities Commission. The Merger does require
the approval of the NYPSC and the Restructuring requires the approval of the New
Hampshire Public Utility Commission ("NHPUC") and the Vermont Public Service
Board ("VPSB"). The required state commission approvals are discussed below.
New York Public Service Commission
Under Section 70 of the New York State Public Service Law, the NYPSC must
approve the transfer of an electric company's franchise, works or systems to
another corporation. The NYPSC has previously asserted jurisdiction over mergers
of holding companies of public utility corporations, even where there was no
direct transfer of the franchise, works or system of the New York utility, based
upon the indirect change of control. Applicants filed a petition with the NYPSC
on January 17, 2001. The NYPSC issued its order authorizing the Merger on
December 3, 2001. See Exhibit C-2 to the Application.
New Hampshire Public Utility Commission
The NHPUC must approve the direct or indirect acquisition of more than 10%
of the stock or bonds of a public utility or public utility holding company
doing business in the state under Section 374:33 of the New Hampshire Revised
Statutes Annotated ("RSA").
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132 Millstone 3, in which NEPCO had a 16.2% interest, was sold to Dominion
Resources, Inc. on March 31, 2001 under circumstances analogous to those
described in New England Electric System, No-Action Letter, File No. 132-3
(April 16, 1998).
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122
The Restructuring may require approval of the NHPUC under RSA 374:33 because of
the indirect transfer of control of Granite State Electric Company, a subsidiary
of National Grid USA, to New National Grid. Under RSA 369:8, approval is not
required for a merger of a parent company of a public utility where the public
utility certifies that the transaction will not have an adverse effect on the
rates, terms, service or operations of the New Hampshire public utility and the
NHPUC does not challenge the certification. If the NHPUC does challenge the
utility's certification of no adverse effect within 30 days of the filing, the
utility may amend its initial certification. If after reviewing the amended
certification, if the NHPUC still challenges the certification, the utility must
review the proposed merger under RSA 374:33. The transaction may be approved
under RSA 374:33 where the NHPUC determines that there will be no net harm to
New Hampshire customers. If the NHPUC takes no action within 60 days after the
public utility's filing of certification of no adverse effect, then the
transaction is considered approved as filed. Applicants have sought a waiver of
any necessary approvals from the NHPUC based upon a certification that the
transaction will not have an adverse effect within the state. Applicants made a
filing with the NHPUC on December 21, 2000. By order dated February 20, 2001,
the NHPUC found that the Restructuring "is reasonable, lawful, proper and in the
public interest and will not have an adverse effect on the rates, terms, service
or operation of [Granite State] or, to the extent [NEPCO] is regulated by the
Commission, of [NEPCO]." See Order of the NHPUC, Order No. 23,640, (February 20,
2001), filed as Exhibit C-6 to the Application at 4. The NHPUC order is
conditioned on the representation of Applicants that the acquisition premium
incurred to acquire NiMo not be charged to Granite State or NEPCO and that any
synergies from the transaction be passed along on an equitable basis to National
Grid's New Hampshire ratepayers.
Vermont Public Service Board
Under Section 107 of Title 30 of the Vermont Statutes Annotated, the VPSB
must approve the direct or indirect acquisition of a controlling interest in a
company subject to the jurisdiction of the VPSB, or in a company which has the
controlling interest in the jurisdictional company. Because NEPCO, a subsidiary
of National Grid USA, operates facilities in Vermont, and is subject to the
VPSB's
123
jurisdiction, the Restructuring will require VPSB approval for the indirect
change of control of NEPCO. The VPSB may approve the acquisition based upon a
finding that the transaction will promote the public good and has discretionary
authority to waive formal hearings. Applicants filed for all necessary approvals
from the VPSB on March 20, 2001 and the VPSB authorized the Restructuring by
order dated June 27, 2001. See Exhibit C-4.
B. Federal Regulation
Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act")
The Merger is subject to the requirements of the HSR Act and the rules and
regulations thereunder, which provide that certain acquisition transactions may
not be completed until certain information has been furnished to the Antitrust
Division of the Department of Justice (the "Antitrust Division") and the Federal
Trade Commission (the "FTC") and until certain waiting periods have been
terminated or have expired. The expiration or earlier termination of the HSR Act
waiting period would not preclude the Antitrust Division or the FTC from
challenging the merger on antitrust grounds. If the merger is not completed
within 12 months after the expiration or earlier termination of the initial HSR
Act waiting period, Applicants would be required to submit new information to
the Antitrust Division and the FTC, and a new HSR Act waiting period would have
to expire or be earlier terminated before the merger could be completed.
Applicants made their filing under the HSR Act on January 26, 2001 and on
February 23, 2001 the waiting period terminated. Applicants have 12 months from
the latter date to consummate the Merger before a new information must be
submitted.
Federal Power Act ("FPA")
Section 203 of the FPA provides that no public utility may sell or
otherwise dispose of its facilities subject to the jurisdiction of the FERC or,
directly or indirectly, merge or consolidate such facilities with those of any
other person or acquire any security of any other public utility without first
having obtained authorization from the FERC. Because this transaction involves a
change in ownership and control of Niagara Mohawk, the prior approval of the
FERC under FPA Section 203 is required in
124
order to complete the merger. In addition, because the Restructuring technically
involves a change of control over NGG's existing public utility subsidiaries to
National Grid, the Restructuring also requires approval of the FERC as a merger
transaction under Section 203 of the FPA.
Under Section 203 of the FPA, the FERC is directed to approve a merger if
it finds such merger "consistent with the public interest." In reviewing a
merger, the FERC generally evaluates: (1) whether the merger will adversely
affect competition; (2) whether the merger will adversely affect rates; and (3)
whether the merger will impair the effectiveness of regulation. In an order
dated June 13, 2001, the FERC authorized the Merger and Restructuring because
the transactions would not adversely affect competition, rates or regulation and
were, therefore, consistent with the public interest. The Commission also
authorized Applicants' proposal for Niagara Mohawk to pay dividends from its
paid-in capital accounts and to transfer revenues from major transactions such
as asset sales, to its parent, subject to the requirement that Applicants
either: (1) make a filing with the FERC within 30 days of the order clarifying
their dividend limitation proposal or (2) adopt an overriding limitation that
Niagara Mohawk must maintain a minimum equity balance equal to 30% of total
capital. See Exhibit G-2. Applicants clarified their dividend limitation
proposal on July 13, 2001. See Exhibit G-3.
Exon-Florio
The Committee on Foreign Investment in the United States ("CFIUS") may
review and investigate the Merger under the Exon-Florio Provisions of the
Omnibus Trade and Competitiveness Act of 1988 ("Exon-Florio"), and the President
of the United States or his designee is empowered to take certain actions in
relation to Mergers, acquisitions and takeovers by foreign persons which could
result in foreign control of persons engaged in interstate commerce in the
United States pursuant to Exon-Florio. In particular, Exon-Florio enables the
President to block or reverse any acquisitions by foreign persons which threaten
to impair the national security of the United States. Before the Merger may be
consummated, any CFIUS review and investigation of the Merger under Exon-Florio
must have terminated, and the President must not have taken any of his
authorized actions under Exon-Florio. Applicants filed an application in
125
connection with the Merger and were informed on March 26, 2001 that action under
Exon-Florio had concluded with respect to the Merger./133
Federal Communications Commission ("FCC")
The FCC must approve the transfer of control of telecommunications permits
or licenses. The Communications Act of 1934 prohibits the transfer, assignment
or disposal in any manner of any construction permit or station license, or any
rights thereunder, to any person without authorization from the FCC. In
addition, a carrier must obtain permission before acquisition or operation of
new lines and may not construct or extend a line, or transmit via such lines,
without prior FCC approval. Under the Communications Act, the FCC will approve a
transfer of control if it serves the public convenience, interest and necessity.
On September 20, 2001, Applicants filed four applications to assign Niagara
Mohawk's licenses. The FCC consented to the applications on September 27, 2001,
October 4, 2001, October 4, 2001, and November 26, 2001. The FCC published the
actions in Public Notices dated October 3, 2001, October 10, 2001, and December
5, 2001. Applicants have 180 days from the date of Public Notice to consummate
the transaction and to notify the FCC of its consummation. If the transaction is
not consummated within that period a request for extension of time must be filed
prior to the expiration of the 180-day period.
No other federal regulatory approvals, other than the approval of this
Commission, are required with respect to the Merger or with respect to the
financing transactions proposed herein.
Item 5. Procedure
Applicants respectfully request that the Commission issue an order granting
and permitting this Application to become effective by January 10, 2002.
Applicants waive a recommended decision by a hearing or other
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133 See Exhibit G-4 to this Application.
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126
responsible officer of the Commission for approval of the Merger and consent to
the Division of Investment Management's assistance in the preparation of the
Commission's decision. There should not be a waiting period between the issuance
of the Commission's order and the date on which it is to become effective.
Item 6. Exhibits and Financial Statements
Exhibits
A-1 Memorandum and Articles of Association of NGG, incorporated by reference
to Exhibit A-1 to SEC File No. 70-9473, filed March 26, 1999.
A-2.1 Memorandum of Association of National Grid (filed herewith).
A-2.2 Articles of Association of National Grid (filed herewith).
A-3 Certificate of Incorporation of NiMo, incorporated by reference to Form
8-K, filed on March 18, 1999.
A-4 By-Laws of NiMo incorporated by reference to NiMo's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.
B-1 Agreement and Plan of Merger and Scheme of Arrangement by and among
National Grid Group plc, Niagara Mohawk Holdings, Inc., New National Grid
Limited, and Grid Delaware, Inc. dated as of September 4, 2000 and
amended December 1, 2000, incorporated by reference to Annex A to the
proxy statement/prospectus filed with Amendment No. 2 to New National
Grid plc's registration statement on Form F-4, Exhibit B-2, hereto.
(Company Disclosure Schedules, dated September 4, 2000, previously filed
under cover of Form SE).
B-2 Registration Statement of New National Grid plc on Form F-4, Amendment
No. 2, incorporated by reference to SEC File No. 333-47234, filed on
December 4, 2000.
C-1 Application to the New York State Public Service Commission.
C-1.1 Supplement to the Application to the New York State Public Service
Commission (filed under cover of Form SE).
C-1.2 Joint Proposal to the New York State Public Service Commission (filed
under
127
cover of Form SE).
C-2.1 Order of the New York State Public Service Commission (filed herewith).
C-2.2 New York State Public Service Commission Revised Joint Proposal (filed
under cover of Form SE)
C-3 Application to the Vermont Public Service Board.
C-4 Order of the Vermont Public Service Board.
C-5 Application to the New Hampshire Public Utilities Commission.
C-6 Order of the New Hampshire Public Utilities Commission.
D-1 Map of National Grid USA's service territory (filed under cover of Form
SE).
D-2 Map of Niagara Mohawk Power Corporation's service territory (filed under
cover of Form SE).
E-1 Opinion of Counsel - National Grid Group plc (filed herewith).
E-2 Opinion of Counsel - Niagara Mohawk Holdings, Inc. (filed herewith).
F-2 Past tense opinion of counsel (to be filed by amendment).
G-1 Application to the Federal Energy Regulatory Commission (filed herewith)
(Exhibit A, Niagara Mohawk Power Corporation Franchise List, Exhibit K,
Maps of Various Operating Areas and Attachment 2 Work Papers of Dr. Henry
Kahwaty, filed under cover of Form SE; Exhibit I incorporated by
reference to Exhibit B-1).
G-2 Order of the Federal Energy Regulatory Commission.
G-3 Clarification of Requested Dividend Authority and Additional Commitment,
filed with the FERC.
G-4 Letter from the Committee on Foreign Investment in the United States,
dated March 26, 2001 (filed herewith).
H-1 Annual Report on Form 20-F of National Grid Group plc for the Fiscal Year
Ended March 31, 2001, incorporated by reference to SEC File No. 001-14958
(filed June 18, 2001).
H-2 Annual Report on Form 10-K of Niagara Mohawk Holdings, Inc. for the
Fiscal Year Ended December 31, 2000, incorporated by reference to SEC
File No. 000-25595 (filed February 16, 2001).
I-1 Proposed Form of Notice.
J-1 Gas Retention Study (filed herewith).
128
K-1 Form of Services Agreement between National Grid USA Service Company and
the NiMo System Companies, incorporated by reference to Exhibit B-2 of
Form U-1 in SEC File No. 70-9473 (filed March 26, 1999).
L-1 Description of National Grid Subsidiaries (filed herewith).
L-2 Description of NiMo Subsidiaries (filed herewith).
M-1 Merger and Restructuring Transaction Steps (confidential treatment
requested).
N-1 Corporate Chart of NiMo System Before the Merger (filed under cover of
Form SE).
N-2 Corporate Chart of National Grid System Before the Merger (filed under
cover of Form SE).
N-3 Corporate Chart of National Grid System After the Merger (filed under
cover of Form SE).
O-1 Outstanding External Financing of the NiMo System (filed herewith).
P-1 Opinion of Donaldson, Lufkin & Jenrette Securities Corporation (included
as Annex B to the proxy statement/prospectus filed with NiMo's
registration statement in Exhibit B-2, hereto).
Q-1 Proposed Tax Allocation Agreement (filed herewith).
Q-2 Memorandum in Support of Proposed Tax Allocation Relief (filed herewith).
Financial Statements
FS-1 National Grid Group plc Unaudited Pro Forma Condensed Combined Balance
Sheet as of September 30, 2001 and Unaudited Pro Forma Condensed Combined
Income Statement for the Twelve Months Ended September 30, 2001.
FS-2 National Grid Group plc Consolidated Balance Sheet and Statement of
Income for the Year Ended March 31, 2001, included in Exhibit H-1 to this
Application.
FS-3 National Grid Group plc Consolidated Balance Sheet and Statement of
Income as of and for the six month's ended September 30, 2001,
incorporated by reference to National Grid's Form 6-K, SEC File No.
001-14958, (filed December 14, 2001).
FS-4 Niagara Mohawk Holdings, Inc. Balance Sheet and Statement of Income for
the
129
Year Ended and As of December 31, 2000, incorporated by reference to
Exhibit H-2.
FS-5 Niagara Mohawk Holdings, Inc. Balance Sheet and Statement of Income as of
and for the nine months ended September 30, 2001, incorporated by
reference to Niagara Mohawk Holdings, Inc.'s Form 10-Q, SEC File No.
000-25595 (filed November 14, 2001).
FS-6 Balance Sheets for Non-Utility Subsidiaries of Niagara Mohawk Holdings,
Inc. as of September 30, 2001.
FS-7 Projected National Grid Profit and Loss Accounts and Statement of
Capitalization for the Authorization Period (confidential treatment
requested).
Item 7. Information as to Environmental Effects.
The proposed Acquisition involves neither 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. No federal agency is preparing an environmental impact
statement with respect to this matter.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, Applicants have duly caused this Application-Declaration to be signed on
their behalf by the undersigned thereunto duly authorized.
Date: January 15, 2002 National Grid Group plc
New National Grid plc
National Grid (US) Holdings Limited
National Grid (US) Investments 4
National Grid (US) Partner 1 Limited
National Grid (US) Partner 2 Limited
NGG Financial plc
By: /s/ Fiona Smith
-----------------
Company Secretary and General Counsel
Date: January 15, 2002 New England Power Company
Massachusetts Electric Company
The Narragansett Electric Company
Granite State Electric Company
Nantucket Electric Company
130
New England Electric Transmission Corporation
New England Hydro-Transmission Corporation
New England Hydro-Transmission Electric Co. Inc.
Vermont Yankee Nuclear Power Corporation
Wayfinder Group, Inc.
NEES Energy, Inc.
EUA Energy Investments Corp.
National Grid Transmission Services Corp.
National Grid USA Service Company Inc.
Metrowest Realty LLC
National Grid USA
National Grid General Partnership
National Grid Holdings Inc.
By: /s/ John G. Cochrane
-----------------
Vice President
National Grid USA
Date: January 15, 2002 Niagara Mohawk Holdings, Inc.
Niagara Mohawk Power Company
By: /s/ Gary J. Lavine
-----------------
Gary J. Lavine
Senior Vice President and Chief Legal Officer
Niagara Mohawk Holdings, Inc.
131
Exhibit Index
Exhibits
A-2.1 Memorandum of Association of National Grid (filed herewith).
A-2.2 Articles of Association of National Grid (filed herewith).
C-2.1 Order of the New York State Public Service Commission and Revised Joint
Proposal.
C-2.2 New York State Public Service Commission Revised Joint Proposal (filed
under cover of Form SE)
E-1 Opinion of Counsel - National Grid Group plc.
E-2 Opinion of Counsel - Niagara Mohawk Holdings, Inc.
G-1 Application to the Federal Energy Regulatory Commission (Exhibit A,
Niagara Mohawk Power Corporation Franchise List, Exhibit K, Maps of
Various Operating Areas and Attachment 2 Work Papers of Dr. Henry
Kahwaty, filed under cover of Form SE; Exhibit I incorporated by
reference to Exhibit B-1)
G-4 Letter from the Committee on Foreign Investment in the United States,
dated March 26, 2001.
J-1 Gas Retention Study.
L-1 Description of National Grid Subsidiaries.
L-2 Description of NiMo Subsidiaries.
O-1 Outstanding External Financing of the NiMo System.
Q-1 Proposed Tax Allocation Agreement.
Q-2 Memorandum in Support of Proposed Tax Allocation Relief.
132
Financial Statements
FS-1 National Grid Group plc Unaudited Pro Forma Condensed Combined Balance
Sheet as of September 30, 2001 and Unaudited Pro Forma Condensed Combined
Income Statement for the Twelve Months Ended September 30, 2001.
FS-6 Balance Sheet and Statement of Income for Significant Non-Utility
Subsidiaries of Niagara Mohawk Holdings, Inc. as of and for the [nine]
months ended September 30, 2001.
133