70-10184
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
The Connecticut Light and Power Company Public Service Company of
CL&P Receivables Corporation New Hampshire
NU Enterprises, Inc. Properties, Inc.
Northeast Generation Services Company North Atlantic Energy Corporation
Woods Network Services, Inc. North Atlantic Energy Services Corp.
NGS Mechanical, Inc. Energy Park
E.S. Boulos Company 780 North Commercial Street
Woods Electrical Co., Inc. Manchester, NH 03101
Northeast Generation Company
Select Energy, Inc. Select Energy Services, Inc
Select Energy New York, Inc. Reeds Ferry Supply Co., Inc.
The Rocky River Realty Company Select Energy Contracting, Inc.
The Quinnehtuk Company HEC/Tobyhanna Energy Project, Inc.
Charter Oak Energy, Inc. 24 Prime Parkway
Mode 1 Communications, Inc. Natick, MA 01760
Northeast Utilities Service Company
Yankee Energy System, Inc. Northeast Utilities
Yankee Gas Services Company Western Massachusetts Electric
Yankee Energy Financial Services Company Company
Northeast Nuclear Energy Company 174 Brush Hill Avenue
NorConn Properties, Inc. West Springfield, MA 01090-0010
Yankee Energy Services Company
107 Selden Street Holyoke Water Power Company
Berlin, CT 06037 Holyoke Power and Electric Company
One Canal Street
Holyoke, MA 01040
(Name of companies filing this statement and addresses of principal
executive offices)
NORTHEAST UTILITIES
(Name of top registered holding company)
Gregory B. Butler, Esq.
Senior Vice President, Secretary and General Counsel
Northeast Utilities Service Company
P.O. Box 270
Hartford, CT 06141-0270
(Name and address of agent for service)
The Commission is requested to mail signed copies of all orders, notices and
communications to
Jeffrey C. Miller David R. McHale
Assistant General Counsel Vice President and Treasurer
Northeast Utilities Northeast Utilities
Service Company Service Company
P.O. Box 270 P.O. Box 270
Hartford, CT 06141-0270 Hartford, CT 06141-0270
The Application/Declaration in this file is hereby amended and restated
to read as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
1. Northeast Utilities ("NU"), a public utility holding company registered
under the Public Utility Holding Company Act of 1935, as amended (the "Act")
and The Connecticut Light and Power Company and its subsidiary CL&P
Receivables Corporation, Western Massachusetts Electric Company, Public
Service Company of New Hampshire and it subsidiary Properties, Inc., Holyoke
Water Power Company and its subsidiary Holyoke Power and Electric Company,
North Atlantic Energy Corporation, North Atlantic Energy Service Corporation,
Northeast Nuclear Energy Company, The Rocky River Realty Company, The
Quinnehtuk Company, Charter Oak Energy, Inc., and Northeast Utilities Service
Company, each a wholly-owned subsidiary of NU, Yankee Energy System, Inc.
("Yankee Energy"), a wholly-owned public utility holding company subsidiary
of NU and its wholly-owned subsidiaries, Yankee Gas Services Company, Yankee
Energy Financial Services Company, Yankee Energy Services Company and NorConn
Properties, Inc.; and NU Enterprises, Inc., a wholly owned nonutility
holding company subsidiary of NU, and its direct and indirect wholly-owned
subsidiaries, Northeast Generation Company, Northeast Generation Services
Company and its subsidiaries, NGS Mechanical, Inc., E. S. Boulos Company, and
Woods Electrical Company, Inc., Select Energy, Inc. and its subsidiary Select
Energy New York, Inc., Select Energy Services, Inc., and its subsidiaries
Reeds Ferry Supply, Co., Inc., HEC/Tobyhanna Energy Project, Inc. and Select
Energy Contracting, Inc., Mode 1 Communications, Inc. and Woods Network
Services, Inc., (collectively, the "Subsidiaries" and collectively with NU,
the "Applicants") submit this application/declaration (the "Application")
pursuant to Section 12 of the Act and Rule 45 thereunder to seek approval for
the amendment of the NU System Tax Allocation Agreement such that NU will
retain the benefit (in the form of the reduction in consolidated tax) that is
attributable to tax losses incurred by it in connection with the Acquisition
Debt (as defined herein), rather than generally provide such tax benefit to
its Subsidiaries.
2. On March 1, 2000, NU acquired Yankee Energy System, Inc. ("Yankee
Energy"). In connection with this acquisition, on March 1, 2000, NU entered
into a $266 million one-year bank term loan facility under which $263 million
was borrowed. On February 28, 2001, NU repaid this facility with the
proceeds of a $263 million floating rate senior note issuance. The senior
note issuance bore an effective rate of 6.9% at February 28, 2001 and was
scheduled to mature in February 2003. In April 2002, NU issued $263 million
of 10-year senior unsecured notes carrying a coupon rate of 7.25% which
mature April 1, 2012. The proceeds from this issuance ("YES Debt") were used
to redeem the floating rate notes. The annual interest payment on the YES
Debt is approximately $19.1 million. See Holding Company Act Rel. No. 35-
27127 (January 31, 2000). At an assumed rate of 35%, the tax benefit to NU is
$6,650,000.
3. For purposes of this Application, "Acquisition Debt" means the YES Debt
and indebtedness that may be incurred by NU to refinance such indebtedness.
4. The Applicants request that the Commission authorize NU and its
Subsidiaries to amend and restate the Amended and Restated Tax Allocation
Agreement, as amended (the "Current Agreement") of the NU system companies in
the manner set forth in the Second Amended and Restated Tax Allocation
Agreement that is filed herewith as Exhibit B-2 (the "Proposed Amended Tax
Allocation Agreement"). The Current Agreement under which taxes are
allocated among the Applicants complies with Rule 45(c) under the Act. The
Current Agreement is dated as of January 1, 1990 and was filed as Exhibit D
to NU's 1994 Form U5S. A First Amendment to the Current Agreement dated as
of October 26, 1998 was filed as Exhibit D to NU's 1997 U5S, and a Second
Amendment dated as of March 1, 2000 was filed as Exhibit D.3 to NU's 2000
U5S. All such Amendments were in conformity with Rule 45(c) and did not
require Commission approval.
5. Under the Proposed Amended Tax Allocation Agreement, the consolidated
tax would generally be allocated among the members of the group in proportion
to the separate return tax of each member, provided that the tax apportioned
to any Subsidiary of NU will not exceed the "separate return tax" of such
Subsidiary with NU allocating the benefits of its own losses generally to its
Subsidiaries. This is the method of allocation required under Rule
45(c)(2)(ii).
6. The Proposed Amended Tax Allocation Agreement further provides that NU
will retain the benefit attributable to tax losses it incurs in connection
with the Acquisition Debt, rather than reallocate such benefit to its
Subsidiaries. This would be effective for the tax year beginning January 1,
2004 and end when the Acquisition Debt, and any refinancings thereof, have
been paid off. In this respect, the proposed Amended Tax Allocation
Agreement does not comply with all of the requirements of Rule 45(c) and
requires Commission approval. The Proposed Amended Tax Allocation Agreement
will therefore have the effect of assigning the tax benefit associated with
the interest expense on the Acquisition Debt to the entity that is legally
obligated for its payment - NU. At the same time, in accordance with Rule
45(c)(2), the portion of the consolidated tax allocated to any of the
Subsidiaries will not exceed the "separate return tax" of such Subsidiary
(the "separate return limitation"). Thus, the Proposed Amended Tax Allocation
Agreement will not have the effect of shifting a larger portion of the
group's tax liability to any member of the group than such company would
otherwise pay on a separate return basis. Exhibit K-1 illustrates the
difference between the Rule 45(c) method and the proposed method in the
amounts of tax that would have been allocated to the members of the NU System
based on a hypothetical set of facts. (It should be noted that in recent
years NU itself has had taxable income as a result of certain transactions
and thus the benefits attributable to tax losses for those years were
retained at the NU level to offset such income. However, due to carry-back
limitations imposed by the Internal Revenue Service, such income will be
unavailable to offset NU's ongoing tax loss benefits after December 31,
2003).
7. A legal analysis of the Proposed Amended Tax Allocation Agreement, in
light of the policies and purposes of Sections 12 and 13 of the Act and Rule
45, is contained in Item 3, below.
8. The Applicants agree to supplement their Rule 24 report in this
proceeding, annually following each quarter in which they file a consolidated
tax return, providing information showing (i) the calculation of the portion
of NU's loss that is attributable to interest expense on Acquisition Debt and
(ii) the actual allocation of federal income tax liability to each of the
members of the consolidated group.
ITEM 2. FEES, COMMISSION AND EXPENSE.
The fees, commissions and expenses paid or incurred or to be incurred
in connection with this Application are estimated at not more than $15,000.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
The Proposed Amended Tax Allocation Agreement in General
1. Tax allocation agreements between a registered holding company and its
subsidiaries must comply with Section 12 of the Act and Rule 45 thereunder.
Rule 45(a) 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. Approval under Rule 45(a) is not required for the filing of
a consolidated tax return pursuant to a tax allocation agreement between
eligible associate companies in a registered holding company system that
complies with the terms of Rule 45(c). However, if a tax allocation agreement
does not comply in all respects with the provisions of Rule 45(c), it may
nonetheless be approved by the Commission under Section 12(b) and Rule
45(a).
2. Rule 45(c)(2) provides that consolidated tax may be apportioned among
the members of a group in proportion to each member's corporate taxable
income or separate return tax, but, in either case, the amount of the tax
apportioned to any subsidiary company may not exceed the separate return tax
of such subsidiary. In other words, the amount of consolidated tax that is
apportioned to any subsidiary company in a consolidated group may not exceed
the amount of tax that such subsidiary company would have paid if such tax
were computed as though such subsidiary company were not a member of a
consolidated group.
3. Rule 45(c)(4) provides that a tax allocation agreement may exclude
associate companies not having positive corporate taxable income for the year
(i.e., loss companies) from a current allocation of the benefit of their
losses, provided that the agreement gives each subsidiary carryover rights
that can be used in future years to reduce their proportionate share of
consolidated tax. Alternatively, under Rule 45(c)(5), the so-called "current
payment" method, a tax allocation agreement may require that the associate
companies with a positive allocation pay the amount so allocated and that
subsidiary companies with a negative allocation receive current payment of
their corporate tax credits. Specifically, Rule 45(c)(5) provides:
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, 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.
4. Thus, under Rule 45(c)(5), only "subsidiary companies," as
opposed to "associate companies" (which includes the holding company in a
holding company system, as well as all subsidiary companies), are entitled to
be paid for any negative allocation (i.e., losses or credits). The Proposed
Amended Tax Allocation Agreement adopts the "current payment" method, but
provides for NU to retain the tax savings attributable to the interest
expense on the Acquisition Debt. The mechanism by which this is achieved is
to include NU among the members of the consolidated group that are entitled
to receive payments (i.e., negative allocations of tax) for their losses, but
then limit the amount which members other than NU can receive to the portion
of NU's loss that is not attributable to the interest expense on the
Acquisition Debt.
5. 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 the consolidated return
savings. The Commission noted that "[e]xploitation of utility companies by
holding companies through asserted misallocation of consolidated tax return
benefits was among the abuses examined in the investigations underlying the
enactment of the Act." It should 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.
Thus, where NU is seeking only to retain the tax benefit attributable to the
interest expense on the Acquisition Debt for which no other company in the NU
system has any liability, the proposed arrangement will not give rise to the
types of problems (e.g., upstream loans) that the Act was intended to
address.
6. In the instant situation, however, the Acquisition Debt was not
incurred to fund investments in NU's Subsidiaries, but rather to acquire the
equity of Yankee Energy. Such debt represents indebtedness of NU, issued
based on its creditworthiness and is non-recourse to the Subsidiaries. By
incurring the Acquisition Debt, NU is creating tax deductions that are non-
recourse to its Subsidiaries. As a result, NU should retain the benefits of
those tax credits. Importantly, NU could not, without the approval of the
commissions having jurisdiction over rates of its utility Subsidiaries,
recover in rates of such utility Subsidiaries any costs, including the
interest on the Acquisition Debt, associated with the acquisition of Yankee
Energy, thus the allocation of tax under the Proposed Amended Tax Allocation
Agreement would not result in any detriment to the customers of NU's utility
Subsidiaries. Moreover, the Acquisition Debt is and will remain unsecured.
Thus, the lenders will not have any call on the assets of NU's Subsidiaries
or any security interest in the common stock of the Subsidiaries that is held
by NU.
7. Although NU's Subsidiaries do not have any legal obligation for
such debt, NU's ability to pay interest on, as well as to pay common stock
dividends, is largely dependent upon its receipt of dividends from its
Subsidiaries. Currently, NU projects that its dividends will be paid largely
from current and retained earnings of the utility Subsidiaries, as allowed by
Rule 46. Currently, NU is not projecting any change in its dividend policy.
In addition, the Proposed Amended Tax Allocation Agreement will have no
impact on the rates or revenue requirements of the utility Subsidiaries.
8. Finally, the amount of tax allocated to the utility Subsidiaries
under the Proposed Amended Tax Allocation Agreement will remain subject to
the separate return limitation and no company will pay more than the amount
it would pay as determined on a stand-alone basis.
The Proposed Tax Allocation Method Is Consistent With The Policies And
Purposes Of The Act
9. The Proposed Amended Tax Allocation Agreement is consistent with
the policies and purposes of Section 12 of the Act. Section 12 neither
prohibits a registered holding company from retaining the benefit of the tax
attributes that it generates nor requires it to reallocate those tax
attributes to its subsidiaries. Section 12 merely prohibits upstream loans or
extensions of credit to a registered holding company, and requires
approval, by rule or by order, for any loan by a holding company, or any
subsidiary thereof, to a subsidiary company.
10. Moreover, the policy underlying Rule 45(c), as articulated by the
Commission in its release proposing Rule 45(c), appears to have little or
nothing to do with the circumstances presented in this case. In its proposing
release, the Commission noted that the "[e]xploitation of utility companies
by holding companies through asserted misallocation of consolidated tax
return benefits" was among the abuses that led to the passage of the Act.
The Commission then explained:
The corporate relationships required by the Act assure that the
deductible corporate expenses of the holding company itself will
always create a consolidated tax saving, since Section 13(a) of the
Act precludes such expenses being passed on to the subsidiaries,
through service charge or contract, so as to transform them into
corporate deductions of the subsidiaries. In light of the
legislative history referred to, an expense reimbursement of the
holding company, in the guise of a tax allocation, would seem
incongruous with Section 13(a). The exclusion in our earlier rule of
the holding company from sharing in consolidated return savings was
intentional and will continue. These considerations do not apply to
other companies in the group that incur losses.
11. As this passage seems to suggest, the prohibition in Rule 45(c)
of a registered holding company sharing in the consolidated tax savings
appears to have been founded chiefly on Section 13(a) of the Act, which
prohibits a registered holding company from entering into or performing any
agreement for the sale of goods or provision of services or construction for
a charge to any subsidiary company. In this case, however, NU is not seeking
to recover its own corporate costs from its Subsidiaries, "in the guise of a
tax allocation," by transforming them into deductible expenses of its
Subsidiaries. Moreover, the Subsidiaries will not be reimbursing NU for the
interest expense on the Acquisition Debt through the tax allocation
mechanism. Instead, the "benefit" obtained by NU under the Proposed Amended
Tax Allocation Agreement is attributable entirely to the lower income tax
liability of the consolidated group that is attributable to NU's interest
expense.
12. In fact, the policies and purposes of Section 13(a), which was
intended only to prohibit holding companies from "exacting tribute" from
subsidiaries through excessive and often illusory service charges for
management services, have no bearing on how NU and its Subsidiaries choose to
allocate the tax savings associated with NU's interest expense. The interest
expense on the Acquisition Debt represents a true cost of capital that NU has
incurred for purposes unrelated to the operations of its Subsidiaries. It is
important to consider that, if NU were to incur interest on debt the proceeds
of which were used to fund loans to its Subsidiaries, the Act and the
Commission's rules would allow NU to recover its cost of funds through
interest charges to its Subsidiaries, and the policies and purposes of
Section 13(a) would not come into play. Where, as in this case, NU's
Subsidiaries have not assumed any legal obligation for the Acquisition Debt,
it would not be detrimental to the Subsidiaries or to consumers if NU were to
retain the benefit associated with its interest expense. Moreover, if NU were
to allocate the tax savings attributable to the interest expense on the
Acquisition Debt to those members of the group with a positive allocation the
net effect would be the same as if NU made a capital contribution to those
Subsidiaries.
13. In National Grid Group plc, HCAR No. 27154 (March 15, 2000), the
Commission authorized National Grid Group and its subsidiaries to enter into
a tax allocation agreement under which the tax benefit of the interest
expense on acquisition debt would be allocated to the U.S. sub-holding
company of National Grid Group that had incurred the debt. With one
exception, the circumstances in that case are identical to those presented
here. In National Grid, a U.S. sub-holding company of National Grid Group
incurred approximately $3.2 billion of bank debt in order to finance the
acquisition of New England Electric System ("NEES"). National Grid Group
explained that, without the requested relief, it would suffer an increased
U.K. tax liability since, under U.K. tax law, there is no system of
consolidated tax groups similar to that under U.S. law. The applicant further
explained that, under U.K. law, a loss member of a corporate group may
"surrender" the loss to another member and thereby reduce the receiving
company's taxable profits. National Grid Group stated that payment for the
loss was necessary for two reasons: first, because under U.K. law, an
agreement requiring an uncompensated surrender of tax benefits could possibly
be voided under creditor protection law, and second, to assure that National
Grid Group would receive appropriate tax credits under U.K. tax laws for the
U.S. taxes paid by the U.S. sub-holding company. In approving the proposed
tax allocation agreement, the Commission observed:
It does not appear that approval of the Tax Allocation Agreement
would lead to the abuses that section 12 is intended to prevent,
and therefore approval will not be detrimental to the NEES Group
and its consumers. The 'separate return' limitation will assure
that the NEES' Utility Subsidiaries tax liability will not be
higher than it otherwise would have been. In addition, the
Financing Applicants note that the conditions applicable to our
authorization with respect to dividend payments will provide
additional protections. Consequently, the Tax Allocation Agreement
does not provide a means for a foreign parent holding company to
'milk' the U.S.-organized companies.
In addition, because the NEES Group has no obligation with respect
to the Merger-Related Debt and the debt does not affect the NEES
Group's financial position or credit, it is not inappropriate to
exclude these companies from the benefits of the tax consequences
arising out of the debt. Accordingly, we approve the use of the
Tax Allocation Agreement. (footnote omitted).
14. NU's current circumstances do not involve any interplay between
foreign and U.S. tax laws, and approval or disapproval of the Proposed
Amended Tax Allocation Agreement will not have any effect on the overall
amount of consolidated income tax that NU will pay. Nevertheless, it is clear
that the Commission's approval of the tax allocation agreement in National
Grid was based almost entirely upon its determination that the agreement
would not lead to the abuses that Section 12 was intended to prevent; that
the NEES utility subsidiaries' allocated share of the consolidated tax would
be no higher than it would otherwise be on a separate return basis; that the
U.S. subsidiaries had no obligation on the merger-related debt; and that the
merger-related debt did not affect the NEES subsidiaries' financial position
or credit. The fact that the proposed tax allocation agreement would reduce
National Grid Group's overall U.S. and U.K. tax liability and enable National
Grid Group to avoid other potential legal problems under U.K. law (associated
with "surrendering" of tax attributes by any subsidiary) appears to have been
a subordinate consideration.
15. The Commission has also authorized other registered public
utility holding companies to enter into tax allocation agreements which have
the effect of retaining the tax losses incurred in connection with
acquisition debt, similar to the request herein. See, Pepco Holdings Inc.,
Holding Co. Act Release Nos. 35-27553, (July 24, 2002), Progress Energy,
Inc., Holding Co. Act Release No. 35-27522 (April 18, 2002); Energy East
Corporation, Holding Co. Act Release No. 35-27643 (January 28, 2003);
NiSource Inc., Holding Co. Act Release No. 35-27567 (September 12, 2002)
(collectively, the "Tax Allocation Orders").
16. NU's circumstances are substantially similar to those presented
in National Grid and the other Tax Allocation Orders. The Proposed Amended
Tax Allocation Agreement will not lead to the kinds of abuses Section 12 was
intended to prevent (e.g., prohibition on upstream loans) and is not a device
for transferring NU's expenses to its Subsidiaries. NU's Subsidiaries'
allocated share of the consolidated return liability will be no greater than
it would be if calculated on a separate return basis, as required by Rule
45(c). The utility Subsidiaries are not obligated, directly or indirectly,
on the Acquisition Debt and the Proposed Amended Tax Allocation Agreement
will not have the effect of shifting NU's tax losses incurred by it in
connection with the Acquisition Debt to the Utility Subsidiaries. Finally,
the Acquisition Debt has not affected the utility Subsidiaries' financial
position or credit, as evidenced by their credit ratings, their projected
capitalization ratios and cash flow.
ITEM 4. REGULATORY APPROVAL
1. Public Service Company of New Hampshire must file a copy of the
Proposed Amended Tax Allocation Agreement with the New Hampshire Public
Utilities Commission, for notice purposes, within 10 days after the date on
which it is executed, and Western Massachusetts Electric Company must file a
copy of the Proposed Amended Tax Allocation Agreement, for notice purposes,
with the Massachusetts Department of Telecommunications and Energy. Either
commission could, sua sponte, institute a proceeding and hold hearings on the
Proposed Amended Tax Allocation Agreement.
2. Except as stated above, no other state commission, and no federal
commission, other than this Commission, has jurisdiction over the Proposed
Amended Tax Allocation Agreement.
ITEM 5. PROCEDURE.
1. The Applicant hereby requests that the Commission publish a notice under
Rule 23 with respect to the filing of this Application as soon as practicable
and that the Commission's order be issued as soon as possible. A form of
notice suitable for publication in the Federal Register is attached hereto as
Exhibit H. The Applicant respectfully requests the Commission's approval,
pursuant to this Application, of all transactions described herein, whether
under the sections of the Act and Rules thereunder enumerated in Item 3 or
otherwise. It is further requested that the Commission issue an order
authorizing the transactions proposed herein at the earliest practicable
date. Additionally, the Applicant (i) requests that there not be any
recommended decision by a hearing officer or by any responsible officer of
the Commission, (ii) consents to the Office of Public Utility Regulation
within the Division of Investment Management assisting in the preparation of
the Commission's decision, and (iii) waives the 30-day waiting period between
the issuance of the Commission's order and the date on which it is to become
effective, since it is desired that the Commission's order, when issued,
become effective immediately.
Other Matters
1. Except in accordance with the Act, neither NU nor any Subsidiary
thereof (a) has acquired an ownership interest in an EWG or a FUCO, as
defined in Sections 32 and 33 of the Act, or (b) now is or as a consequence
of the transactions proposed herein will become a party to, or has or will as
a consequence of the transactions proposed herein have a right under, a
service, sales, or construction contract with an EWG or a FUCO. None of the
proceeds from the transactions proposed herein will be used by NU and its
Subsidiaries to acquire any securities of, or any interest in, an EWG or a
FUCO.
2. NU currently meets all of the conditions of Rule 53(a), except for
clause (1). At September 30, 2003, NU's "aggregate investment," as defined in
Rule 53(a)(1), in EWGs and FUCOs was approximately $448.2 million, or
approximately 55.8% of NU's average "consolidated retained earnings," also as
defined in Rule 53(a)(1), for the four quarters ended September 30, 2003
($802.7 million). With respect to Rule 53(a)(1), however, the Commission has
determined that NU's financing of its investment in Northeast Generation
Company ("NGC"), NU's only current EWG or FUCO, in an amount not to exceed
$481 million or 83% of its "average consolidated retained earnings" would not
have either of the adverse effects set forth in Rule 53(c). See Northeast
Utilities, Holding Co. Act Release No. 27148, dated March 7, 2000 (the "Rule
53(c) Order"). NU continues to assert that its EWG investment in NGC will not
adversely affect the System.
3. In addition, NU and its Subsidiaries are in compliance and will
continue to comply with the other provisions of Rule 53(a) and (b), as
demonstrated by the following determinations:
(i) NGC maintains books and records, and prepares financial statements, in
accordance with Rule 53(a)(2). Furthermore, NU has undertaken to provide the
Commission access to such books and records and financial statements, as it
may request;
(ii) No employees of NU's public utility Subsidiaries have rendered services
to NGC;
(iii) NU has submitted (a) a copy of each Form U-1 and Rule 24
certificate that has been filed with the Commission under Rule 53 and (b) a
copy of Item 9 of the Form U5S and Exhibits G and H thereof to each state
regulator having jurisdiction over the retail rates of NU's public utility
Subsidiaries;
(iv) Neither NU nor any Subsidiary has been the subject of a
bankruptcy or similar proceeding unless a plan of reorganization has been
confirmed in such proceeding;
(v) NU's average CREs for the four most recent quarterly periods have not
decreased by 10% or more from the average for the previous four quarterly
periods; and
(vi) In the previous fiscal year, NU did not report operating losses
attributable to its investment in EWGs/FUCOs exceeding 3 percent of NU's
consolidated retained earnings.
4. The proposed transactions, considered in conjunction with the effect of
the capitalization and earnings of NU's EWGs and FUCOs, would not have a
material adverse effect on the financial integrity of the NU system, or an
adverse impact on NU's public-utility Subsidiaries, their customers, or the
ability of State commissions to protect such public-utility customers. The
Rule 53(c) Order was predicated, in part, upon an assessment of NU's overall
financial condition which took into account, among other factors, NU's
consolidated capitalization ratio and its retained earnings, both of which
have improved since the date of the order.
5. NU's EWG investment (it has no FUCO investment) has been profitable for
all quarterly periods ending June 30, 2000 through September 30, 2003 (NGC
was acquired in March 2000). As of December 31, 1999, the most recent period
for which financial statement information was evaluated in the Rule 53(c)
Order, NU's consolidated capitalization consisted of 35.3% common equity and
64.7% debt (including long and short-term debt, preferred stock, capital
leases and guarantees).
6. As of June 30, 2000, the end of the first quarter after the issuance of
the Rule 53(c) Order, the consolidated capitalization ratios of NU, with
consolidated debt including all short-term debt and non-recourse debt of the
EWG, were as follows:
As of June 30, 2000
(thousands
of dollars) %
Common shareholders' equity 2,365,854 36.9
Preferred stock 277,700 4.3
Long-term and short-term debt 3,768,353 58.8
Total 6,411,907 100.0
7. The consolidated capitalization ratios of NU as of September 30, 2003,
with consolidated debt including all short-term debt and non-recourse debt
of the EWG, were as follows:
As of September 30, 2003
(thousands
of dollars) %
Common shareholders' equity 2,254,292 33.4
Preferred stock 116,200 1.7
Long-term and short-term debt 2,604,509 38.6
Rate Reduction Bonds 1,772,637 26.3
Total 6,747,678 100.0%
If Rate Reduction Bonds are not included, the consolidated
capitalization ratio of NU as of September 30, 2003 is as follows:
As of September 30, 2003
(thousands
of dollars) %
Common shareholders' equity 2,254,292 45.3
Preferred Stock 116,200 2.4
Long-term and short-term debt 2,604,509 52.3
Total 4,975,001 100.0
8. As of June 30, 2000, the end of the first quarter after the issuance of
the Rule 53(c) Order, NU's consolidated retained earnings were $593.6
million. At September 30, 2003, NU's consolidated retained earnings were
approximately $838 million. NGC has made a positive contribution to earnings
by contributing $141.6 million in revenues in the 12-month period ending
September 30, 2003 and net income of $38.6 million for the same period.
Although since the date of the Rule 53(c) Order, the common equity ratio of
NU on a consolidated capitalization basis has decreased, it is mainly as a
result of the issuance of the Rate Reduction Bonds and still it remains at a
financially healthy level, above the 30% benchmark required by the
Commission. If Rate Reduction Bonds are excluded from the calculation of the
common equity ratio, NU's consolidated common equity ratio has increased
since the date of the Rule 53(c) Order. Accordingly, NU's investment in its
EWG has not had an adverse impact on NU's financial integrity.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
A. EXHIBITS.
B. Form of Amended Tax Allocation Agreement. (withdrawn)
*B-2 Proposed Form of Second Amended and Restated Tax Allocation
Agreement
F Legal Opinion
H Form of Notice
**K-1 Comparison of Allocation of Federal Income Tax Liability
under Proposed Amended Tax Allocation Agreement and
Rule 45(c).
* To be Filed by Amendment
** Previously Filed
B. FINANCIAL STATEMENTS.
1. Northeast Utilities Consolidated Balance Sheets, as of December
31, 2002, and Consolidated Statements of Income and Statement of Retained
Earnings, for the 12 months ended December 31, 2002 and Statement of
Capitalization as of December 31, 2002 (incorporated by reference to NU
Annual Report on Form 10K for the year ended December 31, 2002 filed with the
Commission).
2. Northeast Utilities Consolidated Balance Sheets, as of March 31,
2003, June 30, 2003 and September 30, 2003, and Consolidated Statements of
Income and Statement of Retained Earnings, for the quarters ended March 30,
2003, June 30, 2003 and September 30, 2003 and Statement of Capitalization as
of March 31, 2003, June 30, 2003 and September 30, 2003 (incorporated by
reference to NU Quarterly Report on Form 10Q for the Quarters ended March 31,
2003, June 30, 2003 and September 30, 2003 filed with the Commission, File 1-
5324).
3. The impact of the Proposed Amended Tax Allocation Agreement is set
forth in Exhibit K-1
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company
Act of 1935, each of the undersigned companies has duly caused this
Application to be signed on its behalf by the undersigned thereunto duly
authorized.
March 19, 2004
Northeast Utilities
Northeast Utilities Service Company
The Connecticut Light and Power Company
CL&P Receivables, Inc.
Western Massachusetts Electric Company
Public Service Company of New Hampshire
Properties, Inc.
North Atlantic Energy Corporation
North Atlantic Energy Services Corporation
Holyoke Water Power Company
Holyoke Power and Electric Company
Charter Oak Energy Company
Northeast Nuclear Energy Company
Yankee Energy System, Inc.
Yankee Gas Services Company
Yankee Energy Financial Services Company
Yankee Energy Services Company
NorConn Properties, Inc.
The Rocky River Realty Company
The Quinnehtuk Company
NU Enterprises, Inc.
Northeast Generation Company
Northeast Generation Services Company
Woods Electrical Co., Inc.
Woods Network Services, Inc.
E.S. Boulos Company
NGS Mechanical, Inc.
Select Energy, Inc.
Select Energy New York, Inc.
Mode 1 Communications, Inc.
Select Energy Services, Inc.
HEC/Tobyhanna Energy Project, Inc.
Reeds Ferry Supply Co, Inc.
Select Energy Contracting, Inc.
By: /s/ Randy A. Shoop
Name: Randy A. Shoop
Title: Assistant Treasurer-Finance
Northeast Utilities Service Company as Agent for
all of the above-named Applicants.
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Under Rule 45(c), the "separate return tax" is defined to mean "the
tax on the corporate taxable income of an associate company computed as
though such company were not a member of a consolidated group."
See The National Grid Group plc, HCAR No. 27154 (Mar. 15, 2000).
See Allocation of Consolidated Federal Income Tax Liability by
Registered Holding Companies and their Subsidiaries, Holding Co. Act Release
No. 21767 (Oct. 29, 1980) citing Sen. Doc. 92, Part 72A, 70th Congress,
1st Sess. at pp. 477-482.
See Rule 52, which allows a holding company to charge its effective
cost of money on downstream loans to subsidiaries.
Section 12(a) of the Act provides that "[I]t shall be unlawful for any
registered holding company, by use of the mails or any means of
instrumentality of interstate commerce, or otherwise, directly or indirectly,
to borrow, or to 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 . . .."
Section 12(b) of the Act provides that "[i]t shall be unlawful for
any registered holding company or subsidiary company thereof . . . directly
or indirectly, to lend or in any manner extend its credit to or indemnify any
company in the same holding company system in contravention of such rules and
regulations or orders as the Commission deems necessary or appropriate . .
..the Commission promulgated Rule 45(a) pursuant to Section 12(b) of the Act.
See Holding Co. Act Release No. 21767 (Oct. 29, 1980), citing Senate
Doc. 92, Part 72A, 70th Congress, 1st Sess., 1930, pp. 477 - 482.
It should be noted that the earlier rule - Rule 45(b)(6) - did not by
its terms restrict the holding company from retaining the benefit of the tax
losses it generated. Rather, as the Commission explained in its release
proposing Rule 45(c), Rule 45(b)(6) had been interpreted to require the
sharing of tax savings and liabilities exclusively among the members of the
group with actual separate return tax liability or positive income. Thus, all
loss companies, including but not limited to the parent holding company, had
been excluded from sharing in consolidated tax benefits, by interpretation,
under Rule 45(b)(6).
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