File No. 70-
United States Securities and Exchange Commission
Washington, D.C. 20549
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Form U-1
Application/Declaration
Under the
Public Utility Holding Company Act of 1935
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National Grid Transco plc New England Power Company
National Grid (US) Holdings Limited Massachusetts Electric Company
National Grid (US) Investments 4 The Narragansett Electric Company
National Grid (US) Partner 1 Limited Granite State Electric Company
National Grid (US) Partner 2 Limited Nantucket Electric Company
1-3 Strand New England Electric Transmission Corporation
London WC2N 5EH New England Hydro-Transmission Corporation
United Kingdom New England Hydro-Transmission Electric Co.
Inc.
National Grid General Partnership National Grid USA Service Company Inc.
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
And the direct and indirect nonutility Niagara Mohawk Holdings, Inc.
subsidiary companies of National Grid Niagara Mohawk Power Corporation
Transco plc listed on Exhibit A hereto. 300 Erie Boulevard West
Syracuse, New York 13202
(Name of company filing this statement
and address of principal executive office)
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National Grid Transco plc
(Name of top registered holding company)
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Kirk L. Ramsauer
Deputy General Counsel
National Grid USA
25 Research Drive
Westborough, Massachusetts 01582
Telephone: (508) 389-2972
Facsimile: (508) 389-3518
(Name and address of agent for service)
The Commission is also requested to send copies
of any communication in connection with this matter
to:
Markian M. W. Melnyk
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
1875 Connecticut Ave.
Washington, D.C. 20009-5728
Telephone: (202) 986-8212
Facsimile: (202) 986-8102
2
TABLE OF CONTENTS
Item 1. Description of the Proposed Transaction................................2
A. Introduction.......................................................2
B. The Company........................................................2
1. U.K. Business Overview..........................................3
2. U.S. Business Overview..........................................4
C. Request for Financing Authorization................................9
1. National Grid Transco's Current Financing.......................9
2. General Terms Applicable to the Proposed New Financing
Authorization...................................................9
(a) Effective Cost of Money...................................10
(b) Maturity..................................................10
(c) Issuance Expenses.........................................10
(d) Common Equity Ratio.......................................11
(e) Investment Grade Ratings..................................11
(f) Authorization Period......................................12
3. Use of Proceeds................................................12
4. Proposed Financing Program.....................................12
(a) Common Stock..............................................14
(b) Preferred Stock, Preferred Securities and
Equity-linked Securities..................................16
(c) Long-term Debt............................................17
(d) Short-term Debt...........................................17
(e) Utility Subsidiary Financing..............................18
(f) Nonutility Subsidiary Financing...........................21
(g) Continuation of Money Pool................................25
(h) Guarantees................................................28
(i) Interest Rate and Currency Risk Management
Devices...................................................30
i
(j) Payment of Dividends Out of Capital or Unearned
Surplus...................................................32
(k) Tax Allocation Agreement..................................35
(l) Changes in Capitalization of Majority-Owned
Subsidiaries..............................................37
(m) Financing Entities........................................38
(n) EWG-FUCO Financing Limits.................................40
D. Intermediate Subsidiaries and Nonutility Reorganizations..........51
E. Reporting Requirements............................................55
Item 2. Fees, Commissions and Expenses........................................58
Item 3. Applicable Statutory Provisions.......................................58
Item 4. Regulatory Approvals..................................................58
Item 5. Procedure.............................................................58
Item 6. Exhibits and Financial Statements.....................................58
Item 7. Information as to Environmental Effects...............................59
ii
Certain Defined Terms
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Term Definition
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National Grid Transco National Grid Transco plc, the top registered holding
company.
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Lattice Group Lattice Group plc, a foreign utility company ("FUCO") and
a subsidiary of National Grid Transco.
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Utility Subsidiaries All National Grid USA public utility subsidiary companies
(i.e, Niagara Mohawk Power Corporation, Massachusetts
Electric Company, The Narragansett Electric Company,
Granite State Electric Company, Nantucket Electric Company
New England Power Company, New England Electric
Transmission Corporation, New England Hydro-Transmission
Corporation, and
New England Hydro-Transmission Electric Co. Inc.).
------------------------------- -------------------------------------------------------------
Nonutility Subsidiaries All direct or indirect nonutility subsidiaries of National
Grid Transco, except for its FUCO subsidiaries, now existing
(identified in Exhibit A) or hereafter organized or
acquired in accordance with an order of the Commission
or applicable exemption.
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Subsidiaries The Utility Subsidiaries and the Nonutility Subsidiaries,
collectively.
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National Grid Transco System National Grid Transco and its associate companies, with
the exception of FUCO associates.
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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
National Grid Transco 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.
------------------------------- -------------------------------------------------------------
Item 1. Description of the Proposed Transaction
A. Introduction
This Application-Declaration ("Application") seeks authorizations
under the Public Utility Holding Company Act of 1935 ("Act" or "1935 Act")
relating to the financing of National Grid Transco plc ("National Grid Transco")
and its associated companies. On January 16, 2002, the Securities and Exchange
Commission ("Commission") issued an order authorizing National Grid Transco and
certain other applicants to undertake specific financing transactions through
September 30, 2004. See National Grid Group plc, Holding Co. Act Release No.
27409 (January 16, 2002) ("January 2002 Order"). In October 2002, National Grid
Group plc merged with Lattice Group plc and was renamed National Grid Transco
plc. In connection with that transaction, the Commission authorized National
Grid Transco to invest up to $20 billion in foreign utility companies ("FUCOs")
and to issue and sell equity and debt securities and to enter into guarantees to
finance and support such investments. See National Grid Group plc, Holding Co.
Act Release No. 27577 (October 16, 2002) ("FUCO Order"). The January 2002 Order
and the FUCO Order provide that the financing authorizations granted by such
orders expire on September 30, 2004. The proposed new financing authorizations
for the National Grid Transco System, to take effect immediately upon the
issuance of an order granting this Application, are described below.
B. The Company
National Grid Transco is a registered holding company under the 1935
Act. National Grid Transco's ordinary shares are listed on the London Stock
Exchange and its American Depositary Receipts ("ADRs") are listed on the New
York Stock Exchange./1 As of March 31, 2004 there were 3,087,603,756 ordinary
shares (including ADRs) outstanding. For the 12 months ended March 31, 2004,
National Grid Transco reported consolidated gross revenues, operating income and
net income of $15.2 billion,
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1 National Grid has issued American Depositary Shares ("ADSs") in the U.S. which
trade as ADRs and are held by both individuals and U.S. institutions. ADSs, in
the aggregate, account for approximately 2.62% of National Grid Transco's
publicly issued shares as of March 31, 2003.
2
$3.1 billion, and $1.8 billion, calculated in accordance with US GAAP./2 As of
March 31, 2004, National Grid Transco had total consolidated assets of $59.4
billion, and a market capitalization of approximately $21.5 billion. National
Grid Transco and its subsidiaries employ approximately 25,000 employees.
National Grid Transco's consolidated capitalization (including
short-term debt) at March 31, 2004 was as follows:
------------------------ ----------------------- ----------------------------
Book Value Percentage of Total
(millions) (%)
------------------------ ----------------------- ----------------------------
Common Stock Equity* 16,428.7 41.2
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Preferred Stock 70.6 0.2
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Long-Term Debt 20,590.1 51.7
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Short-Term Debt** 2,761.9 6.9
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Total 39,851.3 100.0%
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* Including minority interests.
** Including current portion of long-term debt.
National Grid Transco's senior unsecured debt is currently rated A- by
Standard & Poor's Inc. ("S&P") and Baa1 by Moody's Investor Service ("Moody's").
National Grid Transco's principal subsidiaries are described below.
1. U.K. Business Overview
Through its direct wholly-owned subsidiary, National Grid Holdings One
plc ("NGH One"), and that company's subsidiary, National Grid Holdings Ltd,/3
National
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2 Amounts reported in this Application relating to National Grid Transco in U.S.
dollars are the product of a convenience translation from National Grid
Transco's primary currency, U.K. pounds sterling. National Grid Transco has used
the weighted average exchange rate to translate all U.S. dollar results into
sterling for 2003/04 and 2002/03, being (pound)1.00 = $1.68 and (pound)1.00 =
$1.59 for each year respectively. The balance sheets at March 31, 2004 and March
31, 2003 have been translated at (pound)1.00 = $1.83 and (pound)1.00 = $1.58
respectively.
3 NGH One, National Grid Holdings Ltd. and Lattice Group plc are FUCOs.
3
Grid Transco owns The National Grid Company plc ("NGC") and certain other
non-U.S. subsidiaries. NGC is engaged in the transmission of electricity in
England and Wales. NGC owns and operates a transmission system consisting of
approximately 4,500 route miles of overhead lines and approximately 410 route
miles of underground cable together with approximately 341 substations at some
243 sites.
Through NGH One and its subsidiary Lattice Group plc ("Lattice
Group"), National Grid Transco owns Transco plc ("Transco") and certain other
non-U.S. subsidiaries. Transco is the owner and operator of the majority of
Great Britain's gas transportation and distribution system. Transco's
transportation network comprises approximately 4,200 miles of high pressure
national transmission pipelines and approximately 170,000 miles of lower
pressure regional transmission and distribution systems pipelines. Gas is
transported on behalf of approximately 70 "shippers" either to consumers or
third party pipeline systems. Transco receives gas from several coastal
reception terminals, storage sites, and onshore fields around Great Britain. An
interconnector to Belgium links Transco's own gas transportation system to
continental Europe. A second interconnector supplies gas to Eire and Northern
Ireland. As well as gas transportation, Transco is responsible for the safety,
development and maintenance of the transportation and distribution system,
however it does not sell gas to consumers. The gas transportation and
distribution business in Great Britain is subject to price regulation by the Gas
and Electricity Markets Authority, the same regulator that controls NGC's
transmission rates.
2. U.S. Business Overview
National Grid Transco's U.S. business is conducted through National
Grid USA, a registered holding company and an indirect wholly-owned subsidiary
of National Grid Transco. National Grid USA is held directly and indirectly by
the Intermediate Companies which also are registered holding companies.
4
Through its subsidiaries, National Grid USA is engaged in electric
transmission and distribution to residential, commercial, and industrial
customers in New England and the transmission and distribution of electricity
and the distribution of natural gas to residential, commercial, and industrial
customers in New York. 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.
National Grid USA owns companies that deliver electricity to
approximately 3.3 million customers in New York, Massachusetts, Rhode Island and
New Hampshire. These electric public utility companies own and operate
approximately 76,000 miles of transmission and distribution lines in New York
and New England. The National Grid USA group of companies includes five
wholly-owned electricity distribution companies: Niagara Mohawk Power
Corporation ("Niagara Mohawk"), Massachusetts Electric Company ("Mass.
Electric"), The Narragansett Electric Company ("Narragansett"), Granite State
Electric Company ("Granite State"), and Nantucket Electric Company ("Nantucket")
and four other utility companies: New England Power Company ("NEPCO"), New
England Electric Transmission Corporation ("NEET"), New England
Hydro-Transmission Corporation ("N.H. Hydro") and New England Hydro-Transmission
Electric Company, Inc. ("Mass. Hydro")./4
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, to customers. In addition, Niagara Mohawk provides gas
utility service to over 560,000 retail customers in New York State.
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4 National Grid Transmission Services Corp. is not a utility company. This
company provides non-affiliate companies services such as metering and generator
interconnection studies.
5
Niagara Mohawk provides electric service to about 1.6 million electric
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. Niagara Mohawk owns approximately
52,000 pole miles of electric transmission and distribution lines. 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. As of and for the 12 months
ended March 31, 2004, Niagara Mohawk had total assets of $12,415.9 million,
operating revenues of $4,063.6 million and net income of $139.7 million. Niagara
Mohawk is subject to rate regulation by the Federal Energy Regulatory Commission
("FERC") and the New York State Public Service Commission ("NYPSC").
Mass. Electric is engaged in the delivery of electric energy to
approximately 1.2 million customers in 171 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 16,000 pole miles of electric transmission and
distribution lines. As of and for the 12 months ended March 31, 2004, Mass.
Electric had total assets of $3,123.8 million, operating revenues of $1,993.5
million and net income of $34.8 million. Mass. Electric is subject to regulation
by the FERC and the Massachusetts Department of Telecommunications and Energy
("MDTE").
Narragansett is engaged in the delivery of electric energy to
approximately 473,000 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 4,750
pole miles of electric transmission and distribution lines. As of and for the 12
months ended March 31, 2004, Narragansett had total assets of $1,552.2 million,
operating revenues of $812.1 million and net income of $30.1 million.
Narragansett is subject to rate regulation by the FERC and the Rhode
6
Island Public Utilities Commission ("RIPUC"). The Rhode Island Division of
Public Utilities and Carriers ("RIDIV") has jurisdiction over Narragansett's
financings and transactions with affiliates.
Granite State provides retail electric service to approximately 40,000
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 March 31,
2004, Granite State had total assets of $100.8 million, operating revenues of
$73.1 million and net income of $2.7 million. Granite State is subject to
regulation by the FERC and the New Hampshire Public Utilities Commission
("NHPUC").
Nantucket provides retail electric service to approximately 11,000
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./5 As of and for the 12 months ended March
31, 2004, Nantucket had total assets of $59.2 million, operating revenues of
$19.8 million and net income of $0.9 million. Nantucket is subject to regulation
by the FERC and the MDTE.
National Grid USA's wholly-owned subsidiary, NEPCO, is the operator of
electricity transmission facilities in the states of Massachusetts, Rhode
Island, New Hampshire, and Vermont. As of and for the 12 months ended March 31,
2004, NEPCO had total assets of $2,715.1 million, operating revenues of $457.9
million and net income of $72.5 million. NEPCO is subject to rate regulation by
the FERC. The Vermont Public Service Board ("VPSB"), the MDTE and the NHPUC have
jurisdiction over NEPCO's financings and transactions with affiliates. Although
the Maine Public Utilities Commission ("MPUC") has jurisdiction over NEPCO's
financings, it defers to financing
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5 Nantucket also owns an underground and submarine electric power cable from the
Cape Cod mainland, across Nantucket Sound, to the Island of Nantucket and is in
the process of licensing, permitting and financing a second underground and
submarine cable from the Cape Cod mainland.
7
authorizations from the MDTE. The Nuclear Regulatory Commission ("NRC") has
jurisdiction over NEPCO's ownership of nuclear facilities./6
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 and for the 12 months ended March 31, 2004, NEET
had total assets of $9.8 million, operating revenues of $6.3 million, and net
income of $0.5 million. 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 53.7% 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 and for the 12 months ended March 31, 2004, N.H.
Hydro had total assets of $92.2 million, operating revenues of $25.5 million,
and net income of $3.1 million. N.H. Hydro is subject to rate regulation by
FERC. The NHPUC has jurisdiction over N.H. Hydro's financings and transactions
with affiliates.
Mass. Hydro, 53.7% 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 and for
the 12 months ended March 31, 2004, Mass. Hydro had total assets of $107.8
million, operating revenues of $31.1 million, and net income of $5.1 million.
New England Hydro Finance Company, Inc. ("NE Hydro Finance") is owned in equal
shares by Mass. Hydro and N.H. Hydro. NE Hydro Finance 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.
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6 NEPCO also has minority interests in Yankee Atomic Electric Company (34.5%),
Maine Yankee Atomic Power Company (24%) and Connecticut Yankee Atomic Power
Company (19.5%), all of which have permanently ceased operations.
8
The MDTE has jurisdiction over Mass Hydro's financings and transactions with
affiliates.
The nonutility subsidiaries in the National Grid Transco System that
are Applicants herein are described in Exhibit A hereto.
C. Request for Financing Authorization
1. National Grid Transco's Current Financing
National Grid Transco first received a financing authorization in
connection with the Commission order authorizing the acquisition of the New
England Electric System in March, 2000.7 This authorization was modified when
the Commission authorized National Grid Transco to acquire Niagara Mohawk
Holdings, Inc. ("NiMo Holdings"), in January, 2002./8 The Commission modified
National Grid Transco's financing authority further, in connection with the
Lattice Group merger, in an order increasing the aggregate amount of securities
that National Grid Transco may issue and the amount that it may invest in FUCOs,
in each case up to $20 billion./9
The current financing authorization applicable to the National Grid
Transco System as provided in the January 2002 Order and the FUCO Order expires
on September 30, 2004. This application seeks new financing authorization for
the National Grid Transco System through September 30, 2007 ("Authorization
Period"). For the sake of simplicity, the terms of the proposed financing
authorization are stated below in their entirety.
2. General Terms Applicable to the Proposed New Financing
Authorization
Authorization is requested herein to engage in financing transactions
during the Authorization Period for which the specific terms and conditions are
not at this time known, and which may not be exempt under Rule 52, without
further prior approval
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7 See National Grid Group plc, Holding Co. Act Release No. 27154 (March 15,
2000) ("NEES Acquisition Order").
8 See January 2002 Order.
9 See FUCO Order.
9
by the Commission. The following general terms will be applicable where
appropriate to the proposed external financing activities requested to be
authorized hereby (including, without limitation, securities issued for the
purpose of refinancing or refunding outstanding securities of the issuer):/10
(a) Effective Cost of Money
The effective cost of capital on long-term debt,
preferred stock, preferred securities, equity-linked
securities, and short-term debt will not exceed the
greater of (a) 500 basis points over U.K. or U.S.
government-issued securities or other government
benchmark for the currency concerned having a remaining
term equal to the term of such series or (b) a gross
spread over U.K. or U.S. government-issued securities
that is consistent with similar securities of
comparable credit quality and maturities issued by
other companies./11
(b) Maturity
The maturity of long-term debt will be between one and
50 years after the issuance thereof. Preferred
securities and equity-linked securities will be
redeemed no later than 50 years after the issuance
thereof, unless converted into common stock. Preferred
stock issued directly by National Grid Transco may be
perpetual in duration. Short-term debt will have a
maturity of one year or less.
(c) Issuance Expenses
The underwriting fees, commissions or other similar
remuneration paid in connection with the
non-competitive issue, sale or distribution of
securities pursuant to this Application will not exceed
the greater of (i) 5% of the principal or total amount
of the securities being issued or (ii) issuance
expenses that are generally paid at the time of the
pricing for sales of the particular issuance, having
the
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10 The Commission has previously authorized financing transactions subject to
these same general parameters. See SCANA Corporation, Holding Co. Act Release
No. 27649 (Feb. 12, 2003).
11 Substantially similar interest rate provisions have been authorized by the
Commission in Energy East Corporation, et al., Holding Co. Act Release No. 27643
(January 28, 2003); E.ON AG, Holding Co. Act Release No. 27539 (June 14, 2002);
Ameren Corp. et al., Holding Co. Act Release No. 27655 (February 27, 2003).
10
same or reasonably similar terms and conditions issued
by similar companies of reasonably comparable credit
quality.
(d) Common Equity Ratio
National Grid Transco will maintain common stock
equity12 as a percentage of total capitalization,/13 as
shown in its most recent quarterly balance sheet (but
measured on a book value U.S. GAAP basis), of at least
30% or above./14 National Grid USA, on a consolidated
basis, and each Utility Subsidiary on an individual
basis (except NEET),/15 will maintain common stock
equity of at least 30% of total capitalization as shown
in each company's most recent quarterly balance sheet
(measured on a book value U.S. GAAP basis).
(e) Investment Grade Ratings
Applicants further represent that, except for
securities issued for the purpose of funding Money Pool
operations, no guarantees or other securities, other
than common stock, may be issued in reliance upon the
authorization granted by the Commission pursuant to
this Application, unless (i) the security to be issued,
if rated, is rated investment grade; (ii) all
outstanding securities of the issuer that are rated are
rated investment grade; and (iii) all outstanding
securities of National Grid Transco that are rated, are
rated investment grade. For purposes of this provision,
a security will be deemed to be rated "investment
grade" if it is rated investment grade by at least one
nationally recognized statistical rating organization
("NRSRO"), as that term is used in paragraphs
(c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the
Securities Exchange Act of 1934, as amended ("1934
Act"). Applicants request that the Commission reserve
jurisdiction over the issuance of any guarantee or
other securities in reliance upon the authorization
granted by the Commission pursuant to this Application
at any time
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12 Common stock equity includes 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.
13 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.
14 National Grid Transco will in any event be authorized to issue common stock
(including pursuant to stock-based plans maintained for shareholders, employees
and management) to the extent authorized herein.
15 Nantucket would maintain a minimum of 30% common stock equity as a percentage
of total capitalization on a combined basis with Mass. Electric.
11
that the conditions set forth in clauses (i) through
(iii) above are not satisfied.
(f) Authorization Period
No security will be issued pursuant to the
authorization sought herein after the last day of the
Authorization Period (September 30, 2007).
3. Use of Proceeds
The proceeds from the financings authorized by the Commission pursuant
to this Application will be used for general corporate purposes, including (i)
financing investments by and capital expenditures of the National Grid Transco
System, (ii) the funding of future investments in FUCOs, and companies exempt
under Rule 58 under the Act ("Rule 58 Subsidiaries"), (iii) the repayment,
redemption, refunding or purchase by National Grid Transco or any Subsidiary of
any of its own securities, and (iv) financing working capital requirements of
National Grid Transco and its Subsidiaries. The Applicants represent that no
financing proceeds will be used to acquire the equity securities of any company
unless such acquisition has been approved by the Commission in this proceeding
or in a separate proceeding or in accordance with an available exemption under
the Act or rules thereunder, including Sections 32, 33, 34 and Rule 58.
4. Proposed Financing Program
National Grid Transco requests authorization to increase its
capitalization through the issuance and sale of securities including, but not
necessarily limited to, common stock, preferred stock, preferred securities,
equity-linked securities, options, warrants, purchase contracts, units
(consisting of one or more purchase contracts, warrants, debt securities, shares
of preferred stock, shares of common stock or any combination of such
securities), long-term debt, subordinated debt, bank borrowings, securities with
call or put options, and securities convertible into any of these securities./16
The aggregate amount of new financing obtained by National Grid Transco during
the
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16 Applicants state that any convertible of equity-linked securities would be
convertible into or linked only to securities that National Grid Transco is
otherwise authorized to issue directly or indirectly through a financing entity
on behalf of National Grid Transco.
12
Authorization Period (exclusive of short-term debt), through the issuance of
securities, in each case valued at the time of issuance, shall not exceed $20
billion outstanding at any one time,/17 provided that securities issued for
purposes of refunding or replacing other outstanding securities where National
Grid Transco's capitalization is not increased as a result thereof shall not be
counted against this limitation. In addition, National Grid Transco requests
authority to issue and sell from time to time, directly or indirectly through
one or more financing subsidiaries, short-term debt, including commercial paper
and bank borrowings, in an aggregate principal amount at any time outstanding
not to exceed $5 billion.
Although the financing limits in the application are stated in U.S.
dollars, a large portion of the securities issued under this authorization are
expected to be denominated in pounds or other currencies the value of which will
fluctuate against the dollar. To provide consistent financing limits over the
Authorization Period, for purposes of measuring compliance with the limits,
National Grid Transco would value securities issued in currencies other than the
dollar, on their date of issuance, based on the applicable exchange rate between
the dollar and the currency in which the security is denominated in effect on
the date the Commission order granting this application is entered.
All securities issued by National Grid Transco in accordance with the
authorization requested herein, including, without limitation, securities issued
for the purpose of refunding or retiring outstanding securities, will comply
with the applicable parameters set forth in Item 1.C.2 above.
National Grid Transco contemplates that such securities would be
issued and sold directly to one or more purchasers in privately-negotiated
transactions or to one or more investment banking or underwriting firms or other
entities who would resell such securities without registration under the
Securities Act of 1933, as amended ("1933 Act")
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17 Because the 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 limit is reduced and
additional financing capacity under the limit is made available.
13
in reliance upon one or more applicable exemptions from registration thereunder,
or to the public either (i) through underwriters selected by negotiation or
competitive bidding or (ii) through selling agents acting either as agent or as
principal for resale to the public either directly or through dealers. If
underwriters are used, such securities will be acquired by the underwriters for
their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. Such securities may
be offered to the public either through underwriting syndicates (which may be
represented by a managing underwriter or underwriters designated by National
Grid Transco) or directly by one or more underwriters acting alone, or may be
sold directly by National Grid Transco or through agents designated by National
Grid Transco from time to time. If dealers are utilized, National Grid Transco
will sell such securities to the dealers, as principals. Any dealer may then
resell such securities to the public at varying prices to be determined by such
dealer at the time of resale. If common stock is being sold in an underwritten
offering, National Grid Transco may grant the underwriters thereof a "green
shoe" option permitting the purchase from National Grid Transco at the same
price additional shares then being offered solely for the purpose of covering
over-allotments.
(a) Common Stock
National Grid Transco may issue and sell common stock, or options,
warrants or other stock purchase rights exercisable for common stock, pursuant
to underwriting agreements of a type generally standard in the industry. Public
distributions may be pursuant to private negotiation with underwriters, dealers
or agents, or effected through competitive bidding among underwriters. In
addition, sales may be made through private placements or other non-public
offerings to one or more persons. All such common stock sales will be at rates
or prices and under conditions negotiated or based upon, or otherwise determined
by, competitive capital markets. National Grid Transco may also issue common
stock or options, warrants or other stock purchase rights exercisable for common
stock in public or privately-negotiated transactions as consideration for the
equity securities or assets of other companies, provided that the
14
acquisition of any such equity securities or assets has been authorized in a
separate proceeding or is exempt under the Act or the rules thereunder (e.g.,
Rule 58)./18
National Grid Transco also proposes to issue common stock and/or
purchase shares of its common stock (either currently or under forward
contracts) in the open market for purposes of (i) reissuing such shares at a
later date pursuant to stock-based plans which are maintained for stockholders,
employees and nonemployee directors or (ii) managing its capital structure.
National Grid Transco's stock-based plans are briefly described in Exhibit E
hereto.
National Grid Transco proposes to issue shares of its common stock
under the authorization and within the limitations set forth herein in order to
satisfy its obligations under each of these existing stock-based plans, as they
may be amended or extended, and similar plans or plan funding arrangements
hereafter adopted without any additional Commission order. Shares of common
stock issued under these plans may either be newly issued shares, treasury
shares or shares purchased in the open market, including ADSs, provided that
only the net proceeds from sales of newly issued shares will be counted against
the overall $20 billion limitation on new long-term financing by National Grid
Transco. National Grid Transco may make open-market purchases of common stock in
accordance with the terms of, or in connection with, the operation of the plans,
or as part of a program to repurchase its securities generally. Stock
repurchases would be conducted through open market transactions and could
include the acquisition at arms'-length of National Grid Transco common stock
from institutional investors that may have an affiliate interest in National
Grid Transco.
----------------
18 National Grid Transco will value the equity issued in such circumstances in
accordance with the agreement negotiated between the purchaser and the seller.
The Commission has previously approved the issuance of common stock as
consideration for the acquisition of a new business in an exempt transaction or
transaction that has been approved in a separate proceeding. See e.g., SCANA
Corporation, Holding Co. Act Release No. 27137 (Feb. 14, 2000).
15
(b) Preferred Stock, Preferred Securities and Equity-linked
Securities
National Grid Transco has not issued any preferred stock directly or
other forms of preferred securities indirectly through any financing subsidiary.
In the future, however, National Grid Transco wishes to have the flexibility to
issue preferred stock directly and/or issue, indirectly through one or more
financing subsidiaries, other forms of preferred securities (including, without
limitation, trust preferred securities or monthly income preferred securities).
Preferred stock and other forms of preferred securities may be issued in one or
more series with such rights, preferences, and priorities as may be designated
in the instrument creating each such series, as determined by National Grid
Transco's board of directors, and may be convertible or exchangeable into shares
of National Grid Transco common stock or unsecured indebtedness. Dividends or
distributions on such securities will be made periodically and to the extent
funds are legally available for such purpose, but may be made subject to terms
which allow the issuer to defer dividend payments for specified periods.
National Grid Transco may also issue and sell equity-linked securities in the
form of stock purchase units, which combine a security with a fixed obligation
(e.g., preferred stock or debt) with a stock purchase contract that is
exercisable (either mandatorily or at the option of the holder) within a
relatively short period (e.g., three to six years after issuance)./19 The
dividend or distribution rates, interest rates, redemption and sinking fund
provisions, conversion features, if any, and maturity dates with respect to the
preferred stock or other types of preferred securities and equity-linked
securities of a particular series, as well as any associated placement,
underwriting or selling agent fees, commissions and discounts, if any, will be
established by negotiation or competitive bidding.
----------------
19 Any convertible or equity-linked securities would be convertible into or
linked only to securities that National Grid Transco is otherwise authorized to
issue directly or indirectly through a financing entity on behalf of National
Grid Transco. The Commission has previously authorized registered holding
companies to issue and sell equity-linked securities. See Ameren Corporation,
Holding Co. Act Release No. 27449 (Oct. 5, 2001) and American Electric Power
Company, Inc., Holding Co. Act Release No. 27517 (Apr. 11, 2002).
16
(c) Long-term Debt
Long-term debt may be issued directly through a public or private
placement or indirectly through one or more financing subsidiaries, in the form
of unsecured bonds, notes, convertible notes, medium-term notes or debentures
under one or more indentures or unsecured long-term indebtedness under
agreements with banks or other institutional lenders. The maturity dates,
interest rates, redemption and sinking fund provisions and conversion features,
if any, with respect to the long-term debt of a particular series, as well as
any associated placement, underwriting or selling agent fees, commissions and
discounts, if any, will be established by negotiation or competitive bidding at
the time of issuance./20
(d) Short-term Debt
National Grid Transco proposes to issue and sell from time to time,
directly or indirectly through one or more financing subsidiaries, short-term
debt, in the form of unsecured commercial paper, notes issued to banks and other
institutional lenders, and other forms of unsecured short-term indebtedness, in
an aggregate principal amount at any time outstanding not to exceed $5 billion.
Unused borrowing capacity under a credit facility would not count towards the
short-term financing limit. Short-term borrowings under credit lines will have
maturities of a year or less from the date of each borrowing.
Commercial paper issued under any commercial paper facility would be
sold, directly or indirectly through one or more financing subsidiaries, in
established U.S. or European commercial paper markets. Such commercial paper
would typically be sold to dealers at the discount rate per annum prevailing at
the date of issuance for commercial paper of comparable quality and maturities
sold to commercial paper dealers generally. It is expected that the dealers
acquiring such commercial paper would reoffer it at a discount to corporate,
institutional and, with respect to European commercial paper,
----------------
20 Any convertible debt issued by National Grid Transco would be convertible
only into securities that National Grid Transco is otherwise authorized to issue
directly or indirectly through a financing entity on behalf of National Grid
Transco.
17
individual investors. It is anticipated that such commercial paper would be
reoffered to investors such as commercial banks, insurance companies, pension
funds, investment trusts, foundations, colleges and universities, finance
companies and nonfinancial corporations.
(e) Utility Subsidiary Financing
The issue and sale of most securities by the Utility Subsidiaries will
be exempt from the preapproval requirements of Sections 6(a) and 7 of the Act
pursuant to Rule 52(a), as most such securities must be approved by the public
service commission in the state in which each Utility Subsidiary is incorporated
and operating. Specifically, with respect to the local distribution Utility
Subsidiaries, (1) the NYPSC must approve all financings by Niagara Mohawk, a New
York corporation, other than short-term indebtedness having a maturity of 12
months or less, (2) the MDTE must approve all financings by Mass. Electric and
Nantucket, both Massachusetts corporations, other than short-term indebtedness
having a maturity of 12 months or less, (3) the RIDIV must approve all
financings by Narragansett, a Rhode Island corporation, other than short-term
indebtedness having a maturity of 12 months or less, and (4) the NHPUC must
approve all financings by Granite State, a New Hampshire corporation. With
respect to the other Utility Subsidiaries, the VPSB, MDTE and the MPUC have
jurisdiction over securities issued by NEPCO, other than short-term indebtedness
having a maturity of 12 months or less./21 The NHPUC has jurisdiction over long-
and short-term financings conducted by NEPCO. NEPCO is incorporated in
Massachusetts. NEET and N.H. Hydro, both New Hampshire corporations, are subject
to the jurisdiction of the NHPUC with respect to all financing transactions.
Lastly, Mass. Hydro, a Massachusetts corporation, is subject to the jurisdiction
of the MDTE which must approve all financings, other than short-term
indebtedness having a maturity of 12 months or less.
----------------
21 Although the MPUC has jurisdiction over NEPCO's financings, it defers to
financing authorizations from the MDTE.
18
To the extent their financing is not exempt under Rule 52(a) or
otherwise, the Utility Subsidiaries listed in the table below request
authorization to issue debt securities having a maturity of 12 months or less in
the aggregate amounts shown.
--------------------- ----------------- ------------------- --------------------
Utility Subsidiary Principal Status Under 30% Requested Short-Term
Activity Minimum Common Debt Authorization
Equity Standard
--------------------- ----------------- ------------------- --------------------
Niagara Mohawk electric Will maintain 30%. $1 billion
Power Corporation transmission &
("Niagara Mohawk") distribution,
gas distribution
--------------------- ----------------- ------------------- --------------------
Massachusetts electric Will maintain 30% $400 million
Electric Co. distribution on a combined
("Mass. Electric") basis with
Nantucket./22
--------------------- ----------------- ------------------- --------------------
Nantucket Electric electric Will maintain 30% $40 million/23
Co. ("Nantucket") distribution on a combined
basis with Mass.
Electric.
--------------------- ----------------- ------------------- --------------------
The Narragansett electric Will maintain 30%. $145 million
Electric Co. distribution
("Narragansett")
--------------------- ----------------- ------------------- --------------------
Granite State electric Will maintain 30%. $10 million
Electric Co. distribution
("Granite State")
--------------------- ----------------- ------------------- --------------------
New England Power electric Will maintain 30%. $750 million
Co. ("NEPCO") transmission
operations,
power marketing
--------------------- ----------------- ------------------- --------------------
New England electric Will not maintain $10 million
Electric transmission 30%./24
Transmission Corp.
("NEET")
--------------------- ----------------- ------------------- --------------------
----------------
22 Mass. Electric and Nantucket are combined to calculate the 30% minimum common
equity ratio.
23 Nantucket is planning the construction of a second submarine electric power
cable connecting the Cape Cod mainland, across Nantucket Sound, to the Island of
Nantucket. The cost of the cable project is currently estimated at $30 - $40
million. Although Nantucket plans ultimately to finance the cable project with
long term debt, Nantucket may use short-term borrowing to finance project costs
until long term debt financing can be substituted. After such long-term debt
financing is in place, Nantucket's short-term debt authorization will be reduced
to $15 million.
19
--------------------- ----------------- ------------------- --------------------
New England electric Will maintain 30%. $12.5 million
Hydro-Transmission transmission
Corp. ("NH Hydro")
--------------------- ----------------- ------------------- --------------------
New England electric Will maintain 30%. $12.5 million
Hydro-Transmission transmission
Electric Corp.
("Mass. Hydro")
--------------------- ----------------- ------------------- --------------------
The table below shows the capital structure of each Utility Subsidiary
as of March 31, 2004.
-------------- --------------- ------------ -------------- ---------------- ---------------
Utility Common Stock Preferred Long-Term Short-Term Debt Total
Subsidiary Equity Stock Debt*
-------------- --------------- ------------ -------------- ---------------- ---------------
$ % $ % $ % $ % $ %
(MM) (MM) (MM) (MM) (MM)
-------------- --------- ----- ------ ----- -------- ----- -------- ------- ------- -------
Niagara 3,340.4 42.4 66.3 0.8 4,006.1 50.9 463.5 5.9 7,876.3 100.0
Mohawk
-------------- --------- ----- ------ ----- -------- ----- -------- ------- ------- -------
Mass. 1,649.0 77.5 4.7 0.2 252.2 11.9 220.6 10.4 2,126.5 100.0
Electric
-------------- --------- ----- ------ ----- -------- ----- -------- ------- ------- -------
Nantucket 23.8 49.6 - - 21.6 45.0 2.6 5.4 48.0 100.0
-------------- --------- ----- ------ ----- -------- ----- -------- ------- ------- -------
Narragansett 945.2 89.4 5.3 0.5 74.7 7.1 32.0 3.0 1,057.2 100.0
-------------- --------- ----- ------ ----- -------- ----- -------- ------- ------- -------
Granite State 53.3 78.0 - - 15.0 22.0 - - 68.3 100.0
-------------- --------- ----- ------ ----- -------- ----- -------- ------- ------- -------
NEPCO 1,013.8 71.1 1.3 0.1 410.3 28.8 - - 1,425.4 100.0
-------------- --------- ----- ------ ----- -------- ----- -------- ------- ------- -------
NEET .1 2.6 - - - - 3.7 97.4 3.8 100.0
-------------- --------- ----- ------ ----- -------- ----- -------- ------- ------- -------
NH Hydro 17.2 39.4 - - 25.2 57.7 1.3 2.9 43.7 100.0
-------------- --------- ----- ------ ----- -------- ----- -------- ------- ------- -------
----------------
24 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.
20
-------------- --------- ----- ------ ----- -------- ----- -------- ------- ------- -------
Mass. Hydro 28.3 39.9 - - 42.5 59.9 0.2 0.2 71.0 100.0
-------------- --------- ----- ------ ----- -------- ----- -------- ------- ------- -------
* Includes current portion of long-term debt.
(f) Nonutility Subsidiary Financing
National Grid Transco, through the Nonutility Subsidiaries, expects to
continue to be active in the development and expansion of permitted,
energy-related or otherwise functionally-related, non-utility businesses. To
support continuing operations and to finance investments in such competitive
businesses, it will be necessary for the Nonutility Subsidiaries to have the
ability to engage in financing transactions that are commonly accepted for such
types of investments.
Loans by National Grid Transco or by any Nonutility Subsidiary,
including a financing subsidiary, to a Nonutility Subsidiary would generally
have interest rates and maturities that are designed to parallel the lending
company's effective cost of capital. However, in certain cases, a Nonutility
Subsidiary borrower may not be directly or indirectly wholly owned by National
Grid Transco. Applicants request authorization in such cases for National Grid
Transco or a Nonutility Subsidiary, as the case may be, to acquire the equity
securities of partially owned subsidiaries, and to make loans to partially owned
subsidiaries at interest rates and maturities designed to provide a return to
the lender of not less than its effective cost of capital./25 For wholly owned
subsidiaries, Applicants request authorization to acquire the equity securities
of wholly owned subsidiaries and to lend funds to such companies to finance
ongoing operations and additional investments consistent with their existing
businesses. Except as noted below, loans would bear interest at the lender's
effective cost of capital.
In addition, to provide increased flexibility to finance the
operations of the National Grid USA Group, the Intermediate Companies, National
Grid USA and NiMo Holdings propose to issue and sell securities to: (1) direct
and indirect parent companies, and; (2) FUCOs, such as NGH One and Lattice Group
and their associate company
----------------
25 The Commission has granted similar authority to another registered holding
company. See Entergy Corporation, et al., Holding Co. Act Release No. 27039
(June 22, 1999).
21
subsidiaries (except that such companies would not purchase equity and
convertible debt securities from the Intermediate Companies, National Grid USA
or NiMo Holdings). The Intermediate Companies, National Grid USA and NiMo
Holdings also propose to acquire securities from their direct or indirect
subsidiary companies. The financing of Utility Subsidiaries would be subject to
the borrowing limits set forth in Item 1.C.4.(e) above and the Best Rate Method
described below. The financing of Nonutility Subsidiaries of National Grid USA
also would be conducted under the Best Rate Method.
In no case would the Intermediate Companies, National Grid USA or NiMo
Holdings borrow, or receive any extension of credit or indemnity from any of
their respective direct or indirect subsidiary companies, except their financing
subsidiaries or the financing subsidiaries of a direct or indirect parent
company. Further, the Intermediate Companies, National Grid USA and NiMo
Holdings would not acquire equity or convertible securities from indirect
subsidiaries, unless otherwise authorized or permitted by the Commission, if the
result would be to create a minority interest in a public utility company.
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 Transco 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 have a maturity of one
year or less, 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 the flexibility needed to
efficiently structure financings within the National Grid Transco System and
with FUCO subsidiaries. From time-to-time, it may be advantageous for an
Intermediate Company, National Grid USA, or NiMo Holdings to borrow funds from
an indirect parent company or from a FUCO associate company./26 Such loans allow
National Grid Transco the
----------------
26 Such flexible financing authorization was provided by the Commission in
National Grid Group plc, Holding Co. Act Release No. 27455 (October 22, 2001).
22
flexibility to meet the short-term working capital requirements of National Grid
USA and its subsidiaries when funds can be raised at a lower cost by National
Grid Transco. 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 or NiMo Holdings 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 Transco 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.
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 a FUCO subsidiary such as NGH One or Lattice
Group or their associate company subsidiaries will be on market terms. Financing
on market terms assists National Grid Transco 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.
Regardless of the market rate applicable to such transactions,
however, debt funding provided to National Grid USA Group companies would bear
interest at a rate set according to the Best Rate Method./27 Under the Best Rate
Method, short-term loans from associate companies to National Grid USA Group
companies would bear 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
----------------
27 Borrowings by an Intermediate Company, National Grid USA or NiMo could not be
effected pursuant to Rule 52 because each is a holding company.
23
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 Transco'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 Transco would
use a rate equal to the effective rate that National Grid Transco would pay on
the issuance of a comparable security in a competitive offering to unaffiliated
banks or other lenders.
The interest rates paid by the National Grid USA Group companies in
connection with borrowings from National Grid Transco and the other companies in
the National Grid System, including the FUCO subsidiaries, should not increase
the cost of capital used by the National Grid USA Group. National Grid Transco
regularly monitors its ability to access the capital markets. If it determines
that the rate at which it can borrow is higher than the rate a National Grid USA
Group company would pay in a direct borrowing at that time from a nonassociated
party, the interest rate applied to National Grid USA Group borrowings from
associated companies would be based on that lower cost of funds. Consequently,
under the Best Rate Method, the interest rate on loans to any company in the
National Grid USA Group would be set at a rate equal to the lower of (i)
National Grid Transco's cost of funds, (ii) the cost of funds of another
associate company that proposes to lend funds to the prospective National Grid
USA Group company borrower, and (iii) the cost of funds that would be paid by
the prospective National Grid USA Group company borrower in a transaction
directly with a nonassociated lender.
In implementing the Best Rate Method, National Grid Transco would
determine whether the lending rate applied to an associated company loan is
equal to or lower than the rate available to a National Grid USA Group company
in a direct borrowing from a nonassociated party (i.e., a market rate), in much
the same manner as an independent bank would determine the market rate. National
Grid Transco 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 Transco would also
24
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 Transco 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 USA 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 $1 billion and
would be subject to the financing parameters in Item 1.C.2, above. All
borrowings by National Grid USA would be unsecured.
The Commission has found NiMo Holdings to be an exempt holding company
under Section 3(a)(1) of the Act, although it remains a subsidiary of a
registered holding company./28 NiMo Holdings requests authorization to issue and
sell securities to associate companies, but not NiMo Holdings' direct and
indirect subsidiaries (other than financing subsidiaries), for the purpose of
financing NiMo Holdings' existing business, the businesses of its respective
subsidiaries and future authorized or permitted businesses. NiMo Holdings,
however, would not issue equity or convertible securities to associate companies
other than its immediate parent company./29 Debt securities issued by NiMo
Holdings would bear interest at the rates applicable to National Grid USA Group
companies under the Best Rate Method described above. All borrowings by NiMo
Holdings would be unsecured, except that borrowings may be guaranteed as
provided in Item 1.C.4.(h) below.
(g) Continuation of Money Pool
Certain applicants identified below request authorization to
participate in the money pool established for the National Grid USA Group
("Money Pool") during the Authorization Period, to make unsecured short-term
borrowings from the Money Pool, to
----------------
28 See January 2002 Order.
29 In addition, NiMo Holdings would not issue securities to third parties.
25
contribute surplus funds to the Money Pool, and to lend and extend credit to
(and acquire promissory notes from) one another through the Money Pool.
The following companies, (1) National Grid Transco, (2) the
Intermediate Companies, (3) NGH One, Lattice Group, their subsidiaries and any
subsequently organized or acquired FUCO, (4) National Grid USA, (5) NiMo
Holdings and (6) the Nonutility Subsidiaries of National Grid USA, request
authorization to invest surplus funds and/or lend and extend credit to the
participating subsidiaries through the Money Pool. None of such companies would
borrow from the Money Pool.
All the Utility Subsidiaries request authorization within the limits
for short-term debt set forth in Item 1.C.4.(e) above to (i) invest surplus
funds and/or lend and extend credit to the participating subsidiaries through
the Money Pool, and (ii) to borrow from participating subsidiaries through the
Money Pool. Applicants request that the Commission reserve jurisdiction over the
participation of any National Grid Transco System company in the Money Pool,
other than the Utility Subsidiaries, as a borrower until the record in this
matter has been supplemented with additional information regarding such proposed
participant.
The effective cost of short-term borrowings under the Money Pool will
generally be as favorable to those Subsidiaries that are authorized to make
borrowings than the comparable cost of external short-term borrowings. The
investment rate paid to participating Subsidiaries that invest surplus funds in
the Money Pool will generally be higher than the typical yield on short-term
money market investments.
Under the Money Pool Agreement (Exhibit B hereto), short-term funds
are available from the following sources for short-term loans to the
participating Subsidiaries from time to time: (1) surplus funds in the
treasuries of Money Pool participants, and (2) proceeds received by National
Grid Transco and National Grid USA from the sale of commercial paper, borrowings
from banks and other lenders, and other financing arrangements ("External
Funds"). Funds are made available from such sources in such order as National
Grid USA Service Company, Inc. ("ServiceCo"), as the Administrative Agent under
the Money Pool Agreement, determines would result in a lower cost of
26
borrowing, consistent with the individual borrowing needs and financial standing
of Money Pool participants that invest funds in the Money Pool.
Each Subsidiary that is authorized to borrow from the Money Pool (an
"Eligible Borrower") will borrow pro rata from each Money Pool participant that
invests surplus funds, in the proportion that the total amount invested by such
investing participant bears to the total amount then invested in the Money Pool.
On any day when more than one source of funds invested in the Money Pool (e.g.,
surplus treasury funds of National Grid Transco and other Money Pool
participants ("Internal Funds") and External Funds), with different rates of
interest, is used to fund loans through the Money Pool, each Eligible Borrower
will borrow pro rata from each such funding source in the Money Pool in the same
proportion that the amount of funds provided by that fund source bears to the
total amount of funds invested in the Money Pool. The interest rate charged to
Eligible Borrowers on borrowings under the Money Pool will be as follows:
(i) A borrower with a commercial paper credit rating or an
investment grade bond rating (a "Commercial Paper Issuer")
will pay interest at a rate equal to the weighted monthly
average of the rates on its outstanding commercial paper;
(ii) During any month when a Commercial Paper Issuer has no
such commercial paper outstanding, the rate will be the
monthly average of the rate for high grade 30-day commercial
paper sold through dealers by major corporations as
published in the Wall Street Journal. The rate to be used
for weekends and holidays will be the next preceding
published rate.
(iii) An Eligible Borrower other than Commercial Paper
Issuers will pay interest at a rate of 1.08 times the rate
described in paragraph (b). In no event will the rate be
greater than the monthly average of the Base Lending Rate of
Fleet Boston.
Funds not required by the Money Pool to make loans (with the exception
of funds required to satisfy the Money Pool's liquidity requirements) would
ordinarily be invested in one or more short-term investments, including: (i)
obligations issued or guaranteed by the U.S. government and/or its agencies and
instrumentalities; (ii)
27
commercial paper; (iii) certificates of deposit; (iv) bankers' acceptances; (v)
repurchase agreements; (vi) tax exempt notes; (vii) tax exempt bonds; (viii) tax
exempt preferred stock; and (ix) such other investments as are permitted by
Section 9(c) of the Act and Rule 40 thereunder.
The interest income and investment income earned on loans and
investments of surplus funds would be allocated among those Money Pool
participants that have invested funds in accordance with the ratio of the
surplus funds contributed by each participant to the total surplus funds
invested in the Money Pool.
Each Eligible Borrower receiving a loan through the Money Pool would
be required to repay the principal amount of such loan, together with all
interest accrued thereon, on demand and in any event within one year after the
date of such loan. All loans made through the Money Pool may be prepaid by the
borrower without premium or penalty and without prior notice.
Proceeds of any short-term borrowings from the Money Pool may be used
by an Eligible Borrower (i) for the interim financing of its construction and
capital expenditure programs; (ii) for its working capital needs; (iii) for the
repayment, redemption or refinancing of its debt and preferred stock; (iv) to
meet unexpected contingencies, payment and timing differences, and cash
requirements; and (v) to otherwise finance its own business and for other lawful
general corporate purposes.
(h) Guarantees
National Grid Transco requests authorization to provide guarantees
with respect to debt securities or other contractual obligations of any
Subsidiary as may be appropriate in the ordinary course of such Subsidiary's
business, in an aggregate principal or nominal amount not to exceed $20 billion
at any one time outstanding, provided however, that the amount of any guarantees
in respect of obligations of any Subsidiaries shall also be subject to the
limitations of Rule 53(a)(1) or Rule 58(a)(1), as applicable.
Guarantees may take the form of, among others, direct guarantees,
reimbursement undertakings under letters of credit, "keep well" undertakings,
agreements
28
to indemnify, expense reimbursement agreements, and 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. Any guarantee that is outstanding at the end of the Authorization
Period shall remain in force until it expires or terminates in accordance with
its terms.
The debt of any financing subsidiary guaranteed by National Grid
Transco will comply with the parameters for financing authorization set forth in
Item 1.C.2 above and will count against National Grid Transco's financing limit.
To avoid double counting, the amount of any guarantee with respect to securities
issued by a financing subsidiary will not also be counted against the proposed
limit on guarantees.
Guarantees may, in some cases, be provided to support obligations of
Subsidiaries that are not readily susceptible of exact quantification or that
may be subject to varying quantification. In such cases, National Grid Transco
will determine the exposure under such guarantee for purposes of measuring
compliance with the proposed limitation on guarantees by appropriate means,
including estimation of exposure based on loss experience or projected potential
payment amounts. If appropriate, such estimates will be made in accordance with
Generally Accepted Accounting Principles ("GAAP"). Such estimation will be
reevaluated periodically.
National Grid Transco requests authorization to charge each Subsidiary
a fee for each guarantee that is not greater than the cost, if any, of obtaining
the liquidity necessary to perform such guarantee (for example, bank line
commitment fees or letter of credit fees, plus other transactional expenses) for
the period of time that it remains outstanding.
In addition, authority is requested for the Nonutility Subsidiaries,
and National Grid USA, NiMo Holdings, the Intermediate Companies, and NGH One to
guarantee the indebtedness or contractual obligations and to otherwise provide
credit support to associate companies. Guarantees provided by National Grid USA
and NiMo Holdings in support of the external obligations of direct or indirect
subsidiaries would not exceed $1 billion outstanding at any one time, in the
aggregate, exclusive of any
29
guarantees and other forms of credit support that are exempt pursuant to Rule
45(b) and Rule 52(b), provided however, that the amount of guarantees in respect
of obligations of any Rule 58 Subsidiaries shall remain subject to the
limitations of Rule 58(a)(1). The company providing any such credit support may
charge its associate company a fee for each guarantee provided on its behalf
determined in the same manner as specified above.
(i) Interest Rate and Currency Risk Management Devices
National Grid Transco 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 Transco 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 Transco 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-traded Government Securities/30 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
----------------
30 Government Securities would include U.S. Treasury obligations, U.K. Gilts or
the appropriate government benchmark security for the currency involved in the
hedge.
30
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 Transco
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 Transco System
companies, on the same terms generally applicable to National Grid Transco./31
The Utility Subsidiaries expect to use such authority principally to hedge
external debt.
The Intermediate Companies also request authorization to enter into
currency derivatives with National Grid Transco and other Intermediate Companies
for the purpose of managing their exposure to various currencies that may be
used to finance their business. This authorization would be an extension of a
prior Commission order./32
National Grid Transco 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
----------------
31 The terms applicable to Hedging Instruments entered into by the Utility
Subsidiaries differ from those applicable to National Grid Transco in the
following way. The Utility Subsidiaries will endeavor to qualify Hedging
Instruments entered into by the Utility Subsidiaries 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.
32 See National Grid Group plc, Holding Co. Act Release No. 27445 (October 22,
2001).
31
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 Transco,
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. National
Grid Transco will endeavor to qualify transactions in Hedging Instruments 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 Transco's financial statements filed with the Commission
will contain such reconciliation of the difference between the two methods of
accounting treatment as is required by Form 20-F. No gain or loss on a Hedging
Instrument entered into by National Grid Transco or the Intermediate Companies,
or associated tax effects, will be allocated to National Grid USA or NiMo
Holdings or their subsidiaries, regardless of the accounting treatment accorded
to the transaction and consequently, National Grid USA, and its subsidiaries
would not be adversely affected by such transactions.33
(j) Payment of Dividends Out of Capital or Unearned Surplus
As explained in the January 2002 Order, National Grid Transco
accounted for its acquisition of NiMo Holdings under the purchase accounting
method. Under U.S. GAAP, the purchase accounting method requires the acquisition
premium, together with transaction costs, to be recorded as goodwill on the
acquired company's accounts./34 The application of the purchase method of
accounting to the acquisition also resulted in the elimination of the retained
earnings of NiMo Holdings and its subsidiaries, including Niagara Mohawk. The
value of the goodwill was reflected as additional paid-in-capital
----------------
33 The proposed terms and conditions of the hedging transactions are
substantially the same as the Commission has approved in other cases. See New
Century Energies, Inc., et al., Holding Co. Act Release No. 27000 (Apr. 7,
1999); and Ameren Corp., et al., Holding Co. Act Release No. 27053 (July 23,
1999).
34 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 Holdings, and (2) the fair value of the
liabilities assumed.
32
in the companies' financial statements. These accounting practices left NiMo
Holdings and its subsidiaries without retained earnings after the NiMo Holdings
acquisition. Accordingly, the companies lacked the traditional source of
dividend payment, but, nevertheless had strong balance sheets.
The January 2002 Order authorized Niagara Mohawk to declare and pay
dividends on its common stock in an amount equal to its retained earnings prior
to the acquisition plus earnings after the acquisition, adjusted to add back
amounts attributable to the write down of goodwill ("Income Available for
Dividends"). The Commission's order dated March 15, 2000, authorized similar
dividend relief for NEES, now National Grid USA, and its subsidiaries./35 In
calculating Income Available for Dividends, non-cash charges to income resulting
from accounting changes or charges to income resulting from significant
unanticipated events are excluded. Income Available for Dividends therefore,
reflects Niagara Mohawk's income before the deduction for goodwill impairment.
The January 2002 Order also provided that to the extent that Niagara Mohawk, in
the future, seeks to pay additional dividends to distribute cash obtained in
connection with major transactions (i.e., asset sales, divestitures,
securitization transactions), the company may declare and pay dividends only up
to the amount of the proceeds of the corresponding transactions. Further,
Niagara Mohawk may not pay any dividends out of its paid in capital accounts
unless the company has an investment grade credit rating for its debt./36
The January 2002 Order also authorized NiMo Holdings and its
nonutility subsidiaries 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. Applicants will continue to rely on the
January 2002 Order and the March 2000 Order for the dividend authorization
described therein and summarized above.
----------------
35 National Grid Group plc, Holding Co. Act Release No. 27154 (March 15, 2000)
("March 2000 Order").
36 The term "dividends" as used in this section refers broadly to payments in
the form of dividends or the acquisition, retirement or redemption of securities
of the issuer from an associate company that would result in a constructive
dividend.
33
Applicants now seek authorization for such Nonutility Subsidiaries not
granted relief in the January 2002 Order and the March 2000 Order to pay
dividends with respect to the securities of such companies, from time to time
through the Authorization Period, out of capital and unearned surplus, to the
extent permitted under applicable corporate law and the terms of any credit
agreements and indentures that restrict the amount and timing of distributions
to shareholders./37 In addition, none of such companies will declare or pay any
dividend out of capital or unearned surplus unless it: (i) has received excess
cash as a result of the sale of some or all of its assets; (ii) has engaged in a
restructuring or reorganization; and/or (iii) is returning capital to an
associate company.
National Grid Transco anticipates that there will be situations in
which a Nonutility Subsidiary will have unrestricted cash available for
distribution in excess of such company's current and retained earnings. In such
situations, the declaration and payment of a dividend would have to be charged,
in whole or in part, to capital or unearned surplus. The sale of an asset, for
example, may provide cash in excess of the selling company's retained earnings.
In addition, distributions out of capital may be necessary in connection with
winding down a subsidiary. Further, there may be periods during which
unrestricted cash available for distribution by a Nonutility Subsidiary exceeds
current and retained earnings due to the difference between accelerated
depreciation allowed for tax purposes, which may generate significant amounts of
distributable cash, and depreciation methods required to be used in determining
book income. Finally, even under circumstances in which a Nonutility Subsidiary
has sufficient earnings, and therefore may declare and pay a dividend to its
immediate parent, such immediate parent may have negative retained earnings,
even after receipt of the dividend, due to losses from other operations. In this
instance, cash would be trapped at a
----------------
37 The Commission has granted similar approvals to other registered holding
companies. See Entergy Corporation, et al., Holding Co. Act Release No. 27039
(June 22, 1999); and Interstate Energy Corporation, et al., Holding Co. Act
Release No. 27069 (Aug. 26, 1999).
34
subsidiary level where there is no current need for it./38 In all these
circumstances the payment of dividends out of capital or unearned surplus is
appropriate.
(k) Tax Allocation Agreement
In the March 2000 Order, the Commission authorized National Grid
General Partnership ("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 National
Grid Transco to finance the NEES and EUA acquisitions. In the January 2002 Order
the Commission permitted an amendment to the agreement to add NiMo Holdings and
its subsidiaries as members of the consolidated group and similarly authorized
NGGP to retain the value of the tax deduction associated with the debt incurred
by National Grid Transco to finance the NiMo Holdings acquisition. The January
2002 Order reserved jurisdiction over the applicants' request to retain the
value of deductions for merger and acquisition related expenses that are
prohibited from being charged or allocated to National Grid USA's subsidiaries
("Expense Deductions") under Rule 45(c) under the Act. The Expense Deductions
include various costs allocated to merger and acquisition projects that failed
to result in a completed transaction. Applicants request that the Commission now
release jurisdiction over the retention of the Expense Deductions.
In a subsequent filing, National Grid Transco stated:
----------------
38 The Commission has previously approved the payment of dividends out of
capital or unearned surplus by registered holding companies when the payment
would not impair the subsidiary's ability to meet its obligations and the
subsidiary's assets would be sufficient to meet any anticipated expenses or
liabilities. See Entergy Corp., Holding Co. Act Release No. 26534 (June 18,
1996); Northeast Utilities, Holding Co. Act Release No. 27529 (May 16, 2002);
Excel Energy, Holding Co. Act Release No. 27597 (November 7, 2002). Because the
purpose of Rule 46 is to protect utility operating companies, and not
diversified non-utility enterprises, the Commission has extended blanket
authority for non-utility energy companies to pay dividends from unearned
surplus. Energy East Corp., Holding Co. Act Release No. 27228 (September 12,
2001); Exelon Corporation, Holding Co. Act Release No. 27266 (November 2, 2000);
The Southern Company, Holding Co. Act Release No. 26543 (July 17, 1996). See
also Eastern Utilities Associates, Holding Co. Act Release No. 25330 (July 13,
1991) (finding that the legislative history of Section 12 demonstrates that it
was intended to protect utility operating companies); S. Rep. No. 621, 74th
Cong., 1st Sess. 3434 (1935) and Summary Report of the FTC to the U.S. Senate
Pursuant to S.R. No. 83, 70th Cong., 1st Sess. Doc. 92, Vol. 73-A, pp. 61-62.)
35
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. On an annual basis, subsequent to the filing of
the consolidated tax return and the remittance of payment
from associate companies participating in the consolidated
filing to NG Holdings for the value of the tax deduction
associated with the debt incurred directly or indirectly by
National Grid to finance the Merger, National Grid will use
such amount for the sole purpose of paying debt service on
the Merger debt and the reduction of the outstanding
principal of such Merger debt./39
It is appropriate that National Grid Transco, through its registered
holding company subsidiaries, retain the tax benefit value of acquisition debt
deductions and Expense Deductions. Rule 45(c) is intended to prevent the
exploitation of utility companies by holding companies through the misallocation
of consolidated tax return benefits./40 The Commission has recognized that 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, the registered holding companies in the U.S. group
(i.e., NGGP, National Grid USA and National Grid Holdings Inc. ("NGHI")) are
seeking to receive payment for tax benefits, in the form of interest expense
deductions and Expense Deductions, that derive from costs that they have borne
and not passed on to other group companies. These costs have been incurred by
NGGP, National Grid USA or NGHI, in connection with acquisition-related debt and
merger and acquisition expenses, that are the obligations of the holding
companies, not the subsidiaries of the National Grid USA Group. The NEES
Acquisition Order provided that "charges associated with future mergers and
acquisitions may be allocated to NEES [now, National Grid USA] and/or to
----------------
39 Post-Effective Amendment No. 1 to File No. 70-9849 (filed January 25, 2002).
The term Merger debt in that filing refers to debt incurred to finance the
acquisition of NiMo.
40 Holding Co. Act Release No. 21968 (March 25, 1981), citing Sen. Doc. 92, Part
72A, 70th Congress, 1st Sess. at 477-482.
36
other National Grid Group companies, but not to the NEES Subsidiaries."/41
Because the Expense Deductions are not borne by the subsidiaries, they are in
all relevant respects equivalent to the acquisition-related debt interest
expense.
In accordance with the principle underlying Rule 45(c) that tax costs
and benefits should be attributed to each group company that has borne the
expenses and produced the income, it is reasonable and appropriate that in the
case of acquisition-related debt and Expense Deductions that NGGP, National Grid
USA and NGHI should retain the tax benefits related to these expenses. Lastly,
it is 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 subsidiaries in the National Grid USA
Group are fully insulated from overpaying tax as a result of joining in a
consolidated tax filing agreement. For these reasons, the Applicants request
that the Commission approve the tax allocation agreement as revised to reflect
the retention by NGGP, National Grid USA and NGHI of the value of Expense
Deductions./42
(l) Changes in Capitalization of Majority-Owned Subsidiaries
The portion of an individual Subsidiary's aggregate financing to be
effected through the sale of stock to National Grid Transco or other immediate
parent company during the Authorization Period under Rule 52 and/or under an
order issued by the Commission cannot be ascertained at this time. The proposed
sale of capital securities (i.e., common stock or preferred stock) may in some
cases exceed the then authorized capital stock of such Subsidiary. In addition,
the Subsidiary may choose to use capital stock with no par value.
Applicants request authorization to change the terms of any 50% or
more owned Subsidiary's authorized capital stock capitalization or other equity
interests by an amount deemed appropriate by National Grid Transco or other
intermediate parent company; provided that the consents of all other
shareholders have been obtained for the
----------------
41 NEES Acquisition Order Appendix C at C-2.
42 The form of proposed revised tax allocation agreement is attached as Exhibit
F.
37
proposed change. This request for authorization is limited to National Grid
Transco's 50% or more owned Subsidiaries and will not affect the aggregate
limits or other conditions contained herein. A Subsidiary would be able to
change the par value, or change between par value and no-par stock, or change
the form of such equity from common stock to limited partnership or limited
liability company interests or similar instruments, or from such instruments to
common stock, without additional Commission approval. Additional terms that may
be changed include dividend rates, conversion rates and dates, and expiration
dates. Any such action by a Utility Subsidiary would be subject to and would
only be taken upon the receipt of any necessary approvals by the state
commission in the state or states where the Utility Subsidiary is incorporated
and doing business. National Grid Transco will be subject to all applicable laws
regarding the fiduciary duty of fairness of a majority shareholder to minority
shareholders in any such 50% or more owned Subsidiary and will undertake to
ensure that any change implemented under this paragraph comports with such legal
requirements./43
(m) Financing Entities
National Grid Transco currently owns the stock of NGG Finance plc
which assists in the financing of National Grid Transco and its Subsidiaries.
Applicants request authorization to organize and acquire the securities of one
or more additional corporations, trusts, partnerships or other entities to
finance the business of the respective founding company or its subsidiaries. A
financing subsidiary/44 would be used to finance the authorized or permitted
businesses of its direct or indirect parent company ("Founding Parent"),
including the businesses of the National Grid USA Group, but in no event would a
financing subsidiary engage in prohibited upstream loans involving companies in
the National Grid USA Group. Financing subsidiaries may issue any securities
that the Founding Parent would be authorized to issue under the terms of this
----------------
43 The Commission has previously approved substantially similar proposals. See
e.g., FirstEnergy Corp., Holding Co. Act Release No. 27459 (Oct. 29, 2001); and
Reliant Energy, Inc., et al., Holding Co. Act Release No. 27548 (July 5, 2002).
44 For tax reasons, a financing subsidiary may have its own special purpose
subsidiaries that are engaged in financing transactions. References to financing
subsidiaries herein would include such special purpose subsidiaries which would
be subject to the restrictions on financing subsidiaries set forth in this
Application.
38
Application as authorized by the Commission, or Commission rule, regulation or
order under the Act./45 Applicants also requests authorization to issue
securities to a financing subsidiary to evidence the transfer of financing
proceeds by a financing subsidiary to a company receiving financing.
As noted above, a financing subsidiary would raise funds and finance
the businesses of its Founding Parent company, or the subsidiaries thereof, as
authorized and permitted under the Act. A financing subsidiary would finance
such companies on terms and conditions applicable to financings conducted by its
parent as set forth in this Application or permitted by rule, regulation or
order of the Commission. Accordingly, for example, NGG Finance plc may finance
an Intermediate Company at market rates, but a financing of National Grid USA or
its subsidiaries must be in accordance with the Best Rate Method.
Securities issued by financing subsidiaries to third parties would
count against issuance limits set forth in this Application that are applicable
to the Founding Parent of the financing subsidiary. To avoid double counting,
securities or guarantees issued by the Founding Parent to the financing
subsidiary would not count against the Founding Parent's respective issuance
limits. A Founding Parent may, if required, guarantee or enter into support or
expense agreements in respect of the obligations of any such financing
subsidiary.
National Grid Transco and its Subsidiaries also request authorization
to enter into support or expense agreements ("Expense Agreement") with financing
subsidiaries to pay the expenses of any such entity. In cases where it is
necessary or desirable to ensure legal separation for purposes of isolating the
financing subsidiary from its parent or another Subsidiary for bankruptcy
purposes, the ratings agencies may require that any Expense Agreement whereby
the parent or Subsidiary provides financing related services to the financing
subsidiary be at a price, not to exceed a market price,
----------------
45 For example, if a financing subsidiary founded by National Grid Transco,
National Grid USA or the Utility Subsidiaries, except NEET, issue long-term debt
or preferred stock in a public offering, such securities must, when issued, be
rated investment grade by a nationally recognized statistical rating
organization.
39
consistent with similar services for parties with comparable credit quality and
terms entered into by other companies so that a successor service provider could
assume the duties of the parent or Subsidiary in the event of the bankruptcy of
the parent or Subsidiary without interruption or an increase of fees. Therefore,
Applicants seek approval under Section 13(b) of the Act and Rules 87 and 90 to
provide the services described in this paragraph at a charge not to exceed a
market price but only for so long as such Expense Agreement established by the
financing subsidiary is in place.
(n) EWG-FUCO Financing Limits
National Grid Transco may use the proceeds of the financings proposed
in this Application, in part, for investments in FUCOs. In the FUCO Order,
National Grid Transco was authorized to issue securities to finance additional
FUCO investments and operations up to a total aggregate investment of $20
billion. National Grid Transco now seeks to use the authorization requested in
this Application to issue up to $20 billion of securities during the
Authorization Period for the purpose of financing additional FUCO
investments./46
In determining whether to approve the issue or sale of a security by
National Grid Transco to finance a FUCO investment, the Commission typically
considers the circumstances surrounding the proposed issuance. If the issuance
cannot qualify for the safe harbor in Rule 53(a), the applicant must demonstrate
that the proposed FUCO financing will not have an adverse impact on the
financial integrity of the registered holding company system, or any utility
subsidiary in that system. In addition, the proposed financing must not
adversely affect the customers of the utility subsidiaries or adversely affect
the ability of state commissions to protect the utility subsidiaries and utility
customers.
----------------
46 A reorganization of existing FUCO investments that results in an increased
FUCO investment for accounting purposes as a result of the recognition of the
market value of transferred FUCO interests would not be counted as an increased
FUCO investment if National Grid Transco did not actually make a cash investment
in, or increase its guarantee exposure to, a FUCO subsidiary.
40
National Grid Transco's aggregate investment, as defined in Rule
53(a), in FUCOs as of September 30, 2003 was $14,949 million./47 As of September
30, 2003, National Grid Transco's consolidated retained earnings calculated in
accordance with U.S. GAAP was $3,610,798,400 - excluding Other Comprehensive
loss ("OCL") of ($2,271,200,000). Retained earnings, including OCL were
$1,339,598,400. Consequently, National Grid Transco's aggregate investment in
FUCOs as a percentage of its consolidated retained earnings was 414% as of
September 30, 2003, and the safe harbor in Rule 53(a) is exceeded.
National Grid Transco's current aggregate investment in FUCOs,
combined with the requested additional FUCO investment authorization of $20
billion could result in a total aggregate investment in FUCOs of $34,949 million
during the Authorization Period. Although this investment exceeds the Rule 53(a)
safe harbor, National Grid Transco satisfies the conditions of Rule 53(c).
First, the proposed issuance and sale of securities to finance FUCO investments
will not adversely affect National Grid Transco's financial integrity. The
soundness of National Grid Transco's capital structure is demonstrated by its
high credit rating. National Grid Transco's consolidated capitalization (on a
U.S. GAAP basis) over the recent past is shown in the table below.
--------------------- ---------------------- ------------------- ------------------------
National Grid March 31, 2004 March 31, 2003 March 31, 2002
as at:
--------------------- ---------------------- ------------------- ------------------------
($ mm) (%) ($ mm) (%) ($ mm) (%)
--------------------- ----------- ---------- --------- --------- ------------ -----------
Debt, preferred 23,582 59.0 24,041 61.8% 11,502 68%
stock and minority
interests
--------------------- ----------- ---------- --------- --------- ------------ -----------
Common stock equity 16,408 41.0 14,846 38.2% 5,338 32%
--------------------- ----------- ---------- --------- --------- ------------ -----------
Total 39,991 100% 38,887 100% 16,840 100.0%
--------------------- ----------- ---------- --------- --------- ------------ -----------
National Grid Transco's senior unsecured debt is currently rated A- by
S&P and Baa1 by Moody's. In addition to the company's investment grade rating,
----------------
47 Aggregate investment is defined under Rule 53 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 Transco. 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. National Grid Transco has no investments in
EWGs.
41
National Grid Transco's financial soundness is shown by its equity market value
to book value ratios and stock price to earnings ratios over several years, as
provided below:
-----------------------------------------------------------------------
Market to Book Value
-----------------------------------------------------------------------
As at: March 31, March 31, 2003 March 31, March 31, 2001
2004 2002
-----------------------------------------------------------------------
$mm $mm $mm $mm
-----------------------------------------------------------------------
Market value 21,472 18,982 11,689 11,468
of equity
-----------------------------------------------------------------------
Book value of
equity (under 16,408 14,846 5,338 4,146
U.S. GAAP)
-----------------------------------------------------------------------
Ratio of 1.3x 1.3x 2.2x 2.8x
market to
book value
(times)
-----------------------------------------------------------------------
------------------------------------------------------------------------------
Price/Earnings Ratios
------------------------------------------------------------------------------
As at: March 31, 2004 March 31, 2003 March 31, 2002 March 31, 2001
------------------------------------------------------------------------------
$ $ $ $
------------------------------------------------------------------------------
Basic
earnings per
share (U.S. 0.55 (0.15)* 0.78
GAAP) 0.53
------------------------------------------------------------------------------
Ratio of
price to
earnings 13.1x 11.6x -43.3x 9.9x
------------------------------------------------------------------------------
(*) The full write down and provision for all expected related liabilities for
telecoms investments in Latin America, Energis and Energis Polska and a non-cash
charge to reflect the impact in Argentina of the devaluation of the peso were
exceptional items contributing to the loss in the 12 months ended March 31,
2002. Before exceptional items and goodwill amortization, earnings per share
increased by 61% over the prior 12 month period.
The recent growth in National Grid's retained earnings and
consolidated common stock equity is shown below:
42
--------------------------------------------------------------------------------
As at: March 31, March 31, March 31, 2002 March 31, 2001
2004 2003
--------------------------------------------------------------------------------
$mm $mm $mm $mm
--------------------------------------------------------------------------------
Capital stock 519 490 252 248
--------------------------------------------------------------------------------
Paid-in-capital 13,050 12,259 2,158 291
--------------------------------------------------------------------------------
Treasury stock (57) (62) (65) (14)
--------------------------------------------------------------------------------
Retained earnings 4,537 3,598 17 32
--------------------------------------------------------------------------------
Other comprehensive (2,153) (1,868) 2,976 3,589
income (loss)
--------------------------------------------------------------------------------
Total 15,896 14,417 5,338 4,146
--------------------------------------------------------------------------------
Growth per period 1,479 9,079 1,192 -
--------------------------------------------------------------------------------
Growth rate over last 283%
4 years
--------------------------------------------------------------------------------
Annualized growth rate 10.3% 170% 28.8% _
--------------------------------------------------------------------------------
These tables demonstrate that on a book and market basis National Grid
Transco has been soundly capitalized in the past and that it should continue to
be financially stable. A review of National Grid Transco's liquidity and capital
resources also indicates that the company is financially sound. Net cash inflow
from operations was (pound)2,500 million ($4,200 million) in the fiscal year
ended March 31, 2004, compared with (pound)2,000 million ($3,180 million) in the
prior fiscal year. Cash flow is used to support National Grid Transco's cash
obligations such as principal and interest payments on debt and capital
expenditures. Interest cover (the number of times the net interest charge is
covered by total operating profit excluding goodwill amortization and
exceptional items), which is considered an indicator of the borrowing capacity
of the National Grid Transco group, was 2.7 times (compared with 2.3 times at
March 31, 2003). Capital expenditures of (pound)1,254 million ($2,107 million)
for the year ended March 31, 2004, were steady compared to (pound)1,407 million
($2,237 million) for the year ended March 31, 2003. The strong cash flow and
interest cover numbers demonstrate National Grid Transco's ability to meet its
current and future obligations.
43
National Grid Transco subjects all FUCO investment proposals to
careful and stringent reviews. The investment review process is described
briefly below.
National Grid Transco's investment review process includes as one of
its objectives minimizing the risks associated with FUCO activities. Before
National Grid Transco or its subsidiaries make any investment in a project, the
project is analyzed in detail, including the specific country risk, where
applicable. The project review process includes a series of independent internal
reviews, both at the subsidiary and National Grid Transco levels.
In the U.K., the majority of projects by number relate to the utility
businesses conducted by National Grid Company and Transco. Each potential
project is subjected to a series of formal reviews to ensure its financial
robustness. The process begins with a consideration of National Grid Transco's
strategic plans, which will be updated periodically according to the planning
cycle. Individual project business plans would be prepared as part of the
process of including potential investments in the overall business plan of
National Grid Transco (the "Group Business Plan"). All projects identified as
requiring future funding must be included within the planning cycle. This
planning procedure ensures that all capital and non-recurring revenue project
expenditures can be justified on business, technical and economic grounds. In
addition, project progress will be monitored and subject to normal business
control to ensure that approved projects meet their performance targets.
The project review process includes consideration of business,
financial, regulatory, environmental and legal risks. Foreign projects are
subject to an additional level of scrutiny concerning:
o the political and economic stability of the particular country;
o the host government's commitment to private enterprise;
o the legal and regulatory framework for private investment in utility
facilities;
o local business support for long-term investment of private capital;
o the economic viability of the project;
44
o the environmental impact; and
o currency conversion and repatriation of dividends issues.
Project proposals are subject to successive stages of review by senior
management and directors depending upon National Grid Transco's projected
financial exposure in a particular project. Generally, the process by which
National Grid Transco identifies, manages and approves its business development
activities, broadly follows the following lines:
o The production of a Project Evaluation Paper ("PEP"), which covers, in
outline form, a description of the opportunity, a brief description of
the investment environment, the strategic importance of the investment
and future actions. The PEP is presented to the Group Executive for
approval.
o The production of a Project Development Paper ("PDP"), which
identifies the development strategy for the investment and covers, in
outline form, market conditions, competitive position and an action
plan. The PDP also is presented to the Group Executive for approval.
o If an acquisition is contemplated, an Investment Proposal Paper
("IPP") seeking approval for a bid would be prepared. This paper would
cover the investment opportunity, a financial appraisal, existing
strategy, the transaction, bid details, and planned future actions.
The IPP would be used to brief the Grid Transco board to seek their
approval of the acquisition.
Once development of a project is undertaken, milestones are
established to ensure that continuing expenditures produce acceptable results.
In addition, project teams are established to identify the major technical,
financial, commercial and legal risks associated with a particular project and
risk mitigation strategies. The process follows the following broad outline:
o undertake due diligence;
o prepare valuation;
o prepare business plan;
45
o obtain internal approvals;
o obtain acquisition financing;
o develop corporate and tax structure;
o prepare corporate communications plan;
o prepare and submit bid/offer; and
o prepare post acquisition plan
The final project review process in many cases may be duplicated by lenders that
may agree to provide construction or permanent debt financing on a non-recourse
basis, since repayment of that debt will depend solely upon the success of the
project.
National Grid Transco's system of internal controls is designed to
safeguard shareholders' investment and the group's assets. The process of
managing material risks to the achievement of business objectives is an ongoing
process conducted at all levels of the group. All parts of the group are
required to capture and report, in a standard format, their key business risks,
categorize all risks to highlight the sources of risk, subjectively score risks
to reflect both the financial and reputational impact of the risk and the
likelihood of its occurrence, and validate and approve the risk report with the
participation of local management. Material changes in risks and associated
responsive actions are reported periodically through a network of risk
coordinators throughout the group to maintain a current perspective on overall
group risks. A risk steering group chaired by the general counsel of National
Grid Transco provides direction and impetus to the implementation of risk
management at all levels of the group, acts as a catalyst for change and
provides visible senior executive support to the process.
Accordingly, for the reasons stated above, the conditions of Rule
53(c)(1) are satisfied.
Under Rule 53(c)(2) National Grid Transco must demonstrate that the
proposed use of financing proceeds to invest in FUCOs "will not have an adverse
impact on any utility subsidiary of the registered holding company, or its
customers, or on the ability of state commissions to protect such subsidiary or
customers." The Commission
46
should conclude that the customers of National Grid Transco's U.S. public
utility subsidiary companies will not be adversely impacted by the proposed FUCO
investment based on the following:
(a) All of National Grid Transco's investments in FUCOs will be
segregated from the Utility Subsidiaries. None of the Utility Subsidiaries will
provide financing for, extend credit to, or sell or pledge its assets directly
or indirectly to any FUCO in which National Grid Transco owns any interest.
National Grid Transco also commits not to seek recovery in retail rates for any
failed investment in, or inadequate returns from, a FUCO investment.
(b) Investments in 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 or access to
National Grid Transco financing facilities that will adequately support their
operations.
(c) National Grid Transco 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. National Grid
Transco's FUCOs have experienced and extensive staff resources. Management and
support for FUCO operations will be largely performed by NGH One and Lattice
Group and their subsidiary companies, and by outside consultants (e.g.,
engineers, investment advisors, accountants and attorneys) engaged for projects
as necessary. National Grid Transco also will comply with Rule 53(a)(4)
regarding the provision of FUCO related information to every federal, state and
local regulator having jurisdiction over the retail rates, as applicable, of the
utility subsidiaries.
(d) The proposed FUCO financing authorization also would not have an
adverse impact on the ability of any state commission to protect a National Grid
Transco utility subsidiary subject to its jurisdiction or that subsidiary's
customers. In connection with the January 2002 Order, the Commission obtained
statements from all affected state commissions to support its determination
under Rule 53(c). In particular, the NYPSC, RIPUC, MDTE and the VPSB assured the
Commission that they have sufficient authority and resources to protect their
ratepayers from any adverse impacts arising out of National
47
Grid's proposed increased level of investment./48 The NHPUC provided assurance,
but noted National Grid's representations that it does not intend to invest in
EWGs. Consequently, the Commission reserved jurisdiction over the issuance and
sale of securities for the purposes of financing investments in EWGs, pending
completion of the record. As noted previously, National Grid has no EWG
investments and does not seek EWG investment authorization in this Application.
National Grid requests that the Commission continue to reserve jurisdiction over
the issuance and sale of securities for the purposes of financing investments in
EWGs pending completion of the record. National Grid Transco is seeking
supplemental letters from the state commissions to confirm that the additional
FUCO investment authorization similarly would not adversely affect the Utility
Subsidiaries.
Rhode Island
The RIPUC and its complementary body, the Division of Public Utilities
and Carriers ("RIDIV"), have comprehensive authority to protect Narragansett and
its ratepayers and the ability to exercise that authority through a professional
staff of utility regulators. The proposed FUCO financing will not alter that
authority or ability in the least. The RIPUC and the RIDIV regulate the rates
and terms of service of Narragansett under Title 39 of Rhode Island General
Laws. Their jurisdiction includes review and approval of debt, stock, and
security issuances under Rhode Island General Laws Section 39-3-15 et al. In
addition, transactions between regulated and non-regulated affiliates are
reviewed under Rhode Island General Laws Sections 39-3-28, 39-3-29, and 39-3-30
et al. Under these provisions and other provisions of Title 39, the RIPUC and
RIDIV have the authority to protect the financial integrity of Narragansett and
the interest of Rhode Island ratepayers.
The RIPUC is a three member commission that serves as a quasi-judicial
tribunal with jurisdiction, powers, and duties to implement and enforce
standards of conduct. The RIPUC holds investigational hearings involving the
rates, tariffs, tolls and
----------------
48 The Connecticut Department of Public Utility Control also provided assurances
at that time. National Grid no longer has operations in Connecticut and is not
today subject to the jurisdiction of the Connecticut Department of Public
Utility Control. National Grid has no retail customers in Vermont and is not
subject to the ratemaking jurisdiction of the VPSB.
48
charges and the sufficiency and reasonableness of facilities for electric and
other public utilities. The RIPUC is assisted by a staff of eight.
Regulation of utilities in Rhode Island also is conducted by the
RIDIV, which is headed by an administrator that is not a commissioner of the
RIPUC. The administrator of the RIDIV exercises the jurisdiction, supervision,
powers and duties not specifically assigned to the RIPUC, including the
execution of all laws relating to public utilities and carriers and all
regulations and orders of the RIPUC governing the conduct and charges of public
utilities. The RIDIV has authority over the transactions between public
utilities and their affiliates and all public utility equity and debt issuances.
The RIDIV is staffed by numerous persons including lawyers, engineers, auditors
and rate analysts.
The regulatory authority or ability of the RIPUC or the RIDIV to
regulate and protect Narragansett and to protect its ratepayers would be
unchanged by the proposed FUCO financing. Applicants will seek a supplemental
letter from the RIPUC to the Commission confirming this conclusion.
Massachusetts
The jurisdiction of the MDTE includes review and approval of debt,
stock, and security issuances under Mass. General Laws Chapter 164, Sections 10
through 19 and the general supervisory authority to regulate rates and charges.
In addition, transactions between regulated and non-regulated affiliates are
reviewed under Mass. General Laws Chapter 164, Sections 85, 85A, and 94C. Under
these provisions and other provisions of Chapter 164, the MDTE has the authority
to protect the financial integrity of Mass. Electric and Nantucket and the
interests of their ratepayers. The MDTE has an extensive staff that is organized
into several divisions. Of particular relevance to this discussion, the Rates
and Revenue Requirements Division is responsible for determining the appropriate
levels of revenues and specific rates for the investor owned electric, gas and
water utilities located in Massachusetts. The division reviews rate case
filings, fuel adjustment charges, financing requirements and tariff and special
contracts. The Siting Division reviews the long-range forecast and supply plans
of Massachusetts electric and gas utilities and applications to construct new
facilities such as high voltage transmission lines. The Legal Division provides
legal and policy advice to
49
the MDTE Commissioners and the MDTE staff and presides over rulemaking and
adjudicatory hearings conducted by the MDTE. The mission of the MDTE is to
ensure that utility consumers are provided with the most reliable service at the
lowest possible cost, to protect the public safety from utility accidents, to
oversee the energy facility siting process and to ensure that ratepayer rights
are protected. The MDTE has the statutory authority and ability to fulfill its
mission.
The proposed FUCO financing will not alter the authority or ability of
the MDTE to regulate Mass. Electric and Nantucket in furtherance of its mission
to protect Massachusetts ratepayers. Applicants will seek a supplemental letter
from the MDTE to the Commission confirming this conclusion.
New Hampshire
In its letter dated September 30, 2002, the NHPUC informed the
Commission that the financing authorized in the FUCO Order would not have an
effect upon the NHPUC's exercise of its regulatory jurisdiction over the rates,
services or operations of Granite State. Applicants expect that the additional
FUCO financing proposed herein also would not adversely affect the authority of
the NHPUC under New Hampshire law, or its ability to protect New Hampshire
ratepayers and National Grid Transco's New Hampshire utility subsidiaries.
Applicants will seek a supplemental letter from the NHPUC confirming these
points.
New York
Lastly, in a letter dated October 2, 2002, the NYPSC described its
jurisdiction over National Grid Transco's New York utility subsidiary, Niagara
Mohawk. The letter notes that Niagara Mohawk's financial integrity is protected
by limitations on the amount of dividends it can pay to its parent and that
Niagara Mohawk is prohibited from pledging its assets directly or indirectly to
any FUCO. The letter concludes that "subject to the above discussion, NYPSC
believes it has sufficient authority and resources, which it would use, to
protect the New York operating utility and its ratepayers from adverse impacts
associated with the National Grid investments." Applicants will seek a
supplemental letter from the NYPSC confirming its position with respect to the
current FUCO financing proposal.
50
(e) In addition, National Grid Transco will provide the information
required by Form 20-F to permit the Commission to monitor the effect of National
Grid Transco's FUCO investments on National Grid Transco's financial condition.
Accordingly, the conditions of Rule 53(c)(2) are satisfied.
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 Transco associate company in which a plan of
reorganization has not been confirmed; (2) the average consolidated retained
earnings for the two most recent semiannual periods has not decreased by 10
percent from the average for the previous two semiannual periods,/49 and; (3) in
the past fiscal year, National Grid Transco has not reported operating losses
attributable to its aggregate direct or indirect investments in EWGs and FUCOs.
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 Transco 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
Transco 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 Transco 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.
D. Intermediate Subsidiaries and Nonutility Reorganizations
National Grid Transco proposes to acquire, directly or indirectly, the
securities of one or more entities ("Intermediate Subsidiaries"), which would be
organized exclusively for the purpose of acquiring, holding and/or financing the
----------------
49 Although Rule 53 specifies quarterly periods, National Grid does not prepare
accounts with this frequency.
51
acquisition of the securities of or other interest in one or more FUCOs, Rule 58
Subsidiaries, ETCs or other non-exempt nonutility subsidiaries (as authorized in
this proceeding or in a separate proceeding), provided that Intermediate
Subsidiaries may also engage in administrative activities ("Administrative
Activities") and development activities ("Development Activities"), as such
terms are defined below, relating to such subsidiaries.
Administrative Activities include ongoing personnel, accounting,
engineering, legal, financial, and other support activities necessary to manage
National Grid Transco's investments in nonutility subsidiaries. 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, 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 include ongoing personnel, accounting,
engineering, legal, financial, and other support activities necessary to manage
National Grid Transco'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 FUCO, Rule 58 Subsidiary, ETC or other 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 Transco and non-affiliated
investors; (4) to facilitate the sale of ownership interests in one or more
52
acquired non-utility companies; (5) to comply with applicable laws of foreign
jurisdictions limiting or otherwise relating to the ownership of domestic
companies by foreign nationals; (6) as a part of tax planning in order to limit
National Grid Transco's exposure to taxes; (7) to further insulate National Grid
Transco 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 Transco from the Commission; and (3)
other available cash resources, including proceeds of securities sales by
Nonutility Subsidiaries pursuant to Rule 52. To the extent that National Grid
Transco provides funds or guarantees directly or indirectly to an Intermediate
Subsidiary that are used for the purpose of making an investment in any FUCO or
a Rule 58 Subsidiary, the amount of such funds or guarantees will be included in
National Grid Transco's "aggregate investment" in such entities, as calculated
in accordance with Rule 53 or Rule 58, as applicable.
National Grid Transco requests authorization to consolidate or
otherwise reorganize all or any part of its direct and indirect ownership
interests in Nonutility Subsidiaries, and the activities and functions related
to such investments. To effect any such consolidation or other reorganization,
National Grid Transco may wish to either contribute the equity securities of one
Nonutility Subsidiary to another Nonutility Subsidiary (including a newly formed
Intermediate Subsidiary) or sell (or cause a Nonutility Subsidiary to sell) the
equity securities or all or part of the assets of one Nonutility Subsidiary to
another one. To the extent that these transactions are not
53
otherwise exempt under the Act or rules thereunder,/50 National Grid Transco
hereby requests authorization under the Act to consolidate or otherwise
reorganize under one or more direct or indirect Intermediate Subsidiaries
National Grid Transco's ownership interests in existing and future Nonutility
Subsidiaries./51 Such transactions may take the form of a Nonutility Subsidiary
selling, contributing or transferring the equity securities of a subsidiary or
all or part of such subsidiary's assets as a dividend to an Intermediate
Subsidiary or to another Non-Utility Subsidiary, and the acquisition, directly
or indirectly, of the equity securities or assets of such subsidiary, either by
purchase or by receipt of a dividend. The purchasing Nonutility Subsidiary in
any transaction structured as an intrasystem sale of equity securities or assets
may execute and deliver its promissory note evidencing all or a portion of the
consideration given. Each transaction would be carried out in compliance with
all applicable U.S. or foreign laws and accounting requirements./52 In addition,
in the event that proxy solicitations are necessary with respect to any
corporate reorganization, Applicants will seek Commission approvals as necessary
under Section 6(a)(2) and 12(e) of the Act through the filing of a declaration.
National Grid Transco requests authorization to make expenditures on
Development Activities, as defined above, in an aggregate amount of up to $600
million. National Grid Transco proposes a "revolving fund" for permitted
expenditures on Development Activities. Thus, to the extent a Nonutility
Subsidiary in respect of which expenditures for Development Activities were made
subsequently becomes a FUCO or qualifies as an "energy-related company" under
Rule 58, the amount so expended will cease to be considered an expenditure for
Development Activities, but will instead be
----------------
50 Sections 12(c), 32(g), 33(c)(1) and 34(d) and Rules 43(b), 45(b), 46(a) and
58, as applicable, may exempt many of the transactions described in this
paragraph. Applicants would seek authorization under the Act for the sale or
transfer of a nonutility subsidiary held by a FUCO to another company in the
National Grid Transco group, unless the associate company's acquisition of the
nonutility subsidiary being sold or transferred by the FUCO would otherwise be
exempt under the Act, applicable rules such as Rule 58, or under an applicable
prior Commission order.
51 The Commission has previously granted similar authority to other holding
companies. See Entergy Corporation, et al., Holding Co. Act Release No. 27039
(June 22, 1999).
52 The Commission has authorized other registered holding companies to carry out
future reorganizations of their non-utility businesses without further approval.
See Columbia Energy Group, Inc., Holding Co. Act Release No. 27099 (Nov. 5,
1999).
54
considered as part of the "aggregate investment" in such entity pursuant to Rule
53 or 58, as applicable./53
E. Reporting Requirements
Applicants propose to continue to provide the periodic reports
required by the FUCO Order and restated herein. Specifically, Applicants propose
to provide Rule 24 certificates on a semiannual basis./54 In addition, in the
interest of maintaining the consistent presentation of financial information,
Applicants propose that their Annual Reports on Form U5S contain National Grid
Transco'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 Annual Reports on Form U5S: (1) U.S. GAAP
financial statements for all the companies in the National Grid USA Group, and
(2) U.S. GAAP financial statements or financial statements in the format
required by Form 20-F for (a) NGH One, 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 Transco 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.
National Grid Transco will report the following information in the
semi-annual reports under Rule 24:/55
----------------
53 This type of approval for a revolving fund of permitted expenditures on
Development Activities has been approved by the Commission in prior cases. See
e.g., Exelon Corporation, Holding Co. Act Release No. 27545 (June 27, 2002).
54 Reporting on a semi-annual basis is consistent with the frequency of
financial reporting required in the UK. Under UK rules, National Grid Transco
must prepare and publish consolidated financial information semi-annually. In
addition, semiannual financial reporting is consistent with National Grid
Transco's ADR listing on the New York Stock Exchange. Due to National Grid
Transco 's extensive foreign holdings, it would entail significant additional
work and expense for National Grid Transco to prepare consolidated financial
statements on a quarterly basis.
55 The Rule 24 report proposed herein would supercede the Rule 24 reporting
requirements of the January 2002 Order, as supplemented by the FUCO Order. In
addition, Applicants request that the Commission permit Applicants to cease
providing quarterly reports under Rule 24 in SEC File Nos. 70-7202 and 70-8803.
The information provided by these reports is substantially similar to
information that is provided in Quarterly Reports on Form U-9C-3 and Annual
Reports on Form U5S.
55
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 Transco 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 Transco, the name of the beneficiary of the guarantee
and the terms and purpose of the guarantee.
c. National Grid Transco'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 Transco'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 Transco since the
date of the Order granting 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, as applicable, with the
acquiring company identified and a brief explanation of the procedure
followed to determine 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 deposit or withdrawal balance by company
participating in the money pool as of the end of the reporting period.
g. A retained earnings analysis of each company in the National Grid USA
Group, detailing Gross Earnings (as that term is defined in the
Commission's Order dated March 15, 2000, Holding Co. Act Release No.
27154) or income available for dividends, dividends paid out of each
capital account, and the resulting capital account balances at the end
of the reporting period.
h. A table showing, as of the end of the reporting period, the dollar and
percentage components of the capital structures of National Grid
Transco, NGH One, each Intermediate Company, and each Utility
Subsidiary.
i. A list of borrowings by National Grid USA Group companies from
associated FUCOs, indicating at least three other sources of funds
(with rates and terms) and demonstrating how the Best Rate Method was
applied to such borrowings.
In addition, National Grid Transco will file a report with the
Commission within five business days of the occurrence of any of the following
events. The report will indicate which event listed below occurred and describe
the material circumstances giving rise to the event.
56
1. A 10% or greater decline in the common stock equity under U.S. GAAP
since the end of the previous reporting period for National Grid Transco or any
of its public utility subsidiary companies.
2. A decline to below 30% in the percentage of common stock equity to
total capitalization of National Grid Transco, on a consolidated basis, or any
of its public utility subsidiary companies.
3. A default by National Grid Transco or any of its public utility
subsidiary companies on any debt obligation in a principal amount equal to or
exceeding $10 million if such default permits the holder of the debt obligation
to demand payment.
4. The occurrence of any event described in Rule 53(b).
5. A downgrade by a nationally recognized statistical rating
organization of the senior debt of National Grid Transco or any of its public
utility subsidiary companies.
In the March 2000 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, (a 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 Transco requests that the Commission exempt all subsidiaries
of NGH One and Lattice Group from the requirement that they maintain their
financial statements in conformance with Regulation S-X. NGH One and Lattice
Group would reconcile their financial statements to U.S. GAAP in the manner
required by Form 20-F when such statements are provided to the Commission in the
context of filings or reports required under the Act.
57
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses incurred or to be incurred in
connection with the preparation and filing of this Application are estimated not
to exceed $45,000. Fees, commissions and expenses paid in connection with any
specific financing transaction will be within the limit set forth in Item 1.C.2
above.
Item 3. Applicable Statutory Provisions
The proposed transactions are subject to Sections 6(a), 7, 9(a), 10,
12(b), 12(c) and 13(b) of the Act and Rules 20, 26, 42, 43, 45, 46, 52, 53, 54,
87 and 90 thereunder.
Item 4. Regulatory Approvals
No state commission, and no federal commission, other than the
Commission, has jurisdiction over any of the transactions proposed in this
Application.
Item 5. Procedure
National Grid Transco respectfully requests that the Commission issue
a notice of the transaction proposed herein forthwith and issue an order
granting and permitting this Application to become effective by August 31, 2004
so that the order is issued in advance of the expiration of financing authority
on September 30, 2004.
Applicants waive a recommended decision by a hearing or other
responsible officer of the Commission for approval of the proposed transactions
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 List of Applicant Subsidiaries of National Grid Transco.
B Form of Money Pool Agreement.*
58
C-1 Opinion of Counsel of National Grid Transco plc.*
C-2 Past Tense Opinion of Counsel.*
D Form of Notice.
E National Grid Transco's Stock-Based Plans.*
F Form of Revised Tax Allocation Agreement.*
Financial Statements
FS-1 National Grid Transco plc Consolidated Balance Sheet and Statement of
Income for the Year Ended and as of March 31, 2004, incorporated by
reference to National Grid Transco's Annual Report on Form 20-F, filed on
June 16, 2004 (SEC File No. 001-14958).
FS-2 Projected Financial Statements for National Grid Transco plc for the Three
Year Period Ended March 31, 2007 (to be filed by amendment under a request
for confidential treatment).
* To be filed by amendment.
Item 7. Information as to Environmental Effects
The proposed transaction 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.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the Applicant has duly caused this Amendment to the
Application-Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: July 15, 2004 National Grid Transco plc and its subsidiaries
(except for the National Grid USA Group)
By: /s/ Steve Lucas
Steve Lucas
Group Finance Director
National Grid Transco plc
Date: July 15, 2004 National Grid USA and its subsidiaries
By: /s/ John Cochrane
John Cochrane
Senior Vice President, Chief Financial Officer
and Treasurer
National Grid USA
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Exhibit Index
A List of Applicant Subsidiaries of National Grid Transco.
D Form of Notice.
61