FILE NO. 70-10184
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
The Connecticut Light and Power Company Public Service Company of
CL&P Receivables Corporation New Hampshire
NU Enterprises, Inc. Properties, Inc.
Northeast Generation Services Company North Atlantic Energy
Woods Network Services, Inc. Corporation
NGS Mechanical, Inc. North Atlantic Energy
E. S. Boulos Company Services Corp.
Woods Electrical Co., Inc. Energy Park
Northeast Generation Company 780 North Commercial Street
Select Energy, Inc. Manchester, NH 03101
Select Energy New York, Inc.
The Rocky River Realty Company Select Energy Services, Inc.
The Quinnehtuk Company Reeds Ferry Supply Co., Inc.
Charter Oak Energy, Inc. Select Energy Contracting,
Mode 1 Communications, Inc. Inc.
Northeast Utilities Service Company HEC/Tobyhanna Energy
Yankee Energy System, Inc. Project, Inc.
Yankee Gas Services Company 24 Prime Parkway
Yankee Energy Financial Services Company Natick, MA 01760
Northeast Nuclear Energy Company
NorConn Properties, Inc. Northeast Utilities
Yankee Energy Services Company Western Massachusetts
107 Selden Street Electric Company
Berlin, CT 06037 One Federal Street,
Building 111-4
Springfield, MA 01105
Holyoke Water Power
Company
Holyoke Power and
Electric Company
One Canal Street
Holyoke, MA 01040
(Name of companies filing this statement and addresses of principal
executive offices)
NORTHEAST UTILITIES
(Name of top registered holding company)
Gregory B. Butler, Esq.
Senior Vice President, Secretary and General Counsel
Northeast Utilities Service Company
P.O. Box 270
Hartford, CT 06141-0270
(Name and address of agent for service)
The Commission is requested to mail signed copies of all orders, notices
and communications to
Jeffrey C. Miller David R. McHale
Assistant General Counsel Vice President and Treasurer
Northeast Utilities Northeast Utilities
Service Company Service Company
P.O. Box 270 P.O. Box 270
Hartford, CT 06141-0270 Hartford, CT 06141-0270
The Application/Declaration in this file as heretofore
amended is hereby further amended and restated to read as
follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
1. Northeast Utilities ("NU"), a public utility holding
company registered under the Public Utility Holding Company
Act of 1935, as amended (the "Act") and The Connecticut
Light and Power Company and its subsidiary CL&P Receivables
Corporation, Western Massachusetts Electric Company, Public
Service Company of New Hampshire and it subsidiary
Properties, Inc., Holyoke Water Power Company and its
subsidiary Holyoke Power and Electric Company, North
Atlantic Energy Corporation, North Atlantic Energy Service
Corporation, Northeast Nuclear Energy Company, The Rocky
River Realty Company, The Quinnehtuk Company, Charter Oak
Energy, Inc., and Northeast Utilities Service Company, each
a wholly-owned subsidiary of NU, Yankee Energy System, Inc.
("Yankee Energy"), a wholly-owned public utility holding
company subsidiary of NU and its wholly-owned subsidiaries,
Yankee Gas Services Company, Yankee Energy Financial
Services Company, Yankee Energy Services Company and NorConn
Properties, Inc.; and NU Enterprises, Inc., a wholly owned
nonutility holding company subsidiary of NU, and its direct
and indirect wholly-owned subsidiaries, Northeast Generation
Company, Northeast Generation Services Company and its
subsidiaries, NGS Mechanical, Inc., E. S. Boulos Company,
and Woods Electrical Company, Inc., Select Energy, Inc. and
its subsidiary Select Energy New York, Inc., Select Energy
Services, Inc., and its subsidiaries Reeds Ferry Supply,
Co., Inc., HEC/Tobyhanna Energy Project, Inc. and Select
Energy Contracting, Inc., Mode 1 Communications, Inc. and
Woods Network Services, Inc., (collectively, the
"Subsidiaries" and collectively with NU, the "Applicants")
submit this application/declaration (the "Application")
pursuant to Section 12 of the Act and Rule 45 thereunder to
seek approval for the amendment of the NU System Tax
Allocation Agreement such that NU will retain the benefit
(in the form of the reduction in consolidated tax) that is
attributable to tax losses incurred by it in connection with
the Acquisition Debt (as defined herein), rather than
generally provide such tax benefit to its Subsidiaries.
2. On March 1, 2000 pursuant to Commission order, NU
acquired Yankee Energy System, Inc. ("Yankee Energy") (see
Northeast Utilities, Holding Co. Act Release No.35-27127,
January 31, 2000). In connection with this acquisition, on
March 1, 2000, NU entered into a $266 million one-year bank
term loan facility under which $263 million was borrowed.
On February 28, 2001, NU repaid this facility with the
proceeds of a $263 million floating rate senior note
issuance. The senior note issuance bore an effective rate
of 6.9% at February 28, 2001 and was scheduled to mature in
February 2003. In April 2002, NU issued $263 million of 10-
year senior unsecured notes carrying a coupon rate of 7.25%
which mature April 1, 2012. The proceeds from this issuance
("YES Debt") were used to redeem the floating rate notes.
The annual interest payment on the YES Debt is approximately
$19.1 million. See Holding Co. Act Release. No. 35-27127
(January 31, 2000). At an assumed rate of 35%, the tax
benefit to NU is $6,650,000.
3. For purposes of this Application, "Acquisition Debt"
means the YES Debt and indebtedness that may be incurred by
NU to refinance such indebtedness.
4. The Applicants request that the Commission authorize
NU and its Subsidiaries to amend and restate the Amended and
Restated Tax Allocation Agreement, as amended (the "Current
Agreement") of the NU system companies in the manner set
forth in the Second Amended and Restated Tax Allocation
Agreement that is filed herewith as Exhibit B-2 (the
"Proposed Amended Tax Allocation Agreement"). The Current
Agreement under which taxes are allocated among the
Applicants complies with Rule 45(c) under the Act. The
Current Agreement is dated as of January 1, 1990 and was
filed as Exhibit D to NU's 1994 Form U5S. A First Amendment
to the Current Agreement dated as of October 26, 1998 was
filed as Exhibit D to NU's 1997 U5S, and a Second Amendment
dated as of March 1, 2000 was filed as Exhibit D.3 to NU's
2000 U5S. All such Amendments were in conformity with Rule
45(c) and did not require Commission approval.
5. Under the Proposed Amended Tax Allocation Agreement,
the consolidated tax would generally be allocated among the
members of the group in proportion to the separate return
tax of each member, provided that the tax apportioned to any
Subsidiary of NU will not exceed the "separate return tax"
of such Subsidiary with NU allocating the benefits of its
own losses generally to its Subsidiaries. This is the
method of allocation required under Rule 45(c)(2)(ii).
6. The Proposed Amended Tax Allocation Agreement further
provides that NU will retain the benefit attributable to tax
losses it incurs in connection with the Acquisition Debt,
rather than reallocate such benefit to its Subsidiaries.
This would be effective for the tax year beginning January
1, 2004 and end when the Acquisition Debt, and any
refinancings thereof, have been paid off. In this respect,
the proposed Amended Tax Allocation Agreement does not
comply with all of the requirements of Rule 45(c) and
requires Commission approval. The Proposed Amended Tax
Allocation Agreement will therefore have the effect of
assigning the tax benefit associated with the interest
expense on the Acquisition Debt to the entity that is
legally obligated for its payment - NU. At the same time,
in accordance with Rule 45(c)(2), the portion of the
consolidated tax allocated to any of the Subsidiaries will
not exceed the "separate return tax" of such Subsidiary (the
"separate return limitation"). Thus, the Proposed Amended
Tax Allocation Agreement will not have the effect of
shifting a larger portion of the group's tax liability to
any member of the group than such company would otherwise
pay on a separate return basis. Exhibit K-1 illustrates the
difference between the Rule 45(c) method and the proposed
method in the amounts of tax that would have been allocated
to the members of the NU System based on a hypothetical set
of facts.
7. A legal analysis of the Proposed Amended Tax
Allocation Agreement, in light of the policies and purposes
of Sections 12 and 13 of the Act and Rule 45, is contained
in Item 3, below.
8. The Applicants agree to provide a Rule 24
report in this proceeding, annually following each quarter
in which they file a consolidated tax return, providing
information showing (i) the calculation of the portion of
NU's loss that is attributable to interest expense on
Acquisition Debt and (ii) the actual allocation of federal
income tax liability to each of the members of the
consolidated group.
ITEM 2. FEES, COMMISSION AND EXPENSE.
The fees, commissions and expenses paid or incurred or
to be incurred in connection with this Application are
estimated at not more than $15,000.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
The Proposed Amended Tax Allocation Agreement in General
1. Tax allocation agreements between a registered holding
company and its subsidiaries must comply with Section 12 of
the Act and Rule 45 thereunder. Rule 45(a) generally
prohibits any registered holding company or subsidiary
company from, directly or indirectly, lending or in any
manner extending its credit to or indemnifying, or making
any donation or capital contribution to, any company in the
same holding company system, except pursuant to a Commission
order. Approval under Rule 45(a) is not required for the
filing of a consolidated tax return pursuant to a tax
allocation agreement between eligible associate companies in
a registered holding company system that complies with the
terms of Rule 45(c). However, if a tax allocation agreement
does not comply in all respects with the provisions of Rule
45(c), it may nonetheless be approved by the Commission
under Section 12(b) and Rule 45(a).
2. Rule 45(c)(2) provides that consolidated tax may be
apportioned among the members of a group in proportion to
each member's corporate taxable income or separate return
tax, but, in either case, the amount of the tax apportioned
to any subsidiary company may not exceed the separate return
tax of such subsidiary. In other words, the amount of
consolidated tax that is apportioned to any subsidiary
company in a consolidated group may not exceed the amount of
tax that such subsidiary company would have paid if such tax
were computed as though such subsidiary company were not a
member of a consolidated group.
3. Rule 45(c)(4) provides that a tax allocation agreement
may exclude associate companies not having positive
corporate taxable income for the year (i.e., loss companies)
from a current allocation of the benefit of their losses,
provided that the agreement gives each subsidiary carryover
rights that can be used in future years to reduce their
proportionate share of consolidated tax. Alternatively,
under Rule 45(c)(5), the so-called "current payment" method,
a tax allocation agreement may require that the associate
companies with a positive allocation pay the amount so
allocated and that subsidiary companies with a negative
allocation receive current payment of their corporate tax
credits. Specifically, Rule 45(c)(5) provides:
The agreement may, instead of excluding members
as provided in paragraph (c)(4), include all
members of the group in the tax allocation,
recognizing negative corporate taxable income or
a negative corporate tax, according to the
allocation method chosen. An agreement under
this paragraph shall provide that those
associate companies with a positive allocation
will pay the amount allocated and those
subsidiary companies with a negative allocation
will receive current payment of their corporate
tax credits. The agreement shall provide a
method for apportioning such payments, and for
carrying over uncompensated benefits, if the
consolidated loss is too large to be used in
full. Such method may assign priorities to
specified kinds of benefits.
4. Thus, under Rule 45(c)(5), only "subsidiary
companies," as opposed to "associate companies" (which
includes the holding company in a holding company system, as
well as all subsidiary companies), are entitled to be paid
for any negative allocation (i.e., losses or credits). The
Proposed Amended Tax Allocation Agreement adopts the
"current payment" method, but provides for NU to retain the
tax savings attributable to the interest expense on the
Acquisition Debt. The mechanism by which this is achieved is
to include NU among the members of the consolidated group
that are entitled to receive payments (i.e., negative
allocations of tax) for their losses, but then limit the
amount which members other than NU can receive to the
portion of NU's loss that is not attributable to the
interest expense on the Acquisition Debt.
5. In connection with the 1981 amendments to Rule 45, the
Commission explained that the distinction between "associate
companies," on the one hand, and "subsidiary companies," on
the other, represented a policy decision to preclude the
holding company from sharing in the consolidated return
savings. The Commission noted that "[e]xploitation of
utility companies by holding companies through asserted
misallocation of consolidated tax return benefits was among
the abuses examined in the investigations underlying the
enactment of the Act." It should be noted, however,
that the result in Rule 45(c)(5) is not dictated by the
statute and, as the Commission has recognized, there is
discretion on the part of the agency to approve tax
allocation agreements that do not, by their terms, comply
with Rule 45(c) - so long as the policies and provisions of
the Act are otherwise satisfied. Thus, where NU is seeking
only to retain the tax benefit attributable to the interest
expense on the Acquisition Debt for which no other company
in the NU system has any liability, the proposed arrangement
will not give rise to the types of problems (e.g., upstream
loans) that the Act was intended to address.
6. In the instant situation, however, the
Acquisition Debt was not incurred to fund investments in
NU's Subsidiaries, but rather to acquire the equity of
Yankee Energy. Such debt represents indebtedness of NU,
issued based on its creditworthiness and is non-recourse to
the Subsidiaries. By incurring the Acquisition Debt, NU is
creating tax deductions that are non-recourse to its
Subsidiaries. As a result, NU should retain the benefits of
those tax credits. Importantly, NU could not, without the
approval of the commissions having jurisdiction over rates
of its utility Subsidiaries, recover in rates of such
utility Subsidiaries any costs, including the interest on
the Acquisition Debt, associated with the acquisition of
Yankee Energy, thus the allocation of tax under the Proposed
Amended Tax Allocation Agreement would not result in any
detriment to the customers of NU's utility Subsidiaries.
Moreover, the Acquisition Debt is and will remain unsecured.
Thus, the lenders will not have any call on the assets of
NU's Subsidiaries or any security interest in the common
stock of the Subsidiaries that is held by NU.
7. Although NU's Subsidiaries do not have any legal
obligation for such debt, NU's ability to pay interest on,
as well as to pay common stock dividends, is largely
dependent upon its receipt of dividends from its
Subsidiaries. Currently, NU projects that its dividends will
be paid largely from current and retained earnings of the
utility Subsidiaries, as allowed by Rule 46. Currently, NU
is not projecting any change in its dividend policy. In
addition, the Proposed Amended Tax Allocation Agreement will
have no impact on the rates or revenue requirements of the
utility Subsidiaries.
8. Finally, the amount of tax allocated to the
utility Subsidiaries under the Proposed Amended Tax
Allocation Agreement will remain subject to the separate
return limitation and no company will pay more than the
amount it would pay as determined on a stand-alone basis.
The Proposed Tax Allocation Method Is Consistent With The
Policies And Purposes Of The Act
9. The Proposed Amended Tax Allocation Agreement is
consistent with the policies and purposes of Section 12 of
the Act. Section 12 neither prohibits a registered holding
company from retaining the benefit of the tax attributes
that it generates nor requires it to reallocate those tax
attributes to its subsidiaries. Section 12 merely prohibits
upstream loans or extensions of credit to a registered
holding company, and requires approval, by rule or by
order, for any loan by a holding company, or any subsidiary
thereof, to a subsidiary company.
10. Moreover, the policy underlying Rule 45(c), as
articulated by the Commission in its release proposing Rule
45(c), appears to have little or nothing to do with the
circumstances presented in this case. In its proposing
release, the Commission noted that the "[e]xploitation of
utility companies by holding companies through asserted
misallocation of consolidated tax return benefits" was among
the abuses that led to the passage of the Act. The
Commission then explained:
The corporate relationships required by the Act
assure that the deductible corporate expenses of
the holding company itself will always create a
consolidated tax saving, since Section 13(a) of the
Act precludes such expenses being passed on to the
subsidiaries, through service charge or contract,
so as to transform them into corporate deductions
of the subsidiaries. In light of the legislative
history referred to, an expense reimbursement of
the holding company, in the guise of a tax
allocation, would seem incongruous with Section
13(a). The exclusion in our earlier rule of the
holding company from sharing in consolidated return
savings was intentional and will continue. These
considerations do not apply to other companies in
the group that incur losses.
11. As this passage seems to suggest, the prohibition in
Rule 45(c) of a registered holding company sharing in the
consolidated tax savings appears to have been founded chiefly
on Section 13(a) of the Act, which prohibits
a registered holding company from entering into or
performing any agreement for the sale of goods or provision
of services or construction for a charge to any subsidiary
company. In this case, however, NU is not seeking to recover
its own corporate costs from its Subsidiaries, "in the guise
of a tax allocation," by transforming them into deductible
expenses of its Subsidiaries. Moreover, the Subsidiaries
will not be reimbursing NU for the interest expense on the
Acquisition Debt through the tax allocation mechanism.
Instead, the "benefit" obtained by NU under the Proposed
Amended Tax Allocation Agreement is attributable entirely to
the lower income tax liability of the consolidated group
that is attributable to NU's interest expense.
12. In fact, the policies and purposes of Section
13(a), which was intended only to prohibit holding companies
from "exacting tribute" from subsidiaries through excessive
and often illusory service charges for management services,
have no bearing on how NU and its Subsidiaries choose to
allocate the tax savings associated with NU's interest
expense. The interest expense on the Acquisition Debt
represents a true cost of capital that NU has incurred for
purposes unrelated to the operations of its Subsidiaries. It
is important to consider that, if NU were to incur interest
on debt the proceeds of which were used to fund loans to its
Subsidiaries, the Act and the Commission's rules would allow
NU to recover its cost of funds through interest charges to
its Subsidiaries, and the policies and purposes of Section
13(a) would not come into play. Where, as in this case, NU's
Subsidiaries have not assumed any legal obligation for the
Acquisition Debt, it would not be detrimental to the
Subsidiaries or to consumers if NU were to retain the
benefit associated with its interest expense. Moreover, if
NU were to allocate the tax savings attributable to the
interest expense on the Acquisition Debt to those members of
the group with a positive allocation the net effect would be
the same as if NU made a capital contribution to those
Subsidiaries.
13. In National Grid Group plc, Holding Co. Act
Release No. 35-27154 (March 15, 2000), the Commission
authorized National Grid Group and its subsidiaries to enter
into a tax allocation agreement under which the tax benefit
of the interest expense on acquisition debt would be
allocated to the U.S. sub-holding company of National Grid
Group that had incurred the debt. With one exception, the
circumstances in that case are identical to those presented
here. In National Grid, a U.S. sub-holding company of
National Grid Group incurred approximately $3.2 billion of
bank debt in order to finance the acquisition of New England
Electric System ("NEES"). National Grid Group explained
that, without the requested relief, it would suffer an
increased U.K. tax liability since, under U.K. tax law,
there is no system of consolidated tax groups similar to
that under U.S. law. The applicant further explained that,
under U.K. law, a loss member of a corporate group may
"surrender" the loss to another member and thereby reduce
the receiving company's taxable profits. National Grid Group
stated that payment for the loss was necessary for two
reasons: first, because under U.K. law, an agreement
requiring an uncompensated surrender of tax benefits could
possibly be voided under creditor protection law, and
second, to assure that National Grid Group would receive
appropriate tax credits under U.K. tax laws for the U.S.
taxes paid by the U.S. sub-holding company. In approving
the proposed tax allocation agreement, the Commission
observed:
It does not appear that approval of the Tax
Allocation Agreement would lead to the abuses
that section 12 is intended to prevent, and
therefore approval will not be detrimental to the
NEES Group and its consumers. The 'separate
return' limitation will assure that the NEES'
Utility Subsidiaries tax liability will not be
higher than it otherwise would have been. In
addition, the Financing Applicants note that the
conditions applicable to our authorization with
respect to dividend payments will provide
additional protections. Consequently, the Tax
Allocation Agreement does not provide a means for
a foreign parent holding company to 'milk' the
U.S.-organized companies.
In addition, because the NEES Group has no
obligation with respect to the Merger-Related
Debt and the debt does not affect the NEES
Group's financial position or credit, it is not
inappropriate to exclude these companies from the
benefits of the tax consequences arising out of
the debt. Accordingly, we approve the use of the
Tax Allocation Agreement. (footnote omitted).
14. NU's current circumstances do not involve any
interplay between foreign and U.S. tax laws, and approval or
disapproval of the Proposed Amended Tax Allocation Agreement
will not have any effect on the overall amount of
consolidated income tax that NU will pay. Nevertheless, it
is clear that the Commission's approval of the tax
allocation agreement in National Grid was based almost
entirely upon its determination that the agreement would not
lead to the abuses that Section 12 was intended to prevent;
that the NEES utility subsidiaries' allocated share of the
consolidated tax would be no higher than it would otherwise
be on a separate return basis; that the U.S. subsidiaries
had no obligation on the merger-related debt; and that the
merger-related debt did not affect the NEES subsidiaries'
financial position or credit. The fact that the proposed tax
allocation agreement would reduce National Grid Group's
overall U.S. and U.K. tax liability and enable National Grid
Group to avoid other potential legal problems under U.K. law
(associated with "surrendering" of tax attributes by any
subsidiary) appears to have been a subordinate
consideration.
15. The Commission has also authorized other
registered public utility holding companies to enter into
tax allocation agreements which have the effect of retaining
the tax losses incurred in connection with acquisition debt,
similar to the request herein. See, Pepco Holdings Inc.,
Holding Co. Act Release No. 35-27553, (July 24, 2002),
Progress Energy, Inc., Holding Co. Act Release No. 35-27522
(April 18, 2002); Energy East Corporation, Holding Co. Act
Release No. 35-27643 (January 28, 2003); NiSource Inc.,
Holding Co. Act Release No. 35-27567 (September 12, 2002)
(collectively, the "Tax Allocation Orders").
16. NU's circumstances are substantially similar to
those presented in National Grid and the other Tax
Allocation Orders. The Proposed Amended Tax Allocation
Agreement will not lead to the kinds of abuses Section 12
was intended to prevent (e.g., prohibition on upstream
loans) and is not a device for transferring NU's expenses to
its Subsidiaries. NU's Subsidiaries' allocated share of the
consolidated return liability will be no greater than it
would be if calculated on a separate return basis, as
required by Rule 45(c). The utility Subsidiaries are not
obligated, directly or indirectly, on the Acquisition Debt
and the Proposed Amended Tax Allocation Agreement will not
have the effect of shifting NU's tax losses incurred by it
in connection with the Acquisition Debt to the Utility
Subsidiaries. Finally, the Acquisition Debt has not affected
the utility Subsidiaries' financial position or credit, as
evidenced by their credit ratings, their projected
capitalization ratios and cash flow.
ITEM 4. REGULATORY APPROVAL
1. Public Service Company of New Hampshire must file a
copy of the Proposed Amended Tax Allocation Agreement with
the New Hampshire Public Utilities Commission, for notice
purposes, within 10 days after the date on which it is
executed, and Western Massachusetts Electric Company must
file a copy of the Proposed Amended Tax Allocation
Agreement, for notice purposes, with the Massachusetts
Department of Telecommunications and Energy. Either
commission could, sua sponte, institute a proceeding and
hold hearings on the Proposed Amended Tax Allocation
Agreement.
2. Except as stated above, no other state commission,
and no federal commission, other than this Commission, has
jurisdiction over the Proposed Amended Tax Allocation
Agreement.
ITEM 5. PROCEDURE.
1. The Applicant hereby requests that the Commission
publish a notice under Rule 23 with respect to the filing of
this Application as soon as practicable and that the
Commission's order be issued as soon as possible. A form of
notice suitable for publication in the Federal Register is
attached hereto as Exhibit H. The Applicant respectfully
requests the Commission's approval, pursuant to this
Application, of all transactions described herein, whether
under the sections of the Act and Rules thereunder
enumerated in Item 3 or otherwise. It is further requested
that the Commission issue an order authorizing the
transactions proposed herein at the earliest practicable
date. Additionally, the Applicant (i) requests that there
not be any recommended decision by a hearing officer or by
any responsible officer of the Commission, (ii) consents to
the Office of Public Utility Regulation within the Division
of Investment Management assisting in the preparation of the
Commission's decision, and (iii) waives the 30-day waiting
period between the issuance of the Commission's order and
the date on which it is to become effective, since it is
desired that the Commission's order, when issued, become
effective immediately.
Other Matters
1. Except in accordance with the Act, neither NU nor any
Subsidiary thereof (a) has acquired an ownership interest in
an EWG or a FUCO, as defined in Sections 32 and 33 of the
Act, or (b) now is or as a consequence of the transactions
proposed herein will become a party to, or has or will as a
consequence of the transactions proposed herein have a right
under, a service, sales, or construction contract with an
EWG or a FUCO. None of the proceeds from the transactions
proposed herein will be used by NU and its Subsidiaries to
acquire any securities of, or any interest in, an EWG or a
FUCO.
2. NU currently meets all of the conditions of Rule
53(a), except for clause (1). At June 30, 2004, NU's
"aggregate investment," as defined in Rule 53(a)(1), in EWGs
and FUCOs was approximately $448.2 million, or approximately
53.6% of NU's average "consolidated retained earnings," also
as defined in Rule 53(a)(1), for the four quarters ended
June 30, 2004 ($836 million). With respect to Rule 53(a)(1),
however, the Commission has determined that NU's financing
of its investment in EWGs in an amount not to exceed $1
billion would not have either of the adverse effects set
forth in Rule 53(c). (Holding Co. Act Release No. 35-27868,
June 30, 2004, the "Rule 53 Order"). NU continues to assert
that its EWG investment in NGC will not adversely affect the
System.
3. In addition, NU and its Subsidiaries are in compliance
and will continue to comply with the other provisions of
Rule 53(a) and (b), as demonstrated by the following
determinations:
(i) NGC maintains books and records, and prepares
financial statements, in accordance with Rule 53(a)(2).
Furthermore, NU has undertaken to provide the Commission
access to such books and records and financial statements,
as it may request;
(ii) No employees of NU's public utility Subsidiaries have
rendered services to NGC;
(iii) NU has submitted (a) a copy of each Form U-1 and
Rule 24 certificate that has been filed with the
Commission under Rule 53 and (b) a copy of Item 9 of the
Form U5S and Exhibits G and H thereof to each state
regulator having jurisdiction over the retail rates of NU's
public utility Subsidiaries;
(iv) Neither NU nor any Subsidiary has been the
subject of a bankruptcy or similar proceeding unless a plan
of reorganization has been confirmed in such proceeding;
(v) NU's average CREs for the four most recent quarterly
periods have not decreased by 10% or more from the average
for the previous four quarterly periods; and
(vi) In the previous fiscal year, NU did not report
operating losses attributable to its investment in
EWGs/FUCOs exceeding 3 percent of NU's consolidated retained
earnings.
4. The proposed transactions, considered in conjunction
with the effect of the capitalization and earnings of NU's
EWGs and FUCOs, would not have a material adverse effect on
the financial integrity of the NU system, or an adverse
impact on NU's public-utility Subsidiaries, their customers,
or the ability of State commissions to protect such public-
utility customers. The Rule 53(c) Order was predicated, in
part, upon an assessment of NU's overall financial condition
which took into account, among other factors, NU's
consolidated capitalization ratio, consolidated retained
earnings, credit ratings and historical performance of its
EWG.
5. NU's EWG investment (it has no FUCO investment) has
been profitable for all quarterly periods ending June 30,
2000 through June 30, 2004 (NGC was acquired in March 2000).
As of December 31, 1999, the most recent period for which
financial statement information was evaluated in the Rule
53(c) Order, NU's consolidated capitalization consisted of
35.3% common equity and 64.7% debt (including long and short-
term debt, preferred stock, capital leases and guarantees).
6. As of June 30, 2000, the end of the first quarter after
the issuance of the Rule 53(c) Order, the consolidated
capitalization ratios of NU, with consolidated debt
including all short-term debt and non-recourse debt of the
EWG, were as follows:
As of June 30, 2000
(thousands
of dollars) %
Common shareholders' equity 2,365,854 36.9
Preferred stock 277,700 4.3
Long-term and short-term debt 3,768,353 58.8
Total 6,411,907 100.0%
7. The consolidated capitalization ratios of NU as of June
30, 2004, with consolidated debt including all short-term
debt and non-recourse debt of the EWG, were as follows:
As of June 30, 2004
(thousands
of dollars) %
Common shareholders' equity 2,323,458 34.8
Preferred stock 116,200 1.7
Long-term and short-term debt 2,605,848 39.0
Rate Reduction Bonds 1,639,344 24.5
Total 6,684,850 100.0%
If Rate Reduction Bonds are not included, the
consolidated capitalization ratio of NU as of June 30, 2004
is as follows:
As of June 30, 2004
(thousands
of dollars) %
Common shareholders' equity 2,323,458 46.0
Preferred Stock 116,200 2.3
Long-term and short-term debt 2,605,848 51.7
Total 5,045,506 100.0%
8. As of June 30, 2000, the end of the first quarter after
the issuance of the Rule 53(c) Order, NU's consolidated
retained earnings were $593.6 million. At June 30, 2004,
NU's consolidated retained earnings were approximately
$840.1 million. NGC has made a positive contribution to
earnings by contributing $148.7 million in revenues in the
12-month period ending June 30, 2004 and net income of $39.4
million for the same period. Although since the date of the
Rule 53(c) Order, the common equity ratio of NU on a
consolidated capitalization basis has decreased, it is
mainly as a result of the issuance of the Rate Reduction
Bonds and still it remains at a financially healthy level,
above the 30% benchmark required by the Commission. If Rate
Reduction Bonds are excluded from the calculation of the
common equity ratio, NU's consolidated common equity ratio
has increased since the date of the Rule 53(c) Order.
Accordingly, NU's investment in its EWG has not had an
adverse impact on NU's financial integrity.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
A. EXHIBITS.
*B. Form of Amended Tax Allocation Agreement. (withdrawn)
B-2 Proposed Form of Second Amended and Restated Tax Allocation
Agreement
*F Legal Opinion
*H Form of Notice
*K-1 Comparison of Allocation of Federal Income Tax
Liability under Proposed Amended Tax
Allocation Agreement and Rule 45(c).
* Previously Filed
B. FINANCIAL STATEMENTS.
1. Northeast Utilities Consolidated Balance Sheets,
as of December 31, 2002, and Consolidated Statements of
Income and Statement of Retained Earnings, for the 12 months
ended December 31, 2002 and Statement of Capitalization as
of December 31, 2002 (incorporated by reference to NU Annual
Report on Form 10K for the year ended December 31, 2002
filed with the Commission).
2. Northeast Utilities Consolidated Balance Sheets,
as of March 31, 2003, June 30, 2003 and September 30, 2003,
and Consolidated Statements of Income and Statement of
Retained Earnings, for the quarters ended March 30, 2003,
June 30, 2003 and September 30, 2003 and Statement of
Capitalization as of March 31, 2003, June 30, 2003 and
September 30, 2003 (incorporated by reference to NU
Quarterly Report on Form 10Q for the Quarters ended March
31, 2003, June 30, 2003 and September 30, 2003 filed with
the Commission, File 1-5324).
3. The impact of the Proposed Amended Tax Allocation
Agreement is set forth in Exhibit K-1
4. Northeast Utilities Consolidated Balance Sheets,
as of December 31, 2003, and Consolidated Statements of
Income and Statement of Retained Earnings, for the 12 months
ended December 31, 2003 and Statement of Capitalization as
of December 31, 2003 (incorporated by reference to NU Annual
Report on Form 10K for the year ended December 31, 2003
filed with the Commission).
5. Northeast Utilities Consolidated Balance Sheets,
as of March 31, 2004 and June 30, 2004, and Consolidated
Statements of Income and Statement of Retained Earnings for
the quarters ended March 30, 2004 and June 30, 2004 and
Statement of Capitalization as of March 31, 2004 and June
30, 2004 (incorporated by reference to NU Quarterly Report
on Form 10Q for the Quarters ended March 31, 2004 and June
30, 2004 filed with the Commission, File 1-5324).
[SIGNATURE PAGE TO FOLLOW]
SIGNATURES
Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, each of the undersigned
companies has duly caused this Application to be signed on
its behalf by the undersigned thereunto duly authorized.
October 20, 2004
Northeast Utilities
Northeast Utilities Service Company
The Connecticut Light and Power Company
CL&P Receivables, Inc.
Western Massachusetts Electric Company
Public Service Company of New Hampshire
Properties, Inc.
North Atlantic Energy Corporation
North Atlantic Energy Services Corporation
Holyoke Water Power Company
Holyoke Power and Electric Company
Charter Oak Energy Company
Northeast Nuclear Energy Company
Yankee Energy System, Inc.
Yankee Gas Services Company
Yankee Energy Financial Services Company
Yankee Energy Services Company
NorConn Properties, Inc.
The Rocky River Realty Company
The Quinnehtuk Company
NU Enterprises, Inc.
Northeast Generation Company
Northeast Generation Services Company
Woods Electrical Co., Inc.
Woods Network Services, Inc.
E. S. Boulos Company
NGS Mechanical, Inc.
Select Energy, Inc.
Select Energy New York, Inc.
Mode 1 Communications, Inc.
Select Energy Services, Inc.
HEC/Tobyhanna Energy Project, Inc.
Reeds Ferry Supply Co, Inc.
Select Energy Contracting, Inc.
By: /s/ Randy A. Shoop
Name: Randy A. Shoop
Title: Assistant Treasurer-Finance
Northeast Utilities Service Company as Agent for
all of the above-named Applicants.
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Under Rule 45(c), the "separate return tax" is
defined to mean "the tax on the corporate taxable income of
an associate company computed as though such company were
not a member of a consolidated group."
See The National Grid Group plc, Holding Co. Act
Release No. 35-27154 (Mar. 15, 2000).
See Allocation of Consolidated Federal Income Tax
Liability by Registered Holding Companies and their Subsidiaries,
Holding Co. Act Release No. 35-21767 (Oct. 29, 1980) citing Sen. Doc.
92, Part 72A, 70th Congress, 1st Sess. at pp. 477-482.
See Rule 52, which allows a holding company to charge its
effective cost of money on downstream loans to subsidiaries.
Section 12(a) of the Act provides that "[I]t shall be
unlawful for any registered holding company, by use of the
mails or any means of instrumentality of interstate
commerce, or otherwise, directly or indirectly, to borrow,
or to receive any extension of credit or indemnity, from any
public-utility company in the same holding-company system or
from any subsidiary company of such holding company . . .."
Section 12(b) of the Act provides that "[i]t shall
be unlawful for any registered holding company or subsidiary
company thereof . . . directly or indirectly, to lend or in
any manner extend its credit to or indemnify any company in
the same holding company system in contravention of such
rules and regulations or orders as the Commission deems
necessary or appropriate . . .the Commission promulgated
Rule 45(a) pursuant to Section 12(b) of the Act.
See Holding Co. Act Release No. 35-21767 (Oct. 29,
1980), citing Senate Doc. 92, Part 72A, 70th Congress, 1st Sess.,
1930, pp. 477 - 482.
It should be noted that the earlier rule - Rule
45(b)(6) - did not by its terms restrict the holding company
from retaining the benefit of the tax losses it generated.
Rather, as the Commission explained in its release proposing
Rule 45(c), Rule 45(b)(6) had been interpreted to require
the sharing of tax savings and liabilities exclusively among
the members of the group with actual separate return tax
liability or positive income. Thus, all loss companies,
including but not limited to the parent holding company, had
been excluded from sharing in consolidated tax benefits, by
interpretation, under Rule 45(b)(6).
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