File No. 70-10067
United States Securities and Exchange Commission
Washington, D.C. 20549
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Amendment No. 2
to
Form U-1
Application/Declaration
Under the
Public Utility Holding Company Act of 1935
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National Grid Group plc
15 Marylebone Road
London NW1 5JD
United Kingdom
(Name of company filing this statement
and address of principal executive office)
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National Grid Group 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:
Douglas W. Hawes Frank Lee
Markian M. W. Melnyk Huber Lawrence & Abell
LeBoeuf, Lamb, Greene & MacRae, L.L.P. 605 Third Avenue
125 West 55th Street New York, N.Y. 10158
New York, N.Y. 10019-5389 Telephone: (212) 682-6200
Telephone: (212) 424-8000 Facsimile: (212) 661-5759
Facsimile: (212) 424-8500 Attorneys for Lattice Group plc
Attorneys for National Grid Group plc
2
TABLE OF CONTENTS
Item 1. Description of the Proposed Transaction...............................4
A. Introduction............................................................4
B. The Companies...........................................................6
1. National Grid Group plc..............................................6
2. Lattice Group plc...................................................13
C. The Merger.............................................................24
D. Request for Financing Authorization....................................30
1. National Grid's Current Financing Authorization.....................30
2. Proposed New Financing Authorization................................32
3. The FUCO Financing Request In Particular............................36
4. Reporting Requirements..............................................54
Item 2. Fees, Commissions and Expenses.......................................56
Item 3. Applicable Statutory Provisions......................................56
Item 4. Regulatory Approvals.................................................56
A. State and Federal Regulation...........................................56
B. European Regulation....................................................57
Item 5. Procedure............................................................57
Item 6. Exhibits and Financial Statements....................................58
Item 7. Information as to Environmental Effects..............................59
3
This Pre-Effective Amendment No. 2 amends the Form U-1
Application-Declaration in this proceeding, originally filed with the Securities
and Exchange Commission on June 7, 2002, and amended by Pre-Effective Amendment
No. 1 on August 15, 2002, in its entirety, except that it does not replace
exhibits previously filed.
Item 1. Description of the Proposed Transaction
A. Introduction
This Application-Declaration ("Application") seeks approvals relating
to the financing of a foreign utility company acquisition by National Grid Group
plc ("National Grid"). National Grid is a registered holding company under the
Public Utility Holding Company Act of 1935 (the "Act" or "1935 Act"). National
Grid and Lattice Group plc ("Lattice") have agreed to the terms of a merger of
equals in which National Grid shareholders will retain their shares in National
Grid (to be renamed National Grid Transco plc ("Grid Transco")) and Lattice
shareholders will receive for each Lattice share 0.375 Grid Transco shares (the
"Merger").
As of April 19, 2002, Lattice had a market capitalization of
approximately $8.8 billion. Lattice, through its subsidiaries, is the owner,
operator and developer of the substantial majority of Great Britain's gas
transportation and distribution system. Lattice also owns a number of
telecommunications interests and unregulated gas and infrastructure service
companies. On September 25, 2002, National Grid certified that Lattice meets the
requirements for qualification as a foreign utility company ("FUCO") under
Section 33 of the 1935 Act by filing form U-57 with the Commission.
In this Application, National Grid seeks an increase in the aggregate
amount that it may invest in FUCOs and a corresponding increase in National
Grid's authorization to issue and sell securities to finance such FUCO
investments. By order dated January 16, 2002, Holding Co. Act Release No. 27490
("January 2002 Order") the Commission authorized National Grid to invest up to
$5.406 billion in FUCOs.\1 As of
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1/ National Grid's request for authorization to invest in exempt wholesale
generators ("EWGs") is subject to a reservation of jurisdiction in the
Commission's January 2002 Order. National Grid presently has no investments in
EWGs and no current intention of making EWG investments.
4
August 31, 2002, National Grid had an aggregate investment, as defined in Rule
53, in FUCOs of approximately $3.251 billion. National Grid's current unused
FUCO investment authority is $2.155 billion.
The Merger will result in the issuance of Grid Transco shares of
approximately $9.4 billion\2 and an increase in National Grid's aggregate FUCO
investment of the same amount. Consequently, National Grid's aggregate
post-Merger FUCO investment would be approximately $12.6 billion.\3 Given this
level of investment and National Grid's desire to maintain the flexibility to
make subsequent FUCO investments, National Grid seeks authorization to issue and
sell equity and debt securities and to enter into guarantees up to an aggregate
limit of $20 billion through September 30, 2004. The proceeds of such financings
could support investments of up to $20 billion in FUCOs. The proposed FUCO
investment financing authorization is summarized in the table below.
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Proposed FUCO Investment Financing Authorization
$ (billions)
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National Grid's FUCO investment as of 3.251
August 31, 2002
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Unused authorization 2.155
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Authorized in January 2002 Order 5.406
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Authorization necessary to fund the Merger 9.381
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Additional unused authorization 5.213
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Total proposed FUCO Investment Authorization 20.000
--------------------------------------------- ---------------------
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2/ Currently there are 3,528 million Lattice shares outstanding. Given the
exchange ratio of 0.375 Grid Transco shares for each Lattice share, 1,323
million Grid Transco shares would be issued in the Merger. Based on National
Grid's share price of approximately (pound)4.90 as of April 19, 2002, the last
trading day before the announcement of the Merger on April 22, 2002, and an
exchange rate of $1.44712 = (pound)1, the aggregate value of Grid Transco shares
issued upon the closing of the Merger would be approximately $9.381 billion. The
actual value of Grid Transco shares issued upon the closing of the Merger may be
more or less than $9.381 billion depending on National Grid's share price at
that time and the applicable exchange rate. The actual value of the Grid Transco
shares issued at the closing of the Merger will count towards the aggregate FUCO
investment for purposes of the FUCO investment limit set forth herein.
3/ This amount is comprised of National Grid's current FUCO investment of $3.251
billion plus the new Lattice FUCO investment of $9.381 billion.
5
Certain key financial information for the companies follows.
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For the 15 months to and
For the 12 months to and as of March 31, 2002 as of March 31, 2002
(U.S. GAAP) (U.S. GAAP)
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Closing rate. on 3/31/02 National Grid Lattice Lattice
(pound)1 = $1.42 (audited) (unaudited) (unaudited)
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Closing Avg. 3/31/01
to 3/31/02 (pound) (pound) (pound)
(pound)1 = $1.44 (millions) $(millions) (millions) $(millions) (millions) $(millions)
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Operating Revenues 4,396 6,331 3,142 4,524 4,110 5,918
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Net Income (163) (235) 390 562 778 1,120
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Net Utility Assets* 8,429 11,968 10,672 15,154 10,672 15,154
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Net Other Assets* 9,117 12,946 1,515 2,151 1,515 2,151
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Total Net Assets* 17,545 24,914 12,187 17,306 12,187 17,306
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(*) Net Utility Assets represents the tangible fixed assets of the companies.
Total Net Assets represents fixed assets and current assets. Net Other Assets
represents the balance of Total Net Assets less Net Utility Assets.
B. The Companies
1. National Grid Group plc
National Grid was incorporated in England and Wales on July 11, 2000,
and is a registered holding company under the 1935 Act. National Grid's ordinary
shares are listed on the London Stock Exchange and its American Depositary
Receipts ("ADRs") are listed on the New York Stock Exchange.\4 As of April 19,
2002 there were 1,776,636,707 ordinary shares and one special share
outstanding.\5 National Grid employs, in conjunction with its subsidiaries,
approximately 14,000 employees. As of April 19, 2002, National Grid had a market
capitalization of approximately $12.6 billion.
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4/ National Grid has a small number of 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 4.7% of National
Grid's publicly issued shares.
5/ The special share is a non-voting share owned by the U.K. government and it
provides that certain matters cannot be undertaken without the consent of the
holder of the special share. The special share, also referred to as the golden
share, is a means for the government to assure the continued independence of
National Grid as a provider of transmission services.
6
Through its wholly-owned indirect subsidiary, The National Grid
Company plc ("NGC"), National Grid's principal business in the UK is 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 400 route miles of underground cable together with
substations at some 230 sites. National Grid also has electric utility
businesses located in Argentina and Zambia. National Grid is indirectly a joint
owner of Transener SA, the owner and operator of the principal high-voltage
electricity system in Argentina.\6 In Zambia, National Grid is indirectly a
joint owner of Copperbelt Energy Corporation, the former Power Division of the
Zambia Consolidated Copper Mines. National Grid also is engaged in undersea
electric transmission interconnector projects in Australia, Norway, the
Netherlands and Ireland that are in various stages of development.
National Grid also is active internationally in telecommunications.
GridCom Limited ("GridCom"), a subsidiary of National Grid, provides
communications infrastructure solutions for the U.K. telecommunications
industry, as well as a range of managed services that can be used in conjunction
with GridCom's fiber optic and wireless services. National Grid's network of
approximately 22,000 transmission towers across England and Wales can be used by
mobile operators looking to extend their network coverage. GridCom offers a
turnkey package to allow operators to locate their communications equipment on
existing National Grid towers. In the U.S., NEES Communications, a National Grid
USA subsidiary, builds and leases high-speed fiber optic telecommunications
networks in the New England region and New York.
National Grid also holds a 32.5% stake in the equity of Energis plc
("Energis"), a telecommunications and internet services company. Energis offers
a range of national and international communications services, including basic
and advanced
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6/ National Grid's share of Transener's operating profit was (pound)24.8 million
($35.7 million) for the period ended March 31, 2002. Despite Transener
performing well in local terms, it has experienced a significant reduction in
revenues in US dollar terms as a result of the devaluation of the Argentine peso
coupled with the introduction of new legislation which invalidated the clauses
of Transener's license which effectively fixed tariffs in US dollar terms. As a
result, on April 22, 2002, Transener announced that it had suspended principal
and interest payments on its financial indebtedness of $466 million, which is
wholly denominated in US dollars. Transener has retained a financial adviser to
assist in the restructuring of all of its financial indebtedness and is
renegotiating its concession contract with the Argentine government, in parallel
with other privatized utilities. National Grid has accounted for its share of
Transener's non-cash exceptional foreign exchange losses of (pound)92.5 million
($133.2 million) in its results for the year ended March 31, 2002.
7
telephone and data services, primarily to the business market. The decline in
the global telecommunications market left Energis in a weakened state. As a
result, on July 16, 2002, bankruptcy administrators were appointed to Energis
and its UK operations were sold. National Grid's shareholding in Energis is now
valueless. Consequently, National Grid has written down all of the (pound)392.1
million ($564.6 million) carrying value of its Energis stake.
National Grid also has a number of other telecommunications
investments that are under consideration or agreement for sale or closure. In
Brazil, a consortium known as Intelig provides national and international long
distance call services and value added services. Silica Networks S.A. ("Silica")
developed a broadband communications loop linking Buenos Aires and other cities
in Argentina to Santiago in Chile. National Grid also holds 30.1% of
ManquehueNet S.A. ("ManquehueNet"), a joint venture providing local and long
distance telecommunications and internet services in Chile. National Grid has
fully written-down the carrying value of its Latin American telecommunications
investments totaling (pound)290.4 million ($418.2 million) including provision
for related liabilities. On September 27, 2002, the sale of Silica to members of
its management team was completed. In addition, National Grid has reached
agreement to sell its stake in ManquehueNet and is in advanced discussions to
find a solution to Intelig before the end of its financial year on March 31,
2003.
In Poland, National Grid is joint owner of Energis Polska Sp. zo.o.
("Energis Polska"), a company that provides data and voice services to the
corporate market. National Grid is evaluating its options regarding the company
and has made a provision for its investment in Energis Polska and associated
liabilities of (pound)109.8 million ($158.1 million). National Grid has reached
agreement to restructure the shareholdings of Energis Polska such that National
Grid's stake would fall below 20%.
NGC and the other non-US operations of National Grid are held directly
or indirectly by National Grid Holdings One plc.\7 Its wholly-owned subsidiary
is National Grid Holdings Limited, a FUCO.
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7/ National Grid Holdings One plc was the former top registered holding company
in the National Grid group. It was made a subsidiary of current National Grid in
connection with the scheme of arrangement that implemented National Grid's
merger with Niagara Mohawk Holdings, Inc. See the January 2002 Order. National
Grid Holdings One plc has filed an application with the Commission seeking
deregistration under Section 5 of the Act. SEC File No. 70-9849, filed February
22, 2002. After it is deregistered it will file Form U-57 to certify itself as a
FUCO under the Act.
8
National Grid's U.S. business is conducted through National Grid USA,
an indirect wholly-owned subsidiary of National Grid. Through its subsidiaries,
National Grid USA is engaged in electric distribution to residential,
commercial, and industrial customers in New England and the distribution and
sale of electricity and 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's nonutility subsidiaries are engaged in the
construction and leasing of fiber optic telecommunications systems and the
provision of consulting services to nonaffiliated utilities in the area of
electric utility restructuring and customer choice.
National Grid USA owns companies which deliver electricity to
approximately 3.2 million customers in New York, Massachusetts, Rhode Island and
New Hampshire. These electric public utility companies own and operate
approximately 84,000 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:\8 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"). The distribution companies focus on delivering electricity to
residential, commercial, and industrial customers. The distribution companies
operate and maintain distribution power lines and
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8/ National Grid Transmission Services Corp. is not a utility company. This
company provides non-affiliate companies services such as metering and generator
interconnection studies.
9
substations; provide metering, billing, and customer services; design and build
distribution-related facilities; and provide related products and services
including energy efficiency programs for customers. In addition, Niagara Mohawk
provides gas utility service to approximately 550,000 retail customers in New
York State.
Niagara Mohawk provides electric service to over 1.5 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
50,000 pole miles of electric transmission and distribution lines. Niagara
Mohawk also purchases, transports and distributes natural gas to over 550,000
gas customers 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, 2002, Niagara Mohawk had total assets of
$12,021 million, operating revenues of $3,996 million and net income of $4
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 170 cities and towns in Massachusetts.
The cities and towns served by the company include the highly diversified
commercial and industrial cities of Worcester, Lowell, and Quincy, the
Interstate 495 high technology belt, suburban communities, and many rural towns.
Mass. Electric owns approximately 16,000 pole miles of electric transmission and
distribution lines. As of and for the 12 months ended March 31, 2002, Mass.
Electric had total assets of $2,884 million, operating revenues of $2,003
million and net income of $59 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 460,000 customers in 38 cities and towns in Rhode Island.
Narragansett's service area, which includes urban, suburban, and rural areas,
covers approximately 99% of Rhode Island, and includes the cities of Providence,
East Providence, Cranston, and Warwick. Narragansett owns approximately 4,750
pole miles of electric transmission and
10
distribution lines. As of and for the 12 months ended March 31, 2002,
Narragansett had total assets of $1,457 million, operating revenues of $732
million and net income of $30 million. Narragansett is subject to rate
regulation by the FERC and the Rhode 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 38,000
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,
2002, Granite State had total assets of $93 million, operating revenues of $79
million and net income of $3.5 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. As of and for the 12 months ended March 31,
2002,, Nantucket had total assets of $57 million, operating revenues of $18
million and net income of $0.8 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.\9 As of March 31, 2002, NEPCO had total
assets of $2,740
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9/ NEPCO was formerly a holding company due to its ownership of approximately
24% of the outstanding voting securities of Vermont Yankee Nuclear Power
Corporation ("VYNPC"), the licensed operator of the Vermont Yankee nuclear
facility ("Plant") which has a gross maximum dependable capacity of
approximately 535 MW. NEPCO receives a portion of the plant's output. As of and
for the year ended December 31, 2001 Vermont Yankee Nuclear Power Corporation
had $179 million in total operating revenues, $6 million in total net income,
and total assets of $724 million. On July 30, 2002, the Plant together with
VYNPC's obligation to operate the Plant were sold to Entergy Nuclear Vermont
Yankee, L.L.C., a subsidiary of Entergy, a registered holding company. National
Grid Group plc, Holding Co. Act Release No. 27554 (July 30, 2002). NEPCO also
has minority interests in Yankee Atomic Electric Company (30%), Maine Yankee
Atomic Power Company (20%) and Connecticut Yankee Atomic Power Company (15%),
all of which have permanently ceased operations.
11
million, operating revenues of $560 million and net income of $76 million for
the 12 months to date. NEPCO is subject to rate regulation by the FERC. The
RIDIV, the MDTE, and the NHPUC have jurisdiction over NEPCO's financings and
transactions with affiliates. Although the Maine Public Utilities Commission has
jurisdiction over NEPCO's financings, it defers to the financing authorization
from the MDTE. The Nuclear Regulatory Commission ("NRC") has jurisdiction over
NEPCO's ownership of nuclear facilities.\10
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 March 31, 2002, NEET had total assets of $20
million, operating revenues of $7 million, and net income of $0.5 million for
the 12 months to date. NEET is subject to rate regulation by FERC. The NHPUC has
jurisdiction over its financings and transactions with affiliates.
N.H. Hydro, in which National Grid USA holds 53.97% of the common
stock, operates 121 miles of high-voltage direct current transmission line in
New Hampshire for the second phase of the Interconnection, extending to the
Massachusetts border. As of March 31, 2002, N.H. Hydro had total assets of $106
million, operating revenues of $27 million, and net income of $4 million for the
12 months to date. 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, 53.97% of the voting stock of which is held by National
Grid USA, operates a direct current/alternating current terminal and related
facilities for the second phase of the Interconnection and 12 miles of
high-voltage direct current transmission line in Massachusetts. As of March 31,
2002, Mass. Hydro had total assets
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10/ Prior to July 1, 2002, NEPCO had a contract for sale of electricity to an
end-use customer in Gilman, Vermont; NEPCO's only retail customer in Vermont.
This special contract was subject to the jurisdiction of the Vermont Public
Service Board ("VPSB"). By order dated June 26, 2002, the VPSB authorized NEPCO
to abandon electric service to that customer on June 30, 2002, which NEPCO did
on midnight on that date. Electric service for NEPCO's former customer is now
provided by Central Vermont Public Service Company, a non-affiliate. As a
result, NEPCO no longer has any retail customers in Vermont and is not subject
to the jurisdiction of the VPSB. NEPCO continues to have certain transmission
assets in Vermont that are subject to FERC regulation.
12
of $130 million, operating revenues of $31 million, and net income of $6 million
for the 12 months to date. New England Hydro Finance Company, Inc. ("NE Hydro
Finance") is owned in equal shares by Mass. Hydro and N.H. Hydro. 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. The MDTE has jurisdiction over Mass Hydro's financings
and transactions with affiliates.
National Grid continues to evaluate how best to participate in the
development of the transmission sector in the U.S. Within the New England and
New York regions, National Grid is discussing with a number of other
transmission owners the possible formation of an independent transmission
company within a Regional Transmission Organization ("RTO"). In other regions of
the U.S., National Grid's participation may involve the acquisition and
operation of the transmission assets of participants in RTOs.
In November 2001, National Grid announced that it had entered into an
agreement with the proposed Alliance RTO. Since the original agreement, the
Alliance RTO concept has undergone change in response to orders issued by the
FERC. Under orders issued in December 2001 and April 2002, the Alliance RTO
would be allowed to function as an independent transmission company under the
umbrella of another organization acting as RTO. In May 2002, discussions began
among members of the Alliance RTO, National Grid USA and two RTOs as to whether
the Alliance RTO should be divided and operate under two RTOs. The ultimate
shape and operation of the Alliance RTO are both uncertain and would be subject
to further agreements among the parties and approval from the FERC.
2. Lattice Group plc
Lattice is incorporated in England and Wales and is one of the three
successor companies to what was formerly British Gas plc.\11 Lattice's ordinary
shares
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11/ In February 1997, the shareholders of British Gas plc approved the demerger
of Centrica plc, a supplier of gas and electricity to residential, industrial
and commercial customers throughout Great Britain. At the same time British Gas
plc was renamed BG plc. In December 1999, BG plc completed a financial
restructuring which resulted in the creation of a new parent company, BG Group
plc, which separated the regulated Transco business from its other businesses.
On October 23, 2000, BG Group plc completed the demerger of Lattice Group plc
creating two separate companies.
13
are listed on the London Stock Exchange. As of April 19, 2002 there were
3,528,149,704 ordinary shares and one special share outstanding. Lattice
employs, in conjunction with its subsidiaries, approximately 17,000 employees.
As of April 19, 2002, Lattice had a market capitalization of approximately $8.8
billion.
For administrative and regulatory purposes Lattice is subdivided into
two subsidiary holding groups: Transco Holdings plc and Lattice Group Holdings
Ltd. Transco plc ("Transco"), Transco Holdings plc's principal subsidiary, is
the owner, operator and developer of the substantial majority of Great Britain's
gas transportation and distribution system. The gas transportation and
distribution business in Great Britain is highly regulated and subject to price
regulation by the Gas and Electricity Markets Authority ("Authority"), the same
regulator that controls National Grid's transmission rates. Transco is
ring-fenced for regulatory purposes from the remainder of the Lattice group. The
ring-fence is designed to ensure the financial, organizational and managerial
independence of Transco, as a regulatory entity. Transco has recently entered a
new five year price control period commencing April 1, 2002.
Transco's transportation network comprises approximately 4,100 miles
of high pressure national transmission pipelines and approximately 170,300 miles
of lower pressure regional transmission and distribution systems pipelines. Gas
is transported on behalf of approximately 45 "shippers" either to consumers or
third party pipeline systems. Transco receives gas from several coastal
reception terminals, storage sites, 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.
Lattice Group Holdings Ltd. is divided into two business groups,
Lattice Enterprises and Telecoms (i.e., telecommunications). The businesses in
each group are held directly or indirectly by Lattice Group Holdings Ltd.
through separate legal entities. Unlike Transco, these businesses are not
subject to price regulation.
14
Lattice Enterprises consists of a portfolio of businesses which, as
described below, principally provide expert services for infrastructure
networks, or address new markets based on the innovative application of
Lattice's core capabilities. Lattice Enterprises' businesses are Advantica
Technologies Ltd, Fulcrum Connections Ltd, Lattice Energy Services Ltd, Lattice
Property Portfolio Ltd, The Leasing Group plc and Eastlands (Benefits
Administration) Ltd.
Advantica Technologies Ltd provides advanced technology and systems
solutions for energy and utility companies worldwide through two branded
businesses: Advantica Technology, which targets onshore and offshore oil and gas
industries, and Advantica Stoner, which provides network management solutions to
energy and water delivery companies. Advantica's business developed from its
role as the scientific research and technology development component of British
Gas, Lattice's former parent holding company. Advantica's current customers are
principally Transco, BG Group and similar companies in the energy and utility
industries. Advantica's business is carried on outside the U.K. principally
through Lattice Group International Holdings Ltd. and its subsidiaries.
Fulcrum Connections (Ltd), (formerly First Connect Ltd) provides gas
connection services to the gas transportation network under a service provider
contract with Transco. It connects approximately 160,000 new domestic,
commercial and industrial customers to the network each year. Gas connections
are a competitive service in the U.K.
Lattice Property Portfolio Ltd ("Lattice Property") manages, through
its subsidiaries, the Lattice group's non-operational real estate portfolio. Its
main activities are the reclamation and disposal of former gasworks sites and
the provision of property services to Lattice group companies. The portfolio
consists largely of land and buildings either currently or previously occupied
by group businesses. Lattice Property is not engaged in more than an incidental
manner in the development of real estate prior to its sale. By its nature,
Lattice Property's portfolio of real estate assets will decrease over time as
properties are reclaimed from their former industrial uses and sold.
15
The Leasing Group plc ("The Leasing Group") offers leasing and vehicle
management services to the Lattice group as well as third party customers,
including BG Group, Centrica and the London Fire Authority. It manages a fleet
of more than 25,000 vehicles of which more than 16,000 are commercial vehicles.
The Leasing Group's origins stem from the vehicle fleet management activities of
British Gas and this business became part of the Lattice group of companies upon
the demerger of Lattice from BG Group. Lattice has announced its intention to
sell The Leasing Group and Applicant commits that the company will be sold
within three years of the completion of the Merger.
Lattice Energy Services Ltd provides a range of multi-utility
infrastructure service to industrial and commercial customers, including
connections and the installation of combined heat and power plants.
Eastlands (Benefits Administration) Ltd ("Eastlands"), a wholly-owned
Lattice subsidiary, provides managed payroll services, pensions administration,
accounting, business process outsourcing and consulting services to affiliated
and third party customers. Eastlands' business also is a legacy of British Gas
and a large portion of the payroll and pension administration services that
Eastlands provides are related to current or retired employees of British Gas
companies. Eastlands is a service provider only, it has not assumed pension
liabilities and it does not manage securities or other assets used to fund
pension obligations.
The Telecoms division principally consists of SST (UK) Limited ("SST")
which acquires, builds, leases and manages sites for base stations and radio
masts for mobile telecommunications operators in support of wireless networks in
the U.K., and 186k Limited ("186k"), which provides broadband transmission and
related telecommunications services through its optical fiber network. Both SST
and 186k are held by Telcom International Holdings Ltd., a subsidiary of Lattice
Group Holdings Ltd.
The communications sites acquired, constructed and managed by SST were
developed substantially on properties, rights-of-way and facilities of Transco
and such communications sites are used to provide services such as mobile radio
communications to Transco and nonaffiliates. The business of SST is similar in
this
16
respect to that conducted by National Grid through GridCom. Applicant expects
that subsequent to the Merger, SST and GridCom would be managed and operated
together as a business unit or formally merged.
186k owns and manages an optical fiber network of approximately 1,250
miles connecting 20 centers of demand for high-capacity broadband transmission
and related telecommunications services. Due to deteriorating market conditions,
Lattice has indicated its intent to sell or wind down the business of 186k over
this fiscal year. Applicant commits that 186k will be sold or wound down within
three years of the completion of the Merger.
A list of companies held directly or indirectly by Lattice, including
inactive companies, is included in Exhibit G-1 to the Application.
Selected income statement segment data for the Lattice group for the
12 and the 15 months ended March 31, 2002, under U.K. GAAP are shown in the
tables below:
----------------- ------------------------------ ---------------------------- ------------------------------
Earnings before interest,
Turnover (revenue) Total Operating Profit tax, depreciation and
For the 12 includes (pound)30 million NTS (includes exceptional amortization (excludes
Months Ended capacity income items) exceptional items)
March 31, 2002 Unaudited Unaudited Unaudited
----------------- ------------------------------ ---------------------------- ------------------------------
(pound)1 = (pound) $ (pound) $ (pound) $
$1.44 (millions) (millions) (millions) (millions) (millions) (millions)
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Transco 2,980 4,291 844 1,215 1,315 1,894
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Telecoms 22 32 (385) (554) (52) (75)
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Lattice 238 343 (5) (7) 59 85
Enterprises
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Other corporate 12 17 8 12 9 13
activities
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Pension credit - - 38 55 38 55
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Intra-group (99) (143) 10 14 10 14
items
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Total Lattice 3,153 4,540 510 735 1,379 1,986
group
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
17
----------------- ------------------------------ ---------------------------- ------------------------------
Earnings before interest,
For the 15 Turnover (revenue) Total Operating Profit tax, depreciation and
Months Ended includes(pound)30 million NTS (includes exceptional amortization (excludes
March 31, 2002 capacity income items) exceptional items)
----------------- ------------------------------ ---------------------------- ------------------------------
(pound)1 = (pound) $ (pound) $ (pound) $
$1.44 (millions) (millions) (millions) (millions) (millions) (millions)
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Transco 3,922 5,648 1,298 1,869 1,862 2,681
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Telecoms 22 32 (402) (579) (64) (92)
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Lattice 286 412 (4) (6) 68 98
Enterprises
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Other corporate 14 20 11 16 12 17
activities
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Pension credit - - 56 81 56 81
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Intra-group (123) (177) 10 14 10 14
items
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
Total Lattice 4,121 5,935 969 1,395 1,944 2,799
group
----------------- -------------- --------------- -------------- ------------- ---------------- -------------
18
Balance sheet segment data as of March 31, 2002 under U.K. GAAP is
provided below.
----------------- ------------------------------ ------------------------------ ------------------------------
As of March 31, Fixed Assets Current Assets (net amounts Total Assets
2002 falling due within one year)
----------------- ------------------------------ ------------------------------ ------------------------------
(pound)1 = (pound) $ (pound) $ (pound) $
$1.4223 (millions) (millions) (millions) (millions) (millions) (millions)
----------------- -------------- --------------- -------------- --------------- -------------- ---------------
Transco 7,540 10,724 534 760 8,074 11,484
----------------- -------------- --------------- -------------- --------------- -------------- ---------------
Telecoms 157 223 377 536 534 760
----------------- -------------- --------------- -------------- --------------- -------------- ---------------
Lattice 325 462 504 717 829 1,179
Enterprises
----------------- -------------- --------------- -------------- --------------- -------------- ---------------
Other corporate (17) (24) (713) (1,014) (730) (1,038)
activities,
group items and
pension credit
----------------- -------------- --------------- -------------- --------------- -------------- ---------------
Total Lattice 8,005 11,385 702 999 8,707 12,385
group
National Grid certified Lattice as a FUCO by filing From U-57 on
September 25, 2002. To qualify as a FUCO under Section 33 of the Act:
(1) Lattice must own or operate facilities that are not located in any
U.S. state and that are used for the generation, transmission, or
distribution of electric energy for sale or the distribution at retail
of natural or manufactured gas for heat, light, or power;
(2) Lattice may not derive any part of its income, directly or indirectly,
from the generation, transmission, or distribution of electric energy
for sale or the distribution at retail of natural or manufactured gas
for heat, light, or power, within the U.S.;
(3) Neither Lattice nor any of its subsidiaries may be a public utility
company operating in the U.S.; and
(4) Lattice must provide notice to the Commission on Form U-57 that it is
a FUCO. Sections 33(a)(2) and 33(a)(3).
As demonstrated below, Lattice satisfies or will satisfy each of the
criteria of Section 33(a)(2) and 33(a)(3) and is therefore entitled to FUCO
status.
19
Ownership of Utility Facilities
Lattice's principal subsidiary, Transco, is a gas public utility
company. It owns and operates gas distribution facilities located in Great
Britain that are used to deliver gas to retail consumers. As with U.S. gas
consumers, the vast majority of Transco's end-use consumers use the gas to
produce heat, light or power. Lattice neither owns nor operates gas distribution
facilities located in the U.S.
Transco is not a gas supplier because it does not sell the gas
commodity. It transports and delivers gas through its network from the point of
receipt into the system through transmission pipelines and local distribution
mains to the retail customer's gas meter. Section 33 does not require that a
foreign gas utility engage in the sale of gas to qualify as a FUCO. It is
sufficient that the foreign utility merely own or operate facilities used for
the distribution of gas at retail.
This interpretation is consistent with the Commission's view of gas
utility companies in other contexts. For example, under Rule 58, an energy
marketer or broker that sells gas to retail consumers is not a gas utility if it
neither owns nor operates gas distribution facilities.\12 The unbundling of the
gas supply function from the delivery function is not only a U.K. practice. In
Georgia, for example, gas utility services also are provided in this manner.
Atlanta Gas Light Company ("AGLC"), a public utility subsidiary of registered
holding company AGL Resources, Inc., delivers gas to residential and commercial
customers on behalf of gas marketers and wholesalers authorized to market gas in
the state. AGLC, however, does not sell gas.\13
---------------------------
12/ Exemption of Acquisition By Registered Public-Utility Holding Companies of
Securities of Nonutility Companies Engaged in Certain Energy-Related and
Gas-Related Activities; Exemption of Capital Contributions and Advances to Such
Companies, Holding Co. Act Release No. 26667 (February 14, 1997) ("Rule 58
Adopting Release") citing, Eastern Utilities Assocs., Holding Co. Act Release
No. 26519 (May 23, 1996) (authorizing retail sales of electric power pursuant to
pilot programs in New Hampshire and Massachusetts); SEI Holdings, Inc., Holding
Co. Act Release No. 26581 (Sept. 26, 1996) (authorizing retail marketing of both
electric power and natural gas on a nationwide basis); and Consolidated Natural
Gas Co., Holding Co. Act Release No. 26512 (Apr. 30, 1996) (authorizing a gas
registered holding company to acquire an interest in a partnership formed to
engage in the wholesale brokering and marketing of natural gas, electricity and
other fuels).
13/ AGL Resources, Inc., Holding Co. Act Release No. 27243 (October 5, 2000).
20
Source of Income
Under Section 33, a FUCO may not derive any part of its income,
directly or indirectly, from the generation, transmission, or distribution of
electric energy for sale or the distribution at retail of natural or
manufactured gas for heat, light, or power, within the U.S. Lattice does not
directly or indirectly derive any of its income from the generation,
transmission or distribution of electricity for sale, or retail gas
distribution, within the U.S. As demonstrated in the segment information tables
above, Transco's utility operations in Great Britain provide the substantial
majority of Lattice's income. The non-utility businesses conducted by Lattice
also are focused in Great Britain. A notable exception is Advantica, which
derives a small amount of revenues ($22 million during the year ended December
31, 2001) from energy consulting activities in the U.S. Utility Operations in
the U.S.
Section 33 provides that neither a FUCO nor any of its subsidiaries
may be a public utility company operating in the U.S. A public utility company,
as defined in Section 2(a) of the Act is, in pertinent part, a company that owns
or operates facilities used for the generation, transmission or distribution of
electric energy for sale, or facilities used for the distribution at retail of
natural or manufactured gas for heat, light or power. Lattice owns no such
facilities directly. Its only public utility company subsidiary is Transco and,
as stated above, Transco's public utility facilities and operations are located
outside the U.S.
National Grid is a holding company for U.S. utility companies, foreign
utility companies and other U.S. and non-U.S. non-utility operations. In
connection with National Grid's acquisition of New England Electric System
("NEES"), National Grid adopted a corporate structure that separated its U.S.
utility operations from its foreign utility and other non-U.S. operations.\14
This corporate structure was maintained when National Grid acquired Niagara
Mohawk Holdings, Inc. on January 31, 2002.
National Grid's U.S. utility operations are organized under a chain of
intermediate holding companies ("Intermediate Holding Companies") established in
the
---------------------------
14/ The National Grid Group plc, Holding Co. Act Release No. 27154 (Mar. 15,
2000) ("NEES Acquisition Order").
21
U.K. and the U.S. The chain is headed by National Grid's wholly-owned direct
subsidiary, National Grid (US) Holdings Limited, and ends with National Grid
USA. This chain of companies will be unaffected by the Merger.
National Grid's foreign utility companies and other non-U.S.
operations are held under National Grid's wholly-owned direct subsidiary,
National Grid Holdings One plc and its subsidiary National Grid Holdings
Limited, a FUCO under the Act.\15
This corporate structure reflects the intention to develop the two
business areas generally in a financially independent manner. It allows National
Grid the flexibility to finance its combined FUCO activities at the National
Grid Holdings One plc level, if desirable. It facilitates compliance under the
Act and the regulation of financing and other transactions between the
Intermediate Holding Companies and National Grid Holdings One plc and its
subsidiaries. It also simplifies transactions among companies in the combined
FUCO group. Finally, it simplifies accounting and reporting. Consistent with
this structure, it is proposed that after the Merger, National Grid may transfer
Lattice to the FUCO group under National Grid Holdings One plc. The transfer
could be effected in exchange for shares issued by National Grid Holdings One
plc or the consideration could be left outstanding as an interest bearing
intercompany debt with a principal amount valued at market value. If the
transfer is effected in exchange for intercompany debt, it may be necessary to
review the debt/equity position of National Grid Holdings One plc after the
transfer and, in the light of that review, to capitalize some of the debt.\16
Notice on Form U-57
On September 25, 2002, National Grid, on behalf of Lattice, filed Form
U-57 with the Commission and thereby claimed FUCO status.
Nonutility Subsidiaries
Particularly after giving effect to the sale of The Leasing Group, the
sale or closure of 186k and the merger or operational combination of SST with
GridCom,
---------------------------
15/ See note 7, supra.
16/ The Merger will be effected through a Scheme of Arrangement that is
discussed further in Item 1.C. The acquisition of Lattice in the Merger and the
subsequent possible transfer of Lattice to National Grid Holdings One plc is an
exempt transaction under Section 33(c)(1) of the Act.
22
Lattice's subsidiaries clearly would be engaged in utility and energy-related
non-utility businesses of the type that should be considered to have an
"appropriate relationship to the activities described in Section 33(a)(3)" of
the Act.\17 In the Commission's recent order authorizing E.ON AG to acquire
Powergen plc, the Commission found retention of the water utility operations
conducted by E.ON AG's FUCO, E.ON Energie AG, permissible based on the common
historical background of the combined municipal electric, gas and water
operations acquired and/or operated by the FUCO, the integration of utility
services and the related cost savings attributable to combined operations, and
the interests held by other unaffiliated shareholders in the municipal utilities
held by the FUCO that could prevent the separation of the water utility business
from the electric and gas utility business.\18 Lattice's non-utility businesses
are all logical outgrowths of its gas utility business, such as Lattice Property
which cleans and sells surplus former utility properties. In addition, others
such as Eastlands, the pension and payroll administrator, also have a
significant historical connection to Lattice's former associate company BG plc.
Advantica provides technology solutions to energy and utility companies. Fulcrum
Connections provides gas connections services. Lattice Energy Services provides
utility infrastructure services. Lastly, SST provides communications services
using facilities substantially developed on properties connected with Transco's
business. Lattice's other subsidiaries are engaged in corporate activities, such
as procuring insurance for affiliates (i.e, captive insurance) and financing,
that are typical of most utility groups.
Foreign utility companies often do not exist as pure electric and gas
companies, but may instead be an integrated part of other historically connected
businesses. For this reason, the FUCO exemption in Section 33 of the Act does
not require a FUCO to be exclusively engaged in electric and/or gas utility
activities. Based on the "appropriate relationship" of Lattice's non-utility
businesses to its predominant utility business Transco, Lattice's exemption
under Section 33 does not raise an issue with respect to whether certain
nonutility businesses may or may not be retainable by a FUCO.\19
---------------------------
17/ E.ON AG, Holding Co. Act Release No. 27539 (June 14, 2002), at 25
(discussing the standard for determining whether a FUCO may engage in certain
nonutility businesses).
18/ Id. at 25-28.
19/ See also, Foreign Utility Companies, Holding Co. Act Release No. 27342
(January 31, 2001) (proposing for comment rules 55 and 56 regarding investments
in FUCOs and suggesting that the Commission should establish standards for the
type of businesses in which a FUCO could engage).
23
Under Section 33(a)(1) of the Act, a FUCO is generally exempt from all
the provisions of the Act and is not considered a public utility company under
the Act. Accordingly, Lattice and its subsidiaries will not be public utility
subsidiaries in the National Grid system after the Merger for purposes of
Sections 9 and 10 of the Act and prior approval of the Merger under Section 10
of the Act is not required.
C. The Merger
The Merger will create a leading international energy delivery company
with the critical mass and financial strength to capitalize on growth
opportunities. It will bring together two groups with proven track records of
operating complex energy networks safely and reliably within incentive based
regulatory environments. The Merger will:
o Allow Grid Transco to use its complementary skills to maximize the creation
of shareholder value from existing assets in the U.K. and U.S. through
enhanced operating performance and the sharing of best practices;
o Offer an enhanced operational and financial platform for future growth in
liberalizing energy markets;
o Generate pre-tax financial benefits that are expected to reach an
annualized rate of at least(pound)100 million ($144 million) by the end of
the first full financial year following completion of the Merger. These
financial benefits are expected to arise principally from the elimination
of duplicate head office costs and other central cost savings and from
combining the support services provided to the U.K. regulated electricity
and gas businesses;
o Generate further savings from the progressive combination of certain
activities of the two U.K. transmission businesses, further sharing of best
practice and further financial synergies;
24
o Create a combined group with significant balance sheet strength and strong
operational cash flows. The merged group will seek to maintain a single A
credit rating;
o Enhance earnings per share (pre-exceptional items) in the first full
financial year following completion of the Merger; and
o Bring together the complementary mobile tower portfolios of the two groups
to create the third largest independent tower business in the U.K. capable
of providing broader coverage to mobile operators and well positioned to
exploit growth opportunities.
The Board of Directors of Grid Transco will be drawn from the Boards
of National Grid and Lattice. Sir John Parker will be Non-Executive Chairman,
James Ross will be Non-Executive Deputy Chairman. Roger Urwin will be Group
Chief Executive and Steve Lucas will be Group Finance Director. The remaining
executive directors, drawn from National Grid and Lattice, will be Edward Astle,
Steve Holliday, Rick Sergel and John Wybrew. An additional six non-executive
directors have been selected equally from the Boards of National Grid and
Lattice. John Grant, Bonnie Hill and Paul Joskow, currently non-executive
directors of National Grid, and Kenneth Harvey, Stephen Pettit and George Rose,
currently non-executive directors of Lattice, will be non-executive directors of
Grid Transco following completion of the Merger.
The terms of the Merger are based on the relative equity market
capitalization values of the two companies immediately prior to announcement of
the Merger. The Merger is intended to be implemented by way of a Scheme of
Arrangement ("Scheme"), pursuant to Section 425 of the Companies Act 1985
(U.K.). Under the Scheme, conditional on the Merger becoming effective,
Lattice's currently issued ordinary share capital will be cancelled and reissued
to National Grid. National Grid will therefore become the listed holding company
of the merged group and retain its listings on the London and New York stock
exchanges. Further, National Grid will change its name to National Grid Transco
plc ("Grid Transco") and issue new Grid Transco shares to Lattice shareholders
on the basis of 0.375 new Grid Transco shares for each Lattice
25
share held at the relevant record date.\20 The capital paid up on the special
share in Lattice will be repaid, and the special share will be cancelled. The
special share in National Grid will be returned, and the rights of it will be
amended, principally to reflect National Grid's ownership of Transco. Upon
completion of the Merger, former National Grid shareholders will hold
approximately 57.3 per cent and former Lattice shareholders will hold
approximately 42.7 per cent of the issued share capital of Grid Transco. The
holdings and rights of holders of existing National Grid shares and of National
Grid ADSs will not be affected by the Merger. However, following the issuance of
the new shares, their holdings as a percentage of issued share capital will
decrease. Grid Transco will have a combined market capitalization of
approximately $21.4 billion (based on the London Stock Exchange closing market
prices for the two companies as of April 19, 2002).\21
To implement the Scheme, Lattice made an application to the High Court
of Justice of England and Wales (the "High Court") on June 11, 2002 for the High
Court to summon a shareholders' meeting. Lattice's shareholders will vote on the
Scheme at two meetings which will be held on the same day at a single location.
The High Court granted Lattice's application and ordered the first meeting, (the
"Court Meeting"). For the Scheme to become effective, the Scheme must receive at
the Court Meeting the affirmative vote representing a simple majority in number
of those Lattice shareholders present and voting (either in person or by proxy)
and also represent not less than 75% of the value of Lattice shares held by such
Lattice shareholders who vote at the meeting (either in person or by proxy). At
the second meeting, an Extraordinary General Meeting of Lattice, the
shareholders must pass a special resolution approving the implementation
---------------------------
20/ Fractional entitlements to Grid Transco shares will not be issued to Lattice
shareholders but will be aggregated and sold for the benefit of the relevant
Lattice shareholder.
21/ The calculation of the total market capitalization as of
April 19, 2002, is shown below:
-------------------------------------------------------------------------------------------------------
As of April 19, Closing Price Per Shares
2002 Share (pence) Outstanding Market Capitalization
-------------------------------------------------------------------------------------------------------
(pound)1=$1.44712 (pound) $
-------------------- ------------------- ------------------- --------------------- --------------------
National Grid 490.00 1,776,636,707 8,705,519,864 12,597,931,906
-------------------- ------------------- ------------------- --------------------- --------------------
Lattice 172.75 3,528,149,704 6,094,878,613 8,820,020,739
-------------------- ------------------- ------------------- --------------------- --------------------
Total 14,800,398,477 21,417,952,645
-------------------- ------------------- ------------------- --------------------- --------------------
26
of the Scheme. To pass this resolution, not less than 75% of the votes cast by
Lattice shareholders must be in favor of the resolution. At the Court Meeting
and the Extraordinary General Meeting held on July 15, 2002, the Lattice
shareholders approved the Scheme.
There will now be a further later hearing before the High Court to
sanction the Scheme. All Lattice shareholders are eligible to attend this
hearing and express their views on the Scheme. The Scheme is effective once the
High Court order sanctioning the Scheme has been delivered by Lattice to the
Registrar of Companies in England and Wales and such court order has been
registered by the Registrar of Companies. The High Court will sanction the
Scheme once it is satisfied that the conditions to the Scheme have been
satisfied. Once the Scheme becomes effective, its terms will be binding on all
Lattice shareholders whether or not they voted in favor of the Scheme.
The Merger, as implemented through the Scheme, also requires approval
by an ordinary resolution of National Grid shareholders to be proposed at the
National Grid Extraordinary General Meeting.\22 Ordinary resolutions are passed
if more than fifty percent of the votes cast are in favor. Special resolutions
to change the name of National Grid and to alter its articles of association,\23
conditioned on the Scheme becoming effective, will also be proposed at the
Extraordinary General Meeting. Special resolutions are passed if not less than
75% of the votes cast are in favor of the resolution. National Grid shareholders
passed all resolutions noted above at the Extraordinary General Meeting held on
July 23, 2002.
The Merger is subject to a number of conditions, including regulatory
consents and approvals in the U.K. and the authorization of the financing of the
Merger by the Securities and Exchange Commission pursuant to this Application,
and the approval of the shareholders of both National Grid and Lattice. The
Merger is subject to the condition that the U.K. Office of Fair Trading
indicating in terms satisfactory to both
---------------------------
22/ A declaration seeking authorization to solicit proxies from National Grid's
shareholders in connection with the Merger approval was filed with the
Commission on May 15, 2002 (SEC File No. 70-10066) and authorized in National
Grid Group plc, Holding Co. Act Release No. 27538 (June 12, 2002).
23/ To implement the Merger, the articles of association of National Grid will
need to be amended to change the rights of the Secretary of State under the
special share in National Grid, principally to reflect National Grid's ownership
of Transco.
27
National Grid and Lattice acting reasonably, that it is not the intention of the
Secretary of State for Trade and Industry\24 to refer the Merger or any matter
arising therefrom or related thereto to the U.K. Competition Commission. On July
2, 2002, the Secretary of State announced her decision not to refer the Merger
to the U.K. Competition Commission. In addition, the Merger is subject to the
condition that each of the Authority and the Secretary of State for Trade and
Industry indicating that they will not seek modifications to any licenses held
by National Grid or Lattice or their subsidiaries under the Electricity Act 1989
or the Gas Act 1986 and subsequent legislation, including the Utilities Act 2000
except, in each case, on terms acceptable to both National Grid and Lattice
acting reasonably; that they will not seek undertakings or assurances from
members of the National Grid or Lattice groups except, in each case, on terms
acceptable to National Grid and Lattice acting reasonably; and that in
connection with the Merger, they will give such consents and/or directions (if
any) and/or seek or agree to such modifications (if any) as are, in the
reasonable opinion of National Grid or Lattice, necessary in connection with
such licenses.
The Board of National Grid, which has been advised by N M Rothschild &
Sons Limited ("Rothschild"), considers the terms of the Merger to be fair and
reasonable to National Grid. In providing its advice, Rothschild has taken into
account the National Grid Board's commercial assessments. The National Grid
Board considers the Merger to be in the best interests of National Grid's
shareholders as a whole and has unanimously recommended that National Grid
shareholders vote in favor of the resolution proposed at the National Grid
Extraordinary General Meeting to approve the Merger.
The Lattice Board, which has been so advised by J.P. Morgan plc, a
subsidiary of J.P. Morgan Chase & Co. Inc. ("JP Morgan"), and Cazenove & Co. Ltd
("Cazenove"), considers the terms of the Merger to be fair and reasonable to
Lattice. In providing advice to the Lattice Board, JP Morgan and Cazenove have
taken into account the Lattice Board's commercial assessments. The Lattice Board
considers the Merger to be in the best interests of Lattice shareholders as a
whole and has unanimously
---------------------------
24/ The Secretary of State for Trade and Industry is the special shareholder of
Lattice and National Grid.
28
recommended that Lattice shareholders vote in favor of the resolutions relating
to the Merger proposed at the Lattice Court Meeting and the Lattice
Extraordinary General Meeting.
Standard & Poor's affirmed its single "A" long-term and its "A-1"
short-term corporate credit ratings on National Grid and its subsidiaries
following the announcement of the Merger. Moody's Investors Service has placed
National Grid's "A2" long-term issuer and "Prime-1" commercial paper ratings
under review for possible downgrade.\25 Moody's affirmed the ratings of National
Grid's U.S. subsidiaries.
As noted above, Grid Transco will seek to maintain a single A credit
rating.\26 Grid Transco post-Merger will be well capitalized and financially
sound. As demonstrated in the pro forma capitalization table provided below,
Grid Transco will have a ratio of common stock equity to total capitalization of
40.4% on a U.S. GAAP basis.
---------------------------
25/ Moody's Places the Ratings of The National Grid UK Group of Companies and
Transco plc and Transco Holdings plc Under Review for Possible Downgrade
Following the Merger Announcement Between The National Grid and Lattice, April
22, 2002, available at www.moodys.com.
26/ Investment grade long-term debt is denoted by the Standard & Poor's ratings
of AAA, AA, A and BBB. The ratings may be modified by a plus (+) or minus (-) to
show relative standing within the rating categories. Moody's ratings of Aaa, Aa,
A and Baa denote investment grade long-term debt. Moody's applies numerical
clarifiers (1, 2 and 3) to denote relative ranking within a generic rating
category. Standard & Poor's short-term debt ratings range from A-1 for the
highest quality obligations to D for the lowest. Categories A-1 to A-3 are
investment grade. The A-1 rating may also be modified by a plus sign to
distinguish the strongest credits in that category. Moody's short-term issuer
ratings are Prime-1, Prime-2 and Prime-3, all of which are investment grade.
Fitch IBCA's ratings of AAA - BBB are denoted investment grade categories. A
plus (+) or minus (-) may be appended to a rating to denote relative status
within major rating categories.
29
-----------------------------------------------------------------------------------------------------------
As of March
31, 2002 Acquisition Consol. Pro Forma
NGG Lattice cost adjusts\27 Combined
(U.S. ---------------------------------------------------------------------------------------------
GAAP) $m % $m % $m $m $m %
-----------------------------------------------------------------------------------------------------------
Short-term
Debt 1,654 9.8% 893 7.8% 2,547 7.3%
---------------
Long-term 9,710 57.7% 8,494 73.8% 18,204 52.0%
debt
---------------
Preferred
Stock 112 0.7% - 0.0% 112 0.3%
---------------
Minority 27 0.2% 6 0.1% 33 0.1%
Interest
---------------
Common Equity 5,338 31.7% 2,121 18.4% 8,800 (2,121) 14,138 40.4%
-----------------------------------------------------------------------------------------------------------
Total 16,840 100.0% 11,514 100.0% 8,800 (2,121) 35,033 100.0%
-----------------------------------------------------------------------------------------------------------
Other key pro forma balance sheet and income statement information is
provided on a U.S. GAAP basis in the table below.
----------------------------- -------------------------------------------------------
As of and for the 12 Months
Ended March 31, 2002 National Lattice Pro Forma Combined
(U.S. GAAP) Grid Grid Transco
----------------------------- -------------------------------------------------------
($ millions)
----------------------------- -------------------------------------------------------
Total assets 24,914 17,306 42,220
----------------------------- --------------- ----------------- ---------------------
Net utility assets 11,968 15,154 27,122
----------------------------- --------------- ----------------- ---------------------
Operating revenues 6,331 4,524 10,855
----------------------------- --------------- ----------------- ---------------------
Net income (235) 562 327
----------------------------- --------------- ----------------- ---------------------
D. Request for Financing Authorization
1. National Grid's Current Financing Authorization
The National Grid system received comprehensive financing and
affiliate transactions authorization in connection with the Commission's order
approving the
---------------------------
27/ A fair value study will be conducted following the merger to allocate the
purchase consideration among the assets in the Lattice group of companies. The
consolidated adjustments in this table do not reflect any adjustments that may
be made as a consequence of the fair value study.
30
acquisition of NEES.\28 More recently, in connection with National Grid's
acquisition of Niagara Mohawk Holdings, Inc., its financing authority was
amended and supplemented.\29 In particular, the January 2002 Order authorized
National Grid to issue and sell equity and debt securities in an amount
aggregating not more than $6 billion at any one time outstanding through
September 30, 2004. Such securities could include, but would not necessarily be
limited to, ordinary shares, preferred shares, options, warrants, long- and
short-term debt (including commercial paper), convertible securities,
subordinated debt, bank borrowings and securities with call or put options.
The January 2002 Order provided that the various securities to be
issued would be limited as follows, but would not in the aggregate exceed the $6
billion aggregate limit:
---------------------------------------- ---------------------------------------
Security $ billions
---------------------------------------- ---------------------------------------
Equity, including options and warrants 4.5
---------------------------------------- ---------------------------------------
Debt 5.0
---------------------------------------- ---------------------------------------
In addition, National Grid was authorized to enter into guarantees in an
aggregate amount not to exceed $2 billion. Under the order, National Grid system
financings are subject to several additional conditions repeated below which
this Application does not propose to change. These conditions would also apply
to the increased financing authorization sought in this Application. The terms
of all debt and equity securities authorized in this Application will be the
same as the terms authorized by the Commission in the NEES Acquisition Order, as
amended by the January 2002 Order. In particular,
1. Any long-term debt or preferred stock issued by National Grid in a
public offering will, when issued, be rated investment grade by a nationally
recognized statistical rating organization;
2. National Grid will maintain common stock equity\30 as a percentage of
total capitalization,\31 measured on a book value U.S. GAAP basis, of at least
30% or above;
---------------------------
28/ NEES Acquisition Order.
29/ See January 2002 Order.
30/ Common stock equity would include common stock (i.e., amounts received equal
to the par or stated value of the common stock), additional paid in capital,
retained earnings and minority interests.
31/ 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.
31
3. National Grid USA, on a consolidated basis, and National Grid USA's
electric utility subsidiaries, on an individual basis (except NEET),\32 would
maintain common stock equity of at least 30% of total capitalization. In
addition, if such companies issue long-term debt or preferred stock in a public
offering subject to Commission authorization such securities would, when issued,
be rated investment grade by a nationally recognized statistical rating
organization;
4. The cost of money on National Grid's debt or preferred stock financings
would not exceed the cost of comparable term U.S. treasury securities or
government benchmark for the currency concerned plus the margin demanded in the
financial markets in a competitive offering by an issuer of such securities with
National Grid's credit rating;
5. For Utility Subsidiaries requesting authority to issue debt (Niagara
Mohawk, Mass. Electric, Nantucket, Narragansett, NEPCO and Mass Hydro), the cost
of money on debt securities issued to third parties would not exceed the cost of
comparable term U.S. treasury securities or government benchmark for the
currency concerned plus the margin demanded in the financial markets in a
competitive offering by an issuer of such securities with the respective Utility
Subsidiary's credit rating;
6. The cost of money on National Grid USA's debt or preferred stock
financings would not exceed the cost of comparable term U.S. treasury securities
or government benchmark for the currency concerned plus the margin demanded in
the financial markets in a competitive offering by an issuer of such securities
with National Grid USA's credit rating; and
7. The underwriting fees, commissions or other similar remuneration paid in
connection with the non-competitive issue, sale or distribution of a security
would not exceed 5% of the principal or total amount of the security being
issued.
2. Proposed New Financing Authorization
National Grid requests authorization under Sections 6 and 7 of the Act
and Rule 53(c) to finance the Merger and the Grid Transco system after the
Merger. National
---------------------------
32/ Nantucket would maintain a minimum of 30% common stock equity as a
percentage of total capitalization on a combined basis with Mass. Electric.
32
Grid seeks an increase in the aggregate amount that it may invest in FUCOs and a
corresponding increase in National Grid's authorization to issue and sell
securities to finance such FUCO investments. In the January 2002 Order the
Commission authorized National Grid to invest up to $5.406 billion in FUCOs. As
of August 31, 2002, National Grid had an aggregate investment, as defined in
Rule 53, in FUCOs of approximately $3.251 billion. National Grid's current
unused FUCO investment authority is $2.155 billion.
The Merger will result in the issuance of Grid Transco shares of
approximately $9.4 billion and an increase in National Grid's aggregate FUCO
investment of the same amount. Consequently, National Grid's aggregate
post-Merger FUCO investment would be approximately $12.6 billion. Given this
level of investment and National Grid's desire to maintain the flexibility to
make subsequent FUCO investments, National Grid seeks authorization to issue and
sell equity and debt securities and to enter into guarantees up to an aggregate
limit of $20 billion through September 30, 2004. The proceeds of such financings
could support investments of up to $20 billion in FUCOs.
The post-Merger aggregate FUCO investment of $12.6 billion, subtracted
from the $20 billion requested authorization, leaves a difference of $7.4
billion. This amount of additional authorization would provide National Grid
with necessary financial flexibility to finance the Merger, to allow for the
future financing of the combined National Grid-Lattice FUCO operations by
National Grid (including the flexibility to refinance debt at lower interest
rates if market conditions warrant), and to finance the acquisition of other
FUCOs in the future. The flexibility is justified because National Grid will be
financially sound post-Merger with an investment grade credit rating and a level
of equity to total capitalization that exceeds 40%.
The circumstances under which National Grid might use the $7.4 billion
additional FUCO financing authorization fall into three categories. First, the
value of Grid Transco common stock issued to Lattice shareholders in the Merger
could be more or less than $9.4 billion estimated in this Application. The
exchange ratio of 0.375 Grid Transco shares for each Lattice share means that
1,323 million Grid Transco shares would be issued in exchange for the 3,528
million Lattice shares outstanding. The
33
valuation of the Grid Transco shares for purposes of calculating the amount of
"aggregate investment" under Rule 53 depends on two factors, the value of
National Grid shares on the day of the Merger and the (pound) : $ exchange rate
on that day. National Grid used a share price of (pound)4.90 and an exchange
rate of $1.44712 = (pound)1 to determine that the aggregate value of the Grid
Transco shares issued in the Merger would be $9.381 billion.\33 For example, an
increase of just 5% in the National Grid share price and the value of the Pound
Sterling against the US Dollar would cause the value of the Grid Transco shares
issued in the Merger to increase to $10.379 billion. Therefore, approximately $1
billion of the additional $7.4 billion financing authorization could be absorbed
simply as a result of the effect of market price and exchange rate movements on
the calculation of "aggregate investment" under Rule 53.\34
A second use of the additional FUCO financing authorization could be
to refinance debt that is currently held by Lattice subsidiaries, principally
Transco, and National Grid's FUCO subsidiaries, principally NGC. For example,
National Grid may determine that it would be less expensive to enter into a
joint bank credit facility that would include National Grid, Transco and NGC,
rather than have each company maintain a separate credit facility. To obtain the
lowest interest rate the banks may require National Grid to guarantee loans made
under the facility to NGC and Transco. Any amounts so guaranteed would be
includible in aggregate investment under Rule 53. Alternatively, National Grid
may issue commercial paper, long-term debt or common equity in the capital
markets and lend the proceeds to Transco or NGC to refund higher cost debt. Such
intrasystem loans would count as an additional aggregate FUCO investment. NGC
and Transco currently have a total of $11.3 billion in debt outstanding and of
that amount $3.1 billion is expected to mature during the period of the
financing authorization requested in the application, i.e., through September
30, 2004.\35 National
---------------------------
33/ As of August 21, 2002, National Grid's share price was(pound)4.68.
34/ Options to acquire 78.5 million Lattice shares under certain Lattice
employee benefit plans also may be triggered and made exercisable by the Merger
due to change in control provisions. NGT shares would be issued upon the
exercise of the Lattice share options.
35/ Additional debt may be redeemable at the option of the issuer.
34
Grid requests that the Commission authorize the additional $7.4 billion of FUCO
financing authorization to permit it to engage in the potentially beneficial
FUCO refinancing transactions described above. No refinancing would be conducted
if it would cause National Grid to violate the conditions intended to assure its
financial soundness that are imposed by National Grid's SEC authorizations.
The third and last category of uses for the additional $7.4 billion of
FUCO financing authorization is additional FUCO acquisitions. In particular,
National Grid requests that the Commission authorize the additional $7.4 billion
so that it may acquire other foreign utility businesses and energy-related
business to be owned by a FUCO as opportunities for sound acquisitions may arise
through September 30, 2004. Investment opportunities often arise with little
lead time. Potential acquirers must act rapidly or risk losing the deal to other
interested acquirers. The additional FUCO financing authorization would permit
National Grid to act promptly to complete an acquisition without first obtaining
a supplemental order from the Commission for additional FUCO financing
authorization. National Grid presently has an unused FUCO financing
authorization of approximately $2.155 billion, or 40% of its total $5.406
billion authorization. The proposed $7.4 billion additional FUCO financing
amount would be 37% of the $20 billion overall financing request. The amount
requested is, therefore, proportional to the increased size of National Grid's
FUCO investments and National Grid's capitalization and assets after the Merger.
As the Application demonstrates infra, the proposed $20 billion FUCO investment
represents 57.1% of Grid Transco's pro forma capitalization, 73.8% of its net
utility plant, 47.4% of its total consolidated assets and 93.5% of its market
capitalization. These percentages are lower that the percentages found
acceptable in the Commission's recent order authorizing E.ON's acquisition of
Powergen. In that decision, the authorized $65 billion EWG and FUCO investment
limit represented 114% of consolidated capitalization, 63% of total consolidated
assets and 182% of market capitalization.\36 National Grid's request is
therefore consistent with current Commission precedent.
---------------------------
36/ The aggregate EWG / FUCO investment limit as a percentage of net utility
plant was not given in the E.ON order. E.ON AG, Holding Co. Act Release No.
27539 (June 14, 2002).
35
National Grid proposes that the various securities to be issued would
be limited as follows, but would not in the aggregate exceed the $20 billion
aggregate limit throughout the September 30, 2004 authorization period:
------------------------------------------ -------------------------------------
Security $ billions
------------------------------------------ -------------------------------------
Equity, including options and warrants\37 18.0
------------------------------------------ -------------------------------------
Debt 12.0
------------------------------------------ -------------------------------------
Guarantees 6.0
------------------------------------------ -------------------------------------
We note that the supplemental financing authorization proposed in this
Application is intended solely to finance the Merger and the resulting Grid
Transco holding company group. If the Merger is not consummated, the
Commission's authorization of the Application would automatically cease to be of
any effect and National Grid would continue to finance its operations and
investments under its prior authorizations.
3. The FUCO Financing Request In Particular
Background
National Grid may use the proceeds of the financings proposed in this
Application, in part, for investments in FUCOs, i.e., the Merger and any
subsequent FUCO investments. Under Rule 53, in determining whether to approve
the issue or sale of a security by National Grid to finance a FUCO investment,
the Commission must consider the circumstances surrounding the proposed issuance
and, if the issuance cannot qualify for the safe harbor in Rule 53(a), the
applicant must demonstrate under Rule 53(c) that the proposed FUCO financing
will not have an adverse impact on the financial integrity of the registered
holding company system, any utility subsidiary, its customers or on the ability
of state commissions to protect such subsidiary or customers.
---------------------------
37/ National Grid currently has outstanding (pound)464 million ($671 million) of
4.25% exchangeable bonds that mature in 2008. The bonds are exchangeable on or
prior to February 8, 2008, at the option of the holder, into common stock of
National Grid. Should bondholders exchange their bonds prior to maturity,
National Grid may issue up to 110 million additional shares of common stock not
included in the equity and aggregate limits.
36
National Grid's aggregate investment, as defined in Rule 53(a), in
FUCOs as of August 31, 2002, was $3.251 billion.\38 National Grid has no EWG
investments. As of March 31, 2002, National Grid's consolidated retained
earnings calculated in accordance with U.S. GAAP was $2.976 billion.
Consequently, National Grid's aggregate investment in FUCOs as a percentage of
its consolidated retained earnings was 109%. In the January 2002 Order National
Grid was authorized to issue and sell securities for the purpose of financing
investments in FUCOs in an amount up to $5.406 billion. National Grid now
proposes to increase the authorized financing amount to $20 billion.
The proposed issuance of securities for the purpose of financing
additional FUCO investments does not qualify for the safe harbor in Rule 53(a)
because National Grid's aggregate FUCO investment exceeds 50% of its
consolidated retained earnings. In addition, as provided in Rule 53(b)(3),
relief under Rule 53(a) is not available because write-downs of $1,140.9 million
associated with National Grid's telecommunications investments, held indirectly
by National Grid's FUCO, National Grid Holdings Limited, contributed to reported
operating losses of $186.3 million for National Grid on a consolidated basis in
the fiscal year ended March 31, 2002. Because such operating losses exceed 5% of
National Grid's consolidated retained earnings for the year (5% of $2.976
billion is $148.8 million), the threshold in Rule 53(b)(3) is triggered.
In its application on Form U-1 in SEC File No. 70-9849, National Grid
undertook "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." National Grid's current Application for
additional FUCO financing authorization addresses these events fully and,
accordingly, National Grid requests that the Commission consider this filing as
satisfying the undertaking made in File No. 70-9849.
---------------------------
38/ Aggregate investment is defined in Rule 53 under the Act to include all
amounts invested, or committed to be invested, in EWGs and FUCOs, for which
there is recourse, directly or indirectly to National Grid. This limit is
applied on a net basis and to the extent National Grid's previous investments or
guarantees have been repaid or have expired, those investments are netted from
the total aggregate investment.
37
The Impact of the Proposed FUCO Financing on National Grid's Financial Integrity
The requirements of Rule 53(c) are currently satisfied by National
Grid and will continue to be satisfied post-Merger. First, as provided in Rule
53(c)(1), the issuance and sale of securities by National Grid to finance FUCO
investments "will not have a substantial adverse impact upon the financial
integrity of the registered holding company system." National Grid's
capitalization is currently sound and should continue to be sound post-Merger.
Its ratio of 31.7% equity to total capitalization is in compliance with the
conditions set forth in the January 2002 Order. Post-Merger, the pro forma
capitalization table indicates that Grid Transco will have a very conservative
40.4% ratio of equity to total capitalization. National Grid's consolidated
capitalization (on a U.S. GAAP basis) over the recent past is shown in the table
below.
------------------------- ------------------------ ----------------------- -----------------------
National Grid March 31, 2000 March 31, 2001 March 31, 2002
----------- ------------ ----------- ----------- ----------- -----------
As at: ($ mm) (%) ($ mm) (%) ($ mm) (%)
------------------------- ----------- ------------ ----------- ----------- ----------- -----------
Debt, preferred stock 6,120 62% 5,955 59% 11,502 68%
and minority interests
------------------------- ----------- ------------ ----------- ----------- ----------- -----------
Common stock equity 3,753 38% 4,146 41% 5,338 32%
------------------------- ----------- ------------ ----------- ----------- ----------- -----------
Total 9,873 100% 10,101 100% 16,840 100.0%
------------------------- ----------- ------------ ----------- ----------- ----------- -----------
Assuming the completion of the Merger, Grid Transco's FUCO investment
of $12.6 billion on a pro forma basis as of March 31, 2002\39 would be the
following percentages of capitalization, net utility plant, assets and market
capitalization. The percentages assuming the full utilization of the requested
$20 billion authorization are also provided in the table below.
-------------------------------- ------------ ---------------------- ----------------------
Grid Transco Pro Forma as of $ Billions $12.6 Billion FUCO $20 Billion FUCO
March 31, 2002 Investment Percentage Investment Percentage
-------------------------------- ------------ ---------------------- ----------------------
Consolidated capitalization 35.0 36.0% 57.1%
-------------------------------- ------------ ---------------------- ----------------------
Net utility plant 27.1 46.5% 73.8%
-------------------------------- ------------ ---------------------- ----------------------
Total consolidated assets 42.2 29.9% 47.4%
-------------------------------- ------------ ---------------------- ----------------------
Market capitalization (as of 21.4 58.9% 93.5%
April 19, 2002)
-------------------------------- ------------ ---------------------- ----------------------
---------------------------
39/ This pro forma presentation incorporates National Grid's aggregate FUCO
investment as of August 31, 2002.
38
These percentages are lower than percentages found in the Commission's order in
E.ON AG, Holding Co. Act Release No. 27539 (June 14, 2002), where an authorized
EWG and FUCO investment limit of $65 billion represented 114% of consolidated
capitalization, 63% of total consolidated assets and 182% of market
capitalization.
National Grid's financial integrity and the soundness of its capital
structure is further demonstrated by its high credit rating and National Grid's
sound management and investment practices. National Grid is currently rated A2
by Moody's and it expects to have a post-Merger investment grade long-term debt
credit rating that remains in the single A band. A review of basic financial
measures over time also indicates National Grid's record of financial stability;
a product of its sound management. National Grid's equity market value to book
value ratios and stock price to earnings ratios over recent years are provided
below:
------------------------------------------------------------------------------------------------
Market to Book Value
------------------------------------------------------------------------------------------------
As at: Mar. 31, 1999 Mar. 31, 2000 Mar. 31, 2001 Mar. 31, 2002
-------------------------------- --------------- --------------- --------------- ---------------
$mm $mm $mm $mm
-------------------------------- --------------- --------------- --------------- ---------------
Market value of equity 11,084 13,611 11,468 11,689
-------------------------------- --------------- --------------- --------------- ---------------
Book value of equity (under U.S. 2,416 3,753 4,146 5,338
GAAP)
-------------------------------- --------------- --------------- --------------- ---------------
Ratio of market to book value 4.6x 3.6x 2.8x 2.2x
(times)
-------------------------------- --------------- --------------- --------------- ---------------
39
-----------------------------------------------------------------------------------------------
Price/Earnings Ratios
-----------------------------------------------------------------------------------------------
12 months ended: Mar. 31, 1999 Mar. 31, 2000 Mar. 31, 2001 Mar. 31, 2002
----------------------------- --------------- ---------------- --------------- ----------------
$ $ $ $
----------------------------- --------------- ---------------- --------------- ----------------
Basic earnings per share
(U.S. GAAP)\40 1.13 1.10 0.78 (0.15)*
----------------------------- --------------- ---------------- --------------- ----------------
Ratio of price to earnings 6.6x 8.4x 9.9x -43.3x
----------------------------- --------------- ---------------- --------------- ----------------
(*) 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.
---------------------------
40/ Unadjusted for the net income arising on the sale of Energis shares in the
year ended March 31, 1999 of $1,149.8 million. Unadjusted for the net income
arising on the reduction in National Grid's interest in Energis in the year
ended March 31, 1998 of $184.5 million.
40
The growth in National Grid's consolidated common stock equity is
shown below:
---------------------------------------------------------------------------------------------------------
As at: Mar. 31, Mar. 31, Mar. 31, Mar. 31, Mar. 31, Mar. 31,
1997 1998 1999 2000 2001 2002
---------------------------------------------------------------------------------------------------------
$mm $mm $mm $mm $mm $mm
--------------------- ------------- ------------- ------------- ------------- ------------- -------------
Capital stock 283 286 287 280 248 252
--------------------- ------------- ------------- ------------- ------------- ------------- -------------
Capital stock 286 310 319 327 291 2,158
premium
--------------------- ------------- ------------- ------------- ------------- ------------- -------------
Treasury stock 0 (17) (18) (26) (14) (65)
--------------------- ------------- ------------- ------------- ------------- ------------- -------------
Cumulative other 0 0 (1) 62 32 17
comprehensive income
--------------------- ------------- ------------- ------------- ------------- ------------- -------------
Retained earnings 1,270 443 1,829 3,111 3,589 2,976
--------------------- ------------- ------------- ------------- ------------- ------------- -------------
Shareholder's equity 1,839 1,022 2,416 3,753 4,146 5,338
--------------------- ------------- ------------- ------------- ------------- ------------- -------------
Growth per period __ (44)%\41 136% 55% 10% 29%
--------------------- ------------- ------------- ------------- ------------- ------------- -------------
Growth rate over 190%
last 5 years
--------------------- -------------
Annualized growth 24%
rate
---------------------------------------------------------------------------------------------------------
These tables demonstrate that on a book and market basis National Grid has been
soundly capitalized in the past and that it should continue to be financially
stable. A review of National Grid's liquidity and capital resources also
indicates that the company is financially sound. Net cash inflow from operations
was (pound)1,255.4 million ($1,807.8 million) in the fiscal year ended March 31,
2002, compared with (pound)810.6 million ($1,167.3 million) in the prior fiscal
year. Cash flow is used to support National Grid's cash obligations such as
principal and interest payments on debt and capital expenditures. National
Grid's net debt increased from (pound)3,918.2 million ($5,642.2 million) at
March 31, 2001
---------------------------
41/ A special dividend of $1.23 billion was paid during the year ended March 31,
1998, which distorts the historical trend in growth of shareholder's equity.
41
to (pound)8,240.7 ($11,866.6 million) at March 31, 2002, primarily as a result
of the acquisition of Niagara Mohawk. 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 a more relevant
indicator of the borrowing capacity of the National Grid group, was 3.0 times
(compared with 2.9 times at March 31, 2001 and 8.2 times at March 31, 2000).
Capital expenditures of (pound)593.3 million ($854.4 million) for the year ended
March 31, 2002, were steady compared to (pound)535.8 million ($771.6 million)
for the year ended March 31, 2001. The strong cash flow and interest cover
numbers demonstrate National Grid's ability to meet its current and future
obligations.
In contrast, the write downs of the past year represented unique
events that principally recognize a change in value of sunk investments as
recorded on National Grid's balance sheet.\42 The Latin American
telecommunications businesses, Energis and Energis Polska will not adversely
affect National Grid's financial condition in the future because they have been
written-down fully, including provisions for associated liabilities. The write
downs reflect National Grid's conservative view that, based on current economic
prospects, the affected businesses are not likely to produce substantial future
value. Nevertheless, it is appropriate in this context to recognize that overall
National Grid's investments in the telecommunications industry have generated
over (pound)1 billion ($1.44 billion) of net value for National Grid
shareholders.\43
National Grid has re-focused its telecommunications strategy and is in
the process of withdrawing from its investments in alternative
telecommunications networks.\44 However, National Grid's Directors believe that
there remain attractive
---------------------------
42/ Except for a possible pay-out by National Grid as a guarantor on a bank loan
to Energis Polska, all the write-downs are non-cash in nature.
43/ Proceeds of prior sales of National Grid's stake in Energis (approximately
(pound)2.2 billion) less its investment in the creation of Energis
(approximately (pound)500 million) and the investment in and provisions for the
Latin American telecommunications and Energis Polska investments (approximately
(pound)700 million) have resulted in net positive returns from investments in
the telecommunications industry.
44/ In the U.K. and Europe, the term "alternative telecommunications networks/
companies" is commonly used to refer to those businesses that have been
established to compete with incumbent national telecommunications companies, for
example, Energis in competition with British Telecommunications plc in the U.K.
These new companies are the "alternative" to the existing carrier.
42
opportunities to leverage the group's infrastructure skills and assets in the UK
and US to provide sites and related infrastructure services to the wireless
communications industry. The risk profile of these opportunities is more closely
aligned with the group's core businesses. GridCom, for example, uses National
Grid's project management skills and electricity infrastructure (i.e., its
network of transmission towers across England and Wales) to capitalize on demand
for new base station sites by mobile phone operators. This demand is principally
driven by the need of second and third-generation operators to install new
infrastructure and the sensitivity of the public to new masts. The combination
of these factors makes National Grid's transmission network valuable for mobile
phone operators. In the US, National Grid is developing the capability to offer
similar services, leveraging National Grid USA's infrastructure assets.
Statement of Financial Accounting Standards ("SFAS") 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. Other than the
telecommunications interests that were written down as noted above, National
Grid currently has no other assets that would need to be written down under SFAS
121. National Grid undertakes to notify the Commission by filing a
post-effective amendment in this proceeding in the event that any of the
circumstances described in Rule 53(b) occurs during the Authorization Period.
National Grid's Core Operations are Strong and its Management is Sound
National Grid's core UK electricity transmission business and its US
electricity and gas business are sound and have performed well over the prior
fiscal year. Total operating profit before exceptional costs in the UK for the
twelve months ended March 31, 2002 was (pound)544.5 million ($784.1 million),
reflecting the strong performance of National Grid's core UK electricity
transmission business, and the total operating profit, before exceptional costs
and goodwill amortization of National Grid USA (representing the consolidated US
utility and nonutility operations) was (pound)378.3 million ($544.8 million). As
a whole, National Grid's operating profit, before exceptional items and goodwill
amortization, has increased by 18% and earnings per share, before exceptional
items and goodwill amortization, increased by 61% over the fiscal year ended
March 31, 2001.
43
National Grid's successful operation of both UK and US businesses
indicates that the company has sound management skills and expertise in the
utility industry, whether foreign or domestic. National Grid's core skills are
in design, construction, system operation, regulatory management and customer
service activities associated with operating complex networks. Its primary focus
on regulated electricity networks provides a stable financial base. The proposed
merger with Lattice is consistent with National Grid's core competencies and
will amplify them in the area of the management and operation of gas utility
networks. Like National Grid's US and UK utility businesses, Lattice's core
business, Transco, is also a stable regulated business.
National Grid has put in place a framework to guide its activities
both now and following the Merger to ensure that its business is sustainable and
managed in a responsible manner. This includes standards of business conduct
that encourage open and constructive dialogue with all of National Grid's
stakeholders and the maintenance of high standards of integrity and
professionalism. The framework consists of three goals, each of which is aligned
to the achievement of business objectives:
o Sustainable growth: National Grid recognizes that for its growth to
bring long-term value to shareholders and others, it must be achieved
in a responsible manner.
o Profits with responsibility: National Grid recognizes that for its
business to be sustainable, it must be profitable, but increasing
profitability at any cost is neither sustainable nor acceptable to
society. National Grid must be responsible, therefore, in the way it
generates profits.
o Investing in the future: National Grid recognizes that the physical
presence of its lines, poles and pipes links it closely to the
communities that it serves and in which it operates. National Grid
therefore plays a wider role in society than just the provision of its
services. Commercial success will enable National Grid to continue to
invest in the future in ways that benefit shareholders, the
environment, employees and society, and National Grid's willingness to
do so reflects its desire to be a long-term business.
National Grid's system of corporate governance plays a key role in
assuring that its business is conducted appropriately within the framework
outlined above and with the additional standards set forth in The Combined Code
of Corporate
44
Governance ("Combined Code"). The Combined Code, which is appended to the
Listing Rules of the U.K. Listing Authority, sets out Principles of Good
Governance and specific provisions relating to governance with which listed
companies, including National Grid, are required to comply or to explain the
reasons for any areas of non-compliance.
National Grid has complied with all of the provisions of the Combined
Code throughout the year except for that requiring the appointment of a senior
non-executive director. National Grid considers that the independent
Non-executive Chairman is the appropriate point of contact for shareholders with
concerns about the management of the group, and for this reason does not think
it necessary to appoint a separate senior non-executive director.
National Grid has a separate independent Non-executive Chairman. The
National Grid Board consists of the Chairman, the Group Chief Executive and also
includes five other Executive Directors and five independent Non-executive
Directors. The Board meets at least eight times a year, holding additional
meetings when necessary. The Board must approve certain decisions such as the
start-up of the acquisition of a new company or any activity in a new territory.
The Board also monitors environmental and safety matters throughout the group.
Board members each receive regular and ad hoc reports about group activities and
have the right and duty to make further inquiries if they think it necessary.
The reports provided to the Board are described in further detail in National
Grid's Annual Report on Form 20-F included as Exhibit E-1 to this Application.
The Directors are responsible for making sure that the annual report
and accounts give a balanced and understandable presentation of the group's
position and prospects. The Audit Committee of the Board considers the scope and
extent of internal audit and reports annually to the Board on this function. The
Audit Committee meets at least four times a year and the Group Chief Executive
and Group Finance Director are invited to attend. The Audit Committee has at
least one private meeting with the external auditors with management excluded.
The Audit Committee also considers the re-appointment of the auditors each year.
The Audit Committee has the specific task of keeping under review the nature and
extent of non-audit services provided by the external auditors to ensure that a
proper balance is maintained between objectivity and value for the money.
45
National Grid's system of internal control helps to safeguard
shareholders' investment and the group's assets and is designed to manage,
rather than to eliminate, material risks to the achievement of business
objectives. The Board is responsible for the group's system of internal control
and for reviewing its effectiveness, recognizing that any such system can
provide only reasonable, and not absolute, assurance against material
misstatement or loss. National Grid maintains an ongoing process for
identifying, evaluating and managing the significant risks faced by the group.
Any material matters arising are reported to the Board.
The New Project Review Process
National Grid subjects all project proposals, including the proposed
Merger with Lattice, to careful and stringent reviews. The general investment
review process that will be followed post-Merger is described below.
Grid Transco's investment review process will include as one of its
objectives minimizing the risks associated with FUCO activities. Before Grid
Transco or its subsidiaries make any investment in a project, the project will
be analyzed in detail, including the specific country risk, where applicable.
The project review process will include a series of independent internal
reviews, both at the subsidiary and Grid Transco levels.
In the U.K., the majority of projects by number will relate to NGC's
and Transco's utility businesses. Each potential project will be subjected to a
series of formal reviews to ensure its financial robustness. The process will
begin with a consideration of the group's strategic plans, which will be updated
periodically according to Grid Transco's planning cycle. Individual project
business plans would be prepared as part of the process of including potential
investments in the overall business plan of Grid Transco (the "Group Business
Plan"). All projects identified as requiring future funding must be included
within the planning cycle. This planning procedure will ensure 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.
46
The project review process would include consideration of business,
financial, regulatory, environmental and legal risks. Foreign projects would be
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;
o the environmental impact; and
o currency conversion and repatriation of dividends issues.
Project proposals will be subject to successive stages of review by
senior management and directors depending upon Grid Transco's projected
financial exposure in a particular project. Generally, the process by which Grid
Transco will identify, manage and approve 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 would be 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 would also be 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
47
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 would be
established to ensure that continuing expenditures produce acceptable results.
In addition, project teams would be established to identify the major technical,
financial, commercial and legal risks associated with a particular project and
risk mitigation strategies. The process would follow the following broad
outline:
o undertake due diligence;
o prepare valuation;
o prepare business plan;
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.
Grid Transco's system of internal controls will be 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 that will be conducted at all levels of the group. All parts of the
group will be 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
48
participation of local management. Material changes in risks and associated
responsive actions will be 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 Grid
Transco will provide direction and impetus to the implementation of risk
management at all levels of the group, act as a catalyst for change and provide
visible senior executive support to the process.
For all the reasons stated above, the conditions of Rule 53(c)(1) are
satisfied.
National Grid's US Utility Subsidiaries and Customers Would Not Be Adversely
Affected, and State Commission Oversight Would not be Impaired by, the Proposed
FUCO Investment
Under Rule 53(c)(2) National Grid must demonstrate that the proposed
use of financing proceeds to invest in FUCOs "will not have an adverse impact on
any 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 should conclude that the customers of National Grid'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'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 owns any interest. National Grid
further 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 financing facilities that will adequately support their
operations.
(c) National Grid will comply with the requirements of Rule 53(a)(3)
regarding the limitation on the use of the utility subsidiaries' employees in
connection with providing services to FUCOs. National Grid's FUCOs have
experienced and extensive staff resources. Management and support for FUCO
operations will be largely
49
performed by National Grid Holdings One plc and its subsidiary companies, and by
outside consultants (e.g., engineers, investment advisors, accountants and
attorneys) engaged for projects as necessary. National Grid also will comply
with Rule 53(a)(4) regarding the provision of EWG and FUCO related information
to every federal, state and local regulator having jurisdiction over the retail
rates, as applicable, of the utility subsidiaries.
(d) The proposed FUCO financing authorization also would not have an
adverse impact on the ability of any state commission to protect a National Grid
utility subsidiary subject to its jurisdiction or that subsidiary's customers.
In connection with the increased FUCO investment level authorized in 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, Connecticut Department of Public Utility Control, 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 Grid's
proposed increased level of investment. 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 no longer has operations in Connecticut and is not
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 jurisdiction of the VPSB. 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
50
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 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 32 persons including lawyers, engineers, auditors and
rate analysts.
The proposed FUCO financing will strengthen the financial soundness of
National Grid. As noted above in Item 1.C., the Merger is projected to result in
a combined company, Grid Transco, that would have an investment grade credit
rating and a ratio of 40.4% common equity to total capitalization. Moreover,
Standard & Poor's and Moody's Investors Service affirmed the investment grade
credit ratings for National Grid's public utility subsidiaries following the
announcement of the Merger. The financing for the Merger and any subsequent FUCO
financing would not affect Narragansett since it would not provide financing
for, extend credit to, or sell or pledge its assets directly or indirectly to
any FUCO in which National Grid owns any interest. The Merger also would not
involve any changes to the corporate structure of National
51
Grid's public utility subsidiary companies. Narragansett would continue to be
wholly-owned by National Grid USA and it, in turn, would continue to be owned
indirectly by National Grid which would merely change its name to Grid Transco
after the Merger. Consequently, there would be no change in the regulatory
authority or ability of the RIPUC or the RIDIV to regulate and protect
Narragansett and to protect its ratepayers.
This conclusion is confirmed by a letter dated September 17, 2002 from
the RIPUC to the Commission. The letter advises the Commission that the RIPUC
believes that the Merger and the requested FUCO investment authorization would
not have an adverse impact on the ability of the RIPUC to protect ratepayers in
Rhode Island.
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 DTE 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 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.
52
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. The points made above with respect to Rhode
Island utility regulation apply equally to Massachusetts. The Merger is
projected to result in a financially stronger holding company, Grid Transco,
that would have an investment grade credit rating and a ratio of 40.4% common
equity to total capitalization. Major rating agencies have affirmed their
investment grade credit ratings for National Grid's public utility subsidiaries,
and the financing for the Merger and any subsequent FUCO financing would not
affect Mass. Electric or Nantucket since neither of the utilities would provide
financing for, extend credit to, or sell or pledge its assets directly or
indirectly to any FUCO in which National Grid owns any interest. The Merger also
would not change the corporate structure of Mass. Electric or Nantucket which
would continue to be wholly-owned by National Grid USA. For all these reasons,
there would be no change in the regulatory authority or ability of the MDTE to
regulate and protect Mass. Electric or Nantucket in furtherance of its mission
to protect Massachusetts ratepayers.
This conclusion is confirmed by a letter from the MDTE dated September
30, 2002, to the Commission. The letter noted that the MDTE has authority over
National Grid's subsidiaries Mass. Electric and Nantucket extending to such
matters as rates, financings, affiliate transactions, and financial integrity.
In closing, the MDTE stated that its regulatory authority would be unchanged by
any action of the Commission regarding this Application.
New Hampshire
By letter dated September 30, 2002, the NHPUC informed the Commission
that the Merger will not have an effect upon the NHPUC's exercise of its
regulatory jurisdiction over the rates, services or operations of Granite State.
Consequently, the NHPUC believes that, pursuant to conditions in previous orders
and its authority under New Hampshire law, it has the ability to protect New
Hampshire ratepayers and National Grid's New Hampshire utility subsidiaries in
light of National Grid's request in this Application.
New York
Lastly, in a letter dated October 2, 2002, the NYPSC described its
jurisdiction over National Grid's New York utility subsidiary, Niagara Mohawk.
The
53
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."
(e) In addition, National Grid will provide the information required
by Form 20-F to permit the Commission to monitor the effect of National Grid's
FUCO investments on National Grid's financial condition.
All of the commitments noted in paragraphs (a) - (c) and (e) above
would apply to Grid Transco after the Merger. Consequently, the conditions of
Rule 53(c)(2) are satisfied.
4. Reporting Requirements
National Grid will report the following additional information in the
semi-annual reports under Rule 24 required by Holding Co. Act Release No. 27490
(Jan. 16, 2002), File No. 70-9849:
1. A current calculation of National Grid's aggregate investment in
FUCOs as a percentage of its consolidated retained earnings.
2. A statement of aggregate investment in FUCOs as a percentage of
National Grid's total capitalization, net utility plant, total consolidated
assets and the market value of its common stock equity.
3. A statement indicating the percentage of each component of
capitalization to total capitalization for National Grid on a consolidated basis
and each of its public utility subsidiaries on an individual basis.
4. A statement indicating the market-to-book ratio for National Grid's
common stock.
5. An analysis of National Grid's consolidated earnings that
segregates total earnings attributable to FUCOs from that which is attributable
to National Grid's other subsidiaries.
54
6. A statement of National Grid's authorized FUCO investment limit and
the amount of unused authority based on its aggregate investment as of the end
of the reporting period.
7. A statement of revenues and net income of each of National Grid's
FUCOs for the 12 months or six months, as applicable, as of the end of the
reporting period indicating which FUCOs, if any, were acquired during the
reporting period.
In addition, National Grid 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.
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 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, on a consolidated basis, or any of its
public utility subsidiary companies.
3. A default by National Grid 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 or any of its public utility
subsidiary companies.
55
Item 2. Fees, Commissions and Expenses
National Grid expects to pay or incur approximately $54.3 million in
aggregate fees, commissions and expenses, directly or indirectly, in connection
with the Merger. The estimated fees, commissions and expenses are set forth
below by category.
Category of Fee or Expense $ millions
Financial advisors 40.5
Legal advisors 2.7
Other advisors and consultants 0.9
Accountants 1.1
Miscellaneous costs\45 9.1
Total 54.3
Item 3. Applicable Statutory Provisions
The proposed transactions are subject to Sections 6(a) and 7 of the
Act and Rule 53 thereunder.
Item 4. Regulatory Approvals
A. State and Federal Regulation
Other than the financing approval required from this Commission, the
Merger and the financing transactions proposed herein do not require the
approval of any federal or state regulatory body.
---------------------------
45/ The miscellaneous costs include fees and expenses paid to or incurred with
respect to: (a) registrars, $2.8 mm; (b) printing, $600,000; (c) internal costs,
$500,000; (d) miscellaneous other costs, $300,000, and; (e) an estimate of costs
not yet invoiced, $5.0 mm.
56
B. European Regulation
Under the U.K. Fair Trading Act 1973, the Secretary of State for Trade
and Industry must decide whether to refer the Merger or any matter arising
therefrom or related thereto to the U.K. Competition Commission. On July 2,
2002, the Secretary of State announced her decision not to refer the Merger to
the U.K. Competition commission. This is the only European regulatory action
required before the Merger may be completed.
The Merger is subject to the condition that each of the Authority and
the Secretary of State for Trade and Industry indicating that they will not seek
modifications to any licenses held by National Grid or Lattice or their
subsidiaries under the Electricity Act 1989 or the Gas Act 1986 and subsequent
legislation, including the Utilities Act 2000 except, in each case, on terms
acceptable to both National Grid and Lattice acting reasonably; that they will
not seek undertakings or assurances from members of the National Grid or Lattice
groups except, in each case, on terms acceptable to National Grid and Lattice
acting reasonably; and that in connection with the Merger, they will give such
consents and/or directions (if any) and/or seek or agree to such modifications
(if any) as are, in the reasonable opinion of National Grid or Lattice,
necessary in connection with such licenses. No affirmative action by the
Authority would be required to satisfy this condition and the Merger may proceed
to completion as soon as all other regulatory approvals have been received.
Item 5. Procedure
National Grid 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 October 11, 2002.
Applicants waive a recommended decision by a hearing or other
responsible officer of the Commission for approval of the Merger and consent to
the Division of Investment Management's assistance in the preparation of the
Commission's decision. There should not be a waiting period between the issuance
of the Commission's order and the date on which it is to become effective.
57
Item 6. Exhibits and Financial Statements
Exhibits
A-1 Press Release and Terms of Offer.
B-1 Articles of Association of National Grid Transco plc.*
C-1 Corporate Chart of National Grid Transco plc Post-Merger (filed under cover
of Form SE).
D-1 Opinion of Counsel of National Grid Group plc.*
D-2 Past tense opinion of counsel.**
E-1 Annual Report on Form 20-F of National Grid Group plc for the Fiscal Year
Ended March 31, 2002, incorporated by reference to SEC File No. 001-14958
(filed June 21, 2002).
E-2 Annual Report of Lattice Group plc for the Period Ended March 31, 2002
(filed under cover of Form SE).
E-3 Annual Report on Form 20-F of Transco plc for the Period Ended March 31,
2002 (filed under cover of Form SE).
F-1 Form of Notice.
G-1 List of Lattice Group Companies.*
Financial Statements
FS-1 National Grid Group plc Consolidated Balance Sheet and Statement of Income
for the Year Ended and as of March 31, 2002, incorporated by reference to
Exhibit E-1 hereto.
FS-2 Lattice Group plc Consolidated Balance Sheet and Statement of Income for
the Period Ended and as of March 31, 2002, included in Exhibit E-2 hereto.
FS-3 Projected Financial Statements for National Grid Transco plc for the Three
Year Period Ended March 31, 2005 (confidential treatment requested).
FS-4 Financial Information as of and for the Period Ending March 31, 2002
(confidential treatment requested).
* Filed herewith.
** To be filed by amendment.
58
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.
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: October 15, 2002 National Grid Group plc
By: /s/ Kirk L. Ramsauer
---------------------
Kirk L. Ramsauer
Deputy General Counsel
National Grid USA
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Exhibit Index
Exhibit Description
B-1 Articles of Association of National Grid Transco plc
D-1 Opinion of Counsel of National Grid Group plc
G-1 List of Lattice Group Companies
60