File No. 70-10025
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE
AMENDMENT NO. 3
TO
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
National Grid Group plc
15 Marylebone Road
London NW1 5JD
United Kingdom
National Grid USA
25 Research Drive
Westborough, MA 01582
New England Power Company
25 Research Drive
Westborough, MA 01582
Vermont Yankee Nuclear Power Corporation
185 Old Ferry Road
Brattleboro, VT 05703
(Names and principal executive offices of companies filing this statement)
NATIONAL GRID GROUP plc
(Names of top registered holding company)
Richard P. Sergel
Group Director - North America
National Grid Group plc
c/o National Grid USA
25 Research Drive
Westborough, MA 01582
(Name and address of agent for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application/Declaration to:
Hemmie Chang, Esq. Kirk L. Ramsauer, Esq.
Ropes & Gray National Grid USA
One International Place 25 Research Drive
Boston, MA 02110 Westborough, MA 01582
Denise Redmann, Esq. Nancy S. Malmquist, Esq.
Entergy Corporation Downs, Rachlin & Martin
639 Loyola Avenue P.O. Box 99
New Orleans, LA 70113 90 Prospect Street
St. Johnsbury, VT 05819-0099
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The Application/Declaration in File No. 70-10025 hereby is amended by
adding the following sentence to the end of Item 2, Fees, Commissions and
Expenses: "All of the above fees, commissions and expenses will be shared pro
rata by all of the sponsoring owners of Vermont Yankee."
Such Application/Declaration if further amended by inserting the following
at the end of Item 1.C:
For ease of reference, the discussion on Rule 53 included in the FUCO
Application as filed with the Commission on June 7, 2002 is set forth below
(updated to include March 31, 2002 financial information). Terms used below that
have been defined in the FUCO Application are used as defined therein.
"3. The FUCO Financing Request In Particular
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.
National Grid's aggregate investment, as defined in Rule 53(a), in
FUCOs as of March 31, 2002 was $3.104 billion./31 National Grid has no EWG
investments.
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31 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.
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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 104% as of March 31, 2002. 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 $148.8 million), the threshold in Rule 53(b)(3) is triggered.
In its application on Form U-1 in SEC File No.
70-9849, National Grid undertook "to notify the Commission by filing a
post-effective amendment in this proceeding in the event that any of the
circumstances described in Rule 53(b) occurs during the Authorization Period."
National Grid's current Application for additional FUCO financing authorization
addresses these events fully and, accordingly, National Grid requests that the
Commission consider this filing as satisfying the undertaking made in File No.
70-9849.
The requirements of Rule 53(c) are currently satisfied by National
Grid and will continue to be satisfied post-Merger. First, as provided in Rule
53(c)(1), the issuance and sale of securities by National Grid to finance FUCO
investments "will not have a substantial adverse impact upon the financial
integrity of the registered holding company system." National Grid's
capitalization is currently sound and should continue to be sound post-Merger.
Its ratio of 31.7% equity to total capitalization is in compliance with the
conditions set forth in the January 2002 Order. Post-Merger, the pro forma
capitalization table indicates that Grid Transco will have a very conservative
40.4% ratio of equity to total capitalization. National Grid's consolidated
capitalization (on a U.S. GAAP basis) over the recent past is shown in the table
below.
------------------------- --------------------------- ----------------------- ------------------------------
National Grid March 31, 2000 March 31, 2001 March 31, 2002
As at:
------------------------- --------------------------- ----------------------- ------------------------------
($ mm) (%) ($ mm) (%) ($ mm) (%)
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
Debt, preferred stock 6,120 62% 5,955 59% 11,502 68.3%
and minority interests
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
Common stock equity 3,753 38% 4,146 41% 5,338 31.7%
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
Total 9,873 100% 10,101 100% 16,840 100%
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
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:
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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)
----------------------------------- ---------------- ----------------- -------------- -----------------
-------------------------------------------------------------------------------------------------------
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)/32 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.
The growth in National Grid's consolidated common stock equity is
shown below:
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32 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.
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--------------------- --------------- --------------- ----------------- ----------- ----------- --------------
As at: Mar. 31, 1997 Mar. 31, 1998 Mar. 31, 1999 Mar. 31, Mar. 31, Mar. 31,
2000 2001 2002
--------------------- --------------- --------------- ----------------- ----------- ----------- --------------
$mm $mm $mm $mm $mm $mm
--------------------- --------------- --------------- ----------------- ----------- ----------- --------------
Capital stock 283 286 287 280 248 252
--------------------- --------------- --------------- ----------------- ----------- ----------- --------------
Capital stock 304 384 407 440 393 2,276
premium
--------------------- --------------- --------------- ----------------- ----------- ----------- --------------
Treasury stock 0 (17) (18) (26) (14) (65)
--------------------- --------------- --------------- ----------------- ----------- ----------- -------------
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)%/33 136% 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.
National Grid's successful operation of a national, high-voltage
transmission system indicates that the firm has sound management skills and
expertise in the utility industry, particularly as it relates to foreign utility
operations. To ensure continued success in its new ventures, National Grid
subjects all project proposals to stringent reviews. National Grid's proposed
Merger with Lattice has also been carefully reviewed. 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
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33 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.
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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 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.
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:
- the political and economic stability of the particular country;
- the host government's commitment to private enterprise;
- the legal and regulatory framework for private investment in utility
facilities;
- local business support for long-term investment of private capital;
- the economic viability of the project;
- the environmental impact; and
- 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:
- 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.
- 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.
- If an acquisition is contemplated, an Investment Proposal Paper ("IPP")
seeking approval for a bid would be prepared. This paper would cover the
investment opportunity, a financial appraisal, existing strategy, the
transaction, bid details, and planned future actions. The IPP would be used to
brief the Grid Transco board to seek their approval of the acquisition.
Once development of a project is undertaken, milestones 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:
- undertake due diligence;
- prepare valuation;
- prepare business plan;
- obtain internal approvals;
- obtain acquisition financing;
- develop corporate and tax structure;
- prepare corporate communications plan;
- prepare and submit bid/offer; and
- 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 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 Group
General Counsel 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.
National Grid's telecommunications investments have experienced
difficulty over the past fiscal year. Although Intelig, a telecommunications
provider in Brazil, continued to meet overall revenue and EBITDA targets and its
performance satisfied the pre-conditions to completing permanent vendor
financing, the vendors did not provide the permanent financing facility. As a
consequence, the shareholders of Intelig (National Grid, Sprint, and France
Telecom) have appointed advisors to seek new strategic investors. In the
meantime, Intelig continues to be funded by interim vendor financing, which has
been rolled over, together with limited additional funds from shareholders and
vendors. Silica Networks, a carriers' carrier operating primarily in Argentina,
also was affected by the general telecommunications market downturn and the
severe economic difficulties in that country. As a result, National Grid and the
other shareholders have cut costs, suspended further investment and are seeking
a purchaser for the business. ManquehueNet, National Grid's joint venture with
Williams Communications and MetroGas in Santiago, Chile, has been impacted by
the local economic downturn. Here also, strong management action is being taken
to reduce costs.
Given these difficulties, National Grid has adopted a conservative
approach with the full write down and provision for all expected liabilities
totaling (pound)290 million ($420 million). In addition, as noted earlier,
National Grid has written down all of the (pound)350 million ($506 million)
carrying value of its Energis stake and its stake in Energis Polska. These write
downs are reflected in National Grid's financial statements for the period
ending March 31, 2002.
National Grid continues to see telecommunications as a complement to
its electricity businesses but, as the proposed Merger demonstrates, National
Grid will focus on opportunities which are more closely related to its core
infrastructure assets and capabilities. In contrast to the telecommunications
investments, all of National Grid's electricity businesses have been performing
in line with expectations.
Statement of Financial Accounting Standards No.121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,
requires an evaluation of the impairment of all assets of a utility that a
company plans to write down and take as a loss. 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.
Consequently, the conditions of Rule 53(c)(1) are satisfied.
Under Rule 53(c)(2) National Grid must demonstrate that the proposed
use of financing proceeds to invest in FUCOs "will not have an adverse impact on
any 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 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) In connection with the increased FUCO investment level authorized
in the January 2002 Order, the Commission obtained statements from the 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. If the Commission deems that new certifications are required, it should
solicit the NYPSC, RIPUC, MDTE, VPSB and the NHPUC.
(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.
Consequently, the conditions of Rule 53(c)(2) are satisfied."
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Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, as amended, the applicants named herein have duly caused this statement
to be signed on their behalf by the undersigned thereunto duly authorized.
NATIONAL GRID USA
By /s/ Kirk L. Ramsauer
-----------------------------------------------
Name: Kirk L. Ramsauer
Title: Deputy General Counsel
NATIONAL GRID GROUP PLC
By /s/ Kirk L. Ramsauer
-----------------------------------------------
Name: Kirk L. Ramsauer
Title: Deputy General Counsel
VERMONT YANKEE NUCLEAR POWER
CORPORATION
By /s/ Bruce W. Wiggett
-----------------------------------------------
Name: Bruce W. Wiggett
Title: Sr. Vice President of Finance & Admin.
Date: July 29, 2002
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