SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
The Connecticut Light and Power Company Public Service Company of
CL&P Receivables Corporation New Hampshire
NU Enterprises, Inc. Properties, Inc.
Northeast Generation Services Company North Atlantic Energy
Woods Network Services, Inc. Corporation
NGS Mechanical, Inc. North Atlantic Energy
E.S. Boulos Company Services Corp.
Woods Electrical Co., Inc. Energy Park
Northeast Generation Company 780 North Commercial Street
Select Energy, Inc. Manchester, NH 03101
Select Energy New York, Inc.
The Rocky River Realty Company Select Energy Services, Inc.
Select Energy Contracting, Inc. Reeds Ferry Supply Co., Inc.
The Quinnehtuk Company HEC/Tobyhanna Energy Project,
Charter Oak Energy, Inc. Inc.
Mode 1 Communications, Inc. 24 Prime Parkway
Northeast Utilities Service Company Natick, MA 01760
Yankee Energy System, Inc.
Yankee Gas Services Company Northeast Utilities
Yankee Energy Financial Services Company Western Massachusetts
Northeast Nuclear Energy Company Electric Company
NorConn Properties, Inc. 174 Brush Hill Avenue
Yankee Energy Services Company West Springfield, MA
107 Selden Street 01090-0010
Berlin, CT 06037
Holyoke Power and Electric
Company
One Canal Street
Holyoke, MA 01040
(Name of companies filing this statement and addresses of principal
executive offices)
NORTHEAST UTILITIES
(Name of top registered holding company)
Gregory B. Butler, Esq.
Senior Vice President, Secretary and General Counsel
Northeast Utilities Service Company
P.O. Box 270
Hartford, CT 06141-0270
(Name and address of agent for service)
The Commission is requested to mail signed copies of all
orders, notices and communications to
Jeffrey C. Miller David R. McHale
Assistant General Counsel Vice President and Treasurer
Northeast Utilities Northeast Utilities
Service Company Service Company
P.O. Box 270 P.O. Box 270
Hartford, CT 06141-0270 Hartford, CT 06141-0270
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
1. Northeast Utilities ("NU"), a public utility holding
company registered under the Public Utility Holding Company
Act of 1935, as amended (the "Act") and The Connecticut
Light and Power Company and its subsidiary CL&P Receivables
Corporation, Western Massachusetts Electric Company, Public
Service Company of New Hampshire and it subsidiary
Properties, Inc., Holyoke Water Power Company and its
subsidiary Holyoke Power and Electric Company, North
Atlantic Energy Corporation, North Atlantic Energy Service
Corporation, Northeast Nuclear Energy Company, The Rocky
River Realty Company, The Quinnehtuk Company, Charter Oak
Energy, Inc., and Northeast Utilities Service Company, each
a wholly-owned subsidiary of NU, Yankee Energy System, Inc.
("Yankee Energy"), a wholly-owned public utility holding
company subsidiary of NU and its wholly-owned subsidiaries,
Yankee Gas Services Company, Yankee Energy Financial
Services Company, Yankee Energy Services Company and NorConn
Properties, Inc.; and NU Enterprises, Inc., a wholly owned
nonutility holding company subsidiary of NU, and its direct
and indirect wholly-owned subsidiaries, Northeast Generation
Company, Northeast Generation Services Company and its
subsidiaries, NGS Mechanical, Inc., E.S. Boulos Company, and
Woods Electrical Company, Inc., Select Energy, Inc. and its
subsidiary Select Energy New York, Inc., Select Energy
Services, Inc., and its subsidiaries Reeds Ferry Supply,
Co., Inc., HEC/Tobyhanna Energy Project, Inc. and Select
Energy Contracting, Inc., Mode 1 Communications, Inc. and
Woods Network Services, Inc., (collectively, the "Subsidiaries"
and collectively with NU, the "Applicants") submit this
application/declaration (the "Application") pursuant to Section 12
of the Act and Rule 45 thereunder with respect to the amendment of
the NU System Tax Allocation Agreement such that NU will retain the
benefit (in the form of the reduction in consolidated tax) that is
attributable to tax losses incurred by it in connection with
the Acquisition Debt (as defined herein), rather than
reallocate such tax benefit to its Subsidiaries.
2. On March 1, 2000, NU acquired Yankee Energy System,
Inc. ("YES") and issued $263 million of debt ("YES Debt") to
finance a portion of the acquisition cost. This debt was
refinanced several times and is now represented by Senior
Notes, due 2012 with a coupon rate of 7.25% per annum. See
Holding Company Act Rel. No. 35-27127 (January 31, 2000).
3. For purposes of this Application, "Acquisition Debt"
means the YES Debt and indebtedness that may be incurred by
NU to refinance such indebtedness.
4. The Applicants request that the Commission authorize
NU and its Subsidiaries to amend the Tax Allocation
Agreement as set forth in the Second Amended and Restated
Tax Allocation Agreement that is filed herewith as Exhibit B-
1 (the "Amended Tax Allocation Agreement"). Under the
proposed Amended Tax Allocation Agreement, the consolidated
tax would generally be allocated among the members of the
group in proportion to the separate return tax of each
member, provided that the tax apportioned to any subsidiary
company of NU will not exceed the "separate return tax" of
such subsidiary with NU allocating the benefits of its own
losses generally to its subsidiaries. This is the
method of allocation required under Rule 45(c)(2)(ii).
5. The Amended Tax Allocation Agreement further provides
that NU will retain the benefit attributable to tax losses
it incurs in connection with the Acquisition Debt, rather
than reallocate such benefit to its Subsidiaries. In this
respect, the proposed Amended Tax Allocation Agreement does
not comply with all of the requirements of Rule 45(c) and
requires Commission approval. The proposed Amended Tax
Allocation Agreement will therefore have the effect of
assigning the tax benefit associated with the interest
expense on the Acquisition Debt to the entity that is
legally obligated for its payment - NU. At the same time, in
accordance with Rule 45(c)(2), the portion of the
consolidated tax allocated to any of the Subsidiaries will
not exceed the "separate return tax" of such subsidiary (the
"separate return limitation"). Thus, the proposed Amended
Tax Allocation Agreement will not have the effect of
shifting a larger portion of the group's tax liability to
any member of the group than such company would otherwise
pay on a separate return basis. Exhibit K-1 illustrates the
difference between the Rule 45(c) method and the proposed
method in the amounts of tax that would have been allocated
to the members of the NU System at December 31, 2002.
6. A legal analysis of the Amended Tax Allocation
Agreement, in light of the policies and purposes of Sections
12 and 13 of the Act and Rule 45, is contained in Item 3,
below.
ITEM 2. FEES, COMMISSION AND EXPENSE.
The fees, commissions and expenses paid or incurred or
to be incurred in connection with this Application are
estimated at not more than $15,000.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
The Amended Tax Allocation Agreement in General
1. Tax allocation agreements between a registered holding
company and its subsidiaries must comply with Section 12 of
the Act and Rule 45 thereunder. Rule 45(a) generally
prohibits any registered holding company or subsidiary
company from, directly or indirectly, lending or in any
manner extending its credit to or indemnifying, or making
any donation or capital contribution to, any company in the
same holding company system, except pursuant to a Commission
order. Approval under Rule 45(a) is not required for the
filing of a consolidated tax return pursuant to a tax
allocation agreement between eligible associate companies in
a registered holding company system that complies with the
terms of Rule 45(c). However, if a tax allocation agreement
does not comply in all respects with the provisions of Rule
45(c), it may nonetheless be approved by the Commission
under Section 12(b) and Rule 45(a).
2. Rule 45(c)(2) provides that consolidated tax may be
apportioned among the members of a group in proportion to
each member's corporate taxable income or separate return
tax, but, in either case, the amount of the tax apportioned
to any subsidiary company may not exceed the separate return
tax of such subsidiary. In other words, the amount of
consolidated tax that is apportioned to any subsidiary
company in a consolidated group may not exceed the amount of
tax that such subsidiary company would have paid if such tax
were computed as though such subsidiary company were not a
member of a consolidated group.
3. Rule 45(c)(4) provides that a tax allocation agreement
may exclude companies not having positive corporate taxable
income for the year (i.e., loss companies) from a current
allocation of the benefit of their losses, provided that the
agreement gives the loss companies carryover rights that can
be used in future years to reduce their proportionate share
of consolidated tax. Alternatively, under Rule 45(c)(5), the
so-called "current payment" method, a tax allocation
agreement may require that the members of the group with a
positive allocation pay the amount so allocated and that
members of a consolidated group with a negative allocation
receive current payment of their corporate tax credits.
Specifically, Rule 45(c)(5) provides:
The agreement may, instead of excluding members
as provided in paragraph (c)(4), include all
members of the group in the tax allocation,
recognizing negative corporate taxable income or
a negative corporate tax, according to the
allocation method chosen. An agreement under
this paragraph shall provide that those
associate companies with a positive allocation
will pay the amount allocated and those
subsidiary companies with a negative allocation
will receive current payment of their corporate
tax credits. The agreement shall provide a
method for apportioning such payments, and for
carrying over uncompensated benefits, if the
consolidated loss is too large to be used in
full. Such method may assign priorities to
specified kinds of benefits.
4. Thus, under Rule 45(c)(5), only "subsidiary companies,"
as opposed to "associate companies" (which includes the holding company
in a holding company system, as well as all subsidiary companies), are
entitled to be paid for any negative allocation (i.e., losses or
credits). The proposed Amended Tax Allocation Agreement adopts the
"current payment" method, but provides for NU to retain the tax savings
attributable to the interest expense on the Acquisition Debt. The
mechanism by which this is achieved is to include NU among the members
of the consolidated group that are entitled to receive payments (i.e.,
negative allocations of tax) for their losses, but then limit the
amount which members other than NU can receive to the
portion of NU's loss that is not attributable to the
interest expense on the Acquisition Debt.
5. In connection with the 1981 amendments to Rule 45, the Commission
explained that the distinction between "associate companies," on the
one hand, and "subsidiary companies," on the other, represented a policy
decision to preclude the holding company from sharing in the
consolidated return savings. The Commission noted that "[e]xploitation
of utility companies by holding companies through asserted misallocation
of consolidated tax return benefits was among the abuses examined in the
investigations underlying the enactment of the Act." It should be
noted, however, that the result in Rule 45(c)(5) is not dictated by the
statute and, as the Commission has recognized, there is discretion on
the part of the agency to approve tax allocation agreements that do not,
by their terms, comply with Rule 45(c) - so long as the policies and
provisions of the Act are otherwise satisfied. Thus, where NU is
seeking only to retain the tax benefit attributable to the interest
expense on the Acquisition Debt for which no other company in the NU
system has any liability, the proposed arrangement will not give rise
to the types of problems (e.g., upstream loans) that the Act was
intended to address.
6. Under Rule 45(c)(5), the tax benefit associated with the losses
of a holding company must in effect be reallocated to its subsidiary
companies, thereby reducing the allocated share of the consolidated tax
liability that those subsidiaries would otherwise have if their tax were
determined on a separate return basis. In the typical case, this
reallocation of the holding company's share of the tax savings would not
produce a significant windfall for its subsidiaries, because holding
company expenses tend to be relatively small, consisting mainly of
allocated corporate overhead and salaries. The largest item of holding
company expense - interest on the debt that a holding company incurs
in order to supply capital to its subsidiaries - is typically offset by
the interest income it receives from subsidiaries under the terms of
mirror-image downstream loans.
7. In the instant situation, however, the Acquisition Debt was not
incurred to fund investments in NU's Subsidiaries, but rather to acquire
the equity of Yankee Energy. Such debt represents indebtedness of NU,
issued based on its creditworthiness and is non-recourse to the
Subsidiaries By incurring the Acquisition Debt, NU is creating tax
deductions that are non-recourse to its Subsidiaries. As a result,
NU should retain the benefits of those tax credits.. Importantly, NU
could not, without the approval of the commissions having jurisdiction
over rates of its utility Subsidiaries, recover in rates of such
utility Subsidiaries any costs, including the interest on the
Acquisition Debt, associated with the acquisition of Yankee Energy.
Moreover, the Acquisition Debt is and will remain unsecured. Thus,
the lenders will not have any call companies,"n the assets of NU's
Subsidiaries or any security interest in the common stock of the
Subsidiaries that is held by NU.
8. Although NU's Subsidiaries do not have any legal obligation for
such debt, NU's ability to pay interest on, as well as to pay common
stock dividends, is largely dependent upon its receipt of dividends
from its Subsidiaries. Currently, NU projects that its dividends will
be paid largely from current and retained earnings of the Utility
Subsidiaries, as allowed by Rule 46.
9. Finally, the amount of tax allocated to the utility Subsidiaries
under the Amended Tax Allocation Agreement will remain subject to the
separate return limitation and no company will pay more than the amount
it would pay as determined on a stand-alone basis.
The Proposed Tax Allocation Method Is Consistent With The Policies And
Purposes Of The Act
10. The proposed Amended Tax Allocation Agreement is consistent with
the policies and purposes of Section 12 of the Act. Section 12 neither
prohibits a registered holding company from retaining the benefit of
the tax attributes that it generates nor requires it to reallocate those
tax attributes to its subsidiaries. Section 12 merely prohibits upstream
loans or extensions of credit to a registered holding company,
and requires approval, by rule or by order, for any loan by a holding
company, or any subsidiary thereof, to a subsidiary company.
11. Moreover, the policy underlying Rule 45(c)(5), as articulated by
the Commission in its release proposing Rule 45(c), appears to have
little or nothing to do with the circumstances presented in this case.
In its proposing release, the Commission noted that the "[e]xploitation
of utility companies by holding companies through asserted misallocation
of consolidated tax return benefits" was among the abuses that led to the
passage of the Act. The Commission then explained:
The corporate relationships required by the Act
assure that the deductible corporate expenses of
the holding company itself will always create a
consolidated tax saving, since Section 13(a) of the
Act precludes such expenses being passed on to the
subsidiaries, through service charge or contract,
so as to transform them into corporate deductions
of the subsidiaries. In light of the legislative
history referred to, an expense reimbursement of
the holding company, in the guise of a tax
allocation, would seem incongruous with Section
13(a). The exclusion in our earlier rule of the
holding company from sharing in consolidated return
savings was intentional and will continue. These
considerations do not apply to other companies in
the group that incur losses.
12. As this passage seems to suggest, the prohibition in Rule 45(c)
of a registered holding company sharing in the consolidated tax savings
appears to have been founded chiefly on Section 13(a) of the Act, which
prohibits a registered holding company from entering into or performing
any agreement for the sale of goods or provision of services or
construction for a charge to any subsidiary company. In this case,
however, NU is not seeking to recover its own corporate costs from its
Subsidiaries, "in the guise of a tax allocation," by transforming them
into deductible expenses of its Subsidiaries. Moreover, the Subsidiaries
will not be reimbursing NU for the interest expense on the Acquisition
Debt through the tax allocation mechanism. Instead, the "benefit"
obtained by NU under the Amended Tax Allocation Agreement is
attributable entirely to the lower income tax liability of the
consolidated group that is attributable to NU's interest expense.
13. In fact, the policies and purposes of Section 13(a), which was
intended only to prohibit holding companies from "exacting tribute" from
subsidiaries through excessive and often illusory service charges for
management services, have no bearing on how NU and its Subsidiaries
choose to allocate the tax savings associated with NU's interest
expense. The interest expense on the Acquisition Debt represents a
true cost of capital that NU has incurred for purposes unrelated to
the operations of its Subsidiaries. It is important to consider that,
if NU were to incur interest on debt the proceeds of which were used
to fund loans to its Subsidiaries, the Act and the Commission's rules
would allow NU to recover its cost of funds through interest charges to
its Subsidiaries, and the policies and purposes of Section 13(a) would
not come into play. Where, as in this case, NU's Subsidiaries have not
assumed any legal obligation for the Acquisition Debt, it would not be
detrimental to the Subsidiaries or to consumers if NU were to retain the
benefit associated with its interest expense. Moreover, if NU were to
allocate the tax savings attributable to the interest expense on the
Acquisition Debt to those members of the group with a positive
allocation, as dictated by Rule 45(c)(5), the net effect would be the
same as if NU made a capital contribution to those Subsidiaries.
14. In National Grid Group plc, HCAR No. 27154 (March 15, 2000), the
Commission authorized National Grid Group and its subsidiaries to enter
into a tax allocation agreement under which the tax benefit of the
interest expense on acquisition debt would be allocated to the U.S.
sub-holding company of National Grid Group that had incurred the debt.
With one exception, the circumstances in that case are identical to
those presented here. In National Grid, a U.S. sub-holding company
of National Grid Group incurred approximately $3.2 billion of bank debt
in order to finance the acquisition of New England Electric System
("NEES"). National Grid Group explained that, without the requested
relief, it would suffer an increased U.K. tax liability since, under
U.K. tax law, there is no system of consolidated tax groups similar to
that under U.S. law. The applicant further explained that, under U.K.
law, a loss member of a corporate group may "surrender" the loss to
another member and thereby reduce the receiving company's taxable
profits. National Grid Group stated that payment for the loss was
necessary for two reasons: first, because under U.K. law, an agreement
requiring an uncompensated surrender of tax benefits could possibly be
voided under creditor protection law, and second, to assure that
National Grid Group would receive appropriate tax credits under U.K.
tax laws for the U.S. taxes paid by the U.S. sub-holding company.
In approving the proposed tax allocation agreement, the Commission
observed:
It does not appear that approval of the Tax
Allocation Agreement would lead to the abuses
that section 12 is intended to prevent, and
therefore approval will not be detrimental to the
NEES Group and its consumers. The 'separate
return' limitation will assure that the NEES'
Utility Subsidiaries tax liability will not be
higher than it otherwise would have been. In
addition, the Financing Applicants note that the
conditions applicable to our authorization with
respect to dividend payments will provide
additional protections. Consequently, the Tax
Allocation Agreement does not provide a means for
a foreign parent holding company to 'milk' the
U.S.-organized companies.
In addition, because the NEES Group has no
obligation with respect to the Merger-Related
Debt and the debt does not affect the NEES
Group's financial position or credit, it is not
inappropriate to exclude these companies from the
benefits of the tax consequences arising out of
the debt. Accordingly, we approve the use of the
Tax Allocation Agreement. (footnote omitted).
15. NU's current circumstances do not involve any interplay
between foreign and U.S. tax laws, and approval or disapproval
of the proposed Amended Tax Allocation Agreement will not have
any effect on the overall amount of consolidated income tax that NU
will pay. Nevertheless, it is clear that the Commission's approval of
the tax allocation agreement in National Grid was based almost
entirely upon its determination that the agreement would not
lead to the abuses that Section 12 was intended to prevent;
that the NEES utility subsidiaries' allocated share of the
consolidated tax would be no higher than it would otherwise
be on a separate return basis; that the U.S. subsidiaries
had no obligation on the merger-related debt; and that the
merger-related debt did not affect the NEES subsidiaries'
financial position or credit. The fact that the proposed tax
allocation agreement would reduce National Grid Group's
overall U.S. and U.K. tax liability and enable National Grid
Group to avoid other potential legal problems under U.K. law
(associated with "surrendering" of tax attributes by any
subsidiary) appears to have been a subordinate
consideration.
16. The Commission has also authorized other registered public
utility holding companies to enter into tax allocation agreements which
have the effect of retaining the tax losses incurred in connection with
acquisition debt, similar to the request herein. See, Pepco Holdings
Inc., Holding Co. Act Release Nos. 35-27553, (July 24, 2002), Progress
Energy, Inc., Holding Co. Act Release No. 35-27522 (April 18, 2002);
Energy East Corporation, Holding Co. Act Release No. 35-27643 (January
28, 2003); NiSource Inc., Holding Co. Act Release No. 35-27567
(September 12, 2002) (collectively, the "Tax Allocation Orders").
17. NU's circumstances are substantially similar to those presented
in National Grid and the other Tax Allocation Orders. The proposed
Amended Tax Allocation Agreement will not lead to the kinds of abuses
Section 12 was intended to prevent (e.g., prohibition on upstream loans)
and is not a device for transferring NU's expenses to its Subsidiaries.
NU's Subsidiaries' allocated share of the consolidated return liability
will be no greater than it would be if calculated on a separate return
basis, as required by Rule 45(c). The Utility Subsidiaries are not
obligated, directly or indirectly, on the Acquisition Debt and the
Amended Tax Allocation Agreement will not have the effect of shifting
NU's tax losses incurred by it in connection with the Acquisition Debt
to the Utility Subsidiaries. Finally, the Acquisition Debt has not
affected the Utility Subsidiaries' financial position or credit, as
evidenced by their credit ratings, their projected capitalization ratios
and cash flow.
ITEM 4. REGULATORY APPROVAL.
[CT DPUC]
1. Public Service Company of New Hampshire must file a copy of the
Amended Tax Allocation Agreement with the New Hampshire Public Utilities
Commission, for notice purposes, within 10 days after the date on which
it is executed, and Western Massachusetts Electric Company must file a
copy of the Amended Tax Allocation Agreement, for notice purposes, with
the Massachusetts Department of Telecommunications and Energy. Either
commission could, sua sponte, institute a proceeding and hold hearings
on the Amended Tax Allocation Agreement.
2. Except as stated above, no other state commission, and no federal
commission, other than this Commission, has jurisdiction over the
Amended Tax Allocation Agreement.
ITEM 5. PROCEDURE.
1. The Applicant hereby requests that the Commission publish a notice
under Rule 23 with respect to the filing of this Application as soon as
practicable and that the Commission's order be issued as soon as possible.
A form of notice suitable for publication in the Federal Register is
attached hereto as Exhibit H. The Applicant respectfully requests the
Commission's approval, pursuant to this Application, of all transactions
described herein, whether under the sections of the Act and Rules
thereunder enumerated in Item 3 or otherwise. It is further requested
that the Commission issue an order authorizing the transactions proposed
herein at the earliest practicable date. Additionally, the Applicant
(i) requests that there not be any recommended decision by a hearing
officer or by any responsible officer of the Commission, (ii) consents
to the Office of Public Utility Regulation within the Division of
Investment Management assisting in the preparation of the Commission's
decision, and (iii) waives the 30-day waiting period between the
issuance of the Commission's order and the date on which it is to
become effective, since it is desired that the Commission's order, when
issued, become effective immediately.
Other Matters
1. Except in accordance with the Act, neither NU nor any subsidiary
thereof (a) has acquired an ownership interest in an EWG or a FUCO, as
defined in Sections 32 and 33 of the Act, or (b) now is or as a
consequence of the transactions proposed herein will become a party to,
or has or will as a consequence of the transactions proposed herein have
a right under, a service, sales, or construction contract with an EWG or
a FUCO. None of the proceeds from the transactions proposed herein will
be used by NU and its subsidiaries to acquire any securities of, or any
interest in, an EWG or a FUCO.
2. NU currently meets all of the conditions of Rule 53(a), except for
clause (1). At September 30, 2003, NU's "aggregate investment," as
defined in Rule 53(a)(1), in EWGs and FUCOs was approximately $448.2
million, or approximately 55.8% of NU's average "consolidated retained
earnings," also as defined in Rule 53(a)(1), for the four quarters ended
September 30, 2003 ($802.7 million). With respect to Rule 53(a)(1),
however, the Commission has determined that NU's financing of its
investment in Northeast Generation Company ("NGC"), NU's only current
EWG or FUCO, in an amount not to exceed $481 million or 83% of its
"average consolidated retained earnings" would not have either of the
adverse effects set forth in Rule 53(c). See Northeast Utilities,
Holding Co. Act Release No. 27148, dated March 7, 2000 (the "Rule 53(c)
Order"). NU continues to assert that its EWG investment in NGC will not
adversely affect the System.
3. In addition, NU and its subsidiaries are in compliance and will
continue to comply with the other provisions of Rule 53(a) and (b),
as demonstrated by the following determinations:
(i) NGC maintains books and records, and prepares financial
statements, in accordance with Rule 53(a)(2). Furthermore, NU has
undertaken to provide the Commission access to such books and records
and financial statements, as it may request;
(ii) No employees of NU's public utility subsidiaries have rendered
services to NGC;
(iii) NU has submitted (a) a copy of each Form U-1 and Rule 24
certificate that has been filed with the Commission under Rule 53 and
(b) a copy of Item 9 of the Form U5S and Exhibits G and H thereof to
each state regulator having jurisdiction over the retail rates of NU's
public utility subsidiaries;
(iv) Neither NU nor any subsidiary has been the subject of a
bankruptcy or similar proceeding unless a plan of reorganization has
been confirmed in such proceeding;
(v) NU's average CREs for the four most recent quarterly periods
have not decreased by 10% or more from the average for the previous
four quarterly periods; and
(vi) In the previous fiscal year, NU did not report operating
losses attributable to its investment in EWGs/FUCOs exceeding 3 percent
of NU's consolidated retained earnings.
4. The proposed transactions, considered in conjunction with the
effect of the capitalization and earnings of NU's EWGs and FUCOs, would
not have a material adverse effect on the financial integrity of the NU
system, or an adverse impact on NU's public-utility subsidiaries, their
customers, or the ability of State commissions to protect such
public-utility customers. The Rule 53(c) Order was predicated, in part,
upon an assessment of NU's overall financial condition which took into
account, among other factors, NU's consolidated capitalization ratio
and its retained earnings, both of which have improved since the date
of the order.
5. NU's EWG investment (it has no FUCO investment) has been profitable
for all quarterly periods ending June 30, 2000 through September 30,
2003 (NGC was acquired in March 2000). As of December 31, 1999, the most
recent period for which financial statement information was evaluated
in the Rule 53(c) Order, NU's consolidated capitalization consisted
of 35.3% common equity and 64.7% debt (including long and short-term
debt, preferred stock, capital leases and guarantees).
6. As of June 30, 2000, the end of the first quarter after the issuance
of the Rule 53(c) Order, the consolidated capitalization ratios of NU,
with consolidated debt including all short-term debt and non-recourse
debt of the EWG, were as follows:
As of June 30, 2000
(thousands
of dollars) %
Common shareholders' equity 2,365,854 36.9
Preferred stock 277,700 4.3
Long-term and short-term debt 3,768,353 58.8
Total 6,411,907 100.0
7. The consolidated capitalization ratios of NU as of September 30,
2003, with consolidated debt including all short-term debt and
non-recourse debt of the EWG, were as follows:
As of June 30, 2000
(thousands
of dollars) %
Common shareholders' equity 2,254,292 33.4
Preferred stock 116,200 1.7
Long-term and short-term debt 2,604,509 38.6
Rate Reduction Bonds 1,772,637 26.3
Total 6,747,678 100.0%
If Rate Reduction Bonds are not included, the consolidated
capitalization ratio of NU as of September 30, 2003 is as follows:
As of September 30, 2003
(thousands
of dollars) %
Common shareholders' equity 2,254,292 45.3
Preferred Stock 116,200 2.4
Long-term and short-term debt 2,604,509 52.3
Total 4,975,001 100.0
8. As of June 30, 2000, the end of the first quarter after the
issuance of the Rule 53(c) Order, NU's consolidated retained earnings
were $593.6 million. At September 30, 2003, NU's consolidated retained
earnings were approximately $838 million. NGC has made a positive
contribution to earnings by contributing $141.6 million in revenues
in the 12-month period ending September 30, 2003 and net income of
$38.6 million for the same period. Although since the date of the
Rule 53(c) Order, the common equity ratio of NU on a consolidated
capitalization basis has decreased, it is mainly as a result of the
issuance of the Rate Reduction Bonds and still it remains at a
financially healthy level, above the 30% benchmark required by the
Commission. If Rate Reduction Bonds are excluded from the calculation
of the common equity ratio, NU's consolidated common equity ratio
has increased since the date of the Rule 53(c) Order. Accordingly,
NU's investment in its EWG has not had an adverse impact on NU's
financial integrity.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
A. EXHIBITS.
B. Form of Amended Tax Allocation Agreement.
K-1 Comparison of Allocation of Federal Income Tax
Liability under Proposed Amended Tax Allocation
Agreement and Rule 45(c).
B. FINANCIAL STATEMENTS.
The impact of the amended Tax Allocation Agreement is set forth
in Exhibit K-1
SIGNATURES
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, each of the undersigned companies has duly caused
this Application to be signed on its behalf by the undersigned thereunto
duly authorized.
December 8, 2003
Northeast Utilities
Northeast Utilities Service Company
The Connecticut Light and Power Company
CL&P Receivables, Inc.
Western Massachusetts Electric Company
Public Service Company of New Hampshire
Properties, Inc.
North Atlantic Energy Corporation
North Atlantic Energy Services Corporation
Holyoke Water Power Company
Holyoke Power and Electric Company
Charter Oak Energy Company
Northeast Nuclear Energy Company
Yankee Energy System, Inc.
Yankee Gas Services Company
Yankee Energy Financial Services Company
Yankee Energy Services Company
NorConn Properties, Inc.
The Rocky River Realty Company
The Quinnehtuk Company
NU Enterprises, Inc.
Northeast Generation Company
Northeast Generation Services Company
Woods Electrical Co., Inc.
Woods Network Services, Inc.
E.S. Boulos Company
NGS Mechanical, Inc.
Select Energy, Inc.
Select Energy New York, Inc.
Mode 1 Communications, Inc.
Select Energy Services, Inc.
HEC/Tobyhanna Energy Project, Inc.
Reeds Ferry Supply Co, Inc.
Select Energy Contracting, Inc.
By: /s/ Randy A. Shoop
Name: Randy A. Shoop
Title: Assistant Treasurer-Finance
Northeast Utilities Service Company as Agent for
all of the above-named Applicants.
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Under Rule 45(c), the "separate return tax" is defined to mean
"the tax on the corporate taxable income of an associate company computed
as though such company were not a member of a consolidated group."
See The National Grid Group plc, HCAR No. 27154 (Mar. 15, 2000).
See Allocation of Consolidated Federal Income Tax Liability by
Registered Holding Companies and their Subsidiaries, Holding Co. Act
Release No. 21767 (Oct. 29, 1980) citing Sen. Doc. 92, Part 72A, 70th
Congress, 1st Sess. at pp. 477-482.
See Rule 52, which allows a holding company to charge its
effective cost of money on downstream loans to subsidiaries.
Section 12(a) of the Act provides that "[I]t shall be unlawful
for any registered holding company, by use of the mails or any means of
instrumentality of interstate commerce, or otherwise, directly or
indirectly, to borrow, or to receive any extension of credit or
indemnity, from any public-utility company in the same holding-company
system or from any subsidiary company of such holding company . . .."
Section 12(b) of the Act provides that "[i]t shall be unlawful
for any registered holding company or subsidiary company thereof
.. . . directly or indirectly, to lend or in any manner extend its credit
to or indemnify any company in the same holding company system in
contravention of such rules and regulations or orders as the Commission
deems necessary or appropriate . . .the Commission promulgated Rule
45(a) pursuant to Section 12(b) of the Act.
See Holding Co. Act Release No. 21767 (Oct. 29, 1980), citing
Senate Doc. 92, Part 72A, 70th Congress, 1st Sess., 1930, pp. 477 - 482.
It should be noted that the earlier rule - Rule 45(b)(6) - did
not by its terms restrict the holding company from retaining the benefit
of the tax losses it generated. Rather, as the Commission explained in
its release proposing Rule 45(c), Rule 45(b)(6) had been interpreted to
require the sharing of tax savings and liabilities exclusively among
the members of the group with actual separate return tax liability or
positive income. Thus, all loss companies, including but not limited
to the parent holding company, had been excluded from sharing in
consolidated tax benefits, by interpretation, under Rule 45(b)(6).
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