File No. 70-______
United States Securities and Exchange Commission
Washington, D.C. 20549
----------------------------------------
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)
----------------------------------------
National Grid Group plc
(Name of top registered holding company)
----------------------------------------
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
TABLE OF CONTENTS
Item 1. Description of the Proposed Transaction...............................3
A. Introduction..........................................................3
B. The Companies.........................................................5
1. National Grid Group plc............................................5
2. Lattice Group plc.................................................12
C. The Merger...........................................................18
D. Request for Financing Authorization..................................24
1. National Grid's Current Financing Authorization...................24
2. Proposed New Financing Authorization..............................26
3. The FUCO Financing Request In Particular..........................27
Item 2. Fees, Commissions and Expenses.......................................36
Item 3. Applicable Statutory Provisions......................................36
Item 4. Regulatory Approvals.................................................37
A. State and Federal Regulation...........................................37
B. European Regulation....................................................37
Item 5. Procedure............................................................37
Item 6. Exhibits and Financial Statements....................................38
Item 7. Information as to Environmental Effects..............................40
2
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. Lattice will certify itself as a foreign utility company ("FUCO")
under Section 33 of the 1935 Act prior to the completion of the Merger.
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 September 30, 2001, National Grid had an
aggregate investment, as defined in Rule 53, in FUCOs of approximately $3.092
billion. National Grid's current unused FUCO investment authority is $2.314
billion.
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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.
3
The Merger will result in the issuance of Grid Transco shares of
approximately $8.8 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 $11.9 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.
----------------------------------------------------------------------------
Proposed FUCO Investment Financing Authorization
$ (billions)
----------------------------------------------------------------------------
National Grid's FUCO investment as of September 30, 3.092
2001
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Unused authorization 2.314
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Authorized in January 2002 Order 5.406
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Authorization necessary to fund the Merger 8.800
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Additional unused authorization 5.794
------------------------------------------------------ =====================
Total proposed FUCO Investment Authorization 20.000
------------------------------------------------------ ---------------------
Certain key financial information for the companies follows.
[Financial information is omitted pursuant to a request for confidential
treatment. See Exhibit FS-4 hereto.]
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2 This amount is based on the market capitalization of Lattice as of April 19,
2002, the last trading day before the announcement of the Merger on April 22,
2002. The actual value of Grid Transco shares issued upon the closing of the
Merger may be more or less than $8.8 billion depending on National Grid's share
price at that time. 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. See also footnote 19,
infra.
3 National Grid's current FUCO investment of $3.092 billion plus the new Lattice
FUCO investment of $8.800 billion.
4
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.
Through its wholly-owned indirect subsidiary, The National Grid
Company ("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 4,400 route miles of overhead
lines and approximately 600 route miles of underground cable together with
substations at some 220 sites. National Grid also has electric utility
businesses located in Argentina and Zambia. National Grid is joint owner of
Transener SA, the owner and operator of the principal high-voltage electricity
system in Argentina./6 In Zambia, National Grid is 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
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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 6.5% 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 Operating profit for the year ended December 31, 2001 from Transener was in
line with expectations. However, the devaluation of the Argentine peso has
adversely affected Transener's balance sheet since the majority of its
borrowings are in U.S. dollars. As a result, National Grid will account for its
share of the joint venture's non-cash exceptional foreign exchange losses. Based
on the closing peso:U.S. dollar exchange rate of 2.65 peso:1 USD on March 22,
2002, this would be approximately (pound)85 million ($123 million).
5
projects in Australia, Norway, the Netherlands and Ireland that are in various
stages of development.
National Grid also is active internationally in telecommunications.
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 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.,
NEESCom, 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 telephony and data services, primarily to the business market.
National Grid has written down all of the (pound)350 million ($506 million)
carrying value of its Energis stake.
National Grid also has a number of other telecommunications
investments that are under consideration for sale or closure. In Brazil, a
consortium know as Intelig provides national and international long distance
call services and value added services. Silica Networks S.A. is a joint venture
that has 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., a joint venture providing local and long distance
telecommunications and internet services in Chile. In Poland, National Grid is
joint owner of Energis Polska a company that provides data and voice services to
the corporate market. National Grid has taken a full write down and made
provision for all expected related liabilities for its telecoms investments in
Latin America and Energis Polska.
6
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.
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
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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 Transmission Services Corp. is not a utility company. This
company provides non-affiliate companies services such as metering and generator
interconnection studies.
7
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 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 540,000 customers in New York State.
Niagara Mohawk provides electric service to approximately 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 50,500 pole miles of electric transmission and distribution lines.
Niagara Mohawk also purchases, transports and distributes natural gas to
approximately 540,000 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 December 31, 2001, Niagara
Mohawk had total assets of $11,486 million, operating revenues of $4,123 million
and net income of $30 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 16,021 pole miles of electric transmission and
distribution lines. As of and for the 12 months ended September 30, 2001, Mass.
Electric had total assets of $3,008 million, operating revenues of $2,119
million and net income of $59 million. Mass. Electric is subject to regulation
by the FERC and the Massachusetts Department of
8
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 4,737
pole miles of electric transmission and distribution lines. As of and for the 12
months ended September 30, 2001, Narragansett had total assets of $1,483
million, operating revenues of $800 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 36,000
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 September
30, 2001, Granite State had total assets of $94 million, operating revenues of
$82 million and net income of $3 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 10,000
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 September
30, 2001, Nantucket had total assets of $58 million, operating revenues of $19
million and net income of $0.3 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. NEPCO also holds National Grid USA's
remaining interests
9
in generating units, which the company is actively seeking to divest./9 As of
September 30, 2001, NEPCO had total assets of $2,866 million, operating revenues
of $617 million and net income of $71 million for the 12 months to date. NEPCO
is subject to rate regulation by the FERC. The RIDIV, the MDTE, the NHPUC, and
the Vermont Public Service Board ("VPSB") 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.
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 September 30, 2001, NEET had total assets of $22
million, operating revenues of $8 million, and net income of $0.6 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 September 30, 2001, N.H. Hydro had total assets of
$110 million, operating revenues of $27 million, and net income of $4 million
for the 12 months to date. NH Hydro is subject to rate regulation by FERC. The
NHPUC has jurisdiction
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9 NEPCO is also a holding company because it owns approximately 20% of the
outstanding voting securities of Vermont Yankee Nuclear Power Corporation, the
licensed operator of the Vermont Yankee nuclear facility 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 March 31, 2001 Vermont Yankee
Nuclear Power Corporation had $178,565,569 in total operating revenues,
$6,388,956 in total net income, and total assets of $710,851,866. As of and for
the nine months ended September 30, 2001 (unaudited), Vermont Yankee Nuclear
Power Corporation had $135,862,772 in total operating revenues, $4,764,761 in
total net income, and total assets of $720,803,246. 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. NEPCO is an exempt holding company under the
Act. Yankee Atomic Electric Company, Holding Co. Act Release No. 13048 (Nov. 25,
1955); Connecticut Yankee Atomic Power Company, Holding Co. Act Release No.
14768 (Nov. 15, 1963).
10
over NH 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 September
30, 2001, Mass. Hydro had total assets of $132 million, operating revenues of
$33 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.
11
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./10 Lattice's ordinary
shares 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 the U.K. is highly regulated and subject to price
regulation by the U.K. Office of Gas and Electricity Markets ("OFGEM"), the same
regulator that controls National Grid's U.K. 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 receives gas from several coastal reception terminals around
Great Britain, and transports it to the meters of more than 20 million
industrial, commercial and domestic customers. Its network is made up of
approximately 6,600 km of high pressure pipeline and approximately 270,000 km of
lower pressure pipeline comprising regional transmission and distribution
systems. An interconnector to Belgium links Transco's own gas transportation
system to continental Europe's high-pressure gas grid. A second interconnector
supplies gas to Ireland and Northern Ireland.
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10 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.
12
Transco provides gas transportation and distribution services, but does not sell
the commodity gas to the end-use customer. Transco transports gas for over 45
gas shippers.
Lattice Group Holdings Ltd. has two main business areas: Lattice
Enterprises and Telecoms. Unlike Transco, these businesses are not subject to
price regulation.
Lattice Enterprises consists of a portfolio of businesses which
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, First Connect, Lattice Energy
Services, Lattice Property, The Leasing Group and Eastlands.
Advantica 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.
First Connect provides gas connection services under a service
provider contract. It connects 160,000 new domestic, commercial and industrial
customers to the network each year and is seeking to provide facilities
management services in other non-gas markets. Gas connections are a competitive
service in the U.K.
Lattice Energy Services provides a range of multi-utility
infrastructure services to industrial and commercial customers and developers.
These include new gas, water and electricity connections, conversions to gas,
installation of combined heat and power plants and a compressed gas delivery
service for trucking companies switching to natural gas to fuel their fleets.
Lattice Energy Services is not itself a supplier of gas or electricity and so is
able to provide industrial and commercial energy users with an independent
energy procurement and energy management service.
Lattice Property manages 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
to meet their business
13
needs. Lattice Property does not have significant property holdings that are
unrelated to businesses engaged in by Lattice group companies.
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, with approximately 67% of its
business being for non-Lattice group customers.
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.
The Telecoms division principally consists of SST which acquires,
builds, leases and manages sites for base stations and radio masts for U.K.
telecom operators in support of wireless networks in the U.K., and 186k, a U.K.
based telecommunications network operator that provides wholesale connectivity
services and Internet Protocol ("IP") services./11
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:
[Financial information is omitted pursuant to a request for confidential
treatment. See Exhibit FS-4 hereto.]
Balance sheet segment data as of March 31, 2002 under U.K. GAAP is
provided below.
[Financial information is omitted pursuant to a request for confidential
treatment. See Exhibit FS-4 hereto.]
Lattice will certify as a FUCO under Section 33 of the Act before the
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11 The strategic options for 186k are being reviewed with a view to resolving
the future of the business over this fiscal year, which may include full or
partial sale.
14
consummation of the Merger. 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. 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
15
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
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
--------
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).
16
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 non-U.S. 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 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 Ltd., 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
--------
14 The National Grid Group plc, Holding Co. Act Release No. 27154 (Mar. 15,
2000) ("NEES Acquisition Order").
15 See note 7, supra.
17
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
Lattice has informed National Grid that it will file Form U-57 with
the Commission to claim FUCO status before the Merger is consummated.
Nonutility Subsidiaries
Lattice's subsidiaries are all engaged in utility, energy-related
non-utility, telecommunications and other retainable businesses. Consequently,
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./17
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
--------
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.
17 See, 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).
18
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 ($145 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 the
operations of the two U.K. transmission businesses, sharing best
practice between the U.S. and U.K. businesses and further financial
synergies;
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, Colin Matthews, Rick Sergel and John Wybrew. An additional six
non-executive directors will be drawn equally from the Boards of National Grid
and Lattice.
The terms of the Merger are based on the recent relative equity market
capitalization values of the two companies. The Merger is intended to be
implemented
19
by way of a Scheme of Arrangement ("Scheme"), pursuant to Section 425 of the
Companies Act (U.K.). Under the Scheme, National Grid will issue new Grid
Transco shares to Lattice shareholders on the basis of 0.375 new Grid Transco
shares for each Lattice share held at the relevant record date./18 Upon
completion of the Merger, National Grid shareholders will hold approximately
57.3 per cent and 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. 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)./19
Under the Scheme, Lattice's current issued share capital will be
cancelled and reissued to National Grid. National Grid will therefore become the
listed holding company of the merged group and conditional upon the Merger
becoming effective will change its name to National Grid Transco plc and retain
its listings on the London and New York stock exchanges.
To implement the Scheme, Lattice will make an application to the High
Court of Justice of England and Wales (the "High Court") for the High Court to
summon a shareholders' meeting. After the High Court grants Lattice's
application and orders the 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 first meeting, (the "Court Meeting") is ordered by the High
Court. For the Scheme to become effective, the Scheme must
--------
18 If a Lattice shareholder has a fractional entitlement to Grid Transco shares
with a value in excess of (pound)3.00, such entitlement will be aggregated and
sold for the benefit of the relevant Lattice shareholder. Otherwise, fractions
of a Grid Transco share will not be allotted but will be aggregated and sold for
the benefit of the merged group.
19 The calculation of the total market capitalization as of April 19, 2002, is
shown below:
-------------------- ------------------- ------------------- ------------------------------------------
As of April 19, Closing Price Per Shares Outstanding Market Capitalization
2002 Share (pence)
-------------------- ------------------- ------------------- ------------------------------------------
(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
-------------------- ------------------- ------------------- --------------------- --------------------
20
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 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.
After Lattice's shareholders have approved the Scheme, there will 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, will require approval
by an ordinary resolution of National Grid shareholders to be proposed at the
National Grid Extraordinary General Meeting./20 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/21
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.
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
--------
20 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).
21 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, principally
to reflect National Grid's ownership of Transco.
21
the condition that the U.K. Office of Fair Trading indicating in terms
satisfactory to both National Grid and Lattice acting reasonably, that it is not
the intention of the Secretary of State for Trade and Industry/22 to refer the
Merger or any matter arising therefrom or related thereto to the U.K.
Competition Commission. In addition, the Merger is subject to the condition that
the Director General of OFGEM and the Secretary of State for Trade and Industry
each 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 will unanimously recommend that National Grid
shareholders vote in favor of the resolution to be proposed at the National Grid
extraordinary general meeting to approve the Merger as they intend to do so in
respect of their own beneficial holdings.
The Lattice Board, which has been 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 will unanimously
--------
22 The Secretary of State for Trade and Industry is the special shareholder of
Lattice and National Grid.
22
recommend that Lattice shareholders vote in favor of the resolutions relating to
the Merger to be proposed at the Lattice Court Meeting and the Lattice
extraordinary general meeting as they intend to do so in respect of their own
beneficial holdings.
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./23 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./24 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
__*_% on a U.S. GAAP basis.
[(*) Financial information is omitted pursuant to a request for confidential
treatment. See Exhibit FS-4 hereto.]
Other key pro forma balance sheet and income statement information is
provided on a U.S. GAAP basis in the table below.
[Financial information is omitted pursuant to a request for confidential
treatment. See Exhibit FS-4 hereto.]
--------
23 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.
24 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.
23
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 acquisition of NEES./25 More recently, in connection with National
Grid's acquisition of Niagara Mohawk Holdings, Inc., its financing authority was
amended and supplemented./26 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,
--------
25 NEES Acquisition Order.
26 See January 2002 Order.
24
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/27 as a percentage
of total capitalization,/28 measured on a book value U.S. GAAP basis, of at
least 30% or above;
3. National Grid USA, on a consolidated basis, and National Grid USA's
electric utility subsidiaries, on an individual basis [except certain
subsidiaries noted in the January 2002 Order], 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.
--------
27 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.
28 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.
25
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 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 September 30, 2001, National Grid had an aggregate investment, as
defined in Rule 53, in FUCOs of approximately $3.092 billion. National Grid's
current unused FUCO investment authority is $2.314 billion.
The Merger will result in the issuance of Grid Transco shares of
approximately $8.8 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 $11.9 billion./29 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.
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:
--------
29 National Grid's current FUCO investment of $3.092 billion plus the new
Lattice FUCO investment of $8.800 billion.
26
---------------------------------------------- -----------------------------
Security $ billions
---------------------------------------------- -----------------------------
Equity, including options and warrants/30 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
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 September 30, 2001 was $3,092 million./31 National Grid has no EWG
investments.
--------
30 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.
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.
27
As of September 30, 2001, National Grid's consolidated retained earnings
calculated in accordance with U.S. GAAP was $3,549 million. Consequently,
National Grid's aggregate investment in FUCOs as a percentage of its
consolidated retained earnings was 87% as of September 30, 2001. In the January
2002 Order National Grid was authorized to issue and sell securities for the
pu-rpose of financing investments in FUCOs in an amount up to $5.406 billion.
National Grid now proposes to increase the authorized financing amount to $20
billion.
The requirements of Rule 53(c) are currently satisfied by National
Grid and will continue to be satisfied post-Merger. First, as provided in Rule
53(c)(1), the issuance and sale of securities by National Grid to finance FUCO
investments "will not have a substantial adverse impact upon the financial
integrity of the registered holding company system." National Grid's
capitalization is currently sound and should continue to be sound post-Merger.
Its ratio of *% equity to total capitalization is in compliance with the
conditions set forth in the January 2002 Order. Post-Merger, the pro forma
capitalization table indicates that Grid Transco will have a very conservative *
% ratio of equity to total capitalization. National Grid's consolidated
capitalization (on a U.S. GAAP basis) over the recent past is shown in the table
below.
------------------------- --------------------------- ----------------------- ------------------------------
National Grid March 31, 2000 March 31, 2001 March 31, 2002*
As at:
------------------------- --------------------------- ----------------------- ------------------------------
($ mm) (%) ($ mm) (%) ($ mm) (%)
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
Debt, preferred stock 6,120 62% 5,955 59%
and minority interests
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
Common stock equity 3,753 38% 4,146 41%
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
Total 9,873 100% 10,101 100%
------------------------- -------------- ------------ ----------- ----------- ---------------- -------------
[(*) Financial information is omitted pursuant to a request for confidential
treatment. See Exhibit FS-4 hereto.]
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
28
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
----------------------------------- ---------------- ----------------- -------------- -----------------
Book value of equity (under U.S. 2,416 3,753 4,146
GAAP)
----------------------------------- ---------------- ----------------- -------------- -----------------
Ratio of market to book value 4.6x 3.6x 2.8x
(times)
----------------------------------- ---------------- ----------------- -------------- -----------------
[(*) Financial information is omitted pursuant to a request for confidential
treatment. See Exhibit FS-4 hereto.]
-------------------------------------------------------------------------------------------------------
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
----------------------------- ----------------- ------------------ ----------------- ------------------
Ratio of price to earnings
6.6x 8.4x 9.9x
----------------------------- ----------------- ------------------ ----------------- ------------------
[(*) Financial information is omitted pursuant to a request for confidential
treatment. See Exhibit FS-4 hereto.]
The growth in National Grid's consolidated common stock equity is
shown below:
--------
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.
29
--------------------- --------------- --------------- ----------------- ----------- ----------- --------------
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
--------------------- --------------- --------------- ----------------- ----------- ----------- --------------
Capital stock 304 384 407 440 393
premium
--------------------- --------------- --------------- ----------------- ----------- ----------- --------------
Treasury stock 0 (17) (18) (26) (14)
--------------------- --------------- --------------- ----------------- ----------- ----------- -------------
Retained earnings 1,252 369 1,740 3,060 3,520
--------------------- --------------- --------------- ----------------- ----------- ----------- --------------
Shareholder's equity 1,839 1,022 2,416 3,753 4,146
--------------------- --------------- --------------- ----------------- ----------- ----------- --------------
Growth per period __ (44)%33 136% 55% 10%
--------------------- ------------------------------------------------------------------------- --------------
Growth rate over
last 5 years
--------------------- --------------
Annualized growth
rate
--------------------- ------------------------------------------------------------------------- --------------
[(*) Financial information is omitted pursuant to a request for confidential
treatment. See Exhibit FS-4 hereto.]
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
--------
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.
30
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:
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,
31
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 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;
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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 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
34
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:
34
(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
35
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.
Item 2. Fees, Commissions and Expenses
National Grid expects to pay or incur approximately $_*__ 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
Legal advisors
Other advisors and consultants
Accountants
Miscellaneous costs
Total (*) To be provided by amendment.
Item 3. Applicable Statutory Provisions
The proposed transactions are subject to Sections 6(a) and 7 of the
Act and Rule 53 thereunder.
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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.
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. This is the
only European regulatory action required before the Merger may be completed.
The Merger is subject to the condition that the Director General of
OFGEM and the Secretary of State for Trade and Industry each 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
OFGEM 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 by June 21, 2002 and issue an order granting
and permitting this Application to become effective by August 16, 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
37
Division of Investment Management's assistance in the preparation of the
Commission's decision. There should not be a waiting period between the issuance
of the Commission's order and the date on which it is to become effective.
Item 6. Exhibits and Financial Statements
Exhibits
A-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 ________).**
E-2 Annual Report of Lattice Group plc for the Period Ended March 31, 2002.**
E-3 Annual Report on Form 20-F of Transco plc for the Period Ended March 31,
2002.**
F-1 Form of Notice.*
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, incorporated by reference to
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).*
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* Filed herewith.
** To be filed by amendment.
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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 Application-Declaration to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: June 5, 2002 National Grid Group plc
By: /s/ Kirk Ramsauer
------------------
Kirk Ramsauer
Deputy General Counsel
National Grid USA
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Exhibit Index
Exhibits
A-1 Press Release and Terms of Offer.
F-1 Form of Notice.
41