[Federal Register Volume 69, Number 171 (Friday, September 3, 2004)]
[Notices]
[Pages 53953-53963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2068]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 35-27888; International Series Release No. 1280; 70-10236]


Filings Under the Public Utility Holding Company Act of 1935, as 
Amended (``Act'')

August 30, 2004.
    Notice is hereby given that the following filing(s) has/have been 
made with the Commission pursuant to provisions of the Act and rules 
promulgated under the Act. All interested persons are referred to the 
application(s) and/or declaration(s) for complete statements of the 
proposed transaction(s) summarized below. The application(s) and/or 
declaration(s) and any amendment(s) is/are available for public 
inspection through the Commission's Branch of Public Reference.
    Interested persons wishing to comment or request a hearing on the 
application(s) and/or declaration(s) should submit their views in 
writing by September 24, 2004, to the Secretary, Securities and 
Exchange Commission, Washington, DC 20549-0609, and serve a copy on the 
relevant applicant(s) and/or declarant(s) at the address(es) specified 
below. Proof of service (by affidavit or, in the case of an attorney at 
law, by certificate) should be filed with the request. Any request for 
hearing should identify specifically the issues of facts or law that 
are disputed. A person who so requests will be notified of any hearing, 
if ordered, and will receive a copy of any notice or order issued in 
the matter. After September 24, 2004, the application(s) and/or 
declaration(s), as filed or as amended, may be granted and/or permitted 
to become effective.

National Grid Transco, plc et al (70-10236)

    National Grid Transco plc (``National Grid Transco''), and its 
registered holding company subsidiaries (``Intermediate 
Subsidiaries''), National Grid Holdings One plc, National Grid (U.S.) 
Investments, all at 1-3 Strand, London WC2N 5EH, United Kingdom, 
National Grid General Partnership c/o RL&F Service Corp., One Rodney 
Square, Wilmington, New Castle County, DE 19801, National Grid USA, 
National Grid Holdings Inc., both at 25 Research Drive, Westborough, MA 
01582 all registered holding companies, National Grid USA's public 
utility subsidiaries (``Utility Subsidiaries'') New England Power 
Company (``NEPCO''), Massachusetts Electric Company (``Mass. 
Electric''), The Narragansett Electric Company (``Narragansett''), 
Granite State Electric Company (``Granite State''), Nantucket Electric 
Company (``Nantucket''), New England Electric Transmission Corporation 
(``NEET''), New England Hydro-Transmission Corporation (``N.H. 
Hydro''), New England Hydro-Transmission Electric Co. Inc. (``Mass. 
Hydro''), all at 25 Research Drive, Westborough, MA 01582, and Niagara 
Mohawk Power Corporation (``Niagara Mohawk''), 300 Erie Boulevard, West 
Syracuse, New York 13202 and the direct and indirect nonutility 
subsidiaries (``Nonutility Subsidiaries'') of National Grid Transco 
listed in Exhibit A (``Subsidiaries,'' and collectively ``Applicants'') 
to this application-declaration (``Application''), have filed under 
sections 6(a), 7, 9(a), 10, 12(b), 12(c) and 13(b) of the Act and rules 
20, 26, 42, 43, 45, 46, 52, 53, 54, 87 and 90 under the Act.

I. Background

    By order dated October 16, 2002 (HCAR No. 27577) (``October 2002 
Order''), National Grid Group plc merged with Lattice Group plc 
(``Lattice Group'') (``Merger'') and was renamed National Grid Transco. 
In connection with the Merger, the Commission authorized National Grid 
Transco to invest up to $20 billion in foreign utility companies 
(``FUCOs'') and to issue and sell equity and debt securities and to 
enter into guarantees to finance and support these investments. The 
financing authority granted in the October 2002 Order supplemented 
financing authority that National Grid Transco had received prior to 
the Merger by order dated January 16, 2002 (HCAR No. 27490) (``January 
2002 Order''). The January 2002 Order and the October 2002 Order 
provide that the financing authorizations granted by each order expires 
on September 30, 2004. Applicants now propose the following new 
financing authorizations for the National Grid Transco system.

A. National Grid Transco

    National Grid Transco is a registered holding company under the 
Act. National Grid Transco's ordinary shares are listed on the London 
Stock Exchange and its American Depositary Receipts (``ADRs'') are 
listed on the New York Stock Exchange. As of March 31, 2004, there were 
3,087,603,756 ordinary shares (including ADRs) outstanding. For the 12 
months ended March 31, 2004, National Grid Transco reported 
consolidated gross revenues, operating income and net income of $15.2 
billion, $3.1 billion, and $1.8 billion, calculated in accordance with 
United States generally accepted accounting principles (``US GAAP''). 
As of March 31, 2004, National Grid Transco had total consolidated 
assets of $59.4 billion, and a market capitalization of approximately 
$21.5 billion. National Grid Transco and its subsidiaries employ 
approximately 25,000 employees.
    National Grid Transco's consolidated capitalization (including 
short-term debt) at March 31, 2004 was as follows:

------------------------------------------------------------------------
                                                              Percentage
                                               Book value      of total
                                               (millions)        (%)
------------------------------------------------------------------------
Common Stock Equity*.......................        16,428.7         41.2
Preferred Stock............................            70.6          0.2
Long-Term Debt.............................        20,590.1         51.7
Short-Term Debt**..........................         2,761.9          6.9
                                            -----------------

[[Page 53954]]

 
    Total..................................        39,851.3       100.0
------------------------------------------------------------------------
* Including minority interests.
** Including current portion of long-term debt.

National Grid Transco's senior unsecured debt is currently rated A- by 
Standard & Poor's Inc. (``S&P'') and Baa1 by Moody's Investor Service 
(``Moody's'').
1. U.K. Business Overview
    Through its direct wholly owned subsidiary, National Grid Holdings 
One plc (``NGH One''), and that company's subsidiary, National Grid 
Holdings Ltd, National Grid Transco owns The National Grid Company plc 
(``NGC'') and certain other non-U.S. subsidiaries. NGC is engaged in 
the transmission of electricity in England and Wales. NGC owns and 
operates a transmission system consisting of approximately 4,500 route 
miles of overhead lines and approximately 410 route miles of 
underground cable together with approximately 341 substations at some 
243 sites.
    Through NGH One and its subsidiary Lattice Group, National Grid 
Transco owns Transco plc (``Transco'') and certain other non-U.S. 
subsidiaries. Transco is the owner and operator of the majority of 
Great Britain's gas transportation and distribution system however it 
does not sell gas to consumers. Transco's transportation network 
comprises approximately 4,200 miles of high pressure national 
transmission pipelines and approximately 170,000 miles of lower 
pressure regional transmission and distribution systems pipelines. An 
interconnector to Belgium links Transco's own gas transportation system 
to continental Europe. A second interconnector supplies gas to Eire and 
Northern Ireland.
2. U.S. Business Overview
    National Grid Transco's U.S. business is conducted through National 
Grid USA, a registered holding company and an indirect wholly owned 
subsidiary of National Grid Transco. National Grid USA is held directly 
and indirectly by intermediate companies (``Intermediate Companies'') 
which also are registered holding companies.\1\
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    \1\ Applicants state that Intermediate Companies are all the 
holding companies in the chain of ownership of National Grid USA 
that are direct or indirect subsidiaries of National Grid Transco 
including National Grid (US) Holdings Limited, National Grid (US) 
Investments 4, National Grid (US) Partner 1 Limited, National Grid 
(US) Partner 2 Limited, National Grid General Partnership, National 
Grid Holdings Inc. and any new companies in the chain of ownership 
as the structure may be revised from time to time.
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    Through its subsidiaries, National Grid USA is engaged in electric 
transmission and distribution to residential, commercial, and 
industrial customers in New England and the transmission and 
distribution of electricity and the distribution of natural gas to 
residential, commercial, and industrial customers in New York. 
Applicants state that National Grid USA and its direct and indirect 
subsidiaries (``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 owns companies that deliver electricity to 
approximately 3.3 million customers in New York, Massachusetts, Rhode 
Island and New Hampshire. These electric public utility companies own 
and operate approximately 76,000 miles of transmission and distribution 
lines in New York and New England. The National Grid USA Group includes 
five wholly owned electricity distribution companies: Niagara 
Mohawk,\2\ Mass. Electric, Narragansett, Granite State, and Nantucket 
and four other utility companies: NEPCO, NEET, N.H. Hydro, and Mass. 
Hydro.
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    \2\ Niagara Mohawk is indirectly held by National Grid USA 
through the exempt holding company Niagara Mohawk Holdings Inc. 
(``NiMo Holdings''). See January 2002 Order.
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    Niagara Mohawk provides gas utility service to over 560,000 retail 
customers in New York State and electric service to about 1.6 million 
electric customers in eastern, central, northern and western New York 
State. As of and for the 12 months ended March 31, 2004, Niagara Mohawk 
had total assets of $12,415.9 million, operating revenues of $4,063.6 
million and net income of $139.7 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 171 cities and towns in 
Massachusetts. As of and for the 12 months ended March 31, 2004, Mass. 
Electric had total assets of $3,123.8 million, operating revenues of 
$1,993.5 million and net income of $34.8 million. Mass. Electric is 
subject to regulation by the FERC and the Massachusetts Department of 
Telecommunications and Energy (``MDTE'').
    Narragansett is engaged in the delivery of electric energy to 
approximately 473,000 customers in 38 cities and towns in Rhode Island. 
As of and for the 12 months ended March 31, 2004, Narragansett had 
total assets of $1,552.2 million, operating revenues of $812.1 million 
and net income of $30.1 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 
40,000 customers in 21 communities in New Hampshire. As of and for the 
12 months ended March 31, 2004, Granite State had total assets of 
$100.8 million, operating revenues of $73.1 million and net income of 
$2.7 million. Granite State is subject to regulation by the FERC and 
the New Hampshire Public Utilities Commission (``NHPUC'').
    Nantucket provides retail electric service to approximately 11,000 
customers on Nantucket Island, Massachusetts. As of and for the 12 
months ended March 31, 2004, Nantucket had total assets of $59.2 
million, operating revenues of $19.8 million and net income of $0.9 
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. As of and for the 12 months 
ended March 31, 2004, NEPCO had total assets of $2,715.1 million, 
operating revenues of $457.9 million and net income of $72.5 million. 
NEPCO is subject to rate regulation by the FERC. The Vermont Public 
Service Board (``VPSB''), the MDTE and the NHPUC have jurisdiction over 
NEPCO's financings and transactions with affiliates. Although the Maine 
Public Utilities Commission (``MPUC'') has jurisdiction over NEPCO's 
financings, it defers to financing authorizations 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 (``Interconnection'') and six miles of

[[Page 53955]]

high voltage direct current transmission line in New Hampshire. As of 
and for the 12 months ended March 31, 2004, NEET had total assets of 
$9.8 million, operating revenues of $6.3 million, and net income of 
$0.5 million. 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 53.7% 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 and for the 12 months ended March 31, 
2004, N.H. Hydro had total assets of $92.2 million, operating revenues 
of $25.5 million, and net income of $3.1 million. N.H. Hydro is subject 
to rate regulation by FERC. The NHPUC has jurisdiction over N.H. 
Hydro's financings and transactions with affiliates.
    Mass. Hydro, 53.7% 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 and for the 12 months ended March 31, 2004, Mass. 
Hydro had total assets of $107.8 million, operating revenues of $31.1 
million, and net income of $5.1 million. New England Hydro Finance 
Company, Inc. (``N.E. 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.
    Applicants state that the table below shows the capital structure 
of each Utility Subsidiary as of March 31, 2004.

------------------------------------------------------------------------
                                                      Common
                Utility subsidiary                    stock       Debt
                                                      Equity
------------------------------------------------------------------------
Niagara Mohawk....................................       42.4       57.6
Mass. Electric....................................       77.5       22.5
Nantucket.........................................       49.6       50.4
Narragansett......................................       89.4       10.6
Granite State.....................................       78.0       22.0
NEPCO.............................................       71.1       28.9
NEET..............................................        2.6       97.4
NH Hydro..........................................       39.4       57.7
Mass. Hydro.......................................       39.9       61.1
------------------------------------------------------------------------

    The Nonutility Subsidiaries in the National Grid Transco System 
that are Applicants are described in Exhibit A to the Application.

II. Request for Financing Authorization

A. Financing Parameters

    Applicants request authorization to engage in financing 
transactions through September 30, 2007 (``Authorization Period''), for 
which the specific terms and conditions are not known at this time. 
Applicants state that the following general terms (``Financing 
Parameters'') will be applicable where appropriate to the proposed 
external financing activities requested (including, without limitation, 
securities issued for the purpose of refinancing or refunding 
outstanding securities of the issuer):
1. Effective Cost of Money
    The effective cost of capital on long-term debt, preferred stock, 
preferred securities, equity-linked securities, and short-term debt 
will not exceed the greater of (a) 500 basis points over U.K. or U.S. 
government-issued securities or other government benchmark for the 
currency concerned having a remaining term equal to the term of such 
series or (b) a gross spread over U.K. or U.S. government-issued 
securities that is consistent with similar securities of comparable 
credit quality and maturities issued by other companies.
2. Maturity
    The maturity of long-term debt will be between one and 50 years 
after issuance. Preferred securities and equity-linked securities will 
be redeemed no later than 50 years after issuance, unless converted 
into common stock. Preferred stock issued directly by National Grid 
Transco may be perpetual in duration. Short-term debt will have a 
maturity of one year or less.
3. Issuance Expenses
    The underwriting fees, commissions, or other similar remuneration 
paid in connection with the non-competitive issue, sale or distribution 
of securities under this Application will not exceed the greater of (a) 
5% of the principal or total amount of the securities being issued or 
(b) issuance expenses that are generally paid at the time of the 
pricing for sales of the particular issuance, having the same or 
reasonably similar terms and conditions issued by similar companies of 
reasonably comparable credit quality.
4. Common Equity Ratio
    National Grid Transco will maintain common stock equity \3\ as a 
percentage of total consolidated capitalization \4\, as shown in its 
most recent quarterly balance sheet (but measured on a book value U.S. 
GAAP basis), of at least 30% or above. National Grid USA, on a 
consolidated basis, and each Utility Subsidiary \5\ on an individual 
basis (except NEET),\6\ will maintain common stock equity of at least 
30% of total capitalization as shown in each company's most recent 
quarterly balance sheet (measured on a book value U.S. GAAP basis).
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    \3\ Common stock equity includes 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.
    \4\ 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.
    \5\ Nantucket would maintain a minimum of 30% common stock 
equity as a percentage of total capitalization on a combined basis 
with Mass. Electric.
    \6\ Applicants state that NEET owns and operates a direct 
current/alternating current converter terminal facility for the 
first phase of the Hydro-Quebec and New England interconnection and 
six miles of high voltage DC transmission line in New Hampshire. The 
facilities are financed with a high level of debt on a project 
basis. The New England utilities participating in Phase 1 are 
responsible for the full costs of the facilities under a support 
agreement. Applicants state that it would be disruptive and 
economically inappropriate to refinance the facilities with 
additional equity since that would increase the cost of operating 
the facility. Based on this reasoning, the Commission excepted NEET 
from the 30% minimum common equity standard in the January 2002 
Order.
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5. Investment Grade Ratings
    Applicants further represent that, except for securities issued for 
the purpose of funding money pool operations, no guarantees or other 
securities, other than common stock, may be issued in reliance upon the 
authorization granted by the Commission under this Application, unless 
(a) the security to be issued, if rated, is rated investment grade; (b) 
all outstanding securities of the issuer that are rated are rated 
investment grade; and (c) all outstanding securities of National Grid 
Transco that are rated, are rated investment grade. For purposes of 
this provision, a security will be deemed to be rated ``investment 
grade'' if it is rated investment grade by at least one nationally 
recognized statistical rating organization (``NRSRO''), as that term is 
used in paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the 
Securities Exchange Act of 1934, as amended (``1934 Act''). Applicants 
request that the Commission reserve jurisdiction over the issuance of 
any guarantee or other securities in reliance upon the authorization 
granted by the Commission under this Application at any time that the 
conditions set forth in

[[Page 53956]]

clauses (a) through (c) above are not satisfied.
B. Use of Proceeds
    The proceeds from the financings authorized by the Commission under 
this Application will be used for general corporate purposes, including 
(a) financing investments by and capital expenditures of the National 
Grid Transco System, (b) the funding of future investments in FUCOs, 
and companies exempt under rule 58 under the Act (``Rule 58 
Subsidiaries''), (c) the repayment, redemption, refunding, or purchase 
by National Grid Transco or any Subsidiary of any of its own 
securities, and (d) financing working capital requirements of National 
Grid Transco and the Subsidiaries. The Applicants represent that no 
financing proceeds will be used to acquire the equity securities of any 
company unless the acquisition has been approved by the Commission in 
this proceeding or in a separate proceeding or in accordance with an 
available exemption under the Act or rules, including sections 32, 33, 
34, and rule 58.

III. Proposed Financing Program

    National Grid Transco requests authorization to increase its 
capitalization through the issuance and sale of securities including, 
but not necessarily limited to, common stock, preferred stock, 
preferred securities, equity-linked securities, options, warrants, 
purchase contracts, units (consisting of one or more purchase 
contracts, warrants, debt securities, shares of preferred stock, shares 
of common stock, or any combination of these securities), long-term 
debt, subordinated debt, bank borrowings, securities with call or put 
options, and securities convertible into any of these securities. The 
aggregate amount of new financing obtained by National Grid Transco 
during the Authorization Period (exclusive of short-term debt) through 
the issuance of securities, in each case valued at the time of 
issuance, shall not exceed $20 billion outstanding at any one time, 
(``NGT External Limit''), provided that securities issued for purposes 
of refunding or replacing other securities where National Grid 
Transco's capitalization is not increased as a result shall not be 
counted against the NGT External Limit. In addition, National Grid 
Transco requests authority to issue and sell from time to time, 
directly or indirectly through one or more financing subsidiaries 
(``Financing Subsidiaries''), short-term debt, including commercial 
paper and bank borrowings, in an aggregate principal amount at any time 
outstanding not to exceed $6 billion (``NGT Short-term Limit'').
    Although the financing limits in the application are stated in U.S. 
dollars, a large portion of the securities issued under this 
authorization are expected to be denominated in pounds or other 
currencies the value of which will fluctuate against the dollar. To 
provide consistent financing limits over the Authorization Period, for 
purposes of measuring compliance with the limits, National Grid Transco 
would value securities issued in currencies other than the dollar, on 
their date of issuance, based on the applicable exchange rate between 
the dollar and the currency in which the security is denominated in 
effect on the date the Commission order granting the Application is 
entered.
    National Grid Transco contemplates that securities would be issued 
and sold directly to one or more purchasers in privately-negotiated 
transactions or to one or more investment banking or underwriting firms 
or other entities who would resell the securities without registration 
under the Securities Act of 1933, as amended (``1933 Act'') in reliance 
upon one or more applicable exemptions from registration thereunder, or 
to the public either (a) through underwriters selected by negotiation 
or competitive bidding or (b) through selling agents acting either as 
agent or as principal for resale to the public either directly or 
through dealers. If underwriters are used, securities will be acquired 
by the underwriters for their own account and may be resold from time 
to time in one or more transactions, including negotiated transactions, 
at a fixed public offering price or at varying prices determined at the 
time of sale. These securities may be offered to the public either 
through underwriting syndicates (which may be represented by a managing 
underwriter or underwriters designated by National Grid Transco) or 
directly by one or more underwriters acting alone, or may be sold 
directly by National Grid Transco or through agents designated by 
National Grid Transco from time to time. If dealers are utilized, 
National Grid Transco will sell securities to the dealers, as 
principals. Any dealer may then resell these securities to the public 
at varying prices to be determined by the dealer at the time of resale. 
If common stock is being sold in an underwritten offering, National 
Grid Transco may grant the underwriters a ``green shoe'' option 
permitting the purchase from National Grid Transco at the same price 
additional shares then being offered solely for the purpose of covering 
over-allotments.

A. Common Stock

1. General Issuance
    National Grid Transco proposes to issue and sell common stock, or 
options, warrants, or other stock purchase rights exercisable for 
common stock, through underwriting agreements of a type generally 
standard in the industry. Public distributions may be under private 
negotiation with underwriters, dealers or agents, or effected through 
competitive bidding among underwriters. In addition, sales may be made 
through private placements or other non-public offerings to one or more 
persons. All common stock sales will be at rates or prices and under 
conditions negotiated or based upon, or otherwise determined by, 
competitive capital markets.
2. Acquisitions
    National Grid Transco proposes to issue common stock or options, 
warrants, or other stock purchase rights exercisable for common stock 
in public or privately-negotiated transactions as consideration for the 
equity securities or assets of other companies, provided that the 
acquisition of any equity securities or assets has been authorized in a 
separate proceeding or is exempt under the Act or the rules thereunder 
(e.g., rule 58).
3. Stock Plans
    National Grid Transco also proposes to issue common stock and/or 
purchase shares of its common stock (either currently or under forward 
contracts) in the open market for purposes of (a) reissuing the shares 
at a later date under stock-based plans which are maintained for 
stockholders, employees and nonemployee directors or (b) managing its 
capital structure. Applicants state that National Grid Transco's stock-
based plans are briefly described in Exhibit E to the Application. 
National Grid Transco proposes to issue shares of its common stock in 
order to satisfy its obligations under each of these existing stock-
based plans, as they may be amended or extended, and similar plans or 
plan funding arrangements hereafter adopted without any additional 
Commission order. Shares of common stock issued under these plans may 
either be newly issued shares, treasury shares or shares purchased in 
the open market, including ADSs, provided that only the net proceeds 
from sales of newly issued shares will be counted against the NGT 
External Limit. National Grid Transco proposes to make open-market 
purchases of common stock in accordance with the terms of, or in 
connection with, the operation of

[[Page 53957]]

the plans, or as part of a program to repurchase its securities 
generally. Stock repurchases would be conducted through open market 
transactions and could include the acquisition at arms'-length of 
National Grid Transco common stock from institutional investors that 
may have an affiliate interest in National Grid Transco.

B. Preferred Stock, Preferred Securities and Equity-Linked Securities

    Applicants state that National Grid Transco states that it has not 
issued any preferred stock directly or other forms of preferred 
securities indirectly through any financing subsidiary. In the future, 
however, National Grid Transco wishes to have the flexibility to issue 
preferred stock directly and/or issue, indirectly through one or more 
Financing Subsidiaries, other forms of preferred securities (including, 
without limitation, trust preferred securities or monthly income 
preferred securities). Preferred stock and other forms of preferred 
securities may be issued in one or more series with rights, 
preferences, and priorities as may be designated in the instrument 
creating each series, as determined by National Grid Transco's board of 
directors, and may be convertible or exchangeable into shares of 
National Grid Transco common stock or unsecured indebtedness. Dividends 
or distributions on these securities would be made periodically and to 
the extent funds are legally available for the purpose, but may be made 
subject to terms which allow the issuer to defer dividend payments for 
specified periods. National Grid Transco also proposes to issue and 
sell equity-linked securities in the form of stock purchase units, 
which combine a security with a fixed obligation (e.g.,, preferred 
stock or debt) with a stock purchase contract that is exercisable 
(either mandatorily or at the option of the holder) within a relatively 
short period (e.g., three to six years after issuance). The dividend or 
distribution rates, interest rates, redemption and sinking fund 
provisions, conversion features, if any, and maturity dates with 
respect to the preferred stock or other types of preferred securities 
and equity-linked securities of a particular series, as well as any 
associated placement, underwriting or selling agent fees, commissions 
and discounts, if any, will be established by negotiation or 
competitive bidding.

C. Long-Term Debt

    Applicants state that long-term debt would be unsecured and may be 
issued directly through a public or private placement or indirectly 
through one or more financing subsidiaries, in the form of notes, 
convertible notes, medium-term notes, or debentures under one or more 
indentures, or unsecured long-term indebtedness under agreements with 
banks or other institutional lenders. The maturity dates, interest 
rates, redemption and sinking fund provisions, and conversion features, 
if any, with respect to the long-term debt of a particular series, as 
well as any associated placement, underwriting, or selling agent fees, 
commissions, and discounts, if any, will be established by negotiation 
or competitive bidding at the time of issuance.

D. Short-Term Debt

    National Grid Transco proposes to issue and sell from time to time, 
directly or indirectly through one or more financing subsidiaries, 
short-term debt, in the form of unsecured commercial paper, notes 
issued to banks and other institutional lenders, and other forms of 
unsecured short-term indebtedness, in an aggregate principal amount at 
any time outstanding not to exceed the NGT Short-Term Limit. Unused 
borrowing capacity under a credit facility would not count towards the 
NGT Short-Term Limit. National Grid Transco proposes that short-term 
borrowings under credit lines will have maturities of a year or less 
from the date of each borrowing.
    National Grid Transco proposes that commercial paper issued under 
any commercial paper facility would be sold, directly or indirectly 
through one or more Financing Subsidiaries, in established U.S. or 
European commercial paper markets. Commercial paper would typically be 
sold to dealers at the discount rate per annum prevailing at the date 
of issuance for commercial paper of comparable quality and maturities 
sold to commercial paper dealers generally. It is expected that the 
dealers acquiring the commercial paper would reoffer it at a discount 
to corporate, institutional and, with respect to European commercial 
paper, individual investors. It is anticipated that commercial paper 
would be reoffered to investors such as commercial banks, insurance 
companies, pension funds, investment trusts, foundations, colleges and 
universities, finance companies, and nonfinancial corporations.

E. Utility Subsidiary Financing

    Applicants state that they expect the issue and sale of most 
securities by the Utility Subsidiaries will be exempt from the 
preapproval requirements of sections 6(a) and 7 of the Act under rule 
52(a), as most of these securities must be approved by the public 
service commission in the state in which each Utility Subsidiary is 
incorporated and operating.\7\ To the extent their financing is not 
exempt under rule 52(a) or otherwise, Applicants request authorization 
for the Utility Subsidiaries listed in the table below to issue debt 
securities having a maturity of 12 months or less in the aggregate 
amounts shown.
---------------------------------------------------------------------------

    \7\ Specifically, Applicants state that: (a) The NYPSC must 
approve all financings by Niagara Mohawk other than short-term 
indebtedness having a maturity of 12 months or less, (b) the MDTE 
must approve all financings by Mass. Electric and Nantucket other 
than short-term indebtedness having a maturity of 12 months or less, 
(c) the RIDIV must approve all financings by Narragansett other than 
short-term indebtedness having a maturity of 12 months or less, (d) 
the NHPUC must approve all financings by Granite State, a New 
Hampshire corporation, (e) NEPCO is regulated by the VPSB, MDTE, and 
the MPUC with regard to security issuances other than short-term 
indebtedness having a maturity of 12 months or less and by the NHPUC 
with regard to both long- and short-term financings; (f) NEET and 
N.H. Hydro are subject to the jurisdiction of the NHPUC with respect 
to all financing transactions and (g) Mass. Hydro is subject to the 
jurisdiction of the MDTE which must approve all financings, other 
than short-term indebtedness having a maturity of 12 months or less.

------------------------------------------------------------------------
                                                     In dollars
------------------------------------------------------------------------
Niagara Mohawk............................  1 billion.
Mass. Electric............................  400 million.
Nantucket.................................  40 million.
Narragansett..............................  145 million.
Granite State.............................  10 million.
NEPCO.....................................  750 million.
NEET......................................  10 million.
NH Hydro..................................  12.5 million.
Mass. Hydro...............................  12.5 million.
------------------------------------------------------------------------

F. Nonutility Subsidiary Financing

1. Generally
    Applicants request authority for National Grid Transco or any 
Nonutility Subsidiary, including a Financing Subsidiary, to make loans 
to Nonutility Subsidiaries. Applicants state that these loans would 
generally have interest rates and maturities that are designed to 
parallel the lending company's effective cost of capital. Applicants 
request authorization to acquire the equity securities of wholly owned 
subsidiaries and to lend funds to these companies to finance ongoing 
operations and additional investments consistent with their existing 
businesses. Except as noted below, loans would bear interest at the 
lender's effective cost of capital. Applicants state that no financing 
proceeds will be used to acquire the equity securities of any company 
unless the acquisition has been approved by the Commission in this 
proceeding or in a separate proceeding or in accordance

[[Page 53958]]

with an available exemption under the Act or rules.
2. U.S. Chain of Companies
    Applicants request authority for National Grid USA Group, the 
Intermediate Companies, National Grid USA, and NiMo Holdings to issue 
and sell securities to: (a) direct and indirect parent companies, and 
(b) FUCOs, such as NGH One and Lattice Group and their associate 
company subsidiaries. Applicants state that no FUCO or subsidiary of a 
FUCO will purchase equity and convertible debt securities from the 
Intermediate Companies, National Grid USA or NiMo Holdings. The 
Intermediate Companies, National Grid USA, and NiMo Holdings also 
propose to acquire securities from their direct or indirect subsidiary 
companies. The financing of Utility Subsidiaries would be subject to 
the Finance Parameters and the best rate method (``Best Rate Method''), 
described below. Applicants propose that financing of Nonutility 
Subsidiaries of National Grid USA also would be conducted under the 
Best Rate Method.
    Applicants state that in no case would the Intermediate Companies, 
National Grid USA or NiMo Holdings borrow, or receive any extension of 
credit or indemnity from any of their respective direct or indirect 
subsidiary companies, except their Financing Subsidiaries or the 
Financing Subsidiaries of a direct or indirect parent company. Further, 
the Intermediate Companies, National Grid USA and NiMo Holdings would 
not acquire equity or convertible securities from indirect 
subsidiaries, unless otherwise authorized or permitted by the 
Commission, if the result would be to create a minority interest in a 
public utility company.
3. Intermediate Companies
    Applicants commit that the Intermediate Companies would not issue 
securities to third parties. Applicants state that all borrowings by 
the Intermediate Companies would be unsecured, but may be guaranteed by 
National Grid Transco or other Intermediate Companies. Debt offerings 
by the Intermediate Companies and National Grid USA would have short, 
medium, and long-term maturities. Short-term debt would have a maturity 
of one year or less, medium-term debt would have maturities up to 5 
years, and long-term debt would have maturities up to 50 years.
    Applicants propose to structure financings within the National Grid 
Transco System and with FUCO subsidiaries. From time-to-time, 
Applicants request authority for the Intermediate Companies, National 
Grid USA, or NiMo Holdings to borrow funds from an indirect parent 
company or from a FUCO associate company. Applicants assert that these 
loans allow National Grid Transco the flexibility to meet the short-
term working capital requirements of National Grid USA and its 
subsidiaries when funds can be raised at a lower cost by National Grid 
Transco.
    Applicants propose that the terms and conditions of any financings 
between an Intermediate Company and its direct or indirect parent, or 
between an Intermediate Company and a FUCO subsidiary, such as NGH One 
or Lattice Group or their associate company subsidiaries, be on market 
terms. Applicants state that financing on market terms assists National 
Grid Transco to comply with U.K. tax regulations. Market rate financing 
assures that intercompany loans will not be used to transfer profits 
from one related entity to another. Market rates also allow the lending 
entity to recover its true costs of liquidity, and the risks associated 
with credit quality and interest rate and currency variability.
4. Best Rate Method
    Applicants propose that, regardless of the market rate applicable 
to these transactions, debt funding provided to National Grid USA Group 
companies would bear interest at a rate set according to the Best Rate 
Method. Under the Best Rate Method, short-term loans from associate 
companies to National Grid USA Group companies would bear interest at 
the rate, as published in the Wall Street Journal on the day of the 
borrowing (or the most recently published rate when borrowings occur on 
days when the Wall Street Journal is not published), for high grade 30-
day commercial paper issued by major corporations and sold through 
dealers plus an ``at cost'' allocation of National Grid Transco's 
funding costs.\8\ For medium and long-term loans to National Grid USA 
Group companies, unless there is a directly identifiable external 
borrowing intended to finance the company, National Grid Transco would 
use a rate equal to the effective rate that National Grid Transco would 
pay on the issuance of a comparable security in a competitive offering 
to unaffiliated banks or other lenders.
---------------------------------------------------------------------------

    \8\ National Grid Transco states that the ``at cost'' allocation 
would add to the interest rate for high grade 30-day commercial 
paper a small additional percentage that would compensate National 
Grid Transco for the cost that it incurs in issuing commercial 
paper, notes to banks or other institutional lenders, and other 
forms of unsecured short-term debt. The issuance costs include any 
selling agent fees, commissions, discounts, commitment fees, 
facility fees and other costs directly associated with the 
financing. The costs would be allocated among all borrowers based on 
a ratio derived from historical National Grid Transco short-term 
borrowings and the average costs associated of those borrowings.
---------------------------------------------------------------------------

    The interest rates paid by the National Grid USA Group companies in 
connection with borrowings from National Grid Transco and the other 
companies in the National Grid System, including the FUCO subsidiaries, 
would not increase the cost of capital used by the National Grid USA 
Group. National Grid Transco regularly monitors its ability to access 
the capital markets and states that if it determines that the rate at 
which it can borrow is higher than the rate a National Grid USA Group 
company would pay in a direct borrowing at that time from a 
nonassociated party, the interest rate applied to National Grid USA 
Group borrowings from associated companies would be based on that lower 
cost of funds. Consequently, Applicants state that under the Best Rate 
Method, the interest rate on loans to any company in the National Grid 
USA Group would be set at a rate equal to the lower of: (a) National 
Grid Transco's cost of funds, (b) the cost of funds of another 
associate company that proposes to lend funds to the prospective 
National Grid USA Group company borrower, or (c) the cost of funds that 
would be paid by the prospective National Grid USA Group company 
borrower in a transaction directly with a nonassociated lender.
    In implementing the Best Rate Method, National Grid Transco states 
that it would determine whether the lending rate applied to an 
associated company loan is equal to or lower than the rate available to 
a National Grid USA Group company in a direct borrowing from a 
nonassociated party (i.e., a market rate), in much the same manner as 
an independent bank would determine the market rate. National Grid 
Transco further states that it would take into account the nature of 
National Grid USA's business, or that of the individual subsidiary to 
be financed, evaluate its capital structure, the particular risks to 
which it is subject, and generally prevailing market conditions. 
National Grid Transco would also evaluate and take into account 
information from third parties such as banks that would indicate the 
prevailing market rates for similar businesses. In particular, National 
Grid Transco states that it will obtain information on the range of 
rates used by one or more banks for loans to similar businesses.

[[Page 53959]]

5. National Grid USA
    National Grid USA requests authorization to issue debt securities 
to third parties through public or private offerings. Any issuances 
would be limited to an aggregate amount outstanding at any one time of 
$1 billion (``NGUSA Limit'') and would be subject to the Financing 
Parameters. All borrowings by National Grid USA would be unsecured.
6. NiMo Holdings
    In the January 2002 Order, the Commission found NiMo Holdings to be 
an exempt holding company under section 3(a)(1) of the Act, although it 
remains (regulated as) a subsidiary of a registered holding company. 
NiMo Holdings requests authorization to issue and sell securities to 
associate companies, but not NiMo Holdings' direct and indirect 
subsidiaries (other than Financing Subsidiaries), for the purpose of 
financing NiMo Holdings' existing business, the businesses of its 
respective subsidiaries, and future authorized or permitted businesses. 
Applicants state that NiMo Holdings would not issue equity or 
convertible securities to associate companies other than its immediate 
parent company and would not issue securities to third parties. Debt 
securities issued by NiMo Holdings would bear interest at the rates 
applicable to National Grid USA Group companies under the Best Rate 
Method described above. All borrowings by NiMo Holdings would be 
unsecured, except that borrowings may be guaranteed as provided below.

G. Continuation of Money Pool

    Applicants request authority for the Utility Subsidiaries, National 
Grid USA Service Company (``ServiceCo'') and any National Grid Transco 
System company (``Participating Subsidiaries'') (to participate in the 
money pool established for the National Grid USA Group (``Money Pool'') 
in the Merger Order. Applicants request that the Commission reserve 
jurisdiction over the participation of any National Grid Transco System 
company in the Money Pool, other than the Utility Subsidiaries and 
ServiceCo, as a borrower until the record in this matter has been 
supplemented with additional information regarding the proposed 
participant.
    Applicants request authority for the Participating Subsidiaries to 
make unsecured short-term borrowings from the Money Pool, to contribute 
surplus funds to the Money Pool, to lend and extend credit to, and 
acquire promissory notes from, one another through the Money Pool.
    Applicants further request authority for: (a) National Grid 
Transco, (b) the Intermediate Companies, (c) NGH One, Lattice Group, 
their subsidiaries and any subsequently organized or acquired FUCO, (d) 
National Grid USA, (e) NiMo Holdings, and (f) the Nonutility 
Subsidiaries of National Grid USA to invest surplus funds and/or lend 
and extend credit to the Participating Subsidiaries through the Money 
Pool.
    All the Utility Subsidiaries request authorization within the 
limits for short-term debt set forth in section III.E. above to: (a) 
Invest surplus funds and/or lend and extend credit to the Money Pool 
and (b) to borrow from the Money Pool.
    Applicants state that the effective cost of short-term borrowings 
under the Money Pool will generally be as favorable to the 
Participating Subsidiaries than the comparable cost of external short-
term borrowings. Applicants state that the investment rate paid to 
Participating Subsidiaries that invest surplus funds in the Money Pool 
will generally be higher than the typical yield on short-term money 
market investments. Applicants state that, under the Money Pool 
agreement (``Money Pool Agreement''), short-term funds are available 
from the following sources for short-term loans to the Participating 
Subsidiaries from time to time: (a) Surplus funds in the treasuries of 
Participating Subsidiaries and (b) proceeds received by National Grid 
Transco and National Grid USA from the sale of commercial paper, 
borrowings from banks and other lenders, and other financing 
arrangements (``External Funds''). Applicants state that funds are made 
available from sources in the order that ServiceCo, as the 
administrative agent under the Money Pool Agreement, determines would 
result in a lower cost of borrowing, consistent with the individual 
borrowing needs and financial standing of the Participating 
Subsidiaries.
    Applicants state that Participating Subsidiaries authorized to 
borrow from the Money Pool (``Eligible Borrowers'') will borrow pro 
rata from each lending Participating Subsidiary in the proportion that 
the total amount invested by each Participating Subsidiary bears to the 
total amount then invested in the Money Pool. The interest rate charged 
to Eligible Borrowers on borrowings under the Money Pool will be as 
follows:
    (a) A borrower with a commercial paper credit rating or an 
investment grade bond rating (``Commercial Paper Issuer'') will pay 
interest at a rate equal to the weighted monthly average of the rates 
on its outstanding commercial paper;
    (b) During any month when a Commercial Paper Issuer has no 
commercial paper outstanding, the rate will be the monthly average of 
the rate for high grade 30-day commercial paper sold through dealers by 
major corporations as published in the Wall Street Journal. The rate to 
be used for weekends and holidays will be the next preceding published 
rate.
    (c) An Eligible Borrower other than Commercial Paper Issuers will 
pay interest at a rate of 1.08 times the rate described in paragraph 
(b). In no event will the rate be greater than the monthly average of 
the Base Lending Rate of Fleet Boston.
    Applicants state that funds not required by the Money Pool to make 
loans (with the exception of funds required to satisfy the Money Pool's 
liquidity requirements) would ordinarily be invested in one or more 
short-term investments, including: (a) Obligations issued or guaranteed 
by the U.S. government and/or its agencies and instrumentalities; (b) 
commercial paper; (c) certificates of deposit; (d) bankers' 
acceptances; (e) repurchase agreements; (f) tax exempt notes; (g) tax 
exempt bonds; (h) tax exempt preferred stock; and (i) such other 
investments as are permitted by section 9(c) of the Act and rule 40 
thereunder.
    Applicants state that the interest income and investment income 
earned on loans and investments of surplus funds would be allocated 
among those Money Pool participants that have invested funds in 
accordance with the ratio of the surplus funds contributed by each 
participant to the total surplus funds invested in the Money Pool. 
Applicants state that each Eligible Borrower receiving a loan through 
the Money Pool would be required to repay the principal amount of the 
loan, together with all interest accrued, on demand and in any event 
within one year after the date of the loan. All loans made through the 
Money Pool may be prepaid by the borrower without premium or penalty 
and without prior notice.
    Applicants state that proceeds of any short-term borrowings from 
the Money Pool may be used by an Eligible Borrower: (a) For the interim 
financing of its construction and capital expenditure programs; (b) for 
its working capital needs; (c) for the repayment, redemption or 
refinancing of its debt and preferred stock; (d) to meet unexpected 
contingencies, payment and timing differences, and cash requirements; 
and (e) to otherwise

[[Page 53960]]

finance its own business and for other lawful general corporate 
purposes.

III. Guarantees

    National Grid Transco requests authorization to provide guarantees 
(``Guarantees'') with respect to debt securities or other contractual 
obligations of any Subsidiary as may be appropriate in the ordinary 
course of the Subsidiary's business, in an aggregate principal or 
nominal amount not to exceed $20 billion (``NGT Guarantee Limit'') at 
any one time outstanding, provided however, that the amount of any 
Guarantees in respect of obligations of any Subsidiaries shall also be 
subject to the limitations of rule 53(a)(1) or rule 58(a)(1), as 
applicable.
    National Grid Transco states that Guarantees may take the form of, 
among others, direct guarantees, reimbursement undertakings under 
letters of credit, ``keep well'' undertakings, agreements to indemnify, 
expense reimbursement agreements, and credit support with respect to 
the obligations of the Subsidiaries as may be appropriate to enable 
Subsidiaries to carry on their respective authorized or permitted 
businesses. Any Guarantee that is outstanding at the end of the 
Authorization Period shall remain in force until it expires or 
terminates in accordance with its terms.
    National Grid Transco states that any Guarantee provided to a 
Financing Subsidiary will comply with the Financing Parameters and will 
count against the NGT External Limit. To avoid double counting, 
Applicants propose that the amount of any Guarantee with respect to 
securities issued by a Financing Subsidiary will not also be counted 
against the proposed limit on Guarantees.
    Applicants state that Guarantees may be provided to support 
obligations of Subsidiaries that are not readily susceptible of exact 
quantification or that may be subject to varying quantification. In 
these cases, National Grid Transco will determine the exposure under 
that Guarantee for purposes of measuring compliance with the proposed 
limitation on Guarantees by appropriate means, including estimation of 
exposure based on loss experience or projected potential payment 
amounts. If appropriate, estimates will be made in accordance with GAAP 
and this estimation will be reevaluated periodically.
    National Grid Transco requests authorization to charge each 
Subsidiary a fee for each Guarantee that is not greater than the cost, 
if any, of obtaining the liquidity necessary to perform the Guarantee 
(for example, bank line commitment fees or letter of credit fees, plus 
other transactional expenses) for the period of time that it remains 
outstanding.
    In addition, Applicants request authority for the Nonutility 
Subsidiaries, National Grid USA, NiMo Holdings, the Intermediate 
Companies, and NGH One to guarantee the indebtedness or contractual 
obligations and to otherwise provide credit support to associate 
companies. Guarantees provided by National Grid USA and NiMo Holdings 
in support of the external obligations of direct or indirect 
subsidiaries would not exceed $1 billion outstanding at any one time, 
in the aggregate, exclusive of any Guarantees and other forms of credit 
support that are exempt pursuant to rule 45(b) and rule 52(b), provided 
however, that the amount of Guarantees in respect of obligations of any 
Rule 58 Subsidiaries shall remain subject to the limitations of rule 
58(a)(1). The company providing credit support may charge its associate 
company a fee for each Guarantee provided on its behalf determined in 
the same manner as specified above.

IV. Interest Rate and Currency Risk Management Devices

    National Grid Transco proposes to enter into, perform, purchase and 
sell financial instruments intended to manage the volatility of 
currencies and interest rates, including but not limited to currency 
and interest rate swaps, caps, floors, collars and forward agreements 
or any other similar agreements (``Hedging Instruments''). National 
Grid Transco would employ Hedging Instruments as a means of prudently 
managing the risk associated with any of its outstanding or anticipated 
debt by, for example, synthetically (a) converting variable rate debt 
to fixed rate debt, (b) converting fixed rate debt to variable rate 
debt, (c) limiting the impact of changes in interest rates resulting 
from variable rate debt, and (d) providing an option to enter into 
interest rate swap transactions in future periods for planned issuances 
of debt securities.
    National Grid Transco proposes to enter into Hedging Instruments 
with respect to anticipated debt offerings (``Anticipatory Hedges''), 
to fix and/or limit the interest rate or currency exchange rate risk 
associated with any new issuance. In addition to the use of Hedging 
Instruments, Anticipatory Hedges may include: (a) A forward sale of 
exchange-traded government securities futures contracts, government 
securities and/or a forward swap (each a ``Forward Sale''), (b) the 
purchase of put options on government securities (``Put Options 
Purchase''), (c) a Put Options Purchase in combination with the sale of 
call options on government securities (``Zero Cost Collar''), (d) 
transactions involving the purchase or sale, including short sales, of 
government securities, or (e) some combination of a Forward Sale, Put 
Options Purchase, Zero Cost Collar, and/or other derivative or cash 
transactions, including, but not limited to structured notes, caps, and 
collars appropriate for the Anticipatory Hedges. National Grid may seek 
to hedge its exposure to currency fluctuations through currency swaps 
or options and forward exchange or similar transactions.
    Applicants state that Hedging Instruments and instruments used to 
effect Anticipatory Hedges will be executed on-exchange (``On-Exchange 
Trades'') with brokers through the opening of futures and/or options 
positions, the opening of over-the-counter positions with one or more 
counterparties (``Off-Exchange Trades''), or a combination of On-
Exchange Trades and Off-Exchange Trades. National Grid Transco will 
determine the optimal structure of each transaction at the time of 
execution. Off-Exchange Trades would be entered into only with 
Intermediate Companies or with counterparties whose senior debt ratings 
are investment grade as determined by Standard & Poor's, Moody's 
Investors Service, Inc. or Fitch IBCA, Inc. (``Approved 
Counterparties'').
    The Utility Subsidiaries also propose to enter into Hedging 
Instruments with third-party Approved Counterparties, but not other 
National Grid Transco System companies, on the same terms generally 
applicable to National Grid Transco.\9\ The Utility Subsidiaries expect 
to use this authority principally to hedge external debt.
---------------------------------------------------------------------------

    \9\ Applicants state that the terms applicable to Hedging 
Instruments entered into by the Utility Subsidiaries differ from 
those applicable to National Grid Transco in that the Utility 
Subsidiaries will qualify Hedging Instruments entered into by the 
Utility Subsidiaries for hedge accounting treatment under U.S. GAAP. 
In addition, to the extent a Utility Subsidiary incurs a gain or 
loss on a Hedging Instrument that it has entered into to hedge a 
currency or interest rate risk associated with a security that the 
Utility Subsidiary has issued, the gain or loss would be attributed 
to the Utility Subsidiary.
---------------------------------------------------------------------------

    The Intermediate Companies also request authorization to enter into 
currency derivatives with National Grid Transco and other Intermediate 
Companies for the purpose of managing their exposure to various 
currencies that may be used to finance their business.
    National Grid Transco maintains a central treasury department whose

[[Page 53961]]

activities are governed by policies and guidelines approved by the 
Board of Directors, with regular reviews and monitoring by a standing 
committee of the Board. The treasury department operates as a service 
center rather than as a profit center and is subject to internal and 
external audit. Treasury activities are managed in a non-speculative 
manner and all transactions in Hedging Instruments would be matched to 
an underlying business purpose. Consequently, Applicants state, 
National Grid Transco, the Intermediate Companies and the Utility 
Subsidiaries would not enter into transactions in Hedging Instruments 
for speculative purposes or to finance businesses that are not 
permitted, authorized or exempt under the Act. National Grid Transco 
will qualify transactions in Hedging Instruments for hedge-accounting 
treatment under GAAP in the U.S. or the UK. In the event transactions 
in Hedging Instruments are qualified for hedge accounting treatment 
under UK GAAP, but not under U.S. GAAP, National Grid Transco's 
financial statements filed with the Commission will contain a 
reconciliation of the difference between the two methods of accounting 
treatment as is required by Form 20-F. Applicants affirm that no gain 
or loss on a Hedging Instrument entered into by National Grid Transco 
or the Intermediate Companies, or associated tax effects, will be 
allocated to National Grid USA or NiMo Holdings or their subsidiaries, 
regardless of the accounting treatment accorded to the transaction and 
that National Grid USA, and its subsidiaries would not be adversely 
affected by these transactions.

V. Payment of Dividends Out of Capital or Unearned Surplus

    By order dated March 15, 2000 (HCAR No. 27154) (``March 2000 
Order'') and also in the January 2002 Order, the Commission authorized, 
subject to certain conditions, the payment of dividends out of capital 
and unearned surplus of National Grid USA and its Utility and 
Nonutility Subsidiaries. As to the Utility Subsidiaries, dividends were 
permitted to be paid out of capital and unearned surplus in an amount 
equal to the retained earnings of each subsidiary prior to the mergers 
of National Grid Transco's predecessors with New England Electric 
System and NiMo Holdings. In addition, the March 2000 Order and January 
2002 Order stated that the amortization or write down of goodwill could 
be ignored in calculating earnings available for the payment of 
dividends after the mergers.
    Applicants request that the Utility Subsidiaries continue to be 
authorized to pay dividends out of capital or unearned surplus in an 
amount up to: (a) The amount of any retained earnings of the subsidiary 
prior to the mergers authorized in the January 2002 Order (with respect 
to Niagara Mohawk) and the March 2000 Order (with respect to all other 
Utility Subsidiaries), and (b) the amount of any goodwill impairment 
charge. Consequently, ``Income Available for Dividends'' would be 
calculated by starting with the amount of pre-merger retained earnings 
that had not already been paid in previous periods, adding any post-
merger retained earnings, and adding any current period income grossed 
up for non-cash charges to income resulting from a determination that 
goodwill has been impaired.
    In addition, the January 2002 Order further authorized Niagara 
Mohawk to calculate ``Income Available for Dividends,'' by excluding 
non-cash charges to income resulting from accounting changes or charges 
to income resulting from significant unanticipated events.
    Applicants now request that the Commission continue to authorize 
this variation in the calculation of Income Available for Dividends for 
Niagara Mohawk alone, consistent with the January 2002 Order. 
Applicants state that the Utility Subsidiaries would not pay dividends 
out of capital or unearned surplus if the effect of the dividend would 
be to reduce capitalization to less than 30% equity as a percentage of 
total capitalization or to reduce a rated Utility Subsidiary to below 
investment grade.
    Applicants also seek authorization for the Nonutility Subsidiaries 
to pay dividends from time to time through the Authorization Period, 
out of capital and unearned surplus, to the extent permitted under 
applicable corporate law and the terms of any credit agreements and 
indentures that restrict the amount and timing of distributions to 
shareholders. In addition, Applicants state that none of the Nonutility 
Subsidiaries will declare or pay any dividend out of capital or 
unearned surplus unless it: (a) Has received excess cash as a result of 
the sale of some or all of its assets, (b) has engaged in a 
restructuring or reorganization, and/or (c) is returning capital to an 
associate company.

VI. Changes in Capitalization of Majority-Owned Subsidiaries

    Applicants state that the portion of an individual Subsidiary's 
aggregate financing to be effected through the sale of stock to 
National Grid Transco or other immediate parent company during the 
Authorization Period under rule 52 and/or under an order issued by the 
Commission cannot be ascertained at this time. The proposed sale of 
capital securities (i.e., common stock or preferred stock) may in some 
cases exceed the then authorized capital stock of the Subsidiary. In 
addition, the Subsidiary may choose to use capital stock with no par 
value.
    Applicants request authorization to change the terms of any 50% or 
more owned Subsidiary's authorized capital stock capitalization or 
other equity interests by an amount deemed appropriate by National Grid 
Transco or other intermediate parent company, provided that the 
consents of all other shareholders have been obtained for the proposed 
change. This request for authorization is limited to National Grid 
Transco's 50% or more owned Subsidiaries and will not affect the 
aggregate limits or other conditions contained herein. A Subsidiary 
would be able to change the par value, or change between par value and 
no-par stock, or change the form of equity from common stock to limited 
partnership or limited liability company interests or similar 
instruments, or from instruments to common stock, without additional 
Commission approval. Additional terms that may be changed include 
dividend rates, conversion rates and dates, and expiration dates. Any 
action of this kind by a Utility Subsidiary would be subject to and 
would only be taken upon the receipt of any necessary approvals by the 
state commission in the state or states where the Utility Subsidiary is 
incorporated and doing business. National Grid Transco will be subject 
to all applicable laws regarding the fiduciary duty of fairness of a 
majority shareholder to minority shareholders in any 50% or more owned 
Subsidiary and will undertake to ensure that any change implemented 
under this paragraph comports with such legal requirements.

VII. Financing Entities

    National Grid Transco currently owns the stock of NGG Finance plc 
which assists in the financing of National Grid Transco and its 
Subsidiaries. Applicants request authorization to organize and acquire 
the securities of Financing Subsidiaries in the form of one or more 
additional corporations, trusts, partnerships or other entities, to 
finance the business of the respective founding company or its 
subsidiaries. A Financing Subsidiary would be used to finance the 
authorized or permitted businesses of its direct or indirect

[[Page 53962]]

parent company (``Founding Parent''), including the businesses of the 
National Grid USA Group, but in no event would a Financing Subsidiary 
engage in prohibited upstream loans involving companies in the National 
Grid USA Group. Financing Subsidiaries may issue any securities that 
the Founding Parent would be authorized to issue under the terms of 
this Application as authorized by the Commission, or Commission rule, 
regulation or order under the Act. Applicants also request 
authorization to issue securities to a Financing Subsidiary to evidence 
the transfer of financing proceeds by a Financing Subsidiary to a 
company receiving financing. Applicants state that the terms of the 
securities issued to a Financing Subsidiary would typically be designed 
to service the obligations of the Financing Subsidiary under the 
securities that it has issued.
    As noted above, a Financing Subsidiary would raise funds and 
finance the businesses of its Founding Parent company, or the 
subsidiaries thereof, as authorized and permitted under the Act. A 
Financing Subsidiary would finance these companies on terms and 
conditions applicable to financings conducted by its parent as set 
forth in this Application or permitted by rule, regulation, or order of 
the Commission. Applicants state, for example, NGG Finance plc may 
finance an Intermediate Company at market rates, but a financing of 
National Grid USA or its subsidiaries must be in accordance with the 
Best Rate Method.
    Securities issued by Financing Subsidiaries to third parties would 
count against issuance limits set forth in this Application that are 
applicable to the Founding Parent of the Financing Subsidiary. To avoid 
double counting, securities or Guarantees issued by the Founding Parent 
to the Financing Subsidiary would not count against the Founding 
Parent's respective issuance limits.
    National Grid Transco and its Subsidiaries also request 
authorization to enter into support or expense agreements (``Expense 
Agreement'') with Financing Subsidiaries to pay the expenses of any 
such entity. In cases where it is necessary or desirable to ensure 
legal separation for purposes of isolating the Financing Subsidiary 
from its parent or another Subsidiary for bankruptcy purposes, the 
ratings agencies may require that any Expense Agreement whereby the 
parent or Subsidiary provides financing related services to the 
Financing Subsidiary be at a price, not to exceed a market price, 
consistent with similar services for parties with comparable credit 
quality and terms entered into by other companies so that a successor 
service provider could assume the duties of the parent or Subsidiary in 
the event of the bankruptcy of the parent or Subsidiary without 
interruption or an increase of fees. Applicants seek approval under 
section 13(b) of the Act and rules 87 and 90 to provide the services 
described in this paragraph at a charge not to exceed a market price 
but only for so long as such Expense Agreement established by the 
Financing Subsidiary is in place.

VIII. FUCO Financing Limits

    Applicants propose that National Grid Transco use the proceeds of 
the financings proposed in this Application, in part, for investments 
in FUCOs.\10\ In the October 2002 Order, National Grid Transco was 
authorized to issue securities to finance additional FUCO investments 
and operations up to a total aggregate investment of $20 billion. 
Applicants state that they have current investments in FUCOs of 
approximately $14.9 billion. National Grid Transco now seeks to use the 
authorization requested in this Application to issue up to $20 billion 
of securities during the Authorization Period for the purpose of 
financing additional FUCO investments beyond its current $14.9 
investment. Applicants do not seek authorization to invest in exempt 
wholesale generators, as that term is defined in section 33 of the Act.
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    \10\ Applicants propose that a reorganization of existing FUCO 
investments that results in an increased FUCO investment for 
accounting purposes as a result of the recognition of the market 
value of transferred FUCO interests would not be counted as an 
increased FUCO investment if National Grid Transco did not actually 
make a cash investment in, or increase its guarantee exposure to, a 
FUCO subsidiary.
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IX. Intermediate Subsidiaries and Nonutility Subsidiary Reorganizations

    National Grid Transco proposes to acquire, directly or indirectly, 
the securities of one or more entities (``Intermediate Subsidiaries''), 
which would be organized exclusively for the purpose of acquiring, 
holding and/or financing the acquisition of the securities of or other 
interest in one or more FUCOs, Rule 58 Subsidiaries, exempt 
telecommunications companies as that term is defined in section 34 of 
the Act (``ETCs'') or other non-exempt Nonutility Subsidiaries (as 
authorized in this proceeding or in a separate proceeding), provided 
that Intermediate Subsidiaries may also engage in administrative 
activities (``Administrative Activities'') and development activities 
(``Development Activities''), as those terms are defined below, 
relating to those subsidiaries.
    Applicants state that Administrative Activities include ongoing 
personnel, accounting, engineering, legal, financial, and other support 
activities necessary to manage National Grid Transco's investments in 
Nonutility Subsidiaries. Applicants state that Development Activities 
will be limited to due diligence and design review; market studies; 
preliminary engineering; site inspection; preparation of bid proposals, 
including, in connection therewith, posting of bid bonds; application 
for required permits and/or regulatory approvals; acquisition of site 
options and options on other necessary rights; negotiation and 
execution of contractual commitments with owners of existing 
facilities, equipment vendors, construction firms, and other project 
contractors; negotiation of financing commitments with lenders and 
other third-party investors; and other preliminary activities as may be 
required in connection with the purchase, acquisition, financing or 
construction of facilities or the acquisition of securities of or 
interests in new businesses.
    An Intermediate Subsidiary may be organized, among other things, 
(a) in order to facilitate the making of bids or proposals to develop 
or acquire an interest in any FUCO, Rule 58 Subsidiary, ETC or other 
nonutility subsidiary, (b) after the award of a bid proposal, in order 
to facilitate closing on the purchase or financing of such acquired 
company, (c) at any time subsequent to the consummation of an 
acquisition of an interest in any such company in order, among other 
things, to effect an adjustment in the respective ownership interests 
in such business held by National Grid Transco and non-affiliated 
investors, (d) to facilitate the sale of ownership interests in one or 
more acquired Nonutility Subsidiaries, (e) to comply with applicable 
laws of foreign jurisdictions limiting or otherwise relating to the 
ownership of domestic companies by foreign nationals, (f) as a part of 
tax planning in order to limit National Grid Transco's exposure to 
taxes, (g) to further insulate National Grid Transco and the Utility 
Subsidiaries from operational or other business risks that may be 
associated with investments in Nonutility Subsidiaries, or (h) for 
other lawful business purposes.
    Applicants propose that investments in Intermediate Subsidiaries 
may take the form of any combination of the following: (a) Purchases of 
capital shares, partnership interests, member interests in limited 
liability companies, trust certificates or other forms of equity 
interests, (b) capital contributions, (c)

[[Page 53963]]

open account advances with or without interest, (d) loans, and (e) 
Guarantees issued, provided or arranged in respect of the securities or 
other obligations of any Intermediate Subsidiaries. Funds for any 
direct or indirect investment in any Intermediate Subsidiary will be 
derived from: (a) Financings authorized in this proceeding, (b) any 
appropriate future debt or equity securities issuance authorization 
obtained by National Grid Transco from the Commission, and (c) other 
available cash resources, including proceeds of securities sales by 
Nonutility Subsidiaries under rule 52. Applicants state that, to the 
extent that National Grid Transco provides funds or Guarantees directly 
or indirectly to an Intermediate Subsidiary that are used for the 
purpose of making an investment in any FUCO or a Rule 58 Subsidiary, 
the amount of the funds or Guarantees will be included in National Grid 
Transco's ``aggregate investment'' in those entities, as calculated in 
accordance with rule 53 or rule 58, as applicable.
    National Grid Transco requests authorization to consolidate or 
otherwise reorganize all or any part of its direct and indirect 
ownership interests in Nonutility Subsidiaries, and the activities and 
functions related to such investments. To effect any such consolidation 
or other reorganization, National Grid Transco may wish to either 
contribute the equity securities of one Nonutility Subsidiary to 
another Nonutility Subsidiary (including a newly formed Intermediate 
Subsidiary) or sell (or cause a Nonutility Subsidiary to sell) the 
equity securities or all or part of the assets of one Nonutility 
Subsidiary to another one. National Grid Transco requests authorization 
to consolidate or otherwise reorganize, under one or more direct or 
indirect Intermediate Subsidiaries, National Grid Transco's ownership 
interests in existing and future Nonutility Subsidiaries. Applicants 
state that these transactions may take the form of a Nonutility 
Subsidiary selling, contributing, or transferring the equity securities 
of a subsidiary or all or part of a subsidiary's assets as a dividend 
to an Intermediate Subsidiary or to another Nonutility Subsidiary, and 
the acquisition, directly or indirectly, of the equity securities or 
assets of a subsidiary, either by purchase or by receipt of a dividend. 
The purchasing Nonutility Subsidiary in any transaction structured as 
an intrasystem sale of equity securities or assets may execute and 
deliver its promissory note evidencing all or a portion of the 
consideration given. Each transaction would be carried out in 
compliance with all applicable U.S. or foreign laws and accounting 
requirements. In addition, in the event that proxy solicitations are 
necessary with respect to any corporate reorganization, Applicants 
state that they will seek Commission approvals as necessary under 
section 6(a)(2) and 12(e) of the Act through the filing of a 
declaration.
    National Grid Transco requests authorization to make expenditures 
on Development Activities, as defined above, in an aggregate amount of 
up to $600 million. National Grid Transco proposes a ``revolving fund'' 
for permitted expenditures on Development Activities. Thus, Applicants 
propose, to the extent a Nonutility Subsidiary in respect of which 
expenditures for Development Activities were made subsequently becomes 
a FUCO or qualifies as an ``energy-related company'' under Rule 58, the 
amount so expended will cease to be considered an expenditure for 
Development Activities, but will instead be considered as part of the 
``aggregate investment'' in such entity under rule 53 or 58, as 
applicable.

    For the Commission by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2068 Filed 9-2-04; 8:45 am]
BILLING CODE 8010-01-P