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U.S. Securities and Exchange Commission


(Release No. 35-27677; 70-10104)

Vermont Yankee Nuclear Power Corporation

Order Authorizing Repurchase Of Stock And Payment Of Dividends Out Of Capital

May 13, 2003

Vermont Yankee Nuclear Power Corporation ("Vermont"), Brattleboro, Vermont, an indirect subsidiary of National Grid USA, National Grid Transco Plc and Northeast Utilities, which are registered holding companies under the Public Utility Holding Company Act of 1935, as amended ("Act"), has filed a declaration with the Securities and Exchange Commission ("Commission") under section 12(c) of the Act and rules 42, 46 and 54 under the Act. The Commission issued a notice of the filing on April 11, 2003 (HCAR No. 27666).

Vermont requests authority to repurchase its stock and pay dividends out of capital. Vermont operated a nuclear powered electric generating plant in Vernon, Vermont ("Plant"), from 1972 to July 2002, when the Plant was sold to Entergy Nuclear Vermont Yankee LLC ("ENVY"). Eight sponsoring utilities ("Sponsors") own the entire common capital stock of Vermont. The Sponsors have each entered into power contracts with Vermont dated February 1, 1968, as amended, February 1, 1984, and September 21, 2001 (collectively, "Power Contracts") that entitle and obligate them to pay the operating costs of Vermont and to repurchase from Vermont the output of the Plant according to certain entitlement percentages.1

Vermont, having sold substantially all its assets and anticipating a decreased level of business operations in the future, proposes to issue dividends out of capital and repurchase stock as the final step in the restructuring mandated for these utilities designed to disengage them from nuclear generation. Vermont proposes to declare and pay one or more dividends out of capital in the aggregate amount of up to $43,000,000 in order to reduce its equity capital to a level more commensurate with its activities. Vermont intends to declare and pay these aggregate dividends in one or more steps with all dividends to be declared and paid by December 31, 2003. In addition, Vermont proposes to offer to repurchase and to repurchase, again out of available cash, the shares of its common stock held by New England Power Company, Connecticut Light and Power Company, Public Service Company of New Hampshire and Western Massachusetts Electric Company (collectively, "Non-Vermont Sponsors") at their then stated value, estimated at the time the declaration was filed to be $23.03 per share at the time of repurchase. Vermont intends to carry out the repurchase transaction in one or more steps over the next year, with all repurchases to be completed by December 31, 2003. Vermont will maintain minimum equity until it ultimately prepares to liquidate and wrap up its affairs after March 21, 2012.

Vermont was organized in 1966 for the purpose of constructing and operating the Plant and selling its electrical output to the Sponsors. With the trend toward restructuring of the utility industry in the 1990s, the Sponsors and Vermont began a search for a purchaser of the Plant in 1997, which culminated in a purchase and sale agreement with ENVY, dated August 15, 2001 ("Purchase Agreement"). The closing under the Purchase Agreement also involved Vermont entering into a power purchase agreement, dated September 6, 2001, with ENVY, which required Vermont to purchase from ENVY for resale at wholesale the output of the Plant through March 21, 2012. Under the Power Contracts each Sponsor agreed to repurchase at cost from Vermont its entitlement percentage of that output and to pay its aliquot share of Vermont's other operating expenses, including any liabilities under the Purchase Agreement. The Power Contracts have been approved as wholesale tariffs by the Federal Energy Regulatory Commission ("FERC").

As of July 31, 2002, Vermont's current capital (including Other Paid-In Capital, Capital Stock Expense, and Retained Earnings) consisted of $55,911,468 of equity, evidenced by 369,149 shares of common stock, $100 par value per share, which are held by the eight Sponsors in the proportions described at footnote 1. As a single purpose utility corporation, Vermont's economic life has been, and will continue to be, primarily keyed to the operating licensed life (March 21, 2012) of the Plant.

Balance sheet adjustments must be made so that all assets are appropriately characterized consistent with rate recovery. The unamortized balance of all assets of Vermont is being amortized as regulatory assets as authorized by FERC over the original operating licensed life of the Plant. The recoveries of all investments and assets have been approved by FERC and should be recovered in cost of service rates by March 21, 2012. In the event additional costs of service (operating and/or expense) requirements are needed at any future period, the Power Contracts impose a non-cancelable obligation on the Sponsors to pay these costs of service expenses.

The record states that Vermont's common equity as of September 30, 2002, was $57,249,189. This equity capital was appropriate so long as Vermont owned and operated substantial generating assets. However, after the closing of the Purchase Agreement, Vermont has become a pass-through entity for the purchase and resale at wholesale of the output of the Plant. Because less capital funds will be required to amortize any of the remaining regulatory assets or to fund any of those remaining end of life obligations, Vermont believes that appropriate steps should be taken to reduce Vermont's outstanding equity contemporaneously with its write-down of its assets.

To accomplish the reduction of equity, Vermont proposes a process with two components: (1) Vermont will declare and pay one or more dividends, payable out of capital, up to an aggregate of $116.48 per share (or up to an aggregate of $43,000,000 for all dividends); and (2) Vermont will offer to repurchase and will repurchase (in one or more steps) the shares of its common stock held by its Non-Vermont Sponsors at their then stated value of $23.03 per share. The repurchase price would also be paid out of capital and would reduce the stated capital of Vermont to approximately $4,500,000 (assuming that all shares are repurchased from the Non-Vermont Sponsors and that the maximum aggregate dividends proposed are paid). Vermont intends to maintain approximately this level of equity capital throughout the remainder of its life and then would return any remaining equity to its stockholders upon dissolution.

Vermont believes that the amount of equity capital needed to carry on its business will be less than was historically required because of the decreased role it will play during the balance of the term of its Power Contracts with its Sponsors. Vermont does not intend to engage in any business other than that of a purchaser and reseller at wholesale of the power produced by the Plant. Vermont will be involved with the payment of certain retained liabilities and the collection of certain potential claims under the Purchase Agreement. The two Vermont Sponsors, Central Vermont Public Service Corporation and Green Mountain Power Corporation, have agreed to remain as stockholders of Vermont during this period, either directly or through their respective wholly owned subsidiaries. Vermont expects to be able to satisfy its needs for cash with revenues paid to it under the Power Contracts. Accordingly, Vermont believes that the amount of capital that will remain after consummation of the transactions proposed will be sufficient to meet its ongoing business needs.

Fees and expenses to be paid in connection with the requested transactions are estimated to be $80,000.

No other state or federal commission, other than this Commission, has jurisdiction over the proposed transactions.

The proposed transaction is subject to rule 54, which provides that in determining whether to approve an application which does not relate to an "exempt wholesale generator" ("EWG") or "foreign utility company" ("FUCO"), as those terms are defined in the Act, the Commission shall not consider the effect of the capitalization or earnings of any EWG or FUCO that is a subsidiary of a registered holding company if the requirements of rule 53(a), (b) and (c) are satisfied. Below is an analysis of rule 54 with regard to each registered holding company parent of Vermont.

1. National Grid Transco Plc.

By order dated October 16, 2002 (HCAR No. 27577), the Commission authorized National Grid Group plc ("National Grid") to issue and sell up to $20 billion of securities to finance the acquisition of interests in one or more FUCOs and, in particular, the issuance and sale of National Grid's common stock in connection with a merger with Lattice Group plc ("Lattice Group"), a U.K.-organized FUCO. National Grid completed the merger with Lattice Group on October 21, 2002, and Lattice Group is now a subsidiary of National Grid, which has changed its name to National Grid Transco plc ("NGT"). As of October 21, 2002, NGT had an aggregate investment, as defined under rule 53, in FUCOs of approximately $12.6 billion. NGT has no investments in EWGs.

As of March 31, 2002, NGT's consolidated retained earnings calculated in accordance with U.S. GAAP were $2.976 billion. Although the Lattice Group merger increased NGT's common stock equity, it did not increase retained earnings.

Consequently, NGT's aggregate investment in FUCOs as a percentage of its consolidated retained earnings is now approximately 42.3% based on the retained earnings as of March 31, 2002, and the current FUCO investment of approximately $12.6 billion. NGT, therefore, does not qualify for the safe harbor in rule 53(a) because NGT's aggregate FUCO investment exceeds 50% of its consolidated retained earnings. In addition, as provided in rule 53(b)(3), relief under rule 53(a) is not available because write-downs of $1,140.9 million associated with NGT's telecommunications investments, held indirectly by NGT's FUCO, National Grid Holdings Limited, contributed to reported operating losses of $186.3 million for NGT on a consolidated basis in the fiscal year ended March 31, 2002. Because such operating losses exceed 5% of National Grid's consolidated retained earnings for the year (5% of $2.976 billion is $148.8 million), the threshold in rule 53(b)(3) is triggered.

The Commission found by order dated October 16, 2002, however, that NGT had satisfied the requirements of rule 53(c) and had demonstrated that, as provided in rule 53(c)(1), the issuance and sale of securities by NGT to finance FUCO investments "will not have a substantial adverse impact upon the financial integrity of the registered holding company system." In addition, the Commission found that as provided in rule 53(c)(2), 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." NGT relies on the order of October 16, 2002, to establish compliance with the terms of rule 53.

2. Northeast Utilities.

Except in accordance with the Act, neither Northeast Utilities nor any of its subsidiaries has acquired an ownership interest in an EWG or a FUCO, as defined in sections 32 and 33 of the Act, nor are they now or as a consequence of the transactions proposed will they become a party to, or have or will have as a consequence of the transactions proposed a right under a service, sales, or construction contract with an EWG or a FUCO. None of the proceeds from the transactions proposed will be used by Northeast Utilities or its subsidiaries to acquire any securities of, or any interest in, an EWG or a FUCO.

Northeast Utilities currently meets all of the conditions of rule 53(a), except for clause (1). At June 30, 2002, Northeast Utilities' "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $448.2 million, or approximately 67% of Northeast Utilities average "consolidated retained earnings" ("CRE"), as defined in rule 53(a)(1), for the four quarters ended June 30, 2002 ($670.7 million). With respect to rule 53(a)(1), the Commission determined by order dated March 7, 2000 (HCAR No. 27148) ("Rule 53(c) Order") that Northeast Utilities' financing of its investment in Northeast Generation Company ("NGC"), Northeast Utilities' only EWG or FUCO, in an amount not to exceed $481 million or 83% of its "average consolidated retained earnings" would not have either of the adverse effects set forth in rule 53(c). Northeast

Utilities continues to assert that its EWG investment in NGC will not adversely affect the holding company system. In addition, Northeast Utilities and its subsidiaries are in compliance and will continue to comply with the other provisions of rule 53(a) and (b).

The proposed transactions, considered in conjunction with the effect of the capitalization and earnings of Northeast Utilities' EWGs and FUCOs, would not have a material adverse effect on the financial integrity of the Northeast Utilities system, or an adverse impact on Northeast Utilities public-utility subsidiaries, their customers, or the ability of state commissions to protect the public-utility customers. The Rule 53(c) Order was predicated, in part, upon an assessment of Northeast Utilities' overall financial condition which took into account, among other factors, Northeast Utilities' consolidated capitalization ratio and its retained earnings, both of which have improved since the date of the order. Northeast Utilities' EWG investment (it has no FUCO investment) has been profitable for all quarterly periods ending June 30, 2000, through June 30, 2002 (NGC was acquired in March 2000). As of December 31, 1999, the most recent period for which financial statement information was evaluated in the Rule 53(c) Order, Northeast Utilities consolidated capitalization consisted of 35.3% common equity and 64.7% debt (including long and short-term debt, preferred stock, capital leases and guarantees). As of June 30, 2000, the end of the first quarter after the issuance of the Rule 53(c) Order, the consolidated capitalization ratios of Northeast Utilities, with consolidated debt including all short-term debt and non-recourse debt of the EWG, were as follows as of June 30, 2000: common shareholders' equity, $2,365,854,000, 36.9%; preferred stock, $277,700,000; 4.3%; long-term and short-term debt, $3,768,353,000, 58.8%; for a total of $6,411,907,000. The consolidated capitalization ratios of Northeast Utilities as of June 30, 2002, with consolidated debt including all short-term debt and non-recourse debt of the EWG, were as follows: common shareholders' equity, $2,143,719,000, 31.2%; preferred stock, $116,200,000, 1.7%; long-term and short-term debt, $2,615,924,000, 38.0%; rate reduction bonds, $2,001,191,000, 29.1%; for a total of $6,877,034,000.

Northeast Utilities consolidated retained earnings increased from $581.8 million as of December 31, 1999, to $678.6 million as of June 30, 2002. NGC has made a positive contribution to earnings by contributing approximately $129.8 million in revenues in the twelve months period ended June 30, 2002 and net income of $34.8 million for the same period. Accordingly, since the date of the Rule 53(c) Order,

Northeast Utilities' investment in EWGs and FUCOs has not had an adverse impact on Northeast Utilities' financial integrity.

Due notice of the filing of the declaration has been given in the manner prescribed in rule 23 under the Act and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act are satisfied and that no adverse findings are necessary.

IT IS ORDERED that the declaration, as amended, be permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

Jill M. Peterson
Assistant Secretary


1 The Sponsors, the percentage of stock each holds in Vermont, and their entitlement percentages are as follows: Central Vermont Public Service Corporation, 33.23% of stock, 35% entitlement; Green Mountain Power Corporation, 18.99% of stock, 20% entitlement; New England Power Company, a subsidiary of National Grid USA and National Grid Transco Plc, 23.90% of stock; 22.5% entitlement; Connecticut Light and Power Company, a subsidiary of Northeast Utilities, 10.09% of stock, 9.5% entitlement; Central Maine Power Company, a subsidiary of Energy East Corporation, 4.25% of stock, 4% entitlement; Public Service Company of New Hampshire, a subsidiary of Northeast Utilities, 4.25% of stock, 4% entitlement; Western Massachusetts Electric Company, a subsidiary of Northeast Utilities, 2.65% of stock, 2.5% entitlement; Cambridge Electric Light Company, 2.66% of stock, 2.5% entitlement.



Modified: 08/05/2003