FILE No. 70-8895
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
AMENDMENT NO. 2 TO
APPLICATION/DECLARATION
WITH RESPECT TO INTEREST RATE MANAGEMENT INSTRUMENTS
Under
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
NORTHEAST UTILITIES HOLYOKE WATER POWER COMPANY
174 Brush Hill Avenue 1 Canal Street
West Springfield, MA 01090-0010 Holyoke, MA 01040
THE CONNECTICUT LIGHT AND PUBLIC SERVICE COMPANY
POWER COMPANY OF NEW HAMPSHIRE
107 Selden Street 1000 Elm Street
Berlin, CT 06037 Manchester, NH 03101
WESTERN MASSACHUSETTS NORTH ATLANTIC
ELECTRIC COMPANY ENERGY CORPORATION
174 Brush Hill Avenue 1000 Elm Street
West Springfield, MA 01090-0010 Manchester, NH 03101
(Names of companies filing this application and addresses of principal
offices)
NORTHEAST UTILITIES
(Name of top registered holding company)
Jeffrey C. Miller
Assistant General Counsel
Northeast Utilities Service Company
107 Selden Street
Berlin, CT 06037
(Name and address of agent for service)
The Commission is requested to mail signed copies of all orders, notices and
communications to:
Jane P. Seidl David R. McHale
Senior Counsel Assistant Treasurer
Northeast Utilities Service Northeast Utilities Service
Company Company
107 Selden Street 107 Selden Street
Berlin, CT 06037 Berlin, CT 06037
The Application/Declaration in this proceeding, as previously amended,is
hereby further amended as follows:
Items I, II and V are restated in full as follows:
I. DESCRIPTION OF PROPOSED TRANSACTIONS
(a). Description of Proposed Transactions
1. Northeast Utilities ("NU"), a registered holding company, and
certain of its subsidiaries, The Connecticut Light and Power Company
("CL&P"), Western Massachusetts Electric Company ("WMECO"), Public Service
Company of New Hampshire ("PSNH"), North Atlantic Energy Corporation ("NAEC")
and Holyoke Water Power Company ("HWP") (collectively NU, CL&P, WMECO, PSNH,
NAEC and HWP are referred to herein as "System Companies"), hereby request
approval, if and to the extent required under the Public Utility Holding
Company Act of 1935 (the "Act"), to enter into, perform, purchase and sell
financial instruments intended to manage the volatility of interest rates,
including but not limited to interest rate swaps, caps, floors, collars and
forward rate agreements or any other similar agreements ("Interest Rate
Management Instruments") to the extent any such transactions are
jurisdictional under the Act, for the period ending December 31, 2001, in a
total notional principal amount not to exceed 25% of the total outstanding
debt at any one time for each System Company individually (with the exception
of NAEC, for which the maximum would be 65%).
2. The System Companies propose to employ various types of Interest
Rate Management Instruments as a means of (i) prudently managing their
portfolios of outstanding long-term and short-term debt, such that they can
achieve some degree of control over the impact on earnings and customer rates
resulting from movements in interest rates, and (ii) prudently managing the
risk associated with the issuance of new long-term and short-term debt.
3. The System Companies have used Interest Rate Management Instruments
in the past primarily to manage floating interest rate exposure through the
use of interest rate swaps and interest rate caps. Exhibit G lists the
System Companies' use of Interest Rate Management Instruments since 1990,
including both outstanding and matured positions.
4. With the objectives of optimizing the variable-to-outstanding debt
ratio and mitigating the exposure of customer rates and earnings to changes
in interest rates, the System Companies will manage the debt portfolio in
accordance with prudent financial management practices and make an assessment
of the projected impact on the companies' rate tariffs (for those System
Companies serving customers pursuant to rate tariffs) and earnings per share.
Such management includes but is not limited to an analysis of (i) current and
projected level of interest rates, (ii) the current level of each System
Company's debt, (iii) future debt maturities, and (iv) future financing
requirements.
5. Interest Rate Management Instruments are the tools by which the
System Companies can achieve such balance by, in effect, synthetically (i)
converting variable rate debt to fixed rate debt, (ii) converting fixed rate
debt to variable rate debt, (iii) limiting the impact of changes in interest
rates resulting from variable rate debt, and (iv) providing an option to
enter into Interest Rate Management Instrument transactions in future periods
for both existing exposures and planned issuances of debt securities.
6. The notional principal amount of Interest Rate Management
Instruments for each System Company individually will not exceed 25% of the
total outstanding debt, with the exception of NAEC for which the maximum
would be 65%, at any one time. This exception results from an existing
interest rate swap associated with a $225 million term note and NAEC's
anticipated future total outstanding debt levels when taking into account the
$20 million annual sinking fund provision on its 9.05% first mortgage
bonds. "Total outstanding debt" is defined as the sum of the outstanding
short-term and long-term debt rounded to the nearest million dollars. For
each individual company the table below lists the level of total outstanding
debt at June 30, 1996, the proposed sub-limits as a percentage of total
outstanding debt, and the resulting indicative dollar limit of notional
principal based on the levels of total outstanding debt at June 30, 1996.
Indicative
Dollar
Limit -
% of
Total Out-
Outstanding % Hedge Standing
Company Debt (6/30/96) Limit Debt
- ----------------------------------------------------------------------------
The Connecticut Light and Power Company $1,990,000,000 25% $497,500,000
Public Service Company of New Hampshire $736,000,000 25% $184,000,000
Western Massachusetts Electric Company $366,000,000 25% $91,500,000
North Atlantic Energy Corporation $520,000,000 65% $338,000,000
Holyoke Water Power Company $38,000,000 25% $9,500,000
Northeast Utilities (Parent) $244,000,000 25% $61,000,000
Totals $3,894,000,000 30% $1,181,500,000
7. In no case will the notional principal amount of any Interest Rate
Management Instrument exceed that of the underlying debt instrument and
related interest rate exposure, i.e., no System Company will engage in
"leveraged" or "speculative" transactions. In addition, System Companies
propose to limit the tenor of Interest Rate Management Instruments to the
maximum maturity of the underlying System Company debt, or the maturity of
anticipated specific future debt issuances, proportionate to the amount of
indebtedness at each maturity level.
8. The underlying interest rate indices of such Interest Rate
Management Instruments will closely correspond to the underlying interest
rate indices of the System Companies' debt to which such Interest Rate
Management Instruments relate. Such indices currently include but are not be
limited to (i) floating rate indices such as the London Interbank Offered
Rate (LIBOR), prime rate, certificate of deposit rates, commercial paper
indices, the Federal funds rate, the J.J. Kenny high grade tax-exempt rate,
and the Public Securities Association Index tax-exempt rate, and (ii) fixed
rate indices such as United States Treasury note and bond rates and long-term
municipal bond rates.
9. The terms and conditions of the proposed Interest Rate Management
Instrument transactions will be the same or substantially similar to those of
the International Swap Dealers Association, Inc. (ISDA) Master Agreement,
the form of which is filed as Exhibit B.1. Each System Company would enter
into an individual Master Agreement with each proposed counterparty. A
confirmation pursuant to the Master Agreement would identify the nature of
each individual transaction, the applicable notional principal amount,
effective date, maturity, rates involved and other pertinent terms and
conditions. The System Companies will enter into Interest Rate Management
Instruments with counterparties whose senior secured debt ratings, as
published by Standard & Poor's Corporation, are greater than or equal to
"BBB+", or an equivalent rating from Moody's Investor Service, Inc., Fitch
Investor Service or Duff & Phelps. Additionally, at all times at least 75%
of the outstanding aggregate principal amount of Interest Rate Management
Instruments will be held by counterparties possessing Standard & Poor's
Corporation credit ratings of "A" rating or higher or equivalent rating. In
accordance with the ISDA Master Agreement, it is anticipated that
each party to a proposed Interest Rate Management Instrument transaction will
have the right to terminate such transactions by making early termination
payments. Attached hereto as Exhibit B.II is a copy of the Risk Management
Program Policies and Practices for System Companies participating in Interest
Rate Management Instrument transactions.
10. Interest Rate Management Instruments are subject to numerous
variables which will affect their cost, including (i) tenor, (ii) the strike
rate, or the rate at which it becomes effective, (iii) volatility of interest
rates, (iv) the current and projected level of interest rates, (v) the
notional principal amount of the Interest Rate Management Instrument, and
(vi) market variables such as the liquidity of the specific Interest Rate
Management Instrument. As such, it is difficult for the System Companies to
estimate the price they will pay for Interest Rate Management Instruments.
However, the System Companies will undertake to limit the transaction costs
of Interest Rate Management Instruments. The cost of instruments requiring
upfront payments such as interest rate caps will be limited to five percent
of the principal amount of the transaction. In the case of a sale of an
Interest Rate Management Instrument such as one with an interest rate floor,
the company could use such proceeds to lower the purchase price of a
corresponding Interest Rate Management Instrument, such as an interest rate
cap pertaining to the same debt obligation. The System Companies
will not enter into (a) a floating-to-fixed interest rate swap in which the
swap fixed interest rate, excluding any credit spread associated with the
underlying instrument, would exceed the higher of (i) 200 basis points over
the yield on U.S. Treasury obligations of comparable maturities or (ii) the
fixed interest rate similar issuers pay in respect of comparable debt bearing
comparable maturities; and (b) a fixed-to-floating interest rate swap in
which the swap floating interest rate, excluding any credit spread associated
with the underlying instrument, would be more than 200 basis points over the
applicable index rate used for the swap. Furthermore, the System Companies
will enter into a floating-to-fixed interest rate swap, as opposed to
reducing its floating rate debt and issuing a fixed-rate note of a comparable
maturity, only if the estimated costs associated with the floating-to-fixed
interest rate swap, including transaction costs, are less than the estimated
costs of issuing the fixed rate debt and costs, if any, of prudently reducing
the floating rate debt.
11. The System Companies will fully disclose in their financial
statements the extent of their Interest Rate Management Instrument
transactions in accordance with current and future Commission requirements,
generally accepted accounting principles, and Financial Accounting Standards
Board ("FASB") practices. Current financial statements disclosures include
(i) notional principal amount and (ii) market value of outstanding Interest
Rate Management Instruments outstanding. In addition, the System Companies
undertake to provide the following reports to the Commission in lieu of the
requirements of Rule 24(a) under the Act:
(a) Within thirty days following the trade date of any Interest Rate
Management Instrument, the System Company will submit a report to the
Commission disclosing the following information: the trade date; the type of
Interest Rate Management Instrument traded; the notional principal amount;
the new interest rate or a description of the index and margin; the
termination date; the credit rating of the counterparty; and the material
terms of the underlying instrument (including the interest rate (or index and
margin) and the maturity or termination date of such instrument);
(b) Within forty-five days following the close of each fiscal quarter,
each System Company will submit a report to the Commission disclosing
additional information regarding its trading in Interest Rate Management
Instruments if the aggregate net cash flow for all Interest Rate Management
Instruments exceeds $1 million during the quarter. In such instance, said
System Company will disclose the net cash flow for each interest rate swap,
and the net cash outflow or inflow for each floor or cap, respectively, that
has been open at any time during such quarter. With respect to interest rate
swaps, the net cash flow refers to the difference between the interest paid
and received by each System Company during such quarter for that interest
rate swap. With respect to any floor, the cash outflow refers to the sum of
payments made by each System Company during such quarter under any floor sold
by such System Company. With respect to any cap, the cash inflow refers to
the sum of payments received by each System Company during such quarter under
any cap purchased by such System Company;
(c) Within forty-five days following the close of each fiscal quarter,
each System Company will additionally disclose the market value for each
Interest Rate Management Instrument that is outstanding at the close of the
quarter, as of that closing date, if the aggregate market value of its
Interest Rate Management Instruments increased or decreased by more than $1
million during the quarter. Said System Company will also disclose any gains
or losses realized from the liquidation during such quarter in any position
in any of its Interest Rate Management Instruments if such gains or losses in
the aggregate exceed $1 million. If a report is required, it will include
the proceeds and sale price constituting such gain or loss, and its carrying
value, if any; and
(d) Within forty-five days following the close of each fiscal quarter,
each System Company will disclose the following information if the aggregate
notional principal amount of its outstanding Interest Rate Management
Instruments at the close of that quarter exceeds by $1 million or more the
outstanding or notional principal amount of the underlying instrument: the
date and reason for such condition; the identity of the Interest Rate
Management Instrument causing such condition; and the date (i) the Interest
Rate Management Instrument was terminated or the notional principal amount of
such instrument was reduced or (ii) a new instrument related to the open
Interest Rate Management Instrument was entered into, if applicable. If
System Company enters into a new underlying instrument for any Interest Rate
Management Instrument, it will also disclose the terms of the new underlying
instrument.
12. Pro forma financial statements are not included in this filing
because the System Companies believe it is difficult to reflect the impact of
what could be numerous strategies designed to meet the System Companies'
objectives outlined in this Application, namely management of the System
Companies' existing and future portfolio of long-term and short-term debt,
such that the System Companies achieve a balanced exposure to changes in
interest rates as measured by a ratio of total variable rate debt to total
debt and the resulting impact of System Companies' earnings, and management
of the risks associated with the issuance of new short-term and long-term
debt.
13. No associate company or affiliate of the System Companies has any
material interest, directly or indirectly, in the proposed transactions.
14. Except in accordance with the Act, neither NU nor any subsidiary
thereof (1) has acquired an ownership interest in an exempt wholesale
generator ("EWG") or a foreign utility company ("FUCO") as defined in
Sections 32 and 33 of the Act, or (2) now is or as a consequence of the
transactions proposed herein have a right under, a service, sales or
construction contract with an EWG or FUCO. None of the proceeds from the
transactions proposed herein will be used by the System Companies to acquire
any securities of, or any interest in, an EWG or FUCO.
The NU System is in compliance with Rule 53(a), (b) and (c), as
demonstrated by the following determinations:
(i) NU's aggregate investment in EWGs and FUCOs (e.g. amounts
invested in or committed to be invested in EWGs and FUCOs, for which there is
recourse to NU) does not exceed 50 percent of NU system's consolidated
retained earnings as reported for the four most recent quarterly periods on
NU's Form 10-K and 10-Qs. At June 30, 1996, the ratio of such investment
($40 million) to such consolidated retained earnings ($1.0 billion) was 4.2
percent.
(ii) Encoe Partners, Central Termica San Miguel de Tucuman, S.A. Ave
Fenix and Plantas Eolicas, S. A. (NU's only EWGs or FUCOs at this time)
(collectively, "EWGs/FUCOs") maintain books and records and prepare financial
statements in accordance with Rule 53 (a)(2). Furthermore, NU has undertaken
to provide the Commission access to such books and records and financial
statements, as it may request.
(iii) No employees of the NU system's public utility companies have
rendered services to the EWGs/FUCOs.
(iv) NU has submitted (1) a copy of each Form U-1 and Rule 24
certificates that have been filed with the Commission under Rule 53 and (b)
copy of Item 9 of Form U5S and Exhibits G and H thereof to each state
regulator having jurisdiction over the retail rates of the NU system public
utility companies.
(v) Neither NU nor any NU subsidiary has been subject of a bankruptcy
or similar proceeding unless a plan of reorganization has been confirmed in
such proceeding. In addition, NU's average consolidated retained earnings
for the four most recent quarterly periods has not decreased by 10 percent or
more from the average for the previous four quarterly periods.
(vi) In the previous fiscal year, NU's operating losses attributable
to its investment in the EWGs/FUCOs did not exceed 5 percent of NU's
consolidated retained earnings.
(b). Consideration for Proposed Transactions
No consideration is to be given or received in connection with the
proposed transactions except for the fees, commissions and expenses set forth
in Section II, and amounts payable in accordance with the terms and
conditions of Interest Rate Management Instrument's contract documents the
same or substantially similar to that of the International Swap Dealers
Association, Inc. Master Agreement filed as Exhibit B.1. hereto, and within
the ranges specified in the description of Interest Rate Management
Instruments set forth in Paragraph 4 above.
II. FEES, COMMISSIONS AND EXPENSES
1. Except for the $2,000 fee payable to the Commission and as
otherwise described herein, there are no fees, commissions or expenses other
than legal fees, out-of-pocket expenses of any counterparty and intermediary
and similar expenses to be paid or incurred, directly or indirectly in
connection with the proposed transactions.
2. Based on NUSCO employee hours expended for Interest Rate Management
Instrument transactions entered into in the past, including but not limited
to the analysis, negotiation, documentation and closing of such contracts, it
is estimated that future costs will not exceed $10,000 per transaction. In
general it is believed that the actual costs may be less than $10,000,
however, some margin is necessary for unanticipated transaction costs and/or
for additional time and resource requirements needed to thoroughly understand
newly fashioned and possibly more sophisticated transactions.
Only actual costs of services incurred in connection with a specific
Interest Rate Management Instrument transaction will be charged to the
relevant System Company. The core of NU's accounting system is provided by a
computer program known as the Management Information and Budgeting System
("MIBS"). MIBS controls (i)the processing of actual charges inputed from
source systems such as payroll and purchasing, (ii) the database
reconciliations to assure that all transactions are correct, (iii) the
processing of allocations and System Company billings and (iv) the
performance of all internal and external financial reporting.
V. PROCEDURE
1. The System Companies respectfully request that the Commission's
order herein be issued, subject to completion of this Application, with
respect to NU, immediately, and with respect to the other System Companies,
from time to time as soon as practicable after each individual System Company
has filed with the Commission in this File all State approvals necessary to
authorize its participation in the transactions described in this
Application, with reservation of jurisdiction over the activities of the
System Companies which have not completed the record for their State
approvals.
2. The System Companies hereby waive a recommended decision by a
hearing officer or other responsible officer of the Commission and consent
that the Division of Investment Management may assist in the preparation of
the Commission's finding and/or order and hereby requests that the
Commission's order become effective subject to the conditions set forth
above.
VI. EXHIBITS AND FINANCIAL STATEMENTS
The exhibits list of this Application/Declaration is hereby amended to
add the following exhibit:
B.2 Risk Management Program Policies and Practices for Interest Rate
Management Instruments
The following exhibit is filed herewith:
F.1 Opinion of Counsel
The following exhibit is deleted in its entirety:
H. Proposed Form of Quarterly Report of Interest Rate Management
Instruments.
NORTHEAST UTILITIES
THE CONNECTICUT LIGHT AND POWER COMPANY
WESTERN MASSACHUSETTS ELECTRIC COMPANY
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
HOLYOKE WATER POWER COMPANY
NORTH ATLANTIC ENERGY CORPORATION
By: /s/David R. McHale
Assistant Treasurer
Date: November 8, 1996
Exhibit B.2
Financial Risk Management
Program Policies and Practices
February 1996
Northeast Utilities
Risk Management Program
Policies and Practices
Contents
Section 1 SCOPE AND OBJECTIVES
1.1 Overview............................................. 4
1.2 Operational Risk, not Contractual Risk............... 4
1.3 Range of Risk........................................ 5
1.4 Objectives........................................... 5
Section 2 GOVERNANCE AND RESPONSIBILITIES
2.1 Northeast Utilities Board of Trustees................ 7
2.2 Subsidiary Board of Directors........................ 7
2.3 Risk Oversight Council............................... 8
2.4 Senior Management.................................... 9
2.5 Vice President and Treasurer......................... 10
2.6 Assistant Treasurer - Finance........................ 13
2.7 Assistant Treasurer - Treasury Operations............ 14
Section 3 EXPOSURE MANAGEMENT
3.1 Exposure Definition.................................. 15
3.2 Exposure Measurement................................. 15
3.3 Authorized Hedging Activities........................ 16
3.4 Limits............................................... 17
Section 4 CREDIT RISK MANAGEMENT
4.1 Credit Policies...................................... 19
4.2 Counterparty Selection............................... 21
4.3 Monitoring and Reporting............................. 22
4.4 Documentation........................................ 23
Section 5 MANAGEMENT REPORTING
5.1 Monitoring of Exposures and Hedge Positions.......... 25
5.2 Management Reporting................................. 25
5.3 Hedge Effectiveness and Performance.................. 27
Section 6 OPERATIONS AND PROCESSING
6.1 Trade Execution...................................... 28
6.2 Trade Confirmation................................... 29
6.3 Settlements and Mark-to-Market....................... 31
Section 7 ACCOUNTING AND DISCLOSURE
7.1 Accounting Policies.................................. 33
7.2 Disclosure........................................... 34
7.3 Auditing............................................. 34
Section 8 EXHIBITS
Schedule A................................................ 37
Schedule B................................................ 38
Schedule C................................................ 39
Section 1 SCOPE AND OBJECTIVES
1.1 Overview
These Risk Management Program Policies and Procedures (collectively
Procedures) were developed by the NUSCO Treasury Department in response to
the Retail Business Group s and Wholesale Marketing Group s needs to provide
customers with flexible, competitive pricing structures, often in the form of
long-term, fixed-price contracts. Although long-term, fixed-priced contracts
meet customer needs, they subject the NU System to the risks associated with
variably priced production costs. In the wholesale market segment, these
costs are typically driven by marginal costs that are predominantly fuel-
related, i.e., residual fuel oil and natural gas.
1.2 Operational Risk, Not Contractual Risk
The scope of these Procedures is limited to the internal operational
risks of the NU System, that is, the internal risk that the NU System manages
for itself, including fuel, interest rate and foreign exchange risk. These
Procedures do not address "third party contractual risk", that is, risk that
the NU System manages for others, or the risk of credit default by the NU
System s customers under long-term contracts.
1.3 Range of Risk
The NU System s fuel hedging program was initiated early in 1994 and is
expected to increase in size and scope over time to support the System s
growing wholesale and retail marketing efforts. In addition, the NU System
has been managing interest rate risk with derivatives since 1983, primarily
through interest rate swaps and caps. These efforts are expected to escalate
as the NU System seeks to manage costs more actively and effectively in a
competitive utility environment. The NU System has had very limited
involvement to date with managing foreign exchange exposures. However, as
the international component of HEC s and Charter Oak Energy s business
develops, the NU System may become subject to foreign exchange exposure.
1.4 Objectives
The objectives of these Procedures are:
1.4.1 to manage selected business risks actively, in order to remain
competitive in a new, deregulated, utility environment,
1.4.2 to reduce the NU System s earnings volatility that could, if
risks were not actively managed, result from dramatic moves in
the commodities and financial markets,
1.4.3 to facilitate the NU System s marketing efforts intended to
gain and retain wholesale and retail customers, and to enable
the company s marketing organizations to enter into new
markets with varying risk profiles, and
1.4.4 to improve generating system utilization by increased system
and off-system sales.
Section 2 GOVERNANCE AND RESPONSIBILITIES
2.1 Northeast Utilities Board of Trustees
The Northeast Utilities Board of Trustees (NU Board) has the ultimate
responsibility and authority for risk management practices throughout the NU
System. These Procedures, therefore, must be executed in accordance with any
specific authorizations or restrictions adopted by the NU Board or any
Committee of the NU Board, and any authority delegated by the NU Board or any
Committee.
2.2 Subsidiary Boards of Directors
Subject to any specific authorizations or restrictions adopted by the NU
Board or any Committee of the Board, the respective Boards of Directors of
CL&P, WMECO, PSNH, NAEC, NUSCO, and each other subsidiary of NU (collectively
the Subsidiary Boards) have the ultimate responsibility for risk management
practices for the respective subsidiary. These Procedures, therefore, must
be executed in accordance with any specific authorizations or restrictions
adopted by any Subsidiary Board and any authority delegated by a Subsidiary
Board.
2.3 Risk Oversight Council
2.3.1 A Risk Oversight Council (the ROC or the Council) shall be
established to assist in formulating policies, governance and
review of these Procedures. The number of members of the
Council shall be fixed from time to time by the Chief
Executive Officer (CEO), and members shall be appointed by the
CEO. Members shall include at a minimum the Vice President
and Treasurer, and the Vice President of Wholesale Marketing.
Other Council members are expected to be officers or senior
staff drawn from the affected constituencies within the NU
System. The Council shall establish its own internal working
rules, including such matters as the frequency and conduct of
meetings, quorum, voting rights, attendance by non-members,
and substitutes and proxies for members.
2.3.2 Subject to any specific authorizations or restrictions adopted
by the NU Board or any Committee of the Board, or by any
Subsidiary Board, and except as may otherwise be provided by
the CEO or as may be required by law, risk management policies
adopted by the ROC shall be the policies of the NU System. It
shall be the responsibility of the officers, employees, agents
and representatives of the NU System and its subsidiaries to
conduct their activities and to perform their responsibilities
under these Procedures in accordance with any risk management
policies adopted by the ROC.
2.4 Senior Management
2.4.1 Subject to and in accordance with sections 2.1 through 2.3,
the Chief Financial Officer (CFO) is responsible for approving
and overseeing the NU System s general risk management
policies, methods, practices and procedures. The CFO will
report on these policies to the CEO and to the NU Board or any
Committee of the NU Board, and/or to the Subsidiary Boards, at
such times and in such manners as each such Board or Committee
shall request.
2.4.2 Unless the NU Board (or Committee designated by the Board for
this purpose) otherwise requires, the CFO shall provide the
Board no less frequently than annually with a report
describing the current status of the Risk Management Program.
2.4.3 The CFO must also promptly notify the NU Board (or any
designated Committee) regarding:
a.) material adverse changes in the amount or kind of risk
incurred by the NU System as a whole,
b.) material proposed or actual changes in risk management
policies, methods, practices or procedures, and
c.) material breaches or violations of the NU System s risk
management policies, methods, practices or procedures.
2.4.4 Both the CEO and the CFO shall be available as requested to
advise the ROC and Vice President and Treasurer on request,
and each shall be available to act whenever higher level
exception authority is required.
2.5 Vice President and Treasurer
2.5.1 Subject to and in accordance with sections 2.1 through 2.4,
the Vice President and Treasurer has the overall specific
charge of the development and implementation of these
Procedures and the NU System s risk management policies,
methods, practices and procedures for operational risks within
the scope specified in section 1.2. Accordingly, the Vice
President and Treasurer, in consultation with the ROC, and in
compliance with any policies adopted by the ROC, shall
establish and, to the extent required or to the extent he/she
deems appropriate, shall seek senior management approval for
risk management policies regarding :
a.) risk tolerance levels,
b.) underlying exposures to be hedged,
c.) exposure/hedge ratio,
d.) hedging instruments,
e.) trading limits,
f.) tenors,
g.) management of credit risk, and
h.) financial counterparties.
2.5.2 In accordance with these Procedures, the Vice President and
Treasurer will oversee and authorize execution of risk
management transactions by the Finance Department referred to
in section 2.6. Accordingly, the Vice President will
authorize:
a.) a list of authorized trade personnel within the Finance
Department permitted to execute risk management
transactions on the behalf of the NU System,
b.) a list of authorized financial instruments and underlying
exposure to be used when executing a transaction (hedging
instruments),
c.) a list of approved counterparties in which NU may conduct
business, and
d.) any parameters under which the Finance Department may
execute transactions on the authority of the Assistant-
Treasurer Finance, without transaction-specific
authorization by the Vice President and Treasurer.
2.5.3 Any risk management transactions that do not comply with
authorizations made in accordance with the requirements of
section 2.5.2, and yet which are nevertheless consistent with
these Procedures, may be executed only if specifically
authorized by the Vice President and Treasurer.
2.5.4 In the absence of authorized personnel in the Finance
Department, the Vice President and Treasurer may execute risk
management transactions that are otherwise consistent with
these procedures.
2.5.5 The Vice President and Treasurer is responsible for directing
the risk management activities of the Assistant Treasurer -
Finance and the Assistant Treasurer - Treasury Operations set
forth in sections 2.6 and sections 2.7.
2.6 Assistant Treasurer - Finance
2.6.1 The Assistant Treasurer - Finance reports directly to the Vice
President and Treasurer and directs the activities of the
staff of the Finance Department. The Assistant Treasurer-
Finance is principally responsible for directing the risk
management assignments of the Finance Department, primarily
exposure aggregation and management, credit risk management,
reporting, transaction execution, and accounting compliance.
Responsibilities of the Finance Department are elaborated in
Sections 3-7.
2.6.2 The Assistant Treasurer may execute trades with counterparties
in accordance with authority granted, and in compliance with
parameters established by, the Vice President and Treasurer.
Under no circumstances is he/she allowed both to execute and
to authorize the same trade.
2.6.3 Trade tickets executed by trade personnel other than the
Assistant Treasurer - Finance may be authorized by the
Assistant Treasurer - Finance.
2.6.4 The Assistant Treasurer - Finance is responsible for ensuring
that personnel in the Finance Department involved in risk
management activities are sufficiently trained and
knowledgeable of current risk management practices and these
Procedures.
2.7 Assistant Treasurer - Treasury Operations
2.7.1 The Assistant Treasurer - Treasury Operations reports directly
to the Vice President and Treasurer and directs the activities
of the Cash Management Department. The Assistant Treasurer-
Treasury Operations is principally responsible for directing
the risk management assignments of the Cash Management
Department, primarily operations and processing and management
reporting. Responsibilities of the Cash Management Department
are elaborated in Sections 3-7.
2.7.2 In accordance with section 6.2, the Assistant Treasurer -
Treasury Operations may authorize confirmation schedules
received in the Cash Management Department from trade
counterparties.
2.7.3 The Assistant Treasurer - treasury Operations is responsible
for ensuring that personnel in the Cash Management Department
involved in risk management activities are sufficiently
trained and knowledgeable of current risk management practives
and these Procedures.
Section 3 EXPOSURE MANAGEMENT
3.1 Exposure Definition
3.1.1 The Finance Department is responsible for working with NU
business units to define specific sources of risks and to
aggregate those risks at a corporate level in order to
determine financial statement and economic impacts to the NU
System. Currently, these risks include:
a.) Interest rate risk - originated through the Treasury
Department,
b.) Fuel price risk - originated through the Wholesale and
Retail Marketing Groups, and
c.) Foreign currency risk - originated primarily through
Charter Oak Energy Company.
3.2 Exposure Measurement
3.2.1 Individual business units are responsible for the development
of exposure measurement methodologies and the resulting
quantification of exposures. The Finance Department is
responsible for working with the business units to understand,
develop and validate exposure measurement methodologies and
exposure levels.
3.2.2 Exposure measurement methodologies, including sources of
input, will be documented by the individual business units and
be subject to periodic review and approval by the Vice
President and Treasurer.
3.2.3 Exposure levels will be measured and reported by the
individual business units and reported to the Finance
Department on at least a quarterly basis. The Finance
Department will be responsible for reporting these exposures
to the Vice President and Treasurer, and to manage exposures
in accordance with the company s risk management strategies.
3.3 Authorized Hedging Activities
3.3.1 Under the direction of the Vice President and Treasurer and in
accordance with these Procedures, the Finance Department will
conduct various risk management activities to manage the
financial exposures of the NU System.
3.3.2 The Finance Department will maintain, adhere to, and notify
the Cash Management Department as to the list of authorized:
a.) trading personnel,
b.) hedging instruments,
c.) approved counterparties, and
d.) parameters set by the Vice President and Treasurer
pursuant to section 2.5.2.
3.3.3 The Finance Department is responsible for recommending and
seeking approval from the Vice President and Treasurer, as
necessary, for any changes in the authorizations described in
section 3.3.2.
3.3.4 The Finance Department is responsible for notifying approved
counterparties of the authorized trading personnel and any
restrictions or limitations on their activities. The initial
list of authorized NU trading personnel is attached as
Schedule A.
3.4 Limits
3.4.1 In conducting hedging activities, the Finance Department will
adhere to, and notify Cash Management of pre-established
trading limits authorized by the Vice President and Treasurer,
either on his/her own authority or in accordance with
limitations established by the NU Board, the ROC, or otherwise
pursuant to these Procedures. These limits may include limits
for each category of business exposure in relationship to the
maximum or minimum extent of such exposure(s) to be actively
hedged.
Section 4 CREDIT RISK MANAGEMENT
4.1 Credit Policies
4.1.1 In conducting risk management activities pursuant to these
Procedures, the Finance Department will maintain, adhere to,
and notify Cash Management of pre-established credit risk
policies which relate to NU s financial counterparties.
Established policies relating to credit risk management will
include:
a.) selection criteria for counterparties,
b.) any limitations on the number or value of transactions
with any one or more counterparties, and
c.) cash settlement and mark-to-market terms and
requirements.
4.1.2 Periodic cash settlements of outstanding hedging transactions
will take place in accordance with the contractual payment
terms negotiated by the Finance Department and documented in
the written agreements between the NU System and the
respective authorized counterparties (the Master Swap
Agreements). Payment will be made, and payment terms will be
enforced, by Cash Management.
4.1.3 Periodic mark-to-market of outstanding hedging transactions
will take place in accordance with the contractual mark-to-
market terms negotiated by the Finance Department and
documented in the Master Swap Agreements. Mark-to-market
terms will be enforced by the Cash Management Department.
4.1.4 Counterparties will be subject to collateral requirements
based on mark-to-market positions and individual counterparty
credit ratings approved by the Finance Department and
documented in the Master Swap Agreements.
4.1.5 To further minimize credit risk, the Finance Department is
responsible for monitoring the credit quality of
counterparties and for maintaining counterparties of high
credit quality, with sufficiently diverse financial and
business profiles to diversify the risk of default.
4.1.6 The Finance Department will be responsible for periodic
stress-testing of credit exposures given certain market
conditions and parameters and will report findings to the Vice
President and Treasurer.
4.2 Counterparty Selection
4.2.1 The Finance Department will maintain, adhere to, and notify
Cash Management of the list of approved counterparties. The
Finance Department will recommend and seek approval from the
Vice President and Treasurer, as necessary, for any change in
approved counterparties. Policies relating to counterparty
selection will include:
a.) credit ratings,
b.) counterparty expertise as it relates to specific
business exposures,
c.) acceptance of Master Swap Agreement terms and
conditions,
d.) corporate relationship concerns, and
e.) creditworthiness of a counterparty based on the
credit ratings of the institution as defined by
Moody s Investor Service and Standard & Poor s.
Minimum credit rating levels will be established by
the ROC, or, if the ROC does not establish minimum
credit rating levels, by the Vice President and
Treasurer.
4.2.2 Any changes in counterparty credit ratings will be reported to
the Vice President and Treasurer by the Finance Department.
4.2.3 The Finance Department will require all financial
counterparties to enter into Master Swap Agreements with the
appropriate NU subsidiary, and will conduct business in
accordance with the terms and conditions of the respective
Master Swap Agreements.
4.3 Monitoring and Reporting
4.3.1 The Cash Management Department will be responsible for
monitoring and reporting credit positions, at least quarterly,
to the Vice President and Treasurer. Information conveyed
will include:
a.) conduct of business with approved counterparties, and
b.) aggregate counterparty exposures compared to credit
limits.
4.3.2. The Cash Management Department will report immediately to the
Vice President and Treasurer any exceptions to the Master Swap
Agreement terms and conditions.
4.4 Documentation
4.4.1 The terms and conditions of the Master Swap Agreements will be
negotiated by the Finance Department, which shall assure that
no transactions take place with a counterparty until an
executed Master Swap Agreement complying with the requirements
of these Procedures is in place with that counterparty.
4.4.2 In order to minimize credit risk and ensure proper controls,
Master Swap Agreements will include specific language relating
to:
a.) definition of terms,
b.) calculation of prices/amounts,
c.) payments and settlements,
d.) collateral requirements,
e.) covenants,
f.) material adverse change,
g.) disposition of collateral,
h.) representations and warranties,
i.) events of default,
j.) early and accelerated termination, and
k.) swap and option confirmation schedules.
4.4.3 Legal counsel will be sought by the Finance Department to
approve all terms and conditions, opinions, certificates,
etc., agreed to in the Master Swap Agreements.
4.4.4 A library of all Counterparty Master Swap Agreements including
Schedules, Amendments, etc. will be established by the Finance
Department. They will ensure access to these documents by
providing the Cash Management Department, Internal Audit
Department, Accounting, Department, and the Legal Department
with copies of such material.
Section 5 MANAGEMENT REPORTING
5.1 Monitoring of Exposures and Hedge Positions
5.1.1 The Finance Department will be responsible for the daily
monitoring of the hedge portfolio and will report those
activities to the Vice President and Treasurer and the
Assistant Treasurer - Finance on at least a monthly basis or
as sudden and significant changes to hedged positions occur.
These activities will include:
a.) projections of cash settlement for all outstanding
hedge transactions,
b.) mark-to-market positions of all hedge contracts,
c.) market values and trends for underlying commodities,
interest rates, currencies, and
d.) counterparty credit limits and credit ratings.
5.2 Management Reporting
5.2.1 The Finance Department will be responsible for reporting
exposure and hedge positions to senior management, the Vice
President and Treasurer and the Council through a periodic
management report to be issued on at least a quarterly basis.
This report will include the following information:
a.) business exposures, as determined by business units
and reviewed by the Finance Department,
b.) outstanding hedge contracts, as aggregated by the
Finance Department and verified by the Cash
Management Department,
c.) comparison of exposures to hedge positions relative
to established hedge limits, as calculated by the
Finance Department and verified by the Cash
Management Department,
d.) market values and trends for underlying commodities,
interest rates, currencies or indices based on
publicly available market information or
counterparty quotes and aggregated by the Finance
Department,
e.) current and historical cash settlement positions
aggregated by the Finance Department and verified by
the Cash Management Department,
f.) current and historical mark-to-market positions
aggregated by the Finance Department and verified by
the Cash Management Department, and
g.) counterparty credit limits and exposures, aggregated
by the Finance Department and verified by the Cash
Management Department.
5.2.2 Exception reporting will be prepared by the Cash Management
Department and distributed to the Vice President and
Treasurer, Assistant Treasurer - Finance, and Assistant
Treasurer - Treasury Operations, as necessary.
5.3 Hedge Effectiveness and Performance
5.3.1 The Finance Department will be responsible for measuring the
effectiveness and performance of hedging activities, and will
report on the results of its evaluations to senior management,
the Vice President and Treasurer and the Council on at least
an annual basis.
5.3.2 Effectiveness and performance of the program will be based the
following criteria:
a.) original program objectives as approved by senior
management,
b.) actual risk reduction,
c.) effectiveness of hedge positions relative to
underlying exposures, and
d.) compliance with these Procedures.
Section 6 OPERATIONS AND PROCESSING
6.1 Trade Execution
6.1.1 In accordance with these Procedures, and under the immediate
direction of the Vice President and Treasurer, the Finance
Department as directed by the Assistant Treasurer - Finance
will be responsible for the execution of all hedge
transactions. This responsibility includes compliance with:
a.) trading and credit limits,
b.) approved hedge instruments,
c.) approved hedge tenors,
d.) approved commodities, interest rates, currencies or
indices,
e.) approved counterparties, and
f.) Master Swap Agreement documentation.
6.1.2 In addition to the policies and procedures identified in
section 6.1.1, the Finance Department shall consider the
following factors in executing hedge transactions:
a.) recent price indications and price projections,
b.) evaluations of the ability of potential counterparties to
meet the quantity and/or term of proposed transactions,
and
c.) current capabilities of various counterparties, recent
experience with various counterparties, and
diversification of counterparties.
6.1.3 The Finance Department will be responsible for notifying the
Vice President and Treasurer and the Cash Management
Department of new hedge transactions through the presentation
of a trade ticket. All trade tickets will be signed by
authorized trading personnel and signed for approval by either
the Vice President and Treasurer or the Assistant Treasurer -
Finance, in accordance with the transaction authorization
requirements of these Procedures.
6.2 Trade Confirmation
6.2.1 All hedging transactions will be confirmed by the Cash
Management Department, independent of the Finance Department.
The confirmation process will include:
a.) receipt of a trade ticket from the Finance Department,
signed and approved by the Vice President and Treasurer
or the Assistant Treasurer - Finance,
b.) independent verification of trade details by the Cash
Management Department through telephone conversations
with counterparties back offices,
c.) comparison of trade terms with approved policies and
procedures, including items listed in section 6.1.1,
d.) recording of trade ticket in computer database,
e.) receipt of standard confirmation schedule signed by
counterparty,
f.) verification signature of Assistant Treasurer - Treasury
Operations or Cash Management Supervisor on the
confirmation schedule to signify agreement of trade terms
by NU, and
g.) maintenance of a library containing trade tickets,
confirmation schedules, and other pertinent trade
documents.
6.2.2 All exception reporting relating to approved policies and
procedures will be the responsibility of the Cash Management
Department. Exceptions will be reported directly to the Vice
President and Treasurer and Assistant Treasurer - Finance.
6.3 Settlements and Mark-to-Market
6.3.1 The Cash Management Department will be responsible for the
settlement of all hedging transactions in accordance with
payment provisions of the Master Swap Agreement. This process
may include:
a.) payment of monies to counterparties via electronic funds
transfer to pre-established and approved bank accounts,
and
b.) billing of monies to counterparties through the Sundry
Billing Department through the use of pre-established and
approved NU System invoices.
6.3.2 The Cash Management Department will be responsible for :
a.) the mark-to-market of all outstanding hedge transactions
in accordance with mark-to-market provisions of the
Master Swap Agreements,
b.) comparing mark-to-market positions, by counterparty, to
counterparties and NU System s credit limits, and if
necessary comply with the collateral provisions of the
Master Swap Agreement, and
c.) reporting of all settlements and mark-to-market positions
of the NU System s hedge transactions on at least a
monthly basis via a management report aggregated by the
Finance Department.
6.3.3 The Finance Department will independently calculate
settlements and mark-to-market positions and work with the
Cash Management Department to confirm and reconcile all
payments and positions.
Section 7 ACCOUNTING AND DISCLOSURE
7.1 Accounting Policies
7.1.1 The Finance Department is responsible for maintaining current
knowledge of applicable accounting, tax, SEC and other
applicable standards for risk management transactions.
Accordingly, the Finance Department will work with the Legal,
Accounting and Tax Departments to :
a.) interpret existing criteria for risk management
transactions,
b.) maintain clear written accounting policies for
fundamental transactions,
c.) provide advice and recommendations, as needed, to
the ROC, the CFO, the Vice President and Treasurer,
and the Vice President and Controller on accounting,
tax, SEC and other matters related to risk
management activities and provide updates on new
standards as necessary,
d.) communicate hedge account criteria to independent
business units to ensure proper business decisions
can be made relating to the incidence of risk.
7.2 Disclosure
7.2.1 The Finance Department will also be responsible for working
with the Accounting Department to:
a.) understand and ensure proper financial disclosure of
derivative transactions and inform the Vice President and
Treasurer and Vice President and Controller of disclosure
polices, and
b.) monitor changes in disclosure requirements as proposed by
regulators including the Financial Accounting Standards
Board, the Securities and Exchange Commission and the
Internal Revenue Service.
7.3 Auditing
7.3.1 The NU System s risk management program will be subject to an
annual audit by NUSCO s Internal Audit Department and by the
NU System s external auditors to ensure compliance with these
Procedures. Items subject to audit will include:
a.) compliance with program goals and objectives, including
these Procedures,
b.) compliance with trading and credit limits,
c.) segregation of duties, and
d.) compliance with accounting and disclosure requirements.
7.3.2 The NUSCO Internal Audit Department will report the findings
of its audits to the NU Board and/or the Audit Committee of
the NU Board, to the CEO, CFO, Vice President and Treasurer
and Vice President and Controller, and to the Council.
Section 8 Exhibits
SCHEDULE A Appointment of Authorized Trading Personnel
SCHEDULE B Authorized Hedging Instruments
SCHEDULE C Approved Counterparties
SCHEDULE A - Appointment of Authorized Trading Personnel
The following employees of Northeast Utilities Service Company are
authorized to execute risk management transactions on behalf of the member
companies of the Northeast Utilities System pursuant to, and in compliance
with, the Northeast Utilities System s Risk Management Program Policies and
Practices (February 1996).
Signature Name Title
John B. Keane Vice President & Treasurer
David R. McHale Assistant Treasurer-Finance
Neil S. Herzig Senior Financial Analyst
SCHEDULE B - Authorized Hedging Instruments
Fuel
Floating to fixed swap
Underlying Exposure
Oil - 1% sulfur residual fuel oil, New York Harbor
Natural Gas - Henry Hub
Interest Rate
Cap
Underlying Exposure
LIBOR
JJ Kenny
SCHEDULE C - Approved Counterparties
Fuel
Morgan Stanley Capital Group, Inc.
Barclays Bank PLC
Citibank, N.A.
AIG Trading Corporation
Philbro Division of Solomon Inc.
Interest Rate
Barclays Bank PLC
First Chicago
Fleet Bank
Credit Lyonnais
Citibank, N.A.
Exhibit F.1
November 8, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: Northeast Utilities
The Connecticut Light and Power Company
Western Massachusetts Electric Company
Holyoke Water Power Company
Public Service Company of New Hampshire
North Atlantic Energy Corporation
File No. 70-8895
Ladies and Gentlemen:
I am Assistant General Counsel of Northeast Utilities Service Company
("NUSCO"), a service company affiliate of Northeast Utilities ("NU"). I have
acted as counsel to NU, The Connecticut Light and Power Company ("CL&P"),
Western Massachusetts Electric Company ("WMECO"), Holyoke Water Power Company
("HWP"), Public Service Company of New Hampshire ("PSNH") and North Atlantic
Energy Corporation ("NAEC") (collectively, the "Applicants") in connection
with the transactions contemplated by the application/declaration, as
amended, in the above referenced file (the "Application"). This opinion is
given to you with respect to such transactions pursuant to your Instructions
as to Exhibits to applications and declarations filed on Form U-1. Except as
otherwise defined herein, terms used herein shall have the meanings given
them in the Application.
In connection with this opinion, I have reviewed or caused to be
reviewed the Application and the exhibits thereto, the Applicants' charter
documents, as amended to the date of this opinion, the proceedings of their
shareholders and boards of directors to date and such other papers, documents
and records, and have made or caused to be made such examination of law, as I
deemed relevant and necessary in order to give this opinion. I have assumed
that in respect of the Application an appropriate order of the Commission
under the Public Utility Holding Company Act of 1935 will be issued and all
actions of the Applicants will be in conformity therewith.
The opinions set forth herein are qualified in their entirety as
follows: (a) every opinion rendered herein is expressly subject to the
consummation of such transactions in accordance with the Application using
documents substantially similar to that filed with the Application and in
accordance with such resolutions of the Board of Trustees or the Boards of
Directors of the other Applicants as may hereinafter be enacted to authorize
such transactions; (b) no opinion is expressed as to any laws other than the
federal laws of the United States and the laws of the States of Connecticut
and New Hampshire and of the Commonwealth of Massachusetts; (c) insofar as
any opinion relates to the Declaration of Trust of NU or the Certificate of
Incorporation or Bylaws of any other Applicant, I have assumed that the
Declaration of Trust and the Certificates and Bylaws will not be amended
between now and the time the transactions contemplated by the Application are
consummated; and (d) no opinion is expressed as to the securities laws of any
state.
Based on and subject to the foregoing, I am of the opinion that:
1. All state laws applicable to each of the transactions for which the
Commission's approval is sought will have been complied with at the time each
transaction is consummated.
2. NU, WMECO and HWP is each validly organized and duly existing under
the laws of the Commonwealth of Massachusetts; CL&P is validly organized and
duly existing under the laws of the State of Connecticut; and PSNH and NAEC
is each validly organized and duly existing under the laws of the State of
New Hampshire.
3. The Interest Rate Management Instruments, when executed and
delivered, will be the valid and binding obligations of such Applicants in
accordance with their respective terms.
4. The consummation of the transactions for which the Commission's
approval is sought will not violate the legal rights of the holders of any
securities issued by any of the Applicants or any associate company of such
Applicants.
I hereby consent to the use of this opinion in connection with the
filing of the Application.
I am a member of the Bar of the State of New York. As to matters
involving the laws of other jurisdictions, I have made a study of such laws
and consulted with lawyers employed by NUSCO who are admitted to the Bars of
such other jurisdictions.
Very truly yours,
/s/Jeffrey C. Miller
Assistant General Counsel
Northeast Utilities Service Company
