FILE NO. 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
NORTHEAST UTILITIES SELECT ENERGY, INC.
174 Brush Hill Avenue NORTHEAST GENERATION SERVICES
West Springfield, MA 01090-0010 COMPANY
107 Selden Street
Berlin, CT 06037
(Name of companies filing this statement and
addresses of principal executive offices)
NORTHEAST UTILITIES
(Name of top registered holding company)
Cheryl W. Grise, Esq.
Senior Vice President, Secretary and General Counsel
Northeast Utilities Service Company
P.O. Box 270
Hartford, Connecticut 06141-0270
(Name and address of agent for service)
The Commission is requested to mail signed copies of all orders, notices
and communications to
David R. McHale Jeffrey C. Miller, Esq.
Vice President and Treasurer Assistant General Counsel
Northeast Utilities Northeast Utilities
Service Company Service Company
P.O. Box 270 P.O. Box 270
Hartford, Connecticut Hartford, Connecticut
06141-0270 06141-0270
Table of Contents
Item 1. Description of the Proposed Transaction
Introduction - Paragraph 1
Background - Paragraphs 2-7
Prior Orders - Paragraph 8
Description of the Transaction - Paragraphs 9-14
Item 2. Fees, Commissions and Expenses - Paragraphs 15-16
Item 3. Applicable Statutory Provisions - Paragraphs 17-22
Exclusion of Equity Investment from
EWG/FUCO Investment Calculation - Paragraphs 23-24
Computation of Rule 53(a)(1) Limit based
on Adjusted Consolidated Retained Earnings - Paragraphs 22-29
Increase in EWG Investment to an amount
which exceeds 50% of CREs - Paragraphs 30-54
Service Agreement and Power Brokering
Agreement - Paragraphs 55-57
Item 4. Regulatory Approvals - Paragraph 58
Item 5. Procedures - Paragraph 59
Item 6 Exhibits and Financial Statements
a. Exhibits
b.1 Form of Service Agreement
b.2 Form of Power Brokering Agreement
b.3 Assumption Agreement
d.1 Connecticut Department of Public Utility Control Order
d.2 Massachusetts Department of Telecommunications and Energy Order
d.3 New Hampshire Public Utility Commission Order
f.1 Legal Opinion
g Financial Data Schedule
h.1 Form of Notice
b. Financial Statements
Item 7. Information as to Environmental Effects - Paragraph 60
ITEM 1 DESCRIPTION OF PROPOSED TRANSACTION
Introduction
1. The Applicants are seeking authority under the Public Utility Holding
Company Act of 1935 (the "1935 Act" or "Act") in connection with the
acquisition by Northeast Generation Company ("NGC") of certain generating
assets that are currently owned by The Connecticut Light and Power Company
("CL&P) and Western Massachusetts Electric Company ("WMECO"). Specifically,
Northeast Utilities ("NU") requests authority to enter into two assumption
agreements (collectively, the "Assumption Agreement") in connection with the
acquisition (the "Transaction"). In addition, NU asks the Commission to find
that, upon the consummation of the Transaction, NU will continue to satisfy
the terms of the safe harbor under Rule 53. In the alternative, NU requests
the Commission to find that the Transaction-related financing will not have a
substantial adverse impact upon the financial integrity of the registered
holding company system and 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, as
required by Rule 52(c). Finally, to the extent such transactions are not
authorized by rule or otherwise, the Applicants seek authority for Select
Energy, Inc. ("Select") and Northeast Generation Services Company ("NGS") to
provide certain services to NGC at other than cost.
Background
2. NU is a registered holding company under the Act that is engaged through
its utility subsidiaries in the generation, transmission, distribution, and
sale of electric energy to customers in portions of the states of
Connecticut, Massachusetts and New Hampshire. The utility operating
companies of NU, each of which is wholly-owned, are CL&P, WMECO, Public
Service Company of New Hampshire ("PSNH") and North Atlantic Energy
Corporation ("NAEC") (each individually an "NU Operating Company" and
collectively, the "NU Operating Companies"). NU also furnishes retail
electric service to a limited number of customers through a wholly-owned
subsidiary, Holyoke Water Power Company.
3. NU also has a number of direct and indirect non-utility subsidiaries.
NU Enterprises, Inc. ("NUEI") is a wholly-owned direct subsidiary of NU and
acts as the holding company for the NU system's unregulated companies. Among
the subsidiaries of NUEI are Select a marketing and brokering Rule 58
subsidiary, NGC, intended to be NU's competitive generating company, and NGS,
a Rule 58 generation operation and services company.
4. As a Connecticut utility, CL&P is subject to the jurisdiction of the
Connecticut Department of Public Utility Control (the "DPUC"). In April
1998, the State of Connecticut enacted comprehensive electric utility
restructuring legislation. CL&P is subject to this legislation. In
particular, the law provides, among other things, that CL&P divest its non-
nuclear generating assets (the "CL&P Assets") by January 2000 and its nuclear
generating assets by January 2004 in order to recover stranded costs. Under
the law, affiliates of CL&P were allowed to bid in both auctions. The
auction for the CL&P Assets took place in the spring and summer of 1999. In
addition the law allows for the issuance of rate reduction bonds ("RRBs") to
finance portions of a utility's stranded costs through securitization
transactions. WMECO is subject to similar legislation in Massachusetts and
sold its fossil fueled and a small portion of its hydroelectric generating
plants in the summer of 1999.(1) The Massachusetts law also allows RRBs to
be issued. The remaining non-nuclear generating plants of WMECO; a
hydroelectric pumped storage generating plant jointly owned with CL&P, and
two adjacent hydroelectric plants (the "WMECO Assets"), were included in the
auction with the CL&P Assets.
5. On October 1, 1998, CL&P filed a plan with the DPUC to auction the CL&P
Assets and functionally unbundle its operations. On July 6, 1999, CL&P and
WMECO announced that NGC, which intends to seek exempt wholesale generator
("EWG") status, was the winning bidder for 1,329 megawatts ("MW") of
hydroelectric and pumped storage generating assets in Connecticut and
Massachusetts (the "Transaction"), which comprised all of the WMECO Assets
and the hydroelectric portion of the CL&P Assets (collectively with the WMECO
Assets, the "Utility Assets"). NRG Energy, Inc., a subsidiary of Northern
States Power Company, won the bidding for the remainder of the CL&P Assets.
6. NGS will operate the Utility Assets pursuant to a service agreement with
NGC (the "Service Agreement"), a form of which will be filed by amendment as
Exhibit b.1. Further, NGC currently intends to contract with its affiliate,
Select to market the power generated by the Utility Assets pursuant to a
power marketing agreement with NGC. This agreement will be filed for
approval with the Federal Energy Regulatory Commission ("FERC") and is not
subject to 1935 Act jurisdiction. In the alternative, NGC may also enter
into a power brokering agreement with Select (the "Power Brokering
Agreement"), a form of which will be filed by amendment as Exhibit b.2
pursuant to which Select may broker power generated by the Utility Assets.
7. The NU Operating Companies plan to use a portion of the proceeds from
asset sales and from the RRBs to retire outstanding debt and preferred stock
and to buy down existing power purchase contracts with independent power
producers. To reduce their respective common equity capitalizations, the NU
Operating Companies also plan to use a portion of their restructuring
proceeds either (i) to pay dividends to NU, (ii) to buy back a portion of
their outstanding common stock owned by NU and/or (iii) to effect capital
reductions through a combination of dividends and stock repurchases. NU and
the NU Operating Companies currently expect that the aggregate amount of
funds channeled to NU through these methods will be approximately $915
million. These transactions are the subject of a related filing with the
Commission. See Northeast Utilities, File No. 70-09541 (August 26, 1999).
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(1). PSNH and NAEC are subject to similar restructuring laws in New
Hampshire. Under New Hampshire law, generation assets must be divested and
RRBs may also be issued.
Prior Orders
8. By Order dated November 12, 1998 (HCAR No. 35-26939), in File No. 70-
9343, the Commission, among other things, authorized (i) the formation and
financing by NU of a nonutility subsidiary company (which is referred to
therein as "Newco" but which is now known as NUEI) to engage, through
multiple subsidiaries, in a variety of energy related and other activities
and (ii) the acquisition by NUEI of, among other things, the securities of
GENCO (now known as NGC) and NGS. The Commission also authorized NU and NUEI
to issue guarantees or provide other forms of credit support or enhancements
(collectively, "Guarantees") to or for the benefit of NUEI, NGS, NGC, NU's
other unregulated subsidiaries and NU's other direct or indirect Rule 58
subsidiaries to be formed by NU, in an aggregate amount not to exceed $75
million. The amount of the guarantee authority was increased to $250 million
pursuant to a supplemental Order of the Commission dated May 19,1999 (HCAR
No. 35-27029) in File No. 70-9343 (the "Supplemental Order"). NU and NUEI
filed an amendment to the Application in File No. 70-9343 seeking increased
guaranty authority to $500 million on August 23, 1999.
Description of the Transaction
9. As indicated above, in July 1999, CL&P and WMECO contracted to sell the
Utility Assets to NGC as the result of an auction conducted by J.P. Morgan
Securities, Inc. ("J.P. Morgan"), an independent consultant retained by the
DPUC to sell the Utility Assets for the benefit of CL&P and WMECO. NGC's
bid of $865.5 million was for 10 hydroelectric facilities owned by CL&P in
Connecticut; the Northfield Mountain pumped storage station (owned 81% by
CL&P and 19% by WMECO) in Massachusetts and the Cabot and Turners Falls No. 1
hydroelectric stations located in Massachusetts and owned by WMECO.
Subsequent to the auction, NGC executed a purchase and sale agreement with
CL&P for the assets owned by CL&P (the "CL&P PSA") and a purchase and sale
agreement with WMECO for the assets owned by WMECO (the "WMECO PSA", and
collectively with the CL&P PSA, the "PSA").
10. In connection with the Transaction, NGC intends to file for EWG status
with FERC under Section 32(a) of the Act. Section 32(c)(B) of the Act
provides that Commission approval is not required for the transfer of
generating assets to an EWG where the affected state regulators have found
that the transfer (i) will benefit consumers, (ii) is in the public interest,
and (iii) does not violate state law. The required filings have been made
with the relevant State commissions. Copies of the state orders will be
attached by amendment as Exhibits d.1, d.2 and d.3. Accordingly, CL&P and
WMECO are not required to seek Commission approval of the sale of the Utility
Assets to NGC.
11. NGS will operate the Utility Assets pursuant to Rules 87(b)(1) and
90(d)(1). To the extent Select brokers, rather than markets, the power
generated by the Utility Assets, Select will provide services to NGC under
the Power Brokering Agreement pursuant to Rules 87(b)(1) and 90(d)(1). While
the Applicants believe that these transactions are duly authorized under the
Commission's rules, they nonetheless request such additional authority as the
Commission believes may be required.
12. Because NGC is a newly formed company with no financial resources (see
Northeast Utilities, HCAR 35-26939), NU was required to execute the
Assumption Agreement in connection with the Transaction, the form of which is
attached as Exhibit b.3. Pursuant to the Assumption Agreement, NU agreed,
subject to regulatory approvals, to perform the obligations set out in the
PSA if NGC does not perform such obligations. Under the terms of the PSA,
the purchaser is not required to perform its obligations thereunder if it
does not receive all the required regulatory approvals (including the
approvals of the Commission). Accordingly, NU would only be required to
perform under the PSA pursuant to the terms of the Assumption Agreement if
all regulatory approvals (including that of the Commission) were obtained.
Once all regulatory approvals are received, NU would be obligated to perform
all obligations of NGC under the PSA if NGC did not perform. NU has valued
the obligations of NU under the Assumption Agreement at $13 million. NU
hereby seeks approval of its obligations under the Assumption Agreement
pursuant to Section 12(b) of the Act and Rule 45 thereunder.
13. To finance the acquisition of the Utility Assets, NGC negotiated a
financing transaction with several financial institutions ("Banks"), whereby
Banks would provide financing to NGC in two separate tranches. Tranche A
would consist of a credit facility of up to $365.5 million. This amount
would be repaid concurrently with the funding of the credit facility, using
funds provided to NGC by NU, through NUEI, pursuant to Section 12(b) and Rule
45(b)(4) thereunder.(2) Tranche B would consist of a senior secured 364-day
loan facility in an amount up to $500 million from Banks. Tranche B will be
secured, including by a mortgage on the Utility Assets. NGC presently plans
to repay the funds provided under tranche B from the proceeds of a capital
markets transaction pursuant to Rule 52.
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(2) NU would obtain the necessary funds to make such contribution to NUEI out
of a combination of (i) dividends paid to NU by CL&P and WMECO, (ii) the
repurchase from NU of a portion of the stock of CL&P and WMECO by the
respective companies and (iii) to the extent necessary, funds available to it
from other sources. CL&P and WMECO would use approximately $400 million of
the proceeds from the sale of the Utility Assets to make such payments. CL&P
and WMECO are filing a separate application/declaration on Form U-1 for
authorization to upstream the Returned Capital to NU in this fashion. See,
Northeast Utilities, File No 70-09541 (August 26, 1999).
14. NU will contribute up to $435 million to NUEI, which will, in turn,
contribute it to NGC (the "Equity Investment"). NGC will concurrently apply
these funds to repay tranche A to Banks, pay additional transaction costs and
retain the balance for working capital purposes.
ITEM 2 FEES, COMMISSIONS AND EXPENSES
15. The fees, commissions and expenses paid or incurred, or to be paid
or incurred, directly or indirectly, in connection with the proposed
transaction by the Applicants are as follows:
Legal fees $*
Accounting fees $*
Miscellaneous costs $*
NUSCO Fees $*
* to be filed by Amendment
16. None of such fees, commission or expenses will be paid to any
associate company or affiliate of the Applicants except for payments by the
Applicants for financial and other services, to be performed at cost by
Northeast Utilities Service Company ("NUSCO"), an affiliated service company.
ITEM 3 APPLICABLE STATUTORY PROVISIONS
17. The following sections of the Act and the Commission's rules thereunder
are or may be applicable to the authorization being sought hereunder by the
Applicants: Sections 6(a), 7, 12(b) 13 and 32 of the Act and Rules 45, 53,
54, 87 and 90 promulgated thereunder. To the extent that other sections of
the Act or the Commission's rules thereunder are deemed applicable to the
proposed transactions for which Commission authorization is sought, such
sections and rules should be considered to be set forth in this Item 3.
18. Rule 53 provides that, if each of the conditions of paragraph (a)
thereof is met, and none of the conditions of paragraph (b) thereof is
applicable, then the Commission may not make a finding that the guarantee of
a security of an EWG by a registered holding company is not reasonably
adapted to the earning power of such company or to the security structure of
the companies in the holding company system, or that the circumstances are
such as to constitute the making of such guarantee an improper risk for the
company.
19. Giving effect to the proposals contained herein and assuming the amount
of the Assumption Agreement and the Equity Investment are all included in the
calculation of EWG investment, NU will satisfy all of the conditions of Rule
53(a) except, possibly, for clause (1) thereof, which requires that the
aggregate at risk investment of the registered holding company in EWGs and
FUCOs not exceed 50% of the holding company system's Consolidated Retained
Earnings ("CREs"). None of the conditions specified in Rule 53(b) is or will
be applicable.
20. As of June 30, 1999, NU's aggregate investment in EWGs and FUCOs was
approximately $6 million, or 1% of its average CRE of approximately $579
million. The addition of the investment and credit support necessary for NGC
to consummate the Transaction would cause NU's aggregate investment in EWGs
and FUCOs to exceed 50% of the system's CREs, as computed in reliance on Rule
53. In addition, PSNH has recently agreed with the various New Hampshire
parties to settle a broad variety of disputes relating to restructuring which
will require PSNH to absorb a $225 million after-tax write-off. This write-
off will reduce NU's CREs by such amount to $354 million, if implemented, as
expected, in late 2000.
21. The Rule 53(a)(1) issue is largely accounting-driven. The divestiture
required in the three states, combined with the authorization to issue the
RRBs, leave the NU Operating Companies in a unique financial position in that
they will experience a significant decrease in the amount of tangible assets
that they own and receive a substantial influx of cash almost simultaneously.
However, neither the proceeds from the divestiture of the NU Operating
Companies' generation assets nor the proceeds from the RRBs will have any
effect on the net incomes of the NU Operating Companies. Accordingly, while
the NU Operating Companies will experience a substantial influx of cash from
these transactions, none of that cash will be treated as "earnings" on their
respective financial statements.
22. To address this situation, NU requests that the Commission: (i)
authorize NU to exclude some or all of the Equity Investment from the
calculation of its aggregate EWG/FUCO investment for purposes of Rule 53;
(ii) permit NU to compute the percentage for purposes of Rule 53(a)(1) based
on "adjusted consolidated retained earnings" or "ACREs;" or (iii) grant NU an
exception from the 50% limit in respect of the instant Transaction.
Exclusion of the Equity Investment from EWG/FUCO Investment Calculation.
23. This Equity Investment is equal to approximately 75% of NU's CREs as of
June 30, 1999 and, when aggregated with NU's outstanding FUCO investment at
that date (approximately $6 million), NU's investment in EWGs and FUCOs, on a
pro forma basis, is approximately 76%. When aggregated with the value of the
Assumption Agreement ($13 million ), NU's aggregate investment in EWGs and
FUCOs, pro forma ($454 million), is approximately 78.4% of NU's CREs as of
June 30, 1999. NU seeks authority to exclude some or all of the Equity
Investment from its EWG/FUCO investment calculation for purposes of Rule 53.
The rationale for this proposal is as follows:
(a) The sale of the Utility Assets by CL&P and WMECO is mandated
by electric restructuring legislation in both Connecticut and Massachusetts.
Both states approved the sale of generation assets by auction and must
ultimately approve the outcome of the auctions as well. While NGC was not
required to bid for such assets, NU believes that the ownership of such
assets in today's rapidly deregulating industry, especially assets such as
the Utility Assets, which were previously owned by certain NU Operating
Companies, would be beneficial for the NU System, its shareholders and its
consumers by providing a solid initial base for successfully competing in the
energy business in the Northeastern United States. The proposed EWG
investment is in generating assets that have been owned and operated by
affiliates for many years in the historic service territories of the NU
system. These circumstances significantly mitigate the risk associated with
many other EWG and FUCO investments.
(b) As indicated earlier, approximately $400 million of capital from the
proceeds of the sale of the Utility Assets is expected to be returned to NU
by CL&P and WMECO through the combination of stock purchases and dividend
payments (the "Returned Capital"). Although the Returned Capital will not,
for accounting reasons, count as retained earnings of NU available for EWG
and FUCO investment under Rule 53, it will nonetheless represent cash
available to NU to be expended on other investments just as if it were
retained earnings dividended up to NU by NU's subsidiaries. The Equity
Investment being made by NU in NGC is mostly the intrasystem reallocation of
equity from two companies within the NU system (CL&P and WMECO) to another
system company (NGC). Accordingly, NU does not believe that it is contrary
to the intent of Rule 53 or against public policy for the Commission to grant
a "credit" to NU towards its CREs in the amount of Returned Capital by
excluding from the calculation of its EWG/FUCO investment at least the amount
of the Returned Capital.
(c) Rule 53 was adopted prior to the onset of state mandated generation
divestitures and restructuring and could not have been intended to address
the situation where, as here, the EWG investment is a result of the
acquisition by a subsidiary of a registered holding company of utility assets
that are required to be divested by another subsidiary of the holding
company. Rule 53 was adopted pursuant to Section 32(h)(6) of the 1935 Act
which required the Commission to promulgate rules relating to registered
holding companies' financing support for their affiliate EWGs and the
circumstances under which such financing support could have a "substantial
adverse impact" on the "financial integrity" of a registered system. Neither
Rule 53 nor Section 32 was designed or intended to penalize registered
holding companies for their compliance with state-mandated disaggregation
laws because such laws and the results of disaggregation were not
contemplated when Section 32 was enacted or when Rule 53 was adopted.
24. For the above reasons, NU requests that it be allowed to exclude
from its EWG investment calculation some or all of Equity Investment. In the
alternative, as set forth below, NU asks the Commission to permit NU to
compute the percentage for purposes of Rule 53(a)(1) on the basis of
"adjusted consolidated retained earnings" or "ACREs", or grant NU an
exception from the 50% limit in respect of the instant Transaction.
Computation of Rule 53(a)(1) Limit Based on Adjusted Consolidated
Retained Earnings.
25. It is important to note that NU is not seeking the unfettered
discretion to invest in EWGs and FUCOs. Rather, NU at this time is seeking
only the authorization related to NGC's acquisition of the Utility Assets.
The fact that the Utility Assets are currently owned by NU Operating
Companies is relevant because, although the investment by NU in NGC may be in
excess of 50% of NU's consolidated retained earnings, the disposition by CL&P
and WMECO of their respective generating assets will result in significant
proceeds to each of WMECO and CL&P. As described above, a substantial
portion of such proceeds (approximately $400 million) will be upstreamed to
NU through the Returned Capital. In addition, NU and the NU Operating
Companies expect that up to an additional $515 million will be available to
be upstreamed from the NU Operating Companies to NU from proceeds of other
generating assets sales and the issuance of the RRBs (the "Other Capital").
26. While neither the Returned Capital nor the Other Capital will, for
accounting reasons, count as retained earnings of NU, they will nonetheless
represent cash available to NU for investments. The net effect, therefore,
will be the same as if retained earnings equal to the Returned Capital and
the Other Capital had been dividended up to NU by its subsidiary companies.
To the extent that the Returned Capital and Other Capital function as the
equivalent of retained earnings in this regard, NU seeks authority to add the
Returned Capital and Other Capital to its consolidated retained earnings,
solely for purposes of computing the 50% limit for purposes of Rule 53(a)(1).
Aggregate investment would thus be measured against 50% of "ACREs,"
representing the sum of Returned Capital, Other Capital and consolidated
retained earnings.
27. In the instant matter, on a pro forma basis, with the inclusion of
the Returned Capital ($400 million), NU would have approximately $489.5
million available for its EWG and FUCO investments, that is, 50% of the sum
of $579 million consolidated retained earnings and $400 million Returned
Capital. NU's obligations under the Assumption Agreement and the Equity
Investment, when combined with its current FUCO investment, would amount to
only 46.4% of NU's ACREs ($454 million divided by the sum of $579 million
(consolidated retained earnings) plus $400 million (Returned Capital)) and
only 35.8% of NU's 2000 ACREs ($454 million divided by the sum of $354
million (consolidated retained earnings) plus $400 million (Returned Capital)
plus $515 million (Other Capital)).
28. For the reasons set forth above, NU believes that ACREs provides a
more accurate measure of "system financial integrity" than would traditional
consolidated retained earnings in the facts of this matter. In its release
adopting Rule 53, the Commission explained its choice of the retained
earnings standard:
The Commission chose this standard as the one best suited to
accomplish several key goals. The rules under section 32 are intended
to protect system financial integrity and to protect utilities and their
ratepayers. A key factor in this regards is the ability of system
companies to raise capital at a reasonable cost. Because the parent
company is an important source of the capital invested in the utility
operations of its subsidiaries, its ability to raise capital
economically, especially equity, the most expensive type of capital,
protects the core business and keeps consumer rates down.
Adoption of Rules, Forms, and Form Amendments Relating to Exempt Wholesale
Generators and Foreign Utility Companies, Holding Co. Act Release No. 25886
(Sept. 23, 1993).
29. The proposed Transaction is one of a series of transactions that
will have the effect of permitting WMECO and CL&P to reduce their
capitalization to enable them to provide lower cost service to consumers.
Accordingly, NU does not believe that it is contrary to the intent of Rule 53
or against public policy for the Commission to permit NU to use ACREs in
computing the 50% limit for purposes of Rule 53(a)(1). In the alternative NU
asks the Commission to grant it an exception from the 50% limit in respect of
the instant Transaction.
Increase in EWG Investment to an Amount which Exceeds 50% of CREs
30. Rule 53(c) states that, in connection with a proposal to issue and sell
securities to finance an investment in an EWG, or to guarantee the securities
of an EWG, a registered holding company that is unable to satisfy, among
other provisions, the provision that such investments may not exceed 50% of
CREs, must "affirmatively demonstrate" that such proposal:
(i) will not have a substantial adverse impact upon the financial integrity
of the registered holding company system; and
(ii) 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.
31. The Commission has performed an analysis of the requirements of Rule
53(c) with respect to applications/declarations filed by a number of the
registered holding companies. See The Southern Company ("Southern"), Holding
Co. Act Release No. 26501 (April 1, 1996); Central and South West Corporation
("CSW"), Holding Co. Act Release No. 26653 (Jan. 24, 1997); GPU, Inc.
("GPU"), Holding Co. Act Release No. 26779 (Nov. 17, 1997); Cinergy, Inc.
("Cinergy"), Holding Co. Act Release No.26848 (March 23, 1998); American
Electric Power Company, Inc. ("AEP"), Holding Co. Act Release No. 26864
(April 27, 1998); and New Century Energies, Inc. ("New Century"), Holding Co.
Act Release No. 26982 (February 26, 1999) (collectively, the "100% Orders").
32. Unlike the 100% Orders, which were intended largely to facilitate
foreign investment, the authority sought in this matter is related to an
investment in one specific EWG, not EWGs generally, which was acquired
pursuant to the state-ordered divestiture of two of NU Operating Companies'
generating assets.
33. NU addresses the requirement of Rule 53(c)(i) as follows:
The aggregate investment in NGC is made up of two components: the Assumption
Agreement ($13 million) and the Equity Investment ($435 million). An
analysis of the proposed investment by NU, and the surrounding circumstances,
demonstrates that the aggregate investment associated with the Transaction
will not have a "substantial adverse impact" on the financial integrity of
the NU System.
34. As stated above, the electric industry in the states in which NU
operates is undergoing significant restructuring. All three states in which
the NU Operating Companies operate require that the NU Operating Companies
divest themselves of their respective generating assets. The proceeds of
these divestitures, along with the proceeds from the RRBs, will generate
funds to the NU Operating Companies which will be used to reduce debt and
preferred stock and reduce common capitalization by upstreaming funds to NU
through the use of a combination of dividend payments and stock buybacks. NU
believes that at this stage of restructuring , it is critical that NU have
the flexibility to increase its aggregate investment in EWGs in order to
create maximum shareholder value.
35. Other factors which are relevant and should be considered include the
following:
(a) As indicated above, the sale of the Utility Assets by CL&P and WMECO is
mandated by Connecticut and Massachusetts law. NU believes that the ownership
of such assets in today's rapidly deregulating industry, especially these
assets which had been previously owned by NU Operating Companies, would be
beneficial for the NU System, its shareholders and its consumers.
(b) NU anticipates making no further investment in NGC in connection with
the transfer of the Utility Assets to NGC and the majority of the equity
being invested in NGC by NU is equity that had previously been invested by NU
in CL&P and WMECO. As indicated earlier, most of the funds used to make the
equity investment in NGC will be obtained by NU through Returned Capital from
CL&P and WMECO.
(c) The Utility Assets have been owned and operated by the NU system for
many years and will continue to be maintained and operated by the same NU
organization after the sale; thus, "country," construction and operating
risks are non-factors here.
(d) The power generated by the Utility Assets will be competitively marketed
in the Northeast region, where NU has long been a leading energy marketer,
first through certain of the NU Operating Companies and in the future through
Select, its competitive energy marketing affiliate.
(e) The Utility Assets consist mainly of the Northfield Mountain pumped
storage facility, which NU considers the premier generating property in New
England due to its unique operating characteristics and history of reliable
service.
36. NU's low level of CREs is attributable to the years of losses incurred
while the NU system was solving its problems at the Millstone Point Nuclear
Power plants which required the temporary shutdown of 2 of the 3 nuclear
plants and the permanent shutdown of the third plant and the settlement of
its New Hampshire regulatory and political difficulties. Upon the
divestiture of its nuclear plants, which is mandated by state legislation and
expected to begin prior to 2004, and issuance of RRBs , NU will be a
conventional mid-sized transmission and distribution electric company with a
modest investment in competitive generation and a mid-sized retail gas
company (assuming the proposed Yankee Energy System, Inc. acquisition is
consummated (See Northeast Utilities, File No. 70-09535)) all located in the
same service area it has occupied for many years. The resolution of the
various operational and regulatory issues and the enhanced competitive
position of NU in the Northeast after its restructuring are expected to have
a positive effect on earnings and shareholder value. Set forth below are
some relevant financial ratios referenced in the 100% Orders.
37. Capitalization Ratios. The following analysis will only consider the
EWG investment consisting of the Equity Investment ($435 million) and the
Assumption Agreement ($13 million). The aggregate investments in EWGs and
FUCOs (as defined in Rule 53(a)) of $448 million would still represent a
relatively small commitment of NU capital for a company the size of NU, based
on various financial ratios at June 30, 1999. For example, investments of
this amount would be equal to only approximately 8% of NU's total
consolidated capitalization ($5.5 billion), 7.3% of consolidated net utility
plant ($6.1 billion), 4.4% of total consolidated assets ($10.3 billion), and
18.7% of the market value of NU's outstanding common stock ($2.4 billion) as
of August 20, 1999. The following chart shows how these compare to the same
percentages for Southern, CSW, GPU, Cinergy, and AEP, as reflected in each
system's respective 100% Orders.
Investments in EWGs and FUCOs
(assuming equal to 100% of consolidated retained earnings)
as a percentage of:
Company Consolidated Consolidated Total Market Value of
Capitalization Net Utility Consoli- Outstanding Common
Plant dated Assets Stock
Southern 16.3% 15.4% 11.0% 20.4%
CSW 23.0% 23.0% 14.0% 31.0%
GPU 24.9% 34.2% 19.4% 49.8%
Cinergy 16.0% 16.0% 11.0% 19.0%
AEP 16.0% 13.8% 9.8% 18.5%
Average of
above 19.2% 20.5% 13.0% 27.7%
NU 8.% 7.3% 4.4% 18.7%
38. This comparison verifies that an aggregate investment of $448 million by
NU would involve a relatively small commitment of capital for a company of
NU's size. Moreover, in every category, the NU percentage is lower than or
substantially equal to the applicable percentage for the other registered
systems that have 100% Orders. Furthermore, as indicated elsewhere in this
Application/Declaration, the majority of the equity investment which NU will
be making in NGC will be funded by the sale of the Utility Assets by CL&P and
WMECO. It will be, in essence, a redistribution of NU capital from the
Operating Companies that had previously held the Utility Assets to the EWG
which will in the future own and operate the Utility Assets.
39. Rule 53(B) Factors. With respect to the relevant financial benchmarks
specifically contemplated by Rule 53(b), none is applicable: (1) there has
been no bankruptcy of an NU associate company (Rule 53(b)(1)); (2) although
NU's average CREs of the four most recent quarterly periods have decreased by
more than 10% from the average for the preceding four quarterly periods (Rule
53(b)(2)), NU's aggregate investment in EWGs and FUCOs at June 30, 1999, did
not exceed 2% of NU's consolidated capital invested in utility operations;
and (3) in the previous fiscal year, NU did not report operating losses
attributable to its direct or indirect investments in EWGs and FUCOs that
exceeded an amount equal to 5% of CREs (Rule 53(b)(3)).
40. NU undertakes to notify the Commission by filing a post-effective
amendment in this proceeding in the event that any of the circumstances
described in Rule 53(b) arise during the authorization period.
41. NU addresses the requirement of Rule 53(c)(ii) as follows:
NU's request in this Application/Declaration to raise NU's investment limits
in EWGs and FUCOs to an amount in excess of 50% of its CREs will not have an
"adverse impact" on any of NU's Operating Companies, their respective
customers, or on the ability of the three State commissions having
jurisdiction over the NU Operating Companies to protect such NU Operating
Companies or such customers.
42. The conclusion that the NU Operating Companies and their customers will
not be adversely impacted by the increased level of investment by NU in EWGs
and FUCOs is supported by (i) the insulation of the NU Operating Companies
and their customers from potential direct adverse effects of investments in
EWGs and FUCOs; (ii) analysis of the NU Operating Companies' financial
integrity and (iii) the proven effectiveness of state commission oversight
together with the affirmation by the state commissions of Connecticut,
Massachusetts and New Hampshire that they have authority and jurisdiction,
and will exercise such authority, to protect customers in their respective
states from any adverse impact.
43. Insulation from Risk. All of NU's investments in EWGs and FUCOs are,
and in the future will remain, segregated from the NU Operating Companies.
Any losses that may be incurred by such EWGs and FUCOs would have no effect
on the rates of any NU Operating Company. NU represents that it will not
seek recovery through higher rates from the NU Operating Companies' utility
customers in order to compensate NU for any possible losses that it or NGC
may sustain on the investment in NGC or for any inadequate returns on such
investments.
44. Moreover, to the extent that there may be indirect impacts on the NU
Operating Companies from NU's EWG and FUCO investments through effects on
NU's capital costs, the state commissions regulating the NU Operating
Companies can set the cost of capital for electric utilities by comparison
with selected groups of domestic utilities, which may exclude any utilities
with adverse impacts due to EWGs and FUCOs. Therefore, the states have the
authority and the mechanism to prevent any adverse effects on the cost of
capital due to investments in EWGs and FUCOs from being passed on to
customers.
45. NU has complied and will continue to comply with the requirements of
Rule 53(a)(3) regarding the limitation on the use of NU Operating Company
employees in connection with providing services to EWGs and FUCOs. The
purchase by NGC of the Utility Assets is not anticipated to have any impact
on utilization of NU Operating Company employees. As part of the
acquisition, NGC committed to offer employment to certain employees of CL&P
and WMECO. Accordingly, NGC will have sufficient employees to operate the
Utility Assets, if required beyond the services to be provided by NGC. The
NU Operating Companies have not and will not increase staffing levels to
support the operations of EWGs and FUCOs. NU and NGC expect that certain
operations services for EWGs and FUCOs will largely be performed by NGS and
some by outside consultants engaged by NGC. It is expected that NUSCO will
also be called upon to provide some services. Accordingly, NGC's need for
the support of personnel provided by the NU Operating Companies is expected
to be modest.
46. Finally, NU has complied and will continue to comply with the other
conditions of Rule 53(a) providing specific protections to customers of the
NU Operating Companies and their state commissions, in particular, the
requirements of Rule 53(a)(1) regarding the preparation and making available
of books and records and financial reports regarding EWGs and FUCOs, and the
requirements of Rule 53(a)(4) regarding filing of copies of applications and
reports with other regulatory commissions.
47. NU Operating Company Financial Integrity. As indicated earlier in this
Application/Declaration, the reduced CREs of the NU system is mainly the
result of its problems and shut-down of its Millstone nuclear power units.
As the Commission is aware, all three nuclear units at Millstone ("Millstone
1", "Millstone 2" and "Millstone 3") were shut down in 1996. This created a
substantial drain on the financial resources of the NU system as CL&P and
WMECO were forced to purchase power from third parties and incurred
significant operations and maintenance costs for the Millstone units. In
1998, NU determined that it would not be economical to restart Millstone 1
and instead chose to prepare for decommissioning the unit. Millstone 3 was
returned to service in July 1998. Millstone 2 returned to service and was
restored to rate base in 1999. The return of Millstone 2 and 3 is expected
to continue to enhance the NU Operating Companies' financial health.
48. The improved financial health outlook of the NU Operating Companies is
evidenced by the recent increase in ratings and positive outlook assigned by
the credit ratings agencies. Standard &Poor's raised CL&P and WMECO's senior
secured ratings from BB+ to BBB- in May 1999, and Moody's raised CL&P's and
WMECO's senior secured ratings from Ba2 to Baa3 at the same time. Fitch IBCA
also upgraded CL&P and WMECO's senior secured ratings and placed NU on
"alert" for a possible upgrade.
49. The NU Operating Companies' senior secured ratings as of June 30, 1999
are as follows:
S&P Moody's Fitch
CL&P BBB- Baa3 BB+
WMECO BBB- Baa3 BB+
PSNH BBB- Ba3 BB+
NAEC BB- B1 BB-
50. NU Operating Companies' Capital Needs. Additional investments in NGC
will not have any negative impact on the NU Operating Companies' ability to
fund operations and growth. Current projections indicate that the NU
Operating Companies will continue to fund operations and construction
expenditures primarily from internal sources of cash, credit facilities and
securitization proceeds. Moreover, there is ongoing evidence that the NU
Operating Companies can access capital markets as needed.
51. Adequacy Of State Commission Oversight. The three state commissions
having jurisdiction over the NU Operating Companies, namely Connecticut,
Massachusetts and New Hampshire (collectively, "State Commissions") are able
to protect utility customers within their respective states. The State
Commissions are actively encouraging competition in the industry and have
promulgated regulations concerning competition. In addition, the State
Commissions have approved the sale of the Utility Assets to third parties.
The acquisition of the Utility Assets by NGC must be specifically approved by
the State Commissions.
52. Finally, as noted above, the State Commissions will have authority to
make adjustments in the NU Operating Companies' cost of capital to take into
account any negative effect from NU's and the NU Companies' investments in
EWGs and FUCOs.
53. For these reasons, the State Commissions will have adequate authority to
protect NU Operating Company customers from any adverse effect associated
with NU and NU Company investments in EWGs and FUCOs.
54. Accordingly, NU asks the Commission to grant it an exception to the
requirements of Rule 53(a)(1) in connection with the proposed Transaction.
The Service Agreement and the Power Brokering Agreement
55. As described above, NGS will provide NGC, under the Service Agreement,
with a variety of administrative, operation, management and support services.
These services are expected to include, without limitation, services relating
to information systems, meters, transportation, electric system maintenance,
marketing and customer relations, engineering and construction services,
materials management, facilities, power planning, environmental affairs and
fuels. The Service Agreement allows these services to be provided at other
than cost. Likewise, to the extent Select brokers, rather than markets, the
power generated by the Utility Assets, such service will be provided pursuant
to the Power Brokering Agreement. Such services will be provided at other
than cost.
56. Section 13(b) of the Act allows the Commission to exempt transactions,
by rule, regulation or order, from the provisions of Section 13(b) and the
rules promulgated thereunder if such transactions:
(a) are with any associate company which does not derive, directly or
indirectly, any material part of its income from sources within the United
States and which is not a public utility company operating within the United
States, or
(b) involve special or unusual circumstances or are not in the ordinary
course of business.
57. The Applicants hereby request on behalf of NGS and Select an exemption
under Section 13 of the Act and Rule 90(d)(1) thereunder from the at-cost
requirements in connection with the provision of services by NGS and Select
to NGC. Neither NGC, NGS or Select is (i) a public utility or holding
company, (ii) an investment company or investment trust, (iii) a company
engaged in the business of selling goods to associate companies or performing
services or construction or (iv) a company controlling such a company. The
Applicants believe that the Service Agreement and the Power Brokering
Agreement are structured so as to comply with Section 13 of the Act and the
Commission's rules and regulations thereunder. To the extent Commission
approval is required, NGS hereby requests authorization and approval of the
Service Agreement and Select hereby requests authorization and approval of
the Power Brokering Agreement.
Item 4. REGULATORY APPROVALS
58. No regulatory approvals, other than those of the Commission requested
herein are required for the proposed activities for which Commission
authorization is sought herein.
Item 5. PROCEDURE
59. The Applicants hereby request that the Commission publish a notice under
Rule 23 with respect to the filing of this Application/Declaration as soon as
practicable and that the Commission's order be issued as soon as possible. A
form of notice suitable for publication in the Federal Register is attached
hereto as Exhibit h.1. The Applicants respectfully request the Commission's
approval, pursuant to this Application/Declaration, of all proposed
transactions described herein, whether under the sections of the Act and
Rules thereunder enumerated in Item 3 or otherwise. It is further requested
that the Commission issue an order authorizing such proposed transactions at
the earliest practicable date but in any event not later than November 1,
1999. Additionally, the Applicants (i) request that there not be any
recommended decision by a hearing officer or by any responsible officer of
the Commission, (ii) consent to the Office of Public Utility Regulation
within the Division of Investment Management assisting in the preparation of
the Commission's decision, and (iii) waive the 30-day waiting period between
the issuance of the Commission's order and the date on which it is to become
effective, since it is desired that the Commission's order, when issued,
become effective immediately.
Item 6. EXHIBITS AND FINANCIAL STATEMENT
(a) Exhibits
b.1 Form of Service Agreement*
b.2 Form of Power Brokering Agreement*
b.3 Assumption Agreement
d.1 Connecticut Department of Public Utility Control Order*
d.2 Massachusetts Department of Telecommunications and Energy Order*
d.3 New Hampshire Public Utility Commission*
f.1 Legal Opinion
g Financial Data Schedule*
h.1 Form of Notice
(b) Financial Statements*
* To be filed by amendment
Item 7. Information as to Environmental Effects
60. The proposed transactions neither involve a "major federal action"
nor "significantly affect the quality of the human environment" as those
terms are used in Section 102(2)(C) of the National Environmental Policy Act,
42 U.S.C. Sec. 4321 et seq. Consummation of the proposed transactions will
not result in changes in the operations of NU or any of its respective
subsidiaries that would have any impact on the environment. No federal
agency is preparing an environmental impact statement with respect to this
matter.
SIGNATURES
Pursuant to the requirement of the Public Utility Holding Company Act of
1935, as amended, the undersigned companies have duly caused this statement
to be signed on their behalf by the undersigned thereunto duly authorized.
Date: August 27, 1999
NORTHEAST UTILITIES
NORTHEAST GENERATION SERVICES COMPANY
SELECT ENERGY, INC.
By:/s/ David R. McHale
Name: David R. McHale
Title: Vice President and Treasurer
Exhibit b.3
FORM OF ASSUMPTION AGREEMENT
THE UNDERSIGNED, Northeast Utilities, a Massachusetts business trust ("NU"),
hereby assumes and agrees to perform jointly and severally with NGC (as
hereinafter defined) all obligations of Northeast Generation Company, a
Connecticut corporation ("NGC") and a wholly-owned subsidiary of NU, under
that certain Purchase and Sale Agreement by and between NGC and
_____________________, dated July 2, 1999, as such Purchase and Sale
Agreement may be amended from time to time (the "Purchase and Sale
Agreement"), including, without limitation, any and all payment obligations
of NGC thereunder, as if NU were a party thereto, a named buyer therein, and
jointly and severally liable with NGC thereunder. This Assumption Agreement
is being entered into by NU in order to induce _______________ to enter into
the Purchase and Sale Agreement, and NU hereby acknowledges that __________
would not enter into the Purchase and Sale Agreement but for NU's entering
into this Assumption Agreement.
This Assumption Agreement and NU's obligations hereunder shall continue in
full force and effect from the date hereof until the later of (i) the Closing
(as defined in the Purchase and Sale Agreement) under the Purchase and Sale
Agreement and (ii) that date on which NGC first has outstanding debt
securities rated "investment grade" by Standard & Poor's Corp., Moody's
Investors Service, Inc. or Fitch IBCA or first obtains a comparable "shadow"
or "private" debt rating. For purposes hereof, "investment grade" shall mean
that rating which is generally recognized at the time as constituting an
investment grade rating.
This Assumption Agreement shall be governed by and construed in accordance
with the laws of the State of Connecticut, other than the conflicts of law
provisions in effect therein. This Assumption Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns and may only be amended by an instrument in
writing executed by both NU and _______________; provided, that neither NU
nor _____________may assign this Assumption Agreement without the prior
written consent of the other party, which consent may be granted or withheld
in the sole discretion of the party whose consent is required.
No Trustee or shareholder of NU shall be held to any liability whatever for
any obligation under this Assumption Agreement, and this Assumption Agreement
shall not be enforceable against any such Trustee in their or his or her
individual capacities or capacity. This Assumption Agreement shall be
enforceable against the Trustees of Northeast Utilities only as such, and
every person, firm, association, trust or corporation having any claim or
demand arising under this Assumption Agreement and relating to Northeast
Utilities, its shareholders or Trustees shall look solely to the trust estate
of Northeast Utilities for the payment or satisfaction thereof.
IN WITNESS WHEREOF, NU has executed this Assumption Agreement as of the
second day of July, 1999.
NORTHEAST UTILITIES
By:
Name:
Title:
ACCEPTED AND AGREED:
By:
Name:
Title:
Exhibit F.1
August 27, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Northeast Utilities - SEC File Number 70-
Ladies and Gentlemen:
I am Assistant General Counsel of Northeast Utilities Service Company
("NUSCO"), a service company affiliate of Northeast Utilities ("NU"),
Northeast Generation Service Company ("NGS") and Select Energy, Inc.
("Select" and together with NU and NGS, the "Applicants"). I have acted as
counsel for the Applicants in connection with their Form U-1
Application/Declaration ("Declaration"), filed this date with the Securities
and Exchange Commission ("Commission") under the Public Utility Holding
Company Act of 1935 ("1935 Act") with respect to the proposed transactions
described therein ("Proposed Transactions"). In the Declaration, the
Applicants are seeking authority under the 1935 Act in connection with the
acquisition by Northeast Generation Company ("NGC") of certain generating
assets that are currently owned by The Connecticut Light and Power Company
("CL&P) and Western Massachusetts Electric Company ("WMECO"). Specifically,
NU is requesting authority to enter into two assumption agreements
(collectively, the "Assumption Agreement") in connection with the
acquisition. In addition, NU asks the Commission to find that, upon the
consummation of the acquisition, NU will continue to satisfy the terms of the
safe harbor under Rule 53. In the alternative, NU is requesting the
Commission to find that the acquisition-related financing will not have a
substantial adverse impact upon the financial integrity of the registered
holding company system and 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, as
required by Rule 52(c). Finally, to the extent such transactions are not
authorized by rule or otherwise, the Applicants are seeking authority for
Select and NGS to provide certain services to NGC at other than cost.
In connection with this opinion, I have examined or caused to be
examined by counsel associated with or engaged by me, including counsel who
are employed by NUSCO, originals or copies certified to my satisfaction of
such corporate records of the Applicants, certificates of public officials
and of officers of the Applicants, and agreements, instruments and other
documents, as I have deemed necessary as a basis for the opinions expressed
below. In my examination of such agreements, instruments and documents, I
have assumed the genuineness of all signatures, the authenticity of all
agreements, instruments and documents submitted to me as originals, and the
conformity to original agreements, instruments and documents of all
agreements, instruments and documents submitted to me as certified, conformed
or photostatic copies and the authenticity of the originals of such copies.
The opinions set forth herein are limited to the laws of the
Commonwealth of Massachusetts, the State of Connecticut and the federal laws
of the United States. I am a member of the bar of the State of New York. I
am not a member of the bar of the Commonwealth of Massachusetts nor of the
bar of the State of Connecticut, and do not hold myself out as an expert in
the laws of such Commonwealth and State, although I have made a study of
relevant laws of such Commonwealth and State. In expressing opinions about
matters governed by the laws of the Commonwealth of Massachusetts, I have
consulted with counsel who are employed by NUSCO and are members of the bar
of such Commonwealth. In expressing opinions about matters governed by the
laws of the State of Connecticut, I have consulted with counsel who are
employed by NUSCO and are members of the bar of such State.
Based upon and subject to the foregoing, and assuming that the Proposed
Transactions are carried out in accordance with the Declaration, I am of the
opinion that, when the Commission shall have entered an order granting the
Declaration:
(a) all State laws applicable to the Proposed Transactions will
have been complied with;
(b) NU is validly organized and existing under the laws of the
Commonwealth of Massachusetts. NGC is validly organized and
existing under the laws of the State of Connecticut;
(c) The Financing Guaranty and the Assumption Agreement will be
valid and binding obligations of NU in accordance with their
respective terms, subject to the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium, or similar
law affecting creditors' rights generally and to the effect of
general principles of equity; and
(d) The consummation of the Proposed Transactions will not
violate the legal rights of the holders of any securities issued
by the Applicants or any associate company thereof.
I hereby consent to the filing of this opinion as an exhibit to the
Declaration and in any proceedings before the Commission that may be held in
connection therewith.
Very truly yours,
/s/ Jeffrey C. Miller
Jeffrey C. Miller
Assistant General Counsel
EXHIBIT h.1
FORM OF NOTICE
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- ; 70- )
Filings Under the Public Utility Holding Company Act of 1935 ("Act").
Northeast Utilities ("NU"), et al.
August , 1999
Notice is hereby given that the following filings has/have been made with the
Securities and Exchange Commission (the "Commission") pursuant to provisions
of the Act and rules promulgated thereunder. 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 amendments thereto is/are available for public
inspection through the Commission's Office 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
, 1999 to the Secretary, Securities and Exchange Commission,- Washington,
D.C. 20549, and serve a copy on the applicant(s) and/or declarant(s) at the
address(es) specified below. Proof of service (by affidavit or, in case of an
attorney at law, by certificate) should be filed with the request. Any
request for hearing shall identify specifically the issues of fact 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 said date, the application(s) and/or declaration(s), as filed
or as amended, may be granted and/or permitted to become effective.
* * * * *
NU, 174 Brush Hill Avenue, West Springfield, MA 01090-0010, a registered
holding company under the Act, and two of its nonutility subsidiaries,
Northeast Generation Service Company ("NGS") and Select Energy, Inc.
("Select"), have filed an application/declaration ("Application") under
Sections 6(a), 7, 12(b) 13 and 32 of the Act and Rules 45, 53, 54, 87 and 90
promulgated thereunder. The Applicants are seeking authority under the Act
in connection with the acquisition by Northeast Generation Company ("NGC") of
certain generating assets that are currently owned by The Connecticut Light
and Power Company ("CL&P) and Western Massachusetts Electric Company
("WMECO"). Specifically, NU requests authority to enter into two assumption
agreements (collectively, the "Assumption Agreement") in connection with the
acquisition (the "Transaction"). In addition, NU asks the Commission to find
that, upon the consummation of the Transaction, NU will continue to satisfy
the terms of the safe harbor under Rule 53. In the alternative, NU requests
the Commission to find that the Transaction-related financing will not have a
substantial adverse impact upon the financial integrity of the registered
holding company system and 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, as
required by Rule 52(c). Finally, to the extent such transactions are not
authorized by rule or otherwise, the Applicants seek authority for Select
Energy, Inc. ("Select") and Northeast Generation Services Company ("NGS") to
provide certain services to NGC at other than cost.
NU is a registered electric utility holding company, engaged through its
utility subsidiaries in the generation, transmission, distribution, and sale
of electric energy to customers in portions of the states of Connecticut,
Massachusetts and New Hampshire. The utility operating companies of NU, each
of which are wholly-owned, are CL&P, WMECO, North Atlantic Energy Corporation
and Public Service Company of New Hampshire (each individually an "NU
Operating Company" and collectively, the "NU Operating Companies"). NU also
furnishes retail electric service to certain customers through Holyoke Water
Company, a wholly-owned subsidiary.
NU also has a number of direct and indirect non-utility subsidiaries. NU
Enterprises, Inc. ("NUEI") is a wholly-owned direct subsidiary of NU and acts
as the holding company for the NU system's unregulated companies. Among the
subsidiaries of NUEI are NGC, which will become NU's competitive generating
company, NGS, a Rule 58 generation operation and services company and Select,
a Rule 58 marketing and brokering subsidiary.
As a Connecticut utility, CL&P is subject to the jurisdiction of the
Connecticut Department of Public Utility Control (the "DPUC"). In April
1998, the State of Connecticut enacted comprehensive electric utility
restructuring legislation. In particular, the law provides, among other
things, that CL&P divest its non-nuclear generating assets (the "CL&P
Assets") by January 2000 and its nuclear generating assets by January 2004 in
order to recover stranded costs. Under the law, affiliates of CL&P are
allowed to bid at both auctions. The auction for the CL&P Assets took place
in the spring and summer of 1999. WMECO is subject to similar legislation in
Massachusetts and sold its fossil fuel and a small portion of its hydro
electric generating plants in the summer of 1999. The remaining non-nuclear
generating plants of WMECO (the "WMECO Assets"), a hydro electric pumped
storage generating plant jointly owned with CL&P, and two adjacent
hydroelectric plants, were included in the auction of the CL&P Assets.
On July 6, 1999, CL&P and WMECO announced that NGC was the winning bidder for
1,329 megawatts ("MW") of hydroelectric and pumped storage generating assets
in Connecticut and Massachusetts (the "Transaction"), which comprised all of
the WMECO Assets and the hydroelectric portion of the CL&P Assets (the "Hydro
Assets" and together with the WMECO Assets, the "Utility Assets"). NGS will
operate the Utility Assets pursuant to a service agreement with NGC. Select
intends to market the power generated by the Utility Assets pursuant to a
power marketing agreement with NGC. Pursuant to the auction, NGC executed a
Purchase and Sale Agreement with CL&P concerning the CL&P Hydro Assets (the
"CL&P PSA") and a Purchase and Sale Agreement with WMECO for the WMECO Assets
(the "WMECO PSA", and collectively with the CL&P PSA, the "PSA"). In
connection with the transaction, NGC currently is seeking EWG status from the
Federal Energy Regulatory Commission ("FERC") under Section 32(a) of the Act
and accordingly does not intend to seek authorization of the PSA, the Service
Agreement or the Power Marketing Agreement.
In connection with the Transaction, NU executed the Assumption Agreement,
pursuant to which NU agreed, subject to regulatory approvals, to perform the
activities set out in the PSA if NGC did not perform such obligations. Under
the terms of the PSA, NGC is not required to perform its obligations
thereunder if it does not receive the required regulatory approvals
(including the approval of the Commission). Accordingly, NU would only be
required to perform under the PSA pursuant to the terms of the Assumption
Agreement if all regulatory approvals (including that of the Commission) were
obtained and NGC failed to perform.
To finance the acquisition of the Utility Assets, NGC negotiated a financing
transaction with several financial institutions ("Bank"), whereby Bank would
provide financing to NGC in two separate tranches. Tranche A would consist
of a credit facility of up to $365.5 million. This amount would be repaid
concurrently with the funding of the credit facility, using funds provided by
NU to NUEI by purchase of stock, capital contributions, advance or loan, and
then, in turn, provided by NUEI to NGC by similar means. NU would obtain the
necessary funds to make such contribution to NUEI out of a combination of (i)
dividends paid to NU by CL&P and WMECO, (ii) the repurchase from NU of the
stock of CL&P and WMECO by the respective companies and (iii) to the extent
necessary, funds available from other sources. As a result of this flow of
funds, NU would have an equity investment in NGC of approximately $435
million (the "Equity Investment"). Tranche B would consist of a senior
secured 364-day loan facility in an amount up to $500 million from Bank. NGC
presently intends to repay the funds provided under tranche B from the
proceeds of a capital markets transaction pursuant to Rule 52.
As of June 30, 1999, NU's aggregate investment in EWGs and FUCOs was
approximately $6 million, and its average consolidated retained earnings
("CREs") were approximately $ 579 million. NU's aggregate investment in EWGs
and FUCOs, as of June 30, 1999 (1%), is significantly lower than the safe
harbor limit of the 50% in Rule 53(a)(1). However, as of June 30, 1999, NU's
aggregate investment in EWGs and FUCOs, on a pro forma basis to include the
amount of its proposed NGC investment, would exceed 50% of NU's CREs. To
address this situation, NU requests that the Commission: (i) authorize NU to
exclude some or all of the Equity Investment from the calculation of its
aggregate EWG/FUCO investment for purposes of Rule 53; (ii) permit NU to
compute the percentage for purposes of Rule 53(a)(1) based on "adjusted
consolidated retained earnings" or "ACREs;" to take into account proceeds
available to the holding company as a result of asset sales and
securitization transaction, or (iii) grant NU an exception from the 50% limit
in respect of the instant Transaction.
* * * * *
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
Jonathan G. Katz
Secretary
