FILE NO. 70-9541
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM U-1
APPLICATION/DECLARATION UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
WITH RESPECT TO THE PAYMENT OF DIVIDENDS, SHARE REPURCHASES AND SHARE
ISSUANCES IN CONNECTION WITH RESTRUCTURING BY NORTHEAST UTILITIES AND CERTAIN
SUBSIDIARIES
Northeast Utilities
Western Massachusetts Electric Company
174 Brush Hill Avenue
West Springfield, MA 01090
The Connecticut Light and Power Company
NU Enterprises, Inc.
Northeast Generation Company
Northeast Generation Services Company
Select Energy, Inc.
Select Energy Portland
Pipeline, Inc.
107 Selden Street
Berlin, CT 06037
Public Service Company of New Hampshire
North Atlantic Energy Corporation
1000 Elm Street
Manchester, NH 03015
HEC Inc.
Select Energy Contracting, Inc.
24 Prime Parkway
Natick, MA 01760
Reeds Ferry Supply Co., Inc.
605 Front Street
Manchester, NH 03102
HEC Energy Consulting Canada Inc.
242 Simcoe Street
Niagara on the Lake
Ontario, Canada LOS1J0
Holyoke Water Power Company
Holyoke Power and Electric Company
One Canal Street
Holyoke, MA 01040
(Names of companies filing this statement and addresses of principal
executive offices)
NORTHEAST UTILITIES
(Name of top registered holding company)
Cheryl W. Grise
Senior Vice President, Secretary and 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:
Jeffrey C. Miller, Esq.
Assistant General Counsel
Northeast Utilities Service Company
107 Selden Street
Berlin, CT 06037
David R. McHale
Vice President and Treasurer
Northeast Utilities Service Company
107 Selden Street
Berlin, CT 06037
The application/declaration in this file is amended and restated as
follows:
ITEM 1
DESCRIPTION OF PROPOSED TRANSACTIONS
Introduction
1. Northeast Utilities ("NU"), a public utility holding company registered
under the Public Utility Holding Company Act of 1935, as amended ("the Act"),
The Connecticut Light and Power Company ("CL&P"), Public Service Company of
New Hampshire ("PSNH"), Western Massachusetts Electric Company ("WMECO"), and
North Atlantic Energy Corporation ("NAEC"), each an electric utility
subsidiary of NU, NU Enterprises, Inc. ("NUEI"), a sub-holding company over
certain of NU's non-utility subsidiaries, Northeast Generation Company
("NGC"), Northeast Generation Services Company ("NGS"), Select Energy, Inc.
("SE"), HEC Inc. ("HEC"), and Select Energy Portland Pipeline, Inc.
("SEPPI"), each a direct subsidiary of NUEI and an indirect non-utility
subsidiary of NU, Reeds Ferry Supply Co., Inc. ("Reeds"), Select Energy
Contracting, Inc. ("SECI"), HEC Energy Consulting Canada Inc. ("HEC Energy"),
each a direct subsidiary of HEC and an indirect non-utility subsidiary of NU,
Holyoke Water Power Company ("HWP"), an electric utility subsidiary of NU,
and Holyoke Power and Electric Company ("HP&E"), a direct subsidiary of HWP
and an indirect electric utility subsidiary of NU (collectively, the
"Applicants"), hereby submit this application/declaration (the "Application")
pursuant to Sections 6(a), 7, 9(a), 10 and 12(c) of the Act and Rules
26(c)(3), 42, 43, 44 and 46(a) thereunder with respect to (a) the payment of
dividends to, and/or the repurchase of stock from, NU out of capital or
unearned surplus by each of CL&P, PSNH, WMECO, NAEC and HWP and the payment
of the dividends to, and/or the repurchase of stock from, HWP out of the
capital or unearned surplus of HP&E, (b) the payment of dividends to, and/or
the repurchase of stock from, NU out of capital or unearned surplus by NUEI,
the payment of dividends to, and/or the repurchase of stock from, NUEI out of
capital or unearned surplus by each of NGC, NGS, SE, HEC and SEPPI, and the
payment of dividends to, and/or the repurchase of stock from, HEC out of
capital or unearned surplus by Reeds, SECI and HEC Energy (c) the payment of
dividends and/or the repurchase of shares out of capital or unearned surplus
by NU, (d) the issuance of additional shares by NU to the extent necessary to
fulfill its obligations under one or more forward stock purchase contracts,
and (e) the payment of dividends and/or the repurchase of stock out of
capital or unearned surplus by CL&P in accordance with the provisions of
CL&P's dividend covenant under its First Mortgage Indenture and Deed of Trust
dated May 1, 1921 to the Bankers Trust Company as trustee (the "Mortgage
Indenture"). As described in greater detail herein, the authorizations
sought relate to the capital restructuring of the NU system in connection
with electric utility deregulation in Connecticut, Massachusetts and New
Hampshire and the related required asset divestitures and the issuance of
rate reduction bonds related to stranded cost securitization transactions in
such states. The transactions described herein will permit NU and its
subsidiaries to use the proceeds of those divestitures and bond issuances,
among other things, to adjust their debt-to-equity ratios and reduce their
collective and individual capitalizations in order to keep the rates charged
to their utility customers as low as possible, to provide those companies
with financing flexibility, and to maintain the value of the investment in NU
by its shareholders.
Background
2. Connecticut, Massachusetts and New Hampshire, the states in which CL&P,
WMECO, PSNH and NAEC (collectively, the "Utilities") operate, have enacted or
shortly will enact legislation deregulating the electric utility industry in
such states to provide retail consumers with a choice of electricity
providers. Eventually, consumers in all of those states will be allowed to
choose their energy providers, and energy prices will no longer be set by a
state regulatory commission. The transmission and distribution of
electricity will continue to be provided by the local utilities at regulated
rates.
As vertically integrated utilities with both generation assets and
transmission and distribution assets, CL&P, PSNH, WMECO and NAEC are or will
be (in the case of PSNH and NAEC) required to restructure their companies to
comply with state statutory provisions. This restructuring includes, among
other things, the divestiture of their generating assets. This divestiture,
combined with authorization for the issuance of rate reduction bonds as part
of the restructuring process, will leave the Utilities 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.
Connecticut Restructuring Law and CL&P
3. On April 29, 1998, the Connecticut Governor signed into law a
comprehensive restructuring bill entitled An Act Concerning Electric
Restructuring (the "Connecticut Act"). The Connecticut Act mandates retail
access for up to thirty-five percent of customers located in distressed
cities on and after January 1, 2000, with full retail competition to be
completed by July 1, 2000. Further, during the time period from July 1, 1998
through December 31,1999, rates may not exceed their levels on December 31,
1996. Starting January 1, 2000, the Act requires CL&P to implement standard
offer rates that are ten percent lower than the rates in effect on
December 1, 1996.
The Connecticut Act authorizes the Connecticut Department of Public
Utility Control ("DPUC") to permit electric public utilities to recover the
full amount of their stranded costs through a competitive transition
assessment, conditioned upon the divestiture of all non-nuclear generating
assets at auction by January 1, 2000 and divestiture of all nuclear
generating assets at auction by January 1, 2004. Additionally, all electric
public utilities are required to undertake steps to mitigate stranded costs.
The DPUC is responsible for determining the rate of recovery for each
utility.
The Connecticut Act allows for the issuance of rate reduction bonds to
finance portions of a utility's stranded costs, as determined to be
appropriate by the DPUC, through securitization transactions. The savings
generated through the use of rate reduction bonds ultimately results in a
reduction of electric rates. The Connecticut Act limits the use of
securitization to non-nuclear generation-related regulatory assets and costs
associated with the renegotiation of purchased-power contracts. CL&P may not
securitize any of its nuclear stranded costs.
Pursuant to the Connecticut Act, CL&P has filed stranded cost estimates
and unbundled rates with the DPUC. On July 7, 1999, the DPUC issued a Final
Decision on CL&P's stranded costs, ruling that CL&P can recover up to $3.5
billion in stranded costs.
New Hampshire Restructuring Law and PSNH and NAEC
4. Effective May 21, 1996, the New Hampshire legislature enacted Chapter
374-F of the New Hampshire Revised Statutes (the "New Hampshire Act")
mandating full retail electric choice by January 1, 1998, but allowing a six-
month extension to July 1, 1998. On February 28, 1997, the final version of
the New Hampshire Public Utilities Commission (the "PUC") plan was released
pursuant to which electric utilities are required to divest generation
facilities by January 1, 2000. Concurrent with the release of the PUC plan,
the PUC issued utility-specific orders regarding interim stranded cost
charges that resulted in litigation between PSNH and the PUC. That
litigation was stayed as a result of a Memorandum of Understanding between
New Hampshire and PSNH which was entered into on June 14, 1999. A final
settlement agreement was filed on August 2, 1999 with state regulators.
The settlement agreement provides that PSNH must reduce its rates by
approximately eighteen percent from current levels on the effective date of
the agreement, which is estimated to occur sometime in early 2000. PSNH is
seeking to recover almost $1.9 billion of its total estimated stranded costs,
which would require that PSNH write off approximately $225 million, after
taxes, in existing stranded costs. In addition, the settlement agreement
authorizes the issuance of approximately $725 million in rate reduction
bonds. The final settlement agreement must be approved by the PUC and by the
New Hampshire Legislature.
Massachusetts Restructuring Law and WMECO
5. On November 25, 1997, the Massachusetts Governor signed into law a
comprehensive restructuring bill entitled "An Act Relative to Restructuring
the Electric Utility Industry in the Commonwealth, Regulating the Provision
of Electricity and Other Services, and Promoting Enhanced Consumer
Protections Therein" (the "Massachusetts Act"). Pursuant to the
Massachusetts Act, retail electric competition began on March 1, 1998. WMECO
was ordered to institute a mandatory ten percent reduction in approved rates
commencing March 1, 1998. An additional five percent discount is required on
September 1, 1999. As a result of the rate reductions to date, WMECO's
annual revenues have declined from $426 million in 1997 to $393 million in
1998.
The Massachusetts Act authorizes the Massachusetts Department of
Telecommunications and Energy (the "DTE") to permit electric public utilities
to recover stranded costs through a non-bypassable market transition charge,
and the DTE is responsible for determining each utility's specific recovery,
which recovery is conditioned upon aggressive mitigation by the recovering
utility. The DTE has not issued an order on WMECO's pending filing regarding
stranded cost recovery. In addition, the Massachusetts Act provides for
securitization bonds to be issued to finance a portion of a utility's
stranded costs, as determined by the DTE. WMECO is seeking approval to
securitize up to $500 million in stranded costs.
The Impact of Restructuring on the Utilities
6. Pursuant to the states' statutory restructuring requirements, the
electric generating assets of CL&P, PSNH and WMECO will be sold, and PSNH
will buy out its power purchase agreement with NAEC. However, the applicable
state deregulation laws mandate that any gains on the sale of the electric
generating assets reduce stranded cost recovery, and accordingly the
Utilities will recognize no earnings effect when those gains are realized.
WMECO has already closed on its sale of approximately 290 MW of fossil
and hydroelectric generating assets for a sale price approximately 3.8 times
greater than the assets' 1997 book value. The sales of these assets and
future asset sales will be used to reduce WMECO's stranded costs. WMECO has
auctioned another 270 MW of pumped storage and conventional hydroelectric
generating assets and hopes to receive final regulatory approval for the sale
of those assets and close on the transaction near the end of 1999. CL&P
auctioned off its generating facilities, as required by the Connecticut Act.
In February 1999, the DPUC announced the offering for sale of CL&P's fossil
fuel and hydroelectric generating facilities, and CL&P hopes to receive final
regulatory approval for the sale of those assets and close on that
transaction near the end of 1999. PSNH and NAEC expect to sell their
interests in non-nuclear generating assets once a settlement agreement with
the State of New Hampshire has been approved, which is expected to occur in
the latter part of 2000. In addition, proceeds from the sale of the
Utilities' nuclear generating assets will result in additional restructuring
proceeds.
In addition to the proceeds raised from these sales of generating
assets, at least three of the Utilities, CL&P, PSNH and WMECO, will receive
proceeds from the issuance of rate reduction bonds as part of the
restructuring process. Because of the accounting treatment required by the
regulatory process, the receipt of proceeds from the rate reduction bonds
will have no effect on the respective net incomes of the Utilities.
Accordingly, while the Utilities will experience a substantial influx of cash
from these transactions, none of that cash will be treated as "income" on
their financial statements.
When the aforementioned process is completed, CL&P presently expects to
receive net proceeds of approximately $1.191 billion from the sales of non-
nuclear generating assets and net proceeds of $1.489 billion from the
issuance and sale of rate reduction bonds. Thus, CL&P is presently expecting
to receive approximately $2.680 billion of cash from these restructuring
transactions.
When the aforementioned process is completed, PSNH presently expects to
receive net proceeds of approximately $360 million from the sales of non-
nuclear generating assets and net proceeds of approximately $725 million from
the issuance and sale of rate reduction bonds. Thus, PSNH presently expects
to receive approximately $1.085 billion of cash from these restructuring
transactions.
When the aforementioned process is completed, WMECO presently expects to
receive net proceeds of approximately $233 million from the sales of non-
nuclear generating assets and net proceeds of approximately $303 million from
the issuance and sale of rate reduction bonds. Thus, WMECO is presently
expecting to receive approximately $536 million of cash from these
restructuring transactions.
NAEC presently expects to receive net proceeds from restructuring
activities (primarily from PSNH's buy-out of its power contract with NAEC) of
approximately $646 million. NAEC does not expect to receive proceeds from
the issuance of rate reduction bonds.
A table summarizing these transactions is included as Exhibit I to this
Application.
The Results of Restructuring
7. As described above, CL&P, PSNH, WMECO and NAEC, after completing their
restructuring transactions, will become much smaller companies, requiring
much less capitalization. Further, the proceeds from the securitization of
the Utilities' stranded costs are required to be used to reduce customer
costs by reducing capitalization and, hence, their capital revenue
requirements. In order to achieve these cost savings, CL&P, PSNH, WMECO and
NAEC must reduce their common equity capitalizations to reflect the fact that
they are smaller corporate entities. The above-described proceeds of
restructuring transactions are expected to provide the Utilities with the
funds to achieve this capitalization reduction.
The Utilities plan to apply the net proceeds of their restructuring
transactions, among other things, to retire outstanding debt and preferred
stock, to buy down existing power purchase agreements with independent power
producers (except NAEC, which has no such agreements) and to reduce their
capitalizations. CL&P presently expect to use approximately $310 million to
reduce its common equity capitalization; WMECO presently expects to use
approximately $145 million to reduce its common equity capitalization; PSNH
presently expects to use approximately $297 million to reduce its common
equity capitalization; and NAEC presently expects to use approximately $164
million to reduce its common equity capitalization. (Individually, "CL&P
Returned Equity", "WMECO Returned Equity", "PSNH Returned Equity" and "NAEC
Returned Equity" respectively).
The buy-down of power purchase contracts and the retirement of debt and
preferred stock can be accomplished without Commission approval. In order to
effectively reduce their capitalizations, CL&P, PSNH, WMECO and NAEC seek
Commission authorization to use all or a portion of, respectively, the CL&P
Returned Equity, the PNSH Returned Equity, the WMECO Returned Equity and the
NAEC Returned Equity either (i) to pay dividends to NU, (ii) to buy back a
portion of their outstanding common stock owned by NU or (iii) to effect
common equity capital reductions through a combination of dividends and stock
repurchases. Since, as described earlier, the receipt of restructuring
proceeds does not result in net income giving rise to earned surplus to the
Utilities, the Act and the regulations thereunder require Commission approval
for the use of such proceeds for the payment of dividends or the repurchase
of stock, in the full amount required to decapitalize the Utilities. In
addition, Commission approval is required for the repurchase by the Utilities
of their stock from NU, an affiliate of the Utilities, and these approvals
are sought in this Application.
In addition, the Applicants request approval for the payment of
dividends to, and/or the repurchase of stock from, NU out of capital or
unearned surplus by HWP and the payment of dividends to, and/or the
repurchase of stock from, HWP out of capital or unearned surplus by HP&E.
These payments and repurchases by HWP and HP&E will be effected from time to
time as they have unrestricted cash available in excess of current or
retained earnings which should be better arranged or deployed elsewhere
within the NU system. The amount of these dividends or repurchases will be
dictated by competitive and commercial considerations at the time.
The Commission has previously approved the payment of dividends out of
capital or unearned surplus by a utility subsidiary of a registered holding
company when the payment would not impair the subsidiary's ability to meet
its obligations and the subsidiary's assets would be sufficient to meet any
anticipated expenses or liabilities. See, e.g., AEP Generating Co., H.C.A.
Rel. No. 26754 (August 12, 1997). As described above, CL&P, PSNH, WMECO,
NAEC, HWP and HP&E would not face adverse financial consequences as a result
of the payment to NU. Rather, CL&P, PSNH, WMECO and NAEC are reacting to a
unique situation, restructuring and its related financial impacts, which has
created a large influx of cash not treatable as earned surplus. Payment of
the dividends would not impair the financial integrity of CL&P, PSNH, WMECO
or NAEC because, after the payment of such dividends, each Utility would
still have adequate cash to operate its substantially smaller business. The
authorization being sought by the Utilities is similar to that sought by
Connectiv Inc. and its utilities in its application/declaration on Form U-1
in File No. 70-9499 (May 19, 1999). Similarly, the Commission has recently
approved the use of proceeds from the sale of generating assets to repurchase
the selling entity's stock from its parent registered holding company in
order to keep its capital structure balanced, in the same manner as the
Utilities propose to do here. New England Elec. System, H.C.A. Rel. No.
26918 (Sept. 25, 1998). That approval would seem to be apt precedent for the
stock repurchases proposed here. Moreover, the payment of dividends or the
repurchase of stock by HWP and HP&E would be made out of excess cash held by
those companies, which would also not have an adverse financial impact on
those companies and would permit NU to maintain the appropriate level of
investment in HWP and HP&E.
Payments of Dividends or a Stock Repurchase by Competitive Subsidiaries
8. NU's other direct or indirect competitive subsidiaries, NUEI, NGC, NGS,
SE, HEC, Reeds, SECI, HEC Energy, and SEPPI, (collectively, the "Competitive
Subsidiaries") request approval for: (i) the payment of dividends to, and/or
the repurchase of stock from, NU by NUEI; (ii) the payment of dividends to,
and/or the repurchase of stock from, NUEI by NGC, NGS, SE, HEC and SEPPI; and
(iii) the payment of dividends to, and/or the repurchase of stock from, HEC
by Reeds, SECI and HEC Energy; in each case out of capital or unearned
surplus. The Competitive Subsidiaries anticipate that they may have
unrestricted cash available from time to time for distribution in excess of
their current or retained earnings. To best arrange and deploy the NU
system's equity capital, the Competitive Subsidiaries propose to use some of
this unrestricted cash for the payment of dividends to NU, HEC and NUEI or to
effect a stock repurchase from NU, HEC and NUEI, the proceeds of which NU
ultimately would use to reduce its capitalization, as described below, or for
other corporate purposes. Fundamentally, the question of how much capital NU
should have invested at any one time in its Competitive Subsidiaries will be
dictated by competitive and commercial needs not fully foreseeable at this
time. NU needs the flexibility to adjust its level of equity investment at
any time in these companies as such circumstances dictate.
The Commission has permitted competitive subsidiaries of registered
holding companies to pay dividends out of capital or unearned surplus when
that payment will not adversely affect the financial integrity of the holding
company system or jeopardize the working capital of the operating
subsidiaries, American Electric Power Co., H.C.A. Rel. No. 26760 (Sept. 18,
1997), or when not permitting such a payment would cause cash to be trapped
at the competitive subsidiaries when there is no need for it. The Southern
Co., H.C.A. Rel. No. 26543 (July 17, 1996). See also Northeast Utilities,
H.C.A. Rel. No. 26810 (December 30, 1997). Here, the payment of dividends by
the Competitive Subsidiaries directly or indirectly to NU or the repurchase
of stock by the Competitive Subsidiaries is part of the NU system's overall
plan to maintain its level of investment in each subsidiary as will most
benefit its shareholders and ratepayers, and so having such flexibility will
improve, rather than harm, the financial integrity of the NU system and its
operating companies. Moreover, the cash to be used to pay the dividends or
to repurchase stock may not be needed to achieve their corporate goals, so
there is no need to leave that cash with the Competitive Subsidiaries.
Accordingly, the payment of dividends or the repurchase of stock by the
Competitive Subsidiaries out of capital or unearned surplus should be
approved.
Payment of Dividends and Repurchase of Shares by NU
9. NU plans to utilize a portion of the funds received directly or
indirectly from the Utilities, HWP, HP&E and the Competitive Subsidiaries in
the transactions described above to reduce its capital through the repurchase
of its common shares and/or the payment of dividends to its shareholders, and
NU seeks Commission approval, to the extent required, for such share
repurchases or dividends. The total amount of proceeds to be used for such
dividends and share repurchases is presently estimated at up to approximately
$500 million. NU will use the remainder of the amounts it receives directly
or indirectly from the Utilities, HWP, HP&E and the Competitive Subsidiaries
in the above-described transactions for investments in other activities and
other corporate purposes, including providing equity investments in other NU
subsidiaries. NU will be required to provide approximately $435 million of
equity capital to NGC to fund part of NGC's purchase of CL&P's and WMECO's
hydroelectric generation assets. NU also proposes to utilize a portion of
such proceeds to provide funds for the acquisition of Yankee Energy System,
Inc. Such uses by NU of the restructuring proceeds from its subsidiaries are
not the subject of this Application, and these transactions are the subject
of separate applications filed with the Commission.
As described above, the payment by NU of a dividend and/or the
repurchase of NU's shares out of NU's capital or unearned surplus is required
to effect the reduction in capitalization necessary to reflect the impact on
the NU system of electric utility restructuring in the states in which the
Utilities operate, in a manner that is similar to the situation currently
being considered by the Commission with respect to Conectiv Inc. See
Conectiv Application/Declaration in File No. 70-9499 (May 19, 1999). See
also Niagara Mohawk Holdings, Inc., H.C.A. Rel. No. 26986 (March 4, 1999).
As was discussed with respect to the payment of dividends and/or stock
repurchases by the Utilities and the Competitive Subsidiaries, the reduction
in the capitalization of NU benefits the companies in the NU system by
providing financing flexibility, it benefits the Utilities' customers by
permitting rates to be reduced, and it benefits NU's shareholders by allowing
the optimum allocation of capital between NU's regulated and unregulated
businesses.
Approval of the Issuance of Additional Shares by NU
to Settle One or More Forward Contracts
10. In order to begin the process of reducing its capitalization, NU
anticipates entering into one or more forward stock purchase contracts
(collectively, the "Forwards") with a third party to repurchase shares on
NU's behalf. In addition, NU may also enter into a Forward to economically
reacquire shares necessary to fund the share portion of its proposed merger
with Yankee Energy System, Inc. (see File No. 70-09535). The basic rationale
for this transaction is NU's perception that its shares are relatively
undervalued in the market and will rise in price in the future. Since NU
does not yet have sufficient proceeds from the various restructuring
transactions described above, Forwards provide NU with a viable method of
obtaining its own shares at anti-dilutive prices and with no balance sheet
impact during the carrying period. NU's Board of Trustees has authorized the
reacquisition of up to 25 million shares in the next few years.
In a typical Forward transaction, a broker acting for NU will acquire a
negotiated number of shares at market prices, hold them until a negotiated
deadline, and then deliver them at the acquisition price (determined by one
of a number of possible methods) to NU. NU will pay a carrying charge plus a
fee to compensate the broker, and will collateralize the broker should the
aggregate market price of the carried shares fall below a negotiated
percentage of the original aggregate cost. Ultimately, and critical to the
broker's own financial standing, the broker retains the right to sell out the
position and charge the difference to NU should the market fall off be
substantial. Under present accounting rules, the transaction will be
accounted for as an equity commitment and not as an obligation of
indebtedness. In order to settle a negative forward in shares, NU must have
the lawful right to issue such shares, which is the purpose of this portion
of the Application.
Since NU cannot enter into any Forward until it can settle a negative
Forward in shares, it is vital that NU be granted permission to issue such
settlement shares as soon as possible. NU estimates that it will need the
ability to issue up to 8.5 million shares to compensate for the possibility
of negative Forward settlements and accordingly requests permission to issue
such shares in one or more transactions through the period ending December
31, 2001, which is the last date it could envision receiving the remainder of
the restructuring proceeds referred to herein.
Approval of the Payment of Additional Amounts under the CL&P
Mortgage Indenture restriction, dated May 1, 1921.
11. In addition to the other transactions described herein, the Applicants
request that the Commission exercise its reserved power as provided in the
dividend covenant in CL&P's Mortgage Indenture relating to CL&P's first
mortgage bonds, so as to permit CL&P to effect dividend payments, the
repurchase of its shares or any combination thereof, notwithstanding the fact
that the CL&P Returned Equity does not represent net earnings giving rise to
earned surplus. The full text of the dividend covenant, Section 6.13 of the
Mortgage Indenture, is attached hereto as Exhibit J. CL&P has an additional
issue of first mortgage bonds, its Series TT Bonds, with a comparable
covenant, but such bonds will be retired with the proceeds of CL&P's asset
sales in the fourth quarter of 1999 and prior to any such upstream payment to
NU.
The dividend covenant provides, among other things, that cash dividends
may not be paid on the capital stock of CL&P, or distributions made, or
capital stock purchased by CL&P, in an aggregate amount which exceeds CL&P's
earned surplus after December 31, 1966, plus the earned surplus of CL&P
accumulated prior to January 1, 1967 in an amount not exceeding $13,500,000,
plus such additional amount as may be authorized or approved by the
Commission under the Act. CL&P hereby is requesting that the Commission
approve such an additional amount to enable the payment of dividends and/or
the repurchase of stock, as described above. The Commission has previously
approved the payment of additional amounts under similar dividend
restrictions upon a finding that such approval was in the public interest.
See, e.g., AEP Generating Co., H.C.A. Rel. No. 24989 (Nov. 21, 1989);
Southern Elec. Gen. Co., H.C.A. Rel. No. 14417 (April 25, 1961). The
requested dividend payments and/or repurchase of CL&P stock from
restructuring proceeds are in the public interest as it will not impair
CL&P's ability to meet its obligations and it will result in the benefits to
the NU system, the NU shareholders and the Utilities' customers described
above. Thus, such payments will not negatively affect the interests sought
to be protected under the dividend restriction and CL&P's request should be
approved.
Summary of Requested Action
12. The Applicants request that the Commission issue an order authorizing:
(a) the payment of dividends to, and/or the repurchase of stock from, NU out
of capital or unearned surplus by each of the Utilities and HWP and the
payment of dividends to, and/or the repurchase of stock from, HWP out of
capital or unearned surplus by HP&E; (b) (i) the payment of dividends to,
and/or the repurchase of stock from, NU out of capital or unearned surplus by
NUEI, (ii) the payment of dividends to, and/or the repurchase of stock from,
NUEI out of capital or unearned surplus by each of NGC, NGS, SE, HEC and
SEPPI, and (iii) the payment of dividends to, and/or the repurchase of stock
from, HEC out of capital or unearned surplus by Reeds, SECI and HEC Energy,
(c) the payment of dividends to, and/or the repurchase of shares from, its
shareholders out of capital or unearned surplus by NU; (d) the issuance of
additional shares by NU to the extent necessary to fulfill its obligations
under the Forwards; and (e) the payment of dividends and/or the repurchase of
stock out of capital or unearned surplus by CL&P to NU under its Mortgage
Indenture dividend covenant. The following chart depicts graphically the
various approvals sought in this Application:
Company Approval Sought
CL&P a) payment of dividends and/or
repurchase of stock out of
capital or unearned surplus -
not in excess of $310 million
b) payment of dividends and/or
repurchase of stock out of
capital or unearned surplus in
accordance with Mortgage
Indenture dividend covenant.
WMECO payment of dividends and/or
repurchase of stock out of
capital or unearned surplus -
not incess of $145 million.
PSNH payment of dividends and/or
repurchase of stock out of
capital or unearned surplus -
not in excess of $297 million
NAEC payment of dividends and/or
repurchase of stock out of
capital or unearned surplus -
not in excess of $164 million
HWP, HP&E payment of dividends and/or
repurchase of stock out of
capital or unearned surplus
NUEI, NGC, NGS, SE, HEC, SEPPI,
Reeds, SECI, HEC Energy payment of dividends and/or
repurchase of stock out of
capital or unearned surplus
NU a) payment of dividends and/or
repurchase of shares out of
capital or unearned surplus
b) issuance of up to 8.5
million additional shares to
the extent necessary to fulfill
Forward obligations.
Statement Pursuant to Rule 54
13. Except in accordance with the Act, none of the Applicants (a) have
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 (b) now is or as a consequence of the transactions proposed herein will
become a party to, or has as a consequence of the transactions proposed
herein will have a right under, a service, sales or construction contract
with an EWG or a FUCO. None of the proceeds from the transactions proposed
herein will be used by the Applicants to acquire any securities of, or any
interest in, an EWG or a FUCO.(1)
________________________
(1) Please see the application/declaration filed with the Commission by NU, NGS
and SE on August 26, 1999 concerning the anticipated investments in EWGs by
NU.
The Applicants are in compliance with Rule 53(a), (b) and (c), as
demonstrated by the following determinations:
(i) NU's aggregate investment in EWGs and FUCOs (i.e., amounts invested
in or committed to be invested in EWGs and FUCOs for which there is
no recourse to the NU) does not exceed 50% of NU and its
subsidiaries' consolidated retained earnings as reported for the
four most recent quarterly periods on NU's Form 10-K and 10-Qs.
At June 30, 1999 the ratio of such investment ($6 million) to such
consolidated retained earnings ($579 million) was 1 percent.
(ii) Ave Fenix (NU's only EWG or FUCO at this time) maintains books and
records, and prepares financial statements in accordance with Rule
53(a)(2). Furthermore, NU has undertaken to provide the
Commission with access to such books and records and financial
statements, as it may request.
(iii) No employees of the Applicants have rendered services to the
EWG/FUCO.
(iv) NU has submitted (a) a copy of each Form U-1 and Rule 24
certificate that has been filed with the Commission under Rule 53
and (b) a copy of Item 9 of Form U5S and Exhibits G and H thereof
to each state regulator having jurisdiction over all the rates of
NU's public utility subsidiaries.
(v) None of the Applicants have been the subject of a bankruptcy or
similar proceeding unless a plan of reorganization has been
confirmed in such proceeding. In addition, although NU's average
consolidated retained earnings ("CREs") for the four most recent
quarterly periods have decreased by 10% or more from the average
for the previous four quarterly periods (at June 30, 1998, NU's
CREs were $698 million; at June 30, 1999 NU's CREs were $579
million), NU's aggregate investment in EWGs/FUCOs at such date ($6
million) did not exceed two percent of NU's consolidated capital
invested in utility operations ($5,950 million).
(vi) In the previous fiscal year, NU did not report operating losses
attributable to its investment in EWGs/FUCOs, unless such losses
did not exceed 5 percent of NU's consolidated retained earnings.
ITEM 2
FEES, COMMISSIONS AND EXPENSES
14. The fees, commissions and expenses paid or incurred, or to be paid or
incurred, directly or indirectly, in connection with the proposed
transactions by the Applicants are not expected to exceed $150,000 and are
expected to be comprised primarily of fees for ordinary legal, accounting and
investment banking services. None of such fees, commissions or expenses will
be paid to any associate company or affiliate of the Applicants except for
payments to Northeast Utilities Service Company for financial and other
services.
ITEM 3
APPLICABLE STATUTORY PROVISIONS
15. Sections 6(a), 7, 9(a), 10 and 12(c) of the Act and Rules 26(c)(3), 42,
43, 44 and 46(a) thereunder are or may be applicable to the proposed
transactions. To the extent any other sections of the Act or Rules
thereunder may be applicable to the proposed transaction, the Applicants
request appropriate orders thereunder.
ITEM 4
REGULATORY APPROVALS
16. No state or Federal regulatory approval, other than the approval of the
Commission pursuant to this Application, is required to consummate the
transactions described herein, except that NU will be required to register
any shares issuable under the terms of a Forward to compensate for a funding
deficiency if a Forward terminates under the provisions of the Securities Act
of 1933, as amended.
ITEM 5
PROCEDURE
17. The Applicants respectfully request the Commission's approval, pursuant
to this Application, of all 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 the
transactions proposed herein at the earliest practicable date, but in any
event no 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
on 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 STATEMENTS
(asterisked (*) items were filed with the original Application; items with a
double asterisk (**) were filed with Amendment No. 1 to the Application)
18. (a) Exhibits
**F. Opinion of Counsel
**G. Financial Data Schedules
*H. Proposed Form of Notice
H.1 Revised Proposed Form of Notice (filed herewith)
*I. Chart Depicting Utilities' Proceeds from Restructuring
Transactions and Uses Thereof
*J. CL&P Mortgage Indenture Dividend Covenant
** (b) Financial Statements
1. Northeast Utilities and Subsidiaries (consolidated)
1.1 Balance Sheet, per books and pro forma, as of June 30, 1999.
1.2 Statement of Income, per books and pro forma, for 12 months
ended June 30, 1999 and capital structure, per books and pro
forma, as of June 30, 1999.
2. Northeast Utilities (parent company only).
2.1 Balance Sheet, per books and pro forma, as of June 30, 1999.
2.2 Statement of Income and Surplus, per books and pro forma,for 12
months ended June 30, 1999 and capital structure, per books and
pro forma, as of June 30, 1999.
3. The Connecticut Light and Power Company
3.1 Balance Sheet, per books and pro forma, as of June 30,1999.
3.2 Statement of Income and Surplus, per books and pro forma,for 12
months ended June 30, 1999 and capital structure, per books and
pro forma, as of June 30, 1999.
4. Public Service Company of New Hampshire
4.1 Balance Sheet, per books and pro forma, as of June 30, 1999.
4.2 Statement of Income and Surplus, per books and pro forma,for 12
months ended June 30, 1999 and capital structure, per books and
pro forma, as of June 30, 1999.
5. Western Massachusetts Electric Company
5.1 Balance Sheet, per books and pro forma, as of June 30, 1999.
5.2 Statement of Income and Surplus, per books and pro forma,for 12
months ended June 30, 1999 and capital structure, per books and
pro forma, as of June 30, 1999.
6. North Atlantic Energy Corporation
6.1 Balance Sheet, per books and pro forma, as of June 30, 1999.
6.2 Statement of Income and Surplus, per books and pro forma, for
12 months ended June 30, 1999 and capital structure, per books
and pro forma, as of June 30, 1999.
ITEM 7
INFORMATION AS TO ENVIRONMENTAL EFFECTS
19. (a) The financial transactions described herein do not involve a major
Federal action significantly affecting the quality of the human environment.
(b) No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed transaction.
SIGNATURES
Pursuant to the requirements 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.
NORTHEAST UTILITIES
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
WESTERN MASSACHUSETTS ELECTRIC COMPANY
NORTH ATLANTIC ENERGY CORPORATION
NU ENTERPRISES, INC.
NORTHEAST GENERATION COMPANY
NORTHEAST GENERATION SERVICES COMPANY
SELECT ENERGY, INC.
HOLYOKE WATER POWER COMPANY
HOLYOKE POWER AND ELECTRIC COMPANY
SELECT ENERGY PORTLAND PIPELINE, INC.
By: /s/ David R. McHale
David R. McHale
Vice President and Treasurer
HEC INC.
REEDS FERRY SUPPLY CO, INC.
SELECT ENERGY CONTRACTING, INC.
HEC ENERGY CONSULTING CANADA, INC.
By:/s/ David R. McHale
David R. McHale
Assistant Treasurer
THE CONNECTICUT LIGHT AND POWER COMPANY
By: /s/ Randy A. Shoop
Randy A. Shoop
Treasurer
Date: October 8, 1999
EXHIBIT H.1
PROPOSED FORM OF NOTICE
(Release No. 35-______; 70-9541)
FORM U-1
APPLICATION/DECLARATION UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
WITH RESPECT TO THE PAYMENT OF DIVIDENDS, SHARE REPURCHASES AND SHARE
ISSUANCES IN CONNECTION WITH RESTRUCTURING BY
NORTHEAST UTILITIES AND CERTAIN SUBSIDIARIES
_________________, 1999
Northeast Utilities ("NU"), a public utility holding company registered
under the Public Utility Holding Company Act of 1935, as amended ("the Act"),
The Connecticut Light and Power Company ("CL&P"), Public Service Company of
New Hampshire ("PSNH"), Western Massachusetts Electric Company ("WMECO"), and
North Atlantic Energy Corporation ("NAEC"), each an electric utility
subsidiary of NU, NU Enterprises, Inc. ("NUEI"), a sub-holding company over
certain of NU's non-utility subsidiaries, Northeast Generation Company
("NGC"), Northeast Generation Services Company ("NGS"), Select Energy, Inc.
("SE"), HEC Inc. ("HEC"), and Select Energy Portland Pipeline, Inc.
("SEPPI"), each a direct subsidiary of NUEI and an indirect non-utility
subsidiary of NU, Reeds Ferry Supply Co., Inc. ("Reeds"), Select Energy
Contracting, Inc. ("SECI"), and HEC Energy Consulting Canada Inc. ("HEC
Energy"), each a direct subsidiary of HEC and an indirect non-utility
subsidiary of NU, Holyoke Water Power Company ("HWP"), an electric utility
subsidiary of NU, and Holyoke Power and Electric Company ("HP&E"), a direct
subsidiary of HWP and an indirect electric utility subsidiary of NU
(collectively, the "Applicants"), have submitted an application/declaration
(the "Application") pursuant to Sections 6(a), 7, 9(a),10 and 12(c) of the
Act and Rules 26(c)(3), 42, 43, 44 and 46(a) thereunder. NU and WMECO are
located at 174 Brush Hill Avenue, West Springfield, Massachusetts 01090,
CL&P, NUEI, NGC, NGS, SE, and SEPPI are located at 107 Selden Street, Berlin,
Connecticut 06037, PSNH and NAEC are located at 1000 Elm Street, Manchester,
New Hampshire 03105, HEC and SECI are located at 24 Prime Parkway Natick,
Massachusetts 01760, Reeds is located at 605 Front Street, Manchester, New
Hampshire 03102, HEC Energy is located at 242 Simcoe Street, Niagara-on-the-
Lake, Ontario, Canada LOS1J0, and HWP and HP&E are located at 1 Canal Street,
Holyoke, Massachusetts 01040. CL&P, WMECO, PSNH and NAEC are collectively
referred to herein as the "Utilities." NUEI, NGC, NGS, SE, HEC, Reeds, SECI,
HEC Energy and SEPPI are collectively referred to herein as the "Competitive
Subsidiaries."
The Applicants seek Commission authorization for: (a) the payment of
dividends to, and/or the repurchase of stock from, NU out of capital or
unearned surplus by each of the Utilities and HWP and the payment of
dividends to, and/or the repurchase of stock from, HWP out of capital or
unearned surplus by HP&E; (b) the payments of dividends to, and/or the
repurchase of stock from, NU, NUEI or HEC out of capital or unearned surplus
by each of the Competitive Subsidiaries; (c) the payment of dividends to,
and/or the repurchase of shares from, its shareholders out of capital or
unearned surplus by NU; (d) the issuance of additional shares by NU to the
extent necessary to fulfill its obligations under one or more forward stock
purchase agreements; and (e) the payment by CL&P of dividends and/or the
repurchase of stock out of capital or unearned surplus under the dividend
covenant of its Mortgage Indenture. The Applicants state that the
authorizations sought relate to the capital restructuring of the NU system in
connection with electric utility deregulation and the related divestitures in
the states in which NU's utility subsidiaries operate. The Applicants state
that the proposed transactions will permit NU and its subsidiaries to use the
proceeds of those divestitures and the related issuance and sales of rate
reduction bonds to adjust their debt-to-equity ratios and reduce their
collective and individual capitalizations in order to lower the rates charged
their utility customers, to provide the Applicants with financing
flexibility, and to maintain the value of investment in NU of its
shareholders.
The Applicants state that CL&P, PSNH, NAEC and WMECO are in the process
of divesting their generating assets, and under the applicable laws in
Connecticut, Massachusetts and New Hampshire, the proceeds of those
divestitures are to be used to mitigate stranded costs. Similarly, the
proceeds to CL&P, PSNH and WMECO from the sales of any rate reduction bonds
and to NAEC from PSNH's buyout of its power contract will be used to reduce
electric rates. As a result, those proceeds will not be recognized as
earnings of the Utilities giving rise to earned surplus. The Applicants
state that, as a result of these transactions, the Utilities will experience
both a reduction in the amounts of their tangible assets and a substantial
influx of cash, and the Applicants propose to use that cash to reduce their
capitalizations, thereby reducing their capital revenue requirements. Each
of the Utilities proposes to use a certain amount of the proceeds of these
restructuring transactions to retire outstanding debt and preferred stock, to
buy down existing power purchase agreements with independent power producers
(except in the case of NAEC, which has no such power purchase contracts), and
either to pay dividends to NU and/or to repurchase some of its common stock
from NU. Since the proceeds are not recorded as earnings, the Utilities
require approval to pay those dividends or make those repurchases out of
capital or unearned surplus. In addition, the Applicants state, HWP and HP&E
propose to pay dividends and/or repurchase stock out of unrestricted cash in
excess of current or retained earnings which would be better arranged or
deployed elsewhere in the NU system.
Similarly, the Applicants state, the Competitive Subsidiaries anticipate
that they will have unrestricted cash available from time to time for
distribution in excess of their current or retained earnings. To facilitate
the overall reduction in the NU system's capitalization related to electric
utility restructuring, the Competitive Subsidiaries propose to use some of
this unrestricted cash for the payment to NU, NUEI and HEC of dividends
and/or the repurchase of stock from NU, NUEI or HEC. NU ultimately would use
the proceeds of these transactions to reduce its capitalization.
The Applicants state that NU plans to utilize a portion of the funds
received from the Utilities and the Competitive Subsidiaries in the
transactions described above to reduce its capital revenue requirements
through the repurchase of its common shares and/or the payment of a dividend
to its shareholders, and NU seeks Commission approval, to the extent
required, for such share repurchases and/or dividends. The Applicants state
that the payment by NU of the dividend and/or the repurchase by NU of its
shares are required to effect the reduction in capitalization necessary to
reflect the impact on the NU system of electric utility restructuring and
provide the NU system and its customers and shareholders with the benefits
described above.
NU further anticipates entering into one or more forward stock purchase
contracts (collectively, the "Forwards") with a third party to repurchase
shares on NU's behalf. The Applicants state that the basic rationale for
this transaction is NU's perception that its shares are relatively
undervalued in the market and will rise in price in the future. Since NU
does not yet have sufficient proceeds from the various restructuring
transactions described above, the Applicants state, Forwards provide NU with
a viable method of obtaining its own shares at anti-dilutive prices and with
no balance sheet impact during the carrying period. The Applicants state
that in a typical Forward transaction, a broker acting for NU will acquire a
negotiated number of shares at market prices, hold them until a negotiated
deadline, and then deliver them at the acquisition price (determined by one
of a number of possible methods) to NU. Ultimately, and critical to the
broker's own financial standing, the broker retains the right to sell out the
position and charge the difference to NU should the market fall off be
substantial. In order to settle a negative forward in shares, NU must have
the lawful right to issue such shares, which it requests in the Application.
NU estimates that it will need the ability to issue up to 8.5 million shares
to compensate for the possibility of negative Forward settlements and
accordingly requests permission to issue such shares in one or more
transactions through the period ending December 31, 2001.
In addition, the Applicants state that they have requested the
Commission to exercise its reserved power as provided in the dividend
covenant in CL&P's Mortgage Indenture, dated May 1, 1921, to the Banker's
Trust Company as trustee, related to CL&P's first mortgage bonds so as to
approve the payments of dividends and/or stock repurchases described above
pursuant to the terms of that Indenture.
The Applicants state that they intend to request the Commission's
approval of all transactions described in the Application, whether under the
sections of the Act and the rules thereunder enumerated therein or otherwise.
The Application is available for public inspection through the
Commission's Office of Public Reference. Any interested persons wishing to
comment or request a hearing on the Application 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 Applicants at the
addresses specified above. Proof of service (by affidavit or, in the case of
an attorney at law, by certificate) should be filed with the request. Any
request for hearing 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 this
matter. After said date, the Application as filed, or as it may be amended,
may be permitted to become effective.
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
____________________________________
Secretary
