FILE NO. 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
<TABLE>
<CAPTION>
<S> <C>
Northeast Utilities The Connecticut Light and Power Company
Western Massachusetts Electric Company NU Enterprises, Inc.
174 Brush Hill Avenue Northeast Generation Company
West Springfield, MA 01090 Northeast Generation Services Company
Select Energy, Inc.
Select Energy Portland Pipeline, Inc.
107 Selden Street
Berlin, CT 06037
Public Service Company of New Hampshire HEC Inc.
North Atlantic Energy Corporation Select Energy Contracting, Inc.
1000 Elm Street 24 Prime Parkway
Manchester, NH 03015 Natick, MA 01760
Reeds Ferry Supply Co., Inc. HEC Energy Consulting Canada Inc.
605 Front Street 242 Simcoe Street
Manchester, NH 03102 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)
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
Jeffrey C. Miller, Esq. David R. McHale
Assistant General Counsel Vice President and Treasurer
Northeast Utilities Service Company Northeast Utilities Service Company
107 Selden Street 107 Selden Street
Berlin, CT 06037 Berlin, CT 06037
</TABLE>
<PAGE>
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 and NAEC, (b) the payment of dividends to, and/or the
repurchase of stock from, NU out of capital or unearned surplus by HWP and 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, the payment
of dividends to, and/or the repurchase of stock from, HWP out of capital or
unearned surplus by HP&E, 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
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 the 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 expects 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.
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
and NAEC 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.
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, and HWP and HP&E, which are being
addressed with the competitive subsidiaries for the purposes of this
Application<F1>, (collectively, the "Competitive Subsidiaries") request approval
for: (i) the payment of dividends to, and/or the repurchase of stock from, NU by
HWP and NUEI; (ii) the payment of dividends to, and/or the repurchase of stock
from, NUEI by NGC, NGS, SE, HEC and SEPPI; (iii) the payment of dividends to,
and/or the repurchase of stock from, HWP by HP&E; and (iv) 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, HWP, HEC and NUEI or to effect a stock repurchase from NU, HWP,
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.
[FN]
<F1>HWP and HP&E, although utilities, are included with the other competitive
subsidiaries as they function in a competitive environment in the City of
Holyoke, Massachusetts.
</FN>
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 from the Utilities
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 from the Utilities 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 or will be in the near future 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 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; (b) (i) the payment of
dividends to, and/or the repurchase of stock from, NU out of capital or
unearned surplus by HWP and 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, (iii) the payment of dividends to, and/or the
repurchase of stock from, HWP out of capital or unearned surplus by HP&E, and
(iv) 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.
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 form the transactions proposed herein will be
used by the Applicants to acquire any securities of, or any interest in, an EWG
or a FUCO.<F2>
[FN]
<F2>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.
</FN>
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 are to be provided by amendment to this Application)
18. (a) Exhibits
*F. Opinion of Counsel
*G. Financial Data Schedules
H. Proposed Form of Notice
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.
<PAGE>
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
SELECT ENERGY, INC.
HOLYOKE WATER POWER COMPANY
HOLYOKE POWER AND ELECTRIC COMPANY
SELECT ENERGY PORTLAND PIPELINE, INC.
By: s/s 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/s David R. McHale
---------------------------
Assistant Treasurer
** 1 THE CONNECTICUT LIGHT AND POWER COMPANY
By: s/s Randy A. Shoop
---------------------------
Treasurer
** 2 Date: August 26, 1999
EXHIBIT H
PROPOSED FORM OF NOTICE
(Release No. 35-______; 70-____)
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, SEPPI, HWP and HP&E 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; (b) the payments of dividends to, and/or the
repurchase of stock from, NU, NUEI, HEC or HWP 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.
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 this unrestricted cash for the payment to NU, NUEI, HEC and HWP of
dividends and/or the repurchase of stock from NU, NUEI, HEC or HWP. 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 Applications
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
<TABLE>
<CAPTION>
EXHIBIT I
ANTICIPATED RESTRUCTURING PROCEEDS AND USE OF PROCEEDS
($ Millions) Timing (Estimated)
---------------------------------------------
<S> <C> <C> <C>
CL&P
Asset Sales (non-nuclear) 1,191 Fourth Quarter 1999
Securitization 1,489 Second Quarter 2000
-----
Total Proceeds 2,680
-----
Dividends 310
Other 2,370
WMECO
Asset Sales (non-nuclear) 233 Third and Fourth Quarters
Securitization 303 Second Quarter 2000
-----
Total Proceeds 536
-----
Dividends 145
Other 391
PSNH
Asset Sales (non-nuclear) 360 Fourth Quarter 2000
Securitization 725 Third Quarter 2000
-----
Total Proceeds 1,085
-----
Dividends 297
Other 788
NAEC
Seabrook Contract Buyout 646 Third Quarter 2000
-----
Dividends 164
Other 482
NU System
Asset Sales (non-nuclear) 1,784
Securitization 2,517
-----
Total Proceeds 4,301
-----
Dividends 916
Other 4,031
</TABLE>
EXHIBIT J
DIVIDEND COVENANT FROM CL&P
MORTGAGE INDENTURE
Section 6.13. Dividends (a) It will not declare and pay cash dividends upon
its common stock in excess of the amount of such surplus income or earnings
accumulated since December 31, 1920, as may remain after deducting from the
gross operating and non-operating revenues of the Company expenses and charges
of the Company of the following nature: operating expenses, all expenditures
for current maintenance, replacements and renewals including any amount set
aside under the provisions of Section 6.08, any percentages of earnings
required to be paid under the terms of any franchise, taxes, interest charges,
dividends on preferred stock, including such interest and dividends as have
accrued, and all similar charges lawfully entitled to priority over dividends
payable to the holders of shares of the common stock of the Company.
(b) It will not, after December 31, 1966 declare or pay any dividends,
or make any other distributions (except (1) dividends payable or
distributions made in shares of common stock of the Company and (2)
dividends or distributions payable in cash in cases where, concurrently
with the payment of the dividend or distribution, an amount in cash equal
to the dividend or distribution is received by the Company as a capital
contribution or as the proceeds of the issue and sale of shares of its
common stock), on or in respect of common stock of the Company, or purchase
or otherwise acquire or permit a subsidiary to purchase or otherwise
acquire for a consideration any shares of common stock of the Company, if
the aggregate of such dividends, distributions and such consideration for
purchase or other acquisition of shares of common stock of the Company
after December 31, 1966 shall exceed
(i) the earned surplus of the Company accumulated after December 31,
1966 (determined in accordance with generally accepted accounting
principles and without giving effect to charges to earned surplus on
account of such dividends, distributions or acquisitions or on account of
the disposition of any amounts which may then be classified by the Company
on its books as amounts in excess of the original cost of utility plant or
to charges or credits to earned surplus on account of items inherent in the
balance sheet at December 31, 1966 or on account of transfers from earned
surplus to capital surplus or capital stock accounts), PLUS
(ii) the earned surplus of the Company accumulated prior to January 1,
1967 in an amount not exceeding $13,500,000, PLUS
(iii) such additional amount as shall be authorized or approved,
upon application by the Company, by the Securities and Exchange Commission,
or by any successor commission thereto, under the Public Utility Holding
Company Act of 1935.
For the purposes of this Section, in determining the earned surplus of
the Company accumulated after December 31, 1966, there shall be deducted
the dividends accruing subsequent to December 31, 1966 on preferred stock
of the Company and the total amount, if any, by which the charges to income
or earned surplus for the period since December 31, 1966 as provisions for
depreciation of utility property shall have been less than the replacement
fund requirement for the period. Further, for purposes of this Section, in
determining the earned surplus of the Company accruing subsequent to
December 31, 1966, no effect shall be given to (1) charges to earned
surplus with respect to a distribution of the shares of The Connecticut Gas
Company and/or a company to which the Company conveys all or a substantial
portion of the properties used by the Company in the gas business, or (2)
charges or credits to earned surplus with respect to a profit or loss
realized on the sale or other disposition by the Company of (i) all or a
substantial portion of the properties used by the Company in the gas
business, or (ii) the shares of The Connecticut Gas Company and/or a
company to which the Company conveys all or a substantial portion of the
properties used by the Company in the gas business. The term
"consideration", as used in this Section, shall mean cash or fair value if
the consideration be other than cash, and the term "provision for
depreciation", as used in this Section, shall not be deemed to include
provision for the amortization of any amounts classified by the Company on
its books as amounts in excess of the original cost of utility plant.
