EXHIBIT D 2.1
COMMONWEALTH OF MASSACHUSETTS
DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY
)
Western Massachusetts Electric Company) D.T.E. 00-40
)
PETITION OF WESTERN MASSACHUSETTS ELECTRIC COMPANY
FOR APPROVAL OF THE ISSUANCE OF ELECTRIC RATE REDUCTION
BONDS PURSUANT TO GENERAL LAWS CHAPTER 164, Section 1H.
I. INTRODUCTION
1. Western Massachusetts Electric Company ("WMECO"), an electric company
duly organized and existing under the laws of the Commonwealth of
Massachusetts, hereby petitions the Department of Telecommunications and
Energy (the "Department") for a financing order (FN 1) ("Financing Order")
approving the issuance of electric rate reduction bonds (FN 2) ("RRBs") and
related transactions, pursuant to General Laws Chapter 164, Sections lG and
1H, and the Department's orders dated September 17, 1999 and December 20,
1999 in D.T.E. 97-120 (collectively, the "Restructuring Order"). WMECO
proposes that the Financing Order, among other things: (i) identify the
portion of the transition charge (FN 3) approved by the Department in the
Restructuring Order ("Transition Charge") and related costs that may be
securitized (FN 4) (such portion of the Transition Charge, once securitized,
is referred to as the "RTC Charge"); (ii) approve the organization and
capitalization of one or more special purpose entities (each, an "SPE") to
which "transition property (FN 5) ("Transition Property") will be sold; (iii)
establish as Transition Property the RTC Charge from which RRBs will be
repaid and approve the adjustment from time to time of the RTC Charge; (iv)
approve the servicing of the Transition Property by WMECO, as initial
servicer for the Transition Property, or any successor servicer ("Servicer"),
under a servicing agreement (the "Servicing Agreement"); and (v) grant WMECO
certain exemptions from competitive bidding and par value debt issuance
requirements. WMECO's proposed Appendix 1 to the Financing Order ("Proposed
Financing Order Appendix") is appended to this filing as Exhibit WM-1.
2. In support of this Petition, WMECO appends the following exhibits:
Exhibit WM-1 - WMECO's Proposed Financing Order Appendix;
Exhibit WM-2 - Prefiled testimony of Richard A. Soderman, Director of
Regulatory Policy and Planning for Northeast Utilities Service Company and
its operating companies and affiliates, including WMECO ("Soderman
Testimony");
Exhibit WM-3 - Prefiled testimony of Randy A. Shoop, Assistant Treasurer of
WMECO and Treasurer of The Connecticut Light and Power Company ("Shoop
Testimony");
Exhibit WM-4 - Prefiled testimony of Mark A. Englander, Senior Financial
Analyst in the Finance Group of Northeast Utilities System's Treasury
Department ("Englander Testimony"); and
Exhibit WM-5 - Legal memorandum addressing WMECO's eligibility to securitize
while the divestiture of its Millstone nuclear assets is pending.
3. WMECO is eligible to participate in securitization because it has
complied with the requirements of G.L. c. 164, Section 1G(d)(4), by: (i)
fully mitigating its transition costs, as recognized by the Restructuring
Order (see Soderman Testimony); (ii) safeguarding the positions of
nonmanagerial employees at divested generation facilities (see Soderman
Testimony); (iii) proving that savings to ratepayers will result from
securitization and ensuring that all savings from securitization will inure
to the benefit of ratepayers (see Soderman Testimony); (iv) establishing an
order of preference for the use of bond proceeds such that transition costs
having the greatest impact on customer rates will be the first to be reduced
by those proceeds (see Shoop Testimony and Soderman Testimony). (FN 6) In
addition to meeting the criteria set forth in Section 1G(d)(4), and as
requested by the Department, WMECO is also submitting herewith as Exhibit WM-
5 a legal memorandum explaining WMECO's eligibility to participate in
securitization while the divestiture of its Millstone nuclear assets is
pending.
II. SUMMARY OF KEY TESTIMONY REGARDING CONSUMER BENEFIT
4. If implemented as described herein and in the accompanying supporting
documents, WMECO expects securitization to result in approximately $19
million in net present value savings to WMECO's customers. All such savings
will inure to the benefit of WMECO's customers. See Soderman and Shoop
Testimony. As described in the Shoop Testimony, WMECO expects to apply the
net proceeds to retire debt and equity, thereby eliminating interest
expense, preferred stock expense and equity return. WMECO also expects to
apply the net proceeds to the buyout of a power contract.
III. DESCRIPTION OF PROPOSED RRB TRANSACTION
5. The procedure by which WMECO proposes to securitize a portion of its
approved transition costs is set forth fully in WMECO's proposed financing
order and in the Englander Testimony. The procedure is summarized below.
6. WMECO has been working with the Massachusetts Development Finance Agency
and Massachusetts Health and Educational Facilities Authority (together, the
"Agencies") to develop the structure for the proposed securitization and the
process for approval by the Department. Representatives of the Agencies have
reviewed and commented on this Petition and the exhibits thereto, including
the Proposed Financing Order Appendix (Exhibit WM-1). Based on their
knowledge and experience with other rate reduction bond financings,
representatives of the Agencies have indicated that the proposed transaction
satisfies (A) all requirements under Sections 1G and 1H relating to the terms
and conditions of the RRBs and (B) historic rating agency criteria consistent
with achieving the highest possible ratings for RRBs.
7. In the Restructuring Order, the Department determined that certain
generation-related costs were Transition Costs. Together with the cost of
issuance, ongoing costs (including credit enhancement, trustee, service and
other financing entity or other fees), and the estimated tax liabilities
associated with the transaction, these amounts are eligible for recovery
through the issuance of RRBs and the collection of the RTC Charge.
8. RRBs will thus be issued to securitize a portion of WMECO's Transition
Costs approved in the Restructuring Order, together with the related
transaction and credit enhancement costs (including an overcollateralization
account and liquidity reserves, if any). WMECO currently estimates that the
initial principal amount of RRBs to be issued will be approximately $261
million, subject to adjustments based on, without limitation, prevailing
market conditions at the time the RRBs are priced, input from nationally
recognized statistical rating organizations selected to rate the RRBs by
WMECO (with the approval of the Agencies, tax authorities, and underwriters)
and possible changes in the proposed transaction not now anticipated by
WMECO.
9. The issuance of RRBs will reduce the carrying charge associated with
WMECO's Transition Costs that are securitized. By reducing this charge,
WMECO customers will realize approximately $19 million in net present value
savings, reflected in lower Transition Costs over the life of the RRBs than
otherwise would be required if the transaction is not approved.
10. WMECO will create one or more wholly-owned SPEs. Each SPE will be
bankruptcy-remote, in that its activities will be limited to ownership of the
Transition Property and issuance of notes ("SPE Debt Securities"), and
restrictions will be imposed on its ability to commence a bankruptcy case or
other insolvency proceeding. WMECO will capitalize each SPE in an amount
anticipated to be approximately 0.50% of the initial principal balance of the
RRBs, as may be adjusted at the time of issuance, based on tax authority or
rating agency requirements. Such funds will be used to pay debt service and
related fees and expenses in the event of a shortfall in RTC Charge
collections.
11. WMECO will sell all of its rights in the Transition Property to an SPE
in a transaction that, under Section 1H(f)(1), will be intended and treated
as a legal true sale and absolute transfer to such SPE notwithstanding any
contrary treatment of such transfer for accounting, tax or other purposes.
12. Pursuant to G.L. c. 164, Section 1H(e), upon the effective date of the
Financing Order there shall exist a statutory first priority lien on all
Transition Property then existing or thereafter arising pursuant to the terms
of the Financing Order. Such lien shall secure all obligations, then
existing or subsequently arising, to the holders of RRBs, the trustee or
representative for such holders, each SPE and special purpose trust (FN 7)
and shall arise by operation of law automatically without any action on the
part of WMECO or any other person.
13. The SPE will then issue SPE Debt Securities to a special purpose trust
established by the Agencies. SPE Debt Securities will be non-recourse to
WMECO and its assets, secured by all of the assets of such SPE, including
without limitation: (i) all of the SPE's interest in the Transition Property;
(ii) the rights of such SPE under the transaction documents including the
purchase agreement by which such SPE acquires the Transition Property, the
Servicing Agreement and an administration agreement; (iii) the collection
account and any other account of such SPE contained in such SPE's collection
account, including an overcollateralization subaccount and reserve
subaccount; (iv) any investment earnings on amounts held by such SPE (but
excluding an amount equal to investment earnings on the initial capital
contributed by WMECO, which earnings are to be returned to WMECO semiannually
or more frequently as a distribution of capital by such SPE so long as there
are sufficient moneys available to make scheduled distributions or interest
and principal on the RRBs and pay required financing expenses); and (v) the
capital of such SPE. The interest rate, term, classes, and other
characteristics of the SPE Debt Securities will be determined at the time of
issuance based on then-current market conditions.
14. RRBs, issued by the special purpose trust, are expected to be pass-
through certificates representing undivided beneficial interests in the SPE
Debt Securities. The trustee of the special purpose trust will transfer the
proceeds it receives from the issuance of the RRBs to the SPE as
consideration for SPE Debt Securities, and the SPE will then transfer such
proceeds to WMECO as consideration for the Transition Property.
15. RRBs will not be obligations of WMECO nor will they be secured by a
pledge of the general credit, full faith or taxing power of the Commonwealth
or any agency or subdivision of the Commonwealth in accordance with Section
1H(b) (4). RRBs will be repaid through the collection of the RTC Charge from
each WMECO customer or ratepayer taking the delivery, transmission,
distribution, back-up, maintenance, emergency and any other delivery or
energy service provided by WMECO to such customer within the territory in
which it serves customers, regardless of that customer's source of electric
power (referred to herein as the "Retail Customer"). The RTC Charge will be
collected by WMECO or any successor distribution companies, which may include
third party suppliers or successor servicers. The RTC Charge will be a
usage-based component of the Transition Charge on each Retail Customer's
monthly bill and may include in the future any exit fee collected pursuant to
Section 1G(g) until the RRBs, together with all interest, fees, costs and
expenses, are paid in full. While not separately identified on each retail
user's monthly bill, each monthly bill will note that part of the Transition
Charge is owned by the SPE
16. Section 1H(b)(3) provides that the Financing Order and the RTC Charge
shall be irrevocable, and the Department (or any successor thereto) shall not
have authority to revalue or revise for ratemaking purposes the Transition
Costs, or determine that the Transition Costs or the RTC Charge are unjust or
unreasonable, or in any way reduce or impair the value of the Transition
Property either directly or indirectly by taking into account the Transition
Costs when setting rates for WMECO, nor are the amount of revenues arising
with respect thereto subject to reduction, impairment, postponement or
termination.
17. Prior to the issuance of the RRBs, WMECO will file an initial RTC Charge
in an "Issuance Advice Letter" setting forth the final terms of the RRBs.
Both initially and during the life of the RRBs, the RTC Charge will be
calculated and set at a level intended to recover: (i) the principal balance
of (in accordance with the expected amortization schedule), and interest on,
the SPE Debt Securities authorized under the Financing Order; (ii) the costs
of servicing the SPE Debt Securities and the RRBs, including the Servicing
Fee, the Administration Fee, fees for the trustees, rating agency fees, legal
and accounting fees, managers'/directors' fees, contingent indemnity
obligations in the RRB transaction documents, other fees and expenses; and
(iii) the cost of creating and maintaining any credit enhancement required
for the SPE Debt Securities and the RRBs (other than credit enhancement
obtained because WMECO is making RTC Charge remittances less frequently than
daily).
18. The level of RTC Charge may differ for specified periods during the term
of the RRBs due to several factors, including the nature of the amortization
schedule, changes in the principal balance of RRBs, changes in the weighted
average interest cost of RRBs as the relative principal balance outstanding
changes, the impact of the variability of energy sales, changes in payment
and charge-off patterns, and changes in ongoing fees, costs and expenses of
RRBs.
19. In order to minimize the impact of variability in energy sales, changes
in payment and charge-off patterns, collections on the payment of principal,
interest, fees, costs, and expenses on RRBs and the maintenance of credit
enhancement, and to maintain actual principal amortization in accordance with
the expected amortization schedule, WMECO proposes to adjust the RTC Charge,
up or down, pursuant to an RTC Charge adjustment mechanism in accordance with
Section 1H(b) (5) and the methodology described in an Appendix B to the
Proposed Financing Order Appendix (Exhibit WM-1).
20. Through the sale of the related Transition Property to an SPE, such SPE
will obtain the right and the obligation to assess and collect the RTC
Charge. On behalf of such SPE, WMECO will initially act as the Servicer for
the transition property, although a successor Servicer may perform these
functions in the future. Any successor Servicer will have the same rights
and obligations with respect to the RTC Charge as WMECO as initial Servicer
under the Financing Order and Sections 1G and 1H. WMECO, or any successor
Servicer, will be responsible for calculating, billing, collecting, and
remitting the RTC Charge from all Retail Customers. WMECO will carry out
billing and collection activities both as Servicer with respect to the RTC
Charge - on behalf of the SPE and the RRB holders - and as principal with
respect to its own charges to be paid by such customers. In consideration of
its servicing responsibilities, WMECO or any successor Servicer will receive
a periodic servicing fee that will be recovered through the RTC Charge as
described in Exhibit WM-1.
21. WMECO expects to implement, with the Department's guidance and approval,
certain policies and procedures designed to ensure that the credit ratings of
RRBs will not be downgraded or withdrawn due to the existence of any third
party supplier. The policies and procedures described in the Englander
Testimony will help retain the quality of RTC Charge billings, collections,
and remittances.
IV. SEC APPROVAL
22. WMECO is subject to the jurisdiction of the Securities and Exchange
Commission ("SEC") under the Public Utility Holding Company Act of 1935, as
amended. WMECO will file an Application/Declaration on Form U-1 with the SEC
for approval of the proposed transaction.
V. SERVICE
23. Please include the following on the service list for all correspondence
in this proceeding:
Stephen Klionsky, Esq.
Western Massachusetts Electric Company
260 Franklin Street, 21st Floor
Boston, Massachusetts 02110
Tel. 617/345-4778
Facsimile 617/345-4780
e-mail [email protected]
Jay E. Gruber, Esq.
Janet M. Zipin, Esq.
Palmer & Dodge LLP
One Beacon Street
Boston, Massachusetts 02108
Tel. 617/573-0449
Facsimile 617/227-4420
e-mail [email protected]
Anne Bartosewicz
Manager, Regulatory Planning
Northeast Utilities Service Company
P.O. Box 270
Hartford, Connecticut 06141-0270
Tel. 860/665-3213
WHEREFORE, pursuant to General Laws, Chapter 164, Sections 1G and 1H, WMECO
respectfully requests the Department:
A. Grant any and all authorizations that may be required under
Massachusetts law, including without limitation approval and authorization in
the Financing Order pursuant to Sections 1G and 1H and the Restructuring
Order, for the consummation of the transactions contemplated by the issuance
of RRBs and related matters, including without limitation: (i) the
identification of the portion of the Transition Charge (i.e., the RTC Charge)
that may be securitized through the issuance of RRBs, (ii) the organization
and capitalization of each SPE to which the Transition Property will be sold,
(iii) the establishment as Transition Property and adjustment from time to
time of the RTC Charge from which RRBs to be issued will be repaid, (iv) the
issuance by each SPE of SPE Debt Securities and the pledging by each SPE of
all of its interest in the Transition Property, and certain other collateral,
to secure the SPE Debt Securities, and (v) the servicing of the RTC Charge by
WMECO, as initial Servicer for the Transition Property, or any successor
Servicer under the Servicing Agreement.
B. Find an exemption in the public interest from each of (i) the
competitive bidding requirements of G.L. c. 164, Section 15, and (ii) the par
value debt issuance requirements of G.L. c. 164 Section 15A, in connection
with the issuance of RRBs and to grant each such exemption.
C. Find that savings inure to WMECO's customers, reflected in lower
transition costs to WMECO's Retail Customers over the life of the RRBs than
would otherwise be required to recover the approved transition costs had the
transaction not been approved in accordance with Sections 1G(d)(4) and
1H(b)(2).
D. Make such other findings and issue such other orders as set forth in the
Proposed Financing Order Appendix attached hereto as Exhibit WM-1.
E. Grant such other and further orders and approvals as the Department may
deem necessary or proper in the circumstances.
Respectfully submitted,
WESTERN MASSACHUSETTS ELECTRIC COMPANY
By Its Attorney
Stephen Klionsky
260 Franklin Street, 21st Floor
Boston, Massachusetts 02110
Tel. 617/345-4778
Facsimile 617/345-4780
e-mail [email protected]
Dated: April 18, 2000
Footnotes:
(1) "Financing order" is defined as "an order of the department adopted in
accordance with [G.L. c.164, Section 1H] approving a plan, which shall
include, without limitation, a procedure to review and approve periodic
adjustments to transition charges to include recovery of principal and
interest and costs of issuing, servicing, and retiring electric rate
reduction bonds contemplated by the financing order." G.L. c.164, Section
1H(a). G.L. c.164, Sections lG and 1H are hereinafter referred to as
"Section lG" and "Section 1H", respectively.
(2) "Electric rate reduction bonds" are defined as "bonds, notes,
certificates of participation or beneficial interest, or other evidences of
indebtedness or ownership, issued pursuant to an executed indenture,
financing document, or other agreement of the financing entity, secured by or
payable from transition property, the proceeds of which are used to provide,
recover, finance, or refinance transition costs or to acquire transition
property and that are secured by or payable from transition property."
Section 1H(a).
(3) "Transition charge" is defined as "the charge to the customers which
provides the mechanism for the recovery of an electric company's transition
costs." Section 1H(a). "Transition costs" are defined as "the costs
determined pursuant to section 1G which remain after accounting for maximum
possible mitigation, subject to determination by the department." Section
1H(a).
(4) "Securitized" and "securitization" are used herein to refer to the
"securitization" contemplated by Sections 1G and 1H.
(5) "Transition Property" is defined as "the property right created pursuant
to [G.L. c. 164 Section 1H], including, without limitation, the right, title,
and interest of an electric company or a financing entity to all revenues,
collections, claims, payments, money, or proceeds of or arising from or
constituting reimbursable transition costs amounts which are the subject of a
financing order, including those non-bypassable rates and other charges that
are authorized by the department in the financing order to recover transition
costs and the costs of providing, recovering, financing, or refinancing the
transition costs, including the costs of issuing, servicing, and retiring
electric rate reduction bonds." Section 1H (a). "Reimbursable transition
costs amounts" are defined as "the total amount authorized by the department
in a financing order to be collected through the transition charge, as
defined pursuant to section 1 [of G.L. c.164], and allocated to an electric
company in accordance with a financing order."
(6) In addition, pursuant to G.L. c. 59, Section 38H(c), the Department
cannot approve an application for securitization if a company owns, as of
July 1, 1997, a nuclear generation facility located in the Commonwealth
unless the company has executed a tax agreement with the plant's host
community. WMECO does not own such a facility and the provision is thus
inapplicable (see Soderman Testimony).
(7) "Special purpose trust" is defined to mean "any trust, partnership,
limited partnership, association, corporation, nonprofit corporation, limited
liability company, or other entity established and authorized by the agency
and the authority to acquire transition property or to issue rate reduction
bonds, or both, subject to approvals by the agency and the authority and the
powers of the agency and the authority as provided by the agency and the
authority in their resolutions authorizing the entities to issue rate
reduction bonds." Section 1H(a).
