FILE NO.70-9543
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------------
AMENDMENT NO. 7
TO
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
NORTHEAST UTILITIES NORTHEAST GENERATION SERVICES
174 Brush Hill Avenue COMPANY
West Springfield, MA 01090-0010 107 Selden Street
Berlin, CT 06037
(Name of companies filing this statement and
addresses of principal executive offices)
NORTHEAST UTILITIES
(Name of top registered holding company)
Cheryl W. Grise, Esq.
Senior Vice President, Secretary and General Counsel
Northeast Utilities Service Company
P.O. Box 270
Hartford, Connecticut 06141-0270
(Name and address of agent for service)
The Commission is requested to mail signed copies of all orders, notices and
communications to
David R. McHale Jeffrey C. Miller, Esq.
Vice President and Treasurer Assistant General Counsel
Northeast Utilities Northeast Utilities
Service Company Service Company
P.O. Box 270 P.O. Box 270
Hartford, Connecticut Hartford, Connecticut
06141-0270 06141-0270
Table of Contents
Item 1. Description of the Proposed Transaction
Introduction - Paragraph 1
Background - Paragraphs 2-6
Prior Orders - Paragraph 7
Description of the Transaction - Paragraphs 8-13
Item 2. Fees, Commissions and Expenses - Paragraphs 14-15
Item 3. Applicable Statutory Provisions - Paragraph 16
EWG Investment - Paragraphs 17-47
Service Agreement - Paragraphs 48-50
Item 4. Regulatory Approvals - Paragraph 51
Item 5. Procedures - Paragraph 52
Item 6 Exhibits and Financial Statements
a. Exhibits
b.1 Form of Proposed Service Agreement
b.3 Assumption Agreement
d.1 Connecticut Department of Public Utility Control Order
d.2 Massachusetts Department of Telecommunications and Energy
Order
d.3 New Hampshire Public Utility Commission Order
d.4 Massachusetts Department of Telecommunication and Energy
Order dated January 31, 2000*
d.5 Connecticut Department of Public Utility Control
Clarification Decision dated
February 10, 2000.
f.1 Legal Opinion
g Financial Data Schedule
h.2 Form of Notice
b. Financial Statements
Item 7. Information as to Environmental Effects - Paragraph 53
The Application/Declaration in this File, as amended, is hereby amended
and restated as follows:
Paragraphs 1 through 53 are deleted and replaced in their entirety as
follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
Introduction
1. The Applicants are seeking authority under the Public Utility Holding
Company Act of 1935 (the "1935 Act" or "Act") in connection with the
acquisition by Northeast Generation Company ("NGC") of certain generating
assets that are currently owned by The Connecticut Light and Power Company
("CL&P) and Western Massachusetts Electric Company ("WMECO"). Specifically,
Northeast Utilities ("NU") requests authority to enter into two assumption
agreements (collectively, the "Assumption Agreement") in connection with the
acquisition by NGC, its indirect subsidiary (the "Transaction"). In
addition, NU requests an order modifying the percentage limitation on
investments in Exempt Wholesale Generator ("EWG") which may be made.
Specifically, NU requests authority to invest in and guarantee the
obligations of NGC to the extent necessary for NGC to consummate the
Transaction, but which, when aggregated with NU's "aggregate investment" in
EWGs would not exceed 85% of its consolidated retained earnings as of
December 31, 1999. Finally, to the extent such transaction is not
authorized by rule or otherwise, the Applicants seek authority for Northeast
Generation Services Company ("NGS") to provide certain services to NGC at
other than cost.
Background
2. NU is a registered holding company under the Act that is engaged
through its utility subsidiaries in the generation, transmission,
distribution, and sale of electric energy to customers in portions of the
states of Connecticut, Massachusetts and New Hampshire. The utility
operating companies of NU, each of which is wholly-owned, are CL&P, WMECO,
Public Service Company of New Hampshire ("PSNH") and North Atlantic Energy
Corporation ("NAEC") (each individually an "NU Operating Company" and
collectively, the "NU Operating Companies"). NU also furnishes retail
electric service to a limited number of customers through a wholly-owned
subsidiary, Holyoke Water Power Company.
3. NU also has a number of direct and indirect non-utility subsidiaries.
NU Enterprises, Inc. ("NUEI") is a wholly-owned direct subsidiary of NU and
acts as the holding company for the NU system's unregulated companies. Among
the subsidiaries of NUEI are Select Energy, Inc., a marketing and brokering
Rule 58 subsidiary ("Select"), NGC, intended to be NU's competitive
generating company, and NGS, a Rule 58 generation operation and services
company.
4. As a Connecticut utility, CL&P is subject to the jurisdiction of the
Connecticut Department of Public Utility Control (the "DPUC"). In April
1998, the State of Connecticut enacted comprehensive electric utility
restructuring legislation. CL&P is subject to this legislation. In
particular, the law provides, among other things, that CL&P divest its non-
nuclear generating assets (the "CL&P Assets") by January 2000 and its nuclear
generating assets by January 2004 in order to recover stranded costs. Under
the law, affiliates of CL&P were allowed to bid in both auctions. The
auction for the CL&P Assets took place in the spring and summer of 1999. In
addition the law allows for the issuance of rate reduction bonds ("RRBs") to
finance portions of a utility's stranded costs through securitization
transactions. WMECO is subject to similar legislation in Massachusetts and
sold its fossil fueled and a small portion of its hydroelectric generating
plants in the summer of 1999.(1) The Massachusetts law also allows RRBs to
be issued. The remaining non-nuclear generating plants of WMECO; a
hydroelectric pumped storage generating plant jointly owned with CL&P, and
two adjacent hydroelectric plants (the "WMECO Assets"), were included in the
auction with the CL&P Assets.
_______________________________
(1) PSNH and NAEC are subject to similar restructuring laws in New
Hampshire. Under New Hampshire law, generation assets must be divested and
RRBs may also be issued.
5. On October 1, 1998, CL&P filed a plan with the DPUC to auction the
CL&P Assets and functionally unbundle its operations. On July 6, 1999, CL&P
and WMECO announced that NGC, which filed an application with the Federal
Energy Regulatory Commission the "FERC") seeking EWG status on February 14,
2000, was the winning bidder for 1,329 megawatts ("MW") of hydroelectric and
pumped storage generating assets in Connecticut and Massachusetts , which
comprised all of the WMECO Assets and the hydroelectric portion of the CL&P
Assets (collectively with the WMECO Assets, the "Utility Assets"). NRG
Energy, Inc., a subsidiary of Northern States Power Company, won the bidding
for the remainder of the CL&P Assets.
6. The NU Operating Companies plan to use a portion of the proceeds from
asset sales and from the RRBs to retire outstanding debt and preferred stock
and to buy down existing power purchase contracts with independent power
producers. To reduce their respective common equity capitalizations, the NU
Operating Companies also plan to use a portion of their restructuring
proceeds either (i) to pay dividends to NU, (ii) to buy back a portion of
their outstanding common stock owned by NU and/or (iii) to effect capital
reductions through a combination of dividends and stock repurchases. NU and
the NU Operating Companies currently expect that the aggregate amount of
funds channeled to NU through these methods will be approximately $915
million. These transactions are the subject of a related filing with the
Commission. See Northeast Utilities, File No. 70-09541 (August 26, 1999).
Prior Orders
7. By Order dated November 12, 1998 (HCAR No. 35-26939), in File No. 70-
09343, the Commission, among other things, authorized (i) the formation and
financing by NU of a nonutility subsidiary company (which is referred to
therein as "Newco" but which is now known as NUEI) to engage, through
multiple subsidiaries, in a variety of energy related and other activities
and (ii) the acquisition by NUEI of, among other things, the securities of
GENCO (now known as NGC) and NGS. The Commission also authorized NU and NUEI
to issue guarantees or provide other forms of credit support or enhancements
(collectively, "Guarantees") to or for the benefit of NUEI, NGS, NGC, NU's
other unregulated subsidiaries and NU's other direct or indirect Rule 58
subsidiaries to be formed by NU, in an aggregate amount not to exceed $75
million. The amount of the guarantee authority was increased to $250 million
pursuant to a supplemental Order of the Commission dated May 19,1999 (HCAR
No. 35-27029) in File No. 70-09343 (the "Supplemental Order"). NU and NUEI
filed an amendment to the Application in File No. 70-9343 seeking increased
guaranty authority to $500 million on August 23, 1999.
Description of the Transaction
8. As indicated above, in July 1999, CL&P and WMECO contracted to sell the
Utility Assets to NGC as the result of an auction conducted by J.P. Morgan
Securities, Inc. ("J.P. Morgan"), an independent consultant retained by the
DPUC to sell the Utility Assets for the benefit of CL&P and WMECO. NGC's bid
of $865.5 million was for 10 hydroelectric facilities owned by CL&P in
Connecticut; the Northfield Mountain pumped storage station (owned 81% by
CL&P and 19% by WMECO) in Massachusetts and the Cabot and Turners Falls No. 1
hydroelectric stations located in Massachusetts and owned by WMECO.
Subsequent to the auction, NGC executed a purchase and sale agreement with
CL&P for the assets owned by CL&P (the "CL&P PSA") and a purchase and sale
agreement with WMECO for the assets owned by WMECO (the "WMECO PSA", and
collectively with the CL&P PSA, the "PSA").
9. In connection with the Transaction, NGC filed an application seeking EWG
status with FERC under Section 32(a) of the Act on February 14, 2000.
Section 32(c)(B) of the Act provides that Commission approval is not required
for the transfer of generating assets to an EWG where the affected state
regulators have found that the transfer (i) will benefit consumers, (ii) is
in the public interest, and (iii) does not violate state law. The required
filings have been made with the relevant State commissions and the orders
have been received. Copies of the state orders are attached as Exhibits d.1,
d.2, d.3, d.4 and d.5. Accordingly, CL&P and WMECO are not required to seek
Commission approval of the sale of the Utility Assets to NGC.
10. NGS will operate the Utility Assets pursuant to a service agreement
with NGC (the "Service Agreement"), a proposed form of which is filed as
Exhibit b.1, under Rules 87(b)(1) and 90(d)(1). While the Applicants believe
that this transaction is duly authorized under the Commission's rules, they
nonetheless request such additional authority as the Commission believes may
be required. Further, NGC has contracted with its affiliate, Select, to
market the power generated by the Utility Assets pursuant to a power
marketing agreement with NGC. This agreement will be filed for approval with
the Federal Energy Regulatory Commission ("FERC") and is not subject to 1935
Act jurisdiction.
11. Because NGC is a newly formed company with no financial resources
(see Northeast Utilities, HCAR 35-26939), NU was required to execute the
Assumption Agreement in connection with the Transaction, the form of which is
attached as Exhibit b.3. Pursuant to the Assumption Agreement, NU agreed,
subject to regulatory approvals, to perform the obligations set out in the
PSA as if it were the purchaser if NGC does not perform such obligations.
Under the terms of the PSA, the purchaser is not required to perform its
obligations thereunder if it does not receive all the required regulatory
approvals (including the approval of the Commission). Accordingly, NU would
only be required to perform under the PSA pursuant to the terms of the
Assumption Agreement if all regulatory approvals (including that of the
Commission) were obtained. Once all regulatory approvals are received, NU
would be obligated to perform all obligations of NGC under the PSA if NGC did
not perform. NU estimates its obligations under the Assumption Agreement at
$13 million. NU hereby seeks approval of its obligations under the
Assumption Agreement pursuant to Section 12(b) of the Act and Rule 45
thereunder.
12. To finance the acquisition of the Utility Assets, NGC negotiated a
financing transaction with several financial institutions ("Banks"), whereby
Banks would provide financing to NGC in two separate tranches. Tranche A
would consist of a credit facility of up to $415 million. This amount would
be repaid concurrently with the funding of the credit facility, using funds
provided to NGC by NU, through NUEI, pursuant to Section 12(b) and Rule
45(b)(4) thereunder.(2) Tranche B would consist of a senior secured 364-day
loan facility in an amount up to $500 million from Banks. Both Tranche A and
Tranche B will be secured by various means, including by a mortgage on the
Utility Assets. NGC presently plans to repay the funds provided under
tranche B from the proceeds of a capital markets transaction pursuant to
authority available under Rule 52.
______________________
(2) NU would obtain the necessary funds to make such contribution to NUEI
out of a combination of (i) dividends paid to NU by CL&P and WMECO, (ii) the
repurchase from NU of a portion of the stock of CL&P and WMECO by the
respective companies and (iii) to the extent necessary, funds available to it
from other sources. CL&P and WMECO would use approximately $400 million of
the proceeds from the sale of the Utility Assets to make such payments. CL&P
and WMECO are filing a separate application/declaration on Form U-1 for
authorization to upstream the Returned Capital to NU in this fashion. See,
Northeast Utilities, File No 70-09541 (August 26, 1999).
13. NU will contribute up to $475 million (including the $415 million
referenced in paragraph 12 above) to NUEI, which will, in turn, contribute it
to NGC (the "Equity Investment"). NGC will concurrently apply these funds to
repay tranche A to Banks, pay additional transaction costs and retain the
balance for working capital purposes.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
14. The fees, commissions and expenses paid or incurred, or to be paid or
incurred, directly or indirectly, in connection with the proposed transaction
by the Applicants are estimated not to exceed the following amounts:
Legal fees $ 7,500
Accounting fees $ 5,000
Miscellaneous costs $ 500
NUSCO Fees $ 5,000
__________
Total $ 18,000
15. None of such fees, commission or expenses will be paid to any
associate company or affiliate of the Applicants except for payments by the
Applicants for financial and other services, to be performed at cost by
Northeast Utilities Service Company ("NUSCO"), an affiliated service company.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
16. The following sections of the Act and the Commission's rules
thereunder are or may be applicable to the authorization being sought
hereunder by the Applicants: Sections 6(a), 7, 12(b), 13 and 32 of the Act
and Rules 45, 53, 54, 87 and 90 promulgated thereunder. To the extent that
other sections of the Act or the Commission's rules thereunder are deemed
applicable to the proposed transactions for which Commission authorization is
sought, such sections and rules should be considered to be set forth in this
Item 3.
EWG Investment
17. Rule 53 provides that, if each of the conditions of paragraph (a)
thereof is met, and none of the conditions of paragraph (b) thereof is
applicable, then the Commission may not make a finding that the guarantee of
a security of an EWG by a registered holding company is not reasonably
adapted to the earning power of such company or to the security structure of
the companies in the holding company system, or that the circumstances are
such as to constitute the making of such guarantee an improper risk for the
company.
18. Giving effect to the proposals contained herein and assuming the
amount of the Assumption Agreement and the Equity Investment are all included
in the calculation of EWG investment, NU will satisfy all of the conditions
of Rule 53(a) except for clause (1) thereof, which requires that the
aggregate at risk investment of the registered holding company in EWGs and
FUCOs not exceed 50% of the holding company system's Consolidated Retained
Earnings ("CREs"). None of the conditions specified in Rule 53(b) is or will
be applicable.
19. As of December 31, 1999, NU's aggregate investment in EWGs and FUCOs
was approximately $6.4 million, or 1% of its average CREs of approximately
$582 million. The Equity Investment ($475 million), when aggregated with
NU's outstanding EWG/FUCO investment at that date ($6.4 million) and the
value of the Assumption Agreement ($13 million) is equal to approximately 85%
of NU's CREs as of December 31, 1999($495 million divided by $582 million).
NU seeks authority to invest an amount up to 85% of its CREs to enable NGC to
consummate the Transaction. The rationale for this proposal is as follows:
(a) The Rule 53(a)(1) issue is largely accounting-driven. The divestiture
required in the three states, combined with the authorization to issue the
RRBs, leave the NU Operating Companies in a unique financial position in that
they will experience a significant decrease in the amount of tangible assets
that they own and receive a substantial influx of cash almost simultaneously.
However, neither the proceeds from the divestiture of the NU Operating
Companies' generation assets nor the proceeds from the RRBs will have any
effect on the net incomes of the NU Operating Companies. Accordingly, while
the NU Operating Companies will experience a substantial influx of cash from
these transactions, none of that cash will be treated as "earnings" on their
respective financial statements. In addition, the proposed EWG investment is
in generating assets that have been owned and operated by affiliates for many
years in the historic service territories of the NU system. These
circumstances significantly mitigate the risk associated with many other EWG
and FUCO investments outside the traditional service territories of other
utilities.
(b) Approximately $400 million of capital from the proceeds of the sale of
the Utility Assets is expected to be returned to NU by CL&P and WMECO through
the combination of stock purchases and dividend payments (the "Returned
Capital"). Although the Returned Capital will not, for accounting reasons,
count as retained earnings of NU available for EWG and FUCO investment under
Rule 53, it will nonetheless represent cash available to NU to be expended on
other investments just as if it were retained earnings dividended up to NU by
NU's subsidiaries. The Equity Investment being made by NU in NGC is mostly
the intrasystem reallocation of equity from two companies within the NU
system (CL&P and WMECO) to another system company (NGC).
20. Rule 53(c) states that, in connection with a proposal to issue and
sell securities to finance an investment in an EWG, or to guarantee the
securities of an EWG, a registered holding company that is unable to satisfy,
among other provisions, the provision that such investments may not exceed
50% of CREs, must "affirmatively demonstrate" that such proposal:
(i) will not have a substantial adverse impact upon the financial integrity
of the registered holding company system; and
(ii) will not have an adverse impact on any utility subsidiary of the
registered holding company, or its customers, or on the ability of State
commissions to protect such subsidiary or customers.
21. The Commission has performed an analysis of the requirements of Rule
53(c) with respect to applications/declarations filed by a number of the
registered holding companies. See The Southern Company ("Southern"), Holding
Co. Act Release No. 26501 (April 1, 1996); Central and South West Corporation
("CSW"), Holding Co. Act Release No. 26653 (Jan. 24, 1997); GPU, Inc.
("GPU"), Holding Co. Act Release No. 26779 (Nov. 17, 1997); Cinergy, Inc.
("Cinergy"), Holding Co. Act Release No.26848 (March 23, 1998); American
Electric Power Company, Inc. ("AEP"), Holding Co. Act Release No. 26864
(April 27, 1998); and New Century Energies, Inc. ("New Century"), Holding Co.
Act Release No. 26982 (February 26, 1999) (collectively, the "100% Orders").
22. Unlike the 100% Orders, which were intended largely to facilitate
foreign investment, the authority sought in this matter is related to an
investment in one specific EWG, not EWGs generally, which is being acquired
in the wake of the state-ordered divestiture of two of NU Operating
Companies' generating assets.
23. NU addresses the requirement of Rule 53(c)(i), the impact upon the
financial integrity of the registered holding company system, as follows:
The proposed investment in NGC by NU, in an amount up to 85% of NU's
consolidated retained earnings will not have a "substantial adverse impact"
on the financial integrity of the NU System. The lack of any "substantial
adverse impact" on NU's financial integrity as a result of the investment in
NGC can be demonstrated in several ways, including by analyses of the
circumstances surrounding the acquisition of utility assets by NGC which
precipitates NU's investment, specifically the fact that the Utility Assets
have been owned and operated by the NU system for many years and will
continue to be maintained and operated by the same NU organization after the
sale; thus, "country," construction and operating risks are non-factors here.
In addition, the power generated by the Utility Assets will be competitively
marketed in the Northeast region, where NU has long been a leading energy
marketer, first through certain of the NU Operating Companies and in the
future through Select, its competitive energy marketing affiliate. Further
the Utility Assets consist mainly of the Northfield Mountain pumped storage
facility, which NU considers the premier generating property in New England
due to its unique operating characteristics and history of reliable service.
Consideration of these and other relevant factors supports the conclusion
that the proposed investment by NU in NGC in an amount exceeding the 50%
consolidated retained earnings limitation in Rule 53(a)(1) will not have a
"substantial adverse impact" on the financial integrity of the NU System.
24. The following paragraphs provide data analyzing the impact of the
proposed investment on the NU system in light of the tests developed by the
staff in the course of adopting the 100% Orders. These tests involve
analysis of:
i. Ratios of EWG/FUCO investment (at 100% of CREs) to
- Consolidated Capitalization
- Consolidated Net Utility Plant
- Total Consolidated Assets
- Market Value of Outstanding Stock
ii. The Applicant's CRE Growth
iii. The Applicant's Stock Price to Earnings Ratio
iv. The Applicant's Market to Book Ratio
v. The Applicant's Dividend Payout Ratio
vi. The Applicant's Capitalization Ratios
25. Capitalization Ratios. NU's aggregate investments in EWGs equal to
85% of CREs would represent a relatively small commitment of NU capital for a
company the size of NU, based on various financial ratios at December 31,
1999. For example, investments of this amount would be equal to only
approximately 10.5% of NU's total consolidated capitalization ($4.7 billion),
12.7% of consolidated net utility plant ($3.9 billion), 4.9% of total
consolidated assets ($10.1 billion), and 19.8% of the market value of NU's
outstanding common stock ($2.5 billion) as of February 15, 2000. The table
below illustrates that NU's exposure to EWG/FUCO investments will be
measurably smaller than the companies who received the 100% orders.
Investments in EWGs and FUCOs*
as a percentage of:
Company Consolidated Consolidated Total Market Value of
Capitalization Net Utility Consoli- Outstanding Common
Plant dated Assets Stock
Southern 16.3% 15.4% 11.0% 20.4%
CSW 23.0% 23.0% 14.0% 31.0%
GPU 24.9% 34.2% 19.4% 49.8%
Cinergy 16.0% 16.0% 11.0% 19.0%
AEP 16.0% 13.8% 9.8% 18.5%
New Century 15.5 12.9 9.8 13.5
Average of above 18.6% 19.2% 12.5% 25.4%
NU** 10.5 12.7% 4.9% 19.8%
* Assuming the investment equals 100% of CREs
** Assuming the investment equals 85% of December 31, 1999 CREs
26. This comparison verifies that an aggregate investment of $ 495 million
by NU would involve a relatively small commitment of capital for a company of
NU's size. Moreover, in every category the NU percentage is lower than or
substantially equal to the applicable percentage for the other registered
systems that have 100% Orders except for the comparison of the investment to
the market value of outstanding stock.
27. Consolidated Retained Earnings Growth. NU's CREs have declined for each
of the past three years. This decrease is primarily attributable to the
years of losses incurred while the NU system was solving its problems at the
Millstone Point Nuclear Power plants. As the Commission is aware, all three
nuclear units at Millstone ("Millstone 1", "Millstone 2" and "Millstone 3"),
in which CL&P owns 81%, 81% and 53% interests, respectively, and in which
WMECO owns 19%, 19% and 13% interests, respectively, were shut down in 1996.
In 1998, NU determined that it would not be economical to restart Millstone 1
and instead chose to prepare for decommissioning the unit. These shutdowns
had an adverse effect on the NU system as a whole. Millstone 3 was returned
to service in July 1998. Millstone 2 returned to service and was restored to
rate base in 1999. The resolution of the various operational and regulatory
issues and the enhanced competitive position of NU in the Northeast after its
restructuring are expected to have a positive effect on earnings and CREs.
28. Share Price to Earnings Ratio. Due to recent poor earnings performance,
and the market's perception that NU is on the upswing, NU's share price to
earnings ratio is not comparable to industry peers. The ratio is currently
73.1 ($19/.26). In 1999, after negative earnings for several years, NU
experienced positive earnings of $.26/share for the year ending December 31,
1999. As NU's operations continue to improve, its price to earnings ratio
will likewise improve.
29. Market to Book Ratio. NU's market to book ratio is currently 1.2 based
on book value of $15.819 as of December 31, 1999 and a market price of $
18.9375 as of February16, 2000. This ratio is below the industry average,
which was 1.72 as of June 30, 1999, again primarily because of the
operational issues referred to above which have caused NU's stock price to
remain low.
30. Dividend Payout Ratio. NU's current payout ratio is in excess of 100%
of current earnings due to historic low earnings due to the operational
issues referred to above. NU paid a $.10/share dividend in December, 1999,
its first in 2 years and is scheduled to pay a $.10/share dividend in March
2000. Going forward, assuming earnings from continuing operations continue
to improve, NU expects to bring its dividend payout ratio up to an amount in
line with current industry trends of instituting payout ratios lower than
historic industry norms.
31. Capitalization Ratios. NU's corporate credit rating is currently BBB-
(investment grade) from S&P and Ba3 from Moody's. Its consolidated
capitalization and interest coverage ratios for 1999 were below industry
averages for investment grade rated utilities, but not by a significant
amount (although Moody's does not currently have an investment grade rating
on NU, S&P does, so the analysis here will concentrate on investment grade
utilities). These ratios are as follows:
Actual 1999 Capitalization and Interest Coverage Ratios
(Excluding Non-Recourse Project Debt):
Total Debt/Capital 57.0%
EBIT/Cash Interest (times) 1.6
Funds from Operations/Interest (times) 2.7
Industry Ratios for Baa3 (Investment Grade) Rated Utilities*
Average High Low
Debt/Capital 54.6% 63.9% 44.2%
EBIT/Cash Interest (times) 1.7 3.69 .12
Funds from Operations/Interest (times) 3.7 5.92 2.51
*(Source: Moody's Investors Service Electric Utility
Sourcebook, October 1999)
32. Rule 53(B) Factors. With respect to the relevant financial benchmarks
specifically contemplated by Rule 53(b), none is applicable: (1) there has
been no bankruptcy of an NU associate company (Rule 53(b)(1)); (2) although
NU's average CREs for the four most recent quarterly periods have decreased
by more than 10% from the average for the preceding four quarterly periods
(Rule 53(b)(2)), NU's aggregate investment in EWGs and FUCOs at December 31,
2000, did not exceed 2% of NU's consolidated capital invested in utility
operations; and (3) in the previous fiscal year, NU did not report operating
losses attributable to its direct or indirect investments in EWGs and FUCOs
that exceeded an amount equal to 5% of CREs (Rule 53(b)(3)).
33. NU undertakes to notify the Commission by filing a post-effective
amendment in this proceeding in the event that any of the circumstances
described in Rule 53(b) arise during the authorization period.
34. NU addresses the requirement of Rule 53(c)(ii), the impact of the
proposed investment on the NU Operating Companies, as follows:
NU's request in this Application/Declaration to raise NU's investment
limits in EWGs and FUCOs to an amount equal to 85% of its CREs will not have
an "adverse impact" on any of NU's Operating Companies, their respective
customers, or on the ability of the three State commissions having
jurisdiction over the NU Operating Companies to protect such NU Operating
Companies or such customers.
35. This conclusion is supported by (i) the insulation of the NU Operating
Companies and their customers from potential direct adverse effects of NU's
investments in EWGs and FUCOs; (ii) the NU Operating Companies' current
financial health and (iii) the proven effectiveness of state commission
oversight together with the affirmation by the state commissions of
Connecticut, Massachusetts and New Hampshire that they have authority and
jurisdiction, and will exercise such authority, to protect customers in their
respective states from any adverse impact.
36. Insulation from Risk. All of NU's investments in EWGs and FUCOs are,
and in the future will remain, segregated from the NU Operating Companies.
Any losses that may be incurred by such EWGs and FUCOs would have no effect
on the rates of any NU Operating Company. NU represents that it will not
seek recovery through higher rates from the NU Operating Companies' utility
customers in order to compensate NU for any possible losses that it or NGC
may sustain on the investment in NGC or for any inadequate returns on such
investments.
37. Moreover, to the extent that there may be indirect impacts on the NU
Operating Companies from NU's EWG and FUCO investments through effects on
NU's capital costs, the state commissions regulating the NU Operating
Companies have broad discretion to set the cost of capital for them by a
variety of accepted means and are free to exclude any adverse impacts due to
EWGs and FUCOs. Therefore, the state commissions have the authority and the
mechanism to prevent any adverse effects on the cost of capital due to
investments in EWGs and FUCOs from being passed on to customers.
38. NU has complied and will continue to comply with the requirements of
Rule 53(a)(3) regarding the limitation on the use of NU Operating Company
employees in connection with providing services to EWGs and FUCOs. The
purchase by NGC of the Utility Assets is not anticipated to have any impact
on utilization of NU Operating Company employees. As part of the
acquisition, NGC committed to offer employment to certain employees of CL&P
and WMECO. Accordingly, NGC will have sufficient employees to operate the
Utility Assets, if required beyond the services to be provided by NGS. The
NU Operating Companies have not and will not increase staffing levels to
support the operations of NGC. NU and NGC expect that certain operations
services for NGC will largely be performed by NGS and some by outside
consultants engaged by NGC. It is expected that NUSCO will also be called
upon to provide some services. Accordingly, NGC's need for the support of
personnel provided by the NU Operating Companies is expected to be modest.
39. Finally, NU has complied and will continue to comply with the other
conditions of Rule 53(a) providing specific protections to customers of the
NU Operating Companies and their state commissions, in particular, the
requirements of Rule 53(a)(1) regarding the preparation and making available
of books and records and financial reports regarding EWGs and FUCOs, and the
requirements of Rule 53(a)(4) regarding filing of copies of applications and
reports with other regulatory commissions.
40. NU Operating Company Financial Health. As indicated earlier in this
Application/Declaration, the reduced CREs of NU are mainly the result of the
problems at and shut-down of the Millstone nuclear power units. The shutdown
of the Millstone units created a substantial drain on the financial resources
of the NU Operating Companies, as CL&P and WMECO were forced to purchase
power from third parties and incurred significant operations and maintenance
costs for the Millstone units. The return of Millstone 2 and 3 is expected to
continue to enhance the NU Operating Companies' financial health.
41. The improved financial health outlook of the NU Operating Companies is
evidenced by the recent increase in ratings and positive outlook assigned by
the credit ratings agencies. Standard & Poor's raised CL&P and WMECO's
senior secured ratings from BB+ to BBB- in May 1999, and Moody's raised
CL&P's and WMECO's senior secured ratings from Ba2 to Baa3 at the same time.
Fitch IBCA also upgraded CL&P and WMECO's senior secured ratings to BBB-and
placed NU on "alert" for a possible upgrade.
42. The NU Operating Companies' senior secured ratings as of December 31,
1999 were as follows:
S&P Moody's Fitch
CL&P BBB- Baa3 BBB-
WMECO BBB- Baa3 BBB-
PSNH BBB- Ba3 BB
NAEC BB+ B1 BB-
43. The debt (including short-term debt) ratios of CL&P, WMECO, PSNH and NAEC
as of December 31, 1999 were 56.7%, 62.3%, 61.0% and70%, respectively. These
ratios are within the industry range for like-rated electric utilities but
are high compared to their peers. However, the debt ratios of each of these
companies are expected to improve as the respective companies apply
restructuring proceeds to pay down debt.
44. The proposed investment in NGC will also not have any negative impact
on the NU Operating Companies' ability to fund operations and growth. Current
projections indicate that the NU Operating Companies will continue to fund
operations and construction expenditures primarily from internal sources of
cash, credit facilities, asset sales and securitization proceeds. Moreover,
there is ongoing evidence that the NU Operating Companies can access capital
markets as needed, although the Operating Companies' ability to issue debt
and preferred equity securities in the future depends upon earnings coverages
at the time such securities are issued.
45. Adequacy Of State Commission Oversight. The three state commissions
having jurisdiction over the NU Operating Companies, namely Connecticut,
Massachusetts and New Hampshire (collectively, "State Commissions") are able
to protect utility customers within their respective states. The State
Commissions are actively encouraging competition in the industry and have
promulgated regulations concerning competition. In addition, the State
Commissions have approved the sale of the Utility Assets to third parties.
The acquisition of the Utility Assets by NGC must be specifically approved by
the State Commissions which must make determinations that the ownership of
the Utility Assets by NGC will (i) benefit consumers, (ii) is in the public
interest and (iii) does not violate state law. Such determinations have been
made and the approvals have been received.
46. For these reasons, the State Commissions will have adequate authority to
protect NU Operating Company customers from any adverse effect associated
with NU and NU Company investments in NGC.
47. Accordingly, NU asks the Commission to grant it an exception to the
requirements of Rule 53(a)(1) in connection with the proposed Transaction.
The Service Agreement
48. As described above, it is proposed that under the Service Agreement,
NGS will provide NGC with a variety of administrative, operation, management
and support services. These services are expected to include, without
limitation, services relating to information systems, meters, transportation,
electric system maintenance, marketing and customer relations, engineering
and construction services, materials management, facilities, power planning,
environmental affairs and fuels. The Service Agreement as proposed would
allow these services to be provided at other than cost. It is currently
anticipated that NGS will not have any of its own employees performing these
services. Instead the services will be performed by NGS using employees of
NUSCO, NGS' service affiliate, pursuant to the existing service agreement
between NUSCO and NGS which has been in existence since the formation of NGS.
49. Section 13(b) of the Act allows the Commission to exempt transactions,
by rule, regulation or order, from the provisions of Section 13(b) and the
"at cost" rules promulgated thereunder if such transactions:
(a) are with any associate company which does not derive, directly or
indirectly, any material part of its income from sources within the United
States and which is not a public utility company operating within the United
States, or
(b) involve special or unusual circumstances or are not in the ordinary
course of business.
50. The Applicants hereby request on behalf of NGS an exemption under
Section 13 of the Act and Rule 90(d)(1) thereunder from the at-cost
requirements in connection with the provision of services by NGS to NGC at
other than "cost". Neither NGC nor NGS is (i) a public utility or holding
company, (ii) an investment company or investment trust, (iii) a company
engaged in the business of selling goods to associate companies or performing
services or construction or (iv) a company controlling such a company.
Furthermore, NGC is an EWG and as a result, an exception to the "at cost"
rules can be granted by the Commission. Such exceptions have been granted in
other cases. (See, e.g. DRI Holding Company Act Release 35-27113, December
15, 1999). The Applicants believe that the Service Agreement is structured
so as to comply with Section 13 of the Act and the Commission's rules and
regulations thereunder. To the extent Commission approval is required, NGS
hereby requests authorization and approval of the Service Agreement .
Item 4. REGULATORY APPROVALS
51. No regulatory approvals, other than those of the Commission requested
herein are required for the proposed activities for which Commission
authorization is sought herein.
Item 5. PROCEDURE
52. The Applicants hereby request that the Commission publish a notice
under Rule 23 with respect to the filing of this Application/Declaration as
soon as practicable and that the Commission's order be issued as soon as
possible. A form of notice suitable for publication in the Federal Register
is attached hereto as Exhibit h.1. The Applicants respectfully request the
Commission's approval, pursuant to this Application/Declaration, of all
proposed transactions described herein, whether under the sections of the Act
and Rules thereunder enumerated in Item 3 or otherwise. It is further
requested that the Commission issue an order authorizing such proposed
transactions at the earliest practicable date but in any event not later than
February 29, 2000. Additionally, the Applicants (i) request that there not
be any recommended decision by a hearing officer or by any responsible
officer of the Commission, (ii) consent to the Office of Public Utility
Regulation within the Division of Investment Management assisting in the
preparation of the Commission's decision, and (iii) waive the 30-day waiting
period between the issuance of the Commission's order and the date on which
it is to become effective, since it is desired that the Commission's order,
when issued, become effective immediately.
Item 6. EXHIBITS AND FINANCIAL STATEMENT
(a) Exhibits
b.1 Form of Proposed Service Agreement*
b.3 Assumption Agreement*
d.1 Connecticut Department of Public Utility Control Order*
d.2 Massachusetts Department of Telecommunications and Energy
Order dated November 26, 1999*
d.3 New Hampshire Public Utility Commission Order*
d.4 Massachusetts Department of Telecommunication and Energy Order
dated January 31, 2000*
d.5 Connecticut Department of Public Utility Control Clarification
Decision dated February 10, 2000.*
f.1 Legal Opinion*
g Financial Data Schedule*
h.2 Form of Notice*
(b) Financial Statements*
* Previously filed
Item 7. Information as to Environmental Effects
53. The proposed transactions neither involve a "major federal action" nor
"significantly affect the quality of the human environment" as those terms
are used in Section 102(2)(C) of the National Environmental Policy Act, 42
U.S.C. Sec. 4321 et seq. Consummation of the proposed transactions will not
result in changes in the operations of NU or any of its respective
subsidiaries that would have any impact on the environment. No federal
agency is preparing an environmental impact statement with respect to this
matter.
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, as amended, the undersigned companies have duly caused this Amendment
to be signed on their behalf by the undersigned thereunto duly authorized.
Date: February 22, 2000
NORTHEAST UTILITIES
NORTHEAST GENERATION SERVICES COMPANY
By: /S/ David R. McHale
Name: David R. McHale
Title: Vice President and Treasurer
